Court Opinion

ID: 9480635
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:54:14.14625+00
Date Added: 2024-06-11T17:47:48.968187
License: Public Domain

BOWNES, Senior Circuit Judge,
dissenting.
At the outset I think it necessary to state what this case is not about. This case is not about the extent to which our opinions do or do not “command response.” Nor is it about the happy or unhappy performance of counsel, the lower court, or even the panel whose opinion has now been withdrawn by the full court. Rather, the case presents important issues concerning, inter alia, the scope of a corporation’s disclosure duties under federal securities law as well as the province of the jury in making factual determinations in securities litigation. With respect, I not only disagree with the majority’s resolution of certain of these issues, but I also believe that the issues merit more extended discussion than the majority has accorded them. I begin with an exposition of the pertinent facts.
Polaroid is a manufacturer of instant photographic and light polarizing products based in Cambridge, Massachusetts. In the spring of 1978, Polaroid began national sales of its much-heralded instant motion picture system, Polavision. Polaroid introduced Polavision with a multi-million dollar advertising campaign in March, 1978, and as of that time, projected worldwide sales of 200,000 units in 1978.
The facts that form the heart of this dispute began with the issuance of Polaroid’s Third Quarter Report to Stockholders on November 5, 1978. The bulk of that report spoke in glowing terms of the successful year Polaroid was having in 1978. Fueled by instant camera and film sales, Polaroid was posting record earnings in 1978, and its Third Quarter Report emphasized Polaroid's booming sales and record manufacturing output. One brief statement in this report, however, acknowledged that Polaroid’s earnings “continue to reflect substantial expenses associated with Polavision.” Two other statements observed that Polaroid’s cost of sales had increased due, in part, to these same Pola-vision expenses.
The “substantial expenses” resulted from Polavision sales that were well below initial projections. The lower than expected sales caused Polaroid, in October, 1978, to instruct its Austrian supplier, Eumig, first to reduce its production of Polavision units, and then in November, 1978, to cease production entirely, at least until excess inventory was depleted. Polaroid also requested that Eumig keep information about the production cut secret from the public.
The effect of these low Polavision sales on earnings began to be quantified, albeit tentatively, as early as December, 1978. On December 4, 1978, an internal Polaroid reporting document entitled Forecast 11 was circulated to the Management Executive Committee. The report was based on 10 months actual sales and a forecast for November and December. In Forecast 11, the Polavision sales projection for 1978 dropped to 97,000 units, down from 100,000 projected in October and the 200,000 projected in February. Also, the preliminary earnings estimate for the fourth quarter was calculated to be $1.37 per share, lower than most market analysts were predicting.
The next internal report, Forecast 12, was circulated on January 15, 1979. Forecast 12 was based on 11 months actual sales and an estimate for December, 1978 that was calculated, in part, from early December results. Its preliminary earnings calculation estimated fourth quarter earnings to have been $1.31 per share, one cent less than the final, audited figure of $1.32 per share ultimately calculated. Forecast 12 also reflected the need to take *19an additional reserve for Polavision expenses in the fourth quarter. A $6.8 million reserve was taken on February 1.
At approximately the same time as these events were occurring, the Rowland Foundation, a charitable organization run by Dr. Edwin Land, Polaroid’s founder, decided to sell 300,000 shares of Polaroid stock. A draft press release announcing the sale was given to Polaroid’s in-house general counsel on the morning of January 9 by Julius Silver, a Polaroid vice-president and director who also acted as attorney for the Rowland Foundation. The press release, printed on Rowland Foundation stationery, was issued by Polaroid’s public relations department in the late afternoon of January 9. The release announced as one of the reasons for the sale the desire to diversify the Foundation’s assets and free up funds for new pursuits. It also mentioned the impending retirement of Dr. Land as Chairman and Chief Executive Officer of Polaroid. The sale of stock took placé on January 11, at a price of $52 per share, for a total of $16 million.
