City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CITY OF DEARBORN HEIGHTS ACT No. 14-16814

345 POLICE & FIRE RETIREMENT

SYSTEM, Individually and On Behalf D.C. No.

of All Others Similarly Situated, 5:12-cv-06039-

Plaintiff-Appellant, BLF

v.

OPINION

ALIGN TECHNOLOGY, INC.; THOMAS

M. PRESCOTT; KENNETH B. AROLA,

Defendants-Appellees.

Appeal from the United States District Court

for the Northern District of California

Beth Labson Freeman, District Judge, Presiding

Argued and Submitted October 19, 2016

San Francisco, California

Filed May 5, 2017

Before: ANDREW J. KLEINFELD and MILAN D.

SMITH, JR., Circuit Judges, and JOHN A.

KRONSTADT, * District Judge.

*

The Honorable John A. Kronstadt, United States District Judge

for the Central District of California, sitting by designation.

2 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

Opinion by Judge Milan D. Smith, Jr.;

Concurrence by Judge Kleinfeld

SUMMARY **

Securities Fraud

The panel affirmed the district court’s dismissal, for

failure to adequately plead falsity or scienter, of a securities

fraud action under §§ 10(b) and 20(a) of the Securities

Exchange Act of 1934 and SEC Rule 10b-5.

The alleged violations concerned statements by Align

Technology, Inc., regarding its goodwill valuation of a

subsidiary.

The panel held that the three standards for pleading

falsity of opinion statements articulated in Omnicare, Inc. v.

Laborers Dist. Council Constr. Ind. Pension Fund, 135 S.

Ct. 1318 (2015), a case addressing Section 11, apply to

Section 10(b) and Rule 10b-5 claims. These three standards

are as follows. First, when a plaintiff relies on a theory of

material misrepresentation, the plaintiff must allege both that

“the speaker did not hold the belief she professed” and that

the belief is objectively untrue. Second, when a plaintiff

relies on a theory that a statement of fact contained within an

opinion statement is materially misleading, the plaintiff must

allege that “the supporting fact [the speaker] supplied [is]

untrue.” Third, when a plaintiff relies on a theory of

**

This summary constitutes no part of the opinion of the court. It

has been prepared by court staff for the convenience of the reader.

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 3

omission, the plaintiff must allege “facts going to the basis

for the issuer’s opinion . . . whose omission makes the

opinion statement at issue misleading to a reasonable person

reading the statement fairly and in context.” The panel held

that to the extent that the Ninth Circuit’s prior standard

permitted plaintiffs to plead falsity by alleging that “there is

no reasonable basis for the belief” under a material

misrepresentation theory of liability, the prior standard was

“clearly irreconcilable” with Omnicare, and was therefore

overruled. The panel held that the plaintiff failed to

sufficiently plead falsity under any of the three Omnicare

standards.

The panel held that the plaintiff also failed to sufficiently

plead scienter. Because the plaintiff inadequately alleged a

primary violation of federal securities law, it could not

establish control person liability.

Concurring in the judgment, Judge Kleinfeld agreed with

the majority’s analysis of scienter, which compelled

affirmance. Judge Kleinfeld wrote that the determination

whether the Omnicare analysis applies to Section 10(b)

cases was important and debatable and should have been left

for a case in which it had to be made.

COUNSEL

Amanda M. Frame (argued), Christopher M. Wood, Shawn

A. Williams, Andrew S. Love, and Susan K. Alexander,

Robbins Geller Rudman & Dowd LLP, San Francisco,

California; Darren J. Robbins, Robbins Geller Rudman &

Dowd LLP, San Diego, California; for Plaintiff-Appellant.

4 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

Caz Hashemi (argued), Nicholas R. Miller, Kelley M.

Kinney, and Douglas J. Clark, Wilson Sonsini Goodrich &

Rosati, Palo Alto, California, for Defendants-Appellees.

OPINION

M. SMITH, Circuit Judge:

Plaintiff-Appellant City of Dearborn Heights Act 345

Police & Fire Retirement System (Plaintiff) represents all the

investors who purchased stock in Align Technology, Inc.

(Align) between January 31, 2012, and October 17, 2012

(the Class Period). Plaintiff alleges that Defendants Align,

Align CEO Thomas M. Prescott, and Align CFO Kenneth B.

Arola (collectively, Defendants) violated Sections 10(b) and

20(a) of the Securities Exchange Act of 1934, and SEC Rule

10b-5 in connection with statements regarding Align’s

goodwill valuation of its subsidiary, Cadent Holdings, Inc.

(Cadent). The district court dismissed with prejudice

Plaintiff’s Second Amended Complaint (SAC) for failure to

adequately plead falsity or scienter. We affirm the district

court for four reasons.

First, we hold that the three standards for pleading falsity

of opinion statements articulated in Omnicare, Inc. v.

Laborers District Council Construction Industry Pension

Fund, 135 S. Ct. 1318 (2015), apply to Section 10(b) and

Rule 10b-5 claims. Second, we hold that Plaintiff has failed

to sufficiently plead falsity under any of the three Omnicare

standards. Third, we hold that Plaintiff has also failed to

sufficiently plead scienter. Fourth, we hold that because

Plaintiff has inadequately alleged a primary violation of

federal securities law, Plaintiff cannot establish control

person liability.

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 5

BACKGROUND

Factual Allegations

Defendant Align is a Delaware-incorporated company

that designs, manufactures, and markets the Invisalign

system for treating the misalignment of teeth. Align also

designs, manufactures, and markets 3D digital services and

iTero intra-oral scanners for orthodontics and dentists

through its wholly-owned subsidiary, Cadent. Defendant

Thomas M. Prescott (Prescott) was President and CEO of

Align, and a member of Align’s Board of Directors during

the Class Period. Defendant Kenneth B. Arola (Arola) was

Align’s CFO and Vice President of Finance during the Class

Period. Plaintiff is a public pension fund that purchased

common stock of Align during the Class Period.

On March 29, 2011, Align issued a press release

announcing its acquisition of Cadent. In a press conference

that same day, Prescott and Arola explained that Cadent was

“an attractive, high-growth, strategically valuable asset” that

would allow Align to position itself as a major player in the

intra-oral scanning market and “result in new growth

opportunities, revenue synergies, increasing strategic

leverage, and cost improvements.” The transaction closed

on April 29, 2011, at which Align paid $187.6 million for

Cadent. Align allocated $135.5 million of the purchase price

as “goodwill,” the amount of the purchase price exceeding

the fair value of the net assets of the acquired company. Of

this goodwill allocation, $76.9 million was specifically

allocated to the acquired computer-aided design and

manufacturing (CAD/CAM) and scanner unit (together with

CAD/CAM, the SCCS unit).

