Securities Fraud Class Action Complaint Adequately Alleged Loss Causation when Facts were Considered as a Whole so District Court Erred in Granting Defense Motion to Dismiss Class Action Complaint Ninth Circuit Holds
Plaintiffs, a group of investors, filed a class action against Gilead Sciences, “a biopharmaceutical company that specializes in developing and marketing treatments for life-threatening diseases,” alleging violations of federal securities law; specifically, the class action complaint alleged that defendants “misled the investing public by representing that demand for its most popular product” – Viread, an antiretroviral agent used to treat HIV – was “strong without disclosing that unlawful marketing was the cause of that strength.” In re Gilead Sciences Securities Litig., ___ F.3d ___ (9th Cir. August 11, 2008) [Slip Opn., at 10322-23]. Viread accounted for almost two-thirds of Gilead’s total revenues, and the fourth amended class action complaint alleged that defendants Gilead and “some of its top officers” violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by aggressively promoting Viread for “off-label” uses, that is, for uses that had not been approved by the FDA, id., at 10323-24. The class action complaint outlined an alleged scheme to promote off-label uses and further alleged that ultimately “75% to 95% of Viread sales resulted from off-label marketing efforts.” Id., at 10324-25. Defense attorneys moved to dismiss the class action under Rule 12(b)(6) for failure to adequately allege loss causation; the district court agreed and dismissed the class action complaint. Id., at 10323. The Ninth Circuit reversed.
As with all securities fraud cases, the specific facts detailed in the class action complaint are central to the Circuit Court’s analysis of the district court order dismissing the class action with prejudice. In this case, those facts span more than 9 pages of the appellate court’s opinion. See In re Gilead Sciences, at 10323-31. We do not summarize those facts here, noting only that, according to “two confidential witnesses who served as Gilead salespeople,” the off-label marketing efforts “took three forms: (1) marketing to HIV patients co-infected with Hepatitis B; (2) marketing Viread as a first-line or initial therapy for HIV infection; and (3) marketing against Viread’s safety profile,” and that, ultimately, “75% to 95% of Viread sales resulted from off-label marketing efforts.” Id., at 10325 (footnote omitted). The FDA sent Gilead a letter in March 2002, accusing the company of off-label marketing, id., and in August 2003 the FDA made public a July 2003 “warning letter,” but the investing public did not yet appreciate the letter’s significance, id., at 10328-29. According to the class action complaint, Gilead also encouraged overstocking of Viread but publicly stated that overstocking was not a basis for Viread’s increased sales, id., at 10326-27. It was not until October 2003 that investors realized the impact of off-label marketing on Viread sales, id., at 10330. The district court dismissed the class action with prejudice on the ground that plaintiffs “failed to adequately plead loss causation” under Dura Pharmaceuticals, Inc.. v. Broudo, 544 U.S. 336 (2005), because the class action complaint failed to “connect the following chain of events…: 1) that [the] alleged failure to disclose the off-label marketing scheme caused a material increase in sales; 2) that practitioners materially decreased their demand for Viread due to the publication of the FDA Warning Letter; and most importantly, 3) that the alleged decrease in sales due to the FDA letter proximately caused Gilead’s stock to decrease three months later,” id., at 10331. The Ninth Circuit explained that the district court order rested entirely on its conclusions concerning loss causation, id.
The Circuit Court reversed, explaining that the class action complaint in this case “is meaningfully different from that in Dura Pharmaceuticals.” In re Gilead, at 10334. The Court quoted from the introduction in the class action complaint, at page 10335, as follows: “[T]he market was not told that off-label marketing was the cornerstone of demand. This mistaken impression of demand led to, among other things, wholesaler overstocking in reaction to an anticipated price increase. When the truth about…off-label marketing was disclosed, however, [they] could no longer maintain the sales growth levels that investors had come to expect, and Gilead’s stock price dropped accordingly.” The Ninth Circuit found that if the theory underlying the investors’ class action was “sound,” then the allegations in the class action complaint were sufficient to defeat defendants’ motion to dismiss, id., at 10335-37. The Circuit Court explained that “delay” in the drop in stock price at pages 10337 and 10338, and concluded that under the facts detailed in the opinion the price drop was “immediate” when the facts are considered as a whole. Accordingly, the district court erred in dismissing the class action, id., at 10338.