Approximately five weeks later, after the close of the market on February 22, 1979, Polaroid issued a press release announcing its 1978 earnings. The release reported a 26% earnings gain for all of 1978, and earnings per share of $1.32 in the fourth quarter. Concerning Polavision, the press release announced:
The Company’s 1978 record earnings were achieved notwithstanding manufacturing costs and marketing expenses substantially in excess of revenues from the Polavision program. This program is expected to continue to make significant demands on cash and earnings in 1979.1
The market reaction to this release was quite pronounced. Between February 22 and March 1, the price of Polaroid’s common stock dropped from $49.625 to $39.875, a difference of $9.75. It then stabilized at this level.
The named plaintiffs represent two certified classes of persons who purchased (1) Polaroid common stock or (2) call options on Polaroid common stock during the period January 11, 1979 through February 22, 1979 (the “Class Period”), and who held such securities as of the close of trading on February 22, 1979. Plaintiffs allege that the market price of Polaroid securities was artificially inflated during the class period as a result of Polaroid’s violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.2 Specifically, plaintiffs claim that Polaroid knowingly or recklessly breached a duty to disclose adverse material facts concerning sales difficulties with Polavision; that Polaroid’s failure to disclose these facts artificially inflated the price of Polaroid securities; and that plaintiffs, having relied on Polaroid’s conduct, consequently suffered damages when the information eventually was released and resulted in a sharp decline in the price of Polaroid’s securities.
At the liability phase of the bifurcated trial, Polaroid moved for a directed verdict after the close of plaintiffs’ presentation. This motion was denied. The jury returned a verdict in favor of the plaintiffs and answered special interrogatories finding that Polaroid had knowingly or recklessly breached a duty to disclose material adverse facts known to it prior to January 11, 1979, and that plaintiffs had suffered a loss causally related to Polaroid’s conduct. Af*20ter the trial on damages, the jury found that for each day of the class period, the price of Polaroid common stock was inflated by $9.75 above its true value. The trial judge entered judgment accordingly, and denied Polaroid’s motions for judgment n.o.v. or, alternatively, for a new trial.
Polaroid appealed, claiming that the trial judge had committed reversible error in his instructions to the jury on each of the legal elements of securities fraud and that there was insufficient evidence as a matter of law to support the jury’s verdict. A divided panel of this court agreed with Polaroid that certain jury instructions had been flawed and vacated the judgment on that basis. The panel concluded, however, that sufficient evidence existed to support the plaintiffs’ case and remanded for a new trial.
One of the crucial issues before the panel concerned the sufficiency of the evidence to support the plaintiffs’ claim that Polaroid had a duty to disclose adverse information regarding Polavision’s difficulties. Plaintiffs based their allegations regarding the existence of a duty .on three grounds. First, plaintiffs claimed that Polaroid’s Third Quarter Report was misleading because Polaroid had buried an extremely brief mention of Polavision expenses within an otherwise glowing summary of 1978 earnings to date. Plaintiffs argued that the Report’s failure to contain more concrete information regarding Polavision’s difficulties was misleading, and triggered a duty to disclose adverse facts. Second, plaintiffs alleged that information compiled by Polaroid after November 5, including increasingly negative reports regarding Po-lavision sales as well as reasonably certain preliminary calculations of lower than expected fourth quarter earnings (Forecasts 11 and 12), constituted adverse material facts that Polaroid was under a duty to disclose to prevent its optimistic Third Quarter Report from being misleading. Finally, plaintiffs claimed that Polaroid was intricately involved with the press release announcing the Rowland Foundation’s sale of stock and that it was materially misleading for Polaroid not to include in that press release some mention of the difficulties with Polavision. Plaintiffs argued that this conduct on the part of Polaroid constituted a knowing or reckless breach of a duty to disclose material adverse facts that resulted in harm to the plaintiffs when the adverse information became known and triggered a sharp decline in the price of Polaroid securities.
