Ninth Circuit Confirms Pleading Standard for Securities Fraud Claims Involving Statements of Opinion

by Wilson Sonsini Goodrich & Rosati

On May 5, 2017, the U.S. Court of Appeals for the Ninth Circuit issued an important decision in City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc., et al., affirming the dismissal of a complaint for alleged false statements related to goodwill accounting under Section 10(b) and 20(a) of the Securities Exchange Act of 1934. Wilson Sonsini Goodrich & Rosati represented Align Technology and its former CEO and CFO in the matter. The decision is noteworthy because it concluded, in a matter of first impression for the Ninth Circuit, that the U.S. Supreme Court's recent decision in Omnicare, Inc. v. Laborers Dist. Council Constr. Ind. Pension Fund,1 which set the standard for pleading an opinion claim under Section 11 of the Securities Act of 1933, also applies to cases alleging false statements of opinion brought under Section 10(b). The panel also overruled part of a prior Ninth Circuit opinion in Reese v. Malone,2 to the extent Reese permitted plaintiffs to plead falsity by alleging that "there is no reasonable basis" for a statement of belief or opinion, as that holding is "clearly irreconcilable" with Omnicare, which held this type of pleading is only permissible under an omissions theory.

Factual and Procedural Background

Align Technology designs, manufactures, and markets the Invisalign system for treating the misalignment of teeth.3 In March 2011, Align acquired Cadent, a private company. A portion of the purchase price was allocated to goodwill. In October 2012, Align announced that it was conducting interim goodwill impairment testing for one of the business units acquired in the Cadent transaction. Align took impairment charges against that goodwill in subsequent quarters. The plaintiff filed suit following a stock drop in October 2012, alleging that Align and the individual defendants should have conducted interim goodwill testing earlier and that the defendants were aware that goodwill was impaired during the January 31, 2012 to October 17, 2012 class period. The U.S. District Court for the Northern District of California twice dismissed the plaintiff's case, the second time with prejudice.4

The major issues on appeal included: 1) what was the proper standard for analyzing whether the plaintiff had adequately pled falsity; 2) whether the plaintiff had adequately pled falsity; and 3) whether the plaintiff had adequately pled scienter. The district court had dismissed the complaint prior to the Supreme Court's decision in Omnicare and therefore did not have the opportunity to analyze Omnicare in its opinion. On appeal, the parties disputed what the appropriate standard was for pleading falsity in light of the Omnicare decision. Both the district court and Ninth Circuit found that statements regarding goodwill valuations are "opinion statements" because they are "inherently subjective and involve management's opinion regarding fair value."5

Omnicare and Falsity

The Ninth Circuit ruled that "[a]lthough Omnicare concerned Section 11 claims, we conclude that the Supreme Court's reasoning is equally applicable to Section 10(b) and Rule 10b-5 claims."6 The court then held that Omnicare established three different standards for pleading falsity of opinion statements in a Section 10(b) case.7

First, when a plaintiff relies on a theory of material misrepresentation, the plaintiff must allege both that "the speaker did not hold the belief she professed" and that the belief is objectively untrue. Id. Second, when a plaintiff relies on a theory that a statement of fact contained within an opinion statement is materially misleading, the plaintiff must allege that "the supporting fact [the speaker] supplied [is] untrue." Id. Third, when a plaintiff relies on a theory of omission, the plaintiff must allege "facts going to the basis for the issuer's opinion . . . whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context." Id. at 1332.8

The Ninth Circuit acknowledged that the Omnicare standard was similar to the standard previously articulated by the Ninth Circuit in Reese.9 However, Reese also allowed plaintiffs to plead that statements of opinion were false if there was no reasonable basis for the expressed belief. The Align court noted that under Omnicare, liability due to the lack of a reasonable basis is only available under an "omissions theory of liability." Because Reese allowed liability under such a theory for affirmative statements of opinion or belief, the Align court held that portion of Reese was irreconcilable with Omnicare and overruled it.10

