                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-25-2004

In Re: Adams Golf
Precedential or Non-Precedential: Precedential

Docket No. 03-3945




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                    PRECEDENTIAL                (Filed: August 25, 2004)

     UNITED STATES COURT
      OF APPEALS FOR THE                Elizabeth W. Fox
         THIRD CIRCUIT                  Todd S. Collins [ARGUED]
                                        Berger & Montague
                                        1622 Locust Street
            No. 03-3945                 Philadelphia, PA 19103
                                         Counsel for Appellants

    IN RE: ADAMS GOLF, INC.             Kevin G. Abrams
     SECURITIES LITIGATION              Richards, Layton & Finger
                                        One Rodney Square
                                        P.O. Box 551
 F. KENNETH SHOCKLEY, M.D.;             Wilmington, DE 19899
        DAVID SHOCKLEY;
           TODD TONORE;                 Michael J. Biles
          ZANE BIANACCI;                Jennifer R. Brannen
         PATRICIA CRAUS;                Jesse Z. Weiss
         TERRY LINVILLE;                Paul R. Bessette [ARGUED]
            LARRY PRICE;                Kevin G. Abrams
     FEDERATED NATIONAL                 Akin, Gump, Strauss, Hauer & Feld
INSURANCE COMPANY, on behalf            300 West Sixth Street, Suite 2100
    of all others similarly situated,   Austin, TX 78701
                        Appellants       Counsel for Appellees Adams Golf Inc.,
                                         B.H. Adams, Richard H. Murtland,
                                         Darl P. Hatfield, Paul F. Brown, Jr.
    Appeal from the United States        Roland E. Casati, Finis F. Conner,
          District Court for the         and Stephen R. Patchin
          District of Delaware
     (D.C. Civil Nos. 99-cv-0371,       Robert K. Payson
       99-cv-0397, 99-cv-0421,          Potter, Anderson & Corroon
        99-cv-0469, 99-cv-0498,         1313 North Market Street
       99-cv0-511, 99-cv-0618)          6th Floor, P.O. Box 951
District Judge: Honorable Kent Jordan   Wilmington, DE 19801


        Argued May 25, 2004
                                           *Honorable Arthur L. Alarcón, Senior
   Before: SCIRICA, Chief Judge,        Judge, United States Court of Appeals for
    RENDELL and ALARCÓN*,               the Ninth Circuit, sitting by designation.
           Circuit Judges.
Michael J. Chepiga [ARGUED]                              the District Court dismissed the action
Simpson, Thacher & Bartlett                              under Fed. R. Civ. P. 12(b)(6). In re
425 Lexington Avenue                                     Adams Golf, Inc. Sec. Litig., 176 F. Supp.
New York, NY 10017                                       2d 216 (D. Del. 2001). For the reasons
 Counsel for Appellees Lehman Bros.                      that follow, we will affirm in part and
 Holdings, Banc of America Securities                    reverse in part.
LLC, and Ferris Baker Watts
                                                                              I
                                                                              A

       OPINION OF THE COURT                                     When Barney Adams founded
                                                         Adams Golf in 1987, the Company was a
                                                         golfing components supplier and a contract
RENDELL, Circuit Judge.                                  manufacturer. Over the years, it grew to
                                                         become a designer and manufacturer of its
          In this securities case, plaintiff-            own custom-fit golf clubs. After having
shareholders brought an action under the                 much success by introducing a high-end
Securities Act of 1933 against Adams                     golf club, called Tight Lies, the Company
Golf, Inc., a manufacturer of golf                       offered its shares to the public. On July
equipment, and certain of its officers and               10, 1998, an Initial Public Offering
underwriters. The plaintiffs contended                   (“IPO”) of 5,575,000 shares of the
that the Company’s registration statement                Company’s common stock was made at
and prospectus contained materially false                $16 per share, accompanied by the
or misleading statements in violation of                 requisite registration statement and
sections 11, 12(a)(2), and 15 of the                     prospectus.1
Securities Act. Among other things,
Adams Golf’s public offering materials
indicated that the Company sold its golf                   1
                                                             Originally, the plaintiffs in this action
equipment exclusively to authorized
                                                         consisted of those who purchased directly
retailers and that the golf industry was
                                                         from the defendant-underwriters during
flourishing.         In their complaint, the
                                                         the IPO and those who purchased their
plaintiffs alleged that Adams Golf omitted
                                                         shares from the secondary market soon
i n f o r m a t i o n c o n t r a ry t o t h e s e
                                                         after the IPO. Citing to Gustafson v.
representations, i.e., that unauthorized
                                                         Alloyd Co., 513 U.S. 561 (1995) and
retailers were selling Adams Golf’s golf
                                                         Ballay v. Legg Mason Wood Walker, Inc.,
clubs, and that retailers industry-wide were
                                                         925 F.2d 682 (3d Cir. 1991), the District
carrying an oversupply of golf equipment.
                                                         Court held that the plaintiffs who
Finding that neither the unauthorized retail
                                                         purchased Adams Golf shares on the
nor the oversupply allegations stated a
                                                         public market did not have a private right
claim upon which relief could be granted,
                                                         of action under section 12(a)(2) of the

