When faced with a lawsuit, it’s common for a public company to argue in the court of public opinion that the claims asserted against it are "without merit." However, as a recent U.S. District Court of the District of Massachusetts ruling in the case of City of Fort Lauderdale Police & Firefighters’ Retirement System v. Pegasystems Inc. demonstrates, such an approach is not without risk. The ruling illustrates the potential pitfalls of language such as “without merit” to describe litigation risks in SEC disclosures, particularly when internal evidence suggests a different story. In an environment where every corporate statement can be put under the judicial microscope, this case serves as a stark reminder of the need for careful, accurate communication when litigation is pending.
Background and Case Overview
Pegasystems Inc., a software company, found itself at the center of a legal maelstrom that began with a lawsuit filed in Virginia state court in 2020. The root of the dispute lay in allegations that Pegasystems had willfully and maliciously misappropriated trade secrets from its competitor, Appian Corporation. This corporate espionage saga unfolded over several years, involving allegations that Pegasystems employees posed as customers to access Appian’s proprietary information. In February, 2022, Appian filed an amended complaint for $3 billion, after which Pegasystems filed its Form 10-K in which it described the claims it faced as ”without merit,” and alleging that it had “strong defenses to these claims,” and that “any alleged damages claimed by Appian are not supported by the necessary legal standard.” Ultimately, a jury found Pegasystems liable for misappropriation of trade secrets, and the company was ordered to pay over $2 billion in damages.
The repercussions of this case extended beyond the Virginia courtroom. Following the verdict in Virginia, Pegasystems faced a precipitous drop in its stock price of approximately 28%. This drop set the stage for a new legal battle: a securities fraud class action filed against Pegasystems and its key executives, including its CEO and CFO. The crux of this lawsuit hinged on the company's earlier statements in its SEC filings, including the assertion that the Appian lawsuit was "without merit." This claim, made when internal evidence allegedly suggested otherwise, became a focal point of the securities lawsuit.
Pegasystems moved to dismiss the complaint for “failure to state a claim alleging that Fort Lauderdale has not pled facts with particularity establishing (1) that any of the challenged statements are false or misleading, (2) a strong inference of scienter, and (3) loss causation.”
The Court’s Analysis
The court denied the motion to dismiss as to Pegasystems and its CEO. The court found that Pegasystems assertion that the claims were “without merit” was an actionable statement of opinion, explaining that Pegasystems had “categorically denied that Appian’s claims had any merit—despite possessing substantial information about the viability of those claims.” Therefore, the statement did not “fairly align” with its knowledge at the time it made it. The court also found that Pegasystems’ reference in its SEC filing to a code of conduct in which it promised that it would “never use illegal or questionable means to acquire a competitor’s trade secrets” was also an actionable misrepresentation.
As to the CEO, the court found that, given his alleged involvement in misappropriating trade secrets, he would have known that his statement about the merits of the trade secret litigation "posed a substantial likelihood of misleading a reasonable investor." The court further noted that the "false denial of Appian's claims' merit posed an obvious danger to mislead investors as to the substantial financial risk Pega was facing" in connection with the misappropriation lawsuit. The shareholder class action lawsuit was allowed to proceed.
So what is a company to do when making a public disclosure about litigation in similar circumstances? The judge in this case provides some potentially safer alternatives to asserting that such claims are “without merit.” According to the court, a company may “assert its intention to oppose the lawsuit,” or “state that it has ‘substantial defenses” against it,” provided “it reasonably believes that to be true.”
The bottom line is that companies must take great care, and consult with experienced legal counsel, before making any statements or disclosures to investors regarding pending litigation. As the court explained, an “issuer may legitimately oppose a claim against it, even when it possesses subjective knowledge that the facts underlying the claims against it are true. When it decides to do so, however, it must do so with exceptional care, so as not to mislead investors.”
In many cases, the best approach is to tread lightly in the court of public opinion while vigorously advocating in the court of law. Voltaire has a good rule of thumb here: “Everything you say should be true, but not everything true should be said.”
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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