In Re Adams Golf, Inc. Securities Litigation , 381 F.3d 267 ( 2004 )

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
8-25-2004
In Re: Adams Golf
Precedential or Non-Precedential: Precedential
Docket No. 03-3945
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PRECEDENTIAL (Filed: August 25, 2004)
UNITED STATES COURT
OF APPEALS FOR THE Elizabeth W. Fox
THIRD CIRCUIT Todd S. Collins [ARGUED]
Berger & Montague
1622 Locust Street
No. 03-3945 Philadelphia, PA 19103
Counsel for Appellants
IN RE: ADAMS GOLF, INC. Kevin G. Abrams
SECURITIES LITIGATION Richards, Layton & Finger
One Rodney Square
P.O. Box 551
F. KENNETH SHOCKLEY, M.D.; Wilmington, DE 19899
DAVID SHOCKLEY;
TODD TONORE; Michael J. Biles
ZANE BIANACCI; Jennifer R. Brannen
PATRICIA CRAUS; Jesse Z. Weiss
TERRY LINVILLE; Paul R. Bessette [ARGUED]
LARRY PRICE; Kevin G. Abrams
FEDERATED NATIONAL Akin, Gump, Strauss, Hauer & Feld
INSURANCE COMPANY, on behalf 300 West Sixth Street, Suite 2100
of all others similarly situated, Austin, TX 78701
Appellants Counsel for Appellees Adams Golf Inc.,
B.H. Adams, Richard H. Murtland,
Darl P. Hatfield, Paul F. Brown, Jr.
Appeal from the United States Roland E. Casati, Finis F. Conner,
District Court for the and Stephen R. Patchin
District of Delaware
(D.C. Civil Nos. 99-cv-0371, Robert K. Payson
99-cv-0397, 99-cv-0421, Potter, Anderson & Corroon
99-cv-0469, 99-cv-0498, 1313 North Market Street
99-cv0-511, 99-cv-0618) 6th Floor, P.O. Box 951
District Judge: Honorable Kent Jordan Wilmington, DE 19801
Argued May 25, 2004
*Honorable Arthur L. Alarcón, Senior
Before: SCIRICA, Chief Judge, Judge, United States Court of Appeals for
RENDELL and ALARCÓN*, the Ninth Circuit, sitting by designation.
Circuit Judges.
Michael J. Chepiga [ARGUED] the District Court dismissed the action
Simpson, Thacher & Bartlett under Fed. R. Civ. P. 12(b)(6). In re
425 Lexington Avenue Adams Golf, Inc. Sec. Litig., 176 F. Supp.
New York, NY 10017 2d 216 (D. Del. 2001). For the reasons
Counsel for Appellees Lehman Bros. that follow, we will affirm in part and
Holdings, Banc of America Securities reverse in part.
LLC, and Ferris Baker Watts
I
A
OPINION OF THE COURT When Barney Adams founded
Adams Golf in 1987, the Company was a
golfing components supplier and a contract
RENDELL, Circuit Judge. manufacturer. Over the years, it grew to
become a designer and manufacturer of its
In this securities case, plaintiff- own custom-fit golf clubs. After having
shareholders brought an action under the much success by introducing a high-end
Securities Act of 1933 against Adams golf club, called Tight Lies, the Company
Golf, Inc., a manufacturer of golf offered its shares to the public. On July
equipment, and certain of its officers and 10, 1998, an Initial Public Offering
underwriters. The plaintiffs contended (“IPO”) of 5,575,000 shares of the
that the Company’s registration statement Company’s common stock was made at
and prospectus contained materially false $16 per share, accompanied by the
or misleading statements in violation of requisite registration statement and
sections 11, 12(a)(2), and 15 of the prospectus.1
Securities Act. Among other things,
Adams Golf’s public offering materials
indicated that the Company sold its golf 1
Originally, the plaintiffs in this action
equipment exclusively to authorized
consisted of those who purchased directly
retailers and that the golf industry was
from the defendant-underwriters during
flourishing. In their complaint, the
the IPO and those who purchased their
plaintiffs alleged that Adams Golf omitted
shares from the secondary market soon
i n f o r m a t i o n c o n t r a ry t o t h e s e
after the IPO. Citing to Gustafson v.
representations, i.e., that unauthorized
Alloyd Co., 513 U.S. 561 (1995) and
retailers were selling Adams Golf’s golf
Ballay v. Legg Mason Wood Walker, Inc.,
clubs, and that retailers industry-wide were
925 F.2d 682 (3d Cir. 1991), the District
carrying an oversupply of golf equipment.
Court held that the plaintiffs who
Finding that neither the unauthorized retail
purchased Adams Golf shares on the
nor the oversupply allegations stated a
public market did not have a private right
claim upon which relief could be granted,
of action under section 12(a)(2) of the
2
In their complaint, the plaintiffs profitable margins and
contend that the defendants misrepresented maximize sales of Adams’
and omitted material facts in the products.
registration statement and prospectus.
