City of Miami Fire Fighters & Police Ofcs Ret Tr v. CVS Health Corporation ( 2022 )

United States Court of Appeals
For the First Circuit
No. 21-1479
CITY OF MIAMI FIRE FIGHTERS' AND POLICE OFFICERS' RETIREMENT
TRUST, individually and on behalf of all other persons similarly
situated; INTERNATIONAL UNION OF OPERATING ENGINEERS PENSION
FUND OF EASTERN PENNSYLVANIA AND DELAWARE, individually and on
behalf of all other persons similarly situated,
Plaintiffs, Appellants,
v.
CVS HEALTH CORPORATION; LARRY J. MERLO; DAVID M. DENTON;
JONATHAN C. ROBERTS; ROBERT O. KRAFT; EVA C. BORATTO,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Mary S. McElroy, U.S. District Judge]
Before
Lynch, Kayatta, and Gelpí,
Circuit Judges.
Jeremy A. Lieberman, with whom Brian Calandra, Patrick V.
Dahlstrom, Pomerantz LLP, James E. Miller, Eric L. Young, Jayne A.
Goldstein, Miller Shah LLP, Robert D. Klausner, Stuart Kaufman,
Klausner, Kaufman, Jensen & Levinson, Stephen Cypen, and Cypen &
Cypen were on brief, for appellants.
Steven M. Farina, with whom George A. Borden, Amanda M.
MacDonald, Michael J. Mestitz, Elizabeth A. Wilson, Williams &
Connolly LLP, Robert C. Corrente, and Whelan Corrente & Flanders
LLP were on brief, for appellees.
August 18, 2022
KAYATTA, Circuit Judge. Two retirement funds brought
this putative securities fraud class action against CVS Health
Corporation arising out of difficulties CVS Health experienced in
the wake of its acquisition of Omnicare, Inc., a company that
provides pharmacy services to long-term care facilities.
Plaintiffs allege that executives of CVS Health and its newly
acquired subsidiary employed false statements and misleading
nondisclosures to conceal from investors for more than three years
the disintegration of Omnicare's customer base that eventually led
to a series of write-offs totaling more than $8 billion. The
district court dismissed plaintiffs' complaint because it failed
to allege any actionable false statements or misleading omissions.
On careful de novo review, we find that the district court's
assessment was on the mark. We therefore affirm the dismissal and
the subsequent denial of plaintiffs' attempt to revisit the
judgment. Our reasoning follows.
I.
As this case comes to us on a motion to dismiss, we draw
the facts from the operative Amended Class Action Complaint ("the
complaint") and certain of CVS Health's public filings with the
Securities Exchange Commission (SEC). See Fire & Police Pension
Ass'n of Colo. v. Abiomed, Inc., 778 F.3d 228, 232 n.2 (1st Cir.
2015) (considering public SEC filings among other undisputed
records at the motion-to-dismiss stage); Watterson v. Page, 987
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F.2d 1, 3 (1st Cir. 1993) (noting "narrow exceptions" to the
traditional rule barring consideration of materials outside the
complaint, including for documents whose authenticity is not
disputed).
A.
Headquartered in Woonsocket, Rhode Island, CVS Health is
a publicly traded company that provides integrated pharmacy
healthcare services and operates thousands of retail stores and
clinics across the United States. In 2015, CVS Health acquired
Omnicare, then the leading provider of pharmaceutical services to
long-term care (LTC) facilities.1 Plaintiffs allege that the newly
acquired LTC business subsequently "hemorrhaged" customers due to
CVS Health's mismanagement, including its decision to centralize
and standardize a number of operations that Omnicare had previously
tailored to each customer. According to the complaint, CVS Health
misleadingly concealed these customer losses and their causes so
as not to threaten CVS Health's ability to acquire financing for
another large acquisition planned for 2018. The purported class
period spans from allegedly misleading statements made in February
1 CVS Health's subsidiary, CVS Pharmacy, Inc., entered the
agreement to acquire Omnicare in May 2015, with the acquisition
closing that August. For ease of discussion, we refer to this
acquisition throughout our opinion as the action of the parent
reporting entity, CVS Health.
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2016 through the ultimate disclosure of the full extent of
Omnicare's lost value in February 2019.
B.
In gauging whether plaintiffs have pleaded facts
sufficient to proceed with their claim that CVS Health misled
investors about the difficulties encountered with the acquired
Omnicare LTC business, we begin the fact that between 2016 and
2019 CVS Health repeatedly and publicly wrote off chunks of the
$8.6 billion in goodwill2 originally assigned to the Omnicare
acquisition. The first negative disclosure concerning the LTC
business came on November 8, 2016, when, in the third-quarter Form
10-Q filing,3 CVS Health reported a reduced goodwill balance of
2"Goodwill" is an accounting term that refers to the value
of anticipated future financial results of an asset, as initially
measured by the difference between the price paid for the asset
and its fair value. Under Generally Accepted Accounting
Principles, the acquiring company must test its goodwill
allocation at least annually, as well as in response to events or
circumstances that would likely impair the asset's goodwill. See
City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align
Tech., Inc., 856 F.3d 605, 611 (9th Cir. 2017) (citing 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." Id. (quoting
ASC 350-20-25-30).
3The SEC requires public companies to file a comprehensive
report about their financial performance, called a Form 10-Q, at
the end of the first three quarters of each fiscal year. 17 C.F.R.
