Court Allows Investors’ Claims to Proceed Based on Defendant’s Statement That Trade Secret Claim Was “Without Merit”

At a Glance

• In 2022, the trade secret case Appian v. Pegasystem made headlines when a jury awarded software company Appian more than $2 billion in damages for its competitor Pega’s willful and malicious misappropriation of its trade secrets.
• In July 2023, the court in the securities fraud case City of Fort Lauderdale Police & Firefighters’ Retirement Systems v. Pegasystems found that Pega’s statement in SEC filings that the Appian claims were “without merit” was an actionable statement of opinion, and allowed claims against Pega and its CEO to proceed.
• In addition, Pega’s SEC filings referred to a code of conduct in which it promised it would “never use illegal or questionable means to acquire a competitor’s trade secrets.” The court characterized this as a false promise, and held that it also was an actionable misrepresentation.

The Trade Secret Litigation: Appian v. Pegasystem

The trade secret case Appian v. Pegasystem made headlines in 2022 when a jury awarded software company Appian more than $2 billion in damages for its competitor Pega’s willful and malicious misappropriation of its trade secrets. Appian Corp. v. Pegasystem Inc., et al., Civ. No. 2020-07-216 (Circuit Court of Fairfax County, Virginia). Among other misconduct, Pega hired a contractor to obtain and share Appian’s confidential information and had its employees — whom it called “spies” — create fake companies to pose as Appian customers. 

A Virginia jury awarded Appian over $2 billion in damages from Pega. The judge denied Pega’s motion to set aside the verdict, and awarded Appian all $23.6 million of its attorneys’ fees, plus postjudgement interest of approximately $112 million per year.

The Securities Fraud Case: City of Fort Lauderdale Police & Firefighters’ Retirement Systems v. Pegasystems

New litigation in the District of Massachusetts focuses on Pega’s alleged false statements and misrepresentations to its investors in connection with the trade secret litigation. It is a securities fraud case, brought on behalf of a putative class of investors who held Pega stock during the relevant time period. City of Fort Lauderdale Police & Firefighters’ Ret. Sys. v. Pegasystems Inc., Civ. No. 22-11220-WGY (D. Mass. July 24, 2023).

The complaint alleged that Pega made no mention of the litigation in its Security and Exchange Commission (SEC) filings until more than a year and a half after the case was filed. Then, days after Appian amended its complaint to increase its damages claims from $90 million to $3 billion, Pega filed a Form 10-K with the SEC stating that Appian’s claims were “without merit.” Pega’s share price fell the next day. When the jury awarded over $2 billion in damages, Pega’s share price fell again. 

In denying Pega’s motion to dismiss, the court found that Pega’s statement that the claims were “without merit” was an actionable statement of opinion. It explained that Pega had “categorically denied that Appian’s claims had any merit — despite possessing substantial information about the viability of those claims.” Thus, Pega’s statement in its SEC filings did not “fairly align” with its knowledge.

In addition, Pega’s SEC filings during the litigation referred to a code of conduct in which it promised that it would “never use illegal or questionable means to acquire a competitor’s trade secrets.” While the SEC filings did not themselves contain the code of conduct, they assured investors that Pega had adopted one and cited its location on Pega’s website.

The court characterized this as a false promise not to misappropriate trade secrets and held that it was also an actionable misrepresentation. 

Ultimately, the court allowed claims against Pega and its CEO to proceed. The complaint detailed the CEO’s active participation in and knowledge of Pega’s misappropriation, including his attendance at an early meeting where the government contractor presented confidential Appian information, and his role in directing Pega’s misconduct. The court held that this created the necessary “strong inference” that he was aware of Pega’s misappropriation, and therefore that he knew or was reckless in not knowing that Pega’s statements posed a substantial danger of misleading investors. (The court dismissed without prejudice claims against Pega’s CFO, because the complaint did not describe him as having been personally involved.)

Key Takeaways

Publicly traded companies should carefully consider any disclosures made to investors regarding pending litigation, including trade secret litigation, to ensure that they are complying with their disclosure obligations. 

As the court explained, “[a]n issuer may legitimately oppose a claim against it, even when it possesses subjective knowledge that the facts underlying the claims against it are true. When it decides to do so, however, it must do so with exceptional care, so as not to mislead investors.”

In addition, companies should carefully consider any additional materials such as codes of conduct or other policy statements that are referenced in investor materials.