Huang v. Higgins, Case No. 17-cv-04830-JST

443 F.Supp.3d 1031

INCHEN HUANG, et al., Plaintiffs,

v.Arthur Joseph HIGGINS, et al., Defendants.

Case No. 17-cv-04830-JST

United States District Court, N.D. California.

Signed March 11, 2020

Jennifer Pafiti, Pomerantz LLP, Los Angeles, CA, J. Alexander Hood, II, Pro Hac Vice, Jeremy A. Lieberman, Pro Hac Vice, Pomerantz LLP, New York, NY, Patrick V. Dahlstrom, Pomerantz LLP, Chicago, IL, Adam Christopher McCall, Adam Marc Apton, Rosemary M. Rivas, Levi & Korsinsky, LLP, San Francisco, CA, Nicholas Ian Porritt, Pro Hac Vice, Levi & Korsinsky, LLP, Washington, DC, for Plaintiffs.

Michael A. Mugmon, Wilmer Cutler Pickering Hale & Dorr LLP, San Francisco, CA, Jessica L. Lewis, Jessica R. Lisak, Pro Hac Vice, Jocelyn Marie Keider, Pro Hac Vice, Wilmer Cutler Pickering Hale & Dorr LLP, Boston, MA, Michael G. Bongiorno, Pro Hac Vice, Wilmer Cutler Pickering Hale & Dorr LLP, New York, NY, Rebecca A. Girolamo, Wilmer Cutler Pickering Hall & Dorr LLP, Los Angeles, CA, for Defendants.

ORDER GRANTING MOTION TO DISMISS

Re: ECF No. 92

JON S. TIGAR, United States District Judge

Before the Court is a motion to dismiss Plaintiffs' second amended complaint filed by Defendant Assertio Therapeutics, Inc. and Defendants Arthur Joseph Higgins, James A. Schoeneck, and August J. Moretti (collectively, the "Individual Defendants"). ECF No. 92. The Court will grant the motion.

I. BACKGROUND

This is a putative securities fraud class action brought on behalf of all persons who purchased Depomed, Inc.¹ common stock between July 29, 2015 and August 7, 2017 (the "Class Period"), against Depomed and certain current and former Depomed officers and directors. Second Amended Complaint ("SAC") ¶ 1, ECF No. 87. In its March 18, 2019 order granting Defendants' motion to dismiss Plaintiffs' first amended complaint ("FAC"), the Court extensively summarized the facts and allegations underlying this case. ECF No. 83. In sum, Plaintiffs allege that, during the Class Period, Defendants made material misrepresentations and omissions regarding Depomed's sales, concealing the fact that Depomed was engaged in an illegal off-label marketing campaign for NUCYNTA, a line of opioid drugs that drove the majority of Depomed's revenues. Id. at 2-3.

The Court incorporates its prior summary of the procedural history of this case, see ECF No. 87 at 3-4, adding only that Plaintiffs filed their SAC on May 2, 2019, asserting the same causes of action as their FAC: (1) violations of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission ("SEC") Rule 10b-5; and (2) a violation of Section 20(a) of the Exchange Act. SAC ¶¶ 696-713. Defendants moved to dismiss the SAC on June 17, 2019. ECF No. 92. Plaintiffs filed an opposition on August 1, 2019, ECF No. 94, and Defendants filed a reply on August 30, 2019, ECF No. 96. The Court held a hearing on the motion on December 18, 2019. ECF No. 104.

II. JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa.

III. LEGAL STANDARD

A. The Dual Pleading Requirements

Section 10(b) of the Securities Exchange Act of 1934 prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. To establish a violation of Section 10(b), a plaintiff must plead: (1) a material misrepresentation or omission made by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. See Stoneridge Inv. Partners, LLC v. Sci.-Atlanta , 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008).

