Huang et al v. Assertio Therapeutics, Inc. et al, No. 3:2017cv04830 - Document 83 (N.D. Cal. 2019)
Court Description: ORDER GRANTING MOTION TO DISMISS by Judge Jon S. Tigar granting 66 Motion to Dismiss. Amended Pleadings due by 4/8/2019. (wsn, COURT STAFF) (Filed on 3/18/2019)
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Huang et al v. Assertio Therapeutics, Inc. et al Doc. 83 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 INCHEN HUANG, ET AL., 7 Plaintiffs, 8 ORDER GRANTING MOTION TO DISMISS v. 9 ARTHUR JOSEPH HIGGINS, et al., 10 Re: ECF Nos. 66, 68, 70 Defendants. 11 United States District Court Northern District of California Case No. 17-cv-04830-JST 12 Before the Court is the motion to dismiss Plaintiffs’ amended complaint filed by Defendant 13 14 Assertio Therapeutics, Inc. and Defendants Arthur Joseph Higgins, James A. Schoeneck, and 15 August J. Moretti (collectively, the “Individual Defendants”). ECF No. 66. The Court will grant 16 the motion. 17 I. BACKGROUND This is a putative securities fraud class action brought on behalf of all persons who 18 19 purchased Assertio Therapeutics1 common stock between July 29, 2015 and August 7, 2017, 20 against Assertio and certain current and former Assertio officers and directors. ECF No. 61, 21 Amended Complaint for Violations of the Federal Securities Laws (“FAC”) ¶ 1. The Court 22 provides a brief overview of Plaintiffs’ allegations, discussing them in greater detail as they 23 become relevant to the Court’s analysis. Assertio is “a specialty pharmaceutical company” that “engages in the development, sale, 24 25 and licensing of products, including opioids, for pain and other central nervous system 26 27 28 1 At the time this action was filed, Assertio Thereaputics operated under the name Depomed, Inc., but has since changed names. See ECF No. 72. Accordingly, the Court uses Assertio Therapeutics throughout this order. Dockets.Justia.com 1 conditions.” Id. ¶ 2. On April 2, 2015, Assertio acquired the U.S. rights to the NUCYNTA 2 franchise, a line of opioids containing tapentadol, from Janssen Pharmaceuticals, Inc. and its 3 affiliates (collectively, “Janssen”). Id. ¶ 35. Assertio sold the product in two forms: NUCYNTA 4 ER (extended release) and NUCYNTA IR (immediate release). Id. Under Assertio’s ownership, 5 sales of NUCYNTA in the United States increased substantially, from $189.9 million in 2015 to 6 $281.3 million in 2016. Id. ¶ 36. NUCYNTA formed an important part of Assertio’s business; by 7 August 7, 2017, the end of the Class Period, sales from the two NUCYNTA products accounted 8 for 62 percent of Assertio’s revenues. Id. United States District Court Northern District of California 9 Plaintiffs allege that the growth of Assertio’s NUCYNTA sales was driven by an illegal 10 off-label marketing campaign. Id. ¶ 11. As background, the Food and Drug Administration 11 (FDA) approves a drug or medical device for specific uses, sometimes referred to as “on-label” 12 uses. 21 U.S.C. §§ 355(d), 360e(e)(1)(A). Once the product is approved, however, health care 13 practitioners may also prescribe the product for “off-label” uses, meaning uses not approved by 14 the FDA. Id. § 396; see also In re Gilead Scis. Sec. Litig. (Gilead III), 536 F.3d 1049, 1051 & n.2 15 (9th Cir. 2008). Nonetheless, under current FDA regulations, “pharmaceutical manufacturers are 16 generally prohibited from promoting off-label uses of their products if the off-label marketing is 17 false or misleading, or if it evidences that a drug is intended for such off-label use and is therefore 18 ‘misbranded.’” Polansky v. Pfizer, Inc., 822 F.3d 613, 615 (2d Cir. 2016); see also id. at 615 n.2 19 (citing 21 C.F.R. § 201.128). 20 According to Plaintiffs, Assertio “encouraged sales representatives to market NUCYNTA 21 off-label as a safer, less abusive, less addictive opioid that did not create the same euphoric feeling 22 as other opioids, even though this was not on the FDA-approved label.” FAC ¶ 12. Moreover, 23 Assertio specifically targeted its off-label marketing at “family physicians and internal medicine 24 doctors who were less knowledgeable about the dangers of opioids.” Id. ¶ 11. This off-label 25 marketing allowed Assertio to maintain positive growth in NUCYNTA sales even as sales in the 26 rest of the opioid market were declining. Id. ¶¶ 10-11. As evidence of this off-label marketing 27 campaign, Plaintiffs allege that Assertio’s predecessor, Janssen, was accused in a separate lawsuit 28 of marketing NUCYNTA off-label, that Assertio retained the same third-party sales force to 2 1 market NUCYNTA, and that confidential witnesses observed Assertio’s off-label marketing 2 campaign. Id. ¶¶ 69-91. Plaintiffs reason that Defendants made material misrepresentations and omissions during 3 4 the Class Period by touting the growth of the NUCYNTA franchise in earnings calls and 5 Securities and Exchange Commission (SEC) filings without revealing that this growth was driven 6 by off-label marketing. Id. ¶¶ 10-12. In its SEC filings, Assertio acknowledged the general risk of 7 liability if the company was found to have marketed drugs off-label but did not indicate that it had 8 engaged in any conduct that was likely to be considered off-label marketing. See, e.g., id. ¶¶ 101- 9 102. Further, Plaintiffs assert, the Individual Defendants were aware of these marketing practices 10 and the attendant risks at the time these statements were made. Id. ¶ 163. Finally, Plaintiffs allege that the consequences of this off-label marketing manifested in a United States District Court Northern District of California 11 12 series of disclosures between November 7, 2016, and August 7, 2017. On November 7, 2016, 13 Assertio lowered its revenue projections for the 2016 year, and on subsequent dates, outside 14 market analysts downgraded their assessments of Assertio. Id. ¶¶ 218(a)-(b), (d)-(e). In addition, 15 Plaintiffs attribute economic losses to Senator Claire McCaskill’s March 28, 2017 announcement 16 of “an investigation into the marketing and sales practices of the nation’s top five manufacturers of 17 prescription opioid products, including” Assertio, id. ¶ 218(c), and Assertio’s August 7, 2017 18 announcement that the U.S. Department of Justice and Maryland Attorney General had issued 19 subpoenas seeking similar information, id. ¶ 218(e). The day after each of these incidents, 20 Assertio stock declined as much as $3.08 per share, falling from $22.89 to $6.15 per share over the 21 course of these disclosures. See id. ¶ 218. On August 18, 2017, Inchen Huang filed a putative class action complaint, alleging 22 23 violations of federal securities laws. ECF No. 1. Two parties – the Depomed Investor Group 24 (“DIG”)2 and the City of Pontiac General Employees’ Retirement System3 – filed motions seeking 25 26 27 28 2 DIG consists of the individuals Aurelio Scarpatetti, Manuele Scarpatetti, Duy Vu, and Mark Madrack. See ECF No. 61 at 1. 3 Three other parties filed motions seeking appointment as lead plaintiff but subsequently withdrew those motions or chose not to oppose another party’s motion. See ECF No. 52 at 1. 3 1 appointment as lead plaintiff. ECF Nos. 12, 16. The Court appointed DIG as the lead plaintiff, as 2 DIG had alleged the greatest financial stake in the outcome of the case, pleading approximately 3 $403,000 in losses due to the decline of Assertio stock, and otherwise satisfied the requirements of 4 Federal Rule of Civil Procedure 23. ECF No. 52 at 3-6. The Court also approved DIG’s choice of 5 lead counsel. Id. at 6-7. DIG subsequently filed an amended class action complaint. ECF No. 61. 6 The complaint asserts two causes of action: (1) violations of Section 10(b) of the Securities 7 Exchange Act of 1934 and SEC Rule 10b-5; and (2) violations of Section 20(a) of the Exchange 8 Act. FAC ¶¶ 232-49. Defendants filed a motion to dismiss on April 9, 2018. ECF No. 66. 9 United States District Court Northern District of California 10 II. LEGAL STANDARD 11 A. 12 Section 10(b) of the Securities Exchange Act of 1934 prohibits any act or omission 13 resulting in fraud or deceit in connection with the purchase or sale of any security. To establish a 14 violation of Section 10(b), a plaintiff must plead: (1) a material misrepresentation or omission 15 made by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission 16 and the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. See 17 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008). 18 The Dual Pleading Requirements On a motion to dismiss, the Court accepts the material facts alleged in the complaint, 19 together with reasonable inferences to be drawn from those facts, as true. Navarro v. Block, 250 20 F.3d 729, 732 (9th Cir. 2001). However, “the tenet that a court must accept a complaint’s 21 allegations as true is inapplicable to legal conclusions” or “threadbare recitals of a cause of 22 action’s elements, supported by mere conclusory statements.” Ashcroft v. Iqbal, 556 U.S. 662, 23 678 (2009). Moreover, while a plaintiff generally need only plead “enough facts to state a claim 24 to relief that is plausible on its face” to survive a motion to dismiss, Bell Atlantic Corp. v. 25 Twombly, 550 U.S. 544, 570 (2007), “[s]ecurities fraud class actions must meet the higher, 26 exacting pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities 27 Litigation Reform Act (‘PSLRA’),” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 28 604 (9th Cir. 2014). 4 1 2 rise to a strong inference that the defendant acted with the required state of mind” with respect to 3 each alleged false statement or omission, and “a party must state with particularity the 4 circumstances constituting fraud or mistake.” 15 U.S.C. § 78u-4(b)(2)(A); Fed. R. Civ. P. 9(b); 5 see also Or. Pub. Emps. Ret. Fund, 774 F.3d at 605. “In order to show a strong inference of 6 deliberate recklessness, plaintiffs must state facts that come closer to demonstrating intent, as 7 opposed to mere motive and opportunity.” In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 8 974 (9th Cir. 1999), abrogated on other grounds by S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 9 784 (9th Cir. 2008). If the complaint does not satisfy the PSLRA’s pleading requirements, the 10 United States District Court Northern District of California Under the PSLRA and Rule 9(b), a complaint must “state with particularity facts giving Court must grant a motion to dismiss the complaint. 