955 F.3d 194
1st Cir.2020Background
- Ocular Therapeutix (NASDAQ) submitted an NDA for Dextenza in Sept. 2015; FDA inspected the Bedford facility in Feb. 2016 and issued a Form 483 identifying multiple cGMP-related observations.
- Ocular disclosed receipt of the Feb. 2016 Form 483 and warned of regulatory risk in its 2016 Form 10-K while also stating it "fabricate[s] ... products ... using current Good Manufacturing Practices (cGMP)."
- After a July 2016 Complete Response Letter (CRL) rejecting the NDA, Ocular resubmitted the NDA in Jan. 2017; FDA accepted the resubmission for filing with a July 2017 PDUFA date.
- FDA reinspected in Apr.–May 2017 and issued a May 2017 Form 483 citing, inter alia, particulate contamination (including apparent aluminum) and other process/control deficiencies; Ocular disclosed the May 5, 2017 Form 483 and discussed remediation on an investor call.
- Media publication of the Forms 483 and a subsequent July 12, 2017 CRL caused sharp stock drops. Shareholders filed a putative class action alleging Section 10(b)/Rule 10b-5 fraud (material misstatements/omissions and scienter) and a derivative Section 20(a) claim; the district court dismissed with prejudice for failure to plead scienter.
- The First Circuit affirmed, holding plaintiffs failed to plead facts giving rise to a "strong inference" of scienter under the PSLRA.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether statements in the 2016/2017 Forms 10-K that Ocular manufactured using cGMP were false or misleading | Forms 10-K representations that the company used cGMP were misleading because the Feb. 2016 Form 483 put defendants on notice of systemic GMP failures | The Forms 10-K expressly disclosed the Feb. 2016 Form 483, described its observations and risks, and thus did not falsely suggest compliance | Court declined to decide materiality and instead held plaintiffs failed to plead scienter tied to those statements; disclosure undercut inference of fraudulent intent |
| Whether Ankerud's May 5, 2017 statements that the manufacturing process was "fully developed" were false/misleading | Saying the process was "fully developed" was misleading in light of the May 2017 Form 483 (issued the day before) documenting serious deficiencies including contamination | Ankerud disclosed the May 2017 Form 483, characterized its contents, and the term "fully developed" is a technical term meaning past piloting but still subject to validation; his statements were consistent with remediation and nonfraudulent intent | Court held disclosures and context defeat an inference of scienter; more plausible nonfraudulent inferences existed |
| Whether plaintiffs pleaded a "strong inference" of scienter under the PSLRA | Receipt of two Forms 483, internal admissions (confidential witness), and stock drops support intent/recklessness | Disclosures, public warnings, technical meanings, lack of motive (insider purchases) and alternative innocent explanations negate a strong inference | Court held plaintiffs did not plead facts giving rise to a strong, cogent inference of scienter as required by Tellabs; dismissal affirmed |
| Whether Section 20(a) control-person claim survives absent a Section 10(b) violation | Control-person liability follows if primary securities claim is viable | Section 20(a) is derivative; if Section 10(b) fails, so does Section 20(a) | Because Section 10(b) claim failed, Section 20(a) claim also failed |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (establishes that scienter inference must be cogent and at least as compelling as opposing inferences)
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard; courts accept well-pleaded facts and reasonable inferences)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
- Brennan v. Zafgen, Inc., 853 F.3d 606 (First Circuit guidance on sources considered on Rule 12(b)(6) motions)
- Fire & Police Pension Ass'n v. Abiomed, Inc., 778 F.3d 228 (First Circuit on scienter and risk disclosures undercutting fraudulent intent)
- In re Genzyme Corp. Sec. Litig., 754 F.3d 31 (First Circuit: informative disclosures about FDA interactions weaken scienter inference)
- City of Dearborn Heights Act 345 Pol. & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751 (First Circuit on materiality, risk warnings, and scienter analysis)