Exchange Act Claims Dismissed Against Solar Energy Company For Plaintiffs’ Failure To Allege Falsity Of Optimistic Projections Or Scienter
On October 9, 2018, Judge Richard Seeborg of the United States District Court for the Northern District of California dismissed with prejudice a putative class action against a solar energy company (the “Company”) and certain of its officers under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In re SunPower Corp. Secs. Litig., No. 16-cv-04710-RS (N.D. Cal. Oct. 9, 2018). Plaintiffs alleged the Company misrepresented demand for its projects by failing to report that an extension of an investment tax credit (“ITC”) and other tax rules would decrease demand in the near-term. Observing that the gravamen of the complaint is that the Company made bad predictions, the Court dismissed the action because plaintiffs failed to identify a material misrepresentation or omission and failed to plead facts sufficient to give rise to a strong inference of scienter, as required by the Private Security Litigation Reform Act (“PSLRA”).
The Company delivers solar technology and systems to residential, commercial, and power plant customers. Demand for its products benefited from an ITC and other rules providing tax advantages to solar system owners. These tax benefits were set to expire at the end of 2016, however, and the Company issued guidance expecting higher demand in the near-term as customers rushed to complete projects before the expiration. In December 2015, Congress extended the tax benefits, however, and this removed the urgency for 2016 projects. Plaintiffs alleged the Company issued optimistic guidance and projections in February 2016, even though defendants were immediately impacted by this extension, in particular because one prospective customer terminated negotiations in late 2015. In August 2016, the Company lowered its forecasts, identifying the ITC and tax rule extensions as contributing factors, and its stock price fell 30 percent the next day.
In dismissing the action, the Court held that plaintiffs failed to allege a misrepresentation or omission of material fact for three reasons. First, the Court held that most of the challenged statements announced long-term growth prospects after the tax benefits were extended and therefore concerned future expectations protected under the PSLRA safe harbor. According to the Court, the Company’s optimistic statements about its growth prospects could not be rendered non-forward-looking because of one failed negotiation, as plaintiffs argued. Second, the Court held that statements about “very strong demand” were non-specific and therefore non-actionable puffery. The Court further held that these statements at most reflected inactionable opinions about the Company’s potential to close deals. Third, the Court held that one lost negotiation after the extension of the tax rules was insufficient to allege that any statements were false at the time they were made, particularly because the Company did not immediately realize that its performance had been harmed by the extensions. The Court noted that plaintiffs failed to plead anything that called into question the Company’s methodology for financial forecasting.
The Court also held that the allegations in the complaint did not support a strong inference that defendants knew their optimistic projections or guidance were groundless, concluding that “being aware of some signs there might be a slowdown in a business” is not sufficient to allege scienter. The Court held that the inference that the Company’s management was not yet experiencing the effects of the decreased demand for solar projects was equally plausible, particularly because the Company continued to meet or exceed its revenues and EBITDA guidance in the first two quarters of 2016 following the extensions.