15 U.S.C. § 78u-4(b)(3)(A). 11 B. Falsity and Materiality 12 The PSLRA provides that “the complaint shall specify each statement alleged to have been 13 misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding 14 the statement or omission is made on information and belief, the complaint shall state with 15 particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B). For statements 16 to be actionable under the PSLRA, they must be both false or misleading and material. A 17 statement or omission is misleading under the PSLRA and Section 10(b) of the Exchange Act “if 18 it would give a reasonable investor the impression of a state of affairs that differs in a material way 19 from the one that actually exists.” Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th 20 Cir. 2008) (internal quotation marks and citation omitted). 21 A false or misleading statement or omission is material if there is a “substantial likelihood 22 that the disclosure of the omitted fact would have been viewed by the reasonable investor as 23 having significantly altered the ‘total mix’ of information made available.” TSC Indus., Inc. v. 24 Northway, Inc., 426 U.S. 438, 449 (1976). To plead materiality, a complaint’s allegations must 25 “suffice to raise a reasonable expectation that discovery will reveal evidence satisfying the 26 materiality requirement, and to allow the court to draw the reasonable inference that the defendant 27 is liable.” In re Atossa Genetics Inc Sec. Litig., 868 F.3d 784, 794 (9th Cir. 2017) (citation 28 omitted). “Although determining materiality in securities fraud cases should ordinarily be left to 5 1 the trier of fact, conclusory allegations of law and unwarranted inferences are insufficient to defeat 2 a motion to dismiss for failure to state a claim.” In re Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th 3 Cir. 2010) (internal quotation marks and citations omitted). 4 C. 5 The required state of mind under the PSLRA is a “mental state embracing intent to 6 deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193–94 n.12 (1976). 7 In order to adequately establish scienter, the complaint must “state with particularity facts giving 8 rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 9 78u-4(b)(2)(A). United States District Court Northern District of California 10 Scienter The “strong inference” required by the PSLRA “must be more than merely ‘reasonable’ or 11 ‘permissible’ it must be cogent and compelling, thus strong in light of other explanations.” 12 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). “A court must compare 13 the malicious and innocent inferences cognizable from the facts pled in the complaint, and only 14 allow the complaint to survive a motion to dismiss if the malicious inference is at least as 15 compelling as any opposing innocent inference.” Zucco Partners, LLC v. Digimarc Corp., 552 16 F.3d 981, 991 (9th Cir. 2009). In evaluating whether a complaint satisfies the “strong inference” 17 requirement, courts must undertake a two-step inquiry by first considering “whether any of the 18 allegations, standing alone, are sufficient to create a strong inference of scienter,” and “if no 19 individual allegation is sufficient, . . . conduct[ing] a ‘holistic’ review of the same allegations to 20 determine whether the insufficient allegations combine to create a strong inference of intentional 21 conduct or deliberate recklessness.” Curry v. Yelp Inc., 875 F.3d 1219, 1226 (9th Cir. 2017) 22 (citation omitted). 23 In the Ninth Circuit, scienter is a “mental state that not only covers intent to deceive, 24 manipulate, or defraud, but also deliberate recklessness.” City of Dearborn Heights Act 345 25 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 619 (9th Cir. 2017) (quoting 26 Schueneman v. Arena Pharm., Inc., 840 F.3d 698, 705 (9th Cir. 2016)). “Deliberate recklessness 27 is an extreme departure from the standards of ordinary care[,] which presents a danger of 28 misleading buyers or sellers that is either known to the defendant or is so obvious that the actor 6 1 must have been aware of it.” Webb v. Solarcity Corp., 884 F.3d 844, 851 (9th Cir. 2018) 2 (alteration and emphasis in original) (quoting City of Dearborn Heights, 856 F.3d at 619). Stated 3 differently, deliberate recklessness requires that an actor “had reasonable grounds to believe 4 material facts existed that were misstated or omitted, but nonetheless failed to obtain and disclose 5 such facts although [the actor] could have done so without extraordinary effort.” Police Ret. Sys. 6 of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1063 (9th Cir. 2014) (citation omitted). 7 “Facts showing mere recklessness or a motive to commit fraud and opportunity to do so provide 8 some reasonable inference of intent, but are not sufficient to establish a strong inference of 9 deliberate recklessness.” In re Verifone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. United States District Court Northern District of California 10 2012). 11 D. Loss Causation 12 Loss causation, “i.e., a causal connection between the material misrepresentation and the 13 loss” experienced by the plaintiff, is a necessary element of pleading a securities fraud claim under 14 Section 10(b) of the Exchange Act. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005). The 15 plaintiff “must demonstrate that an economic loss was caused by the defendant’s 16 misrepresentations, rather than some other intervening event.” Lloyd v. CVB Fin. Corp., 811 F.3d 17 1200, 1209 (9th Cir. 2016). In other words, plaintiffs alleging that they suffered a loss because 18 they resold shares at a lower price must show that the price reflects “the earlier misrepresentation” 19 rather than “changed economic circumstances, changed investor expectations, new industry- 20 specific or firm-specific facts, conditions, or other events, which taken separately or together 21 account for some or all of that lower price.” Dura Pharm., 544 U.S. at 343. The Ninth Circuit has 22 held that, as with other elements of a securities fraud claim, plaintiffs must plead loss causation 23 with the particularity required by Federal Rule of Civil Procedure 9(b). See Or. Pub. Emps. Ret. 24 Fund, 774 F.3d at 605. 25 “The burden of pleading loss causation is typically satisfied by allegations that the 26 defendant revealed the truth through ‘corrective disclosures’ which ‘caused the company's stock 27 price to drop and investors to lose money.’” Lloyd, 811 F.3d at 1209 (quoting Halliburton Co. v. 28 Erica P. John Fund, Inc., 134 S. Ct. 2398, 2406 (2014)); see also Nuveen Mun. High Income 7 United States District Court Northern District of California 1 Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1119 (9th Cir. 2013) (“Typically, ‘to satisfy 2 the loss causation requirement, the plaintiff must show that the revelation of that misrepresentation 3 or omission was a substantial factor in causing a decline in the security’s price, thus creating an 4 actual economic loss for the plaintiff.’” (quoting McCage v. Ernst & Young, LLP, 494 F.3d 418, 5 425-26 (3d. Cir. 2007)). However, “[d]isclosure of the fraud is not a sine qua non of loss 6 causation, which may be shown even where the alleged fraud is not necessarily revealed prior to 7 the economic loss.” Nuveen, 730 F.3d at 1120. “The fundamental inquiry before the Court 8 remains whether there is ‘a causal connection between the material misrepresentation and the 9 loss.’” Thomas v. Magnachip Semiconductor Corp., 167 F. Supp. 3d 1029, 1046 (N.D. Cal. 2016) 10 (quoting Dura Pharm., 544 U.S. at 342). 11 III. DISCUSSION 12 Defendants move to dismiss the complaint, arguing that Plaintiffs do not adequately plead 13 (1) a material misrepresentation or omission, (2) scienter, or (3) loss causation. ECF No. 66 at 7- 14 8. 15 A. Falsity and Materiality 16 Plaintiffs allege numerous false or misleading Class Period statements made during 17 earnings calls or in SEC filings. These statements generally fall into two categories. First, 18 Plaintiffs cite statements in which Defendants “described [Assertio’s] recent marketing 19 achievements as successes, but at the same time did not disclose that these supposed successes 20 were obtained in part through an illicit off-label marketing campaign.” FAC ¶ 108; see also, e.g., 21 id. ¶¶ 99, 104, 110. Second, Plaintiffs highlight SEC filings where Assertio acknowledged the 22 possibility that “[w]e may incur significant liability if it is determined that we are promoting or 23 have in the past promoted the ‘off-label’ use of drugs.” Id. ¶¶ 101, 105, 111, 115, 121. Plaintiffs 24 contend that these risk statements were misleading because they did not provide the necessary 25 context that Assertio “had already been deliberately engaged in off-label marketing,” making “the 26 potential exposure arising therefrom . . . a far more likely event.” Id. ¶ 102. The foundational 27 premise of Plaintiffs’ claims, therefore, is that Assertio engaged in off-label marketing. 28 Defendants contend that Plaintiffs’ allegations are insufficient to plead that such off-label 8 1 marketing occurred, and that Plaintiffs consequently fail to plead material misrepresentations or 2 omissions. ECF No. 66 at 11. The Court first considers the extent of off-label marketing 3 plausibly alleged, then turns to whether each category of statements is material and misleading. 1. 