Plaintiff alleges that Cadent’s purchase price, which was

justified in part on Cadent’s 2010 revenues, was artificially

6 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

inflated. According to former Cadent employees cited as

confidential sources, Cadent “offered substantial and

unprecedented discounts to its customers in the last quarter

of 2010” in an attempt to make itself “appear more valuable

to an acquirer.” This practice (channel stuffing) resulted in

an unsustainable 147% increase in scanner sales by Cadent

for the 2010 fiscal year. Defendants allegedly had

knowledge of Cadent’s channel stuffing because the deed

would have been “readily apparent” from Align’s due

diligence and direct access to Cadent’s financial reports and

company documents through a data room that Cadent made

available during the acquisition process.

Align allegedly used Cadent’s artificially inflated 2010

revenue as the basis for projecting a 20% sales growth rate

and 50% gross margins for the SCCS unit, as well as making

its initial goodwill valuation. The SCCS unit’s revenue

increased sequentially from the fourth quarter of 2011 to the

second quarter of 2012, but ultimately failed to meet the

projected 20% growth rate in any post-acquisition quarter.

The SCCS unit’s gross margins also failed to meet the 50%

projection, instead ranging from 24% to 36% during the

Class Period.

Plaintiff alleges that the SCCS unit’s financial results

were negatively impacted by a variety of factors. First, as

part of an effort to integrate Cadent’s infrastructure into

Align’s, Align moved the SCCS unit from New Jersey to

Mexico and Costa Rica in the fourth quarter of 2011. This

integration effort involved the firing of 119 full-time Cadent

employees before Align employees could be properly

trained to assist customers with SCCS products. The firings

negatively impacted customer service, a problem which

Prescott acknowledged in an April 2012 investor call.

Second, Cadent’s competitors in the intra-oral scanning

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 7

market were developing new products and business

strategies. Plaintiff cites to various industry reports

suggesting that competitors were “likely to offer superior

products at considerably lower prices” in 2012 and

predicting a shift to a “no per click or subscription fees”

business model, which would potentially eliminate Cadent’s

revenues generated from services scan fees and 3D digital

modeling and lab services. Third, the SCCS unit

experienced a severe decline in international revenue in part

because of a deteriorating relationship with Cadent’s

exclusive European distributor Straumann, and the European

economic recession at the time. The SCCS unit’s

international revenue fell from $2.5 million in the third

quarter of 2011 to $362,000 during the fourth quarter of

2011. Although international revenues subsequently

increased between the fourth quarter of 2011 and the first

quarter of 2012, they then fell to a historic low in the second

quarter of 2012.

Pursuant to Generally Accepted Accounting Principles

(GAAP), a company must conduct an annual test of its

goodwill for impairment. Financial Accounting Standards

Board Accounting Standards Codification (ASC) Topic 350:

Intangibles – Goodwill and Other, ASC 350-20-35-28.

“Impairment is the condition that exists when the carrying

amount of goodwill exceeds its implied fair value.” ASC

350-20-35-2. A company must also conduct additional

goodwill testing between annual tests (interim goodwill

tests) “if an event occurs or circumstances change that would

more likely than not reduce the fair value of a reporting unit

below its carrying amount.” ASC 350-20-25-30.

Align conducted its annual goodwill impairment testing

in the fourth quarter of 2011 and found no impairment to the

SCCS goodwill valuation of $76.9 million. In its 2011 Form

8 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

10-K, Align explained that “[b]ased on the goodwill

impairment analysis results during the fourth quarter of

2011, we determined that no impairment needed to be

recorded as the fair value of our reporting units were

significantly in excess of the carrying value.” Align did not

conduct any interim goodwill tests or take any interim

goodwill impairments in either the first or second quarters of

2012.

On October 17, 2012, Align announced that it was

conducting an interim goodwill impairment test for the

SCCS goodwill, triggered by the SCCS unit’s poor financial

performance in the third quarter of 2012 and the termination

of its distribution relationship with Straumann. Align

warned that this interim testing could possibly result in a

significant impairment of the SCCS goodwill. This

announcement led to 20 million shares of Align stock being

traded in one day, and a 20% decline in Align’s stock price.

On November 9, 2012, Align announced a goodwill

impairment charge of $24.7 million, reducing the SCCS

goodwill to $52.6 million. On January 30, 2013, Align

announced another goodwill impairment charge of $11.9

million, thereby reducing the SCCS goodwill to $36.6

million. Then, on April 18, 2013, Align announced a final

goodwill impairment charge of the remaining SCCS

goodwill.

Procedural History

Plaintiff’s SAC alleges that Defendants made seven

materially false and misleading statements concerning

Align’s goodwill valuation of Cadent during the Class

Period. These alleged misstatements appeared in Align’s

press releases and Form 8-K, Form 10-K, and Form 10Q

filings with the SEC. Count I of the SAC asserts a claim of

securities fraud based on these misstatements pursuant to

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 9

Section 10(b) of the Securities Exchange Act of 1934,

15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R.

§ 240.10b-5. Count II of the SAC alleges that Prescott and

Arola committed securities fraud as control persons of Align

within the meaning of Section 20(a) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78t(a).

On December 9, 2013, the district court dismissed with

leave to amend Plaintiff’s First Amended Complaint for

failure to plead both falsity and scienter with sufficient

specificity. On August 22, 2014, the district court dismissed

with prejudice Plaintiff’s SAC for failing once again to

adequately plead falsity or scienter. Plaintiff subsequently

filed this timely appeal.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. § 1291. We

review de novo dismissals under Rule 12(b)(6) of the Federal

Rules of Civil Procedure. Zucco Partners, LLC v. Digimarc

Corp., 552 F.3d 981, 989 (9th Cir. 2009). We therefore must

“accept the plaintiffs’ allegations as true and construe them

in the light most favorable to plaintiffs, and will hold a

dismissal inappropriate unless the plaintiffs’ complaint fails

to state a claim to relief that is plausible on its face.” Id.

(internal quotation marks and citations omitted).

ANALYSIS

Section 10(b) and SEC Rule 10b-5 Claim

In Count I of the SAC, Plaintiff alleges that Defendants

made false and misleading statements concerning Align’s

goodwill valuation of Cadent. Plaintiff alleges that

Defendants deliberately overvalued the SCCS goodwill

when Align conducted its 2011 annual goodwill impairment

10 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

test, and continued to do so through the Class Period, thereby

injecting falsity into statements concerning Align’s goodwill

estimates and related financial statements. Furthermore,

Plaintiff alleges the existence of facts throughout the Class

Period that indicated the need to perform an interim

impairment test for the SCCS goodwill much earlier than

October 2012, such that Align should have found

impairment as early as the fourth quarter of 2011. On the

basis of these allegations, Plaintiff identifies the following

seven statements about the SCCS goodwill and SCCS unit’s

general financial condition during the fourth quarter of 2011

and the first and second quarters of 2012 as materially false

and misleading:

• Statement 1 (Press Release on January 30, 2012 and

Form 10-K filed February 29, 2012): false or

misleading financial results for the fourth quarter of

2011 and fiscal year 2011, wherein Align reported

“(a) $649.3 million in total assets; (b) $20.4 million

in net profit for [the fourth quarter of 2011]; and

(c) [earnings-per-share] of $0.25 for [the fourth

quarter of 2011].” Align also reported “$135.3

million in goodwill associated with Cadent, $58.4

million allocated to Clear Aligner and $76.9 million

allocated to SCCS.”

• Statement 2 (Form 10-K, filed February 29, 2012):

“[D]uring the fiscal year ended December 31, 2011,

there were no facts and circumstances that indicated

that the fair value of the reporting units may be less

than their current carrying amount.”

• Statement 3 (Form 10-K, filed February 29, 2012):

“[B]ased on the goodwill impairment analysis results

during the fourth quarter of 2011, we determined that

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 11

no impairment needed to be recorded as the fair value

of our reporting units were significantly in excess of

the carrying value.”

• Statement 4 (Press Release on April 23, 2012 and

Form 10-Q filed May 8, 2012): false or misleading

financial results for first quarter of 2012, wherein

Align reported “(a) $670.4 million in total assets;

(b) $21.0 million in net profit; and (c) GAAP EPS of

$0.26.”

• Statement 5 (Form 10-Q, filed May 8, 2012):

Align’s first quarter of 2012 Form 10-Q stated that

Align performed impairment testing “whenever

events or changes in circumstances indicate that the

carrying value of such assets may not be

recoverable.”

• Statement 6 (Press Release on July 19, 2012 and

Form 10-Q filed August 2, 2012): false or misleading

financial results for the second quarter of 2012,

wherein Align reported: “(a) $744.2 million in total

assets; (b) $28.5 million in net profit; and (c) EPS of

$0.34.”

• Statement 7 (Form 10-Q): Align’s second quarter of

2012 Form 10-Q stated that Align performed

impairment testing “whenever events or changes in

circumstances indicate that the carrying value of

such assets may not be recoverable.”

“To plead a claim under section 10(b) and Rule 10b-5,

the Plaintiff[] must allege: (1) a material misrepresentation

or omission; (2) scienter; (3) a connection between the

misrepresentation or omission and the purchase or sale of a

12 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

security; (4) reliance; (5) economic loss; and (6) loss

causation.” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc.,

774 F.3d 598, 603 (9th Cir. 2014). The complaint must also

satisfy the dual heightened pleading requirements of Federal

Rule of Civil Procedure 9(b) and the Private Securities

Litigation Reform Act (PSLRA), which require that the

complaint plead both falsity and scienter with particularity.

Zucco, 552 F.3d at 990–91. Only allegations regarding

falsity and scienter are at issue in this appeal.

A. Falsity

1. Classification of Statements 1 through 7

The district court concluded that statements regarding

goodwill valuations are opinion statements because they

“are inherently subjective and involve management’s

opinion regarding fair value.” Although our circuit has

never addressed this issue, the Second Circuit reached the

same conclusion on identical reasoning. Fait v. Regions Fin.

Corp., 655 F.3d 105, 110 (2d Cir. 2011) (“Estimates of

goodwill depend on management’s determination of the ‘fair

value’ of the assets acquired and liabilities assumed, which

are not matters of objective fact.”). Plaintiff does not

challenge this characterization with respect to Statements 1,

4, 5, 6, and 7, and we see no reason to conclude otherwise.

However, Plaintiff argues that the district court

erroneously found Statements 2 and 3 to be opinion

statements. In Omnicare, the Supreme Court explained that

opinion statements can “contain embedded statements of

fact,” which “may be read to affirm not only the speaker’s

state of mind . . . but also an underlying fact.” 135 S. Ct. at

1327. Plaintiff argues that Statements 2 and 3 contain

“embedded statements of fact”: Statement 2 asserts the

“fact” that there were “no facts and circumstances”

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 13

indicating impairment of the SCCS goodwill, while

Statement 3 asserts the “fact” that the SCCS division’s fair

value “was significantly in excess of the carrying value.”

Plaintiff’s argument as to Statement 3 is unpersuasive,

since Statement 3 expresses Defendants’ qualitative

assessment of the SCCS division’s fair value. Because that

reference point itself is subjective, the attendant comment

comparing fair value to carrying value cannot be objectively

verified. However, Statement 2’s reference to “no facts or

circumstances” asserts an objectively verifiable fact by

identifying an aspect of Defendants’ goodwill methodology

as opposed to a qualitative aspect of the valuation itself.

Accordingly, while the district court properly concluded that

Statement 3 is an opinion statement, Statement 2 should be

considered an opinion statement with an embedded

statement of fact.

2. Standard for Pleading Falsity of Opinion

Statements

To plead falsity under the PSLRA, a complaint must

“specify each statement alleged to have been misleading, the

reason or reasons why the statement is misleading, and, if an

allegation regarding the statement or omission is made on

information and belief, the complaint shall state with

particularity all facts on which that belief is formed.”

15 U.S.C. § 78u-4(b)(1)(B).

The parties dispute the proper standard for pleading

falsity when the alleged misstatements are opinion

statements. Plaintiff argues that falsity of opinion statements

can be pleaded by alleging facts that demonstrate that “there

is no reasonable basis for the belief.” Reese v. Malone,

747 F.3d 557, 579 (9th Cir. 2014) (quoting Kaplan v. Rose,

49 F.3d 1363, 1375 (9th Cir. 1994)). In contrast, the district

14 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

court concluded that Plaintiff was required to plead

“particularized facts establishing that Defendants did not

believe in their statements concerning goodwill at the time

they made them.” The district court reached this

determination by relying in part upon Rubke v. Capitol

Bancorp, Ltd., 551 F.3d 1156 (9th Cir. 2009), which held

that for claims under Section 11 of the Securities Act of

1933, 15 U.S.C. § 77k(a), misstatements of opinion “can

give rise to a claim . . . only if the complaint alleges with

particularity that the statements were both objectively and

subjectively false or misleading.” 551 F.3d at 1162

(emphasis added). The district court noted that in Fait v.

