Wednesday, August 03, 2022

PSLRA safe harbor protects some yearly estimates as forward-looking statements, court rules

By Lene Powell, J.D.

Estimates by a medical company about the number of nerve injuries and surgeries occurring “each year” were forward-looking statements protected by the PSLRA safe harbor, a three-judge panel of the Eleventh Circuit ruled. In context, the estimated annual number of procedures was at least in part a prediction about the number of injuries requiring nerve repair procedures likely to occur “each year” in the future. Accordingly, the panel affirmed the dismissal by the district court (Einhorn v. Axogen, Inc., August 1, 2022, Brasher, A.).

Yearly estimates. Axogen is a medical technology company specializing in “nerve repair” products. Axogen’s leading product is Avance Nerve Graft, a product used to support nerve regeneration. In connection with two stock offerings, Axogen stated that it:
  • Believes that more than 1.4 million people suffer traumatic injuries to peripheral nerves each year; and
  • Estimates that over 700,000 extremity nerve repair procedures result.
A short seller investigating Axogen published a research report in December 2018 challenging Axogen’s claims about the frequency of peripheral nerve injury repair procedures and the size of Axogen’s market. The report concluded that there were only 28,000 peripheral nerve injury repair procedures each year in the U.S. and that Axogen’s total market for Avance in trauma cases was only 52 million dollars—almost 20 times less than the market Axogen represented to investors during the class period. The release of the short seller’s report caused a market shock, causing a stock drop from $27.53 to $17.09 per share within a few days.

Investors filed a class action suit alleging that Axogen had misled investors about the estimated number of procedures and market size. The district court dismissed the complaint with prejudice, holding that the challenged statements were: (1) forward looking and protected by the safe-harbor provision, 15 U.S.C. § 78z-2, and in the alternative; (2) non-actionable statements of opinion under Omnicare. The district court further found the plaintiffs had failed to show scienter. The issue on appeal was limited to whether Axogen’s statements concerning the frequency of nerve injuries and peripheral nerve injury repair procedures are shielded from liability.

Forward-looking statements protected by safe harbor. The panel first found that in context, the statements were forward-looking. Although the phrase “each year” could be used in a historical context, these statements here were made in a predictive context. The “each year” statement was, at least in part, a prediction about the number of injuries requiring nerve repair procedures that are likely to occur “each year,” including the current year, the year after that, and the year after that, said the panel.

Buttressing this conclusion, as the plaintiffs conceded, the statements were used to support Axogen’s predictions about the size of the market that “could be serviced” by its products. The only reason Axogen made the statements—and the only reason the plaintiffs found them material—was to predict the size of the going-forward or anticipated market for Axogen’s products. Those market-size predictions were about “future economic performance” and are defined as forward-looking statements under the statute, said the panel.

Next, the panel found that the statements’ forward-looking aspect was not severable from their present-tense or historical implications. To the extent the phrase “each year” may have both forward and backward-looking components, the phrase was not readily severable into “distinct present-tense and forward-looking components.”

In the next step of its analysis, the panel found that the forward-looking statements were protected by the PSLRA safe harbor. The panel agreed with the district court that the plaintiffs failed to show “actual knowledge that the statements were false or misleading.” The plaintiffs had made only cursory allegations to this effect, and in fact had disclaimed any allegation that Axogen intentionally misrepresented anything.

The plaintiffs’ argument that the statements were not accompanied by “meaningful cautionary statements” could not rescue the claim. Under Harris, “even if a forward-looking statement has no accompanying cautionary language, the plaintiff must prove that the defendant made the statement with ‘actual knowledge’ that it was false or misleading.”

Concurrence on alternate grounds. Circuit Judge Lagoa wrote separately to concur on the alternative basis that the statements at issue were clear examples of nonactionable statements of opinion under Omnicare. The use of the phrase “We believe” coupled with the use of inherently imprecise phrasing should have triggered the purchaser to realize that Axogen was reciting an opinion in the form of an estimate.

Lagoa concluded that the plaintiffs could not show that Axogen believed the statement to be false because they had expressly disclaimed any allegations that Axogen’s opinion was not honestly held. Further, the plaintiffs did not challenge whether referenced studies exist (they do) or whether Axogen reviewed those studies (it did). Finally, Lagoa concluded that the plaintiffs had failed to state a claim under the omissions provisions.

Dismissal affirmed. Accordingly, because the panel agreed with the district court’s ruling, the dismissal of the claim was affirmed.

This is case No. 21-11246.