Extrinsic Evidence on 12(b)(6) Motion to Dismiss — Good Discussion of Proper/Improper Use of Judicial Notice and Incorporation by Reference (3 Types) — Unfairness of New Matter in Reply in Era of No Oral Argument
Hsu v. Puma Biotechnology, Inc., 2016 U.S. Dist. LEXIS 136527 (C.D. Cal. Sept. 30, 2016):
ORDER DENYING MOTION TO DISMISS
Pension Fund, and others filed this lawsuit under the Securities Exchange Act of 1934 ("Exchange Act") and Securities and Exchange Commission Rule 10b-5. Defendants Puma Biotechnology, Inc., Alan H. Auerbach, and Charles R. Eyler (collectively, "Puma") filed a motion to dismiss the case ("Motion to Dismiss") under Federal Rule of Civil Procedure 9(b) ("Rule 9(b)"), Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)"), and the Private Securities Litigation Reform Act ("PSLRA"). Lead Plaintiff Norfolk County Council, as administering authority of the Norfolk
The Court DENIES the Motion to Dismiss.
In 2013--the most recent year numbers are available--232,924 people in the United States were diagnosed with [*3] breast cancer. Breast Cancer Statistics, Centers for Disease Control and Prevention, http://www.cdc.gov/cancer/breast/statistics/index.htm (last visited September 30, 2016). That year, 41,324 people in the United States died from breast cancer. Id. The disease is the most common cancer among women in our country. See id. And as they often do, statistics fail to give us the right measure of heartbreak. Breast cancer radically reshapes the lives of our mothers and daughters, sons and fathers, brothers and sisters, husbands and wives, friends and family, every day of every year, in every corner of every country. The disease's impact far too often includes (but never ends with) the loss of those who we love most.
Some of the science behind this sickness is relevant here. In particular, this case revolves around statements about a potential treatment for a subset of breast cancers that are called HER2-positive breast cancers. A fourth or fifth of breast cancer patients are HER2-positive: they have cells that make too many copies of a cell surface receptor called human epidermal growth factor receptor 2, or HER2 for short. These HER2 receptors promote cell division and proliferation, which results in HER2-positive breast cancer spreading more [*4] aggressively than other types of breast cancer. There are drugs that combat overexpression of the HER2 gene, but most patients develop resistance to them after a year. So up until now, there generally haven't been any drugs that patients with HER2-positive breast cancer can use after a year on the existing drugs.
Puma hoped to change this. It's a pharmaceutical company that acquires and develops new drugs. Puma has focused its efforts almost entirely on drug PB272, also called neratinib. Neratinib is an "extended adjuvant treatment." "Extended" refers to neratinib's viability as a long-term treatment beyond the year window that existing drugs cover. "Adjuvant therapy" means that neratinib is a therapy given after an initial treatment (such as surgery) to help suppress further formation of cancerous tumors. Neratinib is supposed to irreversibly bind to the HER2 receptor, and eventually slow down or stop out-of-control cell growth.
There was a clinical trial of neratinib called the ExteNET trial. This case concerns Puma's statements about the results of that trial. In short, Norfolk County Council and other investors accuse Puma and its executives of making false or misleading statements [*5] about the ExteNET trial results, and accordingly filed this putative class action.
The alleged misstatements are basically about two things. First, there's the DFS rate. The success of the ExteNET neratinib trial was primarily measured by the percentage of disease free survival ("DFS") among patients taking neratinib versus those taking a placebo. Norfolk County Council says Puma lied to or misled investors and others about the absolute DFS rates coming out of the ExteNET trial and the improvement in DFS between the neratinib group and the placebo group. Second, there are the Kaplan-Meier curves. These are used to identify trends in DFS rates over time--here, for example, between the neratinib group and the placebo group. What's the DFS difference between the two groups after two years? Four years? Eight years? The Kaplan-Meier curves would tell you. A widening difference between the neratinib group and the placebo group over time could suggest that the drug is effective. Norfolk County Council says Puma lied to or misled investors and others about whether that the gap was widening over time, when it was really narrowing.
Finally, there's a money side to medicine too, of course. A few [*6] figures are relevant here. During a public offering, Puma sold $218.5 million in Puma stock. Defendants Auerbach and Eyler--both Puma executives--earned more than $23 million in performance-based compensation. If neratinib makes it to the market, it's expected to cost $6,500 a month, or $78,000 a year.
