First Circuit Upholds Dismissal of Securities Fraud Action Based Upon Immateriality of Allegedly Omitted Information

In In re Boston Scientific Corp. Securities Litigation, 2012 WL 2849660 (1st Cir. July 12, 2012), the United States Court of Appeals for the First Circuit affirmed the dismissal of a securities class action lawsuit against Boston Scientific Corporation (the “BSC”). The Court held that the alleged misstatements or omissions were not sufficiently material to support a claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and that the complaint’s allegations failed to meet the heightened requirements for pleading scienter under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 (“Reform Act”). In so holding, the First Circuit reconfirmed that the federal securities laws do not impose an affirmative duty on management to disclose all information that might affect the price of a company’s stock.

BSC manufactures and distributes medical devices. In August 2009, it was alerted to possible compliance violations by its Cardiac Rhythm Management (“CRM”) sales team. BSC initiated an internal investigation and decided to terminate ten CRM sales persons for violations of the company’s code of ethics. This investigation coincided with a subpoena from the U.S. Department of Health and Human Services, received in September 2009, requesting information regarding certain donations to charities made by the CRM group. BSC publicly disclosed the subpoena in November 2009, but did not disclose the dismissals until February 2010 due to the ongoing internal investigation. During this time, BSC continued to make allegedly optimistic statements about earnings and future sales while the firing and subsequent hiring by a competing company of the CRM sales employees, purportedly led to an estimated $100 million in lost revenue and a ten percent drop in the Company’s stock price.

In April 2010, a putative class of BSC investors filed suit in the United States District Court for the District of Massachusetts charging securities fraud in violation of Sections 10(b) and 20(a) of the Exchange Act. Plaintiffs alleged that, by knowingly making misleading statements or omissions regarding the CRM sales team, BSC executives caused the class members to purchase BSC stock at an artificially inflated rate. The district court dismissed the action, holding that none of the statements made in 2009 were materially false or misleading, while the allegations of scienter as to the remaining 2010 statement were inadequate.

The First Circuit affirmed. The Court held that all the alleged misleading statements made in 2009 were immaterial as a matter of law, as a reasonable investor would not have found that the statements “significantly altered the total mix of information made available.” The Court explained that the standard for materiality of omissions does not require companies to immediately disclose all information with the potential to affect stock price at a later time. Such a standard would impose an overwhelming burden on management and a potential competitive disadvantage to the company and its shareholders. Instead, when information merely creates the possibility that an event affecting the company will later occur, materiality will depend upon “a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.” The Court went on to examine each of the alleged misrepresentations in turn, finding that the outcome of the investigation was uncertain at the time of each statement made in 2009, whether because the investigation was still ongoing, the decision to fire employees had not yet been made or only a fraction of the firings had occurred. More generally, the Court noted that “the possible or imminent discharge of a tiny fraction of sales personnel for a single line of products remains of minimal expected consequence for a company with global operations and 25,000 employees.”

The Court did find as plausibly material BSC’s failure to disclose the hiring of the fired employees by a competitor in January 2010. The Court held, however, that the complaint did not contain sufficient particularized allegations giving rise to a strong inference that the omission was made with scienter, i.e., an intent to mislead investors or reckless disregard that the omission presented a high risk of misleading investors. Specifically, plaintiffs failed to plead facts to provide a clear indication that when the BSC officer spoke favorably about the company’s sales force in January 2010, he was either dishonest or reckless in not mentioning the salespeople hired by BSC’s competitor. The Court noted further that the omitted information was not “of such powerful importance that a wrongful intent can be reasonably inferred,” given that the salespeople fired were a small percentage of the CRM sales force and an even smaller percentage of the overall sales force at the time the statement was made.

There are three main “take aways” from this decision. First, it confirms that Section 10(b) does not impose a general duty on management to disclose publicly all material information that might affect the price of a company’s stock. Second, it illustrates that in appropriate circumstances, courts will rule on the facial immateriality of allegedly omitted information at the pleadings stage. Third, it reflects that the relative immateriality of allegedly omitted information can bear on the strength of an inference of defendants’ scienter.

For further information, please contact John Stigi at (310) 228-3717 or Valentina Shenderovich at (212) 634-3019.

Source:
http://www.corporatesecuritieslawblog.com/securities-litigation-first-circuit-upholds-dismissal-of-securities-fraud-action-based-upon-immateriality-of-allegedly-omitted-information.html

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Harvesting Intellectual Property: Inspired Beginnings and “Work-Makes-Work,” Two Stages in the Creative Process of Artists and Innovators

Professor Jessica Silbey of Suffolk University Law School discusses her Intellectual Property law research, as described in her recent article in Notre Dame Law Review Volume 86, Issue 5 and her upcoming book. Read the article at http://bit.ly/A927vO.

Source: http://legaltalknetwork.com/podcasts/suffolk-law/2012/01/harvesting-intellectual-property/

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FMLA self-care provision is not enforceable against states – Coleman v. Maryland Court of Appeals

During my days as a full time law prof teaching constitutional law and employment discrimination this question came up annually:

Exactly what is the extent of Congress’ power under Section 5 of the 14th amendment? “The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.”