                                                     2
       In their complaint, the plaintiffs               profitable margins and
contend that the defendants misrepresented              maximize sales of Adams’
and omitted material facts in the                       products.
registration statement and prospectus.
First, the plaintiffs argue that the             The registration statement made clear that,
defendants failed to disclose that its           as part of its limited distribution
revenues were artificially inflated by a         arrangement, the Company “does not sell
“gray market” distribution of Adams Golf         its products through price sensitive general
golf clubs. Second, the plaintiffs argue         discount warehouses, department stores or
that the defendants failed to disclose the       membership clubs.”
existence of an industry-wide oversupply
of golf equipment. The facts with respect                Prior to the IPO, however, Adams
to these two sets of allegations will be         Golf had learned that Tight Lies golf clubs
explored in more detail.                         were being sold by Costco, a discount
                                                 warehouse. On June 9, 1998, one month
                    1                            before the reg istration statement’s
                                                 effective date, the Company issued a press
       Adams Golf sold its golf clubs only       release in which it acknowledged that an
to authorized dealers. As its registration       unauthorized dealer was selling its
statement explained:                             signature product. Indeed, the plaintiffs
       To preserve the integrity of              alleged that prior to the IPO, Costco
       its image and reputation, the             possessed over 5,000 Tight Lies clubs in
       Company limits its                        its inventory. In the press release, Adams
       distribution to retailers that            Golf stated it was “concerned” about
       market premium quality golf               Costco’s sale of the golf clubs “because
       equipment and provide a                   Costco [w as] no t an authorized
       high level of customer                    distributor.”    Concerned enough that,
       s e r v ic e a n d technic a l            according to the press release, Adams Golf
       expertise. . . . The Company              initiated legal proceedings, by filing a bill
       believes its selective retail             of discovery against Costco, to determine
       d i s tr i b ut i o n h e l p s its       “whether Costco’s claims that they had
       r e t a il e r s t o m a i n ta i n       properly acquired Adams’ Tight Lies
                                                 fairway woods for resale were accurate.”
                                                 The plaintiffs further alleged that the
                                                 unauthorized distribution was not limited
1933 Act. However, the District Court
                                                 to Costco and included “sales by other
ruled that those secondary market
                                                 unauthorized discount retailers and
purchasers could sue under section 11 of
                                                 international gray market distributors.”
the Act. These determinations have not
been challenged by the parties and so we
                                                        This unauthorized inventory created
do not pass upon them.

                                             3
a “gray market,” according to the                         clubs, and that the Company “does not
plaintiffs. The complaint defines “gray                   believe that the gray marketing of its
market” to sim ply refer to “the                          product can be totally eliminated.”
u n a u t h o r ized distributi o n of th e
Company’s products to discount retailers.”                                     2
The complaint sets out the several
ostensible consequences of this gray                              The complaint also states that by
market. The plaintiffs alleged that the                   omitting any mention of an industry-wide
Company initially experienced a rise in                   glut of golf equipment carried by retailers,
sales as products were diverted to the                    certain passages in Adams Golf’s
unauthorized distributors. According to                   registration statement were materially
their complaint, “[t]he short-term income                 misleading. Specifically, the plaintiffs
generated by sales to the gray market also                refer to the statement that “[t]he Company
skewed the Company’s overall financial                    believes its prompt delivery of products
appearance, creating the false impression                 enables its retail accounts to maintain
of heightened sales and profitability at the              smaller quantities of inventory than may
time of the IPO, according to the historical              be required with other golf equipment
financial statements contained in the                     manufacturers.” Further, the plaintiffs
R e g i s tr a t io n S t a t e m e n t a n d t h e       argue that forward-looking statements
Prospectus.”          Seeking a better deal,              contained in the offering materials,
consumers bought their Tight Lies clubs                   including the belief that “a number of
from cheaper, unauthorized sources. With                  trends are likely to increase the demand for
their sales diminished, authorized dealers                Adams’ products” painted too rosy a
then reduced their orders for Adams Golf                  picture of the golf industry, particularly in
equipment. In time, the ultimate result for               light of the problem of retail oversupply. 2
the Company was an overall drop in
revenue.
                                                              2
                                                               In particular, the offering materials
        About five months after the IPO, on
                                                          indicated that:
January 7, 1999, Adams Golf issued a
                                                                 In 1997, wholesale sales of golf
press release anticipating disappointing
                                                                 equipment in the U.S. reached an
fourth quarter 1998 results. The Company
                                                                 estimated $2.4 billion. Wholesale
stated that sales would continue to suffer
                                                                 sales of golf clubs increased at an
as a result of the “gray market distribution
                                                                 estimated compound annual growth
of its products to a membership warehouse
                                                                 rate of approximately 13% over the
club.” Further, according to the plaintiffs’
                                                                 5-year period from 1992-1997. The
complaint, Adams Golf acknowledged, in
                                                                 Company believes that a number of
its Form 10-K filed in March of 1999, that
                                                                 trends are likely to further increase
despite its best efforts, a membership
                                                                 the demand for Adams' products.
warehouse club had possession of its golf
                                                                 These trends include: (i) significant

                                                      4
        The record indicates that                 238. The Court ruled as to both the gray
oversupply did eventually come to                 market and the retail oversupply claims
adversely affect Adams Golf’s bottom line.        that Adams Golf’s registration statement
Indeed, the first quarter report for 1999         contained neither false, nor misleading
indicated that the Company had suffered           statements, nor any material omissions. In
disappointing financial results, partly           response, the plaintiffs filed a motion to
owing to an “oversupply of inventory at           amend its complaint pursuant to Fed. R.
the retail level, a condition that weakened       Civ. P. 59(e) and 15, which the District
club sales industry wide over the last 12         Court denied in a subsequent order. The
months, [and] has resulted in substantial         plaintiffs timely appealed both rulings of
reductions in retailer purchases.”                the District Court. We have jurisdiction to
                                                  consider this appeal pursuant to 28 U.S.C.
                    B                             § 1291.

