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Second Circuit Affirms Dismissal Of Putative Class Action Against Tobacco Company Alleging False Statements About Scientific Studies and Sales Outlook
01/09/2024On December 26, 2023, the United States Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a putative class action asserting claims against a tobacco company (the “Company”) under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). In re Philip Morris Int’l Inc. Sec. Litig., No. 21-2546 (2d Cir. Dec. 26, 2023). Plaintiffs alleged that the Company made false or misleading statements regarding both the scientific studies it conducted in support of an application to the Food and Drug Administration (“FDA”) and the outlook for the Company’s sales growth in Japanese markets. The district court held that plaintiffs failed to adequately plead falsity or scienter, in a decision previously covered here. The Second Circuit affirmed the dismissal, holding that plaintiffs failed to adequately plead falsity. In its decision, the Court decided two questions of first impression in the Second Circuit. First, it held a securities fraud defendant’s statement that its scientific studies comply with a methodological standard that is published and internationally recognized, but stated in general and inherently subjective terms, is properly analyzed as a statement of opinion, rather than a statement of fact. Second, the Court held that, where a securities fraud defendant’s statement expresses an interpretation of scientific data that is ultimately endorsed by the FDA, such a statement is per se “[]reasonable” (i.e., supported by “meaningful inquiry”) as a matter of law.
The Company is one of the largest tobacco companies in the world. It directly sells its products outside the United States, while domestic sales and marketing are handled by the Company’s former parent company. The Company has recently shifted its focus from cigarettes to smoke-free alternatives, including one vapor-based product (“IQOS”) in particular. Plaintiffs alleged that the Company made misrepresentations in securities filings and public statements about clinical studies it conducted in support of an application to the FDA in which it sought to sell IQOS in the United States and to market IQOS as safer than traditional tobacco products. Plaintiffs also alleged that the Company made misleading statements about its growth projections in Japan regarding IQOS.
The district court found that none of the challenged statements were false or misleading because all the challenged statements were true, inactionable puffery, or inactionable statements of opinion. Furthermore, the district court found that plaintiffs failed to establish the required strong inference of scienter, either by alleging facts showing motive and opportunity to commit fraud or strong circumstantial evidence of conscious misbehavior or recklessness. Accordingly, the district court granted defendants’ motion to dismiss plaintiffs’ first amended complaint and denied plaintiffs’ motion for reconsideration. After the district court dismissed plaintiffs’ second amended complaint, this time with prejudice, plaintiffs appealed.
The Second Circuit affirmed the district court’s decision for failure to plead falsity and declined to reach the merits of the district court’s alternative holding on scienter. First, the Court evaluated plaintiffs’ allegations concerning the Company’s statements about the methodology of its IQOS studies. With respect to general statements about the rigor and extensiveness of their studies, the Court affirmed the district court’s holding that these were inactionable puffery. With respect to more specific Company statements that their studies were conducted in accordance with Good Clinical Practice (“GCP”), the Court affirmed the district court’s holding that these were inactionable statements of opinion. In doing so, the Court rejected plaintiffs’ argument that compliance with GCP is a “verifiable fact that can be relied upon,” emphasizing the “general and often inherently subjective nature” of GCP standards.
The Court then evaluated plaintiffs’ allegations concerning the Company’s statements about the results of its studies. One set of challenged statements concerned the long-term health benefits inferable from the Company’s clinical trials and non-clinical toxicology studies. The Court rejected plaintiffs’ claim that these statements were subsequently revealed to be false when the Tobacco Products Scientific Advisory Committee concluded that the studies did not support the statements about benefits. The Court emphasized that a mere “dispute about the proper interpretation of data” cannot form “a basis for liability” under Section 10(b). The Court also found that the FDA’s eventual acceptance of the challenged interpretation, embodied in its order granting the Company’s application to sell and market IQOS, “conclusively establishe[d] that Defendants’ statements were reasonable, and therefore not actionable” under the Second Circuit’s decision Tongue v. Sanofi and the Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. A separate set of statements concerned unfavorable findings from the Company’s non-clinical toxicology studies. The Court found that these statements were inactionable because they were either “verifiably true as a matter of objective fact” or reasonable as a matter of law.
Next, the Court evaluated plaintiffs’ allegations concerning the Company’s statements concerning sales projections in Japan. Plaintiffs alleged that the Company’s then-CEO affirmatively misrepresented the Company’s internal projections during a 2018 earnings call with investors. The district court dismissed plaintiff’s claim based on these allegations because they fell under the PSLRA’s safe harbor for “forward-looking statements.” The Second Circuit affirmed, but for a different reason. Specifically, the Court held that the CEO’s statements, when read in context, were not false at all—thus mooting the question of whether the safe harbor applies.
Finally, plaintiffs alleged that the Company materially omitted disclosures regarding unfavorable consumer trends it was required to make under Items 303 and 105 of SEC Regulation S-K. The Court affirmed the district court’s conclusion that the relevant trends were adequately disclosed in the Company’s SEC filings. The Court also rejected as “an apparent afterthought” plaintiffs’ argument on appeal that other growth projections were rendered false and misleading by the Company’s failure to disclose a known slowdown in product shipments to Japan, reasoning that plaintiffs “abandoned their argument that such statements were actionable” by “merely mentioning” such statements without “some effort at developed argumentation.”
