55 petition for rehearing en banc and for panel rehearing 09/02
TRANSCRIPT
No. 06-16185
UNITED STATES COURT OF APPEALSFOR THE NINTH CIRCUIT
In re: GILEAD SCIENCES SECURITIES LITIGATION
TRENT ST. CLARE and TERRY JOHNSON,On behalf of themselves and all others similarly situated,
Plaintiffs-Appellants,
V.
GILEAD SCIENCES, INC.; JOHN C. MARTIN; JOHN F. MILLIGAN;
MARK L. PERRY; NORBERT W. BISCHOFBERGER; ANTHONYCARRACIOLO; and WILLIAM LEE,
Defendants-Appellees.
On Appeal from the United States District Court
for the Northern District of California at San Francisco
No. CV-03-04999-MJJ Honorable Judge Jenkins, Presiding
PETITION FOR REHEARING EN BANCAND FOR PANEL REHEARING
STEPHEN C. NEAL
JOHN C. DWYER
GRANT P. FoNDoLORI R.E. PLOEGER
COOLEY GODWARD KRONISH LLP
Five Palo Alto Square3000 El Camino RealPalo Alto, CA 94306-2155(650) 843-5000 (telephone)(650) 857-0663 (facsimile)
CARTER G. PHILLIPS
SIDLEY AUSTIN LLP
1501 K Street, N.W.Washington, D.C. 20005(202) 736-8000 (telephone)(202) 736-8711 ( facsimile)
Attornevs for Defendants-Appellees
CORPORATE DISCLOSURE STATENIENT
Gilead Sciences, Inc. has no parent corporation, and no publicly held
company owns I0% or more of its stock.
TABLE OF CONTENTS
PAGE
1. INTRODUCTION AND STATEMENT OF COUNSEL ....................... 1
II. PETITION FOR REHEARING EN BANC ............................................ 6
A. En Banc Review Is Warranted to Resolve a Conflict
Between the Panel Decision and Corinthian ................................. 6
1. The Facts of This Case and Corinthian AreIndistinguishable in All Material Respects ......................... 7
2. The Panel Decision and Corinthian Apply DifferingLoss Causation Standards ................................................. 1 1
3. The Panel Decision and Corinthian Take Conflicting
Positions on What Constitutes an Unwarranted
Inference ............................................................................ 14
B. En Banc Review Is Warranted to Resolve Questions ofExceptional Importance ............................................................... 18
III. PETITION FOR PANEL REHEARING .............................................. 21
IV. CONCLUSION ...................................................................................... 21
-1-
TABLE OF AUTHORITIES
PAGE(S)
CASES
Bell Atl. Corp. v. Twombly,127 S. Ct. 1955 (2007) ....................................................................18, 19, 20
Dura Pharms., Inc. v. Broudo,544 U.S. 336 (2005) ...................................................................... 1, 4, 12, 18
In re Daou Sys., Inc.,411 F.3d 1006 (9th Cir. 2005) ...................... ................................. 4, 11, 12....
In re Gilead Sciences Sec. Litig.,No. 06-16185, 2008 WL 3271039 (9th Cir. Aug. 11, 2008) ........ .......passim
In re Silicon Graphics Inc. Sec. Litig.,
183 F.3d 970 (9th Cir. 1999) ......................................................... ..............18
In re Syntex Corp. Sec. Litig.,
95 F.3d 922 (9th Cir. 1996) ........................................................... ..............14
Metzler Investment GMBH v. Corinthian Colleges, Inc.,534 F.3d 1068 (9th Cir. 2008), amended and superseded byNo. 06-55826, 2008 WL 3905427 (9th Cir. Aug. 26, 2008) ........ .......passim
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,127 S. Ct. 2499 (2007) ............................. ..................................... 18..............
RULES
Fed. R. App. P. 35(a)(1)-(2) ............................................................... ............ 1, 6
Fed. R. App. P. 40(a)(2) ...................................................... ............... 1, 21..........
