Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc.

United States Court of Appeals, Ninth Circuit

May 5, 2017

City of Dearborn Heights Act 345 Police & Fire Retirement System, Individually and On Behalf of All Others Similarly Situated, Plaintiff-Appellant,
v.
Align Technology, Inc.; Thomas M. Prescott; Kenneth B. Arola, Defendants-Appellees.

          Argued and Submitted October 19, 2016 San Francisco, California

         Appeal from the United States District Court for the Northern District of California Beth Labson Freeman, District Judge, Presiding D.C. No. 5:12-cv-06039-BLF

          Amanda M. Frame (argued), Christopher M. Wood, Shawn A. Williams, Andrew S. Love, and Susan K. Alexander, Robbins Geller Rudman & Dowd LLP, San Francisco, California; Darren J. Robbins, Robbins Geller Rudman & Dowd LLP, San Diego, California; for Plaintiff-Appellant.

          Caz Hashemi (argued), Nicholas R. Miller, Kelley M. Kinney, and Douglas J. Clark, Wilson Sonsini Goodrich & Rosati, Palo Alto, California, for Defendants-Appellees.

          Before: ANDREW J. KLEINFELD and MILAN D. SMITH, JR., Circuit Judges, and JOHN A. KRONSTADT, [*] District Judge.

         SUMMARY[**]

         Securities Fraud

         The panel affirmed the district court's dismissal, for failure to adequately plead falsity or scienter, of a securities fraud action under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

         The alleged violations concerned statements by Align Technology, Inc., regarding its goodwill valuation of a subsidiary.

         The panel held that the three standards for pleading falsity of opinion statements articulated in Omnicare, Inc. v. Laborers Dist. Council Constr. Ind. Pension Fund, 135 S.Ct. 1318 (2015), a case addressing Section 11, apply to Section 10(b) and Rule 10b-5 claims. These three standards are as follows. 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. 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." 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." The panel held that to the extent that the Ninth Circuit's prior standard permitted plaintiffs to plead falsity by alleging that "there is no reasonable basis for the belief" under a material misrepresentation theory of liability, the prior standard was "clearly irreconcilable" with Omnicare, and was therefore overruled. The panel held that the plaintiff failed to sufficiently plead falsity under any of the three Omnicare standards.

         The panel held that the plaintiff also failed to sufficiently plead scienter. Because the plaintiff inadequately alleged a primary violation of federal securities law, it could not establish control person liability.

         Concurring in the judgment, Judge Kleinfeld agreed with the majority's analysis of scienter, which compelled affirmance. Judge Kleinfeld wrote that the determination whether the Omnicare analysis applies to Section 10(b) cases was important and debatable and should have been left for a case in which it had to be made.

          OPINION

          M. SMITH, CIRCUIT JUDGE

         Plaintiff-Appellant City of Dearborn Heights Act 345 Police & Fire Retirement System (Plaintiff) represents all the investors who purchased stock in Align Technology, Inc. (Align) between January 31, 2012, and October 17, 2012 (the Class Period). Plaintiff alleges that Defendants Align, Align CEO Thomas M. Prescott, and Align CFO Kenneth B. Arola (collectively, Defendants) violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 in connection with statements regarding Align's goodwill valuation of its subsidiary, Cadent Holdings, Inc. (Cadent). The district court dismissed with prejudice Plaintiff's Second Amended Complaint (SAC) for failure to adequately plead falsity or scienter. We affirm the district court for four reasons.

         First, we hold that the three standards for pleading falsity of opinion statements articulated in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015), apply to Section 10(b) and Rule 10b-5 claims. Second, we hold that Plaintiff has failed to sufficiently plead falsity under any of the three Omnicare standards. Third, we hold that Plaintiff has also failed to sufficiently plead scienter. Fourth, we hold that because Plaintiff has inadequately alleged a primary violation of federal securities law, Plaintiff cannot establish control person liability.

         BACKGROUND

         I. Factual Allegations

         Defendant Align is a Delaware-incorporated company that designs, manufactures, and markets the Invisalign system for treating the misalignment of teeth. Align also designs, manufactures, and markets 3D digital services and iTero intra-oral scanners for orthodontics and dentists through its wholly-owned subsidiary, Cadent. Defendant Thomas M. Prescott (Prescott) was President and CEO of Align, and a member of Align's Board of Directors during the Class Period. Defendant Kenneth B. Arola (Arola) was Align's CFO and Vice President of Finance during the Class Period. Plaintiff is a public pension fund that purchased common stock of Align during the Class Period.

         On March 29, 2011, Align issued a press release announcing its acquisition of Cadent. In a press conference that same day, Prescott and Arola explained that Cadent was "an attractive, high-growth, strategically valuable asset" that would allow Align to position itself as a major player in the intra-oral scanning market and "result in new growth opportunities, revenue synergies, increasing strategic leverage, and cost improvements." The transaction closed on April 29, 2011, at which Align paid $187.6 million for Cadent. Align allocated $135.5 million of the purchase price as "goodwill, " the amount of the purchase price exceeding the fair value of the net assets of the acquired company. Of this goodwill allocation, $76.9 million was specifically allocated to the acquired computer-aided design and manufacturing (CAD/CAM) and scanner unit (together with CAD/CAM, the SCCS unit).

