FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: GILEAD SCIENCES SECURITIES 

LITIGATION.

RICK HARTMAN, on behalf of

himself and all others similarly

situated; TRENT ST. CLARE; TERRY No. 06-16185

JOHNSON,

D.C. No. Plaintiffs-Appellants,  CV-03-04999-MJJ

v. OPINION

GILEAD SCIENCES, INC.; JOHN C.

MARTIN; JOHN F. MILLIGAN; MARK

L. PERRY; NORBERT W.

BISCHOFBERGER; ANTHONY

CARRACIOLO; JOHN EICHLER,

Defendants-Appellees. 

Appeal from the United States District Court

for the Northern District of California

Martin J. Jenkins, District Judge, Presiding

Argued and Submitted

December 6, 2007—San Francisco, California

Filed August 11, 2008

Before: Alex Kozinski, Chief Judge, Michael Daly Hawkins,

and Robert E. Cowen,* Circuit Judges.

*The Honorable Robert E. Cowen, Senior United States Circuit Judge

for the Third Circuit, sitting by designation. 

10319
Opinion by Judge Hawkins

10320 IN RE GILEAD SCIENCES SECURITIES LITIGATION
COUNSEL

Susan K. Alexander (briefed and argued), Lerach, Coughlin,

Stoia, Geller, Rudman & Robbins LLP, San Francisco, California, for the plaintiffs-appellants. 

John C. Dwyer (briefed and argued), Grant Fondo and Jeffrey

M. Kaban (appeared only), Cooley, Godward, Kronish, LLP,

Palo Alto, California, for the defendants-appellees. 

OPINION

HAWKINS, Circuit Judge: 

A group of individual investors brought this securities fraud

action on behalf of themselves and a proposed class comprising all individuals (collectively, the “Investors”) who purchased Gilead Sciences, Inc.’s (“Gilead”) publicly traded

securities between July 14, 2003, and October 28, 2003

10322 IN RE GILEAD SCIENCES SECURITIES LITIGATION
(“class period”). They allege that Gilead misled the investing

public by representing that demand for its most popular product was strong without disclosing that unlawful marketing

was the cause of that strength. 

The district court dismissed under Rule 12(b)(6) of Civil

Procedure, holding that the Investors failed to sufficiently

allege loss causation. We have jurisdiction under 28 U.S.C.

§ 1291, and we reverse.

FACTS AND PROCEDURAL HISTORY

I. The Complaint’s Allegations 

The Investors’ Fourth Amended Complaint (“complaint”)

alleges violations of sections 10(b) and 20(a) of the Securities

Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and SEC

Rule 10b-5, 17 C.F.R. § 240.10b-5. The complaint names as

defendants Gilead and some of its top officers (“Officers”). 

Taking its allegations as true, the complaint tells the following story about Gilead and its marketing practices.1

Gilead is a biopharmaceutical company that specializes in

developing and marketing treatments for life-threatening diseases. One of the company’s commercial products is Viread,

an antiretroviral agent used in combination with other drugs

to treat HIV. 

Gilead’s fortunes, as reflected in its stock price, depended

heavily on Viread’s commercial success. Sales of Viread

amounted to about 65% of Gilead’s total revenues at all rele1We recount only those facts necessary for understanding the loss causation issue. The complaint, which spans over seventy pages, offers much

greater detail. Because we disagree with the district court on the issue, we

frequently quote the complaint to demonstrate that the Investors did in fact

explicate the causal logic underlying their theory. 

IN RE GILEAD SCIENCES SECURITIES LITIGATION 10323
vant times of this action. “Wall Street analysts looked to sales

of Viread, Gilead’s most important and most promoted drug,

to gauge whether the Company’s business was on track and

growing. If Gilead failed to publicly report healthy, growing

Viread sales, its stock price would be greatly diminished.” 

