Opening the Rule 10b-5 Floodgates: Ninth Circuit Split in Gilead Sciences Leaves the Loss Causation Pleading Standard in Limbo

I. Introduction In the case of In re Gilead Sciences Securities Litigation,1 the Ninth Circuit allowed a class action securities fraud complaint to proceed beyond Rule 12(b)(6) dismissal without any factual basis to demonstrate proximate causation, or more specifically, that plaintiffs' losses were caused by the alleged fraud rather than other confounding factors. The court also approved plaintiffs' causation theory alleging that an "efficient" securities market took three months to incorporate a public fraud disclosure into share prices of the defendant corporation, Gilead Sciences. The standards to which the court held plaintiffs' complaint run contrary, however, to the prevailing loss causation pleading standards among circuit courts, and cut at the policies underlying private securities litigation. Although pre-discovery pleading standards are not traditionally fraught with heavy evidentiary burdens, Congress and the Supreme Court have imposed heightened pleading requirements for securities suits to cut back on frivolous litigation. The Ninth Circuit threatens to undermine these procedural safeguards by introducing a highly permissive loss causation standard that fails to sift meritorious claims from implausible or highly speculative in terrorem securities fraud suits. II. FACTS AND PROCEDURAL HISTORY A. The Circumstances Precipitating Litigation A group of investors who purchased stock in Gilead Sciences, Inc. ("Gilead") between July 14, 2003, and October 28, 2003, brought a class action securities fraud suit against Gilead on December 2, 2005. 2 The plaintiffs' fourth amended complaint alleges that Gilead violated, inter alia, section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by misleading the investing public to believe that demand for its most popular product was strong without disclosing that unlawful marketing was a significant cause of new sales growth.3 Gilead is a biopharmaceutical company that specializes in developing and commercializing medications to treat life-threatening diseases.4 The company's most successful product is Viread, an antiretroviral medication introduced in 2001 to treat HIV/AIDS.5 Viread was so successful that Gilead raised the product's price in June of 2003.6 On July 14, 2003, the first day of the class period, Gilead issued a press release announcing that its second quarter financial results would exceed expectations, driven primarily by the "strong sales growth of Viread."7 The release explained that Viread sales increased due to "broader prescribing patterns ... as well as increases in U.S. wholesaler inventory."8 Two weeks later, on July 31, 2003, Gilead issued another press release disclosing second quarter revenues of $230.7 million, more than half of which related to Viread sales.9 The same day, an officer of Gilead explained to analysts and other investors that Viread sales would likely fall in the third quarter because wholesalers amassed substantial stockpiles of Viread in anticipation of the product's June price increase.10 Notwithstanding this caveat, market analysts - including Morgan Stanley, Prudential, and Bear Stearns - continued to predict strong demand for Viread.11 Plaintiffs allege that Viread's strong sales performance was driven by illegal "off-label" marketing, which refers to the use of marketing information such as clinical study results on the efficacy of an FDAapproved product that have not been approved by the FDA for inclusion in the product's package labeling.12 Gilead's off-label marketing allegedly took three forms: "I) 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."13 The company began training sales and marketing employees as early as 2001 with off- label product information, and implicidy or explicitly encouraged them to use die information to sell Viread through and subsequent to the class period. …