§ 249.308a. Full-year financials are reported annually in the
Form 10-K, shortly after the fourth quarter concludes. See id.§ 249.310.
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only $6.3 billion for the acquired LTC business. The filing stated
that while some reporting units "exceed[ed] their carrying values
by significant margins," the LTC business exceeded its carrying
value by just 7%. During a presentation to investors and analysts
the following month, CVS Health's then-Chief Financial Officer
(CFO) David Denton warned that "[a]s for the retail Long-Term Care
segment, it will be a challenging year. Revenue growth is expected
to be flat to down 1.5%."
This downward reporting trend continued. The following
year, on November 6, 2017, CVS Health disclosed that the fair value
of the LTC business now exceeded its carrying value by only
"approximately 1%." In the same 10-Q filing, CVS Health also
explained that its cash-flow projections for the LTC unit had
declined because of "customer reimbursement pressures, industry
trends such as lower occupancy rates in skilled nursing facilities,
and client retention rates." Finally, it cautioned that:
If we do not achieve our forecasts, given the
small excess of fair value over the related
carrying value, as well as current market
conditions in the healthcare industry, it is
reasonably possible that . . . the LTC
reporting unit could be deemed to be impaired
by a material amount.
Six months later, on May 2, 2018, CVS Health issued
similar warnings about the challenges facing the LTC business --
including client retention -- and the possibility of an impairment.
Then, in the second-quarter 10-Q issued on August 8, 2018, the
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company reported that it had conducted an interim goodwill test
resulting in the impairment of the LTC unit's goodwill to the tune
of $3.9 billion. Even with this write-down, CVS Health warned
that, due to client retention rates and other specified challenges,
"it is reasonably possible in the near term that the goodwill of
the LTC reporting unit could be deemed to be impaired again by a
material amount."
As predicted, the bad news continued. In February 2019,
CVS Health recognized a further impairment of $2.2 billion
assessed in the fourth quarter of 2018. In so doing, the company
identified "client retention rates" as one of several factors that
contributed to the declining value of the business. In this
manner, the goodwill value of the LTC business shrank from the
initial value of $8.6 billion in May 2015 to just $431 million at
the end of 2018.
C.
Plaintiffs claim that this escalating disclosure of
difficulties with the LTC business and write-downs of goodwill
came too late. They also point to numerous statements by senior
management that plaintiffs say misled investors by either
affirmatively misrepresenting or omitting material facts. We
group these alleged statements into five buckets for ease of
discussion.
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The first group concerns representations about the
condition and financial performance of the LTC business. For
example, the fiscal year 2015 Form 10-K filed in February 2016
stated that CVS Health's "segments benefited from the Omnicare
acquisition" and that an increase in net revenues for the
Retail/LTC Segment -- a business reporting unit containing both
the LTC business and CVS Health's much larger preexisting retail
business -- "was primarily driven by the acquisition of Omnicare."
The quarterly and annual filings for 2016 then echoed these
sentiments in substantially similar language. The complaint
asserts generally that this category of statements was "materially
false and misleading," though it does not allege any revenue
information contrary to the statements. The most specific
descriptions of these statements instead allege that these
statements were misleading because they gave a positive impression
of the business without disclosing that Omnicare LTC customers
were fleeing.
Second, in December 2016, Denton allegedly claimed at an
annual investor conference that CVS Health had "a leadership
position in long-term care with Omnicare." Chief Executive Officer
(CEO) Larry Merlo then reiterated during a second-quarter 2017
analyst call that "Omnicare remains the leader in the market."
The complaint generally alleges that these statements were "false
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and misleading" because they omitted information about customer
exodus.
Third, plaintiffs take issue with statements that they
contend overstated CVS Health's understanding of its LTC
customers. The company in multiple 2017 filings said that pharmacy
revenue in the umbrella reporting unit containing both its LTC and
larger retail businesses "continued to benefit from [CVS Health's]
ability to attract and retain managed care customers." It also
reiterated in nearly all quarterly and annual filings throughout
the class period a general "Overview of Our Business" section that
touted CVS Health's "deep understanding of [consumers', payors',
and providers'] diverse needs through [CVS Health's] unique
integrated model." More specifically to the LTC business, Merlo
on investor calls in August 2016 and August 2017 stated that the
company was "[w]orking with our LTC clients to address currently
unmet needs of their residents," and that it had "invested the
time and capital . . . to get the right technology and processes
in place in order to differentiate our offering to make it more
compelling for our clients as well as the residents at these
facilities." The complaint alleges that these statements were
false and misleading because defendants did not in fact understand
their LTC customers' needs and many of these customers were fleeing
CVS Health due to poor customer service.
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Fourth, plaintiffs call out a series of statements about
CVS Health's realization of "synergies" between its existing
retail pharmacy business and its new LTC business. For example,
at the outset of the class period in February 2016, Merlo reported
on an earnings call with analysts and investors that "Omnicare
performed well and in line with our expectations as we began to
realize some of the anticipated synergies." Merlo then reiterated
in a May 2016 earnings call that the LTC business "benefited from
some of the anticipated costs and sourcing synergies." The
complaint alleges that these statements touting "synergies" were
false and misleading because it was in fact the "synergies"
implemented by CVS Health that caused LTC customers to leave.