         Plaintiff alleges that Cadent's purchase price, which was justified in part on Cadent's 2010 revenues, was artificially inflated. According to former Cadent employees cited as confidential sources, Cadent "offered substantial and unprecedented discounts to its customers in the last quarter of 2010" in an attempt to make itself "appear more valuable to an acquirer." This practice (channel stuffing) resulted in an unsustainable 147% increase in scanner sales by Cadent for the 2010 fiscal year. Defendants allegedly had knowledge of Cadent's channel stuffing because the deed would have been "readily apparent" from Align's due diligence and direct access to Cadent's financial reports and company documents through a data room that Cadent made available during the acquisition process.

         Align allegedly used Cadent's artificially inflated 2010 revenue as the basis for projecting a 20% sales growth rate and 50% gross margins for the SCCS unit, as well as making its initial goodwill valuation. The SCCS unit's revenue increased sequentially from the fourth quarter of 2011 to the second quarter of 2012, but ultimately failed to meet the projected 20% growth rate in any post-acquisition quarter. The SCCS unit's gross margins also failed to meet the 50% projection, instead ranging from 24% to 36% during the Class Period.

         Plaintiff alleges that the SCCS unit's financial results were negatively impacted by a variety of factors. First, as part of an effort to integrate Cadent's infrastructure into Align's, Align moved the SCCS unit from New Jersey to Mexico and Costa Rica in the fourth quarter of 2011. This integration effort involved the firing of 119 full-time Cadent employees before Align employees could be properly trained to assist customers with SCCS products. The firings negatively impacted customer service, a problem which Prescott acknowledged in an April 2012 investor call. Second, Cadent's competitors in the intra-oral scanning market were developing new products and business strategies. Plaintiff cites to various industry reports suggesting that competitors were "likely to offer superior products at considerably lower prices" in 2012 and predicting a shift to a "no per click or subscription fees" business model, which would potentially eliminate Cadent's revenues generated from services scan fees and 3D digital modeling and lab services. Third, the SCCS unit experienced a severe decline in international revenue in part because of a deteriorating relationship with Cadent's exclusive European distributor Straumann, and the European economic recession at the time. The SCCS unit's international revenue fell from $2.5 million in the third quarter of 2011 to $362, 000 during the fourth quarter of 2011. Although international revenues subsequently increased between the fourth quarter of 2011 and the first quarter of 2012, they then fell to a historic low in the second quarter of 2012.

         Pursuant to Generally Accepted Accounting Principles (GAAP), a company must conduct an annual test of its goodwill for impairment. Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 350: Intangibles - Goodwill and Other, ASC 350-20-35-28. "Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value." ASC 350-20-35-2. A company must also conduct additional goodwill testing between annual tests (interim goodwill tests) "if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount." ASC 350-20-25-30.

         Align conducted its annual goodwill impairment testing in the fourth quarter of 2011 and found no impairment to the SCCS goodwill valuation of $76.9 million. In its 2011 Form 10-K, Align explained that "[b]ased on the goodwill impairment analysis results during the fourth quarter of 2011, we determined that no impairment needed to be recorded as the fair value of our reporting units were significantly in excess of the carrying value." Align did not conduct any interim goodwill tests or take any interim goodwill impairments in either the first or second quarters of 2012.

         On October 17, 2012, Align announced that it was conducting an interim goodwill impairment test for the SCCS goodwill, triggered by the SCCS unit's poor financial performance in the third quarter of 2012 and the termination of its distribution relationship with Straumann. Align warned that this interim testing could possibly result in a significant impairment of the SCCS goodwill. This announcement led to 20 million shares of Align stock being traded in one day, and a 20% decline in Align's stock price. On November 9, 2012, Align announced a goodwill impairment charge of $24.7 million, reducing the SCCS goodwill to $52.6 million. On January 30, 2013, Align announced another goodwill impairment charge of $11.9 million, thereby reducing the SCCS goodwill to $36.6 million. Then, on April 18, 2013, Align announced a final goodwill impairment charge of the remaining SCCS goodwill.

         II. Procedural History

         Plaintiffs SAC alleges that Defendants made seven materially false and misleading statements concerning Align's goodwill valuation of Cadent during the Class Period. These alleged misstatements appeared in Align's press releases and Form 8-K, Form 10-K, and Form 10Q filings with the SEC. Count I of the SAC asserts a claim of securities fraud based on these misstatements pursuant to Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. Count II of the SAC alleges that Prescott and Arola committed securities fraud as control persons of Align within the meaning of Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a).

         On December 9, 2013, the district court dismissed with leave to amend Plaintiffs First Amended Complaint for failure to plead both falsity and scienter with sufficient specificity. On August 22, 2014, the district court dismissed with prejudice Plaintiffs SAC for failing once again to adequately plead falsity or scienter. Plaintiff subsequently filed this timely appeal.

         JURISDICTION AND STANDARD OF REVIEW

         We have jurisdiction pursuant to 28 U.S.C. § 1291. We review de novo dismissals under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Zucco Partners, LLC v. Digimarc Corp.,552 F.3d 981, 989 (9th Cir. 2009). We therefore must "accept the plaintiffs' allegations as true and construe them in the light most favorable to plaintiffs, and will hold a dismissal inappropriate unless the plaintiffs' complaint fails to ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.