First, the plaintiffs argue that the The registration statement made clear that,
defendants failed to disclose that its as part of its limited distribution
revenues were artificially inflated by a arrangement, the Company “does not sell
“gray market” distribution of Adams Golf its products through price sensitive general
golf clubs. Second, the plaintiffs argue discount warehouses, department stores or
that the defendants failed to disclose the membership clubs.”
existence of an industry-wide oversupply
of golf equipment. The facts with respect Prior to the IPO, however, Adams
to these two sets of allegations will be Golf had learned that Tight Lies golf clubs
explored in more detail. were being sold by Costco, a discount
warehouse. On June 9, 1998, one month
1 before the reg istration statement’s
effective date, the Company issued a press
Adams Golf sold its golf clubs only release in which it acknowledged that an
to authorized dealers. As its registration unauthorized dealer was selling its
statement explained: signature product. Indeed, the plaintiffs
To preserve the integrity of alleged that prior to the IPO, Costco
its image and reputation, the possessed over 5,000 Tight Lies clubs in
Company limits its its inventory. In the press release, Adams
distribution to retailers that Golf stated it was “concerned” about
market premium quality golf Costco’s sale of the golf clubs “because
equipment and provide a Costco [w as] no t an authorized
high level of customer distributor.” Concerned enough that,
s e r v ic e a n d technic a l according to the press release, Adams Golf
expertise. . . . The Company initiated legal proceedings, by filing a bill
believes its selective retail of discovery against Costco, to determine
d i s tr i b ut i o n h e l p s its “whether Costco’s claims that they had
r e t a il e r s t o m a i n ta i n properly acquired Adams’ Tight Lies
fairway woods for resale were accurate.”
The plaintiffs further alleged that the
unauthorized distribution was not limited
1933 Act. However, the District Court
to Costco and included “sales by other
ruled that those secondary market
unauthorized discount retailers and
purchasers could sue under section 11 of
international gray market distributors.”
the Act. These determinations have not
been challenged by the parties and so we
This unauthorized inventory created
do not pass upon them.
3
a “gray market,” according to the clubs, and that the Company “does not
plaintiffs. The complaint defines “gray believe that the gray marketing of its
market” to sim ply refer to “the product can be totally eliminated.”
u n a u t h o r ized distributi o n of th e
Company’s products to discount retailers.” 2
The complaint sets out the several
ostensible consequences of this gray The complaint also states that by
market. The plaintiffs alleged that the omitting any mention of an industry-wide
Company initially experienced a rise in glut of golf equipment carried by retailers,
sales as products were diverted to the certain passages in Adams Golf’s
unauthorized distributors. According to registration statement were materially
their complaint, “[t]he short-term income misleading. Specifically, the plaintiffs
generated by sales to the gray market also refer to the statement that “[t]he Company
skewed the Company’s overall financial believes its prompt delivery of products
appearance, creating the false impression enables its retail accounts to maintain
of heightened sales and profitability at the smaller quantities of inventory than may
time of the IPO, according to the historical be required with other golf equipment
financial statements contained in the manufacturers.” Further, the plaintiffs
R e g i s tr a t io n S t a t e m e n t a n d t h e argue that forward-looking statements
Prospectus.” Seeking a better deal, contained in the offering materials,
consumers bought their Tight Lies clubs including the belief that “a number of
from cheaper, unauthorized sources. With trends are likely to increase the demand for
their sales diminished, authorized dealers Adams’ products” painted too rosy a
then reduced their orders for Adams Golf picture of the golf industry, particularly in
equipment. In time, the ultimate result for light of the problem of retail oversupply. 2
the Company was an overall drop in
revenue.
2
In particular, the offering materials
About five months after the IPO, on
indicated that:
January 7, 1999, Adams Golf issued a
In 1997, wholesale sales of golf
press release anticipating disappointing
equipment in the U.S. reached an
fourth quarter 1998 results. The Company
estimated $2.4 billion. Wholesale
stated that sales would continue to suffer
sales of golf clubs increased at an
as a result of the “gray market distribution
estimated compound annual growth
of its products to a membership warehouse
rate of approximately 13% over the
club.” Further, according to the plaintiffs’
5-year period from 1992-1997. The
complaint, Adams Golf acknowledged, in
Company believes that a number of
its Form 10-K filed in March of 1999, that
trends are likely to further increase
despite its best efforts, a membership
the demand for Adams' products.
warehouse club had possession of its golf
These trends include: (i) significant
4
The record indicates that 238. The Court ruled as to both the gray
oversupply did eventually come to market and the retail oversupply claims
adversely affect Adams Golf’s bottom line. that Adams Golf’s registration statement
Indeed, the first quarter report for 1999 contained neither false, nor misleading
indicated that the Company had suffered statements, nor any material omissions. In
disappointing financial results, partly response, the plaintiffs filed a motion to
owing to an “oversupply of inventory at amend its complaint pursuant to Fed. R.
the retail level, a condition that weakened Civ. P. 59(e) and 15, which the District
club sales industry wide over the last 12 Court denied in a subsequent order. The
months, [and] has resulted in substantial plaintiffs timely appealed both rulings of
reductions in retailer purchases.” the District Court. We have jurisdiction to
consider this appeal pursuant to 28 U.S.C.
