Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_14-cv-04416/USCOURTS-cand-5_14-cv-04416-1/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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Case No. 14-CV-04416-LHK 

ORDER GRANTING MOTION TO DISMISS WITH LEAVE TO AMEND

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United States District Court

Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

RICK L. COLYER, et al.,

Plaintiffs,

v.

ACELRX PHARMACEUTICALS, INC., 

et al.,

Defendants.

Case No. 14-CV-04416-LHK 

ORDER GRANTING MOTION TO 

DISMISS WITH LEAVE TO AMEND

Dkt. No. 35, 36

Plaintiffs Rick Colyer and Harry Zweifel (collectively, “Plaintiffs”) bring this action 

against AcelRx Pharmaceuticals, Inc., Richard A. King, Timothy E. Morris, James H. Welch, and 

Pamela P. Palmer (collectively, “Defendants”). Before the Court are Defendants’ motion to 

dismiss (“Mot”) Plaintiffs’ amended class action complaint (“AC”) and Defendants’ request for 

judicial notice (“RJN”) of exhibits in support of this motion. See ECF No. 28 (“AC”); ECF No. 

35 (“Mot.”); ECF No. 36 (“RJN”). Having considered the parties’ submissions, the relevant law, 

and the record in this case, the Court hereby GRANTS Defendants’ request for judicial notice and 

GRANTS Defendants’ motion to dismiss with leave to amend. 

I. BACKGROUND

A. Factual Background

Traditionally, hospital patients with moderate-to-severe acute pain have used intravenous 

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patient-controlled analgesia treatment (“IV PCA”) to manage their pain. AC ¶ 7. Although 

widely practiced, there are a number of limitations with IV PCA. First, IV PCA leaves most 

patients immobile because “patients [must be] tethered to an IV infusion pump with a line in the 

arm.” Id. ¶ 42. Second, the most commonly used analgesics for IV PCA—morphine and 

hydromorphone—have a relatively low therapeutic index, measured as the ratio of an effective 

dose of analgesic versus a lethal dose of analgesic. Id. ¶ 48. Patients who use an analgesic with a 

lower therapeutic index thus face a higher risk of overdose than patients who use an analgesic with 

a higher therapeutic index. Third, the IV catheters used for IV PCA “are associated with infection 

risks,” as any “break in the skin carries a risk of infection.” Id. Fourth, patients who use IV PCA 

often experience analgesic gaps, defined as “interruptions in analgesic delivery.” Id. ¶ 43. During 

these gaps, patients are “unable to self-administer the drug at the onset of pain.” Analgesic gaps 

significantly disrupt and encumber effective pain management. Id. 

Defendant AcelRx Pharmaceuticals (“AcelRx”) is a publicly-traded company 

headquartered in Redwood City, California. Id. ¶ 19. Defendants Pamela P. Palmer (“Palmer”), 

Richard A. King (“King”), James H. Welch (“Welch”), and Timothy E. Morris (“Morris”) are or 

were high-level executives at AcelRx. Id. ¶¶ 20–23. Over the past few years, AcelRx has 

dedicated considerable time and energy into developing an alternative to IV PCA. AcelRx’s

device, known as Zalviso, “allows patients to self-administer sublingual sufentanil” tablets. Id. ¶

47. Like IV PCA, Zalviso is a combination product that works through the use of an analgesic, 

sufentanil, and a device that delivers that analgesic to the patient. 

Unlike IV PCA, however, Zalviso delivers sufentanil sublingually (i.e., under the tongue). 

Id. ¶ 48. “[S]ufentanil doses . . . are preloaded into a cartridge that is loaded into a device. Once 

the cartridge is loaded into the device, a priming capsule is discharged by the nurse, signaling that 

the device is ready for the patient’s use, and also locking the cartridge within the device.” Id. 

Patients use a pre-programmed, handheld control to adjust the amount of analgesic they need. The 

control employs an optical sensor to help moderate how much sufentanil patients can receive, and 

locks up “for a set period of time between doses.” Id. ¶ 76. “The optical system is important 

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because . . . it is intended to prevent situations where a patient does not receive their dose (due to a 

device malfunction) and the nurse mistakenly thinks that the patient has received the dose (in 

which case, the patient would be without any pain medication while the device remains locked).” 

Id. An optical system error is thus functionally equivalent to an analgesic gap: in both situations, 

patients are unable to self-administer the analgesic that they have been prescribed. 

According to AcelRx, Zalviso improves upon IV PCA in a number of ways. First, “[i]n 

animal studies, the therapeutic index for sufentanil was approximately . . . 300 times [higher] than 

morphine.” Id. n.1. Second, unlike IV PCA, Zalviso provides a “non-invasive route of delivery.” 

Id. ¶ 53. Patients thus have greater mobility and, more importantly, are not exposed to the risk of

IV-related infection. Id. Finally, Zalviso’s delivery system “eliminate[s] the risk of infusion 

pump programming errors”—the sort of analgesic gaps that afflicted patients using IV PCA. Id. 

On September 30, 2013, AcelRx submitted to the FDA a new drug application (“NDA”)

for Zalviso. Id. ¶ 62. The NDA approval process is one of the final steps that a company must 

take before a drug or device may be sold to the public. Prior to submitting Zalviso’s NDA, 

AcelRx had conducted seven Phase 1 studies, three Phase 2 studies, and three Phase 3 trials.1 

AcelRx reported that Phase 3 trials were successful in meeting Zalviso’s targeted endpoints. 

On December 2, 2013, the FDA announced that it had accepted Zalviso’s NDA for review. 

Id. ¶ 5. On July 25, 2014, AcelRx received a Complete Response Letter (“CRL”) from the FDA. 

Id. ¶ 11. According to AcelRx, in the CRL, the FDA “requested additional information on the 

Zalviso System to ensure proper use of the device, including the provision of bench data 

demonstrating a reduction in the incidence of optical system errors, changes to the Instructions for 

Use for the device, and additional data to support the shelf life of the product.” Id. Plaintiffs 

 

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The FDA requires companies to conduct three phases of studies prior to submission of an NDA. 

Phase 1 studies “are designed to determine the metabolism and pharmacologic actions of the drug 

in humans, the side effects associated with increasing doses, and, if possible, to gain early 

evidence on effectiveness.” 21 C.F.R. § 312.21(a)(1). Phase 2 studies are “conducted to evaluate 

the effectiveness of the drug for a particular indication or indications in patients with the disease or 

condition under study.” 21 C.F.R. § 312.21(b). Finally, Phase 3 clinical trials “are intended to 

gather the additional information about effectiveness and safety that is needed to evaluate the 

overall benefit-risk relationship of the drug.” 21 C.F.R. § 312.21(c). 

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allege that, based on this news, AcelRx shares immediately declined by nearly 41%. 

B. Procedural History

On October 1, 2014, Plaintiffs filed their first complaint in this putative class action. ECF 

No. 1. Plaintiffs filed an amended complaint on April 17, 2015. In the amended complaint, 

Plaintiffs seek to represent a class comprised of all persons “who purchased or otherwise acquired 

AcelRx’s common stock and/or call options, or sold/wrote AcelRx’s put options between 

September 30, 2013 [the day that AcelRx submitted the NDA for Zalviso] and July 25, 2014 [the 

day that AcelRx received the CRL for Zalviso].” AC ¶ 1. 