Although Gilead had a clear incentive to aggressively promote Viread, it was required to comply with federal law,

including the Food and Drug Administration’s (“FDA”) marketing regulations. Generally, those regulations prohibit the

marketing of drugs for non-FDA-approved uses, commonly

referred to as “off-label” uses. “For example, it would be considered off-label for a company to market a FDA-approved

HIV/AIDS drug as also being effective for fighting Hepatitis

B infection . . . if such use of the drug had not been reviewed

and approved by the FDA and included in the” drug’s FDAapproved package labeling. While physicians are free to prescribe drugs for off-label uses,2

 they rely on the FDAapproved prescribing information to determine which drugs

can be used safely and effectively by patients with specific

health problems. The FDA approved Viread for use in

approximately 40% of the available HIV patient pool. Repeatedly violating the FDA’s off-label marketing regulations in an

effort to have Viread prescribed to some of the remaining

60% of available HIV patients, Gilead and its officers: 

implemented a scheme to promote and market

Viread with off-label, false, and misleading statements in violation of the Federal Food, Drug, and

Cosmetic Act. In order to gain market share, artificially increase perceived demand, and increase sales,

Gilead officers, executives, and clinical personnel,

2

See 21 U.S.C. § 396; Buckman Co. v. Plaintiffs’ Legal Comm., 531

U.S. 341, 350-51 & n.5 (2001) (explaining that “the FDA is charged with

the difficult task of regulating the marketing and distribution of medical

devices without intruding upon decisions statutorily committed to the discretion of health care professionals”). 

10324 IN RE GILEAD SCIENCES SECURITIES LITIGATION
with the express knowledge and approval of the

[Officers], routinely and consistently provided Gilead’s sales and marketing team with off-label information and encouraged, expected, and directed them

to use it to sell Viread . . . . 

Gilead’s management began preparing Gilead’s sales staff

for off-label marketing as early as September 2001, one

month before Viread received FDA approval. Management

continued to encourage off-label marketing throughout 2002

and the first half of 2003. 

These training efforts produced their intended effect.

According to two confidential witnesses who served as Gilead

salespeople,3 Viread “off-label marketing took three forms:

(1) marketing to HIV patients co-infected with Hepatitis B;

(2) marketing Viread as a first-line or initial therapy for HIV

infection; and (3) marketing against Viread’s safety profile.”

Ultimately, 75% to 95% of Viread sales resulted from offlabel marketing efforts. 

The company and its Officers emphasized to the public that

they carefully complied with federal and state regulations,

when in fact they knew that they were acting unlawfully by

aggressively marketing Viread for off-label uses. 

The first sign of trouble came on March 14, 2002, when the

FDA sent an “Untitled Letter” to Gilead that accused the company of understating the risks of Viread—a form of improper

off-label marketing. The letter ordered Gilead to “immediately cease” this practice. On March 21, 2002, per the FDA’s

request, Gilead sent a reply that acknowledged receipt of the

FDA’s letter and agreed to immediately stop off-label market3One of the confidential witnesses served as “a member of Gilead’s

Field Marketing Advisory Committee, a select committee of Gilead sales

and marketing staff that periodically met to discuss theories and strategies

for marketing and selling Viread.” 

IN RE GILEAD SCIENCES SECURITIES LITIGATION 10325
ing. This was not done. In fact, Gilead’s off-label marketing

increased, either at the Officers’ direction or with their knowledge and tacit encouragement.

By June 2003, Gilead’s off-label marketing put it in the

position to raise Viread’s price. Consistent with standard

industry practice, Gilead informed national drug wholesalers

of this plan in advance of the price increase. The wholesalers

(there are the three major ones that purchase approximately

ninety percent of drug manufacturers’ drugs) typically stockpile drugs in advance of price increases so that they can resell

at a higher price to retailers after the increase takes effect. 

Because Gilead had “illegally inflated sales and artificially

inflated demand for Viread, the major drug wholesalers stockpiled mass quantities of Viread in advance of the June 2003

price increase. This wholesaler stockpiling would not have

occurred but for the off-label marketing and the resulting creation of an artificially increased demand for Viread.” The

stockpiling furthered Gilead’s fraudulent scheme by confirming “the impression that Viread was in high demand and that

Gilead’s financial and operational results were strong.”

On July 14, 2003, Gilead issued a press release announcing

that it anticipated its second quarter financial results would

exceed analysts’ expectations, and explaining that the company’s success “was driven primarily by strong sales growth of

Viread . . . . Increasing Viread sales reflect broader prescribing patterns in all commercial markets, as well as increases in

U.S. wholesaler inventory levels in the second quarter in

anticipation of a Viread price increase.”

