Case Information
1
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA KARIM KHOJA, оn behalf of himself and Case No.: 15-CV-540 JLS (JLB) all others similarly situated, ORDER (1) GRANTING IN PART Plaintiff, AND DENYING IN PART MOVING v. DEFENDANTS’ REQUEST TO CONSIDER MATERIALS OREXIGEN THERAPEUTICS, INC., INCORPORATED BY REFERENCE, JOSEPH P. HAGAN, MICHAEL A. AND (2) GRANTING MOVING NARACHI, and PRESTON KLASSEN, DEFENDANTS’ PARTIAL MOTION
Defendants. TO DISMISS
AND ALL CONSOLIDATED CASES (ECF No. 114)
Presently before the Court is Moving Defendants Joseph P. Hagan, Michael A.
Narachi, and Preston Klassen, M.D., M.H.S.’s Partial Motion to Dismiss Consolidated Amended Complaint for Violation of the Federal Securities Laws (“Mot.,” ECF No. 114), [1] as well as Lead Plaintiff Karim Khoja’s Opposition to (“Opp’n,” ECF No. 115) and Moving Defendants’ Reply in Support of (“Reply,” ECF No. 116) the Motion.
Also before the Court are Moving Defendants’ Request to Consider Documents Incorporated by Reference into the Consolidated Amended Complaint for Violation of the Federal Securities Laws in Support of Defendants’ Partial Motion to Dismiss (“Defs.’ Req.,” ECF No. 114-9), Lead Plaintiff’s Notice of Supplemental Authority in Support of Opposition to Defendants’ Partial Motion to Dismiss the Consolidated Amended Complaint (“1st Not. of Supp. Auth.,” ECF No. 118), Moving Defendants’ Response to Lead Plaintiff’s Notice of Supplemental Authorities (“Resp. to 1st Not. of Supp. Auth.,” ECF No. 119), Lead Plaintiff’s Notice of Supplemental Authorities in Support of Opposition to Defendants’ Partial Motion to Dismiss the Consolidated Amended Complaint (“2d Not. of Supp. Auth.,” ECF No. 126), Moving Defendants’ Response to Lead Plaintiff’s Notice of Supplemental Authorities (“Resp. to 2d Not. of Supp. Auth.,” ECF No. 127), Lead Plaintiff’s Third Notice of Supplemental Authorities in Support of Opposition to Defendants’ Partial Motion to Dismiss the Consolidated Amended Complaint (“3d Not. of Supp. Auth.,” ECF No. 128), Lead Plaintiff’s Notice of Recent Controlling Authority (“4th Not. of Supp. Auth.,” ECF No. 136), Moving Defendants’ Response to Lead Plaintiff’s Notice of Recent Controlling Authority (“Resp. to 4th Not. of Supp. Auth.,” ECF No. 137), and Lead Plaintiff’s Reply to Defendants’ Response to Lead Plaintiff’s Notice of Recent Controlling Authority (“Reply ISO 4th Not. of Supp. Auth.,” ECF No. 138).
The Court vacated the hearing and took the Motion under submission without oral argument pursuant to Civil Local Rule 7.1(d)(1). See ECF No. 117. Having carefully considered Lead Plaintiff’s Consolidated Amended Complaint (“CAC,” ECF No. 111) and the material appropriately incorporated by reference, the Parties’ arguments, and the law, including the cases identified in Lead Plaintiff’s Notices of Supplemental Authority, the Court GRANTS IN PART AND DENIES IN PART Moving Defendants’ Request to Consider Documents Incorporated by Reference and GRANTS Moving Defendants’ Motion.
/ / / 1 BACKGROUND [2]
The factual and procedural background of this case was set forth in detail in this Court’s September 23, 2019 Order (1) Granting in Part and Denying in Part the Moving Defendants’ Request for Judicial Notice, (2) Denying Lead Plaintiff’s Request for Judicial Notice, and (3) Granting in Part and Denying in Part the Moving Defendants’ Motion to Dismiss. See ECF No. 110 at 2–14. To the extent relevant, the Court incorporates that recitation into this Order. Accordingly, the Court sets forth below only those facts relevant to the instant Motion [3] and the procedural history since the issuance of this Court’s September 23, 2019 Order.
I. Factual Background
Orexigen, “a developmental stage biotechnology firm,” has a collaboration agreement with Takeda Pharmaceutical Company Limited (“Takeda”) to develop and commercialize Orexigen’s “primаry product candidate,” a drug for the treatment of obesity called Contrave, in the United States, Canada, and Mexico. CAC ¶ 7. Phase III clinical trials have been completed, and Contrave “was being studied in a drug trial known as the LIGHT Study.” Id. The Light Study’s Executive Steering Committee, Data Monitoring Committee, and Orexigen entered into a data access plan (“DAP”), pursuant to which all agreed to limit the number of people within Orexigen who had access to the interim results of the LIGHT Study to just those individuals who needed to facilitate submission of Orexigen’s marketing application to the United States Food and Drug Administration (“FDA”). Id. ¶ 53 & n.11.
On July 2, 2014, Orexigen filed patent application number 14/322,810 (the “’810 Application”), which “included specific quantitative 25% interim LIGHT Study data,” “pursuant to a statutory ‘nonpublication’ request.” Id. ¶ 12. In early January 2015, Orexigen rescinded the nonpublication request. Id. ¶ 14. On March 3, 2015, the United States Patent and Trademark Office (“USPTO”) issued U.S. Patent No. 8,969,371 (the “’371 Patent”) from the ’810 Application. Id. ¶ 15; see also Defs.’ Req. Ex. B.
