Evanston Police Pension Fund v. McKesson Corp.

411 F.Supp.3d 580

EVANSTON POLICE PENSION FUND, Plaintiff,

v.MCKESSON CORPORATION, et al., Defendants.

Case No. 18-cv-06525-CRB

United States District Court, N.D. California.

Signed October 29, 2019

Filed October 30, 2019

Order Clarifying Decision Dec. 19, 2019

Lesley Elizabeth Weaver, Bleichmar Fonti & Auld LLP, Oakland, CA, Angel Puimei Lau, Spencer A. Burkholz, Robbins Geller Rudman Dowd LLP, San Diego, CA, Luke O. Brooks, Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiff.

Sara B. Brody, Jaime Allyson Bartlett, Sidley Austin LLP, San Francisco, CA, Robin Eve Wechkin, Pro Hac Vice, Sidley Austin LLP, Seattle, WA, for Defendants.

ORDER DENYING MOTION TO DISMISS

CHARLES R. BREYER, United States District Judge

This case arises out of government investigations of anticompetitive agreements in the generic pharmaceutical industry. The resulting complaint, brought by forty-nine states' Attorneys General (the "AG complaint"), alleges that the generic drug industry is rife with price-fixing and market-allocation agreements. The scandal has already resulted in congressional attention, multiple guilty pleas, and a plethora of antitrust and Securities Act lawsuits against generic drug manufacturers.

McKesson Corporation ("McKesson") is (mostly) not a generic drug manufacturer, but a generic drug wholesaler. Nonetheless, the plaintiffs in this putative class action (collectively, "Evanston") allege that McKesson must have participated in illegal anticompetitive conduct. At the very least, Evanston alleges, McKesson was aware of and profited from the illegal agreements.

Evanston claims that by failing to disclose the conspiracy McKesson and its executives violated the Securities Exchange Act of 1934. McKesson has moved to dismiss the complaint for failure to state a claim. Because the Court finds that Evanston has adequately plead the required elements of its Rule 10(b) claim, including falsity, scienter, and loss causation, the motion to dismiss is denied.

I. BACKGROUND

McKesson is a pharmaceutical wholesaler. Compl. ¶ 2 (dkt. 43). Most of its business involves buying drugs from manufacturers and reselling them to pharmacies and hospitals. Id. However, one of McKesson's subsidiaries, NorthStar Rx ("NorthStar"), does manufacture generic drugs. Id.

In the last several years, evidence has come to light of widespread anti-competitive conduct in the generic drug market. Id. ¶ 5. Investigations by Congress, the Department of Justice, and forty-nine state Attorneys General have led to multiple guilty pleas and a complaint alleging a wide-ranging price-fixing conspiracy. Id. ¶ 5, 10. The AG complaint alleges that generic drug manufacturers agreed to divide market share rather than compete on price. Id. ¶ 5. It does not name McKesson as a defendant. Id.

Evanston alleges McKesson, its former Chief Executive Officer John Hammergren, and former Chief Financial Officer James Beer, violated Section 10(b) of the Exchange Act and Rule 10b-5 by concealing the collusive activity. Id. ¶¶ 215–24. It also charges the defendants with control person liability under Section 20(a), and Hammergren with violating Section 20A by selling stock while "in possession of material non-public information." Id. ¶¶ 225–35.

The Consolidated Amended Complaint ("CAC") alleges that McKesson was a party to unlawful price-fixing agreements. McKesson ostensibly participated in anticompetitive conduct both in its role as a wholesaler and through NorthStar. The CAC seizes on the AG complaint's allegations that generic drug manufacturers Heritage Pharmaceuticals, Inc. ("Heritage"), Mayne, and Milan conspired to divide the market for Doxy DR. Because Heritage and Mayne supplied Doxy DR to McKesson, the CAC reasons McKesson must also have been a party to this agreement. Id. ¶¶ 74–77. It also alleges there is direct evidence that NorthStar colluded to fix the price of Leflunomide, and circumstantial evidence, including parallel conduct and various "plus" factors, that it conspired to fix the price of other drugs. Id. ¶¶ 97–128.

