Roman Zak v. Chelsea Therapeutics International
2015 U.S. App. LEXIS 4096
| 4th Cir. | 2015

Background

  • Chelsea Therapeutics sought FDA approval for droxidopa (Northera) based largely on four efficacy trials; only Study 301 (one-week treatment) met its primary endpoint, while longer-duration trials (Study 303 and abandoned Study 306) failed or were stopped.
  • Chelsea announced in Dec. 2010 that FDA had agreed the NDA could be submitted based on Studies 301 and 302 and that additional efficacy studies were not required; investors were not told FDA still expected evidence of durability and typically wanted two successful studies.
  • In Feb. 2012 Chelsea issued a press release noting it had received the FDA staff briefing document and disclosing some lines of inquiry (including short trial duration) but did not disclose the staff’s recommendation against approval; the stock dropped sharply after the release and again when the full briefing document was posted.
  • The FDA advisory committee recommended approval (non-binding) but the FDA denied the NDA on Mar. 28, 2012, requesting an additional successful study to demonstrate durability.
  • Plaintiffs (class of Chelsea investors) sued under §10(b)/Rule 10b-5 alleging defendants made material misstatements/omissions and withheld adverse FDA feedback; the district court dismissed for failure to plead scienter, relying in part on SEC filings (Form 4s and a proxy) the defendants submitted.
  • The Fourth Circuit vacated and remanded, holding the district court erred by judicially noticing SEC exhibits not integral to the complaint and that, on the pleadings, plaintiffs sufficiently alleged a strong inference of scienter based on omissions about FDA expectations and durability concerns.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether the district court properly considered SEC filings attached to defendants’ motion to dismiss Plaintiffs: court should not have judicially noticed SEC documents not integral to complaint; reliance distorted scienter analysis Defendants: SEC filings are public and routinely considered; they show officers didn’t sell stock during class period undermining scienter Court: district court erred — documents were not integral and were misused; consideration was not harmless and affected outcome
Whether plaintiffs pleaded a strong inference of scienter under the PSLRA Plaintiffs: defendants knowingly or recklessly omitted adverse FDA staff recommendation and durability concerns, and made affirmative statements implying FDA acceptance Defendants: they disclosed weaknesses and warnings; omissions were not wrongful and a website link pointed to full material; lack of insider sales negates scienter Court: pleadings, viewed holistically, support a strong inference of scienter (intentional or severe recklessness) and survive dismissal on scienter alone
Proper standard for considering extrinsic public records at pleading stage Plaintiffs: extrinsic records may be judicially noticed only if facts aren’t subject to reasonable dispute and must be construed in plaintiffs’ favor Defendants: judicial notice permissible because accuracy not reasonably questioned Court: judicial notice allowed only narrowly; even if noticed, facts must be construed for plaintiff and court improperly treated filings as disproving alleged insider sales
Whether omission alone can establish scienter Plaintiffs: context shows affirmative statements made the omissions misleading (Matrixx principle) Defendants: omission without affirmative misstatement insufficient; Chelsea warned investors about risks Court: omission can support scienter when viewed in context of affirmative statements that create duty to disclose; here inference is strong enough

Key Cases Cited

  • Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (framework for evaluating competing scienter inferences under PSLRA)
  • Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172 (4th Cir. 2009) (pleading recklessness may satisfy scienter when extreme departure from care)
  • Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874 (4th Cir. 2014) (applying PSLRA heightened pleading and comparative inference analysis)
  • Cozzarelli v. Inspire Pharm., Inc., 549 F.3d 618 (4th Cir. 2008) (requirement that scienter allegations show wrongful intent or severe recklessness)
  • Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338 (4th Cir. 2003) (defining severe recklessness as a slightly lesser species of intentional misconduct)
  • E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435 (4th Cir. 2011) (Rule 12(b)(6) limits on considering extrinsic documents not integral to complaint)
  • Clatterbuck v. City of Charlottesville, 708 F.3d 549 (4th Cir. 2013) (judicial notice of public records at pleading stage must be construed in plaintiff’s favor)
  • Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (U.S. 2011) (companies control disclosures; omissions considered in context of affirmative statements)
  • Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (malicious inference must be at least as compelling as innocent inference under Tellabs)
  • Mizzaro v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008) (insider sales are not required to plead scienter)
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