Eleventh Circuit Holds That Certain Yearly Estimates Are Forward Looking Statements

On August 1, 2022, the Eleventh Circuit affirmed dismissal of a putative securities class action against medical technology company Axogen, Inc. (“Axogen”) ruling that certain yearly estimates about the number of injuries requiring a medical procedure were “forward-looking statements” protected by the Private Securities Litigation Reform Act (“PSLRA”) safe harbor. 

Axogen is a medical technology company that specializes in “nerve repair” products. One of the company’s key products is the Avance Nerve Graft (“Avance”), which is a section of nerve tissue that is derived from human cadavers. Avance is used to assist in nerve regeneration, including in instances of nerve damage resulting from trauma. Avance accounted for approximately half of the company’s revenues, with Axogen claiming that 33-40% of its market was related to the product. Throughout the class period, the company claimed to be experiencing explosive growth. 

As relevant to the appeal, during the class period, Axogen held two public stock offerings. In connection with those offerings, Axogen stated that it believed that “more than 1.4 million people suffer traumatic injuries to peripheral nerves each year” and that it “estimates that over 700,000 extremity nerve procedures result.” In December 2018, a short seller issued a research report challenging, among other things, the claims Axogen made about the frequency of peripheral nerve procedures. The report alleged that there only 28,000 such procedures each year, and that therefore Axogen’s market was much smaller than represented. The release of the report caused a precipitous drop in Axogen’s stock price, damaging investors. 

Investors soon filed a class action suit in the United States District Court for the Middle District of Florida alleging that Axogen had misled investors about the estimated number of nerve repair procedures and the company’s predications about the size of the market. In doing so, the District Court held, among other things, that the statements challenged by investors were “forward-looking” and therefore protected by the safe harbor provisions of the PSLRA. 

Plaintiffs appealed, limiting their appeal to whether Axogen’s statements about the frequency of nerve injuries and the number of repair procedures were protected from liability. The Eleventh Circuit upheld the District Court’s dismissal, ruling that in the context of this case, Axogen’s statements were forward-looking and shielded from liability. Specifically, the Court found that while the statement “each year” could be used in a historical context, the statements at issue in the case were predictive statements rather than historical statements. The Court concluded that these statements were, to some degree, meant to be predictive of the number of nerve injuries requiring repair that were likely to occur each year. The only reason for Axogen to make such statements was to predict the size of the potential future market for Axogen’s products, and therefore they were predictions about future economic performance which are protected as forward-looking statements. 

The impact of the Eleventh Circuit’s decision on protection for certain historically based statements remains to be seen, but it could have a serious impact on securities class actions going forward. 

A copy of the decision can be found here: https://media.ca11.uscourts.gov/opinions/pub/files/202111246.pdf.