Plaintiffs allege that Defendants made “materially false and/or misleading” statements in 

various press releases and SEC filings during this class period in violation of § 10(b) of the 

Exchange Act and Rule 10b-5. See, e.g., id. ¶¶ 13, 102; see also 15 U.S.C. § 78j(b); 17 C.F.R. §

240.10b-5. Specifically, Plaintiffs allege that Defendants failed to disclose “a substantial and 

existing defect with the Phase 3 Device that caused the device to malfunction”—the optical system 

errors. AC ¶ 102. Further, Plaintiffs allege that these optical system errors occurred at a 

sufficiently high rate such “that the issue would certainly [have] draw[n] attention from the FDA” 

and would have “very likely . . . require[d] the company to conduct” additional trials for Zalviso. 

Id. Plaintiffs note that AcelRx had also designed a modified device in an attempt to address these 

errors, but that AcelRx had failed to disclose this fact in AcelRx’s press releases or public filings 

during the class period. Finally, Plaintiffs allege that the individual Defendants (Palmer, King, 

Morris, and Welch) are controlling persons of AcelRx and are therefore liable under § 20(a) of the 

Exchange Act. 

On June 1, 2015, Defendants filed the instant motion to dismiss. ECF No. 35. Plaintiffs 

filed an opposition to Defendants’ motion on July 30, 2015, and Defendants filed a reply on 

September 14, 2015. ECF No. 43 (“Opp’n”); ECF No. 47 (“Reply”). On June 1, 2015, 

Defendants also filed a request for judicial notice of various exhibits filed in support of 

Defendants’ motion to dismiss. ECF No. 36. Plaintiffs filed an opposition to Defendants’ request 

on July 30, 2015, and Defendants filed a reply on September 14, 2015. ECF Nos. 42 & 50. The 

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Court first addresses Defendants’ request for judicial notice then addresses Defendants’ motion to 

dismiss. 

II. JUDICIAL NOTICE

Defendants request judicial notice of fifteen exhibits filed in support of Defendants’

motion to dismiss. The Court reviews these exhibits in turn. 

Exhibits 1 through 5 and 10 through 12 are public SEC filings. Such filings are generally 

subject to judicial notice. Metzler Inv. GMBH v. Corinthian Coll., Inc., 540 F.3d 1049, 1064 n.7 

(9th Cir. 2008) (“SEC filings [are] subject to judicial notice.” ). Plaintiffs nonetheless object to

the inferences that Defendants purportedly seek to draw from Exhibit 12 because, Plaintiffs argue, 

such documents may not be used “to prove the truth of their contents.” ECF No. 42 at 4 (internal 

quotation marks omitted).2 This argument simply recasts the well-accepted legal standard 

governing documents subject to judicial notice—that is, that the Court “may take judicial notice of 

publications introduced to indicate what was in the public realm at the time,” but that the Court 

may not take judicial notice as to “whether the contents of those articles were in fact true.” Von 

Saher v. Norton Simon Museum of Art, 592 F.3d 954, 960 (9th Cir. 2009) (internal quotation 

marks omitted). The Court will bear this standard in mind with respect to Exhibit 12, as the Court 

must bear in mind with respect to all of Defendants’ exhibits. Plaintiffs’ objection, however, does 

not warrant rejection of Defendants’ request for judicial notice. Accordingly, the Court GRANTS 

Defendants’ request for judicial notice of Exhibits 1 through 5 and 10 through 12.

Exhibit 9 is an FDA document providing guidance on the approval process for 

combination products. Exhibits 13 through 15 are patent filings and other related materials filed 

with the U.S. Patent and Trademark Office. All of these documents are in the public record, and 

all are subject to judicial notice. See Oroamerica Inc. v. D & W Jewelry Co., Inc., 10 F. App’x 

516, 517 n.4 (9th Cir. 2001) (granting judicial notice to public documents associated with design 

patent). Plaintiffs have not specifically opposed Defendants’ request that the Court take judicial 

 

2

Plaintiffs did not raise specific objections with regard to Exhibits 1 through 5 or Exhibits 10 and 

11.

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notice of these three exhibits. Accordingly, the Court GRANTS Defendants’ request for judicial 

notice of Exhibit 9 and Exhibits 13 through 15. 

Exhibit 7 is a press release that provides background on AcelRx’s patent portfolio. 

“Courts in the Ninth Circuit routinely take judicial notice of press releases.” In re Am. Apparel, 

Inc. S’holder Litig., 855 F. Supp. 2d 1043, 1062 (C.D. Cal. 2012). Plaintiffs have not specifically 

opposed Defendants’ request that the Court take judicial notice of Exhibit 7. Accordingly, the 

Court GRANTS Defendants’ request for judicial notice of Exhibit 7. 

Finally, Exhibits 6 and 8 are conference call transcripts. In Exhibit 6, a transcript from a 

conference call that occurred on July 28, 2014, Defendants discuss the implications of the FDA’s 

decision to withhold approval for Zalviso. ECF No. 37 at 7. In Exhibit 8, a transcript from a

conference call that occurred on March 9, 2015, Defendants discuss AcelRx’s fourth quarter 

financial earnings. Id. As Plaintiffs concede, the amended complaint refers to both calls on 

multiple occasions. See, e.g., AC ¶¶ 80, 83, 116, 129. In fact, the amended complaint quotes 

extensively from the transcripts of both calls. Other district courts have found conference call 

transcripts subject to judicial notice, particularly where portions of these transcripts are quoted at 

length in the complaint. See In re Am. Apparel, 855 F. Supp. 2d at 1061; In re Copper Mountain 

Sec. Litig., 311 F. Supp. 2d 857, 864 (N.D. Cal. 2004). The Court finds it appropriate to take 

judicial notice of the transcripts at issue. Plaintiffs cannot selectively quote from one part of a 

publicly-available transcript and then object to Defendants’ decision to provide the Court with the 

complete transcript. Accordingly, the Court GRANTS Defendants’ request for judicial notice of 

Exhibits 6 and 8. 

In sum, the Court finds that all of Defendants’ exhibits are subject to judicial notice. 

Defendants’ request for judicial notice is therefore GRANTED in its entirety. 

III. LEGAL STANDARDS

A. Motion to Dismiss

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss an 

action for failure to state a claim upon which relief may be granted. Because Plaintiffs have 

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brought their claims as a federal securities fraud action, Plaintiffs are not subject to the notice 

pleading standards under Federal Rule of Civil Procedure 8(a)(2), which require litigants to 

provide “a short and plain statement of the claim showing that the pleader is entitled to relief.” 

Instead, Plaintiffs must “meet the higher, [more] exacting pleading standards of Federal Rule of 

Civil Procedure 9(b) and the Private Securities Litigation Reform Act (PSLRA).” Or. Pub. Emp. 

Ret. Fund v. Apollo Group Inc., 774 F.3d 598, 603–04 (9th Cir. 2014). 

Under Federal Rule of Civil Procedure 9(b), “[i]n alleging fraud or mistake, a party must 

state with particularity the circumstances constituting fraud or mistake.” Plaintiffs must include 

“an account of the time, place, and specific content of the false representations” at issue. Swartz v. 

KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (internal quotation marks omitted). Rule 9(b)’s 

particularity requirement “applies to all elements of a securities fraud action.” 774 F.3d at 605. 

