United States: Second Circuit Stresses Control, Not Attribution, In Applying Janus's "Ultimate Authority" Test, And Also Allows Expert Testimony In Support Of An "Inflation-Maintenance" Theory Of Liability

In Janus Capital, the Supreme Court established the "ultimate authority" test to determine who may be liable under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") as a "maker" of a materially misleading statement.1 Although the Janus holding is generally understood as limiting the reach of Section 10(b), the decision of the US Court of Appeals for the Second Circuit in In re Pfizer Inc. Securities Litigation, No. 14-2853 (2d Cir. Apr. 12, 2016), demonstrates how influence over a statement can potentially render even a non-speaker liable as a "maker" of the statement. The Pfizer Court unanimously vacated a grant of summary judgment in favor of Pfizer and held that a reasonable jury could find Pfizer was the "maker" of allegedly misleading statements, even though the statements were actually delivered to the market by non-Pfizer employees. The case, which concerned statements made pursuant to a drug co-promotion agreement, demonstrates that a party may be liable under Rule 10b-5 without necessarily having itself directly communicated the challenged statement to the market, and also suggests that Janus's "ultimate authority" test will not invariably limit liability for a statement to a single "maker."

A second noteworthy aspect of Pfizer involved the so-called "inflation-maintenance" theory of liability. On the same day Pfizer was decided, the Eighth Circuit issued its 2-1 decision in IBEW Local 98 Pension Fund v. Best Buy Co., 2No. 14-3178 (8th Cir. Apr. 12, 2016). In that case, at least in the view of Judge Murphy in dissent, the Eighth Circuit effectively rejected price maintenance as a cognizable theory under the Exchange Act, contrary to decisions3 of the Seventh and Eleventh Circuits. In Pfizer, the Second Circuit stressed that it had not and was not endorsing an inflation-maintenance theory as legally cognizable under Rule 10b-5. However, it held that the district court, which had earlier appeared to permit plaintiffs to pursue such a theory, thereafter abused its discretion in precluding plaintiffs from presenting expert loss causation and damages testimony that was consistent with such a theory (even though plaintiffs' expert had not disaggregated the effects of alleged misrepresentations not made by Pfizer).

Background

The Pfizer plaintiffs allege that Pfizer misrepresented the safety of two of its drugs, Celebrex and Bextra, by concealing known cardiovascular risks. In 1998, Pfizer signed a co-promotion agreement with G.D. Searle & Co. ("Searle"), the then-manufacturer of Celebrex, to help market Celebrex. Searle later transferred control over Celebrex to Pharmacia Corporation ("Pharmacia") through a merger in 2000, and Pharmacia succeeded to Searle's rights under the co-promotion agreement. Pfizer continued to fulfill its obligations under that agreement until 2003, when it acquired Pharmacia, thereby obtaining exclusive rights to Celebrex (and to Bextra, a closely related drug, which Pharmacia manufactured at the time).

Plaintiffs allege that, as early as 1998, Pfizer and Searle knew of risks associated with Celebrex, but Searle issued press releases and other public statements denying such risks. Later, both Pharmacia and Pfizer continued to falsely tout the safety of Celebrex (and Bextra). According to plaintiffs, the market did not start to become aware of the truth until the fall of 2004.

Plaintiffs sued under Section 10(b) of the Exchange Act on behalf of investors who purchased Pfizer stock between October 31, 2000 and October 19, 2005. Plaintiffs alleged that Pfizer was responsible for allegedly misleading statements by Searle, Pharmacia, and their employees because Pfizer had authority over those statements via the co-promotion agreement. Plaintiffs also alleged that Pfizer's own alleged misrepresentations during the class period had the effect of maintaining the public's misperception, based on Searle's and Pharmacia's earlier alleged misstatements, about the safety of Celebrex and Bextra. In support of this inflation-maintenance theory of liability, plaintiffs alleged that by fraudulently concealing the same risks that Searle and Pharmacia had hidden, Pfizer caused the market to maintain the company's stock price at an artificially high level, and should therefore be liable for the full amount by which its stock price fell when the truth was eventually revealed.

