MacOmb County Empl. Ret. Sys. v. Align Technology, Inc. ( 2022 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MACOMB COUNTY EMPLOYEES’ No. 21-15823
RETIREMENT SYSTEM, Lead Plaintiff,
Plaintiff-Appellant, D.C. No.
3:20-cv-02897-
and MMC
CITY OF ROSEVILLE EMPLOYEES’
RETIREMENT SYSTEM, individually OPINION
and on behalf of all others similarly
situated,
Plaintiff,
v.
ALIGN TECHNOLOGY, INC.; JOSEPH
M. HOGAN; JOHN F. MORICI; JULIE
TAY,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of California
Maxine M. Chesney, District Judge, Presiding
Argued and Submitted March 10, 2022
San Francisco, California
Filed July 7, 2022
2 MACOMB CERS V. ALIGN TECHNOLOGY
Before: J. Clifford Wallace, Sidney R. Thomas, and
M. Margaret McKeown, Circuit Judges.
Opinion by Judge McKeown
SUMMARY *
Securities Fraud
The panel affirmed the district court’s dismissal of a
securities fraud class action under §§ 10(b), 20(a), and 20A
of the Securities Exchange Act of 1934 and Rule 10b-5.
Plaintiff alleged that corporate executives at Align
Technology, Inc., a medical device manufacturer best known
for selling “Invisalign” braces, misrepresented their
company's prospects in China.
The panel rejected as unsupported defendants’ argument
that their statements could not be considered false at the time
they were made because plaintiff did not allege sufficient
facts to make plausible the inference that the rate of Align’s
growth in China had begun to decline significantly when the
challenged statements were made. The panel concluded that
former employees’ reports, viewed alongside circumstantial
evidence of the short period of time between the twelve
challenged statements and the downturn of Align’s prospects
in China, sufficiently supported the inference that Align’s
growth in China had slowed materially when the statements
were made.
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
MACOMB CERS V. ALIGN TECHNOLOGY 3
The panel held that the district court correctly found that
six of the challenged statements were non-actionable
“puffery,” which involves vague statements of optimism
expressing an opinion that is not capable of objective
verification. The district court also correctly found that the
remaining six statements did not create a false impression of
Align’s growth in China and so were not actionable. Having
determined that all of the challenged statements were non-
actionable, the panel declined to reach issues of scienter and
control-person or insider-trading liability. The panel
rejected the argument that because Align touted positive
facts about China, the company had a duty to disclose
negative facts in order to make the statements not
misleading.
COUNSEL
Javier Bleichmar (argued), Bleichmar Fonti & Auld LLP,
New York, New York, for Plaintiffs-Appellants.
Shay Dvoretzky (argued) and Peter A. Bruland, Skadden
Arps Slate Meagher & Flom LLP, Washington, D.C.; Peter
B. Morrison, Virginia F. Milstead, and Mayra Aguilera,
Skadden Arps Slate Meagher & Flom LLP, Los Angeles,
California; for Defendants-Appellees.
4 MACOMB CERS V. ALIGN TECHNOLOGY
OPINION
McKEOWN, Circuit Judge:
Securities actions often ask courts to distinguish between
corporate braggadocio and genuinely false or misleading
statements. This is one of those cases. In reviewing the
dismissal of this class action, we consider whether corporate
executives misrepresented their company’s prospects in
China to such an extent that their statements were actionable
under our securities laws. After a careful review of the
record, we conclude that the district court did not err in
determining that all twelve challenged statements were non-
actionable.
BACKGROUND
For the better part of twenty years, Align Technology,
Inc. (“Align”)—a medical device manufacturer that is best
known for selling clear, plastic “Invisalign” braces—
enjoyed skyrocketing growth. At the beginning of 2002, the
company had served roughly 44,000 customers, but by 2019
that number had grown to 7 million. During much of that
period, the growth was driven primarily by international
sales, especially in China: Between 2013 and 2017,
shipments of Invisalign cases to China increased by an
average of 88 percent each year, and then by another
91 percent in 2018. Indeed, every quarter in 2017 and 2018,
Align’s year-over-year revenue growth rate in China
hovered between 70 percent and 100 percent.
