Sixth Circuit Reverses Dismissal Of Putative Securities Class Action Against Pharmaceutical Company, Finding That Statements About Future Events Were Not Covered By The PSLRA Safe Harbor Provisions
On September 27, 2018, the United States Court of Appeals for the Sixth Circuit reversed the dismissal of a putative securities class action against pharmaceutical company Esperion Therapeutics, Inc. (the “Company”) and its CEO. Dougherty v. Esperion Therapeutics, Inc., et al., No. 17-1701 (6th Cir. Sept. 27, 2018). Plaintiffs, investors in the Company, alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by falsely stating that, based on feedback received by the Company at a meeting with the Food and Drug Administration (the “FDA”), the FDA would not require additional testing of the Company’s pre-approval anti-cholesterol drug ETC-1002. The Company’s stock price allegedly plummeted when, over a month later, the Company issued a press release indicating that, according to the FDA’s own final meeting minutes which had just been provided to the Company, additional testing would be required prior to any approval of the drug. The United States District Court for the Eastern District of Michigan had dismissed plaintiffs’ complaint, finding that plaintiffs failed to adequately plead a strong inference of scienter because they failed to identify facts demonstrating that defendants actually understood the FDA’s communications in a way that was different than what the Company publicly disclosed, and that defendants had not been reckless. Plaintiffs appealed, and the Sixth Circuit reversed.
The Sixth Circuit considered defendants’ argument that the Company’s August statements regarding the FDA meeting fell within the safe harbor provisions of the Private Securities Litigation Reform Act (“PSLRA”), under which, the Court noted, defendants are not liable for material forward-looking statements if either the statement is accompanied by meaningful cautionary language identifying important factors that could cause actual results to differ materially, or plaintiffs fail to prove that it was made with actual knowledge that the statement was false or misleading. Defendants contended that, because the August statements that the FDA had confirmed it would not require completion of additional cardiovascular outcome trial testing (“CVOT”) prior to approving ETC-1002 occurred prior to the publication of the FDA’s minutes, the statements were forward-looking. The Court disagreed, noting that while the Company’s statements concerned a future event, “that alone does not automatically make them forward-looking statements,” and the Company’s statement—that “[w]e know that [ETC-]1002 will not require a [CVOT test] to be completed prior to approval”—was not forward-looking. The Sixth Circuit also disagreed with the District Court’s conclusion that the contested statements were “assumptions underlying or relating to” a forward-looking statement, finding that where a defendant makes mixed statements of present fact and future prediction, the statement of present fact can be separated from surrounding forward-looking statements. The Sixth Circuit concluded that the Company could have ascertained the truth or falsity of its August statements prior to the issuance of those statements, and therefore held that the statements fell outside of the PSLRA safe harbor provisions.
The Sixth Circuit also considered whether plaintiffs had adequately alleged a strong inference of scienter. Plaintiffs alleged that, after meeting with the FDA in August, the Company knowingly or recklessly issued false statements that the FDA told the Company that it would not need to complete additional CVOT prior to approval, while the Company’s statements one month later acknowledged that the FDA’s final minutes, which had been subsequently published, suggested that a CVOT might be necessary before approval. The Company argued that either the FDA had changed its position between the meeting and publication of the final minutes or the Company may have left the meeting with a different impression than the FDA.
The Sixth Circuit found neither of the Company’s explanations more plausible than plaintiffs’ allegations of knowing or reckless fraud. The Court found that the Company provided no reason why the FDA would have changed its position and that the Company could not support its assertion that its executives misapprehended the FDA’s position given the CVOT test’s crucial importance to ETC-1002’s viability. Applying factors from Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir. 2001) for determining the sufficiency of scienter allegations, the Sixth Circuit found that: plaintiffs had shown divergence between the Company’s internal reports regarding the FDA approval process and its external statements on the same subject; the August statement disregarded the most current factual information provided to the Company at that time by the FDA; and the short six-week gap between divergent statements rendered it more likely that defendants were aware of the falsity of the initial statement. Finding that the FDA minutes reflected what was said at the meeting, and that the minutes were inconsistent with the Company’s August statement, the Sixth Circuit concluded that plaintiffs had alleged a strong inference that the Company knew its statements were false, and held that the District Court erred by concluding that plaintiffs failed to adequately allege scienter.
The Sixth Circuit thus held that plaintiffs had adequately pleaded their claims against the Company under Section 10(b) of the Exchange Act. The Court then held that plaintiffs had adequately pleaded their claims for “control person” violations under Section 20(a). Accordingly, the Sixth Circuit reversed the District Court’s dismissal of the action and remanded the case to the District Court.