A plaintiff files a complaint in federal court that cites or refers to documents — newspaper articles, blog posts, U.S. Securities and Exchange Commission filings, agency reports, press releases, and more — but does not attach any of these documents as exhibits to the filed complaint. If the defendant submits copies of the referenced documents with its motion to dismiss under Rule 12(b)(6), may the district court rely on those documents as a basis for dismissal without converting the motion to a motion for summary judgment?
The Ninth Circuit took up this subject in Khoja v. Orexigen Therapeutics Inc. (filed Aug. 13, 2018), after perceiving a need to clarify “when and how” a district court should consider documents that a plaintiff does not file with its complaint. The court’s opinion expresses unmistakable hostility to the practice of relying on documents incorporated into the complaint by reference and, in the process, breaks new ground. The message for defendants is this: Limit the number of documents you submit with your Rule 12(b)(6) motion and provide a substantial justification for each one. And then prepare to litigate the inclusion of any and all of them.
Khoja is a securities fraud class action against a biotechnology firm, Orexigen, and three of its executive officers. The plaintiff alleged that Orexigen and its executives caused the dissemination of interim clinical trial data without disclosing that the data were statistically unreliable. The complaint referenced and relied on numerous documents, the publication of which allegedly caused the price of Orexigen’s publicly traded shares to rise and fall. The defendants moved to dismiss under Rule 12(b)(6) and submitted 22 documents with their motion. The district court concluded that it could consider 21 of them, and dismissed the complaint.
In its detailed opinion, the district court reviewed then-existing Ninth Circuit case law, including United States v. Ritchie — a case on which the panel would subsequently rely in reversing — and held that most of the exhibits were incorporated by reference because they were “explicitly referenced and relied on” in the consolidated complaint and the plaintiff did not contest their authenticity. This reasoning was consistent with Ritchie, which had stated that a document may be incorporated into a complaint if the plaintiff “refers extensively to the document” but did not hold that “extensive” reference was a condition precedent to incorporation.
In its opinion reversing the district court, the Ninth Circuit panel declared war on what it called the “incorporation-by-reference” doctrine. The court stated that it had detected a “concerning pattern in securities cases,” i.e., “exploiting” incorporated documents to defeat a complaint at the pleadings stage. The court warned against “unscrupulous” overuse of extrinsic documents to resolve disputed facts, and asserted that the risk of premature dismissal was particularly acute in securities fraud matters. According to the court, if defendants are able to present “their own version of facts” by way of incorporated or judicially noticeable documents, “it becomes nearly impossible for even the most aggrieved plaintiff” to state a plausible claim. The court also expressed concern that such documents “can easily topple otherwise cognizable claims.”
Having stated that its goal was to remedy the “undermining of usual pleading burdens,” the court went on to review three documents of which the district court took judicial notice and 15 documents that the district court found to be incorporated into the complaint by reference. The court noted that the source of the district court’s authority to take judicial notice is Rule 201 of the Federal Rules of Evidence. But it did not identify any rule or statute as the source of a court’s authority to determine that a complaint incorporates documents by reference — observing only that “incorporation by reference” is a “judicially created doctrine.” This observation led the court to rely on language from Ritchie instead of construing the text and intent of any relevant rules. But therein lies an initial conundrum: Two federal rules are relevant to the district court’s consideration of documents when deciding a motion to dismiss under Rule 12.
First, Rule 10(c) provides that a copy of a “written instrument” that is an exhibit to the complaint “is part of the pleading for all purposes.” Thus, the rule makes clear that a plaintiff may attach written instruments to the complaint and that courts may consider them for all purposes, including when ruling on a motion directed to the sufficiency of the pleadings.
Second, Rule 12(d) provides that a district court may not consider “matters outside the pleadings” on a motion to dismiss unless it converts the motion to a motion for summary judgment. For documents not attached to the filed complaint as an exhibit (which Rule 10(c) addresses), the interpretative question is whether the document is “outside the pleadings.” Courts typically have analyzed this question in terms of whether the plaintiff had notice that its complaint made the document part of the pleading. (A leading example is the Second Circuit’s 1991 decision in Cortec Industries.) Courts have held that a plaintiff has notice of a document when its complaint explicitly names or cites the document or, alternatively, when the complaint relies on the document as a basis for the plaintiff’s claims.
Instead of addressing the issue of whether a plaintiff had notice that its complaint made any particular document part of the pleading, the Ninth Circuit ruled that courts must determine whether the complaint referred “extensively” to the document or the document formed the basis of the plaintiff’s claim. This “extensive reference” requirement is not found in Rule 10(c) or Rule 12(d), however, and it was not determinative in Ritchie either.
But under Khoja, a “mere mention” of a document — even if explicitly incorporated by citation or URL — does not make the document part of the pleadings such that a district court may consider the fact of its publication under Rule 12(b)(6). The court concluded in Khoja that a quotation was not sufficiently “extensive” because it comprised only a “few lines” in a footnote. On the other hand, a “blog post” quotation that occupied “nearly a page and a half” of the complaint was “extensive” and the entire blog post was properly deemed part of the pleadings, even though Khoja did not base his claims on the blog post.
The Ninth Circuit’s “extensive-reference” legal standard will likely invite plaintiffs to cite and (briefly) quote newspaper articles, blogs, websites and other links to buttress their claims. Even though these plaintiffs will have conceded both notice and the fact of publication by citing to the document, defendants arguably would not be able to rely on the publication of the document’s contents (as distinguished from whether any facts asserted in the published document are true) on a motion to dismiss. At a minimum, the parties would be left to litigate whether the references were “extensive” enough to warrant consideration, at least in cases where it is not obvious that the plaintiff based its claims on the document at issue.
In the litigation that will ensue in the wake of Khoja, the “extensive-reference” standard may well raise more questions than it answers. Does a quotation refer extensively to a document if the quotation exceeds 140 characters? Or is the extensive-reference standard based on the percentage of words in the complaint that the quotation consumes? Does the content of the reference matter? Does the type of referenced document affect the analysis — for example, should courts treat websites identified by URLs the same as they treat traditional print media? Ultimately, does an “extensive-reference” standard secure the just, speedy and inexpensive determination of actions and proceedings?
The Ninth Circuit panel concluded that it needed to address “overuse” of documents incorporated by reference. But the cure may be worse than the disease. If a plaintiff concedes in its complaint that a document has been published and the fact of publication is relevant, as it often is in securities fraud, defamation and other cases, then courts advance rather than hinder substantial justice by considering those documents at the pleading stage. The “risk” that a plaintiff may be unable to state a claim is not problematic if the plaintiff made documents part of the pleading and those documents — by the conceded fact of their publication — show that the pleading is meritless. The same could be said for consideration of the entire content of the quoted document in considering the complaint’s substance. Why should the court be forced to turn a blind eye to the published content of a document incorporated into and made part of a pleading?
For now, of course, the “extensive-reference” standard is the law in the Ninth Circuit. For plaintiffs, the lesson is to cite documents freely but refrain from quoting them extensively in the complaint. For defendants, the lesson is to pick battles carefully, rely on judicial notice when possible, and submit documents incorporated by reference only when the benefit of submitting those documents outweighs the cost of extensive litigation over whether the complaint refers to them extensively.