Court Opinion

ID: 9901291
Source: CourtListenerOpinion
Date Created: 2023-11-21 17:00:40.242129+00
Date Added: 2024-06-11T09:21:30.102981
License: Public Domain

22-2787-cv
Tseng v. De Vries

                          UNITED STATES COURT OF APPEALS
                              FOR THE SECOND CIRCUIT

                                      SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.
CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS
PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A
SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE
(WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A
SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT
REPRESENTED BY COUNSEL.

      At a stated term of the United States Court of Appeals for the Second Circuit,
held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the
City of New York, on the 21st day of November, two thousand twenty-three.

       PRESENT: RAYMOND J. LOHIER, JR.,
                        WILLIAM J. NARDINI,
                        BETH ROBINSON,
                                Circuit Judges.
       ------------------------------------------------------------------
       CHIEN-LUNG TSENG, BILLY SUNG, JERRY YUE,

                       Plaintiffs-Appellants,

       ALEX GARNETT, Individually and on Behalf of All Others Similarly
       Situated,

                       Plaintiff,

                               v.                                           No. 22-2787-cv

       COLLEEN A. DE VRIES, COGENCY GLOBAL
       INC., CITIGROUP GLOBAL MARKETS INC.,
       CHINA RENAISSANCE SECURITIES (HONG
       KONG) LIMITED, RLX TECHNOLOGY INC.,
      YING (KATE) WANG,

                      Defendants-Appellees,

      LONG (DAVID) JIANG, YILONG WEN,
      YUEDUO (RACHEL) ZHANG,

                       Defendants. *
      ------------------------------------------------------------------

      FOR APPELLANTS:                                       MATTHEW M. GUINEY (Patrick
                                                            Donovan, on the brief), Wolf
                                                            Haldenstein Adler Freeman &
                                                            Herz LLP, New York, NY;
                                                            Thomas L. Laughlin, IV,
                                                            Scott+Scott Attorneys at Law,
                                                            New York, NY

      FOR APPELLEES:                                        MICHAEL C. GRIFFIN (Scott D.
                                                            Musoff, Robert A. Fumerton, on
                                                            the brief), Skadden, Arps, Slate,
                                                            Meagher & Flom LLP, New York,
                                                            NY; Susanna M. Buergel, Daniel
                                                            S. Sinnreich, Paul, Weiss, Rifkind,
                                                            Wharton & Garrison LLP, New
                                                            York, NY

      Appeal from a judgment of the United States District Court for the

Southern District of New York (Paul A. Engelmayer, Judge).

      UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,

AND DECREED that the judgment of the District Court is AFFIRMED.

* The Clerk of Court is directed to amend the caption as set forth above.

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         Plaintiffs-Appellants appeal from an October 3, 2022 judgment of the

United States District Court for the Southern District of New York (Engelmayer,

J.) dismissing their claims under Sections 11 and 15 of the Securities Act of 1933, 1

stemming from the initial public offering (IPO) of securities issued by Defendant-

Appellee RLX Technology Inc., an e-cigarette company incorporated in the

Cayman Islands and operating primarily in China. We assume the parties’

familiarity with the underlying facts and the record of prior proceedings, to

which we refer only as necessary to explain our decision to affirm.

         Plaintiffs alleging violations of Section 11 are not required to plead

scienter, reliance, or loss causation. See NECA-IBEW Health & Welfare Fund v.

Goldman Sachs & Co., 693 F.3d 145, 156–57 (2d Cir. 2012). Issuers are thus

“subject to virtually absolute liability under section 11.” In re Morgan Stanley

Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d Cir. 2010) (quotation marks omitted).

The parties agree, and we assume without deciding, that Section 11 authorizes

suit for failure to disclose information required under Item 5 of Form 20-F for

foreign issuers who file a registration statement. See Moab Partners, L.P. v.

1   The Appellants have abandoned their claim under Section 12 of the Securities Act.
                                            3
Macquarie Infrastructure Corp., No. 21-2524, 2022 WL 17815767, at *3 n.2 (2d Cir.

Dec. 20, 2022), cert. granted, No. 21-1165, 2023 WL 6319659 (U.S. Sept. 29, 2023);

Willard v. UP Fintech Holding Ltd., 527 F. Supp. 3d 609, 619 n.5 (S.D.N.Y. 2021).

Item 5(D) of Form 20-F requires that registrants “discuss, for at least the current

financial year, any known trends, uncertainties, demands, commitments or

events that are reasonably likely to have a material effect on the company's net

sales or revenues, income from continuing operations, profitability, liquidity or

capital resources, or that would cause reported financial information not

necessarily to be indicative of future operating results or financial condition.”

Form 20-F, U.S. Sec. & Exch. Comm'n, https://www.sec.gov/files/form20-f.pdf

(last visited Nov. 11, 2023) [https://perma.cc/7TPS-RJ3U].

