## Facts

- A shareholder brought a putative securities-fraud class action against two corporate defendants that manufactured and sold the MicroCool surgical gown, a protective product used in treating highly infectious diseases.
- The complaint alleged the companies publicly represented that the gowns met the highest protection standards and were safe and compliant.
- The plaintiff alleged internal quality-control testing and compliance problems were known within the companies, based largely on later testimony from employees in related litigation describing defect-related information and documents presented to “senior management.”
- The theory of liability was that the corporate defendants made materially misleading statements with fraudulent intent regarding the MicroCool gown’s protective capabilities and regulatory/standards compliance.

## Issues

1. Whether the proposed second amended complaint pleaded facts giving rise to a strong inference of corporate scienter under the PSLRA for alleged misstatements about the MicroCool gown.
2. Whether corporate scienter could be inferred from (a) employee knowledge of defects where those employees were not connected to the challenged public statements, or (b) the asserted importance of the MicroCool gown as a “key product.”
3. Whether the district court abused its discretion by denying the post-judgment motion to amend as futile.

## Decision

- The Second Circuit affirmed the denial of the motion to set aside the judgment and for leave to file a second amended complaint.
- The court held amendment was futile because the proposed pleading did not raise a strong inference of corporate scienter.
- Employee testimony about defect information presented to “senior management” was insufficiently particularized to connect the knowledge to an individual whose scienter could be imputed to the corporations and to the challenged statements.
- The court rejected inferring scienter solely because the statements concerned a “key product,” emphasizing that such collective scienter inferences apply only in exceedingly rare circumstances involving information so dramatic that senior officials necessarily knew it.

## Legal Principles

- For § 10(b) and Rule 10b-5 claims, a plaintiff must plead with particularity facts giving rise to a strong inference that the defendant acted with scienter, as required by the PSLRA.
- When the defendant is a corporation, the complaint must plead a strong inference that an individual whose intent can be imputed to the corporation acted with scienter; generalized allegations that some employees knew adverse facts are insufficient.
- Corporate scienter cannot be established by relying on knowledge of employees unconnected to the challenged statements without well-pleaded facts linking that knowledge to the makers/approvers of the statements or comparable decisionmakers.
- An inference of collective corporate scienter without identifying a culpable individual is available only in exceedingly rare cases where the information is so dramatic that it must have been known to a corporate official positioned to act.

## Conclusion

The court affirmed dismissal at the pleading stage by holding that allegations of internal awareness of product defects, without a particularized link to the individuals responsible for the challenged statements, do not satisfy the PSLRA’s strong-inference scienter requirement for corporate defendants, and that “key product” allegations alone rarely justify inferring corporate scienter.


Jackson v. Abernathy, 960 F.3d 94 (2d Cir. 2020)