4 Plaintiffs rely on three general types of allegations of off-label marketing: (1) allegations 5 6 of off-label marketing by Janssen between 2009 and 2012; (2) confidential witness allegations 7 regarding off-label marketing by Assertio; and (3) a website maintained by Assertio. First, Plaintiffs allege that Janssen engaged in off-label marketing of NUCYNTA prior to 8 9 United States District Court Northern District of California Extent of Off-label Marketing April 2015, when Janssen sold the NUCYNTA franchise to Assertio. FAC ¶¶ 69-80. Plaintiffs 10 point out that the City of Chicago filed a complaint against Janssen, in which the City alleged that 11 “between 2009 and 2012, NUCYNTA and NUCYNTA ER sales representatives repeatedly 12 promoted these drugs as less addictive than other opioids.” Id. ¶ 73. In August 2015, after 13 Assertio acquired NUCYNTA from Janssen, the City of Chicago amended its complaint to name 14 Assertio as an additional defendant, but the court subsequently dismissed Assertio from the 15 litigation in November 2015. Id. ¶ 57. Plaintiffs allege that despite knowledge of the accusations 16 in this litigation, Assertio hired the same third-party sales force that promoted NUCYNTA under 17 Janssen’s ownership (Quintiles) to promote NUCYNTA on Assertio’s behalf. Id. ¶ 83. Defendants argue that the Court should not consider the allegations against Janssen, citing 18 19 cases holding that “paragraphs in a complaint that are either based on, or rely on, complaints in 20 other actions that have been dismissed, settled, or otherwise not resolved, are, as a matter of law, 21 immaterial” for the purposes of a motion to strike.4 In re Countrywide Fin. Corp. Mortg.-Backed 22 Sec. Litig., 934 F. Supp. 2d 1219, 1226 (C.D. Cal. 2013) (quoting RSM Prod. Corp. v. Fridman, 23 643 F. Supp. 2d 382, 403 (S.D.N.Y. 2009)); see also In re Connectics Corp. Sec. Litig., 542 F. 24 25 26 27 28 Supp. 2d. 996, 1005-06 (N.D. Cal. 2008) (granting motion to strike allegations based solely on SEC complaint with no “independent, reasonable investigation as required by Rule 11(b)”). But here, Defendants have not filed a motion or otherwise asked the Court to strike allegations related Federal Rule of Civil Procedure 12(f) provides that “[t]he court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter,” either sua sponte or upon a motion by either party. 9 4 1 to Janssen’s practices, nor explained why the Court should disregard those allegations in the 2 absence of such a motion. Moreover, In re Connectics Corp. Securities Litigation specifically 3 emphasized that the plaintiff there sought to “rely entirely on another complaint as the sole basis 4 for his or her allegations.” 542 F. Supp. 2d at 1005. The In re Connectics court distinguished 5 cases such as In re Cylink Securities Litigation, which permitted “a complaint filed by the SEC 6 may come into the mix of the materials considered by the court on a motion to dismiss.” 542 F. 7 8 9 10 Supp. 2d at 1005 (citing In re Cylink Sec. Litig., 178 F. Supp. 2d 1077, 1080, 1083 (N.D. Cal. 2001)). Ultimately, however, the Court need not decide whether the City of Chicago allegations are immaterial as a matter of law because they contribute at most a weak inference of off-label marketing by Assertio. The Court agrees with Defendants that the alleged conduct of a different company three 11 United States District Court Northern District of California years prior to the Class Period, without more, provides an insufficient basis to infer that Assertio 12 engaged in those same practices. See Cats v. Prot. One, Inc., No. CV99-3755DT(RCX), 2001 WL 13 14 15 16 34070630, at *15 (C.D. Cal. June 4, 2001) (“Alleged [misconduct] occurring prior to the Class Period cannot meet the heightened pleading standards of the PSLRA in the absence of specific facts showing that the practice continued during the Class Period.”). Here, Plaintiffs also note that Assertio retained the same outside sales contractor as Janssen. FAC ¶ 83. This might provide 17 some support for Plaintiffs’ theory that Assertio continued Janssen’s sales practices, had those 18 practices not already come under scrutiny. But, as Plaintiffs stress, Defendants were aware of the 19 substance of the ongoing City of Chicago litigation at the time Assertio acquired NUCYNTA, id. 20 ¶¶ 81, 172, and acknowledged the litigation in their SEC filings, id. ¶¶ 172-173. The Court finds 21 that it is not reasonable to infer that in the face of this ongoing litigation, Assertio continued the 22 same disputed off-label marketing, absent the pleading of specific facts related to Assertio’s 23 practices.5 24 25 26 27 28 Plaintifs’ citation to Webb v. Solarcity Corp., 884 F.3d 844 (9th Cir. 2018), is not to the contrary. In Webb, the Ninth Circuit stated that the district court did not err in concluding that confidential witness allegations from before the Class Period provided “little reliable insight into what occurred during the class period.” Id. at 851 n.1. But the Webb court pointed out that “[i]nformation from before the class period is relevant because it can ‘confirm what a defendant should have known during the class period.’” Id. (quoting In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001)). Here, there is no dispute that the Defendants were aware of the alleged Janssen off-label marketing. Rather, the parties contest whether any off-label marketing 10 5 1 Next, Plaintiffs attempt to plead those facts in the form of allegations from confidential 2 witnesses, whom Plaintiffs designate as Former Employees (“FE”) 1 through 4. FAC ¶¶ 85-91. 3 To satisfy the PSLRA’s pleading requirements, the FEs’ statements must satisfy two tests. First, 4 the FEs must be “described with sufficient particularity to establish their reliability and personal 5 knowledge.” Zucco Partners, 552 F.3d at 995. Second, the FEs’ statements must “themselves be 6 indicative of” the elements in question; here, falsity and materiality. Id. 7 8 9 10 11 Plaintiffs have described the FEs with sufficient particularity by providing “each witness’s job description and responsibilities.” In re Quality Sys., 865 F.3d at 1145. Because each FE was a sales representative for Assertio during at least part of the Class Period, see FAC ¶¶ 85, 87-88, 90, these descriptions “support the probability that a person in the position occupied by the source would possess the information alleged,” In re Quality Sys., 865 F.3d at 1145 (quoting In re Daou United States District Court Northern District of California Sys., Inc., 411 F.3d 1006, 1015 (9th Cir. 2005)). 12 13 Defendants argue, though, that the FEs’ allegations are too vague to establish personal knowledge that any off-label marketing took place. In particular, Defendants note – and Plaintiffs 14 do not dispute – that companies may permissibly communicate some off-label information, such 15 as in response to “unsolicited requests.” ECF No. 66 at 14. Accordingly, allegations that the FEs 16 were told by their superiors that NUCYNTA was a safer opioid, even if taken as true, do not 17 necessarily establish that any sales representatives were instructed to, or actually made, prohibited 18 off-label statements to prescribing practitioners. See In re InterMune, Inc., No. C 03-2954 SI, 19 2004 WL 1737264, at *6 (N.D. Cal. July 30, 2004) (“Plaintiffs fail to allege facts with the 20 necessary particularity to suggest that InterMune’s promotion of Actimmune went beyond what is 21 the acceptable practice of providing doctors[] with informational material to the actual promotion 22 of the drug for its off-label use.”). Many statements provided by the FEs are deficient for this 23 reason. See FAC ¶¶ 86 (“FE1 stated that the [sales] manager was very vocal about NUCYNTA 24 being a ‘safer opioid.’”), 87 (“FE 2 stated ‘We were being convinced it was a safer opioid’ that 25 was ‘the overall consensus being told to us.’”), 89 (“When asked where FE3 heard NUCYNTA 26 was safer and less euphoric, FE3 stated that they were told during sales training that NUCYNTA 27 28 by Assertio “occurred during the class period.” Id. 11 1 did not provide the same euphoria as other street-level opioids.”). None of the FEs alleges that 2 they themselves marketed NUCYNTA off-label. 3 With this distinction in mind, the Court concludes that FE3’s and FE4’s statements do not 4 allege any off-label marketing. FE3 stated that if doctors had “specific questions about abuse, we 5 did talk abuse.” Id. ¶ 89. This statement does not support an inference that FE3 and other sales 6 personnel promoted off-label use, rather than permissibly responding to unsolicited requests for 7 further information. FE4 alleges that “‘there may have been some perception’ that NUCYNTA 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 was a safer painkiller” and that FE4’s trainer “expressed that there was a ‘gray area’ when it comes to selling opioids,” but these statements do not indicate that FE4 had any personal knowledge that off-label marketing occurred. Id. ¶ 90. Construed in their most favorable light, FE2’s allegations raise an inference that some unnamed Assertio supervisors tacitly encouraged off-label marketing. FE2 alleges that “when the sales team complained about selling to neurologists, FE2’s superiors would say that ‘this is a great opportunity to introduce them to the safer opioid.’” Id. ¶ 87. At most, the Court can infer that FE2’s superiors suggested that sales personnel should rely on this talking point in selling to neurologists. FE1 is the only confidential witness who alleges observing any instances of off-label 17 marketing. FE1 states that a manager, David Sims, trained FE1 “to pushback against prescribers 18 who cited concerns writing an opioid prescription,” and that FE1 “heard Sims call NUCYNTA a 19 safer opioid to physicians.” Id. ¶ 86. FE1 further reports observing another “former Quintiles 20 sales representative who actively told physicians that NUCYNTA was a safer opioid.” Id. 21 “Taken collectively,” In re Quality Sys., 865 F.3d at 1145 (citation omitted), the FEs’ 22 statements suggest that Assertio emphasized to its sales representatives that NUCYNTA was a 23 safer opioid, but establish little direct evidence of any off-label marketing. Any inference of off- 24 label marketing is further undermined by two considerations. First, the extent of off-label 25 marketing that can be inferred is limited by the fact that