In Ganem v. InVivo Therapeutics Holdings Corp., 845 F.3d 447 (1st Cir. Jan. 9, 2017), the First Circuit affirmed a District of Massachusetts decision dismissing claims against InVivo Therapeutics Holdings Corp., a biotechnology company, and its former CEO, Frank Reynolds. The First Circuit held that InVivo could not be liable for its projections about the start and end dates of a clinical study, because the plaintiff failed to adequately allege that these statements were rendered materially misleading by the nondisclosure of conditions imposed on the study by the FDA. Having found that the complaint did not support a Section 10(b) or Rule 10b-5 claim against InVivo, the First Circuit held that the plaintiff could not pursue a control person claim against Reynolds.

In early March 2013, InVivo issued its Form 10-K for 2012, in which it stated that its “Lead Product Under Development” was a device called “biopolymer scaffolding,” which was designed to prevent further harm to patients who had already suffered a spinal injury. The annual report indicated that before InVivo could market the device in the U.S., it would have to obtain an Investigational Device Exception (IDE) from the FDA, which would allow it to conduct necessary human clinical trials. Id. at 450.

On March 29, 2013, the FDA sent InVivo a letter indicating that its application for an IDE had been “approved with conditions.” The letter said that InVivo could begin the study immediately with a single human subject, but that that InVivo would need to meet a set of 11 conditions in 45 days and any additional subjects could only be enrolled in the study in five stages over a minimum period of 15 months. The FDA letter also included eight recommended modifications to the study’s design. Id. at *451.

On April 5, the week after receiving the FDA letter, InVivo issued a press release stating that the FDA had approved its IDE application, and indicating that the company “intends to commence a … clinical study in the next few months.” The April 5 release also quoted Reynolds as saying, “we expect to have all data [from the completed study] to the FDA by the end of 2014.” On April 8, the first trading day after InVivo issued this release, its stock price rose from $2.85 to $3.19 on “relatively high” trading volume. Id. at *451-52.

On May 9, InVivo issued another press release, indicating that the company “expects to commence the [study] in mid-2013 and submit data to the FDA by the end of 2014.” There was no allegation that the May 9 release led to an increase in InVivo’s stock price. Id. at 452-53.

Finally, on August 27, InVivo issued another press release entitled, “InVivo Therapeutics Updates Clinical Plan.” This release stated that the company “now expects that, based on the judgment of new management, it will enroll the first patient in [the study] during the first quarter of 2014,” and that additional patients would be enrolled over a period of 21 months after the enrollment of the first. Between August 23, when InVivo’s stock had begun to trade at an unusually high volume, and August 28, the day after the issuance of the “update” release, InVivo’s stock price fell from $4.00 to $2.07. Id. at *453.

The plaintiff in the Ganem litigation sued InVivo and Reynolds on behalf of a putative class consisting of all persons and entities who bought InVivo stock between April 5 and August 26, 2013—that is, all purchasers between the date when InVivo announced it had obtained approval to conduct the study, and the date when it revised the study timeline. The complaint asserted that InVivo and Reynolds had violated Section 10(b) and Rule 10b-5 by making misleading statements about the timing of the study in the April 5 and May 9 press releases. The plaintiff’s basic theory was that the projections in these releases were materially misleading because InVivo had failed to reveal that the FDA’s approval was conditional; that InVivo would need to conduct the study in five stages; and that the FDA had recommended modifications to the study design. Id. at *453-55.

The district court dismissed the complaint, finding that the plaintiff had failed to allege material misrepresentations or scienter to support the first claim. On appeal, the First Circuit considered only whether the plaintiff had pled an actionable misrepresentation—a question that disposed of the entire complaint when answered in the negative. Id. at *454. Notably, although the challenged statements were forward-looking, the First Circuit did not apply the Reform Act’s safe harbor for forward-looking statements, finding that “the absence of a material misrepresentation or omission is determinative.” Id. at 454 n. 5.

Regarding InVivo’s statements in the challenged releases that it expected to begin the study “in the next few months” and in “mid-2013,” the First Circuit held that these projections were not materially misleading because there was nothing in the FDA approval letter that would have prevented InVivo from initiating the study on this schedule. Although the FDA had required, for example, that InVivo meet a set of conditions within 45 days, the plaintiff had alleged “no facts suggesting that InVivo would fail to meet that deadline.” Id. at 456. Likewise, the First Circuit found that InVivo could conceivably have completed the study and submitted data to the FDA within the timeline it offered in these releases (i.e., “by the end of 2014”) while complying with all of the requirements in the FDA letter, including the stipulation that the study must have five stages to be completed over a minimum of 15 months. Id. at *456-57.

Given that the FDA’s approval letter was not inconsistent with InVivo’s projections, the First Circuit concluded that the plaintiff was left “only with the inference that because, in retrospect, the [study] lagged significantly behind the proposed timeline, the timeline must always have been impossible to achieve.” Id. at *457. The court noted, however, that “fraud in the hindsight does not satisfy the pleading requirements in a securities fraud case,” and although “’greater clairvoyance’ might have led InVivo to propose a more conservative timeline [for its study], ‘failure to make such perceptions does not constitute fraud.’” Id. (quoting Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978)).