P.R. Gov't Emps. & Judiciary Ret. Sys. Admin. v. Volkswagen AG (In re Volkswagen "Clean Diesel" Mktg., Sales Practices, & Prods. Liab. Litig.)

Decision Date25 June 2021
Docket NumberNo. 20-15564,20-15564
Parties IN RE VOLKSWAGEN "CLEAN DIESEL" MARKETING, SALES PRACTICES, AND PRODUCTS LIABILITY LITIGATION, Puerto Rico Government Employees and Judiciary Retirement Systems Administration, Plaintiff-Appellee, v. Volkswagen AG ; Volkswagen Group of America, Inc.; Volkswagen Group of America Finance LLC ; Michael Horn; Martin Winterkorn, Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

Robert J. Giuffra Jr. (argued), Sharon L. Nelles, Suhana S. Han, William H. Wagener, and Elizabeth N. Olsen, Sullivan & Cromwell LLP, New York, New York, for Defendants-Appellants.

Ian D. Berg (argued) and Takeo A. Kellar, Abraham Fruchter & Twersky LLP, San Diego, California; Mitchell M.Z. Twersky, Abraham Fruchter & Twersky LLP, New York, New York; for Plaintiff-Appellee.

Douglas Wilens, Robbins Geller Rudman & Dowd LLP, Boca Raton, Florida; Thomas C. Michaud, Vanoverbeke Michaud & Timmony P.C., Detroit, Michigan; for Amicus Curiae Michigan Association of Public Employees Retirement Systems.

Gideon A. Schor, Wilson Sonsini Goodrich & Rosati PC, New York, New York; Joseph A. Grundfest, The William A. Franke Professor of Law and Business, Stanford Law School, Stanford, California; for Amici Curiae Law Professors and Former SEC Officials.

Deanne E. Maynard and Adam L. Sorensen, Morrison & Foerster LLP, Washington, D.C.; Jordan Eth, Mark R. S. Foster, and James R. Sigel, Morrison & Foerster LLP, San Francisco, California; Daryl Joseffer and Janet Galeria, U.S. Chamber Litigation Center, Washington, D.C.; for Amici Curiae Chamber of Commerce of the United States of America, Securities Industry and Financial Markets Association, and Alliance for Automotive Innovation.

Before: J. CLIFFORD WALLACE and MILAN D. SMITH, JR., Circuit Judges, and JANE A. RESTANI,* Judge.

Dissent by Judge J. Clifford Wallace

M. SMITH, Circuit Judge:

This case arises on interlocutory appeal to address the scope of the Affiliated Ute presumption of reliance in "mixed" securities-fraud cases that allege both omissions and affirmative misrepresentations. Because we conclude the allegations in this case cannot be characterized primarily as claims of omission, we hold that the Affiliated Ute presumption of reliance does not apply. See Affiliated Ute Citizens of Utah v. United States , 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). Accordingly, we reverse the order denying summary judgment to Volkswagen, and remand for the district court to further consider whether a triable issue of material fact exists.

FACTUAL AND PROCEDURAL BACKGROUND
I.

Plaintiff-Appellee Puerto Rico Government Employees & Judiciary Retirement Systems Administration (Plaintiff) is a public pension fund that purchased bonds issued by Defendant-Appellant Volkswagen Group of America Finance, LLC (VWGoAF). Non-party Santander Asset Management LLC (Santander) served as Plaintiff's investment advisor.

Defendant-Appellant Volkswagen AG (VWAG) is an international manufacturer of automobiles. Defendant-Appellant Volkswagen Group of America, Inc. (VWGoA) is a wholly owned subsidiary of VWAG that markets and sells Volkswagen brand vehicles in the United States. Defendant-Appellant VWGoAF is a wholly owned subsidiary of VWGoA that issues debt securities.1 ,2

VWGoAF issued the bonds at issue in this case in three private placements that closed on May 23, 2014, November 20, 2014, and May 19, 2015. VWGoAF issued an Offering Memorandum for each bond offering on May 15, 2014, November 12, 2014, and May 19, 2015, respectively (collectively, Offering Memoranda). Plaintiff alleges that on May 15, 2014, the same day VWGoAF issued its Offering Memorandum for the first bond offering, Santander placed orders to buy approximately $4 million worth of bonds on Plaintiff's behalf.

On September 18, 2015, the United States Environmental Protection Agency and California Air Resources Board issued notices of violation to VWGoA relating to the use of defeat devices in certain Volkswagen diesel vehicles. As has been widely publicized by the media, congressional hearings, and scores of lawsuits, Volkswagen was secretly installing defeat devices in millions of its diesel cars worldwide to mask unlawfully high emissions from regulators and cheat on emissions tests. Following the announcement, market prices of some Volkswagen bonds, including those purchased by Plaintiff, temporarily dipped below par value.

