The United States Court of Appeals for the Third Circuit (“Third Circuit”) recently vacated the dismissal of a securities fraud class action alleging that a pharmaceutical company, Pharmacia, Inc., made materially false statements about a clinical study of a popular anti-inflammatory medication. Alaska Elec. Pension Fund v. Pharmacia Corp., 2009 WL 213095 (3d Cir. 2009). The United States District Court for the District of New Jersey (the “District Court”) previously dismissed the class action based on the running of the statute of limitations.
The case involves a group of investors (collectively, the “Plaintiffs”) alleging that Pharmacia, Inc. and its acquirer, Pfizer, Inc., (collectively, the “Defendants”) violated §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 by making, with scienter, materially false statements about a clinical study of Celebrex. Celebrex is a popular anti-inflammatory medication prescribed for arthritis that purportedly caused fewer gastrointestinal (“GI”) side-effects than other less costly nonsteroidal anti-inflammatory drugs (“NSAIDs”). To prove this contention, the Defendants undertook a long-term clinical study of Celebrex’s effect on the GI system (Celecoxib Long-Term Arthritis Safety Study, or the “CLASS study”). The Defendants were allegedly disappointed with the results of the 13-month CLASS study because Celebrex did not show the desired reduction in GI side-effects as compared to the other NSAIDs. Thereafter, the Plaintiffs contend that the Defendants attempted to prevent a decrease in sales of Celebrex and a resultant decrease in stock price by distorting the results of the CLASS study. To this end, Plaintiffs allege that the Defendants only released results from the first six months of the CLASS study that demonstrated the desired reduction in GI side-effects.
Despite these alleged distortions in the CLASS study, the Defendants were unsuccessful in promoting Celebrex as an anti-inflammatory medication with fewer GI side-effects. In particular, the Food and Drug Administration (“FDA”) denied the Defendants’ request to market Celebrex without the GI warning label required for other NSAIDs. Even after the FDA denial, the Plaintiffs allege that the Defendants continued to promote Celebrex as an anti-inflammatory medication with fewer GI side-effects, and continued to assert their belief that the label change was still feasible. However, several sources began to question the Defendants’ propriety in promoting Celebrex based on the truncated version of the CLASS study. Throughout this time period, the price of Pharmacia Inc.’s stock decline.
On April 7, 2003, the first securities fraud class action complaint was filed. Defendants filed a motion to dismiss requesting that the District Court shorten the class period by more than a year. The District Court granted this motion, finding that investors could not have reasonably relied on the Defendants’ alleged misrepresentations after February 6, 2001, the date that the FDA published staff reports commenting on its denial of the revision to Celebrex’s label. Specifically, the District Court noted that such documents contained a negative analysis of the CLASS study and that such information was now public knowledge. Subsequently, Defendants moved for summary judgment on statute of limitations grounds, asserting that the Plaintiffs must have been on inquiry notice of the possible fraud claims as of February 6, 2001. Thus, the Defendants’ argued that the two year statute of limitations for § 10(b) claims barred the Plaintiffs’ claims because the first securities fraud class action complaint was filed on April 7, 2003. The District Court agreed, and granted Defendants’ motion for summary judgment.
The Third Circuit vacated the District Court’s decision on both the determination of the shorter class period and the running of the statute of limitations. The Third Circuit stated that the running of the statute of limitations for § 10(b) claims begins when an investor has inquiry notice of possible fraud. Inquiry notice of possible fraud requires that a reasonable investor of ordinary intelligence would have discovered the information demonstrating possible liability and would recognize it as “storm warnings of culpable activity.” After an examination of the totality of the evidence, the Third Circuit disagreed with the District Court’s analysis that the Plaintiffs had such inquiry notice of possible fraud claims as of February 2001. As such, the Third Circuit found that the District Court erred in (i) terminating the class period in February 2001 and (ii) determining the statute of limitations began to run in February 2001. As such, the Third Circuit vacated such decisions and remanded the case to the District Court for further proceedings.