Court Opinion

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Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

12-15-2005

In Re: Merck & Co
Precedential or Non-Precedential: Precedential

Docket No. 04-3298

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                                             PRECEDENTIAL

         UNITED STATES COURT OF APPEALS
              FOR THE THIRD CIRCUIT

                         No. 04-3298

 IN RE: MERCK & CO., INC. SECURITIES LITIGATION

                            UNION INVESTMENTS
                            PRIVATFONDS GMBH,
                            Lead Plaintiff and the Class,

                                                  Appellants

        Appeal from the United States District Court
                for the District of New Jersey
            (D.C. Civil Action No. 02-cv-03185)
        District Judge: Honorable Stanley R. Chesler

                 Argued September 29, 2005

        Before: ALITO, and AMBRO, Circuit Judges
                 RESTANI,* Chief Judge

       * Honorable Jane A. Restani, Chief Judge, United
States Court of International Trade, sitting by designation.
           (Opinion filed : December 15, 2005)

Sanford P. Dumain, Esquire (Argued)
Milberg Weiss Bershad & Schulman
One Pennsylvania Plaza
48th Floor
New York, NY 10119

Daniel L. Berger, Esquire
Erik J. Sandstedt, Esquire
Bernstein Litowitz Berger & Grossman LLP
1285 Avenue of the Americas
New York, NY 10019

      Counsel for Appellant

Daniel J. Kramer, Esquire (Argued)
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064

Gregory B. Reilly, Esquire
Deborah A. Silodor, Esquire
Lowenstein Sandler
65 Livingston Avenue
Roseland, NJ 07068

      Counsel for Appellees

                              2
                 OPINION OF THE COURT

AMBRO, Circuit Judge

        Merck & Co., Inc. planned an initial public offering of its
wholly owned subsidiary—Medco Health Solutions, Inc.
Before the IPO was to occur, however, information about
Medco’s aggressive revenue-recognition policy came to light.
Some details about the policy were disclosed in Merck’s
registration statements filed with the Securities and Exchange
Commission, but a Wall Street Journal article reading between
the lines of this disclosure precipitated a decline in Merck’s
stock. After further disclosures and larger declines in Merck’s
stock price, the Medco IPO was canceled. Union Investments
Privatfonds GmbH, as lead plaintiff for a class of Merck
stockholders, claims that Merck and Medco committed
securities fraud under section 10(b) of the Securities Exchange
Act of 1934 and that Merck’s officers made material
misstatements or omissions in the registration statements in
violation of section 11 of the Securities Act of 1933. Union also
alleges that the Merck officers and Merck, as Medco’s parent
company, are jointly and severally liable as controlling persons
under section 20(a) of the ‘34 Act. The District Court dismissed
all of these claims on a motion under Federal Rule of Civil
Procedure 12(b)(6). We affirm.

                                3
        I. Factual Background and Procedural History

       Because we review this case at the Rule 12(b)(6) stage,
we take as true the facts pled in the plaintiff’s complaint. Union
is the lead plaintiff for a class of investors owning stock in
Merck, a global pharmaceutical company.1 This suit stems from
the actions surrounding Merck’s plan to spin off Medco in a
2002 initial public offering. Union alleges that Medco engaged
in improper accounting practices, which were not fully disclosed
until, after several amendments, Merck filed a registration
statement gaining SEC approval. Union further alleges that
Merck and Medco made misleading statements about the post-
IPO independence of the two entities.

       Merck first announced its plans for the Medco IPO in a
January 2002 press release, in which Raymond Gilmartin,
Merck’s Chairman and CEO, said that the two companies would
pursue independent strategies for success. On April 17, 2002,
Merck filed its first Form S-1 with the SEC. The SEC did not
approve this S-1, and Merck kept trying, finally securing SEC
approval with its fifth S-1, filed on July 9. Market reaction led
Merck to drop Medco’s offering price, to postpone indefinitely
the IPO, and finally to drop the IPO altogether.

        1
            The class period runs from January 26, 2000, to July 9,
2002.

                                  4
       A.     Medco’s revenue-recognition policy

        Medco is a pharmacy benefits manager (PBM). It saves
its clients (plan sponsors) money by negotiating discount rates
with pharmacies and influencing doctors to prescribe cheaper,
but still therapeutically appropriate, medicines. When a
customer buys drugs at a local pharmacy, the pharmacist checks
with Medco to ensure that the customer is an approved
beneficiary. Then the customer makes a co-payment—usually
between $5 and $15—which goes directly to the pharmacy, not
to Medco.

        Although Medco did not handle these co-payments, it
interpreted the accounting standards to allow it to recognize the
co-payments as revenue.2 But it did not disclose this revenue-
recognition policy. In fact, Merck’s 1999 SEC Form 10-K
stated that Medco recognized revenue “for the amount billed to
the plan sponsor.” After Merck changed auditors, and before it
began filings for the Medco IPO, it changed this language in its
2001 Form 10-K to state that revenues were “recognized based
on the prescription drug price negotiated with the plan sponsor.”

      Merck’s April 17 Form S-1 disclosed for the first time
that Medco had recognized as revenue the co-payments paid by
consumers, but it did not disclose the total amount of co-

       2
          Merck apparently subtracted out these co-payments
later, so its profit numbers were unaffected by this policy.

                               5
payments recognized. The day this S-1 was filed, Merck’s stock
price went up $0.03—from $55.02 to $55.05.3 Merck filed an
amendment to its S-1 on May 21 and another on June 13.

