Lipton v. Pathogenesis Corp.
| Citation | 284 F.3d 1027 |
| Decision Date | 20 March 2002 |
| Docket Number | No. CV-99-00506-BJR.,No. CV-99-00453-JCC.,No. CV-99-00452-RSL.,No. 00-35313.,No. 00-35268.,No. CV-99-00419-TSZ.,No. CV-99-00469-BJR.,No. CV-99-00439-TSZ.,No. CV-99-00455-WLD.,No. CV-99-00503-RSL.,00-35268.,00-35313.,CV-99-00419-TSZ.,CV-99-00439-TSZ.,CV-99-00452-RSL.,CV-99-00453-JCC.,CV-99-00455-WLD.,CV-99-00469-BJR.,CV-99-00503-RSL.,CV-99-00506-BJR. |
| Parties | David S. LIPTON, on his own behalf and on behalf of those similarly situated; Richard Baker, on his own behalf and on behalf of those similarly situated; Ray Fralovk, on his own behalf and on behalf of those similarly situated; Anne Shapiro, on her own behalf and on behalf of those similarly situated; Judy May, on her own behalf and on behalf of those similarly situated; Donald R. Gellert, on his own behalf and on behalf of those similarly situated; Peter Green, on his own behalf and on behalf of those similarly situated; Jerry Bassin, on his own behalf and on behalf of all others similarly situated; C Mark Williams; Paul A. Waskom; Walid Mseitif; and Gregg S. Tenser, Plaintiffs-Appellants-Cross-Appellees, v. PATHOGENESIS CORP.; Wilbur H. Gantz; and Alan R. Meyers, Defendants-Appellees-Cross-Appellants. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Matthew J. Ide, Steven J. Toll, and Mark S. Willis (New York), Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Seattle, WA; Robert M. Kornreich and Patricia I. Avery, Wolf Popper, LLP, New York, NY, for plaintiffs-appellants-cross-appellees.
Stellman Keehnel, Gray Cary Ware & Freidenrich, LLP, Seattle, WA; Tim J. Filer and Christopher G. Emch, Foster Pepper & Shefelman, PLLC, Seattle, WA, for defendants-appellees-cross-appellants.
Appeal from the United States District Court for the Western District of Washington, Thomas S. Zilly, District Judge, Presiding.
Before KLEINFELD and GOULD, Circuit Judges, and ROLL, District Judge.*
Plaintiffs brought this securities fraud class action under §§ 10(b), 20(a) and 20A of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), 78t-1(a) and Rule 10b-5, 17 C.F.R. § 240.10b-5, on behalf of all purchasers of PathoGenesis Corporation common stock on the open market between January 15, 1999 and March 22, 1999. Plaintiffs appeal the district court's Rule 12(b)(6) dismissal of their consolidated complaint, without leave to amend, for failure to meet the pleading requirements of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. §§ 78u-4 and 78u-5. We have jurisdiction under 28 U.S.C. § 1291 and affirm.
PathoGenesis Corporation ("PathoGenesis" or "the Company"), founded in 1991, is a pharmaceutical company that develops and markets medicines to treat chronic infectious diseases. PathoGenesis developed TOBI, (tobramycin solution for inhalation), the first inhaled antibiotic designed to treat lung infections for people with cystic fibrosis. Tobramycin, the key element in TOBI, is an antibiotic that had previously been administered through intravenous injection. The introduction of TOBI was an advance in the treatment of cystic fibrosis patients. As an inhaled medicine, TOBI delivers tobramycin in greater concentrations than is possible through intravenous treatment.
In December 1997, PathoGenesis received U.S. Food and Drug Administration approval to sell TOBI and in January 1998, the Company began selling TOBI to wholesale distributors of pharmaceutical products and mail order pharmacies (collectively, the "wholesalers"). Nearly one year later, on December 11, 1998, PathoGenesis told its wholesalers by letter that the Company was increasing the price of TOBI by at least seven percent, effective that day. The letter further told the wholesalers that they could purchase TOBI at the lower, pre-increase price during a two week "buy-in" period beginning December 11, 1998 (the "buy-in" program). In response to the "buy-in" program, each of the wholesalers purchased large amounts of TOBI, which contributed, in part, to strong fourth quarter ("4Q98") sales. At the end of 1998, PathoGenesis had generated $60.7 million in sales;2 and its 4Q98 sales totaled $17.8 million, a 20% increase over total sales from the preceding quarter.3 Because of PathoGenesis' strong fourth quarter earnings, investors had high expectations that sales of TOBI would continue to grow during the first quarter of 1999. Near the end of the first quarter of 1999, however, PathoGenesis announced that sales of TOBI would not meet these heightened expectations and would only be about $10 million. Stock values dropped and plaintiffs alleged securities fraud.