many of the FEs did not work at Assertio 26 for the entire Class Period. See id. ¶¶ 85 (FE1 ended March 2016), 87 (FE2 ended July 2017), 88 27 28 12 1 (FE3 ended August 2016), 90 (FE4 ended late November/early December 2016).6 See Brodsky v. 2 Yahoo! Inc., 630 F. Supp. 2d 1104, 1115 (N.D. Cal. 2009) (“[B]ecause CW 3 and CW 5 were not 3 Yahoo! employees for most of the Class Period, the Court cannot rely on their statements to 4 support claims of false revenue reporting for the entire Class Period.”). Second, the FEs’ accounts lack the “specific[ity] in time, context, and details” that courts 5 6 7 8 9 10 11 have frequently required as indicia of reliability. Lloyd, 811 F.3d at 1208; see also Costabile v. Natus Med. Inc., 293 F. Supp. 3d 994, 1010 (N.D. Cal. 2018) (reasoning that the court could not determine the reliability of a witness account that did not “provide[] any context surrounding when, why, or how” the witness learned of information); Schaffer v. Horizon Pharma PLC, No. 16-CV-1763 (JMF), 2018 WL 481883, at *8 (S.D.N.Y. Jan. 18, 2018) (holding that where no “source indicates who, when, or how he or she was directed to market drugs in this manner, the United States District Court Northern District of California statements fall short of establishing, with the requisite degree of particularity, a company-wide 12 13 14 15 16 17 practice”). The FEs’ statements are not entirely devoid of such details, as they identify some of the individuals who supervised the FEs. See, e.g., FAC ¶¶ 86, 88. Yet they provide no details as to the critical conversations that would establish personal knowledge of off-label marketing. FE1, for instance, states that Sims and an unnamed Quintiles representative promoted NUCYNTA for off-label uses to physicians, but does not cite any specific conversation, let alone details such as when and with whom a conversation took place, or what was said. Id. ¶ 86. 18 The parties cite a litany of cases in support of their respective positions, but the most on- 19 point cases support Defendants’ view. In Gilead, for instance, confidential witnesses alleged that 20 “specific instructions were given to sales and marketing personnel to utilize off-label information 21 to push sales of” the drug in question. In re Gilead Sci. Sec. Litig. (Gilead I), No. C03-4999-MJJ, 22 2005 WL 181885, at *8 (N.D. Cal. Jan. 26, 2005). Moreover, the confidential witnesses identified 23 the particular meetings at which they received these instructions. Id. Even so, the court reasoned 24 that the confidential witnesses “only allege that [the company’s] representatives were instructed to 25 26 27 28 Defendants argue that FE1’s statements should be discounted because “it is unclear whether FE1 purports to be recounting events at Janssen or at [Assertio],” ECF No. 66 at 15, given that FE1’s employment began in October 2011, FAC ¶ 85. But FE1 is described as an employee of Assertio, with no indication that FE1 ever worked for Janssen. See id. The Court can reasonably infer that FE1’s allegations regarding the marketing of NUCYNTA pertain to events after April 2015, when Assertio acquired NUCYNTA. See id. ¶ 35. 13 6 1 engage in such activity, not that such activity actually took place.” Id. The court concluded that 2 off-label marketing occurred only because the confidential witness allegations were corroborated 3 by FDA letters specifically citing instances of off-label marketing by the company’s sales 4 representatives. Id. Here, the FEs do not provide the details of any individual meetings, nor allege that they 5 6 7 8 9 10 received specific instructions to market NUCYNTA for off-label uses. Further, Plaintiffs do not allege corroborating evidence akin to the FDA warning letters in Gilead. As discussed in greater detail below, the investigation and subpoenas on which Plaintiffs rely were directed at the marketing practices of five opioid manufacturers generally, rather than detailing specific instances of off-label marketing by Assertio personnel. See FAC ¶¶ 138, 157. In re Amgen Inc. Securities Litigation (Amgen I), 544 F. Supp. 2d 1009 (C.D. Cal. 2008), United States District Court Northern District of California 11 12 13 14 15 16 likewise cuts against Plaintiffs’ position. There, a confidential witness described in detail a “sales aid” provided by the company’s regional manager containing specific questions to ask prescribers related to off-label promotion. Id. at 1033. Other confidential witnesses also identified specific training materials and a speaker program that the company used to support off-label marketing. Id. By contrast, Plaintiffs acknowledge that Assertio omitted the alleged off-label facts “from 17 their printed training materials.” FAC ¶ 89. Contrary to Plaintiffs’ suggestion, id., the Court 18 cannot infer that improper verbal instructions were given from the absence of such instructions on 19 printed materials. 20 The Court need not determine whether these flaws render the FEs’ statements entirely 21 unreliable for the purposes of this motion because, even accepting the statements as true, Plaintiffs 22 fail to adequately plead materiality. The Court therefore assumes the truth of the FEs’ statements 23 for the purposes of this motion but declines to infer a broader company-wide practice. 24 Finally, Plaintiffs allege that Assertio operated a website “promoting the prescribing of 25 NUCYNTA based upon the premise that it was a safer, more tolerable, and less abused opioid 26 than Oxycodone,” even though those claims were not on NUCYNTA’s label. ECF No. 68 at 18; 27 see also FAC ¶ 84. Although this allegation is sparse in detail, the Court takes it as true at the 28 motion to dismiss stage. 14 1 2 website that contained some off-label claims, and one Assertio sales representative observed two 3 other representatives make unsolicited off-label claims to prescribers. The Court can infer a 4 slightly broader practice of off-label marketing from confidential witness allegations that 5 NUCYNTA’s potential for off-label uses was a point of emphasis during sales representatives’ 6 training and that Assertio retained the same sales force that had been accused of off-label 7 marketing under Janssen’s watch. 8 9 United States District Court Northern District of California In sum, the most generous reading of Plaintiffs’ complaint is that Defendants maintained a 2. Statements Regarding NUCYNTA Sales The Court next considers whether this off-label marketing renders the challenged 10 statements materially misleading. In their first category of actionable misrepresentations, 11 Plaintiffs cite Defendants’ “misleading statements about [Assertio’s] strengthening sales in spite 12 of worsening negative ‘headwinds’ and/or market conditions affecting the opioid industry.” ECF 13 No. 68 at 14-15. Plaintiffs do not dispute that these statements conveyed factually accurate 14 information about the status of NUCYNTA sales. See, e.g., FAC ¶ 117 (“During the first full year 15 after our relaunch, we delivered $274 million of total NUCYNTA net sales, an increase of 59% 16 over the final year of sales under the previous owner.”). Plaintiffs’ claim, therefore, turns on an 17 omissions theory, i.e., that Defendants were required to disclose their off-label marketing 18 campaign along with NUCYNTA sales figures. 19 The Ninth Circuit has “expressly declined to require a rule of completeness for securities 20 disclosures because ‘[n]o matter how detailed and accurate disclosure statements are, there are 21 likely to be additional details that could have been disclosed but were not.’” Police Ret. Sys. of St. 22 Louis, 759 F.3d at 1061 (alteration in original) (quoting Brody v. Transitional Hosp. Corp., 280 23 F.3d 997, 1006 (9th Cir. 2002)). Accordingly, “[t]o be actionable under the securities laws, an 24 omission must . . . affirmatively create an impression of a state of affairs that differs in a material 25 way from the one that actually exists.” Brody, 280 F.3d at 1006. 26 27 28 Plaintiffs’ failure to plead a widespread off-label marketing campaign dooms their omissions claim. In considering a similar claim, the First Circuit has cogently explained the “long chain of inferences” necessary to make the failure to discuss off-label marketing material: 15 1 First, we would have to infer that, of the 85% of Abiomed revenue due to sales of Impella products, a substantial portion is due to sales of the Impella 2.5. . . . Second, we would have to infer that, of the revenues from the Impella 2.5, a substantial portion was due to purchases for off-label use by health care professionals. . . . Third, we would have to infer that, of the revenues from off-label use, a substantial portion of that use was due to off-label marketing of the device, and, further, that the portion was so significant as to undercut the company’s projected growth figures. And fourth, we would have to infer that the resulting undercutting of the growth figures was substantial enough to have a material effect on the stock price. 2 3 4 5 United States District Court Northern District of California 6 7 Fire & Police Pension Ass’n of Colo. v. Abiomed, Inc., 778 F.3d 228, 242-43 (1st Cir. 2015). 