       On June 21, 2002, The Wall Street Journal reported that
Medco had been recognizing co-payments as revenue and
estimated that in 2001 $4.6 billion in co-payments had been
recognized. Barbara Martinez, Merck Included Co-Payments
Among Revenue, Wall St. J., June 21, 2002, at C1. Later
disclosures would show the actual number to be $5.54 billion.
The market’s reaction was immediate; that day Merck’s stock
lost $2.22—dropping from $52.20 to $49.98. Six days later,
Merck announced the postponement of the Medco IPO and
indicated that it would drop Medco’s offering price.

       Merck filed its fourth S-1 on July 5, 2002, finally
disclosing the full amount of co-payments it had recognized as
revenue. The S-1 showed that Medco had recognized over
$12.4 billion dollars in co-payments as revenue, $2.838 billion
in 1999, $4.036 billion in 2000, and $5.537 billion in 2001.
Four days later, Merck announced that it would postpone the
Medco IPO indefinitely, even as it filed its last S-1, which was

       3
        We can take judicial notice of Merck’s stock prices
even on a motion to dismiss because these facts are “not subject
to reasonable dispute [and are] capable of accurate and ready
determination by resort to a source whose accuracy cannot be
reasonably questioned.” Ieradi v. Mylan Labs., Inc., 230 F.3d
594, 600 n.3 (3d Cir. 2000).

                               6
approved by the SEC.

        Merck’s stock continued to fall, reaching $45.75 on July
9, the end of the class period, and $43.57 on July 10.

       B.     Merck’s and Medco’s independence

       In the January 2002 press release, Gilmartin said,
regarding the planned Medco IPO, “[W]e believe the best way
to enhance the success of both businesses going forward is to
enable each one to pursue independently its unique and focused
strategy.” The independence of Merck and Medco had been and
was to become a subject of some debate.

       The Federal Trade Commission had launched an
investigation of Medco in 1996 to determine whether it was
giving preferential treatment to Merck’s drugs. (The FTC also
investigated some of Merck’s competitors for similar reasons.)
Other drug manufacturers divested their PBMs, but Merck kept
Medco. In 1998 Merck entered into an FTC consent decree,
which suggested, inter alia, that Medco had given favorable
treatment to Merck’s drugs.

       Merck and Medco throughout the class period asserted
that the two companies stayed independent. Both companies
maintained policies of independence posted on their websites.

                               7
       But Union produced data suggesting that Merck’s market
share of drugs sold by Medco was in several instances much
higher than Merck’s national market share. In its April 2002 S-
1, Merck disclosed that post-IPO Medco would be obligated to
continue this elevated level of Merck drug sales; the two
companies had signed an agreement requiring Medco to sell a
higher share of Merck drugs than Merck’s national third-party
market share. The May and June amendments to the S-1 fleshed
out the terms of this agreement, which required Medco to pay
Merck 50% of its lost revenue if it failed to hit the sales targets.

       C.      The class action is filed

       The initial complaint was filed in July 2002. Union was
appointed lead plaintiff in November 2002, and it filed its
corrected amended complaint in March 2003. At the time,
Union’s lead counsel was Bernstein Litowitz Berger &
Grossman LLP. Defendants filed a motion to dismiss pursuant
to Rule 12(b)(6), and the District Court granted it in July 2004.
Union appealed that decision in August 2004. Only then did it
hire Milberg Weiss Bershad & Schulman LLP as its counsel for
this appeal.

            II. Jurisdiction and Standard of Review

       The District Court had subject matter jurisdiction under
28 U.S.C. § 1331 and under 15 U.S.C. §§ 77v and 78aa. It
granted a motion to dismiss under Rule 12(b)(6), so we have

                                 8
jurisdiction under 28 U.S.C. § 1291.

        We exercise plenary review of the District Court’s grant
of a Rule 12(b)(6) motion, and “we apply the same test as the
district court.” Maio v. Aetna, Inc., 221 F.3d 472, 481 (3d Cir.
2000). In reviewing the motion to dismiss, we must accept as
true all facts alleged in the complaint and view them in the light
most favorable to Union. Id. at 482. Union’s claims are also
subject to the heightened pleading standards set forth in Federal
Rule of Civil Procedure 9(b) and under the Private Securities
Litigation Reform Act (PSLRA) of 1995, Pub. L. No. 104-67,
109 Stat. 737 (codified in scattered sections of 15 U.S.C.),
pursuant to 15 U.S.C. § 78u-4(b)(1).

                        III. Discussion

       A.     May Union retain Milberg Weiss to prosecute
              this appeal?

       Lead plaintiffs in securities class actions must secure
court approval of their counsel, but Union retained Milberg
Weiss as appellate counsel after the notice of appeal was filed
and without any court’s approval. We decide that Milberg
Weiss may prosecute this appeal but that future lead plaintiffs
must obtain court approval for any new counsel, including
appellate counsel.

       Congress passed the PSLRA in part to reduce abusive
class action litigation. S. Rep. No. 104-98, at 10–11 (1995),

                                9
reprinted in 1995 U.S.C.C.A.N. 679, 689–90. To this end, the
PSLRA requires courts to appoint as lead plaintiff the “most
adequate plaintiff”—the plaintiff with the most money at stake.
15 U.S.C. § 78u-4(a)(3). The theory behind this requirement is
that plaintiffs with the largest financial interests, typically
institutional investors, will best represent the plaintiff class’s
interests and will choose the best counsel. Elliott J. Weiss &
John S. Beckerman, Let the Money Do the Monitoring: How
Institutional Investors Can Reduce Agency Costs in Securities
Class Actions, 104 Yale. L.J. 2053, 2105 (1995); see also S.
Rep. No. 104-98, at 11 nn.32, 34, reprinted in 1995
U.S.C.C.A.N. 679, 690 (citing Weiss & Beckerman, supra).

