Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc.

• Decision Date: 16 July 2014
• Docket Number: No. 12–16430.,12–16430.
• Citation: 759 F.3d 1051
• Parties: POLICE RETIREMENT SYSTEM OF ST. LOUIS, individually and on behalf of all others similarly situated, Plaintiff–Appellant, v. INTUITIVE SURGICAL, INC.; Benjamin Gong; Aleks Cukic; Jerome McNamara; Mark J. Rubash; Gary Guthart; Marshall Mohr; Lonnie Smith, Defendants–Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

759 F.3d 1051

POLICE RETIREMENT SYSTEM OF ST. LOUIS, individually and on behalf of all others similarly situated, Plaintiff–Appellant,

v.INTUITIVE SURGICAL, INC.; Benjamin Gong; Aleks Cukic; Jerome McNamara; Mark J. Rubash; Gary Guthart; Marshall Mohr; Lonnie Smith, Defendants–Appellees.

No. 12–16430.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 14, 2014.

Filed July 16, 2014.

Ian D. Berg (argued) and Takeo A. Kellar, Abraham, Fruchter & Twersky, LLP, San Diego, CA; Atara Hirsch and Mitchell M.Z. Twersky, Abraham, Fruchter, & Twersky, LLP, New York, NY, for Plaintiff–Appellant.

Michael D. Celio (argued), Robert A. Van Nest, and Cody S. Harris, Keker & Van Nest LLP, San Francisco, CA, for Defendants–Appellees.

Appeal from the United States District Court for the Northern District of California, Lucy H. Koh, District Judge, Presiding. D.C. No. 5:10–cv–03451–LHK.

Before: JEROME FARRIS, A. WALLACE TASHIMA, and M. MARGARET McKEOWN, Circuit Judges.

OPINION

McKEOWN, Circuit Judge:

This case, involving robotic surgical devices, raises the question of how precise public statements of a company's potential growth must be to comply with the anti-fraud protections of the securities laws. Intuitive Surgical, Inc. (“Intuitive”) is a corporation that designs, manufactures, and markets da Vinci Surgical Systems (“Systems”), cutting-edge robotic devices used for minimally invasive surgeries. The Police Retirement System of St. Louis (“PRS”) is a public pension fund that purchased shares of Intuitive stock.

PRS brought a class action suit against Intuitive on behalf of purchasers of Intuitive common stock, alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (“SEC”) Rule 10b–5. See15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R. § 240.10b–5. PRS also named as defendants the following Intuitive executives (collectively, the “individual defendants”): Lonnie M. Smith, the CEO and Chairman of the Board of Directors; Gary S. Guthart, the President and COO; ¹ Jerome J. McNamara, the Executive Vice President of Worldwide Sales and Marketing; Marshall L. Mohr, the Senior Vice President and CFO; Aleks Cukic, the Vice President of Business Development and Strategic Planning; and Benjamin Gong, the Vice President of Finance.

The complaint alleges that through its executives Intuitive knowingly issued false and misleading statements regarding the company's growth and financial health, which caused artificial inflation of the share price throughout the Class Period, from February 1, 2008 to January 7, 2009, resulting in losses to the class members. Despite the nearly six hundred allegations contained in the over three-hundred-page complaint, the company's statements are, in large part, forward-looking statements or garden variety corporate optimism-neither category is actionable under the securities laws. The complaint is also deficient in suggesting that the executives made false statements with knowing or reckless disregard for Intuitive's economic circumstances. Although PRS tries to paint a picture of Intuitive's affirmative misrepresentations, we conclude that after two amendments, the complaint does not meet the heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u–4.

Background and Procedural History

Intuitive sells Systems and instruments for robotic surgeries, specifically da VinciProstatectomy procedures (“ dVP ”) and da VinciHysterectomy procedures (“ dVH ”). The sale of new Systems ² and instruments (“system placement”) and of replacement instruments (“recurring revenue”) to hospitals generates Intuitive's revenue. Revenue grew continuously from 1999, when the Systems were first introduced, to 2007. For example, Intuitive share price closed at $87.11 in January 2007 and grew to $353.00 by December 2007.