But then the trouble began. At the start of 2019, Align’s
Chinese growth rate dipped slightly, apparently due to
increased competitive pressure and diminished consumer
demand, and in the second quarter of that year the rate fell to
between 20 and 30 percent. As news of this fall reverberated
MACOMB CERS V. ALIGN TECHNOLOGY 5
across the market, Align’s stock dropped by roughly
27 percent, from $275.16 per share on July 24, 2019, to
$200.90 per share on July 25, 2019, erasing approximately
$5.4 billion in shareholder value.
A year later, Macomb County Employees’ Retirement
System (“Macomb”), a Michigan-based pension plan, filed
suit against Align (and several of its senior executives) on
behalf of itself and all others that acquired Align common
stock between April 25, 2019, and July 24, 2019 (the “Class
Period”), and were damaged thereby. Macomb alleged that
several Align senior executives had “misrepresent[ed]”
Align’s growth in China throughout the second quarter of
2019, claiming strong numbers despite knowing (or
recklessly disregarding) that the growth rate in China had
slowed significantly. According to Macomb, Align
executives made twelve statements during the Class Period
that are actionable under Sections 10(b), 20(a), and 20A, as
well as Rule 10b-5, of the Securities Exchange Act of 1934,
15 U.S.C. § 78a et seq. (“Exchange Act” or “Act”).
The district court dismissed the action with leave to
amend, holding that the majority of the challenged
statements constituted non-actionable puffery and the rest
were not false or misleading. Instead of amending the
complaint, Macomb requested a final judgment, so the
district court dismissed the action with prejudice. Macomb
appealed.
ANALYSIS
We review de novo a district court’s dismissal for failure
to state a claim, “tak[ing] all allegations of material fact as
true and constru[ing] them in the light most favorable to the
nonmoving party.” In re Quality Sys., Inc. Sec. Litig.
(Quality Systems), 865 F.3d 1130, 1140 (9th Cir. 2017).
6 MACOMB CERS V. ALIGN TECHNOLOGY
Section 10(b) of the Act prohibits using “any
manipulative or deceptive device” that contravenes “such
rules and regulations as the Commission may prescribe.”
15 U.S.C. § 78j(b). Pursuant to this section, Rule 10b-5
prohibits making “any untrue statement of a material fact”
or omitting “a material fact necessary” to make a statement
“not misleading.” 17 C.F.R. § 240.10b-5(b); see also In re
Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010). To
recover damages for violations of Section 10(b) and Rule
10b-5, as Macomb is seeking to do, “a plaintiff must prove
(1) a material misrepresentation or omission by the
defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation.”
Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258,
267 (2014) (internal citations and quotation marks omitted).
Only the first two elements are at issue here.
A complaint alleging a violation of Section 10(b) of the
Exchange Act must meet both the heightened pleading
requirements for fraud claims under Fed. R. Civ. P. 9(b),
which requires that the complaint “state with particularity
the circumstances constituting fraud,” and the “[e]xacting
pleading requirements” of the Private Securities Litigation
Reform Act (“PSLRA”). Tellabs, Inc. v. Makor Issues &
Rights, Ltd. (Tellabs), 551 U.S. 308, 313 (2007). The
PSLRA requires plaintiffs to state with particularity the facts
constituting the alleged violation. Id. These “heightened
pleading requirements for securities fraud cases . . . present
no small hurdle for the securities fraud plaintiff.”
Schueneman v. Arena Pharms., Inc., 840 F.3d 698, 705 (9th
Cir. 2016) (citation omitted).
MACOMB CERS V. ALIGN TECHNOLOGY 7
I. UNSUPPORTED PREMISE
As a threshold matter, Align asks this court to affirm the
district court on the narrow ground that Macomb’s complaint
is based on an unsupported premise. Macomb’s complaint
rests on the premise that Align’s rate of growth had, in fact,
“significantly declined” by the time Align’s executives were
touting the company’s growth in China in May and June of
2019. But, according to Align, it is possible that the rate of
growth only started to decline “significantly” during the
Class Period (which lasts until July 24, 2019). Because,
Align continues, Macomb has not alleged sufficient facts to
make plausible the inference that the rate of growth had
begun to decline “significantly” by the time the Align
executives made the challenged statements, the statements
cannot be considered false at the time they were made, and
therefore they are not actionable. See In re Rigel Pharms.,
Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir. 2012) (holding
that for statements to be actionable under the PSLRA, they
must have been “false or misleading at the time they were
made”). We reject this argument as unsupported.
