Northern District Of Illinois Denies Motion To Dismiss Putative Securities Class Action Against Pharmaceutical Company Relating To Alleged Kickback Scheme
On September 1, 2020, Judge Charles R. Norgle of the United States District Court for the Northern District of Illinois 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. Holwill v. AbbVie Inc., No. 1:18-cv-6790, slip. op. (N.D. Ill. Sept. 1, 2020). Plaintiffs alleged that the company made material misstatements regarding the reasons for the success of the company’s principal drug that were rendered misleading because the company failed to disclose a kickback scheme that allegedly contributed to the drug’s success. The Court held that the complaint adequately alleged actionable misrepresentations as well as the elements of scienter and loss causation.
Plaintiffs alleged that the company engaged in but failed to disclose an unlawful kickback scheme to bribe and influence physicians to issue prescriptions, and that the company’s stock price fell after the alleged scheme became public when legal proceedings were filed—including through a California state court action in which a California regulator intervened and filed claims against the company alleging an unlawful kickback scheme. Id. at 2‑3.
The Court first held that plaintiffs adequately alleged actionable misstatements based on the omission of an unlawful kickback scheme. Id. at 4. The Court explained that plaintiffs plausibly alleged “classic” unlawful kickbacks to physicians of gifts that were “not integrally related” to the drug in question, as well as other support services which became unlawful under the anti-kickback statute because they “eliminate[d] an expense that the physician would have otherwise incurred.” Id. at 5-6. Because the company had repeatedly represented that the drug was successful because of lawful sales and marketing efforts, the Court concluded that the failure to disclose the true reasons for the drug’s success was misleading. Id. at 7. Moreover, the Court held that the alleged omissions were plausibly material because there was a substantial likelihood that the disclosure of the kickback scheme would have been viewed by a reasonable investor as having significantly altered the total mix of available information. Id. at 8.
The Court also rejected the company’s argument that statements in the company’s “code of business conduct”—which is available on the company’s website—were not actionable because they were “inherently aspirational” and did not imply that all officers and directors were in compliance with the code. Id. The Court held to the contrary that the code contained unqualified and actionable statements regarding the company’s conduct, including that “[w]e never offer or provide anything of value to healthcare professionals or other individuals to inappropriately influence their medical judgment or purchasing or prescribing practices in favor of [a company] product.” Id. at 9.
In addition, the Court held that plaintiffs “plausibly plead[ed] a strong inference” that the company knew of, but failed to disclose, the scheme, which should have been disclosed as known risks, trends, and conclusions about company controls pursuant to Regulation S-K. Id. Similarly, the Court found that, in light of the kickback scheme, the company’s executives could not have truthfully certified that the company’s controls were effective. Id. at 9-10.
With respect to the element of scienter, the Court agreed that the complaint gave rise to a strong inference that the alleged false statements and omissions concerning the company’s sales and marketing practices were knowingly or recklessly false. Id. at 10. The Court noted that the company continued to make statements about its marketing practices even in the wake of public allegations concerning the scheme and concluded that, because defendants had made numerous statements about these marketing practices, and attributed significant importance to the drug (including because the drug was responsible for a substantial portion of the company’s revenue), this suggested that defendants possessed detailed information regarding sales and marketing practices for the drug, including the kickback scheme. Id. at 11. The Court also found that allegations about similar kickback schemes the company allegedly used to market other drugs further supported an inference of scienter. Id. at 12. Weighed against these allegations, the Court concluded the competing inference offered by defendants—that they did not disclose an unlawful scheme because they had no reason to believe the company’s marketing practices were unlawful—was not more compelling or cogent at the motion-to-dismiss stage. Id.
Finally, the Court held that plaintiffs sufficiently alleged the element of loss causation by alleging a direct causal connection between the filing of the California regulator’s complaint in the California state court action and an immediate and significant drop in the company’s stock price. Id. at 13. While the company argued that the alleged kickback scheme had already become public in a prior legal proceeding, and therefore this information would already have been incorporated into the stock price prior to the filing of the California regulator’s complaint, the Court held that this alternative theory was a proper subject for discovery and could not be resolved at the motion-to-dismiss stage. Id.