IN RE RESTORATION ROBOTICS, INC. SECURITIES LITIGATION

Background

This putative class action arose from Restoration Robotics’ October 2017 initial public offering. Lead Plaintiff Edgardo Guerrini purchased Restoration common stock under the offering materials and alleged that the registration statement and prospectus contained materially false or misleading statements about the company’s marketing support, patient leads, the functionality and quality of the ARTAS hair-restoration system, the number of systems installed, and procedure-based revenue. He also alleged that the defendants failed to disclose known trends or uncertainties required by Item 303 of Securities and Exchange Commission Regulation S-K.

The defendants included Restoration Robotics, individual directors and officers, venture-capital defendants, and underwriters. Restoration and the individual defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The underwriter and venture-capital defendants moved to join the dismissal motion. The plaintiff did not oppose those joinder motions. The court also considered the defendants’ request for judicial notice of Restoration’s publicly filed prospectus.

Judicial Notice and Joinder

The court granted the request for judicial notice because the prospectus was publicly available and was repeatedly referenced in the complaint. The court also granted the underwriter and venture-capital defendants’ joinder motions.

Section 11 Claims

Section 11 of the Securities Act permits purchasers to seek relief for material misrepresentations or omissions in a registration statement. The court held that Statements 1–3, which generally described Restoration’s marketing strategy, goals, and intentions, were nonactionable corporate optimism or “puffery”—vague opinions or aspirations on which a reasonable investor would not rely. The court also found that the prospectus included cautionary disclosures and did not turn those statements into misleading half-truths. The court therefore granted the motion to dismiss as to Statements 1–3.

The court granted the motion to dismiss as to Statements 1, 4, and 5 because the plaintiff did not adequately plead falsity. The allegations challenged the effectiveness or quality of Restoration’s marketing efforts rather than showing that the statements themselves were false. The court also granted the motion as to Statement 6, concerning the number of staff needed for ARTAS procedures, because the plaintiff had not shown the statement was false. The dismissal of Statement 6 was without leave to amend, as stated by the court.

The court denied the motion as to Statement 7, concerning the ARTAS needle’s precision and incision. The complaint alleged, through a confidential witness identified as a former employee, that the needles were faulty and damaged hair grafts. At the motion-to-dismiss stage, the court drew reasonable inferences for the plaintiff and found that the allegations plausibly pleaded falsity.

The court granted the motion as to Statement 8, concerning the system’s ability to dissect grafts and increase hair yield. The plaintiff did not allege that the reported clinical observations were false or connect physicians’ practical experiences to the truth of those observations.

The court denied the motion as to Statement 9, concerning approximately 34% growth in the company’s installed base. The plaintiff plausibly alleged that the figure included systems sold to international distributors but left in warehouses and not installed or producing procedure-based revenue. The court found that the allegation could make the installed-base disclosure misleading.

The court granted the motion as to Statement 10, concerning reasons procedure-based fees did not grow proportionally with the installed base. The court held that the statement identified several possible factors and did not claim that limited use was the sole cause of the revenue difference. The plaintiff therefore failed to plead that Statement 10 was false or materially misleading.

Section 15 Claim

The court held that the plaintiff stated a Section 15 claim because the complaint stated an underlying Section 11 claim. The opinion’s surviving Section 11 theories included Statements 7 and 9.

Item 303 Claim

Item 303 requires disclosure of known trends or uncertainties reasonably likely to have a material effect on sales, revenue, or income. The plaintiff identified alleged trends involving warehousing by foreign distributors, customers abandoning the ARTAS system, and physicians delaying purchases while awaiting a new feature.

The court granted the motion to dismiss the Item 303 claim. It found that the complaint alleged only one specific warehousing incident, did not plausibly show that defendants knew of a broader abandonment trend, and did not adequately allege that physicians were delaying purchases or that defendants knew of such a trend when the prospectus was published. The court also noted that the prospectus disclosed Restoration’s limited commercial history, significant losses, and business risks.

Disposition and Amendment

The court granted in part and denied in part the defendants’ motion to dismiss. The court stated that the claims based on Statements 1–6, 8, and 10 were inadequately pleaded. Because amendment might cure the deficiencies, the court allowed amendment of those dismissed claims except the Statement 6 claim. The court also stated that the plaintiffs had leave to amend and set November 14, 2019, as the deadline. It warned that failure to amend or cure the deficiencies would result in dismissal of the dismissed claims with prejudice. The court did not authorize new claims or parties without court permission or the parties’ stipulation.