B § 1291.
The District Court granted the II
defendants’ motion to dismiss for failure
to state a claim upon which relief may be This Court reviews Rule 12(b)(6)
granted. Adams Golf, 176 F. Supp. 2d at dismissals de novo, accepting all well-
pleaded allegations as true and drawing all
reasonable inferences in favor of plaintiffs.
Anthony v. Council, 316 F.3d 412, 416 (3d
growth in the number of
Cir. 2003). We may not affirm unless we
golf courses; (ii) increasing
are certain that no relief could be granted
interest in golf from women,
under any set of facts which could be
junior, and minority golfers;
proven. Id. The District Court concluded
(iii) the large numbers of
that the plaintiffs’ complaint was
golfers entering their 40s
insufficient to state a claim against the
and 50s, the age when most
defendants under sections 11 and 12(a)(2)
golfers begin to play more
of the 1933 Act.3
often and increase their
spending on the sport; (iv)
the correspondingly large
3
pop ulation of ‘Echo Plaintiffs also brought claims under
B o o m ers,’ who a re section 15 of the 1933 Act. A form of
beginning to enter their 20s, derivative liability, section 15 permits
the age of when golfers investors to recover, on a joint and several
generally take up the sport; basis, from “control persons” who would
and (v) the rapid evolution be otherwise liable under sections 11 and
of golf club designs and 12(a)(2). 15 U.S.C. § 77o. But because
materials. the District Court dismissed the sections
11 and 12(a)(2) claims, it did not, nor need
5
The 1933 Act creates federal duties, establish his prima facie case.”); Shapiro
particularly involving registration and v. UJB Fin. Corp., 964 F.2d 272, 286 (3d
disclosure, in connection with the public Cir. 1992). 5 To state a claim under section
offering of securities. Sections 11 and 12(a)(2), plaintiffs must allege that they
12(a)(2) impose civil liability for the purchased securities pursuant to a
making of materially false or misleading materially false or misleading “prospectus
statements in registration statements and or oral communication.” 6 The plaintiffs
prospectuses. See 15 U.S.C. §§ 77k,
77l(a)(2). In particular, section 11 5
involves material misstatements or The requirements under section 11
omissions in registration statements, while stand in stark contrast to those of the
section 12(a)(2) involves prospectuses and Securities Exchange Act of 1934 (the
other solicitation materials. “1934 Act”), which include a showing of
reasonable reliance and scienter. Further,
To state a claim under section 11, unlike claims brought under the anti-fraud
plaintiffs must allege that they purchased provisions of the 1934 Act, claims under
securities pursuant to a materially false or the 1933 Act that do not sound in fraud are
misleading registration statem ent. 4 not held to the heightened pleading
Herman & MacLean v. Huddleston, 459 requirements of Fed. R. Civ. P. 9(b).
U.S. 375, 382 (1983) (“If a plaintiff Shapiro, 964 F.2d at 288. Applying
purchased a security issued pursuant to a Shapiro, the District Court determined that
registration statement, he need only show the plaintiffs’ complaint did not sound in
a material misstatement or omission to fraud, a ruling that has not been cross-
appealed by the defendants. Additionally,
the District Court observed that the
we, consider any issues related to control stringent pleading requirements imposed
person liability. by Congress in the Private Securities
Litigation Reform Act of 1995 apply to the
4
Section 11 provides a right of action to 1934 Act alone. The District Court
purchasers: accordingly ruled that the plaintiffs’
In case any part of the complaint was subject only to the liberal
registration statement, when notice pleading standard of Fed. R. Civ. P.
such part became effective, 8.
c o n t a in e d a n u n t r u e
6
statement of a material fact Section 12(a)(2) provides that any
or omitted to state a material defendant who:
fact required to be stated offers or sells a security . . . by
therein or necessary to make means of a prospectus or oral
the statements therein not communication, which includes an
misleading . . . . untrue statement of a material fact
15 U.S.C. § 77k(a). or omits to state a material fact
6
argue that both their claims concerning the Costco’s unauthorized possession of golf
gray market distribution and the existence clubs did not constitute a material
of a retail oversupply meet the above omission.7 Adams Golf, 176 F. Supp. 2d at
pleading minima. Further, they contend
that the District Court improperly denied
their motion to amend the complaint, 7
In addition to materiality, the District
which they filed pursuant to Fed. R. Civ.
Court required the plaintiffs to show that
P. 59(e) (motion to amend or alter the
an omission or misstatement was known to
judgment) and Fed. R. Civ. P. 15 (motion
the Company at the time of the IPO.
to amend the pleadings). We consider
Adams Golf, 176 F. Supp. 2d at 233
each set of claims in turn.
