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First Circuit Court Of Appeals Affirms That Optimistic Statements In Press Releases Do Not Constitute Material Misrepresentations Or Omissions, Even If Incorrect In Hindsight
01/16/2017On January 9, 2017, the United States Court of Appeals for the First Circuit affirmed the dismissal of a putative securities class action against InVivo Therapeutics Holdings Corporation and its former CEO, Frank Reynolds. Battle Const. Co., Inc. v InVivo Therapeutics Holdings Corp., No. 15-1544, 2017 WL 74702 (1st Cir Jan. 9, 2017). The Court held that InVivo’s press releases that allegedly failed to identify caveats and conditions imposed by the Food and Drug Administration (FDA) on clinical trials of a particular medical device did not constitute false or misleading statements under federal securities law. Plaintiff alleged that defendants violated Sections 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 10b-5, and that Reynolds violated Section 20(a) of the Exchange Act pursuant to control person liability, by failing to disclose in the company’s press releases the FDA’s conditions that may impact the timing of the clinical trials.
Plaintiff’s complaint alleged that InVivo’s stock price dropped by approximately half of its peak value after it revealed problems with its previously announced expected timeline for bringing its medical device to market that resulted from requirements imposed by the FDA on InVivo’s clinical studies. The FDA’s requirements included that InVivo satisfy several conditions before testing could begin, such as correcting the informed consent form, modifying its study design so that the preliminary study could serve as the basis for approval of a later, follow-on study, and conducting a staged study, whereby separate FDA approval was required for each of the stages. Plaintiff maintained that defendants’ omission of these conditions in its press releases made InVivo’s temporal predictions regarding the clinical trials materially misleading.
Citing the “well-reasoned” decision of Judge Richard G. Stearns of the United States District Court for the District of Massachusetts, the First Circuit held that “any objective reading of the [FDA’s approval] letter makes clear that the FDA erected no material barriers to an immediate enrollment of the first patient,” and that the timelines released by defendants, even if aggressive, did not contain any falsities. The Court further observed that “securities laws do not make it unlawful for a company to publicize an aggressive timeline or estimate for a proposed action without disclosing every conceivable stumbling block to realizing those plans,” and while “‘greater clairvoyance’ might have led InVivo to propose a more conservative timeline, failure to make such perceptions does not constitute fraud.” Moreover, the Court concluded that “to support a claim that InVivo’s statements were false or misleading, [plaintiff] [wa]s left only with the inference that because, in retrospect, the test lagged significantly behind the proposed timeline, the timeline must have always been impossible to achieve.” Accordingly, the Court affirmed the lower-court’s dismissal of the Section 10(b) and Rule 10b-5 claim. Further, having found that plaintiff “failed to plead a viable claim of a primary violation,” the Court also upheld that dismissal of the Section 20(a) control person claim against Reynolds.
The decision serves as a reminder of the high pleading standard plaintiffs must meet to plead a securities fraud claim under Section 10(b). It also reinforces that courts are generally unwilling to consider optimistic statements in press releases as materially misleading absent specific allegations that such statements were demonstrably false at the time they were made, and that “fraud by hindsight’ does not satisfy the pleading requirements in a securities fraud case.