II.

Seeking to recover for losses relating to the bonds, Plaintiff filed this putative securities-fraud class action against Volkswagen alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and Securities and Exchange Commission (SEC) Rule 10b-5, 17 C.F.R. § 240.10b-5. Although this case involves a long procedural history, both in our court and in the district court, the scope of this appeal is narrow. We focus only on the issue certified for interlocutory appeal from the district court's order denying Volkswagen's motion for summary judgment.

Volkswagen moved for summary judgment exclusively on the element of reliance in Rule 10b-5. Volkswagen argued that Plaintiff, despite its allegations, had no evidence that it or Santander relied on the Offering Memoranda, that the Affiliated Ute presumption of reliance did not apply, and that, if did it apply, Volkswagen had rebutted the Affiliated Ute presumption.

The district court denied Volkswagen's motion for summary judgment. The district court did not rule on the issue of direct reliance, instead reasoning that although Plaintiff bases its claims on certain affirmative statements, "Volkswagen's failure to disclose [the defeat device issue] is ultimately what drives Plaintiff's claims" and "[t]he case is best characterized as a nondisclosure case" such that "[u]nder [ Binder v. Gillespie , 184 F.3d 1059 (9th Cir. 1999) ] and [ Blackie v. Barrack , 524 F.2d 891 (9th Cir. 1975) ] ... Affiliated Ute ’s presumption of reliance applies."

Volkswagen moved the district court to reconsider or to certify the decision for interlocutory appeal. The district court certified the decision and ruled that the order denying Volkswagen's motion for summary judgment " ‘involves a controlling question of law as to which there is substantial ground for difference of opinion’ and that ‘an immediate appeal from the order may materially advance the ultimate termination of the litigation.’ " See Reese v. BP Expl. (Ala.) Inc. , 643 F.3d 681, 687–88 (9th Cir. 2011). We then granted Volkswagen's petition for permission to appeal pursuant to 28 U.S.C. § 1292(b).

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. § 1292(b). We review an order denying summary judgment de novo . Alaska v. United States , 754 F.2d 851, 853 (9th Cir. 1985).

ANALYSIS
I.

"Rule 10b–5(b), enacted under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), makes it unlawful [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.’ " Paracor Fin., Inc. v. Gen. Elec. Capital Corp. , 96 F.3d 1151, 1157 (9th Cir. 1996) (quoting 17 C.F.R. § 240.10b–5(b) ). The elements of a Rule 10b-5 claim are: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Halliburton Co. v. Erica P. John Fund, Inc. , 573 U.S. 258, 267, 134 S.Ct. 2398, 189 L.Ed.2d 339 (2014) (citations and internal quotation marks omitted). If one of these elements is missing, the claim fails. See, e.g. , Loos v. Immersion Corp. , 762 F.3d 880, 883 (9th Cir. 2014) (affirming district court's dismissal where plaintiff failed to show loss calculation).

The Supreme Court in Affiliated Ute Citizens of Utah v. United States , 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), removed affirmative proof of reliance as a condition of recovery under certain limited circumstances. In Affiliated Ute , the Court considered whether members of the Ute Indian Tribe needed to prove actual reliance when they alleged "primarily a failure to disclose." See id. at 153, 92 S.Ct. 1456. Specifically, the tribal members alleged that bank officers bought their restricted stock without disclosing that the bank created a secondary market in which that stock could be resold for profit. Id. at 133–39, 92 S.Ct. 1456. This allowed the bank officers to purchase the tribal members’ stock below market value and then sell it on the secondary market for a profit. Id. If required to affirmatively prove reliance under these circumstances, the tribal members would have been forced to prove a speculative negative: that they would have relied on information about the secondary market before selling their stock had the bank disclosed it. Id. The Court held that in such cases, "involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision." Id. at 153–54, 92 S.Ct. 1456. The Court presumed reliance because "[t]his obligation to disclose and this withholding of a material fact establish the requisite element of causation in fact." Id. at 154, 92 S.Ct. 1456.

Since the Supreme Court's decision in Affiliated Ute , we have recognized the presumption of reliance is "generally available to plaintiffs alleging violations of section 10(b) based on omissions of material fact." See Binder v. Gillespie , 184 F.3d 1059, 1063 (9th Cir. 1999) (citing Kramas v. Sec. Gas & Oil Inc. , 672 F.2d 766, 769 (9th Cir. 1982) ). We "embraced the [ Affiliated...

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