These statements were materially false and misleading

because Gilead and its Officers’ “marketing and promotional

activities for Viread were not in compliance with FDA

approved guidelines, violated federal laws, and created serious public health and safety implications for Viread users.”

Gilead’s promotional scheme was designed to, and did, create

10326 IN RE GILEAD SCIENCES SECURITIES LITIGATION
the impression that demand for Viread was strong. This campaign was misleading, however, because it was unlawful offlabel marketing that was driving prescription volume4

 —and

Gilead had already been ordered to cease such marketing.

While securities analysts, for the most part, reacted favorably to the July 14, 2003, press release, Gilead and its Officers felt the need to respond to some analysts’ concern that

second quarter revenues were primarily attributable to the

wholesaler stockpiling, and not a result of strong demand. On

the same day that the press release was issued, a Gilead

spokeswoman, acting with the knowledge and approval of

Gilead and its officers, told Bloomberg News that “[t]he main

reason for the jump in Viread sales is an increase in prescriptions, not inventory stocking.” This statement was misleading.

It created the impression that demand for Viread was strong,

which it was, but for reasons that were not well-understood by

the public. Omitting the role of off-label marketing in a press

release highlighting the drug’s success made a true statement

(that demand was strong) also a misleading one.

Gilead’s financial news had a marked effect on its stock

price. On July 14, the price of Gilead shares closed at $67.25,

up $7.97 from the previous day’s closing price of $59.28 per

share. This 13.4% increase represented a near-record high. 

Some two weeks later, the FDA issued a July 29 Warning

Letter5 that chastised Gilead for statements made by one of its

4The Investors concluded that between $86.7 million and $109.82 million of Viread’s $115.6 million in domestic sales during the second quarter

of 2003 could be attributed to off-label marketing. 

5The Complaint explains: 

According to the FDA’s website and the FDA’s Regulatory Procedures Manual, warning letters such as this are written communications from the [FDA] to a company notifying the company

that the [FDA] considers one or more promotional pieces or practices to be illegal. . . . A warning letter is much more serious than

an untitled letter. 

IN RE GILEAD SCIENCES SECURITIES LITIGATION 10327
sales representatives at the 15th National HIV/AIDS Update

Conference in March and April of 2003. The letter stated that

the employee “made oral statements that minimized the risk

information and broadened the indication for Viread.” It

reminded Gilead of the Untitled Letter, expressed the “significant public health and safety concerns raised by these repetitive promotional activities,” and ordered Gilead to make

corrective disclosure. Gilead made such disclosure to the conference attendees on November 7, 2003. 

On August 7, 2003, the FDA made public its Warning Letter. Gilead’s shareholders and the investing public did not find

it very significant, though, because they failed to appreciate

the extent of Gilead’s off-label marketing, and thus could not

foresee the letter’s impact on Viread’s sales.

The public’s underestimation of Viread’s troubles was

reflected in Gilead’s share price. Notwithstanding the public

revelation of the letter, shares closed at higher prices than

they opened on both August 7 and August 8. Indeed, by the

end of August, the stock was trading a few dollars higher than

it had been at the beginning of the month, without having

experienced any significant fluctuations. 

Yet, “[u]nbeknownst to investors, the disclosure of the

FDA Warning Letter had a detrimental effect on Viread sales.

Physicians, now alerted to Gilead’s illegal marketing efforts

and to the safety problems with Viread, were less eager to

prescribe it to their patients.” Competitors invoked the letter

in efforts to persuade physicians to switch from Viread to

their products. In the remaining weeks of August, there was

a “marked drop in prescriptions and sales” of Viread. 

Although the Investors lack precise sales figures, a Morgan

Stanley analyst report shows that Viread prescriptions experienced a “sharp drop” in August 2003, followed by “flattened

growth” for the remainder of the third quarter. The prescriptions would have suffered further decline were it not for cer10328 IN RE GILEAD SCIENCES SECURITIES LITIGATION
tain side-effects that made it dangerous for some patients to

discontinue using the drug. 