On March 28, 2013, Judge Laura T. Swain of the Southern District of New York ruled on Pfizer's motion for summary judgment, holding (i) reliance was not negated merely because none of Pfizer's alleged misrepresentations caused the company's stock price to rise, given that a misstatement "may cause inflation simply by maintaining existing market expectations," (ii) of the ten alleged misrepresentations by Searle, Pharmacia, and their employees when the co-promotion agreement was in place, Pfizer could be liable only for one (a press release), but not for the other nine (eight of which were made directly by Searle or Pharmacia employees and one of which was in a Pharmacia 8-K), and (iii) for two of the seven corrective disclosures alleged by plaintiffs, the losses could not reasonably be attributed to revelations of previously undisclosed risks. 4

In response to this ruling, plaintiffs had their loss causation and damages expert prepare an updated report. Although the updated report contained adjustments to account for the district court's ruling that two of the alleged corrective disclosures could not be linked to Pfizer's alleged misrepresentations, it did not make any adjustments in consideration of the district court's conclusion that Pfizer could not be liable for most of Searle's and Pharmacia's alleged misstatements. On May 21, 2014, the district court granted Pfizer's motion in limine to preclude the testimony of plaintiffs' expert, holding that plaintiffs' expert's failure to account for the impact of the excluded Searle and Pharmacia statements rendered his opinions "unhelpful to the jury in making calculations of damages proximately caused by [Pfizer's] alleged misrepresentations and omissions." 5 Subsequently, Judge Swain granted Pfizer's further motion for summary judgment, concluding that plaintiffs' failure to proffer admissible evidence on loss causation and damages was fatal to their claims.

The Pfizer Court Stresses Control, Not Attribution, in Applying Janus's "Ultimate Authority" Test

Rule 10b-5 makes it "unlawful for any person, directly or indirectly, ... [t]o make any untrue statement of a material fact in connection with the purchase or sale of securities." 6 In Janus, the Supreme Court explained that the "maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it." 7 In vacating the district court's grant of summary judgment in favor of Pfizer, the Second Circuit held that the court had erred in determining, as a matter of law, that Pfizer could not be a "maker" of certain of the alleged misrepresentations by Searle and Pharmacia employees.

The Pfizer Court noted that there was no dispute the statements were communicated by Searle and Pharmacia employees, and no evidence that these employees held themselves out as representing Pfizer. Moreover, it acknowledged that, "'in the ordinary case,' the fact that the statements were attributed to Searle or Pharmacia employees '[would be] ... strong evidence that [the] statement[s] w[ere] made by—and only by—the party to whom [they were] attributed.'" 8 Nevertheless, the Court found that plaintiffs had raised a genuine issue of material fact as to whether Pfizer's influence over some of the statements was such that Pfizer could be deemed to have "made" them for purposes of Rule 10b-5. 9 Specifically, the Court cited evidence suggesting that Pfizer may have had a role in scripting and approving certain of the statements, including that Pfizer senior management needed to approve media responses related to the drugs. Thus, even if the co-promotion agreement did not by its express terms grant Pfizer the power to approve or disapprove of Searle or Pharmacia statements to the press, there remained a fact question as to whether Pfizer had "ultimate authority" over such statements. 10 However, the Pfizer Court rejected the argument that Pfizer could be found to have had authority over statements in Pharmacia's Form 8-K, noting that there was no evidence suggesting Pfizer had such authority and the co-promotion agreement expressly provided that communications with regulators were Pharmacia's "sole responsibility." 11

The Pfizer Court Allows Expert Testimony in Support of an Inflation-Maintenance Theory of Liability

The Second Circuit also held that the district court erred in excluding plaintiffs' loss causation and damages expert. As noted, the district court excluded plaintiffs' expert's proposed testimony because he did not account for the district court's holding that Pfizer could not be liable as a "maker" of many of Searle's and Pharmacia's alleged misrepresentations. The Second Circuit reversed, concluding that the district court had misconstrued the expert's role in establishing plaintiffs' claims, and explained that its reversal on this issue did not depend on Pfizer's potential liability for statements by Searle or Pharmacia. 12