Fifth, the complaint alleges that the company's
"boilerplate" statements of risks facing the LTC business, as
repeated in SEC filings throughout the class period, misleadingly
purported to alert investors to only future risks that were, in
fact, "already occurring." These statements cautioned, for
example, that "[t]here can be no assurance that we will be able to
win new business or secure renewal business on terms as favorable
to us as the present terms" and observed that "[p]otential
difficulties that may be encountered in the [acquisition]
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integration process include . . . [r]etaining existing customers
and attracting new customers."4
D.
To support their theory that the goodwill write-downs
were too late and the foregoing statements from the company duped
the investing public, plaintiffs rely on evidence proffered by
their nineteen confidential witnesses (CWs), comprised of former
CVS Health or Omnicare employees. The CWs offer a broad array of
anecdotes concerning legacy Omnicare customers that CVS failed to
retain in the years following the acquisition. An example conveys
the nature of these allegations:
[Confidential Witness 4 (CW4)] both saw
personally and learned from contacts in the
LTC industry that Omnicare LTC divisions in
Illinois and Missouri, and particularly the
St. Louis region, lost at least 50% of their
business from 2015 to 2019. CW4 said that the
customers who left CVS Health were largely
poached by former Omnicare and CVS Health
employees.
4 The complaint also identified as a separate category of
misrepresentations certain executive defendants' certifications
that each SEC filing was complete, accurate, and compliant with
applicable law, which plaintiffs allege were false and misleading
because the filings in fact contained false information and did
not therefore comply with applicable law. But these certification
statements are only alleged to be false or misleading to the extent
the other alleged statements within those filings were, so we need
not discuss the certifications as a distinct category of
misrepresentations.
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II.
In February 2019, plaintiffs commenced this lawsuit
against CVS Health, its CEO Merlo, and its former CFO Denton.
Shortly thereafter, the parties agreed that those defendants need
not respond to the original complaint. Rather, after the
appointment of a lead plaintiff and lead counsel, counsel served
an amended complaint on those and several additional CVS Health
defendants in late July 2019.5 That Amended Class Action Complaint
is now the operative complaint.
The complaint includes claims for violations of
section 10(b) of the Securities Exchange Act of 1934 ("the Exchange
Act"), codified at 15 U.S.C. § 78j(b), and its implementing SEC
Rule 10b-5, codified at 17 C.F.R. § 240.10b-5, as well as
section 20(a) of the Exchange Act, codified at 15 U.S.C. § 78t(a).
Defendants moved to dismiss the complaint for failure to state a
claim, pursuant to Federal Rule of Civil Procedure 12(b)(6). In
plaintiffs' opposition to the motion to dismiss, they wrote: "If
the Court grants any portion of the Motion, Plaintiffs respectfully
request an opportunity to move for leave to amend pursuant to
[Federal] Rule [of Civil Procedure] 15(a)(2)." The district court
5The other individual defendants include Jonathan Roberts
(Executive Vice President (EVP) and Chief Operating Officer of CVS
Health, starting in March 2017), Robert Kraft (former EVP of CVS
Health and President of Omnicare from August 2015 to October 2017),
and Eva Boratto (EVP and CFO of CVS Health starting in November
2018).
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heard argument on the motion on September 16, 2020 and ultimately
granted the motion in full on February 11, 2021, dismissing the
amended complaint with prejudice after finding that it failed to
allege any materially false or misleading statements. City of
Mia. Fire Fighters' & Police Officers' Ret. Tr. v. CVS Health
Corp., 519 F. Supp. 3d 80, 87–90, 94, 97–98 & n.21 (D.R.I. 2021).
The district court did not reach defendants' alternative argument
that the complaint failed to adequately plead the element of
scienter. Id. at 28 n.21.
Four weeks later, plaintiffs moved the court under
Rule 59(e) to reconsider its ruling so as to permit plaintiffs to
amend the complaint for a second time. With this motion, they
included a Proposed Second Amended Class Action Complaint
containing additional allegations. Unpersuaded, the district
court denied the motion to reconsider and the request for further
amendment. Plaintiffs then appealed that ruling along with the
grant of the motion to dismiss.
III.
A.
Having described the course of proceedings and the gist
of plaintiffs' allegations, we turn now to the merits of
plaintiffs' appeal. We begin with plaintiffs' challenge to the
district court's order granting defendants' motion to dismiss. We
review this challenge de novo, "accept[ing] well-pleaded factual
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allegations in the complaint as true and . . . view[ing] all
reasonable inferences in the plaintiff[s'] favor." Constr. Indus.
& Laborers Joint Pension Tr. v. Carbonite, Inc., 22 F.4th 1, 6
(1st Cir. 2021).
1.
At the outset, we note that the viability of plaintiffs'
section 20(a) claim for control-person liability is contingent on
their section 10(b) claim, and no party argues here that one claim
ought stand should the other fall. See Mehta v. Ocular
Therapeutix, Inc., 955 F.3d 194, 211 (1st Cir. 2020) ("A claim
brought under section 20(a) is . . . derivative of a claim
alleging an underlying securities law violation."). We thus
proceed to consider the viability of the section 10(b) claim as
dispositive of the whole complaint.