        Although Congress was confident that the lead plaintiff
would select the best counsel, it relied on the courts’ power to
“approve or disapprove the lead plaintiff’s choice of counsel
when necessary to protect the interests of the plaintiff class.” S.
Rep. No. 104-98, at 12, reprinted in 1995 U.S.C.C.A.N. 679,
691. Thus, the PSLRA provides that the “most adequate
plaintiff shall, subject to the approval of the court, select and
retain counsel to represent the class.” 15 U.S.C. § 78u-
4(a)(3)(B)(v) (emphasis added). This is not an empty
requirement; courts have the “power and the duty to supervise
counsel selection and counsel retention.” In re Cendant Corp.
Litig., 264 F.3d 201, 273 (3d Cir. 2001).

      Union was selected lead plaintiff, and the District Court
approved Bernstein Litowitz Berger & Grossman LLP as lead

                                10
counsel. But as noted, after the notice of appeal was filed,
Union retained Milberg Weiss as appellate counsel. Bernstein
Litowitz consented to Milberg Weiss’s retention, but Union
neither sought nor obtained the District Court’s approval of
Milberg Weiss as class counsel.

      In its brief, Merck challenges Milberg Weiss’s ability to
prosecute this appeal without court approval, and Union
responds with three arguments. We deal with each in turn.

        First, Union argues that Merck does not have standing to
protest the choice of lead counsel. We find few cases, from our
Court or others, that have addressed this issue. It could be that
defendants’ ability to challenge lead counsel selection is the
same as their ability to challenge lead plaintiff selection. If so,
the weight of authority falls against Merck. Compare King v.
Livent, Inc., 36 F. Supp. 2d 187, 190–91 (S.D.N.Y. 1999)
(granting the defendant standing to challenge a motion to
appoint a lead plaintiff and lead counsel), with Cal. Pub.
Employees’ Ret. Sys. v. Chubb Corp., 127 F. Supp. 2d 572, 575
n.2 (D.N.J. 2001) (stating that the majority of courts have denied
defendants the right to challenge “the adequacy of lead plaintiffs
and their chosen counsel” and citing cases), Gluck v. CellStar
Corp., 976 F. Supp. 542, 550 (N.D. Tex. 1997) (deciding that
defendants could not challenge the appointment of a lead
plaintiff), and Greebel v. FTP Software, Inc., 939 F. Supp. 57,
60 (D. Mass. 1996) (same). This makes sense because
defendants will rarely have the best interests of the class at

                                11
heart. See, e.g., 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II) (allowing
only “a member of the purported plaintiff class” to rebut the lead
plaintiff presumptions); Cendant, 264 F.3d at 268; Weiss &
Beckerman, supra, at 2106 n.255.

        On the other hand, it may be that defendants’ ability to
challenge lead counsel is separate from their inability to
challenge lead plaintiff’s appointment. At least one court has
allowed a defendant to challenge the selection of lead counsel.
See In re USEC Sec. Litig., 168 F. Supp. 2d 560, 568 (D. Md.
2001) (“The defendants challenge the [plaintiffs’] selection of
two separate law firms as lead counsel.”). When the challenge
is not to adequacy but is, as here, to a lead plaintiff’s procedural
failure to secure court approval, we hold that defendants do have
standing to challenge the retention of lead counsel.

       Second, Union claimed that the PSLRA does not prevent
it from retaining unapproved appellate counsel, which it
characterized as somehow different from lead counsel. Merely
stating this argument lays out the span of such a stretch. The
PSLRA does not distinguish between lead counsel and appellate
counsel; it simply requires court approval of class “counsel.” 15
U.S.C. § 78u-4(a)(3)(B)(v). The court has a duty to consider the
lead plaintiff’s choice and whether it should be approved.
Cendant, 264 F.3d at 275. This inquiry is “limited to whether
the lead plaintiff’s selection and agreement with counsel are
reasonable on their own terms,” id. at 276, but it is an inquiry
that must be made. We hold that all retentions of class counsel

                                12
by the lead plaintiff—whether lead counsel, trial counsel, or
appellate counsel4—require court approval under the PSLRA.

        Third, Union argues that its retention of Milberg Weiss
is valid by virtue of a jurisdictional loophole: the District Court
lost jurisdiction after the filing of the notice of appeal, and our
Court is not in a position to make the findings required to
approve new lead counsel. While it is generally true that district
courts are divested of jurisdiction—and lose the power to
act—once the notice of appeal is filed, there are “exceptions to
this general rule.” Bensalem Twp. v. Int’l Surplus Lines Ins.
Co., 38 F.3d 1303, 1314 (3d Cir. 1994). We have identified
several, but “limited,” instances in which a district court retains
its power to act; a court may, for example, review attorney’s
fees applications, order the filing of bonds, modify or grant
injunctions, issue orders regarding the record on appeal, and
vacate bail bonds and order arrests. Venen v. Sweet, 758 F.2d
117, 120 n.2 (3d Cir. 1985). We limit these exceptions to avoid

       4
         We note in passing that lead plaintiffs may retain
multiple firms as co-lead counsel, cf. Miller v. Ventro Corp., No.
01-CV-1287, 2001 WL 34497752, at *13 (N.D. Cal. Nov. 28,
2001) (“[I]f [plaintiffs] believe that more than one law firm is
necessary, they must demonstrate to the Court’s satisfaction the
need for multiple lead counsel.”), but court approval is still
required, cf. Martin v. Atchison Casting Corp., 200 F.R.D. 453,
458 (D. Kan. 2001) (requiring information about proposed new
lead counsel before the court would approve the plaintiff’s
attempt to switch lead counsel).