“PSLRA imposes additional specific pleading requirements, including requiring plaintiffs to state 

with particularity both the facts constituting the alleged violation and the facts evidencing 

scienter.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 877 (9th Cir. 2012). In order to 

properly allege falsity, “a securities fraud complaint must . . . specify each statement alleged to 

have been misleading, [and] the reason or reasons why the statement is misleading.” Id. (internal 

quotation marks and alteration omitted). In addition, in order to “adequately plead scienter under 

the PSLRA, the complaint must state with particularity facts giving rise to a strong inference that 

the defendant acted with the required state of mind.” Id. (internal quotation marks omitted). 

For purposes of ruling on a Rule 12(b)(6) motion, the Court “accept[s] factual allegations 

in the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving 

party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008).

Nonetheless, the Court is not required to “‘assume the truth of legal conclusions merely because 

they are cast in the form of factual allegations.’” Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 

2011) (quoting W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981)). Mere “conclusory 

allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss.” 

Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004). Furthermore, “‘a plaintiff may plead 

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[him]self out of court’” if he “plead[s] facts which establish that he cannot prevail on his . . . 

claim.” Weisbuch v. Cnty. of L.A., 119 F.3d 778, 783 n.1 (9th Cir. 1997) (quoting Warzon v. 

Drew, 60 F.3d 1234, 1239 (7th Cir. 1995)).

B. Leave to Amend

Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend “shall be freely 

granted when justice so requires,” bearing in mind “the underlying purpose of Rule 15 to facilitate 

decision on the merits, rather than on the pleadings or technicalities.” Lopez v. Smith, 203 F.3d 

1122, 1127 (9th Cir. 2000) (en banc) (internal quotation marks and alterations omitted). 

Generally, leave to amend shall be denied only if allowing amendment would unduly prejudice the 

opposing party, cause undue delay, or be futile, or if the moving party has acted in bad faith. 

Leadsinger, Inc. v. BMG Music Publ’g, 512 F.3d 522, 532 (9th Cir. 2008).

IV. DISCUSSION

A. Violation of § 10(b) of the Exchange Act and Rule 10b-5

“To plead a claim under section 10(b) and Rule 10b–5, [] Plaintiffs must allege: (1) a 

material misrepresentation or omission; (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.” Or. Pub. Emp. Ret. Fund, 774 F.3d at 603. Defendants argue that 

Plaintiffs have failed to sufficiently allege that Defendants committed a material misrepresentation 

or omission and that Plaintiffs have failed to show that Defendants’ alleged actions support a 

strong inference of scienter. The Court analyzes these contentions in turn.

1. Material Misrepresentation or Omission

The amended complaint is rife with purported examples of Defendants’ materially false 

and/or misleading statements. These statements can be broadly organized into four categories: (a) 

statements that relate to the clinical history of Zalviso prior to submission of the NDA, (b) 

statements that trumpet Zalviso’s alleged superiority to IV PCA, (c) statements that reveal

insufficient disclosure of the risks of Zalviso, and (d) misleading forward-looking statements. As 

the Court will show, no statement in any of these categories rises to the level of a material

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misrepresentation or omission necessary to state a claim under § 10(b) or Rule 10(b)-5.

a. Clinical History of Zalviso Prior to NDA

First, Plaintiffs allege that AcelRx made statements “regarding their NDA submission and 

[regarding] the status of the NDA” that were “materially false and/or misleading.” Opp’n at 5–6. 

Plaintiffs, for instance, emphasize the following statement made by AcelRx in a September 30, 

2013 press release:

The NDA submission is based primarily on data from a Phase 3 registration 

program that included two double-blind randomized placebo-controlled clinical 

trials, one conducted in patients following major abdominal surgery, the other in 

patients following major joint replacement surgery. Additionally, a Phase 3 openlabel active-comparator trial was conducted in patients following either major 

abdominal or orthopedic surgery, comparing Zalviso to the current standard of 

care, intravenous patient-controlled analgesia (IV PCA) with morphine. Zalviso 

successfully achieved the primary efficacy endpoints for each of these studies. 

Treatment-emergent adverse events were typical of opioid usage post-operatively, 

were generally mild-to-moderate in nature, and were similar in both active- and 

placebo-treatment groups for the majority of adverse events.

AC ¶ 100. The Court fails to see how this statement, or statements to this effect, see, e.g., id. ¶¶

103 & 106, are “materially false and/or misleading.” This statement does not shed light upon the 

likelihood of FDA approval for Zalviso. In fact, this statement does not even express an opinion 

as to the results of Zalviso’s Phase 3 trials. Rather, this statement merely summarizes the process

that AcelRx undertook prior to submitting Zalviso for FDA approval. As Plaintiffs acknowledge,

AcelRx did in fact conduct three Phase 3 trials and AcelRx did in fact achieve the primary 

endpoints in each of these trials. Id. ¶ 66. 

Thus, these clinical history statements were not false. In fact, they were (and are) quite 

literally true. These statements were also not misleading. As the Ninth Circuit has held, § 10(b) 

and Rule 10b-5 “prohibit only misleading and untrue statements, not statements that are 

incomplete.” Brody v. Transitional Hosp. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). An 

omission is misleading if it “affirmatively create[s] an impression of a state of affairs that differs 

in a material way from the one that actually exists.” Id. The clinical history statements do not 

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create such an impression. These statements do not suggest or imply that AcelRx believed that the 

FDA would give approval for Zalviso. Instead, these statements provide an accurate snapshot of

the work that AcelRx undertook prior to submission of Zalviso’s NDA. Such statements are not 

misleading for purposes of § 10(b) and Rule 10b-5.

b. Zalviso’s Superiority to IV PCA

Next, Plaintiffs contend that “Defendants made materially false and/or misleading positive 

statements trumpeting Zalviso’s superiority to the IV PCA.” Opp’n at 6. According to Plaintiffs,

Defendants touted the effectiveness of Zalviso but withheld from the public the fact that Zalviso 

was affected by optical system errors. In the amended complaint, Plaintiffs emphasize the 

following statements, made by AcelRx in a number of public SEC filings during the class period: 

Zalviso is designed to address the limitation of IV PCA by offering . . . [a] noninvasive route of delivery[.] The sublingual route of delivery used by Zalviso

provides rapid onset of analgesia, therefore eliminating the risk of IV-related 

analgesic gaps and IV complications, such as catheter-related infections in IV 

PCA treated patients. In addition, because patients are not tethered to IV tubing 

and a pump for pain relief, Zalviso allows for ease of patient mobility. 

AC ¶ 104. Plaintiffs argue that these statements were misleading because they created an 

impression that Zalviso eliminated the risk of all analgesic gaps and all complications, not just 

those analgesic gaps and complications associated with IV PCA.

Plaintiffs’ analysis is not well taken. Plaintiffs do not contest the truth of the following 

statements: Zalviso eliminates the risk of IV-related analgesic gaps, Zalviso eliminates the risk of 

certain other IV-specific complications, and Zalviso provides patients with greater ease of 

mobility. Instead, Plaintiffs claim that Defendants should have also disclosed Zalviso’s optical 

system error rate. Plaintiffs contend that, without including this information, Defendants’ 

statements implied that Zalviso would eliminate analgesic gaps altogether.

