(Article from Securities Law Alert, December 2015)
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D.C. Circuit: Forward-Looking Statements Fall Within the PSLRA’s Safe Harbor Only If Accompanied by Tailored, Company-Specific Warnings
On June 23, 2015, in a securities fraud action against Harman International Industries, the D.C. Circuit found that two forward-looking statements were not entitled to safe harbor protection under the PSLRA because the statements were not (1) “accompanied by warnings specific to the [c]ompany”; (2) “tailored to the specific forward-looking statements” made; and (3) “consistent with the historical facts when the statements were made.” In re Harman Int’l Indus. Sec. Litig., 791 F.3d 90 (D.C. Cir. 2015) (Rogers, J.).
The court 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 [must] also [be] ‘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 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.”
Notably, 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 observed that “[p]erfect clairvoyance may be impossible because of events beyond a company’s control of which it was unaware.”
Eighth Circuit: Key Inquiry for Determining Whether a Statement Is Forward- Looking for Purposes of the PSLRA’s Safe-Harbor Provision Is Whether the Statement’s Veracity Is Discernible at the Time the Statement Is Made
On July 2, 2015, the Eighth Circuit held that “[i]n determining whether a statement is truly forward-looking” for purpose of the PSLRA’s safe-harbor provision, “the determinative factor is not the tense of the statement.” Julianello v. K-V Pharm. Co., 791 F.3d 915 (8th Cir. 2015) (Shepherd, J.). Rather, the court found that “the key is whether [the statement’s] ‘truth or falsity is discernible only after it is made.’”
The Eighth Circuit found that alleged misstatements concerning the likelihood that the FDA would enforce a period of exclusive sales rights once K-V Pharmaceuticals launched Makena, a prescription drug for the prevention of preterm labor, fell within the PSLRA’s safe-harbor provision because (1) the statements were “tied to a future event: the launch of Makena,” and (2) the veracity of K-V’s statements could not be determined until this future event took place.
The Eighth Circuit further found that “the use of the present tense in the challenged statements [did] not undermine [its] determination that they were forward looking.” The court held that “[t]he critical inquiry in determining whether a statement is forward-looking is whether its veracity can be determined at the time the statement is made, not the tense of the statement.”