United States: Ninth Circuit Addresses Use Of Doctrines Of Judicial Notice And Incorporation By Reference At Pleading Stage In Securities Cases

Introduction

In the Ninth Circuit, defendants typically have two tools available to ask a court to consider in connection with a motion to dismiss information outside the four corners of a complaint. First, a defendant may file a request for judicial notice under Rule 201 of the Federal Rules of Evidence to ask the court to consider material outside of the complaint, so long as the material meets the definition set forth in Federal Rule Evidence 201 as "not subject to reasonable dispute because it (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b). Second, under the incorporation by reference doctrine, a district court may consider documents "whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the [plaintiff's] pleading." In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999). This doctrine seeks to prevent plaintiffs from selectively quoting only portions of documents on which their claims are based.

The application of these tools was recently addressed in a published Ninth Circuit opinion, Khoja v. Orexigen Therapeutics, Case No. 16-56069 (9th Cir. 2018), in which the panel noted a "concerning pattern in securities cases" in which "overuse" of the doctrines of incorporation by reference and judicial notice has resulted in the dismissal of securities suits at the pleading stage based on materials outside of the complaint. (Order at 15.)

Khoja Opinion

In a decision issued on August 13, 2018, a unanimous three-judge panel affirmed in part and reversed in part the district court's dismissal of a securities fraud action, concluding that "the district court abused its discretion by improperly considering materials outside of the Complaint." (Order at 4.)

The plaintiff brought a putative class action against defendant biotechnology company Orexigen and its officers, alleging that the defendants made material misrepresentations and omissions in violation of the Securities Exchange Act of 1934 based on the company's disclosure of early results from a study of its new drug. The defendants moved to dismiss the complaint and requested judicial notice of 22 documents or, alternatively, that the district court treat those documents as incorporated into the complaint. The district court granted the request with respect to 21 of 22 documents. The court also granted the defendants' motion to dismiss. The plaintiff appealed.

In concluding that the district court abused its discretion by considering some of those documents, the panel noted "a concerning pattern in securities cases like this one: exploiting these procedures improperly to defeat what would otherwise constitute adequately stated claims at the pleading stage." (Id. at 15.) The panel stated that this trend of "unscrupulous use of extrinsic documents" at the pleading stage creates a risk "especially significant in SEC fraud matters, where there is already a heightened pleading standard, and the defendants possess materials to which the plaintiffs do not yet have access." (Id.) "If defendants are permitted to present their own version of the facts at the pleading stage—and district courts accept those facts as uncontroverted and true—it becomes near impossible for even the most aggrieved plaintiff to demonstrate a sufficiently 'plausible' claim for relief." (Id. at 16.)

As to the judicially noticed facts, while the district court stated "it would not 'take notice of the truth of the facts cited' within the exhibit" (Id. at 17), it took judicial notice of three documents: a transcript of an investors' conference call, a medical report about the drug at issue, and the historical record of the company's patent application for the drug. The panel concluded that certain facts from the medical report and the transcript should not have been judicially noticed because there existed "reasonable dispute" as to what the documents established. (Id. at 17-22.) As to the transcript, the panel held that it was "improper to judicially notice a transcript when the substance of the transcript is subject to varying interpretations, and there is a reasonable dispute as to what the transcript establishes." (Id. at 19 (quotation omitted).) However, the panel concluded that the date of the conference call could be properly noticed from the transcript. (Id. at 18.) The appellate court similarly concluded that the court did not abuse its discretion in taking notice of the patent application, as the court only relied on the application for the date of the application.

The panel also reviewed the documents the district court incorporated by reference, including blog posts and news articles, analyst reports, SEC filings and attachments. In concluding that the district court abused its discretion in incorporating by reference at least seven of these documents, the panel noted that "the doctrine is not a tool for defendants to short-circuit the resolution of a well-pleaded claim" and "what inferences a court may draw from an incorporated documents should also be approached with caution." (Id. at 24.) Specifically, the appellate court concluded that the district court abused its discretion because the complaint's reference to the documents were not "sufficiently extensive" or the documents did not "form the basis of any claim in the Complaint." (Id. at 26.) Notably, the panel concluded that the trial court appropriately incorporated by reference some of the disputed documents that were mentioned extensively in the complaint.

Conclusion

While the Khoja opinion reiterated that when "properly used" the doctrines of judicial notice and incorporation by reference "do have roles to play at the pleading stage," plaintiffs will likely raise this opinion when disputing the use of these doctrines. Parties seeking to judicially notice or incorporate by reference certain facts should be mindful of the panel's cautioning of the "overuse" of these methods and the resulting inefficiency from the court's perspective. In particular, the appellate court noted a specific concern with the abuse of the incorporation by reference doctrine, arising "when parties pile volumes of exhibits to their motion to dismiss," making the briefing "needlessly unwieldy" and demanding the court's "precious time" to review. (Id. at 30-31.) Thus, the opinion took issue specifically with the purported overuse of the incorporation by reference doctrine, while reiterating common principles guiding use of judicial notice. Read in context, the opinion underscores the continued use of both doctrines, while warning against their overuse. Even after the Khoja opinion, parties may continue to seek to use the doctrines of incorporation by reference and judicial notice, but parties should consider the opinion to avoid overuse.

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