2. LEGAL STANDARD
A court will grant a motion to dismiss if the complaint does not allege claims upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). A claim to relief must be plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Securities fraud claims like the ones in this case require more. Specifically, they "must satisfy the heightened pleading requirements of both Federal Rule of Civil Procedure 9(b) and the [PSLRA]." In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir. 2012). Rule 9(b) "requires particularized allegations of the circumstances constituting fraud, including identifying the statements at issue and setting forth what is false or misleading . . . about the statement and why the statements were false or misleading [*7] at the time they were made." Id. The PSLRA requires "plaintiffs to state with particularity both the facts constituting the alleged violation and the facts evidencing" that the defendants had the required state of mind. Id.
In analyzing the complaint's sufficiency, a court must "accept all factual allegations in the complaint as true and constru[e] them in the light most favorable to the nonmoving party." Skilstaf, Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1014 (9th Cir. 2012).
3. WHAT (ELSE) SHOULD THE COURT CONSIDER?
The Court has accordingly accepted all the facts alleged in the complaint as true. But there are remaining questions about what else the Court can consider in its analysis of the Motion to Dismiss.
Typically, a court can only consider what's in the complaint when it is deciding a Rule 12(b)(6) motion to dismiss a complaint. See Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). And typically, if a court considers more than what's in the complaint, the motion gets converted into a Federal Rule of Civil Procedure 56 ("Rule 56") motion for summary judgment. See Fed. R. Civ. P. 12(d). This conversion can muddy the analysis for clients, counsel, and courts alike, by implicating rules and requirements that don't otherwise apply to motions to dismiss. See, e.g., L.R. 56-1 (requiring that a party moving for summary judgment file a separate "Statement of Uncontroverted Facts and Conclusions [*8] of Law"); see also Kramer v. Time Warner Inc., 937 F.2d 767, 773 (2d Cir. 1991) ("If a district court wishes to consider additional material, Rule 12(b) requires it to treat the motion as one for summary judgment under Rule 56, giving the party opposing the motion notice and an opportunity to conduct necessary discovery and to submit pertinent material.").
But there are a couple of doctrines that allow a court to consider material outside of the complaint without turning a Rule 12(b)(6) motion to dismiss into a Rule 56 motion for summary judgment: judicial notice and incorporation by reference. United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003); see also In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d at 876 (holding that a court deciding a motion to dismiss for failure to state a claim is "generally limited to the face of the complaint, materials incorporated into the complaint by reference, and matters of which [the court] may take judicial notice").
3.1 Judicial Notice
First, judicial notice. Judicial notice is an explicitly limited doctrine that's supposed to be used to allow a court to consider "a fact that is not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201. For example, a court might take judicial [*9] notice that January 4, 1986, was a Saturday, or that a party filed a brief opposing a motion in a state court case, or that a particular document was recorded with the county recorder's office. See Lee, 250 F.3d at 690 (discussing judicial notice of undisputed matters of public record); see also Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 592 n.11 (1993) (discussing judicial notice of "firmly established" scientific laws); Barnes v. Indep. Auto. Dealers Ass'n of Cal. Health & Welfare Benefit Plan, 64 F.3d 1389, 1395 (9th Cir. 1995) (discussing judicial notice of "[w]ell-known medical facts").
Judicial notice functions like an evidentiary exception in two different ways. First, judicial notice can be a substitute for the presentation of evidence. As a general rule, a party asserting a fact bears the burden of proving that fact with evidence. But judicial notice lets a party skip this production (and the accompanying authentication) for certain facts. See Castillo-Villagra v. INS, 972 F.2d 1017, 1026 (9th Cir. 1992) ("Notice is a way to establish the existence of facts without evidence."). Second, as noted, judicial notice can be a workaround for the exclusion of evidence. As a general rule, parties can't present (and courts can't consider) evidence outside of the complaint when deciding a Rule 12(b)(6) motion to dismiss. See Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1989). But "[f]acts subject to judicial notice may be considered on a motion to dismiss." Maiman v. Talbott, No. SACV 09-0012 AG (ANx), 2011 WL 13065750, at *2 (C.D. Cal. Aug. 29, 2011) (citing Mullis v. U.S. Bankr. Ct., 828 F.2d 1385 (9th Cir. 1987)).
Unfortunately, [*10] too many attorneys don't understand judicial notice. Some take judicial notice literally, as a command. "Hey! Judge! Look!" They use judicial notice to get a court's attention like a businessman who's running late and trying to whistle down a taxi on a crowded downtown street. But courts aren't cabbies, and judicial notice isn't appropriately used this way. Other attorneys ask courts to judicially notice things that don't need to be judicially noticed, like a controlling piece of law. Or attorneys ask courts to judicially notice things that aren't appropriate for judicial notice, like emails between the parties' counsel. All of these misuses misconstrue the narrow doctrine.
