The Second Circuit declined to upset a lower court’s finding that a complaint failed to allege Sanofi misled investors by making statements that omitted information about clinical trials of the firm’s multiple sclerosis drug. The ruling comes one year after a Manhattan federal judge tossed securities fraud claims against Sanofi, and just a few weeks shy of the first anniversary of the Supreme Court’s Omnicare decision, which clarified liability for material omissions. The Sanofi panel concluded that allegations about statements of opinion by Sanofi regarding the timing of the drug’s regulatory approval, launch date, and clinical trial results fell short of the Omnicare standard (In re Sanofi Sec. Litig., March 4, 2016, Parker, B.).
The plaintiffs had claimed that Sanofi made opinions about its MS drug Lemtrada that artificially inflated the value of milestone-driven contingent value rights (CVRs) they received under the terms of Sanofi’s acquisition of Lemtrada’s former owner. Specifically, the plaintiffs said Sanofi misled them by omitting information about the FDA’s worries about the structure of Lemtrada’s clinical trial. Ultimately, the Second Circuit saw the case against Sanofi as chance to apply Omnicare’s teachings about how an issuer’s opinion may not always be misleading just because it failed to disclose some information that goes against the opinion.
Altered Fait fate. As it would happen, the Second Circuit’s Sanofi opinion was authored by Judge Barrington Parker, the judge who penned the now "altered" Fait standard; Judge Raymond Lohier, Jr. also participated in both Sanofi and Fait. The court opened its Sanofi analysis by acknowledging that the Supreme Court’s Omnicare decision had changed the Second Circuit landscape regarding omissions cases.
The Sanofi panel said the Supreme Court in Omnicare shifted the analysis from the conjunctive Second Circuit approach to an expanded, disjunctive one: liability can result from either the speaker not holding the stated belief or from the speaker’s supporting facts being untrue. Moreover, Omnicare can result in liability for sincerely held yet true statements if the speaker omitted information whose omission would render the statement misleading to a reasonable investor.
The earlier Fait panel had cited the Supreme Court’s Virginia Bankshares opinion, a case that has bedeviled many who try to apply it outside the proxy setting, and which reserved key questions for decision at another time. The district court in Sanofi issued its decision prior to Omnicare. The Second Circuit agreed to reconsider the lower court’s ruling in light of Omnicare because the district judge had invoked Fait.
Opinions nonactionable. The appeals court examined each of the three sets of Sanofi statements of opinion which the district court had mulled in its opinion dismissing the complaint. First, there was no "serious conflict" between Sanofi’s optimistic view of when Lemtrada might be approved and the ongoing dialog between Sanofi and the FDA about whether Sanofi should use double-blind trials. This finding invoked the reasonable investor aspect of Omnicare
Moreover, the sophisticated plaintiffs in Sanofi would have been aware of the FDA’s preference for double-blind trials and Sanofi’s concession that it used a single-blind trial for Lemtrada. A footnote to the opinion recalled that Sanofi chose single-blind trials due to Lemtrada’s side effects and the likelihood the drug’s biannual dosing schedule could reveal which patients actually got the drug, although the company used other means to reduce potential bias, such as making the trial rater-blind.
The court also rejected the plaintiffs’ argument that disclosure is needed when drug approval turns on above-normal risk because that would result in a bright line disclosure rule, which Omnicare does not require and the plaintiffs here could not meet because they never alleged extraordinary risks associated with Lemtrada’s approval.
As for Lemtrada’s launch date, no reasonable investor would have inferred that statements by Sanofi executives that the company was "relaxed" or "satisfied" implied the FDA did not have an industry-standard dialogue with Sanofi about clinical trial deficiencies. The court, quoting Omnicare, explained that these statements did not even show any facts regarding Sanofi’s development of its opinion.
Additionally, Sanofi’s statement that it expected the FDA to rule on Lemtrada by year’s end was about timing, not the likelihood of approval, and it proved correct: the FDA rejected the drug on the second to last day of 2013. The FDA would later approve the drug, but not until after passage of the approval milestone in the plaintiffs’ CVRs.
Lastly, the court rejected arguments that Sanofi’s statements about "stunning" trial results showing a "strong and robust treatment effect" were made solely to prime investor expectations about FDA approval because Sanofi planned to offer Lemtrada globally in 30 countries where the drug was already approved. The court also invoked Omnicare’s teachings about the making of a statement that one’s conduct is lawful. According to the court, Sanofi’s statements about Lemtrada’s trial, despite the FDA’s worries, could not be misleading if Sanofi in fact held the view it expressed after conducting a meaningful inquiry.
Open question. The Second Circuit declined to enter the fray regarding the failure of an issuer to disclose interim regulatory comments about drug trials. The district court had discussed materiality in the Sanofi case, but the appeals panel focused its opinion on applying Omnicare to allegedly materially misleading opinions without delving into other issues. The panel explained in a footnote that by limiting its opinion to the omissions issue there was no reason for it to address whether the district court used a bright-line test that could be employed by issuers to avoid making disclosures about interim FDA feedback. The footnote was necessitated by the Supreme Court’s 2011 Matrixx opinion.
The case is No. 15-588-cv.
Attorneys: Christopher L. Nelson (The Weiser Law Firm P.C.) and Daniella Quitt (Harwood Feffer LLP) for Gen. Partner Glenn Tongue and Deerhaven Capital Management. John A. Neuwirth (Weil, Gotshal & Manges LLP) for Sanofi and Sanofi Pharmaceuticals, Inc.
Companies: Sanofi; Sanofi Pharmaceuticals, Inc.
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