8 Here, Plaintiffs have adequately pleaded facts necessary to support the first inference 9 because they allege that NUCYNTA comprised 62 percent of Assertio’s revenue during the Class 10 Period. FAC ¶ 10. But Plaintiffs’ theory falters at the second required inference. Plaintiffs have 11 not alleged any facts related to what portion of NUCYNTA sales “was due to purchases for off- 12 label use by health care professionals.” Abiomed, Inc., 778 F.3d at 242-43. Nor are Plaintiffs’ 13 allegations, which support an inference only that some limited amount of off-label marketing 14 occurred, enough for the Court to infer that “a substantial portion of [off-label] use was due to off- 15 label marketing.” Id.; see also Schaffer, 2018 WL 481883, at *8 (“[T]he mere fact that 16 prescriptions were written for off-label purposes . . . does not necessarily imply that Horizon was 17 actively marketing its drugs as such.”). Similarly, “[u]nder the heightened pleading standard 18 required in PSLRA cases, the Court cannot simply assume that [any] off-label marketing of 19 [NUCYNTA] necessarily resulted in increased sales of that drug.” Gilead I, 2005 WL 181885, at 20 *9 (N.D. Cal. Jan. 26, 2005). As in Gilead I, Plaintiffs have failed to “identify a single 21 prescription written for [NUCYNTA] that was allegedly generated by off-label marketing 22 activity,” and so have not “allege[d] facts to bridge this logical gap.” Id.7 Accordingly, the Court holds that this category of statements was not materially 23 24 25 26 27 28 7 In Gilead II, plaintiffs subsequently amended their complaint to include confidential witness allegations as to the percentage of sales that resulted from off-label marketing, facts regarding the proportion of off-label use, and specific examples of doctors prescribing off-label uses after “receiv[ing] unsolicited data from Defendants.” In re Gilead Scis. (Gilead II), No. C 03-4999 MJJ, 2005 WL 2649200, at *7 (N.D. Cal. Oct. 11, 2005). Nonetheless, the court concluded that these far more detailed allegations raised a “close question” as to materiality, which it ultimately did not decide because plaintiffs had failed to satisfy loss causation. Id. 16 1 2 3 3. Risk Statements Plaintiffs’ second category of statements covers SEC filings that disclosed the general risk 4 of liability from off-label marketing but did not indicate that Assertio was engaged in activities 5 that, as Plaintiffs contend, were likely to be deemed to violate FDA rules. 6 United States District Court Northern District of California misleading. A risk statement may be materially misleading if it “speaks about the risks . . . in the 7 abstract, with no indication that the risk ‘may already have come to fruition.’” Siracusano v. 8 Matrixx Initiatives, Inc., 585 F.3d 1167, 1181 (9th Cir. 2009), aff’d, 563 U.S. 27 (2011) (quoting 9 Berson, 527 F.3d at 986). For instance, Siracusano concluded that a drug manufacturer’s 10 statement that “[w]e may incur significant costs resulting from product liability claims” was 11 materially misleading where the statement “failed to disclose that a lawsuit alleging that [the 12 product] caused anosmia had already been filed and, given the finding of [university] researchers . 13 . . it was highly likely that additional suits would be filed in the future.” Id. at 1172. 14 Similarly, in Atossa Genetics, Atossa received an FDA warning letter expressing a variety 15 of concerns, including that one of Atossa’s products was misbranded, another product lacked FDA 16 clearance, and Attosa’s marketing materials were false and misleading. 868 F.3d at 791. In a 17 subsequent SEC filing, Atossa reported receiving the letter but omitted “the balance of the FDA’s 18 alleged serious concerns” regarding the need for FDA approval and misleading marketing 19 materials. Id. at 797. The court reasoned that Atossa “hid the ball” because “the omissions gave 20 the reasonable inference that the FDA had raised no concerns related” to the omitted matters, even 21 though “the FDA had raised precisely that concern.” Id. Moreover, given these specific concerns, 22 “Atossa’s general disclaimer that it could be subject to future regulatory action from ‘other 23 matters’” did not prevent the risk statement from being materially misleading. Id. 24 Here, because Plaintiffs do not adequately plead a widespread off-label marketing scheme, 25 Assertio did not materially misstate the likelihood or extent of regulatory risks. See Lloyd, 811 26 F.3d at 1207 (rejecting a similar argument that the “risk had already come to fruition” where the 27 statements gave adequate and accurate context as to the facts relevant to the risk). Plaintiffs do not 28 offer any arguments on this point independent of their widespread off-label allegations. Further, 17 United States District Court Northern District of California 1 cases such as Siracusano and Atossa Genetics involved specific manifestations of a precise risk 2 not present here. 3 The Court holds that this category of statements was also not materially misleading.8 4 B. 5 Plaintiffs’ complaint also fails to raise a strong inference of scienter. Plaintiffs rely on a Scienter 6 variety of allegations to demonstrate scienter for the Individual Defendants (Higgins, Schoeneck, 7 and Moretti). If the scienter requirement is met as to any of the Individual Defendants, it is met as 8 to Assertio because Defendants do not argue that the Individual Defendants were acting outside 9 the scope of their apparent authority. In re ChinaCast Educ. Corp. Sec. Litig., 809 F.3d 471, 476 10 (9th Cir. 2015) (“The scienter of the senior controlling officers of a corporation may be attributed 11 to the corporation itself to establish liability as a primary violator of § 10(b) and Rule 10b–5 when 12 those senior officials were acting within the scope of their apparent authority.”).9 The Court addresses each argument individually, then considers all of the relevant 13 14 allegations holistically. See Curry, 875 F.3d at 1226. 1. 15 Actual Awareness First, Plaintiffs contend that Higgins, Schoeneck, and Moretti were actually “aware that 16 17 18 19 20 21 22 23 24 25 26 27 28 8 To the extent that Defendants argue that they are not liable because off-label marketing is protected by the First Amendment, ECF No. 66 at 19-21, their cited authority does not support that proposition. Plaintiffs do not assert that the off-label marketing itself was materially misleading and therefore the basis for liability, but rather that the Defendants’ statements and omissions related to NUCYNTA sales were false and material because they did not disclose that off-label marketing was taking place. Moreover, even under the Second Circuit’s holding in United States v. Caronia, 703 F.3d 149 (2d Cir. 2012), off-label marketing exposes a company to regulatory risks because “Caronia left open the government’s ability to prove misbranding on a theory that promotional speech provides evidence that a drug is intended for a use that is not included on the drug’s FDA-approved label,” Polansky, 822 F.3d at 615 n.2 (citing Caronia, 703 F.3d at 162). Under a different set of facts, the omission of such risks could well be material. The Ninth Circuit has suggested that, in some cases, it may be “possible to raise the inference of scienter without doing so for a specific individual,” such as where “a company’s public statements were so important and so dramatically false that they would create a strong inference that at least some corporate officials knew of the falsity upon publication.” In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1063 (9th Cir. 2014) (second quoting Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 743 (9th Cir. 2008)). To the extent that Plaintiffs’ complaint suggests reliance on such a “collective scienter” theory, see FAC ¶ 215, Plaintiffs’ opposition focuses exclusively on the Individual Defendants’ scienter, making clear that Plaintiffs are not relying on collective scienter, see ECF No. 68 at 22-27. 18 9 United States District Court Northern District of California 1 [Assertio] was instructing its employees to market NUCYNTA ‘off-label,’” and thus knew that 2 omitting this information rendered their challenged statements misleading. ECF No. 68 at 18. 3 Plaintiffs’ complaint provides examples of the Individual Defendants discussing NUCYNTA as a 4 safer opioid with investors, accompanied by the caveat that Defendants could not make such 5 claims for marketing purposes. See FAC ¶¶ 177 (Schoeneck stating “I can’t make a claim around 6 that because we don’t actually have that in the label”); 179 (Higgins stating that Assertio was 7 “looking to strengthen our label”), 186 (Moretti stating that “I think that physicians feel that 8 [NUCYNTA has less potential for abuse]; however, those claims are not on the label”). These 9 statements demonstrate that Defendants were aware that off-label marketing was improper, but not 10 that such marketing occurred. Allegations related to Defendants’ “vast experience in the 11 pharmaceutical industry,” id. ¶¶ 197-200, are to the same effect. 12 Plaintiffs also rely on the same confidential witness allegations discussed above. As an 13 initial matter, Plaintiffs must “allege scienter with respect to each of the individual defendants.” 14 Or. Pub. Emps. Ret. Fund, 774 F.3d at 607. The FEs’ allegations do not mention Higgins or 15 Moretti, and so “do not permit the Court to conclude that any [FE] had personal knowledge of 16 [their] state of mind.” Shenwick v. Twitter, Inc., 282 F. Supp. 3d 1115, 1149 (N.D. Cal. 2017) 17 (finding CW allegations insufficient where “[c]ritically, none of the CWs report communicating 18 directly with” the individual defendants). 19 The complaint does contain one FE allegation related to Schoeneck. FE3, a pain sales 20 specialist at Assertio, stated that, “I heard Jim Schoeneck talk a lot. The perception of opioids? 21 You’re selling a molecule that’s not supposed to cause euphoria. You’re kind of talking out both 22 sides of your mouth. I’m selling a painkiller, but not the same as (the ones) on the street.” FAC 23 ¶ 192. It is unclear which portions of this statement are attributable to Schoeneck, rather than 24 FE3. Further, as discussed above, this confidential witness allegation lacks the “specific[ity] in 25 time, context, and details” to support its reliability. Lloyd, 811 F.3d at 1208; see also Or. Pub. 26 Emps. Ret. Fund, 774 F.3d at 607 (discounting anonymous accounts of meetings that purportedly 27 demonstrated scienter where “Plaintiffs do not provide specificity about the[] meetings”). 