On February 4, 2020, Judge Ronnie Abrams of the United States District Court for the Southern District of New York dismissed a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 against a tobacco company and certain of its executives. In re Philip Morris Int’l Inc. Sec. Litig., No. 18-CV-08049 (S.D.N.Y. Feb. 4, 2020). Plaintiffs alleged that the company made misrepresentations in securities filings and public statements regarding clinical studies it published in connection with its application to the U.S. Food and Drug Administration to sell its vapor-based product in the United States and to market it as presenting a lower risk than traditional tobacco products. Plaintiffs also alleged that the company made misrepresentations regarding sales growth in Japan for the same product. The Court held that plaintiffs failed to allege an actionable misstatement or omission or to establish scienter, but granted leave to amend with respect to certain allegations.
Plaintiffs argued that statements such as “regulators may not permit the commercialization of these products or the communication of scientifically substantiated risk-reduction claims” were misleading in light of the fact that the company had conducted but delayed publishing four studies with negative results. Id. at 22. The Court held, however, that such statements were a “truthful expression of [the company’s] lack of certainty that the FDA would approve its [application]” and therefore could not serve as the basis for an Exchange Act claim. Id.
The Court also determined that a number of statements identified by plaintiffs were mere puffery, including that the company was “conducting extensive and rigorous scientific studies,” “producing the best science you can produce in the field today,” and that its “studies are very advanced and point in the direction of risk reduction and potential to improve health.” Id. at 23-24. The Court held that such statements did not amount to a guarantee and were “too general to cause a reasonable investor to rely upon them.” Id. at 24.
The Court also considered whether statements about the company’s clinical studies and adherence to ethical and scientific standards were actionable “subjective statements of opinion” because they were either subjectively false or the supporting facts supplied were untrue. Id. at 24-25 (citing Tongue v. Sanofi, 816 F.3d 199 (2d. Cir 2016)). The Court determined that plaintiffs’ argument essentially amounted to a dispute about how to interpret the data from the clinical studies, and a reasonable investor would not expect that the FDA would necessarily agree with the company’s view of the data. Id. at 27. The Court further emphasized that a company “need not disclose all concerns about its research methodology so long as the omitted facts do not conflict with what a reasonable investor would take from the statement itself.” Id. at 28.
With respect to allegations that the company delayed the release of four adverse studies, the Court held, pursuant to the Second Circuit’s decision in Sanofi, that the company need not disclose all negative facts that “tended to cut against their projections” of FDA approval, and plaintiffs are “not entitled to so much information as might have been desired to make their own determination about the likelihood of FDA approval.” Id. at 29. However, the Court concluded that these allegations did suggest a lack of transparency and “thus come closest to representing a material omission.” Id. at 28-29. The Court therefore granted leave to amend regarding these allegations, cautioning that plaintiffs must allege with specificity how the non-disclosure of those studies made the company’s statements misleading. Id. at 30.
The Court separately rejected plaintiffs’ allegations that defendants had made misleading statements about its growth projections in Japan relating to the same product. The Court emphasized that statements such as that the company expected “continued investment” to “further drive its positive momentum,” that “there’s nothing on the horizon that . . . would cause any change in what happened in the previous years,” and that demand was “anticipated to further increase in the first quarter of 2018,” were protected as forward-looking statements of opinion and were accompanied by meaningful cautionary language. Id. at 32-33. Moreover, allegations based on an alleged failure to meet market share projections amounted to impermissible “fraud by hindsight.” Id. at 36.
The Court also held that plaintiffs had failed to establish the required strong inference of scienter, either by alleging facts showing “motive and opportunity to commit the fraud” or “strong circumstantial evidence of conscious misbehavior or recklessness.” Id. at 36-37. The Court rejected plaintiffs’ argument that two stock sales by a company executive established motive and opportunity, finding to the contrary that these stock sales were part of consistent trading patterns, were not unusual in size, and that the executive actually increased his stock holdings during the period in question. Id. at 39. The Court also held that plaintiffs’ allegations of conscious misbehavior or recklessness were insufficient because they were based on allegations made by a former company scientist who left well before the relevant period and had limited interactions with company executives. Id. at 40. Separately, the Court rejected plaintiffs’ argument, based on the “core operations” theory, that the company’s executives would have been aware of key non-public information by virtue of their positions. The Court held that, even assuming the “core operations” theory were viable and sufficient to establish scienter, plaintiffs alleged no particularized facts and “boilerplate allegations are insufficient to establish scienter.” Id. at 41.
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