Backman v. Polaroid Corp.

• Citation: 910 F.2d 10
• Decision Date: 09 May 1990
• Docket Number: Nos. 89-1171,89-1172,s. 89-1171
• Parties: Fed. Sec. L. Rep. P 95,389 Irving A. BACKMAN, et al., Plaintiffs, Appellees, v. POLAROID CORPORATION, Defendant, Appellant. Irving A. BACKMAN, et al., Plaintiffs, Appellants, v. POLAROID CORPORATION, Defendant, Appellee. . Reheard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 10

910 F.2d 10

Fed. Sec. L. Rep. P 95,389

Irving A. BACKMAN, et al., Plaintiffs, Appellees, v. POLAROID CORPORATION, Defendant, Appellant.

Irving A. BACKMAN, et al., Plaintiffs, Appellants, v. POLAROID CORPORATION, Defendant, Appellee.

Nos. 89-1171, 89-1172.

United States Court of Appeals First Circuit.

Reheard May 9, 1990.

Decided Aug. 2, 1990.

John R. Hupper, with whom Frederick A.O. Schwarz, Jr., James L. Buchal, David E. Sternberg, Cravath, Swaine & Moore, James E. Tolan, William K. Dodds, Rodney M. Zerbe, Olwine, Connelly, Chase, O'Donnell & Weyher, Stephen D. Poss and Goodwin, Procter & Hoar, were on brief, for Polaroid Corp.

Thomas J. Dougherty, Skadden, Arps, Slate, Meagher & Flom, Patrick W. Hanifin and New England Legal Foundation, on brief, for Associated Industries of Mass. and the New England Foundation, amici curiae.

Stanley Keller and Palmer & Dodge, on brief, for Business Law Section of Boston Bar Ass'n, amici curiae.

John D. Donovan, Jr., Mark P. Szpak and Ropes and Gray, on brief, for New England Corporate Counsel Ass'n and American Corporate Counsel Ass'n (Northeast Chapter), amici curiae.

Thomas G. Shapiro, with whom Carolyn Grace, Shapiro, Grace & Haber, Richard B. Dannenberg, David C. Harrison, Lowey, Dannenberg, Bemporad, Brachtl & Selinger, P.C., Ronald Litowitz, Bernstein Litowitz Berger & Grossmann, Arthur N. Abbey, and Abbey & Ellis, were on brief, for Irving A. Backman, et al.

Before BREYER, Chief Judge, ALDRICH, Senior Circuit Judge, CAMPBELL, Circuit Judge, BOWNES, Senior Circuit Judge, TORRUELLA, SELYA and CYR, Circuit Judges.

BAILEY ALDRICH, Senior Circuit Judge.

This is a class action brought by Irving A. Backman on behalf of himself and all other persons who purchased shares of stock of defendant Polaroid Corporation on the open market between January 11 and February 22, 1979, allegedly misled by defendant's conduct that violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the regulations promulgated thereunder. Suit was filed in June, 1979. The case came on for trial, on a second amended complaint, in June, 1987, by which time the docket showed 363 entries. The improprieties asserted, both in the complaint and in plaintiffs' opening to the jury, as responsible for plaintiffs' purchasing shares before a substantial drop in the market, were defendant's failure to disclose unfavorable facts about its new product, Polavision, an instant movie camera. Following trial on liability, the jury found for plaintiffs. Defendant moved for judgment n.o.v., or, alternatively, for a new trial, but the court denied both motions. On appeal, a divided panel affirmed as to the former, but granted a new trial. On this rehearing en banc we reverse, and order judgment for defendant.

THE FACTS AND THE LAW: PHASE ONE

While we have been surprised before, we have never been so reminded that, no matter how fully expressed, our opinions do not always command response. In their amended complaint plaintiffs alleged that defendant failed to disclose that Polavision, introduced in the spring, had been unprofitable throughout 1978, and would continue so, significantly, at least through 1979; that it had been excessively inventoried and had suffered lagging sales; that little, if any, information had been made public; that defendant knew that this undisclosed information was material to investors, and that major investment research firms had publicly projected defendant's earnings based on assumptions defendant knew were contrary to the true facts, all of which non-disclosure was in violation of the securities laws.

Secondly, plaintiffs re-alleged the above, and added that over the years defendant had advertised that it was a growth company, and that, through its successes, the investment community had come to consider it the best of the growth companies, and that its failing to make the above disclosures operated as a fraud and deceit on the investing public, was a "fraud on the market," and constituted an unlawful manipulation thereof.