                                13
the “confusion and inefficiency” of having two courts dealing
with the same issues. Id. at 121.

        The power to approve lead plaintiffs’ counsel under the
PSLRA would not engender this same kind of “confusion and
inefficiency”—the approval or disapproval of counsel would lie
with the district court, and we typically would not need to
second-guess or make this decision ourselves. Therefore, we
add this approval power to the short list of actions a district
court may take during the pendency of an appeal.

       That leaves this case, in which for the sake of efficiency
we eschew a remand and proceed as if Milberg Weiss were
approved as appellate counsel. Moreover, because we affirm the
District Court’s opinion, we do not require Union to secure ex
post approval for this appeal.

       B.     Does Union have a valid claim under section
              10(b)?

        Section 10(b) of the Exchange Act makes it “unlawful”
to “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). Rule 10b-5
makes it illegal, as a manipulative or deceptive device, “[t]o
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,

                               14
not misleading.” 17 C.F.R § 240.10b-5.

       To make out a securities fraud claim under section 10(b),
a plaintiff must show that “(1) the defendant made a materially
false or misleading statement or omitted to state a material fact
necessary to make a statement not misleading; (2) the defendant
acted with scienter; and (3) the plaintiff’s reliance on the
defendant’s misstatement caused him or her injury.” Cal. Pub.
Employees’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 143 (3d Cir.
2004) (citing In re Burlington Coat Factory Sec. Litig., 114 F.3d
1410, 1417 (3d Cir. 1997)). These requirements are heightened
by the PSLRA, which requires that the complaint “state with
particularity all facts on which [plaintiff’s] belief is formed.” 15
U.S.C. § 78u-4(b)(1). At issue in this case is whether Merck’s
statements were material and whether Union properly alleged
“false or misleading” statements by Merck and Medco.

       1.      When Merck disclosed information regarding its
               revenue calculations, was the disclosure
               material?

       We have said that establishing materiality is the “first
step” for a plaintiff with a section 10(b) claim. In re Burlington
Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir. 1997).
The District Court discussed briefly the issue of materiality
regarding Union’s § 10(b) claim, but it did not reach the issue
because it ultimately found that Union had failed sufficiently to
show scienter. Union argues that Merck’s statements were

                                15
material, citing the fact that Merck’s stock dropped significantly
when The Wall Street Journal’s article detailing Medco’s
accounting practices appeared. Merck claims that because its
stock price rose immediately following its initial, minimal
disclosure, the disclosure was immaterial as a matter of law.

       Our Court, as compared to the other courts of appeals,
has one of the “clearest commitments” to the efficient market
hypothesis.5 Nathaniel Carden, Comment, Implications of the
Private Securities Litigation Reform Act of 1995 for Judicial
Presumptions of Market Efficiency, 65 U. Chi. L. Rev. 879, 886
(1998). Our 1997 Burlington opinion created a standard for
measuring the materiality of statements in an efficient market.6
See 114 F.3d at 1425. In 2000, we ratified the Burlington
standard post-PSLRA in Oran v. Stafford. 226 F.3d 275, 282
(3d Cir. 2000) (citing Burlington). The Oran-Burlington
standard holds that “the materiality of disclosed information
may be measured post hoc by looking to the movement, in the
period immediately following disclosure, of the price of the
firm’s stock.” Id.

       5
        We have defined an efficient market as that in which
“information important to reasonable investors (in effect, the
market) is immediately incorporated into stock prices.”
Burlington, 114 F.3d at 1425 (citation omitted).
       6
          Union has alleged that Merck’s stock traded on an
efficient market. Compl. ¶ 212(c).

                               16
       In Oran, information was disclosed on July 8, and the
stock price rose for four days afterward. We held that the failure
to disclose the information earlier was immaterial. Id. at 283.
Similarly, in In re NAHC, Inc. Securities Litigation, we
discerned “no negative effect” on a company’s stock price
“immediately following” the date of disclosure. 306 F.3d 1314,
1330 (3d Cir. 2002). Again, we held the disclosed information
immaterial as a matter of law. Id.

        In this case, the disclosure occurred on April 17, and
there was no negative effect on Merck’s stock. The Wall Street
Journal’s article, accompanied by a significant decline in
Merck’s stock, appeared two months later. Union claims that
this June stock decline demonstrates the materiality of the
information Merck disclosed. But the situation we faced in
NAHC was similar: the company’s stock price plunged 75% just
three weeks after the disclosure was made. Id. at 1321. That
disclosure was made on November 2, with no negative effect on
the stock price, but the stock plummeted on November 26, after
another disclosure. Id. at 1321, 1330. We held the first
disclosure not material. Merck’s stock did not drop after the
first disclosure, and that is generally when we measure the
materiality of the disclosure, not two months later.

