Carl Schwartz v. Arena Pharmaceuticals, Inc.
2016 U.S. App. LEXIS 19318
| 9th Cir. | 2016Background
- Arena Pharmaceuticals developed lorcaserin, a serotonin-agonist weight-loss drug, and ran large Phase II/III clinical programs while also conducting a nonclinical rat carcinogenicity study (the "Rat Study").
- By 2007 preliminary Rat Study results showed multiple tumor findings; Arena reported the results to FDA and advanced human trials while pursuing a "Prolactin Hypothesis" to explain rat tumors as not relevant to humans.
- FDA demanded follow-up testing and bi-monthly reporting and characterized its back-and-forth with Arena as "highly unusual," though it did not initially halt the human trials.
- In 2009 Arena publicly touted lorcaserin’s safety and likelihood of approval, repeatedly referring to completed animal/preclinical studies as supportive; the final Rat Study report was in the FDA file at that time.
- The FDA posted briefing documents in Sept. 2010 disclosing concerns about the Rat Study for the first time; Arena’s stock fell ~40% in one day. After re-review and supplemental submissions, FDA ultimately approved lorcaserin in 2012.
- Plaintiff Schwartz sued under §10(b)/Rule 10b-5 and §20(a); the district court twice dismissed for failure to plead scienter and denied further amendment as futile; Ninth Circuit reversed, holding scienter adequately pleaded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiff pleaded a strong inference of scienter for omissions about the Rat Study | Schwartz: defendants touted animal studies and approval prospects while withholding FDA concerns about the Rat Study, so omissions were deliberately reckless | Arena: this was a good-faith scientific dispute with FDA; continued trials and lack of further negative communications meant no duty to disclose | Court: pleaded facts—FDA’s "highly unusual" requests, Arena’s affirmative statements about "all animal studies," hiring experts, and defensive steps—support a cogent, strong inference of scienter; reversal |
| Whether positive statements about safety obligate disclosure of adverse nonpublic preclinical data | Schwartz: once defendants touted animal data, they had to disclose adverse information that cut against those claims | Arena: no affirmative duty to disclose all adverse info; reasonable to rely on FDA permitting trials to continue | Court: companies may control disclosures, but touting favorable animal data while knowing FDA concerns can create an obligation to avoid misleading investors; duty here arose |
| Whether the case is merely a permissible difference of scientific opinion | Arena: like AstraZeneca, this was a legitimate scientific disagreement; no evidence defendants intentionally misled | Schwartz: material fact was that FDA and Arena were at odds — market would want to know that dispute existed | Court: distinction matters; non-disclosure of an ongoing material dispute about FDA concerns is actionable even if science is debatable |
| Reliance on confidential informants and motive evidence to plead scienter | Schwartz: CI allegations and business facts show consciousness of risk | Arena: CI allegations were vague and routine corporate facts cannot show scienter | Court: rejected CI allegations as weak for motive, but found other alleged facts sufficient to plead scienter without those CI claims |
Key Cases Cited
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (Sup. Ct. 2011) (defendant must disclose adverse information once it has made affirmative representations that would be misleading without disclosure)
- Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008) (touting a metric binds defendant to avoid misleading characterization of that metric)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (standard for pleading deliberate recklessness and scienter under PSLRA)
- Nat’l Elevator Indus. Pension Fund v. VeriFone Holdings, Inc. (In re Verifone Holdings, Inc. Sec. Lit.), 704 F.3d 694 (9th Cir. 2012) (pleading particularity and review standards on dismissal)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Sup. Ct. 2007) (requirement that inference of scienter be cogent and at least as compelling as alternative explanations)
- Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (Sup. Ct. 2011) (elements of a Rule 10b-5 action and reliance principles)
- In re Rigel Pharm., Inc. Sec. Lit., 697 F.3d 869 (9th Cir. 2012) (routine corporate objectives alone do not establish scienter)
- Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338 (4th Cir. 2003) (definition of deliberate recklessness)
- Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2003) (leave to amend standard)