United States District Court, N.D. California
ORDER DENYING MOTION TO DISMISS
CHARLES R. BREYER UNITED STATES DISTRICT JUDGE
case arises out of government investigations of
anticompetitive agreements in the generic pharmaceutical
industry. The resulting complaint, brought by forty-nine
states' Attorneys General (the “AG
complaint”), alleges that the generic drug industry is
rife with price-fixing and market-allocation agreements. The
scandal has already resulted in congressional attention,
multiple guilty pleas, and a plethora of antitrust and
Securities Act lawsuits against generic drug manufacturers.
Corporation (“McKesson”) is (mostly) not a
generic drug manufacturer, but a generic drug wholesaler.
Nonetheless, the plaintiffs in this putative class action
(collectively, “Evanston”) allege that McKesson
must have participated in illegal anticompetitive conduct. At
the very least, Evanston alleges, McKesson was aware of and
profited from the illegal agreements. Evanston claims that by
failing to disclose the conspiracy McKesson and its
executives violated the Securities Exchange Act of 1934.
McKesson has moved to dismiss the complaint for failure to
state a claim. Because the Court finds that Evanston has
adequately plead the required elements of its Rule 10(b)
claim, including falsity, scienter, and loss causation, the
motion to dismiss is denied.
is a pharmaceutical wholesaler. Compl. ¶ 2 (dkt. 43).
Most of its business involves buying drugs from manufacturers
and reselling them to pharmacies and hospitals. Id.
However, one of McKesson's subsidiaries, NorthStar Rx
(“NorthStar”), does manufacture generic drugs.
last several years, evidence has come to light of widespread
anti-competitive conduct in the generic drug market.
Id. ¶ 5. Investigations by Congress, the
Department of Justice, and forty-nine state Attorneys General
have led to multiple guilty pleas and a complaint alleging a
wide-ranging price-fixing conspiracy. Id. ¶ 5,
10. The AG complaint alleges that generic drug manufacturers
agreed to divide market share rather than compete on price.
Id. ¶ 5. It does not name McKesson as a
alleges McKesson, its former Chief Executive Officer John
Hammergren, and former Chief Financial Officer James Beer,
violated Section 10(b) of the Exchange Act and Rule 10b-5 by
concealing the collusive activity. Id. ¶¶
215-24. It also charges the defendants with control person
liability under Section 20(a), and Hammergren with violating
Section 20A by selling stock while “in possession of
material non-public information.” Id.
Consolidated Amended Complaint (“CAC”) alleges
that McKesson was a party to unlawful price-fixing
agreements. McKesson ostensibly participated in
anticompetitive conduct both in its role as a wholesaler and
through NorthStar. The CAC seizes on the AG complaint's
allegations that generic drug manufacturers Heritage
Pharmaceuticals, Inc. (“Heritage”), Mayne, and
Milan conspired to divide the market for Doxy DR. Because
Heritage and Mayne supplied Doxy DR to McKesson, the CAC
reasons McKesson must also have been a party to this
agreement. Id. ¶¶ 74-77. It also alleges
there is direct evidence that NorthStar colluded to fix the
price of Leflunomide, and circumstantial evidence, including
parallel conduct and various “plus” factors, that
it conspired to fix the price of other drugs. Id.
to the CAC, McKesson benefited from the conspiracy both by
charging supracompetitive prices for NorthStar's drugs,
and because its wholesale business was more profitable when
drug prices were high. Id. ¶¶ 57-62.
Evanston argues that even if McKesson did not directly
participate in anticompetitive conduct, it made false and
misleading statements covering up the manufacturer's
illegal agreements. Opp'n at 16 (dkt. 53). The alleged
false and misleading statements fall into six categories:
claims that generic drug price inflation was driven by
“supply disruption, ” statements touting
McKesson's role as a negotiator on behalf of its
purchasers, claims that the generic drug market remained
competitive, descriptions of NorthStar as a “growth
driver, ” announcements of McKesson's financial
results, and statements that McKesson's earnings had been
derisked. See, e.g., id. at ¶¶
138, 155, 196.
further alleges that Hammergren and Beer made the challenged
statements knowing they were false, or with deliberate
recklessness. Opp'n at 24-30. Evidence of the
defendant's scienter includes statements touting their
knowledge of generic drug pricing and compensation
arrangements tying Hammergren and Beer's stock and cash
awards to McKesson's financial performance. See,
e.g., Compl. ¶¶ 125-26, 185-92. Evanston also
points to the executives' positions at McKesson, the
magnitude of the alleged scheme, and the governmental
investigations. See Opp'n at 28-29.
generic drug prices dropped, and with them, McKesson's
earnings. This development was disclosed in a series of three
financial announcements from October 27, 2016, to January 25,
2017. Compl. ¶¶ 196-98, 200. In the same time
period, two articles revealing the government investigations
were published in Bloomberg and Reuters.
