Opinion ID: 3052567
Heading Depth: 2
Heading Rank: 3

Heading: The Sufficiency of the Complaint

Text: 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 IN RE GILEAD SCIENCES SECURITIES LITIGATION 10335 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 6 The 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. 10336 IN RE GILEAD SCIENCES SECURITIES LITIGATION 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 IN RE GILEAD SCIENCES SECURITIES LITIGATION 10337 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 10338 IN RE GILEAD SCIENCES SECURITIES LITIGATION 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.