On January 14, 2022, Judge William H. Orrick of the Northern
District of California denied a motion to dismiss a putative
securities class action asserting claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5, against a lithium battery development
company (the "Company") and certain of its executives
(collectively, "defendants"). In re
Quantumscape Securities Class Action Litigation, No.
3:21-cv-00058-WHO (N.D. Cal. Jan. 14, 2022). The
Company's "solid-state" battery is an aspiring
competitor to conventional lithium-ion batteries for use in
electric vehicles. The Court denied defendants' motion to
dismiss, holding that the Complaint was adequately plead with the
exception of one of the challenged statements that it
dismissed.
The Complaint alleged that defendants falsely represented the
progress and effectiveness of the Company's solid-state
batteries and relied on two publications to support their
claims. First, a January 4, 2021 publication authored by an
expert who reviewed a December 2020 showcase by the Company
revealed that, notwithstanding that the Company "had some
successes," the Company "had 'overstated'
certain" of its capabilities, concluding, among other things,
that the Company's solid-state batteries were "completely
unacceptable for real world field electric vehicle
performance." Second, an April 15, 2021 publication
stated, among other things, that the Company's testing of its
solid-state batteries was "compromised," including by
using too-small cells, too-high temperatures, and pulse tests, all
of which made the Company's batteries seem more commercially
viable than defendants allegedly knew them to be, and that
defendants made false claims about the progress of the
Company's solid-state batteries and in some instances
mispresented the Company's testing data. This publication
cited several anonymous former Company employees and industry
experts. According to plaintiff, both of these publications
caused the Company's stock price to drop significantly.
In support of their motion to dismiss, defendants argued that the
two publications could not be relied upon to show falsity because
they provided no evidence that anything defendants stated was false
or misleading. Defendants further argued that both articles
lacked credibility because the paid author of the first article was
the CEO of one of the Company's competitors, and that he also
held a long position in another electric car company that uses
lithium-ion batteries; and the author of the second article was a
short-seller of the Company's stock. The Court, however,
refused to dismiss the claims based on the purported motives of the
authors of the publications, noting that although the purported
motives ultimately could later raise serious credibility issues,
defendants pointed to no case in which motive alone was sufficient
to discredit otherwise adequate allegations at the pleading
stage. The Court also found that to the extent the articles
relied on information from confidential witnesses, including some
of the Company's former employees, that information was
"supported by both public information . . . and by what
experts stated." Therefore, the Court held that
"[o]n the whole, it is plausible that reasonable investors
would have relied on both publications and the plaintiffs have
adequately alleged that each publication has the minimum indicia of
reliability to make it past the pleadings stage."
The Court next considered what it identified as the two groups of
alleged misstatements at issue: "(1) statements about
[the Company's] testing conditions and having solved the
'fundamental risks' or 'fundamental science risks'
of solid-state batteries such that the batteries were ready for
commercialization and (2) comparisons of the solid-state batteries
to lithium-ion batteries or 'conventional batteries'
already on the market."
Regarding the first set of alleged misstatements about testing
conditions, the Court found that while the Company's
disclosures of underlying testing data and the results of those
tests were "extensive" and may well weaken or even defeat
the plaintiff's case at a later stage when a factfinder can
weigh them contextually, it cannot conclude that the adequacy of
the disclosure "is so obvious that 'reasonable minds could
not differ' about whether the overall statements were
misleading." The Court further observed that plaintiff
does not allege that the Company should have used a different
methodology for its studies, but rather that "the studies were
represented to be one thing (uncompromised) when they were in fact
another (compromised) that required experts (and in some cases,
insiders) to accurately comprehend." According to the
Court, these allegations were sufficient to survive defendants'
motion to dismiss. Turning to the second group of alleged
misstatements, the Court found that the statements were at least in
part misleading to the extent that these comparative statements
were made based upon, or in conjunction with, the allegedly
compromised testing data, which the Court already held were
adequately alleged to be misleading.
The Court next addressed whether a number of alleged misstatements
were protected under the PSLRA's safe harbor. The Court
held that most of the challenged statements were not because the
alleged statements either concerned the Company's past
developments, its current state of affairs, or did not discuss the
Company's future at all. Accordingly, the Court held that
the majority of the challenged statements failed to meet the
safe-harbor requirements. The Court found one part of one of
the alleged misstatements—"if we can get into this
market, which is the task we are currently focused
on"—was in fact forward-looking and not
actionable.
The Court then turned to whether any of the statements were, as
defendants argued, non-actionable opinions. The Court
rejected defendants' argument that the challenged statements
concerned the Company's progress and development "as a
factual matter," specifically with respect to its testing and
capabilities. The Court similarly found that most of the
challenged statements were not unactionable puffery, with the
exception of one statement that the solid-state batteries were
"record-breaking" in comparison to conventional
lithium-ion batteries. According to the Court, plaintiff did
not point to an actual "record" at issue, and defendants
calling something "record-breaking" is corporate hype
that no reasonable investor would credit.
Next, addressing the sufficiency of the scienter allegations, the
Court found that "the statements that the defendants made over
and over were, according to the plaintiffs' allegations,
verifiable falsehoods." The Court noted that the Company
continued to state that it used uncompromised testing conditions
when according to its disclosures it in fact used compromised
testing conditions. The Court also rejected defendants'
argument that plaintiff impermissibly imputed scienter onto the
individual defendants based on their positions as executives,
emphasizing that the individual defendants themselves allegedly
reported false information about the Company.
Finally, the Court held that the Complaint adequately alleged loss
causation at the pleading stage by alleging facts that the
Company's stock price dropped immediately following the
publishing of both purported corrective disclosures. The
Court held that, because of this, "the revelation of alleged
fraud was at least a substantial cause of the loss of
value."
In re Quantumscape Securities Class Action Litigation
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