According to the CAC, McKesson benefited from the conspiracy both by charging supracompetitive prices for NorthStar's drugs, and because its wholesale business was more profitable when drug prices were high. Id. ¶¶ 57–62. Evanston argues that even if McKesson did not directly participate in anticompetitive conduct, it made false and misleading statements covering up the manufacturer's illegal agreements. Opp'n at 16 (dkt. 53). The alleged false and misleading statements fall into six categories: claims that generic drug price inflation was driven by "supply disruption," statements touting McKesson's role as a negotiator on behalf of its purchasers, claims that the generic drug market remained competitive, descriptions of NorthStar as a "growth driver," announcements of McKesson's financial results, and statements that McKesson's earnings had been derisked. See, e.g., id. at ¶¶ 138, 155, 196.

Evanston further alleges that Hammergren and Beer made the challenged statements knowing they were false, or with deliberate recklessness. Opp'n at 24–30. Evidence of the defendant's scienter includes statements touting their knowledge of generic drug pricing and compensation arrangements tying Hammergren and Beer's stock and cash awards to McKesson's financial performance. See, e.g., Compl. ¶¶ 125–26, 185–92. Evanston also points to the executives' positions at McKesson, the magnitude of the alleged scheme, and the governmental investigations. See Opp'n at 28–29.

Eventually, generic drug prices dropped, and with them, McKesson's earnings. This development was disclosed in a series of three financial announcements from October 27, 2016, to January 25, 2017. Compl. ¶¶ 196–98, 200. In the same time period, two articles revealing the government investigations were published in Bloomberg and Reuters. Id. ¶ 199. Each of the four disclosures was followed by a significant decrease in McKesson's stock price. Id. at 196–200.

II. LEGAL STANDARD

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed for failure to state a claim upon which relief may be granted. Dismissal may be based on either "the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Godecke v. Kinetic Concepts, Inc., 937 F.3d 1201, 1208 (9th Cir. 2019). A complaint must plead "enough facts to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 697, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. When evaluating a motion to dismiss, the Court "must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). "Courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).

Claims for fraud must meet the pleading standard of Federal Rule of Civil Procedure 9(b), which requires a party "alleging fraud or mistake [to] state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). Rule 9(b) "requires ... an account of the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (internal quotation marks omitted). This standard "applies to all elements of a securities fraud action, including loss causation." Or. Public Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 605 (9th Cir. 2014).

Security fraud claims must also meet the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"), which states that the complaint "shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1) ; Tellabs, 551 U.S. at 321, 127 S.Ct. 2499. The Court must dismiss any complaint that does not meet these requirements. See 15 U.S.C. § 78u-4(b)(3)(A).

The PSLRA also requires plaintiffs to state with particularity facts giving rise to a strong inference of the defendants' scienter. See 15 U.S.C. § 78u-4(b)(2). "[A]n inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any 4 opposing inference of nonfraudulent intent." Tellabs, 551 U.S. at 314, 127 S.Ct. 2499. Therefore, a court "must consider plausible, nonculpable explanations for the defendant's conduct." Id. at 324, 127 S.Ct. 2499. "Where pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a ‘strong inference’ that misleading statements were knowingly or deliberate recklessness [sic] made to investors, a private securities fraud complaint is properly dismissed under Rule 12(b)(6)." Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001).

III. DISCUSSION

A. Evidentiary Issues

1. Judicial Notice and Incorporation by Reference

McKesson has requested judicial notice of twenty-five documents (Exhibits 1–25) cited in its motion to dismiss. RJN (dkt. 50). It also argues that the Court may consider most of these materials "under the doctrine of incorporation by reference." RJN at 1. Evanston does not...