(Article from Securities Law Alert, August 2017)
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On August 1, 2017, the Southern District of New York held that a company had no duty to disclose a contractual pricing dispute with one of its largest customers even though it had publicly described the parties’ relationship as “very, very, solid.” In re Express Scripts Holding Co. Sec. Litig., 2017 WL 3278930 (S.D.N.Y. Aug. 1, 2017) (Ramos, J.). The court found dispositive the absence of any allegation of a “definitive statement” of the customer’s intent to terminate the contract during the class period.
According to the complaint, “the parties had a fundamental $15 billion difference of opinion on the contract; were refusing to negotiate that gap at all; and repeatedly accused each other of acting in bad faith.” Twice before the end of the class period, the customer served the company with formal notifications of breach of contract. The customer ultimately filed suit against the company for breach of contract.
Plaintiffs contended that because defendants chose to discuss the “purported strength” of the customer relationship and the parties’ “allegedly productive negotiations,” defendants were then “obligated to speak fully and truthfully” about all aspects of those negotiations. The court recognized that “[u]nder certain circumstances, . . . a company could have a duty to disclose a breach of contract that puts an important, publicly-touted business relationship at great risk.” Id. (quoting In re Hi-Crush Partners L.P. Sec. Litig., 2013 WL 6233561 (S.D.N.Y. Dec. 2, 2013)). But “[w]here an outcome is merely speculative,” as in the instant action, “the duty to disclose does not attach.”
The Express Scripts court distinguished its prior decision in Hi-Crush. There, a company allegedly “publicly hyped the importance of its relationship” with one of its customers even after that customer had terminated the contract. Hi-Crush, 2013 WL 6233561. The Express Scripts court explained that “Hi-Crush does not hold that a party has an obligation to disclose all disputes with a major customer.” Rather, the Hi-Crush court found that “the dispute ‘ripened’ as to trigger a duty to disclose on the date” the customer notified the company of its termination of the agreement. Express Scripts, 2017 WL 3278930 (quoting Hi-Crush, 2013 WL 6233561).
The Express Scripts court emphasized that in the case before it, “the actual contractual negotiations were ongoing” during the class period “and no termination right was exercised.” The court found that there was no duty to disclose “because no intent of termination was provided during the [c]lass [p]eriod.” The court also rejected plaintiffs’ contention that the company “should have revised its accounting treatment” of the contract at issue. The court found the complaint did not “plausibly allege that [the company] did not believe its statements regarding the useful life of the [c]ontract for accounting purposes at the time the statements were made,” as required under the Second Circuit’s decisions in Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011) and City of Omaha Civilian Employees’ Retirement System v. CBS Corp., 679 F.3d 64 (2d Cir. 2012).