Of these three possible bases advanced by the plaintiffs to support a duty to disclose, the panel expressed reservations about the sufficiency of the evidence to support theories one and three, but reserved judgment on them. The panel did rule, however, that a properly instructed jury could base a duty to disclose on theory two. Specifically, the panel stated: “even if the optimistic Third Quarter Report was not misleading at the time of its issuance, there is sufficient evidence to support a jury’s determination that the report’s relatively brief mention of Polavision difficulties became misleading in light of the subsequent information acquired by Polaroid indicating the seriousness of Polavision’s problems.” (Emphasis in original).
Polaroid petitioned for a rehearing before the full court. The petition was granted to consider whether the panel’s ruling with respect to plaintiffs’ second theory erroneously created an overly broad “duty to update” on the part of Polaroid, and, if so, whether overturning the panel on this ground required entry of judgment in favor of Polaroid. The majority of the court has answered both questions in the affirmative. I respectfully disagree.
I. DUTY TO DISCLOSE
In Roeder v. Alpha Industries, Inc., 814 F.2d 22 (1st Cir.1987), this court identified three situations that could trigger a duty to disclose: (1) when a “corporate insider trades on confidential information,” (2) when a corporation has made “inaccurate, incomplete, or misleading prior disclosures,” and (3) when a statute or regulation requires disclosure. Id. at 26-27; see also Staffin v. Greenberg, 672 F.2d 1196, 1203-04 (3d Cir.1982) (identifying insider trading and misleading statements as the two con*21texts that trigger a duty to disclose). Roe-der stated further that:
The materiality of the information claimed not to have been disclosed, however, is not enough to make out a sustainable claim of securities fraud. Even if information is material, there is no liability under Rule 10b-5 unless there was a duty to disclose it.
Roeder, 814 F.2d at 26; see also Basic, Inc. v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 987 n. 17, 99 L.Ed.2d 194 (1988) (“Silence, absent a duty to disclose, is not misleading under Rule 10b-5”); Chiarella v. United States, 445 U.S. 222, 235, 100 S.Ct. 1108, 1118, 63 L.Ed.2d 348 (1980); Starkman v. Marathon Oil Co., 772 F.2d 231, 238 (6th Cir.1985) (“[T]he established view is that a ‘duty to speak’ must exist before the disclosure of material facts is required under Rule 10b-5.”), cert. denied, 475 U.S. 1015, 106 S.Ct. 1195, 89 L.Ed.2d 310 (1986).
Invoking the second factor articulated in Roeder, the panel opinion stated that a duty to disclose could arise if a company possessed material facts that must be released in order to render prior statements not misleading. The panel held that sufficient evidence existed in the record to support the existence of a disclosure obligation on the part of Polaroid under this theory, and accordingly remanded for a new trial.
Polaroid challenges the panel’s disclosure theory as an unwise extension of Roeder. At the heart of this challenge is a distinction that Polaroid draws between a corporation’s duty to correct prior statements, and a corporation’s duty to update prior statements. Polaroid appears to concede that in two types of situations corporations may have a duty to disclose information in order to correct prior statements. First, there is a duty to correct prior statements that were inaccurate or misleading when they were made. See, e.g., Roeder, 814 F.2d at 26-27. Second, there can be a duty to correct prior statements of a forward-looking or predictive nature that, although perhaps true when made, have become misleading due to subsequent events.3 See, e.g., In re Phillips Petroleum Securities Litigation, 881 F.2d 1236, 1245 (3d Cir.1989) (“There can be no doubt that a duty exists to correct prior statements, if the prior statements were true when made but misleading if left unrevised.”); Greenfield v. Heublein, Inc., 742 F.2d 751, 758 (3d Cir.1984), cert. denied, 469 U.S. 1215, 105 S.Ct. 1189, 84 L.Ed.2d 336 (1985); Ross v. A.H. Robins Co., 465 F.Supp. 904, 908 (S.D.N.Y.) (“It is now clear that there is a duty to correct or revise a prior statement which was accurate when made but which has become misleading due to subsequent events. This duty exists so long as prior statements remain ‘alive’.”), rev’d on other grounds, 607 F.2d 545 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). Polaroid contends, however, that corporations have no duty to update statements of past historical fact that were accurate when made but that have simply become stale with the passage of time. It argues that the panel opinion unwisely created such a duty to update and that this poses an impossible dilemma for companies in trying to determine their disclosure obligations.