(“While the plaintiffs build their case
around Adams Golf statements appearing
A
after the IPO date, in order to state a claim
for material omission, the plaintiffs [sic]
The plaintiffs alleged that by
allegations must identify that this alleged
omitting any mention of what they
undisclosed material risk was known and
characterize as a gray market problem,
material at the time of the IPO.” (emphasis
Adams Golf rendered the registration
supplied)). This is not correct. Sections
statement false or misleading, specifically
11 and 12(a)(2) are virtually absolute
those claims concerning the Company’s
liability provisions, which do not require
reliance on a network of authorized
plaintiffs to allege that defendants
distributors. The District Court found that
possessed any scienter. Huddleston, 459
U.S. at 382. As this Court has held:
There are substantial differences
necessary in order to make between the elements a plaintiff
the statements, in the light must establish under § 10 and Rule
of the circumstances under 10b-5 of the Securities Exchange
which they were made, not Act of 1934 and under §§ 11 and
misleading (the purchaser 12(2) of the Securities Act of 1933.
not knowing of such untruth Under the former, the plaintiffs
or omission), and who shall must plead not only that the
not sustain the burden of defe ndan ts made material
proof that he did not know, o m i s s i o n s a n d / o r
and in the exercise of misrepresentations, but also that
reasonable care could not they reasonably relied on them and
have known, of such untruth that the defendants acted with
or omission, shall be liable . knowledge or recklessness. In
. . to the person purchasing contrast, §§ 11 and 12(2) impose no
such security from him . . . . such requirements.
15 U.S.C. § 77l. In re Donald J. Trump Casino Sec.
7
234 (“In sum, plaintiffs have not alleged reasonable minds cannot differ on the
support for their proposition that the fact question of materiality is it appropriate for
that an unauthorized discount retailer had the district court to rule that the allegations
illegally obtained a number of Adams Golf are inactionable as a matter of law.”
clubs constituted a material risk at the time Shapiro, 964 F.2d at 281 n.11 (citing TSC
of the IPO, or a ‘known trend’ threatening Indus., 426 U.S. at 450) (emphasis added).
the Company’s future sales, that should Although the District Court did not
have been disclosed.”). Further, the Court expressly reference this standard, its
determined that, in any event, the omission dismissal for failure to state a claim was
of any information regarding the gray proper only if the gray market and retail
market did not render the registration o v e r s u p p l y i s s u e s w e r e p l a in l y
statement and prospectus false or unimportant to a reasonable investor.
misleading.
To support its determination that
Materiality is ordinarily an issue left the gray market claim lacked materiality,
to the factfinder and is therefore not the District Court observed that Costco
typically a matter for Rule 12(b)(6) possessed what it considered a “limited
dismissal. 8 Weiner v. Quaker Oats Co., number” of golf clubs at the time of the
129 F.3d 310, 317 (3d Cir. 1997) (“[T]he IPO. The defendants explain that these
emphasis on a fact-specific determination were 5,000 golf clubs out of 235,000, or
of materiality militates against a dismissal roughly two percent of the golf clubs sold
on the pleadings.”). “Only if the alleged by Adams Golf that fiscal quarter. By
misrepresentations or omissions are so itself, however, this figure does not
obviously unimportant to an investor that persuade us that the fact was plainly
immaterial. Were Costco to have had
more than ten percent of the Company’s
Litig.-Taj Mahal Litig., 7 F.3d 357, 369 golf clubs in its inventory, we might agree
n.10 (3d Cir. 1993) (internal citations that the unauthorized inventory would be
omitted). undoubtedly material. To illustrate the
8 other extreme, if a discount retailer had
The standard test in securities law to
just a handful of golf clubs, we might
determine the materiality of an omission is
conclude that a few errant fairway woods
“whether there is a ‘substantial likelihood
would be obviously immaterial to a
that the disclosure of the omitted fact
reasonable investor. In contrast, the
would have been viewed by the reasonable
materiality of Costco’s unauthorized
investor as having significantly altered the
inventory of several thousand Adams Golf
‘total mix’ of information made
golf clubs cannot be so easily divined. In
available.’” In re NAHC, Inc. Sec. Litig.,
order to make the “delicate assessments”
306 F.3d 1314, 1331 (3d Cir. 2002)
involved in a materiality determination,
(quoting TSC Indus., Inc. v. Northway,
Shapiro, 964 F.2d at 281 n.11, we would
Inc., 426 U.S. 438, 449 (1976)).
