899 F.3d 988 (9th Cir. 2018), 16-56069, Khoja v. Orexigen Therapeutics, Inc.
|Citation:||899 F.3d 988|
|Opinion Judge:||TASHIMA, Circuit Judge|
|Party Name:||Karim KHOJA, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. OREXIGEN THERAPEUTICS, INC.; Joseph P. Hagan; Michael A. Narachi; Preston Klassen, Defendants-Appellees.|
|Attorney:||Ramzi Abadou (argued), Khan Swick & Foti, San Francisco, California; Lewis Khan, Alexander Burns, and Scott St. John, Khan Swick & Foti LLC, Madisonville, Louisiana; for Plaintiff-Appellant. Jessica Valenzuela Santamaria (argued) and John C. Dwyer, Cooley LLP, Palo Alto, California; Mary Kathryn ...|
|Judge Panel:||Before: A. Wallace Tashima, and Marsha S. Berzon, Circuit Judges, and Robert E. Payne, District Judge|
|Case Date:||August 13, 2018|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted November 6, 2017 Pasadena, California
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Ramzi Abadou (argued), Khan Swick & Foti, San Francisco, California; Lewis Khan, Alexander Burns, and Scott St. John, Khan Swick & Foti LLC, Madisonville, Louisiana; for Plaintiff-Appellant.
Jessica Valenzuela Santamaria (argued) and John C. Dwyer, Cooley LLP, Palo Alto, California; Mary Kathryn Kelley and Dane R. Voris, Cooley LLP, San Diego, California; for Defendants-Appellees.
Appeal from the United States District Court for the Southern District of California, Janis L. Sammartino, District Judge, Presiding, DC No. 3:15-cv-00540-JLS.
Before: A. Wallace Tashima, and Marsha S. Berzon, Circuit Judges, and Robert E. Payne,[*] District Judge
The panel affirmed in part and reversed in part the district court's dismissal, for failure to state a claim, of a securities fraud action under the Securities Exchange Act of 1934.
Defendant Orexigen Therapeutics, Inc., a small biotechnology firm, developed Contrave, an obesity drug candidate. Count I alleged that Orexigen and its executives misrepresented and/or omitted material facts to conceal the truth and/or adverse material information about a drug trial called the Light Study, in violation of § 10(b) of the Act and SEC Rule 10b-5. Count II alleged a fraudulent scheme under SEC Rules 10b-5(a) and (c), and Count III alleged control person liability on the part of the executives under § 20(a) of the Act.
The district court relied, in part, on documents that it judicially noticed or incorporated into the complaint by reference. The panel held that under Federal Rule of Evidence 201, a court may take judicial notice of matters of public record without converting a motion to dismiss into a motion for summary judgment, but a court cannot take judicial notice of disputed facts contained in such public records. The panel concluded that the district court abused its discretion in judicially noticing certain facts but properly took judicial notice of the date of Orexigen's international patent application for Contrave. The panel reversed and remanded for clarification on Exhibit D, reversed the district court's judicial notice of Exhibit E, and affirmed the judicial notice of Exhibit V.
The panel held that incorporation-by-reference is a judicially created doctrine that treats certain documents as though they are part of the complaint itself. The doctrine prevents plaintiffs from selecting only portions of documents that support their claims, while omitting portions of those very documents that weaken or doom their claims. The panel held that a defendant may seek to incorporate a document into the complaint if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff's claim. But if a document merely creates a defense to the well-pled allegations in the complaint, then that document did not necessarily form the basis of the complaint. And it is improper to assume the truth of an incorporated document if such assumptions only serve to dispute facts stated in a well-pleaded complaint. The panel held that the district court abused its discretion by incorporating certain documents into the complaint and properly incorporated others. Specifically, the panel reversed the district court's incorporation-by-reference of Exhibits B, C, F, H, R, S, and U, and it affirmed the incorporation of Exhibits A, I K, L, N, O, P, and T.
The panel affirmed in part and reversed in part the district court's dismissal of Count I for failure sufficiently to allege falsity and materiality, and it affirmed the district court's dismissal of Count II on the basis that the substance of the claim could not be discerned. Where affirming, the panel granted leave to amend the complaint. As to Count III, the panel reversed so that the district court could reconsider those claims in light of the reversal of claims in Count I and any amendments to the complaint.
The panel specified that its disposition of the appeal pertained only to claims against the executive defendants. With respect to Orexigen, appellate proceedings remained stayed pending resolution of bankruptcy proceedings. The panel instructed the Clerk to administratively close the docket with respect to Orexigen, pending further order of the court.
