In re Under Armour Securities Litigation

          MEMORANDUM OPINION

          Richard D. Bennett, United States District Judge

         Plaintiffs Aberdeen City Council as Administrating Authority for the North East Scotland Pension Fund (“Aberdeen” or “Lead Plaintiff”) and Monroe County Employees' Retirement System (“Monroe”) (collectively, “Plaintiffs”) bring this putative class action against Under Armour, Inc. (“Under Armour” or “the Company”) and Kevin A. Plank (“Plank”) (collectively, “Defendants”) alleging violations of federal securities laws. (Consol. Second Am. Compl., ECF No. 78.)^[1] Plaintiffs bring this federal class action under the Securities Exchange Act of 1934 (“Exchange Act”) §§ 10(b), 20(a), and 20A, 15 U.S.C. §§ 78j(b), 78(t)(a), 78t-1, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Plaintiffs purport to represent a class of all persons or entities that purchased or acquired common stock of Under Armour between September 16, 2015 to January 30, 2017, inclusive (“Class Period”), and who were damaged thereby. (ECF No. 78 at ¶ 2).

         Currently pending before this Court are three motions: (1) Defendants' Motion to Dismiss Plaintiffs' Consolidated Second Amended Complaint (ECF No. 80); (2) Defendants' Motion to Strike the Declarations of Mark A. Cohen and Professor M. Todd Henderson (ECF No. 79); and (3) Plaintiffs' Motion to Strike Exhibits 21, 23, and 24 Attached to Defendants' Motion to Dismiss Plaintiffs' Consolidated Second Amended Complaint (ECF No. 88). The parties' submissions have been reviewed, and no hearing is necessary. See Local Rule 105.6 (D. Md. 2018).

         For the reasons that follow, this Court shall GRANT Defendants' dismissal motion, and shall also GRANT both parties' motions to strike. Specifically, this Court concludes that Plaintiffs have failed to meet the burden imposed upon them by the heightened pleading standards to which the Exchange Act claims of Count I are subject. Therefore, Count I shall be dismissed with prejudice. Since Count I must be dismissed, Counts II and III also fail because they are each dependent upon a predicate violation of the Exchange Act.

         BACKGROUND

         In ruling on a motion to dismiss, this Court “accept[s] as true all well-pleaded facts in a complaint and construe[s] them in the light most favorable to the plaintiff.” Wikimedia Found. v. Nat'l Sec. Agency, 857 F.3d 193, 208 (4th Cir. 2017) (citing SD3, LLC v. Black & Decker (U.S.) Inc., 801 F.3d 412, 422 (4th Cir. 2015)). The Court may consider only such sources outside the complaint that are, in effect, deemed to be part of the complaint, for example, documents incorporated into the complaint by reference and matters of which a court may take judicial notice. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); see also Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988 (9th Cir. 2018) (clarifying the proper use of judicial notice and incorporation-by-reference in securities litigation).^[2]

         In brief, ^[3] Under Armour is a Maryland-based sports apparel company that sells branded athletic apparel, footwear and accessories worldwide. (ECF No. 78 at ¶ 4.) Since its formation in 1996, the Company grew to become a leading premium sportswear brand, achieving the position of number two sportswear brand by revenue in the United States by 2014. (Id. at ¶¶ 5-6.) By capitalizing on its premium brand image and reputation for state-of-the-art fabrics, Under Armour reported 26 consecutive quarters of 20% or more compounded annual growth between 2010 and 2016. (Id. at ¶ 6.) Plank is the Company's founder, Chief Executive Officer, Chairman of the Board, and largest shareholder. (Id. at ¶ 24.) Plaintiffs allege generally that beginning in September 2015, Defendants' public statements concealed that they knew consumer demand for Under Armour's products was declining, so the Company abandoned its “brand strength over price” sales philosophy and resorted to discounting, which led to Under Armour's stock prices being artificially inflated by lower-margin sales and international expansion. (Id. at ¶¶ 9-12.) In January 2016, Morgan Stanley & Co. LLC (“Morgan Stanley”)^[4] published a report relying on industry sales data that revealed Under Armour's average-sales-price and market-share decline, which started a corresponding decline in the Company's stock prices. (Id. at ¶ 13.) Plaintiffs also allege that Plank “personally cashed in on” the stock's artificial inflation by selling a substantial amount of his stock in the Company during the Class Period. (Id. at ¶ 12.)

