Northern District Of California Dismisses With Prejudice Putative Class Action Against Pharmaceutical Company

Shearman & Sterling LLP


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On May 7, 2024, Judge Beth Labson Freeman of the United States District Court for the Northern District of California dismissed with prejudice a putative shareholders' class action against a pharmaceutical company and certain of its executives...
United States Corporate/Commercial Law
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On May 7, 2024, Judge Beth Labson Freeman of the United States District Court for the Northern District of California dismissed with prejudice a putative shareholders' class action against a pharmaceutical company ("Company") and certain of its executives ("Individual Defendants"), alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), as well as Rule 10b-5 promulgated thereunder. Sneed v. AcelRx Pharms., Inc., No. 21-cv-4353-BLF (N.D. Cal. May 7, 2024). Plaintiffs alleged the Company made false or misleading statements in marketing materials of one of its products in order to expand the target market, putting the Company at risk to adverse action by the Food and Drug Administration ("FDA"). The Court granted the motion to dismiss with prejudice, finding that plaintiffs failed to adequately plead scienter and that further amendment would be futile.

The Company, which develops pharmacological therapies to treat acute pain, developed an opioid pain killer that is administered sublingually, which the FDA approved in 2018. The FDA approved the medication alongside the Company's Risk Evaluation and Mitigation Strategy ("REMS"), a drug-safety program that the FDA can require for certain medications with serious safety concerns. In February 2021, the FDA issued a warning letter to the Company about its use of a slogan in two promotional materials that allegedly oversimplified the drug's application and risks. The warning letter indicated that the FDA allegedly viewed the promotional materials as containing false and misleading statements about the risks and benefits of the medication in violation of the Food, Drug, and Cosmetic Act ("FDCA") and at odds with the REMS. Shortly thereafter, the FDA announced the warning letter via press release; the Company disclosed its receipt of the warning letter that same day. The Company's stock dropped sharply.

Plaintiffs alleged that the Company and Individual Defendants purposefully used false and misleading marketing materials that oversimplified the safety and efficacy of the Company's drug in order to expand the medication's target market from hospitals to ambulatory centers. Defendants moved to dismiss the complaint for failure to state a claim. The Court agreed.

The Court first assessed whether plaintiffs alleged clearly and with particularity why the statements concerning the drug's administration set forth in the Company's promotional materials and made by the Company's chief executive officer were false. It found that plaintiffs had alleged sufficient facts to present a "close call" as to the falsity of those statements, and declined to hold at the pleading stage that no reasonable investor could find that the marketing materials created a misleading impression about the efficacy and safety of the Company's drug. Nevertheless, the Court found that plaintiffs' claims failed because they failed to plead scienter.

To allege scienter, plaintiffs principally relied upon statements from twelve former employees that, collectively, alleged: (i) Individual Defendants approved of the slogan in the promotional materials that drew the FDA's ire; (ii) Individual Defendants were aware that the FDA was heavily regulating misbranding and knew of internal concerns that the slogan was likely to result in a warning letter; and (iii) defendants nevertheless used the slogan because they were motivated to prove the drug's success to investors and oversimplify the drug's application to expand into ambulatory surgical centers. The Court found that, taken together, these allegations did not give rise to a strong inference of scienter. It found particularly significant that plaintiffs did not allege that the Individual Defendants were aware the promotional materials were false or misleading or that they otherwise violated the FDCA or were noncompliant with the REMS.

The Court also dismissed the Section 20(a) claim for plaintiffs' failure to sufficiently plead an underlying Section 10(b) violation. The Court dismissed the action with prejudice on the basis that further amendment would be futile.

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