Court Opinion

ID: 4166566
Source: CourtListenerOpinion
Date Created: 2017-05-05 17:03:54.330655+00
Date Added: 2024-06-11T14:37:57.414157
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

 CITY OF DEARBORN HEIGHTS ACT                       No. 14-16814
 345 POLICE & FIRE RETIREMENT
 SYSTEM, Individually and On Behalf                   D.C. No.
 of All Others Similarly Situated,                 5:12-cv-06039-
                   Plaintiff-Appellant,                 BLF

                      v.
                                                      OPINION
 ALIGN TECHNOLOGY, INC.; THOMAS
 M. PRESCOTT; KENNETH B. AROLA,
              Defendants-Appellees.

        Appeal from the United States District Court
            for the Northern District of California
       Beth Labson Freeman, District Judge, Presiding

           Argued and Submitted October 19, 2016
                 San Francisco, California

                        Filed May 5, 2017

    Before: ANDREW J. KLEINFELD and MILAN D.
        SMITH, JR., Circuit Judges, and JOHN A.
             KRONSTADT, * District Judge.

     *
       The Honorable John A. Kronstadt, United States District Judge
for the Central District of California, sitting by designation.
2       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

             Opinion by Judge Milan D. Smith, Jr.;
               Concurrence by Judge Kleinfeld

                           SUMMARY **

                         Securities Fraud

    The panel affirmed the district court’s dismissal, for
failure to adequately plead falsity or scienter, of a securities
fraud action under §§ 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5.

   The alleged violations concerned statements by Align
Technology, Inc., regarding its goodwill valuation of a
subsidiary.

    The panel held that the three standards for pleading
falsity of opinion statements articulated in Omnicare, Inc. v.
Laborers Dist. Council Constr. Ind. Pension Fund, 135 S.
Ct. 1318 (2015), a case addressing Section 11, apply to
Section 10(b) and Rule 10b-5 claims. These three standards
are as follows. First, when a plaintiff relies on a theory of
material misrepresentation, the plaintiff must allege both that
“the speaker did not hold the belief she professed” and that
the belief is objectively untrue. Second, when a plaintiff
relies on a theory that a statement of fact contained within an
opinion statement is materially misleading, the plaintiff must
allege that “the supporting fact [the speaker] supplied [is]
untrue.” Third, when a plaintiff relies on a theory of

    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.                 3

omission, the plaintiff must allege “facts going to the basis
for the issuer’s opinion . . . whose omission makes the
opinion statement at issue misleading to a reasonable person
reading the statement fairly and in context.” The panel held
that to the extent that the Ninth Circuit’s prior standard
permitted plaintiffs to plead falsity by alleging that “there is
no reasonable basis for the belief” under a material
misrepresentation theory of liability, the prior standard was
“clearly irreconcilable” with Omnicare, and was therefore
overruled. The panel held that the plaintiff failed to
sufficiently plead falsity under any of the three Omnicare
standards.

    The panel held that the plaintiff also failed to sufficiently
plead scienter. Because the plaintiff inadequately alleged a
primary violation of federal securities law, it could not
establish control person liability.

    Concurring in the judgment, Judge Kleinfeld agreed with
the majority’s analysis of scienter, which compelled
affirmance. Judge Kleinfeld wrote that the determination
whether the Omnicare analysis applies to Section 10(b)
cases was important and debatable and should have been left
for a case in which it had to be made.

                         COUNSEL

Amanda M. Frame (argued), Christopher M. Wood, Shawn
A. Williams, Andrew S. Love, and Susan K. Alexander,
Robbins Geller Rudman & Dowd LLP, San Francisco,
California; Darren J. Robbins, Robbins Geller Rudman &
Dowd LLP, San Diego, California; for Plaintiff-Appellant.
4      CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

Caz Hashemi (argued), Nicholas R. Miller, Kelley M.
Kinney, and Douglas J. Clark, Wilson Sonsini Goodrich &
Rosati, Palo Alto, California, for Defendants-Appellees.

                          OPINION

M. SMITH, Circuit Judge:

    Plaintiff-Appellant City of Dearborn Heights Act 345
Police & Fire Retirement System (Plaintiff) represents all the
investors who purchased stock in Align Technology, Inc.
(Align) between January 31, 2012, and October 17, 2012
(the Class Period). Plaintiff alleges that Defendants Align,
Align CEO Thomas M. Prescott, and Align CFO Kenneth B.
Arola (collectively, Defendants) violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and SEC Rule
10b-5 in connection with statements regarding Align’s
goodwill valuation of its subsidiary, Cadent Holdings, Inc.
(Cadent). The district court dismissed with prejudice
Plaintiff’s Second Amended Complaint (SAC) for failure to
adequately plead falsity or scienter. We affirm the district
court for four reasons.

    First, we hold that the three standards for pleading falsity
of opinion statements articulated in Omnicare, Inc. v.
Laborers District Council Construction Industry Pension
Fund, 135 S. Ct. 1318 (2015), apply to Section 10(b) and
Rule 10b-5 claims. Second, we hold that Plaintiff has failed
to sufficiently plead falsity under any of the three Omnicare
standards. Third, we hold that Plaintiff has also failed to
sufficiently plead scienter. Fourth, we hold that because
Plaintiff has inadequately alleged a primary violation of
federal securities law, Plaintiff cannot establish control
person liability.
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.               5

                     BACKGROUND

   Factual Allegations

    Defendant Align is a Delaware-incorporated company
that designs, manufactures, and markets the Invisalign
system for treating the misalignment of teeth. Align also
designs, manufactures, and markets 3D digital services and
iTero intra-oral scanners for orthodontics and dentists
through its wholly-owned subsidiary, Cadent. Defendant
Thomas M. Prescott (Prescott) was President and CEO of
Align, and a member of Align’s Board of Directors during
the Class Period. Defendant Kenneth B. Arola (Arola) was
Align’s CFO and Vice President of Finance during the Class
Period. Plaintiff is a public pension fund that purchased
common stock of Align during the Class Period.

    On March 29, 2011, Align issued a press release
announcing its acquisition of Cadent. In a press conference
that same day, Prescott and Arola explained that Cadent was
“an attractive, high-growth, strategically valuable asset” that
would allow Align to position itself as a major player in the
intra-oral scanning market and “result in new growth
opportunities, revenue synergies, increasing strategic
leverage, and cost improvements.” The transaction closed
on April 29, 2011, at which Align paid $187.6 million for
Cadent. Align allocated $135.5 million of the purchase price
as “goodwill,” the amount of the purchase price exceeding
the fair value of the net assets of the acquired company. Of
this goodwill allocation, $76.9 million was specifically
allocated to the acquired computer-aided design and
manufacturing (CAD/CAM) and scanner unit (together with
CAD/CAM, the SCCS unit).

