District Court Dismisses a Shareholder Suit for Failing to Plead Scienter

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The US District Court for New Jersey recently granted a motion to dismiss by defendants, Columbia Laboratories, Inc. (Columbia) and Watson Pharmaceuticals, Inc. (Watson). The plaintiff group brought an action under Section 10(b) of the Securities and Exchange Act of 1934 and under Securities and Exchange Commission Rule 10b-5 for fraudulent misrepresentation. The District Court held that the plaintiff group’s second amended complaint failed the scienter pleading requirement of the Private Securities Litigation Reform Act because it failed to allege Columbia knew about a heightened statistical significance standard for a study to approve a new drug.In 2004, Columbia started a clinical study to evaluate a new drug called Prochieve. The US Food and Drug Administration (FDA) advised that one study might be enough if it showed a more robust statistical significance (99% confidence) than usually required (95% confidence). Although the 2004 study did not produce significant results, Prochieve was later tested from 2008 to 2010 for a new use. Columbia and Watson announced on June 27, 2011, that the FDA had accepted the filing for Prochieve based on test results meeting the 95% confidence standard. On June 28, 2011, the FDA issued a letter that there was a problem with discrepancies in the data between tests in the United States and abroad that would be a potential review issue. 

The District Court found that plaintiffs failed adequately to allege facts creating a strong inference that Columbia or Watson knew the FDA would not approve Prochieve. In their second amended complaint, the plaintiff group focused on the original conversations between Columbia and the FDA regarding the more robust 99% confidence standard for the test trials, alleging that Columbia knew this standard was meant for the 2008 to 2010 trial as well. The District Court concluded that even if that were true, the plaintiffs did not plead that the FDA ever communicated this fact to Columbia, and thus could not plead that Columbia knew the statements were false when made. 

In re Columbia Lab.s, Inc. Sec. Litig., No. 12-614 (FSH) (D.N.J. Oct. 21, 2013).

Topics:  Dismissals, Fraud, Misrepresentation, Pleadings, Rule 10b-5, Scienter, Securities Exchange Act, Shareholder Litigation, Shareholders

Published In: Business Torts Updates, Civil Procedure Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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