Regions Financial Corporation, the Second Circuit had

devised an identical falsity pleading standard for opinion

statements in Section 11 cases, 655 F.3d at 122, and in City

of Omaha, Nebraska Civilian Employees’ Retirement System

v. CBS Corp., 679 F.3d 64 (2d Cir. 2012) subsequently

extended that pleading standard to Section 10(b) cases, id. at

67‒68. Defendants argue that the Supreme Court’s recent

decision in Omnicare supports the district court’s conclusion

that subjective falsity must be pleaded.

Determining the proper pleading standard for falsity of

opinion statements requires a close examination of

Omnicare. In Omnicare, the Supreme Court noted that

Section 11 imposes liability for both material misstatements

and omissions and thus “creates two ways to hold issuers

liable for the contents of a registration statement—one

focusing on what the statement says and the other on what it

leaves out.” 135 S. Ct. at 1323. With respect to the material

misstatement theory of liability, the Supreme Court rejected

the Sixth Circuit’s holding that “a statement of opinion that

is ultimately found incorrect—even if believed at the time

made—may count as an ‘untrue statement of material fact’”

under Section 11. Id. at 1325 (quoting 15 U.S.C. § 77k(a)).

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 15

The Supreme Court explained that such a standard “wrongly

conflates facts and opinions” because “a statement of fact

. . . expresses certainty about a thing, whereas a statement of

opinion . . . does not,” and concluded that Congress codified

this distinction in the first clause of Section 11 by creating

liability only for “untrue statement[s] of . . . fact.” Id. at

1325‒26 (internal quotation marks omitted) (alteration in

original). The Supreme Court further clarified that

expressions of opinion “explicitly affirm[] one fact: that the

speaker actually holds the stated belief,” and liability

therefore follows only if the speaker does not honestly hold

the stated belief and the belief is objectively incorrect. Id. at

1326; see also id. at 1326 n.2. Thus, Omnicare affirms

Rubke’s requirement that both objective and subjective

falsity must be alleged to sufficiently plead falsity for a

Section 11 claim based on a material misrepresentation

theory of liability.

However, Omnicare articulated a different method for

pleading falsity under an omissions theory of liability. The

Supreme Court explained that a reasonable investor “expects

not just that the issuer believes the opinion (however

irrationally), but that it fairly aligns with the information in

the issuer’s possession at the time.” Id. at 1329. Liability

therefore attaches when “a registration statement omits

material facts about the issuer’s inquiry into or knowledge

concerning a statement of opinion” and “those facts conflict

with what a reasonable investor would take from the

statement itself.” Id. But the Supreme Court cautioned that

pleading falsity under an omissions theory would be “no

small task for an investor.” Id. at 1332. A plaintiff “cannot

just say that the issuer failed to reveal [the] basis” for the

opinion at issue. Id. Instead, an investor must “call into

question the issuer’s basis for offering the opinion” by

“identify[ing] particular (and material) facts going to the

16 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

basis for the issuer’s opinion—facts about the inquiry the

insurer did or did not conduct or the knowledge it did or did

not have—whose omission makes the opinion statement at

issue misleading to a reasonable person reading the

statement fairly and in context.” Id. Furthermore, liability

is not necessarily established by demonstrating that “an

issuer knows, but fails to disclose, some fact cutting the other

way,” because “[r]easonable investors understand that

opinions sometimes rest on a weighing of competing facts.”

Id. at 1329. And finally, “whether an omission makes an

expression of opinion misleading always depends on the

context,” which includes “all its surrounding text, including

hedges, disclaimers, and apparently conflicting

information.” Id. at 1330.

As discussed in the preceding section, Omnicare also

recognized that some opinion statements “contain embedded

statements of fact,” which “may be read to affirm not only

the speaker’s state of mind . . . but also an underlying fact.”

Id. at 1327. For such statements, the Supreme Court held

that falsity could be established “not only if the speaker did

not hold the belief she professed but also if the supporting

fact she supplied were untrue.” Id. at 1327.

Accordingly, Omnicare establishes three different

standards for pleading falsity of opinion statements. First,

when a plaintiff relies on a theory of material

misrepresentation, the plaintiff must allege both that “the

speaker did not hold the belief she professed” and that the

belief is objectively untrue. Id. Second, when a plaintiff

relies on a theory that a statement of fact contained within an

opinion statement is materially misleading, the plaintiff must

allege that “the supporting fact [the speaker] supplied [is]

untrue.” Id. Third, when a plaintiff relies on a theory of

omission, the plaintiff must allege “facts going to the basis

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 17

for the issuer’s opinion . . . whose omission makes the

opinion statement at issue misleading to a reasonable person

reading the statement fairly and in context.” Id. at 1332.

Although Omnicare concerned Section 11 claims, we

conclude that the Supreme Court’s reasoning is equally

applicable to Section 10(b) and Rule 10b-5 claims. The

Supreme Court’s definition of opinion statements and

differentiation of them from factual statements was specific

to Section 11 only to the extent that Section 11 imposes

liability for “untrue statement[s] of . . . fact.” Id. at 1326

(alterations in original) (citing 15 U.S.C. § 77k(a)). Rule

10b-5, which was promulgated pursuant to Section 10(b),

contains an identical limitation of liability to “untrue

statement[s]” and omissions of “fact.” 17 C.F.R. § 240.10b-

5(b); see also City of Omaha, 679 F.3d at 68 (“[Section 10(b)

and Section 11] claims all share a material misstatement or

omission element.”). The only other circuit to have

considered Omnicare’s effect on the falsity pleading

standard for Section 10(b) claims based on opinion

statements has held that the reasoning of Omnicare applies.

Tongue v. Sanofi, 816 F.3d 199, 209‒10 (2d Cir. 2016)

(noting that Omnicare “refined the standard for analyzing

whether a statement of opinion is materially misleading” and

applying Omnicare to Section 10(b) claims). We are

likewise so persuaded, and we therefore hold that the three

standards for pleading falsity under Omnicare also apply to

Section 10(b) and Rule 10b-5 claims.

