Howard v. Arconic Inc.

Decision Date21 June 2019
Docket Number2:17-cv-1057
Citation395 F.Supp.3d 516
Parties Martin HOWARD, Plaintiff, v. ARCONIC INC. et al., Defendants.
CourtU.S. District Court — Western District of Pennsylvania

Edwin J. Kilpela, Carlson Lynch, LLP, Pittsburgh, PA, for Plaintiff.

Carrie M. Reilly, Pro Hac Vice, John Barker, Pro Hac Vice, Paul Vizcarrondo, Wachtell, Lipton, Rosen & Katz, New York, NY, Melissa J. Tea, Thomas E. Birsic, K & L Gates LLP, Pittsburgh, PA, for Defendants.


Mark R. Hornak, Chief United States District Judge

In 2017, a tragic fire at Grenfell Tower in London, England, claimed 71 lives and injured 70 more. One of Arconic's architectural products, Reynobond PE paneling, formed part of the Tower's exterior cladding system, and some news outlets reported that the panels contributed to the fire's rapid spread. Plaintiffs allege, on behalf of themselves and a securities class, that a UK-based sales employee had reason to know that the Reynobond PE that Arconic's subsidiary supplied would be improperly used by a third party on that high-rise tower. But this is not a products liability case. Plaintiffs claim that 81 of Arconic's statements in prior SEC filings, customer brochures, and presentations to investors violated federal securities laws by failing to disclose alleged sales of Reynobond PE for unsafe uses. However, Plaintiffs have failed to adequately, plausibly plead that Defendants had knowledge of the facts they allegedly failed to disclose, or that Defendants made materially false or misleading statements or failed to disclose facts they had a duty to disclose, so as to make out a violation of the federal securities laws they invoke. For these and the other following reasons, the Court will grant Defendants' Motion to Dismiss.

A. Facts

For purposes of ruling on the pending Motion to Dismiss, the Court will accept the facts as alleged in the First Amended Complaint as true and review it in its entirety. The Court also may review and consider "documents incorporated into the complaint by reference, and matters of which a court may take judicial notice," including documents required by law to be filed with the Securities and Exchange Commission and press releases. Winer Family Tr. v. Queen , 503 F.3d 319, 327 (3d Cir. 2007) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 323, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) ).1

In reviewing the First Amended Complaint, the Court notes that, for their claims under the Securities Exchange Act of 1934, Plaintiffs must satisfy the heightened pleading requirements established by the Private Securities Litigation Reform Act as discussed in Section III, infra.

Arconic, Inc. ("Arconic" or the "Company") is a global company engaged in "the engineering and manufacturing of aluminum and other lightweight metals into products used worldwide in the aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial industries." (First Amended Complaint, ECF No. 61 ("FAC" or "Complaint") ¶ 19.) Arconic is incorporated in Delaware and its common stock was listed on the New York Stock Exchange at all relevant times. (Ex. 1, ECF No. 72–3 (certificate of incorporation); FAC ¶ 2.) In September 2014, shares of Arconic's Class B Mandatory Convertible Preferred Stock were sold to the public ("Preferred Offering"), pursuant to a registration statement filed with the SEC ("Registration Statement"). (FAC ¶ 74–76.)

One product Arconic manufactures and sells is Reynobond wall cladding. (Id. ¶ 40.) Reynobond is the Company's brand of aluminum composite material ("ACM"), and consists of two thin sheets of aluminum bonded to either side of a non-aluminum core. (Id. ¶ 40.) Arconic manufactured two Reynobond products: Reynobond PE, which featured a polyethylene core, and Reynobond FR, which featured a fire-resistant material at the core. (Id. ) Combined with insulation, panels of Reynobond can be used to form a cladding system affixed to a building's exterior. (Id. ) Reynobond was sold by Arconic's Engineered Products and Solutions business segment until the third quarter of 2015, and then by its Transportation and Construction Solutions segment. (Id. ¶ 214.) Plaintiffs allege that Arconic's sales personnel pushed Reynobond PE, which was cheaper than Reynobond FR, to customers, particularly when engaged in competitive bidding. (Id. ¶ 40.)

According to Arconic's 10-Ks, sales for Arconic's product grouping of "architectural aluminum systems," of which Reynobond PE formed part, accounted for approximately 4 percent of the Company's overall sales in 2013 through 2015, and approximately 8 percent in 2017. (See Ex. 2, ECF No. 72–4 (2013 10-K), at 132 ($977 million out of $23 billion in total sales); Ex. 3, ECF No. 72–5 (2014 10-K), at 134 ($1.002 billion out of just under $24 billion); Ex. 4, ECF No. 72–6 (2015 10-K), at 140 ($951 million out of $22.5 billion); Ex. 6, ECF No. 72–8 (2017 10-K), at 91 ($1.065 billion out of $12.9 billion).)