This is not a reasonable interpretation of Defendants’ statements. Defendants’ statements 

make clear that Zalviso would eliminate IV-related analgesic gaps and other IV-related 

complications because of Zalviso’s “sublingual route of delivery”—that is, because Zalviso did 

not require patients to use an IV catheter to receive pain medication. AC ¶ 104. Such statements 

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do not state or imply that Zalviso would eliminate the risk of all analgesic gaps or all 

complications. At most, Defendants’ statements comparing Zalviso’s efficacy to IV PCA are 

incomplete, as these statements do not disclose that Zalviso might come with its own set of risks. 

However, AcelRx never promised investors that Zalviso would be a perfect device, and a 

reasonable investor would not read Defendants’ statements to imply such a conclusion. 

In Plaintiffs’ opposition to the instant motion, Plaintiffs cite a number of cases where 

courts have allegedly found that literally true statements can nonetheless be misleading. Opp’n at

6–7. These cases, however, do not support Plaintiffs’ contentions. Both Church of Scientology 

Flag Service Organization, Inc. v. City of Clearwater, 2 F.3d 1514 (11th Cir. 1993), and K & T 

Enterprises, Inc. v. Zurich Insurance Co., 97 F.3d 171, 180–81 (6th Cir. 1996), have nothing to do 

with securities fraud. The former case concerns the First Amendment implications of an

ordinance regulating the solicitation of funds by charitable organizations. The latter case centers 

on an insurance dispute which required the interpretation of various fraud and misrepresentation 

provisions in Michigan state law. Neither case is helpful in determining whether Defendants here

made a misleading statement for purposes of federal securities fraud liability. 

The remaining cases relied upon by Plaintiffs are likewise inapposite. In Brody v. 

Transitional Hospitals Corp., the Ninth Circuit rejected the plaintiffs’ contention that certain 

statements made by the defendants were misleading. Although the Ninth Circuit acknowledged 

that some statements can be both “literally true” and “misleading,” the Ninth Circuit also made 

clear that Rule 10b-5 liability does not attach to statements that are simply incomplete. 280 F.3d 

at 1006. In fact, “[o]ften, a statement will not mislead even if it is incomplete or does not include 

all relevant facts.” Id. (emphasis added). “No matter how detailed and accurate disclosure 

statements are, there are likely to be additional details that could have been disclosed but were 

not.” Id.; see also Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 987 (9th Cir. 2008) (“[T]he 

securities laws don’t require firms to disclose all information.”). The Ninth Circuit went on to 

explain that, “in order to survive a motion to dismiss under the heightened pleading standards of 

the [PSLRA], the plaintiffs’ complaint must specify the reason or reasons why the statements 

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made . . . were misleading or untrue, not simply why the statements were incomplete.” Brody, 280 

F.3d at 1006. Plaintiffs in the instant case have failed to clear this hurdle. At most, Defendants’ 

statements were incomplete, not misleading. 

Finally, Plaintiffs cite Operating Local 649 Annuity Trust Fund v. Smith Barney Fund 

Management LLC, 595 F.3d 86 (2d Cir. 2010), where the Second Circuit determined that the 

defendants did make a materially misleading omission. Yet, in reaching this conclusion, the 

Second Circuit emphasized that the defendants had omitted information that the defendants were 

required to disclose under SEC disclosure rules. Id. at 92–95. Plaintiffs in the instant case have 

identified no such applicable rules which require disclosure of Zalviso’s alleged shortcomings. 

To summarize, Defendants were under no obligation to reveal Zalviso’s alleged 

shortcomings in statements comparing Zalviso to IV PCA. Defendants did not make false or 

misleading statements when comparing Zalviso to IV PCA. Defendants’ statements were in fact 

literally true and were, at most, incomplete. Under such circumstances, Plaintiffs have failed to 

state a claim upon which relief may be granted under § 10(b) and Rule 10b-5.

c. Insufficient Disclosure of Risk/Need for Additional Device Testing

Plaintiffs also contend that Defendants’ risk disclosures contained materially false and/or 

misleading statements because these disclosures did not mention Zalviso’s optical system error 

rate. Plaintiffs point specifically to the following language from AcelRx’s risk disclosures:

We have conducted multiple Design Validation, Software Verification and 

Validation, Reprocessing and Human Factors studies, which have informed the 

design of the Zalviso device and we plan to conduct additional Human Factors 

studies prior to submitting the planned NDA for Zalviso. However, we cannot 

predict if the Phase 3 device will be fully functional or ready for commercial use. 

If we need to modify the Phase 3 device, we may incur higher costs and 

experience delay in regulatory approval and commercialization of Zalviso. 

Furthermore, if the changes to the device are substantial, we may need to conduct 

further clinical trials in order to have the commercial device approved by the 

FDA.

AC ¶ 101. These risk disclosures do not mention that Defendants were designing a modified 

device to address Zalviso’s optical system errors. According to Plaintiffs, Defendants’ decision to 

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design such a device is evidence of Defendants’ knowledge “that the optical system errors 

occurred at a substantially high enough rate [to] . . . at least draw careful scrutiny from the FDA.” 

Opp’n at 8. These errors “created a substantial risk, undisclosed to investors, that the FDA, aware 

of the existence of a superior and safer device, would require [AcelRx] to conduct trials sufficient 

to generate data to demonstrate the safety and effectiveness of the Modified Phase 3 Device before 

the FDA would approve Zalviso.” Id. (footnote omitted). Defendants’ risk disclosure statements 

were therefore, under Plaintiffs’ theory, misleading. 

The Court is unconvinced by this argument. As a threshold matter, AcelRx’s decision to 

improve upon the design of one of its products cannot, by itself, give rise to a federal securities 

fraud action. A company does not commit securities fraud when it decides to improve upon one 

of its products, and seeks patent protection for some of these improvements. More importantly, 

Plaintiffs have offered no response to Defendants’ plausible explanation that AcelRx would first 

“seek approval of the clinically tested [Phase 3] design, launch that product[,] and then seek 

approval of any design changes thereafter.” Mot. at 18; see also AC ¶ 83 (noting that Defendants

viewed the optical system errors as “a commercial issue,” and not as a regulatory issue) (internal 

quotation marks omitted). In fact, Plaintiffs’ only response to Defendants’ explanation is to state 

that this explanation “is no excuse for not telling investors of the inferiority of the device used in 

the Phase 3 trials.” Opp’n at 10. Yet Plaintiffs have provided no legal support, and the Court has 

found none, as to why Defendants’ actions were inexcusable or, more importantly, actionable 

under § 10(b) and Rule 10b-5. 

In fact, governing precedent from the U.S. Supreme Court and the Ninth Circuit points 

toward the opposite conclusion. In Matrixx Initiatives v. Siracusano, 131 S. Ct. 1309, 1321 

(2011), the U.S. Supreme Court stated that “§ 10(b) and Rule 10b–5(b) do not create an 

affirmative duty to disclose any and all material information.” Rather, “[d]isclosure is required 

only when necessary to make statements made, in the light of the circumstances under which they 

were made, not misleading.” Id. (internal quotation marks and alteration omitted). “Even with 

respect to information that a reasonable investor might consider material, companies can control 

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what they have to disclose under these provisions by controlling what they say to the market.” Id. 

at 1322. In interpreting Matrixx, the Ninth Circuit has held that “as long as the omissions do not 

make the actual statements misleading, a company is not required to disclose every safety-related 

result from a clinical trial, even if the company discloses some safety-related results and even if 

investors would consider the omitted information significant.” In re Rigel, 697 F.3d at 880 n.8. 

“The materiality of information is different from the issue of whether a statement is false or 

misleading.” Id. 

