Plymouth County Retirement System v. Patterson Companies, Inc.

Background

Plymouth County Retirement System, individually and on behalf of similarly situated investors, brought the action against Patterson Companies, Inc. and Scott P. Anderson. The amended complaint asserted claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5, as well as a control-person claim under Section 20(a) against the individual defendants. The court had previously dismissed several other individual defendants.

Plaintiffs alleged that Patterson, Benco Dental Supply Company, and Henry Schein, Inc. agreed to exclude group purchasing organizations from the dental-supply industry. Plaintiffs also alleged that Patterson and its officials made false statements about compliance with antitrust laws, competition with Benco and Henry Schein, and Patterson’s efforts to obtain or develop group purchasing organization contracts. The Federal Trade Commission had determined that Patterson’s agreement with Benco violated federal antitrust laws, according to the opinion.

Plaintiffs alleged that Patterson’s stock price declined after disclosures on November 22, 2016; February 12, 2018; and March 1, 2018. Defendants argued that the declines reflected other business conditions, including problems in Patterson’s animal-health segment, sales-force changes, an enterprise-resource-planning system, and the termination of an exclusive distribution agreement.

The proposed class included people and entities that purchased or otherwise acquired Patterson common stock between June 26, 2013, and February 28, 2018. The proposed class excluded the defendants and specified related people and entities.

Class-certification standard

Under Federal Rule of Civil Procedure 23, a plaintiff seeking class certification must show that the proposed class is sufficiently numerous, shares common legal or factual questions, has representative claims, and will be adequately represented. Plaintiffs must also satisfy one of Rule 23(b)’s additional requirements. They relied on Rule 23(b)(3), which requires common questions to predominate over individual questions and requires a class action to be the superior method of resolving the dispute.

The court explained that class certification is not merely a pleading determination. It may consider merits issues only as far as those issues matter to the Rule 23 requirements.

Rule 23(a) findings

The court found numerosity because Patterson stock traded on the NASDAQ, as many as 105 million shares were outstanding, and more than 1,100 institutional investors owned more than 90% of the stock during the class period.

The court found commonality because class members’ claims involved common questions, including whether defendants engaged in a scheme to defraud, knowingly or recklessly made material misrepresentations or omissions, caused artificial inflation in Patterson’s stock price, and caused damages measurable by a common method.

The court found typicality because the named plaintiffs, like the proposed class members, acquired Patterson securities during the class period at allegedly inflated prices and claimed losses when the alleged fraud was disclosed. The court rejected defendants’ arguments that the named plaintiffs were atypical because some purchases occurred after partial disclosures or because the plaintiffs or their investment managers did not personally read the challenged statements. The court reasoned that those facts did not defeat typicality under plaintiffs’ market-based reliance theory.

The court also found the named plaintiffs adequate. Although they used portfolio-monitoring services and relied on experienced counsel, the court found that they reviewed the complaint, provided knowledgeable witnesses, understood their responsibilities, and actively participated in the litigation.

The court appointed Saxena White P.A. and Robbins Geller Rudman & Dowd LLP as class counsel. It found both firms qualified and experienced in securities class actions and noted that defendants did not dispute their qualifications.

Predominance and reliance

The court found that common issues predominated. Plaintiffs invoked the fraud-on-the-market presumption recognized in Basic Inc. v. Levinson. That presumption may allow securities-fraud plaintiffs to establish reliance collectively when the alleged public misrepresentations affected a stock traded in an efficient market and the purchases occurred before the truth was revealed.

The court found that the alleged statements were public, that the purchases occurred during the relevant period, and that Patterson stock traded in an efficient market. Its reasoning included Patterson’s NASDAQ listing, trading volume, analyst coverage, market makers, eligibility to file a Form S-3, market capitalization, bid-ask spread, public float, and evidence that the stock responded to company-specific news.

Defendants argued that the alleged misstatements had no effect on Patterson’s stock price because the stock did not show statistically significant increases on the dates of the statements. The court rejected that argument at the certification stage, explaining that plaintiffs relied on a price-maintenance theory and had presented evidence of statistically significant declines after the alleged corrective disclosures. The court found that defendants had not produced evidence sufficient to sever the connection between the alleged misrepresentations and the stock-price effects.

The court did not reach plaintiffs’ alternative reliance argument under a separate legal presumption because it found the Basic presumption applicable.

Damages and superiority

The court found that common issues of damages predominated. Plaintiffs’ expert proposed an event-study model that would estimate the fraud-related inflation in Patterson’s stock price on each day of the class period. The court found that the model was consistent with plaintiffs’ liability theory and could be applied using a common methodology. It treated defendants’ objections about the model’s accuracy, disaggregation, and other possible causes of price changes as issues for summary judgment or trial rather than reasons to deny class certification.

The court also found that a class action was superior. The proposed class included thousands of purchasers whose individual damages might not justify separate litigation. The court found no evidence of other related litigation, considered this forum efficient for resolving the claims, and found no class-management problems.

Class-period request and disposition

Defendants asked the court to end the class period on February 12, 2018, rather than March 1, 2018. The court denied that request. It found that the March 1 stock-price decline raised a factual question about whether the market was then recognizing the full effect of the alleged antitrust conduct or responding to other factors. The court held that this issue concerned the merits and loss causation and should not be resolved at the class-certification stage.

The court ordered that Lead Plaintiffs’ motion to certify the class, appoint class representatives, and appoint class counsel was GRANTED. It certified the action as a class action under Rules 23(a) and 23(b)(3), appointed Plymouth County Retirement System, Pembroke Pines Fund for Firefighters and Police Officers, Central Laborers Pension Plan, and Gwinnett County Public Employees Retirement System as class representatives, and appointed Saxena White P.A. and Robbins Geller Rudman & Dowd LLP as class counsel. Judge Michael J. Davis’s order addressed whether the case could proceed as a class action; it did not decide defendants’ ultimate liability or the amount of any damages.