We recognize that Omnicare establishes a falsity

pleading standard for opinion statements that is

substantively similar to the current standard within this

circuit, which allows plaintiffs to establish falsity in three

ways: “if (1) the statement is not actually believed, (2) there

is no reasonable basis for the belief, or (3) the speaker is

18 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

aware of undisclosed facts tending seriously to undermine

the statement’s accuracy.” Reese, 747 F.3d at 579 (quoting

Kaplan, 49 F.3d at 1375). The first and third methods of

pleading falsity under this standard are consistent with

Omnicare’s standards for pleading falsity under the material

misrepresentation theory of liability and the omission theory

of liability, respectively. However, Omnicare clarifies that

pleading falsity by alleging that “there is no reasonable basis

for the belief” is permissible only under an omissions theory

of liability, subject to the principles discussed above. We

thus hold that to the extent our current standard permits

plaintiffs to plead falsity by alleging that “there is no

reasonable basis for the belief” under a material

misrepresentation theory of liability, it is “clearly

irreconcilable” with Omnicare, and is therefore overruled.

Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en

banc).

3. Application of the Falsity Pleading Standard

The SAC does not satisfy any of the Omnicare pleading

standards for falsity. The SAC contains no allegations that

Defendants (1) believed that SCCS’s goodwill was impaired

at the end of 2011 or during the first and second quarters of

2012, (2) did not believe that Align performed impairment

testing when required, and (3) did not believe that SCCS’s

fair value was “significantly in excess of the carrying value.”

As such, the SAC contains no allegations of subjective

falsity.

Nor has Plaintiff pleaded sufficient facts that would

allow us to infer subjective falsity. Plaintiff contends that

Defendants must have known that the SCCS goodwill was

impaired and that their goodwill valuations finding no

impairment were false. First, Plaintiff alleges that

Defendants were aware that Cadent improperly inflated its

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 19

2010 annual revenue numbers prior to being acquired by

Align in April 2011. And, because Defendants made the

initial $76.9 million SCCS goodwill valuation based on

Cadent’s 2010 revenue numbers, Plaintiff alleges that

Defendants must have known that their finding of no

impairment to the SCCS goodwill in the fourth quarter of

2011 was false. Second, Plaintiff alleges that based on the

SCCS unit’s financial results and changes in the market

during the Class Period, Defendants must have known that

there was likely impairment to the SCCS goodwill pursuant

to GAAP. Plaintiff notes that: (1) the SCCS division’s

revenues never met the projected 20% growth rate during the

Class Period; (2) gross margins fell from roughly 45% to a

range of 24% to 36% after Align acquired Cadent;

(3) international sales declined by roughly 86% during the

fourth quarter of 2011; (4) new competitors emerged

offering improved products and alternative fee structures;

and (5) the integration effort in the fourth quarter of 2011

created customer support problems for SCCS products.

Third, Plaintiff submits its own calculations showing

impairment to the SCCS goodwill under both the market

approach and the income approach, two methods of

calculating goodwill upon which Defendants purportedly

relied.

This theory of falsity suffers from two flaws. First,

Plaintiff fails to plead any facts establishing that Defendants

continued to use Cadent’s inflated 2010 revenue figures in

conducting its goodwill impairment testing for the SCCS

unit. While Plaintiff relies on confidential informants to

substantiate the allegations of Cadent’s channel stuffing,

none of these witnesses subsequently participated in Align’s

accounting or goodwill analysis. Plaintiff’s confidential

informants therefore cannot link Cadent’s channel stuffing

to Defendants, much less the set of assumptions that

20 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

Defendants used to conduct its goodwill valuation of the

SCCS unit at the end of 2011.

Second, the SCCS unit’s financial results and changes in

the market during the Class Period do not compel a finding

of goodwill impairment under GAAP. Pursuant to GAAP, a

company should conduct interim goodwill impairment

testing “if an event occurs or circumstances change that

would more likely than not reduce the fair value of a

reporting unit below its carrying amount.” ASC 350-20-35-

30. Examples of such events and circumstances include “a

decline in actual or planned revenue or earnings compared

with actual and projected results of relevant prior periods,”

as well as “an increased competitive environment . . . [or]

change in the market for an entity’s products or services.”

ASC 350-20-35-3C. The circumstances and events

identified by Plaintiff, as enumerated above, fall into these

categories. However, in determining whether goodwill

impairment is “more likely than not,” a company must also

assess “the totality of events” as well as any “positive and

mitigating events.” ASC 350-20-35-3E and ASC 350-20-

35-3F. Furthermore, “none of the individual examples of

events” suggesting potential goodwill impairment are

“intended to represent standalone events . . . that necessarily

require an entity” to perform interim testing. ASC 350-20-

35-3G.

Here, there were positive and mitigating events that

Align could have found to either balance or outweigh the

events and circumstances identified by Plaintiff. First,

although SCCS revenue did not meet Align’s projection of

20% growth, SCCS revenue increased sequentially each

quarter, from $10 million in the fourth quarter of 2011 to

$11.8 million in the first quarter of 2012 to $11.9 million in

the second quarter of 2012. Second, although international

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 21

sales declined from $2.5 million in the third quarter of 2011

to $362,000 in the fourth quarter of 2011, international sales

increased to $631,000 in the first quarter of 2012. Third,

although Plaintiff cites to industry analyst reports that

warned that Cadent would soon face competitors offering

“superior products at considerably lower prices” as well as

more favorable fee structures, the SAC does not identify a

single competing product that emerged on the market or a

single competitor who offered such a fee structure during the

Class Period. Thus, Plaintiff’s bare allegations of events and

circumstances during the Class Period that could have

suggested the likelihood of goodwill impairment under

GAAP cannot establish that Defendants must have known

there was a likelihood of goodwill impairment.

The common element underlying both flaws in

Plaintiff’s theory of falsity is Plaintiff’s failure to allege the

actual assumptions that Defendants relied upon in

conducting their goodwill analysis. Without this allegation,

it cannot be plausibly inferred that Defendants intentionally

disregarded the aforementioned events and circumstances

when conducting their goodwill analysis, such that the

goodwill valuations were knowingly false or misleading

when made. Plaintiff’s pleading of its own calculations

indicating impairment of the SCCS goodwill in the fourth

quarter of 2011 does not provide a sufficient substitute for

Plaintiff’s failure to plead the actual assumptions used by

Defendants. As aptly noted by the district court, “[t]hat

Plaintiff selected certain assumptions to reach a conclusion

of impairment does not demonstrate what assumptions Align

made in conducting its 4Q11 impairment analysis, nor does

it suffice to show that Align’s selection of different

assumptions would have been so unreasonable as to amount

to fraud.” Because Plaintiff does not sufficiently allege

subjective falsity, Plaintiff fails to plead falsity under a

22 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

material misstatement theory of liability with respect to

Statements 1, 3, 4, 5, 6, and 7.

