United States Court of Appeals
For the First Circuit
Nos. 18-1369, 18-1472
METZLER ASSET MANAGEMENT GMBH, on behalf of itself and all other
similarly situated parties;
ERSTE-SPARINVEST KAPITALANANLAGEGESELLSCHAFT MBH, on behalf of
itself and all other similarly situated parties,
Plaintiffs, Appellants/Cross-Appellees,
v.
STUART A. KINGSLEY; GEORGE A. SCANGOS; PAUL J. CLANCY;
BIOGEN INC.,
Defendants, Appellees/Cross-Appellants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor, IV, U.S. District Judge]
Before
Lynch, Stahl, and Barron,
Circuit Judges.
Gregg S. Levin, with whom Christopher F. Moriarity, William
H. Narwold, Motley Rice LLC, Jonathan Gardner, Labaton Sucharow
LLP, Robert M. Rothman, Mark T. Millkey, Susan K. Alexander, Andrew
S. Love, and Robbins Geller Rudman & Dowd LLP were on brief, for
appellants/cross-appellees.
James R. Carroll, with whom Michael S. Hines, Sara J. van
Vliet, and Skadden, Arps, Slate, Meagher & Flom LLP were on brief,
for appellees/cross-appellants.
June 27, 2019
BARRON, Circuit Judge. Metzler Asset Management GmbH
("Metzler") and Erste–Sparinvest Kapitalanlagegesellschaft mbH
("Erste–Sparinvest") have been designated the lead plaintiffs,
pursuant to the Private Securities Litigation Reform Act
("PSLRA"), 15 U.S.C. § 78u-4, in a federal securities class action
that they brought against Biogen Inc. and three Biogen executives
("Biogen"). The suit alleges that Biogen and its executives
committed fraud, in violation of regulations promulgated by the
Securities and Exchange Commission pursuant to the Securities
Exchange Act, 15 U.S.C. § 78a et seq, by falsely stating that
Biogen's product, Tecfidera, was both safer and more widely used
than it was. The putative class is comprised of all purchasers of
Biogen common stock from July 23, 2014, through July 23, 2015.
The defendants moved to dismiss the suit on claim
preclusion grounds, based on this Court's earlier decision in In
re Biogen Inc. Securities Litigation, 857 F.3d 34 (1st Cir. 2017)
("Biogen I"), and for failing to plead facts "giving rise to a
strong inference" of scienter, 15 U.S.C. § 78u-4(b)(2)(A), as the
PSLRA requires that a complaint alleging fraud must in order for
it to survive such a motion. The District Court rejected the
defendants' claim preclusion argument but dismissed the suit under
the PSLRA for failing to adequately plead scienter. We affirm.
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I.
The corporate defendant, Biogen, is a multinational
biotechnology company based in Cambridge, Massachusetts. Its
stock trades on the NASDAQ. Id. at 37. The three individual
defendants are George Scangos, who was Biogen's Chief Executive
Officer from July 23, 2014, through July 23, 2015; Paul Clancy,
who was Biogen's Chief Financial Officer and Executive Vice
President of Finance during that time; and Stuart Kingsley, who
was its Executive Vice President of Global Commercial Operations
during the same period. Id.
The plaintiffs' complaint sets forth the following
allegations. Biogen developed and sold a United States Food and
Drug Administration ("FDA") approved drug for multiple sclerosis
("MS") called Tecfidera during the relevant time period. Tecfidera
accounted for a third of Biogen's total revenue in this time frame.
As of July 23, 2014, Tecfidera bore a label that warned patients
taking the drug of an increased risk of developing lymphopenia -- a
condition of having low lymphocyte counts, leading to a weakened
immune system.
On October 22, 2014, Biogen held a third-quarter
earnings call with its investors. The company announced for the
first time publicly that an MS patient who had been regularly
taking Tecfidera had died of progressive multifocal
leukoencephalopathy ("PML"), a rare neurological disease which
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counts lymphopenia as one of its precursors. One month later,
Biogen amended the Tecfidera label to include a warning about the
risk of PML.
On January 29, 2015, Biogen provided full-year revenue
guidance for 2015. It predicted a 14% to 16% overall growth rate
for the company for the year. However, on April 24, 2015, Biogen
released first-quarter financial results for the year that showed
that Tecfidera's revenue had fallen below the market estimates.
On July 24, 2015, Biogen released its second-quarter
earnings report. The report amended the company's 2015 revenue
guidance. It lowered Biogen's predicted revenue growth from 14-16%
to 6-8% for the year. Biogen attributed its tempered expectations,
in part, to slowing Tecfidera growth.
Biogen's stock fell by more than 20% in one day due to
the second quarter earnings report. On October 9, 2015, Biogen
announced that Kingsley was leaving the company. Less than two
weeks later, the company announced that it was cutting roughly 11%
of its workforce. Id. at 39.
On August 18, 2015, a putative federal securities fraud
class action was filed in the District of Massachusetts against
the company and the same three individual defendants in the case
before us in this appeal. Id. at 36-39. The putative class in
that action consisted of persons who had purchased common stock of
Biogen between January 29, 2015, and July 23, 2015. Tehrani v.
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Biogen, Inc., No. 15-13189, 2015 WL 7302132, at *1 (D. Mass. Nov.
