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Northern District Of California Dismisses Putative Securities Class Action Against Manufacturing Company For Failure To Adequately Allege Misrepresentations
12/22/2020On December 10, 2020, Judge Lucy Koh of the United States District Court for the Northern District of California dismissed with prejudice a putative securities class action asserting claims under the Securities Exchange Act of 1934 against a manufacturing and design company and certain of its officers. Kipling v. Flex Ltd., No. 18-CV-02706-LHK, 2020 WL 7261314 (N.D. Cal. Dec. 10, 2020). Plaintiff alleged that the company made misrepresentations concerning a major contract to manufacture shoes for a shoe company. The Court held that plaintiff failed to adequately allege actionable misstatements or omissions and, because the Court had already granted plaintiff an opportunity to replead in a prior order, dismissed the case with prejudice.
The Court first explained that one challenged statement—that a contract with the shoe company “ha[d] been a great solution for us, a great story for us” and that “[w]e have to drive significant volume, which we’re doing today”—had been dismissed in the Court’s prior order as nonactionable puffery. Because reasonable investors “do not rely on vague statements of optimism like ‘good,’ ‘well-regarded,’ or other feel good monikers,” and that a “‘great story’ of ‘driv[ing] significant volume’ is a paradigmatically vague statement of optimism,” the Court reaffirmed that the statement was not actionable. Id. at *9.
The Court next assessed plaintiff’s allegations, which were based on information provided by seven confidential witnesses, that the company made false statements regarding the profitability of the manufacturing contract. Id. at *10. The Court rejected the reliability and import of the witnesses’ statements on various grounds, concluding that “none … [was] indicative of the falsity of the profitability [s]tatements.” Id. at *12. As to certain witnesses, the Court determined that their statements were “vague hearsay” because they did not specify who supplied the confidential witnesses with the alleged information, any dates or details of the discussions in which that information was provided, or how the colleagues who allegedly supplied the information knew that information in the first instance. Id. at *11. Plaintiff contended that these witnesses had personal knowledge by virtue of having attended corporate meetings, but the Court observed that there was no allegation that those meetings involved discussions of the company missing its production projections, either generally or with respect to the contract in question. Id. For other witnesses, the Court found their testimony unreliable because they had never done any work in connection with the contract at issue. Id. The Court also determined that many of the witnesses’ statements were unreliably vague, including a witness who failed to detail which specific production metrics were not met and departed the company before certain challenged statements were made. Id. With regard to other confidential witness statements, the Court determined that they only described “operational difficulties,” which did not necessarily render the profitability statements false. Id. at *12-14.
The Court also concluded that plaintiff failed to adequately allege falsity with respect to challenged statements not related to profitability. Id. *15. Plaintiff alleged that the company’s allegedly undisclosed operational difficulties rendered misleading statements that the company was “accelerating our investments” in the project “on the back of early automation successes” and that the company was “starting to get early successes around some of the design engagements that we’re having.” Id. But the Court determined that the mere existence of operational problems did not mean the company did not have “early successes.” Id. The Court further observed that certain allegations by confidential witnesses actually “supported the veracity” of some of the challenged statements, because they suggested that the company initially had met its production metrics before those metrics fell off later in time. Id. The Court also emphasized, as it had in a prior order, that the company had disclosed “sweeping risks to the viability” of the contract, including that the contract concerned a “new product category and we’re very new to it.” Id. at *17.
Because the Court determined that further amendment would be futile, and that plaintiff had failed to cure the deficiencies highlighted in the Court’s prior order, the Court dismissed the action with prejudice. Id. at *18.