Fed. R. Civ. P. 8(a) ............................................................................. ......5, 6, 19
Fed. R. Civ. P. 9(b) ............................................................................. 5, 6, 19, 20
Fed. R. Civ. P. 12(b)(6) ...................................................................... .............. 20
OTHER AUTHORITIES
Cornerstone Research, Securities Class Action Case Filings,2007: A Year in Review (2008) ...................................................................19
H.R. Conf. Rep. No. 105-803 (1998) ............................................................... 18
-ii-
I. INTRODUCTION AND STATEMENT OF COUNSEL
Defendants-Appellees Gilead Sciences, Inc. ("Gilead") et al. seek
rehearing en banc of the panel decision in In re Gilead Sciences Securities
Litigation, No. 06-16185, 2008 WL 3271039 (9th Cir. Aug. 11, 2008)
(Kozinski, C.J., Hawkins, Cowen, JJ.) ("panel decision"), in which the panel
reversed the district court's ruling that the Fourth Amended Complaint
("Complaint") had failed adequately to plead loss causation consistent with
Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005). Rehearing en
banc is warranted to maintain uniformity of decisions in this Circuit and to
address issues of exceptional importance. Fed. R. App. P. 35(a)(l)-(2). Panel
rehearing also is appropriate to address points of law misapprehended or
overlooked by the panel. Fed. R. App. P. 40(a)(2).
The panel decision presents an irreconcilable conflict with the decision
issued less than three weeks earlier by a different panel in Metzler Investment
GMBH v. Corinthian Colleges, Inc., 534 F.3d 1068 (9th Cir. 2008) (Goodwin,
B. Fletcher , Smith , JJ.), amended and superseded by No. 06-55826 , 2008 WL
3905427 (9th Cir. Aug. 26, 2008). In Corinthian, also a securities case, the
panel affirmed the district court's dismissal, on loss causation grounds, of a
complaint alleging facts materially indistinguishable from those in this case.
The Corinthian and Gilead panels applied different legal standards and
engaged in fundamentally different analytical approaches to reviewing loss
causation allegations. Unless the Gilead decision is reviewed en bane, both
litigants and lower courts will be subject to conflicting standards.
The loss causation allegations in the two cases are remarkably similar.
As here, plaintiffs in Corinthian alleged that a large portion of the company's
success was driven by revenues made possible by underlying fraudulent
practices unrelated to the sale of any securities. In Corinthian, plaintiffs
alleged that defendants had engaged in fraudulent activities to procure federal
funding for its colleges. In Gilead, plaintiffs alleged that defendants had
engaged in widespread off-label marketing of its HIV drug Viread.
In both cases, the announcement of disappointing financial results was
preceded by an earlier third-party disclosure that arguably touched upon the
alleged improper activities . In Corinthian , an article in the Financial Times
disclosed an investigation into federal educational funding practices at one of
Corinthian's campuses. Corinthian's stock price briefly dipped 10 percent
after that disclosure. In Gilead, the Food and Drug Administration ("FDA")
disclosed that it had issued a warning letter to Gilead regarding two instances
of improper off-label marketing. Gilead's stock price rose slightly after that
disclosure.
In both cases, the companies later announced financial results that failed
to meet analyst expectations. In Corinthian, the company's financial results
were announced a little over a month after the initial disclosure; in Gilead, the
initial disclosure and announcement of financial results were three months
apart. In neither case did the company's announcement link the disappointing
financial results to the allegedly improper practices; in each case, the
announcement attributed the disappointing news to other factors. In both
cases, the company's stock price dropped following the financial-results
announcement, though in neither case was there any indication that the market
attributed the poor financial results to the companies' allegedly improper
practices.
In both cases, plaintiffs argued that they had adequately alleged loss
causation because, according to plaintiffs, the market understood as a result of
the disclosures that the company's financial success was dependent on the
improper practice and this success was now at risk.
Despite these incredibly similar facts, the Gilead and Corinthian panels
reached diametrically opposite results. In Corinthian, the panel affirmed
3
dismissal of the complaint, holding that plaintiffs did not adequately plead loss
causation. Interpreting Dura and this Court's decision in In re Daou Systems,
Inc., 411 F.3d 1006 (9th Cir. 2005), the panel held that "the complaint must
allege that the practices that the plaintiff contends are fraudulent were revealed
to the market and caused the resulting losses." Corinthian, 2008 WL 3905427,
at *10. The panel found plaintiffs' argument that the "market understood [the
two disclosures] as a revelation of Corinthian's systematic manipulation of
student enrollment" to be an unwarranted inference, not a fact that had to be
accepted as true. Id. at * 11. Further, the panel concluded that "a far more
plausible reason for the resulting drop in Corinthian's stock price [was that] the
company failed to hit prior earnings estimates ." Id. The Corinthian panel
based its decision not only on the complaint but also on facts judicially noticed
by the district court.