8
need more information regarding, for rela tionships wit h its authorized
example, the importance of the limited distributors, and signaled trouble that
distribution arrangement to Adams Golf’s might be difficult to overcome.
business model and, perhaps, the nature of
the golf club industry more generally. In a Perhaps animated by this concern,
t i g h t l y c o m p e t i ti v e m a r k e t , t h e the Company issued a press release on
maintenance of exclusivity among Adams June 9, 1998, one month prior to going
Golf’s network of authorized dealers may public, noting that it had filed an equitable
have been vital, and the Company’s bill of discovery to investigate the
touting this mode of distribution seems to unauthorized inventory. According to the
imply that it is. Indeed, in its registration press release, “Adams Golf became
statement, the Company indicated that its concerned when it learned that Costco was
distribution system allowed it “to maintain selling their Tight Lies fairway woods
profits and maximize sales of Adams Golf because Costco is not an authorized
products.” In light of such considerations, distributor.” While not all company press
the possession of 5,000 golf clubs in the releases publicize material information, we
hands of a nationwide, discount retailer recognize that a company often chooses to
may have been material, since it may have issue an extraordinary press release when
“altered the ‘total mix’ of information” it needs to disseminate important
available to a reasonable investor. NAHC, information to its investors. In light of this
306 F.3d at 1331. But without further p u b l i c a c k n o w l e d g m e n t o f th e
factual development, the answer to this u n a u t h o r iz e d i n v e n t o r y a n d i t s
materiality inquiry is far from plain. announcement of legal action, and our
obligation to draw all reasonable
The District Court also reasoned inferences in favor of the plaintiffs, we are
that the gray market problem was hard pressed to see how the existence of
immaterial because it was an “isolated 5,000 golf clubs for sale at a discounter,
incident” and not part of a “known trend.” outside the protected distribution network,
Adams Golf, 176 F. Supp. 2d at 234. But was unquestionably immaterial to a
a fact need not be part of a pattern to be reasonable investor. 9
material. Even isolated incidents can
result in immediate and negative
consequences for a company. An aberrant 9
The District Court found that the “Bill
event such as an oil tanker crash may
of Discovery and the issuing of the press
nevertheless be material in the eyes of a
release [prior to the IPO] are consistent
reasonable investor in the unlucky oil
with the defendants [sic] contentions that
company. Analogously, even if the
it was in fact Adams Golf’s policy not to
unauthorized inventory of golf clubs was a
authorize ‘distribution of the Company’s
one-time occurrence, it may have posed
products to discount retailers.’” 176 F.
significant consequences for Adams Golf’s
Supp. 2d at 233. Yet such “consistency” is
9
On appeal, the defendants contend
that the fact that the gray market was not
material is reflected by the absence of any
upon by the defendants are inapposite. See
decline in share value when the market
Acme Propane, Inc. v. Tenexco, Inc., 844
learned of it in the January 7, 1999 press
F.2d 1317, 1323 (7 th Cir. 1988) (no
release.10 They rely on In re Burlington
obligation to disclose information on
relevant state laws as statutes are in the
not salient to a materiality inquiry. Adams public domain); Rodman v. Grant Found.,
Golf may have been working resolutely, in 608 F.2d 64, 70 (2d Cir. 1979) (no
conformance with its stated policy, to obligation to disclose motivation of
solve its unauthorized inventory situation. corporate officers to maintain corporate
But a company’s effort to manage a control and prevent hostile takeovers as
problem does not by itself discharge its such intentions are “universal.”); Seibert v.
obligation to inform investors of that Sperry Rand Corp., 586 F.2d 949, 952 (2d
problem; if an event is material, the Cir. 1978) (no obligation to disclose labor
securities laws may require disclosure, difficulties when those problems were
notwithstanding the type of consistency “reported countrywide in the press and on
identified by the District Court. If it were radio and television, were discussed in
otherwise, companies could justify Congress, and were analyzed in published
keeping quiet about significant corporate administrative and judicial opinions.”).
crises by simply noting that they were Costc o ’ s u n a u t h o riz e d inve n to ry,
handling the situation in accordance with announced in a single press release before
some previously stated management the Company went public, was simply
policy. unlike the publicly known or available
facts in the above cases.
10
The defendants also argue that the Further, we find that the
June 9, 1998 pre-IPO press release defendants’ citation to this Court’s
sufficed to inform the public of Costco’s decision in Klein v. General Nutrition Co.,
unauthorized inventory of Tight Lies 186 F.3d 338 (3d Cir. 1999), to be even
clubs. They argue that if information further afield. Klein involved securities
regarding any gray market problem was traded on the secondary market. We held
placed in the public domain through its that the market “promptly digested current
pre-IPO press release, the Company would information regarding GNC from all
have had no obligation to mention it in publicly-available sources and reflected
their offering materials. First, this that information in GNC’s stock price.”
contention of course contradicts the Id. at 338. But there is no indication that
defendants’ claim that the stock price did there was any such efficient market in
not drop after the investing public first Adams Golf shares prior to the IPO.
learned of the gray market problem on Accordingly, we cannot conclude that the
January 7, 1999. Second, the cases relied pre-IPO press release in this case, issued a
10
Coat Factory Sec. Litig., Inc., 114 F.3d Doe v. GTE Corp., 347 F.3d 655, 657 (7 th
1410 (3d Cir. 1997), in which we observed Cir. 2003) (“[L]itigants need not try to
that “to the extent that information is not plead around defenses.”).
