One of the most significant pieces of legislation to emerge from the New Deal, the Securities Act 1933 (“the 1933 Act”), imposes a disclosure requirement for registration statements and other securities offerings.  The 1933 Act provides that when 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,” investors who purchase those securities have a cause of action to sue in both law and equity.  U.S. Code, 15 U.S.C. § 77k.   Earlier this October, the Commercial Division considered whether this provision requires biopharmaceutical companies to disclose results from ongoing clinical trials in their securities offerings.  See In re Akebia Therapeutics, Inc. Sec. Litig. v. XXX, No. 654373/2021, 76 Misc.3d 1221(A), 175 N.Y.S.3d 715, 2022 WL 9688356 (N.Y. Sup. Ct. October 17, 2022).  The Commercial Division gave a mixed response.  The court granted a motion to dismiss the complaint, but left open the possibility that pharmaceutical companies might have a duty to disclose results from ongoing clinical trials, if those companies knew about the results and such clinical results constituted “material facts” within the meaning of the 1933 Act.  We discuss the Commercial Division’s decision below.

Background

Akebia Therapeutics, Inc. (“Akebia”) and Keryx Biopharmaceuticals Inc. (“Keryx”) are biopharmaceutical companies developing therapeutics for patients suffering from kidney diseases.  In 2014, Keryx received approval from the U.S. Food and Drug Administration (“FDA”) for Auryxia tablets, an oral treatment for patients with chronic kidney disease suffering from iron deficiency.  Id. at *3.  Akebia was in the process of developing a treatment called vadadustat, which was also an oral treatment for anemia caused by chronic kidney disease.  Id.  On December 13, 2018, Akebia and Keryz announced a complete merger to create a fully integrated renal company.  This combined company touted its “plan to launch vadadustat for the treatment of anemia due to [chronic kidney disease] in 2020,” id. at *4, and the “potential to deliver an all-oral treatment approach for patients with anemia due to [chronic kidney disease].” Id. at *4. (citation omitted).  At the time of the merger, vadadustat was in Phase 3 of its clinical trials.  Id. at *5.  In connection with this merger, pursuant to a registration statement dated October 29, 2018, Akebia issued 57,773,090 shares with a value of $8.94 per share.  Id. at *2.  Each common share in Keryx was converted into 0.37433 of Akebia’s common share.  Id. at *3. 

In a 2017 Form 10-K, Akebia had reported positive efficacy results from the Phase 2d clinical trials.  Id. at *4-5.  However, Akebia also disclosed vadadustat’s potential safety risks: there was a higher incidence of serious adverse events (SAEs) among patients who were treated with vadadustat as compared to patients who received a placebo.  Id.  Phase 3 of the vadadustat’s clinical trials began in December 2015 and achieved full enrollment following the merger.  Id. at *5.  Unlike prior phases of vadadustat’s clinical trials, Phase 3 clinical trials were “an open-label study, meaning that the treatment given was not concealed from the researchers or the subjects.”  Id. at *5.  A key component of these Phase 3 clinical trials was assessing major cardiovascular events (“MACE”) for vadadustat and competing treatments for anemia in patients suffering from renal failure, and calculating the relevant MACE rates for these treatments.  Id. at *5.  On September 3, 2020, Akebia announced the results from vadadustat’s Phase 3 clinical trials.  Vadadustat was linked with increased heart risks as compared to competing treatments, and “did not meet the primary safety endpoint” of the clinical trials.  Id. at *6.  Vadadustat’s MACE rate was not within the expected safety range in comparison to other treatments.  Vadadustat was, in effect, not commercially viable since it was unlikely to receive FDA approval.  Akebia’s announcement caused a nearly 64% drop in its share value on the same day: at close of trade on September 3, the trading price of Akebia’s shares fell from $7.35 per share to $2.65 per share.  Id. at *6. 

Investors brought a class action against Akebia and its senior officers under Sections 11, 12(a)(2), and 15 of the 1933 Act for failing to disclose material information concerning vadadustat’s commercial viability.  Id. at *6.  Akebia, in the registration statement dated October 29, 2018 and other offering documents represented that vadadustat was a commercially viable to secure FDA approval.  Since the Phase 3 clinical trials were being conducted open-label, however, the investors alleged the Akebia was aware long before the December 2018 merger that vadadustat would not meet its safety endpoint.  Nonetheless, Akebia did not disclose the interim results from vadadustat’s Phase 3 clinical trials in the October 2018 registration statement.  These omissions, investors argued, constituted a material misrepresentation under the 1933 Act.  Id. at *5-6. 

