Sanofi: Second Circuit Holds Issuer Not Liable for Statements of Opinion Under Omnicare | Practical Law

Sanofi: Second Circuit Holds Issuer Not Liable for Statements of Opinion Under Omnicare | Practical Law

The US Court of Appeals for the Second Circuit, in In re Sanofi Sec. Litig., AG Funds, L.P. v. Sanofi, applied the US Supreme Court's decision in Omnicare v. Laborers District Council Construction Industry Pension Fund for the first time, holding that, in light of the context of the statements, Sanofi was not liable for statements of opinion under Section 11 of the Securities Act.

Sanofi: Second Circuit Holds Issuer Not Liable for Statements of Opinion Under Omnicare

by Practical Law Corporate & Securities
Published on 10 Mar 2016 • USA (National/Federal)
The US Court of Appeals for the Second Circuit, in In re Sanofi Sec. Litig., AG Funds, L.P. v. Sanofi, applied the US Supreme Court's decision in Omnicare v. Laborers District Council Construction Industry Pension Fund for the first time, holding that, in light of the context of the statements, Sanofi was not liable for statements of opinion under Section 11 of the Securities Act.
On March 4, 2016, the US Court of Appeals for the Second Circuit, in In re Sanofi Sec. Litig., AG Funds, L.P. v. Sanofi, applied the US Supreme Court's 2015 decision in Omnicare v. Laborers District Council Construction Industry Pension Fund (135 S.Ct. 1318 (2015)) for the first time, holding that, in light of the context of the statements, an issuer's statements of opinion that did not disclose certain conflicting facts were not material misstatements or omissions (No. 15-588-cv, (2d Cir. Mar. 4, 2016)). In Omnicare, the US Supreme Court clarified the application of Section 11 of the Securities Act to statements of opinion made by an issuer in a registration statement. Section 11 provides buyers of securities with an express right of action for damages if any part of the issuer's registration statement (when it is declared effective by the SEC) contains an "untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading."

Background

In 2011, Sanofi, a global pharmaceutical company, acquired another pharmaceutical company, Genzyme Corporation, which was the owner of a promising drug called Lemtrada. Lemtrada had not yet been approved by the Food and Drug Administration (FDA), but had shown potential in treating multiple sclerosis (MS).
The acquisition was structured as a tender offer followed by a short-form merger, which were registered under a Form F-4 (Offering Materials). The Offering Materials incorporated by reference some of Genzyme's prior SEC filings containing statements about Lemtrada, its clinical results, and its potential for approval by the FDA.
The acquisition included an arrangement through which Genzyme's shareholders would receive contingent value rights (CVRs), which were financial instruments entitling shareholders to cash payouts upon the achievement of certain milestones in Lemtrada's development. The achievement of the first of these milestones entitled CVR holders to $1 per CVR if the FDA approved Lemtrada for the treatment of MS by March 31, 2014 (Approval Milestone).
At least as far back as 2002, the FDA had periodically expressed its concerns about the use of single-blind, rather than double-blind, studies in the clinical trials for Lemtrada. However, the FDA had also expressed its view on a few occasions that the single-blind studies might be adequate if the studies showed that the effect of the drug was large. Despite the FDA's periodic expressions of concern, Sanofi (and Genzyme before it) frequently expressed optimism about Lemtrada's prospects of being approved by the FDA in time to hit the Approval Milestone, without disclosing any of the FDA's concerns.
In December 2013, Sanofi announced that it had received a formal rejection of Lemtrada from the FDA and acknowledged that it did not anticipate that it would receive FDA approval for the drug in time to hit the Approval Milestone. In April 2014, Sanofi announced that it was engaged in discussions with the FDA regarding Lemtrada's application and, in May 2014, it announced that the FDA had accepted Lemtrada for resubmission. On November 14, 2014, the FDA approved Lemtrada, well after the deadline for the Approval Milestone.
CVR purchasers (Plaintiffs) filed class action complaints against Sanofi, Genzyme, and three Sanofi executives (Defendants) in December 2013, alleging that Sanofi's failure to disclose the FDA's concerns about the use of single-blind studies misled investors about the likelihood of meeting the Approval Milestone, and thereby artificially inflated the value of the CVRs. The claims were brought under Sections 11 and 12(a)(2) of the Securities Act and Section 10(b) of the Exchange Act.
On June 27, 2014, Defendants moved to dismiss both complaints for failing to state a claim, arguing that:
  • The complaints did not allege any materially false or misleading statements.
  • There were no sufficient allegations of scienter.
  • Their statements were protected as forward-looking statements.
On January 28, 2015, the US District Court for the Southern District of New York granted the motion to dismiss (In re Sanofi Sec. Litig., 87 F. Supp. 3d 510 (S.D.N.Y. 2015). Plaintiffs appealed. After the District Court's decision, the US Supreme Court issued its decision in Omnicare, which clarified the application of Section 11 of the Securities Act to statements of opinion made by an issuer in a registration statement.

