Nguyen v. Endologix, Inc., 2020 WL 3069776 (9th Cir. June 10, 2020)

On June 10, 2020, the Ninth Circuit affirmed the dismissal of a putative securities fraud class action brought against a medical device corporation, Endologix, Inc., and certain of its officers, regarding statements concerning the FDA’s likelihood of premarket approval of the Company’s aneurysm sealing product, Nellix. The Court held that plaintiff failed to allege facts giving rise to a strong inference of scienter (i.e., fraudulent intent) and thus failed to adequately plead a claim for securities fraud.

According to the complaint, Endologix executives allegedly repeatedly assured investors of the likelihood of FDA premarket approval of Nellix within a certain time frame.  The complaint alleged that the executives made these statements despite knowledge of problems with the device migrating (i.e. moving from its initial placement) in European patients and, as a result, defendants knew “there was absolutely no hope” of receiving FDA approval of the drug.  The Company announced that, rather than approve Nellix within the timeframe that Endologix had previously announced, the FDA requested two additional years of follow-up data.  And, eight months later, the Company announced it would no longer seek FDA approval of Nellix.

In affirming the district court’s ruling, the Ninth Circuit held that the complaint had not adequately alleged a strong inference of scienter.  Emphasizing the illogical underpinnings of plaintiff’s claims and the absence of any “insider” trading allegations, the Ninth Circuit asked: “why would defendants promise the market that the FDA would approve Nellix if defendants knew the FDA would eventually figure out that Nellix could not be approved due to . . . device migration problems?”  The appeals court also addressed allegations the complaint attributed to a confidential witness (“CW1”), who was alleged to have previously worked in Endologix’s research and development group.  The appeals court concluded that the CW1 allegations did not give rise to a strong inference of scienter because CW1 left Endologix before the company allegedly received some of the migration data at issue, and CW1’s account lacked particularized details inconsistent with the company’s public statements.  The court also highlighted the fact that Company executives openly addressed on an investor call a study that the complaint alleged had revealed the migration problems to be more severe than previously known.

The Endologix decision underscores that while, in describing a drug’s ultimate path to FDA approval, companies must exercise care around their public statements, pleading scienter in this context carries a heavy burden.  The decision illustrates that and courts will not accept at face value a plaintiff’s implausible assertion that executives made positive statements about the company’s prospects for FDA approval while supposedly knowing such approval was unlikely to be obtained.

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Photo of Anne Johnson Palmer Anne Johnson Palmer

Anne, a partner in the San Francisco office, has extensive experience in complex commercial litigation matters, with a particular emphasis on class action litigation and corporate disputes. Her practice includes front-line representation in consumer and securities class actions, shareholder derivative actions, and M&A…

Anne, a partner in the San Francisco office, has extensive experience in complex commercial litigation matters, with a particular emphasis on class action litigation and corporate disputes. Her practice includes front-line representation in consumer and securities class actions, shareholder derivative actions, and M&A and transaction-related litigation. In addition to representing public companies as well as private equity firms and their portfolio companies in such matters, Anne has led clients through a range of commercial disputes involving unfair competition, antitrust, consumer protection, and business tort claims.

Anne is also a core member of the firm’s data privacy and cybersecurity practice. She has guided clients through forensic investigations and incident response efforts in the wake of large data breaches, and in defending the class action litigation that frequently follows. Anne is part of the firm’s dedicated working group focused on the California Consumer Privacy Act (CCPA). She has counseled clients on how to assess and mitigate the litigation risks introduced by the CCPA, and has presented on the new law at client roundtables that the firm has hosted around the country.

Anne has appeared in federal and state courts in California and a number of other jurisdictions, and in multidistrict litigations. In 2018, Anne was recognized by the Daily Journal in its “Top 40 Under 40” list of leading California attorneys. Anne is a member of the Women’s Forum Steering Committee at Ropes & Gray, and serves as one of the Hiring Partners for the firm’s San Francisco office.

Photo of Nicole Horowitz Nicole Horowitz

Nicole Horowitz is an associate in Ropes & Gray’s Litigation and Enforcement group. She counsels clients in the development and enhancement of their compliance programs, internal investigations, and enforcement matters, with a focus on anti-corruption/anti-bribery and securities issues. Nicole regularly advises private equity…

Nicole Horowitz is an associate in Ropes & Gray’s Litigation and Enforcement group. She counsels clients in the development and enhancement of their compliance programs, internal investigations, and enforcement matters, with a focus on anti-corruption/anti-bribery and securities issues. Nicole regularly advises private equity sponsors, investment advisers, and multinational companies on international risk issues related to transactions and investments.

Her practice also covers a broad range of civil litigation, including securities, antitrust, and complex commercial disputes. Nicole has experience in all stages of litigation, including drafting pleadings and dispositive motions, managing all aspects of discovery, and representing clients at depositions and hearings.

Nicole holds a Masters in Art Business and previously worked for a major art collector. Given her background in the arts and fluency in Spanish, she focuses her pro bono efforts on advising arts organizations, such as the San Francisco Museum of Modern Art (SFMOMA), and obtaining grants of asylum for clients from Central America. Stemming from the relationship with SFMOMA, Nicole completed a secondment in 2018 during which she assisted the museum in establishing its litigation protocols, among other projects.

Emily Smit

Emily Smit is an associate in Ropes & Gray’s Litigation and Enforcement practice group. Prior to joining Ropes & Gray, Emily served as a law clerk to the Honorable Ramon E. Reyes, Jr. of the U.S. District Court for the Eastern District of…

Emily Smit is an associate in Ropes & Gray’s Litigation and Enforcement practice group. Prior to joining Ropes & Gray, Emily served as a law clerk to the Honorable Ramon E. Reyes, Jr. of the U.S. District Court for the Eastern District of New York and a Junior Research Scholar for New York University School of Law Professor Helen Hershkoff.

During law school, Emily was a staff editor for New York University School of Law’s Moot Court Board and served as a research assistant for three professors. She also served as a teaching assistant for Professors Arthur Miller and John Sexton (President Emeritus) in a Civil Procedure course for first year law students.