Section 10(b) of the Exchange Act prohibits the use, "in
connection with the purchase or sale of any security[,] . . . [of]
any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the [SEC] may
prescribe as necessary or appropriate in the public interest or
for the protection of investors." 15 U.S.C. § 78j(b). SEC
Rule 10b-5 is such a rule, implementing section 10(b)'s
prohibition by making it unlawful 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
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circumstances under which they were made, not misleading." 17
C.F.R. § 240.10b–5(b).
Stating a claim under section 10(b) and Rule 10b-5
requires the pleading of six elements: "(1) a material
misrepresentation or omission; (2) scienter; (3) a connection with
the purchase or sale of a security; (4) reliance; (5) economic
loss; and (6) loss causation." Carbonite, 22 F.4th at 6 (quoting
In re Biogen Inc. Sec. Litig., 857 F.3d 34, 41 (1st Cir. 2017)).
Additionally, Federal Rule of Civil Procedure 9(b) requires
plaintiffs claiming fraud to "state with particularity the
circumstances constituting fraud." Complaints alleging securities
fraud specifically are also subject to the heightened pleading
requirements of the Private Securities Litigation Reform Act
(PSLRA), including the mandate that plaintiffs "specify each
statement alleged to have been misleading, [and] the reason or
reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1).
Against the backdrop of these heightened pleading requirements,
our analysis begins and ends with the first of the section 10(b)
elements, as we agree with the district court that the complaint
fails to allege a material misrepresentation or omission.
For allegedly false statements to support a claim of
securities fraud, they must be "false when made." Gross v. Summa
Four, Inc., 93 F.3d 987, 994 (1st Cir. 1996); see also Karth v.
Keryx Biopharms., Inc., 6 F.4th 123, 135 (1st Cir. 2021) ("[A
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plaintiff] may not plead 'fraud by hindsight'; i.e., a complaint
'may not simply contrast a defendant's past optimism with less
favorable actual results' in support of a claim of securities
fraud." (quoting ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d
46, 62 (1st Cir. 2008))). Moreover, "[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) (omission in original) (quoting 17 C.F.R. § 240.10b-
5(b)). Thus, a theory of securities fraud liability premised on
nondisclosure or omission must also rest on some statement that,
absent disclosure, misleads as to a contemporaneous material fact.
2.
Close review of the complaint reveals that, despite its
length, it fails to allege sufficiently specific facts about the
state of the LTC business at particular points in time to enable
us to conclude that any of the goodwill write-downs were too late
or that any of defendants' alleged misstatements contradicted the
state of that business as it then stood. Plaintiffs thus fail to
allege that defendants made statements of fact that were false
when made or misleadingly incomplete in light of contemporaneous
circumstances.
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We start with the parties' point of agreement: the
condition of the LTC business at either end of the class period.
Between the May 2015 acquisition and the end of the class period
in February 2019, the Omnicare business suffered a material
reduction in value on the order of $8 billion. The dispute centers
therefore on whether the complaint alleges facts demonstrating --
"with particularity," Fed. R. Civ. P. 9(b) -- that defendants
misrepresented the existence, extent, nature, or pace of that
reduction as it occurred. But the complaint provides us with no
meaningful way to compare defendants' disclosures and statements
about the LTC business with the contemporaneous state of the
business. The district court was especially critical of the
complaint's failure to juxtapose the proffered reports of lost
customers with what CVS was disclosing at the time of those losses.
See CVS Health, 519 F. Supp. 3d at 88–89, 97. In the wake of that
criticism, one would have expected perhaps a timeline in
plaintiffs' brief on appeal. One would have been disappointed.
We have nevertheless reviewed the complaint's forty-six
paragraphs alleging customer losses and have identified just six
that attempt to place losses within specific periods of time --
and even then, only in highly general terms. The following
summarized allegations from the complaint contain references to
the timing of a customer loss:
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1. One CW, who worked for a former "Omnicare LTC customer
with four campuses and approximately 850 to 900 beds,"
fired CVS Health as its LTC provider and moved to a
competitor "in 2016."
2. Omnicare competitor Remedi SeniorCare "had been taking
Omnicare customers who were leaving or had left CVS
Health since 2015."
3. "Omnicare LTC divisions in Illinois and Missouri, and
particularly [in] the St. Louis region, lost at least
50% of their business from 2015 to 2019." This included
one client operating "a large number of nursing homes
in Missouri" that withdrew its business from CVS Health
"in 2016."
4. Omnicare competitor Polaris Pharmacy Services "took 30%
of the Omnicare LTC business in South Florida in 2016."
5. "In 2015," Omnicare competitor Modern Health Pharmacy
"took 10% to 15% of Omnicare's business in California."
6. An Omnicare affiliate in New York called MedWorld lost
75% of its 22,000 beds "almost immediately after the
[Omnicare] Acquisition" with "another 15% of the
beds . . . lost thereafter," such that, "only 18 months
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after the Acquisition, the MedWorld location where CW13
worked closed."
Two of these allegations cover such broad swaths of time
that they effectively provide no date limitation. The second
describes a particular competitor who had been pulling an
unspecified number of CVS customers "since 2015." The third notes
that a regional division of Omnicare suffered customer losses "from
2015 to 2019." For all we can discern from these capacious
timeframes, these two losses may not have come anywhere close to
their ultimate scale until shortly before the complaint was filed.
And we certainly have no basis for finding that CVS Health
experienced these losses before it took an appropriate write-down
or made an inconsistent statement -- indeed, that some losses of
customers occurred "since 2015" or "from 2015 to 2019" is entirely
consistent with CVS Health's reporting.
As to the other four allegations that are tethered to
some more precise timeframe, the complaint paints with only a
slightly finer brush. It alleges customers left CVS only within
particular years; i.e., one competitor poached customers "in
2015," two others did so "in 2016," and an Omnicare affiliate
pharmacy in New York lost most of its customers "immediately after
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the Acquisition" such that a particular site of that affiliate
closed "18 months after the Acquisition."6
Of these four losses of customers, only the first ("in
2015") definitively occurred prior to the first disclosed goodwill
write-down (in November 2016). But the complaint provides us with
no reason to think that that 2015 loss by itself was both material
and not offset by new business. Nor does the complaint offer any
reason to regard the alleged loss of some customers in 2016 as
anything but consistent with the general negative trend of CVS
Health's goodwill write-offs beginning in 2016 and its statement
in 2017 that issues with "client retention rates" contributed to
declining revenues in the prior year. Cf. Ponsa-Rabell v.
Santander Sec. LLC, 35 F.4th 26, 35 (1st Cir. 2022) ("[I]t is not
a material omission to fail to point out information of which the
market is already aware." (quoting Baron v. Smith, 380 F.3d 49, 57
(1st Cir. 2004))).
6 Plaintiffs' appellate brief did not facilitate our attempt
to locate in time the complaint's allegations of customer loss, as
the brief attributes to several alleged losses more specific time
periods than actually pleaded. The brief claims that two specified
sets of lost customers -- one comprising several skilled nursing
facilities in upstate New York and a second set comprising
customers poached by competitor Remedi -- occurred "by the end of
2015." In fact, the complaint alleges that the New York customers
were lost "in the aftermath of the acquisition" and that Remedi
had been poaching customers "since 2015." Elsewhere, the brief
claims that two specified losses (in California and New York) were
suffered "shortly after the Acquisition" when only one of these
was alleged as such in the complaint.
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Plaintiffs' concession that they "do not dispute
anything about Defendants' accounting," which necessarily includes
the figures included in the company's goodwill reports throughout
the class period, reinforces the gap in their pleading. For
accurate figures to mislead, plaintiffs would need to point us to
some more concrete and inaccurate conclusions that those figures
would invite, not just pockets of customer loss that may very well
have been entirely consistent with the reported goodwill
diminution. Nor can we simply infer that because CVS Health
eventually wrote off the goodwill assigned to the Omnicare
acquisition that it should have done so sooner. See In re
Cabletron Sys., Inc., 311 F.3d 11, 37 (1st Cir. 2002)
("[P]laintiffs may not simply seize upon disclosures made later
and allege that they should have been made earlier." (alteration
in original) (quoting Berliner v. Lotus Dev. Corp., 783 F. Supp.
708, 710 (D. Mass. 1992))).
Plaintiffs' failure to establish a reasonably clear
timeline of customer losses inconsistent with the company's
goodwill disclosures is representative of the complaint's
overarching failure to allege material facts inconsistent with
defendants' public statements. To start, plaintiffs allege that
CVS Health misled investors in December 2016 and in the second
quarter of 2017 by publicly invoking Omnicare's position as a
"leader" in the LTC market. But the complaint never alleges that
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Omnicare was in fact not the market leader -- even by the end of
the class period, long after these statements were made.7
Similarly, plaintiffs point to repeated statements in filings
starting shortly after the acquisition indicating that the
Retail/LTC Segment's revenue gains were primarily driven by the
Omnicare acquisition. But, again, they do not challenge any
reported accounting metrics and do not allege that the Omnicare
acquisition in fact failed to contribute substantial revenue.
Plaintiffs also allege that CVS Health misleadingly
touted its understanding of LTC customers, but they marshal a
series of statements that do no such thing. Most of these
statements refer not to customers of the LTC business but to a
much broader universe of customers -- those of the umbrella
Retail/LTC Segment or the "consumers, payors, and providers"
serviced by the entirety of CVS Health.8 Several other statements
7 Plaintiffs claim that several district court cases support
their argument that "[s]tatements characterizing a business as a
leader [are] misleading when the business is materially
declining." But none of these cases even suggest, much less hold,
that a claim of leadership is false or misleading merely because
the size of the lead has materially shrunk. See Ark. Pub. Emp.
Ret. Sys. v. GT Solar Int'l, Inc., No. 08-cv-312, 2009 WL 3255225,
at *7–11 (D.N.H. Oct. 7, 2009); Scritchfield v. Paolo, 274 F. Supp.
2d 163, 175 (D.R.I. 2003); In re Lucent Techs., Inc. Sec. Litig.,
217 F. Supp. 2d 529, 546, 557 (D.N.J. 2002).
8 Plaintiffs' brief on appeal recasts one of these alleged
statements concerning customer needs to make it appear as if the
statement referred specifically to the LTC business. The complaint
alleges that all of the class-period SEC filings stated CVS Health
was:
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discuss efforts taken to improve the experience of LTC customers,
but the complaint never alleges that CVS Health failed to take
these efforts. For example, plaintiffs point to Merlo's statement
in August 2017 that "[w]e have invested the time and capital over
the past two years to get the right technology and processes in
place in order to differentiate our offering." Rather than
alleging that the company in fact did not invest in technology and
processes to "differentiate [its] offering," plaintiffs contend
only that some customers chose to leave CVS Health in part because
of new technologies and processes. That outcome plainly is not
inconsistent with Merlo's statement that the company invested in
those operations with different aims in mind.
the only integrated pharmacy health care
company with the ability to impact consumers,
payors, and providers with innovative,
channel-agnostic solutions to complex
challenges managing costs and care. We have
a deep understanding of their diverse needs
through our unique integrated model . . . .