Upon reconsideration, I am persuaded that certain language in the panel opinion, when construed in the factual context of this case, could be interpreted as creating an overly broad duty on the part of corporations to update even accurate statements of past historical fact. To the extent the en banc majority curtails this language, I concur.4 Even with a narrower view of *22corporate disclosure obligations, however, I am convinced that there is still sufficient evidence to warrant sending this case back for a new trial.
■II. MATERIALLY MISLEADING STATEMENTS
Under the disclosure standard articulated in Roeder, 814 F.2d at 26-27, if Polaroid uttered misleading statements in its Third Quarter Report, or if Polaroid failed to reveal in the Report information necessary to make other statements not misleading, such conduct would trigger a duty to disclose. For the reasons that follow, I believe sufficient evidence exists to require remanding this case for a properly instructed jury to determine whether the Third Quarter Report was misleading in this sense at the time of its issuance.5
Plaintiffs’ argument with respect to the misleading nature of the Third Quarter Report rests in large part on the claim that the Report’s optimistic discussion of 1978 earnings, together with its failure to contain more than but a brief mention of Pola-vision expenses, created a misleading impression with respect to the financial health of Polavision and of Polaroid.6 Examination of the Report and of other evidence in the record provides some measure of support for the plaintiffs’ claim.
There can be little dispute that the overall tone of the Third Quarter Report was abundantly optimistic. The Report stated that Polaroid’s “worldwide manufacturing facilities continue to operate at close to maximum capacity.” It also spoke of “record worldwide sales and earnings for both the third quarter and the first nine months of 1978” and referred to the construction of new plants to house expanded manufacturing facilities. Finally, the Report featured a picture of Polavision on its front cover, supporting the inference that the optimism expressed in the report extended to Polavision as well.
Yet, the record furnishes support for plaintiffs’ contention that none of these statements reflected the true status of Po-lavision. In an October 31 telex, Eumig, Polaroid’s Austrian manufacturer of Pola-vision units, confirmed that Polaroid had asked it to cut back Polavision production by 110,000 units. In a November 14 telex, Eumig subsequently confirmed that Polaroid had instructed it to cease Polavision production entirely. Even though this last *23telex was not sent by Eumig until after November 5, a jury reasonably could infer that Polaroid must have been in the process of making this decision prior to November 5.
This evidence would support an inference that Polaroid had assembled sufficient information prior to the issuance of the November 5 quarterly report to know that there were significant problems in Polavision sales. Certainly, the Third Quarter Report’s statement about manufacturing facilities operating at close to maximum capacity was not true as to Polavision. Nor were the statements concerning record sales or expanding manufacturing facilities accurate as to Polavision.
Despite these indications of serious difficulties in Polavision sales, the Third Quarter Report’s only mention of Polavision consisted of three scattered references to the fact that earnings and cost of sales continued to reflect “substantial expenses associated with Polavision.” The majority focuses on these references and holds that no reasonable jury could find the Report to be misleading because it contained this mention of Polavision expenses. I disagree. The references to Polavision expenses were brief — only one even constituted a full sentence — and were buried in a glowingly optimistic report about the tremendous year that Polaroid was having. Moreover, the mere statement that there were substantial expenses associated with Polavision does not convey that Polaroid was experiencing serious difficulties in Po-lavision sales. Substantial expenses are a natural part of any new product’s development, even for products that achieve instant commercial success. Polavision, however, was experiencing more than simply normal start-up expenses; Polavision was suffering from significantly lower than expected sales. It is this information about poor sales that plaintiffs claim should have been disclosed in the Third Quarter Report.