Defendant moved to dismiss on the ground that the complaint did not state a cause of action. This motion was denied. We have not reviewed the possible correctness of that ruling as of that date, but later it became clearly incorrect. In March, 1987, three months before trial, we decided Roeder v. Alpha Industries, Inc., 814 F.2d 22 (1st Cir.1987). In that case officers of the defendant bribed an employee of a defense contractor in order to obtain a subcontract. When it was learned that its officers were about to be indicted, defendant released that information to the public. Plaintiff brought a class action on behalf of himself and others who had purchased stock on the market following the bribery, but before the announcement, claiming that its non-disclosure was a violation of the securities laws. The district court dismissed, holding that although there was a duty to disclose material facts, there were no material facts to disclose until an indictment became probable, and that, as to this, defendant acted promptly. We affirmed, but rejected the court's reasoning. Rather, the fact of the bribery itself "reasonable investors might have considered ... to be important information they would want to have before they made their investment decisions." 814 F.2d at 25. However, mere market interest is no basis for imposing liability. We said, at page 26,

The materiality of the information claimed not to have been disclosed ... is not enough to make out a sustainable claim of securities fraud. Even if information is material, there is no liability under Rule 10b-5 unless there is a duty to disclose it.

A duty to disclose "does not arise from the mere possession of non-public information." Chiarella v. United States, 445 U.S. 222, 235, 100 S.Ct. 1108, 1118, 63 L.Ed.2d 348 (1980).

Continuing, at pages 27-28,

Roeder claims that a corporation has an affirmative duty to disclose all material information even if there is no insider trading, no statute or regulation requiring disclosure, and no inaccurate, incomplete, or misleading prior disclosures. The prevailing view, however, is that there is no such affirmative duty of disclosure....

Roeder relies on the "fraud on the market" theory, which has been employed by a number of courts in nondisclosure cases, for his argument that there is an affirmative duty to disclose material information to the public. [cit. omitted] Contrary to Roeder's claim, the fraud on the market theory has nothing to do with an affirmative duty to disclose material information. It only addresses ... reliance.... In every fraud on the market case Roeder cites, there was a duty to disclose because of misleading reports or statements....

In sum, Roeder's complaint does not allege facts that, if proved, would establish Alpha had a duty to disclose the alleged illegal payments.

It would seem difficult to find language, or a holding, that more closely tracked, and completely invalidated, both aspects of plaintiffs' complaint. Notwithstanding, in total disregard, plaintiffs' opening, trespassing at length on the court's own prerogative, informed the jury that the law was that it could find an unfulfilled duty to disclose if it found that what defendant failed to disclose about Polavision would have been material to the investing public. ¹ At the side bar, at the close of the opening, defendant correctly pointed out that there had been no indication that defendant had traded in its own stock, or had made a misrepresentation, or had violated any reporting requirements, and moved for a directed verdict pursuant to Roeder, of which it had previously given the court a copy. The court, unhappily, failed to see that plaintiffs' case was dead on arrival, and denied the motion without comment.

Nor did Roeder stimulate plaintiffs to change their tack, and meet Roeder, by claiming "inaccurate, incomplete, or misleading prior disclosures." Rather, in a twelve day trial, they precisely followed their opening, alleging, simply, nondisclosure of material information. As summarized in their final argument,

Polaroid ... violated the federal securities laws which require full disclosure so that people who purchase and sell securities do so on a fair playing field; that people have the same information and people can make their investment decisions based on having all of the information and having truthful information.... [Y]ou have to find that Polaroid had adverse information, that information was material--i.e., that it was important--and that Polaroid knowingly and deliberately withheld it. And that's all we're asking you to do here. (Emphasis supplied).

The summation was not an inadvertence, but was in accord with plaintiffs' own testimony.

Q. Now, Mr. Backman, in this action you are not claiming, are you, that the financial information put out by Polaroid was in any way false and misleading, are you?

A. I think you'll have to refer to the complaint. I believe the failure to disclose is just as improper as providing false information. And I believe the essence of my suit deals with the failure to disclose.... I do claim it was false and misleading because the failure to disclose is just as misleading a (sic) improper disclosure.

This, of course, is not so. "Silence, absent a duty to disclose, is not misleading under Rule 10b-5." Chiarella, ante. ² Plaintiffs' summation was followed by the court's charge, equally contrary to Roeder. ³

TRANSITION

We have gone into this at length, not so much to show the emptiness of plaintiffs' first claim--agreed to by the full panel--but to accent our finding that there had been no falsity or misleading by defendant in any respect. In eight years of preparation and twelve days of trial, the words misrepresentation and misleading never crossed plaintiffs' lips, even when challenged by defendant's citation of Roeder, except to deny that they were claimed. Surely in plaintiffs' four law firms,...