    Plaintiff alleges that Cadent’s purchase price, which was
justified in part on Cadent’s 2010 revenues, was artificially
6      CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

inflated. According to former Cadent employees cited as
confidential sources, Cadent “offered substantial and
unprecedented discounts to its customers in the last quarter
of 2010” in an attempt to make itself “appear more valuable
to an acquirer.” This practice (channel stuffing) resulted in
an unsustainable 147% increase in scanner sales by Cadent
for the 2010 fiscal year. Defendants allegedly had
knowledge of Cadent’s channel stuffing because the deed
would have been “readily apparent” from Align’s due
diligence and direct access to Cadent’s financial reports and
company documents through a data room that Cadent made
available during the acquisition process.

    Align allegedly used Cadent’s artificially inflated 2010
revenue as the basis for projecting a 20% sales growth rate
and 50% gross margins for the SCCS unit, as well as making
its initial goodwill valuation. The SCCS unit’s revenue
increased sequentially from the fourth quarter of 2011 to the
second quarter of 2012, but ultimately failed to meet the
projected 20% growth rate in any post-acquisition quarter.
The SCCS unit’s gross margins also failed to meet the 50%
projection, instead ranging from 24% to 36% during the
Class Period.

    Plaintiff alleges that the SCCS unit’s financial results
were negatively impacted by a variety of factors. First, as
part of an effort to integrate Cadent’s infrastructure into
Align’s, Align moved the SCCS unit from New Jersey to
Mexico and Costa Rica in the fourth quarter of 2011. This
integration effort involved the firing of 119 full-time Cadent
employees before Align employees could be properly
trained to assist customers with SCCS products. The firings
negatively impacted customer service, a problem which
Prescott acknowledged in an April 2012 investor call.
Second, Cadent’s competitors in the intra-oral scanning
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.               7

market were developing new products and business
strategies. Plaintiff cites to various industry reports
suggesting that competitors were “likely to offer superior
products at considerably lower prices” in 2012 and
predicting a shift to a “no per click or subscription fees”
business model, which would potentially eliminate Cadent’s
revenues generated from services scan fees and 3D digital
modeling and lab services.           Third, the SCCS unit
experienced a severe decline in international revenue in part
because of a deteriorating relationship with Cadent’s
exclusive European distributor Straumann, and the European
economic recession at the time.            The SCCS unit’s
international revenue fell from $2.5 million in the third
quarter of 2011 to $362,000 during the fourth quarter of
2011.      Although international revenues subsequently
increased between the fourth quarter of 2011 and the first
quarter of 2012, they then fell to a historic low in the second
quarter of 2012.

    Pursuant to Generally Accepted Accounting Principles
(GAAP), a company must conduct an annual test of its
goodwill for impairment. Financial Accounting Standards
Board Accounting Standards Codification (ASC) Topic 350:
Intangibles – Goodwill and Other, ASC 350-20-35-28.
“Impairment is the condition that exists when the carrying
amount of goodwill exceeds its implied fair value.” ASC
350-20-35-2. A company must also conduct additional
goodwill testing between annual tests (interim goodwill
tests) “if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit
below its carrying amount.” ASC 350-20-25-30.

    Align conducted its annual goodwill impairment testing
in the fourth quarter of 2011 and found no impairment to the
SCCS goodwill valuation of $76.9 million. In its 2011 Form
8      CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

10-K, Align explained that “[b]ased on the goodwill
impairment analysis results during the fourth quarter of
2011, we determined that no impairment needed to be
recorded as the fair value of our reporting units were
significantly in excess of the carrying value.” Align did not
conduct any interim goodwill tests or take any interim
goodwill impairments in either the first or second quarters of
2012.

    On October 17, 2012, Align announced that it was
conducting an interim goodwill impairment test for the
SCCS goodwill, triggered by the SCCS unit’s poor financial
performance in the third quarter of 2012 and the termination
of its distribution relationship with Straumann. Align
warned that this interim testing could possibly result in a
significant impairment of the SCCS goodwill. This
announcement led to 20 million shares of Align stock being
traded in one day, and a 20% decline in Align’s stock price.
On November 9, 2012, Align announced a goodwill
impairment charge of $24.7 million, reducing the SCCS
goodwill to $52.6 million. On January 30, 2013, Align
announced another goodwill impairment charge of $11.9
million, thereby reducing the SCCS goodwill to $36.6
million. Then, on April 18, 2013, Align announced a final
goodwill impairment charge of the remaining SCCS
goodwill.

    Procedural History

     Plaintiff’s SAC alleges that Defendants made seven
materially false and misleading statements concerning
Align’s goodwill valuation of Cadent during the Class
Period. These alleged misstatements appeared in Align’s
press releases and Form 8-K, Form 10-K, and Form 10Q
filings with the SEC. Count I of the SAC asserts a claim of
securities fraud based on these misstatements pursuant to
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.              9

Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R.
§ 240.10b-5. Count II of the SAC alleges that Prescott and
Arola committed securities fraud as control persons of Align
within the meaning of Section 20(a) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78t(a).

    On December 9, 2013, the district court dismissed with
leave to amend Plaintiff’s First Amended Complaint for
failure to plead both falsity and scienter with sufficient
specificity. On August 22, 2014, the district court dismissed
with prejudice Plaintiff’s SAC for failing once again to
adequately plead falsity or scienter. Plaintiff subsequently
filed this timely appeal.

   JURISDICTION AND STANDARD OF REVIEW

    We have jurisdiction pursuant to 28 U.S.C. § 1291. We
review de novo dismissals under Rule 12(b)(6) of the Federal
Rules of Civil Procedure. Zucco Partners, LLC v. Digimarc
Corp., 552 F.3d 981, 989 (9th Cir. 2009). We therefore must
“accept the plaintiffs’ allegations as true and construe them
in the light most favorable to plaintiffs, and will hold a
dismissal inappropriate unless the plaintiffs’ complaint fails
to state a claim to relief that is plausible on its face.” Id.
(internal quotation marks and citations omitted).

