Northern District Of California Dismisses Putative Securities Class Action For Failure To Adequately Allege Misstatements, Scienter, And Loss Causation

On September 7, 2018, Judge Haywood S. Gilliam, Jr. of the United States District Court for the Northern District of California dismissed a putative class action against Impax Laboratories and certain of its officers under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder alleging that the company made material misstatements regarding (1) the cause of substantial price increases for two generic drugs and (2) trends associated with other drugs. Fleming v. Impax Labs. Inc., No. 16 Civ. 6577 (N.D. Cal. Sept. 7, 2018). The Court held that (a) the allegations regarding drug price increases adequately pleaded a material misstatement, but insufficiently alleged scienter or loss causation, and (b) the allegations regarding trends failed to plead either a material misstatement or scienter. Plaintiff was, however, granted leave to replead.

Plaintiff alleged that the company had misrepresented that price increases for certain drugs were due to natural market forces when, in fact, they were the result of illegal price fixing. In support, plaintiff alleged that on two separate occasions Impax raised prices for the drugs "in perfect lock-step" with a competitor—by more than 700% for the first drug and 116% for the second drug. Slip op. at 5-6. The Court held that plaintiff had set forth in sufficient detail why these drug markets were "structurally susceptible to collusion," including the high level of market concentration, inelastic demand, barriers to entry, and easy information sharing among competitors. The Court also found sufficient at the pleading stage plaintiff's allegations that Impax's explanations for the price increases were internally inconsistent and objectively false with respect to the number of competitors for these drugs. The Court concluded that the omission of collusive activity is material, as reasonable investors would likely view collusive price fixing as altering the "total mix of information available." Id.

The Court held, however, that plaintiff's price-fixing allegations did not adequately plead scienter or loss causation. As to scienter, the Court held that plaintiff failed to plausibly suggest that defendants engaged in unlawful price fixing or approved collusive activity, given that the complaint failed to specifically allege that any individual defendant engaged in collusive...