That same day, Orexigen filed a Form 8-K with the United States Securities and Exchange Commission (“SEC”) announcing the publication of the ’371 Patent and releasing the 25 percent interim LIGHT Study results. CAC ¶¶ 15, 87; see also Defs.’ Req. Ex. C. The Form 8-K noted that the ’371 Patent “incorporate[d] data from [the LIGHT Study],” and that the ’371 Patent “contain[s] claims related to a positive effect of Contrave on [cardiovascular (“CV”)] outcomes” based on an “analysis . . . conducted based on 94 observed and adjudicated major adverse cardiovascular events (“MACE”), which was approximately 25% of the planned MACE for the Light Study.” CAC ¶ 87; see also Defs.’ Req. Ex. C. The Form 8-K further explained that the interim analysis “was prospectively designed to enable an early and preliminary assessment of safety to support regulatory approval” and that “[a] larger number of MACE are required to precisely determine the effect of Contrave on CV outcomes.” Orexigen did not consult the FDA, Dr. Nissen, or Takeda prior to filing the Form 8-K. CAC ¶ 15.
Also on March 3, 2015, Forbes released an article reporting that the FDA had been unaware that the ’810 Application contained the interim data and was “very disappointed by Orexigen’s actions.” ¶ 93. That same day, Orexigen issued a press release stating that “the USPTO published the patent and supporting documentation,” id. ¶ 94, but the press release failed to disclose that “the USPTO only published what Orexigen itself needlessly put into the 2014 Patent Application” or that Orexigen “had rescinded its earlier request that the 2014 Patent Application remain unpublished,” id . ¶ 95.
On March 2, 2015, Orexigen’s common stock had closed at $5.79 per share. Id. ¶ 89. However, the March 3, 2015 publication of the “misleading” interim LIGHT Study data and the “misleading” response to the FDA’s statements the same day “artificially inflat[ed] the price of Orexigen’s securities” and “deceiv[ed] analysts and investors.” ¶¶ 17, 97. That same day, common stock shares “soared almost 32% to close at $7.64 . . . on enormous trading volume of more than 95.8 million shares,” id. ¶ 16, with trading as high as $9.37 per share, id. ¶ 89. On March 4, 2015, Orexigen common stock “rose an additional 11% on massive volume, to close at $8.49 per share.” ¶ 16; see also id. ¶ 97.
In Section VI of the CAC, titled “Loss Causation and Economic Loss,” Lead Plaintiff alleges, in relevant part:
131. On May 12, 2015, it was also disclosed for the first time in a Bloomberg article, called “Takeda Threatened to End Orexigen Partnership as Study Halted,” that Takeda – Orexigen’s commercialization partner for Contrave – had initiated dispute resolution proceedings against Orexigen demanding it pay the full cost – estimated at $200 million – of a new cardiovascular outcomes trial due to Orexigen’s materially misleading March 3, 2015 statements and omissions regarding Contrave’s purported heart benefit. In a May 12, 2015 email to Bloomberg , Takeda spokesperson Sandy Rodriguez stated that “Takeda sent a dispute letter to Orexigen on May 12 whereby Takeda seeks termination of its collaboration agreement with Orexigen based on Orexigen’s material breach of the agreement …” A May 13, 2015 article appearing in the Wall Street Journal titled “Orexigen and Takeda Feud Over Cost of a Controversial Diet Drug Trial” confirmed, inter alia , that: “[t]he disclosure is causing Orexigen shares to drop , since the cost of thе trial is estimated to be about $200 million, according to RBC Capital Markets analyst Simos Simeonidis, who calculates that Orexigen would be on the hook for as much as an extra $100 million if it loses the dispute.” Similarly, a May 13, 2015 article appearing in Biospace.com added that “the company stock took a big hit, dropping from a high of $6.93 per share on May 12, the day the partnership [with Takeda] was terminated, to today’s low [on May 13, 2015] of $5.48 per share.”
132. As a direct result of the May 12, 2015 disclosures alleged in ¶[ . . .] 131, supra , which disclosed the truth for the first time regarding: . . . (iii) Takeda’s initiation of a $200 million action against Defendants (which revealed for the first time that Defendants had failed to disclose that they had filed the March 3, 2015 Form 8-K revealing the dubious 25% heart benefit data without first informing Takeda as alleged in ¶¶15-17, 87-89, supra ) the price of Orexigen’s common stock fell from an opening price on May 11, 2015 of $6.75 per share to close on May 13, 2015 at $5.02 per share on massive trading volume as investors digested the full impact of Defendants’ materially mislеading statements and deliberately reckless acts. Together, the revelations and disclosures alleged in ¶[ . . .] 131, supra caused the Company’s share price to drop approximately 25% in a single day between May 12 and May 13, 2015 on unusually high trading volume.
133. The timing and magnitude of Orexigen’s common stock price declines between May 12 and May 13, 2015 negates any inference that the losses suffered by Plaintiff and the other members of the Class were caused by changed market conditions, macroeconomic or industry factors, or even Company-specific facts unrelated to Defendants’ fraudulent conduct. The Company’s share price dropped from a high of $6.93 per share on May 12, 2015 to a low of $5.48 per share on May 13, 2015 – a sharp decline of approximately 25%. The Company’s share price never recovered and Orexigen was thereafter delisted from NASDAQ. Chapter 11 bankruptcy later ensued.
