Securities Litigation Update: First Circuit Holds That Future-Focused Risk Disclosures Are Not Misleading Absent "Grand Canyon"-Level Threat To Company

Published date10 August 2021
Subject MatterCorporate/Commercial Law, Corporate and Company Law, Securities
Law FirmCadwalader, Wickersham & Taft LLP
AuthorMr Jason Halper, Ellen Holloman, Jonathan Watkins and Adam Magid

On July 9, 2021, in Karth v. Keryx Biopharmaceuticals, Inc.,1 the U.S. Court of Appeals for the First Circuit affirmed entry of judgment for the defendants in a putative class action asserting violations of Section 10(b) of the Securities Exchange Act of 1934 based on a pharmaceutical company's alleged understatement of risks associated with its reliance on a single third-party manufacturer for the only drug it produced. In so ruling, the Court invoked a 'Grand Canyon' metaphor for a company's obligation to describe risks as active or imminent, as opposed to theoretical: 'one cannot tell a hiker that a mere ditch lies up ahead, if the speaker knows the hiker is actually approaching the precipice of the Grand Canyon.'2 In this case, however, the Court held that the defendant's risk disclosures'which stated that it 'could experience a loss of revenue' if its supplier failed to perform'were not misleading, given the absence of a 'widely-accepted certainty of failure' at the time. Rather, the situation was in theory 'merely risky,' akin to approaching a 'ditch,' but the risk had not matured to the point where it was active or imminent, i.e., the Grand Canyon.

Karth sets a high bar for claims of securities fraud based on allegedly inadequate disclosures regarding risks associated with uncertain future events, requiring identification of risks as active or imminent only when there is 'near certainty' of 'financial disaster' to the company. The decision also clarifies that, where a company describes risks associated with uncertain future events, 'meaningful cautionary language,' containing 'substantive' not 'boilerplate' information, may insulate it from liability. While application of Karth inevitably will vary on a case-by-case basis, the decision stands as a win for Section 10(b) defendants and a step toward greater clarity on risk-disclosure standards.


This case concerns Keryx Biopharmaceuticals, Inc., a Boston-based pharmaceuticals company that sold only one product, the drug Auryxia, used to treat chronic kidney disease. To produce the drug, Keryx relied on third-party contractors to carry out a two-step process: (1) producing the active pharmaceutical ingredient, and (2) converting the active ingredient into finished tablet form. Keryx used several contractors for step one of the process, but relied on a single source for step two'Norwich Pharmaceuticals, Inc. Keryx began selling Auryxia in December 2014, soon after receiving FDA approval.

The alleged fraud began on May 8, 2013, when Keryx filed a quarterly report with the SEC stating that it 'rel[ied] on third parties to manufacture and analytically test our drug candidate,' and should those third parties fail, 'our business may be harmed.' The company repeated similar disclosures over the next several years, even though it relied only on Norwich for step two of the production process. Over that time, Keryx also experienced intermittent production issues, including multiple instances in which Norwich identified contamination in the active ingredient. Further, a consultant advised the Keryx board of directors that the company's reliance on Norwich posed a risk of a '[s]upply disruption' and '[l]oss of credibility with customers.' Nevertheless, the company successfully met market demand for Auryxia over that period.

On February 26, 2016, Keryx modified its risk disclosures, issuing an annual report stating for the first time that it 'depend[ed] on a single supply source for...

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