It is settled precedent that the passage of just a short
period of time between executives’ rosy statements about
their company’s prospects and a downturn in those prospects
is “circumstantial evidence” that the challenged statements
“were false when made.” Fecht v. Price Co., 70 F.3d 1078,
1083 (9th Cir. 1995). In Fecht, for instance, the passage of
two-and-a-half months was a sufficient “shortness of time”
to be considered “circumstantial evidence that the
challenged statements were false when made.” Id. Here,
just three months passed between the first challenged
statement and the revelation of Align’s downturn in China.
In addition, Fecht demands that we accord such
circumstantial evidence “more weight” where there is no
8 MACOMB CERS V. ALIGN TECHNOLOGY
“intervening catastrophic event” that might suggest a later,
abrupt downturn, such that the executives’ earlier statements
may not, in fact, have been false. Id. at 1083–84. Here, as
in Fecht, there was no such catastrophic event.
Macomb has provided additional evidence to support the
inference that Align’s growth rate was declining
substantially at the time of the challenged statements.
Multiple reports from former employees support the
inference that Align’s growth in China had slowed
materially when the challenged statements were made in late
April, May, and June 2019. For instance, one analyst’s
report described “clear, early indications as of April 1, 2019
that Align’s growth in China had slowed . . . and that data
was available to executives to monitor.” Viewed alongside
the short period of time between the challenged statements
and the downturn in Align’s prospects in China, Macomb
has alleged sufficient evidence to support the inference that
Align’s growth in China had slowed materially when the
challenged statements were made in late April, May, and
June 2019. Macomb’s complaint does not rest on an
unsupported premise. 1
1
Align contends that Ronconi v. Larkin, 253 F.3d 423 (9th Cir.
2001), supports the opposite conclusion. This case is not like Ronconi.
There, the plaintiffs inadequately pleaded falsity because the complaint
“fail[ed] to describe, chart or graph what sales actually did” and failed to
“identify any documents or facts suggesting that the defendants knew
that the growth rate was not accelerating.” Ronconi, 253 F.3d at 431.
By contrast, Macomb has explained “what sales actually did” (i.e., sales
growth in China fell from close to 70% to 20–30% in one quarter), id.,and Macomb pointed to specific systems and reports that executives
allegedly reviewed indicating slowing growth.
MACOMB CERS V. ALIGN TECHNOLOGY 9
II. PUFFERY
Turning to the challenged statements, we hold that the
district court correctly found that six were non-actionable
“puffery.” Corporate “puffing” involves “expressing an
opinion” that is not “capable of objective verification.”
Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund
v. Hewlett-Packard Co., 845 F.3d 1268, 1275 (9th Cir. 2017)
(quoting Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc.,
774 F.3d 598, 606 (9th Cir. 2014)). These “vague statements
of optimism like ‘good,’ ‘well-regarded,’ or other feel good
monikers, are not actionable because professional investors,
and most amateur investors as well, know how to devalue
the optimism of corporate executives.” Police Ret. Sys. of
St. Louis v. Intuitive Surgical, Inc. (Intuitive Surgical),
759 F.3d 1051, 1060 (9th Cir. 2014) (internal quotation
marks omitted) (quoting In re Cutera Sec. Litig., 610 F.3d
at 1111).
The six challenged statements that the district court
determined to be puffery are as follows:
1. During an April 24, 2019, earnings call,
Chief Executive Officer Joseph Hogan
stated in response to analyst questions
about Align’s international business,
“[w]e still have a great business in APAC
from a growth standpoint overall,” and
“China is a great growth market for us.”
2. At a healthcare conference on May 14,
2019, Chief Financial Officer John
Morici said, “China . . . gets a lot of
attention. And rightly so, it’s a huge
market opportunity for us.”