There were always two potential extreme answers:

1. The power is limited to regulating conduct that itself violates the 14th amendment.

2. The power is expansive, much like the necessary and proper clause.

Law students typically wanted to know the rule that the Court would apply in every case. Something simple. Something predictable.

I always told them that there are nine Justices, and one must understand how each individual Justice sees things, and then count up the votes.

As time went by, most of the Justices adopted the view that Congress could go beyond regulating conduct that itself violates the 14th amendment, provided that there was “congruence and proportionality” between the injury to be prevented or remedied and the means adopted to that end. This, of course, gave the Justices huge individual leeway to determine what was congruent and what was proportional. Not simple. Not predictable.

And so it was with Coleman v. Maryland Court of Appeals (US Supreme Ct 03/20/2012) with the Court splitting up into three opinions: 4-1-4.

Coleman sued his employer, an instrumentality of the State of Maryland, claiming a violation of the Family Medical Leave Act (FMLA) by denying him self-care leave. The Federal District Court dismissed the suit; the 4th Circuit affirmed. The US Supreme Court affirmed (4-1-4).

Four Justices said that in order for Congress to abrogate the states’ immunity through the use of Section 5 of the 14th amendment, there must be “a congruence and proportionality between the injury to be prevented or remedied and the means adopted to that end .” In Nevada Dept of Human Resources v. Hibbs, 538 US 721 (2003), the Court upheld the portion of the FMLA that provides leave for the care of a spouse, son, daughter, or parent with a serious medical condition. However, the sex-based discrimination identified in the Hibbs case is absent with regard to the self-care provision. There is a lack of congruence and proportionality. The plurality rejected arguments that the self-care provision addresses sex discrimination and sex stereotyping, that it is a necessary adjunct to the family-care provision upheld in Hibbs, and that it helps single parents keep their jobs when they get ill.

Justice Scalia rejected the “congruence and proportionality” approach, saying that (outside of race discrimination) Congress’ power under Section 5 of the 14th amendment is limited to regulating conduct that itself violates the 14th amendment.

Four DISSENTING Justices, in applying the “congruence and proportionality” approach, would hold that “the self-care provision … validly enforces the right to be free from gender discrimination in the workplace.”

How many opinions?

Well, technically four. Actually five.

  • There was the plurality opinion by Justice Kennedy, joined by Chief Justice Roberts and Justices Thomas and Alito.
  • Justice Thomas also wrote a separate concurring opinion.
  • Then, concurring in the outcome, but with alternative reasoning, an opinion by Justice Scalia.
  • The dissent by Justice Ginsburg was joined by Justices Breyer, Sotomayor, and Kagan.
  • Wait, Justices Sotomayor and Kagan did not join in on Justice Ginsburg’s footnote 1, which expressed the idea (joined by Justice Breyer) that “Congress can abrogate state sovereign immunity pursuant to its Article I Commerce Clause power.”

So now everything is clear, right?

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Source: http://www.lawmemo.com/blog/2012/03/fmla_selfcare_p_1.html

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I’m really tired, a frequent refrain today

“I am really tired, and want to retire.”  But, retirement is out of reach for many lawyers after their homes and retirement plans took heavy hits over the last few years. “Business purgatory” is how one phrased it.

Delays in retirement are now common, with 38% in one survey saying their retirement will be at least 5 years later than expected. The income stream for many lawyers comes from their law practice. Selling, closing or merging the practice are options, but none are likely to provide the same income stream the lawyer is accustomed to receiving.

Unless the lawyer is willing to adjust one’s life style, he will remain in practice, working to build up the practice further in order to reap the rewards needed to fund retirement.

Source: http://feeds.lexblog.com/~r/LawBizBlog/~3/2PCWh9pUbPk/

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I’m really tired, a frequent refrain today

“I am really tired, and want to retire.”  But, retirement is out of reach for many lawyers after their homes and retirement plans took heavy hits over the last few years. “Business purgatory” is how one phrased it.

Delays in retirement are now common, with 38% in one survey saying their retirement will be at least 5 years later than expected. The income stream for many lawyers comes from their law practice. Selling, closing or merging the practice are options, but none are likely to provide the same income stream the lawyer is accustomed to receiving.

Unless the lawyer is willing to adjust one’s life style, he will remain in practice, working to build up the practice further in order to reap the rewards needed to fund retirement.

Source: http://feeds.lexblog.com/~r/LawBizBlog/~3/2PCWh9pUbPk/

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Parent-Trigger Laws: A Bold Plan To Save Schools

Several states have passed what are known as parent-trigger laws, which give parents a path to make operational changes in failing schools. Education Week reporter Sean Cavanagh talks about where parent-trigger laws are in place and what we know about whether or not they are working.

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Source: http://www.npr.org/2012/09/27/161894992/parent-trigger-laws-a-bold-plan-to-save-schools?ft=1&f=1070

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