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On March 4, 2016, the Second Circuit applied the Supreme Court’s decision in Omnicare v. Laborers’ District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015)[1] in affirming dismissal of a securities fraud action alleging that Sanofi had issued misleading opinions regarding the prospects for its multiple sclerosis drug, Lemtrada. Tongue v. Sanofi, 2016 WL 851797 (2d Cir. 2016) (Parker, J.) (Sanofi II). The Second Circuit held that “Omnicare does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed in the registration statement,” provided that the opinion “fairly align[ed] with the information in the issuer’s possession at the time.”

Background

In 2011, Sanofi acquired Genzyme Corporation, which was in the process of developing Lemtrada. The merger agreement provided that each Genzyme shareholder would receive not only a cash payment per share, but also a contingent value right (“CVR”) per share that “entitled the holder to cash payouts upon the achievement of certain ‘milestones’ connected to the success of Lemtrada.”

The offering materials for the merger included numerous statements expressing Sanofi’s expectation that the FDA would approve Lemtrada before March 31, 2014, the cutoff date for achievement of the first CVR milestone (the “Approval Milestone”). After the merger, “Sanofi continued to speak optimistically about Lemtrada.”

Sanofi did not disclose the fact that “the FDA [had] expressed concern about the use of single-blind studies for Lemtrada.”[2] However, the FDA had indicated that a single-blind study for Lemtrada “may be adequate” for approval purposes if the study’s “effect [was] large.”

On November 8, 2013, the FDA released briefing materials for a pending FDA hearing in which two reviewing physicians raised concerns regarding Sanofi’s use of single-blind studies. These briefing materials “also detailed the FDA’s communications with Genzyme and Sanofi regarding the use of single-blind clinical trials.” Upon release of these briefing materials, the value of the CVRs fell by more than 62%. Several weeks later, Sanofi announced that the FDA had formally rejected its application for Lemtrada’s approval. The value of the CVR’s “dropped further on the news.”

In December 2013, purchasers of the CVRs brought two putative class actions against Sanofi, Genzyme Corporation, and several Sanofi executives (collectively, “defendants”). One putative class alleged claims under Section 10(b) and Rule 10b-5, as well as Section 20(a) claims, under the Exchange Act against the individual defendants. The other putative class asserted claims under Sections 11 and 12(a)(2) of the Securities Act, in addition to claims under Sections 10(b), 18, and 20(a) and state blue sky law claims. Both sets of plaintiffs alleged that “by failing to disclose the feedback from the FDA regarding the use of single-blind studies, [d]efendants [had] misled investors as to the likelihood of meeting the Approval Milestone, . . . thereby artificially inflating the value of the CVRs.” Defendants moved to dismiss both complaints.

In May 2014, the FDA accepted Sanofi’s resubmission for FDA approval of Lemtrada. The FDA approved Lemtrada for the treatment of multiple sclerosis in November 2014 without any further clinical data.

Southern District of New York Finds Defendants’ Statements of Opinion Not Misleading Under the Standard Set Forth in Fait v. Regions Financial Corporation

On January 28, 2015, the Southern District of New York held that both sets of plaintiffs had failed to allege that defendants’ statements of opinion regarding Lemtrada’s prospects were false or misleading under the standard set forth in the Second Circuit’s decision in Fait v. Regions Financial Corporation, 655 F.3d 105 (2d Cir. 2011).[3] In re Sanofi Sec. Litig., 87 F. Supp. 3d 510 (S.D.N.Y. 2015) (Engelmayer, J.) (Sanofi I). In Fait, the Second Circuit held that “when a plaintiff asserts a claim under [S]ection 11 or 12 based upon a belief or opinion alleged to have been communicated by a defendant, liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed.” The Southern District of New York applied the Fait standard both to plaintiffs’ Section 10(b) claims and plaintiffs’ claims brought under Sections 11 and 12 of the Securities Act. The court found that there were no well-pleaded allegations indicating that defendants “did not genuinely believe what they were saying at the time they said it,” and further determined that plaintiffs had failed to allege that defendants’ opinions were objectively false. Sanofi I, 87 F. Supp. 3d 510. 

After the district court dismissed plaintiffs’ complaints, the Supreme Court issued its decision in Omnicare clarifying the pleading requirements for Section 11 claims based on statements of opinion. Plaintiffs appealed the district court’s ruling and urged the Second Circuit to reconsider the court’s decision based on Omnicare.

Second Circuit Explains That Omnicare “Altered the Standard” Set Forth in Fait for Liability Based on Statements of Opinion

At the outset of its analysis, the Second Circuit stated that Omnicare “altered the standard” established in Fait for liability based on statements of opinion.[4] Sanofi II, 2016 WL 851797. The Second Circuit explained that “Omnicare affirmed that liability . . . may lie if either ‘the speaker did not hold the belief she professed’ or ‘the supporting fact[s] she supplied were untrue.” Id. (quoting Omnicare, 135 S. Ct. 1318). However, the Second Circuit noted that the Omnicare Court “went on to hold that opinions, though sincerely held and otherwise true as a matter of fact, may nonetheless be actionable if the speaker omits information whose omission makes the statement misleading to a reasonable investor.” The Second Circuit explained that this omitted information must “conflict with what a reasonable investor would take from the statement itself.” Id. (quoting Omnicare, 135 S. Ct. 1318).