The Pfizer Court observed that—regardless whether Pfizer were to be found liable as a "maker" of statements by Searle and Pharmacia employees—plaintiffs' inflation‐maintenance theory (if successful) would obviate any need to separately account for the impact of Searle's and Pharmacia's misrepresentations. Specifically, under that theory, so long as Pfizer's own fraudulent conduct kept the same information concealed from the market as had Searle's and Pharmacia's earlier misrepresentations, then Pfizer would be liable for all of the resulting artificial inflation, as measured by the stock price drop attributable to the disclosure of the truth. 13 Accordingly, plaintiffs' expert did not need to analyze how inflation entered Pfizer's stock price. 14 Thus, the Second Circuit held, plaintiffs' expert's proposed testimony could be helpful to the jury without disaggregating the effects of Pfizer's alleged misrepresentations, because, on plaintiffs' theory of the case, that testimony could show that the revelation of the information allegedly concealed by Searle, Pharmacia, and Pfizer caused shareholders harm and calculated that harm. 15

The Second Circuit expressly cautioned that its holding was "a narrow one." 16 It explained that, given the district court's determination on Pfizer's initial summary judgment motion that "a misstatement may cause inflation simply by maintaining existing market expectations," it was not necessary for plaintiffs' expert to account for the possibility that Pfizer might not be found liable as a "maker" of statements by Searle and Pharmacia employees. 17 Moreover, given that Pfizer had not argued below that plaintiffs' inflation-maintenance theory was not legally cognizable or supported by the record, the Court declined to analyze those arguments in the first instance on appeal. 18 Accordingly, the Pfizer Court emphasized that its holding was limited to whether the district court had abused its discretion in light of plaintiffs' theory of the case, and did not resolve whether plaintiffs' inflation-maintenance theory was legally sustainable or sufficiently supported by the evidence in the record. 19

Footnotes

1 Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 (2011).

See Eighth Circuit Holds Presumption of Reliance Rebutted Under Halliburton II and Reverses Class Certification in Securities Action, SHEARMAN & STERLING LLP (Apr. 14, 2016), http://www.shearman.com/en/newsinsights/publications/2016/04/eighth-circuit-holds-presumption .

See IBEW, slip op. at 14 (Murphy, J., dissenting); see also, e.g., Glickenhaus & Co. v. Household Int'l, Inc., 787 F.3d 408, 419 (7th Cir. 2015); FindWhat Inv'r Grp. v. FindWhat.com, 658 F.3d 1282, 1314 (11th Cir. 2011).

4 In re Pfizer Inc. Sec. Litig., 936 F. Supp. 2d 252, 271 (S.D.N.Y. 2013).

5 In re Pfizer Inc. Sec. Litig., No. 04 Civ. 9866, 2014 WL 2136053, at *1 (S.D.N.Y. May 21, 2014).

6 17 C.F.R. § 240.10b‐5.

7 Janus, 131 S. Ct. at 2302.

8 Pfizer, slip op. at 35 (quoting Janus, 131 S. Ct. at 2302).

9 Id. at 35-38.

10 Id. at 37.

11 Id.

12 Id. at 40-41.

13 Id.

14 Id. at 41.

15 Id. at 46.

16 Id. at 31.

17 Id. at 44-45.

18 Id. at 47 n.9.

19 Id. at 46. The district court had also excluded plaintiffs' expert's testimony on the ground that his findings and proposed adjustments related to the two corrective disclosures rejected by the court were not reliable. The Second Circuit did not take issue with the district court's conclusion that the expert's adjustments were not reliable, but held that the district court abused its discretion in concluding that the entirety of the expert's testimony should therefore be excluded. Instead, the Court held that the district court should have excluded only those portions of the testimony deemed unreliable, while allowing the remainder of the expert's testimony on loss causation and damages to be presented to the jury. Id. at 49.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions