In recent years, the life science industry has been a primary target for securities fraud class action lawsuits as “nearly one out of every four securities fraud class action lawsuits filed in 2016 was brought against a life sciences company.” ((Dechert LLP, Dechert survey: Developments in securities fraud class actions against U.S. life sciences companies 6 (2016), https://www.dechert.com/files/Uploads/Documents/Lit%20-%20General/White%20Paper%20-%20Securities%20Fraud%20U.S.%20Life%20Sciences%20-%20eFINAL%20-%2002-16-17.pdf.)) These fraudulent class action lawsuits have become increasingly common as 2016 highlighted a 70% increase in number as compared to 2014. ((Ben Dipietro, The Morning Risk Report: Life Sciences Firms Remain Targets for Securities Fraud Litigation, Wall St. J. (Feb. 21, 2017), http://blogs.wsj.com/riskandcompliance/2017/02/21/the-morning-risk-report-life-sciences-firms-remain-targets-for-securities-fraud-litigation/.)) Nearly half of these lawsuits were targeted against smaller companies with “market capitalizations of $500 million or less.” ((Id.)) Based on the recent increase in litigation, there is no sign that securities claims against life sciences will decrease even though the majority of cases in 2016 resulted in victory for defendant companies. ((Dechert LLP, supra note 1 at 4.)) With statistical data showing an increase in class action lawsuits, what are some of the developments that have led to current state of affairs for life science firms? This blog post will track recent developments in securities fraud litigation and discuss some of the implications for life science firms and how these firms can reduce their risk of litigation.
Following trends in litigation since 2011, life science firms are “more likely to experience industry-specific allegations, vs. generalized claims of financial improprieties.” ((Jennifer Sharkey, Directors & Officers Liability for Life Sciences Marketplace, Arthur J. Gallagher & Co. (March 2016), https://www.ajg.com/media/1698350/2016-market-conditions_do-for-life-sciences.pdf.)) These claims may reflect the “heightened regulatory environment and the increase in investigations and enforcement actions by the Department of Justice (DOJ) and Securities Exchange Commission (SEC).” ((Id.)) These lawsuits typically involve claims of “misrepresentations or omissions about product efficacy, product safety and the likelihood of approval from the U.S. Food and Drug Administration.” ((Dipietro, supra note 2.)) It was noted in early 2016 that these lawsuits would not slow down as a result of plaintiffs developing better proficiency with books-and-records demands to withstand motions by including more details in complaints. ((Sharkey, supra note 4.))
Although the numbers show a heavy burden on life science firms, industry-specific allegations have been dismissed quite frequently. ((Id.)) The dismissal rate may have something to do with courts being “unwilling to accept vague or conclusory allegations of securities fraud against a life science company.” ((Id.)) However the risk remains very real for life science firms, as these lawsuits may result in substantial losses, evidenced by Pfizer’s $400 million dollar settlement stemming from off-label marketing. ((Id.)) Furthermore, life science firms can still be victim to generalized securities fraud complaints such as claims alleging violation of fiduciary duties. ((Dechert LLP, supra note 1 at 9.))
Although there remains significant risks involved in class action litigation, it is not expected that the premiums for life science companies will change significantly. ((Sharkey, supra note 4.)) Instead, it is likely that there will be “contract language enhancements” that will provide broader and more inclusive protection for specific risks. ((Id.)) Life science firms should look to reduce the risk of litigation by means of reviewing internal processes relating to communications and disclosures about products, being aware that omissions in incomplete statements must not make any statements misleading, and developing insider trading policies to avoid giving the upper hand to class action lawyers seeking to develop litigation theories. ((Dechert LLP, supra note 1 at 18.))