Plaintiff’s falsity pleadings fare no better when

construed under an omissions theory of liability. In its reply

brief, Plaintiff contends that Defendants omitted three

material facts: (1) Cadent’s “channel stuffing,” which

allegedly inflated Defendants’ initial growth projections for

SCCS, (2) the aforementioned integration issues and market

competition, which allegedly affected SCCS’s fair value,

and (3) that Defendants allegedly failed to conduct any

goodwill impairment testing at year-end 2011, which would

have revealed “significant impairment to the scanner

division’s goodwill.” Plaintiff argues that all three

omissions “are indisputably material, were never disclosed,

and effectively rendered [D]efendants’ goodwill valuation

statements – which proclaimed there was no impairment –

misleading if not entirely false.”

Plaintiff’s omissions theory of liability fails because

none of the three alleged omissions “call[s] into question the

issuer’s basis for offering the opinion.” Omnicare, 135 S.

Ct. at 1332. First, for the reasons discussed above, Plaintiff

pleads no facts establishing that Defendants used the inflated

2010 revenues that resulted from Cadent’s channel stuffing

to conduct its goodwill impairment testing at the end of

2011, and also fails to plead the exact assumptions that

Defendants used. Without any allegations tying Cadent’s

channel stuffing to any of Defendants’ goodwill valuations,

a reasonable investor would not find the fact of Cadent’s

channel stuffing, which occurred in 2010, to undermine

Align’s conclusion at the end of 2011 that the SCCS

goodwill was not impaired.

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 23

Second, the record indicates that Defendants publicly

disclosed both Align’s integration issues and the risk posed

by market competitors. As early as May 5, 2011, Align

warned through its Form 10-Q filing that “the anticipated

financial [and] strategic benefits” of acquiring Cadent might

be impeded by potential risks which included “aggressive

competition from other manufacturers of intraoral scanners”

which could result in “price reductions and loss of sales.”

And with respect to Align’s integration issues, Prescott

explained during an April 2012 investor call that “in the

course of creating a more integrated business we have

negatively impacted several important customer-facing

functions like customer service, tech support, and even

delivery schedules in some cases.”

Third, Plaintiff’s allegation that Defendants failed to

conduct any goodwill impairment testing at the end of 2011

is not a fact, but rather Plaintiff’s conclusion based on its

belief that no set of reasonable assumptions could support

Defendants’ determination in the fourth quarter of 2011 that

the SCCS goodwill was unimpaired. We need go no further

in concluding that it cannot serve as an omission of fact that

sufficiently pleads falsity. Because Plaintiff cannot identify

any material facts omitted by Defendants, Plaintiff fails to

plead falsity under an omissions theory of liability with

respect to Statements 1, 3, 4, 5, 6, and 7.

Finally, Plaintiff’s failure to allege the assumptions

underlying Defendants’ goodwill valuations of the SCCS

unit also prevents Plaintiff from pleading objective falsity as

to Statement 2. Without identifying what negative factors

and assumptions Defendants already incorporated into their

goodwill valuations, Plaintiff cannot demonstrate that

Defendants were aware of additional “facts and

circumstances” that would have indicated that “the fair value

24 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

of the [SCCS division] may be less than [its] carrying

amount.”

In sum, the district court correctly determined that

Plaintiff has failed to plead falsity with respect to all seven

of Defendants’ alleged misstatements. We therefore affirm

the district court’s dismissal of Count I of the SAC.

B. Scienter

Plaintiff has also failed to adequately plead scienter,

which serves as an independent basis to affirm the district

court’s dismissal of Count I of the SAC. Under the PSLRA,

a plaintiff must “state with particularity facts giving rise to a

strong inference that the defendant acted with the required

state of mind.” 15 U.S.C. § 78u-4(b)(2)(A). A defendant is

liable under Section 10(b) and Rule 10b-5 when he acts with

scienter, a “mental state that not only covers intent to

deceive, manipulate, or defraud, but also deliberate

recklessness.” Schueneman v. Arena Pharm., Inc., 840 F.3d

698, 705 (9th Cir. 2016) (internal citation and quotation

marks omitted). “[D]eliberate recklessness is ‘an extreme

departure from the standards of ordinary care . . . which

presents a danger of misleading buyers or sellers that is

either known to the defendant or is so obvious that the actor

must have been aware of it.’” Id. (quoting Zucco, 552 F.3d

at 991). As such, “[f]acts showing mere recklessness or a

motive to commit fraud and opportunity to do so provide

some reasonable inference of intent, but are not sufficient to

establish a strong inference of deliberate recklessness.” In

re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701

(9th Cir. 2012). Moreover, a strong inference of scienter

must be “at least as compelling as any opposing inference

one could draw from the facts alleged.” Tellabs, Inc. v.

Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).

When analyzing the sufficiency of a plaintiff’s scienter

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 25

pleadings, we first “determine whether any of the

allegations, standing alone, are sufficient to create a strong

inference of scienter.” N.M. State Inv. Council v. Ernst &

Young LLP, 641 F.3d 1089, 1095 (9th Cir. 2011). “[I]f no

individual allegation is sufficient, we conduct a ‘holistic’

review of the same allegations to determine whether the

insufficient allegations combine to create a strong inference

of intentional conduct or deliberate recklessness.” Id.

Plaintiff fails to establish a strong inference that

Defendants either knew or were deliberately reckless in

ignoring that the SCCS goodwill was significantly inflated

during the Class Period. Plaintiff argues that a strong

inference of scienter is established by a combination of

(1) Defendants’ knowledge of Cadent’s alleged channel

stuffing as well as the aforementioned facts that purportedly

contradicted their goodwill valuations; (2) the temporal

proximity between Defendants’ alleged misstatements and

the SCCS goodwill writedown and the magnitude of the

writedown; (3) Prescott and Arola’s stock sales during the

Class Period; and (4) Arola’s resignation as Vice President

of Finance.

