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Lu v. Align Technology, Inc.

United States District Court, N.D. California, San Jose Division

October 29, 2019

XIAOJIAO LU, et al., Plaintiffs,
ALIGN TECHNOLOGY, INC., et al., Defendants.



         This case is a putative securities class action against Align Technology, Inc.; its President and Chief Executive Officer, Joseph M. Hogan; its Chief Financial Officer, John F. Morici; its former Chief Marketing, Portfolio and Business Development Officer, Raphael S. Pascaud; and its Senior Vice President of Global Operations, Emory M. Wright (collectively, “Defendants”). Lead Plaintiff SEB Investment Management AB (“Plaintiff”) brings this suit individually and on behalf of “all other persons and entities who purchased or otherwise acquired the common stock of Align Technology, Inc. between April 25, 2018 and October 24, 2018, both dates inclusive (the ‘Class Period').” ECF No. 90-1 ¶ 1.

         Before the Court is Defendants' motion to dismiss. ECF No. 92. The Court GRANTS Defendants' motion to dismiss with leave to amend.

         I. BACKGROUND

         A. Factual Background

         Defendant Align Technology, Inc. (“Align, ” or the “Company”) “designs, manufactures, and sells clear aligners for the treatment of malocclusion, or the misalignment of teeth, under the trademark Invisalign.” CCAC ¶ 1. Owing to a number of patents held by Align, the Company “held a virtual monopoly over the clear aligner market, ” at least until those patents began to expire in 2017. Id. ¶¶ 1, 3. However, as Align began to lose its patent protections, analysts began to acknowledge that new market entrants could “pressure [average sale prices].” Id. ¶ 3.

         Plaintiff's claims center around those competitive pressures and the representations that Defendants made to investors regarding how competition would impact Align's business. Plaintiff alleges that, on six separate occasions between April 25, 2018 and September 5, 2018, Defendants made false and misleading statements and/or omissions to investors that downplayed the competition, hid the Company's price cuts to combat competition, and failed to acknowledge that their strategies were insufficient to mitigate competitive pressures. Id. ¶ 128. For example, Plaintiff points to Hogan's response to a question on the April 25, 2018 quarterly conference call asking whether the company was “seeing any changes, perhaps in promotional activity or pricing from competitors”:

No, we haven't seen any change at all, John. I mean, we - I mean, the same cast of competitors are still out there that we had before. Obviously, we expect the 3M product at the AAO [(American Association of Orthodontists Annual Session)]. We are pretty sure to see one there. We saw the DENTSPLY announcement with the MTM expansion in the 510(k) that they've done. But we haven't seen that translate into any kind of strategy or implementation in the marketplace yet. We only expect to see that in the second half. Our guess, John, is pretty much what we've been telling you and the rest of the teams over the last couple of years is we expect this to be midrange products, so in the 26 aligner or less kind of an area. We expect a kind of a slow ramp-up just because of the nature of how you have to scale in this business, take some time in treatment planning and also manufacturing. So I mean, you can see with our kind of bullish forecast for the second half of the year that John just called that we're pretty much-have this in place in the sense of what we thought we would face, and we haven't really changed that analysis since we put the plan together last year.

Id. ¶ 130 (emphasis in original) (brackets omitted). Plaintiff purports to show that this and other, similar statements are false or misleading in light of the same repeated, undisclosed factual allegations:

Defendants: (i) met frequently regarding competition issues, including monthly EMC meetings; (ii) were internally warning their employees about the consequences of the patent expirations and the fact that competition was coming prior to the start of the Class Period (e.g., “they're coming”); (iii) internally made clear that they planned to address their concerns regarding the expiration of the Company's Invisalign patents and increased clear aligner competition by running promotions and offering cheaper alternatives; (iv) already had taken steps specifically intended to address the increasing competition, including overhauling Align's Advantage Program in January 2018 to spur greater dentist participation and provide discounts for certain non-comprehensive products; and (v) based on the available data, knew or were deliberately reckless in not knowing that the 2018 Advantage Program was insufficient by itself to counteract the impact of competition on Align.

Id. ¶ 137; see also Id. ¶¶ 148, 152, 154, 160, 165. Plaintiff alleges that Align's promotional activity and discounts demonstrate the enormity of the competitive pressures on the Company. See Id. ¶ 128. Plaintiff specifically focuses on Defendant's “significant changes” as of January 1, 2018 to the Company's Invisalign Advantage Program, a doctor incentive system offering volume-based discounts. Id. ¶ 7. Plaintiff further notes an additional summer discount program (the “summer sizzler” promotion) in the third quarter of 2018, which provided $200 discounts for certain sales. Id. ¶ 10. Plaintiff alleges that Defendants were aware of, but failed to disclose, the impact that these discounts had on the company's average sales prices (“ASP”), a key metric for investors to which Defendants had access throughout the class period. Id. ¶ 6.