important to reasonable investors, it
follows that its release will have a Mindful of this Court’s dismissal
negligible effect on the stock price.” Id. at standard for immateriality, and our
1425. But Burlington Coat Factory was a obligation to draw reasonable inferences in
Rule 10b-5 case brought under the 1934 the plaintiffs’ favor, we cannot agree with
Act, which requires that plaintiffs plead the District Court’s conclusion that the
loss causation, i.e., allege that the material gray market issue was obviously
misstatement or omission caused a drop in unimportant to a reasonable investor. Of
the stock price. Actions brought under the course, ultimately, Costco’s inventory of
1933 Act are, however, critically different. Tight Lies golf clubs may be found to be
Under sections 11 and 12(a)(2), plaintiffs immaterial, but that is for a factfinder to
do not bear the burden of proving determine in light of a developed record.
causation. It is the defendants who may
assert, as an affirmative defense, that a A determination that information
lower share value did not result from any missing from a registration statement and
nondisclosure or false statement. See 15 prospectus is material does not end our
U.S.C. §§ 77k(e), 77l(b). While a analysis. We must also decide whether the
defendant may be able to prove this issuer had the duty to disclose that material
“negative causation” theory, an affirmative fact such that its omission made the
defense may not be used to dismiss a statement misleading. See Zucker v.
plaintiff’s complaint under Rule 12(b)(6). 11 Quasha, 891 F.Supp. 1010, 1014 (D.N.J.
1995) (“To avoid com mitting
misrepresentation, a defendant is not
month before the offering materials were required to disclose all known information,
filed, was sufficient to inform the but only information that is ‘necessary to
investing public of a gray market in make other statements not misleading.’”
Adams Golf equipment. (quoting Craftm atic S ec. Litig. v.
11 Kraftsow, 890 F.2d 628, 640 n.16 (3d Cir.
In any event, while there was no effect
1989))). In order to make out prima facie
to the stock in Burlington Coat Factory,
violations of sections 11 and 12(a)(2),
here, after disclosure of the gray market in
plaintiffs must allege that an omitted
the January 7, 1999 press release, the
material fact was required to be included
number of Adams Golf shares traded
by the securities laws or that its absence
jumped from 58,000 to 1.2 million, and
rendered statements in the prospectus
resulted in a 17 percent decline in the
misleading. See 15 U.S.C. § 77k(a)
stock price, though in absolute terms, this
(referring to “an untrue statement of a
just represented a drop from $4.63 to
material fact or omitted to state a material
$3.88.
11
fact required to be stated therein or Costco’s unauthorized possession, in
necessary to make the statements therein addition to the alleged “sales by other
not misleading”); § 77l (referring to “an unauthorized discount retailers and
untrue statement of a material fact or omits international gray market distributors,”
to state a material fact necessary in order were necessary to make the statements
to make the statements, in the light of the regarding the Com pany’s limited
circumstances under which they were distribution not misleading. Accordingly,
made, not misleading”). As noted above, we will reverse the District Court’s
the plaintiffs allege that the Company’s dismissal of the plaintiffs’ gray market
statements touting its limited distribution claims.
arrangements were false or misleading in
light of the omitted gray market problem. B
While we agree with the District Court that
none of these statements in the registration We next turn to the plaintiffs’
statement was technically false, we claims regarding an oversupply of golf
disagree with the Court’s conclusion that equipment among retailers. As noted
the statements were obviously not above, the plaintiffs contend that the
misleading. omission of this oversupply rendered two
sets of statements in the offering materials
The relevant statements in the materially misleading: 1) the specific
of f e r i n g materials indicated that representation that “[t]he Company
distribution was limited to certain retailers believes its prompt delivery of products
and that the Company “does not sell its enables its retail accounts to maintain
products through price sensitive general smaller quantities of inventory than may
discount warehouses.” The District Court be required with other golf equipment
properly found that Costco’s unauthorized manufacturers”; and 2) the general
possession of Adams Golf clubs could not forward-looking statements concerning the
be reasonably taken to make those trends “likely to increase the demand” for
statements false, for there was no Adams Golf products. We agree with the
allegation that Adams Golf itself sold golf District Court that neither of these
clubs to unauthorized retailers. But while statements were materially misleading by
technically true, those statements may have the omission of these industry conditions.