                        ANALYSIS

   Section 10(b) and SEC Rule 10b-5 Claim

   In Count I of the SAC, Plaintiff alleges that Defendants
made false and misleading statements concerning Align’s
goodwill valuation of Cadent.        Plaintiff alleges that
Defendants deliberately overvalued the SCCS goodwill
when Align conducted its 2011 annual goodwill impairment
10       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

test, and continued to do so through the Class Period, thereby
injecting falsity into statements concerning Align’s goodwill
estimates and related financial statements. Furthermore,
Plaintiff alleges the existence of facts throughout the Class
Period that indicated the need to perform an interim
impairment test for the SCCS goodwill much earlier than
October 2012, such that Align should have found
impairment as early as the fourth quarter of 2011. On the
basis of these allegations, Plaintiff identifies the following
seven statements about the SCCS goodwill and SCCS unit’s
general financial condition during the fourth quarter of 2011
and the first and second quarters of 2012 as materially false
and misleading:

     •   Statement 1 (Press Release on January 30, 2012 and
         Form 10-K filed February 29, 2012): false or
         misleading financial results for the fourth quarter of
         2011 and fiscal year 2011, wherein Align reported
         “(a) $649.3 million in total assets; (b) $20.4 million
         in net profit for [the fourth quarter of 2011]; and
         (c) [earnings-per-share] of $0.25 for [the fourth
         quarter of 2011].” Align also reported “$135.3
         million in goodwill associated with Cadent, $58.4
         million allocated to Clear Aligner and $76.9 million
         allocated to SCCS.”

     •   Statement 2 (Form 10-K, filed February 29, 2012):
         “[D]uring the fiscal year ended December 31, 2011,
         there were no facts and circumstances that indicated
         that the fair value of the reporting units may be less
         than their current carrying amount.”

     •   Statement 3 (Form 10-K, filed February 29, 2012):
         “[B]ased on the goodwill impairment analysis results
         during the fourth quarter of 2011, we determined that
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.             11

       no impairment needed to be recorded as the fair value
       of our reporting units were significantly in excess of
       the carrying value.”

   •   Statement 4 (Press Release on April 23, 2012 and
       Form 10-Q filed May 8, 2012): false or misleading
       financial results for first quarter of 2012, wherein
       Align reported “(a) $670.4 million in total assets;
       (b) $21.0 million in net profit; and (c) GAAP EPS of
       $0.26.”

   •   Statement 5 (Form 10-Q, filed May 8, 2012):
       Align’s first quarter of 2012 Form 10-Q stated that
       Align performed impairment testing “whenever
       events or changes in circumstances indicate that the
       carrying value of such assets may not be
       recoverable.”

   •   Statement 6 (Press Release on July 19, 2012 and
       Form 10-Q filed August 2, 2012): false or misleading
       financial results for the second quarter of 2012,
       wherein Align reported: “(a) $744.2 million in total
       assets; (b) $28.5 million in net profit; and (c) EPS of
       $0.34.”

   •   Statement 7 (Form 10-Q): Align’s second quarter of
       2012 Form 10-Q stated that Align performed
       impairment testing “whenever events or changes in
       circumstances indicate that the carrying value of
       such assets may not be recoverable.”

    “To plead a claim under section 10(b) and Rule 10b-5,
the Plaintiff[] must allege: (1) a material misrepresentation
or omission; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a
12      CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

security; (4) reliance; (5) economic loss; and (6) loss
causation.” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc.,
774 F.3d 598, 603 (9th Cir. 2014). The complaint must also
satisfy the dual heightened pleading requirements of Federal
Rule of Civil Procedure 9(b) and the Private Securities
Litigation Reform Act (PSLRA), which require that the
complaint plead both falsity and scienter with particularity.
Zucco, 552 F.3d at 990–91. Only allegations regarding
falsity and scienter are at issue in this appeal.

     A. Falsity

        1. Classification of Statements 1 through 7

    The district court concluded that statements regarding
goodwill valuations are opinion statements because they
“are inherently subjective and involve management’s
opinion regarding fair value.” Although our circuit has
never addressed this issue, the Second Circuit reached the
same conclusion on identical reasoning. Fait v. Regions Fin.
Corp., 655 F.3d 105, 110 (2d Cir. 2011) (“Estimates of
goodwill depend on management’s determination of the ‘fair
value’ of the assets acquired and liabilities assumed, which
are not matters of objective fact.”). Plaintiff does not
challenge this characterization with respect to Statements 1,
4, 5, 6, and 7, and we see no reason to conclude otherwise.

    However, Plaintiff argues that the district court
erroneously found Statements 2 and 3 to be opinion
statements. In Omnicare, the Supreme Court explained that
opinion statements can “contain embedded statements of
fact,” which “may be read to affirm not only the speaker’s
state of mind . . . but also an underlying fact.” 135 S. Ct. at
1327. Plaintiff argues that Statements 2 and 3 contain
“embedded statements of fact”: Statement 2 asserts the
“fact” that there were “no facts and circumstances”
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.              13

indicating impairment of the SCCS goodwill, while
Statement 3 asserts the “fact” that the SCCS division’s fair
value “was significantly in excess of the carrying value.”

    Plaintiff’s argument as to Statement 3 is unpersuasive,
since Statement 3 expresses Defendants’ qualitative
assessment of the SCCS division’s fair value. Because that
reference point itself is subjective, the attendant comment
comparing fair value to carrying value cannot be objectively
verified. However, Statement 2’s reference to “no facts or
circumstances” asserts an objectively verifiable fact by
identifying an aspect of Defendants’ goodwill methodology
as opposed to a qualitative aspect of the valuation itself.
Accordingly, while the district court properly concluded that
Statement 3 is an opinion statement, Statement 2 should be
considered an opinion statement with an embedded
statement of fact.

       2. Standard for Pleading Falsity of Opinion
          Statements

    To plead falsity under the PSLRA, a complaint must
“specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an
allegation regarding the statement or omission is made on
information and belief, the complaint shall state with
particularity all facts on which that belief is formed.”
15 U.S.C. § 78u-4(b)(1)(B).

