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On June 23, 2015, the D.C. Circuit revived a securities fraud action against Harman International Industries. In re Harman Int’l Indus. Sec. Litig., 2015 WL 3852089 (D.C. Cir. 2015) (Rogers, J.). The court found the complaint “plausibly allege[d]” that two forward-looking statements were not entitled to safe harbor protection under the Private Securities Litigation Reform Act (“PSLRA”) because the statements were not (1) “accompanied by warnings specific to the [c]ompany” that were (2) “tailored to the specific forward-looking statements” made and (3) “consistent with the historical facts when the statements were made.” The court further held that a third statement describing product sales as “very strong” was “plausibly understood” as something other than “mere ‘puffery’” because it was “specific about [both] product and time period” and contained “specifics that an investor could use to evaluate the statement’s veracity.”

Background

Plaintiffs alleged that Harman International Industries and three of its officers had made “materially false and misleading statements” regarding “the status of the [c]ompany’s personal navigation device (‘PND’) products” between April 2007 and September 2007, when the company was being considered for acquisition. 

On April 26, 2007, the same day that defendants announced a potential buyout, Harman’s CEO said during an analyst conference call that the company “planned to reduce [high PND inventories in Europe] to normal levels at year-end.” Specifically, he stated that the company expected to sell more than 600,000 PND units that year. Several months later, on September 29, 2007, Harman’s CFO stated during an analyst conference call that the company was “continu[ing] the growth and expansion of [the PND] business primarily in Europe.” Both calls were preceded by announcements that the discussions would include “forward-looking statements” that were “subject to risks and uncertainties.”

On August 29, 2007, the company filed its Form 10-K which stated that “[s]ales of aftermarket products, particularly PNDs, were very strong during fiscal year 2007.” The Annual Report “stated that it ‘contains forward-looking statements’” and cautioned “that readers should ‘not place undue reliance on these statements.’” The Annual Report also “included a detailed account of the ‘risk factors’” that “may cause fluctuations in [the company’s] operating results.”

Plaintiffs alleged that all three statements were “materially false and misleading” in light of “the historical evidence of growing inventory, widespread obsolescence, and stagnant sales” of PNDs. Defendants moved to dismiss plaintiffs’ complaint. On January 17, 2014, the district court for the District of Columbia granted defendants’ motion to dismiss, finding that “the statements [made] during the conference calls fell within the [PSLRA’s] safe harbor for forward-looking statements accompanied by meaningful cautionary statements, and the statement in the FY 2007 Annual Report was ‘mere puffery’ and inactionable.” Plaintiffs appealed. 

D.C. Circuit Holds the PSLRA’s Safe Harbor Applies Only to Forward-Looking Statements Accompanied by Factually Accurate, Company-Specific Warnings Tailored to the Specific Statements Made

On appeal, the D.C. Circuit explained that in order “[t]o come within the [PSLRA’s] statutory safe harbor, a statement must not only be forward looking (and identified as such), but also ‘accompanied by meaningful cautionary statements’” (quoting 15 U.S.C. § 78u-5(c)(1)(A)(i)). The court found that “‘[t]he requirement for ‘meaningful’ caution calls for substantive company-specific warnings based on a realistic description of the risks applicable to the particular circumstances’” (quoting Southland Sec. Corp. v. INSpire Ins. Solutions, 365 F.3d 353 (5th Cir. 2004)). The court determined that cautionary statements cannot be “mere boilerplate” but must instead be “tailored to the specific future projections, estimates or opinions in the [forward-looking statements]” (quoting Institutional In’vrs Grp. v. Avaya, 564 F.3d 242 (3d Cir. 2009)). The court explained that this requirement “follows from the statutory requirement that cautionary language must warn of what ‘could cause actual results to differ materially from those in the forward-looking statement’” (quoting 15 U.S.C. § 78u-5(c)(1)(A)(i)) (emphasis added by the court).

The D.C. Circuit emphasized that “cautionary language cannot be ‘meaningful’ if it is ‘misleading in light of historical fact[s]’” (quoting Slayton v. Am. Express Co., 604 F.3d 758 (2d Cir. 2010)). “If a company were to warn of the potential deterioration of one line of its business, when in fact it was established that that line of business had already deteriorated, then . . . its cautionary language would be inadequate to meet the safe harbor standard.” The court explained that “there is an important difference between warning that something ‘might’ occur and that something ‘actually had’ occurred.”

The D.C. Circuit recognized that “Congress did not require the cautionary statement warn of ‘all’ important factors, so long as ‘an investor has been warned of risks of a significance similar to that actually realized,’ such that the investor ‘is sufficiently on notice of the danger of the investment to make an intelligent decision about it according to her own preferences for risk and reward.’” The court noted that “[p]erfect clairvoyance may be impossible because of events beyond a company’s control of which it was unaware.”

D.C. Circuit Finds the Complaint Plausibly Alleged Defendants’ Conference Call Statements Were Not Accompanied by Meaningful Cautionary Statements

The D.C. Circuit then turned to the question of “whether the [c]ompany’s statements during the two conference calls were accompanied by warnings specific to the [c]ompany and tailored to the specific forward-looking statements, not mere boilerplate, and consistent with the historical facts when the statements were made.” With respect to the cautionary statements, the court determined that the complaint’s allegations “plausibly show” that “the general information provided by the [c]ompany about its plan to reduce its substantial inventory did not disclose historical facts that could have affected the success of the plan being discussed” and that “[r]eferences to amassed [PND] inventory did not convey that inventory was obsolete, as opposed to stocked with the latest, cutting-edge models.” The court found that the complaint sufficiently alleged “a misleading picture with regard to the impact of ‘a large inventory of older generation, obsolete PNDs which [the company] could not sell or was forced to sell at a substantial loss.’”

D.C. Circuit Finds Defendants’ Representation of “Very Strong” PND Sales Was Potentially an Actionable Misstatement Rather Than Mere “Puffery” Because It Specifically Described a Particular Product and Time Period

With respect to defendants’ representation in the company’s 2007 Annual Report of “very strong” PND sales, the D.C. Circuit explained that “‘statements of reasons, opinions, or beliefs’ can be actionable” (quoting Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991)). The court noted 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, 501 U.S. 1083).

The D.C. Circuit determined that “given the context in which it was made,” “the ‘very strong’ statement in the FY 2007 Annual Report [was] plausibly understood as a description of historical fact rather than unbridled corporate optimism, i.e., immaterial puffery.” The court explained that “PNDs were part of the [c]ompany’s largest division and had been the focus of recent public statements.” Moreover, the court found that “[t]he ‘very strong’ statement was specific about product and time period,” and not “too vague to be material.” 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 Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651 (6th Cir.2005)).

Defendants attempted to rely on the Sixth Circuit’s decision in City of Monroe to argue that “the ‘very strong’ statement [was] puffery because it ‘lacked a standard against which a reasonable investor could expect [it] to be pegged’” (quoting City of Monroe, 399 F.3d 651). Rejecting this contention, 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’ PND sales” (quoting City of Monroe, 399 F.3d 651).  

The D.C. Circuit reversed dismissal of plaintiffs’ complaint, and remanded the action for further proceedings consistent with its opinion.