The theory of plaintiffs' complaint is that PathoGenesis had access to information in December 1998 and the beginning of 1999 that showed patient demand for TOBI had plateaued. According to the plaintiffs, the buy-in program was devised both to conceal flat patient demand for TOBI and artificially to inflate 4Q98 sales. Plaintiffs further contend PathoGeneis needed to demonstrate strong sales in order to negotiate favorable financing with lenders and to expand distribution with foreign distributors.
In their complaint, plaintiffs allege that between January 15 and March 22, 1999 (the "class period") PathoGenesis made at least three false and misleading statements designed to create the impression that PathoGenesis' impressive fourth quarter results were the result of increasing patient demand for TOBI. On January 15, 1999, the day the class period begins, PathoGenesis' Chairman and CEO, Wilbur H. Gantz, was interviewed on a syndicated television program. He said that the Company had a "very good fourth quarter" and that PathoGenesis was "seeing a continuing ramp [up of business] here in the United States."4 Ten days later, PathoGenesis announced in a press release its year-end 1998 and 4Q98 results and made what plaintiffs contend is the second misleading statement during the class period.5 In the press release Gantz said: "Our strong showing is due to excellent acceptance of TOBI by the cystic fibrosis community." The next day, the price of PathoGenesis common stock rose by about 11.8 %, or $5.19, to close at $50.25 per share.
As additional evidence of motive to commit fraud, plaintiffs point to two stock sales made by Gantz during the class period. On February 1, 1999, one week after PathoGenesis announced its 4Q98 and year-end results, Gantz filed a document with the U.S. Securities and Exchange Commission declaring his intention to sell 50,000 shares of PathoGenesis common stock. Gantz began selling his PathoGenesis stock that day, selling 5,000 shares of PathoGenesis common stock at $51 per share. He sold another 5,000 shares of PathoGenesis at $44 per share on February 10, 1999. Before these two transactions, Gantz had not sold any of his holdings of PathoGenesis common stock.
Meanwhile, on February 3, 1999, Alan R. Meyer, PathoGenesis' Chief Financial Officer, made the third allegedly false and misleading statement during the class period. Meyer told attendees at an investor conference that the company was "looking at very strong sales growth and earnings growth for the future." He went on to say, "We think we are poised very well for future penetration of the cystic fibrosis market."6
Meyer's optimistic forecast was not met. On March 22, 1999, PathoGenesis issued a mid-quarter press release stating that "some first quarter 1999 sales were accelerated into the fourth quarter of 1998 as patients and wholesalers increased their normal orders." PathoGenesis announced that 1Q99 results would not be as strong as previously predicted and would be approximately $10 million. The next day, on March 23, 1999, PathoGenesis common stock dropped like a rock and plummeted 66%, from $34 a share to $12 a share.
On March 24, one day after the price drop, plaintiff David S. Lipton filed a lawsuit in U.S. District Court for the Western District of Washington against PathoGenesis, Gantz and Meyer. Lipton alleged violations of Sections 10(b)7 and 20(a)8 of the Securities Exchange Act of 1934 and Rule 10b-5.9 Shortly thereafter, seven more actions were filed in the same court. The eight cases were consolidated. Nearly six months later, on September 10, 1999, a consolidated amended class action complaint was filed against PathoGenesis, Gantz and Meyer. This complaint added a claim under Section 20A of the 1934 Act.10
In November 1999, defendants filed a motion to dismiss plaintiffs' complaint. Defendants submitted documents, including, inter alia, graphs that tracked the number of prescriptions for TOBI and investor analyst reports on PathoGenesis. The prescription data graphs submitted with defendants' motion to dismiss were generated by ProMetrics Consulting, Inc. PathoGenesis relied on ProMetrics to provide weekly and monthly information on the number of patient prescriptions being filled for TOBI. ProMetrics, in turn, received this data from an information vendor, IMS Health ("IMS"). The IMS data was available to the investment analysts who followed PathoGenesis and was available to anyone who subscribed directly with IMS or through an intermediary, such as ProMetrics. Reports from investment analysts indicated that in December 1998 and during the class period, patient demand for TOBI was on the rise.11
After the filing of defendants' motion to dismiss, the plaintiffs moved to strike the ProMetrics graphs and the investment analyst reports. On February 14, 2000 the district court granted plaintiffs' motion to strike the prescription demand data, finding the authenticity of these reports in dispute. But the district court ruled that it would consider the investment analyst reports for the purpose of determining whether and when information was disclosed to the market.
On February 17, 2000, the district judge, in an oral ruling, dismissed the complaint with prejudice, holding that: (1) plaintiffs had not pleaded detailed and particular facts giving rise to a strong inference of scienter as...
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