Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-25-2000

Ieradi v. Mylan Lab Inc.
Precedential or Non-Precedential:

Docket 00-3076




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Recommended Citation
"Ieradi v. Mylan Lab Inc." (2000). 2000 Decisions. Paper 176.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/176


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Filed August 25, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 00-3076

FRANK P. IERADI, individually and on
behalf of all others similarly situated,

       Appellant

v.

MYLAN LABORATORIES, INC.; MILAN PUSKAR;
FRANK A. DEGEORGE; RODERICK P. JACKSON;
PATRICIA A. SUNSERI

Appeal from the United States District Court
For the Western District of Pennsylvania
D.C. No.: 99-cv-00010
District Judge: Honorable Robert J. Cindrich

Argued: July 20, 2000

Coram: RENDELL, ROSENN, Circuit Judges, and
O'NEILL,* District Judge.

(Filed August 25, 2000)

Andrea Bierstein (Argued)
Kirby, McInerney & Squire
830 Third Avenue 10th Floor
New York, NY 10022



_________________________________________________________________
* Honorable Thomas N. O'Neill, Jr., United States Senior District Court
Judge for the Eastern District of Pennsylvania, sitting by designation.
       Stephen J. Jurman
       114 Portvue Drive
       Moon Township, PA 15108

        Counsel for Appellant

       James B. Weidner (Argued)
       Martin L. Seidel
       Clifford, Chance, Rogers & Wells
       200 Park Avenue
       New York, NY 10166

       Gordon W. Schmidt
       Doepken, Keevican & Weiss
       600 Grant Street
       USX Tower, 58th Floor
       Pittsburgh, PA 15219

        Counsel for Appellees

OPINION OF THE COURT

ROSENN, Circuit Judge.

In this time of rapidly escalating prices of branded and
generic drugs, the primary question on this appeal pertains
to the adverse impact of such prices not on the consumer
public, but rather on potential stockholders of a leading
drug manufacturer. Plaintiff Frank P. Ieradi purchased
common stock in defendant Mylan Laboratories, Inc.
(Mylan), in the face of a price investigation being conducted
by the Federal Trade Commission (FTC). The investigation,
which focused on Mylan's recent increases in the prices of
fourteen of its drugs, ultimately resulted in the FTC filing a
complaint in federal district court alleging that Mylan had
engaged in practices in restraint of trade in violation of the
Sherman Act. The plaintiff alleges that initiation of the
action by the FTC, in turn, caused Mylan's stock price to
drop over three points.

Following this drop in stock price, Ieradi filed a complaint
in the United States District Court for the Western District
of Pennsylvania claiming that Mylan violated section 10(b)
of the Securities and Exchange Act of 1934 (the 1934 Act)

                                 2
and Securities and Exchange Commission Rule 10b-5 by
concealing, in both its press releases and filings with the
Securities and Exchange Commission (SEC), the existence
of two supply contracts which gave Mylan exclusive access
to raw materials necessary to produce two of its generic
anti-anxiety medications. These exclusive contracts enabled
Mylan to obtain higher prices for drugs and presumably
greater profits for its stockholders. The complaint also
charges that the individual officers and directors of Mylan
are liable for its misconduct because they are control
persons within the meaning of section 20 of the 1934 Act.
The District Court dismissed Ieradi's complaint, holding
that disclosure of the exclusive supply contracts would not
have significantly altered the total mix of information
available to the reasonable investor, and that therefore the
failure to disclose specifically those contracts was not
material. Ieradi timely appealed and we affirm. 1

I.

Mylan manufactures and markets generic
pharmaceuticals, including two anti-anxiety medications
named lorazepam and chlorazepate. The raw materials
essential to the manufacture of these two drugs are
produced solely by Profarmaco S.r.l. ("Profarmaco"), an
Italian company, and distributed in the United States solely
by Gyma Laboratories of America ("Gyma"). In November of
1997, Mylan entered into agreements with Profarmaco and
Gyma that gave it exclusive access to these raw materials
in the United States for a period of ten years.

Shortly after entering the agreements, Mylan raised its
prices significantly on fourteen generic drugs, including
lorazepam and chlorazepate. On January 12, 1998, Mylan
increased the price of chlorazepate tablets by amounts
ranging from 1900% to 3200%. On March 3, 1998, Mylan
raised its prices on lorazepam tablets. These increases
ranged from 1900% to 2600%. Mylan made the increases,
although the cost of manufacturing both clorazepam and
lorazepate remained steady.
_________________________________________________________________

1. The district court had subject matter jurisdiction under 28 U.S.C.
S 1331. We have appellate jurisdiction under 28 U.S.C. S 1291.

