Sixth Circuit Affirms District Court’s Dismissal of Securities Class Action

An opinion was issued on Thursday in the Sixth Circuit in a suit initially filed in the Northern District of Ohio by plaintiff Plymouth County Retirement Association (PCRA) against ViewRay, Inc. and associated individuals. The complaint alleged that ViewRay had recorded its orders for their technology in a way that misrepresented the sales to investors in violation of the Exchange Act.

ViewRay, the opinion says, manufactures and markets a machine that is said to image and treat cancer while using MRI-guided radiation known as the Linac MRIdian. Notably, the $6 million dollar machine is able to distinguish between types of tissue which allows it to more effectively deliver radiation, the filing says.

PCRA’s suit focuses on how defendant ViewRay tracks the orders for the Linac MRIdian. As a method of estimating future revenue from the machine, VIewRay uses a backlog for orders that they have not yet recognized revenue for )or have contracts for) but still consider valid, according to the opinion. The plaintiff argues that the defendant used this backlog to mislead investors “by failing to follow the publicly disclosed criteria for determining which orders to include in the backlog, which thereby inflated the backlog with orders that didn’t belong.” ViewRay purportedly did not disclose this practice to investors, leading the plaintiff to allege that they were representing the machine’s success in a misleading manner.

The Northern District of Ohio Court dismissed PCRA’s first amended and second amended complaint, claiming that PCRA “failed to meet its hefty pleading burden under the Private Securities Litigation Reform Act and Federal Rule of Civil Procedure 9(b).” In both cases, the Northern District of Ohio agreed and granted the motion.

Most recently, PCRA appealed the dismissal of the second amended complaint. The district court found that the plaintiff had not pleaded their falsity and scienter claims with particularity, and thus had not sufficiently alleged their claims that the defendant had violated the Exchange Act. The Sixth Circuit affirmed this finding, claiming that ViewRay’s publicly available backlog criteria “[does not] objectively require that every backlogged order be supported by contracts with end-customers.”

The Sixth Circuit also concluded that the plaintiff’s allegations that ViewRay included invalid orders in their backlog were not adequately alleged. They wrote that ultimately, “Plymouth failed to plead with particularity any theory of falsity based on the backlog.” The district court’s judgment was affirmed by the Sixth Circuit on Thursday.

The plaintiff was represented in the suit by Scott+Scott, while the defendants were represented by Gibson, Dunn & Crutcher.