10 MACOMB CERS V. ALIGN TECHNOLOGY
3. At a dental and veterinary conference on
May 29, 2019, in response to an analyst
question about growth rates in the Asia-
Pacific (i.e., APAC) region, Morici
responded, “we see tremendous growth in
APAC, in China in particular.”
4. At the same conference, in response to an
analyst question probing deeper about
China, Morici stated, “we’re seeing
tremendous growth.”
5. At the same conference, Morici said,
“[t]he dynamics in China are really good
for us . . . . [T]he appetite for growth and
new technology adoption in China has
been great for us. And as you mentioned,
the economics work well for us.”
6. At a healthcare conference on June 5,
2019, Morici also described China as “a
market that’s growing significantly for
us” with “[g]reat economics.”
These six statements plainly fit beneath the umbrella of
puffery. All use vague, generically positive terms,
describing China as “a great growth market,” “a huge market
opportunity,” “a market that’s growing significantly for us,”
and possessing “really good” “dynamics,” and describing
Align’s performance there as “tremendous” and “great.”
Such characterizations are not “objectively verifiable.”
Retail Wholesale, 845 F.3d at 1276. None of these six
statements present the kind of precise information on which
investors rely “[w]hen valuing corporations.” In re Cutera
Sec. Litig., 610 F.3d at 1111.
MACOMB CERS V. ALIGN TECHNOLOGY 11
Contrary to Macomb’s assertions, the district court did
not err by failing to “consider the context” in which these six
statements were made. Although “general statements of
optimism” made against a clearly pessimistic backdrop
“may form a basis for a securities fraud claim,” Intuitive
Surgical, 759 F.3d at 1060 (citation omitted), this was not
the case here. Significantly, at the time Align’s executives
made the six challenged statements, the company’s sales
were still growing in China, albeit at a diminished rate, so
these feel-good descriptions from Align’s executives did not
“affirmatively create[] an impression of a state of affairs that
differ[ed] in a material way from the one that actually
exist[ed].” Quality Systems, 865 F.3d at 1144 (quoting
Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th
Cir. 2002)).
III. OTHERWISE NON-ACTIONABLE STATEMENTS
We next hold that the district court correctly found that
the remaining six statements did not create a false
impression of Align’s growth in China and so were not
actionable. We briefly address each of these six statements
below.
Three of the statements contained factual assertions that
Macomb’s complaint does not contradict:
1. At a dental and veterinary conference on
May 29, 2019, in response to an analyst
question whether he saw China as “fastest
growth, highest [average sales price] that
should remain in place for the next couple
of years,” Morici stated, “[China] is
higher [average sales price]. They start
with a higher list price. They have very
complicated cases, comprehensive cases,
12 MACOMB CERS V. ALIGN TECHNOLOGY
and we’ve invested from a treatment
planning to be in country, speak the same
language, reduce the cycle time between
having iTero [a digital scanner of
patients’ teeth sold by Align] in China.
We introduced that in second quarter of
last year. We went from almost no cases
sent digitally to almost 50% of the cases
sent digitally within China.
2. At a healthcare conference on June 5,
2019, in response to an analyst question
about competition in China, Morici
responded, “Great economics there from
the standpoint that massive population,
growing middle class, we have higher list
prices, higher [average sales prices] in
China, very complicated cases, a lot of
orthodontists that we sell to, selling more
and more to hospitals . . . .”
3. At a healthcare conference on June 11,
2019, an analyst asked whether Align had
seen the same increase in Invisalign
uptake after placing iTero scanners into
the market as the company had in the U.S.
Morici responded, “Yes . . . [iTero]
drives higher and higher amount of
Invisalign volume.”
We observe that Macomb’s complaint contains no
allegations contrary to the assertions regarding Align’s
average sales price in China, the relative complexity of the
cases, the “cycle time,” China’s “massive population,”
China’s growing middle class, iTero’s effects on driving
MACOMB CERS V. ALIGN TECHNOLOGY 13
higher Invisalign volume, etc. As a result, these three
statements are not actionable under our securities laws.
