986 F.3d 63
1st Cir.2021Background
- AVEO's lead drug, tivozanib, showed better progression-free survival but worse overall survival in Phase 3 (TIVO-1); FDA expressed concern at a May 2012 pre-NDA meeting and recommended a second Phase 3 trial and a final OS analysis.
- AVEO's executives (including CMO Slichenmyer) and board were informed; AVEO's board later approved planning/budget for a second trial but AVEO still submitted an NDA on Sept. 27, 2012.
- AVEO publicly disclosed FDA "concern" about overall survival (Aug. 2, 2012) but did not disclose the FDA's May 2012 recommendation for a second trial; scripted analyst responses were used on calls.
- On Feb. 27, 2013, CFO David Johnston publicly stated AVEO had not had "formal discussions" with the FDA about further trials, despite knowing of the May 2012 recommendation and subsequent FDA communications.
- The FDA publicly revealed its May 2012 recommendation in April 2013 (ODAC materials), AVEO's stock fell ~31%, and the SEC sued Johnston for securities-law violations; a jury returned verdict for the SEC and the district court entered penalties and injunctions.
- On appeal, Johnston argued (1) no duty to disclose the FDA recommendation and (2) insufficient scienter; he also sought a new trial based on jury-instruction error. The First Circuit affirmed.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Johnston) | Held |
|---|---|---|---|
| Duty to disclose FDA recommendation when addressing discussions with FDA | Johnston made half-truths/omissions while speaking about FDA discussions; once he spoke, he had a duty not to mislead and the omission was material | No affirmative duty to disclose internal FDA communications; mere possession of material nonpublic information is not actionable | Court: No blanket duty to disclose every FDA communication, but statements that create a misleading impression (half-truths) can be actionable; jury could find Johnston's statements misleading and material |
| Whether Johnston's statements were knowingly misleading (misrepresentations/half-truths) | Scripted answers and Johnston's Feb. 27, 2013 denial conveyed a false picture that FDA had not recommended another trial | Statements were general risk-discussions and consistent with prior disclosures; not tantamount to saying approval was impossible | Court: Jury could reasonably find that Johnston crafted half-truths and distortions that conveyed a false past fact (i.e., that FDA had not discussed/recommended a second trial) |
| Scienter (intent or high recklessness) | Johnston knew of the May 2012 recommendation and repeated/approved scripted misleading answers; publishing statements inconsistent with known facts supports scienter | No clear duty to disclose; adherence to counsel and disclosure processes and negative assurance letters show lack of scienter | Court: Enough evidence of scienter (conscious intent or high recklessness) to support verdict; reliance on counsel/letters insufficient to negate scienter here |
| Jury instructions/new trial claims (materiality vs duty; disclosure of interim FDA communications) | Jury instructions failed to separate materiality and duty and omitted limits on duties regarding interim/regulatory feedback | Instructions were legally correct and explained materiality vs duty; court needn't cover every factual permutation | Court: Instructions were adequate; no abuse of discretion; new trial denied |
Key Cases Cited
- Basic Inc. v. Levinson, 485 U.S. 224 (materiality standard: "total mix" of information)
- In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (mere possession of material nonpublic info does not alone create disclosure duty)
- Corban v. Sarepta Therapeutics, Inc., 868 F.3d 31 (no obligation to disclose every FDA communication; truthful representations must not be misleading)
- Yan v. ReWalk Robotics Ltd., 973 F.3d 22 (disclosing risks and not contradicting progress statements matters for liability)
- Hill v. Gozani, 638 F.3d 40 (risk disclosures without quantification often non-actionable absent near-certainty)
- In re Bos. Sci. Corp. Sec. Litig., 686 F.3d 21 (regulated entities not required to disclose every regulator communication)
- Kader v. Sarepta Therapeutics, Inc., 887 F.3d 48 (distinguishing nondisclosure from falsely implying a different regulator position)
- Aldridge v. A.T. Cross Corp., 284 F.3d 72 (scienter shown where defendants published statements known to be misleading)
- SEC v. Ficken, 546 F.3d 45 (scienter required for Rule 10b-5/§10(b) and §17(a)(1); negligence suffices for §17(a)(2)/(3))