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Central District Of California Dismisses Putative Class Action Against Electric Automobile Company For Failure To Adequately Allege Actionable Misrepresentations
02/28/2023On February 16, 2023, Judge Josephine L. Staton of the United States District Court for the Central District of California dismissed without prejudice a putative securities class action asserting claims under the Securities Exchange Act of 1934, the Securities Act of 1933, and Regulation S‑K against an electric automobile company, certain of its executives and directors, and underwriters in the company’s initial public offering. Crews v. Rivian Automotive, Inc., No. 2:22-cv-01524-JLS-E, slip op. (C.D. Cal. Feb. 16, 2023), ECF No. 149. Plaintiffs alleged that the company made various misrepresentations relating to the pricing and profitability of the company’s vehicles, while allegedly knowing that it would need to increase pricing to address rising costs. The Court held that plaintiffs failed to adequately allege any false statement or actionable omission.
The Court first assessed statements concerning the company’s profitability. Concerning statements attributing the company’s negative gross monthly profits to “significant labor and overhead costs” at a particular factory, while noting that it had “just started to ramp vehicle production at the site” (Id. at 20), the Court rejected plaintiffs’ argument that the statement suggested that merely increasing production volume would solve the company’s negative profitability. The Court determined that the challenged statement “ma[de] no promises, explicit or implied,” and that other disclosures in the offering documents emphasized that “[w]e do not expect to be profitable for the foreseeable future … and we cannot assure you that we will ever achieve or be able to maintain profitability in the future.” Id. at 21-22. The Court further held that the company’s statements that it expected to “operate at a negative gross profit per vehicle for the near term” were, in fact, consistent with plaintiffs’ allegation that the company internally projected a three-year path to profitability. Id. at 23.
The Court also assessed challenged statements relating to the pricing of the company’s vehicles. For statements that referenced inflation and customer demand as driving vehicle pricing, the Court found these statements were not plausibly alleged to be false even if, as plaintiffs alleged, price increases would have been eventually required regardless of those factors. Id. at 25. The Court explained that in “broaching the subject of potential price increases, [the company] did not need to address all relevant considerations or disclose its internal profitability projections and pricing strategy.” Id. at 25.
Having dismissed plaintiffs’ Exchange Act claims for failure to adequately allege misstatements, the Court likewise dismissed plaintiffs’ claims under Sections 11 and 12(a)(2) of the Securities Act, noting that plaintiffs had not adequately alleged falsity regardless of whether the Securities Act claims sounded in fraud and the heightened pleading standard of Rule 9(b) applied. Id. at 28, 35-36.
In addition, the Court rejected plaintiffs’ claims based on Item 105 of SEC Regulation S-K (requiring offering materials filed on form S-1 to discuss the most significant risk factors) as well as Item 303 of Regulation S-K (requiring the disclosure of “any known trends or uncertainties” materially impacting net sales or revenues). Id. at 29. Plaintiffs alleged that the company should have disclosed that its production costs had been increasing, its gross profit margins were becoming increasingly negative, its projected timeline for positive gross profit margins was being pushed back further into the future, its vehicle prices needed to increase, and that without price increases the company would lose money on each vehicle sold for several years. Id. at 29-30. The Court rejected that the company was required to disclose that prices needed to be increased, noting that plaintiffs’ allegations suggested only that company management knew that “prices would need to increase eventually, but the timing of price hikes was in flux.” Id. at 32. The Court explained that it was “reluctant to interpret securities laws and regulations as requiring disclosure of a prospective pricing strategy or challenging pricing decisions that a company is currently facing.” Id. at 32-33. The Court further rejected plaintiffs’ arguments based on allegedly rising production costs. Noting that vehicle profit margins were not known until two months before the IPO, the Court emphasized that rising costs in the company’s “internal forecasts and pre-production estimates” did not need to be disclosed because that amounted to a “future trend projection” rather than a present known trend. Id. at 34. Moreover, the Court concluded that Item 105 and Item 303 do not require disclosure “at th[e] level of specificity” of the bill of materials cost for a particular vehicle model, given that the company had not otherwise addressed pricing for that specific model in the offering documents. Id.
