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Eastern District Of Wisconsin Dismisses Class Action Against Energy Products Company For Failure To Allege Falsity, Scienter, And Materiality
03/11/2025On February 7, 2025, Judge Brett H. Ludwig of the United States District Court for the Eastern District of Wisconsin dismissed a putative class action alleging that an energy product sales company (the “Company”) and its chief executive officer and chief financial officer (the “Officer Defendants”) violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.City Pension Fund for Firefighters & Police Officers in the City of Tampa Bay v. Generac Holdings, 22-cv-1436-bhl (E.D. Wis. Feb. 7, 2025).According to plaintiffs, defendants allegedly failed to disclose negative trends regarding the decrease in demand of the Company’s products post-pandemic as well as defects and risks with its solar energy products.The Court dismissed the complaint for failure to plausibly allege falsity, scienter, and materiality, noting that the pleading was “heavy in sheer number of its allegations and in its conclusory allegations of fraud” but “light on specific plausible factual allegations” supporting plaintiffs’ claims.
The Company sells energy-related products including power generators, solar power storage systems, home electricity controls, and gasoline powered tools.Plaintiffs’ lawsuit relates to two energy products: home standby (“HSB”) generators and solar energy storage (“PWRcell”).During the COVID-19 pandemic, the Company’s sales flourished as demand for HSB generators surged.In 2021, the Company reported a 50% increase in net sales based on “exceptional demand,” which continued through the first half of 2022.As the pandemic waned in late 2022, however, the Company reported that its residential product sales were weaker than expected in the third quarter of 2022 and that it was experiencing elevated levels of inventory and lower-than expected orders from its channel partners. Separately, in or around 2019, the Company developed its PWRcell line of products to capture and store electricity from solar panels and other power sources, reduce home energy costs, and protect homes from shorter duration power outages.A significant component of the PWRcell was “SnapRS”—a rapid shutdown device required in solar panel systems to alleviate the risk of electrocution.Although PWRcell’s sales grew in 2020 and 2021, SnapRS devices allegedly began to fail in early 2021 by turning on and off repeatedly, resulting in units overheating, deforming, and melting.In August 2022, the Company’s primary solar product channel partner filed suit against the Company over the SnapRS defects and subsequently went bankrupt.
Plaintiffs claim that the Company stock value dropped almost 80% from its peak value and allege that defendants failed to disclose three “trends”: (i) an allegedly weakening demand for the HSB generators; (ii) an alleged defect in the SnapRS solar energy products that allegedly led to residential fires, product failures, and increased warranty claims; and (iii) alleged risk of overreliance on a single distributor for its solar energy product sales that ultimately went bankrupt.The Court rejected these contentions, concluding that “misfortune does not necessarily equate with fraud” and that plaintiffs “failed to satisfy their heavy burdens under Rule 9(b) and the PSLRA.”
The Court initially addressed defendants’ argument that plaintiffs’ complaint, which included “118 statements across at least 63 paragraphs, almost all of which contain numerous subparts,” with no attempt to connect the statements to the reasons they were allegedly misleading, amounted to improper “puzzle pleading.”Although the Court was sympathetic to the argument and agreed that the complaint was “unnecessarily lengthy” and that plaintiffs’ approach of “throwing everything at the wall” was “unhelpful and antithetical to the purposes of Rule 8, Rule 9, and the PSLRA,” it declined to dismiss the complaint on that basis because “the fundamental problem with the pleading [was] not its use of confusing and repetitive cross references but rather its failure, despite its length and repetitiveness, to offer specific plausible allegations of falsity, scienter, and materiality.”
Next, the Court held that plaintiffs failed to plausibly allege falsity or scienter with respect to the HSB generator demand statements.First, the Court noted that plaintiffs did not contend that any of the statements were false but rather that those statements concealed the purported “trend” that demand for HSB generators was declining. The Court held that a company’s general statements about “robust” demand are not actionable and that plaintiffs did not allege that any of the statements about the underlying metrics that accompanied the demand statements were false.Second, the Court held that the complaint had few scienter allegations, all of which were generalized and conclusory in nature.Plaintiffs’ allegations at most were that the CEO at some point became aware of declining close rate (i.e., the rates at which client consultations resulted in sales) and growing inventory, but these allegations fell far short of supporting a strong inference that the CEO was aware or should have been aware that those factors made any statements at issue false or misleading.The Court also rejected plaintiffs’ contention that scienter should be inferred because the Officer Defendants controlled the Company’s messaging to investors, closely monitored the HSB generator sales, and were incentivized through compensation packages to inflate the Company stock price.The Court noted that a company’s CEO and CFO “almost always” control its messaging and monitor and make public disclosures about key parts of the business and that it was equally common for their compensation to be tied to company’s performance. The Court held that inferring scienter based on these facts would render PSLRA’s requirements meaningless.
Finally, the Court held that the allegations regarding the Company’s PWRcell line of business failed to support a securities fraud claim.First, the Court found that plaintiffs failed to plead with particularity when defendants became aware of the alleged pervasiveness of the SnapRS defect and that it would expose the Company to increased liabilities, warranty claims, and reputational harm.Without such allegations, plaintiffs could not plausibly allege that defendants’ statements regarding the SnapRS defects were false when made, and plaintiffs’ speculative allegation that defendants “must have” known about them was insufficient.Similarly, plaintiffs’ allegation that defendants’ non-disclosure that the Company’s solar product sales were highly concentrated with a single dealer was not enough to sustain a securities fraud claim.The Court stated that plaintiffs mischaracterized defendants’ statements about network and distribution partners for all of the Company’s products as pertaining only to PWRcell and that a purported “failure to disclose that one solar energy dealer accounted for a significant portion of their moderate solar energy-related sales [was] simply immaterial.”
The Court dismissed the complaint but allowed plaintiffs 30 days to amend.