28 Accordingly, this allegation raises only a weak inference of scienter; nonetheless, the Court 19 1 2 3 2. Core Operations Doctrine Plaintiffs’ other arguments in support of Individual Defendants’ awareness are premised on 4 the core operations doctrine. Under the core operations doctrine, “[a]llegations regarding 5 management’s role may help satisfy the PSLRA scienter requirement in three circumstances:” 6 7 8 9 10 11 United States District Court Northern District of California considers this statement in its holistic analysis. First, the allegations may be viewed holistically, along with other allegations in the complaint, to raise a strong inference of scienter under the Tellabs standard. Second, the allegations “may independently satisfy the PSLRA where they are particular and suggest that defendants had actual access to the disputed information,” as in Daou and Oracle. Third, in rare circumstances, such allegations may be sufficient, without accompanying particularized allegations, where the nature of the relevant fact is of such prominence that it would be “absurd” to suggest that management was without knowledge of the matter. 12 Reese, 747 F.3d 557, 575–76 (9th Cir. 2014), overruled on other grounds by City of Dearborn 13 Heights, 856 F.3d at 616. 14 Plaintiffs appear to argue that Schoeneck had “actual access” based on his role overseeing 15 “the sales, marketing, and managed care functions” of Assertio, dating back to at least November 16 7, 2016. ECF No. 68 at 23 (quoting FAC ¶ 196). “As [the Ninth Circuit] has noted on more than 17 one occasion, corporate management’s general awareness of the day-to-day workings of the 18 company’s business does not establish scienter – at least absent some additional allegation of 19 specific information conveyed to management and related to the fraud.” Metzler Inv. GMBH v. 20 Corinthian Colleges, Inc., 540 F.3d 1049, 1068 (9th Cir. 2008). The vague allegation that the 21 sales and marketing functions “report[ed] directly” to Schoeneck, FAC ¶ 196, does not provide the 22 “what, where, when, and how regarding [Schoeneck’s] access to the relevant information that 23 belies fraudulent intent,” Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., No. 10-CV-03451- 24 LHK, 2012 WL 1868874, at *19 (N.D. Cal. May 22, 2012), aff’d, 759 F.3d 1051 (9th Cir. 2014); 25 see also In re Daou Sys., 411 F.3d at 1022 (“General allegations of defendants’ ‘hands-on’ 26 management style, their interaction with other officers and employees, their attendance at 27 meetings, and their receipt of unspecified weekly or monthly reports are insufficient [to establish 28 scienter].”). This flaw is further compounded by the defects in Plaintiffs’ allegations regarding 20 1 instances of off-label marketing. In other words, the Court cannot infer from Schoeneck’s role 2 that he had “actual access” to information that off-label marketing was occurring when Plaintiffs 3 have not provided enough detail as to what information existed. United States District Court Northern District of California 4 Next, Plaintiffs invoke the third use of the core operations doctrine, arguing that it would 5 be “absurd to suggest” that the Individual Defendants “were unaware of how the company 6 managed to increase prescriptions and sales” of NUCYNTA because the drug franchise comprised 7 over 60 percent of Assertio’s revenue. ECF No. 68 at 23-24. Had Plaintiffs adequately alleged 8 that the basis for NUCYNTA’s growth in sales was a systematic, widespread off-label marketing 9 claim, this argument might have merit. Cf. Berson, 527 F.3d at 988 n.5 (holding that absurdity 10 inference applied to stop-work order “on the company’s largest contract with one of its most 11 important customers”). Similarly, if the complaint supported an inference of a widespread 12 marketing campaign under Assertio’s watch, then allegations related to Defendants’ knowledge of 13 the allegations regarding Janssen and Quintiles’ prior practices, see ECF No. 68 at 22, would be 14 relevant to show that Defendants either knew of, or were willfully blind to, Assertio’s own off- 15 label marketing. But given that Plaintiffs have alleged primarily that Assertio emphasized 16 NUCYNTA’s off-label properties to its sales representatives, but only provide one vague account 17 of two representatives actually marketing off-label, it is not “absurd to suggest” that the Individual 18 Defendants were unaware that such misconduct had occurred. See Curry v. Yelp Inc., No. 14-CV- 19 03547-JST, 2015 WL 1849037, at *12 (N.D. Cal. Apr. 21, 2015). 20 Therefore, the Court concludes that Plaintiffs have not adequately alleged that Schoeneck 21 had “actual access” or that it would be absurd for the Individual Defendants not to know of the 22 alleged off-label marketing. 23 24 25 3. Financial Motives Plaintiffs contend that Defendants had financial motives to mislead investors, citing compensation tied to corporate objectives and stock options. FAC ¶¶ 205-208. 26 “A strong correlation between financial results and stock options or cash bonuses for 27 individual defendants may occasionally be compelling enough to support an inference of scienter.” 28 Zucco Partners, 552 F.3d at 1004. However, because “it is common for executive compensation, 21 1 including stock options and bonuses, to be based partly on the executive’s success in achieving 2 key corporate goals,” the Ninth Circuit has cautioned that “allegations of [such] routine corporate 3 objectives . . . are not, without more, sufficient to allege scienter; to hold otherwise would support 4 a finding of scienter for any company that seeks to enhance its business prospects.” In re Rigel 5 Pharm., Inc. Sec. Litig., 697 F.3d 869, 884 (9th Cir. 2012). United States District Court Northern District of California 6 Here, Plaintiffs argue that the “more” is that “Defendants were complicit in an overarching 7 scheme” involving multiple major opioid manufacturers, citing findings in a report from Senator 8 McCaskill’s investigation. ECF No. 68 at 24-25. These scienter allegations are not in Plaintiffs’ 9 complaint, cf. FAC ¶¶ 205-208, and therefore the Court may not consider them, see Schneider v. 10 Cal. Dep’t of Corr., 151 F.3d 1194, 1197 (9th Cir. 1998) (“In determining the propriety of a Rule 11 12(b)(6) dismissal, a court may not look beyond the complaint to a plaintiff’s moving papers, such 12 as a memorandum in opposition to a defendant’s motion to dismiss.”). Nonetheless, because the 13 FAC adequately alleges a link between Defendants’ compensation and specific corporate 14 objectives, the Court will consider Defendants’ potential financial motivations as part of the 15 holistic scienter analysis below. See In re Rigel Pharm., 697 F.3d at 884. 4. 16 Stock Sales 17 Plaintiffs assert that “while in possession of material, nonpublic information concerning 18 [Assertio’s] true business health, Moretti also sold 30,000 shares of his stock for $572,797.49.” 19 FAC ¶ 209. 20 “Although ‘unusual’ or ‘suspicious’ stock sales by corporate insiders may constitute 21 circumstantial evidence of scienter, insider trading is suspicious only when it is ‘dramatically out 22 of line with prior trading practices at times calculated to maximize the personal benefit from 23 undisclosed inside information.’” Zucco Partners, 552 F.3d at 1005 (quoting Silicon Graphics, 24 183 F.3d at 986). Whether a stock sale meets this standard turns on three factors: “(1) the amount 25 and percentage of shares sold by insiders; (2) the timing of the sales; and (3) whether the sales 26 were consistent with the insider’s prior trading history.” City of Dearborn Heights, 856 F.3d at 27 621 (quoting Zucco Partners, 552 F.3d at 1005). 28 Plaintiffs’ bald allegation of Moretti’s stock sale (or sales), without any specifics as to the 22 1 percentage of shares, the timing of the sale, or Moretti’s prior trading history, does not contribute 2 to an inference of scienter. As this court said in Curry, it “has no basis on which to conclude that 3 there exists a strong inference that these sales were out of line with prior trading practices because 4 the Complaint does not allege any information regarding the insider's prior trading practices.” 5 2015 WL 1849037 at *13; see also City of Dearborn Heights, 856 F.3d at 622 (rejecting stock sale 6 allegations that did not allege “the timing of these sales, and the prior trading history” for the 7 defendants). 5. 8 Plaintiffs further point to Schoeneck’s resignation on March 28, 2017, as evidence of 9 10 scienter. FAC ¶ 211-214.10 “[A]n employee’s resignation supports an inference of scienter only when ‘the resignation 11 United States District Court Northern District of California Resignation 12 at issue was uncharacteristic when compared to the defendant’s typical hiring and termination 13 patterns or was accompanied by suspicious circumstances.’” City of Dearborn Heights, 856 F.3d 14 at 622 (quoting Zucco Partners, 552 F.3d at 1002). Here, Plaintiffs primarily assert that Schoeneck’s departure was suspicious because he 15 16 resigned on the same day that Senator McCaskill first announced her investigation. ECF No. 68 at 17 26; FAC ¶¶ 213-214.11 Shenwick v. Twitter, on which Plaintiffs rely, is distinguishable because 18 that case involved additional evidence, beyond temporal proximity, that the alleged fraud was the 19 reason for the departures. 282 F. Supp. 3d at 1148; see also Middlesex Ret. Sys. v. Quest Software 20 Inc., 527 F. Supp. 2d 1164, 1188 (C.D. Cal. 2007) (finding a resignation suspicious where the 21 defendant “did not resign because of internal pressure, but instead resigned specifically to avoid 22 23 24 25 26 27 28 Plaintiffs’ complaint also cites the resignations and compensation packages of two nonDefendant Assertio officers between November 2016 and June 2017 as evidence of scienter. FAC ¶ 211. Because Plaintiffs do not rely on these two resignations in their opposition, cf. ECF No. 68 at 26-27, the Court does not consider them. 10 Plaintiffs also claim that Schoeneck’s departure was unusual because he received a severance package not authorized by his employment agreement and his resignation announcement “did not contain any of the typical salutary words often found in corporate statements announcing highlevel resignations.” FAC ¶¶ 211, 213. Without specific allegations as to Assertio’s “typical” practices, the Court cannot infer that these practices were “uncharacteristic.” City of Dearborn Heights, 856 F.3d at 622 (citation omitted). 