The wholesalers observed the initial drop in sales and prescriptions of Viread, and the ensuing slow growth. Because

Viread was underperforming relative to the expectations generated by the second quarter reports, the wholesalers drew

down much more of their excess inventory than they had originally planned, letting supply of Viread drop to the lowest

level in four quarters, and well below the industry average for

other drugs. 

Although wholesalers recognized Viread’s struggles, the

public continued to misunderstand the significance of the

Warning Letter. Gilead did nothing to correct that misunderstanding. In its Form 10-Q reporting on the 2003 second quarter, issued on August 14, Gilead persisted in emphasizing the

increased volume of Viread’s second quarter sales without

discussing the role of off-label marketing. Although the Form

10-Q did briefly address the Warning Letter, it failed to reveal

the activities that gave rise to that letter, or the impact the letter would have on sales of Viread.

The Officers exploited the public’s ignorance. In the days

between the receipt and public disclosure of the Warning Letter, two of the Officers each sold over $3 million worth of

stock. On August 7, the day the FDA disclosed the letter, Gilead’s Senior Vice President/Chief Financial Officer sold

nearly $700,000 worth of shares. Throughout August, while

the market misapprehended Gilead’s impending troubles, the

Officers continued to sell off substantial numbers of shares.

This activity was “unusual and suspicious” because this was

the first month in which all of the Officers sold stock. More

to the point, this was proof that the Officers acted with knowledge or with deliberate recklessness when they issued materially false and misleading documents and statements that were

disseminated to the investing public.

IN RE GILEAD SCIENCES SECURITIES LITIGATION 10329
Not until October 28, 2003, did the public finally realize

the impact of the off-label marketing and the Warning Letter.

After the markets closed that day, Gilead issued a press

release detailing third quarter financial results. The public

learned that Viread sales fell significantly below expectations

because there had been substantially more overstocking by

wholesalers than previously reported. Accordingly, third quarter prescriptions were filled by wholesalers’ existing inventory, and wholesalers did not reorder Viread at a

commensurate level. Market analysts attributed the disappointing sales to “lower end-user demand.” That lower enduser demand, as noted, was a direct result of the Warning Letter, which had exposed Gilead’s unlawful off-label marketing

efforts to physicians.

The market was “stunned” by the third quarter results.

Share prices closed at $59.46 on October 28, before the press

release was circulated. It may be the case that the market had

already begun to slowly incorporate the information regarding

Viread’s off-label marketing into the share price. But the

third-quarter earnings release made the effect of that information inescapably clear. The day after the press release was

issued, trading volume of Gilead shares was up 1,400% from

its average daily level. The day opened with Gilead’s price

per share at $50.69, and closed with a price of $52 per share,

a 12% decrease from the previous day’s closing price.

Summing it all up, 

At all relevant times, the material misrepresentations . . . directly or proximately caused or were a

substantial contributing cause of the damages sustained by [the Investors]. . . . [Gilead and the Officers] made or caused to be made a series of

materially false or misleading statements about Gilead’s sales, business, product marketing and promotion, prospects, operations and financial results.

These material misstatements had the cause and

10330 IN RE GILEAD SCIENCES SECURITIES LITIGATION
effect of creating in the market an unrealistically

positive assessment of Gilead . . . thus causing the

Company’s publicly traded securities to be overvalued and artificially inflated at all relevant times.

II. The District Court’s Decision 

The district court dismissed the complaint with prejudice.

Based on the Investors’ allegations and judicially-noticed

documents that had been referenced in the complaint, the

court concluded that the Investors had failed to adequately

plead loss causation as that requirement was articulated in

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).

Specifically, the district court found the complaint failed to

connect the following chain of events . . . : 1) that

[Gilead’s and the Officers’] alleged failure to disclose the off-label marketing scheme caused a material increase in sales; 2) that practitioners materially

decreased their demand for Viread due to the publication of the FDA Warning Letter; and most importantly, 3) that the alleged decrease in sales due to the

FDA letter proximately caused Gilead’s stock to

decrease three months later[.] 

The district court rested its decision exclusively on loss

causation, and did not consider whether the Investors sufficiently alleged falsity or scienter.