Id. ¶ 199. Each of the four disclosures was
followed by a significant decrease in McKesson's stock
price. Id. at 196-200.
to Federal Rule of Civil Procedure 12(b)(6), a complaint may
be dismissed for failure to state a claim upon which relief
may be granted. Dismissal may be based on either “the
lack of a cognizable legal theory or the absence of
sufficient facts alleged under a cognizable legal
theory.” Godecke v. Kinetic Concepts, Inc.,
937 F.3d 1201, 1208 (9th Cir. 2019). A complaint must plead
“enough facts to state a claim to relief that is
plausible on its face.” Ashcroft v. Iqbal, 556
U.S. 662, 697 (2009) (citing Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible
“when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant
is liable for the misconduct alleged.” Id.
When evaluating a motion to dismiss, the Court “must
presume all factual allegations of the complaint to be true
and draw all reasonable inferences in favor of the nonmoving
party.” Usher v. City of Los Angeles, 828 F.2d
556, 561 (9th Cir. 1987). “Courts must consider the
complaint in its entirety, as well as other sources courts
ordinarily examine when ruling on Rule 12(b)(6) motions to
dismiss, in particular, documents incorporated into the
complaint by reference, and matters of which a court may take
judicial notice.” Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 322 (2007).
for fraud must meet the pleading standard of Federal Rule of
Civil Procedure 9(b), which requires a party “alleging
fraud or mistake [to] state with particularity the
circumstances constituting fraud or mistake.”
Fed.R.Civ.P. 9(b). Rule 9(b) “requires . . . an account
of the time, place, and specific content of the false
representations as well as the identities of the parties to
the misrepresentations.” Swartz v. KPMG LLP,
476 F.3d 756, 764 (9th Cir. 2007) (internal quotation marks
omitted). This standard “applies to all elements of a
securities fraud action, including loss causation.”
Or. Public Emps. Ret. Fund v. Apollo Grp. Inc., 774
F.3d 598, 605 (9th Cir. 2014).
fraud claims must also meet the heightened pleading
requirements of the Private Securities Litigation Reform Act
(“PSLRA”), which states that the complaint
“shall specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief
is formed.” 15 U.S.C. § 78u-4(b)(1);
Tellabs, 551 U.S. at 321. The Court must dismiss any
complaint that does not meet these requirements. See
15 U.S.C. § 78u-4(b)(3)(A).
PSLRA also requires plaintiffs to state with particularity
facts giving rise to a strong inference of the
defendants' scienter. See 15 U.S.C. §
78u-4(b)(2). “[A]n inference of scienter must be more
than merely plausible or reasonable-it must be cogent and at
least as compelling as any opposing inference of
nonfraudulent intent.” Tellabs, 551 U.S. at
314. Therefore, a court “must consider plausible,
nonculpable explanations for the defendant's
conduct.” Id. at 324. “Where pleadings
are not sufficiently particularized or where, taken as a
whole, they do not raise a ‘strong inference' that
misleading statements were knowingly or deliberate
recklessness [sic] made to investors, a private securities
fraud complaint is properly dismissed under Rule
12(b)(6).” Ronconi v. Larkin, 253 F.3d 423,
429 (9th Cir. 2001).
Judicial Notice and Incorporation by Reference
has requested judicial notice of twenty-five documents
(Exhibits 1-25) cited in its motion to dismiss. RJN (dkt.
50). It also argues that the Court may consider most of these
materials “under the doctrine of incorporation by
reference.” RJN at 1. Evanston does not oppose
McKesson's request, but maintains that the documents
“cannot be noticed for the truth of the matters
asserted therein.” Opp'n at 5 n.5.
reviewing a motion to dismiss, a district court is usually
limited to the facts stated in the complaint. Arpin v.
Santa Clara Valley Transp. Agency, 261 F.3d 912, 925
(9th Cir. 2001). “A court may, however, consider
certain materials-documents attached to the complaint,
documents incorporated by reference in the complaint, or
matters of judicial notice-without converting the motion to
dismiss into a motion for summary judgment.” United
States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).
may take judicial notice of facts that are “not subject
to reasonable dispute” because they (1) are
“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(b).
Matters of public record may be judicially noticed, but
disputed facts contained in those records may not. Khoja
v. Orexigen Therapeutics, Inc., 899 F.3d 988, 999 (9th
doctrine of incorporation-by-reference “treats certain
documents as though they are part of the complaint.”
Id. at 1002. Documents are subject to incorporation
by reference if the plaintiff refers to them
“extensively” or they form the basis of the
complaint. Id. Unlike documents subject to judicial
notice, courts may properly assume the truth of documents
incorporated by reference. Id. at 1003. But
“it is improper to assume the truth of an incorporated
document if such assumptions only serve to dispute facts
stated in a well-pleaded complaint.” Id.
1-13 and 15-17 are transcripts of earnings calls and
corporate presentations that the CAC alleges contained
materially false statements or corrective disclosures. RJN at
1-3; see also, generally, Compl. Because these
documents form the basis of Evanston's complaint, they
are subject to incorporation by reference. See
Khoja, 899 F.3d at 1005 (documents containing alleged
misrepresentations and corrective disclosures form the basis
of a Section 10(b) and are subject to incorporation by
reference). Similarly, Exhibits 18 and 19 are news articles
the CAC identifies as corrective disclosures. RJN at 3,
Compl. ¶ 199. They are also subject to incorporation by
reference. Khoja, 899 F.3d at 1005.
