Securities Motion to Dismiss Trends (Part 3): The Central District of California

FIGS

FIGS, a company selling medical scrubs and other doctor gear directly to consumers, witnessed “explosive growth” in demand during the COVID-19 pandemic and capitalized on that growth to pursue an IPO in 2021. 

Unfortunately for the company, as the pandemic abated, customers transformed from Zach Braff superfans into TLC in the blink of an eye. Or, in English: Customers went from loving scrubs to wanting no scrubs. FIGS’ explosive growth slowed, and shareholder plaintiffs sued the company.  

Plaintiffs identified more than 40 alleged misstatements in their complaint. This is a sophisticated and highly technical pleading strategy called: “Throw Everything at the Wall and Hope Something Sticks.” The alleged misstatements had three general flavors:  

• Statements that the company had data analytics capabilities permitting it to “reliably predict buying patterns” and “anticipate demand” 
• Statements that the company maintained low-risk inventory, it was focused on scrubs, and it had a disciplined approach to buying 
• Misleading statements about the company’s use of air freight 

In January 2025, the court granted the company’s motion to dismiss. Here’s why. 

Section 11 and the Falsity Fight 

On top of Section 10(b) claims, FIGS shareholders brought claims under Section 11 of the Securities Act. Plaintiffs love Section 11 claims because they do not require scienter (i.e., intent). To bring Section 11 claims, you need a registration statement. This means that Section 11 claims are mostly brought after IPOs (plaintiffs can also leverage registration statements for follow-on stock offerings). 

Without the scienter requirement, plaintiffs can focus their attention on falsity. And, as we saw in SDNY and ND Cal, confidential witnesses are often plaintiffs’ best chance to show daylight between the company’s statements and the “true” situation on the ground at the time.  

The FIGS shareholders could only dredge up two confidential witnesses: an IT employee and a product developer. Two can be enough, but quality matters more than quantity when it comes to confidential witnesses, and the confidential witnesses in FIGS were of low quality. 

The IT employee was not employed at the company until after the supposed misstatements were made. Next!

The product developer opined on the company’s supposedly deficient data analytics capabilities but did not actually work in that function. As a result, the judge decided that the developer’s allegations were speculative and could not be credited. No dice. 

Without the benefit of strong confidential witness statements, the court had little difficulty throwing out the Section 11 claims for lack of falsity. 

Three Bites at the Apple 

The federal courts have a generous approach to pleadings. The deck is meant to be stacked in favor of plaintiffs (although less so in securities cases). And, even when a judge grants a motion to dismiss, she almost always gives plaintiffs a chance to file an amended complaint. This is because of Federal Rule of Civil Procedure 15(a)(2), which says: “The court should freely give leave when justice so requires.”

There is no hard and fast rule for how many times a judge will grant leave to amend before dismissing a case with prejudice. Apart from the informal rule that “everybody gets one,” judges have tons of discretion here. Some are comfortable getting rid of clearly lame cases after a single amendment. Others give repeated bites at the apple. 

In FIGS, the CD Cal judge granted the first motion to dismiss and gave plaintiffs leave to amend. Then the judge threw out the complaint again but gave plaintiffs another chance to amend many of their claims. As a result, despite two wins by the company, the case is ongoing. Another judge might have thrown the case out altogether at this point. 

Owlet

Owlet sells medical products to monitor infant health and wellness, including a Smart Sock that alerts parents if a baby has stopped breathing during the night. According to shareholder plaintiffs, beginning in 2016 the Food and Drug Administration (FDA) advised Owlet that the Smart Sock qualified as a medical device and would need to be approved by the government. Despite this, Owlet continued selling the Smart Sock. 

Then, in 2021, Owlet went public via de-SPAC. In its registration statement, the company said the Smart Sock was not a medical device and did not require marketing authorization, but that the FDA “could” require authorization in order for Owlet to continue selling the product. 