    The parties dispute the proper standard for pleading
falsity when the alleged misstatements are opinion
statements. Plaintiff argues that falsity of opinion statements
can be pleaded by alleging facts that demonstrate that “there
is no reasonable basis for the belief.” Reese v. Malone,
747 F.3d 557, 579 (9th Cir. 2014) (quoting Kaplan v. Rose,
49 F.3d 1363, 1375 (9th Cir. 1994)). In contrast, the district
14     CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

court concluded that Plaintiff was required to plead
“particularized facts establishing that Defendants did not
believe in their statements concerning goodwill at the time
they made them.”          The district court reached this
determination by relying in part upon Rubke v. Capitol
Bancorp, Ltd., 551 F.3d 1156 (9th Cir. 2009), which held
that for claims under Section 11 of the Securities Act of
1933, 15 U.S.C. § 77k(a), misstatements of opinion “can
give rise to a claim . . . only if the complaint alleges with
particularity that the statements were both objectively and
subjectively false or misleading.” 551 F.3d at 1162
(emphasis added). The district court noted that in Fait v.
Regions Financial Corporation, the Second Circuit had
devised an identical falsity pleading standard for opinion
statements in Section 11 cases, 655 F.3d at 122, and in City
of Omaha, Nebraska Civilian Employees’ Retirement System
v. CBS Corp., 679 F.3d 64 (2d Cir. 2012) subsequently
extended that pleading standard to Section 10(b) cases, id. at
67‒68. Defendants argue that the Supreme Court’s recent
decision in Omnicare supports the district court’s conclusion
that subjective falsity must be pleaded.

    Determining the proper pleading standard for falsity of
opinion statements requires a close examination of
Omnicare. In Omnicare, the Supreme Court noted that
Section 11 imposes liability for both material misstatements
and omissions and thus “creates two ways to hold issuers
liable for the contents of a registration statement—one
focusing on what the statement says and the other on what it
leaves out.” 135 S. Ct. at 1323. With respect to the material
misstatement theory of liability, the Supreme Court rejected
the Sixth Circuit’s holding that “a statement of opinion that
is ultimately found incorrect—even if believed at the time
made—may count as an ‘untrue statement of material fact’”
under Section 11. Id. at 1325 (quoting 15 U.S.C. § 77k(a)).
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.                15

The Supreme Court explained that such a standard “wrongly
conflates facts and opinions” because “a statement of fact
. . . expresses certainty about a thing, whereas a statement of
opinion . . . does not,” and concluded that Congress codified
this distinction in the first clause of Section 11 by creating
liability only for “untrue statement[s] of . . . fact.” Id. at
1325‒26 (internal quotation marks omitted) (alteration in
original).     The Supreme Court further clarified that
expressions of opinion “explicitly affirm[] one fact: that the
speaker actually holds the stated belief,” and liability
therefore follows only if the speaker does not honestly hold
the stated belief and the belief is objectively incorrect. Id. at
1326; see also id. at 1326 n.2. Thus, Omnicare affirms
Rubke’s requirement that both objective and subjective
falsity must be alleged to sufficiently plead falsity for a
Section 11 claim based on a material misrepresentation
theory of liability.

    However, Omnicare articulated a different method for
pleading falsity under an omissions theory of liability. The
Supreme Court explained that a reasonable investor “expects
not just that the issuer believes the opinion (however
irrationally), but that it fairly aligns with the information in
the issuer’s possession at the time.” Id. at 1329. Liability
therefore attaches when “a registration statement omits
material facts about the issuer’s inquiry into or knowledge
concerning a statement of opinion” and “those facts conflict
with what a reasonable investor would take from the
statement itself.” Id. But the Supreme Court cautioned that
pleading falsity under an omissions theory would be “no
small task for an investor.” Id. at 1332. A plaintiff “cannot
just say that the issuer failed to reveal [the] basis” for the
opinion at issue. Id. Instead, an investor must “call into
question the issuer’s basis for offering the opinion” by
“identify[ing] particular (and material) facts going to the
16     CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

basis for the issuer’s opinion—facts about the inquiry the
insurer did or did not conduct or the knowledge it did or did
not have—whose omission makes the opinion statement at
issue misleading to a reasonable person reading the
statement fairly and in context.” Id. Furthermore, liability
is not necessarily established by demonstrating that “an
issuer knows, but fails to disclose, some fact cutting the other
way,” because “[r]easonable investors understand that
opinions sometimes rest on a weighing of competing facts.”
Id. at 1329. And finally, “whether an omission makes an
expression of opinion misleading always depends on the
context,” which includes “all its surrounding text, including
hedges,     disclaimers,      and     apparently     conflicting
information.” Id. at 1330.

    As discussed in the preceding section, Omnicare also
recognized that some opinion statements “contain embedded
statements of fact,” which “may be read to affirm not only
the speaker’s state of mind . . . but also an underlying fact.”
Id. at 1327. For such statements, the Supreme Court held
that falsity could be established “not only if the speaker did
not hold the belief she professed but also if the supporting
fact she supplied were untrue.” Id. at 1327.

    Accordingly, Omnicare establishes three different
standards for pleading falsity of opinion statements. First,
when a plaintiff relies on a theory of material
misrepresentation, the plaintiff must allege both that “the
speaker did not hold the belief she professed” and that the
belief is objectively untrue. Id. Second, when a plaintiff
relies on a theory that a statement of fact contained within an
opinion statement is materially misleading, the plaintiff must
allege that “the supporting fact [the speaker] supplied [is]
untrue.” Id. Third, when a plaintiff relies on a theory of
omission, the plaintiff must allege “facts going to the basis
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.              17

for the issuer’s opinion . . . whose omission makes the
opinion statement at issue misleading to a reasonable person
reading the statement fairly and in context.” Id. at 1332.

    Although Omnicare concerned Section 11 claims, we
conclude that the Supreme Court’s reasoning is equally
applicable to Section 10(b) and Rule 10b-5 claims. The
Supreme Court’s definition of opinion statements and
differentiation of them from factual statements was specific
to Section 11 only to the extent that Section 11 imposes
liability for “untrue statement[s] of . . . fact.” Id. at 1326
(alterations in original) (citing 15 U.S.C. § 77k(a)). Rule
10b-5, which was promulgated pursuant to Section 10(b),
contains an identical limitation of liability to “untrue
statement[s]” and omissions of “fact.” 17 C.F.R. § 240.10b-
5(b); see also City of Omaha, 679 F.3d at 68 (“[Section 10(b)
and Section 11] claims all share a material misstatement or
omission element.”). The only other circuit to have
considered Omnicare’s effect on the falsity pleading
standard for Section 10(b) claims based on opinion
statements has held that the reasoning of Omnicare applies.
Tongue v. Sanofi, 816 F.3d 199, 209‒10 (2d Cir. 2016)
(noting that Omnicare “refined the standard for analyzing
whether a statement of opinion is materially misleading” and
applying Omnicare to Section 10(b) claims). We are
likewise so persuaded, and we therefore hold that the three
standards for pleading falsity under Omnicare also apply to
Section 10(b) and Rule 10b-5 claims.

