Oran v. Stafford
| Decision Date | 29 February 2000 |
| Docket Number | No. 99-5184,99-5184 |
| Parties | (3rd Cir. 2000) ALBERT ORAN; TERRY ADOLPHS; PHILIP MORRIS; JAMES DOYLE LUPO; PAUL H. MAURER, INDIVIDUALLY AND ON BEHALF OF A CLASS OF OTHERS SIMILARLY SITUATED, APPELLANTS V. JOHN R. STAFFORD; ROBERT G. BLOUNT; JOSEPH J. CARR; LOUIS L. HOYNES, JR.; WILLIAM J. MURRAY; DAVID M. OLIVIER; JOHN R. CONSIDINE; PAUL J. JONES; FRED HASSAN; AMERICAN HOME PRODUCTS CORPORATION Argued: |
| Court | U.S. Court of Appeals — Third Circuit |
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY, Dist. Court No. 97-cv-04513, District Court Judge: Nicholas H. Politan
[Copyrighted Material Omitted]
[Copyrighted Material Omitted] Marian P. Rosner (Argued) Michael A. Schwartz Wolf Popper Llp 845 Third Avenue New York, NY 10022, Allyn Z. Lite Joseph J. Depalma
Lite DePalma Greenberg & Rivas, Llc Two Gateway Center - 12th Floor Newark, NJ 07102, Counsel for Appellants
Anthony F. Phillips (Argued) Elizabeth S. Strong Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019 Donald A. Robinson Robinson, Lapidus & Livelli Two Penn Plaza East Newark, NJ 07105, Counsel for Appellees
Before: Alito and Stapleton, Circuit Judges, and Pollak, District Judge.*
OPINION FOR THE COURT
Plaintiffs brought this securities class action against American Home Products Corporation ("AHP") and certain of its directors and officers1 after AHP, in response to reports of serious medical side effects, withdrew its prescription weight-loss drugs Pondimin and Redux from the market. Stockholder plaintiffs allege that AHP made material misrepresentations and omissions regarding the safety of the drugs while failing to disclose several studies linking the drugs to heart-valve damage. As a result, plaintiffs claim, they suffered substantial financial loss when AHP's stock prices dropped following public disclosure of the withheld information. The District Court dismissed all claims on the pleadings for failure to state a claim, and we affirm.
Because this is an appeal from the District Court's grant of a motion for judgment on the pleadings, we accept as true all allegations in the complaint and draw all reasonable inferences in favor of the plaintiffs. See Consolidated Rail Corp. v. Portlight, Inc., 188 F.3d 93, 94 (3d Cir. 1999). Plaintiffs' complaint sets forth the following facts.
Defendant American Home Products Corporation ("AHP"), a Delaware corporation headquartered in New Jersey, is engaged in the research, development, manufacture and marketing of prescription and over-the-counter medications. During the period relevant to this litigation, AHP marketed the weight-loss drugs Pondimin (fenfluramine) and Redux (dexfenfluramine). Pondimin was marketed together with another drug, phentermine, in a combination popularly known as "fen-phen." Pondimin was approved by the Food and Drug Administration in 1973. Redux was recommended for approval by an FDA Advisory Committee in November 1995 and approved by the FDA in 1996.
In February 1994, AHP learned that a Belgian cardiologist had documented leaky heart valves in seven patients who had been taking diet pills containing Pondimin and Redux. By the time the FDA Advisory Committee voted to approve Redux in November 1995, AHP knew of at least 31 cases of heart valve abnormalities in European diet-pill users, but had informed the FDA about only eight of those cases. During the same time period, AHP also received hundreds of adverse reaction reports of patients displaying symptoms often associated with heart and lung problems. AHP represented to the FDA that these symptoms were reactions to the drugs and were not caused by any underlying heart condition.
In March 1997, AHP representatives met separately with cardiologists from the Mayo Clinic and MeritCare Health Systems who informed AHP that they had documented heart-valve abnormalities in a total of 17 fen-phen users. Dr. Heidi Connolly, the Mayo cardiologist, informed AHP that she had never seen this type of valve damage except in patients with rare cancers or in those who had taken ergotamine, a migraine drug that, like Redux and Pondimin, affects the body's serotonin level. Although AHP continued to investigate the Mayo data throughout 1997, it did not immediately release the reports to the public.