The Gilead panel reached the opposite conclusion and reversed the
judgment of dismissal. The panel criticized the district court for expressing
incredulity regarding plaintiffs' loss causation allegations, holding that "so
long as the plaintiff alleges facts to support a [loss causation] theory that is not
facially implausible, the court's skepticism is best reserved for later stages of
the proceedings when the plaintiff' s case can be rejected on evidentiary
4
grounds." Id. at 10335-36. The Gilead panel did not cite or discuss any of the
facts of which the district court took judicial notice.
The irreconcilable results in Gilead and Corinthian' are directly
attributable to the application of differing legal standards regarding pleading
loss causation that will confound the parties and district courts in the Ninth
Circuit unless reconciled by en banc review.
Additionally, rehearing en banc is warranted because this case presents
important issues concerning courts' gatekeeping function in the numerous
securities actions filed in this Circuit. The district courts need clear guidance
on the standards for evaluating loss causation allegations so they can
effectively implement the important goal of weeding out groundless suits
before they reach discovery and become unduly costly. The panel decision
undermines that goal. This problem is compounded by the panel's failure to
apply Federal Rule of Civil Procedure 9(b)'s pleading standard. The panel
stated that it need not decide whether the more stringent Rule 9(b) particularity
standard or the more lenient Rule 8(a) notice standard applies because the
Complaint's loss causation allegations satisfy both standards. But it is apparent
The plaintiffs-appellants in Corinthian requested and received an extension toSeptember 8, 2008 to file a petition for rehearing. Corinthian, No. 06-55826,Docket No. 43 (9th Cir. Aug. 5, 2008).
5
that the panel analyzed the allegations solely under Rule 8(a). The Court is
obliged to evaluate whether the allegations meet the more stringent Rule 9(b)
standard, and the Complaint here would not survive such scrutiny.
For the same reasons that rehearing en banc is warranted, panel
rehearing is also warranted.
II. PETITION FOR REHEARING EN BANC
The Court may grant en banc review to secure or maintain uniformity
of the court's decisions" or to resolve "a question of exceptional importance."
Fed. R. App. P. 35(a)(1)-(2). En banc review is warranted here on both
grounds.
A. En Banc Review Is Warranted to Resolve a Conflict Between
the Panel Decision and Corinthian.
The panel decision directly conflicts with Corinthian, resulting in an
irreconcilable split in this Circuit's authority. The two decisions, handed down
less than three weeks apart, come to opposite conclusions on facts that are
indistinguishable in all material respects. The two panels applied different loss
causation standards and fundamentally different analytical frameworks in
reviewing the respective complaints. En banc review should be granted to
resolve the conflict and to maintain uniformity within this Circuit.
6
1. The Facts of This Case and Corinthian AreIndistinguishable in All Material Respects.
In Corinthian, plaintiffs alleged that defendants were engaged in
systemic fraud in which they manipulated student enrollment figures to gain
federal funds. 2008 WL 3905427, at *2. Plaintiffs alleged that 50 to 60
percent of the people whom the company represented to the government to be
qualified students were, in fact, not qualified for federal funding. Id.
The Corinthian plaintiffs pointed to two disclosures that, when read in
tandem, purportedly revealed Corinthian's fraudulent practices to the market.
Id. at *6. First, a June 2004 Financial Times article reported on a Department
of Education ("DOE") investigation at one of Corinthian's campuses and stated
that school officials had helped students manipulate financial aid documents in
order to maximize federal payments . Id. As a result of the investigation, one
campus lost the privilege of receiving up-front federal funding and instead was
required to seek reimbursement of expenditures. Id. at *4. Following
publication of the article, Corinthian's stock dipped by 10 percent, but quickly
rebounded. Id. at *6.
Second, a company press release, issued approximately one month after
the Financial Tines article, disclosed reduced earnings and earnings
projections but stated that "student population growth was up nearly 50%
7
overall and same-school population increased 15°o ...." Id. at * 11. The press
release also revealed that Corinthian had met with the California Attorney
General regarding an investigation into its admission practices. Id. at *6. The
company attributed the reduced earnings to several factors, including "higher
than anticipated attrition ." Id. at *7. Following the announcement,
Corinthian's stock price fell by 45 percent. Id.