CAC ¶¶ 131–33 (emphasis in original); see also id. ¶ 5 (alleging that “the loss causing disclosures on May 12, 2015 revealed the truth to the market about Defendants’ materially false and misleading statements and omissions on March 3, 2015 . . . .”); id. (““In response / / /
to the disclosures on . . . May 12, 2015, Orexigen’s share price fell precipitously.”) (citing id. § VI).
II. Procedural Background
On September 23, 2019, this Court issued its Order (1) Granting in Part and Denying in Part the Moving Defendants’ Request for Judicial Notice, (2) Denying Lead Plaintiff’s Request for Judicial Notice, and (3) Granting in Part and Denying in Part the Moving Defendants’ Motion to Dismiss. See ECF No. 110. As relevant to the pending Motion, the September 23, 2019 Order determined that a May 12, 2015 press release authored by Dr. Nissen “was not a corrective disclosure as to the alleged misrepresentations from March 3, 2015,” and accordingly Lead Plaintiff had failed to adequately allege loss causation for a portion of his claims. Id. at 37–38.
On October 17, 2019, Lead Plaintiff filed his CAC. See ECF No. 111. On November 15, 2019, Moving Defendants filed the instant Motion. After briefing was complete, Lead Plaintiff filed four notices of supplemental authority on January 24, May 27, June 12, and October 12, 2020. See ECF Nos. 118, 126, 128, 136. Moving Defendants filed responses to the first, second, and fourth. See ECF Nos. 119, 127, 137.
Meanwhile, on April 28, 2020, the Ninth Circuit issued an ordеr lifting the
administrative closure of the appeal as to Orexigen and substituting Wind-Down
Administrator Province, Inc., in the place and stead of Orexigen as Defendant-Appellee.
See
ECF No. 125. On May 19, 2020, in light of the bankruptcy court’s lifting of the § 362
automatic stay, the Ninth Circuit issued an order “fully adopt[ing its] opinion in [
Khoja v.
]
Orexigen
[
Therapeutics, Inc.
],
REQUEST TO CONSIDER MATERIALS INCORPORATED BY REFERENCE
I. Legal Standard
“Generally, district courts may not consider material outside the pleadings when
assessing the sufficiency of a complaint under Rule 12(b)(6) of the Federal Rules of Civil
Procedure.”
Khoja v. Orexigen Therapeutics, Inc.
, 899 F.3d 988, 998 (9th Cir. 2018)
(citing
Lee v. City of Los Angeles
,
Pursuant to Federal Rule of Evidence 201(b), “[t]he court may judicially notice a
fact that is not subject to reasonable dispute because it: (1) is generally known within the
trial court’s territorial jurisdiction; or (2) can be accurately and readily determined from
sоurces whose accuracy cannot reasonably be questioned.” “Accordingly, ‘[a] court may
take judicial notice of matters of public record without converting a motion to dismiss into
a motion for summary judgment.’”
Khoja
,
“Even if a document is not attached to a complaint, it may be incorporated by
reference into a complaint if the plaintiff refers extensively to the document or the
document forms the basis of the plaintiff’s claim.”
United States v. Ritchie
,
When a document is incorporated by reference, “the district court may treat such a
document as part of the complaint, and thus may assume that its contents are true for
1
purposes of a motion to dismiss under Rule 12(b)(6).”
Ritchie
,
II. Analysis
Moving Defendants ask the Court to incorporate by reference six documents: (1) “Food and Drug Administration’s (‘FDA’) September 10, 2014 ‘Center for Drug Evaluation and Research Summary Review,’ which is publicly available at https://www.accessdata.fda.gov/drugsatfda_docs/nda/2014/200063Orig1s00 0SumR.pdf (the ‘2014 FDA Review’),” “for background facts about the Light Study and the FDA’s regulatory process with respect to Contrave,” Defs.’ Req. at 1, 4; see id. Ex. A;
(2) “United States Patent No. 8,969,371, which is publicly available at 16 http://portal.uspto.gov/pair/PublicPair (the ‘’371 patent’),” “for background facts about Orexigen’s U.S. patent application and the issuance of the ’371 17 patent,” Defs.’ Req. at 1, 4; see id. Ex. B; 18
(3) “Orexigen Therapeutics, Inc.’s (‘Orexigen’) Form 8-K filed with the 19 Securities Exchange Commission (‘SEC’) on March 3, 2015, which is publicly available at 20
http://www.sec.gov/edgar/searchedgar/companysearch.html (the ‘March 3 8- 21 K’),” “so the Court has a complete picture of the information provided to investors on March 3, 2015,” Defs.’ Req. at 1, 4–5; see id. Ex. C; 22 23 (4) “Carlone Chen’s www.bloomberg.com article on May 12, 2015, titled ‘Takeda Threatens to End Orexigen Partnership as Study Halted,’ which is 24 available at https://www.bloomberglaw.com/document/NO9IEU6JTSE8 (the 25 ‘May 12 Bloomberg Article’),” on which Moving Defendants purport Lead Plaintiff relies “to form the basis of his new loss causation theory,” Defs.’ 26 Req. at 1, 5 (citing CAC ¶¶ 131, 132); see id. Ex. D; 27
(5) “Ed Silverman’s www.wsj.com article on May 13, 2015, titled, ‘Orexigen and Takeda Feud Over Cost of a Controversial Diet Drug Trial,’ which is publicly 1 available at https://blogs.wsj.com/pharmalot/2015/05/13/orexigen-and- takeda-feud-over-cost-of-a-controversial-diet-drug-trial/ (the ‘March 13 WSJ 2 Article’),” on which Moving Defendants purport Lead Plaintiff relies “to form 3 the basis of his new loss causation theory,” Defs.’ Req. at 2, 5 (citing CAC ¶¶ 131, 132); see id. Ex. E; and 4
5 (6) “Alex Keown and Riley McDermid’s www.biospace.com article on May 13, 2015, titled, ‘Takeda Threatens to End Orexigen Partnership Over Stopped 6 Obesity Study,’ which is publicly available at 7 https://www.biospace.com/article/takeda-threatens-to-end-orexigen- partnership-over-stopped-obesity-study-/ (the ‘May 13 BioSpace Article’),” 8 on which Moving Defendants purport Lead Plaintiff relies “to form the basis of his new loss causation theory,” Defs.’ Req. at 2, 5 (citing CAC ¶¶ 131,
132);
see id.