18, 2015). The suit alleged that Biogen and the three executives
had fraudulently misled investors, in violation of Sections 10(b)1
and 20(a)2 of the Securities Exchange Act of 1934, see 15 U.S.C.
§§ 78j(b), 78t(a), regarding Tecfidera's usage rates in light of
the PML incident. Tehrani, 2015 WL 7302132, at *1.
Notice of the action was published pursuant to the PSLRA,
which establishes procedures for bringing securities class
actions. See id. at *2. In accordance with those procedures, on
November 17, 2015, the District Court preliminarily appointed GBR
Group Ltd. ("GBR") "lead plaintiff" in the matter, a status that
Congress created in the PSLRA "to increase the chances that
securities fraud cases are brought by investors who have
substantial and genuine interests in the litigation." Id.
On January 19, 2016, GBR filed an amended complaint.
The amended complaint changed the class period, such that it ran
from December 2, 2014, through July 23, 2015. Biogen I, 857 F.3d
at 36.
1
Section 10(b), as set forth in 15 U.S.C. § 78j(b), makes it
unlawful "[t]o use or employ, in connection with the purchase or
sale of any security . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the
Commission may prescribe."
2
Section 20(a), as set forth in 15 U.S.C. § 78t(a), creates
"[j]oint and [s]everal" liability for "[e]very person who,
directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder."
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Biogen moved to dismiss the complaint. The District
Court granted that motion as to both the Section 10(b) and 20(a)
claims. See Biogen I, 193 F. Supp. 3d 5, 56 (D. Mass. 2016).
GBR moved to vacate the order of dismissal and for leave
to file a second amended complaint with the District Court under
Federal Rules 59(e) and 60(b)(2). In re Biogen Inc. Sec. Litig.,
No. 15-13189, 2016 WL 5660329, at *3 (D. Mass. Sept. 28, 2016).
The motion requested that the District Court vacate the order of
dismissal based on the new scienter allegations in the proposed
second amended complaint. Id. The District Court denied the
motion. Id. at *6. The District Court determined that the
plaintiffs could have discovered the evidence on which they were
based earlier with reasonable diligence. Id.
GBR appealed both the dismissal of the complaint for
failure to state a claim as well as the denial of its motion to
vacate that dismissal and for leave to file the second amended
complaint. As discussed below, that appeal ultimately ended in
affirmance of the District Court. During the pendency of the
appeal in that case, however, separate Biogen stockholders filed
a subsequent putative class action in the District Court on October
20, 2016, against Biogen and certain of its executives on behalf
of a class of investors in the company. Metzler Asset Mgmt. GmbH
v. Kingsley ("Biogen II"), 305 F. Supp. 3d 181, 205, 202 (D. Mass.
2018). They alleged that, through its comments to investors,
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Biogen misled the market about Tecfidera's safety profile and
discontinuation rates.
This new action is the one before us on appeal. It,
too, asserts violations of Sections 10(b) and 20(a) of the
Securities Exchange Act. Nonetheless, it differs from the first
putative class action that had been filed against Biogen in three
ways. First, the class period for the putative class in the new
suit began on July 23, 2014, as opposed to December 2, 2014.
Second, the complaint in the new suit alleged that Biogen had made
additional misleading statements not referenced in the prior suit
and also set forth statements from confidential witnesses ("CWs")
to prove scienter that had not been referenced in the complaint in
the earlier suit. These newly alleged statements included ones
that had been set forth in the amended complaint in the earlier
putative class action that the District Court rejected for not
having been included in a timely manner. See Biogen I, 857 F.3d
at 45-46. Third, the new suit alleged that, in addition to making
fraudulent statements regarding Tecfidera's usage rate, Biogen
executives also made fraudulent statements about the drug's safety
profile.
On February 1, 2017, the District Court preliminarily
appointed Metzler and Erste–Sparinvest -- not GBR -- to be the
lead plaintiffs in this new suit pursuant to the PSLRA. See
Metzler Asset Mgmt. GmbH v. Kinglsey, No. 16-12101, 2017 WL 438731
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(D. Mass. Feb. 1, 2017). Plaintiffs also filed a motion to stay
the District Court proceedings pending resolution of the appeal of
the earlier action. That motion was denied. Id. at *4.
On May 12, 2017, we affirmed the District Court's order
of dismissal for lack of sufficient allegations of scienter in
Biogen I. Biogen I, 857 F.3d at 46. In so doing, we also held
that the confidential witness statements provided by the
plaintiffs were "insufficiently particular" to prove scienter.
Id. at 41. Finally, we denied the plaintiffs' motion to vacate
and file a second amended complaint. Id. at 45.
Following Biogen I, Biogen moved to dismiss the
complaint in the putative class action that is now before us for
failing to adequately plead scienter and on claim preclusion
grounds. The District Court rejected the claim preclusion argument
but agreed that the complaint in the new suit failed to plead facts
sufficient to create a strong inference of scienter. Biogen II,
305 F. Supp. 3d at 205, 222. The appeal from that ruling then
followed.
II.
To establish claim preclusion, the defendant must show
that "(1) the earlier suit resulted in a final judgment on the
merits, (2) the causes of action asserted in the earlier and later
suits are sufficiently identical or related, and (3) the parties
in the two suits are sufficiently identical or closely related."