The Mayo data, which by that time included 24 reports of heart-valve abnormalities in fen-phen users, was finally disclosed to the public on July 8, 1997. On that date, AHP, Mayo, MeritCare and the FDA each made a public announcement concerning the reports. The Mayo announcement noted that the information "raise[d] significant concern that this combination of appetite suppressants has important implications regarding valvular disease." (App. 52-53.) AHP's announcement similarly stated that the company was investigating "the potential association of valvular heart disorders with the combination use of [fen-phen]." (App. 56.) The Mayo, FDA, and AHP announcements, however, all emphasized that there was no conclusive evidence establishing a causal relationship between fen-phen and heart valve disorders and that further study was needed before such a link could be confirmed. Following these announcements, there was no decline in the New York Stock Exchange price of AHP common stock.
On September 12, 1997, the FDA informed AHP of a survey showing that 92 of 291 fen-phen users had developed heart-valve abnormalities. The next business day, September 15, 1997, AHP announced that it was withdrawing Pondimin and Redux from the market. The same day, AHP issued a press release estimating total lost profits of 14 cents per share for 1997 and 1998 as a result of lost sales of the two drugs, as well as a one-time product withdrawal loss of $200 million to $300 million. On September 15, the day of the withdrawal announcement, the closing price of AHP common stock fell 3 11/16 points, to 73 1/4.
On September 16, 1997, a Wall Street Journal article reported that AHP (App. 103.) Nevertheless, AHP's stock rose slightly for the day. On September 17, 1997, articles in the Wall Street Journal and the New York Times reported that AHP had known about possible heart-valve abnormalities since at least March 1997, and that the company faced substantial personal injury liability exposure. That day, AHP stock suffered a 4 1/4 point decline, to close at 69 15/16.
Plaintiffs allege that from March 1, 1997, through September 16, 1997 (the "Class Period"), AHP made material misrepresentations and omissions regarding the safety of Pondimin and Redux, as well as AHP's knowledge of the heart-valve reports. For example, on March 27, 1997, AHP issued its Annual Report, which contained a statement that "Redux, the first prescription weight-loss drug to be cleared by the FDA in more than 20 years, was one of the most successful drug launches ever." (App. 47.) The report contained no reference to either the European or the Mayo data. On April 21, 1997, AHP issued a press release addressing newspaper reports of a death that had been mistakenly attributed to Redux by an FDA official. The press release noted that "[s]cientific evidence has shown Redux to be safe and effective when used as indicated." (App. 50.) In addition, in various releases listing Redux and Pondimin's side effects, AHP omitted any mention of heart-valve damage.
Plaintiffs also contend that, following the public disclosure of the Mayo data on July 8, 1997, AHP issued further misleading statements that were designed to minimize the impact of that data. Although AHP's statements to the public discussed "a possible serious heart valve disorder" and "an unusual type of serious regurgitant valvular heart disease," AHP failed to disclose that it had been aware of the Mayo data since March 1997, and of the European data since early 1995. (App. 57.) According to plaintiffs, this omission served to materially mislead investors as to AHP's potential exposure to damages from products liability litigation arising out of the two drugs.
In the period between the March meeting with Mayo and the end of the Class Period, seven of the individual defendants sold a total of $40 million of AHP stock, resulting in profits of $25 million. Plaintiffs allege that these sales were consciously designed to take advantage of AHP's artificially-inflated stock price prior to public disclosure of the heart-valve data.
Plaintiffs filed this securities class action in federal court on September 18, 1997, alleging that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. SS 78j(b) and 78t(a), as well as Rule 10b-5, 17 C.F.R. S 240.10b-5. On January 30, 1998, the plaintiffs filed an Amended Class Action Complaint (the "Amended Complaint"). Defendants moved to dismiss the complaint, and the District Court granted their motion in its entirety without leave for plaintiffs to amend further. See Oran v. Stafford, 34 F. Supp. 2d 906 (D.N.J. 1999).
Finding that plaintiffs had failed to plead any material misstatement or omission under federal securities law, the court noted that on July 8, 1997--halfway through the Class Period--there had been full disclosure of the Mayo data without any appreciable effect on AHP's stock price. As a result, the court concluded, "the medical data disclosed by AHP on July 8, 1997 was immaterial as a matter of law." Id. at 911. The court also held that disclosure of the European data and earlier adverse reaction reports would not have materially altered the substance of the July 8 release....
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