Ninth Circuit Panel Holds Investors Should Know Better Than to Rely on “Vague” Statements of Optimism

A Ninth Circuit appellate panel has affirmed a lower court decision dismissing a securities fraud class action brought under Rule 10b-5 against Align Technology, Inc. (“Align Tech” or the “Company”). 

Align Tech is a medical device manufacturer best known for its “Invisalign” braces.  Between 2013 and 2018, the Company experienced an explosive growth in sales, especially in China.  In early 2019, Align Tech’s growth rate in China slipped due to competitive pressure and decreased demand. 

Despite this growth decline, and before it was revealed to investors, executives at Align Tech continued to tout the strength of the Company’s growth prospects in China.  For example, the CEO of Align Tech stated in the spring of 2019 that “China is a great market for us.”  Around the same time, the CFO responded to an analyst question about growth in the region by touting that the Company “see[s] tremendous growth … in China in particular.”

By early summer 2019, the truth about Align Tech’s China-specific sales growth decline was revealed to the market.  Investor response was sharp and swift.  Align Tech’s stock dropped by approximately 27%, causing shareholders to lose a collective $5.4 billion.

The Ninth Circuit, in affirming the lower court decision, found the Align Tech executives’ statements to be non-actionable “puffery.”  In evaluating the statements at issue, the Court noted that “[a]ll use vague, generically positive terms” such as “tremendous” and “great.”  “Such characterizations,” the Court explained, “are not ‘objectively verifiable’” because they do not “present the kind of precise information on which investors rely when valuing corporations.” (internal citations and quotes omitted). 

Importantly, the Ninth Circuit did not hold that these statements are inactionable as a matter of law.  Had Align Tech, for example, experienced an actual sales decline, rather than a growth decline, the statements could have “affirmatively create[d] an impression of a state of affairs that differed in a material way from the one that actually existed.” (cleaned up).  However, without a “clear[] pessimistic backdrop” against which the “general statements of optimism were made,” investors have no recourse.

The case is Macomb County Employees’ Retirement System v. Align Technology, Inc., D.C. No. 3:20-cv-02897-MMC.  The decision was filed on July 7, 2022.