Indirect proof of the incomplete nature of the Third Quarter Report’s disclosures is provided by Polaroid’s instructions to Eu-mig to keep news of the Polavision production cutback secret. If the Third Quarter Report’s mention of Polavision expenses truly had constituted a substantially complete disclosure of Polavision’s difficulties, as Polaroid and the majority seem to contend, one wonders why Polaroid would have instructed Eumig to keep the Polavision cutback secret. An obvious inference that a reasonable jury could draw is that Polaroid wanted this news kept secret because the production cutback constituted detrimental information with respect to Po-lavision’s problems that Polaroid had not disclosed and was not yet planning to disclose — in its Third Quarter Report or otherwise.
The majority also bases its rejection of plaintiffs’ claim on the fact that the Third Quarter Report was literally accurate in what it stated. Thus, with respect to plaintiffs’ contention that it was misleading as to Polavision for the Report to state that “worldwide manufacturing facilities continue to operate at close to maximum capacity,” the majority observes that “the statement, taken as a whole, was true; it expressly recognized an absence of totality.”
Surely, however, it cannot be enough that a disclosure simply is literally accurate in what it says. Well-trained lawyers will always be able to craft literally accurate statements. Rather, the context in which a disclosure appears must be considered as crucial in any determination as to whether the disclosure is adequate or misleading. The nuances of what a disclosure emphasizes versus what it glosses over can render even a factually accurate disclosure misleading in an overall sense. See, e.g., Isquith v. Middle South Utilities, Inc., 847 F.2d 186, 201-03 (5th Cir.), cert. denied, 488 U.S. 926, 109 S.Ct. 310, 102 L.Ed.2d 329 (1988); Greenapple v. Detroit Edison Co., 618 F.2d 198, 205, 210 (2d Cir.1980). Phrased another way, disclosures not only must be literally accurate but they also must be “complete enough so as not to be misleading.” Staffin v. Greenberg, 672 F.2d at 1204; cf. Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 164 (2d Cir.1980) (acknowledging that even if there were no statement of an untrue fact, a company’s issuance of rosy, optimistic statements *24could be deemed misleading if internal company reports were less optimistic).
For many of the same reasons as previously articulated, I believe that sufficient evidence exists to support a reasonable jury’s conclusion that Polaroid’s Third Quarter Report failed to be complete enough so as not to be misleading. Although the Report clearly was drafted carefully so as to be literally accurate in what it stated, the Report failed to disclose certain concrete information regarding Po-lavision’s difficulties. In particular, the Report contained no mention of either the lower than expected Polavision sales or the cutback in Polavision production at Eumig.
I fully acknowledge that these alleged nondisclosures are not so egregious as to constitute an overwhelming case against Polaroid.7 Indeed, the majority persuasively has countered many of the plaintiffs’ contentions. Regardless of whether I agree with the majority on the underlying merits, however, that is not the issue before us. The applicable standard does not require that plaintiffs have a substantial likelihood of success in order to get their case to the jury. Rather, our role is strictly limited to determining whether there is sufficient evidence so that a properly instructed jury could reasonably find for the plaintiffs. See, e.g., Fact Concerts, Inc. v. City of Newport, 626 F.2d 1060, 1064 (1st Cir.1980), vacated on other grounds, 453 U.S. 247, 101 S.Ct. 2748, 69 L.Ed.2d 616 (1981); 5A J. Moore & J. Lucas, Moore’s Federal Practice ¶ 50.07[2] (1990).
I believe that the plaintiffs in this case have met this threshold. I concede that it is a close question, and I recognize why corporations may be uneasy about juries’ handling such close questions, particularly in complex securities litigation, where there is the potential for bias against corporate defendants. There is more than a hint of this concern in the majority’s opinion. Courts, however, must vigilantly guard against any tendency to heighten the standard required for plaintiffs to get such cases before a jury, or they risk undercutting the vital role of the jury in our legal system.