        The District Court granted the                                 II
defendants’ motion to dismiss for failure
to state a claim upon which relief may be                This Court reviews Rule 12(b)(6)
granted. Adams Golf, 176 F. Supp. 2d at           dismissals de novo, accepting all well-
                                                  pleaded allegations as true and drawing all
                                                  reasonable inferences in favor of plaintiffs.
                                                  Anthony v. Council, 316 F.3d 412, 416 (3d
              growth in the number of
                                                  Cir. 2003). We may not affirm unless we
              golf courses; (ii) increasing
                                                  are certain that no relief could be granted
              interest in golf from women,
                                                  under any set of facts which could be
              junior, and minority golfers;
                                                  proven. Id. The District Court concluded
              (iii) the large numbers of
                                                  that the plaintiffs’ complaint was
              golfers entering their 40s
                                                  insufficient to state a claim against the
              and 50s, the age when most
                                                  defendants under sections 11 and 12(a)(2)
              golfers begin to play more
                                                  of the 1933 Act.3
              often and increase their
              spending on the sport; (iv)
              the correspondingly large
                                                      3
              pop ulation of ‘Echo                     Plaintiffs also brought claims under
              B o o m ers,’ who a re              section 15 of the 1933 Act. A form of
              beginning to enter their 20s,       derivative liability, section 15 permits
              the age of when golfers             investors to recover, on a joint and several
              generally take up the sport;        basis, from “control persons” who would
              and (v) the rapid evolution         be otherwise liable under sections 11 and
              of golf club designs and            12(a)(2). 15 U.S.C. § 77o. But because
              materials.                          the District Court dismissed the sections
                                                  11 and 12(a)(2) claims, it did not, nor need

                                              5
       The 1933 Act creates federal duties,        establish his prima facie case.”); Shapiro
particularly involving registration and            v. UJB Fin. Corp., 964 F.2d 272, 286 (3d
disclosure, in connection with the public          Cir. 1992). 5 To state a claim under section
offering of securities. Sections 11 and            12(a)(2), plaintiffs must allege that they
12(a)(2) impose civil liability for the            purchased securities pursuant to a
making of materially false or misleading           materially false or misleading “prospectus
statements in registration statements and          or oral communication.” 6 The plaintiffs
prospectuses. See 15 U.S.C. §§ 77k,
77l(a)(2).     In particular, section 11               5
involves material misstatements or                      The requirements under section 11
omissions in registration statements, while        stand in stark contrast to those of the
section 12(a)(2) involves prospectuses and         Securities Exchange Act of 1934 (the
other solicitation materials.                      “1934 Act”), which include a showing of
                                                   reasonable reliance and scienter. Further,
        To state a claim under section 11,         unlike claims brought under the anti-fraud
plaintiffs must allege that they purchased         provisions of the 1934 Act, claims under
securities pursuant to a materially false or       the 1933 Act that do not sound in fraud are
misleading registration statem ent. 4              not held to the heightened pleading
Herman & MacLean v. Huddleston, 459                requirements of Fed. R. Civ. P. 9(b).
U.S. 375, 382 (1983) (“If a plaintiff              Shapiro, 964 F.2d at 288. Applying
purchased a security issued pursuant to a          Shapiro, the District Court determined that
registration statement, he need only show          the plaintiffs’ complaint did not sound in
a material misstatement or omission to             fraud, a ruling that has not been cross-
                                                   appealed by the defendants. Additionally,
                                                   the District Court observed that the
we, consider any issues related to control         stringent pleading requirements imposed
person liability.                                  by Congress in the Private Securities
                                                   Litigation Reform Act of 1995 apply to the
  4
   Section 11 provides a right of action to        1934 Act alone. The District Court
purchasers:                                        accordingly ruled that the plaintiffs’
      In case any part of the                      complaint was subject only to the liberal
      registration statement, when                 notice pleading standard of Fed. R. Civ. P.
      such part became effective,                  8.
      c o n t a in e d a n u n t r u e
                                                       6
      statement of a material fact                      Section 12(a)(2) provides that any
      or omitted to state a material               defendant who:
      fact required to be stated                         offers or sells a security . . . by
      therein or necessary to make                       means of a prospectus or oral
      the statements therein not                         communication, which includes an
      misleading . . . .                                 untrue statement of a material fact
15 U.S.C. § 77k(a).                                      or omits to state a material fact

