In re Align Technology, Inc. Securities Litigation

Background

Lead plaintiff Macomb County Employees’ Retirement System sued Align Technology, Inc., Joseph M. Hogan, John F. Morici, and Julie Tay. The amended complaint alleged that Align designs, manufactures, and markets Invisalign removable braces and iTero dental scanners. It alleged that, during the class period from April 25, 2019, through July 24, 2019, defendants repeatedly told investors that Align’s sales growth in China remained about 70% annually, even though defendants allegedly knew or recklessly disregarded that growth had fallen to 20%–30%.

The amended complaint asserted three claims: (1) a claim against Align, Hogan, and Morici under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5; (2) a Section 20A claim against Morici and Tay; and (3) a Section 20(a) claim against Hogan, Morici, and Tay.

Section 10(b) and Rule 10b-5

The court applied the pleading standards for a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), which asks whether the complaint states a legally sufficient claim. Securities-fraud claims also must satisfy heightened requirements under Rule 9(b) and the Private Securities Litigation Reform Act, including identifying each misleading statement, explaining why it was misleading, and providing particular facts supporting allegations based on information and belief.

The court held that most of the statements attributed to Hogan and Morici were non-actionable corporate puffery. Statements such as describing China as a “great growth market,” reporting “tremendous growth,” and saying that the market had “great economics” were general expressions of optimism that could not be objectively verified. The court noted that Align’s business in China was growing when the statements were made, even if its growth rate had declined. The challenged statements also did not compare current growth with the previously reported 70% annual rate.

The court separately examined statements that were not treated as puffery. It found that the plaintiff had not adequately alleged that Hogan’s statement about competitor Straumann was false when made. The plaintiff also did not show that Morici’s statement about competition represented that competition had no material effect on growth. The court found no sufficient allegations that statements at the May 2019 Stifel Conference, the June 2019 Jefferies Conference, or the June 2019 Goldman Sachs Conference were false when made.

The plaintiff also alleged that defendants omitted information about declining growth, consumer backlash, a tougher consumer environment, and competition in China. The court rejected that theory. It found that later statements by Hogan and Morici about sales becoming more difficult and experiencing some slowdown in June did not establish that growth had already fallen below 30% by the beginning of the class period. The court therefore held that the plaintiff had not adequately alleged an actionable material misrepresentation or omission and had failed to state a claim under Section 10(b) or Rule 10b-5.

Sections 20(a) and 20A

The court held that the Section 20(a) and Section 20A claims also failed because both depended on adequately alleging a primary violation of Section 10(b) or Rule 10b-5. Since the plaintiff had not stated the primary securities-fraud claim, the court concluded that the plaintiff could not state the related control-person or insider-trading claims.

Disposition

Judge Maxine M. Chesney granted defendants’ motion to dismiss and dismissed the amended complaint with leave to amend. The court stated that any second amended complaint had to be filed by April 26, 2021. It continued the case-management conference from April 30, 2021, to June 18, 2021, and required a joint case-management conference statement by June 11, 2021.