Desktop Metal Lawsuit Alleging Misleading of Investors Dismissed

In January of this year, we reported on a class action lawsuit against Desktop Metal (NYSE: DM) and its executives, including CEO Ric Fulop and former EnvisionTEC executives Ali El-Siblani and Michael Jafar. Now, according to a judicial opinion that has just been made public, that lawsuit has been dismissed by the United States District Court for the District of Massachusetts. Lead plaintiffs had accused the company of misleading investors about compliance with U.S. Food and Drug Administration (FDA) regulations and the quality of its products.

The lawsuit alleged that Desktop Metal made materially false and misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act. The court’s decision, issued on September 20, 2023, by Judge Indira Talwani, granted the defendants’ motion to dismiss the plaintiffs’ Amended Corrected Consolidated Class Action Complaint. An interesting side note: Judge Talwani is Massachusetts’ first South Asian federal judge and presided over the sentencing of many of the parents in the Varsity Blues college admissions scandal, including actress Felicity Huffman.

The court’s assessment followed the standard of reviewing a motion to dismiss for failure to state a claim, assuming the truth of all well-pleaded facts and drawing all reasonable inferences in the plaintiff’s favor. However, to survive dismissal, a complaint must contain sufficient factual material to state a claim that is plausible on its face.

In its decision, the court wrote, “In evaluating a motion to dismiss for failure to state a claim, the court assumes ‘the truth of all well-pleaded facts’ and draws ‘all reasonable inferences in the plaintiff’s favor.’ To survive dismissal, a complaint must contain sufficient factual material to ‘state a claim to relief that is plausible on its face.'”

The lawsuit centered around allegations that Desktop Metal and its executives made false statements related to the company’s acquisition of EnvisionTEC and the subsequent launch of Desktop Health. EnvisionTEC, the inventor of digital light printing (DLP) technology, was a key player in the dental 3D printing market. The plaintiffs particularly focused on EnvisionTEC’s Flexcera resin, a biocompatible material used for high-quality dental prosthetics.

Allegations included the claim that Flexcera resin was manufactured at EnvisionTEC’s non-FDA registered Montreal facility and mislabeled as being manufactured at the FDA-registered facility in Germany. This non-compliant resin reportedly comprised approximately 10% of total Flexcera resin sales during a certain period. Additionally, EnvisionTEC’s CEO El-Siblani was accused of pushing sales of the PCA 4000 curing box for use with the Flexcera line, even though it was not used in the FDA application for the product.

The lawsuit further claimed that these actions misled investors about the company’s regulatory compliance and product quality. However, the court found the plaintiffs’ allegations insufficient to support a claim under the Private Securities Litigation Reform Act (PSLRA). The plaintiffs failed to demonstrate that the alleged misrepresentations were materially false or misleading or that the individual defendants acted with the knowledge of wrongdoing. Moreover, the plaintiffs did not provide compelling evidence to suggest that the non-fraudulent inference of the defendants’ actions was less plausible than the fraudulent one.

The judge determined that the plaintiffs did not provide ample evidence regarding executive foreknowledge of the issues with the resin’s production and labeling, nor any misinforming of investors. Because Desktop Metal was quick to respond when problems with the products were raised, it actually demonstrated ideal corporate behavior related to potentially harmful materials. In this way, the company should be lauded for its appropriate guarding of public safety.

The court’s decision should be considered a success for Desktop Metal, which, like every other publicly traded AM firm, has had to weather a negative macroeconomic climate. Because the dental 3D printing industry is one of the most mature sectors for AM, lawsuits such as these can potentially harm a company like Desktop Metal. The purchase of Cubicure by Align Technologies, for instance, has had investors raise questions about Align’s partner, 3D Systems, as it relates to the production of dental aligners. Meanwhile, the closure of SmileDirectClub has closely tied HP’s Multi Jet Fusion technology to the failed firm’s business model, though it likely didn’t play a role as much as the economic environment did. Therefore, any negative publicity can hinder a company’s progress. As Desktop Metal and Carbon work together to advance the Flexcera line, they can do smoothly.