Together, In re Rigel and Matrixx Initiatives provide a clear answer to the alleged 

omissions at issue. Under these cases, Plaintiffs must show (1) that statements made by AcelRx

were actually misleading, and (2) that disclosure of certain information would have made these 

statements not misleading. The Court finds, under step (1), that there was nothing misleading 

about AcelRx’s risk disclosure statements. 

These risk disclosure statements begin by summarizing the studies AcelRx undertook prior 

to submission of the NDA. See AC ¶ 101 (“We have conducted multiple Design Validation, 

Software Verification and Validation, Reprocessing and Human Factors studies, which have 

informed the design of the Zalviso device and we plan to conduct additional Human Factors 

studies prior to submitting the planned NDA for Zalviso.”). This summary is akin to the clinical 

history statements that were previously described and analyzed. As with those clinical history 

statements, this summary is not actionable under § 10(b) and Rule 10b-5. The risk disclosure

statements continue by noting that “we [AcelRx] cannot predict if the Phase 3 device will be fully 

functional or ready for commercial use.” This sentence is not misleading. If anything, this

sentence makes clear that Defendants were uncertain about Zalviso’s prospects for FDA approval, 

and that Defendants could not provide any guarantees as to Zalviso’s market horizon. Finally, the 

risk disclosure statements conclude: “If we need to modify the Phase 3 device, we may incur 

higher costs and experience delay in regulatory approval and commercialization of Zalviso. 

Furthermore, if the changes to the device are substantial, we may need to conduct further clinical 

trials in order to have the commercial device approved by the FDA.” Again, these sentences are 

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not misleading. They are in fact an accurate description of the regulatory process. As outlined in 

21 U.S.C. § 356a, if a company does decide to make changes to the manufacturing process of a 

particular drug, the company must notify the FDA. If the change “is not a major manufacturing 

change,” the company need only comply with a set of requirements not nearly as onerous as those 

required for approval of a new drug. 21 U.S.C. § 356a(d). However, if the change is “a major 

manufacturing change,” the company may need to submit a more detailed “supplemental 

application.” 21 U.S.C. § 356a(c). The Court fails to see how sentences which accurately 

summarize this process can be misleading. 

Setting aside the specific language in the risk disclosure statements for a moment, the gist 

of Plaintiffs’ complaint is that Defendants knew about a risk that would jeopardize FDA approval 

for Zalviso and that Defendants did not publicly disclose this risk. Under In re Rigel and Matrixx 

Initiatives, however, knowledge alone is insufficient for § 10(b) and Rule 10b-5 liability. Again, 

“a company is not required to disclose every safety-related result from a clinical trial, even if the 

company discloses some safety-related results and even if investors would consider the omitted 

information significant.” In re Rigel, 697 F.3d at 880 n.8. In addition, “[t]he materiality of 

information is different from the issue of whether a statement is false or misleading.” Id. Thus, 

what matters is not whether the omitted information was significant, but whether, absent the 

omitted information, Defendants’ statements were misleading. As the Court has made clear, 

Defendants’ statements were not misleading.

Moreover, the Court also finds that Plaintiffs have failed to explain how Defendants’ 

knowledge of Zalviso’s optical system errors would necessarily translate into knowledge that 

Zalviso would face a significantly higher risk of rejection by the FDA. Plaintiffs cite In re 

Connetics Corporation Securities Litigation, 2008 WL 3842938 (N.D. Cal. Aug. 14, 2008), and In 

re Merck & Co., Inc., Inc. Securities, Derivative, & ERISA Litigation, 2011 WL 3444199 (D.N.J. 

Aug. 8, 2011), but these cases do not support Plaintiffs’ position. First, both cases were decided 

prior to Matrixx Initiatives and prior to In re Rigel. Plaintiffs have not explained why the Court 

should rely upon In re Connetics and In re Merck in light of subsequent U.S. Supreme Court and 

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Ninth Circuit case law. In any event, the Court finds In re Connetics and In re Merck inapposite. 

As the district court in In re Connetics noted, the defendants “had actual knowledge of the results 

of [a] transgenic mouse study, and defendants also knew, as they themselves aver, that very few 

other drugs with similar test results had been approved by the FDA.” 2008 WL 3842938, *7. In 

addition, in In re Merck, the defendants “deliberately deferred conducting a large-scale trial . . . 

which would compare Vioxx and a traditional NSAID, for fear that it would show a greater 

incidence of adverse . . . events in Vioxx users.” 2011 WL 3444199, at *11. Thus, in both In re 

Connetics and In re Merck, the plaintiffs alleged that the companies knew about a drug’s 

shortcomings, that these shortcomings had resulted in rejection of similar drugs, and that the 

companies actively withheld information about these shortcomings to investors. 

There have been no such allegations made in the instant case. Indeed, unlike the 

defendants in In re Connetics and In re Merck, Plaintiffs here have not alleged that Defendants 

knew that “very few other drugs with similar test results had been approved by the FDA,” or even 

that there were other drugs or devices to which Defendants could compare Zalviso. 2008 WL 

3842938, at *7. When asked by a market analyst whether there had been “any guidance from the 

[FDA] or any prior precedence with other devices or products where [the FDA] have [sic] asked 

for [a] certain threshold on optical error rate,” then-AcelRx CEO Richard King responded: “None 

that I’m aware of. This is a system that is incorporated into our technology which is specific to 

our technology. So I am unaware of any other request.” AC ¶ 80; see also AC ¶ 84 (“[W]e 

haven’t been given a specific target rate” for the optical system errors.). There is no indication 

that Defendants knew that Zalviso’s optical system error rate would be cause for concern for the 

FDA.

3

 

To summarize, Plaintiffs have failed to show that Defendants’ actual risk disclosures were

 

3

In Plaintiffs’ opposition to the instant motion, Plaintiffs contend that “the FDA is likely to deem 

any error risking patient safety . . . statistically significant, particularly when [as with Zalviso] the 

error rate is in excess of 5%.” Opp’n at 12 n.11. Plaintiffs, however, have not provided any 

support for this legal conclusion and, for purposes of a motion to dismiss, the Court is not required 

to “assume the truth of legal conclusions merely because they are cast in the form of factual 

allegations.” Fayer v. Vaughn, 649 F.3d at 1064 (internal quotation marks omitted).

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misleading as required under In re Rigel and under Matrixx Initiatives. The authority that 

Plaintiffs do rely upon predates both of these cases and, in any event, does not support Plaintiffs’ 

claims. Accordingly, the Court finds that Plaintiffs have failed to state a claim under § 10(b) and 

Rule 10b-5 for the alleged omissions in Defendants’ risk disclosures.

d. Forward-Looking Statements

Finally, Plaintiffs allege that Defendants made certain forward-looking statements about 

the outlook of Zalviso that were materially false and/or misleading. In particular, Plaintiffs point 

to statements such as the following, made in AcelRx’s 10-K:

[A]ssuming successful approval of our NDA . . . , we anticipate launching the 

commercial sale of Zalviso in the United States in the first quarter of 2015. 

AC ¶ 110. According to Plaintiffs, these statements misled investors into believing that the FDA 

would approve Zalviso, despite the fact that Defendants knew Zalviso would not receive approval

because of the device’s optical system errors. 

Plaintiffs’ contentions are not well taken. Under PSLRA, a forward-looking statement is 

defined to include any “statement of the plans and objectives of management for future operations, 

including plans or objectives relating to the products or services of the issue” and “any statement 

of the assumptions underlying or relating to any [such] statement.” 15 U.S.C. § 78u-5(i)(1). 