                               3
On February 17, 1998, Mylan filed its Form 10-Q with
the SEC for the quarter ending December 31, 1997. In this
10-Q, Mylan reported on the existence of an exclusive
supply and distribution agreement it had entered into with
a Canadian company, Genpharm, Inc., relating to the sale
of another drug in the United States. The report, however,
mentioned nothing about the exclusive contracts with
Profarmaco and Gyma.

On June 19, 1998, Mylan filed its Form 10-K with the
SEC for the fiscal year ending March 31, 1998. In that
filing, the company stated:

       While Mylan anticipates continued benefits from price
       increases in the near future, the continuation of this
       trend and any resulting benefits depend on several
       factors, some of which are beyond the Company's
       control.

The Form 10-K also reported increases in Mylan's revenues
and net earnings of 37% and 132%, respectively.

On July 4, 1998, Mylan filed its Form 10-Q with the SEC
for the quarter ending June 30, 1998. The 10-Q reported
similar increases with respect to revenues and earnings,
attributing the significant earnings improvements to overall
shipment volumes and selective price increases on fourteen
products implemented during the June 1998 quarter. The
10-Q then disclosed the existence of an investigation by the
Federal Trade Commission ("FTC").

Specifically, the 10-Q stated:

       As a result of price increases initiated by the Company
       during the past six months, the Company has received
       notification from the Federal Trade Commission that it
       is investigating whether the Company and others have
       engaged in activities restricting competition in the
       manufacture or sale of pharmaceutical ingredients or
       products. The Company is cooperating fully with the
       review and is providing all the information requested
       by the Commission. As with all governmental inquiries
       the process is inherently uncertain.

The 10-Q further reported:

                                 4
       While these price increases have favorably impacted
       earnings in the current quarter, the extent if any in
       future quarters depends upon several factors, some of
       which are beyond the Company's control. During the
       quarter ended June 30, 1998, the Company received
       notice that the Federal Trade Commission . . . , in light
       of the price increases, was investigating whether the
       Company and others had engaged in activities
       restricting competition in the manufacture or sale of
       pharmaceutical ingredients or products. The Company
       is cooperating fully with this investigation and is
       supplying the documents requested. Management
       believes that the Company has acted properly and in
       full compliance with the Federal Trade Commission Act
       and all other laws and regulations governing trade and
       competition in the marketplace. . . . The Company
       believes the ultimate resolution of this matter will not
       have a material adverse effect on the Company's
       financial position or results of operations.

In the "Forward Looking Statements" section of the same
10-Q, Mylan stated:

       The Company may be unable to realize [its] plans and
       objectives . . . due to various important factors,
       including, but not limited to, . . . if the FTC concludes,
       on the basis of its investigation, that the Company has
       acted improperly.

On July 6, 1998, the Wall Street Journal reported on
Mylan's price increases on the fourteen drugs, including
lorazepam and chlorazepate. Around that time, a Mylan
spokesperson specifically denied that Mylan had cornered
the market on certain raw materials needed to manufacture
these two anti-anxiety medications. However, on or about
July 20, 1998, Mylan Vice President Patricia Sunseri
revealed that the FTC had sent a subpoena to the company
the previous month asking about a series of price increases
on generic drugs since the prior fall. Sunseri claimed the
FTC "just wanted to make sure . . . [the price increases]
w[ere] justified." Still, Mylan made no public reference at
this time to its contracts with Profarmaco and Gyma.

On October 26, 1998, Ieradi purchased 100 shares of
Mylan stock at a price of $33-13/16.

                               5
On December 5, 1998, the public learned that the FTC
notified Mylan that it was preparing to sue the company,
alleging that Mylan had raised prices after cornering the
market on raw materials used to produce anti-anxiety
drugs. Following this announcement, Mylan's stock price
dropped from $34-3/8 on Friday, December 4, to $31-5/16
on Monday, December 7. The FTC subsequently initiated an
action charging Mylan, Profarmaco, and Gyma with various
violations of the antitrust laws. The case has since been
settled, subject to judicial approval. The settlement requires
that Mylan disgorge $147 million in profits derived from its
price increases.2

II.

Section 10(b) of the 1934 Act broadly prohibits the use of
"manipulative or deceptive devices" in connection with the
purchase or sale of a security. SEC Rule 10b-5,
promulgated thereunder, prohibits persons from, inter alia,
making "any untrue statement of a material fact or
omit[ting] to state a material fact necessary in order to
make the statements made, in light of the circumstances in
which they were made, not misleading . . . ." To state a
claim for securities fraud under Section 10(b) and Rule
10b-5,

       a private plaintiff must plead the following elements: (1)
       that the defendant made a misrepresentation or
       omission of (2) a material (3) fact; (4) that the
       defendant acted with knowledge or recklessness and (5)
       that the plaintiff reasonably relied on the
       misrepresentation or omission and (6) consequently
       suffered damage. . . . Also, because section 10(b)
       claims sound in fraud, the circumstances constituting
       the fraud must be stated with particularity. . . .
_________________________________________________________________

2. We take judicial notice under Federal Rule of Evidence 210(f) of an
article in the New York Times of July 13, 2000 entitled "Generic Drug
Maker Agrees to Settlement in Price-Fixing Case." See United States v.
Poszgai, 

, 731 (3d Cir. 1993)(appellate court may take
judicial notice of a matter not before the District Court); See also
Peters
v. Delaware River Port Authority, 

, 1356-57 (3d Cir.
1994)(appellate court may take judicial notice of newspaper articles).

                               6
       [Federal Rule of Civil Procedure] 9(b) requires a plaintiff
       to plead (1) a specific false representation of material
       fact; (2) knowledge by the person who made it of its
       falsity; (3) ignorance of its falsity by the person to
       whom it was made; (4) the intention that it should be
       acted upon; and (5) that the plaintiff acted upon it to
       his damage. . . .

In re Westinghouse Sec. Litig., 

, 710 (3d Cir.
1996) (citations and internal quotation marks omitted).

The plaintiff alleges that defendants, in disregard of their
duty to disseminate accurate and truthful information to
public investors of a company whose common stock was
listed and actively traded on the New York Stock Exchange,
publicly attributed Mylan's increased revenues primarily to
continued growth in all product lines when, in fact, the
Company's success "was primarily possible because of its
contracts with Profarmaco and Gyma for [the raw materials
for] lorazepam and chlorazepate." (Para. 35 of Complaint.)
The plaintiff further alleges that Mylan downplayed the risk
that the FTC investigation would materialize into a federal
civil action by specifically denying in its statements to the
press that it had "cornered the market" on the raw
materials necessary to produce lorazepam and clorazepate
and by stating in its SEC filings that the Company believed
it acted properly in increasing the prices of its drugs.

According to the plaintiff, these statements artificially
inflated the price of Mylan's common stock because they
failed adequately to inform investors of the risk that the
FTC investigation would materialize into a civil action
directed at the Company's primary source of increased
revenues. In making this claim, the plaintiff does not
contend that Mylan was required to provide the investing
public with a summary of the FTC's case against the
Company followed by a summary of the Company's defense.
Nor does he argue that Mylan was required to admit that it
had monopolized the raw materials market in question.
Rather, he argues that in commenting on the FTC
investigation Mylan had a duty to disclose the existence
and substance of its exclusive supply contracts with
Profarmco and Gyma so that he and other reasonable
investors could intelligently assess the risk that the FTC

                                7
investigation would result in a civil antitrust action against
Mylan.

As noted above, the District Court held that Mylan's
failure to disclose specifically the exclusive supply contracts
was not material because this information would not have
significantly altered the total mix of information available to
the reasonable investor. The issue of materiality is a mixed
question of law and fact. TSC Indus., Inc. v. Northway, Inc.,

, 450 (1976). However, because we must
accept all factual allegations contained in Ieradi's complaint
as true for purposes of this motion to dismiss, our review
of the District Court's decision is plenary. See Port Auth. of
N.Y. and N.J. v. Arcadian Corp., 

, 311 (3d Cir.
1999); Alexander v. Whitman, 

, 1397-98 (3d
Cir.), cert. denied, 

(1997).

"The question of materiality . . . is an objective one,
involving the significance of an omitted or misrepresented
fact to a reasonable investor." 

; see
also Basic Inc. v. Levinson, 

, 232 (1988)
(applying TSC materiality standard to claim under Section
10(b) and Rule 10b-5). "An omitted fact is material if there
is a substantial likelihood that a reasonable investor would
consider it important in deciding" how to act. 

