Introduction

The case of Gen. Partner Glenn Tongue, Deerhaven Capital Management v. Sanofi represents a significant examination of securities litigation, particularly concerning the standards for materially misleading statements of opinion. Decided by the United States Court of Appeals for the Second Circuit on March 4, 2016, the case addresses allegations that Sanofi and its executives provided false or misleading statements about Lemtrada, a breakthrough drug for multiple sclerosis (MS), thereby inflating the value of contingent value rights (CVRs) held by investors.

The plaintiffs, including investors such as Deerhaven Capital Management and John Solak, contended that Sanofi failed to disclose critical FDA feedback regarding the methodology of Lemtrada's clinical trials. Specifically, they alleged that the use of single-blind studies, rather than the preferred double-blind studies, was omitted, leading to inflated projections of FDA approval and, consequently, the artificial inflation of CVRs.

Summary of the Judgment

The Second Circuit affirmed the district court's decision to dismiss the plaintiffs' claims under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. The court agreed with the district court that the plaintiffs did not adequately demonstrate that Sanofi's statements were materially false or misleading. Additionally, the court held that the plaintiffs failed to establish scienter—the required intent or knowledge of wrongdoing—for their claims under the Securities Exchange Act of 1934.

Importantly, the court addressed the impact of the Supreme Court's decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, which refined the standard for what constitutes a materially misleading statement of opinion. Even after considering Omnicare, the court concluded that the plaintiffs had not met the heightened standard required to establish that Sanofi's statements of opinion were misleading.

Analysis

Precedents Cited

The judgment heavily relied on precedents such as FAIT v. REGIONS FINANCIAL CORP. and Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. In Fait, the court established that for statements of opinion to be actionable, they must be objectively false and disbelieved by the issuer at the time they were made. However, Omnicare refined this standard by introducing the necessity for plaintiffs to identify particular and material facts that the issuer omitted, which would render the opinion misleading to a reasonable investor.

Furthermore, the case referenced Matrixx Initiatives, Inc. v. Siracusano for materiality considerations and Kleinman v. Elan Corp. for scienter requirements, reinforcing the necessity for plaintiffs to demonstrate not only false statements but also the intent or knowledge of their falsity.

Legal Reasoning

The court's legal reasoning centered on whether Sanofi's statements of opinion about Lemtrada's FDA approval and clinical trial results were materially misleading. Applying the Omnicare standard, the court examined if the omission of FDA's concerns about single-blind studies conflicted with the optimistic projections made by Sanofi.

The court concluded that there was no inherent conflict between Sanofi's positive statements and the FDA's feedback, as Sanofi had indicated that the deficiencies could be overcome if the trial outcomes were exceptionally positive. Additionally, the court recognized that sophisticated investors, aware of the pharmaceutical industry's norms and the FDA's preferences, would not be misled by Sanofi's forward-looking statements despite the omitted FDA concerns.

Moreover, the plaintiffs failed to demonstrate scienter, as they did not provide sufficient evidence that Sanofi knowingly made false statements or omitted material facts with fraudulent intent. The court also upheld the protection of forward-looking statements under the Private Securities Litigation Reform Act (PSLRA), as Sanofi's statements were accompanied by sufficient cautionary language.

Impact

This judgment reinforces the stringent standards plaintiffs must meet to succeed in securities fraud claims involving statements of opinion. The decision underscores the significance of the Omnicare standard, emphasizing that only omissions of particular and material facts that render an opinion misleading to a reasonable investor can form the basis of actionable claims.

Consequently, companies issuing forward-looking statements can maintain a degree of protection against securities fraud litigation, provided they frame their opinions within a context that aligns with industry practices and does not omit facts that would significantly alter the investor's understanding. This precedent serves as a critical guideline for both plaintiffs and defendants in future securities litigation, particularly in complex industries like pharmaceuticals.

Complex Concepts Simplified

Securities Exchange Act of 1934

A key piece of legislation governing securities transactions in the United States, aiming to protect investors by ensuring transparency and fairness in the securities markets.

Scienter

A legal term referring to the intent or knowledge of wrongdoing. In securities fraud cases, plaintiffs must demonstrate that the defendant acted with scienter to establish liability.

Material Fact

Information that a reasonable investor would consider important in making an investment decision. The omission or misstatement of a material fact can render a statement misleading.

Forward-Looking Statements

Statements about future events or performance that involve risks and uncertainties. Under the PSLRA, these statements are protected from liability if accompanied by proper cautionary language.

Contingent Value Rights (CVRs)

Financial instruments issued to investors that provide additional payments if certain future events, such as FDA drug approvals, occur.

Omnicare Standard

A legal standard established by the Supreme Court which requires plaintiffs to identify specific, material facts omitted by the issuer that would render an opinion statement misleading to a reasonable investor.

Conclusion

The Second Circuit's affirmation in Gen. Partner Glenn Tongue, Deerhaven Capital Management v. Sanofi delineates the high threshold plaintiffs must meet to prove that statements of opinion are materially misleading under securities law. By reinforcing the standards set forth in Omnicare and emphasizing the necessity of demonstrating scienter, the court has clarified the protections afforded to issuers issuing forward-looking statements. This decision highlights the balance between investor protection and the issuers' ability to communicate strategic outlooks without undue litigation risks, thereby shaping the landscape of future securities fraud litigation.