(Article from Securities Law Alert, March 2018)
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On March 2, 2018, the Northern District of California held that the presumption of reliance for omission-based Section 10(b) claims established in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) does not apply if the alleged “omission is of the truth that certain affirmative statements allegedly misrepresent.” In re Volkswagen “Clean Diesel” Mktg., Sales Practices, and Prod. Liab. Litig., 2018 WL 1142884 (N.D. Cal. 2018) (Breyer, J.). In so holding, the court expressly followed the Second Circuit’s recent decision in Waggoner v. Barclays, 875 F.3d 79 (2d Cir. 2017).[1]
The Northern District of California had previously determined that the Affliated Ute presumption applied because plaintiffs’ “case can be characterized as one that primarily alleges omissions.” In re Volkswagen “Clean Diesel” Mktg., Sales Practices and Prod. Liab. Litig., 2017 WL 3058563 (N.D. Cal. 2017). Defendants moved for reconsideration based on the Second Circuit’s intervening decision in Waggoner. The Second Circuit held that plaintiffs cannot rely on the Affiliated Ute presumption if their claims “are primarily based on misstatements.” Waggoner, 875 F.3d 79. The Second Circuit underscored that “[t]he Affiliated Ute presumption does not apply to earlier misrepresentations made more misleading by subsequent omissions, or to what has been described as ‘half-truths,’ nor does it apply to misstatements whose only omission is the truth that the statement misrepresents.”
The Northern District of California found the Second Circuit’s reasoning “persuasive.” The court noted that “[t]he Ninth Circuit has also recognized a need to ‘maintain[ ] the well-established distinction, for purposes of the Affiliated Ute presumption, between omission claims, on the one hand, and misrepresentation and manipulation claims, on the other.’” Id. (quoting Desai v. Deutsche Bank Sec., 573 F.3d 931 (9th Cir. 2009)). The Northern District of California “conclude[d] that whether the Affiliated Ute presumption of reliance is applicable is a decision that should be based on whether the presumption’s purpose—of avoiding the need to prove a speculative negative—is implicated.”
On reconsideration, the court held that plaintiffs could not rely on the Affiliated Ute presumption because their claims were “predicated on affirmative statements” concerning research and development (“R&D”) and regulatory risk, which plaintiffs challenged as misleading because defendants did not disclose alleged emissions fraud. The court explained that plaintiffs either “relied on the R&D and regulatory-risk statements … or they did not.” The court held that if plaintiffs “did not, they should not be able to overcome this shortfall by characterizing their claims as primarily alleging omissions.”
[1] Please click here to read our discussion of the Second Circuit’s decision in Waggoner.