I have faith that a properly instructed jury could handle the issues presented by this case objectively and competently. I also believe that the evidence is not so weak as to support the majority’s conclusion that no reasonable jury could find for the plaintiffs. Accordingly, I respectfully dissent.

. Polavision sales did not improve. Sales continued to drop and Polavision eventually was removed from the market.

. Rule 10b-5 states:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a)To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or 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, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5 (1990).

. Determining whether a statement is of sufficient continuing viability or possesses a sufficiently forward-looking nature to support a duty to disclose raises a host of difficult questions, which are perhaps best considered on a case-by-case basis. The facts of this case do not require me to address these questions. See infra n. 7. One possible example of such a statement, however, would be an announcement by a company that it had just secured a major long-term contract to provide products or services to another party. If the contract collapsed, for some reason, the company arguably would have a duty to disclose this information to prevent its prior statement, which would still be "alive," from misleading investors.

. 1 do not, however, agree with the en banc majority’s characterization of the panel opinion as constituting an "outright rejection” of Roeder, *22an opinion that I authored and with which I have more than a passing acquaintance. The panel may have extended Roeder to an extent at odds with the full court, but it in no way rejected Roeder. Indeed, there is language in the panel opinion expressly reaffirming Roeder's standard.

. It is true- that the panel opinion expressed reservations about the sufficiency of the evidence to support plaintiffs’ argument regarding the misleading nature of the Third Quarter Report at the time of its issuance. Contrary to Polaroid's contentions, however, the panel did not decide the matter finally. In any event, the question is up for reconsideration along with the other duty-to-disclose issues.

. Polaroid contends, and the majority appears to agree, that plaintiffs should be barred from raising on appeal the issue of misrepresentations or misleading conduct because they allegedly did not present this theory at trial. I disagree. The plaintiffs’ theory consistently has been that Polaroid’s failure to disclose information misled investors. As part of their support for this theory, plaintiffs introduced evidence pertaining to information acquired by Polaroid prior to November 5 (e.g., the Eumig production cutback) and yet not disclosed by Polaroid in its Third Quarter Report or later. In his closing argument to the jury, plaintiffs’ counsel explicitly stressed the allegedly misleading nature of the Third Quarter Report, stating:
Now, Mr. Tolan [Polaroid’s counsel] suggested to you that the October announcement, the third-quarter announcement, revealed that they [Polaroid] were having Polavision losses. Did that announcement reveal that things were so bad they stopped producing it? ... [Polaroid was] bursting at the seams, and they were telling the world, we can’t produce enough of our product. Did they tell the world that they shut down production of Pola-vision, that they laid off workers? They didn’t.
Concededly, plaintiffs have emphasized the misleading nature of the Third Quarter Report more heavily on appeal than they did at trial. This increased emphasis undoubtedly is due to the plaintiffs’ accurate perception that the part of their disclosure theory that rested on information acquired by Polaroid after November 5 is of questionable validity. A change in emphasis, however, does not constitute an objectionable alteration of a legal theory advanced below.

. In an effort to build a stronger case, plaintiffs argue that the Third Quarter Report contained forward-looking statements sufficient to trigger a duty on the part of Polaroid to disclose adverse information acquired after November 5. Although a quarterly report could, in principle, contain such forward-looking statements, I have found none in the Third Quarter Report. The Report concentrated on the presentation of information concerning Polaroid’s financial results as of November 5. Nor am I persuaded by the plaintiffs’ argument that Polaroid’s participation in the issuance of the Rowland Foundation’s press release was sufficient to trigger a duty to disclose. Rowland’s stated reasons for selling its Polaroid stock had absolutely nothing to do with Polaroid’s financial health.