In the US, courts have largely found statements of “puffery”, also described as “corporate optimism”, to be non-actionable. In the wake of the #MeToo movement and the Covid-19 pandemic however, plaintiffs are undeterred and the landscape is being re-evaluated.
Puff and Nonsense
Volatile markets are breeding grounds for securities litigation in the US. As markets tumble, the door opens for investors to seek damages from a company and its directors and officers for material misrepresentations made in connection with a sale or purchase of a security.
Historically however, US courts have permitted companies some leeway to discuss their prospects with an optimistic outlook without fear of repercussions. Corporate officials are consequently free to report they “are in a good position” or that they “expect sales to grow in the next quarter” as long as the author is not aware of any information to the contrary. There are other criteria of course, such as the statements being vague and non-specific, as well as future projections being regarded as “opinion” and not statements of fact. This is known as the Doctrine of “Puffery”, which has served as a robust defence to class actions suits for years.
In order for a misrepresentation to be actionable, there must have been a “substantial likelihood” that it would have “significantly altered the total mix of information available”. Therefore, it is considered that general expressions of corporate optimism render the representation inactionable because no reasonable investor could find them important to the general mix of information available.
Historically, misrepresentation class actions have been brought in relation to accounting based allegations. However, in the wake of the #MeToo movement and the Covid-19 pandemic, investors are developing ever more inventive ways of challenging the status quo. In recent months, plaintiffs have brought cases in response to data breaches, sexual-harassment and regulatory investigations (so-called “event-based” securities litigation). Federal courts have therefore been asked to consider statements not just in relation to accounts or financial predictions, but about companies’ Codes of Conduct and Codes of Ethics or Business Ethics.
Developments in the Doctrine
In the 2019 case of Singh v Cigna Corporation, the plaintiffs alleged misrepresentation arising from statements made in Cigna’s Code of Ethics. At the time, Cigna was experiencing difficulties in achieving regulatory compliance, which it is alleged, caused the statements in the Code of Ethics to be misleading. The Court held that generalised statements of that type were mere puffery and the case was therefore inactionable. Nevertheless, partly encouraged by the #MeToo movement, plaintiffs were undeterred.
A subsequent action was brought in re Signet Jewelers Limited Securities Litigation. The company’s Code of Conduct highlighted its commitment to making employment decisions on the basis of merit and eschewing all forms of harassment. At the time, it was alleged that sexual harassment was pervasive in the company particularly amongst the high-ranking officials. When these rumours became public, Signet’s share price fell and the company pointed to its Code of Conduct as reassurance to nervous investors, thereby artificially maintaining the company’s stock price. The judge found that such statements were indeed material and that they were capable of misleading a reasonable investor. Accordingly, the puffery defence was not available to Cigna and the matter later settled for circa $240m.
In another situation, a class action was filed against Inovio Pharmaceuticals, Inc. and its CEO, J. Joseph Kim alleging the company made misleading public statements in connection with a vaccine against the virus. In February 2020, Mr Kim stated publicly that Inovio had developed a vaccine “in a matter of about three hours” and later stated that they would “begin human trials in April 2020”. This led to a surge in the company’s stock price until the company later conceded that it had not developed a fully-functioning vaccine, but had merely “designed a vaccine construct”. The stock price plunged to near its original value, which motivated dissatisfied investors to bring a class action against the company in March 2020.
It is no wonder then that in response to the Covid-19 pandemic, the US Securities and Exchange Commission (“SEC”) issued a statement confirming that disclosures for public companies affected by the Covid-19 pandemic are required under securities laws. Public companies are now required to provide investors with an assessment of the risks to the company arising out of Covid-19 and its plans to address them.
However, provision of information may itself lead companies unwittingly into trouble. In the recent case of Douglas v Norwegian Cruise Line Holdings Ltd, the company, a cruise operator, allegedly downplayed its exposure to the Covid-19 pandemic in a series of public statements. The company proactively issued a press release in February 2020, when the impacts of the virus were becoming clear, stating amongst others that “the Company’s booked position remained ahead of prior year”. The plaintiffs allege that the statements about the company’s performance in the press release were misleading and/or lacked a reasonable basis. It remains to be seen whether they are regarded as merely a general expression of corporate optimism (which would then allow the company to avail itself of the puffery defence) or whether, for example, it was characterised as a guarantee to investors.
Out of Puff
The Norwegian Cruise Line case demonstrates the careful balance companies must strike in issuing statements concerning the effects of the pandemic on its business. We are seeing a strengthening of the disclosure obligations for public companies in the US, presumably because investors will place more reliance on those statements. Will a company’s positive outlook on weathering the Covid-19 storm “significantly alter the total mix of information available” to investors? This is certainly a risk. If a company makes an optimistic statement indicating it will remain buoyant, which then does not materialise, how will the courts view puffery in such statements? Regardless of how generic the statement is, will the SEC’s guidance act as shackles for the Doctrine?
The effects of the pandemic are so widespread that it affects almost every corner of business making it it all the more hazardous to offer the type of optimism that is currently allowed under the puffery doctrine
On 25 March 2020, the SEC issued disclosure guidance on the issues companies should consider as part of their assessment of the impacts of the pandemic. Topics include impacts on capital and financial resources, business continuity planning, product demand and supply chain issues. Companies and their officials have a wealth of points to consider and report on, which makes the opportunity for going beyond mere puffery all the greater.
We will undoubtedly see claims in relation to a company’s readiness to deal with the fallout from the pandemic, and mismanaging and downplaying the impact. Perhaps the most obvious claims are those which arise from a company’s portrayal of its ability to take advantage of the situation, such as in Inovio. The judge in Singh made one point abundantly clear though: the courts are alive to attempts to recast corporate mismanagement cases as securities fraud.
We are a very long way from the end of the pandemic (or at least that appears to be the case at the time of writing), and perhaps from the conclusion of the puffery Doctrine too. How it will play out remains to be seen. One thing is clear however: puffery has become far more than just hot air.