DISCUSSION

I. Standards of Review

“We review de novo the district court’s dismissal of a complaint for failure to state a claim under Federal Rule of Civil

Procedure 12(b)(6). On review, we accept the plaintiffs’ allegations as true and construe them in the light most favorable

IN RE GILEAD SCIENCES SECURITIES LITIGATION 10331
to plaintiffs.” Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th

Cir. 2002) (citation omitted). “The court need not, however,

accept as true allegations that contradict matters properly subject to judicial notice or by exhibit. Nor is the court required

to accept as true allegations that are merely conclusory,

unwarranted deductions of fact, or unreasonable inferences.”

Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th

Cir. 2001) (citation omitted), amended on other grounds, 275

F.3d 1187 (9th Cir. 2001). The complaint is properly dismissed if it fails to “plead ‘enough facts to state a claim to

relief that is plausible on its face.’ ” Weber v. Dep’t of Veterans Affairs, 521 F.3d 1061, 1065 (9th Cir. 2008) (quoting Bell

Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007)).

II. Applicable law

[1] Section 10(b) of the Securities Exchange Act of 1934

makes it unlawful “[t]o use or employ, in connection with the

purchase or sale of any security . . . any manipulative or

deceptive device or contrivance in contravention of such rules

and regulations as the Commission may prescribe.” 15 U.S.C.

§ 78j(b). Pursuant to this section, the Securities and Exchange

Commission promulgated Rule 10b-5, which makes it unlawful:

(a) To employ any device, scheme, or artifice to

defraud, 

(b) To make any untrue statement of a material fact

or to omit to state a material fact necessary in order

to make the statements made, in the light of the circumstances under which they were made, not misleading, or 

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or

deceit upon any person, in connection with the purchase or sale of any security. 

10332 IN RE GILEAD SCIENCES SECURITIES LITIGATION
17 C.F.R. § 240.10b-5. 

[2] We have identified five basic elements of a Rule 10b-5

claim: “(1) a material misrepresentation or omission of fact,

(2) scienter, (3) a connection with the purchase or sale of a

security, (4) transaction and loss causation, and (5) economic

loss.” In re Daou Sys., Inc., 411 F.3d 1006, 1014 (9th Cir.

2005) (citing Dura Pharms., 544 U.S. at 341-42). 

Because the district court addressed only loss causation

under Rule 10b-5, we will limit our consideration to that

issue, “following the general rule [that] a federal appellate

court does not consider an issue not passed upon below.” Miller v. Thane Int’l, Inc., 519 F.3d 879, 892 (9th Cir. 2008)

(alteration in original; internal quotation marks omitted). A

plaintiff bears the burden of proving that a defendant’s

alleged unlawful act “caused the loss for which the plaintiff

seeks to recover damages.” 15 U.S.C. § 78u-4(b)(4). To establish loss causation, “the plaintiff must demonstrate a causal

connection between the deceptive acts that form the basis for

the claim of securities fraud and the injury suffered by the

plaintiff.” Daou, 411 F.3d at 1025. The misrepresentation

need not be the sole reason for the decline in value of the

securities, but it must be a “ ‘substantial cause.’ ” Id. (quoting

Robbins v. Koger Props., Inc., 116 F.3d 1441, 1447 n.5 (11th

Cir. 1997)). 

Rule 9(b) of Civil Procedure provides: “In alleging fraud

. . . a party must state with particularity the circumstances

constituting fraud . . . .” Gilead and the Officers contend that

the Investors’ loss causation arguments should be subject to

this heightened pleading requirement, although they recognize

that the Supreme Court has not decided the issue. See Dura

Pharms., 544 U.S. at 346. The Investors argue that Rule

8(a)(2)’s “short and plain statement” requirement should control loss causation pleading. 

We need not resolve this issue today. Rule 9(b) imposes the

heightened requirement so that the fraud-action defendant

IN RE GILEAD SCIENCES SECURITIES LITIGATION 10333
“can prepare an adequate answer from the allegations.” Odom

v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007) (internal quotation marks omitted). As we explain below, the Investors’ complaint offers “sufficient detail to give defendants

ample notice of [their] loss causation theory, and to give us

some assurance that the theory has a basis in fact.” Berson v.

Applied Signal Tech., Inc., 527 F.3d 982, 989-90 (9th Cir.