This statement appears in the CVS Health filings in a section
headed "Overview of Our Business," which summarizes the business
of the entire CVS Health Corporation, including its "9,800 retail
locations, more than 1,100 retail health care clinics, [and, among
other services,] leading pharmacy benefits manager." Plaintiffs'
brief, however, inserts a bracketed revision when quoting from the
above statement such that it purportedly refers to "the LTC
business's 'deep understanding of [our LTC customers'] diverse
needs.'" The full quote above makes plain that the phrase "their
diverse needs" refers in context to the needs of "consumers,
payors, and providers" -- for the entire CVS Health enterprise --
rather than plaintiffs' preferred recasting.
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As to the fifth category of alleged misrepresentations,
plaintiffs' briefing castigates defendants' general public
references to anticipated and realized "synergies" from the
Omnicare acquisition. But while their CWs identify several of CVS
Health's business operations decisions that allegedly alienated
LTC customers by providing less personalized service, the
complaint points to no specific instance where a defendant claimed
-- contrary to then-existing facts -- that a particular business
operation was succeeding.9 Moreover, defendants' statements
frequently paired the realization of synergies with cost savings,
a potential benefit of centralized business operations as to which
the complaint is totally silent.10
9 We note that Merlo's February 2016 "synergies" statement
also refers positively to corporate performance: "Omnicare
performed well and in line with our expectations as we began to
realize some of the anticipated synergies." To the extent
plaintiffs' concerns are with this statement's representation
about performance (i.e., "Omnicare performed well") rather than
its characterization of "synergies," we have already explained why
the complaint provides us with no basis for deeming such statements
false or misleading when made.
10 In addition to the complaint's failure to allege facts
contrary to this category of statements, we are also skeptical
that statements touting anticipated or realized "synergies" from
a corporate merger, untethered to some objective indicator, would
be specific enough to constitute a statement of material fact.
Such statements may fairly be characterized as "loosely optimistic
statements that are so vague [or] so lacking in specificity . . .
that no reasonable investor could find them important to the total
mix of information available." Shaw v. Digit. Equip. Corp., 82
F.3d 1194, 1217 (1st Cir. 1996).
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To be sure, statements need not be literally false to
give rise to liability under section 10(b). Statements that are
literally true may nonetheless omit information necessary to
prevent them from steering investors toward inaccurate
conclusions. See SEC v. Johnston, 986 F.3d 63, 72 (1st Cir. 2021)
("[Statements] can also be misleading if they are half-truths,
painting a materially false picture in what they say because of
what they omit."). But those conclusions must still be inaccurate
as of the time the statements were made. See 17 C.F.R.
§ 240.10b-5(b) (prohibiting the omission of facts necessary to
prevent statements from being misleading "in the light of the
circumstances under which the[] [statements] were made"); Ganem v.
InVivo Therapeutics Holdings Corp., 845 F.3d 447, 455–56 (1st Cir.
2017) (finding plaintiff's omission theory insufficient where the
complaint failed to allege facts "necessary . . . for the
statements to have been misleading when made"). While plaintiffs
generally allege in the alternative that all of the alleged
misrepresentations discussed above also omitted material facts
concerning LTC customer loss, we simply cannot infer from this
complaint that any of the alleged statements were misleadingly
incomplete for largely the same reasons we cannot infer their
falsity -- the complaint provides too little basis for comparing
any material conclusions implied by the statements against the
contemporaneous state of the LTC business.
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This observation also captures the final category of
statements, which are only alleged as misleadingly incomplete,
rather than directly false: CVS Health's "boilerplate risk
factors" that warned of the possibility that the company would not
realize benefits from its acquisitions because of, among other
risks, difficulties with retaining customers. We have recognized
that warnings or disclosures in the securities context that frame
risks as merely hypothetical may be misleading when they resemble
the "Grand Canyon" metaphor, in that "one cannot tell a hiker that
a mere ditch lies up ahead, if the speaker knows the hiker is
actually approaching the precipice of the Grand Canyon." Karth,
6 F.4th at 137. However, we have also clarified that, in the
context of a section 10(b) claim, a speaker warning of a
hypothetical risk only acquires a duty to disclose further known
information about the extent of that risk when "the alleged risk
had a 'near certainty' of causing 'financial disaster' to the
company" or where the warned-of risk "had already begun to
materialize." Id. at 137–38 (quoting Hill v. Gozani, 638 F.3d 40,
59–60 (1st Cir. 2011)).
Plaintiffs assert that the LTC business's loss of
goodwill value due to customer flight was just such a "near
certainty" -- throughout the entire class period -- because these
losses had already begun to materialize as of the first such risk
statement made in the February 2016 Form 10-K that kicked off the
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class period. But, again, and as we recently noted in another
case rejecting a Grand Canyon comparison, "[w]hether or not this
assertion is true we cannot determine because the . . . plaintiffs
simply do not plead sufficient allegations allowing us to do so."