Ex. F.
Lead Plaintiff argues that Moving Defendants impermissibly are “offering these
exhibits for the truth of the underlying facts they contain,” Opp’n at 19, because, for
example, the language from the March 3, 2015 8-K cited in Moving Defendants’ Motion
“is the
same language
that Defendants relied on to argue that the statements they made on
March 3 were not false – a theory which was squarely rejected by the Ninth Circuit,” and
accordingly “[i]t is unclear why Defendants would have cited to this language
if not
to try
to impermissibly contradict Lead Plaintiff’s well-pled allegations,”
id.
(emphasis in
original) (citing Mot. at 5;
Khoja
,
The Court previously has incorporated by reference Exhibits A through C. See ECF No. 76 at 18; ECF No. 110 at 18–19. In its September 23, 2019 Order, the Court found that incorporation by reference of Exhibits A and B, for the same purposes offered here, was proper. See ECF No. 110 at 18. The Court again finds incorporation by reference proper for Exhibits A and B. With regard to Exhibit C, the Court’s September 23, 2019 Order noted that Lead Plaintiff’s “Consolidated Complaint refers extensively to the March 3, 2015 Form 8-K, see, e.g. , CC ¶¶ 87–88, which also forms the basis of Lead Plaintiff’s claims predicated upon false and misleading omissions in that very filing. See, e.g. , id. ¶¶ 87–92.” ECF No. 110 at 18. The Court concluded that, “[a]lthough ‘what inferences [the C]ourt may draw from [the] incorporated document should . . . be approached with caution,’ see Khoja , 899 F.3d at 1003, Exhibit C is appropriately incorporated by reference.” ECF No. 110 at 18–19. The Court again finds it appropriate to incorporate Exhibit C by reference, but the Court will not incorporate into the CAC any statements therein offered solely to contest any well-pleaded facts in the CAC.
As for Exhibits D through F, the Court finds that Lead Plaintiff relies on the May
12, 2015
Bloomberg
article to form the basis of his loss causation theory, and therefore the
Court concludes that it is appropriate to incorporate by reference Exhibit D. Again, the
scope of the Court’s incorporation by reference will exclude “Defendants’ factual
conclusions or characterizations of” the document.
See
Opp’n at 19–20. However, the
Court agrees with Lead Plaintiff that it is not appropriate to incorporate Exhibits E and F
by reference. The CAC does not refer extensively to these documents, nor does Lead
Plaintiff rely on them to form the basis of his claim. As the Ninth Circuit has stated, “[f]or
‘extensively’ to mean anything under
Ritchie
, it should, ordinarily at least, mean more than
once.”
See Khoja
,
the share prices dropped on May 13, 2015. See CAC ¶ 131. Thus, the Court sees no reason to incorporate these ancillary documents by reference.
Accordingly, the Court GRANTS IN PART AND DENIES IN PART Moving Defendants’ Request to Consider Documents Incorporated by Reference (ECF No. 114-9), as outlined above.
PARTIAL MOTION TO DISMISS
I. Legal Standard
Rule 12(b)(6) permits a party to raise by motion the defense that the complaint
“fail[s] to state a claim upon which relief can be granted,” generally referred to as a motion
to dismiss. The Court evaluates whether a complaint states a cognizable legal theory and
sufficient facts in light of Federal Rule of Civil Procedure 8(a), which requires a “short and
plain statement of the claim showing that the pleader is entitled to relief.” Although Rule
8 “does not require ‘detailed factual allegations,’ . . . it demands more than an unadorned,
the-defendant-unlawfully-harmed-me accusation.”
Ashcroft v. Iqbal
,
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” (quoting
Twombly
,
Further, “[c]laims brought under Rule 10b-5 . . . must meet Federal Rule of Civil
Procedure 9(b)’s particularity requirement that ‘[i]n all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with particularity.’”
In re Dura
Pharm., Inc. Sec. Litig.
,
The Court will grant leave to amend unless it determines that no modified contention
“consistent with the challenged pleading . . . [will] cure the deficiency.”
DeSoto v. Yellow
Freight Sys., Inc.
,
II. Analysis
“Section 10(b) of the . . . 1934 [Act] forbids (1) the ‘use or employ[ment] . . . of any
. . . deceptive device,’ (2) ‘in connection with the purchase or sale of any security,’ and
(3) ‘in contravention of’ [SEC] ‘rules and regulations.’”
Dura Pharm., Inc. v. Broudo
, 544
U.S. 336, 341 (2005) (quoting 15 U.S.C. § 78j(b)). “Rule 10b-5 forbids, among other
things, the making of any ‘untrue statement of a material fact’ or the omission of any
material fact ‘necessary in order to make the statements made . . . not misleading.’”
