On March 28, 2018, Judge J. Paul Oetken of the United States District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action against Mylan N.V. and several of its officers asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 1 of the Israeli Securities Law of 1968. In re Mylan N.V. Securities Litigation, 16 Civ. 7926 (JPO) (S.D.N.Y. Mar. 28, 2018). Plaintiffs alleged that Mylan (which is dual listed on NASDAQ and the Tel Aviv Stock Exchange) misclassified its drug EpiPen for purposes of Medicaid rebates; entered into anticompetitive agreements to inflate drug prices; and made materially misleading statements to investors about its conduct. While the Court dismissed the Israeli securities law claims “in the interests of international comity,” the Court found that most of the Exchange Act claims were adequately pleaded.
Plaintiffs’ allegations fell into six general categories: statements of Mylan’s income; statements explaining the sources of Mylan’s income; statements describing the market in which Mylan sold its products; statements concerning Medicaid rebate rates; statements concerning the complexity and regulatory risk associated with calculating Medicaid rebate rates; and statements about Mylan’s code of conduct and business ethics. The complaint alleged that Mylan, having made partial disclosures on these subjects, had a duty to make additional disclosures. The Court considered whether a reasonable investor could be misled by each set of statements, and held statements about the complexity of rebate calculations were non-actionable statements of opinion, slip op. at 17, and statements related to Mylan’s code of conduct and business ethics were mere puffery, id. at 20.
With regard to other categories of statements, however, the Court held a reasonable investor could be misled. For example, the Court stated that certain of Mylan’s public filings explaining its income put the sources of its income at issue; in that regard, attributing EpiPen’s strength to “favorable pricing and volume” may have been misleading without also disclosing that the EpiPen’s strength was due to anticompetitive agreements and knowingly miscalculated Medicaid rebates. Id. at 11-12. Relatedly, the Court held that certain Mylan statements regarding the risks that “a governmental authority may take a . . . contrary” position and that it “could [be] subject[ed] . . . to investigation” regarding rebate rates were potentially misleading in that they suggested that such events had not yet occurred, whereas plaintiffs plausibly alleged that defendants were aware at the time that the government disputed Mylan’s rebate calculations. Id. at 19.
The Court also held plaintiffs adequately pleaded scienter for various categories of alleged misstatements. While certain of plaintiffs’ claims did not require that defendants actually engaged in illegal conduct, the Court noted that allegations regarding rebate misclassifications required showing illegal conduct and a strong inference of scienter as to such conduct. The Court found these elements adequately pleaded because plaintiffs alleged with particularity that the government had “repeatedly informed Mylan that Mylan was misclassifying the EpiPen.” Id. at 25. While noting that government investigations generally do not demonstrate scienter, the Court emphasized that the communications reflected a final determination by the government that Mylan had misclassified EpiPen. Id. And the Court held that plaintiffs’ other pieces of circumstantial evidence bolstered an inference of scienter, such as: the individual defendants’ positions at the company, the importance of EpiPen to Mylan’s bottom line, and defendants’ SOX certifications. Id. at 26. In contrast, the Court held that allegations regarding anticompetitive agreements Mylan allegedly entered into regarding EpiPen were inadequately pleaded, both because plaintiffs failed to plausibly allege that these agreements violated antitrust laws, and because plaintiffs failed to plead scienter with particularity as to any defendant. Id. at 27-30.
The Court, however, declined to exercise supplemental jurisdiction over plaintiffs’ claims under Israeli law, for two reasons: (i) the claims raised a complex issue of foreign law, namely, whether Israeli courts would apply U.S. or Israeli law to dual-listed companies like Mylan, and (ii) exceptional circumstances, namely, two separate class actions were already pending in Israeli courts based on allegations similar to those in plaintiffs’ complaint. The Court concluded that, “[i]n the interests of international comity, this court hesitates to impinge on Israeli courts’ ability to adjudicate the claims of their own citizens under their own securities laws—even if Israel has chosen, as a matter of Israeli law, to apply U.S. securities law.” Id. at 39.
This ruling underscores that disclosures about the sources of a company’s revenue (as opposed to disclosures limited to the amount of a company’s revenue) can subject the company to securities law claims challenging whether the company adequately disclosed material facts potentially affecting those revenues.