3.2 Incorporation by Reference
There's also the doctrine of incorporation by reference. As this Court has previously noted, "[a]lthough often conflated, the doctrine of incorporation by reference is distinct from judicial notice." Gammel v. Hewlett Packard Co., 905 F. Supp. 2d 1052, 1061 (C.D. Cal. 2012). Further confusing things, different courts and counsel use "incorporation by reference" to encompass at least three different approaches to extrinsic evidence.
In its most limited and literal form, incorporation by reference allows a court deciding a Rule 12(b)(6) motion to dismiss to consider materials attached [*11] to the complaint that are referenced in the complaint. Hal Roach Studios, 896 F.2d at 1555 n.19. This application of the doctrine echoes Federal Rule of Civil Procedure 10, which states in relevant part that "[a] copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes." Fed. R. Civ. P. 10(c).
Incorporation by reference has also been used to allow a court deciding a Rule 12(b)(6) motion to dismiss to consider a document that isn't attached to the complaint if the complaint "necessarily relies" on it and "(1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the copy attached to the 12(b)(6) motion." Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006). The Ninth Circuit has suggested the complaint must refer to the document "extensively." Ritchie, 342 F.3d at 908.
In its most expansive form, incorporation by reference has been used to get a court considering a Rule 12(b)(6) motion to dismiss to consider materials that are neither attached to nor mentioned in the complaint. Specifically, the Ninth Circuit has
extended the "incorporation by reference" doctrine to situations in which the plaintiff's claim depends on the contents of a document, the defendant attaches the document to its motion to dismiss, and the parties do not dispute the authenticity [*12] of the document, even though the plaintiff does not explicitly allege the contents of that document in the complaint.
Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005). In this way, the incorporation by reference doctrine has become the incorporation without reference doctrine.
3.3 The Impact on Access to Justice
This last interpretation of the incorporation by reference doctrine and the incorrect use of judicial notice merit more discussion. Although these are two distinct doctrines with different legal requirements, they both can be used to get a court to consider extrinsic evidence on a Rule 12(b)(6) motion to dismiss. For a plaintiff, this consideration can mean having the courthouse doors slammed shut, such that there's no discovery, no further motion practice, no cross-examination, and no jury trial. For a defendant, this consideration can mean avoiding lengthy litigation, arduous motion practice, and expensive, expansive discovery battles.
This practical reality has led to inappropriate efforts by defendants to expand the two doctrines. These efforts are distinct from the other inappropriate misuses of the doctrines already identified. Nowadays, it seems more and more common to come across Rule 12(b)(6) motions to dismiss filed with hundreds of pages of [*13] attachments, authenticated through attorney declarations. These declarations will be coupled with a request for judicial notice. That judicial notice will often conflate judicial notice and incorporation by reference. Too often, these mountainous motions make arguments more appropriate for a motion for summary judgment or some other later stage of the case. Nonetheless, with little to lose, too many defense attorneys are tempted by the puncher's chance offered by such a motion. At worst, they lose a generally inexpensive motion. But at best, they can knock their opponent out cold, right at the beginning of round one. In this way, efforts to expand courts' consideration of extrinsic evidence at the motion to dismiss stage are consistent with other developments in the law that diminish the ability of wronged plaintiffs to get their constitutionally-protected day in court. See Iqbal, 556 U.S. 662; Twombly, 550 U.S. 544. Such trends are particularly troubling in the common situation of asymmetry, where a defendant starts off with sole possession of the information about the alleged wrongdoing.
3.4 The Doctrines Applied Here
So how do these two doctrines apply here? Puma filed two supporting requests for judicial notice--one with [*14] its Motion to Dismiss, and one with its reply. Norfolk County Council opposed the request for judicial notice filed with the Motion to Dismiss, and tried unsuccessfully to get permission to file a surreply opposing the request for judicial notice filed with the reply. There are also incorporation by reference arguments in some of the requests for judicial notice, reflecting the common conflation of the two doctrines by counsel (and sometimes courts). The parties largely seem to agree that any documents the Court considers under either doctrine should only be considered for their existence, and not for the truth of their contents. See Gammel, 905 F. Supp. 2d at 1061.
There are fourteen or fifteen disputed exhibits. Puma asks the Court to consider (one way or another) twenty-eight exhibits as part of its analysis of the Motion to Dismiss. These exhibits consist of SEC filings, transcripts of conference calls, a press release, and a set of slides from a presentation. To its credit, Norfolk County Council only disputes some of the exhibits--specifically, exhibits 14 and 16 through 28. Norfolk County Council also objects to the incompleteness of exhibit 15, but not in any meaningful way. Accordingly, the Court will now [*15] consider documents 1 through 13 and 15, without determining whether these documents are appropriate for judicial notice or whether they fall within the doctrine of incorporation by reference.
