Khoja v. Orexigen Therapeutics, Inc., No. 16-56069 (9th Cir. 2018)
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Under Federal Rule of Evidence 201, a court may take judicial notice of matters of public record without converting a motion to dismiss into a motion for summary judgment, but a court cannot take judicial notice of disputed facts contained in such public records. The incorporation-by-reference doctrine prevents plaintiffs from selecting only portions of documents that support their claims, while omitting portions of those very documents that weaken or doom their claims.
The Ninth Circuit addressed and clarified when and how the district court should consider materials extraneous to the pleadings at the motion to dismiss stage via judicial notice and the incorporation-by-reference doctrine. In this case, plaintiffs appealed the district court's dismissal of an action under the Securities Exchange Act of 1934. The panel held that the district court erred in part by judicially noticing some facts, but properly took notice of the date of Orexigen's international patent application for Contrave. Therefore, the panel reversed and remanded for clarification on Exhibit D, reversed the district court's judicial notice of Exhibit E, and affirmed the judicial notice of Exhibit V. The panel also that the district court abused its discretion by incorporating certain documents into the complaint and properly incorporated others. The panel reversed the district court's incorporation-by-reference of Exhibits B, C, F, H, R, S, and U, and affirmed the incorporation of Exhibits A, I K, L, N, O, P, and T. The panel affirmed in part, reversed in part, and remanded as to the remaining claims.
Court Description: Securities Fraud. The panel affirmed in part and reversed in part the district court’s dismissal, for failure to state a claim, of a securities fraud action under the Securities Exchange Act of 1934. Defendant Orexigen Therapeutics, Inc., a small biotechnology firm, developed Contrave, an obesity drug candidate. Count I alleged that Orexigen and its executives misrepresented and/or omitted material facts to conceal the truth and/or adverse material information about a drug trial called the Light Study, in violation of § 10(b) of the Act and SEC Rule 10b-5. Count II alleged a fraudulent scheme under SEC Rules 10b-5(a) and (c), and Count III alleged control person liability on the part of the executives under § 20(a) of the Act. The district court relied, in part, on documents that it judicially noticed or incorporated into the complaint by reference. The panel held that under Federal Rule of Evidence 201, a court may take judicial notice of matters of public record without converting a motion to dismiss into a motion for summary judgment, but a court cannot take judicial notice of disputed facts contained in such public records. The panel concluded that the district court abused its discretion in judicially noticing certain facts but properly took judicial notice of the date of Orexigen’s international patent application for Contrave. The panel reversed and remanded KHOJA V. OREXIGEN THERAPEUTICS 3 for clarification on Exhibit D, reversed the district court’s judicial notice of Exhibit E, and affirmed the judicial notice of Exhibit V. The panel held that incorporation-by-reference is a judicially created doctrine that treats certain documents as though they are part of the complaint itself. The doctrine prevents plaintiffs from selecting only portions of documents that support their claims, while omitting portions of those very documents that weaken or doom their claims. The panel held that a defendant may seek to incorporate a document into the complaint if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff’s claim. But if a document merely creates a defense to the well-pled allegations in the complaint, then that document did not necessarily form the basis of the complaint. And it is improper to assume the truth of an incorporated document if such assumptions only serve to dispute facts stated in a well- pleaded complaint. The panel held that the district court abused its discretion by incorporating certain documents into the complaint and properly incorporated others. Specifically, the panel reversed the district court’s incorporation-by- reference of Exhibits B, C, F, H, R, S, and U, and it affirmed the incorporation of Exhibits A, I K, L, N, O, P, and T. The panel affirmed in part and reversed in part the district court’s dismissal of Count I for failure sufficiently to allege falsity and materiality, and it affirmed the district court’s dismissal of Count II on the basis that the substance of the claim could not be discerned. Where affirming, the panel granted leave to amend the complaint. As to Count III, the panel reversed so that the district court could reconsider those claims in light of the reversal of claims in Count I and any amendments to the complaint. 4 KHOJA V. OREXIGEN THERAPEUTICS The panel specified that its disposition of the appeal pertained only to claims against the executive defendants. With respect to Orexigen, appellate proceedings remained stayed pending resolution of bankruptcy proceedings. The panel instructed the Clerk to administratively close the docket with respect to Orexigen, pending further order of the court.
The court issued a subsequent related opinion or order on May 19, 2020.
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