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PSLRA Class Action Defense Cases–Little Gem v. Orphan Medical: Eighth Circuit Affirms Dismissal Of Securities Class Action Holding Class Action Complaint Failed To Meet Heightened Pleading Requirements Under PSLRA

Securities Class Action Properly Dismissed for Failure of Allegations in Class Action Complaint to Meet PSLRA’s Heightened Pleading Standards because Defendants were Under no Legal Duty to “Search out and Disclose” Raw Data of FDA Clinical Trials Prior to FDA Issuing Results of Drug Trial Eighth Circuit Holds

Plaintiff filed a class action against Orphan Medical and two of its officers for violations of federal securities laws; specifically, the class action complaint alleged that defendants “negligently failed to disclose material information to Orphan’s stockholders before asking the stockholders to approve Orphan’s merger with [Jazz Pharmaceuticals], in violation of §§ 14(a) and 20(a) of the Securities Exchange Act of 1934…, and Securities and Exchange Commission (SEC) Rule 14a-9.” Little Gem Life Sciences LLC v. Orphan Medical, Inc., 537 F.3d 913, 914 (8th Cir. 2008). Defense attorneys moved to dismiss the class action complaint on the grounds that the class action’s allegations “failed to meet the heightened pleading standards required by the Private Securities Litigation Reform Act (PSLRA)”; the district court agreed and dismissed the class action. Id. On appeal, plaintiff argued that the district court should have converted the motion to dismiss into a motion for summary judgment, and that the allegations in the class action complaint satisfied the PSLRA. Id., at 914-15. The Eighth Circuit affirmed.

According to the class action complaint, Orphan, a pharmaceutical company, sought a merger because it was experiencing financial difficulties. At the time, the company’s future profitability was uncertain, largely because it was unclear whether its drug Xyrem, upon which it heavily relied, had broader medical uses. In particular, Orphan was testing whether Xyrem could be used to treat fibromyalgia, and it initiated Phase I of its FDA clinical trials in June 2004, which it passed. Xyrem still had to pass Phase II and Phase III trials before it could obtain FDA approval to treat fibromyalgia. Little Gem, at 915. The gravamen of the class action was that shareholders voted on the merger in June 2005, and in July 2005 it was announced that Xyrem successfully passed Phase II: plaintiff alleges that defendants should have disclosed the successful completion of Phase II before the shareholders voted on the merger with Jazz. Id., at 915-16. In support of its motion to dismiss the class action, defendants “asserted factual allegations that went beyond the face of [the class action] complaint.” Id., at 916. The district court did not consider those factual allegations in holding that the class action “failed to meet the heightened pleading standards mandated by the PSLRA.” Id.

The Eighth Circuit first rejected plaintiff’s claim that the district court should have converted the defense motion to dismiss into a motion for summary judgment: the district court did not consider the additional facts submitted by defendants except to the extent that they “did not contradict [the class action] complaint and were not critical to the outcome of [defendants’] motion. Little Gem, at 916. With respect to whether the class action complaint satisfied the heightened pleading requirements under the PSLRA, the Circuit Court rejected plaintiff’s argument that negligent misrepresentation claims need not meet the PSLRA’s heightened pleading standards as “unpersuasive and unsupported by precedent.” Id., at 917 (citing United States v. Robinson, 439 F.3d 777, 780 (8th Cir.2006)). The Court rejected also plaintiff’s claim that the district court failed to consider the facts in the class action complaint “as a whole,” finding no nothing in the record that supported the claim. Id. Finally, the Eighth Circuit explained at page 917 that plaintiff’s class action essentially “alleges that several comments in [defendant’s] proxy statement were false or misleading because [defendant’s] officers could have had access to the Xyrem test results and negligently failed to gain access,” and that if defendant’s officers had taken such steps then “perhaps a better stock price could have been attained in the Jazz merger.” The legal issue before the Court, then, was not whether defendant’s officers “had early access to the raw test data” – which was a fact in dispute – but whether defendant’s officers “had a legal duty to search out and disclose such information while it remained under professional analysis in accordance with FDA drug trial regulations.” Id., at 917. The Circuit Court held that no such duty existed and, accordingly, defendants could not be held liable for negligently failing to perform that duty. Id. Accordingly, the Eighth Circuit affirmed the district court’s order dismissing the class action complaint. Id.

Download PDF file of Little Gem Life Sciences LLC v. Orphan Medical