JONES, II, District Judge.
The instant motion relates to the consolidated class action in which lead Plaintiff Carpenters' Local 27 Defined Benefit Fund asserts that Defendants ViroPharma Incorporated ("ViroPharma"), Vincent J. Milano, Charles A. Rowland, Thomas F. Doyle, and John P. Wolf violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) ("Section 10(b)"); Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"); and Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) ("Section 20(a)"). Plaintiff filed this litigation on behalf of all persons who purchased ViroPharma securities between December 14, 2011 and April 9, 2012 (the "Class Period").
Having considered the motion, the pleadings, and the oral arguments made in open court on June 10, 2013, for the reasons set forth below, Defendant's Motion is denied.
ViroPharma Incorporated ("ViroPharma") is a publicly traded biotechnology company that maintains a principal place of business in Exton, Pennsylvania. ViroPharma markets and sells a number of products, one of which is the antibiotic Vancocin, which treats the gastrointestinal infection, Clostridium dificile associated diarrhea ("CDAD"). Vancocin was a lucrative property for ViroPharma, and comprised a substantial portion of ViroPharma's revenues from 2005-2011.
The Complaint alleges that the patent for Vancocin expired in 1996. The FDA's requirement that a generic version of Vancocin be tested on humans, however, created a barrier for generics to enter the market. In 2006 the FDA changed its position regarding the proof necessary to establish bioequivalence, allowing for laboratory testing instead of testing on human subjects. The Complaint alleges that this change substantially lowered any barriers to entry and threatened ViroPharma's hold on the Vancocin Market. As a challenge to the FDA's decision, ViroPharma filed a Citizen's Petition
In 2008, Congress passed the QI Program Supplemental Funding Act of 2008 (the "QI Act"), which permits the FDA to grant an additional three years of marketing exclusivity for "Old Antibiotics"—such as Vancocin—under the Hatch-Waxman Act
In an effort to stave off the arrival of generics from other companies and to gain three years of statutory exclusivity under the QI Act,
The Genzyme Study compared tolamer—a Genzyme experimental drug used to treat CDAD—with Vancocin. Though the Genzyme study was ultimately a failure, in that Genzyme could not gain approval for tolamer, ViroPharma sought to use this data. Based on analysis of the licensed data in the Genzyme study, ViroPharma submitted an sNDA to the FDA on April 23, 2010, even though ViroPharma "knew, based on FDA policy statements, that the FDA would not accept such an analysis as evidence of effectiveness for any use." In February 2011, the FDA rejected the sNDA, which ViroPharma then amended and resubmitted in June 2011.
During the Class Period, and before the FDA ultimately made a decision on ViroPharma's Citizen's Petition, Plaintiff alleges that ViroPharma continued to make materially false and misleading statements to the public, and omit crucial information from public statements and documents regarding the FDA's indication that Vancocin would not be approved for a "new condition of use."
Upon the news of the formal denial of exclusivity, and the FDA's simultaneous approval of three generic versions of Vancocin produced by competitors, ViroPharma shares declined 21%.
In deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir.2008) (internal quotation marks omitted). After the Supreme Court's decision in Bell Atlantic
Section 10(b) of the Exchange Act makes it unlawful for any person, through the use of "any means of interstate commerce, the mails, or any national securities exchange, to employ . . . any manipulative or deceptive device or contrivance in contravention of rules" promulgated by the Securities and Exchange Commission (SEC). 15 U.S.C. § 78j.
Section 10(b) is enforced by Rule 10b-5, one such rule promulgated by the SEC, and prohibits, in connection with the purchase or sale of securities, the making of "any untrue statement of a material fact" or the omission of "a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5 (1951).
Here, Plaintiff alleges omissions of material fact. To state a claim for omissions under Section 10(b) of the Exchange Act and Rule 10b-5, a plaintiff must allege: (1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005).
Plaintiffs bringing claims for securities fraud under Section 10(b) and Rule 10-b5 must satisfy the heightened pleading standards of both Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the "PSLRA").
The PSLRA additionally mandates that a plaintiff allege that defendants acted with scienter for each alleged misstatements or omissions.
Section 20(a) of the Exchange Act provides that:
15 U.S.C. § 78t.
Section 20(a) is a derivative cause of action, predicated upon § 10(b) liability by a "controlled person," such that a "plaintiff cannot maintain a claim under § 20(a) without meeting the pleading requirements for a primary violation of the Act." In re Aetna, Inc. Sec. Litig., CIV.A. 07-4451, 2009 WL 1619636 *28 (E.D.Pa. June 9, 2009) aff'd in part, 617 F.3d 272 (3d Cir.2010) (citations omitted). "If no controlled person is liable, no controlling person liability exists." Belmont v. MB Inv. Partners, Inc., CIV.A. 09-4951, 2010 WL 2348703 *9 (E.D.Pa. June 10, 2010) aff'd, 708 F.3d 470 (3d Cir.2013) (citations omitted). "[A] plaintiff can survive a motion to dismiss a controlling person claim upon a showing of a primary violation of the federal securities laws by a controlled person and control of the primary violator by the defendant." Id. at *10.