         The initial Complaints alleging violations of federal securities law were filed in February and March 2017 and were consolidated on March 23, 2017.^[5] A Consolidated Amended Complaint was filed on August 9, 2017, claiming four causes of action: Counts I and II for violations of the Securities Act^[6] and Counts III and IV for violations of the Exchange Act^[7]. (ECF No. 30.) On September 18, 2018, this Court granted Defendants' dismissal motions, dismissing the Securities Act claims (Counts I and II) with prejudice, and dismissing the Exchange Act claims (Counts III and IV) without prejudice. In re Under Armour Sec. Litig., 342 F.Supp.3d 658 (D. Md. 2018). By their Consolidated Second Amended Complaint (ECF No. 78), filed on November 16, 2018, Plaintiffs have dropped all defendants except for Plank and Under Armour, contending that the prior pleading deficiencies have been remedied and that all necessary elements have been adequately alleged to establish that Plank and Under Armour violated §§ 10(b), 20(a) and 20A of the Securities Exchange Act of 1934. (Pls.' Resp. 1, ECF No. 86.) By the Defendants' Motion to Dismiss Plaintiffs' Consolidated Second Amended Complaint, the Defendants seek the dismissal with prejudice of Plaintiffs' claims. (Defs.' Mot., ECF No. 80.) Defendants assert that Plaintiffs have added no new factual allegations and still fail to plead scienter as to either Plank or the Company, the only two remaining defendants. (Mot. Mem. 1, ECF No. 80-2.) Defendants further contend that Plaintiffs have attempted to address the deficiencies in their pleadings by adding declarations from “expert” witnesses to support their conclusions. (Id. at 2.) By the Defendants' Motion to Strike the Declarations of Mark A. Cohen and Professor M. Todd Henderson, the Defendants move this Court to strike the declarations and disregard the opinions expressed in them. (ECF No. 79.) Defendants assert that an expert report attached to a complaint is not a “written instrument” under Rule 10(c) of the Federal Rules of Civil Procedure and that opinions cannot act as substitutes for facts under the heightened pleading standard of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. §§ 78u-4, et seq.

         Finally, Plaintiffs seek to have this Court strike certain exhibits attached to Defendants' Motion to Dismiss. (ECF No. 88.) Specifically, Plaintiffs move, pursuant to the PSLRA and Rule 12(f) of the Federal Rules of Civil Procedure, to strike Exhibits 21, 23, and 24 attached to Defendants' Motion to Dismiss and to strike all references to, and assertions based upon, those materials. (Id.) Defendants contend that the three documents are not incorporated by reference nor or they the proper subjects of judicial notice and are attached for the improper purpose of rebutting Plaintiffs' allegations of scienter. (Pls.' Mot. Mem. 4, ECF No. 88-1.)

         This Court shall address first the motions to strike and then the substantive motion to dismiss. For the reasons that follow, this Court shall GRANT all three motions. Specifically, this Court concludes that Plaintiffs have failed to meet the burden imposed upon them by the heightened pleading standards to which the Exchange Act claims of Count I are subject. Therefore, Count I shall be dismissed with prejudice. Since Count I must be dismissed, Counts II and III also fail because they are each dependent upon a predicate violation of the Exchange Act.

         STANDARD OF REVIEW

         Rule 8(a)(2) of the Federal Rules of Civil Procedure requires that a complaint contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Rule 12(b)(6) authorizes the dismissal of a complaint if it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The United States Supreme Court's opinions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), require that complaints in civil actions be alleged with greater specificity than previously was required. While a court must accept as true all factual allegations contained in the complaint, legal conclusions drawn from those facts are not afforded such deference. Iqbal, 556 U.S. at 678. A complaint must set forth “enough factual matter (taken as true) to suggest” a cognizable cause of action, “even if . . . [the] actual proof of those facts is improbable and . . . recovery is very remote and unlikely.” Twombly, 550 U.S. at 556 (internal quotations omitted).