23 11 1 cooperating with the Special Committee – a body created to investigate potential impropriety”). 2 Moreover, Plaintiffs have not alleged that Assertio was aware of Senator McCaskill’s 3 investigation when Schoeneck made the decision to resign, nor even that Senator McCaskill’s 4 announcement preceded Schoeneck’s resignation. Cf. FAC ¶ 211. By contrast, in In re Banc of 5 California Securities Litigation, the company itself announced the SEC investigation on the same 6 day as the Defendant’s resignation, demonstrating its awareness of that investigation. No. 7 SACV1700118AGDFMX, 2017 WL 3972456, at *8 (C.D. Cal. Sept. 6, 2017). 8 United States District Court Northern District of California 9 The proximity between Schoeneck’s resignation and Senator McCaskill’s announcement raises some possibility that the two events were connected, but this is not enough to support an 10 inference of Schoeneck’s scienter. Even assuming that the investigation was related to the alleged 11 off-label marketing and that Assertio forced Schoeneck to resign as a result, Plaintiffs “point to no 12 particularized allegation refuting the reasonable assumption” that Schoeneck was forced out 13 “simply because the errors . . . occurred on his watch or because he failed adequately to supervise 14 his [employees].” Zucco Partners, 552 F.3d at 1002 (quoting In re U.S. Aggregates, Inc. Sec. 15 Litig., 235 F. Supp. 2d 1063, 1074 (N.D. Cal. 2002)). Without such allegations, Schoeneck’s 16 resignation does not contribute to a finding of scienter. See Webb, 884 F.3d at 857. 17 6. Holistic Review 18 To recap, Plaintiffs allege no direct evidence that Moretti or Higgins knew of off-label 19 marketing. Moreover, the core operations doctrine contributes little to the analysis, given the 20 limited scope of off-label marketing that can be inferred and Plaintiffs’ boilerplate allegations of 21 Moretti’s and Higgins’s “general awareness of the day-to-day workings of the company’s 22 business.” Metzler Inv. GMBH, 540 F.3d at 1068. Considering these factors, combined with 23 Plaintiffs’ “allegations of routine corporate objectives” linked to Moretti’s and Higgins’s 24 compensation, In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d at 884, the Court concludes that 25 Plaintiffs have failed to raise a “cogent and compelling” inference of scienter as to those two 26 Defendants, Tellabs, 551 U.S. at 324. 27 28 The case for Schoeneck’s scienter is not meaningfully stronger. In addition to similar allegations of Schoeneck’s management role and compensation motivations, Plaintiffs offer one 24 1 FE’s ambiguous allegation that Schoeneck discussed NUCYNTA’s off-label uses to sales 2 representatives, and perhaps encouraged off-label promotion. Further, Schoeneck resigned on the 3 same day as the McCaskill investigation was announced, although Plaintiffs have not alleged facts 4 supporting a causal relationship between the two events. United States District Court Northern District of California 5 Viewing these allegations holistically, the Court finds that they do not overcome the 6 competing inference that the Individual Defendants were unaware that in some instances 7 NUCYNTA sales representatives crossed the line into promoting off-label uses, so as to render 8 Defendants’ statements regarding NUCYNTA sales and regulatory risk materially misleading. 9 Simply put, “Plaintiffs’ allegations reveal isolated instances of [off-label marketing], rather than 10 widespread deception, which is necessary to establish fraudulent intent or reckless ignorance 11 based on a holistic analysis.” Or. Pub. Emps. Ret. Fund, 774 F.3d at 608. 12 C. Loss Causation 13 Finally, Plaintiffs also fail to allege loss causation. The complaint identifies two categories 14 of events that Plaintiffs contend establish loss causation: (1) lowered revenue projections and (2) 15 announcements of investigatory actions by outside entities. The Court examines each in turn. 16 17 1. Lowered Revenue Projections Plaintiffs cite a series of negative disclosures regarding Assertio’s financial health, each of 18 which was followed by a drop in Assertio’s stock price. First, on November 7, 2016, Assertio 19 lowered its projected total revenue for 2016 from $480-505 million to $455-465 million, citing, 20 among other things, “worsening conditions in the opioid market.” FAC ¶ 123, 218(a). Neither the 21 press release or earnings call on that day mentioned off-label marketing; in fact, Assertio cited 22 growth in both NUCYNTA IR and NUCYNTA ER prescriptions, although shipments to 23 wholesalers declined. Id. ¶ 123-124. Next, on December 11, 2016, a market analyst firm (Piper 24 Jaffray) downgraded its projections for Assertio, stating, “it has become clear to us that 25 management, based in part on its own commentary, does not really have a new strategy in place to 26 wring significant further volume growth out of NUCYNTA ER in the face of more challenging 27 market dynamics.” Id. ¶¶ 129, 218(b). On May 17, 2017, another market analyst (Roth Capital 28 Partners) reduced its price target for Assertio stock, “based largely on a deteriorating macro 25 1 environment for opioid pain treatments.” Id. ¶ 218(d). Finally, on August 7, 2017, Assertio 2 lowered its estimates for its 2017 total revenue from $405-425 million to $395-410 million, and 3 added language to its SEC filings “to discuss worsening market conditions resulting from 4 regulatory actions, government investigations, and heightened public attention on opioid abuse.” 5 Id. ¶ 218(e); see also id. ¶ 157. United States District Court Northern District of California 6 Plaintiffs argue that the disclosures on November 7, 2016, December 11, 2016, and May 7 17, 2017, “signaled to investors that Defendants’ prior statements about Depomed’s ability to 8 weather negative headwinds in the opioid industry were misleading.” ECF No. 68 at 28. 9 Defendants respond that these announcements “do not mention improper sales practices or imply 10 that they occurred,” and instead relate to “the general worsening market conditions for opioid 11 products and the consequent effect on [Assertio’s] financial performance.” ECF No. 66 at 34. 12 Plaintiffs counter that the announcements need not directly disclose the off-label marketing, 13 because the off-label marketing proximately caused the worsening sales outlook for NUCYNTA. 14 ECF No. 68 at 27. Plaintiffs attribute these lowered revenue projections to greater “regulatory 15 scrutiny,” which they contend made prescribers “less inclined to write ‘off-label’ prescriptions.” 16 Id. at 30. Plaintiffs reasons that this sequence of events constitutes a “materialization of risk,” a 17 theory of loss causation that has been accepted by district courts within this Circuit. Id. at 28 18 (citing In re Amgen Inc. Sec. Litig. (Amgen II), No. CV072536PSGPLAX, 2014 WL 12585809, at 19 *20 (C.D. Cal. Aug. 4, 2014) (collecting cases)). 20 The Ninth Circuit has been clear that “[d]isclosure of the fraud is not a sine qua non of loss 21 causation, which may be shown even where the alleged fraud is not necessarily revealed prior to 22 the economic loss.” Mineworkers’ Pension Scheme v. First Solar Inc., 881 F.3d 750, 753 (9th Cir. 23 2018) (quoting Nuveen, 730 F.3d at 1120). Accordingly, there are an “‘infinite variety’ of 24 causation theories a plaintiff might allege to satisfy proximate cause,” id. (quoting Lloyd, 811 F.3d 25 at 1210), including that “that the stock price fell upon the revelation of an earnings miss,” where 26 the alleged fraud bears a sufficient relationship to the earnings miss, id. In Nuveen, the Ninth 27 Circuit acknowledged that other circuits had “recognize[d] loss causation where a plaintiff shows 28 that ‘misstatements and omissions concealed the price-volatility risk (or some other risk) that 26 1 materialized and played some part in diminishing the market value’ of a security,” but found it 2 unnecessary to adopt that theory in order to resolve the case. 730 F.3d at 1120 (quoting Lentell v. 3 Merrill Lynch & Co., 396 F.3d 161, 176 (2d Cir. 2005)). 4 5 to establish loss causation, because even assuming the viability of such a theory, Plaintiffs have 6 not sufficiently alleged “a causal connection” between the risks of the alleged off-label marketing 7 and the negative financial news announced on the identified disclosure dates. Dura Pharm., 544 8 U.S. at 342. The cases that Plaintiffs cite in support of their theory provide a helpful contrast. 9 United States District Court Northern District of California Here, the Court likewise need not determine whether “materialization of risk” is sufficient In Gilead, the plaintiffs alleged that Gilead’s off-label marketing “led to higher demand for 10 [the drug] Viread, which in turn inflated Gilead’s stock price.” Gilead III, 536 F.3d at 1057. The 11 FDA had publicly issued a Warning Letter condemning Gilead’s off-label marketing and ordering 12 Gilead to make corrective disclosures. Id. at 1053. Critically, the plaintiffs there alleged that the 13 Warning Letter led to a drop in sales because “[p]hysicians, now alerted to Gilead’s illegal 14 marketing efforts and to the safety problems with Viread, were less eager to prescribe it to their 15 patients” and that “[c]ompetitors invoked the letter in efforts to persuade physicians to switch from 16 Viread to their products.” Id. The Ninth Circuit held that “the complaint sufficiently alleges a 17 causal relationship between (1) the increase in sales resulting from the off-label marketing, (2) the 18 Warning Letter’s effect on Viread orders, and (3) the Warning Letter’s effect on Gilead’s stock 19 price.” Id. at 1057. 