       In Basic Inc. v. Levinson, the Supreme Court declined to
resolve “how quickly and completely publicly available
information is reflected in market price.” 485 U.S. 224, 248
n.28 (1988). Union tells us that we cannot therefore apply the

                               17
Oran-Burlington standard. But it overlooks that our Court has
resolved how “quickly and completely” public information is
absorbed into a firm’s stock price. We have decided that this
absorption occurs “in the period immediately following
disclosure.” Oran, 226 F.3d at 282.

        This does not mean instantaneously, of course, but in this
case there was no adverse effect to Merck’s stock price from the
disclosure “in the period immediately following disclosure.” In
fact, Merck’s stock continued to rise from its baseline of $55.02,
including the April 17 S-1 filing date, for five trading days after
the disclosure. The five-trading-day rise was followed by a five-
trading-day decline, which reached a low of $54.34. Then,
starting on May 1, 2002, Merck’s stock remained above $55.02
until June 4. But Union expects us to ignore this one-month
increase in Merck’s stock price in favor of a five-day decline of
little over 1%. This we will not do.

       Union also argues that the April 17 disclosure was so
opaque that it should not have counted as a disclosure.
Although Merck disclosed that it had recognized co-payments
as revenue in April, it did not disclose the sum total of those co-
payments until July. This is why, Union claims, the stock price
did not drop until The Wall Street Journal’s reporter made
public the estimated magnitude of the co-payment recognition.
In effect, Union is arguing that investors and analysts stood in
uncomprehending suspension for over two months until the
Journal brought light to the market’s darkness.

                                18
       The Journal reporter arrived at an estimate of $4.6 billion
of co-payments recognized in 2001 by using one assumption and
performing one subtraction and one multiplication on the
information contained in the April S-1. She determined the
number of retail prescriptions filled (462 million) by subtracting
home-delivery prescriptions filled (75 million) from total
prescriptions filled (537 million). She then assumed an average
$10 co-payment and multiplied that average co-payment by the
number of retail prescriptions filled to get $4.6 billion.7

       The issue is whether needing this amount of
mathematical proficiency to make sense of the disclosure
negates the disclosure itself. We scrutinized a disclosure
requiring calculation in Ash v. LFE Corp., 525 F.2d 215 (3d Cir.
1975). A proxy statement disclosed directors’ current pension
amounts and, in another section, their newly proposed pension
amounts, but it did not disclose the increase. Id. at 218. We
held that requiring readers to perform the subtraction themselves
was immaterial because the “facts [we]re disclosed prominently
and candidly.” Id. at 219 (“We decline to hold that those
responsible for the preparation of proxy solicitations must

       7
         Union makes much of the difference between the
estimated $4.6 billion and the actual $5.54 billion, but had the
Journal reporter used a slightly higher average co-payment, this
difference would have been smaller. She noted that “$10 to $15
is typical in the industry.” Martinez, supra. Had she used
$12.50, the average of $10 and $15, she would have come up
with $5.78 billion.

                               19
assume that stockholders cannot perform simple subtraction.”).
The calculation from Merck’s S-1 was somewhat more
complex—it required some close reading and an assumption as
to the amount of the co-payment. But the added, albeit minimal,
arithmetic complexity of the calculation hardly undermines faith
in an efficient market.

        Union points out nonetheless that Merck was followed by
many analysts, including J.P. Morgan, Morgan Stanley, and
Salomon Smith Barney, who “closely examine a company’s
revenue and revenue growth when valuing a company’s stock”
in Merck’s industry. Compl. ¶ 9. The logical corollary of
Union’s argument then is the following rhetorical question: If
these analysts—all focused on revenue—were unable for two
months to make a handful of calculations, how can we presume
an efficient market at all? Union is trying to have it both ways:
the market understood all the good things that Merck said about
its revenue but was not smart enough to understand the co-
payment disclosure.8 An efficient market for good news is an
efficient market for bad news. The Journal reporter simply did

       8
          Union needs the market to be efficient. With an
efficient market it can use the fraud-on-the-market theory, which
allows it to meet its section 10(b) reliance requirement. See
Burlington, 114 F.3d at 1415 n.1, 1419 n.8. The fraud-on-the-
market theory supposes that “‘the price of a company’s stock is
determined by the available material information regarding the
company and its business.’” Basic Inc., 485 U.S. at 241
(quoting Peil v. Speiser, 806 F.2d 1154, 1160 (3d Cir. 1986)).

                               20
the math on June 21; the efficient market hypothesis suggests
that the market made these basic calculations months earlier.

        But we do not wish to reward opaqueness. We decline to
decide how many mathematical calculations are too many or
how strained assumptions must be, but Merck was clearly
treading a fine line with this delayed, piecemeal disclosure. It
should have disclosed the amount of co-payments recognized as
revenue in the April S-1; it should have disclosed this revenue-
recognition policy as soon as it was adopted. Sunshine is a fine
disinfectant, and Merck tried for too long to stay in the shade.
The facts were disclosed, though, and it is simply too much for
us to say that every analyst following Merck, one of the largest
companies in the world, was in the dark.

       2.     Did Union properly allege that “false or
              misleading” statements were made by Merck and
              Medco?9

       i)     Were the Merck and Medco statements regarding
              their independence false or misleading?

       9
        Scienter and reliance typically would come next in our
analysis after materiality. See Burlington, 114 F.3d at 1417.
But because we have decided that the initial S-1 disclosure was
not materially false or misleading and did not omit sufficient
facts, we do not discuss scienter here.