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Airframe Sys., Inc. v. Raytheon Co., 601 F.3d 9, 14 (1st Cir.
2010). The District Court rejected Biogen's claim preclusion
argument. See Biogen II, 305 F. Supp. 3d at 205. The District
Court did not question whether Biogen I represented a final
judgment, as it plainly did. Id. at 204. Nor did the District
Court rule that that the causes of action in the two cases were
not related or identical, as it found that they were. Id. Instead,
the District Court rejected the contention that GBR, as lead
plaintiff under the PSLRA in Biogen I, could "adequate[ly]
represent" the class in Biogen II, such that the plaintiffs in the
two actions may be deemed to be sufficiently "identical," as they
must be for claim preclusion to apply. Id. at 205.
The District Court explained that the putative class in
Biogen I was not certified through Federal Rule of Civil Procedure
23 and thus remained merely a "proposed class action[.]" Id.
(citing Smith v. Bayer Corp., 564 U.S. 299, 316 (2011)). For that
reason, the District Court ruled, GBR could not, by virtue of its
role as the lead plaintiff under the PSLRA in Biogen I, be deemed
to have "adequate[ly] represented" the putative class in Biogen
II.
In reaching this conclusion about whether the members of
the putative class in Biogen II were adequately represented by GBR
in Biogen I, the District Court relied on the Supreme Court's
ruling in Smith. There, the Supreme Court held that a consumer's
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motion for class certification was not precluded by a previous
decision denying a similar motion for class certification to a
different party. Smith, 564 U.S. at 304-05. The Court stated,
"[w]e could hardly have been more clear [in Taylor v. Sturgell,
553 U.S. 880 (2008)] that a 'properly conducted class action,'
with binding effect on nonparties, can come about in federal courts
in just one way -- through the procedure set out in Rule 23." Id.
at 316.
Biogen argues that the District Court erred in this
aspect of its claim preclusion analysis. Biogen contends that the
PSLRA's process for appointing a lead plaintiff sufficed to ensure
that GBR, in its role as lead plaintiff of the putative class in
Biogen I, did adequately represent the interests of the putative
class in Biogen II, even though the class in Biogen I had not been
certified at the time of the dismissal of that action. Thus,
Biogen contends that the dismissal in Biogen I could be preclusive
of the claims brought by the putative class in Biogen II, even
though GBR is not the lead plaintiff for that putative class.
In challenging Biogen's claim preclusion argument, the
appellants contend that the protections afforded absent parties by
the PSLRA are not as robust as those afforded by the requirements
set forth in Rule 23 itself, due to the preliminary nature of the
PSLRA's lead plaintiff appointment procedures. Indeed, as
multiple courts have recognized, nothing about lead plaintiff
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appointment pursuant to the PSLRA is "dispositive with respect to
the ultimate certification of the class and designation of a class
representative." Greebel v. FTP Software, Inc., 939 F. Supp. 57,
62 n.4 (D. Mass 1996); Dempsey v. Vieau, 130 F. Supp. 3d 809, 813
(S.D.N.Y. 2015) ("Lead plaintiff designation does not abnegate the
necessity of class certification . . . ."). Consequently, the
argument proceeds, lead plaintiff appointment pursuant to the
PSLRA is simply too preliminary for a lead plaintiff of an
as-yet-uncertified class to be deemed on that basis alone to be an
adequate representative for claim preclusion purposes of a class
in a subsequent action. Dempsey, 130 F. Supp. 3d at 813.
In addition to this potential problem with Biogen's
claim preclusion contention here, there is another that is more
particular to this case. The proposed class in Biogen II includes
stockholders who purchased Biogen securities between July 23,
2014, and December 2, 2014. This group of purchasers was not
included in the class proposed in Biogen I. Biogen does not
explain how the lead plaintiff in Biogen I could be thought to
have adequately represented those members of the proposed class in
Biogen II who are not only represented by different lead plaintiffs
but also were not even members of the putative class in Biogen I.
We need not, however, resolve the claim preclusion issue
definitively here. Even if we were to assume that the adequate
representation requirement could not be satisfied here, such that
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the plaintiffs' claim is not precluded, the suit in Biogen II would
still have to be dismissed. As we next explain, the District Court
properly ruled that, under the PSLRA, the plaintiffs failed to
adequately plead scienter for purposes of surviving a motion to
dismiss for failure to state a claim.
III.
To state a claim under Section 10(b)3 of the Securities
Exchange Act, plaintiffs must adequately plead "(1) a material
misrepresentation or omission; (2) scienter; (3) a connection with
the purchase or sale of a security; (4) reliance; (5) economic
loss; and (6) loss causation." Biogen I, 857 F.3d at 41. Scienter
is defined as either the "intentional or willful conduct designed
to deceive or defraud investors" or "a high degree of
recklessness." Id. (internal quotations omitted).
Under the PSLRA, to survive a motion to dismiss for
failure to state a claim, plaintiffs must "state with particularity
facts giving rise to a strong inference that the defendant acted
with [scienter]." 15 U.S.C. § 78u-4(b)(2)(A) (emphasis added).
