Nguyen v. Endologix, Inc., 2020 WL 3069776 (9th Cir. June 10, 2020)
On June 10, 2020, the Ninth Circuit affirmed the dismissal of a putative securities fraud class action brought against a medical device corporation, Endologix, Inc., and certain of its officers, regarding statements concerning the FDA’s likelihood of premarket approval of the Company’s aneurysm sealing product, Nellix. The Court held that plaintiff failed to allege facts giving rise to a strong inference of scienter (i.e., fraudulent intent) and thus failed to adequately plead a claim for securities fraud.
According to the complaint, Endologix executives allegedly repeatedly assured investors of the likelihood of FDA premarket approval of Nellix within a certain time frame. The complaint alleged that the executives made these statements despite knowledge of problems with the device migrating (i.e. moving from its initial placement) in European patients and, as a result, defendants knew “there was absolutely no hope” of receiving FDA approval of the drug. The Company announced that, rather than approve Nellix within the timeframe that Endologix had previously announced, the FDA requested two additional years of follow-up data. And, eight months later, the Company announced it would no longer seek FDA approval of Nellix.
In affirming the district court’s ruling, the Ninth Circuit held that the complaint had not adequately alleged a strong inference of scienter. Emphasizing the illogical underpinnings of plaintiff’s claims and the absence of any “insider” trading allegations, the Ninth Circuit asked: “why would defendants promise the market that the FDA would approve Nellix if defendants knew the FDA would eventually figure out that Nellix could not be approved due to . . . device migration problems?” The appeals court also addressed allegations the complaint attributed to a confidential witness (“CW1”), who was alleged to have previously worked in Endologix’s research and development group. The appeals court concluded that the CW1 allegations did not give rise to a strong inference of scienter because CW1 left Endologix before the company allegedly received some of the migration data at issue, and CW1’s account lacked particularized details inconsistent with the company’s public statements. The court also highlighted the fact that Company executives openly addressed on an investor call a study that the complaint alleged had revealed the migration problems to be more severe than previously known.
The Endologix decision underscores that while, in describing a drug’s ultimate path to FDA approval, companies must exercise care around their public statements, pleading scienter in this context carries a heavy burden. The decision illustrates that and courts will not accept at face value a plaintiff’s implausible assertion that executives made positive statements about the company’s prospects for FDA approval while supposedly knowing such approval was unlikely to be obtained.