                                               6
argue that both their claims concerning the       Costco’s unauthorized possession of golf
gray market distribution and the existence        clubs did not constitute a material
of a retail oversupply meet the above             omission.7 Adams Golf, 176 F. Supp. 2d at
pleading minima. Further, they contend
that the District Court improperly denied
their motion to amend the complaint,                 7
                                                      In addition to materiality, the District
which they filed pursuant to Fed. R. Civ.
                                                  Court required the plaintiffs to show that
P. 59(e) (motion to amend or alter the
                                                  an omission or misstatement was known to
judgment) and Fed. R. Civ. P. 15 (motion
                                                  the Company at the time of the IPO.
to amend the pleadings). We consider
                                                  Adams Golf, 176 F. Supp. 2d at 233
each set of claims in turn.
                                                  (“While the plaintiffs build their case
                                                  around Adams Golf statements appearing
                    A
                                                  after the IPO date, in order to state a claim
                                                  for material omission, the plaintiffs [sic]
       The plaintiffs alleged that by
                                                  allegations must identify that this alleged
omitting any mention of what they
                                                  undisclosed material risk was known and
characterize as a gray market problem,
                                                  material at the time of the IPO.” (emphasis
Adams Golf rendered the registration
                                                  supplied)). This is not correct. Sections
statement false or misleading, specifically
                                                  11 and 12(a)(2) are virtually absolute
those claims concerning the Company’s
                                                  liability provisions, which do not require
reliance on a network of authorized
                                                  plaintiffs to allege that defendants
distributors. The District Court found that
                                                  possessed any scienter. Huddleston, 459
                                                  U.S. at 382. As this Court has held:
                                                          There are substantial differences
             necessary in order to make                   between the elements a plaintiff
             the statements, in the light                 must establish under § 10 and Rule
             of the circumstances under                   10b-5 of the Securities Exchange
             which they were made, not                    Act of 1934 and under §§ 11 and
             misleading (the purchaser                    12(2) of the Securities Act of 1933.
             not knowing of such untruth                  Under the former, the plaintiffs
             or omission), and who shall                  must plead not only that the
             not sustain the burden of                    defe ndan ts made material
             proof that he did not know,                  o m i s s i o n s        a n d / o r
             and in the exercise of                       misrepresentations, but also that
             reasonable care could not                    they reasonably relied on them and
             have known, of such untruth                  that the defendants acted with
             or omission, shall be liable .               knowledge or recklessness. In
             . . to the person purchasing                 contrast, §§ 11 and 12(2) impose no
             such security from him . . . .               such requirements.
15 U.S.C. § 77l.                                  In re Donald J. Trump Casino Sec.

                                              7
234 (“In sum, plaintiffs have not alleged            reasonable minds cannot differ on the
support for their proposition that the fact          question of materiality is it appropriate for
that an unauthorized discount retailer had           the district court to rule that the allegations
illegally obtained a number of Adams Golf            are inactionable as a matter of law.”
clubs constituted a material risk at the time        Shapiro, 964 F.2d at 281 n.11 (citing TSC
of the IPO, or a ‘known trend’ threatening           Indus., 426 U.S. at 450) (emphasis added).
the Company’s future sales, that should              Although the District Court did not
have been disclosed.”). Further, the Court           expressly reference this standard, its
determined that, in any event, the omission          dismissal for failure to state a claim was
of any information regarding the gray                proper only if the gray market and retail
market did not render the registration               o v e r s u p p l y i s s u e s w e r e p l a in l y
statement and prospectus false or                    unimportant to a reasonable investor.
misleading.
                                                             To support its determination that
       Materiality is ordinarily an issue left       the gray market claim lacked materiality,
to the factfinder and is therefore not               the District Court observed that Costco
typically a matter for Rule 12(b)(6)                 possessed what it considered a “limited
dismissal. 8 Weiner v. Quaker Oats Co.,              number” of golf clubs at the time of the
129 F.3d 310, 317 (3d Cir. 1997) (“[T]he             IPO. The defendants explain that these
emphasis on a fact-specific determination            were 5,000 golf clubs out of 235,000, or
of materiality militates against a dismissal         roughly two percent of the golf clubs sold
on the pleadings.”). “Only if the alleged            by Adams Golf that fiscal quarter. By
misrepresentations or omissions are so               itself, however, this figure does not
obviously unimportant to an investor that            persuade us that the fact was plainly
                                                     immaterial. Were Costco to have had
                                                     more than ten percent of the Company’s
Litig.-Taj Mahal Litig., 7 F.3d 357, 369             golf clubs in its inventory, we might agree
n.10 (3d Cir. 1993) (internal citations              that the unauthorized inventory would be
omitted).                                            undoubtedly material. To illustrate the
   8                                                 other extreme, if a discount retailer had
    The standard test in securities law to
                                                     just a handful of golf clubs, we might
determine the materiality of an omission is
                                                     conclude that a few errant fairway woods
“whether there is a ‘substantial likelihood
                                                     would be obviously immaterial to a
that the disclosure of the omitted fact
                                                     reasonable investor.      In contrast, the
would have been viewed by the reasonable
                                                     materiality of Costco’s unauthorized
investor as having significantly altered the
                                                     inventory of several thousand Adams Golf
‘total mix’ of information made
                                                     golf clubs cannot be so easily divined. In
available.’” In re NAHC, Inc. Sec. Litig.,
                                                     order to make the “delicate assessments”
306 F.3d 1314, 1331 (3d Cir. 2002)
                                                     involved in a materiality determination,
(quoting TSC Indus., Inc. v. Northway,
                                                     Shapiro, 964 F.2d at 281 n.11, we would
Inc., 426 U.S. 438, 449 (1976)).