    We recognize that Omnicare establishes a falsity
pleading standard for opinion statements that is
substantively similar to the current standard within this
circuit, which allows plaintiffs to establish falsity in three
ways: “if (1) the statement is not actually believed, (2) there
is no reasonable basis for the belief, or (3) the speaker is
18     CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

aware of undisclosed facts tending seriously to undermine
the statement’s accuracy.” Reese, 747 F.3d at 579 (quoting
Kaplan, 49 F.3d at 1375). The first and third methods of
pleading falsity under this standard are consistent with
Omnicare’s standards for pleading falsity under the material
misrepresentation theory of liability and the omission theory
of liability, respectively. However, Omnicare clarifies that
pleading falsity by alleging that “there is no reasonable basis
for the belief” is permissible only under an omissions theory
of liability, subject to the principles discussed above. We
thus hold that to the extent our current standard permits
plaintiffs to plead falsity by alleging that “there is no
reasonable basis for the belief” under a material
misrepresentation theory of liability, it is “clearly
irreconcilable” with Omnicare, and is therefore overruled.
Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en
banc).

       3. Application of the Falsity Pleading Standard

     The SAC does not satisfy any of the Omnicare pleading
standards for falsity. The SAC contains no allegations that
Defendants (1) believed that SCCS’s goodwill was impaired
at the end of 2011 or during the first and second quarters of
2012, (2) did not believe that Align performed impairment
testing when required, and (3) did not believe that SCCS’s
fair value was “significantly in excess of the carrying value.”
As such, the SAC contains no allegations of subjective
falsity.

    Nor has Plaintiff pleaded sufficient facts that would
allow us to infer subjective falsity. Plaintiff contends that
Defendants must have known that the SCCS goodwill was
impaired and that their goodwill valuations finding no
impairment were false.        First, Plaintiff alleges that
Defendants were aware that Cadent improperly inflated its
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.              19

2010 annual revenue numbers prior to being acquired by
Align in April 2011. And, because Defendants made the
initial $76.9 million SCCS goodwill valuation based on
Cadent’s 2010 revenue numbers, Plaintiff alleges that
Defendants must have known that their finding of no
impairment to the SCCS goodwill in the fourth quarter of
2011 was false. Second, Plaintiff alleges that based on the
SCCS unit’s financial results and changes in the market
during the Class Period, Defendants must have known that
there was likely impairment to the SCCS goodwill pursuant
to GAAP. Plaintiff notes that: (1) the SCCS division’s
revenues never met the projected 20% growth rate during the
Class Period; (2) gross margins fell from roughly 45% to a
range of 24% to 36% after Align acquired Cadent;
(3) international sales declined by roughly 86% during the
fourth quarter of 2011; (4) new competitors emerged
offering improved products and alternative fee structures;
and (5) the integration effort in the fourth quarter of 2011
created customer support problems for SCCS products.
Third, Plaintiff submits its own calculations showing
impairment to the SCCS goodwill under both the market
approach and the income approach, two methods of
calculating goodwill upon which Defendants purportedly
relied.

    This theory of falsity suffers from two flaws. First,
Plaintiff fails to plead any facts establishing that Defendants
continued to use Cadent’s inflated 2010 revenue figures in
conducting its goodwill impairment testing for the SCCS
unit. While Plaintiff relies on confidential informants to
substantiate the allegations of Cadent’s channel stuffing,
none of these witnesses subsequently participated in Align’s
accounting or goodwill analysis. Plaintiff’s confidential
informants therefore cannot link Cadent’s channel stuffing
to Defendants, much less the set of assumptions that
20     CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

Defendants used to conduct its goodwill valuation of the
SCCS unit at the end of 2011.

    Second, the SCCS unit’s financial results and changes in
the market during the Class Period do not compel a finding
of goodwill impairment under GAAP. Pursuant to GAAP, a
company should conduct interim goodwill impairment
testing “if an event occurs or circumstances change that
would more likely than not reduce the fair value of a
reporting unit below its carrying amount.” ASC 350-20-35-
30. Examples of such events and circumstances include “a
decline in actual or planned revenue or earnings compared
with actual and projected results of relevant prior periods,”
as well as “an increased competitive environment . . . [or]
change in the market for an entity’s products or services.”
ASC 350-20-35-3C.           The circumstances and events
identified by Plaintiff, as enumerated above, fall into these
categories. However, in determining whether goodwill
impairment is “more likely than not,” a company must also
assess “the totality of events” as well as any “positive and
mitigating events.” ASC 350-20-35-3E and ASC 350-20-
35-3F. Furthermore, “none of the individual examples of
events” suggesting potential goodwill impairment are
“intended to represent standalone events . . . that necessarily
require an entity” to perform interim testing. ASC 350-20-
35-3G.

    Here, there were positive and mitigating events that
Align could have found to either balance or outweigh the
events and circumstances identified by Plaintiff. First,
although SCCS revenue did not meet Align’s projection of
20% growth, SCCS revenue increased sequentially each
quarter, from $10 million in the fourth quarter of 2011 to
$11.8 million in the first quarter of 2012 to $11.9 million in
the second quarter of 2012. Second, although international
        CITY OF DEARBORN HEIGHTS V. ALIGN TECH.                21

sales declined from $2.5 million in the third quarter of 2011
to $362,000 in the fourth quarter of 2011, international sales
increased to $631,000 in the first quarter of 2012. Third,
although Plaintiff cites to industry analyst reports that
warned that Cadent would soon face competitors offering
“superior products at considerably lower prices” as well as
more favorable fee structures, the SAC does not identify a
single competing product that emerged on the market or a
single competitor who offered such a fee structure during the
Class Period. Thus, Plaintiff’s bare allegations of events and
circumstances during the Class Period that could have
suggested the likelihood of goodwill impairment under
GAAP cannot establish that Defendants must have known
there was a likelihood of goodwill impairment.

     The common element underlying both flaws in
Plaintiff’s theory of falsity is Plaintiff’s failure to allege the
actual assumptions that Defendants relied upon in
conducting their goodwill analysis. Without this allegation,
it cannot be plausibly inferred that Defendants intentionally
disregarded the aforementioned events and circumstances
when conducting their goodwill analysis, such that the
goodwill valuations were knowingly false or misleading
when made. Plaintiff’s pleading of its own calculations
indicating impairment of the SCCS goodwill in the fourth
quarter of 2011 does not provide a sufficient substitute for
Plaintiff’s failure to plead the actual assumptions used by
Defendants. As aptly noted by the district court, “[t]hat
Plaintiff selected certain assumptions to reach a conclusion
of impairment does not demonstrate what assumptions Align
made in conducting its 4Q11 impairment analysis, nor does
it suffice to show that Align’s selection of different
assumptions would have been so unreasonable as to amount
to fraud.” Because Plaintiff does not sufficiently allege
subjective falsity, Plaintiff fails to plead falsity under a
22     CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

material misstatement theory of liability with respect to
Statements 1, 3, 4, 5, 6, and 7.

