This week, we are attending the 139th annual Westminster Kennel Club dog show. We are Standard Poodle aficionados. Before the current passel of Drug and Device Rescue Dogs – mixed breeds – we always had a Standard Poodle or two. Though Standard Poodles were developed as hunting dogs in Germany – water retrievers — the Standard Poodle class at a dog show displays these tough, athletic creatures in extreme haircuts (we won’t waste blog space on the utilitarian origins of these haircuts) as they prance – “gait” – around a ring. Our all-time favorite movie, “Best in Show,” portrays this accurately. While we adore Westminster, it is startling for the uninitiated, some of whom recoil at the spectacle of these beautiful animals out of their natural context and in unfamiliar trappings. And that sets the stage for our weak transition to today’s case. It is a case about off-label promotion, but not in its familiar context. Rather, this interesting and sensible decision out of the (not always hospitable) First Circuit rejects plaintiffs’ attempt to dress off-label promotion in the trappings of a 10(b)(5) violation.
In Fire and Police Pension Association of Colorado v. Abiomed, No. 14-1502, 2015 U.S. App. LEXIS 1944 (1st Cir., Feb. 6, 2015) the First Circuit considered the appeal of the district court’s dismissal of a complaint alleging that defendant Abiomed and two of its officers had committed securities fraud when they told investors that the company’s policy was “to avoid off-label marketing” of its Impella 2.5 micro heart pump, when they were in fact “orchestrating and engaged in widespread off-label marketing promotion.” Fire and Police Pension Association, 2015 U.S. App. LEXIS 1944 at *2 (citation omitted). The complaint further alleged that defendants told investors that the company was cooperating with the FDA’s investigation into its marketing practices and working “to resolve a few discrete issues,” while it was actually “trivializing the concerns” and “continuing to off-label market.” Id. (citation omitted). The district court held that plaintiffs had not pleaded facts “giving rise to a cogent and compelling inference of scienter,” as required under the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Id. at *2-3.
The First Circuit affirmed, holding, “Even assuming that plaintiffs plausibly alleged that defendants made false or misleading statements which had a material effect on Abiomed’s stock price – a matter that is far from clear – plaintiffs have not sufficiently alleged that defendants made those statements with the conscious intent to defraud or a high degree of recklessness.” Id. at *3 (internal punctuation and citations omitted).
The Court explained the FDA’s prohibition on off-label marketing, but emphasized that physicians are permitted to engage in off-label uses of medical devices. Id. at *5-6. Abiomed received first an Untitled Letter and, later, a Warning Letter from the FDA related to promotion of the Impella 2.5 for non-FDA-cleared uses and to improper efficacy claims. In its formal response, Abiomed assured the agency that it would not run the challenged advertisement again and that related materials were removed from its website. Id. at *10-11. However, the off-label marketing allegedly continued, and, approximately a year after the FDA’s Warning Letter, the U.S. Attorney’s Office for the District of Columbia began an investigation into the company’s marketing and promotional practices, causing Abiomed stock prices to fall. Id. at *14-16. Three months later, the FDA issued a Close-Out Letter, stating that Abiomed had adequately addressed the violations set forth in the Warning Letter, and stock prices rebounded. Id. at *17.
Plaintiffs alleged that, in the period between the Warning Letter and the beginning of the U.S. Attorney’s investigation, “defendants made specific false and misleading statements that deceived the investing public and caused the plaintiffs to purchase Abiomed stock at artificially inflated prices.” Id. (internal punctuation and citation omitted). They alleged that investors were misled by the company’s failure to attribute the growth in Impella revenues to unlawful off-label marketing practices, by its statement that it had a policy of not engaging in off-label marketing, and by it erroneous statement that it was addressing FDA concerns while, in fact, it was engaged in “intentional and pervasive off-label marketing, contrary to its stated policy.” Id. at *23-24.
The Court explained that, “[t]o state a claim for securities fraud under Section 10(b), a plaintiff must allege (1) a material misrepresentation or omission; 2) scienter, or a wrongful state of mind; 3) in connection with the purchase or sale of a security; 4) reliance; 5) economic loss; and 6) loss causation. Id. at *26 (citation omitted). In addition, “the PSLRA imposes a rigorous pleading standard on allegations of scienter.” Id. at *26-27 (citation omitted). “A complaint will survive a motion to dismiss only if it states with particularity facts giving rise to a strong inference that defendants acted with a conscious intent to deceive or defraud investors by controlling or artificially affecting the price of securities or acted with a high degree of recklessness.” Id. at *27 (citations omitted). The district court had dismissed, holding that plaintiffs had not satisfied this pleading standard with respect to scienter.
In its affirmance, the First Circuit held that, “assum[ing] arguendo that the district court correctly found that plaintiffs . . . alleged enough to survive dismissal on claims that Abiomed provided false explanation for Impella revenue growth, . . . the statements are not actionable on scienter grounds.” Id. at *32. The Court stated, “The materiality of the impugned omission here – Abiomed’s failure to state that some of the increased revenues were due to off-label marketing – is marginal at best.” Id. at *32-33. Moreover, “[p]laintiffs’ contention that the omission would have mattered to a reasonable investor depends on a long chain of inferences, most of which are not sufficiently substantiated by the allegations in the complaint.” Id. at *33. While plaintiffs alleged “that off-label promotion was widespread, . . . they [did] not state or even suggest what proportion of sales were made as a result of such efforts, or the significance of the contribution of those sales to Abiomed’s stock price.” Id. at *34.
The Court commented, “The marginal materiality of the alleged statements and omissions concerning revenues weighs against an argument that defendants here possessed the required scienter.” Id. In addition, “the company did not withhold information about the FDA’s concerns once the FDA issued a Warning Letter,” and “did not promise a positive resolution of the matter;” rather, it acknowledged that future similar matters could have significant consequences for the company. Id. at *35-36. The Court concluded, “These are not the actions of a company bent on deceiving investors as to their future earnings prospects.” Id. at *36. Thus, while “Abiomed’s promotional and marketing activities . . . might have been a risky course in terms of its likelihood of promoting sanctions from the FDA,” these activities did not support a securities violation. Id. at *43.
We’re not securities lawyers, but scienter is scienter. Given that these allegations of intentional concealment of off-label promotion were not enough – as a matter of law − to establish scienter in a securities context, we don’t think such allegations should suffice to establish the scienter requirement of fraud claims in other contexts where intent is required, including common-law fraud and some consumer fraud claims. That’s why we’re blogging about it here.
Last week, we discussed draft legislation in which a section heading with text “to be supplied” gave us hope that the FDA may be approaching a formal posture of acknowledgment of the beneficial innovation off-label marketing promotes. While the First Circuit carefully parsed today’s decision in securities law terms, we choose to see a subtext embodying the stance that off-label marketing should be accepted as inevitable and that its supposed negative ripple effects should not be overemphasized. We will continue to root for the FDA to codify this stance. And, Tuesday night, though a Portuguese Water Dog named Matisse is favored to take it all, we will be rooting for the Standard Poodle.