Plaintiffs alleged that the cumulative effect of the two disclosures was to
"peel back the curtain and reveal Corinthian's `impaired and falsely presented
financial condition,' leading to the considerable stock drop that caused
Plaintiffs' claimed damage." Id. at *7. Plaintiffs argued that the statement that
there was "higher than anticipated attrition" was a "euphemism for an
admission" that Corinthian had fraudulently enrolled students. Id. at * 11.
In Gilead, plaintiffs ' loss causation theory follows a remarkably similar
pattern. Plaintiffs allege that Gilead engaged in pervasive "off-label"
marketing of Viread that produced approximately 75 to 95 percent of all Viread
sales. (ER 33-34, 55 ¶¶ 7-9, 87.) FDA regulations prohibit marketing drugs
for non-FDA-approved uses, commonly referred to as "off-label" uses. (ER 44
¶ 50.)
8
The Gilead plaintiffs point to two disclosures that, when read in tandem,
purportedly revealed Gilead's fraudulent practices to the market. First, on July
29, 2003, the FDA issued a Warning Letter, made public on August 7, 2003,
asserting that Gilead sales representatives engaged in improper off-label
marketing on two separate occasions at conferences . Gilead, slip op. at 10327-
28, 10338. In plaintiffs' own words, the FDA letter referred to a couple of
stale transgressions" with "little implication for ongoing sales," and the
market did not understand the scope of the off-label marketing. (ER 82-83 ¶^(
191-195.) Following the disclosure, Gilead's stock price increased. Gilead,
slip op. at 10327-28.
Second, Gilead's October 28, 2003 press release, published nearly three
months after the FDA letter was disclosed, stated that, as anticipated, Gilead's
third-quarter Viread revenues had declined, but that "important demand
indicators, such as new and total prescriptions" for the drug had increased.
(ER 86-87 ¶ 205; SER 192.) The company attributed the reduced Viread
9
revenues to the reduction in inventory levels by its wholesalers., On October
29th, the day following the announcement, Gilead's stock price fell 12.5
percent, but recovered nearly half that loss within one day and recovered fully
within a month. (ER 36 ¶ 16; SER 202-03.)
Nevertheless, plaintiffs alleged that the off-label marketing scheme,
revealed on August 7th, caused the stock drop on October 29th. (ER 86-88 9
203-208.) Plaintiffs claimed that Gilead's alleged off-label marketing activities
had artificially inflated demand for Viread, accounting for 75 to 95 percent of
all Viread sales (ER 33-34, 55 9 7-9, 87); drug wholesalers , anticipating a
price increase in June 2003, increased their Viread inventories, an action that
would not have happened but for the artificially inflated demand created by
off-label marketing (ER 79, 80 ¶ 181); following public disclosure of the FDA
letter in August 2003, doctors became "less eager to prescribe it to their
2 Though doctors' prescriptions create demand for Viread (ER 32, 34, 79 ¶¶ 5,9, 178), Gilead earns revenues by selling Viread to pharmaceuticalwholesalers, who supply the drug to pharmacies, which fill the prescriptions.(ER 76 9 166-68.) Wholesalers profit by stockpiling large quantities of a drugbefore an expected manufacturer price increase and later selling the drug at thehigher price. (ER 76 ¶ 168.) In July 2003, Gilead had announced that itssecond-quarter revenues had increased substantially, in part due to this sort ofincrease in wholesaler purchases. (ER 78, 80 ¶¶ 174, 183.) Gilead alsoannounced that it anticipated third-quarter revenues would be at or belowsecond-quarter revenues as wholesalers drew down their Viread inventories.(SER 179-180.)
10
patients" (ER 85 ¶ 200); competitors used the letter to persuade physicians to
prescribe their products rather than Viread (id.); the result was decreasing
demand for Viread (ER 85, 86 ¶T 201-204); and the market and the public
understood all this when the company disclosed its third-quarter earnings (ER
87-88 208). Plaintiffs sought to establish loss causation on the assertion that
the "October 28, 2003 press release tacitly admitted that demand for Viread
was not as strong as investors were previously led to believe." (Id.)
