The Ninth Circuit on Wednesday affirmed Intuitive Surgical Inc.'s win in a securities fraud class action, holding that allegedly false or misleading statements that the company made regarding its finances and growth prospects are largely "nonactionable forward-looking statements" or "garden variety corporate optimism."
A three-judge appellate panel upheld U.S. District Judge Lucy H. Koh's ruling dismissing the suit brought by Intuitive shareholder Police Retirement System of St. Louis. PRS alleged that Intuitive and seven of its executives knowingly or recklessly misrepresented the robotic surgical device maker's financial situation in a 2007 regulatory filing and four analyst calls in 2008, causing artificial inflation of the company's share price.
But the Ninth Circuit panel found that PRS' complaint didn't meet the heightened pleading requirements under the Private Securities Litigation Reform Act and federal civil procedural rules.
"The heart of PRS' allegations, which target misstatements made during various analyst calls, are not actionable because they are covered by the safe harbor provision of the PSLRA or mere corporate puffery," Judge M. Marget McKeown wrote for the panel. "Nor are the claimed omissions in the 2007 annual report actionable because they are not material."
Intuitive, which manufactures the da Vinci line of robotic surgical systems for minimally invasive surgeries, experienced continual revenue growth from 1999 to 2007, and its share price closed at $353 in December 2007, according to court documents. But the company's stock and revenues subsequently began to fall, and by the end of the class period in PRS' suit in January 2009, its share price closed at $110.54, court documents said.
Ultimately, Intuitive disclosed that it was unable to sustain system placement growth and that 2008 revenue had increased only 46 percent, meeting the company's guidance of 40 percent growth but falling slightly short of its expected 49 percent to 50 percent growth for 2007, according to court documents.
PRS claimed that the individual defendants had access to advance undisclosed information about Intuitive's business and present or future prospects but knew of or recklessly disregarded the falsity of certain public statements and disclosures.
In Wednesday's ruling, the Ninth Circuit panel characterized the alleged misstatements made during the analyst calls as "classic growth and revenue projections" that fall within the PSLRA's safe harbor.
"Contrary to PRS' assertions, the statements are not 'misleading as to the then-present effects and circumstances' of known trends on Intuitive's financial health; they plainly project expectations for future growth," Judge McKeown wrote.
Four of the challenged statements in PRS' suit fall into the realm of corporate puffery, the appellate panel said. PRS argued that those statements, including Intuitive's assertion that the opportunity for system placement at hospitals was "still very, very large," are objectively verifiable and qualify as material misstatements. But the panel disagreed, saying the statements are the "antithesis of facts" and represent the "feel good" talk characteristic of nonactionable puffery.
While acknowledging that the 2007 annual report filed with the SEC was factually accurate, PRS alleged that certain statements in the report altered the "total mix" of information available to investors, faulting Intuitive for not detailing known trends, including that system placement was declining because of market saturation and the economic downturn.
The appellate panel said that the securities laws don't require the kind of reporting demanded by PRS.
"Nothing about the statements in the 2007 annual report would give a reasonable investor the impression that Intuitive's growth was different than it was in reality," Judge McKeown wrote. "The statements accurately reflect the company's growth in 2007; they do not purport to speak to any trends in Intuitive's growth or revenues and do not alter the total mix of information available to investors. The 2007 annual report is neither incomplete nor misleading."
The panel further found that PRS didn't establish the requisite scienter on the part of Intuitive's executives through any of several theories, including the core operations theory, which relies on the principle that corporate officers have knowledge of the critical core operations of their companies. At best, the facts in PRS' complaint only support an inference of the executives' knowledge of all core operations, not scienter, Judge McKeown wrote.
Michael D. Celio of Keker & Van Nest LLP, who argued the case for Intuitive before the Ninth Circuit, praised the appeals court's ruling.
"We are thrilled Judge McKeown not only agreed with Judge Koh's well-reasoned opinion dismissing the complaint and exonerating Intuitive Surgical, but also that she restored the core operations theory to its original intention," Celio said in an email. "Armed with this opinion, future defendants can dedicate their valuable resources to developing their business instead of battling groundless allegations."
An attorney for PSR did not immediately respond to a request for comment Wednesday.
Judges M. Margaret McKeown, Jerome Farris and A. Wallace Tashima sat on the Ninth Circuit panel.
PSR is represented by Ian D. Berg, Takeo A. Kellar, Atara Hirsch and Mitchell M.Z. Twersky of Abraham Fruchter & Twersky LLP.
Intuitive is represented by Michael D. Celio, Robert A. Van Nest and Cody S. Harris of Keker & Van Nest LLP.
The case is Police Retirement System of St. Louis v. Intuitive Surgical Inc. et al., case number 12-16430, in the U.S. Court of Appeals for the Ninth Circuit.