First, particularized allegations that defendants had

“actual access to the disputed information” may raise a

strong inference of scienter. Reese, 747 F.3d at 575 (internal

quotation mark omitted). With respect to Cadent’s channel

stuffing, Plaintiff alleges insufficient facts to establish that

Prescott and Arola had direct knowledge of Cadent’s

channel stuffing. According to Plaintiff’s confidential

informants, Cadent’s channel stuffing would have been

“readily apparent” from Cadent’s financial documents,

which Align had direct access to through the data room that

Cadent set up for potential buyers. But Plaintiff does not

allege that Prescott or Arola personally accessed the data

26 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

room, or that the confidential informants personally

disclosed Cadent’s channel stuffing to Prescott or Arola.

Plaintiff attempts to indirectly establish Defendants’

knowledge of Cadent’s channel stuffing through the core

operations theory of scienter. Under the core operations

theory, “[a]llegations regarding management’s role in a

corporate structure and the importance of the corporate

information about which management made false or

misleading statements may also create a strong inference of

scienter when made in conjunction with detailed and specific

allegations about management’s exposure to factual

information within the company.” S. Ferry LP, No. 2 v.

Killinger, 542 F.3d 776, 785 (9th Cir. 2008). Plaintiff argues

that the core operations theory is met here because (1) Align

proclaimed goodwill to be one of Align’s “critical

accounting policies,” (2) Prescott and Arola announced

Align’s financial results each quarter and signed Align’s

SEC filings, (3) Prescott and Arola both had significant

involvement in the acquisition of Cadent, and (4) Align

performed goodwill impairment testing in the fourth quarter

of 2011. While these allegations may be sufficient to

establish Prescott’s and Arola’s knowledge of Align’s

financial information, they do not establish “management’s

exposure” to Cadent’s financial information, especially

given that Cadent’s channel stuffing occurred in 2010 and

predated Align’s acquisition of Cadent.

With respect to Cadent’s financial results and changes in

the market during the Class Period, Defendants cannot

contest knowledge of these facts, as they are drawn from

Align’s SEC filings and press releases. However,

Defendants’ knowledge of these facts, at most, establish only

that Defendants may have committed GAAP violations in

determining that no interim goodwill impairment testing was

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 27

required. But we have held that “a failure to follow GAAP,

without more, does not establish scienter.” In re Worlds of

Wonder Sec. Litig., 35 F.3d 1407, 1426 (9th Cir. 1994)

(quoting Malone v. Microdyne Corp., 26 F.3d 471, 479 (4th

Cir. 1994)). This is because GAAP “tolerate[s] a range of

reasonable treatments, leaving the choice among alternatives

to management.” Or. Pub. Emps. Ret. Fund, 774 F.3d at 609

(quoting Thor Power Tool Co. v. C.I.R., 439 U.S. 522, 544

(1979)).

Plaintiff’s theory of scienter based on Defendants’

failure to conduct interim goodwill impairment testing

illustrates the inability of GAAP violations alone to provide

evidence of scienter. As discussed above, a company need

only conduct interim goodwill impairment testing if it

concludes, after assessing “the totality of events” as well as

any “positive and mitigating events,” ASC 350-20-35-3E

and ASC 350-20-35-3F, that negative events or

circumstances “would more likely than not” cause

impairment. ASC 350-20-25-30. In other words, a

corporation must exercise its judgment in assessing both

positive and negative factors when determining whether

interim goodwill impairment testing is necessary. It

therefore follows that a corporation’s mere knowledge of

negative factors that potentially indicate goodwill

impairment does not of itself support an inference that a

corporation acted with scienter in exercising its judgment to

conclude that no goodwill impairment is likely to occur. To

plead an inference of scienter in this context, a plaintiff must

allege additional facts that call into question the manner in

which the corporation conducted its goodwill analysis.

But here, Plaintiff has failed to allege the precise

assumptions that Defendants used in conducting the 2011

year end goodwill valuation of the SCCS goodwill and in

28 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

determining that no interim goodwill valuation analysis was

needed in the first and second quarters of 2012. Without

these allegations, we agree with the district court that “[i]t is

not known what significance Align accorded to the

triggering circumstances that Plaintiff has identified, nor

what positive and mitigating factors were considered in

determining that interim impairment analysis was not

warranted.” As such, the more compelling inference is that

Defendants made a good faith but mistaken determination in

its goodwill valuations that the positive factors outweighed

the negative ones.

Second, stock sales by corporate insiders “[are]

suspicious only when [they are] ‘dramatically out of line

with prior trading practices at times calculated to maximize

the personal benefit from undisclosed inside information.’”

Zucco, 552 F.3d at 1005 (quoting In re Silicon Graphics Inc.

Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999)). To make this

determination, we look to three factors: “(1) the amount and

percentage of shares sold by insiders; (2) the timing of the

sales; and (3) whether the sales were consistent with the

insider’s prior trading history.” Id. (quotation marks

omitted). The SAC primarily relies upon a conclusory

allegation that Prescott and Arola sold “hundreds of

thousands of shares” to “reap[] over $14.8 million in

unlawful proceeds” during the Class Period and thus fails to

allege the precise amount of shares sold, the timing of these

sales, and the prior trading history for either individual.

Although Plaintiff does allege the price and quantity of a

single sale that Prescott made on February 29, 2012, the

timing of this sale is inconsistent with insider trading

“calculated to maximize the personal benefit from

undisclosed inside information.” Zucco, 552 F.3d at 1005

(internal quotation marks omitted). Of the 322,751 shares

that Prescott sold on February 29, 2012, Prescott obtained a

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 29

price of $25.51 per share for 252,751 shares and $26.26 per

share for 70,000 shares. However, the Align stock price not

only subsequently reached a Class Period high of $39.17 per

share (on September 13, 2012), but also closed at $28.18 per

share on the last day of the Class Period when Align first

announced the potential of significant impairment to the

SCCS goodwill (October 17, 2012). Prescott thus obtained

a price on February 29, 2012 that is even lower than the price

he could have obtained had he waited until the allegedly

undisclosed SCCS goodwill impairment was actually

disclosed. As we have previously explained, “[w]hen

insiders miss the boat this dramatically, their sales do not

support an inference that they are preying on ribbon clerks

who do not know what the insiders know.” Ronconi v.

Larkin, 253 F.3d 423, 435 (9th Cir. 2001). Prescott’s and

Arola’s stock sales during the Class Period therefore cannot

contribute to an inference of scienter.