Outcome

The Second Circuit affirmed the District Court's decision and, in doing so, applied the new Omnicare standard for the first time.

Omnicare

The Supreme Court in Omnicare held, among other things, that an issuer may be liable under Section 11 for a materially misleading statement of opinion if:
  • The issuer omits material facts about the issuer's inquiry into, or knowledge concerning, the statement of opinion.
  • The omitted facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.
In other words, opinions, even if they are sincerely held and otherwise true as a matter of fact, may be actionable if the speaker omits information whose omission makes the statement misleading to a reasonable investor.
Omnicare also noted, however, that a statement of opinion is not necessarily misleading just because an issuer knows, but fails to disclose, a fact that cuts the other way. This is because a reasonable investor:
  • Understands that opinions sometimes rest on a weighing of competing facts.
  • Does not expect that every fact known to an issuer must support its statement of opinion.
Omnicare further noted that whether an omission makes an expression of opinion misleading also depends on the context. While investors do not expect opinions contained in SEC filings to reflect baseless judgments, they also read statements, whether fact or opinion, in light of the surrounding text, including hedges, disclaimers, and apparently conflicting information. Investors also take into account the customs and practices of the relevant industry.
For a full summary of Omnicare, see Legal Update, Omnicare: Supreme Court Clarifies Application of Section 11 of the Securities Act to Statements of Opinion.

Sanofi

In Sanofi, the Second Circuit analyzed three groups of statements of opinion made by the Defendants:
  • Expected timing of FDA approval. Six statements in the Offering Materials related to Sanofi's expectation that the FDA would approve Lemtrada prior to March 31, 2014, the cutoff date for the Approval Milestone.
  • Timing of launch of Lemtrada. A subset of statements made after the tender offer regarding the launch of Lemtrada, which indicated that the Defendants:
    • were satisfied with the drug's progress;
    • expected a decision on Lemtrada by the end of the year; and
    • were feeling relaxed.
  • Lemtrada's trial results. A subset of statements regarding Lemtrada's clinical trial results, which indicated that Lemtrada demonstrated strong results and held tremendous promise and that Defendants were very pleased with the results of the clinical trials.

Expected Timing of FDA Approval

Plaintiffs argued that by failing to disclose the FDA's repeated statements of concern about the use of single-blind studies, statements estimating a 90% likelihood of achieving the Approval Milestone and projecting FDA approval in late 2012 were materially misleading.
The Second Circuit rejected this argument, noting that:
  • The omitted facts regarding the FDA's concerns did not conflict with what a reasonable investor would take from the statement itself. There was no plausible allegation that the FDA's feedback conflicted with any reasonable interpretation of Defendants' statements about FDA approval. Although the FDA had expressed concerns about the use of single-blind studies, it had also stated that this deficiency could be overcome if the results showed a large effect. The parties did not dispute that Lemtrada's effect in the clinical trials was indeed large.
  • The context of the allegedly misleading opinions should have prevented the Plaintiffs from misinterpreting the opinions. Plaintiffs were sophisticated investors who were aware that projections provided by issuers are synthesized from a wide variety of information, and that some underlying facts may be in tension with the issuer's ultimate projection. These investors were also aware of the custom in the pharmaceutical industry of continuous dialogue between the FDA and a proponent of a new drug. The investors would therefore fully expect that the Defendants and the FDA were engaged in a dialogue about the sufficiency of various aspects of the clinical trials, and would know that differing views often exist in a dialogue. Further, the Offering Materials made numerous caveats to the reliability of the projections. A reasonable investor, especially one dealing in a complex financial instrument like the CVRs, would have considered the statement in light of the surrounding text, including hedges, disclaimers, and apparently conflicting information.
Further, the Second Circuit noted that under Omnicare, an issuer is not liable for a statement of opinion merely because it failed to disclose a fact that cut the other way. Therefore, Defendants were not required to disclose the FDA's feedback merely because it tended to cut against their projections. The Second Circuit acknowledged that Plaintiffs would have been interested in knowing about the FDA feedback, and perhaps would have acted otherwise had the feedback been disclosed, but stated that that this is not enough to trigger liability under Omnicare.
The Second Circuit also rejected the Plaintiffs' argument that the appropriate test should be whether Defendants failed to disclose a risk above and beyond the normal risks associated with drug approval, stating that no plain reading of Omnicare supports this interpretation.
Finally, the Second Circuit noted that the FDA has long made public its preference for double-blind trials, and that sophisticated investors should have been aware of this preference. Especially where a complex financial instrument whose value is tied to FDA approval is involved, investors may be expected to be aware of the FDA's public positions on testing methodology.