Id.
(quoting 17 C.F.R. § 240.10b-5). “The basic elements of a Rule 10b-5 claim, therefore,
are: (1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with
the purchase or sale of a security, (4) transaction and loss causation, and (5) economic
loss.”
Daou Sys.
,
Although Moving Defendants claim that their Motion is directed solely to the issue of loss causation, in actuality, the Motion argues that Lead Plaintiff’s CAC fails to adequately plead several of the required elements of a claim for securities fraud. Primarily, Moving Defendants assert that Lead Plaintiff has not adequately pleaded loss causation in
alleg[ing] that investors learned on May 12, 2015 that Takeda Pharmaceutical Cо. Ltd. (“Takeda”)—Orexigen’s commercial partner in conducting the Light Study—initiated a “$200 million action” against Defendants which purportedly revealed for the first time that Orexigen disclosed the data underlying the patent on March 3 without notifying Takeda in advance.
Mot. at 2 (citing CAC ¶ 132) (footnote omitted). However, Moving Defendants also argue that Lead Plaintiff fails to plead falsity adequately, because Defendants had no duty to inform investors that the March 3, 2015 8-K was filed without first informing Takeda. at 12 (citing CAC ¶ 132). Moving Defendants further claim that the CAC contains no allegations to support the materiality of the allegedly misleading statement or omission. at 13–14 (citations omitted). [4] A. Material Misrepresentation or Omission of Fact
The Court will first address Moving Defendants’ argument that Lead Plaintiff fails
to plead a material misrepresentation or omission of fact. Mot. at 12. A statement or
omission is misleading “if it would give a reasonable investor the ‘impression of a state of
affairs that differs in a material way from the one that actually exists.’”
Berson v. Applied
Signal Tech., Inc.
,
“[A]n omitted fact is material if there is a substantial likelihood that a reasonable
shareholder would consider it important.”
Basic Inc. v. Levinson
,
disregard arguments raised exclusively in footnotes.” (quoting Bryan Garner, The Redbook: A Manual on Legal Style 168 (3d ed. 2013)))). 1 Moving Defendants argue that “Plaintiff cannot establish falsity, because Defendants had no duty to inform investors that Orexigen filed the March 3 8-K ‘without first informing Takeda.’” Mot. at 12 (quoting CAC ¶ 132). Moving Defendants analogize to Lead Plaintiff’s former claim that Defendants misled investors by failing to disclose that Orexigen had violated the DAP on March 3, 2015, which information the Ninth Circuit determined Defendants had no duty to share “‘because Orexigen never touted having permission to publish’ the 25% data on that date.” Mot. at 13 (quoting Khoja , 899 F.3d at 1011). Finally, Moving Defendants argue that, even if any statement or omission were actionable, it must also be material, but “the [CAC] contains no allegations to suggest that a reasonable investor would even care” about Orexigen’s alleged failure to give Takeda advance notice of the March 3, 2015 8-K. Mot. at 13 (footnote omitted).
Lead Plaintiff argues that this argument “conflates the standards for evaluating whether a defendant has a duty to disclose material information with those for proximate cause.” Opp’n at 13. While it is true, as this Court noted supra at 14, that this argument does not relate to loss causation, purportedly the only subject of Moving Defendants’ Motion, [5] a material misrepresentation or omission of fact is nonetheless a required element of a claim for securities fraud that Lead Plaintiff must plead in order to state a claim, and Lead Plaintiff was put on notice of this argument by Moving Defendants’ thorough treatment of the issue in their opening brief. See Mot. at 12–14. Indeed, Lead Plaintiff’s Opposition contains a section titled “Defendants’ Violation of Their Duty Not to Mislead the Public Has Been Established and is Law of the Case.” Opp’n at 13. However, the section bearing this heading is largely devoted to the reasonable foreseeability of Takeda’s decision to seek termination of its partnership with Orexigen in light of the alleged March 3, 2015 omissions, id. , and concedes that the Ninth Circuit “found that Defendants did not have a duty to disclose that it had violated the DAP,” id. (citation omitted).
1 The Court agrees with Moving Defendants that Lead Plaintiff fails to plead adequately this element of his claim, to the extent it is premised on the May 12, 2015 Bloomberg article correcting any misleading statements or omissions from March 3, 2015. Although Lead Plaintiff alleges that “Orexigen filed the Form 8-K without first consulting with the FDA, Dr. Nissen or its own business partner, Takeda,” CAC ¶ 15, Lead Plaintiff does not allege that Moving Defendants had a duty to disclose their failure to provide Takeda with advance notice, nor can the Court plausibly infer from the allegations in the CAC that such a duty existed. Rather, the Court agrees with Moving Defendants that this scenario is similar to Lead Plaintiff’s unsuccessful attempt to plead that it was misleading for Defendants to fail to disсlose that the publication of the 25% LIGHT Study data violated the DAP. In dismissing this theory, the Ninth Circuit reasoned:
Although Orexigen touted the interim results and therefore created a duty to disclose the corresponding adverse information, Orexigen never touted having permission to publish the results.
Even though violating the DAP could have negative consequences for Orexigen (and its investors), Orexigen did not have a duty to share that information. The Complaint does not identify earlier statements by Orexigen that suggest a duty either.
