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Ninth Circuit Reverses Denial Of Motion For Summary Judgment In Putative Securities Fraud Class Action, Finding The Affiliated Ute Presumption Of Reliance Did Not Apply Because Plaintiff’s Allegations Could Not Be Characterized Primarily As Claims Of Omission
07/07/2021On June 25, 2021, a divided panel of the United States Court of Appeals for the Ninth Circuit reversed a decision of the United States District Court for the Northern District of California denying summary judgment to defendants in a putative securities fraud class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder against an automobile manufacturer and its wholly owned subsidiary. In re Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation, —F.3d—, 2021 WL 2621171 (9th Cir. 2021) (“In re Volkswagen”). Plaintiff alleged that, in connection with bonds issued through three private placements, defendants made omissions and affirmative misrepresentations related to the use of emissions “defeat devices” in their vehicles. Defendants moved for summary judgment on the reliance element of plaintiff’s claims, but the district court denied the motion, reasoning that plaintiff’s claims were based primarily on defendants’ alleged omissions rather than affirmative misstatements, and a presumption of reliance therefore applied. Considering the issue on interlocutory appeal, a divided panel of the Ninth Circuit reversed and remanded.
Plaintiff filed the putative securities fraud class action seeking to recover losses related to their bond investments allegedly incurred after the United States Environmental Protection Agency and California Air Resources Board issued notices of violation to defendants concerning their use of “defeat devices” in certain of their vehicles. Specifically, as was widely publicized by the media, defendants were “secretly installing defeat devices in millions of [their] diesel cars worldwide to mask unlawfully high emissions from regulators and cheat on emissions tests.” Id. at *2. Following the announcement of the notices of violation, plaintiff’s bonds dipped below par value. Plaintiff alleged that defendants made several misrepresentations and omissions in the Offering Memoranda for the bonds. Significantly, plaintiff’s complaint alleged “more than nine pages of affirmative misrepresentations” that were made by defendants “and relied upon” by plaintiff. Id. at *5. Defendants moved for summary judgment on the issue of reliance, which the district court denied.
The Ninth Circuit reversed, holding that the presumption of reliance set forth by the Supreme Court in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), was inapplicable. The Court reasoned that Affiliated Ute and subsequent cases established a presumption of reliance only for instances “involving primarily a failure to disclose” and where, as a result, plaintiffs had the “difficult task of proving a speculative negative”—i.e., “I would not have bought had I known.” In re Volkswagen at *4 (citing Blackie v. Barrack, 524 F.2d 891, 908 (9th Cir. 1975); Binder v. Gillespie, 184 F.3d 1059, 1064 (9th Cir. 1999)). The Court found that plaintiff’s complaint could not be characterized as one that primarily alleged omissions, stressing that the complaint included detailed allegations of affirmative misrepresentations allegedly made by defendants and, moreover, expressly alleged that plaintiff and its advisors relied on those affirmative misrepresentations. The Court thus held that while “[t]here is no question that Plaintiff alleges an omission regarding [defendants’] use of defeat devices,” nevertheless “that omission is simply the inverse of the affirmative misrepresentations” defendants made “about environmental compliance and financial liabilities.” Id. at *7. The Court emphasized that to find plaintiff’s claims to be based primarily on omissions (therefore warranting a presumption of reliance) would effectively afford the presumption to all securities fraud claims, because all misrepresentations are also nondisclosures to the extent that there is a failure to disclose which facts in the representation are not true. The Court therefore reversed and remanded for the district court to further consider whether triable issues of material fact existed.
Judge Wallace dissented. He “agree[d] with the majority that this interlocutory appeal presents a mixed case of both omissions and affirmative misrepresentations,” but maintained that Ninth Circuit precedent “dictate that the Affiliated Ute presumption can be available here because the plaintiff alleges a case primarily based on [defendants’] omission.” Id. at *8 (citing Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975); Binder v. Gillespie, 184 F.3d 1059 (9th Cir. 1999)). According to Judge Wallace, the majority’s reading of Affiliated Ute and its progeny “effectively removes the availability of the Affiliated Ute presumption of reliance for plaintiffs alleging mixed cases primarily based on omissions if some ‘positive statement’ or affirmative misrepresentation was also made and relied upon.” Id.
Given the 2-1 split and the disagreement between the majority and dissent regarding the application of Circuit precedent to cases alleging both omissions and affirmative misstatements, it is possible that the Ninth Circuit will consider en banc the issue of the reach of the Affiliated Ute presumption of reliance.