Defendants’ Motion to Dismiss

Defendants filed a motion to dismiss the class action, arguing that the investors failed to identify an actionable misrepresentation.  Defendants claimed that they were not aware of the interim data from vadadustat’s Phase 3 clinic trial and thus any assertions about vadadustat’s commercial viability in the registration statement was “purely non-actionable corporate optimism.”  Id. at *7.  Defendants also argued that the New York Supreme Court should not hear the dispute for two reasons: (i) that the court lacked general jurisdiction to hear the dispute under N.Y. CPLR § 301 or under the long-arm jurisdiction statute under CPLR § 302; and (ii) that the New York Supreme Court was forum non conveniens under CPLR § 327, and that the proper forum to handle the dispute was Massachusetts state court.  Id. at *7-9. 

The Commercial Division’s Decision

On October 17, 2022, the Commercial Division granted Defendants’ motion to dismiss on the ground that Plaintiffs failed to allege an actionable misrepresentation.  However, the court rejected Defendants’ other contentions concerning jurisdiction and forum non conveniens, and granted Plaintiffs leave to amend their consolidated complaint. 

The court began by noting that the broad policy behind the 1933 Act was “protect[ing] investors by ensuring that companies issuing securities make a full and fair disclosure of information relevant to a public offering.  Id. at *6 (quoting Omnicare, Inc. v Laborers Dist. Council Const. Indus., 575 US 175, 178 (2015)).  After noting that the 1933 Act imposes a strict liability for misrepresentations in securities offerings, the court reiterated that analyzing whether a statement counts as false or misleading depends on the information available at the time that the statement was made. 

The court held that the investors failed to allege any actionable misrepresentations because, at the time of the merger, Akebia did not know the relevant MACE rate either for vadadustat or competing treatments.  Id. at *7.   In short, Akebia did not know that vadadustat was linked to increased heart risks as compared to competing treatments because Akebia did not know the relevant safety ranges for these treatments.  Thus, according to the court, Akebia’s failure to include interim results from vadadustat’s Phase 3 trials did not constitute a material misstatement within meaning of Section 11 of the 1933 Act.  Id. at *7.  However, the court found that “vadadustat was material to the Merger.” Id..  If Akebia knew or could infer at the time of the merger that vadadustat’s MACE rate was not within the expected safety range but omitted to mention this fact in the relevant securities offerings, then investors would have a cause of action under the 1933 Act.  Id. at *7.  The court therefore granted leave to the investors to amend the complaint.  Id. at *9. 

In disposing of the Defendants’ jurisdictional argument, the court noted that, in order for New York courts to have jurisdiction over the investors’ claim under CPLR § 302, there must be an “articulable nexus” between the investors’ claims of misrepresentation and Akebia’s transactions within New York state.  Id. at *8 (quoting English v. Avon Prods., Inc., 169 N.Y.S.3d 300, 304 (App. Div. 1st Dep’t 2022)).   Akebia drafted the registration statement and solicited investors in New York.  Moreover, BlackRock Inc., a New York-based entity, was the largest shareholder in Akebia and Keryx as well as the primary target of the Akebia’s securities offerings.  For these reasons, the court had no difficulty in finding an articulable nexus between the investors’ claims and Akebia’s in-state conduct.  Id. at *8.

The court also held that the New York Supreme Court was not an inconvenient forum under CPLR § 327.  Id. at *8-9.  A court that possesses jurisdiction can nonetheless either stay or dismiss the action for reasons for forum non conveniens by balancing various factors including “(i) the burden on New York courts, (ii) the potential hardship to the defendants, (iii) the unavailability of an alternative forum, (iv) the residence of the parties, and (v) where the transaction at issued occurred.”  Id. at *8.  However, the court determined that the burden on New York courts to hear the Akebia litigation was minimal since the Commercial Division regularly decides similar securities disputes.  And there was no other alternative forum since Massachusetts did not provide a forum for hearing a nationwide class action.