The United States Court of Appeals for the Ninth Circuit recently affirmed a California federal district court’s dismissal of a shareholder’s securities fraud complaint against cybersecurity technology company Finjan Holdings, Inc.  In re Finjan Holdings, Inc., No. 21-16702, 2023 WL 329413 (9th Cir. Jan. 20, 2023). While the ruling is a win for Finjan, it continues the Ninth Circuit’s minority view on the ease with which shareholders can initiate securities law claims arising from tender offers.

Case Background 

Finjan develops security technologies for mobile devices and invests in intellectual property related to mobile and computer security. 2023 WL 329413, at *3. While it holds itself out as a cybersecurity company, most of Finjan’s revenue comes from (1) lawsuits accusing others of violating its IP or (2) threatening patent infringement lawsuits to extract licenses for the use of its IP. Id. As a non-practicing entity, Finjan has litigated against many cybersecurity technology software providers, achieving several settlements and multi-million dollar verdicts.

In the summer of 2020, Finjan was sold to Fortress Investment Group, LLC (“Fortress”) after a strategic review process Finjan conducted with the help of Atlas Technology Group LLC (“Atlas”), beginning in 2018. Id. at *2-3. The share price for Finjan, which went public in 2013, was $3.94 on Nasdaq on the day it announced it had hired Atlas for the strategic review in 2018, and early parties’ offers expressing interest in buying Finjan in fall 2018 ranged from $4.29 to $5.10 per share. Id. at *3. As Finjan’s stock decreased in 2018 and 2019, only two potential acquirers remained interested: Fortress, its eventual buyer, and a company known only as Party B in legal filings. Id. at *4. In June 2020, after negotiations with Party B stalled, the Finjan board approved a sale to Fortress and accepted a tender offer of $1.55 per share. Id.

After the sale was announced and shareholder approval of the deal was necessary, Finjan, according to the shareholder’s complaint, directed Atlas to prepare a fairness assessment of the deal using considerably lower revenue projections than the revenue projections Finjan had made a few months earlier before the COVID-19 pandemic. The revised revenue projections made after the sale were the subject of the putative class action, brought by Robert Grier, a former Finjan shareholder. Id. at *5.

The Exchange Act Claim

Grier, in making his allegations, relied on Section 14(e) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78n(e), which prohibits the use of false or misleading statements in connection with a tender offer. Id. at *2. This statute and Supreme Court precedent set forth four elements to a § 14(e) claim: (1) Finjan did not actually believe the revenue projections and share-value estimations it issued to its shareholders (“subjective falsity”), (2) the revenue projections and share-value estimations did not reflect the company’s likely future performance (“objective falsity”), (3) the shareholders foreseeably relied on the revenue projections and share-value estimations in accepting the tender offer, and (4) shareholders suffered an economic loss as a result of the deal with Fortress. Id. at *2. 

The parties agreed that only “subjective falsity,” i.e. whether Finjan believed the post-sale revised revenue projections, was at issue. The district court held that the subjective falsity element required allegations of scienter, a conscious, fraudulent state-of-mind and thus the “strong inference” heightened pleading standard of the Private Securities Litigation Reform Act (PSLRA) § 4(b)(2) for “particular states of mind” applied. Id. 

According to the district court, Grier’s allegations did not rise to support the heightened strong inference standard of subjective falsity, so the district court dismissed the claim. Id. 

On appeal, the Ninth Circuit held that the heightened “strong inference” standard under PSLRA § 4(b)(2) did not apply to § 14(e) claims for subjective falsity because one can negligently say a subjectively false statement and “negligence does not require proof of a mental state.” The Ninth Circuit acknowledged that such negligent subjectively false statements are rare but hypothesized that it was not impossible:

“It is rare for a speaker to express an opinion without knowing that he is

doing so. But it is not impossible. For example, an individual could negligently issue a statement that includes an opinion that the speaker does not hold. If a corporate executive prepares a statement truthfully indicating that he believes his corporation will have a revenue of $400 million over the next year, but through a scrivener’s error the statement is released to the public with the figure instead reading $40 million, then the corporate executive has perhaps negligently released a statement to the public with an opinion that the corporate executive does not believe.”

Rejecting a heightened pleading standard for a § 14(e) claim, the Court held that a reasonable inference of subjective falsity would be sufficient to allow the claim to proceed. Id. However, the Court held that the shareholder plaintiff in Fjnjan did not meet even the reasonable inference in his factual allegations and upheld the dismissal. Id. at *3. Put another way, there was no reasonable inference that “Finjan . . . believed that the revenue projections or share-value estimations provided to shareholders were inaccurate.” Id.

What the Ruling Means

The Ninth Circuit’s ruling that a § 14(e) tender offer claim is not subject to PSLRA’s heightened pleading standards for state of mind is a reaffirmance of its 2018 decision in Varjabedian v. Emulex Corp., 888 F.3d 399 (9th Cir. 2018). 

That case created a split with five other Courts of Appeals—the Second, Third, Fifth, Sixth, and Eleventh Circuits—that the Supreme Court was poised to resolve before dismissing the certiorari petition as improvidently granted Emulex Corp. v. Varjabedian, 139 S. Ct. 1407 (2019). Until the Supreme Court resolves the split, some securities cases that might have been dismissed under the stronger pleading standard in other Circuits can survive under the lower standard the Ninth Circuit reaffirmed in Finjan.

However, the Ninth Circuit’s decision shows that even under the lower pleading standard, it still may be difficult for shareholders to show subjective falsity. Pleadings must contain a plethora of factual allegations that make it reasonable to infer the speaker knew that the statements given were false. Though that is a lower bar to clear than strong inference, it is still a high bar indeed. 

The biggest privacy takeaway for companies? Finjan will still be around to bring infringement actions against cybersecurity software vendors used by countless companies.

Caroline Dzeba also contributed to this article.