                                                 8
need more information regarding, for                         rela tionships wit h its authorized
example, the importance of the limited                       distributors, and signaled trouble that
distribution arrangement to Adams Golf’s                     might be difficult to overcome.
business model and, perhaps, the nature of
the golf club industry more generally. In a                             Perhaps animated by this concern,
t i g h t l y c o m p e t i ti v e m a r k e t , t h e       the Company issued a press release on
maintenance of exclusivity among Adams                       June 9, 1998, one month prior to going
Golf’s network of authorized dealers may                     public, noting that it had filed an equitable
have been vital, and the Company’s                           bill of discovery to investigate the
touting this mode of distribution seems to                   unauthorized inventory. According to the
imply that it is. Indeed, in its registration                press release, “Adams Golf became
statement, the Company indicated that its                    concerned when it learned that Costco was
distribution system allowed it “to maintain                  selling their Tight Lies fairway woods
profits and maximize sales of Adams Golf                     because Costco is not an authorized
products.” In light of such considerations,                  distributor.” While not all company press
the possession of 5,000 golf clubs in the                    releases publicize material information, we
hands of a nationwide, discount retailer                     recognize that a company often chooses to
may have been material, since it may have                    issue an extraordinary press release when
“altered the ‘total mix’ of information”                     it needs to disseminate important
available to a reasonable investor. NAHC,                    information to its investors. In light of this
306 F.3d at 1331. But without further                        p u b l i c a c k n o w l e d g m e n t o f th e
factual development, the answer to this                      u n a u t h o r iz e d i n v e n t o r y a n d i t s
materiality inquiry is far from plain.                       announcement of legal action, and our
                                                             obligation to draw all reasonable
        The District Court also reasoned                     inferences in favor of the plaintiffs, we are
that the gray market problem was                             hard pressed to see how the existence of
immaterial because it was an “isolated                       5,000 golf clubs for sale at a discounter,
incident” and not part of a “known trend.”                   outside the protected distribution network,
Adams Golf, 176 F. Supp. 2d at 234. But                      was unquestionably immaterial to a
a fact need not be part of a pattern to be                   reasonable investor. 9
material. Even isolated incidents can
result in immediate and negative
consequences for a company. An aberrant                         9
                                                                 The District Court found that the “Bill
event such as an oil tanker crash may
                                                             of Discovery and the issuing of the press
nevertheless be material in the eyes of a
                                                             release [prior to the IPO] are consistent
reasonable investor in the unlucky oil
                                                             with the defendants [sic] contentions that
company.      Analogously, even if the
                                                             it was in fact Adams Golf’s policy not to
unauthorized inventory of golf clubs was a
                                                             authorize ‘distribution of the Company’s
one-time occurrence, it may have posed
                                                             products to discount retailers.’” 176 F.
significant consequences for Adams Golf’s
                                                             Supp. 2d at 233. Yet such “consistency” is

                                                         9
       On appeal, the defendants contend
that the fact that the gray market was not
material is reflected by the absence of any
                                                    upon by the defendants are inapposite. See
decline in share value when the market
                                                    Acme Propane, Inc. v. Tenexco, Inc., 844
learned of it in the January 7, 1999 press
                                                    F.2d 1317, 1323 (7 th Cir. 1988) (no
release.10 They rely on In re Burlington
                                                    obligation to disclose information on
                                                    relevant state laws as statutes are in the
not salient to a materiality inquiry. Adams         public domain); Rodman v. Grant Found.,
Golf may have been working resolutely, in           608 F.2d 64, 70 (2d Cir. 1979) (no
conformance with its stated policy, to              obligation to disclose motivation of
solve its unauthorized inventory situation.         corporate officers to maintain corporate
But a company’s effort to manage a                  control and prevent hostile takeovers as
problem does not by itself discharge its            such intentions are “universal.”); Seibert v.
obligation to inform investors of that              Sperry Rand Corp., 586 F.2d 949, 952 (2d
problem; if an event is material, the               Cir. 1978) (no obligation to disclose labor
securities laws may require disclosure,             difficulties when those problems were
notwithstanding the type of consistency             “reported countrywide in the press and on
identified by the District Court. If it were        radio and television, were discussed in
otherwise, companies could justify                  Congress, and were analyzed in published
keeping quiet about significant corporate           administrative and judicial opinions.”).
crises by simply noting that they were              Costc o ’ s u n a u t h o riz e d inve n to ry,
handling the situation in accordance with           announced in a single press release before
some previously stated management                   the Company went public, was simply
policy.                                             unlike the publicly known or available
                                                    facts in the above cases.
    10
      The defendants also argue that the                    Further, we find that the
June 9, 1998 pre-IPO press release                  defendants’ citation to this Court’s
sufficed to inform the public of Costco’s           decision in Klein v. General Nutrition Co.,
unauthorized inventory of Tight Lies                186 F.3d 338 (3d Cir. 1999), to be even
clubs. They argue that if information               further afield. Klein involved securities
regarding any gray market problem was               traded on the secondary market. We held
placed in the public domain through its             that the market “promptly digested current
pre-IPO press release, the Company would            information regarding GNC from all
have had no obligation to mention it in             publicly-available sources and reflected
their offering materials.      First, this          that information in GNC’s stock price.”
contention of course contradicts the                Id. at 338. But there is no indication that
defendants’ claim that the stock price did          there was any such efficient market in
not drop after the investing public first           Adams Golf shares prior to the IPO.
learned of the gray market problem on               Accordingly, we cannot conclude that the
January 7, 1999. Second, the cases relied           pre-IPO press release in this case, issued a

