(Article from Securities Law Alert, December 2015)
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D.C. Circuit: Descriptions Such as “Very Strong” May Be Actionable If Tied to a Specific Product and Time Period
On June 23, 2015, in a securities fraud action against Harman International Industries, the D.C. Circuit found that a statement describing product sales as “very strong” was “plausibly understood” as “a specific statement about [the company’s] recent financial performance and not mere ‘puffery’” because the statement was “specific about [both] product and time period.” In re Harman Int’l Indus. Sec. Litig., 791 F.3d 90 (D.C. Cir. 2015) (Rogers, J.).
The D.C. Circuit explained that “‘conclusory terms [like ‘high’ value and ‘fair’] in a commercial context are reasonably understood to rest on a factual basis that justifies them as accurate, the absence of which renders them misleading’” (quoting Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991)). The court determined that “given the context in which it was made,” “the ‘very strong’ statement . . . [was] plausibly understood as a description of historical fact rather than unbridled corporate optimism, i.e., immaterial puffery.” The court explained that the statement referred to products that “were part of the [c]ompany’s largest division and had been the focus of recent public statements.” Moreover, the court found that the statement was not “too vague to be material” because it contained “specifics that an investor could use to evaluate the statement’s veracity.” The court noted that puffery, on the other hand, encompasses statements that are “‘too untethered to anything measurable, to communicate anything that a reasonable person would deem important to a securities investment decision’” (quoting City of Monroe Emps Ret. Sys. v. Bridgestone Corp., 399 F.3d 651 (6th Cir. 2005)).
Notably, the D.C. Circuit found “[n]othing” in the Sixth Circuit’s City of Monroe decision that “purports to render inactionable any statement that does not contain its own metric.” The court explained that the statements at issue in City of Monroe—such as claims that “Bridgestone sold ‘the best tires in the world’”—were “more in line with generalized boasting” and were “more ‘squishy’ . . . than the [c]ompany’s report of ‘very strong’ . . . sales” at issue here (quoting City of Monroe, 399 F.3d 651).
Second Circuit: Statements of General Corporate Optimism Are Typically Inactionable
On April 15, 2015, the Second Circuit found that the Royal Bank of Scotland’s (“RBS”) positive statements concerning its acquisition of ABN Amro were “inactionable puffery.” IBEW Local Union No. 58 Pension Trust Fund & Annuity Fund v. Royal Bank of Scotland Grp., 783 F.3d 383 (2d Cir. 2015) (Chin, J.). The court reaffirmed that “[s]tatements of general corporate optimism . . . do not give rise to securities violations” unless “‘they are worded as guarantees or are supported by specific statements of fact, or if the speaker does not genuinely or reasonably believe them’” (quoting In re IBM Sec. Litig., 163 F.3d 102 (2d Cir. 1998)). In the case before it, the Second Circuit determined that RBS’s statements were mere puffery because the statements were “not worded as guarantees” and “there [were] no allegations that defendants did not reasonably believe” the statements at the time they were made.