20 Similarly, in Amgen, plaintiffs alleged an extensive off-label marketing campaign and “that 21 the risk of decreased off-label sales materialized . . . when the FDA imposed a black box warning 22 on all [of the relevant drugs’] labeling, cautioning against the use of [the drugs] in certain off-label 23 settings.” Amgen II, 2014 WL 12585809, at *21. Noting that the complaint “states that the black 24 box warning ‘had the economic effect of curtailing Amgen’s off-label marketing,’” the court 25 reasoned that it adequately pleaded “a causal connection between Defendants’ misrepresentations 26 that Amgen [did not engage in off-label marketing] and the harm investors ultimately suffered as a 27 result of the FDA’s restrictions on off-label use.” Id. 28 Here, the flaw in Plaintiffs’ materialization of risk theory is that they fail to connect the 27 United States District Court Northern District of California 1 risks of the alleged off-label marketing to a subsequent stagnation or decrease in off-label 2 prescriptions underlying the negative financial news released on Plaintiffs’ loss causation dates. 3 Plaintiffs offer only a conclusory allegation that “prescribing physicians began to scale back their 4 ‘off-label’ use of NUCYNTA due to the growing ‘opioid epidemic.’” ECF No. 68 at 28. As 5 noted with respect to materiality, Plaintiffs fail to plead any specific facts related to the scale of 6 off-label marketing of NUCYNTA, its off-label prescriptions, or the curtailment of those 7 prescriptions. Nor does the content of the disclosures support Plaintiffs’ theory. Indeed, 8 Assertio’s November 7, 2016 announcement touted an “all-time monthly high of over 30,000 9 prescriptions” for NUCYNTA ER in August 2016 and stated that “[w]e continue to see 10 NUCYNTA IR prescription showing signs of growth.” FAC ¶ 124. Assertio instead attributed the 11 earnings miss for third quarter revenues to “several factors, including a disconnect between 12 prescription demand and wholesaler shipments.” Id. ¶ 123. Moreover, Plaintiffs’ cursory 13 descriptions of the subsequent downgrades by Piper Jaffray and Roth Capital Partners do not 14 provide details that would link Assertio’s lowered revenue projections to prescribers cutting back 15 off-label NUCYNTA prescriptions. Id. ¶ 129, 218(d). In Gilead, by contrast, the complaint alleged “that 75% to 95% percent of sales were 16 17 caused by off-label marketing” and an “analyst report show[ed] that Viread prescriptions 18 experienced a ‘sharp drop’” following the publication of the FDA Warning Letter. 536 F.3d at 19 1053, 1058. Here, Plaintiffs’ allegations do not give the Court a basis to infer that a reduction in 20 off-label sales was responsible for the reduced revenue guidance, rather than the negative 21 conditions in the opioid market generally, which were cited by the announcements at issue. See 22 FAC ¶¶ 123-124, 129, 218(a)-(b), (d). Plaintiffs’ theory of loss causation thus lacks the 23 particularity required by the PSLRA and Rule 9(b). See Or. Pub. Emps. Ret. Fund, 774 F.3d at 24 608. 25 26 27 28 Accordingly, Plaintiffs fail to adequately allege loss causation based on a materialization of risk theory. 2. Investigation Announcements Plaintiffs cite two separate investigation announcements as establishing loss causation. 28 1 First, Plaintiffs point to the March 28, 2017 announcement that Senator McCaskill was launching 2 an investigation into the marketing practices of the five largest opioid manufacturers, including 3 Assertio. FAC ¶¶ 138-139, 218(c). Second, Plaintiffs highlight Assertio’s August 7, 2017 4 announcement that the Maryland Attorney General and the U.S. Department of Justice had issued 5 “subpoenas related to opioid sales and marketing” to Assertio and other opioid manufacturers. Id. 6 ¶¶ 157, 217(e). United States District Court Northern District of California 7 “[T]he announcement of an investigation, standing alone and without any subsequent 8 disclosure of actual wrongdoing, does not reveal to the market the pertinent truth of anything, and 9 therefore does not qualify as a corrective disclosure.” Lloyd, 811 F.3d at 1209-10 (quoting Loos 10 v. Immersion Corp., 762 F.3d 880, 890 n.3 (9th Cir. 2014)). In other words, an investigation’s 11 revelation of “a mere ‘risk’ or ‘potential’ for fraud is insufficient to establish loss causation.” 12 Loos, 762 F.3d at 889. In Lloyd, however, the Ninth Circuit held that a plaintiff could plead loss 13 causation if the investigation announcement was accompanied by “a subsequent corrective 14 disclosure by the defendant.” 811 F.3d at 1210. The Lloyd court concluded that the following 15 sequence of events adequately pleaded loss causation: “(1) [the bank] CVB’s disclosure of [an 16 SEC] subpoena caused its stock price to drop precipitously; (2) the market and various analysts 17 perceived the subpoena to be related to CVB’s alleged misstatements about [its largest borrower] 18 Garrett’s ability to repay; (3) the market’s fears about the subpoena were confirmed by CVB’s 19 September 9 disclosure that it was writing off $34 million in Garrett loans and categorizing the 20 remainder as non-performing; and (4) the September 9 disclosure’s minimal effect on CVB’s 21 stock price indicate[d] that the earlier 22% drop reflected, at least in part, the market’s concerns 22 about the Garrett loans.” Id. at 1210-11. 23 Here, Plaintiffs first argue that the announcements of investigations are themselves 24 sufficient because they “were not isolated incidents” but involved “three investigations announced 25 over a period of five months . . . by external government agencies.” ECF No. 68 at 31. But Ninth 26 Circuit precedent rejects this approach. Loos, for instance, cautioned that “at the moment an 27 investigation is announced, the market cannot possibly know what the investigation will ultimately 28 reveal.” 762 F.3d at 890. And in Curry, the Ninth Circuit explained that “the element of loss 29 United States District Court Northern District of California 1 causation cannot be adequately made out merely by resting on a number of customer complaints 2 and asserting that where there is smoke, there must be fire.” 875 F.3d at 1225. More 3 investigations might mean more smoke, but that does not authorize the Court to speculate as to the 4 likelihood of fire, absent “an express disclosure of actual wrongdoing” within the announcement 5 of the investigation, Loos, 762 F.3d at 890 n.3, or “a subsequent corrective disclosure,” Lloyd, 811 6 F.3d at 1210. Further, as Defendants point out, the inference of fraudulent conduct raised by these 7 announcements is weakened by the fact that the investigations were directed at the opioid industry 8 generally, rather than Assertio in particular. See Or. Pub. Emps. Ret. Fund, 774 F.3d at 608 9 (declining to find loss causation based on government report that “revealed a systemic practice of 10 manipulative and deceptive recruitment practices” because it “focused on the for-profit education 11 industry as a whole, rather than” the defendants). 12 Second, Plaintiffs analogize to Lloyd, arguing that additional events “gave Plaintiffs reason 13 to believe that wrongdoing on the part of Defendants had occurred.” ECF No. 68 at 32. Plaintiffs 14 cite the additional risk warnings contained in Assertio’s August 7, 2017 Form 10-Q, but nothing in 15 the potential for “negative publicity” or “increased regulation” disclosed in that document 16 indicates that Assertio engaged in the off-label marketing that Plaintiffs alleged. ECF No. 68 at 31 17 (citing FAC ¶¶ 157-158). The form references industry-wide scrutiny and “greater public 18 awareness of the problem of opioid abuse,” but does not specifically reference Assertio’s 19 practices. See FAC ¶ 157.12 This falls far short of the subsequent corrective disclosure in Lloyd, 20 where the defendant bank announced that it was writing off $34 million in loans from its largest 21 borrower, directly confirming the market’s fears that the earlier subpoena into the bank’s loan 22 underwriting guidelines reflected “misstatements about [that particular borrower’s] ability to 23 repay.” 811 F.3d at 1210-11. Here, additional disclosures as to the general state of affairs in the 24 opioid industry do not confirm any speculation as to whether Assertio’s marketing practices were, 25 in fact, improper. 26 27 28 12 The disclosures also reveal additional lawsuits and investigations, FAC ¶ 157, but as noted above, the fact of these actions alone cannot establish loss causation. The same is true for the post-August 7, 2017 investigations cited in Plaintiffs’ opposition. ECF No. 68 at 32 n.5. 30 1 2 health emergency regarding the opioid epidemic “validate[d] investor suspicions,” ECF No. 68 at 3 32 n.5, but declaring a state of emergency as to the extent of opioid abuse does not reveal any 4 information about investigations into opioid manufacturers’ marketing practices. 5 6 United States District Court Northern District of California Plaintiffs also assert that President Trump’s October 26, 2017 announcement of a public Therefore, the Court finds that Plaintiffs also fail to allege loss causation based on the announcement of investigations. 7 D. Section 20(a) Control Person Liability 8 Section 20(a) of the Exchange Act, which forms the basis of Plaintiffs’ second cause of 9 action, extends liability to persons who directly or indirectly control a violation of the securities 10 laws. 15 U.S.C. § 78t(a). Under Section 20(a), “a defendant employee of a corporation who has 11 violated the securities laws will be jointly and severally liable to the plaintiff, as long as the 12 plaintiff demonstrates a primary violation of federal securities law and that the defendant 13 exercised actual power or control over the primary violator.” City of Dearborn Heights, 856 F.3d 14 at 623 (quoting Zucco Partners, 552 F.3d at 990). 15 A claim under Section 20(a) can survive only if the underlying predicate Exchange Act 16 violation also survives. See City of Dearborn Heights, 856 F.3d at 623. Because the Court 17 dismisses Plaintiffs’ Exchange Act claim, Plaintiffs’ second cause of action must also be 18 dismissed. CONCLUSION 19 20 21 22 23 24 25 For the foregoing reasons, the Court grants Defendants’ motion to dismiss without prejudice. Plaintiffs may file an amended complaint within 21 days. IT IS SO ORDERED. Dated: March 18, 2019 ______________________________________ JON S. TIGAR United States District Judge 26 27 28 31
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