Opinion ID: 2976605
Heading Depth: 3
Heading Rank: 1

Heading: Standard for Determining Materiality

Text: Plaintiffs’ claim is based “entirely on Defendants’ failure to disclose that OmniCare had materially breached the CRA and was thus in immediate risk of losing its sole source of revenue and subject to substantial financial and other penalties.” Compl. ¶ 127. Plaintiffs must prove that this failure to disclose by UAHC was material. E.g., In re Comshare, 183 F.3d at 548. For the purposes of securities fraud cases, “materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information.” Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988). That is, a statement is material where there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Id. at 231-32 (citations omitted). Once materiality is proved, reliance need not be shown. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972) (“[P]ositive proof of reliance is not a prerequisite to recovery [in a failure-todisclose case]. All that is necessary is that the facts withheld be material in the sense that a reasonable investigator might have considered them important in the making of this decision.”). However, materiality alone is not enough to place a duty to disclose on a company. See In re Sofamor Danek, 123 F.3d at 402. Further limitations on this duty to disclose are necessary because “corporations might otherwise ‘face potential second-guessing in a subsequent disclosure suit,’ a regime that would threaten to ‘deluge investors with marginally useful information, and would damage corporations’ legitimate needs to keep some information non-public.’” City of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669 (6th Cir. 2005) (citing In re Sofamor Danek, 123 F.3d at 403). In determining whether or not the duty to disclose exists, the In re Sofamor Danek Court distinguished between “soft information” and “hard information”; a company has a duty to disclose hard information but not soft information unless other criteria are met. In re Sofamor Danek, 123 F.3d at 402. Hard information is typically historical information or other factual information that is objectively verifiable. Such information is to be contrasted with “soft” information, which includes predications and matters of opinion. Id. at 401 (internal quotations and omissions omitted). “The failure to disclose soft information is actionable only if it is virtually as certain as hard facts.” City of Monroe, 399 F.3d at 669 (citing Starkman v. Marathon Oil Co., 772 F.2d 231, 241 (6th Cir. 1985)) (internal citations omitted). In addition to the limitation on liability where information is deemed to be “soft,” the PSLRA has provided a safe-harbor provision that generally protects companies from liability when they issue future forecasts: [The safe harbor] provision excuses liability for defendants’ projections, statements of plans and objectives, and estimates of future economic performance. A plaintiff may overcome this protection only if the statement was material; if defendants had actual knowledge that it was false or misleading; and if the statement was not identified as “forward-looking” or lacked meaningful cautionary statements. Helwig, 251 F.3d at 547-48 (citing 15 U.S.C. § 78u-5(c)(1)). Where a company does disclose that its statement is forward-looking, liability may still attach to the extent that the company made the statement in a misleading manner. That is, if a company chooses to disclose information about the future, “its disclosure must be full and fair, and courts may conclude that the company was obliged No. 07-1298 Zaluski, et al. v. United American Healthcare Corp., et al. Page 7 to disclose additional material facts to the extent that the volunteered disclosure was misleading.” Id. at 564 (internal quotations and omissions omitted). Therefore, once a company chooses to speak, it must “provide complete and non-misleading information with respect to subjects on which [it] undertakes to speak.” Rubin v. Schottenstein, Zox & Dunn, 143 F.3d 263, 268 (6th Cir. 1998). In such cases, [t]he question thus is not whether a [company’s] silence can give rise to liability, but whether liability may flow from [its] decision to speak . . . concerning material details . . . , without revealing certain additional known facts necessary to make [its] statements not misleading. This question is answered by the text of the [SEC] Rule 10b-5(b) itself: it is unlawful for any person to “omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . . ” Id. at 267 (quoting 17 C.F.R. § 240.10b-5(b)); see also City of Monroe, 399 F.3d at 670. In City of Monroe, this Court considered allegations that omissions made in financial statements and a press release were material. The plaintiffs in City of Monroe alleged that the defendants were aware of the high rate of tire failure that was occurring, and that officials in other countries were investigating several tire blow-outs attributable to defects in manufacturing, but nonetheless published statements regarding confidence in their product and leadership in the market. 399 F.3d at 671. The plaintiffs argued that these annual statements were actionable because they were made while the defendants were in possession of “specific, adverse information undermining the truth of those statements.” Id. The statements included that the company’s tires were “the best tires in the world,” that it had “no reason to believe there is anything wrong with” the tires, that the products demonstrated “global consistent quality,” and that successful sales were due to “high regard among automakers for our strengths in product quality.” Id. However, the City of Monroe Court concluded that these statements were immaterial, as they were “best characterized as loosely optimistic statements insufficiently specific for a reasonable investor to ‘find them important to the total mix of information available.’” Id. at 671 (quoting In re Ford, 381 F.3d at 570-71.) The City of Monroe Court did find a single statement made by the defendants in a press release to be actionable. Despite being in possession of internal reports revealing high rates of tire failure and being aware that the company had entered into private settlements with several parties because of the unsafe tire conditions, the company nevertheless stated: “we continually monitor the performance of all our tire lines, and the objective data clearly reinforces our belief that these are high-quality, safe tires.” Id. at 672. The Court reasoned that, given that the press release was issued in response to several consumer lawsuits alleging product defects that caused fatalities as well as safety groups’ requests that Ford recall all Explorers carrying the tires, “[a] reasonable juror could . . . conclude that the statement, without some qualification or accompanying disclosure of the numerous pieces of evidence that tended to cut the other way, was a misrepresentation” Id. The Court reached no decision as to whether the defendant “necessarily had an obligation to disclose the various safety and looming regulatory issues” surrounding the tires, but found that “once Firestone elected to make statements such as the statement regarding the ‘objective data,’ it was required to qualify that representation with known information undermining (or seemingly undermining) the claim.” Id. at 673 (citing Mayer v. Mylod, 988 F.2d 635, 639 (6th Cir. 1993) and In re K-tel Intern, Inc., Sec Litig., 300 F.3d 881, 896, 898 (8th Cir. 2002) (quoting Helwig, 251 F.3d at 561)).