Western District Of Washington Partially Dismisses Exchange Act Claims Against Technology Company
On October 4, 2019, Judge Robert Lasnik of the United States District Court for the Western District of Washington granted in part and denied in part a motion to dismiss a putative securities class action asserting claims under the Securities Exchange Act of 1934 against a technology company and certain of its executives. In re Impinj, Inc., Sec. Litig., No. C18-5704 RSL, 2019 WL 4917101 (W.D. Wash. Oct. 4, 2019). The Court held that plaintiffs failed to alleged falsity as to certain alleged misrepresentations and dismissed claims against one of the company’s executives for failure to adequately allege scienter, but otherwise upheld plaintiffs’ claims.
The company’s products allowed customers to place radio frequency identification (“RFID”) tags on everyday items to track their location. The alleged misrepresentations fell into two categories. First, plaintiffs alleged that the company misrepresented that its RFID products could identify a tagged item’s unique location (for example, one executive asserted that the device was accurate to within 1.5 feet). Id. at *1. Second, plaintiffs alleged that the company represented that its sales were increasing when they were actually declining, and that the company also masked the decline by pulling future sales orders into current quarters. Id. at *2. The Court held that plaintiffs adequately alleged falsity as to all the alleged misrepresentations with the exception of statements regarding increasing sales prior to the first quarter of 2017. The Court emphasized that, whereas plaintiffs alleged that the company became aware of declining sales in the first quarter of 2017, there were “no allegations that could support a finding that demand had stalled or was in decline prior to that date.” Id. at *4.
With respect to one of the company’s executives, the Court held that plaintiffs failed to adequately allege that he was the “maker” of any alleged misstatement under the Exchange Act, which requires having “ultimate authority over the statement, including its content and whether and how to communicate it.” Id. at *4 (citing Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (2011)). Plaintiffs sought to impose liability based on the executive’s “position in the company and his [alleged] power to control and/or opportunity to prevent/correct corporate misstatements,” but did not allege that the executive actually said or wrote any of the alleged misstatements or point to specific statements over which he had final authority. Id. Instead, the Court held the complaint alleged, at most, that the executive “had the power to suggest what should be communicated to the public” in connection with certain challenged statements, which was insufficient under Janus. Id.
With respect to scienter, the Court evaluated allegations of scienter as to two other company executives. Whereas the Court found a strong inference of scienter existed for one executive who attended meetings where problems with the location technology were discussed, and had acknowledged the problems and the fact that it would take a few years to find a solution, the Court determined that there were no such allegations for another executive and that it was possible he might not be “conversant in the engineering aspects of the business.” Id. at *5. As for alleged misrepresentations regarding sales growth, the Court found a compelling inference of scienter as to both executives—one who was personally involved in determining product-specific demand levels, and the other who was informed of declining sales during monthly forecast meetings and quarterly review sessions. Id. at *6. Given the importance of the location product to the company’s overall revenue, the Court held that even if those executives did not have actual knowledge of the decline in demand, the allegations gave rise to a strong inference of deliberate indifference regarding the truth of their representations. Id.
The Court also rejected defendants’ arguments as to loss causation. The Court held that plaintiffs’ allegations that the stock price dropped upon the Company’s disclosure “that demand was actually declining rather than increasing,” id., was sufficient to plead loss causation because it disclosed the truth regarding defendants’ alleged misrepresentations regarding demand and because it was plausible that declining demand and revenues resulted from the previously hidden lack of functionality of the RFIDs, which in turn had potentially led to the drop in demand for them. Id. The Court noted that “[w]hile the revelation of fraud in the marketplace followed by a drop in share price is one theory of causation plaintiffs may allege, it is not the only one.” Id. In this context, the Court held that allegations that “the stock price fell upon the revelation of an earnings miss”—even though the market may have been unaware of the reason for the earnings miss—were sufficient at the pleading stage to establish loss causation.