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Northern District Of California Grants Motion To Dismiss Putative Class Action Against Biotechnology Instrument Company
03/26/2024On February 20, 2024, Judge Haywood S. Gilliam, Jr. of the United States District Court for the Northern District of California granted with leave to amend a motion to dismiss a putative securities class action against a manufacturer of laboratory instruments and other advanced automation systems (the “Company”), certain of its current and former officers and directors, several venture capital firms that invested in the Company, and the underwriters of the Company’s July 2020 IPO. Victor J. Ng, et al. v. Berkeley Lights, Inc., et al., No. 21-cv-09497-HSG (N.D. Cal. Feb. 20, 2024). Plaintiff alleged that defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, by making false and misleading statements and omissions regarding the functionality of the Company’s flagship product (the “Product”).
According to plaintiff, the Product is a laboratory instrument designed to analyze and process cell data for use in developing and commercializing biotherapeutics and other cell-based products. Sales of the Product and the Company’s other advanced automation systems allegedly constitute the majority of the Company’s revenue. Plaintiff alleged that, while defendants touted the superiority of the Product compared to other instruments on the market, the Product in fact was unreliable due to several design and manufacturing defects. Specifically, plaintiff alleged that the Product suffered from breakdowns, high error rates, and data integrity issues that prevented customers from using the technology at scale. Plaintiff also alleged that defendants failed to disclose numerous customer complaints about these issues, and that defendants misrepresented the Company’s past financial growth and future growth potential. Plaintiff further alleged that in September 2021, a short-seller of the Company’s stock issued a report purporting to reveal failures of the Company’s business model and the Product in particular. The report allegedly cited interviews with former employees, industry scientists and some of the Company’s largest customers, who allegedly claim that they were “tricked” or “misled” into buying the Product. The report concluded that only a few biotechnology companies could afford the Product, and that customer complaints would stifle the Company’s growth. Following the issuance of the report, the Company’s stock price allegedly dropped significantly over the course of two days and continued to drop in January 2022 following the Company’s announcement that its total revenue for 2021 was expected to fall short of projections and that the Company was replacing its CEO.
As a threshold matter, the Court addressed defendants’ argument that the allegations in the amended complaint were insufficient because they were premised on the short-seller report, which was issued by a short-seller with its own self-interest in the Company’s stock price declining. The Court noted that the Ninth Circuit has not held that short-seller reports are per se unreliable, and the critical issue is the character of the report itself. Because the report was written by a short-seller, rather than a named author, the Court determined that it falls “under the same umbrella” of information provided by confidential witnesses. With that context, the Court found that plaintiff failed to meet its PSLRA burden with respect to the short-seller report, noting that the amended complaint entirely relied on the self-interested short-seller’s own assertions that the characterizations allegedly passed on by these former employees were credible, and also failed to include any particularized details about their job titles or period of employment, or their firsthand knowledge of facts contradicting defendants’ public statements. Moreover, plaintiff pled no specific details about the positions of the interviewed customers, and also failed to allege particularized facts to substantiate the short-seller report’s overall “subjective conclusion.”
The Court then determined whether the challenged statements were false or misleading, grouping the alleged misstatements into the following two categories: (1) statements concerning the Product’s capabilities, and (2) statements about the Company’s finances and growth prospects. The Court held that the amended complaint did not allege with any level of specificity how any of the identified characterizations of the Product were false, finding that these statements were not objectively verifiable and instead constituted inactionable puffery. With respect to the omissions alleged to be false or misleading, the Court found that plaintiff’s omission theory “fail[ed] to pass muster under the PSLRA,” because plaintiff did not sufficiently plead “general statements of optimism made against a clearly pessimistic backdrop.” The Court further agreed with defendants that the Company was not required to disclose that the Product had experienced defects or recite the specifics of all customer complaints every time it described the Product.
Turning next to the alleged misstatements about the Company’s finances and growth prospects, the Court held that they were either (i) non-actionable opinion statements, or (ii) forward-looking statements protected by the PSLRA’s safe harbor doctrine. As to opinion statements, the Court found that optimistic representations regarding the Company’s growth were not objectively verifiable and amounted to inactionable puffery. The Court held that plaintiff failed to plausibly allege that defendants did not genuinely hold the optimistic beliefs, or that they were objectively untrue. The Court found that other statements identified by plaintiff were forward-looking, such that their truth or falsity could not be discerned until after the statements were made. In particular, the Court observed that plaintiff failed to plead that any of the challenged statements about the Company’s revenue guidance contained an actionable representation of current or past fact, that the confidential witness statements describing the Product’s purported manufacturing defects and customer complaints fell short of plausibly pleading that the Company’s representations about its revenue projections were materially false or misleading, and that the purported omissions of shortcomings as to the Company’s platform were fatally disconnected from corporate statements regarding the Company’s revenue projections and growth potential.
Lastly, the Court held that plaintiff failed to sufficiently plead scienter, finding that the amended complaint did not plead with particularity that the individual defendants knew about any of the Product’s specific claimed defects or particular customer complaints at the time they made the challenged statements. The Court also rejected plaintiff’s “core operations” theory of scienter, finding there were no allegations that the specific individual defendants admitted any involvement with the minutiae of specific customer complaints or the Product’s claimed technical defects. Similarly, the Court rejected plaintiff’s theory of scienter based on alleged insider trading, noting the failure to allege that defendants made significant profits from their sales and that the amended complaint contained no allegations regarding defendants’ prior trading history.
Having found no primary violation of securities law, the Court rejected plaintiff’s control person claims. The Court also dismissed plaintiff’s Section 11 claims, holding that those claims sounded in fraud and were therefore subject to the heightened pleading standards under Rule 9(b). For the same reasons discussed regarding the Section 10(b) claims, the Court held that plaintiffs failed to meet Rule 9(b)’s requirements with respect to pleading a false or misleading statement under Section 11.
