b'CASES GOODWINcannabidiol-based medicine, began developingPlaintiff moved to strike 18 of the 19 exhibits attached a chewing gum product that was to be used as ato defendants motion to dismiss for which defendants treatment that utilized CBD for smokeless tobacco useasked the court to take judicial notice of the documents and addiction. In May 2016, the company filed a patentor incorporate them by reference. The court granted application for the product with the U.S. Patent andthe motion to strike as to four of the exhibits, which Trademark Office (USPTO), in addition to a continuingincluded Citron Researchs twitter page and news patent application in February 2017.articles about Citron Researchs founder, because In April 2017, the USPTO made a non-final rejection ofthey did not meet the standard for such documents the patent through letter correspondence and then ato be incorporated by reference. However, the court final rejection decision on December 20, 2017. In Juneconcluded that the remaining exhibits, which included 2017, the company issued a press release about itsthe USPTOs web page showing the status of the plan for the chewing gum product in which the foundercompanys patent application, in addition to press and then-CEO stated that the product had a favorablereleases and transcripts of investor calls, were subject development roadmap. In the companys Form 10-Qto judicial notice or incorporated by reference.and Form 10-K filings between the second quarterWith respect to defendants motion to dismiss, of 2017 and the first quarter of 2018, the companydefendants argued, among other things, that the continued to describe its chewing gum productchallenged statements were neither false nor as its lead drug candidate based on proprietarymisleading on the basis that the patent application formulations, processes and technology that [theprocess routinely extends beyond a final rejections company] believe[s] are patent-protectable and notedby the USPTO and that use of the term proprietary that the company plan[s] to vigorously pursue patentto describe the product was non-actionable puffery. protection. The company continued to make similarThe court concluded that plaintiffs met the heightened statements through August 1, 2018, when the companypleading standard and sufficiently identified the noted in a press release that its drug developmentmisleading statements with particularity and why they program is making steady progress in advancing [its]were misleading. The court further concluded that the proprietary lead drug candidateCVSI-007whichprimary issue was whether a reasonable investor would addresses the multibillion dollar smokeless tobaccohave believed that a patent remain[ed] pending after use and addiction market. a final rejection given the defendants characterization On August 20, 2018, activist short-seller stockholderof the chewing gum product as patent-pending or Citron Research published a report that claimed thepatent-protectable, which had required discovery and company failed to disclose to investors that the patentexpert testimony in similar cases, and was, therefore, for its chewing gum product had been rejected by thebeyond the scope of an appropriate inquiry into USPTO. The companys stock price subsequently felldefendants motion. 63% from $9.20 to $3.40. The defendants also asserted a truth-on-the-market On August 24, 2018, an investor brought a putativedefense on the grounds that all of the information class action alleging a violation of Sections 10(b) andthat plaintiff claimed was omitted from the companys 20(a) of the Exchange Act and Rule 10b-5 againstpublic filings (including the final rejection letter) the company, its CEO and COO, alleging that thewas available on the USPTO website. The court also defendants made materially false and misleadingrejected this argument, noting that under Ninth Circuit statements about the status of the companys chewingprecedent such a defense would require a fact-specific gum products patent application. Specifically, plaintiffinquiry and rarely serves as a basis for dismissal at alleged that defendants failure to disclose in numerousthis stage of a case. As to plaintiffs scienter claim, the SEC filings and public statements that the productscourt concluded that plaintiff sufficiently pleaded that patent had been rejected. Defendants filed a motion todefendants knew of the patent rejection, which raised dismiss the complaint in its entirety and plaintiff moveda strong inference of scienter. Similarly, the court held to strike exhibits to defendants motion to dismiss. Thethat plaintiff properly alleged his loss causation claim court denied the motion to dismiss and granted thebecause the disclosure of the final rejection letter by motion to strike in part. Citron Research was sufficient to show that defendants fraudulent conduct proximately caused plaintiffs loss. 7'