On May 7, 2019, the United States Court of Appeals for the Second Circuit summarily affirmed the judgment by Judge Edgardo Ramos of the United States District Court for the Southern District of New York granting defendants’ motion to dismiss in a putative securities class action. In re Express Scripts Holdings Co. Securities Litigation No. 18-cv-1850 (2d Cir. May 7, 2019). Plaintiffs alleged that defendants—a pharmacy benefit manager (“the Company”) and certain of its officers—violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) by making materially false or misleading statements in connection with the purchase or sale of securities. As discussed in our prior post, the District Court granted defendants’ motion to dismiss, finding that plaintiffs did not adequately plead that defendants made any misleading statements or that defendants acted with the requisite scienter. On appeal, plaintiffs argued that the District Court incorrectly held that the Amended Complaint failed to adequately allege that defendants made materially false and misleading statements and omission and acted with scienter. The Second Circuit affirmed in a summary order. Summary orders do not have binding precedential effect.

The Company entered into a ten-year agreement with a major insurance company to serve as its exclusive pharmacy benefits manager, which was subject to periodic pricing reviews and could be renewed at the end of the ten-year term. Plaintiffs allege that defendants “materially misrepresented” and “failed to disclose the true state” of the Company’s “relationship and negotiations” with the insurance company, and that the Company “misled investors by amortizing the [a]greement over 15 years, rather than 10 years,” when it knew the agreement would not be renewed. Plaintiffs cited the following four statements by defendants as being materially false or misleading: (i) an officer describing the relationship between the Company and the insurance company as “great,” “very, very solid,” and “business as usual;” (ii) an officer stating that the Company “really enjoys” its relationship with the insurance company and that it is a “two-way street;” (iii) an officer stating that the Company was “currently in discussions with [the insurance company] regarding the periodic pricing provisions of the agreement” and “excited to continue productive discussions,” which were “very early on;” and (iv) an SEC filing by the Company representing that it was actively engaged in good-faith discussions with the insurer concerning the periodic pricing review. According to the Second Circuit, the statements by the officers were opinions and “expressions of puffery” and as such were not misleading. The Court emphasized that the Company had made efforts to negotiate and had attempted to resolve disputes between the parties, and the Company’s statements merely expressed optimism about the process and did not become misleading just because it did not turn out as planned. Indeed, the Second Circuit noted that the Company had in fact warned investors that the negotiations could be unsuccessful and that the agreement might not be renewed. Accordingly, the Second Circuit found that “no reasonable investor could have found the statements, in light of the overall context, to be false, misleading, or incomplete.”

The Second Circuit next considered plaintiffs’ allegation that the Company misleadingly amortized the ten-year agreement over a fifteen-year period when it knew that there was a remote possibility that the agreement would actually be renewed. While agreeing that the Company’s expectations were “overly optimistic,” the Second Circuit found that these actions did not demonstrate that the Company “overvalued” the agreement. Furthermore, the Second Circuit found that defendants did not have a duty to disclose the allegedly troubled relationship between the parties. Citing to the Second Circuit’s holding in In re Vivendi, S.A. Sec. Litig., 837 F.3d 223, 239 (2d Cir. 2016), the Court noted that a “pure omission is actionable under securities laws only when the corporation is subject to a duty to disclose the omitted facts, [a]nd in and of themselves, [Section] 10(b) and Rule 10b-5 do not create an affirmative duty to disclose any and all material information.” Because discussions between the parties were ongoing, the Court found that defendants’ “lack of clairvoyance . . . does not constitute securities fraud.”

Turning to the issue of scienter, the Second Circuit agreed with the District Court’s holding that plaintiffs failed to allege that defendants had an intent to deceive or misrepresent the relationship to the public. The Second Circuit noted that while scienter based on conscious misbehavior or reckless conduct may be established with circumstantial evidence that defendants knew or had access to information suggesting that their public statements were not accurate, the Second Circuit has “limited the scope of securities fraud liability” on such a basis and liability would not be found if public statements were consistent with information that was “available at the time.” The Court found that defendants “could not have known that the negotiations with [the insurance company] would ultimately fail, especially considering the fact that the first periodic pricing review was successful even though it took ‘approximately a year,’ was ‘combative,’ and led [the insurance company] to ‘raise[] the possibility of litigation’ to resolve the contractual dispute.” According to the Court, the “fact that [d]efendants’ optimism ‘turned out to be unwarranted is not circumstantial evidence of conscious fraudulent behavior or recklessness.’”

Finding plaintiffs’ remaining arguments without merit, the Second Circuit affirmed the District Court’s judgment dismissing the claims with prejudice against defendants.

In re Express Scripts Holdings Co. Securities Litigation