The First Circuit, in D’Agostino v. ev3, Inc., unanimously affirmed the dismissal of a qui tam suit alleging that medical device manufacturer ev3 and its subsidiary, Micro Therapeutics, Inc., violated the False Claims Act by fraudulently obtaining approval from the Food and Drug Administration for a medical device sold to doctors who later filed reimbursement claims with the Centers for Medicare and Medicaid Services. The FCA imposes liability on anyone who knowingly presents, or causes to be presented, a fraudulent claim for payment to the federal government. The key issue before the court was whether the relator adequately pleaded a causal connection between the defendants’ alleged misrepresentations to the FDA and the reimbursement payments issued by the CMS. The court rejected the relator’s theory of causation, which contended only that the defendants’ alleged misrepresentations “could have” influenced the FDA to approve the device. According to the court, the FDA’s decision not to withdraw its approval of the device in light of the relator’s allegations precluded the relator from basing his claims on the theory that approval was fraudulently obtained. The court cautioned that “[t]o rule otherwise would be to turn the FCA into a tool with which a jury of six people could retroactively eliminate the value of FDA approval and effectively require a product largely to be withdrawn from the market even when the FDA itself sees no reason to do so.” The court noted that the relator’s allegations might not satisfy the FCA’s materiality standard because the CMS had not denied reimbursement for the device in the wake of the relator’s allegations.
District Court Dismisses Securities Fraud Class Action Against Pharmaceutical Company That Issued Forward-Looking Statements Based On Initial FDA Feedback
In Dougherty v. Esperion Therapeutics, Inc., a Michigan federal district court dismissed a securities fraud class action alleging that defendants Esperion Therapeutics, Inc. and its CEO violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements about the market viability of a cholesterol drug the company was developing. The plaintiffs alleged that the defendants had stated that the Food and Drug Administration would not require completion of a cardiovascular-outcomes trial, before later disclosing that the FDA was encouraging Esperion to promptly initiate such a trial. The court dismissed the plaintiffs’ claims on both scienter and materiality grounds. First, the court found that the plaintiffs failed to allege particularized facts showing that at the time of the first statement the defendants understood the FDA’s initial feedback to be different than what was disclosed. Second, the court found that the plaintiffs failed to allege a material misstatement or omission because the defendants had consistently stated that they planned to undertake a cardiovascular-outcomes trial regardless of the FDA’s position, and had repeatedly cautioned that their statements were forward-looking and involved risks and uncertainties.
Ninth Circuit Joins D.C. Circuit in Affirming Limitations of Federal Subject-Matter Jurisdiction Under SLUSA
The Ninth Circuit, in Rainero v. Archon Corp., affirmed dismissal of a state-law securities fraud class action based on lack of federal jurisdiction. The plaintiff brought suit in Nevada district court, alleging that defendant Archon breached a contract in redeeming its outstanding preferred stock at an incorrect price. Importantly, the Ninth Circuit joined the D.C. Circuit’s Campbell v. American International Group, Inc. opinion in holding that the Securities Litigation Uniform Standards Act does not provide an independent basis for federal subject matter jurisdiction over a plaintiff’s state-law claim as “[t]here is no indication . . . that Congress intended . . . to create federal jurisdiction over a category of state-law securities class actions beyond jurisdiction to determine whether a particular state-law action is precluded by SLUSA.” This narrow reading of SLUSA will likely have significant ramifications concerning what kinds of securities fraud claims are brought in district courts within the Ninth Circuit. The court also found there was no federal diversity jurisdiction.
First Circuit Affirms Dismissal Of Securities Fraud Class Action Alleging That Pharmaceutical Company Misstated Its Ability To Abide By Aggressive Timeline
The First Circuit, in Ganem v. InVivo Therapeutics Holdings Corp., affirmed dismissal of a securities fraud class action alleging that defendants InVivo Therapeutics Holdings Corporation and its CEO violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements concerning the development timeline of a new medical device. The plaintiff alleged that the defendants’ statements regarding the timeline were misleading because they omitted certain conditions the Food and Drug Administration had imposed on a clinical trial. The First Circuit affirmed the district court’s finding that the plaintiff failed to plead facts showing that the defendants made material misstatements or omissions. The court found there were no facts alleged suggesting InVivo could not comply with the FDA’s conditions within the proposed timeline or that InVivo had to comply with the conditions. The court categorized the plaintiff’s argument that InVivo’s failure to meet the proposed timeline indicates that the proposed timeline was misleading as “fraud by hindsight,” and observed that the federal “securities laws do not make it unlawful for a company to publicize an aggressive timeline or estimate for a proposed action without disclosing every conceivable stumbling block to realizing those plans.”
