On 4 March 2016, in Tongue v. Sanofi, the federal appellate court based in New York affirmed the dismissal of securities claims arising out of statements of opinion concerning the likelihood that a drug would be approved by the Food and Drug Administration (“FDA”). This decision is an important application of the US Supreme Court’s March 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. As discussed in a prior edition of this publication, the Court in Omnicare held that a statement of opinion is misleading, even if honestly held, if it omits information that is contrary to what a reasonable investor would assume was the basis for the stated opinion. The court in Sanofi held that Omnicare does not require a defendant to disclose every single piece of information that might go against its honestly held belief.

The plaintiffs in Sanofi held securities whose value depended on the achievement by the defendant biotechnology company of certain milestones, including FDA approval of its multiple sclerosis treatment. According to the plaintiffs, positive statements that the defendants made about the drug, including its high likelihood of receiving FDA approval, were misleading in light of their failure to disclose the FDA’s skepticism about the company’s use of a “single-blind,” rather than “double-blind” test of the drug. The court held that the omission of the FDA’s concerns did not render the defendants’ statements misleading because “Omnicare does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed.”

The court in Sanofi considered several factors in determining that the omitted information did not render the defendants’ statements misleading. First, the FDA’s concerns did not conflict with the defendants’ statements because the FDA also told the defendants that the company could overcome the FDA’s concerns if the drug exhibited an “extremely large effect” on patients. In addition, based on the instruction in Omnicare to view allegedly misleading opinions in context, the court here held that because the plaintiffs were sophisticated investors dealing in securities called contingent value rights, which would pay out preset amounts based on the company achieving certain milestones, including milestones established by the FDA, they should have known that it is common in the pharmaceutical industry for the FDA to engage in a dialogue with companies about the drugs for which they seek approval. As such, they should have known that there could initially be discrepancies between the company’s views and those of the FDA. Similarly, the court viewed the plaintiffs as being on notice of the FDA’s publicly expressed preference for double-blind trials. The court also noted the “numerous caveats” that the defendants made as to the reliability of their projections.

While Omnicare opened a new avenue of liability for expressions of opinion, the Sanofi court’s application of Omnicare takes seriously the Supreme Court’s admonition that meeting the Omnicare standard for omissions liability “is no small task for an investor.” Another notable point is that, whereas Omnicare dealt with claims under the Securities Act of 1933 (the “Securities Act”), Sanofi applied the same standard to claims under the Securities Exchange Act of 1934 (the “Exchange Act”) as well. Sanofi, however, addressed only whether the statements at issue were materially misleading, without considering what a plaintiff is required to plead in order to show fraudulent intent for statements of opinion under the Exchange Act. Ultimately, the court held that for an honestly held belief to be misleading, more is required than merely the omission of a fact that has the potential to undermine the opinion.

For more information on the Sanofi decision, please see our client note at:

http://www.shearman.com/en/newsinsights/publications/2016/03/second-circuits-first-published-opinion