Reiner v. Teladoc Health, Inc.

Background

Jon Reiner brought this proposed securities-fraud class action on behalf of people who purchased or otherwise acquired Teladoc securities between March 3, 2016, and December 5, 2018. After Mark Hirschhorn’s workplace affair with a lower-level Teladoc employee became public, Teladoc’s stock price fell 6.69%.

The lead plaintiffs alleged that Teladoc, Hirschhorn, and Teladoc’s chief executive officer, Jason Gorevic, violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. They claimed that the defendants made misleading public statements about Teladoc’s ethics program and code of conduct, and about the company’s dependence on its senior management team. They also alleged that Teladoc retaliated against employees who reported the relationship.

Report and Recommendation

Magistrate Judge Barbara Moses recommended granting defendants’ motion to dismiss. She concluded that the alleged ethics statements were nonactionable “puffery”—general, aspirational statements that are too vague to support a securities-fraud claim—and that the senior-management disclosures were not misleading. She did not reach whether the defendants acted with the required fraudulent intent, known as scienter. She also recommended dismissing the control-person-liability claim under Section 20(a) and denying leave to amend.

Court’s analysis

Judge Woods reviewed the portions of the recommendation to which the lead plaintiffs objected independently. He adopted the recommendation’s conclusions concerning the senior-management statements, scienter, and control-person liability.

The court held that the lead plaintiffs could not rely on two provisions in Teladoc’s Code of Business Conduct and Ethics because they had not specifically identified those provisions as fraudulent in the Second Amended Complaint. Securities-fraud complaints must identify each allegedly misleading statement with particularity under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act.

For the ethics statements that were adequately identified in the complaint, the court held that the plaintiffs had not sufficiently alleged materially false or misleading statements. The court agreed that the statements were generally worded assurances about integrity, compliance, and ethical conduct, and that their aspirational language did not invite reasonable investor reliance. The court also held that the alleged misconduct did not plausibly show that Teladoc held none of the aspirations expressed in its policies.

The court disagreed with some of Judge Moses’s treatment of the factual allegations. In particular, Judge Woods stated that the allegations concerning the possible retaliation against Amy McKay were sufficient at the motion-to-dismiss stage and that some allegations about another employee were thin but should not be rejected by discrediting their factual basis. The court also declined to adopt the recommendation’s characterization of the company’s response to the affair. The court nevertheless concluded that these differences did not change the result because the provisions most directly concerning immediate discipline and retaliation had not been specifically pleaded as fraudulent.

The court expressly took no position on whether the lead plaintiffs could state a securities-fraud claim if they specifically identified those provisions in an amended complaint.

Disposition

The court granted defendants’ motion to dismiss the Second Amended Complaint. It departed from the recommendation concerning amendment and granted the lead plaintiffs leave to amend. The court directed them to file any amended complaint within thirty days of the order. The opinion does not state that the dismissal was with or without prejudice.