"For an inference of scienter to be strong, 'a reasonable person
3 As the plaintiffs' Section 20(a) claims are necessarily
dependent on the existence of a Section 10(b) violation, our
analysis need only address the deficiencies in the plaintiffs'
Section 10(b) claims in order to uphold the District Court's
decision. See ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46,
67 (1st Cir. 2008) ("The plain terms of [S]ection 20(a) indicate
that it only creates liability derivative of an underlying
securities violation.").
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would [have to] deem [it] cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.'" Biogen
I, 857 F.3d at 41 (alterations in original) (quoting Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)).
The District Court dismissed the plaintiffs' suit in
Biogen II after determining that none of the statements that the
plaintiffs allege that the individual Biogen executive defendants
made were of a kind that could give rise to the "strong inference"
of scienter that the PSLRA requires. On that basis, the District
Court concluded that the claims against each of these executives
individually, as well as the claims against Biogen itself, must be
dismissed. Cf. Biogen I, 857 F.3d at 37, 41. Our review of the
District Court's ruling on scienter is de novo. See id. at 41.
To make their case on appeal, the plaintiffs focus on
six statements in their complaint that the District Court held, in
making its scienter ruling, were at least "plausibly misleading."
Biogen II, 305 F. Supp. 3d at 206, 212.4 These statements fall
into two general categories: (1) those that pertain to Tecfidera's
4 For the purpose of this appeal, we will assume, favorably
to plaintiffs, that the District Court was correct in concluding
that these six statements were, in fact, "plausibly misleading."
Although we do not definitively conclude that these six statements
are plausibly misleading, we will nonetheless refer to them
throughout the opinion as the six "plausibly misleading"
statements for clarity's sake.
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safety profile, and (2) those that pertain to Tecfidera's usage
rate. We consider the statements in each category in turn.
Before doing so, however, we note that although the
statements that we focus on were made by, respectively, Alfred
Sandrock (Biogen's Chief Medical Officer), Doug Williams (Biogen's
Executive Vice President of Research and Development) and
Kingsley, only Kingsley is a defendant in his own right. Thus, it
is unclear what role, if any, the statements by Sandrock and
Williams serve in the plaintiffs' fraud claims against Kingsley,
Scangos, and Clancy. But, even if we assume that Williams's and
Sandrock's statements somehow could be imputed to these three
individual defendants, as the plaintiffs appear implicitly to
assume in their briefing to us in contending that the District
Court erred in dismissing the claims against them, the plaintiffs'
argument would still fail.
A.
The first category of statements on which the plaintiffs
in this appeal rely with respect to the claims against the
individual defendants concerns Tecfidera's safety profile. The
plaintiffs point to two such statements, the first of which was
made on September 11 by Sandrock. According to the complaint,
Sandrock stated at that time that "Tecfidera continues to provide
patients with effective oral treatment for MS that is supported by
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a growing body of data reinforcing its benefits and favorable
safety profile."
The complaint alleges that Sandrock made this statement
before Biogen's October announcement of the PML-related death, and
the plaintiffs do not contend that any of the individual defendants
knew about that death before Sandrock made this statement.5 The
plaintiffs nevertheless contend that the District Court erred in
concluding that the complaint failed adequately to allege that
Sandrock made the statement with the "intentional or willful"
design to deceive investors.
To make this case, the plaintiffs point out that, in
August and September of 2014, Dr. Ben Thrower, the medical director
at the Shepherd Center in Atlanta, notified Keith Ferguson, the
company's senior sales director, and Eric Hall, the medical science
liaison for Biogen, that his research showed that patients who
were taking Tecfidera had a higher risk of developing low
lymphocyte counts than Biogen had originally disclosed. The
complaint further alleges that, for this reason, Dr. Thrower chose
to discontinue Tecfidera prescriptions for approximately 200 of
his patients and to stop issuing new prescriptions for the drug.
5
CW 15's statements that Biogen had already prepared a
response for a potential PML-related death is not to the contrary.
That the company had a PML-related contingency in place for a drug
that it already knew -- and disclosed -- caused low lymphocyte
counts is not surprising and does not indicate that Sandrock made
the statement at issue deceitfully.
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The complaint also alleges that he told Ferguson and Hall about
this development.
But, according to the complaint, Sandrock in his
September 2014 statement said only that Tecfidera was "effective"
at treating MS and that its safety profile was "supported by a
growing body of data." Nothing about Dr. Thrower's alleged
statements to Hall and Ferguson about his own research
findings -- especially given the limited slice of the market on
which those findings were based -- contradicts the statements that
the complaint alleges that Sandrock made. See Geffon v. Micrion
Corp., 249 F.3d 29, 36 (1st Cir. 2001) ("Even if the statements at
issue were material and false or misleading, the evidence does not
support a finding that defendants knew the statements would
materially mislead the investing public." (emphasis omitted)).
Thus, even assuming that Sandrock's statement was "plausibly
misleading" and made with knowledge of Thrower's conclusions, we
find insufficient support for a "strong inference" that Sandrock
spoke with the intent to deceive investors. And thus, the
allegations regarding Sandrock fail to establish a "strong
inference" of scienter as to even him, let alone as to any
individual defendant.
