Karim Khoja v. Orexigen Therapeutics, Inc.
899 F.3d 988
9th Cir.2018Background
- Orexigen, a biotech developing obesity drug Contrave, received unexpectedly favorable 25% interim cardiovascular results from its FDA‑mandated LIGHT Study; those results were confidential under a Data Access Plan (DAP).
- The 25% interim results leaked internally; FDA sanctioned Orexigen and required limited access and a new trial. Orexigen nonetheless included the 25% results in a provisional patent filing (kept confidential under 35 U.S.C. § 122) and later requested publication of that application, which led to public disclosure via a March 3, 2015 Form 8‑K.
- Market reaction to the March disclosure briefly inflated Orexigen’s stock; later press reports and subsequent LIGHT Study data (50% interim results) showed the earlier apparent benefit did not persist and the ESC halted the LIGHT Study.
- Plaintiff Khoja (a shareholder) sued Orexigen and three executives under § 10(b)/Rule 10b‑5 (misstatements/omissions), § 10b‑5(a)/(c) (scheme liability), and § 20(a) (control person liability), alleging misleading disclosures about the LIGHT Study and a scheme to publish interim data via the patent application.
- The district court dismissed most claims after considering numerous extrinsic documents by judicial notice or incorporation by reference; Khoja appealed. The Ninth Circuit reviewed (de novo for dismissal; abuse of discretion for judicial notice/incorporation) and reversed in part, remanding with instructions about proper use of extrinsic materials and leave to amend certain claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether district court properly judicially noticed or incorporated extrinsic documents at motion‑to‑dismiss | Many defendant‑submitted public reports and analyst items are not properly noticed/incorporated because they are subject to dispute or not relied on extensively in the complaint | Defendants argued those documents are public, authentic, and bear on what investors knew or on the chronology | Court: mixed — abused discretion as to several documents (e.g., investor call transcript, EMA report, certain SEC filings and USPTO history) and clarified limits on judicial notice vs incorporation by reference |
| Whether March 3, 2015 Form 8‑K misled investors by omitting that the 25% interim results were already known to be unreliable | Orexigen touted the favorable 25% results but omitted FDA warnings that those results had a high degree of uncertainty; that omission was material | Orexigen argued the Form 8‑K cautioned the results were preliminary and a larger number of events were required, so no duty to disclose further | Court: reversed dismissal — plaintiff plausibly alleged duty to disclose that results were likely unreliable; claim survives pleading stage |
| Whether May 2015 Form 8‑K, Form 10‑Q, and May 8 earnings call misrepresented status of LIGHT Study and omitted 50% interim results/termination | Khoja: filings and executives indicated the LIGHT Study was ongoing and failed to disclose ESC termination and unfavorable 50% results, misleading investors | Orexigen: either the ESC’s March 26 action was only a recommendation, or prior market reports already disclosed status, so no omission/misstatement | Court: reversed dismissal as to these items — reasonable inferences support that Study was halted/50% results existed and omission could be material; district court erred by resolving factual disputes against plaintiff using incorporated documents |
| Sufficiency of scheme liability (Rule 10b‑5(a),(c)) and control‑person liability (§ 20(a)) | Khoja alleged a scheme to conceal then publish interim data via the patent application and that executives controlled dissemination | Orexigen argued insufficient particularity and failed primary violations to support scheme or control liability | Court: affirmed dismissal of Count II for lack of particularity but granted leave to amend; reversed dismissal of Count III to be re‑evaluated after resolution/amendment of primary claims |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (courts may consider documents incorporated by reference and matters subject to judicial notice when ruling on Rule 12(b)(6) motions in securities cases)
- Lee v. City of Los Angeles, 250 F.3d 668 (9th Cir. 2001) (courts may take judicial notice of public records but not disputed facts within them)
- Ritchie v. United States, 342 F.3d 903 (9th Cir. 2003) (incorporation‑by‑reference doctrine: incorporate when complaint refers extensively to or the document forms the basis of the claim)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility pleading standard)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for complaints)
- Berson v. Applied Signal Technology, Inc., 527 F.3d 982 (9th Cir. 2008) (once defendant touts favorable data, they must disclose material adverse facts that have come to fruition)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (disclosure required to prevent statements that would be misleading in light of circumstances)
- In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (9th Cir. 2012) (PSLRA and heightened pleading in securities fraud cases)
- In re Gilead Sci. Sec. Litig., 536 F.3d 1049 (9th Cir. 2008) (court need not accept conclusory allegations or unreasonable inferences at pleading stage)