Khoja , 899 F.3d at 1011. Similarly, here, Lead Plaintiff does not allege that Orexigen touted that it had informed Takeda of its intention to publish the 25% LIGHT Study data, or that Takeda had approved of its decision to do so. Absent a duty to disclose, there is no actionable misleading omission. And, while Defendants’ duty to disclose that the 25% LIGHT Study data were unreliable is certainly law of the case, Defendants’ duty to disclose whether or not they had told Takeda of their intention to disclose those data is not. Accordingly, Lead Plaintiff fails to state a claim to the extent he relies on Moving Defendants’ failure to disclose that they did not inform Takeda in advance of their intention to file the March 3, 2015 8-K. [6]
B. Loss Causation
The Court next addresses Moving Defendants’ argument that Lead Plaintiff fails to adequately plead loss causation. Mot. at 10–12. To demonstrate loss causation, a plaintiff must allege “a causal connection between the material misrepresentation and the loss.” Dura Pharms. , 544 U.S. at 342; see also 15 U.S.C. § 78u-4(b)(4). The Ninth Circuit recently held that, to plead loss causation
by relying on one or more corrective disclosures, a plaintiff must show that: (1) a corrective disclosure revealed, in whole or in part, the truth concealed by the defendant's misstatements; and (2) disclosure of the truth caused the company's stock price to decline and the inflation attributable to the misstatements to dissipate. At the pleading stage, the plaintiff's task is to allege with particularity facts “plausibly suggesting” that both showings can be made.
In re BofI Holding, Inc. Sec. Litig.
, No. 18-55415, __ F.3d __,
Moving Defendants argue that Lead Plaintiff fails to allege that the disclosures in the May 12, 2015 Bloomberg article correct any allegedly false or misleading statement appearing in the March 3, 2015 8-K. Mot. at 10–12. Specifically, Moving Defendants argue that only two statements from March 3, 2015 “remain at issue”: (1) the failure to reveal in the March 3, 2015 8-K that the 25% LIGHT Study results were “unreliable,” and (2) Defendants’ failure to disclose in the March 3, 2015 press release their role in / / /
1 [7] publishing the ’371 patent. Mot. at 10. Moving Defendants contend that Lead Plaintiff does not allege that these statements were false or misleading “ because of аnything Defendants said about Takeda, or because of any omission related to Takeda.” at 10– 11 (emphasis in original) (citing CAC ¶¶ 92, 95, 98). Moving Defendants further argue that,
even if there was a statement on March 3 to tie back to, the May 12 articles that disclose Takeda’s initiation of dispute proceedings against Orexigen do not actually reveal that “Defendants had failed to disclose” that Orexigen filed the March 3 8-K “without first informing Takeda.” Thus, Plaintiff has not even pleaded an alleged corrective disclosure in the first place. Indeed, those articles do not suggest any connection whatsoever between Takeda’s claims for breach of the collaboration agreement and Orexigen’s alleged failure to provide advance notice of the March 3 8-K.
Id . at 11 (citing CAC ¶¶ 131–32; Exs. D, E, F). Finally, even if such a connection were established, Moving Defendants claim, analogizing to cases addressing the revelation of litigation or investigations, that the mere allegation that “Tаkeda had sued Orexigen for ‘material breach’ based on Orexigen’s failure to give notice of the March 3 8-K” is inadequate, standing on its own, to establish loss causation. at 12 n.9 (citations omitted).
Lead Plaintiff responds that:
The May 12, 2015 disclosures make clear for the first time that Takeda wanted to dissolve its partnership with Defendants based on “Orexigen’s material breach of the agreement.” The facts before the Court strongly suggest that this breach relates back to Defendant’s unilateral decisions to: (i) publish the unreliable 25% interim data; and (ii) hide their role in getting the patent published. These allegations are “inextricably linked” with Takeda’s announcement that they were seeking to dissolve their partnership with Orexigen and leave them with the entire cost of the subsequent safety [ sic ].
Opp’n at 16 (citing CAC ¶ 131; In re Silver Wheaton Corp. Sec. Litig ., 2019 U.S. Dist. LEXIS 59428, at *40 (C.D. Cal. 2019)). Thus,
Defendants’ decision to publicize the unreliable 25% interim data is the proximate cause of: (i) the LIGHT Study’s cancellation; (ii) the FDA’s warning that Contrave might be pulled from the market; and (iii) Takeda’s decision to institute dispute resolution proceedings. Since Takeda had known since late 2014 that the FDA would require another safety study, there is no other reason that it would have resorted to such aggressive tactics at that time. Moreover, Defendants do not offer one here.
Id.
at 17 (citing CAC ¶¶ 55, 126). Lead Plaintiff argues that Moving Defendants’ analogy
to government investigation cases is inapt because an announcement of an investigation
with something more, such as a corrective disclosure, can establish loss causation, and
“[h]ere, Takeda’s announcement, along with the news that [the] LIGHT Study had been
terminated prematurely, and following Dr. Jenkins’ March 5 warning ‘gave investors the
context necessary to interpret [Takeda’s disclosure] as revealing the fraud.’”
Id.
at 18
(citing
Evanston Police Pension Fund v. McKesson Corp.
,
Furthermore, according to Lead Plaintiff, the May 12, 2015
Bloomberg
article’s
disclosure of Takeda’s actions “was a reasonably foreseeable consequence” of Orexigen’s
duty to disclose the unreliability of the 25% interim LIGHT Study data in the March 3,
2015 8-K.