From May 8, 2010, until April 17, 2017, Defendant Klaus Kleinfeld was the Company's Chief Executive Officer ("CEO") and Chairman of its Board of Directors. (FAC ¶ 20.) In addition to Defendant Arconic, the remaining Defendants are current and former officers and directors of Arconic who signed the Registration for the Preferred Offering (those individuals, together with Kleinfeld, the "Individual Defendants"), and investment banking firms that acted as underwriters for the Preferred Offering (together, the "Underwriter Defendants"). (Id. ¶¶ 25–26.)

On June 14, 2017, a fire broke out at Grenfell Tower in North Kensington, London, England, a 24-story, 67-meter-high tower block of public housing apartments. (Id. ¶ 43.) Seventy-one (71) people died, and over seventy (70) people were injured. (Id. ¶ 45.)

Grenfell Tower had been recently renovated, and in connection with that renovation, Reynobond PE was installed by Harley Facades as part of the building's cladding system in 20152016. (Id. ¶ 47.) A French subsidiary of Arconic, Alcoa Architectural Products SAS (later known as Arconic Architectural Products SAS) ("AAP SAS"), sold the panels to Omnis Exteriors, a fabricator, who cut the panels into shape and supplied them to the Grenfell contractors. (Id. ¶¶ 47, 50.) Approximately 3,125 square meters of Reynobond PE were used to clad the Tower. (Id. ¶ 44.) The cladding was combined with Celotex RS50000 PIR Thermal insulation. (Id. ¶ 47.) Studio E Architects, of Ryton Ltd., oversaw the project. (Id. ¶ 13.) Ryton, who had outbid another bidder, called for the installation of Reynobond PE. (Id. ¶ 48.) Although the initial building plans from 2012 specified zinc cladding, the Kensington and Chelsea Tenant Management Organisation ("KCTMO"), who managed Grenfell Tower, pressured the project manager on the Grenfell renovation to cut costs, and suggested swapping the panels of zinc cladding for panels of Reynobond PE. (Id. ¶ 49.)

Ten days after the fire, on June 24, 2017, The New York Times and Reuters published articles suggesting a link between the fire's rapid spread and Grenfell Tower's cladding system, including Reynobond PE. (Id. ¶¶ 67–68.) These reports also detailed emails from mid-2014 between Deborah French, Arconic's UK sales manager for Reynobond, and executives at the contractors involved in the bidding process for the renovation at Grenfell Tower. (Id. ¶ 68; see id. ¶ 50.) In those emails, French responded to requests from the companies on the availability of samples of five different types of Reynobond panels, all of which were available in the PE and FR versions. (Id. ¶ 68.) Those emails did not refer to how tall Grenfell Tower was, but did refer to other high-rise projects where paneling had been used when discussing the desired appearance for Grenfell Tower. (Id. )

Following these news reports, the price of the Preferred Shares decreased when trading resumed on Monday, June 26th, 2017, trading down as low as $36.50 per share in intraday trading—down nearly $4 per share, or 9.5%, from their close of $40.11 on the evening of Friday, June 23rd, 2017, on the high volume of more than 1.4 million shares trading. (Id. ¶ 70.)

On June 26, 2017, the same day as the stock price drop, Arconic announced that it was discontinuing global sales of Reynobond PE for use on high-rise buildings. (Id. ¶¶ 61, 109.) In that announcement, Arconic stated:

The loss of lives, injuries and destruction following the Grenfell Tower fire are devastating, and our deepest condolences are with everyone affected by this tragedy. We have offered our full support to the authorities as they conduct their investigations.
While the official inquiry is continuing and all the facts concerning the causes of the fire are not yet known, we want to make sure that certain information is clear:
• Arconic supplied one of our products, Reynobond PE, to our customer, a fabricator, which used the product as one component of the overall cladding system on Grenfell Tower. The fabricator supplied its portion of the cladding system to the façade installer, who delivered it to the general contractor.
The other parts of the cladding system, including the insulation, were supplied by other parties. We were not involved in the installation of the system, nor did we have a role in any other aspect of the building's refurbishment or original design.
• While we provided general parameters for potential usage universally, we sold our products with the expectation that they would be used in compliance with the various and different local building codes and regulations. Current regulations within the United States, Europe and the UK permit the use of aluminum composite material in various architectural applications, including in high-rise buildings depending on the cladding system and overall building design. Our product is one component in the overall cladding system; we don't control the overall system or its compliance.
Nevertheless, in light of

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