A fourth statement was an accurate assessment of
Align’s past growth when considered in context:
4. At a healthcare conference on May 14,
2019, in response to an analyst question
about competitors absorbing market
share over a period of several years,
Morici stated, “whether it’s in China or
U.S. or other places, we’ve been
competing against many of these
companies that I mentioned for a number
of years and still been able to grow as we
have.”
Read in light of the analyst’s question, a reasonable investor
would understand the phrase “grow as we have” to refer to
Align’s historical growth rate in China over at least the prior
year if not longer. Considering the context, this statement
would not “give a reasonable investor the impression of a
state of affairs that differs in a material way from the one that
actually exists” sufficient to make the statement actionably
misleading. Reese v. BP Expl. (Alaska) Inc., 643 F.3d 681,
691 (9th Cir. 2011) (internal quotation marks and citation
omitted).
A fifth statement was an assessment of the effect of a
competitor’s entry into the market:
5. During an April 24, 2019, earnings call,
Hogan stated in response to analyst
questions about how Align could
continue to grow in China as quickly as
they historically had, “China is a great
14 MACOMB CERS V. ALIGN TECHNOLOGY
growth market for us,” and “Straumann’s
[the competitor] move with third- or
fourth-tier player from a clear aligner
standpoint, I don’t see that as dramatic
effect on this market now or in the
immediate future at all.”
The Align executive’s optimistic prediction was not a clearly
untrue or misleading gloss. Macomb failed to plead
sufficient facts to establish that the competitor’s presence in
China caused the slowdown in Align’s growth, especially
considering that the complaint referenced at least two other
competitors in addition to Straumann (SmileDirectClub and
Angel Align) that were putting pressure on Align in China.
So, the executive’s assertion was not “false when made.”
Fecht, 70 F.3d at 1083.
This leaves a final statement contained in Align’s May
2, 2019, Form 10-Q:
6. “Demand for our products may not
increase as rapidly as we anticipate due to
a variety of factors including a weakness
in general economic conditions.”
Macomb never argued on appeal that this sixth statement
was actionable, so that argument was waived. Brown v.
Rawson-Neal Psychiatric Hosp., 840 F.3d 1146, 1148 (9th
Cir. 2016). Even if this argument were not waived, the
statement presents no concrete assertions that could render it
actually false or trigger a duty to disclose additional
information. “Disclosure is required … only when
necessary ‘to make … statements made, in the light of the
circumstances under which they were made, not
misleading.’” Matrixx Initiatives, Inc. v. Siracusano,
563 U.S. 27, 44 (2011) (quoting 17 C.F.R. § 240.10b-5(b)).
MACOMB CERS V. ALIGN TECHNOLOGY 15
IV. REMAINING MATTERS
Having determined that all of the challenged statements
are non-actionable, we can quickly dispense with Macomb’s
remaining arguments. We decline to reach the matters of
scienter and control-person or insider-trading liability.2
And we reject Macomb’s argument that because Align
touted “positive facts about China,” the company had “a duty
to disclose negative facts in order to make the statements not
misleading.” Our securities laws “do not create an
affirmative duty to disclose any and all material
information.” Id. Because all twelve challenged statements
are non-actionable, Align had no duty to provide additional
information to render those statements “not misleading.”
See Retail Wholesale, 845 F.3d at 1278 (no duty to disclose
where statements did not “affirmatively create an impression
of a state of affairs that differs in a material way from the
one that actually exists”).
AFFIRMED.
2
To prevail on claims for violations of Section 20(a), 15 U.S.C.
§ 78t(a) (creating joint and several liability for any person who controls
a person liable for violating the Act), or Section 20A, 15 U.S.C. § 78t-
1(a) (creating liability for anyone who violates the Act or its regulations
“by purchasing or selling a security while in possession of material,
nonpublic information”), “[a] plaintiff[] must first allege a violation of
§ 10(b) or Rule 10b-5.” Lipton v. Pathogensis Corp., 284 F.3d 1027,
1035 n.15 (9th Cir. 2002). Thus, whether Align violated Section 10(b)
or Rule 10b-5 is a threshold issue. Because we agree with the district
court that Macomb failed to state a claim under Section 10(b) or Rule
10b-5, Macomb is likewise unable to state a claim under Sections 20(a)
or 20A.