The only other "plausibly misleading" statement that
concerns the drug's safety profile to which the plaintiffs point
is one that, according to the complaint, Williams made in April of
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2015. In it, Williams allegedly stated that "there's no real
change in the benefit/risk profile of the drug for patients with
MS. So it's pretty much status quo at the moment."
By April of 2015, according to the complaint, Biogen had
already disclosed the PML death and updated the drug's label to
account for the increased understanding of its risk. Given that
none of the findings by the researchers that the plaintiffs cite
aver that the drug was less safe than these revised disclosures,
we do not see how the plaintiffs can plausibly suggest that
Williams was aware that the drug was less safe than these revised
disclosures suggested. Therefore, even if, drawing all inferences
in favor of the plaintiff, one could conclude that Williams's
statement -- read in a vacuum -- was misleading, one could not
draw a "strong inference" from that statement that it was said
with an "intent to deceive," given what the record shows about
Biogen's earlier disclosures and the state of Williams's knowledge
of the drug's safety profile. See City of Dearborn Heights Act
345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 760
(1st Cir. 2011) ("[A]ttempts to provide investors with warnings of
risks generally weaken the inference of scienter." (alteration in
original) (quoting Ezra Charitable Tr. v. Tyco Int'l, Ltd., 466
F.3d 1, 8 (1st Cir. 2006)).
We turn, then, to the four "plausibly misleading"
statements that pertain to Tecfidera's usage rates. All four
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statements were allegedly made by Kingsley, who is an individual
defendant. But, we find no basis for concluding that any of these
statements permit us to infer the necessary intent to deceive that
could suffice to create the "strong inference" of scienter that
the PSLRA requires. And, even the cumulative weight of these
statements and the CW evidence discussed below would not suffice.
We first address the January 29, 2015 statement by
Kingsley that "Tecfidera [was] on track to become the most
prescribed therapy for MS worldwide." The plaintiffs argue that
this statement was misleading and creates the "strong inference"
of scienter on Kingsley's part, because at the time of the
statement, Kingsley knew about both the PML death and about
Tecfidera's declining sales and discontinuation rates.
At the time that Kingsley made the statement, however,
Biogen had already disclosed to the public the news of the PML
death, had already changed the drug's label, had already publicized
that it expected the drug's growth rate to "slow," and had already
disclosed that the drug's discontinuation rates were higher than
expected. Moreover, during the conference call on which Kingsley
made the statement at issue, he also noted that the company had
observed "moderating" growth for the drug at the end of 2014 and
expected that trend to continue into the new year. Given these
disclosures pointing against sales growth, it is hard to
characterize Kingsley's statement that he believed Tecfidera would
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"become the most-prescribed therapy for MS worldwide" as anything
other than misguided optimism. See Fire & Police Pension Ass'n of
Colo. v. Abiomed, Inc., 778 F.3d 228, 244 (1st Cir. 2015) (holding
that defendants' informative disclosures "undercut any inference
of scienter"). Accordingly, we fail to see how one could
characterize Kingsley as having had the requisite intent to deceive
when he made this statement, such that one could draw the "strong
inference" of scienter required by the PSLRA.
We, turn, then, to three statements of Kingsley's from
January 29, 2015, to February 25, 2015, in which, according to the
complaint, he stated that there had not been any "meaningful
change" in Tecfidera's discontinuation rates and that those rates
were "consistent with historical averages." As previously
mentioned, at the time that Kingsley made these statements, the
company had already disclosed to investors that Tecfidera's
discontinuation rate was higher than Biogen would have hoped but
that the company aimed to "get better performance in the
discontinuation rates over a longer period of time." Given the
statements in which Kingsley had been forthcoming about the status
of Tecfidera's discontinuation rates, we do not see how Kingsley's
early 2015 refrain that the company had not seen "meaningful
change" in the drug's discontinuation rate and that the rates were
"consistent with historical averages" may fairly be characterized
as having been made with the "intent to deceive." Id.
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In arguing otherwise, plaintiffs point to statements set
forth in the complaint that were allegedly made by CWs. The
complaint contains statements made by seventeen CWs regarding
their observations on Tecfidera's sales, discontinuation rates,
and safety profile. Ten of the seventeen CWs referenced in the
complaint were also referenced in the complaint in Biogen I (CWs
1-10).6 In addition to referring to seven new CWs (CWs 11-17),
the Biogen II complaint also includes multiple new statements from
four of the CWs (CWs 1, 3, 7, and 8) who were included in the
original Biogen I complaint.
In Biogen I, our Court found that none of the CWs'
statements included in that complaint were probative of the
defendants' scienter because they were imprecise, did not contain
information that was directly communicated to the individual
defendants, or concerned events that occurred after the individual
defendants made the plausibly misleading statements at issue in
that case. See Biogen I, 857 F.3d at 42-43. That logic applies
with equal force here, insofar as the plaintiffs have reprised
their argument that the statements by CWs set forth in the Biogen
I complaint illustrate that Kingsley made his four plausibly
misleading statements with the requisite scienter.
6 Of the seven "new" confidential witnesses included in the
present complaint (CWs 11-17), two (CWs 11 and 12) were included
in the Second Amended Complaint that our Court rejected as untimely
in Biogen I. See Biogen I, 857 F.3d at 45-46.
