Opinion ID: 3014742
Heading Depth: 2
Heading Rank: 3

Heading: Was the April 17 registration statement

Text: disclosure material under section 11? Section 11 of the 1933 Securities Act provides a private right of action to individuals who have suffered harm from misstatements in an issuer’s registration statement. 15 U.S.C. § 77k(a). Because the S-1 is a registration statement, the April 2002 disclosure regarding Medco’s revenue-recognition policy can be subject to a section 11 claim as well as a section 10(b) claim. We have already decided that this disclosure was not material under section 10(b). The question we must now decide is whether it was material under section 11. 11 We find unpersuasive Union’s arguments that the cautionary language was insufficient, that Gilmartin had actual knowledge, and that the statement was not mere puffery; therefore, we do not address them in detail. The cautionary language was sufficient because the press release incorporated by reference the cautionary statements in Merck’s 2000 Form 10-K, as well as those in its periodic reports. Cautionary statements do not have to be in the same document as the forward-looking statements. Cf. EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 875 (3d Cir. 2000). Union could not establish Gilmartin’s actual knowledge of the alleged falsity of his statement based on his position alone. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 539 (3d Cir. 1999). And his statement could also have been mere puffery, because it was a “vague and general statement[] of optimism,” id. at 538. 26 The District Court dismissed Union’s section 11 claims as by law immaterial. Union claims that the market’s failure to react to a disclosure is an invalid basis for dismissing a section 11 claim, and it cites a 2004 case from our Circuit, In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267 (3d Cir. 2004), for the proposition that the Oran-Burlington 10(b) materiality standard does not apply to section 11 claims. A section 11 claim looks to whether a registration statement “contain[s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). We have made it clear that claims under both section 11 and section 10(b) require a showing of a “material” misrepresentation or omission. We first noted that section 11(a) and Rule 10b-5 shared the materiality element in our Craftmatic opinion, where we adopted the Supreme Court’s TSC materiality definition (substantial likelihood of importance to a reasonable shareholder) for both. In re Craftmatic Sec. Litig., 890 F.2d 628, 641 & n.18 (3d Cir. amended 1990) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). In Trump we said that the “materiality requirement” was “common to” section 11 and section 10(b) claims. In re Donald J. Trump Casino Sec. Litig.—Taj Mahal Litig., 7 F.3d 357, 368 n.10 (3d Cir. 1993). We also reiterated that the Supreme Court’s TSC materiality definition applied to section 10 and section 11 actions. Id. at 27 369. In Westinghouse we again noted that sections 10(b) and 11 both required “that plaintiffs allege a material misstatement or omission.” In re Westinghouse Sec. Litig., 90 F.3d 696, 707 (3d Cir. 1996) (emphasis in original). We created a test for materiality under section 10(b) in Burlington. The TSC materiality definition “[o]rdinarily” applies, but in efficient markets materiality is defined as “information that alters the price of the firm’s stock.” Burlington, 114 F.3d at 1425. We reached this conclusion in two steps. First, “reasonable investors” are the market. Second, information important to the market will be reflected in the stock’s price. Thus, “information important to reasonable investors . . . is immediately incorporated into stock prices.” Id. Sections 11 and 10(b) share the materiality element and the TSC materiality definition. In the context of an efficient market, they also share the stock-price test for materiality. If a company’s stock trades on an efficient market, we measure materiality under the Burlington (as ratified in Oran) standard. Thus, “the materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm’s stock.” Oran, 226 F.3d at 282. Our opinion in Adams Golf, however, may be read by some to hold that the Oran-Burlington materiality inquiry did 28 not apply to actions brought under section 11. Adams Golf is a manufacturer of specialty golf equipment, best known for its Tight Lies golf clubs. The company sold its shares in an initial public offering on July 10, 1998. Id. at 270. Part of its business strategy was to sell its clubs only through “authorized dealers,” but before the IPO it discovered that Costco, the discount warehouse retailer, was selling its clubs. Adams Golf issued a pre-IPO press release on June 9, 1988, disclosing that an unauthorized dealer was selling Tight Lies clubs. Id. at 271. This “gray market” distribution of Adams Golf’s clubs created a short-term revenue boost around the time of the IPO but cannibalized later sales. Id. at 271–72. The company therefore predicted disappointing financial performance and issued a press release to that effect on January 7, 1999. The stock price dropped 17 percent after this press release with an increase in trading volume from 58,000 to 1.2 million. Id. at 277 n.11. Under section 10(b), plaintiffs have to plead loss causation—i.e., that the misrepresentation caused the stock price drop. Id. at 277. Section 11 plaintiffs do not have to plead loss causation. Id. Instead, it is an affirmative defense in section 11 cases; defendants can limit damages by showing that the plaintiffs’ losses were caused by something other than their misrepresentations. 