Ponsa-Rabell, 35 F.4th at 36. As we have already explained, the
complaint fails to provide the information necessary to infer that
there was any material net loss of customers that was not timely
reflected in the 2016 write-off. A fortiori, it hardly suffices
to allege in conclusory terms that the failure of the acquisition
was a "near certainty." Our caselaw on this variety of omission
theory "does not require a company to be omniscient, even if the
company looks foolish in hindsight for not properly predicting
whatever harm befell it." Karth, 6 F.4th at 138.
In sum, as it is plaintiffs' burden to plead specific
facts "showing that the statements presented to the public were
false or misleading at the time they were made," Suna v. Bailey
Corp., 107 F.3d 64, 69 (1st Cir. 1997), their failure to do so
means they have failed to allege the necessary element of a
misrepresentation or omission of material fact. See Gross, 93
F.3d at 993 ("Though Gross adamantly contends that the statement
is false, the amended complaint provides little in the way of
specific facts to support this contention."). Accordingly, we
agree with the district court that the complaint fails to allege
a violation of section 10(b) or Rule 10b-5.
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B.
We turn our attention, finally, to plaintiffs' efforts
to be allowed a third bite of the apple in the form of a second
amended complaint. By the time defendants filed their motion to
dismiss, plaintiffs had once amended their complaint already, so
they no longer had a right to amend the pleading again without the
agreement of defendants or leave of the court. See Fed. R. Civ.
P. 15(a)(1). Such leave, though, would have been "freely given"
had plaintiffs asked and "justice so require[d]." Id. In short,
when plaintiffs received the motion to dismiss spelling out what
defendants claimed to be gaps in the amended complaint, plaintiffs
could have sought leave to amend their pleading yet again. Whether
the court would have allowed the motion, we do not know, because
plaintiffs never filed it.
Instead, plaintiffs simply included in their memorandum
opposing the motion to dismiss a brief note asking for a
conditional opportunity to move for leave to amend, "if the Court
grants any portion of the [m]otion [to dismiss]." No motion or
argument was advanced in support of this request. Nor was any
proposed amendment filed. The district court treated this
"contingent" request as holding "no legal significance." City of
Mia. Fire Fighters' & Police Officers' Ret. Tr. v. CVS Health
Corp., 541 F. Supp. 3d 231, 233 (D.R.I. 2021). We see no reason
to treat it otherwise. See Abiomed, 778 F.3d at 247 ("No proper
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request [to amend] was made to the district court, only a mention
in a footnote in their opposition to dismissal."); Fisher v.
Kadant, Inc., 589 F.3d 505, 509 (1st Cir. 2009) (reiterating that
a contingent request to amend a complaint contained in an
opposition to a motion to dismiss "does not constitute a motion to
amend a complaint" (quoting Gray v. Evercore Restructuring L.L.C.,
544 F.3d 320, 327 (1st Cir. 2008))). It therefore stands to
reason, a fortiori, that plaintiffs' conditional request cannot
"transmogrify [a] post-judgment motion for reconsideration into a
Rule 15(a) motion." Fisher, 589 F.3d at 511.
When the district court then dismissed the first amended
complaint, it did so with prejudice. That approach is disfavored,
at least when dealing with a complaint that has not been previously
amended, but is nevertheless allowed within the discretion of the
district court. See In re Genzyme Corp. Sec. Litig., 754 F.3d 31,
47 (1st Cir. 2014).
Once judgment was entered, Rule 15 was no longer on the
table. Rather, plaintiffs first needed to get the judgment set
aside. See id. at 46. Toward that end, they filed their
unsuccessful Rule 59(e) motion to reconsider the court's order
dismissing their complaint. A district court may grant such a
motion "where the movant shows a manifest error of law," "newly
discovered evidence," or "an error not of reasoning but
apprehension." Ruiz Rivera v. Pfizer Pharms., LLC, 521 F.3d 76,
- 29 -
81 (1st Cir. 2008) (first quoting Kansky v. Coca-Cola Bottling Co.
of New England, 492 F.3d 54, 60 (1st Cir. 2007), and then quoting
Sandoval Diaz v. Sandoval Orozco, No. 01-1022, 2005 WL 1501672, at
*2 (D.P.R. June 24, 2005)). "The granting of a motion for
reconsideration is 'an extraordinary remedy which should be used
sparingly.'" Palmer v. Champion Mortg., 465 F.3d 24, 30 (1st Cir.
2006) (quoting 11 Charles Alan Wright et al., Federal Practice and
Procedure § 2810.1 (2d ed. 1995)). We review challenges to the
denial of a Rule 59(e) motion for manifest abuse of discretion.
Ruiz Rivera, 521 F.3d at 81.
Plaintiffs rely on a claim of newly discovered evidence.
A party asking a court to reconsider its judgment on this basis
must show "that [it] could not in the exercise of reasonable
diligence have obtained [the] new evidence earlier." In re Biogen,
857 F.3d at 46. So, we focus on what plaintiffs knew or reasonably
could have learned "before the district court entered its order of
dismissal." Id.; see also Advest, 512 F.3d at 57 ("The plaintiffs
argue . . . they were entitled to wait and see if their amended
complaint was rejected by the district court before being put to
the costs of filing a second amended complaint. . . . Plaintiffs
have it exactly backwards.").
