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Ninth Circuit Partially Revives Putative Class Action Against Manufacturer Of Pop Culture Collectibles
02/10/2026On February 4, 2026, the United States Court of Appeals for the Ninth Circuit reversed in part a decision from the United States District Court for the Western District of Washington granting a motion to dismiss a putative class action lawsuit, reviving claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against a manufacturer of pop culture collectibles (the “Company”) and two of its officers. Construction Laborers Pension Trust of Greater St. Louis et al. v. Funko Inc., et al., No. 24-4909 (9th Cir. Feb. 4, 2026). Plaintiffs alleged that defendants misled investors as to the progress of the Company’s major warehouse relocation, the quality and management of the Company’s inventory, its use and upgrade of information technology, and its distribution capabilities. We previously covered the district court’s ruling in which it dismissed the complaint for failure to sufficiently allege falsity or scienter here. The Ninth Circuit reversed in part, holding that the district court erred in its assessment of whether certain alleged statements regarding the Company’s inventory management and its use of existing information technology systems were sufficiently false and misleading.
Plaintiffs identified five categories of allegedly false or misleading statements from March 3, 2022, through November 3, 2022: (1) risk-factor statements in SEC filings regarding inventory management that presented failures as hypothetical future risks when problems had already materialized; (2) risk factor statements in SEC filings regarding the use of existing information technology systems when those systems were already failing; (3) statements on earnings calls regarding the new distribution center’s operations; (4) statements on earnings calls characterizing inventory as “generally high quality” and “in a really good healthy position”; and (5) statements at a press and investor day meeting regarding future distribution capabilities. Following the Company’s November 3, 2022, earnings call in which it reported higher-than-expected operating expenses resulting from the Company’s implementation of new technology, the Company’s stock dropped 59%.
Addressing falsity, the district court held that the Company’s risk disclosures concerning its inventory management were “forward-looking statements” protected by the PSLRA’s Safe Harbor provision. The district court also held that plaintiffs did not adequately plead scienter because the complaint lacked particularized allegations showing that the individual defendants knew that the specifically warned risked had materialized. The district court therefore dismissed for failure to state a claim.
The Ninth Circuit affirmed in part and reversed in part. The panel held that the district court was correct in concluding that plaintiffs did not adequately plead falsity as to alleged statements about the Company’s distribution center operations, inventory quality characterizations, and future distribution capabilities, as those statements were either accurate when made or non-actionable puffery. The Ninth Circuit also affirmed the district court’s decision as to alleged risk-factor statements regarding the Company’s upgrade of technology, finding no delay had yet materialized when disclosures were made.
However, the Ninth Circuit reversed as to falsity with respect to the Company’s alleged risk-factor statements in SEC filings concerning its inventory management and its use of existing information technology systems. First, the panel held the district court erred because the risk disclosures concerning inventory management—such as that the Company “must avoid accumulating excess inventory”—were not forward-looking statements protected by the PSLRA’s Safe Harbor provision, but rather were implicit statements about the present state of affairs that could mislead investors into thinking the warned-of risks had not yet occurred when they already had. Second, the Court held that plaintiffs adequately pleaded falsity as to similar risk-factor statements regarding the Company’s use of its existing information technology systems, which were already failing and causing disruption at the time of the disclosures.
The Ninth Circuit also reversed with respect to scienter regarding the falsity of the alleged inventory and technology systems statements. Applying the “core operations doctrine,” the Court held that, given the importance to the Company’s operations of inventory management and information technology, and the alleged frequency of the officers’ involvement in meetings regarding these issues, a reasonable trier of fact could find it “absurd” that the CEO and CFO were unaware of the problems and therefore did not know their statements were misleading at the time they were made.
Having found that plaintiffs adequately pleaded falsity and scienter as to the underlying Section 10(b) claim, the Court revived plaintiffs’ Section 20(a) control-person liability claim. The Court remanded the case to the district court to address the remaining elements.