15 U.S.C. § 77k(e). The defendants in Adams Golf were contesting materiality under Burlington by pointing to the absence of a stock-price decline after the press release (although the stock dropped 17 percent, it only dropped from $4.63 to $3.88, Adams Golf, 381 F.3d at 277). The Adams 29 Golf Court interpreted the defendants’ argument as an attempt to make an affirmative loss-causation defense, and it declined to apply Burlington. Id. It reasoned that, because Burlington was a Rule 10b-5 case with a loss-causation requirement plaintiffs must meet, it did not apply to a section 11 case with no losscausation requirement. Id. With that backdrop, we do not read Adams Golf as altering the Oran-Burlington materiality standard for section 11 claims. First, because our Court in Adams Golf both knew of and referred to Westinghouse, Trump, and Craftmatic, and inasmuch as precedential cases cannot be overruled unless by the Circuit en banc, Third Circuit Internal Operating Procedure 9.1, it is obvious that Adams Golf did not intend to conflict with the three earlier decisions equating section 11’s materiality element with section 10(b)’s. Second, the Oran-Burlington standard applies only to “efficient markets,” Burlington, 114 F.3d at 1425; see also Oran, 226 F.3d at 282, a key ingredient missing in Adams Golf. In Burlington, the plaintiffs alleged that Burlington’s stock traded on an efficient market. 114 F.3d at 1425. Plaintiffs in Oran did likewise. 226 F.3d at 283 n.3. While the plaintiffs in Adams Golf noted that the company’s stock traded on the NASDAQ, they did not allege that the stock traded on an efficient market. Consolidated and Amended Class Action Complaint ¶ 8, In re Adams Golf, Inc. Sec. Litig., 176 F. Supp. 2d 216 (D. Del. 2001) (No. 99-371-RRM). Indeed, our Court 30 noted that the company’s shares did not trade on an efficient market pre-IPO. Adams Golf, 381 F.3d at 276 n.10. Without an efficient market, the Oran-Burlington standard would not apply. Here, Union has alleged that Merck’s stock was traded on an efficient market. Compl. ¶ 212(c). Third, the language in Adams Golf at issue likely was dicta. The defendants would have lost on appeal even had the Court found Oran-Burlington directly applicable. That is, the Adams Golf panel held that Costco’s unauthorized, out-ofnetwork selling of 5,000 Tight Lies clubs was not “unquestionably immaterial to a reasonable investor.” Adams Golf, 381 F.3d at 276. We reversed the District Court’s conclusion that the disclosure was immaterial as a matter of law because of the nature and magnitude of the unauthorized sales. In addition, the company’s stock price did decline following the disclosure; it dropped 17% along with a twentyfold increase in trading volume. Id. at 277 n.11. Under the Oran-Burlington standard this decline would have been material. The Court’s refusal to apply that standard was irrelevant to its decision, and the language about its refusal was in essence dicta. Fourth, reading materiality and loss causation in Adams Golf to be synonymous is incorrect. They are different concepts. In Burlington we did not even mention the phrase “loss causation.” Rather, our creation of the stock-price rule was explicitly to determine whether information was material. Burlington, 114 F.3d at 1425 (“In this case, plaintiffs have 31 represented to us that the July 29 release of information had no effect on BCF’s stock price. This is, in effect, a representation that the information was not material.” (emphasis added)). Also, loss causation and materiality are two separate elements of a section 10(b) claim. Discussing a 10b-5 claim in 2001, we listed loss causation as an element separate from materiality. See Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 174 (3d Cir. 2001). To leave no doubt, the Supreme Court this year also described loss causation as a separate element in section 10(b) and Rule 10b-5 actions. Dura Pharms., Inc. v. Broudo, ___ U.S. ___, ___, 125 S. Ct. 1627, 1631 (2005). The bottom line is this: the Adams Golf Court did not explicitly claim to change the structure of 10b-5 actions, so we must not read it to do so. Merck’s disclosure was not material under the OranBurlington standard. This standard is applicable to section 11 as well as to section 10(b). Thus, because Union must show materiality to succeed on its section 11 claim, that claim fails as well.