Fortunato ex rel. Situated v. Akebia Therapeutics, Inc.

Dates: February 21, 2017

Present:

County: SUFFOLK, ss.

Keywords: MEMORANDUM AND ORDER ALLOWING DEFENDANTS' MOTION TO DISMISS

Anthony Fortunato asserts claims on behalf of himself and a putative class of investors in Akebia Therapeutics, Inc. The amended complaint alleges that Akebia's final registration statement and prospectus for its initial public offering were misleading because they did not disclose interim results from an ongoing clinical drug trial. Fortunato claims that as a result Akebia, senior executives and directors who signed the offering materials, and the investment banks that acted as underwriters for the IPO all violated the federal Securities Act of 1933.

Defendants move to dismiss this action on the grounds that: (1) the federal courts have exclusive jurisdiction over Securities Act class actions; (2) Fortunato's claims sound in fraud and he has failed to state the factual basis for his claims with sufficient particularity; and (3) if particularity is not required, Fortunato has failed to allege facts that plausibly suggest he and the putative class are entitled to relief.

The Court concludes that the first two arguments are without merit. State courts have concurrent jurisdiction to hear Securities Act class actions; the Securities Litigation Uniform Standards Act of 1998 did not take that power away. And Fortunato need not meet the heightened pleading standard that applies to fraud claims because he alleges only negligent misrepresentations and expressly disclaims any claim of intentional or reckless fraud.

But the Court will ALLOW the motion to dismiss because the facts alleged by Fortunato do not plausibly suggest that he is entitled to any relief under the Securities Act. Fortunato claims that the offering materials issued by Akebia for its March 2014 IPO were misleading because they failed to disclose preliminary information from Akebia's ongoing Phase 2b clinical trial of its first potential pharmaceutical product suggesting that patients receiving the test drug were more likely to experience serious adverse events than patients who received a placebo. But the complaint and the materials it cites make clear that this Phase 2b study was a double-blind, placebo controlled, randomized trial. They also indicate that this trial was not completed, and thus the study results were not unblinded to reveal which patients received the trial drug and which received a placebo, until six months or more after the IPO. Fortunato alleges no facts plausibly suggesting that Defendants knew or could have known any material information about the double-blind Phase 2b trial before Akebia's IPO or, indeed, at any time before Akebia publicly released the final trial results in October 2014.

1. Subject Matter Jurisdiction. Fortunato asserts claims on behalf of himself and a proposed class of more than fifty investors under sections 11, 12(a)(2), and 15 of the federal Securities Act of 1933; these provisions are codified as 15 U.S.C. §§ 77k, 771, and 77o, respectively. "The Securities Act 'was designed to provide investors with full disclosure of material information concerning public offerings.' " In re Ariad Pharm., Inc. Sec. Litig., 842 F.3d 744, 755 (1st Cir. 2016), quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). "Section 11 advances this goal by creating virtually strict liability for any 'untrue statement' or misleading omission of material fact in a registration statement." Id., quoting 15 U.S.C. § 77k(a)."[S]ection 12(a)(2) imposes similar liability on sellers who make such statements in a prospectus or oral communication." Plumbers' Union Local No. 12 Pension Fundy. Nomura Asset Acceptance Corp., 632 F.3d 762, 766 (1st Cir. 2011), citing 15 U.S.C. § 77/(0(2). "Section 15 creates liability for any individual or entity that 'controls any person liable' under sections 11 or 12." Id., quoting 15 U.S.C. § 77o. Thus, "a liability finding under either §§ 11 or 12 is a prerequisite for success under § 15." Silverstrand Investments v. AMAG Pharm., Inc., 707 F.3d 95, 107 (1st Cir. 2013).

Defendants argue that the Securities Act gives federal courts exclusive jurisdiction and deprives the Massachusetts courts of subject matter jurisdiction over Fortunato's class claims. (Defendants have actually moved to dismiss all of Fortunato's claims for lack of subject matter jurisdiction. But their jurisdictional argument only pertains to the claims he seeks to assert on behalf of the putative claims, not to his personal claims under the federal Securities Act.)

Fortunato makes two responses. First, he points out that Akebia made the same jurisdictional argument after attempting to remove this action to federal district court; notes that Judge Saris rejected the jurisdictional argument and remanded the case to the Superior Court; and argues that Judge Saris's ruling is binding and may not be revisited. Second, Fortunato asserts in the alternative that Judge Saris's ruling was correct and that state and federal courts have concurrent jurisdiction over class actions brought under the federal Securities Act.