To state a securities fraud claim under Rule 10b-5, "a plaintiff must show that (1) the defendant made a materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading; (2) the defendant acted with scienter; and (3) the plaintiff's reliance on the defendant's misstatement caused him or her injury." Marion v. TDI, Inc., 591 F.3d 137, 152 (3d Cir.2010) (internal quotation marks omitted). These pleading requirements are heightened by the PSLRA, which imposes the additional requirements that: 1) "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); and 2) "the complaint shall, with respect to each act or omission alleged to violate this title, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).
The PSLRA requires that plaintiffs "specify each allegedly misleading statement, the reason or reasons why the statement is misleading, and, if an allegation is made on information and belief, all facts supporting that belief with particularity." Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 259 (3d Cir.2009) (citing 15 U.S.C. § 78u-4(b)(1)). Plaintiff alleges that Defendants made at least eight material misrepresentations and omissions in press releases, SEC filings, conference calls, public statements, and letters:
(Pl's Opp. to MTD at 14).
As is required under Rule 10b-5, in paragraphs 75-133 of the Complaint, Plaintiff has set forth those specific statements and omissions they allege were misleading. Plaintiff identified who made each statement or omission, when the statement was made, and the reasons each was misleading. Of course to be actionable, these misrepresentations or omissions of fact must be material, which is addressed in Section C, below.
Defendants argue that the alleged misrepresentations and omissions are not actionable because they constitute forward-looking
Defendants argue that "statements regarding the likelihood and timing of FDA approval for a drug and the reasons for management's beliefs that such approval will occur fall under the statutory definition of `forward-looking.'" Defendants further contend that "[t]he statements at issue in this case are precisely the type of forward-looking statements that the PSLRA's safe harbor is designed to protect from lawsuits such as this where a plaintiff seeks to apply 20-20 hindsight when future results disappoint."
Courts in this District have held that omissions of existing facts or circumstances are not forward-looking, and thus do not qualify for safe harbor protection. In re Cell Pathways, Inc. Sec. Litig., No. 99-725, 2000 WL 805221, at *10-11 (E.D.Pa. June 20, 2000) ("[A]llegations based upon omissions of existing facts or circumstances do not constitute forward looking statements protected by the safe harbor of the Securities Act.") (citing In re MobileMedia Sec. Litig., 28 F.Supp.2d 901, 930 (D.N.J.1998)). Taking Plaintiff's allegations as true, Defendants' identified statements were not forward looking, despite being accompanied by "meaningful cautionary language," because the risks being warned of had already come to pass at the time the statements were made. See e.g. Marsden v. Select Med. Corp., No. CIV. A. 04-4020, 2006 WL 891445, at *7 (E.D.Pa. Apr. 6, 2006) vacated in part on other grounds, 2007 WL 518556 (E.D.Pa. Feb. 12, 2007) (determining safe harbor was inapplicable to statements challenged on basis they omitted "`present facts'-facts known at the time the statement was made."); In re Majesco Sec. Litig., No. CIV. A 05CV-3557 PGS, 2006 WL 2846281, at *4 (D.N.J. Sept. 29, 2006); Cal. Pub. Emps.' Ret. Sys. v. Chubb Corp., No. 00-4285, 2002 WL 33934282, at *11 (D.N.J. June 26, 2002). Accordingly, any cautionary language could not cure the fact that, at the time the statements were made, the sNDA was already lacking a necessary condition precedent to exclusivity.
There is no bright-line rule for determining materiality. Matrixx Initiatives,
Plaintiff alleges that once the Defendants began speaking about "exclusivity," they had the duty to disclose information relating to their communications with the FDA. Defendants are correct in their argument that, as part of an ongoing dialogue with the FDA, they are not obligated to disclose all conversations or questions from FDA staffers. See In re MedImmune, Inc. Sec. Litig., 873 F.Supp. 953, 966 (D.Md.1995). Nevertheless, Plaintiff has adequately alleged that the FDA's
This Court cannot find as a matter of law that a reasonable investor would not have found the information regarding ViroPharma's ongoing communications with the FDA—specifically those regarding whether the Genzyme Study was "adequate and well controlled" as to Vancocin—significant in making investment decisions. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976).
Scienter, "a mental state embracing intent to deceive, manipulate, or defraud" is necessary to state a claim under Rule 10b-5 and the PSLRA. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Defendants argue that Plaintiff's Complaint "does not plead sufficient facts to give rise to a strong inference of scienter, as is required by the PSLRA." 15 U.S.C. § 78u-4(b)(2). A court's analysis of the complaint requires that it consider:
Tellabs, 551 U.S. at 324, 127 S.Ct. 2499 (quotation marks, citation, and footnote omitted).
