Ninth Circuit Partially Reverses Dismissal Of Impax Laboratories Shareholder Suit Based On Loss Causation

On January 11, 2021, the Third Circuit issued a ruling in N.Y. Hotels Trades Council & Hotel Association of NYC Inc. Pension Fund et al. v. Impax Laboratories, Inc., et al., No. 19-16744 (9th Cir. Jan. 11, 2021) affirming in part and reversing in part the dismissal of a shareholder class action lawsuit against Impax Laboratories, Inc. (“Impax”) for violations of Section 10(b) of the Exchange Act of 1934. In doing so, the Court found that allegations in the shareholder’s Second Amended Complaint sufficiently plead loss causation as to plaintiff’s price fixing theory, falsity regarding defendants’ statements about diclofenac’s past performance and defendant’s forward-looking earnings projections, and that defendants’ forward-looking revenue guidance was made with actual knowledge of falsity. The Ninth Circuit upheld the lower court ruling that media reports that were the basis for stock price declines were just speculation about potential indictment and not a basis for loss causation. 

With respect to loss causation, the Ninth Circuit emphasized that plaintiffs sufficiently alleged loss causation because plaintiffs are only required to “satisfy the familiar test for proximate cause… and loss causation ‘may be shown even where the alleged fraud is not necessarily revealed prior to the economic loss[.]’” Plaintiffs had alleged that defendants agreed with co-conspirators to fix prices of generic drugs and strategically cede market share to new market participants. Further, plaintiffs alleged that Impax’s August 2015 earnings miss was not due to the impact of additional competition, but rather was due to Impax’s concession of market share pursuant to the price fixing scheme. The Ninth Circuit held that plaintiffs’ price fixing scheme allegations were sufficient to establish loss causation because they sufficiently [traced the loss back to the very facts about which the defendant lied.” 

However, the Ninth Circuit held that the district court did not err in finding that allegations relating to the media reports could not be a basis for loss causation. The Ninth Circuit found that the reports were no more than speculation because the market couldn’t possibly know whether defendants would be indicted and therefore any associated drop in Impax’s stock price could only be attributed to speculation as to the accuracy of the media reports.

With respect to defendants’ alleged misstatements, the Ninth Circuit also found that plaintiffs sufficiently alleged: (1) falsity regarding defendants’ statements about diclofenac’s past performance; (2) falsity regarding defendants’ forward-looking earnings projections; and (3) that  defendants statements relating to forward-looking revenue guidance were made with actual knowledge of falsity. In reversing the district court, The Ninth Circuit held that plaintiff’s allegations that defendants misrepresented the extent of the price decline and the extent that diclofenac caused the price decline sufficiently met Rule 9(b)’s heightened pleading standards. Additionally, the Ninth Circuit Found that plaintiffs sufficiently alleged the forward-looking revenue guidance was made with actual knowledge of falsity because allegations that the misstatements were made by an Impax official with intimate knowledge of Impax’s pricing strategy, models and forecasts demonstrate that the official “had actual knowledge that [his] non-forward looking statements were false and misleading.”