How Strong is “Very Strong”?

The U.S. Court of Appeals for the District of Columbia only hears a small number of securities cases, which means that it is often playing catch-up on the relevant legal standards.  In In re Harman Int’l Industries, Inc. Sec. Litig., 2015 WL 3852089 (D.C. Cir. June 23, 2015), the court appears to have issued its first decision addressing (a) the PSLRA’s safe harbor for forward-looking statements and (b) the concept of corporate puffery.

(1) Safe Harbor – The PSLRA’s safe harbor renders forward-looking statements inactionable if they are “accompanied by meaningful cautionary statements.”  The court, citing Second Circuit and Seventh Circuit precedent, held that cautionary language cannot be meaningful if it is misleading in light of historical facts.  For example, “[i]f a company were to warn of the potential deterioration of one line of its business, when in fact it was established that that line of business had already deteriorated, then . . . its cautionary language would be inadequate to meet the safe harbor standard.”

While Harman had warned investors about the risk that its products could become obsolete and had reported growing inventories of its personal navigation devices (PNDs), the court found that the complaint sufficiently alleged that Harman already knew (but failed to disclose) that it was experiencing a serious inventory obsolescence problem related to those products.  Moreover, the court’s conclusion that the safe harbor could not be invoked was “reinforc[ed]” by the fact that Harman made no changes to its cautionary statements during the relevant time period, suggesting that the cautionary language was merely boilerplate.

(2) Puffery – The court agreed with the general legal proposition that corporate puffery (i.e., “generalized statements of optimism that are not capable of objective verification”) is immaterial to investors.  In this case, however, the supposed puffery consisted of a statement that “sales of aftermarket products, particularly PNDs, were very strong during fiscal 2007.”  The court found that this statement was “tied to a product and a time period” and therefore was “not too vague to be material.”  Although defendants argued that “very strong” lacked a standard against which it could be assessed, the court noted that nothing in the case law “purports to render inactionable any statement that does not contain its own metric.”

Holding: Dismissal of complaint reversed as to statements at issue.