                                               10
Coat Factory Sec. Litig., Inc., 114 F.3d              Doe v. GTE Corp., 347 F.3d 655, 657 (7 th
1410 (3d Cir. 1997), in which we observed             Cir. 2003) (“[L]itigants need not try to
that “to the extent that information is not           plead around defenses.”).
important to reasonable investors, it
follows that its release will have a                         Mindful of this Court’s dismissal
negligible effect on the stock price.” Id. at         standard for immateriality, and our
1425. But Burlington Coat Factory was a               obligation to draw reasonable inferences in
Rule 10b-5 case brought under the 1934                the plaintiffs’ favor, we cannot agree with
Act, which requires that plaintiffs plead             the District Court’s conclusion that the
loss causation, i.e., allege that the material        gray market issue was obviously
misstatement or omission caused a drop in             unimportant to a reasonable investor. Of
the stock price. Actions brought under the            course, ultimately, Costco’s inventory of
1933 Act are, however, critically different.          Tight Lies golf clubs may be found to be
Under sections 11 and 12(a)(2), plaintiffs            immaterial, but that is for a factfinder to
do not bear the burden of proving                     determine in light of a developed record.
causation. It is the defendants who may
assert, as an affirmative defense, that a                     A determination that information
lower share value did not result from any             missing from a registration statement and
nondisclosure or false statement. See 15              prospectus is material does not end our
U.S.C. §§ 77k(e), 77l(b).            While a          analysis. We must also decide whether the
defendant may be able to prove this                   issuer had the duty to disclose that material
“negative causation” theory, an affirmative           fact such that its omission made the
defense may not be used to dismiss a                  statement misleading. See Zucker v.
plaintiff’s complaint under Rule 12(b)(6). 11         Quasha, 891 F.Supp. 1010, 1014 (D.N.J.
                                                      1995) (“To avoid com mitting
                                                      misrepresentation, a defendant is not
month before the offering materials were              required to disclose all known information,
filed, was sufficient to inform the                   but only information that is ‘necessary to
investing public of a gray market in                  make other statements not misleading.’”
Adams Golf equipment.                                 (quoting Craftm atic S ec. Litig. v.
  11                                                  Kraftsow, 890 F.2d 628, 640 n.16 (3d Cir.
    In any event, while there was no effect
                                                      1989))). In order to make out prima facie
to the stock in Burlington Coat Factory,
                                                      violations of sections 11 and 12(a)(2),
here, after disclosure of the gray market in
                                                      plaintiffs must allege that an omitted
the January 7, 1999 press release, the
                                                      material fact was required to be included
number of Adams Golf shares traded
                                                      by the securities laws or that its absence
jumped from 58,000 to 1.2 million, and
                                                      rendered statements in the prospectus
resulted in a 17 percent decline in the
                                                      misleading. See 15 U.S.C. § 77k(a)
stock price, though in absolute terms, this
                                                      (referring to “an untrue statement of a
just represented a drop from $4.63 to
                                                      material fact or omitted to state a material
$3.88.

                                                 11
fact required to be stated therein or                Costco’s unauthorized possession, in
necessary to make the statements therein             addition to the alleged “sales by other
not misleading”); § 77l (referring to “an            unauthorized discount retailers and
untrue statement of a material fact or omits         international gray market distributors,”
to state a material fact necessary in order          were necessary to make the statements
to make the statements, in the light of the          regarding the Com pany’s limited
circumstances under which they were                  distribution not misleading. Accordingly,
made, not misleading”). As noted above,              we will reverse the District Court’s
the plaintiffs allege that the Company’s             dismissal of the plaintiffs’ gray market
statements touting its limited distribution          claims.
arrangements were false or misleading in
light of the omitted gray market problem.                                 B
While we agree with the District Court that
none of these statements in the registration                 We next turn to the plaintiffs’
statement was technically false, we                  claims regarding an oversupply of golf
disagree with the Court’s conclusion that            equipment among retailers. As noted
the statements were obviously not                    above, the plaintiffs contend that the
misleading.                                          omission of this oversupply rendered two
                                                     sets of statements in the offering materials
           The relevant statements in the            materially misleading: 1) the specific
of f e r i n g materials indicated that              representation that “[t]he Company
distribution was limited to certain retailers        believes its prompt delivery of products
and that the Company “does not sell its              enables its retail accounts to maintain
products through price sensitive general             smaller quantities of inventory than may
discount warehouses.” The District Court             be required with other golf equipment
properly found that Costco’s unauthorized            manufacturers”; and 2) the general
possession of Adams Golf clubs could not             forward-looking statements concerning the
be reasonably taken to make those                    trends “likely to increase the demand” for
statements false, for there was no                   Adams Golf products. We agree with the
allegation that Adams Golf itself sold golf          District Court that neither of these
clubs to unauthorized retailers. But while           statements were materially misleading by
technically true, those statements may have          the omission of these industry conditions.
nevertheless led a reasonable investor to
conclude that the selective distribution                     Adams Golf’s specific claims to
model was functioning properly, i.e., that           nimble delivery and relatively smaller
this method was exclusive, and therefore             inventory were not rendered false or
that unauthorized retailers were not selling         misleading in light of any alleged industry-
significant quantities of its Adams Golf             wide oversupply of golf equipment. The
merchandise. Reasonable minds could                  offering materials merely indicated that
disagree as to whether the omitted fact of           stores had fewer Adams Golf clubs in their

