In In re Sanofi Securities Litigation, No. 15-588-cv, 2016 U.S. App. LEXIS 4107 (2d Cir. Mar. 4, 2016), the United States Court of Appeals for the Second Circuit affirmed the dismissal of class action complaints alleging that the defendants had made materially false or misleading statements or omissions in their registration statement. The Court examined the impact of the United States Supreme Court’s intervening decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015) (previously covered here), which held that a statement of opinion which omits material facts about the issuer’s knowledge may be misleading if the omitted facts conflict with what a reasonable investor would infer from reading the statement in context. The Second Circuit in Sanofi held that statements of opinion were not misleading under Omnicare where they omitted a fact that did not conflict with what a reasonable investor would take from the statement. The court further noted that statements of opinion are not misleading simply because they omit facts cutting the other way.

The claims at issue in Sanofi centered on statements made regarding Lemtrada, a multiple sclerosis (“MS”) drug being developed and tested by defendant Genzyme. While Lemtrada was still under review by the United States Food & Drug Administration (“FDA”), defendant Sanofi acquired Genzyme. As a result of the sale, defendants’ shareholders received, among other things, contingent value rights tied to the achievement of certain “milestones” related to the success of Lemtrada. Defendants made public statements regarding Lemtrada, its clinical results, and its potential approval by the FDA, both in SEC filings and other venues. Those statements did not disclose that the FDA had expressed concern that Lemtrada was being tested using single-blind, rather than double-blind, studies. The FDA rejected Lemtrada’s initial application referencing, among other things, concerns about the failure to use double-blind studies. The FDA ultimately approved Lemtrada for the treatment of MS, but did so only after the deadline for the Approval Milestone had passed.

Plaintiffs brought class action complaints against defendants, alleging violations of various securities laws, including Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Securities & Exchange Commission Rule 10b-5, and Section 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78t(a). Plaintiffs alleged that defendants had made false and misleading statements about Lemtrada by failing to disclose feedback received from the FDA regarding the use of single-blind studies. Plaintiffs challenged three groups of statements: (1) statements regarding the expected timing of FDA approval; (2) statements regarding the timing of Lemtrada’s launch; and (3) statements regarding Lemtrada’s trial results. Defendants moved to dismiss.

The United States District Court for the Southern District of New York granted the motion to dismiss, holding that plaintiffs had failed to allege false or materially misleading statements. As pertinent to the appeal, the court held that plaintiffs had failed to allege facts suggesting that any statements of opinion that had been made were objectively false, or that defendants did not believe the statements when they made them.

After the district court issued its opinion in this case, the United States Supreme Court decided Omnicare. Omnicare refined the Second Circuit’s standard for analyzing a statement of opinion is materially misleading. Under Omnicare, sincerely held opinions may be actionable if the speaker omits information, the omission of which renders the statement misleading to a reasonable investor. Under this new standard, the core inquiry is whether the omitted facts would conflict with what a reasonable investor would take from the statement itself.

In Sanofi, the Second Circuit affirmed, emphasizing two points from Omnicare. First, in order for a statement of opinion to be misleading, it must conflict with what a reasonable investor would take from the statement itself. Applying this principle to statements regarding the timing of FDA approval, the court found that Defendants’ statements were not misleading. Though the FDA had made preliminary statements expressing concern about the use of single-blind testing, other statements made by the FDA indicated that the concern could be overcome. The omitted information thus did not conflict with the optimistic opinion. The court noted that context was also important to this determination. Here, plaintiffs were sophisticated investors who were familiar with the pharmaceutical industry. They would have expected the FDA to discuss the sufficiency of the clinical trials with defendants, and would have considered the caveats included in defendants’ written statements. That the statement of opinion ultimately proved incorrect did not render it misleading.

Second, the Court emphasized that a statement of opinion is not necessarily misleading when an issuer knows, but fails to disclose, a fact cutting the other way. Issuers are required to make statements that fairly align with the information in their possession but are not required to disclose facts that potentially undermine that opinion. Accordingly, the Court held that defendants’ statements were not misleading simply because they had not disclosed facts that tended to cut against their opinion. The Court held this was particularly true given plaintiffs’ familiarity with the drug approval process.

The Second Circuit also applied these principles to two other groups of statements. The Court held that defendants’ statements regarding the timing of Lemtrada’s launch were generalized statements of subjective optimism or confidence. Such statements were not actionable both because they did not conflict with the information available to the defendants and because no reasonable investor would have inferred that statements of confidence meant the FDA was not discussing potential deficiencies in the testing protocol with defendants. The Court similarly held that defendants’ statements that Lemtrada demonstrated a strong treatment effect in trials were not actionable, because plaintiffs failed to show a relationship between the omitted information and the statements, and failed to demonstrate any conflict between the two. The Court noted that the defendants’ statements were not misleading simply because the FDA disagreed with defendants’ interpretation of the data.

Sanofi provides useful; guidance as to how courts will interpret and apply Omnicare. Although issuers may be held liable for statements of opinion that omit facts which conflict with what a reasonable investor would take from their statement, they may not be held liable simply because they did not disclose a fact which merely cut the other way.