20-23 are excerpts from McKesson's FY 2013, 2014, 2015
and 2016 Proxy Statements. RJN at 4. The CAC cites the proxy
statements as evidence that McKesson's compensation
arrangements created a motive for its executives to commit
fraud. See Compl. ¶¶ 185-92. This
discussion spans three pages and conveys numerous facts
gleaned from the proxy statements about Hammergren and
Beer's compensation. Id. The Ninth Circuit has
held that a document was “extensively” discussed,
even though the complaint quoted it only one, because the
quote was a “page and a half” long and
“convey[ed] numerous facts.” Khoja, 899
F.3d at 1004. The proxy statements are extensively referenced
in the CAC and subject to incorporation. Similarly, Exhibit
25, the AG complaint, is cited throughout the CAC. See
generally Compl. Additionally, an eighteen-page excerpt
is attached to the CAC as Exhibit A. Compl Ex. A. The AG
complaint is also subject to incorporation by reference.
contrast, Exhibits 14 (McKesson's July 27, 2017 earnings
call for Q1 2017) and 24 (Hammergren's SEC Forms 4 filed
with the SEC between October 24, 2013 and January 25, 2017),
are not cited in the CAC. See RJN at 3-4. These
documents not subject to incorporation by reference. See
Khoja, 899 F.3d at 1006 (SEC filings that were not
extensively referenced in the complaint and “merely
demonstrated that there was some financial incentive”
to commit fraud not subject to incorporation by reference).
Nonetheless, both the transcript of the earnings call and the
SEC filings are publicly-filed documents whose accuracy
cannot reasonably be questioned and are therefore subject to
judicial notice. Wochos v. Tesla, Inc., No.
17-cv-05828-CRB, 2019 WL 1332395, at *2 (N.D. Cal. March 25,
parties dispute whether the CAC may rely on allegations in
the AG Complaint. McKesson cites a line of cases holding that
“paragraphs in a complaint that are either based on, or
rely on, complaints in other actions that have been
dismissed, settled, or otherwise not resolved are, as a
matter of law, immaterial within the meaning of Fed.R.Civ.P.
12(f).” Mot. at 7 n.3 (citing In re Countrywide
Fin. Corp. Mortg.-Backed Sec. Litig., 934 F.Supp.2d
1219, 1226 (C.D. Cal. 2013)). Evanston responds that several
other courts have considered allegations from the AG
Complaint when ruling on motions to dismiss. Opp'n at 9
n.7. Because the Ninth Circuit has relied on comparable
documents when deciding motions to dismiss Section 10(b) and
antitrust claims, the Court holds it is appropriate to do so
here. See In re VeriFone Holdings, Inc. Sec. Litig.,
704 F.3d 694, 706-07 (9th Cir. 2012) (relying on allegations
in an SEC complaint incorporated into the plaintiff's
pleadings); In re Musical Instruments and Equip.
Antitrust Litig., 798 F.3d 1186, 1199 (9th Cir. 2015)
(relying on allegations in an FTC complaint and settlement).
state a claim for securities fraud under Section 10(b) of the
Securities Exchange Act, a plaintiff must plead: (1) a
misrepresentation or the use or employment of any
manipulative or deceptive device or contrivance; (2)
scienter; (3) a connection with the purchase or sale of a
security; (4) reliance; (5) economic loss; and (6) loss
causation. Stoneridge Inv. Partners, LLC v.
Scientific- Atlanta, Inc., 552 U.S. 148, 157
(2008). “SEC Rule 10b-5 implements [Section] 10(b) by
declaring it unlawful: ‘(a) To employ any device,
scheme, or artifice to defraud, (b) To make any untrue
statement of a material fact or to omit to state a material
fact necessary in order to make the statements . . . not
misleading, or (c) To engage in any act, practice, or course
of business which operates or would operate as a fraud or
deceit upon any person, in connection with the purchase or
sale of any security.'” Tellabs, 551 U.S.
at 318 (quoting 17 CFR § 240.10b-5). McKesson moves to
dismiss Evanston's Section 10(b) claim on the grounds
that the CAC fails to adequately plead a misrepresentation,
scienter, or loss causation. Mot. at 12.
False or Misleading Statements
prevail on a Section 10(b) claim, a plaintiff must show that
the defendant made a statement that was “ misleading as
to a material fact.” Basic Inc. v. Levinson,
485 U.S. 224, 238 (1988) (emphasis omitted). The materiality
requirement is satisfied when there is “a substantial
likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having
significantly altered the ‘total mix' of
information made available.” Id. at 231-232.
Moreover, “[Section] 10(b) and Rule 10b-5(b) do not
create an affirmative duty to disclose any and all material
information.” Matrixx Initiatives, Inc. v.
Siracusano, 563 U.S. 27, 44 (2011). Disclosure is
required only when necessary “to make . . . statements
made, in the light of the circumstances under which they were
made, not misleading.” Id. (citing 17 C.F.R.