In In re Rigel Pharmaceuticals, Inc. Securities Litigation, No. 10-17619, 2012 WL 3858112 (9th Cir. Sept. 6, 2012), the United States Court of Appeals for the Ninth Circuit held that disagreements between plaintiffs and defendants over statistical methodology and study design are insufficient to allege a materially false statement for purposes of pleading a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The Ninth Circuit held that merely because the statistical methodology chosen — and disclosed — by the defendant may not have been the best or most acceptable methodology, use of such an allegedly less-than-optimal methodology does not render statements about the results of the methodology false or misleading for purposes of stating a claim. This is a decision of first impression for the Ninth Circuit.
Defendant Rigel Pharmaceuticals, Inc. (“Rigel”) is a clinical-stage drug development company that discovers and develops novel, small-molecule drugs for the treatment of inflammatory and autoimmune diseases, certain cancers and other diseases. One of those drugs is R788, which Rigel was developing to treat and stop the progression of rheumatoid arthritis. Rigel conducted a Phase IIa clinical trial to evaluate the safety and preliminary clinical efficacy of R788 in patients who were suffering from active rheumatoid arthritis despite therapy with methotrexate.
Plaintiffs, a class of purchasers of Rigel stock, brought a securities fraud action against Rigel and its senior management alleging that the results of Riger’s Phase IIa clinical trials of drug R788 were “false” because they included “statistically ‘false p-values (in clinical trials, p-values usually are used to determine the statistical significance of the results)’” and inaccurate and improper statistical analyses. Plaintiffs also alleged that Rigel should have disclosed more information concerning side effects on the day of the initial press release because the omission of some information related to side effects made the initial statements misleading. The complaint focused on the alleged statements by Rigel and other individuals concerning the results of the R788 clinical drug trial and alleged statements about partnership prospects for Rigel.
The crux of plaintiffs’ allegations of “falsity” was their contention that defendants should have used their chosen statistical methodology rather than the methodology defendants actually used. Plaintiffs alleged that using their proposed statistical methodology would have resulted in different p-values and that these newly calculated p-values were not statistically significant. Therefore, plaintiffs argued, defendants’ statistical results were “false.” Plaintiffs did not allege that defendants inaccurately reported the results of their own statistical analysis. Nor did plaintiffs allege that defendants had chosen or changed their statistical methodology after seeing the unblinded raw data from the clinical trial.
The United States District Court for the Northern District of California dismissed plaintiffs’ Section 10(b) and Rule 10b-5 claims on the ground that disagreements over statistical methodology and study design are insufficient to allege a materially false statement. The district court also held that plaintiffs failed to allege scienter. Plaintiffs appealed.
The Ninth Circuit affirmed. The Court held that in order to allege falsity, a plaintiff must plead facts explaining why the difference between the defendants’ statements and what plaintiffs believe was the truth “is not merely the difference between two permissible judgments, but rather the result of a falsehood.” Because plaintiffs did not allege that defendants misrepresented their own statistical methodology, analysis and conclusions, but instead only criticized the statistical methodology employed by defendants, the Court held that plaintiffs did not adequately plead falsity.
Plaintiffs also contended that the district court erred when it ruled that they failed adequately to plead falsity with respect to defendants’ initial statements about certain safety-related results from the clinical trial, arguing that defendants should have disclosed more information about side effects in the initial press release. The Ninth Circuit, however, held that the press release clearly identified its table of results for certain side effects as “key safety results,” not “all safety results” or even just “safety results.” Thus, the Ninth Circuit held, defendants never claimed that these were all of the safety results or that these results included every occurrence of every possible side effect. Accordingly, the Ninth Circuit affirmed the district court’s holding that plaintiffs did not adequately allege that the statements related to possible side effects were false or misleading.
Neither the United States Supreme Court nor the Ninth Circuit had addressed the question of whether statements concerning statistical results of a clinical trial may be considered false or misleading under Section 10(b) and Rule 10b-5 based upon the assertion that the statistical methodology that produced those results was not the best or most acceptable methodology. The Ninth Circuit’s decision here confirms that the courts will not impute an implied representation or warranty that a statistical methodology chosen and disclosed by the issuer is necessarily the best or most acceptable, and is consistent with district court decisions that have addressed the issue.