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As to the additional statements not included in the
Biogen I complaint, the District Court similarly rejected them as
not probative of the defendants' scienter because they failed to
"set forth specific facts" that directly conflicted with the six
"plausibly misleading" statements that the District Court
highlighted. Biogen II, 305 F. Supp. 3d at 214-15 (emphasis in
original). The District Court went on to note -- based on logic
similar to that which we applied in Biogen I -- that these
statements' relevance is further diminished by the fact that the
complaint does not allege that any of the CWs ever spoke with any
of the individual defendants or otherwise shared with them their
observations. Id. at 215 n.29.
On appeal, the plaintiffs do reference the statements of
one CW in particular, CW 13. According to the plaintiffs, CW 13
explained that "everyone in leadership had access to reporting
metrics" and that leadership frequently monitored the "new start"
rates for Tecfidera as part of the process for producing their
sales projections.
But, the fact that Biogen's leadership monitored
Tecfidera's reporting metrics does not in and of itself suffice to
create the "strong inference" that Kingsley made his four
statements about Tecfidera's discontinuation rates with the
requisite intent to deceive. We would expect responsible
management to engage in such monitoring. As a result, before one
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could infer what plaintiffs ask, one would need to know what
Kingsley learned from such monitoring, and whether what he learned
was at odds with any of his "plausibly misleading" statements.
Yet, the complaint alleges no facts that are illuminating in that
regard.
The only additional confidential witness statement that
the plaintiffs expressly reference in their brief's section on
individual scienter is the statement made by CW 1. That witness
allegedly said that Biogen instructed Area Business Managers to
"downplay the significance of the PML death" when attempting to
convince doctors to prescribe the drug. But, the complaint does
not allege that Sandrock, Williams, or Kingsley was aware of this
alleged instruction by the company. Nor do we see why such an
instruction gives rise to an inference that Kingsley's public
assessment of the drug's actual usage was inaccurate, let alone
intentionally deceitful.
As to the statements concerning safety, the plaintiffs
do not dispute that Biogen disclosed the PML death to investors
and the public. Moreover, nothing in CW 1's alleged statement
reveals that what Sandrock and Williams actually said publicly
about the drug's safety was known by them to be misleading.
In their briefing to us, the plaintiffs expressly
reference a number of other confidential witness statements to
support their arguments that the three individual defendants
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possessed the requisite scienter. But, the plaintiffs do not
allege that any of the confidential witnesses who made these
statements spoke with Kingsley before he made his statements about
the discontinuation rates, and most of these confidential
witnesses are, by the complaint's account, several levels removed
from the company's executive team. See Biogen II, 305 F. Supp. 3d
at 215 n.29 ("The complaint does not allege that any of
the . . . confidential witnesses ever spoke with one of the named
defendants."); see also Fire & Police Pension Ass'n of Colo., 778
F.3d at 245 (noting that "none of the witnesses were in senior
management positions, and they appear to have had relatively little
ongoing contact with senior management" (internal quotations
omitted)).
B.
The plaintiffs do separately argue that they can meet
their burden to allege that Biogen (though, we presume, not any of
the individual defendants) had the requisite scienter under a
theory of "corporate scienter." Specifically, the plaintiffs
contend that, if the complaint plausibly alleges that one of the
company's employees made a misleading statement to investors
without scienter and "an individual within Biogen’s management
team . . . knew or had access to information" that showed that
this misleading statement was not true, then Biogen can be found
to have had the requisite scienter on a corporate scienter theory.
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The plaintiffs then proceed to contend that the record provides
support for finding a "strong inference" of scienter on this basis,
in light of the six "plausibly misleading" statements in the
complaint that we have just reviewed, the company's failure to
correct them, and the allegations that the complaint sets forth
regarding what persons within the company knew or what the company
may itself be charged with having known. And, the plaintiffs
further contend, the District Court erred by failing even to
address this basis for finding scienter vis à vis the claims
against Biogen.
The plaintiffs attempt to make the case for their showing
of corporate scienter as follows. They allege that Ferguson and
Hall knew, due to their conversation with Dr. Thrower, that
Tecfidera was less safe than the company stated publicly when
Sandrock said that "Tecfidera continues to provide patients with
effective oral treatment for MS that is supported by a growing
body of data reinforcing its benefits and favorable safety
profile," and when Williams said that "there's no real change in
the benefit/risk profile of the drug for patients with MS. So
it's pretty much status quo at the moment." The plaintiffs argue
that Ferguson and Hall may be understood to have had this knowledge
because, as the complaint alleges, Dr. Thrower discussed with
Ferguson and Hall his research that Tecfidera could cause lower
lymphocyte counts than the company originally disclosed.
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But, the fact that Dr. Thrower and researchers like Dr.
Zamvil concluded on the basis of their own research that Tecfidera
could cause lower lymphocyte counts than was originally understood
does not, in and of itself, suffice to contradict the assertions
that Tecfidera was "effective" at treating MS and that this fact
was "supported by a growing body of research." For that reason,
even if we were to assume that the statement was plausibly
misleading and that Hall's and Ferguson's knowledge of Dr.
