Austin Williams v. Globus Medical Inc

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

________________

No. 16-3607

________________

AUSTIN J. WILLIAMS; MARK SILVERSTEIN,

Individually and on behalf of all others similarly situated

v.

GLOBUS MEDICAL, INC.; DAVID C. PAUL; RICHARD

A. BARON; DAVID M. DEMSKI; STEVEN M. PAYNE

Austin J. Williams,

Appellant

_______________________

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Civil Action No. 2-15-cv-05386)

District Judge: Honorable: Wendy Beetlestone

______________

ARGUED: April 5, 2017

Before: CHAGARES, SCIRICA, and FISHER,

Circuit Judges

(Opinion Filed: August 23, 2017)

Jacob A. Goldberg [ARGUED]

Keith R. Lorenze

Rosen Law Firm

101 Greenwood Avenue

Suite 440

Jenkintown, PA 19046

Robert V. Prongay

Jason L. Krajcer

Charles H. Linehan

Glancy Prongay & Murray

1925 Century Park East

Suite 2100

Los Angeles, CA 90067

Counsel for Appellant

Cheryl W. Foung

Wilson Sonsini Goodrich & Rosati

650 Page Mill Road

Palo Alto, CA 94304

Barry M. Kaplan [ARGUED]

Gregory L. Watts

Wilson Sonsini Goodrich & Rosati

701 Fifth Avenue

Suite 5100

Seattle, WA 98104

2

Marc J. Sonnenfeld

Timothy D. Katsiff

Morgan Lewis & Bockius

1701 Market Street

Philadelphia, PA 19103

Counsel for Appellees

_________________

OPINION OF THE COURT

_________________

SCIRICA, Circuit Judge

In the spring of 2014, Globus Medical, Inc., a medical

device company, terminated its relationship with one of its

product distributors. Several months later, in August 2014,

Globus executives alerted shareholders that sales growth had

slowed, attributed this decline in part to the decision to

terminate its contract with the distributor, and revised

Globus’s revenue guidance downward for fiscal year 2014.

The price of Globus shares fell by approximately 18% the

following day.

Globus shareholders contend the company and its

executives violated the Securities Exchange Act and

defrauded investors by failing to disclose the company’s

decision to terminate the distributor contract and by issuing

revenue projections that failed to account for this decision.

The trial court dismissed the shareholders’ suit, and the

shareholders appealed. We will affirm.

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I. BACKGROUND

A. Facts

Globus is a publicly traded medical device company

that designs, develops, and sells musculoskeletal implants,

particularly for individuals with spine disorders. Globus

relies on both in-house sales representatives and independent

distributors to sell its products to surgeons and surgical staff

nationwide. Vortex Spine, LLC, was one of Globus’s

independent distributors, serving as the exclusive distributor

for Globus’s spine implant products in certain portions of

Louisiana and Mississippi. Vortex signed its initial

Exclusive Distributorship Agreement with Globus in 2004,

and the parties renewed the agreement in 2008 and 2010. The

2010 agreement was scheduled to expire on December 31,

2013.

Globus’s statements and actions in the wake of the

December 31, 2013, expiration of the agreement have become

the focus of this case. Plaintiffs allege that Globus decided to

terminate its partnership with Vortex around the time of the

expiration of the agreement. This was in line with the

company’s strategy to increase its reliance on in-house sales

representatives in the hopes of controlling commission costs

and strengthening its control over its sales team. Nonetheless,

Globus extended the existing distributorship agreement for

four months—through April 2014—and allegedly told Vortex

the companies would use this period to negotiate terms for a

new distributorship agreement. Plaintiffs contend Globus

instead used this period to establish a new in-house sales

position to cover the geographic territory being handled by

Vortex.

