## Facts

- Polaroid introduced Polavision, an instant movie camera, in 1978; plaintiffs alleged it was unprofitable, over-inventoried, and experiencing lagging sales during 1978.
- Polaroid’s third-quarter 1978 report announced record earnings and sales and stated that earnings reflected substantial Polavision expenses; other public statements noted Polavision was increasing overall costs of sales.
- Plaintiffs alleged Polaroid knew adverse internal information about Polavision and took steps such as production cutbacks, including confidential instructions to an Austrian manufacturer, without disclosing the severity of the product’s problems.
- In February 1979, Polaroid withdrew $6.8 million from reserves for Polavision-related expenses and issued a press release stating Polavision’s costs substantially exceeded revenues.
- A foundation controlled by Polaroid’s founder sold 300,000 shares during the relevant period.
- After the February 22, 1979 disclosure, Polaroid’s stock price dropped materially (about $49.62 to $39.87 per share).
- Purchasers of Polaroid stock (and certain option purchasers) during January 11 to February 22, 1979 sued under Exchange Act § 10(b) and Rule 10b-5, alleging a fraud-on-the-market theory based on nondisclosure.

## Issues

1. Whether Polaroid’s public statements about earnings and Polavision-related expenses were materially misleading such that Polaroid had a duty to disclose additional adverse information about Polavision.
2. Whether § 10(b), Rule 10b-5, or any statute/regulation imposed a duty to update or correct prior disclosures concerning Polavision’s deteriorating performance absent an offering or other mandated disclosure setting.
3. Whether the stock sale by a foundation controlled by Polaroid’s founder created a disclosure duty attributable to the corporate issuer in this case.

## Decision

- The en banc First Circuit reversed the panel’s disposition and ordered judgment entered for Polaroid.
- The court held that Polaroid had no legally cognizable duty to disclose the additional adverse Polavision information alleged by plaintiffs.
- The court concluded Polaroid’s cited public statements were not materially misleading in a way that triggered a duty to correct or update.
- The court rejected using fraud-on-the-market as a substitute for an underlying actionable misstatement or omission grounded in a recognized duty to disclose.

## Legal Principles

- § 10(b) and Rule 10b-5 do not impose a general affirmative obligation to disclose all material, nonpublic information; nondisclosure is actionable only when there is a duty to speak.
- A disclosure duty typically arises from: (1) insider trading on material nonpublic information, (2) prior materially false or misleading statements requiring correction or updating, or (3) a specific statutory or regulatory disclosure requirement.
- Statements acknowledging product-related expenses are not necessarily misleading representations that the product is profitable or successful; without a materially misleading statement, an issuer generally need not provide additional adverse internal assessments.
- Securities laws do not require continuous, mid-course reporting of every adverse business development; internal uncertainty, forecasts, and business judgments about a new product’s prospects are not automatically subject to mandatory disclosure.
- Fraud-on-the-market theory presupposes an actionable misrepresentation or omission; it cannot create liability where no duty to disclose exists.

## Conclusion

The en banc court ruled that disappointment in a new product and undisclosed adverse internal information, without insider-trading-based obligations, misleading prior statements, or a specific legal disclosure mandate, does not establish issuer liability under § 10(b) and Rule 10b-5, and it directed judgment for Polaroid.


Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990) (en banc)