The Second Circuit observed that the Omnicare Court “cautioned against an overly expansive reading of this standard.” The Supreme Court stated that reasonable investors expect that an issuer’s statement of opinion “fairly aligns with the information in the issuer’s possession at the time.” Omnicare, 135 S. Ct. 1318. But the Supreme Court also explained that “[r]easonable investors understand that opinions sometimes rest on a weighing of competing facts” and they do not “expect that every fact known to an issuer supports its opinion statement.” Significantly, the Supreme Court made it clear that a statement of opinion “is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way.”

The Omnicare Court further stated that an investor is expected to “read[ ] each statement . . . in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information.” The investor also “takes into account the customs and practices of the relevant industry.” The Court explained that “an omission that renders misleading a statement of opinion when viewed in a vacuum may not do so once that statement is considered, as is appropriate, in a broader frame.”

Second Circuit Holds Defendants’ Opinions Regarding the Expected Timing of FDA Approval Did Not Conflict With What Plaintiffs Would Have Understood From Those Statements

The Second Circuit concluded that “even under the Supreme Court’s revised approach to allegations of materially misleading opinions,” plaintiffs had failed to state a claim as to defendants’ opinions regarding Lemtrada’s prospects, Sanofi II, 2016 WL 851797.

The Second Circuit first considered whether defendants’ opinions “conflict[ed] with what a reasonable investor would [have] take[n] from” the statements themselves (quoting Omnicare, 135 S. Ct. 1318). The court found that there was no “serious conflict between the FDA’s interim, albeit repeated, concerns about [the clinical testing] methodology and [d]efendants’ optimism about FDA approval.” The court noted that the FDA had stated that its concerns “could be overcome if the results showed an ‘extremely large effect,’” which in fact was shown.

Notably, the Second Circuit observed that plaintiffs were “sophisticated investors” who were “well accustomed to the ‘customs and practices of the relevant industry.’” The court explained that “[r]easonable investors understand that dialogue with the FDA is an integral part of the drug approval process, and no sophisticated investor familiar with standard FDA practice would expect that every view of the data taken by [d]efendants was shared by the FDA.” The court determined that this ongoing dialogue “did not prevent [d]efendants from expressing optimism, even exceptional optimism, about the likelihood of drug approval.” The Second Circuit observed that while a layperson might “have misinterpreted [d]efendants’ statements as evincing assurance of success,” plaintiffs here could “claim no such ignorance,” particularly given that “the FDA has long made public its preference for double-blind trials.” The court reasoned that “[e]specially where a complex financial instrument whose value is tied to FDA approval is involved, investors may be expected to keep themselves apprised of the FDA’s public positions on testing methodology.”

Second Circuit Holds Defendants’ Failure to Disclose the FDA’s Concerns Did Not Render Defendants’ Opinions Misleading Under Omnicare

The Second Circuit further held that defendants’ failure to disclose the FDA’s concerns about Lemtrada’s clinical testing methodology did not render their opinions misleading. The court emphasized that under Omnicare, a statement of opinion “is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way” (quoting Omnicare, 135 S. Ct. 1318). Rather, Omnicare simply requires that defendants’ statements “fairly align[ed] with the information in [their] possession at a time” (quoting Omnicare, 135 S. Ct. 1318).

Here, plaintiffs might “have been interested in knowing about the FDA feedback,” and may even “have acted otherwise had the feedback been disclosed.” But the Second Circuit emphasized that “Omnicare does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed in the registration statement.” The court determined that defendants had no obligation to “disclose[ ] the FDA feedback merely because it tended to cut against their projections.”

Plaintiffs argued that the “test” for opinion liability in this case should be “whether [d]efendants [had] failed to disclose a risk above and beyond the normal risks associated with drug approval.” The Second Circuit determined that “[n]o plain reading of Omnicare supports this interpretation.” The court explained that plaintiffs’ proposed test “eschew[ed] the more taxing question of whether an issuer’s statement [was] misleading, and instead . . . impose[d] a bright-line disclosure rule, regardless of the nature of the statements actually made by the issuer.”

Second Circuit Determines That Defendants’ Opinions Regarding the Lemtrada Study Results Were Not Misleading Under Omnicare

Plaintiffs also challenged as misleading defendants’ opinions touting the effectiveness of Lemtrada. The Second Circuit analogized defendants’ statements to the example offered in Omnicare of an issuer expressing its belief that its conduct is lawful. The Second Circuit explained that “[s]uch a statement does not imply that the issuer’s conduct is, in fact, lawful, but only that the issuer has conducted a meaningful inquiry and has a reasonable basis upon which to make such an assertion.” Here, the court determined that defendants’ statements concerning Lemtrada’s effectiveness could not be deemed “misleading merely because the FDA disagreed with the conclusion—so long as [d]efendants [had] conducted a ‘meaningful’ inquiry and in fact held that view.”

The Second Circuit remarked that plaintiffs’ claims regarding these statements were “little more than a dispute about the proper interpretation of data,” which the court had previously “rejected as a basis for liability” in Kleinman v. Elan Corp., 706 F.3d 145 (2d Cir. 2013). The court explained that “[d]efendants’ statements were not misleading simply because the FDA disagreed with [d]efendants’ interpretation of the data.”

The Second Circuit concluded that under the standard set forth in Omnicare, “no reasonable investor would have been misled by [d]efendants’ optimistic statements regarding the approval and launch of Lemtrada.”