Northern District Of California Denies Motion To Dismiss Exchange Act Claims Against Electric Vehicle Battery Development Company, Holding Plaintiff Adequately Pleaded Misleading Statements, Scienter, And Loss Causation
On January 14, 2022, Judge William H. Orrick of the Northern District of California denied a motion to dismiss a putative securities class action asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5, against a lithium battery development company (the “Company”) and certain of its executives (collectively, “defendants”). In re Quantumscape Securities Class Action Litigation, No. 3:21-cv-00058-WHO (N.D. Cal. Jan. 14, 2022). The Company’s “solid-state” battery is an aspiring competitor to conventional lithium-ion batteries for use in electric vehicles. The Court denied defendants’ motion to dismiss, holding that the Complaint was adequately plead with the exception of one of the challenged statements that it dismissed.
The Complaint alleged that defendants falsely represented the progress and effectiveness of the Company’s solid-state batteries and relied on two publications to support their claims. First, a January 4, 2021 publication authored by an expert who reviewed a December 2020 showcase by the Company revealed that, notwithstanding that the Company “had some successes,” the Company “had ‘overstated’ certain” of its capabilities, concluding, among other things, that the Company’s solid-state batteries were “completely unacceptable for real world field electric vehicle performance.” Second, an April 15, 2021 publication stated, among other things, that the Company’s testing of its solid-state batteries was “compromised,” including by using too-small cells, too-high temperatures, and pulse tests, all of which made the Company’s batteries seem more commercially viable than defendants allegedly knew them to be, and that defendants made false claims about the progress of the Company’s solid-state batteries and in some instances mispresented the Company’s testing data. This publication cited several anonymous former Company employees and industry experts. According to plaintiff, both of these publications caused the Company’s stock price to drop significantly.
In support of their motion to dismiss, defendants argued that the two publications could not be relied upon to show falsity because they provided no evidence that anything defendants stated was false or misleading. Defendants further argued that both articles lacked credibility because the paid author of the first article was the CEO of one of the Company’s competitors, and that he also held a long position in another electric car company that uses lithium-ion batteries; and the author of the second article was a short-seller of the Company’s stock. The Court, however, refused to dismiss the claims based on the purported motives of the authors of the publications, noting that although the purported motives ultimately could later raise serious credibility issues, defendants pointed to no case in which motive alone was sufficient to discredit otherwise adequate allegations at the pleading stage. The Court also found that to the extent the articles relied on information from confidential witnesses, including some of the Company’s former employees, that information was “supported by both public information . . . and by what experts stated.” Therefore, the Court held that “[o]n the whole, it is plausible that reasonable investors would have relied on both publications and the plaintiffs have adequately alleged that each publication has the minimum indicia of reliability to make it past the pleadings stage.”
The Court next considered what it identified as the two groups of alleged misstatements at issue: “(1) statements about [the Company’s] testing conditions and having solved the ‘fundamental risks’ or ‘fundamental science risks’ of solid-state batteries such that the batteries were ready for commercialization and (2) comparisons of the solid-state batteries to lithium-ion batteries or ‘conventional batteries’ already on the market.”
Regarding the first set of alleged misstatements about testing conditions, the Court found that while the Company’s disclosures of underlying testing data and the results of those tests were “extensive” and may well weaken or even defeat the plaintiff’s case at a later stage when a factfinder can weigh them contextually, it cannot conclude that the adequacy of the disclosure “is so obvious that ‘reasonable minds could not differ’ about whether the overall statements were misleading.” The Court further observed that plaintiff does not allege that the Company should have used a different methodology for its studies, but rather that “the studies were represented to be one thing (uncompromised) when they were in fact another (compromised) that required experts (and in some cases, insiders) to accurately comprehend.” According to the Court, these allegations were sufficient to survive defendants’ motion to dismiss. Turning to the second group of alleged misstatements, the Court found that the statements were at least in part misleading to the extent that these comparative statements were made based upon, or in conjunction with, the allegedly compromised testing data, which the Court already held were adequately alleged to be misleading.
The Court next addressed whether a number of alleged misstatements were protected under the PSLRA’s safe harbor. The Court held that most of the challenged statements were not because the alleged statements either concerned the Company’s past developments, its current state of affairs, or did not discuss the Company’s future at all. Accordingly, the Court held that the majority of the challenged statements failed to meet the safe-harbor requirements. The Court found one part of one of the alleged misstatements—“if we can get into this market, which is the task we are currently focused on”—was in fact forward-looking and not actionable.
The Court then turned to whether any of the statements were, as defendants argued, non-actionable opinions. The Court rejected defendants’ argument that the challenged statements concerned the Company’s progress and development “as a factual matter,” specifically with respect to its testing and capabilities. The Court similarly found that most of the challenged statements were not unactionable puffery, with the exception of one statement that the solid-state batteries were “record-breaking” in comparison to conventional lithium-ion batteries. According to the Court, plaintiff did not point to an actual “record” at issue, and defendants calling something “record-breaking” is corporate hype that no reasonable investor would credit.
Next, addressing the sufficiency of the scienter allegations, the Court found that “the statements that the defendants made over and over were, according to the plaintiffs’ allegations, verifiable falsehoods.” The Court noted that the Company continued to state that it used uncompromised testing conditions when according to its disclosures it in fact used compromised testing conditions. The Court also rejected defendants’ argument that plaintiff impermissibly imputed scienter onto the individual defendants based on their positions as executives, emphasizing that the individual defendants themselves allegedly reported false information about the Company.
Finally, the Court held that the Complaint adequately alleged loss causation at the pleading stage by alleging facts that the Company’s stock price dropped immediately following the publishing of both purported corrective disclosures. The Court held that, because of this, “the revelation of alleged fraud was at least a substantial cause of the loss of value.”