nevertheless led a reasonable investor to
conclude that the selective distribution Adams Golf’s specific claims to
model was functioning properly, i.e., that nimble delivery and relatively smaller
this method was exclusive, and therefore inventory were not rendered false or
that unauthorized retailers were not selling misleading in light of any alleged industry-
significant quantities of its Adams Golf wide oversupply of golf equipment. The
merchandise. Reasonable minds could offering materials merely indicated that
disagree as to whether the omitted fact of stores had fewer Adams Golf clubs in their
12
inventories than the equipment of other Further, the plaintiffs make much of
manufacturers. The statement cannot the Company’s April 12, 1999 press
reasonably be taken to mean that “Adams release, announcing financial results for
Golf retailers were not carrying excess the first quarter of 1999, in which,
inventory,” as plaintiffs allege. Those according to their complaint, “defendants
retailers may very well have had bloated d i s close d that fo r at least 1 2
inventories. But they may have months—since we ll prior to the
maintained a relatively smaller inventory IPO— there had been an ‘oversupply of
of Adams Golf equipment while carrying inventory at the retail level’ on an
a surplus of merchandise produced by industry-wide basis.” Initially, we observe
Adams Golf’s competitors. We find that that Adams Golf was not duty-bound to
plaintiffs’ allegations concerning retailers’ disclose general industry-wide trends
excess supplies of other companies’ easily discernable from information
equipment simply cannot render false or already available in the public domain.
misleading that portion of the registration See Klein, 186 F.3d at 342 (determination
statement concerning the retailers’ smaller of materiality takes into account
inventory of Adams Golf products. “availability [of information] in the public
domain”); Whirlpool Fin. Corp. v. GN
While the plaintiffs may be able to Holdings, Inc., 67 F.3d 605, 609 (7 th Cir.
prove their allegations that Adams Golf’s 1995) (“The nondisclosure of . . . industry-
rivals were suf fering from retail wide trends is not a basis for a securities
oversupply and were taking “corrective fraud claim.”); Tenexco, 844 F.2d 1317,
action to address the industry-wide 1323–24 (“The securities laws require the
oversupply” problem at the time of Adams disclosure of information that is otherwise
Golf’s IPO, these allegations are of no not in the public domain.”). Moreover, all
moment. Whatever financial problems the April 12, 1999 press release seemed to
other manufacturers and retailers may have acknowledge was that retailers of golf
struggled with, the securities laws equipment had experienced generally
obligated Adams Golf to disclose material sluggish sales for over a year. As
information concerning its own business discussed above, however, there is nothing
and not necessarily the details relating to contradictory or inconsistent about
its competitors. See Trump Casino, 7 F.3d retailers with excess inventories in general
at 375 (holding that “the issuer of a and the Company’s representation that
security [need not] compare itself in those same retailers kept a smaller
myriad ways to its competitors, whether inventory of Adams Golf clubs in
favorably or unfavorably. . . .”); Wielgos v. particular. Accordingly, we find that
Commonwealth Edison Co., 892 F.2d 509, Adams Golf’s representation of prompt
517 (7 th Cir. 1989) (“Issues or securities delivery and relatively smaller retail
must reveal firm-specific information.” inventories was not materially false or
(emphasis added)). misleading. Moreover, the fact that
13
looking backward, one perceives a trend EchoCath, Inc., 235 F.3d 865, 873–75 (3d
does not necessarily mean that conditions Cir. 2000) (collecting cases). And here the
were such that one year earlier the cautionary statements relate directly to the
situation was sufficiently obvious or claim on which plaintiffs allegedly relied;
noteworthy. the general representations of better
business ahead were mitigated by the
The plaintiffs also alleged that the discussion of the several factors that could
retail oversupply affecting golf industry have caused poor financial results.
retailers also rendered misleading the Accordingly, we agree with the District
forward-looking statements made in the Court that plaintiffs’ allegations regarding
registration statement. In particular, the the forward-looking statements must also
plaintiffs argued that those forecasts were succumb to the motion to dismiss.
“misleading with respect to the prospects
for growth in the golf industry.” Those We conclude that the plaintiffs can
statements included sanguine prospects for prove no set of facts that would
the golf industry and the rising popularity demonstrate that either the specific
of the sport more generally. But we have representation as to prompt delivery and
firmly held that “[c]laims that these kinds retailers’ inventory of Adams Golf
of vague expressions of hope by corporate equipment or the general forward-looking
managers could dupe the market have been statements was materially misleading. As
almost uniformly rejected by the courts.” reasonable minds could not disagree on
Burlington Coat Factory, 114 F.3d at this issue, we affirm the District Court’s
1427. dismissal of the plaintiffs’ retail
oversupply claims as a matter of law.
Moreover, Adams Golf was not
entirely upbeat about its future. The C
registration statement referred to a series
of risks facing an investor, including the After the dismissal of their
prospects of lagging demand for the complaint, plaintiffs filed a motion under
Company’s products, competitive products Fed. R. Civ. P. 59(e) to amend or alter the
from rivals, unseasonable weather patterns judgment so as to add new allegations by
that could diminish the amount of golf virtue of Fed. R. Civ. P. 15.12 They sought
played, and an overall decline in
discretionary consumer spen ding.
Applying the “bespeaks caution” doctrine, 12
The plaintiffs had already amended
this Court has held that meaningfully
their complaint once before. After filing
cautionary statements can render the
their original complaint on June 11, 1999,
alleged omissions or misrepresentations of
the plaintiffs amended their complaint on
forward-looking statements immaterial as
May 17, 2000, the “Consolidated and
a matter of law. EP Medsystems, Inc. v.