                                                12
inventories than the equipment of other                       Further, the plaintiffs make much of
manufacturers. The statement cannot                  the Company’s April 12, 1999 press
reasonably be taken to mean that “Adams              release, announcing financial results for
Golf retailers were not carrying excess              the first quarter of 1999, in which,
inventory,” as plaintiffs allege. Those              according to their complaint, “defendants
retailers may very well have had bloated             d i s close d that fo r at least 1 2
inventories.       But they may have                 months—since we ll prior to the
maintained a relatively smaller inventory            IPO— there had been an ‘oversupply of
of Adams Golf equipment while carrying               inventory at the retail level’ on an
a surplus of merchandise produced by                 industry-wide basis.” Initially, we observe
Adams Golf’s competitors. We find that               that Adams Golf was not duty-bound to
plaintiffs’ allegations concerning retailers’        disclose general industry-wide trends
excess supplies of other companies’                  easily discernable from information
equipment simply cannot render false or              already available in the public domain.
misleading that portion of the registration          See Klein, 186 F.3d at 342 (determination
statement concerning the retailers’ smaller          of materiality takes into account
inventory of Adams Golf products.                    “availability [of information] in the public
                                                     domain”); Whirlpool Fin. Corp. v. GN
       While the plaintiffs may be able to           Holdings, Inc., 67 F.3d 605, 609 (7 th Cir.
prove their allegations that Adams Golf’s            1995) (“The nondisclosure of . . . industry-
rivals were suf fering from retail                   wide trends is not a basis for a securities
oversupply and were taking “corrective               fraud claim.”); Tenexco, 844 F.2d 1317,
action to address the industry-wide                  1323–24 (“The securities laws require the
oversupply” problem at the time of Adams             disclosure of information that is otherwise
Golf’s IPO, these allegations are of no              not in the public domain.”). Moreover, all
moment. Whatever financial problems                  the April 12, 1999 press release seemed to
other manufacturers and retailers may have           acknowledge was that retailers of golf
struggled with, the securities laws                  equipment had experienced generally
obligated Adams Golf to disclose material            sluggish sales for over a year.           As
information concerning its own business              discussed above, however, there is nothing
and not necessarily the details relating to          contradictory or inconsistent about
its competitors. See Trump Casino, 7 F.3d            retailers with excess inventories in general
at 375 (holding that “the issuer of a                and the Company’s representation that
security [need not] compare itself in                those same retailers kept a smaller
myriad ways to its competitors, whether              inventory of Adams Golf clubs in
favorably or unfavorably. . . .”); Wielgos v.        particular.     Accordingly, we find that
Commonwealth Edison Co., 892 F.2d 509,               Adams Golf’s representation of prompt
517 (7 th Cir. 1989) (“Issues or securities          delivery and relatively smaller retail
must reveal firm-specific information.”              inventories was not materially false or
(emphasis added)).                                   misleading.       Moreover, the fact that

                                                13
looking backward, one perceives a trend             EchoCath, Inc., 235 F.3d 865, 873–75 (3d
does not necessarily mean that conditions           Cir. 2000) (collecting cases). And here the
were such that one year earlier the                 cautionary statements relate directly to the
situation was sufficiently obvious or               claim on which plaintiffs allegedly relied;
noteworthy.                                         the general representations of better
                                                    business ahead were mitigated by the
        The plaintiffs also alleged that the        discussion of the several factors that could
retail oversupply affecting golf industry           have caused poor financial results.
retailers also rendered misleading the              Accordingly, we agree with the District
forward-looking statements made in the              Court that plaintiffs’ allegations regarding
registration statement. In particular, the          the forward-looking statements must also
plaintiffs argued that those forecasts were         succumb to the motion to dismiss.
“misleading with respect to the prospects
for growth in the golf industry.” Those                     We conclude that the plaintiffs can
statements included sanguine prospects for          prove no set of facts that would
the golf industry and the rising popularity         demonstrate that either the specific
of the sport more generally. But we have            representation as to prompt delivery and
firmly held that “[c]laims that these kinds         retailers’ inventory of Adams Golf
of vague expressions of hope by corporate           equipment or the general forward-looking
managers could dupe the market have been            statements was materially misleading. As
almost uniformly rejected by the courts.”           reasonable minds could not disagree on
Burlington Coat Factory, 114 F.3d at                this issue, we affirm the District Court’s
1427.                                               dismissal of the plaintiffs’ retail
                                                    oversupply claims as a matter of law.
        Moreover, Adams Golf was not
entirely upbeat about its future. The                                    C
registration statement referred to a series
of risks facing an investor, including the                  After the dismissal of their
prospects of lagging demand for the                 complaint, plaintiffs filed a motion under
Company’s products, competitive products            Fed. R. Civ. P. 59(e) to amend or alter the
from rivals, unseasonable weather patterns          judgment so as to add new allegations by
that could diminish the amount of golf              virtue of Fed. R. Civ. P. 15.12 They sought
played, and an overall decline in
discretionary consumer spen ding.
Applying the “bespeaks caution” doctrine,              12
                                                          The plaintiffs had already amended
this Court has held that meaningfully
                                                    their complaint once before. After filing
cautionary statements can render the
                                                    their original complaint on June 11, 1999,
alleged omissions or misrepresentations of
                                                    the plaintiffs amended their complaint on
forward-looking statements immaterial as
                                                    May 17, 2000, the “Consolidated and
a matter of law. EP Medsystems, Inc. v.
                                                    Amended Class Action” complaint. It was