New York Court Of Appeals Holds That The Acceptance Of An Auction Bid Constitutes A Binding Agreement Even When The Sale Remains Subject To A Final Written Agreement
In Stonehill Capital Management, LLC v. Bank of the West, the New York Court of Appeals held that the seller of a syndicated loan (Bank of the West) entered into a binding agreement with a buyer (Stonehill) when it accepted an auction bid from the buyer, even though the seller withdrew from the transaction before the parties entered into a written agreement and before the buyer submitted a 10% deposit, as required by the offering memorandum. While Bank of the West argued that those were preconditions to the contract, the court concluded that they were “post-agreement requirements the parties were obligated to perform pursuant to an existing agreement,” noting that the “formulaic language” in the offering memorandum did not amount to the type of “forthright, reasonable signal” required to show that the parties did not intend to enter an agreement despite the totality of their conduct. The court found that “[l]ess ambiguous and more certain language is necessary to remove any doubt of the parties’ intent not to be bound absent a writing.”
District Court Dismisses Derivative Action Where Shareholder Failed To Make Demand Or Adequately Allege Demand Was Futile, While Declining To Take Notice Of Plaintiff’s Exhibits
In Durgin v. Sharer, a California federal district court dismissed a shareholder derivative action against various directors and officers of Amgen, Inc. and nominal defendant Amgen alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and breaches of fiduciary duty. Applying Delaware law, the court held that the plaintiff failed to make a pre-suit demand on Amgen’s board and failed to adequately allege that demand would be futile, as required by Fed. R. Civ. P. 23.1. Under Delaware law, a plaintiff can show demand futility by raising a reasonable doubt that: (1) a majority of directors is capable of acting in a disinterested or independent manner; or (2) the challenged transaction was the result of business judgment. First, the court held that the plaintiff failed to plead particularized facts showing that the directors were interested where the plaintiff merely alleged in conclusory fashion and without factual support that: (a) four of the ten directors engaged in alleged insider trading; (b) certain directors were interested due to their positions on the Amgen corporate and audit committees; (c) a particular director with certain expertise had a heightened duty of oversight; (d) the entire board was interested because it approved or permitted the wrongdoing alleged; (e) the directors would have been exposed to further liabilities upon approving the suit; and (f) the directors had insurance policies with an “insured versus insured exclusion” that provided no coverage for direct suits filed by Amgen against its directors. The court also rejected the plaintiff’s argument that one director lacked independence merely because his compensation was determined by several other directors. Second, the court rejected the plaintiff’s “broad and generalized assertions” that the board “caused” and “directed” Amgen to engage in “wrongdoing” as insufficient to overcome the protection of the business judgment rule. Notably, the court declined to take notice of documents submitted by the plaintiff in opposition to the motion to dismiss in an effort to bolster the demand futility allegation, as the documents were “merely consistent with the Complaint’s allegations rather than referenced in or relied upon by the Complaint,” and the documents either post-dated the filing of the complaint or were obtained by the plaintiff after its filing.
District Court Certifies Investor Class Action Based On “Fraud-On-The-Market” PresumptionIn Todd v. STAAR Surgical Co., a California federal district court certified the class in a class action alleging that defendants STAAR Surgical Company and two of its executive officers made misleading public statements about the likelihood that the Food and Drug Administration would approve one of the company’s products. As numerosity, commonality and adequacy were not in dispute, the court focused on the typicality and predominance requirements for class certification under Fed. R. Civ. P. 23(a). First, the court found that the lead plaintiff met Rule 23(a)’s typicality requirement because his testimony showed that he, like the rest of the class, relied on publicly available information when purchasing STAAR stock, even though the lead plaintiff initially purchased stock before the start of the class period. Second, the court deemed Rule 23(a)’s predominance requirement satisfied because the lead plaintiff’s allegations sufficed to permit application of the fraud-on-the-market presumption. Based on the fact that STAAR stock traded on the NASDAQ and on testimony from the lead plaintiff’s expert witness concerning the five Cammer factors for evaluating market efficiency, the court found that the plaintiff had adequately alleged that STAAR stock traded on an efficient market and was therefore entitled to application of the fraud-on-the-market presumption.
Jennifer L. ChuniasPartner