                              21
       Union’s complaint alleges that Medco made false
statements about Merck’s and Medco’s independence. The
District Court held that these statements were not actionable
because Union’s supporting evidence came mostly from dates
outside the class period. Medco’s website contained statements
about Medco’s independence policy. The website stated, among
other things, that Medco would “make decisions on the
therapeutic aspects of its programs without substantive influence
from Merck” and would “treat Merck products no differently
from those of any other manufacturer, observing the same
procedures for independent clinical review as it does for drugs
of any other manufacturer.” Compl. ¶ 126. Union produced
data showing the extent to which Merck’s market share among
Medco beneficiaries was significantly higher than its nationwide
market share.

       The District Court discarded this market-share evidence,
holding it unusable because most of it arose from outside the
class period. To support its holding, the Court cited only a case
from the Northern District of California, Clearly Canadian,
which held “statements made or insider trading” done outside
the class period “irrelevant to [the] plaintiffs’ fraud claims.” In
re Clearly Canadian Sec. Litig., 875 F. Supp. 1410, 1420 (N.D.
Cal. 1995). The Clearly Canadian Court, though, had just
denied the defendants’ motion to dismiss and was striking from
the plaintiffs’ complaint nearly 20 pages of allegations of
statements and insider trading from outside the class period. Id.
The Court was removing out-of-period claims because the

                                22
defendants were not liable for them; it was not addressing their
relevance as evidence.

        Two Second Circuit cases have, however, addressed out-
of-period information for the purposes of allowing inferences to
be drawn. In Novak v. Kasaks the plaintiffs’ complaint provided
facts about inventory write-offs from after the expiration of the
class period, and the Court held that those facts supported the
plaintiffs’ allegations that inventory issues existed during the
class period. 216 F.3d 300, 312–13 (2d Cir. 2000). It further
held that a report showing inventory information “six months
after the Class Period . . . supports the inference that inventory
during the Class Period was similar[].” Id. at 213. In a 2001
case the Second Circuit reversed the District Court, holding that
pre-class data was relevant to show defendants’ knowledge at
the start of the class period. In re Scholastic Corp. Sec. Litig.,
252 F.3d 63, 72 (2d Cir. 2001). The Court made clear that both
post-class-period data and pre-class data could be used to
“confirm what a defendant should have known during the class
period,” noting that “[a]ny information that sheds light on
whether class period statements were false or materially
misleading is relevant.” Id.

       The District Court in our case found that Union could not
“rely on statistical data collected prior to the commencement of
the class period . . . to buttress [its] contention that the
statements on Medco’s website were misleading.” In re Merck
& Co., Inc. Sec. Litig., No. 02-CV-3185 (SRC), slip op. at 34

                               23
(D.N.J. July 6, 2004). This finding directly conflicts with the
Second Circuit’s holding in Scholastic, and the Clearly
Canadian case is meager support. We shall follow the Second
Circuit here and hold the pre-class data regarding Merck’s
market share relevant to showing Medco’s statements to be
misleading. The District Court therefore incorrectly disregarded
the evidence of Medco’s favoritism toward Merck products.10

       ii)    Did Gilmartin’s January 2002 statement fall
              within the “forward-looking statement” safe
              harbor?

       Union alleged that Gilmartin’s statement in a January
2002 press release was false and misleading. As we noted,
Gilmartin, discussing the planned Medco IPO, said, “[W]e
believe the best way to enhance the success of both businesses
going forward is to enable each one to pursue independently its
unique and focused strategy.” The District Court held that this
statement fell within the “forward-looking statement” safe
harbor, thereby foreclosing liability for the statement. Union
argues that this statement cannot meet the safe harbor’s
requirements because it was about a planned initial public
offering.

       Concerned about the effect of litigation’s specter on

       10
         We of course do not remand this case, because we held
against Union on materiality.

                              24
corporate disclosure, Congress created in the PSLRA a safe
harbor for forward-looking statements. S. Rep. No. 104-98, at
16, reprinted in 1995 U.S.C.C.A.N. 679, 695. This safe harbor
is designed to shield statements like those regarding revenue
projections and future business plans from leading to liability.
Id. at 17, reprinted in 1995 U.S.C.C.A.N. 679, 696.

        But the safe harbor does not apply to statements “made
in connection with an initial public offering.” 15 U.S.C. § 78u-
5(b)(2)(D). It can be assumed that statements made in a
registration statement and prospectus filed for an IPO are made
“in connection with” that IPO. See, e.g., In re Ravisent Techs.,
Inc. Sec. Litig., No. Civ.A. 00-CV-1014, 2004 WL 1563024, at
*11 n.27 (E.D. Pa. July 13, 2004) (registration statement); In re
Musicmaker.com Sec. Litig., No. CV00-2018 CAS(MANX),
2001 WL 34062431, at *13 n.7 (C.D. Cal. June 4, 2001)
(registration statement and prospectus). One case has suggested
that statements made at pre-IPO presentations are “in connection
with” an IPO. See In re Ins. Mgmt. Solutions Group, Inc. Sec.
Litig., No. 8:00CV2013T26MAP, 2001 WL 34106903, at *1, *9
(M.D. Fla. July 11, 2001).

        We hold today only that a statement made in a press
release several months before a planned IPO that never
subsequently happened is not “in connection with” an IPO. We
do not address, however, whether statements made in
registration statements and prospectuses may lead to liability if

                               25
an IPO does not occur.11

       C.     Was the April 17 registration statement
              disclosure material under section 11?

       Section 11 of the 1933 Securities Act provides a private
right of action to individuals who have suffered harm from
misstatements in an issuer’s registration statement. 15 U.S.C.
§ 77k(a). Because the S-1 is a registration statement, the April
2002 disclosure regarding Medco’s revenue-recognition policy
can be subject to a section 11 claim as well as a section 10(b)
claim. We have already decided that this disclosure was not
material under section 10(b). The question we must now decide
is whether it was material under section 11.