PSLRA further provides that: 

[A] person . . . shall not be liable with respect to any forward-looking statement, 

whether written or oral, if and to the extent that—

(A) the forward-looking statement is—

(i) identified as a forward-looking statement, and is accompanied by meaningful 

cautionary statements identifying important factors that could cause actual results 

to differ materially from those in the forward-looking statement; or

(ii) immaterial; or

(B) the plaintiff fails to prove that the forward-looking statement—

(i) if made by a natural person, was made with actual knowledge by that person 

that the statement was false or misleading; or

(ii) if made by a business entity; was—

(I) made by or with the approval of an executive officer of that entity; and

(II) made or approved by such officer with actual knowledge by that officer that 

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the statement was false or misleading.

15 U.S.C. § 78u–5(c)(1) (footnote omitted). Together, these terms provide a safe harbor for 

forward-looking statements. In fact, according to the Ninth Circuit, these terms provide two safe 

harbors: one safe harbor for forward-looking statements identified as such and accompanied by 

meaningful cautionary statements, see 15 U.S.C. § 78u–5(c)(1)(A) (“Subsection A”), and another 

safe harbor for “unidentified forward-looking statements and forward-looking statements 

unaccompanied by meaningful cautionary language,” see 15 U.S.C. § 78u–5(c)(1)(B) (“Subsection 

B”). See In re Cutera Sec. Litig., 610 F.3d 1103, 1112–13 (9th Cir. 2010) (explaining how the safe 

harbors work together). 

The statements recited above are clearly forward-looking statements as defined under 

Subsection A. These statements provide detail on the planned rollout of Zalviso. They thus fall 

within the purview of “statements of the plans and objectives of management for future 

operations.” 15 U.S.C. § 78u-5(i)(1). In addition, these statements were identified as forwardlooking statements by Defendants. The very first page of AcelRx’s 10-K states, for instance, that 

“[t]his Annual Report . . . contains ‘forward-looking statements’ within the meaning of Section 

21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject 

to the ‘safe harbor’ created by that section.” R. 37-4 (“2013 10-K”) at 3. Further, the 10-K 

provides that investors “can identify forward-looking statements by the following words: ‘may,’ 

‘will,’ ‘could,’ . . . ‘anticipate.” Id. (emphasis added); see AC ¶ 110 (“[W]e anticipate launching 

the commercial sale of Zalviso in the United States in the first quarter of 2015.”). The 10-K also

lists several factors “that could cause actual results to differ materially from those in the forwardlooking statement.” Id. These factors include the “ability to obtain and maintain regulatory 

approval of Zalviso,” “the success, cost and timing of . . . product development activities and 

clinical trials,” and any “regulatory developments in the United States and foreign countries. 2013 

10-K at 3. In sum, the statements at issue fall under the Subsection A safe harbor because they are

forward-looking statements, were identified as such, and were accompanied by meaningful 

cautionary statements. 

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Plaintiffs’ arguments to the contrary are unavailing. First, Plaintiffs argue that “Defendants 

cannot knowingly mislead the public, while shielding themselves from liability by adding some 

cautionary language.” Opp’n at 10 n.8. This argument appears to relate to a different safe-harbor 

provision— Subsection B. That safe harbor provides that a person shall not be liable for forwardlooking statements if “the plaintiff fails to prove that the forward-looking statement . . . was made 

with actual knowledge by that person that the statement was false or misleading.” 15 U.S.C. § 

78u–5(c)(1)(B). However, as the Court has held, the instant statements are not governed by 

Subsection B, which applies to unidentified forward-looking statements and forward-looking 

statements unaccompanied by meaningful cautionary language, but by Subsection A. To reiterate, 

the forward-looking statements at issue were identified by AcelRx as being forward-looking 

statements and were accompanied by meaningful cautionary language. As the Ninth Circuit has 

held, “if a forward-looking statement is identified as such and accompanied by meaningful 

cautionary statements, then the state of mind of the individual making the statement is irrelevant, 

and the statement is not actionable regardless of the plaintiff’s showing of scienter.” In re Cutera, 

610 F.3d at 1112. Accordingly, Plaintiffs’ arguments regarding Defendants’ state of mind are 

irrelevant because the forward-looking statements at issue fall under Subsection A, not Subsection 

B. 

Second, even if Defendants’ state of mind was relevant—that is, even if the Court were to 

consider Plaintiffs’ arguments under Subsection B —Plaintiffs would need to show that 

Defendants made forward-looking statements with “actual knowledge . . . that the statement[s] 

w[ere] false or misleading.” Plaintiffs, in other words, would need to plead facts sufficient to raise 

a strong inference of scienter by Defendants. As the Court will discuss in the next section, the 

amended complaint fails to raise such an inference. Defendants’ forward-looking statements thus 

fall under the purview of PSLRA’s safe-harbor provisions, whether examined under Subsection A 

or under Subsection B. 

In sum, Plaintiffs have identified four types of statements that Plaintiffs allege constitute 

material misrepresentations or omissions under § 10(b) and Rule 10b-5: (a) statements that relate 

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to the clinical history of Zalviso prior to submission of the NDA, (b) statements that trumpet 

Zalviso’s alleged superiority to IV PCA, (c) statements that insufficiently disclose the risks and 

shortcomings of Zalviso, and (d) certain forward-looking statements. The Court finds that none of 

these statements constitute a material misrepresentation or omission sufficient to state a claim for 

liability under § 10(b) and Rule 10b-5. 

2. Scienter

In order to survive a motion to dismiss, Plaintiffs’ complaint must also give rise to a strong 

inference of scienter. With respect to the strong inference requirement, the Ninth Circuit has 

stated that “[a] strong inference of scienter must be more than merely plausible or reasonable—it 

must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” 

Reese v. Malone, 747 F.3d 557, 569 (9th Cir. 2014). With respect to the element of scienter itself,

the “complaint must allege that the defendants made false or misleading statements either 

intentionally or with deliberate recklessness.” Zucco Partners, LLC v. Digimarc Corp., 562 F.3d 

981, 991 (9th Cir. 2009) (internal quotation marks omitted). “[F]acts showing mere recklessness 

or a motive to commit fraud and [the] opportunity to do so” are insufficient. Id. “Rather, the 

plaintiff must plead a highly unreasonable omission, involving not merely simple, or even 

inexcusable negligence, but an extreme departure from the standards of ordinary care, and 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.” Id. (internal quotation marks omitted). In the 

Ninth Circuit, courts must determine first “whether any of the plaintiff’s allegations, standing 

alone, is sufficient to create a strong inference of scienter.” In re NVIDIA Corp. Sec. Litig., 768 

F.3d 1046, 1056 (9th Cir. 2014). If none is sufficient alone, the court must “then consider the 

allegations holistically to determine whether they create a strong inference of scienter taken 

together.” Id. 