Scienter may also be established if a Plaintiff "set[s] forth facts that constitute circumstantial evidence of either reckless or conscious behavior." In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir.1999). "While allegations relating to motive and opportunity may not independently support a finding of scienter, such considerations may amplify an inference of scienter as part of the holistic information available to the court." Frater v. Hemispherx Biopharma, Inc., 996 F.Supp.2d 335, 2:12-CV-07152-WY, 2014 WL 272027 (E.D.Pa. Jan. 24, 2014) (citation omitted).
At its heart, the Complaint alleges that Defendants had access to information showing that they knew that Vancocin would not achieve an additional three years of exclusivity based on the inadequacy of the Genzyme Study. This information, as Plaintiff alleges, directly contradicts public statements that Defendants made about the prospect of achieving an additional term of exclusivity. See In re Cambrex Corp. Sec. Litig., No. 03-CV-4896(WJM), 2005 WL 2840336, at *11 (D.N.J. Oct. 27, 2005). Plaintiff also alleges that the Approval Letter regarding the label change underscores this fact. Plaintiff alleges that the FDA made it known to Defendants on five occasions that the Genzyme study was inadequate.
What's more, assuming what Plaintiff alleges as true regarding confidential witnesses (several of whom were high-ranking individuals within ViroPharma), the witnesses stated the Defendants were actively involved in the sNDA application and were in contact with the FDA. When dealing with Confidential Witnesses, Courts should assess the "`detail provided by the confidential sources, the sources' basis of knowledge, the reliability of the sources, the corroborative nature of other facts alleged, including from other sources, the coherence and plausibility of the allegations, and similar indicia.'" Rahman v. Kid Brands, Inc., 736 F.3d 237, 244 (3d Cir.2013) (citing Avaya, 564 F.3d at 261). The Confidential witnesses were at meetings with top ViroPharma executives during which the significance of pediatric testing was discussed, were intimately familiar with the purpose of the Genzyme study, and were involved in the details of the bid for extended exclusivity.
Furthermore, the fact that sales of Vancocin comprised ViroPharma's "core business," also supports the inference that Defendants either knew or should have been aware of the issues concerning the drug's approval. See, e.g., Avaya, 564 F.3d at 271. It is undisputed that, during the class period, sales of Vancocin accounted for more than 50% of ViroPharma's revenue and profit margins. This ties directly to Plaintiff's theory of Defendants motive—that Defendants knew that exclusivity was not forthcoming, so they sought to mislead investors and delay the ultimate denial of exclusivity. The strong inference of scienter is supported by Plaintiff's several confidential witnesses, and the allegations supported by documentation in the Complaint.
The strong inference of scienter is also supported by allegations of stock sales by Defendants Doyle and Rowland, given their unusual scope and timing. Avaya, 564 F.3d at 279. The Complaint alleges that Defendants Doyle and Rowland sold
Plaintiff has alleged facts establishing both motive and opportunity. Advanta, 180 F.3d at 534-35. Accepting Plaintiff's allegations as true, and taking in to account competing inferences, the inference that Defendants have acted with scienter is "at least as likely as any plausible opposing inference," Tellabs, 551 U.S. at 328, 127 S.Ct. 2499. Thus, Plaintiff's complaint gives rise to a strong inference of scienter that is "cogent and compelling," thus satisfying the heightened requirements of the PSLRA. See Tellabs, 551 U.S. at 323, 127 S.Ct. 2499.
"Section 20(a) of the Exchange Act imposes joint and several liability upon one who controls a violator of Section 10(b)." Suprema, 438 F.3d at 284 (citing 15 U.S.C. § 78t(a)). Defendants argue that Plaintiff's Section 20(a) claim for control person liability must be dismissed because Plaintiff has failed to state an actionable Section 10(b) claim. See Avaya, 564 F.3d at 252. Because this Court finds that Plaintiff indeed does state a claim under Rule 10b-5, Plaintiff's Section 20(a) claim survives.
For the aforementioned reasons, the Motion to Dismiss of Defendants is denied. An appropriate order follows.
AND NOW, this 15th day of May, 2014, upon consideration of Defendants' Motion to Dismiss the Amended Class Action Complaint ("Motion") (Dkt. No. 41), and the responses thereto, it is hereby ORDERED that said Motion is DENIED.
In re Wellbutrin XL Antitrust Litig., CIV.A. 08-2431, 2012 WL 1657734 (E.D.Pa. May 11, 2012)
The letter goes on to state:
California Pub. Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126, 144, 145 (3d Cir.2004).
In re Advanta Corp. Sec. Litig., 180 F.3d 525, 531 (3d Cir.1999).
Rahman v. Kid Brands, Inc., 736 F.3d 237, 242 fn. 3 (3d Cir.2013) (internal citations omitted)
15 U.S.C. § 78u-5(i)(1)