A few months after the company went public, the FDA issued a warning letter saying that the Smart Sock qualified as a medical device and instructed Owlet to stop distributing the product for certain uses. Following the news, Owlet’s stock price fell by 23%, and plaintiffs’ lawyers eagerly brought a securities class action.

Ten bucks to the first reader who can guess whether the motion to dismiss was granted. 

You got it—this wasn’t a hard one for the judge. The court denied the motion to dismiss with a sweep of the pen in 2024, and the case settled earlier this year for $3.5 million. 

The falsity analysis was pretty straightforward for the judge. The scienter discussion was more interesting—let’s take a look. 

Scienter: Dueling Narratives

As a reminder, to beat a motion to dismiss in a 10(b) case, shareholders have to allege facts that give rise to a “strong inference of scienter.” According to the Supreme Court, this means that the “the inference of scienter must be more than merely ‘reasonable’ or ‘permissible’ – it must be cogent and compelling, thus strong in light of other explanations.” In the Ninth Circuit, the minimum standard for scienter is recklessness.

In Owlet, the company argued (I’m paraphrasing here): “Why would we continue selling a product that we knew would eventually be subject to a warning letter from the FDA? That makes no sense. It makes more sense that we just misinterpreted the FDA’s previous comments and were quite surprised when the warning letter came out.”

The shareholder plaintiffs argued that Owlet barreled ahead with selling the Smart Sock despite knowing the FDA had asked them to stop because the company didn’t have enough cash to work toward regulatory clearance and needed to tap the public markets to get that cash. 

The allegations in support of plaintiffs’ theory of scienter appear to have been pretty thin. The court didn’t mention any internal meetings, internal documents, or other indicia that Owlet’s statements were specifically motivated by a need to seek capital or a conscious disregard of the FDA’s prior statements. 

Instead, I think the court decided that (1) the false statements were super-duper false; and (2) because the statements were so false, the company must have acted recklessly by putting them out; and so (3) scienter! 

I understand why the court reached this outcome, but it kind of collapses the falsity and scienter analysis into a single inquiry. If a false statement is super-duper demonstrably false, it might be the case that plaintiffs can get away with less than robust allegations on scienter. In contrast, if falsity is a wobbler, scienter allegations might get more scrutiny from the judge.

This seems like sensible rough justice. It’s also not really how the law is supposed to work on paper. But, in the district court trenches, technical legal forms sometimes fall victim to the need to deliver just and sensible outcomes in the real world. 

Read:  
Securities Motion to Dismiss Trends (Part 1): The Northern District of California 
Securities Motion to Dismiss Trends (Part 2): The Southern District of New York 

Conclusion 

If anyone read all three of my articles on district court motion to dismiss outcomes from cover to cover, please drop me a line so we can be friends. For everyone else, thanks for skimming. I hope you learned something about why companies and shareholders each bat .500 in the critical motion to dismiss stage. 

To recap, here are our learnings from the past few weeks: 

1. The PSLRA safe harbor is wide and deep—but watch out for statements of “then current fact."
2. Confidential witnesses can be the key that unlocks discovery for plaintiffs—and one SVP is worth more than 34 lower-level employees. 
3. Phrasing matters—cases are won and lost on word choice, not on the master narrative. 
4. It only takes one viable misstatement to defeat a motion to dismiss. 
5. Opinion statements are a powerful prophylactic against securities class actions—but false opinion statements can still get you in trouble. 
6. As a matter of law, falsity and scienter are separate analyses but, in the real world, the concepts can collapse into one another. So don’t say things that are demonstrably false because a court will probably find scienter. 

Companies, of course, don’t always get to choose their facts. It’s easy to Monday-morning quarterback suboptimal disclosure decisions. It is much harder to make the right calls under complex conditions, quarter after quarter after quarter. And, even if you do an A+ job, the vagaries of judicial decision-making mean that you may still find yourself looking down the barrel of a significant settlement. 

That’s why a well-crafted D&O insurance program is critical for public companies.