Friday, August 25, 2023

Again with the corporate scienter

I’ve previously blogged about difficulties that courts have when determining the scienter of a “corporation” in Section 10(b) cases.  The summary judgment decision Roofer’s Pension Fund v. Papa, 2023 WL 5287783 (D.N.J. Aug. 17, 2023), is another example of the genre.

There, the defendants were alleged to have concealed Perrigo’s collusion with other generic drug makers.  By the time the case got to summary judgment, however, the court concluded that the only individual defendants and named speakers had not acted with scienter.  The plaintiffs maintained that scienter could be shown against the corporate entity by virtue of the knowledge of two non-speaking executives, who were alleged to have been complicit in the collusive scheme.  The question, then, was the legal standard the court would use to determine corporate scienter.  I.e., would the non-speaking executives’ scienter be imputed to the corporate entity?

At that point, the court identified a purported difference among circuit approaches, which – the court lamented – was particularly difficult to examine in the summary judgment context because most of the prior decisions were reached on a motion to dismiss:

The narrow approach, applicable in the Fifth and Eleventh Circuits, requires a plaintiff to identify a corporate official responsible for the challenged statement who also possessed scienter…. Judge Walls rejected this narrow approach, finding it would allow corporations to escape “liability through tacit encouragement and willful ignorance,” and because it “fails to address instances where widespread corporate fraud cannot be connected to individual defendants at the pleading stage.”….

The intermediate approach taken by the Sixth Circuit looks to the state(s) of minds of certain employees to determine whether to impute scienter to the corporation. …Under this approach, courts may look to:

  1. The individual agent who uttered or issued the misrepresentation;
  2. Any individual agent who authorized, requested, commanded, furnished information for, prepared (including suggesting or contributing language for inclusion therein or omission therefrom), reviewed, or approved the statement in which the misrepresentation was made before its utterance or issuance;
  3. Any high managerial agent or member of the board of directors who ratified, recklessly disregarded, or tolerated the misrepresentation after its utterance or issuance.

The broad approach, applicable in the Second and Seventh Circuits, allows a plaintiff to establish scienter against a corporation without specifically identifying an individual in a pleading. … Under this approach, scienter can be imputed to a corporation in two ways: (1) from an individual defendant, director, or officer who either made the challenged statement, or who was “involved in the dissemination of the fraud” even if not the speaker; or (2) from the statement itself in those “exceedingly rare instances” where the statement is “so dramatic that collective corporate scienter may be inferred.” …If a plaintiff seeks to impute scienter to a corporation from a person who was “not the actual speaker” of the challenged statement, the plaintiff must establish “connective tissue between those employees and the alleged misstatements.”…

To infer scienter from the statement itself, the statement must be “so dramatic” or extreme to permit an inference that knowledgeable corporate officials approved the statement. In Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702 (7th Cir. 2008), the Seventh Circuit gave an example of such a statement:

        Suppose General Motors announced that it had sold one million SUVs in 2006, and the actual number was zero. There would be a strong inference of corporate                   scienter, since so dramatic an announcement would have been approved by corporate officials sufficiently knowledgeable about the company to know that the                    announcement was false.

…Setting aside these varying approaches, “at the summary judgment stage, ‘[t]o prove liability against a corporation, ... a plaintiff must prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation.’ ”

Plaintiffs seem to believe that Boothe's and Wesolowski's state of minds can be imputed to Perrigo, but they offer no explanation on how. They do not show any connection between Boothe's and Wesolowski's alleged misdeeds and their knowledge of the price-fixing scheme to the challenged statements at issue. Plaintiffs have left this Court clueless because they have not shown, for example, whether Boothe or Wesolowski furnished any information to Papa and Brown, or drafted, reviewed, or approved the challenged statements. … It is truly unfortunate that Plaintiffs have not adequately addressed this theory at this late stage of the case. Nonetheless, as an exercise of caution, and acutely aware that further delay will result, the Court will require additional briefing on the corporate scienter doctrine and the evidence (if any) Plaintiffs rely on to support its corporate scienter argument.

Now, first, the issue of procedural posture is something I highlighted in one of my earlier posts on the subject.  Because the question of corporate scienter comes up a lot in the motion to dismiss context, it’s often hard to tell from the rhetoric what courts are treating as the definition of corporate scienter – what does it mean, substantively, for a corporation to act with intent – versus what kind of facts are sufficient to show it, which, presumably, will vary to some extent on a motion to dismiss vs summary judgment (or trial).

Second, the court faults the plaintiffs for failing to show how these two particular executives may have been involved with any of the allegedly false statements.  And I agree with the court that under prevailing standards in all circuits, if you want to show that a non-speaking individual’s state of mind should be imputed to the corporation, you need to show some kind of connection that individual had to the allegedly false statement. 

My problem with the court’s analysis (and, to be fair, I think it’s taken from earlier decisions) is that it fails to recognize that all of these approaches are the same.  Or at the very least, we do not have enough information about them to determine where they differ.

Substantively, every single one of these approaches requires that there be someone in the corporation who was in some sense “responsible” for the false statement, and who acted with scienter.  The difference between the Second/Seventh Circuit and the others has to do with evidence.  Namely, the Second and Seventh Circuits have explicitly allowed for the possibility that under some circumstances, the plaintiff may be able to create an inference that there was such a person without in fact naming them.  I.e., if a dramatically false statement was approved by the board, you can infer that at least someone on the board knew the statement was false, because there’s no way that kind of information wouldn’t have made it to the board, even if you don’t know which board member(s) it was.

It's the same substantive standard for defining what it means for a corporation to act intentionally as prevails in the other circuits – there was a human being who had scienter and was responsible for the statement – it’s just, the Second and Seventh Circuits have been explicit that the type of proof they require does not necessarily include naming the human.  Of course, since these were motions to dismiss, one might say you need a different proof at the summary judgment stage – but the facts you’re trying to prove remain the same.



Where the circuits might differ has to do with what it means to be “responsible” for a false statement.  Almost certainly, approval by a board level official counts.  Almost certainly, drafting by a high level official, but leaving their name off of it, counts.  But the circuits get very squirrely about what other kinds of internal actions would be sufficient, and whether the responsible person has to have a certain level of authority within the entity.  That’s a potential substantive difference as to what it means for a corporation to act with intent, but it’s not reflected in the court’s opinion or the quotes the court uses.

Ann Lipton | Permalink


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