The Third Circuit ruled that the plaintiff could not rely on a fraud on the market theory to recover for alleged common law fraud under Pennsylvania law, and affirmed the District Court’s dismissal of the plaintiff’s claims that the defendants had fraudulently doctored the results of tests conducted on a commercial medical device.

Defendants were hired as consultants to perform research for Sunrise Technologies International, Inc., a manufacturer of medical equipment. Defendants helped Sunrise develop and obtain government approval for a laser intended to permanently correct farsighted vision. After initially failing to obtain Food and Drug Administration approval, the device was later approved as a temporary means of correcting farsightedness. Plaintiff alleged the defendants misrepresented the results of clinical trials and made other false statements about the laser’s effectiveness which artificially inflated the Sunrise stock price. Plaintiff further alleged that when the limitations of the device were revealed the stock price fell.

Plaintiff asserted common law fraud claims against the defendants—but not against Sunrise—under Pennsylvania law, alleging that the defendants’ fraudulent activity wrongfully induced him to invest in Sunrise. Although plaintiff could not show that he directly relied upon defendants’ alleged misrepresentations, he contended that his reliance on the company’s artificially inflated market price satisfied the “reasonable reliance” element of his fraud claim. The Third Circuit disagreed. While noting that some prior decisions indicated that Pennsylvania courts might follow federal securities law and recognize the fraud on the market theory as a basis for establishing the reliance element of common law fraud claims, the court found that no Pennsylvania decision had ever done so. Accordingly, the Third Circuit affirmed the District Court’s grant of summary judgment in favor of defendants. (Aubrey v. Sanders, 2009 WL 3059055 (3d Cir. Sept. 24, 2009))