Third, an employee’s resignation supports an inference

of scienter only when “the resignation at issue was

uncharacteristic when compared to the defendant’s typical

hiring and termination patterns or was accompanied by

suspicious circumstances.” Zucco, 552 F.3d at 1002.

Otherwise, “the inference that the defendant corporation

forced certain employees to resign because of its knowledge

of the employee’s role in the fraudulent representations will

never be as cogent or as compelling as the inference that the

employees resigned or were terminated for unrelated

personal or business reasons.” Id. Plaintiff argues that

Arola’s resignation was accompanied by the suspicious

circumstance of coinciding with Align’s announcement on

January 30, 2013, that it would record a goodwill

impairment charge of $11.9 million. This amounts to a

“[m]ere conclusory allegation[] that a financial manager

resigns or retires . . . shortly before the corporation issues its

30 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

restatement,” which “without more, cannot support a strong

inference of scienter.” Id. Moreover, the fact that Arola

remained an employee of Align for an additional six months

after the first goodwill impairment announcement was made

further diminishes any inference of scienter based on his

resignation. See In re NVIDIA Corp. Sec. Litig., 768 F.3d

1046, 1063 (9th Cir. 2014) (declining to find scienter on the

basis of executive departures in part because “two of the

three individuals remained at NVIDIA in some type of

advisory role”).

The only remaining allegations that contribute to an

inference of scienter are the timing and magnitude of the

SCCS goodwill write downs. But neither allegation alone

establishes a strong inference of scienter or contributes

strongly to such an inference. Yourish v. Cal. Amplifier,

191 F.3d 983, 997 (9th Cir. 1999) (explaining that “temporal

proximity of an allegedly fraudulent statement or omission

and a later disclosure” is insufficient on its own to establish

scienter and can only “bolster” an inference based on other

allegations); Gammel v. Hewlett-Packard Co., 905 F. Supp.

2d 1052, 1077 (C.D. Cal. 2012) (surveying cases and

concluding that the magnitude of a write down plays a

“minor role in the scienter analysis”).

With only the timing and magnitude of the SCCS

goodwill writedowns contributing to an inference of

scienter, we conclude that the “plausible, nonculpable

explanations” for Defendants’ conduct outweigh the

“inferences favoring” Plaintiff. Tellabs, 551 U.S. 323‒24.

Plaintiff has failed to establish an inference of scienter that

is at least as compelling as the opposing inference that

Defendants exhibited poor business judgment in overpaying

for Cadent and determining that no impairment was

necessary during the Class Period. We therefore affirm the

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 31

district court’s dismissal of Count I of the SAC on this basis

as well.

Control Person Liability, Section 20(a) Claim

In Count II of the SAC, Plaintiff alleges that Prescott and

Arola violated Section 20(a) of the Securities Exchange Act

as control persons of Align. Under Section 20(a), “a

defendant employee of a corporation who has violated the

securities laws will be jointly and severally liable to the

plaintiff, as long as the plaintiff demonstrates ‘a primary

violation of federal securities law’ and that ‘the defendant

exercised actual power or control over the primary

violator.’” Zucco, 552 F.3d at 990 (quoting No. 84

Employer-Teamster Joint Council Pension Tr. Fund v. Am.

W. Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003)).

Plaintiff alleges that both Prescott and Arola knowingly or

recklessly participated in the fraudulent scheme to misreport

the SCCS goodwill because both individuals, by virtue of

their positions within Align, possessed the “power and

authority to control the contents of Align’s quarterly reports

[and] press releases” and had “access to material non-public

information” that they knew was being concealed from the

public.

For the reasons explained in the preceding sections,

Plaintiff has not sufficiently alleged violations of Section

10(b) and Rule 10b-5. And, without “a primary violation of

federal securities law,” Plaintiff cannot establish control

person liability. Id. (quotation marks omitted). We therefore

affirm the district court’s dismissal of Count II of the SAC.

CONCLUSION

For the foregoing reasons, the district court’s dismissal

with prejudice of Plaintiff’s SAC for failure to plead falsity

32 CITY OF DEARBORN HEIGHTS V. ALIGN TECH.

and scienter is AFFIRMED. Plaintiff shall bear costs on

appeal. Fed. R. App. P. 39(a)(2).

KLEINFELD, Senior Circuit Judge, concurring in the

judgment:

I concur. The majority opinion is compelling on the

record before us, with respect to lack of scienter. Because

scienter is an element of section 10(b) liability, the reasoning

in Part I.B., with which I fully agree, compels the result we

reach.

The majority provides an alternative ground for reaching

the same result, under the Supreme Court decision in

Omnicare Inc., v. Laborers District Council Construction

Industry Pension Fund. 1 That was a section 11 case. This

is a section 10(b) case. As the Supreme Court explained in

Herman & MacLean v. Huddleston, section 10(b) and

section 11 are materially different. 2 The majority holds that

the reasoning in Omnicare effectively overrules our decision

in Reese v. Malone. 3 Under Miller v. Gammie 4 and its

progeny, the tension between Reese and Omnicare and the

doubt Omnicare casts on our analysis in Reese does not

suffice to overrule Reese. Reese has to be “clearly

1

135 S. Ct. 1318 (2015).

2

459 U.S. 375, 380–84 (1983).

3

747 F.3d 557 (9th Cir. 2014).

4

335 F.3d 889 (9th Cir. 2003) (en banc).

CITY OF DEARBORN HEIGHTS V. ALIGN TECH. 33

irreconcilable” with Omnicare for Reese to be overruled. 5

Whether it is clearly irreconcilable strikes me as debatable,

because Omnicare is a section 11 case and Reese is a section

10(b) case.

I do not suggest that Reese survives. My concern is that

it is an important and debatable question, one that we need

not decide, and therefore one that we ought not to decide. 6

The delicacy of the question arises from the considerable

differences, noted in Herman, between section 11 and

section 10(b), as well as the pleading difference, Federal

Rule of Civil Procedure 9(b) for section 10(b) claims and

Federal Rule of Civil Procedure 8(a) for section 11 claims

unless they are grounded in fraud. 7 Though I might well

agree with the majority that the Omnicare analysis applies to

section 10(b) cases, I think it is wiser to leave that arguable

and important determination to a case where it has to be

made.

5

Id. at 900.

6

See Nat’l. Fed. of the Blind v. United Airlines, 813 F.3d 718,

745–47 (9th Cir. 2016) (Kleinfeld, J. concurring).

7

In re Rigel Pharm., Inc. Sec. Litig, 697 F.3d 869, 875–77, 885–86

(9th Cir. 2012).