Southern District Of New York Dismisses Putative Class Action Against Pharmaceutical Company For Failure To Adequately Allege Misstatements And Scienter
04/09/2019On March 28, 2019, Judge William H. Pauley of the United States District Court for the Southern District of New York granted a motion to dismiss a putative securities class action asserting claims under the Securities Exchange Act of 1934 and Rule 10b-5 thereunder against a pharmaceutical company and certain of its executives. Gagnon v. Alkermes PLC, —F. Supp. 3d—, 2019 WL 1388700 (S.D.N.Y. Mar. 28, 2019). Plaintiff alleged that defendants made misleading statements in investor and analyst calls and public filings concerning the efficacy of the company’s opioid-dependence drug Vivitrol and the reasons for increased revenue from Vivitrol, which plaintiff alleged actually resulted from deceptive marketing and lobbying tactics. Id. at *2. The Court held that all but one of the alleged misstatements were not actionable, and as to the one actionable misstatement, plaintiff had failed to adequately allege scienter. Because the Court had previously given plaintiff an opportunity to replead, the action was dismissed with prejudice.
The Court determined that certain alleged misstatements regarding the growth in Vivitrol sales were non-actionable puffery. Specifically, the Court found statements that the growth was “organic,” “grassroots,” and “viral” were too general to cause a reasonable investor to rely upon them. Id. at *7. The Court also found statements that the company followed customary marketing practices to be non-actionable generalizations about the company’s business practices. Id. at *8. Further, the Court found various other alleged misstatements insufficient to support a claim, determining that alleged misstatements concerning the drug’s efficacy were not designed to be “ironclad guarantees” of the drug’s effectiveness, but merely explained how the drug was designed to work. Id. at *11. The Court also rejected plaintiff’s claims that statements that Vivitrol was for those who wanted to “live a drug-free life” were misleading, concluding that such statements were too vague and aspirational to be actionable, and held that statements claiming the drug was different from its competitors merely highlighted the functional distinctions among the drugs on the market. Id.
The Court held, however, that one alleged misstatement was actionable (if barely)—a statement that the company was seeing “accelerating sales growth” driven by organic growth and the company’s “focus on criminal justice programs,” which plaintiff alleged omitted the true nature of the company’s improper marketing activities, which allegedly involved misrepresentations as to its efficacy. Id. at *8. While emphasizing that the securities laws do not impose a general duty to disclose mismanagement or uncharged criminal conduct, the Court determined that a duty to disclose the true nature of the company’s alleged marketing efforts arose because the company had put the reasons for its success at issue. Id. at *9. Thus, at this stage, the Court found that plaintiff had adequately pleaded an “actionable half-truth.” Id.
The Court, however, held that scienter was not adequately alleged as to this single actionable misstatement. First, the Court considered whether plaintiff had adequately alleged scienter based on a “motive and opportunity to commit the fraud.” Plaintiff argued that the individual defendants’ stock sales were indicative of a motive to defraud investors, but the Court found that these sales did not suggest the requisite “concrete and personal benefit as a result of the alleged fraud” because the sales came before the alleged misstatement and also because they were part of a consistent pattern of monthly sales. Id. at *13.
The Court also rejected plaintiff’s argument for an inference of scienter based on “conscious misbehavior or recklessness,” as plaintiff did not contend that defendants undertook deliberately illegal behavior or failed to check information that they had a duty to monitor. Id. The Court concluded the complaint did not allege that the executive who made the alleged misstatement (or any other corporate insider) “knew contrary facts or had access to information contradicting” the statement. Id. at *14. While plaintiff pointed to a white paper allegedly circulated by the company criticizing a competing drug, as well as a meeting with a Maryland state official in which the company was asked not to disparage its competitors, plaintiff failed to allege specific facts suggesting that the executive who made the alleged misstatement knew or had access to this information. Id.
Finally, the Court also rejected plaintiff’s allegations of corporate scienter, noting that plaintiff had not identified an individual whose scienter could be imputed onto the company and that plaintiff had not established that the challenged statements were otherwise so important or dramatic that they would have been approved by corporate officials with sufficient information to know that the statement was false. Id. at *14-15.