On March 4, 2016, the United States Court of Appeals for the Second Circuit affirmed the District Court for the Southern District of New York in Tongue v. Sanofi, No. 15-588-CV, 2016 WL 851797 (2d Cir. Mar. 4, 2016), holding that the District Court properly dismissed the Investor Plaintiffs/Appellants’ Complaint. The Plaintiffs alleged that the Defendants, a pharmaceutical company, its predecessor, and three executives, violated §§ 10(b), 18, and 20(a) of the Securities Exchange Act of 1934, §§ 11 and 12 of the Securities Act of 1933, and state law by making misleading statements and/or omissions concerning the clinical testing of the Defendants’ drug multiple sclerosis Lemtrada.

Until 2011, predecessor defendant Genzyme Corporation was the owner of Lemtrada, a drug designed to treat MS through two annual treatment courses. At least in part because of the treatment design, Genzyme used a single-blind study in its clinical trials. In 2002, 2006, and 2010, the FDA expressed concern about the use of single-blind studies, noting that this course of action might make it difficult for Genzyme to obtain a Biologics License Application and/or a Supplemental Biologics Application. The FDA did note, however, that if Genzyme’s studies showed an extremely large effect, the FDA might accept Genzyme’s rater-blind study. The FDA allowed Genzyme to enroll patients in Phase III clinical trials.

In 2010, corporate defendant Sanofi made an effort to acquire Genzyme. Genzyme rebuffed the first offer, and Sanofi and Genzyme ultimately negotiated a deal in which investors would be compensated by a financial instrument tied to Lemtrada’s success (“contingent value rights” or “CVRs”). Shareholders eventually received $74 per share plus one CVR. The holders of CVRs were entitled to cash payouts based on the completion of milestones connected to the drug, including an FDA approval milestone. After acquiring Genzyme, Sanofi made optimistic statements concerning Lemtrada in its securities filings and on investor conference calls in 2011, 2012, and 2013.

In late 2013, the FDA announced a hearing on Lemtrada, and CVRs fell from $2.00 to $0.77. On December 30, 2013, Sanofi announced the FDA had rejected Lemtrada, and the value of the CVRs fell to $0.32 per share. In April 2014, the FDA approved Lemtrada for treatment of MS, but the deadline for the approval milestone had passed.

Two class action complaints were filed in December 2013 and later consolidated. The gravamen of both claims was that the Defendants’ optimistic statements concerning Lemtrada and the failure to disclose the FDA’s concerns about the single-blind studies artificially inflated the value of the CVRs. The Defendants moved to dismiss, arguing that: “the complaints did not allege any materially false or misleading statements, there were no sufficient allegations of scienter, and their statements were protected as forward-looking statements.” The District Court granted the motion to dismiss.

On appeal, the Plaintiffs argued, inter alia, that the Second Circuit should reconsider the District Court’s ruling under Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, ––– U.S. ––––, 135 S.Ct. 1318 (2015). The Second Circuit affirmed, finding that “even under Omnicare’sstandard, Plaintiffs have failed to allege that Defendants made materially misleading statements of opinion.” Specifically, the Second Circuit held that: (a) some of the statements at issue were not statements of opinion; (b) there was no serious conflict between the FDA’s interim concerns about single-blind studies and the Defendants’ optimism about approval; (c) sophisticated investors could not have been misled because the Defendants had been open about using single-blind studies and the FDA’s preference for double-blind studies was well-known; (d) the Defendants’ statements that they were “relaxed” or “satisfied” could not have caused a reasonable investor to infer that the FDA had not engaged in dialog with the corporations; (e) the Defendants’ statements concerning the timing of an expected decision were accurate and not misleading; and (f) the Defendants’ statements interpreting the data from clinical trials (saying the results “demonstrated a ‘strong and robust treatment effect,’ and that ‘the data are nothing short of stunning.’”) were not alleged to be irrational, unreasonable, or even ultimately wrong. In conclusion, the Court held that “[i]ssuers must be forthright with their investors, but securities law does not impose on them an obligation to disclose every piece of information in their possession. As Omnicare instructs, issuers need not disclose a piece of information merely because it cuts against their projections. Given the sophistication of the investors here, the FDA’s public preference for double-blind studies, and the absence of a conflict between Defendants’ statements and the FDA’s comments, we conclude that no reasonable investor would have been misled by Defendants’ optimistic statements regarding the approval and launch of Lemtrada.”