Timing of Launch of Lemtrada

Plaintiffs argued that by failing to disclose the FDA's repeated statements of concern about the use of single-blind studies, statements on the timing of the launch of Lemtrada were materially misleading. The Second Circuit rejected this argument as well because:
  • No reasonable investor would have inferred that mere statements of confidence suggested that the FDA had not engaged in industry-standard dialogue with Defendants about potential deficiencies in either the testing methodology or the drug itself.
  • Defendants' statement that they expected a decision on Lemtrada by the end of the year did not conflict with the information available to them at the time. In fact, Defendants' statement turned out to be correct, as they announced on December 30, 2013 that the FDA had rejected Lemtrada (the relevant statement had been about timing and not about likelihood of approval). Further, the Second Circuit found that Defendants' optimism about the approval of Lemtrada did not conflict with the FDA's feedback, which had indicated that Lemtrada could be approved if it demonstrated a large effect in the clinical trials.

Lemtrada's Trial Results

Plaintiffs argued that by failing to disclose the FDA's repeated statements of concern about the use of single-blind studies, statements on the results of Lemtrada's clinical trials were materially misleading. The Second Circuit rejected this argument, finding that:
  • Plaintiffs failed to show a relationship between the FDA's critical feedback and Defendants' statements touting the results of the Lemtrada trials. Sanofi is a global pharmaceutical company whose product, Lemtrada, had been approved for distribution in at least 30 countries, based on Lemtrada's exceptional clinical results. There was no merit to Plaintiffs' argument that Sanofi had no reason to comment on Lemtrada's trial success except to build investor anticipation about FDA approval because Sanofi had an interest in building a global interest in Lemtrada. Sanofi's statements on the effectiveness of Lemtrada, when taken in the context of a global rollout plan, did not suggest any special approval, or likelihood of approval, from the regulators of a single country.
  • Plaintiffs failed to demonstrate any conflict between Defendants' statements about the general effectiveness of Lemtrada and the FDA's feedback. Defendants' statements about the effectiveness of Lemtrada cannot be misleading merely because the FDA disagreed with the conclusion, as long as Defendants conducted a meaningful inquiry and in fact held that view. Reasonable investors are aware of the ongoing dialogue with the FDA during the drug approval process, and no sophisticated investor familiar with standard FDA practice would expect that every view of the data by Defendants was shared by the FDA.

Practical Implications

While Omnicare extended potential liability under Section 11 for material omissions relating to an opinion, Sanofi demonstrates that the Omnicare standard may be a difficult standard for plaintiffs to meet. Issuers, however, should continue to minimize their risk of liability when stating an opinion by:
  • Making clear that the statement is a belief.
  • Identifying facts forming the basis for the belief (keeping in mind that not every fact need be disclosed).
  • Conducting due diligence on the facts underlying the belief.
  • Including hedges, disclaimers, and information that may cut against the opinion.
Sanofi is also important because the Second Circuit applied the standards and used the same analysis set out by the Supreme Court in Omnicare to claims brought under Section 10(b) of the Exchange Act. In Omnicare, the Supreme Court only addressed Section 11.
To learn more about Section 11 and other liability provisions applicable to securities offerings, see Practice Note, Liability Provisions: Securities Offerings.