The United States Court of Appeals for the Sixth Circuit recently affirmed the dismissal of a putative securities class action brought by shareholders of mattress manufacturer Tempur-Pedic International, Inc. Significantly, the Sixth Circuit found that the company’s financial guidance fell within the PSLRA’s safe harbor for forward-looking statements, and that plaintiffs could not avoid the safe harbor because defendants had adequately alerted investors to the underlying risks posed by competitors introducing new products similar to those offered by the company. Plaintiffs had asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, arguing that Tempur-Pedic and two of its executives issued misleading statements and rosy financial projections despite the fact, and without disclosing, that sales growth already had slowed at retailers who carried competitor Serta’s new product that was similar to Tempur-Pedic’s “memory foam” mattresses. According to plaintiffs, Tempur-Pedic’s stock price declined approximately 75% during a seven-week period after the full extent of the risk posed by this new competition from Serta materialized, ultimately forcing the company to revise its yearly financial projections downward.
The statements that plaintiffs claimed to be false and misleading were contained in a press release, two earnings calls, the company’s 2011 annual report, and presentations to investors via a webcast and an institutional investors’ conference. The challenged statements included financial guidance that later turned out to be overly optimistic, as well as generalized statements regarding the “competitiveness” of the company’s products and the risk posed by competition to the company’s bottom line, which plaintiffs characterized as incomplete. The district court originally granted defendants’ motion to dismiss and denied leave to amend, finding that that none of the statements challenged by plaintiffs as misleading were actionable, and that amendment would be futile. The Sixth Circuit affirmed, finding that Defendants did not mislead investors by failing to disclose the specific effect of competition from Serta on the company’s growth rate, where Plaintiffs did not challenge the accuracy of the company’s reported sales figures and where the risk posed by competition was in fact disclosed. Tempur-Pedic had no obligation “to disclose that [the company’s] sales might have grown more without competition from Serta’s iComfort once they chose to speak about the company’s recent positive results or competition generally. Holding an earnings call did not oblige them to disclose all facts contributing to or undermining the company’s recent successes. Such a rule would require almost unlimited disclosure on any conceivable topic related to an issuer’s financial condition whenever an issuer released any kind of financial data.”