Broudo v. Dura Pharmaceuticals, Inc.

• Citation: 339 F.3d 933
• Decision Date: 05 August 2003
• Docket Number: No. 01-57136.,01-57136.
• Parties: Michael BROUDO; Baldev S. Gill; Larry Morgan Ira; Leonid Shvartsman, (for G & S partnership); Neil Siskind; Roberta Speck; Brent Vogt, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. DURA PHARMACEUTICALS, INC.; Cam L. Garner; James W. Newman; Charles W. Prettyman; Walter F. Spath; James C. Blair; Julia R. Brown; Joseph C. Cook, Jr.; Mitchell R. Woodbury; Merill Lynch and Co./Merrill Lynch, Pierce Fenner and Smith, Inc.; Nissan Motor Co., a Japanese corporation, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 933

339 F.3d 933

Michael BROUDO; Baldev S. Gill; Larry Morgan Ira; Leonid Shvartsman, (for G & S partnership); Neil Siskind; Roberta Speck; Brent Vogt, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. DURA PHARMACEUTICALS, INC.; Cam L. Garner; James W. Newman; Charles W. Prettyman; Walter F. Spath; James C. Blair; Julia R. Brown; Joseph C. Cook, Jr.; Mitchell R. Woodbury; Merill Lynch and Co./Merrill Lynch, Pierce Fenner and Smith, Inc.; Nissan Motor Co., a Japanese corporation, Defendants-Appellees.

No. 01-57136.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 4, 2003.

Filed August 5, 2003.

William S. Lerach, Jan M. Adler, Eric A. Isaacson, Henry Rosen, Tor Gronborg, Joseph D. Daley, Milberg Weiss Bershad Hynes & Lerach LLP, Alan Schulman, Blair A. Nicholas, Bernstein Litowitz Berger & Grossmann, LLP, San Diego, CA; Steven J. Toll, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Seattle, WA, for the plaintiffs-appellants.

William F. Sullivan, Christopher H. McGrath, Sean T. Prosser, Colleen E Huschke, Brobeck, Phleger & Harrison, LLP, San Diego, CA, for the defendants-appellees.

Appeal from the United States District Court for the Southern District of California; M. James Lorenz, District Judge, Presiding. D.C. No. CV-99-00151-MJL(NLS).

Before: Harry Pregerson, Stephen Reinhardt, and Glenn L. Archer, Jr.,^* Circuit Judges.

OPINION

ARCHER, Senior Circuit Judge.

Michael Broudo et al. ("Appellants") appeal the district court's dismissal with prejudice of the second amended complaint ("SAC") under Federal Rule of Civil Procedure ("FRCP") 12(b)(6). In re Dura Pharm., Inc. Sec. Litig., No. 99CV0151-L(NLS) (S.D.Cal. Nov. 11, 2001). Because 1) the SAC satisfied the loss causation element of a Section 10(b) violation of the Securities and Exchange Act of 1934 with respect to the Albuterol Spiros device; and 2) the district court abused its discretion in not permitting Appellants to amend the SAC to include additional allegations regarding Dura's Ceclor CD sales, the district court's judgment is reversed and remanded.

BACKGROUND

This securities fraud case is a class action on behalf of investors who purchased Dura Pharmaceutical securities between April 15, 1997, and February 24, 1998 ("the class period"). This appeal is drawn specifically to alleged misleading and untrue statements made by Dura and its officials (collectively "Dura")¹ about Dura's Albuterol Spiros delivery device for asthma medication² and Dura's Ceclor CD antibiotic. During the class period, Dura issued several press releases³ indicating satisfactory development and testing of the Albuterol Spiros Device and claiming rising sales of Ceclor CD, both of which Appellants allege were known to Dura and the individual defendants to be untrue. The most relevant statements are the following:

April 15, 1997 Press Release commenting on better-than-expected first quarter results: "Dura ... announced that revenues and net income for the first quarter more than doubled over the same period last year." This press release also quoted a Dura official as stating that he was "very pleased with the first quarter results" and that "we are happy with the strong progress made in selling our new respiratory antibiotic Ceclor CD." The release further stated that "Patient dosing was completed for clinical trials needed for NDA (new drug application) submission of Spiros albuterol...." (SAC ¶ 56)

June 5, 1997 Press Release: "Dura ... announced the completion of the clinical trials necessary for a new drug application (NDA) submission for the Albuterol Spiros product...." "We are pleased with the results to date and are preparing the NDA for filing in the latter half of this year." (SAC ¶ 79)

July 15, 1997 Press Release commenting on better-than-expected Q2 results: "We are pleased with Dura's performance in the second quarter of 1997. Ceclor CD ... ha[s] been well received by physicians who are responding favorable to our promotional efforts.... We completed clinical trials necessary for NDA (new drug application) submission and are on track to file the Albuterol Spiros NDA on behalf of Spiros Corp. in the second half of 1997." (SAC ¶ 85)