Having decided that Omnicare applied, the Ninth Circuit concluded that the plaintiff had not adequately pled falsity in this case.11 The plaintiff's theory relied on allegations from confidential witnesses and public filings purportedly showing that Cadent was overvalued by Align due to channel stuffing by Cadent shortly before the acquisition, that the acquired business was not meeting projections during the class period, and that the acquired business was facing significant competition during the class period. The Ninth Circuit rejected these allegations because the plaintiff failed to connect these allegations to Align's goodwill testing.12 The opinion notes that the plaintiff provides no allegations showing "the actual assumptions that the defendants relied upon in conducting their goodwill analysis."13 For example, the complaint could not link the allegations of channel stuffing by Cadent before the acquisition to the defendants, "much less the set of assumptions that Defendants used to conduct its goodwill valuation..."14 While the plaintiff chose assumptions that led the plaintiff to conclude there was an impairment, there were no allegations to show what assumptions Align made, which was necessary to show that Align's assumptions amounted to fraud.15


The Ninth Circuit also rejected the plaintiff's argument that the complaint adequately pled scienter.16 The plaintiff argued that scienter was established through: 1) knowledge of facts which purportedly contradicted the defendants' goodwill statements; 2) the temporal proximity between the alleged misstatements and the write-downs of goodwill (along with the magnitude of the write-downs); 3) stock sales by the individual defendants; and 4) the former CFO's resignation.17

The Ninth Circuit rejected the plaintiff's purported allegations of "knowledge" by the defendants because the allegations either failed to actually show knowledge on the part of either individual defendant or the alleged facts could only, at best, show that the defendants may have violated Generally Accepted Accounting Principles (GAAP) by failing to conduct interim goodwill testing.18 The Ninth Circuit reiterated that the mere failure to follow GAAP, without more, cannot establish scienter.19 The Ninth Circuit also rejected the stock sale allegations because the plaintiff failed to allege relevant information for certain sales and because the former CEO's sale of stock in February 2012 occurred when the stock price was significantly below the class period high and at a price that was even lower than the price on the day following the close of the class period.20 The Ninth Circuit also rejected as conclusory the allegations related to the former CFO's resignation several months after the close of the class period and further noted that the fact the former CFO remained at Align for six months after the goodwill impairment announcement was made, diminished any inference of scienter.21 Finally, the allegations about the timing and magnitude of the impairments could not, by themselves, establish a strong inference of scienter.22

One of the judges on the panel, Judge Andrew J. Kleinfeld, issued a concurring opinion which states that he would have affirmed on the basis of scienter alone.23 Judge Kleinfeld said while he may agree that Omnicare also applies to cases brought under Section 10(b), he did not believe that the panel needed to reach that question because it could affirm just on scienter.


The Ninth Circuit is now the second circuit to hold that Omnicare applies to cases brought under Section 10(b). The Second Circuit previously held this in Tongue v. Sanofi.24 The Align decision also reconciles an apparent conflict between two Ninth Circuit opinions, Reese and Rubke v. Capitol Bancorp, Ltd.,25 on the appropriate standard for cases alleging that statements of opinion or belief were false. Reese has been a plaintiff-friendly citation at the motion-to-dismiss stage, so the language in Align limiting that decision is a boon to defendants. This opinion also will be particularly important for defendants facing securities fraud suits involving accounting judgements.

1 135 S. Ct. 1318 (2015).
2 747 F.3d 557 (9th Cir. 2014).
3 Slip op. at 5-8.
4Id. at 9.
5Id. at 12.
6Id. at 17.
7Id. at 16-17.
9Id. at 17-18.
11Id. at 18.
12Id. at 18-24.
13Id. at 19-21.
14Id. at 20.
15Id. at 21.
16Id. at 24-31.
17Id. at 25.
18Id. at 25-28.
19Id. at 26-27.
20Id. at 28-29.
21Id. at 29-30.
22Id. at 30.
23Id. at 32-33.
24 816 F.3d 199 (2d Cir. 2016).
25 551 F.3d 1156 (9th Cir. 2009)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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