This week, we take a look at one decision considering when California law requires application of California’s statute of limitations, and another reiterating the strict standard for pleading scienter in a securities fraud case.
RUSTICO v. INTUITIVE SURGERY, INC.
The Court holds that under California choice-of-law principles, California’s statute of limitations applies when a state resident is sued in California and the conflicting out-of-state law is not intended to protect plaintiffs.
Panel: Judges Wardlaw, Bea, and Caine, Jr. (W.D. La.), with Judge Bea writing the opinion.
Key highlight: “Both California and Connecticut’s statutes of limitations are designed to protect in-state defendants and courts by preventing the litigation of stale claims and limiting in-state liability. But the Rusticos, now citizens of Florida, attempt to thwart this policy by reviving their stale claims and extending in-state liability. The application of only California’s statute of limitations, which would bar the claims, advances the purpose of protecting California defendants and California courts.”
Background: Plaintiff Jean Rustico, then a resident of Connecticut, underwent surgery in which the doctor used a surgical robot. The robot malfunctioned, causing Rustico internal injuries. Intuitive had designed and manufactured the robot in California, where it is headquartered.
Approximately a year after the surgery, Intuitive proposed that Rustico enter into a tolling agreement: Rustico would agree to delay filing suit and bring any suit in the Northern District of California, while Intuitive would toll the statute of limitations for three months starting from date Rustico provided it her name. The agreement expressly provided, however, that it did not “waive or release any statute of limitations defense that could have been asserted before the date of the tolling period.” By the time Rustico entered the agreement and provided Intuitive her name, California’s two-year statute of limitations had already run, but Connecticut’s three-year period had not. When Rustico and her husband later brought suit, the district court dismissed their claims as time-barred.
Result: The Ninth Circuit affirmed. As the Court explained, the outcome of the suit turned on which state’s statute of limitations applied: California’s, or Connecticut’s. Because this was a diversity case, California’s choice-of-law rules applied. And California has adopted a “governmental interest” standard for resolving such questions, asking whether the laws of the relevant states conflict, the interests the competing jurisdictions have in the application of those laws, and the “comparative impairment” of those interests.
Applying this standard, the Court concluded it had “no doubt” that California had a “legitimate interest” in the application of its statute of limitations. That was because both of the law’s central purposes—protecting states residents and courts from stale claims—would be furthered if it were applied. But, the Court continued, it could not accept Intuitive’s proposed rule: that the California statute of limitations must always be applied whenever a California resident is sued in California. Rather, the Court explained, in some circumstances, another state might have a greater interest in the application of its law.
Here, however, that was not the case, because Connecticut had no special interest in the application of its statute of limitations. The Court rejected the Rustico’s argument that Connecticut had created special protections for product-liability plaintiffs, noting that the same 3-year limit applies to all tort claims. And, the Court noted, Connecticut’s statute of limitations was designed to protect defendants, not plaintiffs. The Court distinguished cases involving laws (like the discovery doctrine) designed to extend the period in which a plaintiff could file suit. Because, the Court concluded, only California had a legitimate interest in the application of its statute of limitations, California law applied.
Finally, the Court also rejected Rustico’s argument based on the tolling agreement. As the Court declared, while Rustico characterized the agreement as a “clever bait and switch and gotcha trap,” she “did not identify any words or phrases in the Tolling Agreement that would lead to such conclusions." For similar reasons, the Court rejected Rustico’s argument that Intuitive should be equitably estopped from asserting a statute of limitations defense.
DANIELA PRODANOVA v. H.C. WAINWRIGHT & CO.
The Court holds a securities fraud complaint did not offer a plausible motive for defendants’ actions or provide particularized allegations of scienter, and thus was properly dismissed.
Panel: Judges Gould, Lee, and VanDyke, with Judge Lee writing the opinion.
Key Highlight: “As its name suggests, a securities fraud lawsuit requires a showing of an intent to defraud investors. Mere negligence—even head-scratching mistakes—does not amount to fraud. So if the complaint fails to plead a plausible motive for the allegedly fraudulent action, the plaintiff will face a substantial hurdle in establishing scienter.”
Background: H.C. Wainwright (HCW) is an investment bank specializing in life sciences and biotech. In October 2017, pharmaceutical producer MannKind announced the FDA had approved a favorable labeling change for the company’s only FDA-approved drug, Afrezza. Mannkind’s stock jumped 128% in three days. About a week later, an HCW analyst published a report setting a $7 buy target for MannKind shares. The same day, MannKind stock surged another 26% to $6.71 a share. But later that evening, HCW announced that it would act as the placing agent for a dilutive offering that priced MannKind stock at $6 per share. Unsurprisingly, MannKind’s stock price dropped the following day, down to $5.47.
A securities fraud class action lawsuit against the investment bank soon followed. The complaint alleged that the bank fraudulently sought to inflate the price of the company’s stock price. The district court ultimately dismissed the suit, concluding that plaintiffs had not adequately pleaded scienter.
Result: The Ninth Circuit affirmed. First, the Court explained that a complaint alleging fraud must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Such a strong inference requires allegations that the defendant made false or misleading statements with an “intent to deceive, manipulate, or defraud,” or with “deliberate recklessness”—meaning “an extreme departure from the standards of ordinary care.” Under that exacting standard, a complaint will survive a motion to dismiss “only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.”
The Court concluded the plaintiffs here failed to meet that standard. For starters, plaintiffs’ theory about HCW’s motives didn’t add up. Inflating MannKind’s share price would not have affected HCW’s compensation for the offering, which was based on gross proceeds: “HCW would have received the same compensation for a $61 million Offering, no matter if the share price was $6 or $7.” If anything, the Court pointed out, “HCW would stand to lose more from its allegedly fraudulent actions than it would gain.” Losing MannKind as a client and suffering public criticism would’ve hardly been worth a slightly higher return from a single transaction. Thus, the Court continued, the glaring conflict between the report and the offering was most plausibly nothing more than an embarrassing snafu.
Nor did plaintiffs sufficiently plead that the individual defendants had the requisite scienter. There was no indication the report’s author knew about the offering. No facts indicated the bank’s CEO or COO had any role in writing, publishing, or reviewing the report. And no member of HCW’s compliance department had any alleged link to the report or offering. The core operations theory—which presumes that “corporate officers have knowledge of the critical core operation of their companies”—was also of no help to plaintiffs. There were no specific allegations about the officers’ involvement, just the conclusory assertion that they “would have” been involved in creating and publishing the report. That, the Court said, wasn’t enough. Nor was HCW’s failure to promptly correct the report. Considering all the allegations in aggregate, the Court concluded that “the lack of a plausible motive as well as the lack of particularized facts showing any individual’s knowledge or deliberate recklessness about the Report’s falsity at the time of its publication" foreclosed plaintiffs’ fraud claims.