    Plaintiff’s falsity pleadings fare no better when
construed under an omissions theory of liability. In its reply
brief, Plaintiff contends that Defendants omitted three
material facts: (1) Cadent’s “channel stuffing,” which
allegedly inflated Defendants’ initial growth projections for
SCCS, (2) the aforementioned integration issues and market
competition, which allegedly affected SCCS’s fair value,
and (3) that Defendants allegedly failed to conduct any
goodwill impairment testing at year-end 2011, which would
have revealed “significant impairment to the scanner
division’s goodwill.”       Plaintiff argues that all three
omissions “are indisputably material, were never disclosed,
and effectively rendered [D]efendants’ goodwill valuation
statements – which proclaimed there was no impairment –
misleading if not entirely false.”

    Plaintiff’s omissions theory of liability fails because
none of the three alleged omissions “call[s] into question the
issuer’s basis for offering the opinion.” Omnicare, 135 S.
Ct. at 1332. First, for the reasons discussed above, Plaintiff
pleads no facts establishing that Defendants used the inflated
2010 revenues that resulted from Cadent’s channel stuffing
to conduct its goodwill impairment testing at the end of
2011, and also fails to plead the exact assumptions that
Defendants used. Without any allegations tying Cadent’s
channel stuffing to any of Defendants’ goodwill valuations,
a reasonable investor would not find the fact of Cadent’s
channel stuffing, which occurred in 2010, to undermine
Align’s conclusion at the end of 2011 that the SCCS
goodwill was not impaired.
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.              23

    Second, the record indicates that Defendants publicly
disclosed both Align’s integration issues and the risk posed
by market competitors. As early as May 5, 2011, Align
warned through its Form 10-Q filing that “the anticipated
financial [and] strategic benefits” of acquiring Cadent might
be impeded by potential risks which included “aggressive
competition from other manufacturers of intraoral scanners”
which could result in “price reductions and loss of sales.”
And with respect to Align’s integration issues, Prescott
explained during an April 2012 investor call that “in the
course of creating a more integrated business we have
negatively impacted several important customer-facing
functions like customer service, tech support, and even
delivery schedules in some cases.”

    Third, Plaintiff’s allegation that Defendants failed to
conduct any goodwill impairment testing at the end of 2011
is not a fact, but rather Plaintiff’s conclusion based on its
belief that no set of reasonable assumptions could support
Defendants’ determination in the fourth quarter of 2011 that
the SCCS goodwill was unimpaired. We need go no further
in concluding that it cannot serve as an omission of fact that
sufficiently pleads falsity. Because Plaintiff cannot identify
any material facts omitted by Defendants, Plaintiff fails to
plead falsity under an omissions theory of liability with
respect to Statements 1, 3, 4, 5, 6, and 7.

    Finally, Plaintiff’s failure to allege the assumptions
underlying Defendants’ goodwill valuations of the SCCS
unit also prevents Plaintiff from pleading objective falsity as
to Statement 2. Without identifying what negative factors
and assumptions Defendants already incorporated into their
goodwill valuations, Plaintiff cannot demonstrate that
Defendants were aware of additional “facts and
circumstances” that would have indicated that “the fair value
24      CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

of the [SCCS division] may be less than [its] carrying
amount.”

    In sum, the district court correctly determined that
Plaintiff has failed to plead falsity with respect to all seven
of Defendants’ alleged misstatements. We therefore affirm
the district court’s dismissal of Count I of the SAC.

     B. Scienter

    Plaintiff has also failed to adequately plead scienter,
which serves as an independent basis to affirm the district
court’s dismissal of Count I of the SAC. Under the PSLRA,
a plaintiff must “state with particularity facts giving rise to a
strong inference that the defendant acted with the required
state of mind.” 15 U.S.C. § 78u-4(b)(2)(A). A defendant is
liable under Section 10(b) and Rule 10b-5 when he acts with
scienter, a “mental state that not only covers intent to
deceive, manipulate, or defraud, but also deliberate
recklessness.” Schueneman v. Arena Pharm., Inc., 840 F.3d
698, 705 (9th Cir. 2016) (internal citation and quotation
marks omitted). “[D]eliberate recklessness is ‘an extreme
departure from the standards of ordinary care . . . which
presents a danger of misleading buyers or sellers that is
either known to the defendant or is so obvious that the actor
must have been aware of it.’” Id. (quoting Zucco, 552 F.3d
at 991). As such, “[f]acts showing mere recklessness or a
motive to commit fraud and opportunity to do so provide
some reasonable inference of intent, but are not sufficient to
establish a strong inference of deliberate recklessness.” In
re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701
(9th Cir. 2012). Moreover, a strong inference of scienter
must be “at least as compelling as any opposing inference
one could draw from the facts alleged.” Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).
When analyzing the sufficiency of a plaintiff’s scienter
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.               25

pleadings, we first “determine whether any of the
allegations, standing alone, are sufficient to create a strong
inference of scienter.” N.M. State Inv. Council v. Ernst &
Young LLP, 641 F.3d 1089, 1095 (9th Cir. 2011). “[I]f no
individual allegation is sufficient, we conduct a ‘holistic’
review of the same allegations to determine whether the
insufficient allegations combine to create a strong inference
of intentional conduct or deliberate recklessness.” Id.

    Plaintiff fails to establish a strong inference that
Defendants either knew or were deliberately reckless in
ignoring that the SCCS goodwill was significantly inflated
during the Class Period. Plaintiff argues that a strong
inference of scienter is established by a combination of
(1) Defendants’ knowledge of Cadent’s alleged channel
stuffing as well as the aforementioned facts that purportedly
contradicted their goodwill valuations; (2) the temporal
proximity between Defendants’ alleged misstatements and
the SCCS goodwill writedown and the magnitude of the
writedown; (3) Prescott and Arola’s stock sales during the
Class Period; and (4) Arola’s resignation as Vice President
of Finance.