       11
           We find unpersuasive Union’s arguments that the
cautionary language was insufficient, that Gilmartin had actual
knowledge, and that the statement was not mere puffery;
therefore, we do not address them in detail. The cautionary
language was sufficient because the press release incorporated
by reference the cautionary statements in Merck’s 2000 Form
10-K, as well as those in its periodic reports. Cautionary
statements do not have to be in the same document as the
forward-looking statements. Cf. EP MedSystems, Inc. v.
EchoCath, Inc., 235 F.3d 865, 875 (3d Cir. 2000). Union could
not establish Gilmartin’s actual knowledge of the alleged falsity
of his statement based on his position alone. See In re Advanta
Corp. Sec. Litig., 180 F.3d 525, 539 (3d Cir. 1999). And his
statement could also have been mere puffery, because it was a
“vague and general statement[] of optimism,” id. at 538.

                               26
        The District Court dismissed Union’s section 11 claims
as by law immaterial. Union claims that the market’s failure to
react to a disclosure is an invalid basis for dismissing a section
11 claim, and it cites a 2004 case from our Circuit, In re Adams
Golf, Inc. Sec. Litig., 381 F.3d 267 (3d Cir. 2004), for the
proposition that the Oran-Burlington 10(b) materiality standard
does not apply to section 11 claims.

       A section 11 claim looks to whether a registration
statement “contain[s] an untrue statement of a material fact or
omit[s] to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.” 15
U.S.C. § 77k(a). We have made it clear that claims under both
section 11 and section 10(b) require a showing of a “material”
misrepresentation or omission.

        We first noted that section 11(a) and Rule 10b-5 shared
the materiality element in our Craftmatic opinion, where we
adopted the Supreme Court’s TSC materiality definition
(substantial likelihood of importance to a reasonable
shareholder) for both. In re Craftmatic Sec. Litig., 890 F.2d
628, 641 & n.18 (3d Cir. amended 1990) (citing TSC Indus., Inc.
v. Northway, Inc., 426 U.S. 438, 449 (1976)). In Trump we said
that the “materiality requirement” was “common to” section 11
and section 10(b) claims. In re Donald J. Trump Casino Sec.
Litig.—Taj Mahal Litig., 7 F.3d 357, 368 n.10 (3d Cir. 1993).
We also reiterated that the Supreme Court’s TSC materiality
definition applied to section 10 and section 11 actions. Id. at

                               27
369. In Westinghouse we again noted that sections 10(b) and
11 both required “that plaintiffs allege a material misstatement
or omission.” In re Westinghouse Sec. Litig., 90 F.3d 696, 707
(3d Cir. 1996) (emphasis in original).

       We created a test for materiality under section 10(b) in
Burlington. The TSC materiality definition “[o]rdinarily”
applies, but in efficient markets materiality is defined as
“information that alters the price of the firm’s stock.”
Burlington, 114 F.3d at 1425. We reached this conclusion in
two steps. First, “reasonable investors” are the market. Second,
information important to the market will be reflected in the
stock’s price. Thus, “information important to reasonable
investors . . . is immediately incorporated into stock prices.” Id.

       Sections 11 and 10(b) share the materiality element and
the TSC materiality definition. In the context of an efficient
market, they also share the stock-price test for materiality. If a
company’s stock trades on an efficient market, we measure
materiality under the Burlington (as ratified in Oran) standard.
Thus, “the materiality of disclosed information may be
measured post hoc by looking to the movement, in the period
immediately following disclosure, of the price of the firm’s
stock.” Oran, 226 F.3d at 282.

      Our opinion in Adams Golf, however, may be read by
some to hold that the Oran-Burlington materiality inquiry did

                                28
not apply to actions brought under section 11. Adams Golf is a
manufacturer of specialty golf equipment, best known for its
Tight Lies golf clubs. The company sold its shares in an initial
public offering on July 10, 1998. Id. at 270. Part of its business
strategy was to sell its clubs only through “authorized dealers,”
but before the IPO it discovered that Costco, the discount
warehouse retailer, was selling its clubs. Adams Golf issued a
pre-IPO press release on June 9, 1988, disclosing that an
unauthorized dealer was selling Tight Lies clubs. Id. at 271.
This “gray market” distribution of Adams Golf’s clubs created
a short-term revenue boost around the time of the IPO but
cannibalized later sales. Id. at 271–72. The company therefore
predicted disappointing financial performance and issued a press
release to that effect on January 7, 1999. The stock price
dropped 17 percent after this press release with an increase in
trading volume from 58,000 to 1.2 million. Id. at 277 n.11.

        Under section 10(b), plaintiffs have to plead loss
causation—i.e., that the misrepresentation caused the stock price
drop. Id. at 277. Section 11 plaintiffs do not have to plead loss
causation. Id. Instead, it is an affirmative defense in section 11
cases; defendants can limit damages by showing that the
plaintiffs’ losses were caused by something other than their
misrepresentations. 15 U.S.C. § 77k(e). The defendants in
Adams Golf were contesting materiality under Burlington by
pointing to the absence of a stock-price decline after the press
release (although the stock dropped 17 percent, it only dropped
from $4.63 to $3.88, Adams Golf, 381 F.3d at 277). The Adams

                               29
Golf Court interpreted the defendants’ argument as an attempt
to make an affirmative loss-causation defense, and it declined to
apply Burlington. Id. It reasoned that, because Burlington was
a Rule 10b-5 case with a loss-causation requirement plaintiffs
must meet, it did not apply to a section 11 case with no loss-
causation requirement. Id.