Amended Class Action” complaint. It was
14
to introduce “new” factual allegations granted.
about both the gray market and retail
oversupply claims. The District Court We have held that “[w]here a timely
denied the motion in a subsequent order, motion to amend judgment is filed under
which ruling we review for abuse of Rule 59(e), the Rule 15 and 59 inquiries
discretion. Cureton v. Nat’l Collegiate turn on the same factors.” Id. These
Athletic Ass’n, 252 F.3d 267, 272 (3d Cir. considerations include undue delay, bad
2001). faith, prejudice, or futility. Alston v.
Parker, 363 F.3d 229, 236 (3d Cir. 2004).
But the purported new allegations The District Court found that the
consist not of new information, but, rather, plaintiffs’ motion to amend was unduly
information available at all times relevant delayed and ultimately futile. The concept
to this action and facts not necessarily of “undue delay” includes consideration of
curative of the pleading problems at issue. whether new information came to light or
With respect to the gray market claim, the was available earlier to the moving party.
plaintiffs merely furnished additional Here, as the District Court observed,
details, such as the extent of financial plaintiffs could have introduced the
losses attributable to unauthorized allegations in the motion to amend long
distribution, none of which would have before the Court granted the motion to
affected the substance of a Rule 12(b)(6) dismiss, and indeed could have included
analysis. We note that insofar as these them in their original complaint filed in
facts pertain to the claims concerning the 1999. Plaintiffs relied at their peril on the
gray market, the plaintiffs would be free to possibility of adding to their complaint,
develop them on remand. With respect to but in doing so they clearly risked the
the retail oversupply claim, the plaintiffs prospect of the entry of a final dismissal
sought to add more detailed factual order. Plaintiffs argue that they withheld
allegations seeking to show the existence the allegations so as to comply with the
of an industry-wide trend of excess “short and plain statement” requirement of
inventory. This is also not helpful to their Fed. R. Civ. P. 8, citing to cases involving
cause. In dismissing the oversupply claim, complaints in excess of 100 pages. See,
both our analysis and that of the District e.g., In re Westinghouse Sec. Litig., 90
Court assumed the existence of such an F.3d 696, 703 (3d Cir. 1996). Considering
oversupply. Whether or not we were to that the amendment would have added a
consider the new factual allegations, the mere five pages of allegations to the
plaintiffs’ oversupply allegations do not plaintiffs’ twenty-two page complaint, we
state a claim upon which relief could be do not credit this argument and conclude
that the District Court did not err in
refusing to open the judgment of dismissal
when plaintiffs clearly relied on
this amended complaint that the District
“misplaced confidence” in their original
Court dismissed under Rule 12(b)(6).
15
pleading. Cureton, 252 F.3d at 274. III
Moreover, as the District Court reasoned,
the proposed amendments would not have For the foregoing reasons, we will
remedied the pleading deficiencies and affirm the District Court’s dismissal of the
would thus have been futile. plaintiffs’ claims relating to retail
oversupply and we will reverse the
Accordingly, we find that the dismissal of those claims relating to the
District Court did not abuse its discretion gray market and remand for further
in dismissing the plaintiffs’ motion under proceedings consistent with this opinion.
Rules 59(e) and 15. Cf. Lorenz v. CSX
Corp., 1 F.3d 1406, 1414 (3d Cir. 1993)
(finding that district court did not abuse its
discretion in light of plaintiff’s
“unreasonable delay” and futility of
proposed amendments).13
13
Plaintiffs contend that the applicable
standard of rev iew o f futility
determinations is de novo, relying upon
our decision in Burlington Coat Factory,
114 F.3d at 1410, as adopting the standard
employed by several of our sister courts of
appeals, but we do need read Burlington as
having done so. See Freeman v. First
Union Nat’l, 329 F.3d 1231, 1234 (11 th
Cir. 2003) (“[W]hen the district court
denies the plaintiff leave to amend due to
futility, we review the denial de novo
because it is concluding that as a matter of
law an amended complaint ‘would
necessarily fail.’ (quoting St. Charles
Foods, Inc. v. America’s Favorite Chicken Comito, L.L.P. v. Iowa, 269 F.3d 932, 936
Co., 198 F.3d 815, 822 (11th Cir.1999))); (8th Cir. 200 1); Glassman v.
Inge v. Rock Fin. Corp., 281 F.3d 613, 625 Computervision Corp., 90 F.3d 617, 623
(6th Cir.2002) (“When . . . the district (1 st Cir. 1996). Accordingly, we decline
court denies the motion to amend on the plaintiffs’ invitation to chart a new
grounds that the amendment would be course and consider the District Court’s
futile, we review denial of the motion de finding of futility for abuse of discretion.
novo.”); United States ex rel. Gaudineer &
16