It
contemplates "a showing of a substantial likelihood that,
under all the circumstances, the omitted fact would have
assumed actual significance in the deliberations of the
reasonable shareholder. Put another way, there must be a
substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as
having significantly altered the `total mix' of information
made available." 

misrepresentations or omissions are so
obviously unimportant to an investor that reasonable
minds cannot differ on the question of materiality,"
dismissal is warranted. Shapiro v. UJB Fin. Corp., 

, 281 n.11 (3d Cir.), cert. denied, 

(1992).
However, where there is room for differing opinions on the
issue of materiality, the question should be left for jury
determination. See Ballan v. Wilfred Am. Educ. Corp., 

, 249 (E.D.N.Y. 1989).

                               8
Returning to the case at bar, we see no error in the
District Court's conclusion that Mylan's failure to disclose
the existence and substance of the exclusive supply
contracts was immaterial. First, as Ieradi acknowledges, in
Mylan's 10-Q for the quarter ending June 30, 1998, the
Company did disclose that the FTC was investigating
"whether the Company and others had engaged in activities
restricting competition in the manufacture or sale of
pharmaceutical ingredients or products." Moreover, in the
"Forward Looking Statements" section of the 10-Q, Mylan
also disclosed that it "may be unable to realize[its] plans
and objectives . . . if the FTC concludes, on the basis of its
investigation, that the Company has acted improperly." We
think this public disclosure was more than sufficient to put
potential investors such as Ieradi on notice that Mylan's
alleged anticompetitive activity in raising the prices of its
drugs, including chorazepate and lorazepam, could subject
the company to antitrust action by the FTC.

Moreover, we find support for the District Court's
conclusion that disclosure of the two exclusive contracts
was immaterial in the action of the stock market that
followed the FTC investigation. Although the revenues and
earnings of the company substantially increased, as
reported in its Form 10-Q for the quarter ending June 30
1998, the closing stock market price for Mylan common
stock price fell sharply following the disclosure of the FTC
investigation into Mylan's anticompetitive activities. After a
closing high of 35 on July 17, 1998, Mylan's stock price
declined every successive day thereafter except one, even
without any information pertaining to the exclusive supply
contracts, until the close of 25 on August 4, 1998. 3 This
_________________________________________________________________

3. Under Federal Rule of Evidence 201, we may take judicial notice at
any stage of the proceeding of a fact not subject to reasonable dispute
that is capable of accurate and ready determination by resort to a source
whose accuracy cannot be reasonably questioned. See SEC v. Bilzerian,

, 123 n. 10 (D.D.C. 1993); Jack B. Weinstein &
Margaret A. Berger, Weinstein's Federal Evidence S 201.12[8] (Joseph
McLaughlin, ed., Matthew Bender 2d ed. 1997). The opening and closing
stock prices on the New York Stock Exchange for Mylan during the
period of July 17 to August 4, 1998 are reported by Quotron Chart
Service.

                               9
drop of ten points is more than 300 per cent in excess of
the 3 1/6 point "plummet" that occurred several months
after the plaintiff purchased stock on October 26, 1998.

Second, we disagree with Ieradi to the extent he argues
that, with the knowledge of the exclusive supply contracts
at issue in this litigation, a reasonable investor would have
been able to assess the risk that the FTC investigation
would have resulted in the commencement of a civil action.
As the district court noted, exclusive supply contracts that
allow a company to raise prices, and thereby increase
revenue, are usually viewed as advantageous to investors.
Moreover, although Ieradi does allege that the contracts at
issue here were anticompetitive and in violation of the
antitrust laws, we seriously doubt that "the reasonable
investor" possesses the depth of antitrust law expertise that
would allow him or her to conclude that the contracts were
susceptible to successful attack under the antitrust laws.
Knowledge that the FTC was engaging in an investigation of
Mylan's extraordinary pricing of its drugs because of its
anticompetitive activities was much more informative to
"the reasonable investor" than information pertaining to
Mylan's exclusive contracts for raw materials for two of its
drugs.

Armed with information of the FTC investigation into
Mylan's anticompetitive activities, we believe that Ieradi was
sufficiently informed on October 26, 1998, the date he
purchased his Mylan stock, that the Company faced a risk
of a civil antitrust action. We are further persuaded that
the disclosure of the exclusive supply contracts at issue in
this case would have been of little, if any, benefit to the
reasonable investor.

III.

Accordingly, we conclude that the District Court
committed no error in holding that the non-disclosure of
the exclusive contracts relating to lorazepam and
chlorazepate was not a material fact. For the reasons set
forth above, the order of the District Court will be affirmed.
Costs taxed against the appellant.

                               10
A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               11