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On February 26, 2014—in the midst of the period

covered by the extension of the agreement with Vortex—

Globus Chief Financial Officer Richard A. Baron projected

“sales in the range of $480 million to $486 million, earnings

per fully diluted share of $0.90 to $0.92 per share” for fiscal

year 2014 during an earnings conference call. A51. A few

weeks later, on March 14, 2014, Globus filed its 2013 10-K

with the Securities & Exchange Commission. In a section of

the 10-K titled “Risks Related to Our Business and Our

Industry,” Globus cautioned, “If we are unable to maintain

and expand our network of direct sales representatives and

independent distributors, we may not be able to generate

anticipated sales.” A46. The risk disclosure added:

We face significant challenges and risks in

managing our geographically dispersed

distribution network and retaining the

individuals who make up that network. If any

of our direct sales representatives were to leave

us, or if any of our independent distributors

were to cease to do business with us, our sales

could be adversely affected. Some of our

independent distributors account for a

significant portion of our sales volume, and if

any such independent distributor were to cease

to distribute our products, our sales could be

adversely affected. In such a situation, we may

need to seek alternative independent distributors

or increase our reliance on our direct sales

representatives, which may not prevent our

sales from being adversely affected.

A47.

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Globus met with Vortex’s founder and manager on

April 18, 2014. Globus leadership notified him that Globus

had designated a new in-house sales representative to handle

distribution for the geographic territory covered by Vortex.

Globus proposed a new agreement with Vortex which would

require Vortex to turn over its customers to Globus in

exchange for a royalty payment and would require Vortex’s

sales representatives to become Globus employees. Vortex

rejected the proposed terms.

Approximately ten days later, on another earnings

conference call, CFO Baron again projected Globus would

achieve $480 to $486 million in sales, with $0.90 to $0.92

earnings per fully diluted share for fiscal year 2014—

estimates identical to those he projected in February 2014.

The next day, April 30, 2014, Globus filed with the SEC its

Quarterly Report on Form 10-Q for the period ended March

31, 2014. In a section titled “Quantitative and Qualitative

Disclosure About Market Risk,” Globus stated, “We have

evaluated the information required under this item that was

disclosed in our 2013 Annual Report on Form 10-K and there

have been no significant changes to this information.” A49–

50.

Months later, on August 5, 2014, Globus issued a press

release announcing its results for the second fiscal quarter of

2014 and revising its revenue guidance. According to the

release, Globus “now expect[ed] full year net sales to be in

the range of $460 to $465 million” but added that its earnings

per share guidance “remained unchanged.” A53. In an

earnings conference call held the same day, Globus Chief

Operating Officer David M. Demski explained that “domestic

sales growth in the quarter was below our historical

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standards” attributing this development, in part, to the fact

that “early in the quarter we made the decision not to renew

our existing contract with a significant U.S. distributor,

negatively impacting our sales.” A53. Demski observed that

the company “understood the risks to our short-term results.”

A53. Globus shares fell $4.05 per share (17.9%) in the wake

of the revised revenue guidance to close at $18.51 per share

on August 6, 2014. Ultimately, at the fiscal year’s end,

Globus announced it had achieved $474.4 million in sales,

with earnings per share at $0.97—meaning sales for the fiscal

year ultimately finished just 1.17% below the initial

projection made in February 2014 and earnings per share

exceeded the projection by 5.4%.

B. Procedural History

Plaintiff Mark Silverstein filed this action in the

United States District Court for the Eastern District of

Pennsylvania on September 29, 2015, on behalf of “all those

who purchased or otherwise acquired Globus securities traded

on the New York Stock Exchange [between February 26,

2014 and August 5, 2014] and were damaged upon the

revelation of the alleged corrective disclosure.” A54. On

January 14, 2015, the District Court granted the motion of

Austin J. Williams to be appointed lead plaintiff as the person

most capable of adequately representing the class.1

1

The Private Securities Litigation Reform Act amended the

Securities Exchange Act to provide that “[n]ot later than 90

days” after notice to shareholders of the pending securities

action, “the court shall consider any motion made by a

purported class member in response to the notice, . . . and

shall appoint as lead plaintiff the member or members of the

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By stipulation of the parties, plaintiffs filed an

Amended Complaint on February 19, 2016. The Amended

Complaint names as defendants Globus, Globus CEO David

C. Paul, Globus CFO Richard A. Baron, Globus COO David

M. Demski, and Globus Chief Accounting Officer Steven M.

Payne. The Amended Complaint alleges the 2013 10-K, 2014

1Q 10-Q, and related earnings calls violated §§ 10(b) and

20(a) of the Securities Exchange Act and Rule 10b-5

promulgated under that Act by the Securities and Exchange

Commission.

