Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 164 5 first circuit decisions goodwin First Circuit Decisions In re Ariad Pharmaceuticals, Inc. Securities Litigation, 2016 WL 6933788 (1st Cir. Nov. 28, 2016) (Chief Circuit Court Judge Jeffrey R. Howard) ARIAD Pharmaceuticals, Inc. develops and commer- cializes anti-cancer drugs, including ponatinib, a treat- ment for chronic myeloid leukemia. In December 2012, the FDA approved ponatinib for second-line use, but required the company to include a “box” warning for the risk of adverse cardiovascular events. During this period, the company was also engaged in a Phase 3 EPIC trial to assess ponatinib’s potential as a front-line treatment. By 2013, however, the FDA suspended the EPIC trial and suspended ARIAD’s marketing of ponati- nib as a second-line treatment, causing the company’s stock price to drop by more than 80%. Shareholders filed a class action lawsuit alleging violations of Sec- tions 10(b) and 20(a) and Rule 10b-5 of the 1934 Act, and claims under Sections 11 and 15 of the 1933 Act against the company, its directors, and various underwriters involved in the company’s January 2013 secondary public common stock offering. In 2015, the district court dismissed the lawsuit in its entirety for failure to allege facts giving rise to a strong inference of scienter with respect to the 1934 Act claims, and for failure to allege any material misrepresentations with respect to the 1933 Act claims. Plaintiffs appealed to the First Circuit, and the First Circuit affirmed dismissal of all claims except for one Section 10(b) claim (and a related Section 20(a) claim) against ARIAD and four of its officers. The remaining claim was based upon a report issued by an investment bank after a meeting with ARIAD executives that indi- cated management was optimistic about ponatinib’s chances for approval with a favorable label, when the FDA had rejected ARIAD’s proposed label just weeks before. The court held that, assuming allegations were true, it was knowingly or recklessly misleading for ARIAD’s management to express optimism under these circumstances without disclosing recent FDA develop- ments. The First Circuit affirmed dismissal of plaintiffs’ 1933 Act claims and dismissal of the underwriter de- fendants from the case, though on different grounds than those articulated by the district court. The court concluded that plaintiffs had not adequately alleged standing to sue under Section 11, which requires that the plaintiff has purchased its securities in the offering being challenged (as opposed to other securities that entered the market through other offerings or other- wise). The First Circuit concluded that “general allega- tions” of traceability “alone are not sufficient to avoid dismissal,” thus restricting standing to only those who could plead sufficient facts that plausibly trace their shares to the offering at issue. The First Circuit held that plaintiffs could not meet this burden, and thus rejected the Section 11 claims. This landmark ruling may help both issuers and underwriters get cases dismissed at the outset for lack of standing. Local No. 8 IBEW Retirement Plan & Trust v. Vertex Pharmaceuticals, Inc., 838 F.3d 76 (1st Cir. 2016) (Circuit Court Judge William J. Kayatta, Jr.) In January 2012, Vertex Pharmaceuticals, Inc., a glob- al biotechnology company that researches, develops and commercializes pharmaceuticals to treat a variety of illnesses, received FDA approval for Kalydeco, an oral medication developed by Vertex for the treatment of cystic fibrosis. On May 7, 2012, the company an- nounced favorable interim results for its Phase 2 clinical trial of a combination therapy using Kalydeco, reporting that 46% of patients enrolled in the trial experienced an “absolute” improvement of five percentage points or more, and 30% of patients experienced an “absolute” improvement of 10 percentage points or more. On May 29, 2012, Vertex reported that it had made an error in its earlier announcement, and that the previously released results were “relative” rather than “absolute.” Vertex’s stock price fell by nearly 11%. Investors sued Vertex and several of its executives, alleging violations of Sections 10(b), 20(a), 20A, and Rule 10b-5 of the 1934 Act based on the company’s allegedly false and misleading May 7, 2012, announce- ment. In their motion to dismiss, defendants conceded that Vertex’s announcement had been materially false or misleading, but argued that they did not know the reported results were erroneous until the date Vertex issued its corrective disclosure. Plaintiffs countered that Vertex should have realized the results were too good to be true. The district court granted defendants’ motion, finding that plaintiffs had not alleged any facts suggesting that defendants knew of the error before they publicly corrected it. On appeal, the First Circuit affirmed dismissal, concluding that none of the argu- ments advanced by plaintiffs established the requisite intent under the PSLRA. Notably, the First Circuit dis- missed plaintiffs’ insider trading allegations, finding that there were non-fraudulent explanations for the nearly $32 million in insider stock sales made during the relevant three-week period, including one executive’s departure from the company. Ganem v. InVivo Therapeutics Holdings Corporation, 2017 WL 74702 (1st Cir. Jan. 9, 2017) (Circuit Court Judge Kermit Lipez) InVivo Therapeutics is a clinical-stage biotechnology company that develops and commercializes technol- ogies for the treatment of spinal cord injuries. In the company’s 2012 annual report, it identified “biopolymer scaffolding” as its “Lead Product Under Development.” On March 29, 2013, the FDA conditionally accepted InVivo’s Investigational Device Exception (“IDE”) appli- cation, allowing the company to conduct its first human clinical trial. In its conditional acceptance, the FDA pre- sented the company with 13 issues to address before the initial study could begin. The FDA also required that the initial study be staged such that the company would follow single subjects for three months at a time before requesting approval to enroll the next subject, noting that this would result “in a total of 5 subject[s] enrolled over a minimum 15 month period.” On April 5, 2013, InVivo issued a press release stating that the FDA approved its IDE and that it intended to commence a 15-month clinical study “in the next few months.” On May 9, 2013, the company issued a second press release noting that it expected to “commence the study in mid-2013 and submit data to the FDA by the end of 2014.” After a turnover in management, the company issued an August 27, 2013, press release disclosing the FDA’s conditions and revising the schedule for the clinical trial, pushing the expected start date to the beginning of 2014 and increasing the anticipated length of the trial to 21 months. InVivo’s stock dropped nearly 50%. Shareholders filed a class action lawsuit against InVivo and its former CEO, alleging violations of Sec- tions 10(b) and 20(a) and Rule 10b-5 of the 1934 Act. Plaintiffs alleged that the FDA’s conditions and require- ment of a staged study made it impossible for InVivo to follow through on its timeline, and the company’s failure to disclose the FDA’s conditions rendered its tempo- ral predictions materially misleading. The defendants moved to dismiss, and the district court granted their motion, finding that plaintiffs had failed to adequately plead any material misrepresentations or scienter. The First Circuit affirmed the district court’s dismissal, con- cluding that none of the challenged statements were false or misleading. The court noted that the FDA’s own conditional acceptance letter explicitly permitted InVivo to enroll one patient immediately and stated that the minimum duration of the study would be 15 months. The court rejected plaintiffs’ theory—that because the com- pany’s actual timeline lagged behind its proposed one, it must have always been impossible to achieve—as an attempt to plead “fraud by hindsight.” As explained by the court, “the 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.”