    First, particularized allegations that defendants had
“actual access to the disputed information” may raise a
strong inference of scienter. Reese, 747 F.3d at 575 (internal
quotation mark omitted). With respect to Cadent’s channel
stuffing, Plaintiff alleges insufficient facts to establish that
Prescott and Arola had direct knowledge of Cadent’s
channel stuffing. According to Plaintiff’s confidential
informants, Cadent’s channel stuffing would have been
“readily apparent” from Cadent’s financial documents,
which Align had direct access to through the data room that
Cadent set up for potential buyers. But Plaintiff does not
allege that Prescott or Arola personally accessed the data
26     CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

room, or that the confidential informants personally
disclosed Cadent’s channel stuffing to Prescott or Arola.

    Plaintiff attempts to indirectly establish Defendants’
knowledge of Cadent’s channel stuffing through the core
operations theory of scienter. Under the core operations
theory, “[a]llegations regarding management’s role in a
corporate structure and the importance of the corporate
information about which management made false or
misleading statements may also create a strong inference of
scienter when made in conjunction with detailed and specific
allegations about management’s exposure to factual
information within the company.” S. Ferry LP, No. 2 v.
Killinger, 542 F.3d 776, 785 (9th Cir. 2008). Plaintiff argues
that the core operations theory is met here because (1) Align
proclaimed goodwill to be one of Align’s “critical
accounting policies,” (2) Prescott and Arola announced
Align’s financial results each quarter and signed Align’s
SEC filings, (3) Prescott and Arola both had significant
involvement in the acquisition of Cadent, and (4) Align
performed goodwill impairment testing in the fourth quarter
of 2011. While these allegations may be sufficient to
establish Prescott’s and Arola’s knowledge of Align’s
financial information, they do not establish “management’s
exposure” to Cadent’s financial information, especially
given that Cadent’s channel stuffing occurred in 2010 and
predated Align’s acquisition of Cadent.

    With respect to Cadent’s financial results and changes in
the market during the Class Period, Defendants cannot
contest knowledge of these facts, as they are drawn from
Align’s SEC filings and press releases.             However,
Defendants’ knowledge of these facts, at most, establish only
that Defendants may have committed GAAP violations in
determining that no interim goodwill impairment testing was
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.               27

required. But we have held that “a failure to follow GAAP,
without more, does not establish scienter.” In re Worlds of
Wonder Sec. Litig., 35 F.3d 1407, 1426 (9th Cir. 1994)
(quoting Malone v. Microdyne Corp., 26 F.3d 471, 479 (4th
Cir. 1994)). This is because GAAP “tolerate[s] a range of
reasonable treatments, leaving the choice among alternatives
to management.” Or. Pub. Emps. Ret. Fund, 774 F.3d at 609
(quoting Thor Power Tool Co. v. C.I.R., 439 U.S. 522, 544
(1979)).

    Plaintiff’s theory of scienter based on Defendants’
failure to conduct interim goodwill impairment testing
illustrates the inability of GAAP violations alone to provide
evidence of scienter. As discussed above, a company need
only conduct interim goodwill impairment testing if it
concludes, after assessing “the totality of events” as well as
any “positive and mitigating events,” ASC 350-20-35-3E
and ASC 350-20-35-3F, that negative events or
circumstances “would more likely than not” cause
impairment. ASC 350-20-25-30. In other words, a
corporation must exercise its judgment in assessing both
positive and negative factors when determining whether
interim goodwill impairment testing is necessary. It
therefore follows that a corporation’s mere knowledge of
negative factors that potentially indicate goodwill
impairment does not of itself support an inference that a
corporation acted with scienter in exercising its judgment to
conclude that no goodwill impairment is likely to occur. To
plead an inference of scienter in this context, a plaintiff must
allege additional facts that call into question the manner in
which the corporation conducted its goodwill analysis.

    But here, Plaintiff has failed to allege the precise
assumptions that Defendants used in conducting the 2011
year end goodwill valuation of the SCCS goodwill and in
28     CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

determining that no interim goodwill valuation analysis was
needed in the first and second quarters of 2012. Without
these allegations, we agree with the district court that “[i]t is
not known what significance Align accorded to the
triggering circumstances that Plaintiff has identified, nor
what positive and mitigating factors were considered in
determining that interim impairment analysis was not
warranted.” As such, the more compelling inference is that
Defendants made a good faith but mistaken determination in
its goodwill valuations that the positive factors outweighed
the negative ones.

    Second, stock sales by corporate insiders “[are]
suspicious only when [they are] ‘dramatically out of line
with prior trading practices at times calculated to maximize
the personal benefit from undisclosed inside information.’”
Zucco, 552 F.3d at 1005 (quoting In re Silicon Graphics Inc.
Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999)). To make this
determination, we look to three factors: “(1) the amount and
percentage of shares sold by insiders; (2) the timing of the
sales; and (3) whether the sales were consistent with the
insider’s prior trading history.” Id. (quotation marks
omitted). The SAC primarily relies upon a conclusory
allegation that Prescott and Arola sold “hundreds of
thousands of shares” to “reap[] over $14.8 million in
unlawful proceeds” during the Class Period and thus fails to
allege the precise amount of shares sold, the timing of these
sales, and the prior trading history for either individual.
Although Plaintiff does allege the price and quantity of a
single sale that Prescott made on February 29, 2012, the
timing of this sale is inconsistent with insider trading
“calculated to maximize the personal benefit from
undisclosed inside information.” Zucco, 552 F.3d at 1005
(internal quotation marks omitted). Of the 322,751 shares
that Prescott sold on February 29, 2012, Prescott obtained a
        CITY OF DEARBORN HEIGHTS V. ALIGN TECH.                29

price of $25.51 per share for 252,751 shares and $26.26 per
share for 70,000 shares. However, the Align stock price not
only subsequently reached a Class Period high of $39.17 per
share (on September 13, 2012), but also closed at $28.18 per
share on the last day of the Class Period when Align first
announced the potential of significant impairment to the
SCCS goodwill (October 17, 2012). Prescott thus obtained
a price on February 29, 2012 that is even lower than the price
he could have obtained had he waited until the allegedly
undisclosed SCCS goodwill impairment was actually
disclosed. As we have previously explained, “[w]hen
insiders miss the boat this dramatically, their sales do not
support an inference that they are preying on ribbon clerks
who do not know what the insiders know.” Ronconi v.
Larkin, 253 F.3d 423, 435 (9th Cir. 2001). Prescott’s and
Arola’s stock sales during the Class Period therefore cannot
contribute to an inference of scienter.