Despite virtually identical fact patterns, Corinthian and the panel
decision reached irreconcilably different conclusions regarding whether loss
causation had been adequately pled.
2. The Panel Decision and Corinthian Apply Differing Loss
Causation Standards.
Corinthian held that to plead loss causation adequately, "the complaint
must allege that the practices that the plaintiff contends are fraudulent were
revealed to the market and caused the resulting losses." 2008 WL 3905427, at
*10. The panel cited favorably this Court' s earlier decision in In re Daou
Systems, 411 F.3d 1006 (9th Cir. 2005), which held that plaintiffs adequately
pled loss causation "because their complaint alleged that the market learned of
and reacted to [the] fraud, as opposed to merely reacting to reports of the
defendant ' s poor financial health generally ." Corinthian, 2008 WL 3905427,
at *10.
The Corinthian panel affirmed dismissal of the complaint, reasoning that
neither the Financial Times article nor the August 2nd press release
"disclosed-or even suggested-to the market that Corinthian was
manipulating student enrollment figures company-wide in order to procure
excess federal funding, which is the fraudulent activity that [plaintiffs]
contend[] forced down the stock that caused its losses." Id. The press release
failed to demonstrate "that the market became aware of, and the resulting stock
drop resulted from, widespread enrollment fraud," despite the reference to the
California Attorney General's investigation. Id. at * 1 1. The court rejected
plaintiffs' argument that the "higher than anticipated attrition" statement in the
press release was a "euphemism for an admission" that Corinthian had
improperly enrolled students. The panel wrote:
[N]either Daou nor Dura require an admission or
finding of fraud before loss causation can be properly
pled. But that does not allow a plaintiff to plead loss
causation through "euphemism" and thereby avoid
alleging the necessary connection between
defendant's fraud and the actual loss. So long as
there is a drop in a stock's price, a plaintiff will
always be able to contend that the market,'understood" a defendant's statement precipitating a
loss as a coded message revealing the fraud. Enabling
12
a plaintiff to proceed on such a theory wouldeffectively resurrect what Dura discredited-that losscausation is established through an allegation that astock was purchased at an inflated price.
Id.
In contrast, the Gilead decision does not require that the market become
aware of the alleged fraud. The Complaint contains no allegations that the
market became aware of the alleged widespread off-label marketing scheme.
Neither the FDA letter nor the October 28th press release can reasonably be
read to reveal such a scheme. As the panel noted, the FDA letter "discussed
only two instances of off-label marketing" and "did not contain enough
information to significantly undermine" Gilead's previous statements. Gilead,
slip op. at 10338. The press release revealed that Gilead's third-quarter
revenues had declined due to larger-than-anticipated wholesaler inventory
draw-down, but that prescriptions (demand) had continued to rise. The press
release did not mention off-label marketing, the FDA letter, decreasing
prescriptions, or any alleged wrongdoing at Gilead.
Plaintiffs alleged that the "press release tacitly admitted that demand for
Viread was not as strong as investors were previously led to believe." (ER 87-
88 ¶ 208 (emphasis added).) Corinthian rejected just such a theory, stating that
pleading loss causation through "euphemism" is not permitted . Yet in Gilead,
13
in direct conflict with Corinthian, the panel held that the Complaint adequately
pled loss causation, and reversed the judgment of dismissal.
3. The Panel Decision and Corinthian Take ConflictingPositions on What Constitutes an Unwarranted
Inference.
The Corinthian panel explained that plaintiffs' allegation that the market
"understood the June 24 and August 2 disclosures as a revelation of
Corinthian's systematic manipulation of student enrollment is not a `fact,"' but
rather, an inference that plaintiffs believe is warranted by the facts. 2008 WL
3905427, at *11. Following Circuit precedent, the Corinthian panel analyzed
whether that inference was "warranted." Id. (citing In re Syntex Corp. Sec.
Litig., 95 F.3d 922, 926 (9th Cir. 1996)).
By contrast, the panel decision here failed to evaluate critically the
inferences plaintiffs urged. While acknowledging that a court need not make
unreasonable or unwarranted inferences, the panel stated: "But so long as the
plaintiff alleges facts to support a theory that is not facially implausible, the
court's skepticism is best reserved for later stages of the proceedings when the
plaintiffs case can be rejected on evidentiary grounds." Gilead, slip op. at
10336.