         With that backdrop, we do not read Adams Golf as
altering the Oran-Burlington materiality standard for section 11
claims. First, because our Court in Adams Golf both knew of
and referred to Westinghouse, Trump, and Craftmatic, and
inasmuch as precedential cases cannot be overruled unless by
the Circuit en banc, Third Circuit Internal Operating Procedure
9.1, it is obvious that Adams Golf did not intend to conflict with
the three earlier decisions equating section 11’s materiality
element with section 10(b)’s.

       Second, the Oran-Burlington standard applies only to
“efficient markets,” Burlington, 114 F.3d at 1425; see also
Oran, 226 F.3d at 282, a key ingredient missing in Adams Golf.
In Burlington, the plaintiffs alleged that Burlington’s stock
traded on an efficient market. 114 F.3d at 1425. Plaintiffs in
Oran did likewise. 226 F.3d at 283 n.3. While the plaintiffs in
Adams Golf noted that the company’s stock traded on the
NASDAQ, they did not allege that the stock traded on an
efficient market. Consolidated and Amended Class Action
Complaint ¶ 8, In re Adams Golf, Inc. Sec. Litig., 176 F. Supp.
2d 216 (D. Del. 2001) (No. 99-371-RRM). Indeed, our Court

                               30
noted that the company’s shares did not trade on an efficient
market pre-IPO. Adams Golf, 381 F.3d at 276 n.10. Without an
efficient market, the Oran-Burlington standard would not apply.
Here, Union has alleged that Merck’s stock was traded on an
efficient market. Compl. ¶ 212(c).

       Third, the language in Adams Golf at issue likely was
dicta. The defendants would have lost on appeal even had the
Court found Oran-Burlington directly applicable. That is, the
Adams Golf panel held that Costco’s unauthorized, out-of-
network selling of 5,000 Tight Lies clubs was not
“unquestionably immaterial to a reasonable investor.” Adams
Golf, 381 F.3d at 276. We reversed the District Court’s
conclusion that the disclosure was immaterial as a matter of law
because of the nature and magnitude of the unauthorized sales.
In addition, the company’s stock price did decline following the
disclosure; it dropped 17% along with a twentyfold increase in
trading volume. Id. at 277 n.11. Under the Oran-Burlington
standard this decline would have been material. The Court’s
refusal to apply that standard was irrelevant to its decision, and
the language about its refusal was in essence dicta.

       Fourth, reading materiality and loss causation in Adams
Golf to be synonymous is incorrect. They are different
concepts. In Burlington we did not even mention the phrase
“loss causation.” Rather, our creation of the stock-price rule
was explicitly to determine whether information was material.
Burlington, 114 F.3d at 1425 (“In this case, plaintiffs have

                               31
represented to us that the July 29 release of information had no
effect on BCF’s stock price. This is, in effect, a representation
that the information was not material.” (emphasis added)).
Also, loss causation and materiality are two separate elements
of a section 10(b) claim. Discussing a 10b-5 claim in 2001, we
listed loss causation as an element separate from materiality.
See Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259
F.3d 154, 174 (3d Cir. 2001). To leave no doubt, the Supreme
Court this year also described loss causation as a separate
element in section 10(b) and Rule 10b-5 actions. Dura Pharms.,
Inc. v. Broudo, ___ U.S. ___, ___, 125 S. Ct. 1627, 1631 (2005).
The bottom line is this: the Adams Golf Court did not explicitly
claim to change the structure of 10b-5 actions, so we must not
read it to do so.

       Merck’s disclosure was not material under the Oran-
Burlington standard. This standard is applicable to section 11
as well as to section 10(b). Thus, because Union must show
materiality to succeed on its section 11 claim, that claim fails as
well.

       D.     Is there controlling-person liability?

       Section 20(a) of the Exchange Act provides for liability
for “controlling person[s].” 15 U.S.C. § 78t. Section 20(a)
makes controlling persons jointly and severally liable with the
controlled person. Id. But controlling-person liability is
“premised on an independent violation of the federal securities

                                32
laws.” In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d
198, 211 (3d Cir. 2002); Shapiro v. UJB Fin. Corp., 964 F.2d
272, 279 (3d Cir. amended 1992).

        Because the District Court found that Union had not
sufficiently alleged a securities violation, the Court dismissed its
section 20(a) claims.12 Union, of course, argues that the Court
erred in dismissing its section 10(b) and section 11 claims; it
therefore claims that its section 20(a) claims were also
incorrectly dismissed.

        Because the District Court was correct in dismissing
Union’s other claims, leaving Union with no valid section 20(a)
claim, we agree as well with the District Court’s conclusion as
to that claim.

                         IV. Conclusion

        Union failed to establish a material statement or omission
by Merck, so Union did not sufficiently plead a section 10(b)
violation or a section 11 violation. Because of this, Union also
fails to make a valid section 20(a) claim. We therefore affirm
the District Court’s decision.

       12
         The District Court mistakenly cited a case discussing
section 20A—not section 20(a). In re Merck, slip op. at 46
(citing Advanta, 180 F.3d at 541). But the standards for the two
sections lead to the same result here.

                                33