A recent 9th Circuit decision offers protection to pharmaceutical companies using their judgment in clinical trials—protection that could extend to other industries.
In In re: Rigel Pharmaceuticals, Inc. Securities Litigation, Rigel developed an arthritis drug and did a clinical trial on 189 patients in the U.S. and Mexico. Plaintiff Inter-Local Pension Fund GCC/ IBT bought stock in Rigel after reading a press release that revealed the “statistically significant” results of the trial.
However, the stock price plummeted shortly thereafter, when Rigel revealed more comprehensive, academic information at a presentation and in a scholarly article in a medical journal, which included further details about the drug’s adverse effects. The pension fund brought a securities fraud action against Rigel, claiming that the company made false statements about its study results and the efficacy of the arthritis drug, and that Rigel did not correctly analyze its data.
A district court dismissed the complaint because the pension fund failed to sufficiently plead that Rigel had made a false or misleading statement, and therefore the drug maker had not violated securities laws. The 9th Circuit upheld this decision on Sept. 6, writing that the plaintiff’s main argument was a disagreement with the methodology of Rigel’s study, which the court found insufficient.
“The allegations … concern two different judgments about the appropriate statistical methodology to be used by Defendants,” the court wrote. “The allegations are not about false statements.”
The 9th Circuit found that securities laws don’t require companies to report information from “optimal” studies, a welcome ruling considering getting scientists to agree on exactly which method is optimal would be nearly impossible. This decision leaves some breathing room for differing opinions.
“It certainly gives [companies] protection—protection I think they need,” says Alyson Weiss, a partner at Loeb & Loeb. “People want to be able to do their jobs without the fear of getting sued for fraud simply because some other scientist or professional, in their professional judgment, disagrees with the method used.”
However, the court did insert a word of caution into its opinion. Fraud claims might have some teeth, it wrote, if a company committed to one statistical methodology and then changed to another after seeing the data from the clinical trial, because “someone can manipulate the unblinded data to obtain a favorable result.”
“You should feel comfortable in devising a methodology,” says Morrison & Foerster Partner Sean Prosser. “Courts won’t second-guess it so long as you’ve devised that methodology in good faith. But once you create the methodology and get your data, you should not be changing the method of interpreting the data without very substantial disclosures about the changes.”
The ruling is less about drugs and more about professional judgment, so it could prove to be helpful for similar litigation in other industries. The 9th Circuit’s decision in Rigel is already in line with some other court decisions about business judgment, including those in Delaware dealing with decisions made during a merger (see “Delaware Decisions”). But at the very least, Rigel should set the standard for clinical trials in the pharmaceutical industry.
“It’s helpful that it’s the 9th Circuit saying this,” Prosser says. “It probably is a more impactful, useful decision because it’s in a jurisdiction where you have a lot of biotechnology and pharmaceutical companies.”
The court also addressed the amount of safety information drug companies have to disclose, finding that just because Rigel didn’t reveal all the available safety statistics in its first press release did not make it guilty of falsity.
“You don’t have a duty to disclose all material information; you have a duty to disclose all material information that’s necessary to make the statements that you have made not misleading,” says Schiff Hardin Partner Paul Dengel.
To the pension fund’s credit, that’s exactly what it claimed: “Plaintiff argues that Defendants should have disclosed more information concerning side effects on the day of the initial press release because the omission of some information related to side effects made the initial statements misleading,” the decision reads.
However, Rigel explicitly stated in its press release that it was revealing the “key facts” and didn’t claim that it was disclosing all of the available information. What’s more, the side effects Rigel did disclose were the most adverse; it saved the more minor side effects for its article and presentation. “If Defendants were intent on misleading investors about the safety of [the drug], it does not make sense that the safety information they would choose to disclose in their initial, allegedly fraudulent reports, would be the most severe adverse events,” the 9th Circuit wrote.
Although this decision offers protection to companies exercising their judgment, in-house counsel should still make sure their clients make an effort to be transparent about the results they choose to reveal.
“As long as you’re clear about what you’re disclosing and what you’re not disclosing, there’s no fraud claim and there’s no requirement under the securities laws to present every single data point,” Weiss says.