On August 6, 2019, Judge Katherine S. Hayden of the United States District Court for the District of New Jersey denied a motion to dismiss a putative securities class action asserting claims under Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, and Rules 10b-5 and 14a-9 promulgated thereunder. In re Allergan Generic Drug Pricing Sec. Litig., No. 16- CV-9449, 2019 WL 3562134 (D.N.J. Aug. 6, 2019). Plaintiffs alleged that a pharmaceutical company and several of its executives participated in a price-fixing conspiracy that caused the prices of six generic drugs sold by the company to increase dramatically during the alleged class period—as ultimately revealed through a U.S. Department of Justice investigation—and that defendants made material misstatements and omissions regarding the alleged conspiracy. The Court held that plaintiffs adequately pleaded their claims, including with respect to material misstatements, scienter and loss causation.
The Court first determined that plaintiffs plausibly alleged that the company participated in a price-fixing conspiracy. In particular, the Court pointed to plaintiffs’ allegations concerning drug price increases during the relevant period, communications between the company and its competitors and information about the market for the generic drugs, and found these allegations were sufficient to establish that the alleged conspiracy was plausible. Id. at *6-7.
The Court next turned to whether plaintiffs adequately alleged material misstatements or omissions, premised on defendants’ failure to disclose the underlying alleged wrongdoing. As for statements regarding market competition for generic drugs, the Court noted that the statements plaintiffs identified resembled statements that have been held not actionable under the securities laws, because they merely reflected vague and optimistic statements about the nature of the market. Id. at *7-10. But the Court reasoned that these statements must be viewed in the overall context of the company “attributing its generics business’s revenue, growth, and pricing strategy to legitimate business factors and conditions,” and therefore found these statements actionable. Id. at *10. The Court held that the company’s statements downplaying the significance of the federal investigation were also misleading, rejecting defendants’ argument that the investigation did not have anything to do with the six specific drugs identified by plaintiffs in the complaint, and holding that if the company was engaged in any type of price-fixing, a federal investigation into such conduct would be material. Id. at *11. Similarly, because plaintiffs plausibly alleged the company’s participation in a price-fixing scheme, the Court held that the company’s income statements, Sarbanes-Oxley certifications and its discussion of its code of conduct, were “natural corollaries to the alleged conduct” and that the pleadings were sufficient to allege they were misleading at this stage of litigation. Id.
The Court also held that plaintiffs adequately alleged scienter. The Court credited allegations that the company had received a subpoena in a federal investigation of price-fixing and had been named in suits filed by state attorneys general. Id. at *12. The Court concluded that, notwithstanding the company’s “minimization” of these investigations, the investigations had already revealed particularized facts and evidence, and the complaint affirmatively alleged that “there was no reasonable explanation for the price hikes” such as other market forces. Id. And the Court also held that plaintiffs sufficiently alleged scienter based on a “core operations” theory—which permits scienter to be imputed to individual defendants where the alleged fraud relates to the core business of the company—because in this case, the company’s generic drug sales accounted for a significant portion of its revenue. Id.
The Court next determined that plaintiffs had adequately alleged loss causation based on significant stock drops following two alleged corrective disclosures: (i) when the company disclosed it had received a subpoena as part of the federal investigation into the generic pharmaceutical market, and (ii) when the company disclosed it understood the federal government might press criminal charges against generic drug manufacturers as a result of its investigation. Id. at *13. The Court emphasized that corrective disclosures relating to regulatory investigations support loss causation if they reveal the truth underlying the alleged false statements and if they cause a drop in stock price, both of which were alleged by plaintiffs here. Id. at *13-14.
As for plaintiffs’ Section 14(a) and Rule 14a-9 claims concerning an alleged material misstatement or omission in the company’s proxy statement, the Court refused to dismiss these claims based on its holding that plaintiffs had plausibly alleged the company’s participation in a price-fixing conspiracy, and also based on the conclusion that the claims were plausibly timely at this stage. Id. at *15. While defendants argued that these claims were subject to a one-year statute of limitations, accruing from the time when plaintiffs discovered or should have discovered the facts necessary to bring the claims, the Court noted that within the Third Circuit such a timeliness argument can only be made on a motion to dismiss if the necessary facts are contained on the face of the complaint, which was not the case here. Id.