Potential for More Securities Lawsuits
Stephen B. Thau, a partner with the law firm Morrison & Foerster and co-chair of its Life Sciences Group, and a lawyer representing BayBio in the Matrixx case, told GEN the Supreme Court’s decision upheld existing law on the topic and did not go beyond the immediate case. Thau said companies will need to carefully decide what to disclose based on the specific facts of a given situation, including cautionary language and balanced disclosure.
“Companies sometimes find it frustrating, and I think frankly investors find it a little bit frustrating and confusing, because it leads to a little less filtering sometimes than would be helpful,” Thau said.
That will prove especially challenging, he said, for small companies. “They want to be out in front of the investment community talking about their products. And at the same time, they need to make sure that what they are saying is complete and accurate, and that in hindsight, they won’t get accused of having cherry-picked only the good information and not disclosed the bad information.
“It’s a very challenging dance that companies have to make. You can always be second-guessed in hindsight, and you want to present an accurate and balanced picture of the information.”
Asked if the decision may dissuade smaller companies from going public, Thau noted that disclosure was just one of several challenges they face. “This was an opportunity to make going public more inviting, and the Supreme Court did not move in that direction.”
Instead, the Court paved the way for a new wave of securities lawsuits, as investors who lose money will be more easily able to attribute their losses to information companies failed to disclose, Richard Samp, chief counsel, Litigation Division with the Washington Legal Foundation, told GEN.
“It will be very difficult for any defendant in one of these kinds of cases to win dismissal for the case at the pleading stage,” Samp said. “If a company cannot win dismissal at that stage, very often it is essentially required to settle the case because it’s just too expensive and too risky a proposition to take it all the way to trial. You’ll probably see many more of these kinds of cases.”
Most plaintiffs attorneys, Samp said, will now recognize that they can avoid motions to dismiss their suits. “Therefore, they should be able to enter into a reasonably lucrative settlement.” That will add to companies’ costs through higher insurance premiums, he predicted.
“There probably will be more disclosure as a result of this decision. But I don’t think that increased disclosure will succeed in reducing the number of lawsuits,” Samp said. “No matter how much disclosure they do, the plaintiffs’ lawyers are going to argue that companies should have done more.”
Joseph C. Weinstein, a partner with the law firm Squire Sanders & Dempsey and chair of its securities and shareholder litigation practice, said life sciences companies will have to proceed more cautiously when it comes to decisions whether or not to disclose adverse events.
“I think the decision is going to change the way a lot of pharma companies do business,” Weinstein said. “Until now, there may have been what we now know was over-reliance on not reporting things that weren’t statistically significant. Now there’s got to be more assessment about the information a company has, particularly when it’s making public statements about its business or about the products that may be at issue.”
As the Supreme Court noted, the FDA does not limit the criteria for its decisions to statistically significant data. That led the Court to ask, why should investors?