Eastern District Of Pennsylvania Declines To Dismiss Putative Class Action Against Pharmaceutical Company
On March 25, 2022, the United States District Court for the Eastern District of Pennsylvania largely denied a motion to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against a pharmaceutical company and certain of its executives. Halman Aldubi Provident & Pension Funds Ltd. v. Teva Pharm. Indus. Ltd., No. 20-cv-4660-KSM (E.D. Pa. Mar. 25, 2022). Plaintiff alleged that the company made misrepresentations with respect to the reasons one of its drugs was commercially successful. The Court held that except for allegations against the company’s CFO, plaintiff adequately alleged misrepresentations, scienter, and loss causation.
Plaintiff alleged that the company donated more than a hundred million dollars to patient assistance programs as part of an alleged scheme through which those programs would use the funds to pay patients’ co-pays for the company’s drug, in violation of an anti-kickback statute. Slip op. at 2-4. Plaintiff further alleged that the company made various statements regarding the drug’s success which were rendered false or misleading because they did not mention the alleged scheme. Id. at 5-9. Plaintiff further alleged that the company continued to make such misrepresentations even after it disclosed having received a subpoena from the Department of Justice (“DOJ”) concerning the company’s charitable donations, which ultimately led to the DOJ filing a complaint alleging that the company’s practices violated the False Claims Act. Id. at 9‑12.
The Court first assessed alleged misstatements regarding the drug’s market share. While the company argued that it had no obligation to disclose illegal activity, the Court observed that the company contended that the donations were, in fact, legal. The Court, in any event, determined that whether the donations were legal was “largely immaterial” because plaintiff sufficiently alleged that, whereas the company “attributed [the drug’s] success to legitimate business factors, such as the quality of the product and physician and patient loyalty,” the “driving reason for this success” was actually the alleged scheme. Id. at 20-21. Further, the Court determined that while the company’s statements “expressing optimism about [the drug’s] market share and revenue forecasts would ordinarily constitute nothing more than puffery,” they were actionable because they were made “in the context of” other statements ascribing reasons to the drug’s success. Id. at 21. Similarly, the Court noted that while statements of opinion are “generally not actionable,” they were actionable in this context because plaintiff alleged that “the speakers omitted material facts supporting their understanding of [the drug’s] success.” Id. at 22.
For similar reasons, the Court held that the challenged statements concerning the company’s program that facilitated patient access to the company’s drugs were adequately alleged to be false or misleading because they placed at issue the true reasons for the program and the drug’s success without disclosing the alleged scheme. Id. at 23-24. However, the Court held that the company’s statements regarding compliance with applicable laws and regulations were not actionable because they did not put the source of the drug’s success at issue and the Court noted that there was “no duty to disclose uncharged, unadjudicated wrongdoing.” Id. at 24–25. In addition, the Court dismissed plaintiff’s claims against the company’s CFO, as the Court noted that he was not alleged to have made any of the challenged misstatements that put the drug’s success at issue. Id. at 25 n.7.
The Court next evaluated whether the challenged statements were made with scienter. The Court first determined that the drug was one of the company’s “‘core operations,’ supporting an inference of scienter,” because the drug allegedly made up a large share of the company’s overall revenue and the company “repeatedly underscored the drug’s importance to the company.” Id. at 27. However, the company noted that the “core operations” theory of scienter “does not establish a strong inference of scienter” without additional allegations regarding “specific information conveyed to management.” Id. at 28. Thus, the Court turned to individual defendants and observed that, for example, certain executives held themselves out as an expert on the drug, regularly spoke about the drug with confidence, and/or approved the challenged donations, which strongly suggested that they were aware of the alleged scheme, which the Court emphasized involved “incredibly large” donations that were labeled with the drug’s name and made at the direction of the team responsible for marketing the drug. Id. at 28–35. Because the Court found that scienter had been adequately pleaded as to the individual defendants, the Court imputed their scienter to the company. Id. at 35.
The Court also held that plaintiff adequately alleged loss causation by identifying a corrective disclosure—namely, the stock price decline after the alleged truth was revealed. Id. at 36. Specifically, the Court held that the filing of the DOJ’s complaint was sufficiently alleged to be a corrective disclosure because the company’s stock fell after it was filed and it plausibly revealed the truth of the alleged misrepresentations, even though the DOJ’s complaint contained allegations rather than proven facts. Id. at 39. However, the Court determined that the disclosure of the DOJ subpoena was not a corrective disclosure because the company’s stock price did not fall when the subpoena was disclosed and the company’s revision of its earnings forecasts was not a corrective disclosure because it did not “specifically relate to—or correct—the alleged misrepresentations.” Id. at 37.