Thrower's research -- or any of the other research cited by the
plaintiffs -- could be imputed to the company as a whole, that
knowledge would still fail to create the "strong inference" of
scienter on Biogen's part. That is so, we emphasize, even if we
were to accept the plaintiffs' theory of corporate scienter.
Similarly, the plaintiffs argue that Dr. Thrower's
statements to Hall and Ferguson show that the company knew that
the drug's usage rates were lower than was publicized. But, we
fail to see how the knowledge that one doctor -- whose patients
constituted less than 0.2% of all Tecfidera users -- would no
longer prescribe Tecfidera could suffice to show that the company
understood the drug's usage rate to be at odds with any statement
regarding its usage that had been made publicly. For that reason,
once again, Ferguson and Hall's knowledge of what Dr. Thrower had
allegedly told them about his own experience with the drug does
not suffice to establish the "strong inference" of scienter, even
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if we were inclined to impute what Ferguson and Hall knew to the
company overall in the way that the plaintiffs contend that we
must under their expansive theory of "corporate scienter."7
The plaintiffs also point to statements made by the
confidential witnesses to support their contention that the
complaint adequately alleges that employees in the company knew
that the statements by Kingsley that the District Court found to
be "plausibly misleading" were untrue. They then proceed to argue
from that contention that the complaint's allegations suffice to
create a "strong inference" of scienter on the company's part, in
consequence of Kingsley's plausibly misleading statements
regarding the drug's usage. But, the alleged statements at issue
either were not made with sufficient particularity, see Biogen I,
875 F.3d at 42 (noting that the confidential witness statements
did not "quantify the magnitude of the sales decline at the company
level. [Nor did they] explain with any precision" the cause of
7 Plaintiffs' reliance on CW 12's statements as evidence of
corporate scienter does little to strengthen their position.
According to the plaintiffs, Craig Brown, Biogen's Regional
Director, noted that CW 12's regional sales numbers declined after
Dr. Thrower stopped prescribing Tecfidera to his patients. This
statement simply speaks to the fact that individuals in the company
were aware that, at least for a time, Dr. Thrower's decision would
have an impact on their sales in the Atlanta region where CW 12
was stationed. CW 12's observation does not indicate that anyone
in the company knew Kingsley's statements about Tecfidera's
discontinuation rate nationally were in any way untrue such that
those observations would create the "strong inference" of scienter
necessary to survive a motion to dismiss under the PSLRA.
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the decline in sale) or did not describe events that took place
before Kingsley's three statements concerning the drug's
discontinuation rates, see id. at 42-43 (describing "a significant
timing problem" with many of the confidential witness statements,
as most of them described declines in Tecfidera sale that occurred
after Kingsley made the three plausibly misleading statements at
issue here).
For example, plaintiffs reference the statements made by
CW 11 that Biogen was aware that Tecfidera sales would decline
after the PML death was announced and "drastically lowered sales
targets for the drug." But, the plaintiffs never explain how
reductions in sales targets in November of 2014 indicate that that
anyone in the company was aware that discontinuation rates were
higher than Kingsley's statements indicated in early 2015. After
all, the fact that the company reduced sales targets does not,
necessarily, mean that actual sales fell at a commensurate rate.
Accordingly, while these statements do indicate that employees in
the company were concerned about the impact the PML death would
have on Tecfidera sales, they do not create a "strong inference"
that someone in the company's management team knew that Kingsley's
generalized statements about the drug's discontinuation rates were
untrue.
Similarly, CW 14's statements that there were "lots of
discontinuations" in the New York region after the PML death was
- 28 -
announced do not suffice to support the plaintiffs attempt to show
that the District Court erred in dismissing the claims against
Biogen. The fact that one employee observed an unspecified
increase in discontinuation rates in New York in November of 2014
does not create a strong inference that the Biogen management team
knew that Kingsley's early 2015 statements about the drug's
discontinuation rates company-wide were untrue. In fact,
according to the complaint, at the time that Kingsley made those
statements, the company had already disclosed to investors that
the drug's discontinuation rates were higher than expected.
Finally, the plaintiffs point to CW 1's statement about
having participated in "emergency" conference calls in December of
2014 and January of 2015 regarding Tecfidera's declining sales.
But, the plaintiffs do not describe what specifically was
communicated to the employees during those calls, and nothing in
the complaint suggests that CW 1 received any information during
them that directly conflicted with the four "plausibly misleading"
statements attributed to Kingsley.
Moreover, the few confidential witness statements
alleged in the complaint that were particularized and
appropriately timed concerned narrow slices of the market for the
sale of the drug. For example, CW 17 -- an Executive Territory
Business Manager -- reported that his Tecfidera sales dropped 25%
after the PML death. But, the fact that his individual sales
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experienced a decline does not indicate that he knew that
Kingsley's generalized assessments of the magnitude of the change
in discontinuation rates nationally for the company were untrue.8
C.
Finally, we address the plaintiffs "additional scienter"
arguments. Here, the plaintiffs argue that the District Court did
not properly credit their allegations that the defendants knew or
should have known that the public statements that had been made by
Kingsley regarding Tecfidera were misleading because Tecfidera was
part of the company's "core operations"; many of the plausibly
misleading statements were "repeated" and "specific"; and Biogen
operates in a highly regulated industry. We disagree.9
8 The plaintiffs additionally point to CW 15's and CW 16's
knowledge that the company had prepared a response to a PML-linked
death well in advance of the October 2014 announcement. According
to the plaintiffs, the fact that the company did so reveals that
the company knew for some time that the drug could cause PML and
yet failed to acknowledge this reality in its public disclosures.