On a motion to dismiss, the Court accepts the material facts alleged in the complaint, together with reasonable inferences to be drawn from those facts, as true. Navarro v. Block , 250 F.3d 729, 732 (9th Cir. 2001). However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions" or "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements...." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Moreover, while a plaintiff generally need only plead "enough facts to state a claim to relief that is plausible on its face" to survive a motion to dismiss, Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), "[s]ecurities fraud class actions must meet the higher, exacting pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (‘PSLRA’)," Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc. , 774 F.3d 598, 604 (9th Cir. 2014).

Under the PSLRA and Rule 9(b), a complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" with respect to each alleged false statement or omission, and "a party must state with particularity the circumstances constituting fraud or mistake." 15 U.S.C. § 78u-4(b)(2)(A) ; Fed. R. Civ. P. 9(b) ; see also Or. Pub. Emps. Ret. Fund , 774 F.3d at 605. "In order to show a strong inference of deliberate recklessness, plaintiffs must state facts that come closer to demonstrating intent, as opposed to mere motive and opportunity." In re Silicon Graphics Inc. Sec. Litig. , 183 F.3d 970, 974 (9th Cir. 1999), abrogated on other grounds by S. Ferry LP, No. 2 v. Killinger , 542 F.3d 776, 784 (9th Cir. 2008). If the complaint does not satisfy the PSLRA's pleading requirements, the Court must grant a motion to dismiss the complaint. 15 U.S.C. § 78u-4(b)(3)(A).

B. Falsity and Materiality

The PSLRA provides 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)(B). For statements to be actionable under the PSLRA, they must be both false or misleading and material. A statement or omission is misleading under the PSLRA and Section 10(b) of the Exchange Act "if it would give a reasonable investor the impression of a state of affairs that differs in a material way from the one that actually exists." Berson v. Applied Signal Tech., Inc. , 527 F.3d 982, 985 (9th Cir. 2008) (internal quotation marks and citation omitted).

A false or misleading statement or omission is material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available." TSC Indus., Inc. v. Northway, Inc. , 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). To plead materiality, a complaint's allegations must "suffice to raise a reasonable expectation that discovery will reveal evidence satisfying the materiality requirement, and to allow the court to draw the reasonable inference that the defendant is liable." In re Atossa Genetics Inc. Sec. Litig. , 868 F.3d 784, 794 (9th Cir. 2017) (citation omitted). "Although determining materiality in securities fraud cases should ordinarily be left to the trier of fact, conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim." In re Cutera Sec. Litig. , 610 F.3d 1103, 1108 (9th Cir. 2010) (internal quotation marks and citations omitted).

C. Scienter

The required state of mind under the PSLRA is a "mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder , 425 U.S. 185, 193-94 n.12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In order to adequately establish scienter, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A).

The "strong inference" required by the PSLRA "must be more than merely ‘reasonable’ or ‘permissible’ – it must be cogent and compelling, thus strong in light of other explanations." Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). "A court must compare the malicious and innocent inferences cognizable from the facts pled in the complaint, and only allow the complaint to survive a motion to dismiss if the malicious inference is at least as compelling as any opposing innocent inference." Zucco Partners, LLC v. Digimarc Corp. , 552 F.3d 981, 991 (9th Cir. 2009). In evaluating whether a complaint satisfies the "strong inference" requirement, courts must undertake a two-step inquiry by first considering "whether any of the allegations, standing alone, are sufficient to create a strong inference of scienter," and "if no individual allegation is sufficient, ... conduct[ing] a ‘holistic’ review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness." Curry v. Yelp Inc. , 875 F.3d 1219, 1226 (9th Cir. 2017) (citation omitted).

In the Ninth Circuit, scienter is a "mental state that not only covers intent to deceive, manipulate, or defraud, but also deliberate recklessness." City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc. , 856 F.3d 605, 619 (9th Cir. 2017) (quoting Schueneman v. Arena Pharm., Inc. , 840 F.3d 698, 705 (9th Cir. 2016) ). "Deliberate recklessness is an extreme departure from the standards of ordinary care[,] which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Webb v. Solarcity Corp. , 884 F.3d 844, 851 (9th Cir. 2018) (alteration and emphasis in original) (quoting City of Dearborn Heights , 856 F.3d at 619 ). Stated differently, deliberate recklessness requires that an actor ...