         Most importantly, this Court has noted that a claim for securities fraud must meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b). In re Constellation Energy Grp., Inc. Sec. Litig., 738 F.Supp.2d 614, 634 (D. Md. 2010). Rule 9(b) of the Federal Rules of Civil Procedure requires that “the circumstances constituting fraud be stated with particularity.” Fed.R.Civ.P. 9(b). The rule “does not require the elucidation of every detail of the alleged fraud, but does require more than a bare assertion that such a cause of action exists.” Mylan Labs., Inc. v. Akzo, N.V., 770 F.Supp. 1053, 1074 (D. Md. 1991). To satisfy the rule, a plaintiff must “identify with some precision the date, place and time of active misrepresentations or the circumstances of active concealments.” Johnson v. Wheeler, 492 F.Supp.2d 492, 509 (D. Md. 2007). As the United States Court of Appeals for the Fourth Circuit stated in United States ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., 707 F.3d 451 (4th Cir. 2013), the aims of Rule 9(b) are to provide notice to defendants of their alleged misconduct, prevent frivolous suits, eliminate fraud actions where all the facts are learned after discovery, and protect defendants from harm to their goodwill and reputation. 707 F.3d at 456 (citation omitted).

         The Private Securities Litigation Reform Act further requires a securities fraud claim to (1) “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading, ” and (2) “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Tellabs, 551 U.S. at 321 (quoting 15 U.S.C. § 78u-4(b)(1), (b)(2)). These heightened pleading standards in the securities fraud context are demanding but were implemented because Congress recognized that there was potential for abuse. Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 623 (4th Cir. 2008). Courts were charged to “be vigilant in preventing meritless securities fraud claims from reaching the discovery phase of litigation” and “instructed courts to dismiss any securities fraud complaint that does not” plead a strong inference of scienter. Id. (citing 15 U.S.C. § 78u-4(b)(2)).

         ANALYSIS

         I. Motions to Strike

         Necessarily, this Court shall begin its analysis by determining which exhibits are properly before the Court at this time. The parties have requested that this Court strike several items: (1) two expert declarations attached to the Plaintiffs' complaint; and (2) three exhibits attached to the Defendants' dismissal motion. (ECF Nos. 79, 88.)

         Under Rule 12(f) of the Federal Rules of Civil Procedure, the Court “may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter” on its own or on a party's timely motion. Fed.R.Civ.P. 12(f). In Waste Mgmt. Holdings, Inc. v. Gilmore, 252 F.3d 316, 347 (4th Cir. 2001), the United States Court of Appeals for the Fourth Circuit noted that, “Rule 12(f) motions are generally viewed with disfavor ‘because striking a portion of a pleading is a drastic remedy and because it is often sought by the movant simply as a dilatory tactic' ” (citing 5A C. Wright & A. Miller, Federal Practice & Procedure § 1380, 647 (2d ed. 1990)). See also Stockart.com, LLC v. Caraustar Custom Packaging Grp., Inc., RDB-05-2409, 240 F.R.D. 195, 199 (D. Md. 2006). However, if “the pleading is obviously insufficient as a matter of law, ” a court has discretion to grant a motion to strike. Ong v. Chipotle Mexican Grill, Inc., 294 F.Supp.3d 199, 222 (S.D.N.Y. 2018) (citations omitted).

         A. Declarations Attached to the Complaint

         Plaintiffs argue that the expert declarations attached as Exhibits D and E to the Second Amended Complaint qualify as “written instruments” under Fed.R.Civ.P. 10(c). (ECF No. 87 at 7.) Plaintiffs assert that the declarations are integral to the complaint, are incorporated by reference, and their authenticity is not challenged. (Id. at 8.) Further, Plaintiffs rely on them to “explain key specific facts” supporting their allegations of scienter. (Id.)

