On August 12, 2019, Judge Haywood S. Gilliam, Jr. of the United States District Court for the Northern District of California dismissed without leave to amend a putative securities class action against a pharmaceutical company, and certain of its officers, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. New York Hotel Trades Council & Hotel Assoc. of N.Y.C., Inc. Pension Fund v. Impax Laboratories Inc.
, No. 16 Civ. 6577 (N.D. Cal. Aug. 12, 2019). As to alleged misrepresentations regarding alleged price fixing, the Court held that the announcement of a government investigation cannot, as a matter of law, amount to a “corrective disclosure” sufficient to allege loss causation. As to other alleged misrepresentations regarding price erosion as to certain drugs, the Court held that plaintiff failed to plead a false statement, materiality, and/or scienter.
The Court previously dismissed plaintiff’s first amended complaint with leave to amend. Fleming v. Impax Labs. Inc.
, No. 16-cv-06557-HSG, 2018 WL 4616291 (N.D. Cal. Sept. 7, 2018). Although the Court held that plaintiff adequately alleged falsity with respect to price fixing, it held that plaintiff failed to adequately allege scienter and loss causation. As to the remaining allegations, the Court held that plaintiff failed to adequately allege falsity and scienter. (For additional discussion of the Court’s ruling, see Northern District of California Dismisses Putative Securities Class Action for Failure to Adequately Allege Misstatements, Scienter, and Loss Causation
, Shearman & Sterling LLP Need-to-Know Litigation Weekly (September 17, 2018), https://www.lit-sl.shearman.com/northern-district-of-california-dismisses-putative-securities-class-action-for-failure-to-adequately
Plaintiff filed a 196-page second amended complaint, which defendants moved to dismiss. The Court again found that plaintiff failed to plead loss causation with respect to alleged price fixing. In this regard, plaintiff’s only allegation of a “corrective” disclosure was an announcement that the Company had received a grand jury subpoena. The Court held that an announcement of a government or regulatory investigation does not qualify as a corrective disclosure as a matter of law under the Ninth Circuit’s decision in Loos v. Immersion Corp.
, 762 F.3d 880, 890 & n.3 (9th Cir. 2014) (observing that an investigation “simply puts investors on notice of a potential future disclosure of fraudulent conduct”), and that plaintiff’s remaining allegations were irrelevant because they related to price decreases
that followed the alleged misstatements when the opposite is required to allege loss causation.
Plaintiff also raised allegations that the Company failed to disclose sufficiently price-erosion that was taking place with respect to two specific drugs – diclofenac and budesonide. With respect to diclofenac, the Court held that statements about projected growth were forward-looking statements protected by the safe harbor of the Private Securities Litigation Reform Act (“PSLRA”). In making this holding, the Court rejected plaintiff’s argument that the projections about diclofenac included statements about past sales of the drug, including its “steady growth,” observing that the “core flaw in Plaintiff’s argument” is that the complaint “only charges [the Company] with setting ‘unreasonable targets.’” The Court held that plaintiff’s claim that the targets were unreasonable based on past performance could be said of any forward-looking statement, but that the PSLRA “demands more” by requiring allegations of actual knowledge of falsity. The Court also rejected plaintiff’s claim that a Company announcement lowering guidance for diclofenac was misleading because the Company did not also disclose that it was about to record a $15 million shelf-stock adjustment. The Court held that plaintiff failed to allege that the Company had a duty to disclose the shelf-stock adjustment before it did. In rejecting plaintiff’s argument that a duty arose because the Company’s announcement of one reason for the lowered guidance led investors to believe there were no other reasons for the lowering, the Court held that plaintiff had “cite[d] to no case law for the proposition that disclosing one adverse material fact implicitly denies that any other adverse material fact exists.”
Finally, with respect to budesonide, plaintiff claimed that the Company, after acquiring the drug, misrepresented that the drug had a positive financial outlook and would be integrated easily. The Court held that plaintiff failed to plead scienter adequately because its theory relied on the “unreasonable assumption” that the Company willfully knew that the acquisition was overpriced, when the “far more reasonable—and non-culpable—inference, however, is that [d]efendants simply overvalued the acquired products.” The Court also held that the allegation of scienter might have been stronger had they related to a drug that the Company already owned, rather than one it acquired, observing that “overestimating one’s own capabilities is categorically different from overestimating the subject of an acquisition.”