         During the disclosure of third quarter results on an October 24, 2018 investor conference call, Defendant Morici acknowledged a drop in third-quarter ASP figures of approximately $85 “due to a combination of promotional programs, unfavorable foreign exchange and product mix, partially offset by price increases across all regions.” Id. ¶ 121. Align's stock price declined nearly $59 a share by the following day, id. ¶ 124, and this suit followed.

         B. Procedural History

         On November 5, 2018, an Align shareholder filed the instant case captioned Lu v. Align Technology, Inc., et al., N.D. Cal. Case No. 5:18-CV-06720-LHK. See ECF No. 1. Another shareholder filed suit on December 12, 2018, in a case captioned Infuso v. Align Technology, Inc., et al., N.D. Cal. Case No. 5:18-CV-07469. On January 2, 2019, the Court granted an administrative motion to relate the two cases. ECF No. 11. On March 22, 2019, the Court consolidated the two cases. ECF No 72. In the same Order, the Court appointed Plaintiff SEB Investment Management AB as lead plaintiff and appointed Kessler Topaz as lead counsel. Id.

         On May 10, 2019, Plaintiff filed a Consolidated Amended Class Action Complaint, ECF No. 87, which Plaintiff later corrected, ECF No. 90 (“CCAC” or the “Complaint”) ¶ 1.[1] On June 24, 2019, Defendants filed a motion to dismiss the Consolidated Amended Class Action Complaint. ECF No. 92 (“Mot.”). On August 13, 2019, Plaintiff filed an opposition. ECF No. 97 (“Opp'n”). On September 12, 2019, Defendants filed a reply. ECF No. 98 (“Reply”).

         In support of their motion to dismiss, Defendants filed a request for judicial notice and notice of incorporation by reference. ECF No. 93. Plaintiff does not object to incorporation by reference or judicial notice, but instead contests what facts or inferences the Court may draw from those documents. See Opp'n at 12 n.6. The Court only takes judicial notice of the fact of the filings; the Court does not accept as true any of the disputed facts in the filings. The Court GRANTS Defendants' request for judicial notice and incorporation by reference.


         Pursuant to Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss an action for failure to state a claim upon which relief may be granted. Because Plaintiff has brought claims as a federal securities fraud action, Plaintiff must “meet the higher, [more] exacting pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (PSLRA).” Or. Pub. Emp. Ret. Fund v. Apollo Group Inc., 774 F.3d 598, 603-04 (9th Cir. 2014).

         Under Federal Rule of Civil Procedure 9(b), “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Plaintiff must include “an account of the time, place, and specific content of the false representations” at issue. Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (internal quotation marks omitted). Rule 9(b)'s particularity requirement “applies to all elements of a securities fraud action.” Apollo Group, 774 F.3d at 605. “PSLRA imposes additional specific pleading requirements, including requiring plaintiffs to state with particularity both the facts constituting the alleged violation and the facts evidencing scienter.” In re Rigel Pharmaceuticals, Inc. Sec. Litig., 697 F.3d 869, 877 (9th Cir. 2012). In order to properly allege falsity, “a securities fraud complaint must . . . specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading.” Id. (internal quotation marks and alteration omitted). In addition, in order to “adequately plead scienter under the PSLRA, the complaint must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. (internal quotation marks omitted).

         For purposes of ruling on a Rule 12(b)(6) motion, the Court “accept[s] factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Nonetheless, the Court is not required to “assume the truth of legal conclusions merely because they are cast in the form of factual allegations.” Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (quoting W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981)). Mere “conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss.” Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004). Furthermore, “a plaintiff may plead [him]self out of court” if he “plead[s] facts which establish that he cannot prevail on his . . . claim.” Weisbuch v. Cty. of L.A., 119 F.3d 778, 783 n.1 (9th Cir. 1997) (quoting Warzon v. Drew, 60 F.3d 1234, 1239 (7th Cir. 1995)).

         Under Federal Rule of Civil Procedure 15(a), when a court grants dismissal, leave to amend “shall be freely granted when justice so requires, ” bearing in mind “the underlying purpose of Rule 15 to facilitate decision on the merits, rather than on the pleadings or technicalities.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (internal quotation marks and alterations omitted). Generally, leave to amend shall be denied only if allowing amendment would unduly prejudice the opposing party, cause undue delay, or be futile, or if the party moving for leave to amend has acted in bad faith. Leadsinger, Inc. v. BMG Music Publ'g, 512 F.3d 522, 532 (9th Cir. 2008).

         III. ...

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