         “A copy of a written instrument that is an exhibit to a pleading is part of the pleading for all purposes.” Fed.R.Civ.P. 10(c); see also Thompson v. Greene, 427 F.3d 263, 268 (4th Cir. 2005) (“[T]he complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.”). The Fourth Circuit has not specifically addressed whether declarations are permissible attachments to pleadings under Fed.R.Civ.P. 10(c). See Occupy Columbia v. Haley, 738 F.3d 107, 116-17 (4th Cir. 2013) (commenting on there being no uniform rule among the circuits with respect to whether affidavits are “written instruments” that may be considered in resolving a dismissal motion).

         Further, some district courts have accepted affidavits or declarations for purposes of evaluating a dismissal motion, while other district courts have not. Compare Malinowski v. Lichter Grp., LLC, Civil No. WDQ-14-917, 2015 WL 857511, at *4 (D. Md. Feb. 26, 2015) (“Documents contemplated by Rule 10(c) include ‘contracts, notes, and other writing[s] on which [a party's] action or defense is based,' but not affidavits.”) (quoting Rose v. Bartle, 871 F.2d 331, 339 n.3 (3d Cir. 1989)); and Copeland v. Aerisyn, LLC, No. 1:10-CV-78, 2011 WL 2181497, at *1 (E.D. Tenn. June 3, 2011) (“An ‘instrument' is defined by Black's Law Dictionary (9th ed. 2009) as ‘[a] written legal document that defines rights, duties, entitlements, or liabilities, such as a contract, will, promissory note, or share certificate.'”); with Alvarez-Soto v. B. Frank Joy, LLC, 258 F.Supp.3d 615, 623 (D. Md. 2017) (considering declarations attached to the complaint but not those attached to the motions); and Reaves v. Am. Home Mortg. Servicing, Inc., No. 5:15-CV-180-FL, 2017 WL 9478517, at *3 (E.D. N.C. Aug. 21, 2017) (“The court ‘may properly take notice of matters of public record' and ‘may also consider documents attached to the complaint, see Fed. R. Civ. P. 10(c), as well as those attached to the motion to dismiss, so long as they are integral to the complaint and authentic.'”) (quoting Phillips v. Pitt Cty. Mem'l Hosp., 572 F.3d 176, 180 (4th Cir. 2009)).

         Importantly, this case is subject to a heightened pleading standard. Complaints filed under the PSLRA “must allege specific facts demonstrating material misstatements or omissions made with scienter. Even if non-opinion portions of an expert's affidavit constitute an instrument pursuant to Rule 10, opinions cannot substitute for facts under the PSLRA.” Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 286 (5th Cir. 2006). As this Court has previously noted, “Plaintiffs may not substitute factual allegations with the speculation of their expert witness.” Lerner v. Northwest Biotherapeutics, 273 F.Supp.3d 573, 590 (D. Md. 2017). In the context of securities fraud complaints, courts have stricken a declaration where plaintiffs asked the court to consider it for the truth of its opinions, see Ong, 294 F.Supp.3d at 209, but at least one court has allowed a declaration when used “merely to buttress” the plaintiffs contentions, see In re MannKind Sec. Actions, 835 F.Supp.2d 797, 821 (C.D. Cal. 2011). It is apparent that both the context of the case and the purpose of the declarations are important elements for a court to evaluate when considering whether to strike the documents.

         In this case, Plaintiffs contend that the declarations “only serve to support and help explain the allegations” in the complaint. (ECF No. 87 at 10.) Therefore, they do not form the basis of the complaint, are not integral to the complaint, and this Court will not refer to them as a substitution for its own analysis. This Court's evaluation of a motion to dismiss accepts as true all the factual allegations, so “buttressing” and external support are unnecessary. See Twombly, 550 U.S. at 555-56. However, this Court also distinguishes factual allegations from “mere conclusory statements, ” opinions, or legal conclusions. Iqbal, 556 U.S. at 678. Expert opinions generated for purposes of supporting Plaintiffs' theories in a third version of their complaint do not warrant the assumption of truth.