2008). Therefore, under either Rule 8 or Rule 9, the Investors

have sufficiently pleaded loss causation. 

III. The Sufficiency of the Complaint

The district court identified Dura Pharmaceuticals as the

authority that doomed the Investors’ complaint. Dura featured

plaintiffs who alleged that they “paid artificially inflated

prices” for Dura’s securities and “suffered damages thereby.”

Dura, 544 U.S. at 339-40 (alterations, emphasis, and quotation marks omitted). The court below had held that loss causation was established merely by demonstrating that share

prices on the date of purchase were inflated. Broudo v. Dura

Pharms., Inc., 339 F.3d 933, 938 (9th Cir. 2003). 

[3] The Supreme Court reversed, and held that an inflated

purchase price alone is not enough to establish loss causation.

Dura, 544 U.S. at 342. More is required of plaintiffs—

particular allegations as to “what the relevant economic loss

might be,” and “what the causal connection might be”

between the fraud alleged and the economic losses actually

suffered. Id. at 347.

[4] The complaint in this case is meaningfully different

from that in Dura Pharmaceuticals. The Investors here identify a specific economic loss: the drop in value on October 29,

2003, that followed the October 28 press release. They also

allege that this loss was caused by Gilead’s misrepresentations. They provide abundant details of Gilead’s off-label

marketing, and they assert that this led to higher demand for

10334 IN RE GILEAD SCIENCES SECURITIES LITIGATION
Viread, which in turn inflated Gilead’s stock price.6

 As summarized in the complaint’s introduction, 

[T]he market was not told that off-label marketing

was the cornerstone of demand. This mistaken

impression of demand led to, among other things,

wholesaler overstocking in reaction to an anticipated

price increase. When the truth about [Gilead’s and

the Officers’] off-label marketing was disclosed,

however, [they] could no longer maintain the sales

growth levels that investors had come to expect, and

Gilead’s stock price dropped accordingly. 

Assuming, then, that the Investors’ theory is sound and that

they can prove all that they allege, the district court erred by

holding that Dura Pharmaceuticals compelled dismissal of

this action. 

The dismissal order below, though, suggests that the district

court was unwilling to make these assumptions. The district

court found that the complaint contained “too many logical

and factual gaps.”

[5] Based on our own review, we find the complaint sufficiently alleges a causal relationship between (1) the increase

in sales resulting from the off-label marketing, (2) the Warning Letter’s effect on Viread orders, and (3) the Warning Letter’s effect on Gilead’s stock price. 

Perhaps what truly motivated the dismissal was the district

court’s incredulity. The court expressly identified two allegations it was unwilling to accept. First, it could not make “the

unreasonable inference that a public revelation on August 8

6The complaint includes one concrete example of how Gilead’s stock

price was directly inflated by Viread’s sales performance: the 13.4% rise

in share value triggered by Gilead’s positive statements about demand for

Viread on July 14, 2003, the first day of the class period.

IN RE GILEAD SCIENCES SECURITIES LITIGATION 10335
caused a price drop three months later on October 28.” Order

Granting Defs.’ Mot. to Dismiss at 11. Second, with respect

to the Warning Letter’s impact on Viread sales, the court

found “a slowing increase in demand, alone, too speculative

to adequately demonstrate loss causation.” Id. at 12 n.10. 

[6] As an initial matter, we note that a district court ruling

on a motion to dismiss is not sitting as a trier of fact. It is true

that the court need not accept as true conclusory allegations,

nor make unwarranted deductions or unreasonable inferences.

Sprewell, 266 F.3d at 988. But so long as the plaintiff alleges

facts to support a theory that is not facially implausible, the

court’s skepticism is best reserved for later stages of the proceedings when the plaintiff’s case can be rejected on evidentiary grounds. “[A] well-pleaded complaint may proceed even

if it strikes a savvy judge that actual proof of those facts is

improbable, and that a recovery is very remote and unlikely.”

Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1965 (2007)

(internal quotation marks omitted). 

