Resolution of whether Item 303 of Securities and Exchange Commission Regulation S-K creates an affirmative duty to disclose and a private right of enforcement under the Securities Exchange Act of 1934 will have to wait. On October 17, 2017, the Supreme Court of the United States removed argument in Leidos, Inc. v. Indiana Public Retirement System, et al.
, 583 U.S. __, 16-581 (Oct. 17, 2017), from its calendar and held further proceedings in abeyance. Leidos
is an appeal in a putative shareholder class action alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder against government contractor Leidos, Inc. (“Leidos”). See U.S. Supreme Court To Consider Registrant’s Liability For Non-Disclosure Under Item 303 Of Regulation S-K
, Shearman & Sterling LLP Need to Know Litig. Newsletter (Apr. 4, 2017), http://www.lit-sl.shearman.com/us-supreme-court-to-consider-registrantrsquos-lia
. The Court granted certiorari on March 27, 2017, merits briefing was completed on October 2, 2017, and the Court had set oral argument for November 6, 2017. In their October 6, 2017, joint motion noting an agreement in principle to settle, the parties stated that they were preparing settlement documentation and will ask the Court to reschedule argument for October Term 2018 if a final settlement is not approved by May 31, 2018.
The crux of plaintiffs’ allegations in Leidos
is that Leidos’s predecessor, SAIC, Inc. (“SAIC”), failed to disclose its potential liability in a criminal investigation arising out of an alleged kickback scheme relating to a New York City government contract for a timekeeping system. SAIC eventually disclosed the existence of the probe in June 2011 and ultimately agreed to pay approximately $500 million in restitution and penalties. In granting a motion to dismiss, the United States District Court for the Southern District of New York held in part that the omission was not actionable under Item 303, which requires the disclosure of “trends and uncertainties.” The Second Circuit reversed, holding—in contrast to the Third and Ninth Circuits—that Item 303 creates an affirmative duty to disclose along with a private enforcement right under the Exchange Act.
In its petition for review, Leidos had argued that the Second Circuit erred because, under Basic, Inc. v. Levinson
, 15 485 U.S. 224, 239 n.17 (1988), silence is not actionable absent a duty to disclose, and the Supreme Court had previously found a duty to disclose only where an omission rendered an affirmative statement misleading or in the case of a fiduciary relationship—neither of which was alleged here. Moreover, Leidos argued that allowing private enforcement of Regulation S-K would undermine the SEC’s disclosure regime, incentivize public companies to make defensive and over-inclusive disclosures, and encourage hindsight-driven litigation.
Business groups, including the U.S. Chamber of Commerce and Securities Industry and Financial Markets Association, submitted briefs in support of Leidos, while other amici
including the U.S. Government and institutional investors submitted briefs in support of plaintiffs. The Solicitor General’s office had also been granted leave to participate in oral argument.
With the issue off the Supreme Court’s calendar for now, the Circuit split regarding potential liability arising out of Item 303 will remain. In the meantime, investor plaintiffs will likely seek to capitalize on the Second Circuit’s decision by continuing to bring Item 303-based claims within the Second Circuit, such that eventual review by the Supreme Court remains likely.