Securities Regulation Daily Optimistic statements during contract negotiations did not become fraudulent when negotiations fell through
Tuesday, May 7, 2019

Optimistic statements during contract negotiations did not become fraudulent when negotiations fell through

By Rebecca Kahn, J.D.

Allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did failed to state a securities fraud claim.

A Second Circuit panel summarily affirmed dismissal of a securities fraud claim, finding that optimistic statements made during negotiations to renew a pharmacy benefits manager agreement were nonactionable puffery. The panel ruled that the complaint alleged fraud by hindsight and defendants had no duty to disclose the uncertain relationship between the parties during negotiations. Moreover, the statements were consistent with what was known at the time they were made (Teachers Insurance & Annuity Ass'n of America v. Express Scripts Holdings Co., May 7, 2019, Parker, B.D.).

Lead plaintiff-appellant Teachers Insurance and Annuity Association (“TIAA”) sued on behalf of itself and a proposed class of purchasers of Express Scripts common stock between February 24, 2015, and March 21, 2016 (the “Class Period”), alleging that Defendants violated Exchange Act Sections 10(b) and 20(a) by making materially false or misleading statements in connection with the purchase or sale of securities.

Exclusivity agreement. In April 2009, Express Scripts and Anthem entered into a ten-year agreement (“Agreement”) for Express Scripts to serve as Anthem's exclusive pharmacy benefits manager, making Anthem its most important customer. Under generally accepted accounting procedures (“GAAP”), the Agreement was an intangible asset and accounting for the Agreement was “based on its useful life to [Express Scripts],” and, under GAAP, Express Scripts was required to update any changes to the Agreement's useful life. From 2009 to April 25, 2016, Express Scripts amortized the Agreement over a 15-year period in its SEC filings because it anticipated renewing the Agreement with Anthem.

Optimistic statements. The Agreement allowed Anthem to review pricing every three years and both parties agreed to negotiate new pricing terms in good faith. The first pricing review in 2011 lasted nearly a year, and strained the parties' relationship. Anthem initiated a second pricing review in October 2014 and took a “more aggressive” approach, initially demanding nearly $15 billion in pricing concessions. The Complaint alleged that during the Class Period Defendants made several positive statements about Express Scripts' relationship and negotiations with Anthem. The Complaint further alleged that these statements were false or misleading because both parties had accused each other privately of not proceeding in good faith; Anthem served Express Scripts with two notices of breach; and Express Scripts rejected or failed to respond to Anthem's proposals and repeatedly refused to meet with Anthem.

Action for breach, dismissal and appeal. On March 21, 2016 Anthem sued Express Scripts for breaching the Agreement. Express Scripts disclosed the litigation and adjusted its amortization of the Agreement to reflect the assumption that the Agreement would not be renewed beyond its ten-year term. On August 30, 2017, TIAA filed its amended Complaint, which was dismissed for failure to state a claim.

On appeal, TIAA argued that the district court incorrectly held that the Complaint failed to adequately allege that Defendants made materially false and misleading statements and omissions; and acted with scienter. The Second Circuit panel agreed.

Statements about the relationship with Anthem. TIAA identified four statements as materially false or misleading: (1) on a February 25, 2015 conference call, one individual defendant described the Express Scripts-Anthem relationship as “great,” “very, very solid,” and “business as usual”; (2) on an April 29, 2015 conference call, another individual defendant stated that Express Scripts “really enjoys” its relationship with Anthem and it is a “two-way street”; (3) on December 22, 2015, the same defendant stated that Express Scripts was “currently in discussions with Anthem regarding the periodic pricing provisions of the [A]greement,” and “excited to continue productive discussions,” which were “very early on”; and (4) on February 16, 2016, Defendants stated in an SEC filing that it was “actively engaged in good faith discussions with Anthem” regarding the periodic pricing review. TIAA argued that these statements were misleading because of the state of the negotiations between Express Scripts and Anthem.

Neither false nor misleading. The Second Circuit panel agreed with the district court that no reasonable investor could have found these statements, in context, to be false, misleading, or incomplete. First, puffery and corporate optimism do not give rise to securities violations. Second, Express Scripts was clearly trying to negotiate a new agreement and maintain its relationship with Anthem throughout the Class Period, as discussions were ongoing. Defendants' statements merely suggested hope that the talks would go well and did not become materially misleading when that the talks did not proceed well. Even though Express Scripts received notices of breach prior to these statements, the companies continued to engage in the dispute resolution process throughout the Class Period. Finally, during the Class Period, Express Scripts made numerous statements acknowledging the possibility that negotiations could fail and the Agreement would not be renewed.

No duty to disclose. TIAA argued that Defendants had a duty to disclose Express Scripts' dispute with Anthem and the uncertain relationship between the two companies. TIAA essentially argued that Defendants should have anticipated the outcome of the negotiations sooner or that the negotiations would deteriorate. But given the ongoing discussions, Defendants had no duty to disclose more about the uncertain state of the negotiations.

Scienter. The panel found that TIAA's numerous categories of facts allegedly demonstrating a strong inference of scienter failed to provide strong circumstantial evidence of misbehavior or recklessness, because Defendants' statements were consistent with information available at the time. Defendants could not have known that the negotiations with Anthem would fail, especially considering the fact that the first periodic pricing review was successful even though it took approximately a year, was combative, and led Anthem to threaten litigation to resolve the dispute. The fact that Defendants' optimism turned out to be unwarranted was not circumstantial evidence of conscious fraudulent behavior or recklessness. The panel wrote that much of what TIAA alleged was fraud by hindsight. Allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud.

The case is No. 18-1850-cv.

Attorneys: Salvatore J. Graziano (Bernstein Litowitz Berger & Grossmann LLP) for Teachers Insurance & Annuity Association of America. Scott D. Musoff (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates) for Melbourne Municipal Firefighters Pension Trust Fund.

Companies: Teachers Insurance & Annuity Association of America; Melbourne Municipal Firefighters Pension Trust Fund.

MainStory: TopStory Enforcement FraudManipulation PublicCompanyReportingDisclosure

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