                                               14
to introduce “new” factual allegations              granted.
about both the gray market and retail
oversupply claims. The District Court                       We have held that “[w]here a timely
denied the motion in a subsequent order,            motion to amend judgment is filed under
which ruling we review for abuse of                 Rule 59(e), the Rule 15 and 59 inquiries
discretion. Cureton v. Nat’l Collegiate             turn on the same factors.” Id. These
Athletic Ass’n, 252 F.3d 267, 272 (3d Cir.          considerations include undue delay, bad
2001).                                              faith, prejudice, or futility. Alston v.
                                                    Parker, 363 F.3d 229, 236 (3d Cir. 2004).
        But the purported new allegations           The District Court found that the
consist not of new information, but, rather,        plaintiffs’ motion to amend was unduly
information available at all times relevant         delayed and ultimately futile. The concept
to this action and facts not necessarily            of “undue delay” includes consideration of
curative of the pleading problems at issue.         whether new information came to light or
With respect to the gray market claim, the          was available earlier to the moving party.
plaintiffs merely furnished additional              Here, as the District Court observed,
details, such as the extent of financial            plaintiffs could have introduced the
losses attributable to unauthorized                 allegations in the motion to amend long
distribution, none of which would have              before the Court granted the motion to
affected the substance of a Rule 12(b)(6)           dismiss, and indeed could have included
analysis. We note that insofar as these             them in their original complaint filed in
facts pertain to the claims concerning the          1999. Plaintiffs relied at their peril on the
gray market, the plaintiffs would be free to        possibility of adding to their complaint,
develop them on remand. With respect to             but in doing so they clearly risked the
the retail oversupply claim, the plaintiffs         prospect of the entry of a final dismissal
sought to add more detailed factual                 order. Plaintiffs argue that they withheld
allegations seeking to show the existence           the allegations so as to comply with the
of an industry-wide trend of excess                 “short and plain statement” requirement of
inventory. This is also not helpful to their        Fed. R. Civ. P. 8, citing to cases involving
cause. In dismissing the oversupply claim,          complaints in excess of 100 pages. See,
both our analysis and that of the District          e.g., In re Westinghouse Sec. Litig., 90
Court assumed the existence of such an              F.3d 696, 703 (3d Cir. 1996). Considering
oversupply. Whether or not we were to               that the amendment would have added a
consider the new factual allegations, the           mere five pages of allegations to the
plaintiffs’ oversupply allegations do not           plaintiffs’ twenty-two page complaint, we
state a claim upon which relief could be            do not credit this argument and conclude
                                                    that the District Court did not err in
                                                    refusing to open the judgment of dismissal
                                                    when plaintiffs clearly relied on
this amended complaint that the District
                                                    “misplaced confidence” in their original
Court dismissed under Rule 12(b)(6).

                                               15
pleading. Cureton, 252 F.3d at 274.                                       III
Moreover, as the District Court reasoned,
the proposed amendments would not have                       For the foregoing reasons, we will
remedied the pleading deficiencies and                affirm the District Court’s dismissal of the
would thus have been futile.                          plaintiffs’ claims relating to retail
                                                      oversupply and we will reverse the
       Accordingly, we find that the                  dismissal of those claims relating to the
District Court did not abuse its discretion           gray market and remand for further
in dismissing the plaintiffs’ motion under            proceedings consistent with this opinion.
Rules 59(e) and 15. Cf. Lorenz v. CSX
Corp., 1 F.3d 1406, 1414 (3d Cir. 1993)
(finding that district court did not abuse its
discretion in light of plaintiff’s
“unreasonable delay” and futility of
proposed amendments).13


   13
     Plaintiffs contend that the applicable
standard of rev iew o f futility
determinations is de novo, relying upon
our decision in Burlington Coat Factory,
114 F.3d at 1410, as adopting the standard
employed by several of our sister courts of
appeals, but we do need read Burlington as
having done so. See Freeman v. First
Union Nat’l, 329 F.3d 1231, 1234 (11 th
Cir. 2003) (“[W]hen the district court
denies the plaintiff leave to amend due to
futility, we review the denial de novo
because it is concluding that as a matter of
law an amended complaint ‘would
necessarily fail.’ (quoting St. Charles
Foods, Inc. v. America’s Favorite Chicken             Comito, L.L.P. v. Iowa, 269 F.3d 932, 936
Co., 198 F.3d 815, 822 (11th Cir.1999)));             (8th Cir. 200 1); Glassman v.
Inge v. Rock Fin. Corp., 281 F.3d 613, 625            Computervision Corp., 90 F.3d 617, 623
(6th Cir.2002) (“When . . . the district              (1 st Cir. 1996). Accordingly, we decline
court denies the motion to amend on                   the plaintiffs’ invitation to chart a new
grounds that the amendment would be                   course and consider the District Court’s
futile, we review denial of the motion de             finding of futility for abuse of discretion.
novo.”); United States ex rel. Gaudineer &

                                                 16