      The Appellants’ second amended complaint alleges violations of RLX’s

disclosure obligations under Section 11 and Item 5.2 The complaint alleges that

RLX’s IPO materials failed to disclose three statements made by the State

2 In the second amended complaint, the Appellants initially styled their Item 5 claims as
violations of Item 303 of SEC Regulation S-K, 17 C.F.R. § 229.303. Item 5 of Form 20-F
is the analogue of Item 303 for foreign corporations, and the District Court therefore
evaluated Appellants’ Item 303 claim as an Item 5(D) claim. See Willard, 527 F. Supp.
3d at 619 n.5. We assume, without deciding, that for the purposes of this appeal, the
duties arising under Item 5(D) are identical to those arising under Item 303.
                                             4
Tobacco Monopoly Administration (STMA), the Chinese government agency

charged with regulating China’s tobacco industry, relating to possible regulation

of e-cigarettes in China: the STMA’s replies in September 2017 and October 2018

to the National People's Congress, and its reply in September 2019 to the

National Committee of the Chinese People's Political Consultative Conference.

      Among other things, the September 18, 2017 reply announced that the

STMA was “actively studying and formulating” a regulatory scheme that would

incorporate “[e]lectronic cigarettes into the management of tobacco products.”

App’x 57. The October 16, 2018 reply similarly announced that the STMA “fully

agree[d] that . . . [e]lectronic cigarettes . . . shall be managed as tobacco

products.” App’x 61. Finally, the September 29, 2019 reply revealed that

although the STMA “explicitly [brought] heated tobacco products into the scope

of monopoly management,” it had not yet done so for e-cigarettes and was

instead “strengthen[ing] the . . . legal research on [e]lectronic cigarettes” by

exploring the regulatory models implemented by other countries and

“communicat[ing] and coordinat[ing] closely with relevant departments” to

“actively promote the introduction of control measures.” App’x 67.

                                           5
      The Appellants claim that, by failing to disclose the STMA’s replies, RLX

misleadingly stated or omitted important facts related to the risk of more

stringent regulation of e-cigarettes in China, including the state monopoly-style

regulation of e-cigarettes as a traditional tobacco product. In dismissing the

complaint, the District Court concluded that the offering materials “adequately

disclosed the possibility of stricter regulations—indeed, the possible outright

prohibition—of e-cigarettes in China” and that in any case “there was no material

nondisclosure.” Garnett v. RLX Tech. Inc., 632 F. Supp. 3d 574, 601, 607 (S.D.N.Y.

2022) (emphasis added). Reviewing the District Court’s judgment de novo, IWA

Forest Indus. Pension Plan v. Textron Inc., 14 F.4th 141, 145 (2d Cir. 2021), we affirm

on the basis that the offering materials adequately disclosed the risk of stricter

regulations of e-cigarettes in China.

      In particular, the offering materials discussed several regulations, such as a

national ban on e-cigarette sales to minors and a ban on using e-cigarettes in

public places in various cities, that the Chinese government and local

governments implemented before the IPO. The offering materials also

explained that in 2019 the STMA encouraged e-cigarette companies to shut down

                                           6
their e-commerce operations and withdraw internet advertising for e-cigarettes,

which RLX elected to do. The offering materials further cautioned that RLX

“cannot assure you that government authorities will not impose further

restrictions on e-vapor products in the future, including but not limited to

requirements to obtain and maintain licenses, approvals or permits for relevant

business operation.” App’x 177.

      As the District Court noted, RLX’s offering materials “cited strict

regulatory measures taken by other countries with respect to e-cigarettes,”

including “the imposition of taxes on e-cigarette sales and the outright

prohibition of e-cigarettes,” and “recited the local, administrative, and national

regulatory measures that Chinese authorities had already put in place with

respect to e-cigarettes as of the time of the IPO.” Garnett, 632 F. Supp. 3d at 601.

We agree that this discussion, together with the IPO documents’ warning that e-

cigarettes may be subject to yet more regulation, was “sufficient to pick up the

regulatory risk that later materialized: that China would decide to calibrate

regulation of e-cigarettes to track its regulation of tobacco products.” Id. at 602.

The offering materials thus adequately disclosed the risk that e-cigarettes would

                                          7
be regulated as a traditional tobacco product, even though they did not refer to

the STMA’s three statements.

      The Appellants nevertheless argue that disclosing the STMA’s three replies

would have confirmed for investors that regulation of e-cigarettes as a tobacco

product in China—and the attendant risks associated with such regulation—

would materialize. We disagree. While the 2017 and 2018 replies indicated the

STMA’s preliminary intention to regulate e-cigarettes as a traditional tobacco

product, the final September 2019 reply—which indicated only that the STMA

was still exploring the regulatory models of other countries with respect to e-

cigarettes—reflected a retreat from any specific intent to regulate e-cigarettes as a

tobacco product. The regulation of e-cigarettes as a traditional tobacco product

was thus not “reasonably likely to occur” at the time of RLX’s IPO, see Stratte-

McClure v. Morgan Stanley, 776 F.3d 94, 103 (2d Cir. 2015) (quotation marks

omitted), and RLX had no duty to disclose the replies.

                                          8
      We have considered the Appellants’ remaining arguments and conclude

that they are without merit. For the foregoing reasons, the judgment of the

District Court is AFFIRMED.

                                     FOR THE COURT:
                                     Catherine O’Hagan Wolfe, Clerk of Court

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