    Third, an employee’s resignation supports an inference
of scienter only when “the resignation at issue was
uncharacteristic when compared to the defendant’s typical
hiring and termination patterns or was accompanied by
suspicious circumstances.” Zucco, 552 F.3d at 1002.
Otherwise, “the inference that the defendant corporation
forced certain employees to resign because of its knowledge
of the employee’s role in the fraudulent representations will
never be as cogent or as compelling as the inference that the
employees resigned or were terminated for unrelated
personal or business reasons.” Id. Plaintiff argues that
Arola’s resignation was accompanied by the suspicious
circumstance of coinciding with Align’s announcement on
January 30, 2013, that it would record a goodwill
impairment charge of $11.9 million. This amounts to a
“[m]ere conclusory allegation[] that a financial manager
resigns or retires . . . shortly before the corporation issues its
30     CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

restatement,” which “without more, cannot support a strong
inference of scienter.” Id. Moreover, the fact that Arola
remained an employee of Align for an additional six months
after the first goodwill impairment announcement was made
further diminishes any inference of scienter based on his
resignation. See In re NVIDIA Corp. Sec. Litig., 768 F.3d
1046, 1063 (9th Cir. 2014) (declining to find scienter on the
basis of executive departures in part because “two of the
three individuals remained at NVIDIA in some type of
advisory role”).

    The only remaining allegations that contribute to an
inference of scienter are the timing and magnitude of the
SCCS goodwill write downs. But neither allegation alone
establishes a strong inference of scienter or contributes
strongly to such an inference. Yourish v. Cal. Amplifier,
191 F.3d 983, 997 (9th Cir. 1999) (explaining that “temporal
proximity of an allegedly fraudulent statement or omission
and a later disclosure” is insufficient on its own to establish
scienter and can only “bolster” an inference based on other
allegations); Gammel v. Hewlett-Packard Co., 905 F. Supp.
2d 1052, 1077 (C.D. Cal. 2012) (surveying cases and
concluding that the magnitude of a write down plays a
“minor role in the scienter analysis”).

    With only the timing and magnitude of the SCCS
goodwill writedowns contributing to an inference of
scienter, we conclude that the “plausible, nonculpable
explanations” for Defendants’ conduct outweigh the
“inferences favoring” Plaintiff. Tellabs, 551 U.S. 323‒24.
Plaintiff has failed to establish an inference of scienter that
is at least as compelling as the opposing inference that
Defendants exhibited poor business judgment in overpaying
for Cadent and determining that no impairment was
necessary during the Class Period. We therefore affirm the
       CITY OF DEARBORN HEIGHTS V. ALIGN TECH.              31

district court’s dismissal of Count I of the SAC on this basis
as well.

   Control Person Liability, Section 20(a) Claim

    In Count II of the SAC, Plaintiff alleges that Prescott and
Arola violated Section 20(a) of the Securities Exchange Act
as control persons of Align. Under Section 20(a), “a
defendant employee of a corporation who has violated the
securities laws will be jointly and severally liable to the
plaintiff, as long as the plaintiff demonstrates ‘a primary
violation of federal securities law’ and that ‘the defendant
exercised actual power or control over the primary
violator.’” Zucco, 552 F.3d at 990 (quoting No. 84
Employer-Teamster Joint Council Pension Tr. Fund v. Am.
W. Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003)).
Plaintiff alleges that both Prescott and Arola knowingly or
recklessly participated in the fraudulent scheme to misreport
the SCCS goodwill because both individuals, by virtue of
their positions within Align, possessed the “power and
authority to control the contents of Align’s quarterly reports
[and] press releases” and had “access to material non-public
information” that they knew was being concealed from the
public.

    For the reasons explained in the preceding sections,
Plaintiff has not sufficiently alleged violations of Section
10(b) and Rule 10b-5. And, without “a primary violation of
federal securities law,” Plaintiff cannot establish control
person liability. Id. (quotation marks omitted). We therefore
affirm the district court’s dismissal of Count II of the SAC.

                      CONCLUSION

   For the foregoing reasons, the district court’s dismissal
with prejudice of Plaintiff’s SAC for failure to plead falsity
32         CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

and scienter is AFFIRMED. Plaintiff shall bear costs on
appeal. Fed. R. App. P. 39(a)(2).

KLEINFELD, Senior Circuit Judge, concurring in the
judgment:

    I concur. The majority opinion is compelling on the
record before us, with respect to lack of scienter. Because
scienter is an element of section 10(b) liability, the reasoning
in Part I.B., with which I fully agree, compels the result we
reach.

    The majority provides an alternative ground for reaching
the same result, under the Supreme Court decision in
Omnicare Inc., v. Laborers District Council Construction
Industry Pension Fund. 1 That was a section 11 case. This
is a section 10(b) case. As the Supreme Court explained in
Herman & MacLean v. Huddleston, section 10(b) and
section 11 are materially different. 2 The majority holds that
the reasoning in Omnicare effectively overrules our decision
in Reese v. Malone. 3 Under Miller v. Gammie 4 and its
progeny, the tension between Reese and Omnicare and the
doubt Omnicare casts on our analysis in Reese does not
suffice to overrule Reese. Reese has to be “clearly

     1
         135 S. Ct. 1318 (2015).

     2
         459 U.S. 375, 380–84 (1983).

     3
         747 F.3d 557 (9th Cir. 2014).

     4
         335 F.3d 889 (9th Cir. 2003) (en banc).
           CITY OF DEARBORN HEIGHTS V. ALIGN TECH.                    33

irreconcilable” with Omnicare for Reese to be overruled. 5
Whether it is clearly irreconcilable strikes me as debatable,
because Omnicare is a section 11 case and Reese is a section
10(b) case.

     I do not suggest that Reese survives. My concern is that
it is an important and debatable question, one that we need
not decide, and therefore one that we ought not to decide. 6
The delicacy of the question arises from the considerable
differences, noted in Herman, between section 11 and
section 10(b), as well as the pleading difference, Federal
Rule of Civil Procedure 9(b) for section 10(b) claims and
Federal Rule of Civil Procedure 8(a) for section 11 claims
unless they are grounded in fraud. 7 Though I might well
agree with the majority that the Omnicare analysis applies to
section 10(b) cases, I think it is wiser to leave that arguable
and important determination to a case where it has to be
made.

    5
        Id. at 900.

    6
     See Nat’l. Fed. of the Blind v. United Airlines, 813 F.3d 718,
745–47 (9th Cir. 2016) (Kleinfeld, J. concurring).
     7
       In re Rigel Pharm., Inc. Sec. Litig, 697 F.3d 869, 875–77, 885–86
(9th Cir. 2012).