On March 28, 2016, Globus filed a motion to dismiss

the Amended Complaint. The District Court granted that

motion and dismissed all claims against all defendants by

Memorandum and Order dated August 25, 2016. Plaintiff

filed a motion for reconsideration, which the District Court

denied on September 12, 2016. This timely appeal followed.

II. JURISDICTION AND STANDARD OF REVIEW

The District Court had jurisdiction under Section 27 of

the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and

28 U.S.C. §§ 1331 and 1337. We have jurisdiction over the

appeal from a final order granting a motion to dismiss under

Federal Rule of Civil Procedure 12(b)(6) under 28 U.S.C. §

purported plaintiff class that the court determines to be most

capable of adequately representing the interests of class

members[.]” 15 U.S.C. § 78u-4(a)(3)(B)(i). The statute

provides a rebuttable presumption that the most adequate

plaintiff is the person that “in the determination of the court,

has the largest financial interest in the relief sought by the

class.” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(bb).

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1291. “We exercise plenary review over the order dismissing

the complaint, as well as the District Court’s interpretation of

securities law.” Morrison v. Madison Dearborn Capital

Partners III L.P., 463 F.3d 312, 314 (3d Cir. 2006).

III. ANALYSIS

A. Legal Standard

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

prohibits any person “[t]o use or employ, in connection with

the purchase or sale of any security . . . any manipulative or

deceptive device or contrivance in contravention of such rules

and regulations as the [Securities and Exchange] Commission

may prescribe . . . .” 15 U.S.C. § 78j(b). Rule 10b-5,

promulgated by the Securities and Exchange Commission

under the Exchange Act, makes it unlawful:

(a) To employ any device, scheme, or artifice to

defraud,

(b) To make any untrue statement of a material

fact or to omit to state a material fact necessary

in order to make the statements made, in the

light of the circumstances under which they

were made, not misleading, or

(c) To engage in any act, practice, or course of

business which operates or would operate as a

fraud or deceit upon any person,

in connection with the purchase or sale of any

security.

17 C.F.R. § 240.10b-5.

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To state a claim for relief under section 10(b), a

plaintiff must plead facts demonstrating that (1)

the defendant made a materially false or

misleading statement or omitted to state a

material fact necessary to make a statement not

misleading; (2) the defendant acted with

scienter; and (3) the plaintiff’s reliance on the

defendant’s misstatement caused him or her

injury.

Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 143

(3d Cir. 2004).

All securities fraud claims are subject to Rule 9(b),

which requires plaintiff to “state with particularity the

circumstances constituting fraud or mistake.” Fed. R. Civ. P.

9(b). In addition, the Public Securities Litigation Reform Act

(PSLRA) imposes two heightened pleading requirements

above the normal Rule 12(b)(6) standard. First, “the

complaint must specify each allegedly misleading statement,

why the statement was misleading, and if an allegation is

made on information and belief, all facts supporting that

belief with particularity.” Institutional Investors Grp. v.

Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009) (internal

quotations omitted) (citing 15 U.S.C. § 78u-4(b)(1)). Second,

the complaint must “with respect to each act or omission

alleged to violate this chapter, 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).

Accordingly, “[f]ailure to meet the threshold pleading

requirements demanded by [Rule 9(b) and the PSLRA]

justifies dismissal apart from Rule 12(b)(6).” Cal. Pub.

Emps.’ Ret. Sys., 394 F.3d at 145.

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B. Application

Plaintiffs’ claims can be divided into two categories:

challenges to historical statements, namely the risk

disclosures found in Globus’s 2013 10-K and 2014 1Q 10-Q;

and challenges to forward-looking statements, namely the

sales and earnings projections made in the February and April

earnings conference calls. We address each category in turn.

1. Historical Statements

The District Court held that plaintiffs failed to plead

actionable omissions from Globus’s risk disclosures because

Globus had no duty to disclose either its decision to terminate

its relationship with Vortex or the completed termination of

that relationship. Plaintiffs argue the District Court erred

because the absence of that information rendered the risk

disclosures materially misleading. We disagree and conclude

there was no duty to disclose.

“[Section] 10(b) and Rule 10b-5(b) do not create an

affirmative duty to disclose any and all material information.

Disclosure is required under these provisions only when

necessary ‘to make . . . statements made, in light of the

circumstances under which they were made, not misleading.’”

Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011)

(quoting 17 C.F.R. § 240.10b–5(b)). “Silence, absent a duty

to disclose, is not misleading under Rule 10b-5.” Basic Inc.

v. Levinson, 485 U.S. 224, 239 n.17 (1988). As we have

previously held, “[e]ven non-disclosure of material

information will not give rise to liability under Rule 10b-5

unless the defendant had an affirmative duty to disclose that

11

information.” Oran v. Stafford, 226 F.3d 275, 285 (3d Cir.

2000). The duty to disclose arises “when there is insider

trading, a statute requiring disclosure, or an inaccurate,

incomplete or misleading prior disclosure.” Id. at 285–86.

Plaintiffs contend Globus’s omission of its decision to

terminate its relationship with Vortex falls into the final

category because, without that information, Globus’s existing

risk disclosures were inaccurate, incomplete, or misleading.

Globus’s risk disclosures in the 2013 10-K and 2014 1Q 10-Q

warned that the loss of an independent distributor could have

a negative impact on sales—but it omitted to warn investors,

plaintiffs argue, that Globus had in fact lost an independent

distributor.

Once a company has chosen to speak on an issue—

even an issue it had no independent obligation to address—it

cannot omit material facts related to that issue so as to make

its disclosure misleading. Kline v. First W. Gov’t Sec., Inc.,

24 F.3d 480, 490–91 (3d Cir. 1994) (“[E]ncompassed within

that general obligation [to speak truthfully] is also an

obligation or ‘duty’ to communicate any additional or

qualifying information, then known, the absence of which

would render misleading that which was communicated.”)

(internal citation omitted). Consistent with this principle,

courts are skeptical of companies treating as hypothetical in

their disclosures risks that have already materialized.

For example, in In re Harman International Industries,

Inc. Securities Litigation, the United States Court of Appeals

for the District of Columbia Circuit considered a company—a

manufacturer of information and entertainment systems for

automobiles—that touted its considerable inventory of

12

personal navigational devices (PNDs) while also warning

generally that its sales depended on its ability to develop new

products in a competitive market. 791 F.3d 90, 103–04 (D.C.

Cir. 2015). But the company did not disclose to investors that

much of its PND inventory had already been rendered

obsolete by new technology, forcing the company to cut its

prices and reducing its sales revenue. The District of

Columbia Circuit suggested the company’s general warnings

about product obsolescence could be misleading and

emphasized, “there is an important difference between

warning that something ‘might’ occur and that something

‘actually had’ occurred.” Id. at 103.

Similarly, in the United States Court of Appeals for the

Ninth Circuit, a government intelligence and surveillance

contractor was sued after its revenue dropped by 25%

following the cancellation of several contracts. Berson v.

Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008). The

contracts at issue were subject to “stop-work” orders—which

immediately stop payment to the company and often signal

eventual cancellation of the contract—but the company

included revenue from these contracts as part of its “backlog”

of work the company had contracted to do, but had not yet

performed. The company warned that “future changes in

delivery schedules and cancellations of orders” might mean

sales for the year would not match the full backlog value, but

the court found the company’s representations could be

misleading. Id. at 986. The company’s warning, the court

held, “speaks entirely of as-yet-unrealized risks and

contingencies. Nothing alerts the reader that some of these

risks may already have come to fruition, and that what the

company refers to as backlog includes work that is

substantially delayed and at serious risk of being cancelled

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altogether.” Id.; see also Siricusano v. Matrixx Initiatives,

Inc., 585 F.3d 1167, 1181 (9th Cir. 2009) (finding actionable

a statement that “speaks about the risks of product liability

claims in the abstract, with no indication that the risk ‘may

already have come to fruition.’”), aff’d 563 U.S. 27 (2011).

We agree that a company may be liable under Section

10b for misleading investors when it describes as hypothetical

a risk that has already come to fruition. But this is not such a

case. In the 2013 10-K filed in March 2014, and incorporated

by reference in the 2014 1Q 10-Q a month later, Globus

warned, “if any of our independent distributors were to cease

to do business with us, our sales could be adversely affected.”

A47. The risk actually warned of is the risk of adverse effects

on sales—not simply the loss of independent distributors

generally. Accordingly, the risk at issue only materialized—

triggering Globus’s duty to disclose—if sales were adversely

affected at the time the risk disclosures were made.

Plaintiffs have not plead that Globus’s sales were

adversely affected by the decision to terminate Vortex at the

time the risk disclosures were made. The 2013 10-K was

filed in March 2014, while Vortex was still distributing

Globus’s products under the four-month extension of the

existing distributorship agreement. Nothing in the Amended

Complaint suggests sales had decreased at that time. The

2014 1Q 10-Q was filed on April 30, 2014—less than two

weeks after Vortex rejected Globus’s proposed terms for a

new agreement. Plaintiffs have not pleaded facts sufficient to

show that Globus’s sales were adversely affected within that

short window. To the contrary, plaintiffs allege Globus had

spent months preparing to end its relationship with Vortex

and had an in-house sales representative prepared to take over

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the territory previously covered by Vortex. Nothing in the

Amended Complaint permits the inference that Globus was

aware of adverse effects on sales prior to the August 5, 2014,

earnings conference call when the company revised its

revenue projections.

Accordingly, this case is unlike the materialization of

risk cases cited by plaintiffs, in which the adverse effects at

issue had in fact been realized. In Harman, at the time of the

company’s general warnings about the need to develop new,

competitive products, the obsolescence of its PNDs had

already led to a reduction in prices and missed sales targets.

791 F.3d at 107 (“by April, inventory obsolescence was

becoming a problem; by September it had fully materialized

into a serious problem effecting Company revenues”)

(internal citations omitted). Similarly, in Berson, the court

noted that stop-work orders—like those that were not

disclosed by the company in conjunction with its backlog

report—“immediately interrupt the company’s revenue

stream.”2 527 F.3d at 986. Accordingly, the circumstances in

2

In re Facebook, Inc. IPO Securities & Derivative Litigation

is also illustrative. 986 F. Supp. 2d 487 (S.D.N.Y. 2013).

Facebook’s risk disclosures warned that increased mobile

usage might negatively affect the company’s revenue, but the

court found the plaintiffs had sufficiently plead that the

disclosure was misleading. It explained, “Facebook’s

Registration Statement did not disclose that increased mobile

usage and the Company’s product decisions had already had a

negative impact on the Company’s revenues and revenue

growth. The Company’s purported risk warnings

misleadingly represented that this revenue cut was merely

15

these cases differ from the circumstances here because

plaintiffs have not plead that Globus was already

experiencing an adverse financial impact at the time of the

risk disclosures.

Nor have plaintiffs sufficiently pleaded that a drop in

sales was inevitable. Plaintiffs suggest Globus should have

known that its sales would be adversely affected by the

company’s decision to end its relationship with Vortex based

on the company’s experience with “distributor turnover” in

2010. Plaintiffs note that defendant Paul acknowledged that

it took “almost two years” to get Globus back to the same

level financially in the wake of that turnover. A48–49. But

the Amended Complaint provides no details about the

“distributor turnover” in 2010, including how many

distributors were involved, whether the distributor or

distributors involved were of comparable significance to

Globus’s sales as Vortex was, whether the turnover was

expected, and what, if any, contingencies were in place at the

time of the distributor turnover. Absent this information, we

cannot conclude that Globus and its executives should have

expected a similar financial impact from its decision to

terminate its relationship with Vortex as from the 2010

“distributor turnover.”

Because plaintiffs have failed to adequately plead that

the risk about which Globus warned—the risk of adverse

effects on sales as a result of the loss of a single independent

distributor—had actually materialized at the time of either the

2013 10-K or the 2014 1Q 10-Q, Globus had no duty to

possible when, in fact, it had already materialized.” Id. at

516.

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disclose its decision to terminate its relationship with Vortex,

and the risk disclosures were not materially misleading. We

will affirm the District Court’s dismissal of the claims based

on historical statements.

2. Forward-Looking Statements

Plaintiffs contend Globus and its executives violated

Section 10(b) and Rule 10b-5 by issuing revenue projections

in February and April 2014 that failed to account for the

company’s decision to terminate its relationship with Vortex.

The District Court dismissed these claims because it found

that plaintiffs failed to plead facts sufficient to show that the

revenue projections were false when made, or in the

alternative, the challenged statements were entitled to the

protection of PSLRA’s safe harbor.

a. Falsity

Because plaintiffs allege that the revenue projections at

issue were false or misleading, their allegations must meet the

“[e]xacting pleading requirements” of the PSLRA. City of

Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 168 (3d Cir.

2014) (alteration in original, internal quotations omitted). “In

addition to requiring plaintiffs to specify each statement

alleged to have been misleading, . . . the PSLRA directs

plaintiffs to specify ‘the reason or reasons why the statement

is misleading.’” Calif. Pub. Emps., 394 F.3d at 145 (quoting

15 U.S.C. § 78u–4(b)(1)). These “true facts” allegations

cannot rely exclusively on hindsight, but must be sufficient to

show that the challenged statements were “actionably

unsound when made.” See In re Burlington Coat Factory

Sec. Litig., 114 F.3d 1410, 1430 (3d Cir. 1997); see also In re

17

NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d Cir. 2002)

(“To be actionable, a statement or omission must have been

misleading at the time it was made; liability cannot be

imposed on the basis of subsequent events.”). Accordingly,

“it is not enough merely to identify a forward-looking

statement and assert as a general matter that the statement

was made without a reasonable basis.” Burlington, 114 F.3d

at 1429. Instead, plaintiffs were required to plead factual

allegations that show the projections were “made with either

(1) an inadequate consideration of the available data or (2) the

use of unsound forecasting methodology.” Id.

In this case, plaintiffs’ allegations hinge on their

conclusory assertion that Globus’s “announced forecast

incorporated Vortex’s projected sales figures for the

remainder of the 2014 fiscal year.” A51. To support this

claim, plaintiffs draw numerous inferences based on

statements made by Globus executives during the August

2014 call explaining the revisions to the revenue guidance.

First, they cite defendant Baron’s statement that “the decision

not to renew the distributor, and the impact to pricing will

affect our top line expectations. We now expect full year

revenue to be in the range of $460 million to $465 million.”

A327. This statement, they contend, shows Globus must

have incorporated Vortex revenue into their earlier

projections—otherwise they would not have needed to revise

the revenue forecast downward. Further, because defendant

Baron responded, “I don’t think we should comment on that,”

when asked whether the revenue guidance would have been

revised “if not for the distributor issue,” A336, plaintiffs

contend we should infer the loss of Vortex’s revenue

accounted for the full $20 million downward revision.

We agree with the District Court that these allegations

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fall short of the exacting pleading standards imposed by the

PSLRA. Plaintiffs were required to plead “true facts”

sufficient to show the February and April revenue projections

were false or misleading when made. But instead of citing

contemporaneous sources to show Globus knowingly

incorporated Vortex revenue into those projections, plaintiffs

rely on conjecture based on subsequent events. This is

insufficient. See In re NAHC, 306 F.3d at 1330 (“[L]iability

cannot be imposed on the basis of subsequent events.”); see

also Burlington, 114 F.3d at 1430 (“Plaintiffs’ Complaint

contains a number of vague factual assertions regarding the

period prior to November 1, 1993, but plaintiffs have failed to

link any of these allegations to their claim that the November

1 forecast was actionably unsound when made.”).

Even assuming plaintiffs’ conclusory assertions were

sufficient to infer that Globus’s projections incorporated some

revenue from Vortex, the Amended Complaint would still

fail. Plaintiffs fail to plead specific facts regarding the

amount of sales revenue from Vortex projected by Globus;

how far short of the projections Vortex sales ultimately fell;

and, how significant the shortfall was in the context of

Globus’s sales overall. Without these facts, plaintiffs do not

sufficiently plead that, at the time the projections were made,

Globus failed to adequately account for the imminent change

in distributorship and any resulting effect on sales. Absent

these details, plaintiffs have done nothing more than “assert

as a general matter that the [revenue projections were] made

without a reasonable basis.” Burlington, 114 F.3d at 1429.