Id.
at 13 (citing
Khoja
,
In their Reply, Moving Defendants argue that none of the reasons why the March 3, 2015 misstatements are materially false or misleading, as alleged in the CAC, are related to the purported failure to provide notice of the March 3, 2015 8-K to Takeda. Reply at 2– 3. This “failure to allege that the March 3 8-K was false or misleading because of anything said or not said about Takeda is dispositive.” at 4. Moving Defendаnts further argue that, because Lead Plaintiff’s sole loss causation theory pleaded in the CAC is a market- revelation theory, Lead Plaintiff cannot rely on a foreseeable consequences and/or outcomes theory. Reply at 5; see id. at n.4. Even so, Lead Plaintiff’s argument that the May 12, 2015 Bloomberg article establishes that Takeda’s actions related back to the decision to publish the unreliable interim LIGHT Study data is nothing but unsupported speculation that does not satisfy the pleading requirements of Twombly . at 5–7; see also id. at 7 n.7.
Having carefully reviewed the pleadings and the Parties’ arguments, the Court agrees that the facts currently alleged in the CAC, viewed in the light most favorable to Lead Plaintiff, simply do not allege a link sufficient for the Court to find that the May 12, 2015 Bloomberg article was a “correction” of any false or misleading statements or omissions made on March 3, 2015, or that the Bloomberg article “relates back” to the March 3, 2015 statements or omissions. The Court agrees with Moving Defendants that Lead Plaintiff’s argument that Takeda’s dеcision to send a letter on May 12, 2015 instituting dispute resolution proceedings against Orexigen necessarily relates back to Orexigen’s failure to disclose the unreliability of the 25% LIGHT Study data is unsupported.
As the Ninth Circuit stated in Metzler Investments GMBH v. Corinthian Colleges, Incorporated :
[W]hile the court assumes that the facts in a complaint are true, it is not required to indulge unwarranted inferences in order to save a complaint from dismissal. The TAC’s allegation that the market understood the June 24 and August 2 disclosures as a revelation of Corinthian's systematic manipulation of student 1 enrollment is not a “fact.” It is an inference that Metzler believes
is warranted from the facts that are alleged. But Corinthian persuasively explains why this is not the case.
C. Lead Plaintiff’s Notices of Supplemental Authority The four notices of supplemental authority filed by Lead Plaintiff do not аlter the Court’s view that the allegations of the CAC are insufficient to state a claim to the extent they rely on linking the May 12, 2015 Bloomberg article to any misstatements or omissions from March 3, 2015. [8]
Lead Plaintiff’s First Notice concerns
Karinski v. Stamps.com
, Case No. 19-cv-
1828-MWF (SKx),
Lead Plaintiff’s Second Notice concerns
In re Twitter, Inc. Securities Litigation
,
Case No. 16-cv-05314-JST,
Lead Plaintiff’s Third Notice concerns
In re WageWorks, Inc., Securities Litigation
,
Case No. 18-CV-01523-JSW,
Finally, Lead Plaintiff’s Fourth Notice concerns
In re BofI Holding, Inc. Securities
Litigation
, No. 18-55415, __ F.3d __, 2020 WL 5951150 (9th Cir. Oct. 8, 2020).
See
generally
4th Not. of Supp. Auth.; Reply ISO 4th Not. of Supp. Auth. Once more, the
Court finds the facts of
BofI
distinguishable. First, in
BofI
, “the shareholders allege that
defendants made false or misleading statements touting the bank's conservative loan
underwriting standards, its effective system of internal controls, and its robust cоmpliance
infrastructure.”
Second, in
BofI
, the alleged corrective disclosure was “a whistleblower lawsuit filed
against BofI by Charles Erhart, a former mid-level auditor at the company.”
Id.
at *3. The
Ninth Circuit found that “[t]he allegations of egregious wrongdoing in the Erhart lawsuit,
if accepted as true, unquestionably revealed to the market that at least some of BofI’s
alleged misstatements were false.”
Id.
at *6. For instance, one of the allegations was “that
[Erhart] personally prepared a memorandum . . . which identified roughly 30% of BofI’s
customers as ‘bad,’ meaning the customers had red flags such as suspiciously high cash
balances, social security numbers that did not match any public records, and, in one
instance, the social security number of a dead person,” but “when he gave the list to his
superior, Senior Vice President John Tolla, Tolla demanded that the аudit committee alter
the list and give the altered version to the OCC.” at *6. Thus, there’s a clear connection
between the alleged misleading statements and the correcting disclosure. While the Ninth
Circuit noted that, to relate back, “a corrective disclosure need not be a mirror image of the
prior misstatement,”
id.
at *6 n.3 (citing
In re Williams Sec. Litig.—WCG Subclass
, 558
F.3d 1130, 1140 (10th Cir. 2009)), the alleged corrective disclosure here bears almost no
relation to the alleged misstatement or omission, and it would require the Court to accept
unsupported and implausible inferences to find a causal connection between the alleged
loss and the statements. Thus, this is more a case of “‘asserting that where there is smoke,
there must be fire.’” at *8 (quoting
Curry v. Yelp Inc.
,
1 2017)). Accordingly, BofI does not help Lead Plaintiff on the facts presently pleaded in the CAC. [9]
Thus, in light of Lead Plaintiff’s failure to allege adequately that the May 12, 2015 Bloomberg article relates back to a material misrepresentation or omission of fact from March 3, 2015, the Court GRANTS Moving Defendants’ Motion.