The amended complaint alleges that Defendants knew about, but actively tried to hide, 

evidence of Zalviso’s optical system errors, and that Defendants therefore made materially 

misleading statements about Zalviso’s likelihood of approval either with intent or with deliberate 

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recklessness. Plaintiffs point to three categories of facts that allegedly give rise to a strong 

inference of scienter: (a) Defendants’ decision to modify and improve upon Zalviso, (b) the 

importance of Zalviso to AcelRx’s core operations, and (c) Defendants’ financial motivations to 

commit fraud. Defendants dispute these contentions and argue that these facts in fact corroborate 

Defendants’ central narrative: that Defendants submitted Zalviso’s NDA in good faith, that 

Defendants planned to commercialize Zalviso in early 2015, and that Defendants were actively 

working to improve Zalviso’s commercial potential. Following In re NVIDIA, the Court analyzes

Plaintiffs’ three categories of allegations in turn, before “consider[ing] the allegations holistically 

to determine whether they create a strong inference of scienter [when] taken together.” Id. 

a. Additional Device Modifications

Plaintiffs point first to a number of modifications that Defendants undertook on the Zalviso

device prior to and during the class period. Plaintiffs single out AcelRx’s patent filing records 

which, according to Plaintiffs, demonstrate that Defendants knew about the alleged optical system 

errors at issue. See Opp’n at 15–20. 

Plaintiffs’ narrative, however, is not “as compelling as any opposing inference of 

nonfraudulent intent.” Reese, 747 F.3d at 569. As the Court has noted, Defendants contend that 

they submitted Zalviso’s NDA in good faith and that they were continuously working to improve 

upon Zalviso. The amended complaint does not contradict this version of events. In fact, the 

amended complaint includes statements from Defendants that Defendants understood the optical 

system errors to be a “commercial issue,” and not necessarily a regulatory issue. AC ¶ 83; see 

also id. ¶ 116 (“So firstly, what does the optical error rate have to get down to, it’s not clear to be 

honest with you, we . . . thought it’s being a commercial issue that we were addressing.”). These 

facts corroborate Defendants’ narrative rather than Plaintiffs’ contention that Defendants acted 

with scienter. Under the circumstances, Defendants have thus presented an opposing inference of 

nonfraudulent intent that is at least as compelling (if not more compelling) than Plaintiffs’ own 

inference. 

On this particular point, the Court finds instructive the Ninth Circuit’s decision in In re 

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NVIDIA. The plaintiffs in NVIDIA contended that NVIDIA was aware that some of NVIDIA’s 

products were experiencing problems, and that executives at NVIDIA deliberately withheld this 

information from investors in order to buy time and to mislead shareholders. The Ninth Circuit 

rejected this theory. In reaching this result, the Ninth Circuit held that a defendant’s decision to 

“delay[] disclosure while investigating the scope of [an] issue” does not give rise to a strong 

inference of scienter. 768 F.3d at 1065. 

This same reasoning governs the instant case. Here, Defendants contend that Defendants 

were actively trying to determine the cause behind the optical system error rate, and it is plausible 

that Defendants might have delayed disclosure in order to investigate the scope of this issue. 

Plaintiffs have offered no factual basis to rebut this theory. Thus, following the reasoning in In re 

NVIDIA and the allegations in the amended complaint, the Court finds that Defendants’ alleged 

modifications to Zalviso do not support a strong inference of scienter. 

b. Zalviso’s Importance to Core Operations

Next, Plaintiffs argue that the Court should find a strong inference of scienter because 

Zalviso “was, in a very real sense, AcelRx’s core operation.” Opp’n at 20. However, as Plaintiffs 

concede, the Ninth Circuit has typically “found inadequate complaints alleging that facts critical to 

a business’s core operations or an important transaction generally are so apparent that their 

knowledge may be attributed to the company and its key officers.” Zucco Partners, 552 F.3d at 

1000 (internal quotation marks omitted). The Ninth Circuit recognizes two exceptions to this 

general rule. “The first exception permits general allegations about management’s role in a 

corporate structure and the importance of the corporate information about which management 

made false or misleading statements to create a strong inference of scienter when these allegations 

are buttressed with detailed and specific allegations about management’s exposure to factual 

information within the company.” Id. (internal quotation marks omitted). “The second exception 

. . . permits an inference of scienter where the information misrepresented is readily apparent to 

the defendant corporation’s senior management.” Id. at 1001. “[R]eporting false information will 

only be indicative of scienter where the falsity is patently obvious.” Id. 

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Defendants’ actions do not fall under either of these exceptions. Both exceptions require 

management to have, at a minimum, made false or misleading statements. As the Court has held,

however, Defendants did not make any such statements. Moreover, Plaintiffs have failed to show 

that whatever false information Defendants allegedly reported was “patently obvious.” To be 

clear, knowing about the existence of certain optical system errors and knowing that one should 

report these errors to the public are two different things. Defendants might well have known about 

the optical system errors that afflicted Zalviso. Defendants might well have tried to address some 

of these errors prior to and during the class period. However, Defendants contend that Defendants 

did not know that the error rate would jeopardize regulatory approval for Zalviso, and Defendants 

contend that the FDA never did anything to dissuade Defendants of this belief. Plaintiffs have not 

challenged these contentions. It was therefore not “patently obvious” to Defendants that Zalviso’s 

optical system errors would jeopardize Zalviso’s chances for FDA approval. 

In light of these circumstances, the Court rejects Plaintiffs’ core operations theory. The 

Court finds that Plaintiffs have failed to sufficiently allege that Defendants made false or 

misleading statements or that Defendants acted with intent or with deliberate recklessness in 

making any such statements. 

c. Financial Motives for Fraud

Finally, Plaintiffs point to Defendants’ alleged financial motivations to commit fraud. 

Namely, Plaintiffs allege (i) that Defendants sought to increase their personal financial wealth, (ii) 

that Defendants sought to obtain a first mover advantage for Zalviso, and (iii) that Defendants 

sought to obtain financing and broker partnership opportunities during the class period. The Court

will review these allegations in turn.

i. Increases to Personal Financial Wealth

First, Plaintiffs spend several paragraphs in the amended complaint describing AcelRx’s 

executive compensation structure. See, e.g., AC ¶¶ 140–46. Plaintiffs point to the fact that 

compensation for the individual Defendants was tied to certain goals, such as “completion of a 

partnership deal for Zalviso” and “obtaining positive top-line results” in Phase 2 and Phase 3 

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trials. Id. ¶ 141. “Thus, Defendants’ misrepresentations and omissions to the market about 

Zalviso . . . made it possible for them . . . to increase their compensation.” Id. ¶ 142.

This argument lacks merit. First, the Court fails to see how the existence of certain goals 

can, by themselves, lend support to a strong inference of scienter. If nothing else, these goals 

serve as practical targets that any company would set in order to encourage executives to work

towards a larger common goal: to take a product to market. Second, and more importantly, the 

facts in this case simply do not corroborate Plaintiffs’ narrative. During the class period, 

individual Defendants King, Palmer, and Welch actually increased their respective stock holdings 

in AcelRx.4 King, Palmer, and Welch thus suffered significant financial losses as a result of their 

holdings in AcelRx—losses that dwarfed their actual compensation. See ECF No. 37 ¶ 13. 

In the amended complaint, for instance, Plaintiffs allege that King was paid $2,631,565 in 

compensation in 2013, inclusive of salary, option awards, and other compensation. AC ¶ 143. 

During the class period, however, King lost approximately $4,609,377 in value as a result of 

King’s holdings in AcelRx. ECF No. 37 ¶ 13. Plaintiffs allege that Palmer was paid $2,023,519 

in compensation in 2013, inclusive of salary, option awards, and other compensation. AC ¶ 146. 