         Accordingly, this Court shall GRANT Defendants' Motion to Strike the Declarations of Mark A. Cohen and Professor M. Todd Henderson (ECF No. 79). However, any factual allegations in the Second Amended Complaint that were derived from the expert reports, if any, shall be accorded the consideration due to factual allegations in a dismissal context.

         B. Defendants' Exhibits Attached to Motion

         Plaintiffs note that Defendants submitted 32 exhibits spanning nearly 1, 700 pages. (Pls.' Mot. Mem. 1, ECF No. 88-1.) Plaintiffs move to exclude three exhibits that they contend are not incorporated by reference or subject to judicial notice. (Id. at 2.) Defendants argue that the challenged exhibits are subject to judicial notice. (ECF No. 92 at 2.) The three challenged exhibits include a press release filed with the United States Securities and Exchange Commission (“SEC”) and two Maryland state court filings. (Id.) Defendants assert that the documents are publicly filed documents offered for the limited purpose of establishing the timing of events to which they relate and not to establish the truth of the matters contained therein. (Id.)

         “[C]ourts are permitted to consider facts and documents subject to judicial notice without converting the motion to dismiss into one for summary judgment.” Zak v. Chelsea Therapeutics Int'l, Ltd., 780 F.3d 597, 607 (4th Cir. 2015). Under Federal Rules of Evidence 201, facts that are not “subject to reasonable dispute” may be judicially noticed. Fed.R.Evid. 201(b). If a fact is “generally known, ” or “can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned, ” then it is “not subject to reasonable dispute.” Id. If a court considers such facts at the motion to dismiss stage, the facts must be construed “in the light most favorable to the plaintiffs.” Zak, 780 F.3d at 607 (citation omitted).

         As this Court previously noted, in August 2018, the Ninth Circuit clarified the proper use of judicial notice and incorporation-by-reference in securities litigation. See In re Under Armour Sec. Litig., 342 F.Supp.3d at 667 n. 3 (citing Khoja, 899 F.3d 988). In Khoja, the Ninth Circuit reminded district courts that generally, if materials outside the pleadings are considered, the dismissal motion is converted into a motion for summary judgment so that both parties have an opportunity to present material pertinent to the motion. 899 F.3d at 998 (citing Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001)). Judicial notice and incorporation-by-reference are exceptions to this general rule. Id. (citing Fed.R.Evid. 201). However, improper application of these exceptions may lead to premature dismissals that may have been valid if discovery were allowed, and this risk is especially significant in SEC fraud matters where plaintiffs are subject to heightened pleading standards. Id.^[8] The Ninth Circuit further noted that “accuracy is only part of the inquiry under Rule 201(b). A court must also consider-and identify-which fact or facts it is noticing . . . .” Id.

         Defendants' Exhibits 21 and 23 relate to proceedings in another case in a different court, namely the Under Armour Shareholder Litigation in the Maryland Circuit Court for Baltimore City. (ECF No. 92 at 3.) Exhibit 24 is an SEC filing on Form 8-K, filed on March 16, 2016. All three exhibits relate to the Class C stock issuance. (Id.) Defendants assert that the exhibits are offered only to establish the timeline of events in connection with the Class C stock issuance. (Id. at 4.) Defendants argue that such documents are routinely subject to judicial notice, and they assert that they are not asking the Court to take judicial notice of any disputed facts. (Id. at 5-7.) Defendants also note that there is no disputed fact with regard to the timeline, but merely a typographical error in the Second Amended Complaint. (Id. at 10.)

         Certainly, “courts routinely take judicial notice of documents filed in other courts . . . to establish the fact of such litigation and related filings.” Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) (citations omitted). Also, “[j]udicial notice is appropriate of the content of S.E.C. filings, to the extent that this establishes that the statements therein were made, and the fact that these documents were filed with the agency. . . .” In re Mun. Mortg. & Equity, LLC, Sec. & Derivative Litig., 876 F.Supp.2d 616, 653 n.7 (D. Md. 2012), aff'd sub nom. Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874 (4th Cir. 2014). However, “the ...