[7] There is no exception to this rule for the element of loss

causation. The Third Circuit has stated that “loss causation

becomes most critical at the proof stage,” and has cited scholarly authority stating that it is normally inappropriate to rule

on loss causation at the pleading stage. McCabe v. Ernst &

Young, LLP, 494 F.3d 418, 427 n.4 (3rd Cir. 2007) (internal

quotation marks omitted). Similarly, the Second Circuit has

held that loss causation “is a matter of proof at trial and not

to be decided on a Rule 12(b)(6) motion to dismiss.” Emergent Capital Inv. Mgmt., LLC. v. Stonepath Group, Inc., 343

F.3d 189, 197 (2d Cir. 2003). But see Lentell v. Merrill Lynch

& Co., 396 F.3d 161, 172-77 (2d Cir. 2005) (failure to plead

any facts supporting loss causation warranted 12(b)(6) dismissal of complaint). 

[8] We agree. So long as the complaint alleges facts that,

if taken as true, plausibly establish loss causation, a Rule

12(b)(6) dismissal is inappropriate. This is not “a probability

10336 IN RE GILEAD SCIENCES SECURITIES LITIGATION
requirement . . . it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of”

loss causation. Bell Atl., 127 S. Ct. at 1965. 

The district court’s concern about the elapse of time

between the public issuance of the Warning Letter and the

drop in price recalls our holding in No. 84 Employer-Teamster

Joint Council Pension Trust Fund v. America West Holding

Corp., 320 F.3d 920 (9th Cir. 2003) (internal quotation marks

omitted). There, a Rule 10b-5 defendant argued that its

alleged misrepresentations were per se immaterial because the

injurious drop in stock price took place more than one and a

half months after the market learned the truth about the misrepresentations. Id. at 934. We rejected “a bright-line rule

requiring an immediate market reaction” because “[t]he market is subject to distortions that prevent the ideal of a free and

open public market from occurring.” Id. (internal quotation

marks omitted). Instead, we held that courts must engage in

a “fact-specific inquiry.” Id. (internal quotation marks omitted). 

[9] We believe that America West’s discussion of materiality applies with equal force to the loss causation requirement.

A limited temporal gap between the time a misrepresentation

is publicly revealed and the subsequent decline in stock value

does not render a plaintiff’s theory of loss causation per se

implausible. 

[10] Our review of the Investors’ complaint convinces us

that the October drop in stock price was plausibly caused by

the Warning Letter. Importantly, the drop occurred immediately after Gilead disclosed less-than-expected revenues

resulting from the reduction in wholesalers’ Viread inventories, which analysts ascribed to lower end-user demand. That

lower end-user demand, in turn, is expressly alleged to have

been caused by the Warning Letter. In this light, the market

did react immediately to the corrective disclosure—the October 28 press release. The Warning Letter, which discussed

IN RE GILEAD SCIENCES SECURITIES LITIGATION 10337
only two instances of off-label marketing, would not necessarily trigger a market reaction because it did not contain

enough information to significantly undermine Gilead’s July

2003 pronouncements concerning demand for Viread. It is not

unreasonable that physicians—the targets of the off-label

marketing—would respond to the Warning Letter while the

public failed to appreciate its significance. 

[11] The district court also erroneously concluded that a

slowing increase in demand is too speculative to establish loss

causation. Had the Investors alleged that the Warning Letter

eliminated all sales resulting from off-label marketing, it

would be very unlikely that demand would continue to

increase, since the complaint asserts that 75% to 95% of sales

were caused by off-label marketing. But they do not allege

that, and we see no reason why the court cannot proceed to

the evidentiary stages to determine the extent of the Warning

Letter’s impact on the growth of demand for Viread. 

[12] The complaint specifically alleges that physicians

were less eager to prescribe Viread, and competitors used the

Warning Letter to lure Viread customers to other drugs. This

is “enough fact to raise a reasonable expectation that discovery will reveal evidence”—or the lack thereof—of the Warning Letter’s effect on demand. Bell Atl., 127 S. Ct. at 1965.

CONCLUSION

For the foregoing reasons, the district court improperly

granted Gilead’s and the Officers’ Rule 12(b)(6) motion. The

Investors have sufficiently alleged loss causation and economic loss. We leave it to the district court to determine

whether they have sufficiently alleged the other elements of

their claims. 

REVERSED and REMANDED. 

10338 IN RE GILEAD SCIENCES SECURITIES LITIGATION