During the class period, however, Palmer lost approximately $4,732,773 in value as a result of 

Palmer’s holdings in AcelRx. ECF No. 37 ¶ 13. Plaintiffs allege that Welch was paid $963,145 in 

compensation in 2013, inclusive of salary, option awards, and other compensation. AC ¶ 144. 

During the class period, however, Welch lost approximately $1,014,042 in value as a result of 

Welch’s holdings in AcelRx. ECF No. 37 ¶ 13. 

The Court fails to see how the individual Defendants were financially motivated to mislead 

investors about Zalviso. To emphasize: King, Palmer, and Welch increased their holdings in 

AcelRx during the class period and, as a result, suffered financial losses that dwarfed their actual 

compensation. There is no plausible reason—and, indeed, Plaintiffs have offered none—for the 

individual Defendants to have increased their personal investment in Zalviso if, in fact, the 

 

4

The remaining individual Defendant, Morris, was not employed by AcelRx during the class

period and did not own shares of AcelRx during the class period. See ECF No. 37 ¶ 13 n.1. 

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individual Defendants knew that the FDA would likely withhold approval for Zalviso. See In re 

Pixar Sec. Litig., 450 F. Supp. 2d 1096, 1107 (N.D. Cal. 2006) (“[T]he absence of insider trading 

by a defendant is highly relevant and undermines any inference of scienter.”). 

ii. First Mover Advantage

Next, Plaintiffs argue that Defendants sought to obtain a first mover advantage for Zalviso, 

so that the product would reach the market before the competition. Plaintiffs single out IONSYS, 

another “needle-free, patient-activated . . . analgesic system” developed by The Medicines 

Company. AC ¶ 131. According to Plaintiffs, Defendants rushed Zalviso through the approval 

process so that Zalviso would become the leading alternative to IV PCA rather than IONSYS. 

Plaintiffs’ argument is not well taken. Had Defendants actually known that the FDA 

would reject Zalviso, there would have been no point in rushing Zalviso through the regulatory 

approval process. The first mover advantage goes to the company that makes it to the market first, 

not to the company that gets rejected first. The alternative scenario is that Defendants honestly 

believed that Zalviso would receive FDA approval but—like all drugs submitted to the FDA—

understood that such approval was not guaranteed. This alternative scenario, however,

undermines a finding of scienter. Rather, this scenario lends support to Defendants’ narrative that 

Defendants submitted Zalviso’s NDA in good faith, that Defendants planned to launch Zalviso 

after FDA approval, and that Defendants were actively working to improve Zalviso’s commercial 

viability. 

To summarize, Defendants either believed Zalviso would be rejected or believed that 

Zalviso would be approved by the FDA. Under the former scenario, Defendants could not have 

been motivated by a first mover advantage. Under the latter scenario, Defendants’ genuine belief 

in Zalviso’s approval undermines an inference that Defendants made false or misleading public 

statements either with intent or with deliberate recklessness.

iii. Financing and Partnership Opportunities

Plaintiffs also point to certain financing and partnership opportunities of which Defendants

allegedly sought to take advantage. See AC ¶ 137–38. Specifically, Plaintiffs allege that 

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Defendants were motivated to mislead the public in order to obtain financing from an investment 

firm, and that Defendants “were looking for potential companies to partner with in the United 

States.” Id. The Court fails to see how these opportunities support an inference of scienter. All 

that Plaintiffs have managed to describe are common business practices that virtually all 

companies undertake. More importantly, Defendants’ alleged actions are again entirely consistent 

with Defendants’ own narrative: Defendants sought financing in order to help take a core product 

to market and Defendants sought partners in order to help distribute this product. The Court finds 

that these financing and partnership opportunities do not give rise to a strong inference of scienter. 

d. Holistic Evaluation

As a final step, the Court must examine whether Plaintiffs’ allegations, taken together,

sufficiently support a strong inference of scienter. Considered holistically, these allegations do not

create an inference of scienter that is “as compelling as any opposing inference of nonfraudulent 

intent.” Reese, 747 F.3d at 569. According to Plaintiffs, Defendants acted with scienter because 

(1) Defendants actively made changes to the design of Zalviso, (2) Zalviso formed AcelRx’s core 

operation, and (3) Defendants had financial incentives to commit fraud. However, an opposing 

inference of nonfraudulent intent is equally if not more compelling. Defendants could have 

submitted Zalviso for FDA approval in good faith. Defendants could have been trying to make

changes to Zalviso in order to make the product more commercially viable. The individual 

Defendants could have acquired additional shares of AcelRx during the class period because the 

individual Defendants sincerely believed that Zalviso would receive FDA approval. Because 

Plaintiffs have failed to contradict any of these plausible inferences that do not implicate fraud, the 

Court finds that Plaintiffs have failed to allege facts sufficient to support a strong inference of 

scienter. 

In conclusion, Plaintiffs have failed to state a claim upon which relief may be granted. The

amended complaint fails to plead facts sufficient to show that Defendants committed a material 

misrepresentation or omission or that Defendants acted with scienter. Defendants’ motion to 

dismiss is therefore GRANTED. 

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B. Violation of § 20(a) of the Exchange Act

Plaintiffs also allege that the individual Defendants—Palmer, King, Welch, and Morris—

should be held liable as controlling persons under § 20(a) of the Exchange Act. Under § 20(a), “a 

defendant employee of a corporation who has violated the securities laws will be jointly and 

severally liable to the plaintiff, as long as the plaintiff demonstrates a primary violation of federal 

securities law and that the defendant exercised actual power or control over the primary violator.” 

In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 711 (9th Cir. 2012) (internal quotation 

marks omitted). The Court finds dismissal of Plaintiffs’ § 20(a) claim appropriate because 

Plaintiffs have failed to state an underlying violation of federal securities law. Accordingly, the 

Court GRANTS Defendants’ motion to dismiss Plaintiffs’ § 20(a) claim. 

C. Leave to Amend

Plaintiffs shall have leave to amend because the Court finds that amendment would not 

necessarily be futile, as Plaintiffs may be able to allege sufficient facts to show, for instance, that 

Defendants knew that Zalviso would be denied approval or that Defendants did in fact act with 

intent or with deliberate recklessness. See Lopez, 203 F.3d at 1127 (holding that “a district court 

should grant leave to amend . . . unless it determines that the pleading could not possibly be cured 

by the allegation of other facts.”) (internal quotation marks omitted). Should Plaintiffs elect to file 

an amended complaint, Plaintiffs must specify what statements made by Defendants were 

misleading, how these statements were misleading, and why Defendants’ alleged omissions, if 

disclosed, would have made these statements not misleading. In addition, Plaintiffs must specify 

what actions by Defendants give rise to a strong inference of scienter, and not an opposing 

inference that Defendants acted in good faith.

V. CONCLUSION

For the reasons stated above, Defendants’ motion to dismiss is GRANTED with leave to 

amend. Should Plaintiffs elect to file an amended complaint curing the deficiencies identified 

herein, Plaintiffs shall do so within 30 days of the date of this Order. Failure to meet the 30 day 

deadline to file an amended complaint or failure to cure the deficiencies identified in this Order 

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will result in a dismissal with prejudice. Plaintiffs may not add new causes of actions or parties 

without leave of the Court or stipulation of the parties pursuant to Federal Rule of Civil Procedure 

15. 

IT IS SO ORDERED.

Dated: November 25, 2015

______________________________________

LUCY H. KOH

United States District Judge

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