On July 28, the Ninth Circuit reversed the dismissal of a securities class action, and remanded to the Central District of California. In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130 (9th Cir. 2017). Quality Systems, which develops and markets electronic health records software, allegedly made false statements about its current and past sales “pipeline,” and used those statements to support public projections about the company’s future performance. Id. at 1135. The court addressed the application of the Private Securities Litigation Reform Act’s Safe Harbor for forward-looking statements—essentially predictions regarding future events or performance. The court announced a bright-line rule for “mixed” statements, which occur “[w]here a forward-looking statement is accompanied by a non-forward-looking factual statement that supports” it. Id. at 1146. The court held that “[i]f the non-forward-looking statement is materially false or misleading, it is likely that no cautionary language—short of an outright admission of the false or misleading nature of the non-forward-looking statement—would be ‘sufficiently meaningful’ to qualify the statement for the safe harbor.” Id. at 1146–47. The court further ruled that for “mixed” statements, whether “the non-forward-looking statements are, or may be, untrue is clearly an ‘important factor’ of which investors should be made aware.” Id. at 1148.
Doug Greene, Peter Hawkes, and I authored an amicus curiae brief on behalf of the Washington Legal Foundation, urging the Ninth Circuit to rehear the case en banc to replace the panel’s unduly constricted approach to the Safe Harbor with a context-driven standard that is consistent with Congress’s judgment in enacting the Safe Harbor. The brief first explains that the Safe Harbor was enacted to encourage companies to offer predictions about their future performance without the fear of crippling securities litigation if their predictions are not borne out by future events. To accomplish that, the Safe Harbor protects false or misleading forward-looking statements if they are identified as forward-looking and accompanied by “meaningful cautionary statements” identifying important risk factors that could affect future performance. The Safe Harbor offers an independent second prong that protects forward-looking statements if the speaker lacks actual knowledge that the statements are false. The brief shows that courts have been reluctant to apply the first prong of the Safe Harbor independently, fearing that it gives companies a “license to defraud.” By announcing an inflexible rule that, for “mixed statements,” cautionary language cannot be “meaningful” absent an admission of the falsity of any inaccurate statements of present or past fact—regardless of whether the company even knows they are false—the Ninth Circuit panel similarly nullifies the Safe Harbor’s first prong by ignoring disclosures of other “important” risk factors and holding companies strictly liable for innocent misstatements.