D. Leave to Amend
Moving Defendants urge thе Court to deny leave to amend, “as Plaintiff could never allege a cognizable fraud claim based on this theory.” Mot. at 14. While the Court is skeptical that Lead Plaintiff will be able to allege adequately that the May 12, 2015 Bloomberg article relates back to the alleged misrepresentations or omissions from March 3, 2015, the Court also is not convinced that it is an impossibility, and Lead Plaintiff has not yet had an opportunity to amend these allegations. Thus, the Court will grant Lead Plaintiff one final opportunity to amend. Accordingly, the Court DISMISSES Plaintiff’s claims to the extent they rely on a connection between the May 12, 2015 Bloomberg article and the March 3, 2015 misleading statements and/or omissions, but will do so WITHOUT PREJUDICE .
CONCLUSION
In light of the foregoing, the Court GRANTS IN PART AND DENIES IN PART Moving Defendants’ Request to Consider Materials Incorporated by Reference (ECF No. 114-9) and GRANTS Moving Defendants’ Motion (ECF No. 114). Lead Plaintiff MAY FILE an amended consolidated complaint within thirty (30) days of the date on which this / / /
Order is electronically docketed. Should Lead Plaintiff fail to file an amended complaint by this date, this action will proceed on his surviving causes of action .
IT IS SO ORDERED.
Dated: November 2, 2020
Notes
[1] Defendant Orexigеn Therapeutics, Inc., filed a voluntary petition for bankruptcy under Chapter 11, see 27 In re Orexigen Therapeutics, Inc. , No. 18-10518-KG (Bankr. D. Del. filed Mar. 12, 2018); consequently, pursuant to the automatic bankruptcy stay, see 11 U.S.C. § 362(a), Orexigen is not a party to this Motion, which was filed before the automatic stay was lifted.
[2] The facts alleged in Plaintiff’s Consolidated Amended Complaint are accepted as true for purposes of
18
Moving Defendants’ Motion.
See Vasquez v. Los Angeles Cnty.
,
[3] The Parties agree that the sole issue raised by the present Motion is whether “the Amended Complaint 22 fails to plead with particularity that Defendants’ allegedly fraudulent statements on March 3, 2015 have any casual connection to the losses purportedly suffered by Plaintiff on May 12, 2015.” ECF No. 114 23 (“Not. of Mot.”) at 1; see also Opp’n at 1 (“Defendants do, hоwever, suggest that Plaintiff has not adequately pled loss causation in connection with the May 12, 2015 announcement that Takeda 24 Pharmaceutical Co. (“Takeda”) — Orexigen’s own business partner — disclosed for the first time that it was initiating a $200 million claim against Orexigen due to Defendants’ misconduct in revealing the 25% 25 data LIGHT Study in the March 3, 2015 Form 8-K.”). Although several of the new or revised allegations 26 in the Consolidated Amended Complaint (“CAC”) are intended to strengthen Lead Plaintiff’s loss causation allegations as to Defendants’ May 8, 2015 statements, “[Moving] Defendants did not challenge 27 the Original Complaint on this ground, and do not challenge the adequacy of Plaintiff’s loss causation allegations as to the May 8 statements here.” Mot. at 2. Accordingly, the Court omits those facts from its recitation of the relevant facts.
[4] In a footnote, Moving Defendants assert a fourth argument, that “[t]he Amended Complaint is also bereft
of allegations that Defendants intended to deceive or were deliberately reckless in failing to inform
investors that Takeda allegedly did not have advance notice of the March 3 8-K. Thus, any such claim
should also be dismissed for failure to plead scienter.” Mot. at 14 n.12 (citing
Ronconi v. Larkin
, 253 F.3d
423, 432 (9th Cir. 2001)). Similarly, Lead Plaintiff responds to the argument in a single sentence in a
footnote in his Opposition. Opp’n at 14 n.7.
The Court declines to address this argument, which was not fully briefed by the Parties. “‘Arguments
raised only in footnotes, or only on reply, are generally deemed waived’ and need not be considered.”
Cheever v. Huawei Device USA, Inc.
, No. 18-CV-06715-JST,
[5] See, e.g. , Not. of Mot. at 1 (indicating Moving Defendants move for dismissal in part of the CAC “for failure to plead loss causation”).
[6] In light of the Court’s finding that Lead Plaintiff fails to state a claim due to his failure adequately to allege a misrepresentation or omission, the Court need not address the materiality of the same.
[7] Lead Plaintiff appears to agree that these two statements from March 3, 2015 are the only ones relevant to the loss causation issue. See, e.g. , Opp’n at 16.
[8] The Court notes that Moving Defendants objectеd to Lead Plaintiff’s Second Notice for exceeding “[t]he 27 purpose and permissible scope of a notice of supplemental authorities.” Resp. to 2d Not. of Supp. Auth. at 1. While Lead Plaintiff does use its Notices to provide further arguments and commentary, Moving Defendants rebutted those arguments, at least as to the first two Notices and the fourth Notice, and had an
[9] Lead Plaintiff also makes much of the fact that, in BofI , the Ninth Circuit held that allegations in a lawsuit alone can serve as a corrective disclosure, and there need not be an additional disclosure to confirm the 25 truth of those allegations. See id. at *7. Lead Plaintiff contends that Takeda, like Erhart, had “firsthand 26 knowledge” of the alleged misconduct. 4th Not. of Supp. Auth. at 1. But the Court finds distinguishable allegations in a lawsuit, made by a person with firsthand knowledge and publicly filed for all to see, and 27 an article written by a person without firsthand knowledge reporting on the mere sending of, and not the specific allegations in, a demand letter, even if the demand letter in question came from someone with firsthand knowledge of the alleged misconduct.