3.4.1 Should the Court Consider Exhibit 14? Yes, Sort Of.
Exhibit 14 is a set of slides. Puma asks the Court to consider these under the incorporation by reference doctrine, and in the alternative, through judicial notice. Puma says the complaint "references certain materials available on the American Society of Clinical Oncology's ("ASCO") website," including these slides. Norfolk County Council argues that Puma included the wrong set of slides, and attaches what it sees as the right set of slides.
The Court will consider Norfolk County Council's version of Exhibit 14, as Puma asks the Court to do, without determining whether these slides fall within the doctrine of incorporation by reference or whether they are appropriate for judicial notice.
3.4.2 Should the Court Consider Exhibits 16, 17, and 19 through 26? No.
Exhibits 16, 17, and 19 through 26 are market analyst reports. Puma wants the Court to consider these documents through judicial notice "to demonstrate the information publicly available [*16] and known to the market." Norfolk County Council argues that Puma hasn't shown that these reports were publically available and that the reports reflect an inherent bias favoring Puma.
The Court agrees with Norfolk County Council that Puma hasn't adequately shown that Exhibits 16, 17, and 19 through 26 should be judicially noticed here. Puma argues that the complaint itself refers to analyst reports, but it doesn't show that the complaint refers to the same reports Puma wants the Court to consider. Puma also cites several cases supporting its proposition that "[m]arket analyst reports . . . are frequently subject to judicial notice" and that judicial notice is appropriate here. But some of these cases don't clarify the types of documents they address. See, e.g., In re Impact Mortgage Holdings, Inc. Sec. Litig., 554 F. Supp. 2d 1083, 1088 (C.D. Cal. 2008) ("The Court takes judicial notice of the 22 documents submitted as exhibits to Defendants' Request for Judicial Notice ('RJN').") Some of these cases discuss different sorts of documents. See, e.g., In re Nuvelo, Inc. Sec. Litig., 668 F. Supp. 2d 1217, 1219 (N.D. Cal. 2009) (discussing a journal article and FDA documents); Constr. Laborers Pension Trust of Greater St. Louis v. Neurocrine Biosciences, Inc., No. 07-CV-1111 IEG RBB, 2008 WL 2053733, at *6 (S.D. Cal. May 13, 2008) ("[D]efendants request judicial notice of several FDA documents."). Some of these cases involve undisputed [*17] requests for judicial notice. See, e.g., Primo v. Pac. Biosciences of Cal., Inc., 940 F. Supp. 2d 1105, 1115 n.1 (N.D. Cal. 2013) ("Plaintiffs do not oppose Defendants' requests. Accordingly, the Court GRANTS Defendants' request for judicial notice."). Some of these cases discuss analyst reports objected to on different grounds. See, e.g., In re Century Aluminum Co. Sec. Litig., 749 F. Supp. 2d 964, 980 (N.D. Cal. 2010) ("Plaintiffs object that the . . . analyst reports . . . are hearsay.") All of these cases are meaningfully distinguishable.
3.4.3 Should the Court Consider Exhibit 18? Yes, Sort Of.
Exhibit 18 is a transcript of a conference call. Like the market analyst reports, Puma wants the Court to consider this transcript through judicial notice. Puma offers the transcript "to demonstrate the information publicly available and known to the market." Perhaps conflating judicial notice with the doctrine of incorporation by reference, Norfolk County Council argues that the transcript wasn't referenced in the complaint. And perhaps questioning the accuracy of the transcript, Norfolk County Council argues that the transcript lacks authentication. It compares the transcript to other transcripts that it didn't object to. Puma responded by providing a more properly authenticated transcript.
The Court will consider the more properly authenticated version [*18] of Exhibit 18 only because the parties appear to agree that the Court should consider this version of the transcript. This is not a determination that this transcript is appropriate for judicial notice. Puma appears to have addressed most, and maybe all, of Norfolk County Council's concerns. It is unclear why Puma couldn't have done this from the get-go.
3.4.4 Should the Court Consider Exhibit 27? No.
Exhibit 27 is a printout from the website of Herceptin, the name-brand version of another drug called trastuzumab that's used to treat HER2-positive cancer in the first year after the initial treatment. Puma again asks the Court to consider this document through judicial notice. Puma argues that Norfolk County Council "relies on data from four clinical trials for the breast cancer treatment Herceptin, but does not provide full context for those data." Accordingly, Puma argues, the Court should take judicial notice of some "publicly available figures" from the Herceptin website. Norfolk County Council argues (and Puma doesn't seem to dispute) that the webpages Puma provided were captured in November 2015, while the relevant time period for the claims here is from roughly July 2014 through [*19] May 2015. Norfolk County Council also argues that being publicly available online doesn't mean a document is a "source . . . whose accuracy cannot be reasonably questioned," as Puma argues this document is.
