A recent decision in the long-running Merck securities litigation contains a pair of interesting holdings. In In re Merck & Co., Inc. Securities, Derivative & ERISA Litigation, 2012 WL 3779309 (D.N.J. Aug. 29, 2012), the court considered the impact of its rulings in a related individual suit on the securities class action.
(1) False or Misleading Statements - Can accurate financial statements be rendered false or misleading because the company fails to disclose ongoing business problems? Plaintiffs frequently bring claims based on these types of allegations, with mixed results in the courts. In Merck, the court found that this theory of liability “would expose a company to liability every time it reported previous successes without disclosing any and every reason, established or not, the company had for second-guessing the reported performance, be it a contemplated change in business strategy, dissension among company management or adverse information about a key product.” Accordingly, the court declined to find that the company’s earnings statements could have been rendered inaccurate by the company’s failure to disclose drug safety issues.
(2) Control Person Liability - Does a plaintiff have to adequately plead that the defendant was a “culpable participant” to move forward with a control person claim? The Merck court noted that other judges in the District of New Jersey have held that it is not necessary to provide factual support for this element. The court held that this position is no longer tenable, however, following the Supreme Court’s Iqbal decision, which clarified that a claim cannot survive a motion to dismiss unless “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Moreover, because pleading “culpable participation” is akin to pleading scienter, it is subject to the PSLRA’s heightened pleading standard. A plaintiff asserting a control person claim therefore “must plead with particularity facts giving rise to a strong inference that the controlling person knew or should have known that the primary violator, over whom the person had control, was engaging in fraudulent conduct.”
One of the first decisions in the Facebook securities litigation addresses a Securities Litigation Uniform Standards Act of 1998 (SLUSA) issue that has been the subject of a longstanding district court split.
Private actions under the Securities Act of 1933 ('33 Act) may be brought in federal or state court. SLUSA was designed, however, to prohibit the bringing of securities class actions based on misrepresentations or deception in state court and provides for the removal of these cases to federal court. In doing so, however, SLUSA specifically limits itself to class actions "based upon the statutory or common law of any State." Which leaves open the question: can plaintiffs bring a '33 Act class action in state court and prevent its removal?
In Lapin v. Facebook, Inc., 2012 WL 3647409 (N.D. Cal. Aug. 23, 2012), the court held that '33 Act class actions are removable. The court found that SLUSA amended the jurisdiction section of the '33 Act by inserting an "except as provided in" SLUSA provision that exempts covered class actions from concurrent jurisdiction (presumably even though '33 Act class actions are brought under federal, not state or common, law). Moreover, this interpretation of the amendment to the jurisdiction section is supported by SLUSA's legislative history, which broadly states that SLUSA's purpose "is to prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than in Federal, court."
Holding: Motion to remand denied.
Determining whether a pharmaceutical company has made a false statement about a clinical trial can raise technical issues. In In re Rigel Pharmaceuticals, Inc. Sec. Litig., 2012 WL 3858112 (9th Cir. Sept. 6, 2012), the plaintiffs alleged that the company misstated the results of a clinical trial for a drug designed to treat rheumatoid arthritis. The district court found that the plaintiffs "had failed to adequately plead a false statement regarding efficacy [of the drug] because disagreements over statistical methodology and study design are insufficient to allege a materially false statement."
On appeal, the Ninth Circuit agreed with that analysis. The court found that the plaintiffs were really "alleging that Defendants should have used different statistical methodologies, not that Defendants misrepresented the results they obtained from the methodologies they employed." Even if another statistical methodology would have been better or more accurate, accepting the plaintiffs' argument "would suggest that a company should announce statistical results that are obtained using a statistical methodology that is adopted after the study data is made available to the researchers and that is different from the methodology used as part of the clinical trial." Any company that took this approach "could raise concerns regarding reliability, biased scientific methods, or even fraud."
Holding: Dismissal affirmed (both on falsity and scienter grounds).
Addition: The Recorder has an article on the decision.