The landscape changed significantly in the first quarter of 2008 when the share price fell to $280.50. Shortly after Intuitive announced these results, Oppenheimer & Co. released a report (“the Oppenheimer Report”), expressing the view, corroborated by other sources, that Intuitive's first quarter of 2008 share price “was nowhere near enough to sustain [its] valuation” and that system placement was decelerating.

Stock prices and revenues continued to fall, and, by the end of the Class Period, the share price closed at $110.54. Around this time, the Board of Directors adopted a severance plan providing for generous benefits to the individual defendants in the event of a change in control of the company. Ultimately, Intuitive disclosed that “it was unable to sustain system placement growth,” and 2008 revenue increased only 46%, meeting the company's guidance of 40% growth, but falling slightly short of its expected 49–50% growth for 2007.

PRS alleges that in the 2007 Annual Report filed with the SEC and in four analyst calls in 2008, Intuitive knowingly or recklessly misrepresented the company's financial situation. The report warned that an economic downturn “may have significant impact on the ability of our customers to secure funding to buy our products or might cause purchasing decisions to be delayed.... [, which] may result in decreased revenues and also allow our competitors additional time to develop products that may have a competitive edge, making future sales of our products more difficult.” The analyst calls also contained warnings that certain forward-looking statements might be made and that “[a]ctual results may differ materially from those expressed or implied, as a result of certain risks and uncertainties,” such that “investors are cautioned not to place undue reliance on such forward-looking statements.”

Relying on witness accounts, PRS alleges that the individual defendants “by virtue of their positions with the company, had access to adverse undisclosed information about the company's business, operations, operational trends, financial statements, markets and present and future business prospects via internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and board of directors meetings and committees thereof, and via reports and other information provided to them in connection therewith.” According to the witnesses, Intuitive's proprietary software tracked each use of the Systems for each procedure down to the types of movements involved, and this information, “was used to track all aspects of [Intuitive's] business in real-time and to generate reports on [Intuitive's] business operations and business goals.” PRS also points to witness accounts that this software was “accessible on-line and thus available at all times” to the individual defendants. One witness described the company's management as “top-down,” with the individual defendants “play[ing] very active roles in running the day-to-day operations.”

Based on the witness accounts, PRS asserts that the individual defendants knew of or recklessly disregarded the falsity of certain public statements and disclosures because the proprietary software reflected a different situation. Although the individual defendants publicly claimed that the company would remain in a growth position, PRS alleges that the individual defendants knew or should have known that system placement was decreasing because of the economic downturn, market saturation, and sales and service trends, and that this decreased growth was evident from the software-generated reports to which the executives had access.

In addition to alleging false statements, PRS claims that statements about increased revenue were misleading because Intuitive did not disclose known trends, including the facts that revenue increased due to price increases for Systems rather than higher system placement rates; the economic crisis would continue to impact system placement negatively; market saturation was also causing decreased system placement; diminished system placement would impact recurring revenue; and the number of dVP procedures, which generate the most revenue per procedure, was decelerating faster than disclosed and would result in decreased system placement that the growth in dVH procedures would not offset. These representations allegedly “misled investors about the sustainability of system placement growth ... and [r]ecurring revenue growth.”

PRS also highlights other allegedly suspicious activity during the Class Period. The already-significant compensation of Intuitive executives spiked. Smith, Guthart, McNamara, and Mohr made lucrative sales of Intuitive stock allegedly based on insider information. Finally, in March 2009, three months following the end of the Class Period, the Board of Directors, led by Smith, authorized a stock buy back, which was privately negotiated with the individual defendants.

After two amendments, the district court dismissed the complaint with prejudice for failure to state a claim under Federal Rules of Civil Procedure 9(b) and (12)(b)(6).

Analysis

The adoption of the PSLRA in 1995 spurred a growing body of appellate precedent related to pleading requirements in securities suits. See, e.g., Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694 (9th Cir.2012). The PSLRA standards, though well known, require careful application in each case, particularly in evaluating dismissal under Federal Rules of Civil Procedure 9(b) and 12(b)(6). See Tellabs, 551 U.S. at 313, 127 S.Ct. 2499. Rule 10b–5, which implements the anti-fraud provisions of section 10(b) of the Securities Exchange Act, makes it “unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange ... [t]o make any...