The Court agrees with Norfolk County Council that Puma hasn't adequately shown that Exhibit 27 should be judicially noticed here. There are a few problems with Puma's arguments to the contrary. First, Puma appears to improperly push the burden on a request for judicial notice onto the party opposing the request. Specifically, Puma notes that "Plaintiff cites no authority for the argument that the accuracy of the Herceptin website is questionable just because Genentech uses the website to sell Herceptin." Second, Puma argues that the Herceptin website has a link to FDA archives, and that those FDA archives have been up since at least 2010 and can't be reasonably questioned. Maybe. But Puma isn't asking the Court to take judicial notice of the FDA archives.
Or is it? Puma says, "[s]hould Plaintiff continue to dispute the accuracy of Exhibit 27 because its source (the Herceptin website) is questionable, Defendants submit the identical information reflected in the FDA archive as Exhibit 29 to [*20] this Reply." This raises a fundamental question of fairness. Moving parties typically get the last written word on motions, through a reply brief. To make things fair then, moving parties can't save arguments or requests to spring on an opponent for the first time in a reply brief, where the opponent has no chance to reply in writing (and given the frequency with which courts allow oral argument these days, often no chance period). Puma's request for the Court to take judicial notice of the FDA archives, presented for the first time in its reply brief, is inappropriate, and accordingly the Court won't address the merits of the issue. That's particularly true because, again, it's not clear why Puma couldn't have included this request in its initial motion. See Fed. R. Evid. 201(c)(2) (emphasis added) ("The court . . . must take judicial notice if a party requests it and the court is supplied with the necessary information.")
3.4.5 Should the Court Consider Exhibit 28? No.
Exhibit 28 is the "Policies and Exceptions" page from a website maintained by ASCO. Puma again asks the Court to consider this document through judicial notice. But Puma seems to conflate that legal principle with the doctrine of incorporation [*21] by reference. Puma says Norfolk County Council "relies on materials submitted to ASCO, but omits the policies governing the submission of such documents." So, Puma says, the Court should take judicial notice of the ASCO Confidentiality Policy, which it pulled in November 2015. As with the Herceptin webpage, Norfolk County Council argues (and Puma doesn't seem to dispute) that the webpages Puma provided were captured in November 2015, while the relevant time period for the claims here is from roughly July 2014 through May 2015. Norfolk County Council also has some objections about how Puma uses this document in its Motion to Dismiss.
The Court agrees with Norfolk County Council that Puma hasn't adequately shown that Exhibit 28 should be judicially noticed here. Puma responds to Norfolk County Council's arguments by providing information from the Internet Archive's Wayback Machine, an online internet page archive, showing the November 2015 page and the relevant page are "substantively identical." But even if the Court accepted this as a sufficient showing to take judicial notice, Puma is again providing this extrinsic evidence to support its extrinsic evidence for the first time in a [*22] reply brief.
3.4.6 The Requests for Judicial Notice Generally
Applying the law and the Court's best judgment, the Court has tried to justly resolve the disputes over the requests for judicial notice. But the Court can't help but note that the disputes largely reflect lots of effort with little effect. The Court's ultimate ruling on the Motion to Dismiss wouldn't change if its rulings on these requests for judicial notice were different, given that it generally had to take all well-plead factual allegations in the complaint as true.
The requests to consider extrinsic evidence weren't inherently inappropriate, as extrinsic evidence does sometimes come in on securities fraud cases like this one. But a dispute over fourteen or fifteen of twenty-eight exhibits may have been unnecessary. A reply brief supporting a request for judicial notice may be unnecessary. An emergency application to file a surreply to that reply brief may be unnecessary. And it's not clear what happened during the meet-and-confer process required under Local Rule 7-3. Puma should have been able to avoid filing a reply laden with new material, and Norfolk County Council should have been able to avoid filing an emergency application [*23] to file a surreply responding to that reply, if the parties had meaningfully discussed these requests. It's not clear who's at fault--it's possible Puma didn't adequately describe its planned requests, it's possible Norfolk County Council held back its objections, and it's possible neither side wanted to focus on requests for judicial notice instead of the Motion to Dismiss itself. It's also not particularly important now. The inefficiencies created by whatever happened here are small in the scope of civil litigation. But the Court notes them to encourage counsel to try to avoid them moving forward.
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