TASHIMA, Circuit Judge
This is an appeal from the dismissal by the district court of an action under the Securities Exchange Act of 1934, 15 U.S.C. § § 78a et seq. We must decide whether the district court erred in dismissing the action. We conclude that it did, in part. We also conclude that, in dismissing the action, the district court abused its discretion by improperly considering materials outside the Complaint. We also address and clarify when and how the district court should consider materials extraneous to the pleadings at the motion to dismiss stage via judicial notice and the incorporation-by-reference doctrine.
I. Facts Alleged in Complaint
Appellee Orexigen Therapeutics, Inc. ("Orexigen") is a small biotechnology firm that develops obesity drugs.1 At all relevant times, Orexigen employed Michael Narachi (CEO and Director), Joseph Hagan (Chief Business Officer, Treasurer, and CFO), and Preston Klassen (Head of Global Development) (collectively, the "Executive Defendants").2
A. Contrave and the "Light Study"
Contrave is Orexigens primary drug candidate. It was developed to treat obesity in patients. Obese patients are at risk for major adverse cardiovascular events ("MACE"). To develop Contrave, Orexigen partnered with Takeda Pharmaceutical Co. Ltd. ("Takeda").
The Food and Drug Administration ("FDA") required Orexigen to conduct a trial of Contrave, called the "Light Study." Because obese persons are already at risk for MACE, the Light Study would assess if Contrave increased that risk. Once 25 percent of a pre-determined amount of MACE occurred, an "interim analysis" would assess if patients on Contrave were more likely to suffer MACE than those on a placebo ("25 percent interim results"). As required by the FDA, an Executive Steering Committee ("ESC"), separate from Orexigen, oversaw the Light Study. Dr. Steven Nissen, from the Cleveland Clinic, headed the ESC. A Data Monitoring Committee ("DMC") was also created to monitor the trial and report its results.
FDA guidelines require that trial results remain confidential. Orexigen entered into a data access plan ("DAP") with the ESC and the DMC. Orexigen agreed that when it received the 25 percent interim results, only "those individuals at [Orexigen] who needed to facilitate its regulatory filings with the FDA" would have access to them.
Orexigen initiated the Light Study in June 2012.
B. Orexigen Leaks Positive 25 Percent Interim Results
In November 2013, subject to the DAP, the DMC shared the 25 percent interim results with Orexigen. The results were unexpectedly positive. Rather than increase the risk of MACE, "Contrave reduced cardiovascular events by 41 [percent] compared with a placebo."
The Light Study administrators requested that Orexigen produce a list of individuals who knew of the 25 percent interim results. Orexigen revealed that over 100 people with a financial interest in the Light Study knew of the 25 percent interim results.
As a sanction for Orexigens apparent leak, the FDA required that four Orexigen executives, including Klassen, sign an agreement forbidding Orexigen from disclosing the 25 percent interim results again. Another DAP further limited which Orexigen employees had access to interim results. Although the Light Study would continue, the FDA also required that Orexigen perform an entirely new trial to study Contraves cardiovascular effects.
During a June 4, 2014, meeting about the leak, the FDA reminded Narachi and Klassen that the leaked results— representing only 25 percent of the pre-determined amount of MACE required for the study— have "a high degree of uncertainty and were likely to change with the accumulation of additional data."
C. Orexigen Files Patent Application Containing Interim Results Confidentially, Then Requests Publication.
Less than a month later, on July 2, 2014, Klassen submitted a provisional patent application ("2014 Patent Application") for Contrave to the United States Patent and Trademark Office ("USPTO"). The 2014 Patent Application contained the 25 percent interim results. Orexigen filed the 2014 Patent Application pursuant to 35 U.S.C. § 122, which renders patent applications confidential.
In December 2014, the European Medicines Agency ("EMA") informed Orexigen that, in March 2015, the EMA would review a draft decision to grant marketing authorization for Contrave in Europe.3 Orexigen then requested that the USPTO publish the 2014 Patent Application, thus rescinding its earlier request to keep it confidential. On February 11, 2015, the USPTO informed Orexigen that it would publish the 2014 Patent Application— which contained the confidential interim results— on March 3, 2015.
D. Orexigen Reveals Interim Results Again.
When the USPTO published the 2014 Patent Application, Orexigen filed a Form 8-K ("March 2015 Form 8-K") with the Securities and Exchange Commission...
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