As I noted at the beginning of the U.S. Supreme Court’s current term in my summary of securities cases on the Court’s docket, one of the three key securities cases the court was to consider this term was Leidos, Inc. v. Indiana Public Retirement Systems. As discussed in greater detail here, this case, which was to be argued on November 6, 2017, was to address the recurring question of whether the failure to make disclosure required by Item 303 of Reg. S-K is an actionable omission under Section 10(b) and Rule 10b-5. However, as a result of developments in the case, the case is now in “abeyance,” oral argument in the case has taken off the calendar, and the case ultimately may be removed from the court’s docket altogether.
Item 303 of Reg. S-K states in pertinent part that in its periodic reports to the SEC, a company is to “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a materially favorable or unfavorable impact” on the company. Guidance provided by the SEC on Item 303 clarifies that disclosure is necessary where a “trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations.”
The federal circuit courts have reached contrary conclusions on the question of whether or not Section 303 creates an affirmative duty of disclosure. The Second Circuit has held that Item 303 does create an actionable duty of disclosure, while the Ninth and Third Circuits have held that it does not. The court agreed to take up the Leidos case on a writ of certiorari to the Second Circuit in order to address what the petitioner described as a “deep split of authority” on the question. The existence of the split, the petitioner argued, creates the possibility of a divergence of outcomes based simply on the court in which a case is filed.
The Leidos case and its pendency before the Supreme Court attracted a great deal of attention, although not all of it favorable to the Court’s consideration of the questions presented. For example, Stanford Law Professor Joseph Grundfest, in a law review article about the case (discussed here), referred to the case as a “nothing burger,” because, he contended, regardless of which way the Court comes out in the case, the outcome will make little practical difference.
My own view about Leidos was that the case was important not only because of the split in the circuits but also because the question of whether or not Item 303 creates an actionable disclosure duty comes up all the time. Plaintiffs armed with the benefit of hindsight frequently attempt to allege in reliance on Item 303 that the securities suit defendant has failed to allege known risks, trends, or uncertainties.
While I continue to believe these issues are important, it now appears that the Supreme Court likely will not be considering these issues this term.
On October 6, 2017, after the case had been fully briefed and just a month before oral argument was scheduled in the case, the parties filed with the Supreme Court a Joint Motion to Recalendar Argument and to Stay Proceedings (here). In their Motion, the parties advised the Court that they had “reached an agreement in principle to settle this dispute,” and that the parties “are now preparing the settlement documentation.” The parties requested that the Court remove the case from the oral argument calendar and hold the case in abeyance while the parties take steps to obtain settlement approval. The parties stated that they would advise the Court before May 31, 2018 whether a settlement has been approved. They asked that if the district court has not granted final approval that the Supreme Court set the case for oral argument in the October Term 2018.
On October 17, 2017, the Supreme Court granted the parties’ motion to hold the case in abeyance, and further ordered the same day that the case be removed from the November 6, 2017 argument calendar.
As the Goodwin Proctor law firm noted in its October 24, 2017 summary of these developments in the case, unless the district court declines to approve the parties’ settlement, this outcome of the case “leaves pending the hotly debated circuit split between the Second Circuit, on the one hand, and the Third and Ninth Circuits, on the other hand,” as to whether Item 303 creations an actionable duty of disclosure.
In its own October 24, 2017 memo about the developments in the Leidos case, the Sherman & Sterling law firm noted that “investor plaintiffs will like seek to capitalize on the Second Circuit’s decision by continuing to bring Item-303 base claims within the Second Circuit,” in light of which, the law firm memo suggests, “eventual review by the Supreme Court remains likely.”
The Hunton & Williams law firm, in its October 2017 memo about Leidos, speculated that as a result of the Leidos case coming off of the Court’s docket, the existing circuit split will likely deepen, adding that “Already district courts outside the Second and Ninth Circuits have had to choose which approach to follow, with predictably inconsistent results. As new cases continue to be heard, other circuits will likely weigh in on the question eventually. Undecided circuits may well take notice of the SEC’s amicus brief in the case, which supported the position advanced by the investor plaintiffs.”