However, as stated previously with regard to the plaintiffs'
individual scienter claims, we fail to see how a company's
preparation for a worst-case scenario indicates that the company
knew that such a scenario would come to pass. Consequently, we
similarly reject the plaintiffs' reliance on CW 15's and CW 16's
statements as they pertain to their corporate scienter
contentions, as we conclude that even if we were to impute CW 15's
and CW 16's knowledge to the company, the plaintiffs would still
fail to create a "strong inference" of scienter.
9 Plaintiffs also argue that, because only a short period of
time passed between the defendants' "plausibly misleading"
statements and the fraud's alleged "disclosure," it can be assumed
that the plaintiffs knew that their statements were misleading at
the time that they were made. However, it appears that the
plaintiffs did not make this argument to the District Court below,
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In pressing the "core operations" theory, the plaintiffs
contend that, when "facts critical to a business’s core operations
or an important transaction generally are so apparent[,] knowledge
[of those facts] may be attributed to the company and its key
officers," even if those officers did not, in actuality, know the
critical information. Bodri v. GoPro, Inc., 252 F. Supp. 3d 912,
932 (N.D. Cal. 2017). But, as we have explained, the plaintiffs
fail to identify any allegations in the complaint that show that
anyone in the company had knowledge regarding the drug's safety
profile and sales that contradicted the company's public
representations. So, the "core operations" theory also does little
to aid the plaintiffs' case. S. Ferry LP, No. 2 v. Killinger, 542
F.3d 776, 784-85 (9th Cir. 2008) ("As a general matter, 'corporate
management's general awareness of the day-to-day workings of the
company's business does not establish scienter -- at least absent
some additional allegation of specific information conveyed to
management and related to the fraud' or other allegations
supporting scienter." (quoting Metzler Inv. GmbH v. Corinthian
Colls., Inc., 534 F.3d 1068, 1087 (9th Cir. 2008))).
In this regard, the precedents on which the plaintiffs
rely -- see, e.g., Stratte-McClure v. Morgan Stanley, 784 F. Supp.
2d 373, 389 (S.D.N.Y. 2011); Crowell v. Ionics, Inc., 343 F. Supp.
and we thus do not consider it. See United States v. Swiss American
Bank, Ltd., 191 F.3d 30, 37 (1st Cir. 1999).
- 31 -
2d 1, 19 (D. Mass. 2004) -- are distinguishable. In each, the
record contained much stronger evidence of knowledge within the
company of fraudulent practices than is set forth in the
allegations in the plaintiffs' complaint here. Compare Crowell,
343 F. Supp. 2d at 19 (explaining that the low-level witnesses had
received an email stating that a mid-level vice president ordered
a company-wide practice of fraudulently inflating sales numbers
and thus that, even if the corporate officers were personally
unaware of the fraudulent sales practice, generally -- that
knowledge could be imputed to them though the core operations
theory), with Lenartz v. Am. Superconductor Corp., 879 F. Supp. 2d
167, 183 n.9 (D. Mass. 2012) (rejecting the plaintiffs' core
operations theory where the facts offered to prove that the
defendant's actions were fraudulent were "less clear" than the
"particularized facts" of Crowell).
The plaintiffs' "highly regulated industry" theory
suffers from the same defect. According to the plaintiffs, because
"Biogen operates in the heavily regulated pharmaceuticals
industry," one can infer "that the Individual Defendants were
acutely aware of safety-related concerns [related to Tecfidera]."
But, if by "safety concerns" the plaintiffs mean the alleged
statements from Dr. Thrower to Ferguson and Hall regarding Dr.
Thrower's research on Tecfidera, then we have already explained
the problem with this theory. Even if we were to assume that the
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individual defendants were aware of Dr. Thrower's comments to
Ferguson and Hall, none of the six "plausibly misleading"
statements so clearly conflicts with Dr. Thrower's assessment of
the drug -- especially given the other safety disclosures the
company made prior to those statements -- that there exists a
"strong inference" that any of those six statements were made with
the intent to deceive.
Nor can the plaintiffs succeed in pressing their case on
appeal based on their contention that the defendants' repeated
specific statements about the drug show that they knew that their
public disclosures were misleading when made and thus that there
is a "strong inference" of scienter not only as to them but also
as to Biogen. We may assume that a plausibly misleading statement
was made publicly more than once. But nothing in the complaint
alleges facts that indicate that anyone in Biogen's management had
knowledge that was sufficiently in conflict with any of the six
"plausibly misleading" public statements to permit the conclusion
that the company had the requisite intent to deceive in permitting
those statements to have been made and in not having corrected
them in some respect.
IV.
For the foregoing reasons we affirm the District Court's
judgment granting the motion to dismiss.
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Metzler Asset Mgmt. GMBH v. Kingsley
Court: Court of Appeals for the First Circuit
Date filed: 2019-06-27
Citations: 928 F.3d 151
Copy CitationsCombined Opinion