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On June 25, 2021, the Ninth Circuit reversed the denial of summary judgment to a defendant auto manufacturer in a putative securities fraud class action alleging that defendant made omissions and affirmative misrepresentations in offering memoranda relating to its secret use of defeat devices in its vehicles to hide unlawfully high emissions. In re Volkswagen “Clean Diesel” Mktg., Sales Pracs., & Prods. Liab. Litig., 2021 WL 2621171 (9th Cir. 2021) (Smith, J.). The Ninth Circuit held that the presumption of reliance established by Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), did not apply because plaintiff’s allegations could not be characterized “primarily” as claims of omission. The Ninth Circuit remanded the case to the district court to further consider whether a triable issue of material fact exists.

Background

Plaintiff commenced this securities fraud class action after government regulators issued notices of violation to defendant relating to its use of defeat devices, which were designed to only neutralize vehicle emissions during emissions testing. Defendant moved for summary judgment exclusively on the element of reliance in Rule 10b-5, arguing that plaintiff had no evidence that it or its investment advisor relied on the offering memoranda and that the Affiliated Ute presumption of reliance did not apply. The district court denied defendant’s motion for summary judgment and then certified the decision for interlocutory appeal on the scope of the Affiliated Ute presumption of reliance in “mixed” securities fraud cases—cases alleging both omissions and affirmative misrepresentations.

The Ninth Circuit Examines the Presumption of Reliance

The court began its analysis by discussing Affiliated Ute, which established the presumption of reliance in a case where plaintiff stockholders alleged “primarily a failure to disclose.”[1] The Supreme Court reasoned that if the stockholders were required to affirmatively prove reliance under these circumstances, they “would have been forced to prove a speculative negative: that they would have relied on information about the secondary market before selling their stock had the bank disclosed it.” Subsequently, Binder v. Gillespie, 184 F.3d 1059 (9th Cir. 1999), distinguished between “pure omissions” cases and “mixed” cases that allege both omissions and affirmative misrepresentations. In Binder, the Ninth Circuit held that the “presumption should not be applied to cases that allege both misstatements and omissions unless the case can be characterized as one that primarily alleges omissions.”

Alleged Reliance on Affirmative Misrepresentations Pushed the Case Outside of Affiliated Ute’s Presumption of Reliance

After acknowledging that plaintiff alleged an overarching omission (that for years defendant failed to disclose that it was secretly installing defeat devices), the Ninth Circuit pointed out that plaintiff also alleged “more than nine pages of affirmative misrepresentations that were made by [defendant] and relied upon by Plaintiff and its investment advisor.” The court observed that plaintiff “does not face the difficult or impossible task of proving a speculative negative.” The Ninth Circuit concluded that while this is a mixed case, plaintiff’s “allegations cannot be characterized primarily as claims of omission, so the Affiliated Ute presumption of reliance does not apply.” The court determined that “[t]hese affirmative misrepresentations, which Plaintiff alleges it relied upon when purchasing the bonds, push this case outside Affiliated Ute’s narrow presumption.” The Ninth Circuit explained that to hold otherwise would make the presumption available for all securities fraud claims “because all misrepresentations can be cast as omissions, at least to the extent they fail to disclose which facts are not true.”