The Court concludes that it must make its own determination as to its subject matter jurisdiction, and not merely defer to Judge Saris's prior ruling. It would also be inappropriate to skip over the jurisdictional question and decide whether Fortunato has stated a viable claim without first determining whether the Court has the power to resolve that question. Turning to that question, the Court concludes that state courts retain concurrent jurisdiction to hear and decide Securities Act class actions.

1.1. Law of the Case. Defendants tried to remove this action to federal court. They ran afoul of a Securities Act provision that bars removal of any case under the federal statute that is "brought in any State court of competent jurisdiction." See 15 U.S.C. § 77v(a). Fortunato sought a remand under this provision. Defendants opposed the remand request on the ground that the Superior Court is not a "court of competent jurisdiction" because Congress has given federal courts exclusive jurisdiction over class actions under the federal Securities Act. Judge Saris disagreed. She held that the state and federal courts have concurrent jurisdiction over Fortunato's class claims. She therefore ordered that the case be remanded to the Suffolk County Superior Court. See Fortunato v. Akebia Therapeutics, Inc., 183 F.Supp.3d 326 (D.Mass. 2016). By law, Defendants cannot appeal or otherwise seek review of this remand order. See Kircher v. Putnam Funds Trust, 547 U.S. 633, 640-644 (2006).

Fortunato insists that, under the "law of the case" doctrine, the prior jurisdictional ruling by Judge Saris "controls here" and therefore "precludes" and "prevents" any further consideration of the issue. That is not correct.

The decision to remand this case has no preclusive effect, with respect to Judge Saris's jurisdictional ruling or otherwise, because Defendants had no right to seek any appellate review. Kircher, supra, at 646-647; see also Alicea v. Commonwealth, 466 Mass. 228, 234 (2013) (whether federal court judgment or order has preclusive effect in state court proceeding "is governed by Federal common law," not by state law). "While the state court cannot review the decision to remand in an appellate way, it is perfectly free to reject the remanding court's reasoning[.]" Kircher, at 647. Furthermore, a federal judge has no more power to "confer jurisdiction" on Massachusetts courts than does the secretary of a state agency, and her "opinion with respect to the existence of jurisdiction" is similarly "neither controlling nor entitled to special weight." Cf. Cummings v. Secretary of Exec. Office of Envtl. Affairs, 402 Mass. 611, 613-14 (1988) (state agency cannot confer jurisdiction on courts by regulation).

The law of the case doctrine does not prevent a second judge from revisiting "an earlier ruling by another judge." Martin v. Roy, 54 Mass. App. Ct. 642, 644, (2002); accord Gleason v. Hardware Mut. Cas. Co., 331 Mass. 703, 710 (1954). Since final judgment has not entered, the Court has "broad discretion" to revisit any prior ruling in this case. Genesis Technical & Fin., Inc. v. Cast Navigation, LLC, 74 Mass. App. Ct. 203, 206 (2009); accord Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 401 (2003) ("it is within the inherent authority of a trial judge to ‘reconsider decisions made on the road to final judgment.' ") (quoting Franchi v. Stella, 42 Mass. App. Ct. 251, 258 (1997)).

There are several reasons why it makes sense for the Court to make its own determination as to whether it has subject matter jurisdiction, rather than merely adopt Judge Saris's thoughtful decision.

As Judge Saris recognized, there is a sharp disagreement among federal district judges as to whether federal courts have exclusive jurisdiction over federal Securities Act class actions or, alternatively, whether state courts share concurrent jurisdiction over such claims. Fortunato, 183 F.Supp.3d at 328; accord, e.g., Rosenberg v. Cliffs Natural Resources, Inc., No. 1:14CV1531, 2015 WL 1534033, *2- *3 (N.D. Ohio 2015); Toth v. Envivo, Inc., No. C 12-5636 CW, 2013 WL 5596965, *1 n.1 (N.D. Cal. 2013). It appears that no federal appellate court has addressed the issue.^[2] The Supreme Court is considering whether to step in and resolve this split among federal district judges.^[3] It has invited the Acting Solicitor General to express the views of United States as to whether certiorari should be granted.^[4] But at present the issue remains...