On March 29, 2019, Judge J. Paul Oetken of the United States District Court for the Southern District of New York partially granted a motion to dismiss claims under the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in a putative class action against a pharmaceutical company and certain of its executives. In re Mylan N.V. Securities Litigation
, No. 16-cv-7926 (JPO) (S.D.N.Y. Mar. 29, 2019). Plaintiffs alleged that defendants made misleading statements regarding, among other things, an alleged rebate scheme involving the company’s EpiPen, and the alleged inflation of prices for various generic drugs. After the Court dismissed in part plaintiffs’ first amended complaint as noted in our prior post
, plaintiffs filed a second amended complaint that added an executive as a defendant, new allegations to support scienter for previously dismissed claims, a new alleged corrective disclosure in support of loss causation arguments, and additional claims asserting fraud based on the failure to disclose illegal anticompetitive misconduct. The Court held certain of plaintiffs’ new allegations based on anticompetitive behavior were inadequately pleaded but permitted one claim to go forward, and also held that certain new allegations of scienter were sufficient.
The newly alleged illegal anticompetitive conduct fell into two categories: (i) an alleged anticompetitive rebate scheme in violation of Section 2 of the Sherman Act and (ii) agreements to fix the prices of three generic drugs in violation of Section 1 of the Sherman Act. Slip op. at 9. While emphasizing that there is no general duty to disclose corporate mismanagement or uncharged criminal conduct, the Court considered whether the alleged omissions were actionable because affirmative statements by defendants had been rendered misleading by the failure to disclose the alleged unlawful conduct. As to the alleged rebate scheme, the Court held that plaintiffs’ allegations that the activities blocked a competitor from a significant portion of the relevant market and that the ultimate price of the product rose as a result of the scheme were sufficient to allege unlawful conduct under the Sherman Act based on harm to competition and net anticompetitive effects. Id.
The Court, however, dismissed plaintiffs’ claims based on the alleged failure to disclose illegal price-fixing agreements for three generic drugs. Rather than arguing that these agreements were supported by circumstantial evidence, plaintiffs purported to base these claims on “direct evidence” of the alleged price-fixing agreements by citing a phone call between employees of the company and a competitor where they “reached an agreement … to raise prices” for a specific drug. Id.
at 14. Plaintiffs also alleged employees sent emails following this call and kept in “frequent contact” regarding these drugs during the relevant period. Id.
The Court held these allegations were insufficiently detailed to adequately plead that an agreement had been made, as they did not “identify which employees were involved, where the call took place, or the contours of the alleged agreements.” Id.
The Court also concluded that loss causation had been adequately alleged with respect to certain alleged misstatements, rejecting defendants’ argument that because the company’s stock price following those alleged misstatements was lower than at any other time during the class period, the alleged misstatements were not actionable under the PSLRA’s “90-day bounce-back rule,” which applies when the average stock price is higher following the corrective disclosure than the price that a plaintiff paid. Id.
at 15. Plaintiffs countered that class members who held their shares through the corrective disclosure period could still have suffered a loss. The Court determined that plaintiffs’ allegations of a purchase of stock at an “inflated price” and that the stock price “dropped after the alleged fraud became known” were sufficient at the pleading stage, and whether specific class members’ losses were proximately caused by a particular misrepresentation could be addressed at a later stage of litigation. Id.
at 16. The Court also rejected defendants’ argument that a newly alleged corrective disclosure—a press release with new allegations by 47 state attorneys’ general—was not a corrective disclosure at all because it did not contain new factual information. Although certain information was previously known to the market, the Court determined that the disclosure also contained new information regarding the participation of one executive as well as the findings of an investigation into price fixing (although the price-fixing allegations were dismissed separately). Id.
at 17. Thus, these allegations were sufficient to provide “some indication of the loss and the causal connection that plaintiff has in mind.” Id.
Finally, the Court denied the motion to dismiss plaintiffs’ allegations against a new individual defendant and found that certain of these new allegations were sufficient to support an inference of scienter. The Court held that allegations of scienter as to the new defendant were insufficient to support claims relating to the EpiPen or generic drug price fixing. Id.
at 22. Indeed, there were no allegations specifically alleging that the new defendant was informed of the alleged misconduct, and the allegation that the EpiPen was part of the company’s “core business” was insufficient without more to support a strong inference of scienter. Id.
at 21-22. The Court held, however, that the allegation that the executive was personally involved in a conversation with the president of a competing pharmaceutical company, in which an agreement on market allocation for one drug was reached, was sufficient to support an inference of scienter. The Court rejected defendants’ argument that such allegations must be disregarded because they were taken from the action brought by the state attorneys general, holding that “plaintiffs may base factual allegations on complaints from other proceedings,” particularly in the case of a “government investigation” and given that the allegations were claimed to have been “verified by plaintiffs’ counsel.” Id.
at 23-24. The Court therefore found scienter adequately pleaded as to these allegations regarding the newly added defendant.