On March 11, 2022, the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 ("Exchange Act") against a pharmaceutical company (the "Company"). Arkansas Pub. Emps. Ret. Sys. v. Bristol-Myers Squibb Co., No. 20-3716-CV (2d Cir. Mar. 11, 2022). Plaintiffs alleged that the Company made material misrepresentations and omissions in describing a clinical trial it conducted on a drug that treated specific types of cancer. Following a dismissal of plaintiff's initial complaint without prejudice, a decision previously covered here, the district court subsequently dismissed plaintiffs' amended complaint with prejudice. The Second Circuit affirmed, holding that plaintiffs failed to allege (i) material misrepresentations or omissions or (ii) facts giving rise to a strong inference of scienter.
Plaintiffs alleged that the Company made materially misleading statements and omissions to investors about the design of the clinical trial for a new lung cancer drug (the "Drug"). In 2014, the Company described the patients eligible for its clinical trial as those who were "strongly expressing" the PD-L1 protein, a cancerous cell biomarker. Plaintiffs alleged that this language was significant—and caused them to be optimistic about the success of the trial—because the Drug was known to work best in patients who had the strongest expression of PD-L1 cells. Notably, the Company did not publicly disclose a numerical threshold of PD-L1 expression that would make patients eligible for the trial. When the Company announced in August 2016 that the trial failed—because it did not show better results from the Drug than from chemotherapy—it also disclosed for the first time that it had used 5% as its threshold for a "strong" expression of the PD-L1 protein. Plaintiffs claimed that the use of the phrase "strongly expressing" was misleading because the consensus definition of "strong" in this context was 50% or higher rather than 5%.
The Second Circuit affirmed the lower court's determination that plaintiffs failed to plead with particularity facts sufficient to show a material misstatement or omission. The Court held that the Company "had no obligation to disclose the precise percentage of PD-L1 expression which defined 'strong' expression in the [Drug] trial" and, because the Company's competitors could have taken commercial advantage of such information, "such a disclosure likely would have been unwise." Further, the Court found that the Company did not make any false, misleading, or incomplete statements about the strength of expression of PD-L1 in the patients in the trial. Indeed, the Company "made clear at all times that it would not discuss the exact threshold or confirm speculation or predictions." Significantly, the Court noted that the complaint discussed "varied thresholds used for PD-L1 positivity, ranging from 1% to 49%, depending on the study" and that some investment analysts had "correctly predicted that [the Company] defined strong expression as 5%." Although plaintiffs attempted to bolster their claims by relying on an expert who opined that "there was an industry consensus" that "strong" referred to 50% or higher, the Second Circuit was unpersuaded because "opinions cannot substitute for facts under the PSLRA."
The Court also affirmed the district court's holding that plaintiffs failed to allege with particularity facts giving rise to a strong inference of scienter. With respect to plaintiffs' claim that "scienter is evidenced by share sales by certain individual defendants," the Court rejected this argument because "those sales were made at a rate similar to prior periods, or pursuant to stock trading plans or for other procedural purposes, and the net effect of their transactions was to increase their total holdings." The Court also rejected plaintiffs' other argument—"that scienter is shown by [the Company's] alleged reaction to the failure [of the clinical trial], including candid assessments of why it occurred and the departure of two high-level employees." The Court noted that the Company's statement in 2016 "that in hindsight the PD-L1 expression threshold was set too low" "provides no information regarding [the Company's] state of mind when initially describing the study" in 2014. According to the Court, the Company's "conclusion was inescapable after the success of [a competitor's] comparable trial." With respect to the departure of two employees responsible for the trial, which occurred close in time to the announcement of the trial's failure, the Court held that the departures "may reflect the importance that [the Company] placed on the study's potential success," but did not provide "reason to doubt the veracity or intent of [the Company's] disclosures." In sum, the Court held that the Company's "unremarkable responses to a disappointing result do not signify anything nefarious."
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