The Proposed Second Amended Class Action Complaint
(PSAC) plaintiffs included with their Rule 59(e) motion identified
twenty-five new CWs, seventeen of whom were drawn entirely from
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another complaint against CVS Health filed in September 2020, and
eight of whom were identified by plaintiffs' investigators. The
district court did not clearly err in finding that the allegations
that were lifted directly from the September complaint were easily
discoverable through due diligence well before the dismissal order
the following February. As to the remaining set of eight new CWs,
plaintiffs point to only two in arguing that this evidence could
not have been discovered before the dismissal. Those two CWs were
still employed by CVS Health "when Plaintiffs were preparing the
Complaint," with one employed there until October 2020, "after
motion to dismiss briefing and oral argument were completed."
Thus, even plaintiffs' presumptively best examples of late-
discovered evidence were nonetheless available to them at least
three months before the court dismissed their complaint. Of
course, plaintiffs in suits of this type may have good grounds for
seeking a reasonable period of time within which to gather and
synthesize newly available information. But in that event, they
should notify the court of their supplemental investigation so
that the court can consider delaying its ruling in anticipation of
the filing of an amended complaint. See In re Biogen, 857 F.3d at
46 ("[T]he plaintiffs could have alerted the court to their
intentions earlier, but did not."). Plaintiffs here gave no such
notice, so the "argument that the district court abused its
discretion by failing to account for the time the plaintiffs needed
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to vet the evidence . . . has no force." Id. As the district
court below noted:
Even if they did not at that time know of the
full extent of the testimony they could obtain
from these eight confidential witnesses, they
could have moved to amend and requested leave
for an extension of time in which to submit
the proposed amended complaint. Instead, for
five months, they simply waited and hoped for
a favorable decision.
CVS Health, 541 F. Supp. 3d at 234.
Finally, plaintiffs argue that the combined effects of
our precedent as applied by the district court lead to a "manifest
injustice" to the detriment of meritorious claimants. Of course,
the same could be said when any significant deadline or procedural
rule is enforced. Moreover, whether the proposed amendment would
have itself withstood a motion to dismiss is hardly clear. Even
in plaintiffs' briefs on appeal, they point to no new allegations
in the PSAC that would connect defendants' public statements with
contradictory contemporaneous facts or would demonstrate that the
further anecdotal losses described by the new CWs materially
exceeded the losses recognized by CVS Health itself in the
pertinent time frames. So this is not a case in which a manifestly
meritorious claim has been lost due to any delay by counsel.
There are also off-setting, prudential considerations.
As we have previously noted, "allowing plaintiffs to hedge their
bets by adding a cursory contingent request in an opposition to a
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motion to dismiss would encourage plaintiffs to test the mettle of
successive complaints and freely amend under Rule 15(a) if their
original strategic choices prove inadvisable." Fisher, 589 F.3d
at 510; see also Advest, 512 F.3d at 57 (explaining that honoring
this combination of conditional and post-judgment requests "would
lead to delays, inefficiencies, and wasted work"). Thus, entirely
apart from any leniency in granting proper motions to amend a
complaint under Rule 15, "[p]laintiffs may not, having the needed
information, deliberately wait in the wings . . . with another
amendment to a complaint should the court hold the first amended
complaint was insufficient." Advest, 512 F.3d at 57.
For largely the same reasons, plaintiffs miss the mark
in their last-ditch argument that the district court's denial of
leave to amend here would permit dismissing PSLRA complaints with
prejudice and without leave to amend in every case. First, we do
not know how the district court would have treated a properly filed
motion to amend here because plaintiffs did not file one. See CVS
Health, 541 F. Supp. 3d at 233 (noting, for example, that
plaintiffs here failed to attach an amended complaint to their
conditional request for leave to amend, as required by local rule).
Second, there is no basis for contending that in this case the
grounds for the dismissal were somehow a surprise. To the
contrary, they were the focus of defendants' briefing. See
Abiomed, 778 F.3d at 247 ("[P]laintiffs were put on notice of the
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deficiencies in the complaint by the motion to dismiss. If they
had something relevant to add, they should have moved to add it
then. . . . We wish to discourage this practice of seeking leave
to amend after the case has been dismissed."). Third, we reiterate
that plaintiffs' basis for seeking leave to amend was an ongoing
investigation about which, prior to dismissal, they never informed
the court. Fourth, the dismissal came twenty-four months after
plaintiffs commenced this action and seventeen months after
defendants filed their motion to dismiss explaining why they
contended that the complaint was deficient -- certainly long enough
to allow the district court to assume that the table was set for
a final disposition. Accordingly, our ruling today does nothing
to discourage district courts in their discretion from staying
rulings to allow for reasonable due diligence, from temporarily
postponing the entry of judgment after granting a Rule 12(b)(6)
motion, see 1 Steven S. Gensler & Lumen N. Mulligan, Federal Rules
of Civil Procedure, Rules and Commentary, Rule 15 ("[l]eave to
amend after dismissal of complaint but before final judgment"), or
from granting motions to reconsider dismissal when due diligence
uncovers new evidence that was previously unavailable.
In sum, the district court did not abuse its discretion
or commit a legal error when it denied plaintiffs' Rule 59(e)
motion.
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IV.
For the foregoing reasons, the district court's orders
dismissing plaintiffs' complaint and denying the motion to
reconsider are affirmed.
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