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This Sheppard Mullin blog discusses the Third Circuit’s recent decision in In re Ocugen, Inc. Securities Litigation in which a three-judge panel repealed its decades old “Oran-Burlington rule.” The Third Circuit, unlike the Second and Ninth Circuits, had previously applied a categorical defense to securities fraud claims — “if a company’s stock price did not decline (or quickly recovered) after a purported corrective disclosure, the misstatement was immaterial as a matter of law.”

The Oran-Burlington rule originated in the Third Circuit’s 1997 decision in In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410 (3d Cir. 1997), and its 2000 decision in Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000). The rule established a test for determining the materiality of alleged misstatements: if the company’s stock price exhibited little or no movement (or a quick rebound) after a corrective disclosure, then the misstatement was immaterial. Both Burlington and Oran rested on a strict application of the efficient market hypothesis, which posits that markets immediately incorporate any material information into stock prices, such that the absence of a price movement following a disclosure indicates the market did not consider the disclosure material.

In Ocugen, the Third Circuit held that the Supreme Court’s later decision in Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011), foreclosed a bright-line materiality test based solely upon stock-price movement (or lack thereof). The panel traced the origins of the materiality standard to TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), in which the Supreme Court held that an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by a reasonable investor as having significantly altered the “total mix” of information made available. Twelve years later, in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court adopted the same standard for Section 10(b) claims while rejecting a Third Circuit bright-line rule that deemed pre-merger discussions per se immaterial until the parties reached an agreement-in-principle on key terms. In Matrixx, the Supreme Court rejected another categorical rule, this time a Seventh Circuit rule that rendered statistically insignificant adverse event reports per se immaterial, reaffirming that materiality requires a fact-specific inquiry.

The blog notes that this decision removes a barrier to claims in the Third Circuit. But it’s important to note that the case was brought following the announcement that the company would restate 15 quarters of financial statements. The Third Circuit vacated the district court’s judgment and, despite the announcement that the financials were “materially misstated,” on remand, instructed the district court to assess the misstatements under the “total mix” standard.

The Court cautioned that it was not replacing the Oran-Burlington rule with another categorical rule; thus, bare allegations of a restatement that occurs when errors are material to the prior period financial statements, without explanation of what the restatement means, may still fail to meet the materiality standard. [. . .] [T]he decision preserves materiality as a meaningful ground for defense, especially given the court’s warning that restatements are not per se proof of material falsity.

– Meredith Ervine