Further, at the end of the fiscal year, Globus achieved

$474.4 million in sales—just less than its initial projection of

$480 million to $486 million—and earnings of $0.97 per

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share—compared to an initial projection of $0.90 to $0.92. In

other words, Globus exceeded its projections for earnings per

fully diluted share and missed its initial revenue projection by

just 1.17%. While the ultimate touchstone is whether the

projections were false or misleading when made, plaintiffs’

claim that the projections were impossible to achieve is

undermined by the fact that the company ultimately

substantially achieved the challenged projections. See Avaya,

564 F.3d at 266–67. On these facts, we conclude plaintiffs

have not adequately pleaded the revenue projections were

false or misleading when made.

b. Safe Harbor

In the alternative, like the trial court, we find the

challenged revenue projections are entitled to protection

under the PSLRA’s safe harbor. The statute “immunizes

from liability any forward-looking statement, provided that:

the statement is identified as such and accompanied by

meaningful cautionary language; or is immaterial; or the

plaintiff fails to show the statement was made with actual

knowledge of its falsehood.” Avaya, 564 F.3d at 254 (citing

15 U.S.C. § 78u–5(c)). We find plaintiffs have failed to

adequately plead that the revenue projections were made with

actual knowledge of falsehood.

The PSLRA requires plaintiffs in securities class

actions to “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). To meet this standard, “an

inference of scienter must be more than merely plausible or

reasonable—it must be cogent and at least as compelling as

any opposing inference of nonfraudulent intent.” Tellabs,

20

Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314

(2007).

Plaintiffs primarily point to three facts in asking us to

infer actual knowledge of falsity on the part of Globus and its

executives: (1) during the August 5, 2014, call explaining the

revisions to the sales projections, COO Demski stated that the

company “understood the risks to our short-term results”

when it terminated its relationship with Vortex, A53; (2)

during that same call, CEO Paul and CFO Baron

acknowledged that they recalled Globus’s 2010 experience

with “distributor turnover” and the two-year period it took to

get the company “back to where [it was],” A45–46; and (3)

the nature of the market for spinal implant products and the

importance of goodwill between salespeople and customers.

From these facts, it may be plausible to infer that

Globus knew or should have known that ending its

relationship with Vortex could have some effect on its sales.

But, as the District Court correctly noted, actual knowledge

that sales from one source might decrease is not the same as

actual knowledge that the company’s overall sales projections

are false. Silverstein v. Globus Medical, Inc., No. 15-5386,

2016 WL 4478826, at *8 (E.D. Pa. Aug. 25, 2016) (“But

simply knowing that the loss of a distributor may cause a drop

in sales does not mean that Globus failed to account for this

drop in its projections.”). Plaintiffs have not pleaded any

facts to support their claim that Globus incorporated

anticipated revenue from Vortex in its projections. Indeed,

given plaintiffs’ allegations regarding Globus’s extensive,

months-long planning for the end of its relationship with

Vortex—including the company’s broad strategy to transition

its sales force from independent distributors to in-house sales

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representatives and the fact that a new in-house sales

representative was in place to take over Vortex’s geographic

territory before the relationship was terminated—the more

plausible inference from the Amended Complaint is that

Globus accounted for the change in strategy when it devised

its sales projections for the year. Globus’s later revision of

those projections does not sufficiently show that Globus knew

the projections were false when made—particularly when

Globus ultimately achieved sales for the fiscal year within

1.17% of the original, challenged projection and exceeded its

projection for earnings per share. Absent facts giving rise to

a strong inference of scienter, Globus’s forward-looking

revenue projections are entitled to the protection of the

PSLRA safe harbor.

3. Section 20(a) Claims

Section 20(a) of the Securities Exchange Act permits

plaintiffs to bring a cause of action against individuals who

control a corporation that has violated Section 10(b). 15

U.S.C. § 78t(a). “[L]iability under Section 20(a) is derivative

of an underlying violation of Section 10(b) by the controlled

person.” Avaya, 564 F.3d at 252. Because we affirm the

dismissal of plaintiffs’ claims under Section 10(b), we also

affirm the District Court’s dismissal of their Section 20(a)

claims.

IV. CONCLUSION

For these reasons, plaintiffs have failed to adequately

plead any violation of the Securities Act on the part of Globus

or its controlling officers. We will affirm the District Court’s

dismissal of all claims.

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