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(Article from Securities Law Alert, May 2023) 

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On April 11, 2023, the Ninth Circuit reversed and remanded a district court’s dismissal of a securities fraud class action on the ground that it was untimely. York Cnty. v. HP, Inc., 65 F.4th 459 (9th Cir. 2023) (Bybee, J.). The Ninth Circuit determined that the defendant printing supply company’s “allegedly fraudulent statements, on their own, were insufficient to start the clock on the statute of limitations.” The Ninth Circuit held that the complaint was timely, concluding that plaintiff could not have discovered the facts necessary to plead an adequate complaint until after the issuance of an SEC order that revealed the misleading nature of defendants’ statements.

Background and Procedural History

During investor calls between November 2015 and June 2016, the defendant company made statements about whether it was meeting its inventory target ranges. The company allegedly failed, however, to disclose its complete inventory information or that it engaged in sales practices that led to short term gains but harmed overall profits.[1] Following an investigation, the SEC allegedly uncovered these practices and issued an order in 2020 (“SEC Order”) instituting cease-and-desist proceedings. The company agreed to pay a fine but did not admit or deny the allegations. The SEC Order alleged that the company’s disclosures omitted material information causing them to be incomplete and misleading.

Within weeks of the SEC Order, plaintiff filed a complaint alleging that the company violated Section 10(b) and Rule 10b-5. The company moved to dismiss on the basis that plaintiff’s claims were time-barred by the two-year statute of limitations in 28 U.S.C. § 1658(b)(1), which provides “that private actions alleging securities fraud must be brought no more than ‘2 years after the discovery of the facts constituting the violation’ of securities laws.”[2] The district court dismissed the complaint as time-barred, finding that the public statements, loss in profits, and reductions in channel inventory had all taken place by 2016 and reasoning that a reasonably diligent plaintiff would have discovered the operative facts of its complaint in 2016, more than four years before the complaint was filed.

Facts Not Deemed Discovered Until Plaintiff Has Sufficient Detail and Particularity to Survive a Motion to Dismiss

Relying on Merck & Co. v. Reynolds, 559 U.S. 633 (2010), the Ninth Circuit held that “a defendant establishes that a complaint is time-barred under § 1658(b)(1) if it conclusively shows that either (1) the plaintiff could have pleaded an adequate complaint based on facts discovered prior to the critical date and failed to do so, or (2) the complaint does not include any facts necessary to plead an adequate complaint that were discovered following the critical date.” Under Merck, “the critical date” is defined as the date “two years before the complaint was filed.” Adopting the reasoning of City of Pontiac General Employees’ Retirement System v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011), the Ninth Circuit further held that a “reasonably diligent plaintiff has not ‘discovered’ one of the facts constituting a securities fraud violation until he can plead that fact with sufficient detail and particularity to survive a 12(b)(6) motion to dismiss.”

In this case, the critical date was April 21, 2019—two years before the complaint was filed on April 21, 2021. Separating the facts alleged to have occurred before the critical date from those alleged to have occurred after it, the Ninth Circuit noted the allegation that the false statements and misrepresentations were made approximately three years before the critical date. The court then pointed out plaintiff’s assertion that it did not “discover the facts constituting the violation” until after the critical date because “the SEC Order put [the company’s] prior statements in a new context, revealing that ostensibly innocuous statements were actually intentional misrepresentations.” In other words, plaintiff argued that the issuance of the SEC Order provided sufficient evidence of scienter.

Because plaintiff pleaded facts that post-dated the critical date, the court explained that the company could show the claim was timebarred by either showing that: (i) plaintiff “could have pleaded its claim based solely on things that it knew or should have known prior to the critical date”; or (ii) “the SEC Order provided no information necessary” to plaintiff’s claim. The court stated that the company did not explain how plaintiff could have known of the allegedly fraudulent practices prior to the critical date or have pleaded scienter without discovering these practices. For the same reasons, the court also concluded that the company failed to show that the SEC Order did not provide information necessary for plaintiff to plead an adequate complaint.