October 14, 1997 Press Release, commenting on better-than-expected Q3 results: "Dura ... today reported record earnings for both the third quarter and nine months year-to-date of 1997, compared to the same periods last year.... Pharmaceutical sales growth is principally attributable to the impact of new product acquisitions and introductions, such as Ceclor CD...." (SAC ¶ 111)

November 10, 1997 Press Release, announcing submission of NDA: "Dura... today announced that it has submitted a new drug application (NDA) with the FDA for Albuterol Spiros." (SAC ¶ 123)

January 20, 1998 Press Release, commenting on better-than-expected Q4 results: "Dura reported record revenues... for the quarter and the full year.... `During the past year we significantly strengthened both the pharmaceutical product marketing and the Spiros development arms of our business... We have continued to demonstrate our capabilities as a respiratory marketing force as shown by the growth of our Ceclor CD market share ... from 8% at the beginning of 1997 to 25 % by year-end.'" (SAC ¶ 128)

In the class period, Dura's stock reached a high of $53 per share. On the last day of the class period, February 24, 1998, Dura revealed that it expected lower-than-forecast 1998 revenues and 1998 earnings per share ("EPS") due to, inter alia, slower-than-expected sales of Ceclor CD. Dura's stock then dropped from $39 1/8 on February 24, 1998, to $20¾ on February 25, 1998, a 47% one-day loss. Throughout the remainder of 1998, Dura's business declined. In an April 16, 1998 conference call with stock analysts, Dura revealed that as early as December 1997, wholesale channels had been clogged with many months of excess inventory and that actual sales of several products, including Ceclor CD, had in fact been declining. Later, in November 1998, Dura also revealed that the FDA found the Albuterol Spiros device not approvable due to electro-mechanical reliability issues and chemistry, manufacturing, and control concerns.

Appellants filed several class actions alleging violations of sections 10(b) and 20(a) of the Securities and Exchange Act and Rule 10b-5 promulgated by the Securities Commission, which, in due course, were consolidated. The district court granted Dura's motion to dismiss the Consolidated and Amended Complaint but dismissed it without prejudice. In doing so, the court instructed the Appellants as follows:

The amended complaint shall comply with Federal Rule of Civil Procedure 8, and concisely set forth each allegedly false or misleading statement or omission, and follow each statement or omission with the specific reasons why the statements were false when made or why the Defendants had a duty to disclose. In addition, the Plaintiffs shall specify which Defendants made the statements and knew the "true facts" that should have been disclosed.

In re Dura Pharmaceuticals, Inc. Securities Litigation, No. 99CV0151-L(NLS) 2000 WL 33176043, *12 (S.D.Cal. Jul. 11 2000). Appellants subsequently filed the SAC which the district court also dismissed, this time, however, with prejudice.

With respect to the Albuterol Spiros device, the district court found that Appellants had not properly pled the loss causation element of a 10(b) violation. Specifically, the district court focused on the last day of the class period — February 28, 1998 — and Dura's revelation that day which led to the large drop in stock price:

The SAC does not contain any allegations that the FDA's non-approval [of the Albuterol Spiros device] had any relationship to the February price drop. Accordingly, the SAC does not explain how the alleged misrepresentations and omissions regarding Albuterol Spiros "touched" upon the reasons for the decline in Dura's stock price. Rather, the decline in Dura's stock price was the result of an expected revenue shortfall. Accordingly, the SAC's allegations regarding Albuterol Spiros are insufficient to state a claim.

In re Dura Pharm., slip op. at 15. The district court reasoned further that because the February 24 announcement did not mention the Albuterol Spiros device, any omissions or misleading statements about this device could not be said to have caused the decline in price. Therefore, the district court ruled that the loss causation element was not met.

Turning to Dura's statements regarding Ceclor CD sales made during the class period, the district court found that Appellants' allegations in the SAC were not sufficient to indicate that these statements were false and made with knowledge of their falsity. Id. at 20. The district court therefore held that the allegations in the SAC were not sufficient to withstand a motion to dismiss based on the scienter requirement for a § 10(b) violation. Id.

The district court then dismissed the complaint with prejudice "[b]ecause the Plaintiffs have had an opportunity to amend the complaint to meet the pleading requirements under the PSLRA and Silicon Graphics." Id. at 23. This appeal followed, and we have jurisdiction under 28 U.S.C. § 1291.

DISCUSSION

A complaint's dismissal under FRCP 12(b)(6) is reviewed de novo. See Howard v. Everex Sys., 228 F.3d 1057, 1060 (9th Cir.2000). And on review, the court must accept the complaint's well-pleaded allegations as true and construe them in the light most favorable to the plaintiff. See In re Silicon Graphics Sec. Litig., 183 F.3d 970, 983 (9th Cir.1999). A district court's denial of leave to amend is reviewed for abuse of discretion. See In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1097 (9th Cir.2002).

In order for plaintiffs to properly allege a claim brought under § 10(b) of the Securities Exchange Act of 1934, they must state the following: (1) defendants made a false statement or omission with...