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(Article from Securities Law Alert, October 2017) 

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On September 30, 2017, the Southern District of New York held that there is no duty to update statements of existing fact that cannot be “characterized as ‘hype’ or ‘forward-looking projections.’” Plumbers and Steamfitters Local 137 Pension Fund v. American Express Co., 2017 WL 4403314 (Sept. 30, 2017) (Gardephe, J.). The court further held that Item 303 of Regulation S-K does not mandate disclosure of speculative quantitative information concerning known trends or uncertainties.

There Is No Duty to Update Statements That Do Not “Hype” an Aspect of the Company’s Business

The court explained that “[t]he duty to correct applies when ‘a company makes a historical statement that at the time made, the company believed to be true, but as revealed by subsequently discovered information actually was not.’” Id. (quoting In re Int'l Bus. Machines Corp. Sec. Litig., 163 F.3d 102 (2d Cir. 1998)). “Alternatively, ‘a duty to update may exist when a statement, reasonable at the time it is made, becomes misleading because of a subsequent event.’” The court emphasized that “[t]he duty to update is not without limits.” The court stated that the duty to update “does not extend to (1) ‘vague statements of optimism or expressions of opinion’; (2) statements that are ‘not forward looking and do not contain some factual representation that remains alive in the minds of investors as a continuing representation’; or (3) statements that are not material.”

In the case before it, the court found defendants had no duty to update statements concerning a business agreement. The court distinguished the company’s statements from those at issue in In re Time Warner Securities Litigation, 9 F.3d 259 (2d Cir. 1993) and In re Quintel Entertainment Securities Litigation, 72 F. Supp. 2d 283 (S.D.N.Y. 1999). In both cases, “defendants ‘hyped’ a part of their business plan as a solution to a problem or to justify a claim that the value of the company was increasing.” Here, however, there were no allegations that the company “hyped” the U.S. agreement.

Item 303 of Regulation S-K Does Not Mandate Disclosure of Speculative Quantitative Business Information  

Plaintiffs contended that defendants “failed to quantify and disclose the expected impact” of a “known trend of increased competition with respect to co-brand agreements” as required under Item 303 of Regulation S-K, which sets forth the disclosure requirements for the Management’s Discussion and Analysis (MD&A) section of a public company’s SEC filings. Item 303 states that a public company must “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”[1]

The court noted that the SEC has “cautioned that [Item 303] requires quantitative information only when it is reasonably available and will provide material information for investors.” The court also observed that in Stratte-McClure v. Morgan Stanley, 776 F.3d 94 (2d Cir. 2015), the Second Circuit did not interpret Item 303 to “require companies to ‘give competitors notice of proprietary strategies and information.’” Id. (quoting Stratte-McClure, 776 F.3d 94). The court explained that “Stratte-McClure evinces a concern for the disclosure of sensitive business information.”

The court held the company was not required under Item 303 to “precisely quantify potential effects on its business” because the company “did not know (1) which agreements might not be renewed; (2) which agreements might be renewed on less favorable terms; or (3) for agreements that were renewed on less favorable terms, what the new terms and their financial impact might be.”