IN RE Talis Biomedical Securities Litigation

Background

Two investor class actions were filed concerning Talis securities purchased in or traceable to Talis’s February 2021 initial public offering. The cases were consolidated, and Martin Dugan, Leon Yu, and Max Wisdom Technology Ltd. were appointed co-lead plaintiffs. The defendants include Talis Corporation and current and former Talis officers and board members who signed the IPO registration statement.

The amended consolidated complaint asserts claims under Sections 11 and 15 of the Securities Act of 1933. It alleges that the registration statement falsely stated or implied that Talis had ordered 5,000 instruments, that those instruments were being manufactured and delivered, and that Talis One was reliable and highly accurate. It also alleges that the registration statement omitted material information about risks involving the reliability of Talis One and the Food and Drug Administration’s concerns about the comparator assay used in Talis’s application for emergency authorization of its COVID-19 test.

Dugan sought certification of a class of persons or entities that purchased or otherwise acquired Talis common stock issued under or traceable to the registration statement and were damaged as a result. At the hearing, plaintiff’s counsel clarified that the proposed end date was January 7, 2022, the date the first lawsuit was filed. The defendants opposed certification, arguing that Dugan was inadequate and atypical and that individualized issues, particularly share tracing, predominated. They also argued that the class period should end when the 180-day lock-up period expired on August 11, 2021.

Rule 23 Requirements

Federal Rule of Civil Procedure 23 requires a plaintiff seeking class certification to show that the proposed class satisfies four requirements: enough members that individual lawsuits are impractical, common legal or factual questions, a representative whose claims are typical of the class, and adequate representation. The plaintiff must also satisfy at least one additional Rule 23 requirement. Dugan relied on Rule 23(b)(3), which requires common questions to be more important than individual questions and a class action to be the best method for resolving the dispute.

The court found numerosity satisfied because Talis sold 15,870,000 IPO shares, its stock traded actively on a national exchange, and the proposed class likely included hundreds or thousands of members. The court also found commonality because the case presented common questions about whether the registration statement contained material misstatements or omissions, whether the individual defendants were controlling persons under Section 15, and whether defendants could establish affirmative defenses.

The defendants challenged Dugan’s adequacy and typicality based on his deposition testimony, investment history, alleged lack of knowledge about the litigation, credibility issues, possible awareness of the March 8, 2021 press release, and purchases after the lock-up period. The court concluded that Dugan was sufficiently involved and knowledgeable about the lawsuit, understood his responsibilities, communicated regularly with counsel, and could explain the alleged misstatements and omissions in general terms. The court also found that the cited credibility issues did not make him inadequate because they were not directly relevant to the claims.

The court rejected the argument that Dugan’s investment motivations created a conflict or made his claims atypical. It explained that reliance is generally not an individual issue in a Section 11 case and that materiality is judged by an objective standard. The court also concluded that the possibility Dugan had seen media coverage of the March 8 press release did not defeat adequacy or typicality. Whether the press release disclosed all of the information allegedly omitted could be resolved on a class-wide basis, and the actual-knowledge defense applied to only one alleged misstatement or omission.

Predominance and Superiority

The court found that common questions predominated. The common issues include whether the registration statement contained an omission or misrepresentation, whether it was material, and how damages should be calculated. The court rejected defendants’ argument that individual questions about investors’ knowledge of the March 8 press release predominated, reasoning that the defense concerned only one part of the case and that the content and coverage of the press release could be evaluated for the class as a whole.

The court also found that a class action was superior to separate lawsuits. It concluded that class treatment would improve class members’ access to relief, avoid requiring each member to litigate the same substantial issues separately, and provide benefits that outweighed the difficulties of managing the class action.

Class Period and Tracing

Section 11 requires a purchaser to be able to trace the purchased security to the relevant registration statement. The parties disputed whether purchases after August 11, 2021, could be traced after pre-IPO and IPO shares became available and were commingled on the open market. Plaintiff offered expert evidence and proposed using trading data and accounting methods to establish tracing. Defendants argued that the proposed methodology was unreliable and that tracing was impossible under the system for holding securities through the Depository Trust Company.

The court certified a class limited to purchases made between February 11, 2021, and August 11, 2021, inclusive, because those purchases were made during the lock-up period and presented no tracing issue. The court did not resolve the parties’ objections to the tracing experts and evidence. It stated that plaintiff could renew the request to certify a class covering purchases from August 12, 2021, through January 7, 2022, after receiving discovery that plaintiff contended would demonstrate class-wide tracing.

Disposition

The court granted plaintiff’s motion for class certification. It certified the following class: all persons or entities that purchased or otherwise acquired Talis common stock issued pursuant to or traceable to the registration statement and prospectus issued in connection with Talis’s February 11, 2021 initial public offering, between February 11, 2021, and August 11, 2021, inclusive, and were damaged thereby. The class excludes the defendants and their affiliates or subsidiaries; current and former Talis officers and directors and their immediate family members; defendants’ liability insurance carriers and related entities; entities controlled by a defendant; Talis employee retirement and benefit plans; and the legal representatives, heirs, estates, agents, successors, or assigns of those excluded persons or entities.

The court appointed Martin Dugan as Class Representative and Bleichmar Fonti & Auld LLP and Pomerantz LLP as Co-Class Counsel.