14
The two panels also took different approaches to considering materials
subject to judicial notice in evaluating whether certain inferences were
reasonable. The Corinthian panel expressly based its factual summary on the
allegations in the complaint, matters incorporated therein, and matters
judicially noticed by the district court. 2008 WL 3905427, at *1 n. l . The
Gilead panel did not cite or discuss any of the facts that the district court had
judicially noticed. As a result, the panel ignored several facts that contradict
the central premise of the Complaint's loss causation theory, namely that
demand for Viread had been inflated due to improper activities and that
demand decreased following disclosure of the FDA letter:
• On July 31, 2003, before the FDA letter was disclosed, the
company announced expected total 2003 Viread revenues of $550
to $600 million. (SER 180.) In January 2004, the company
reported that it had met those projections. (SER 219.)
• In the October 28, 2003 press release , the Company announced
that "important demand indicators, such as new and total
prescriptions" had increased during the third quarter. (SER 192.)
• The October 2003 analyst reports cited by plaintiffs reported a
third-quarter Viread prescription increase of 14 to 17 percent. (ER
15
87 4_^ 206, 207; ER 1 16; SER 213.) The same reports stated that
Gilead continued to increase its market share during that period,
and that the "[f]undamentals of the business remain as strong as
ever, with Viread scrips continuing to exhibit strong growth."
(SER 208.)
• Fourth-quarter 2003 revenue for Viread exceeded S175 million,
reflecting a 52 percent increase over third-quarter sales. (See SER
192-93, 219.)
The panels' differing approaches directly resulted in conflicting
outcomes. In Corinthian, plaintiffs asked the court to infer that the market
became aware of widespread enrollment fraud and that the decline in revenue
resulted from the DOE investigation. Rejecting this inference, the Corinthian
panel noted that "the August 2 announcement simultaneously reported that
student population growth was up nearly 50% overall and same-school
population increased 15% . . . ." 2008 WL 3905427, at *11. Moreover, "the
August 2 announcement contained a far more plausible reason for the resulting
drop in Corinthian's stock price-the company failed to hit prior earnings
estimates." Id. Thus, the court held that it was "unwarranted to infer that the
reference to `attrition' was understood by the market to mean that Corinthian
16
had revealed widespread misrepresentation of student enrollment to
fraudulently procure excess federal funding." Id.
In Gilead, plaintiffs asked the panel to infer that, following the October
2003 press release, the market somehow realized that Viread's remarkable
success was due almost solely to an illegal marketing scheme; the market
understood that, as a result of this scheme, demand for Viread had been
artificially inflated; and the temporary stock drop the following day was
causally linked to this scheme.
Had the Gilead panel applied the analytical approach used by the
Corinthian panel, these inferences certainly would have been rejected. There
is no factual support for the notion that the market linked the stock drop to
concerns about the company's marketing practices or the FDA letter. Further,
the inference urged by plaintiffs that prescriptions (demand) for Viread fell
during the third quarter in response to the FDA letter-the lynchpin of their
loss causation theory-is contradicted by the very documents on which they
rely and by judicially noticed facts. Moreover, as in Corinthian, there is a
much more plausible explanation for why Gilead's stock price fell on October
29th-it reported less revenue due to larger than anticipated inventory draw-
down.
17
This Court should grant en bane review to resolve the direct and
irreconcilable conflict between the panel decision and Corinthian.
B. En Bane Review Is Warranted to Resolve Questions ofExceptional Importance.
The potentially abusive and costly nature of shareholder litigation has
long been identified as an issue of exceptional importance. The Private
Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform
Standards Act of 1998 were enacted to ensure uniform standards that would
protect the interests of shareholders and employees by preventing the filing of
frivolous securities class action lawsuits. H.R. Conf. Rep. No. 105-803 (1998);
In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 973 (9th Cir. 1999). The
failure to require uniform and meaningful pleading standards for loss causation
"would permit a plaintiff `with a largely groundless claim to simply take up the
time of a number of other people, with the right to do so representing an in
terrorem increment of the settlement value, rather than a reasonably founded
hope that the [discovery] process will reveal relevant evidence."' Dura, 544
U.S. at 347-48 ( citation omitted); see also Bell All. Corp. v. Twombly, 127 S.
Ct. 1955, 1966-67 (2007); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.
Ct. 2499, 2504 (2007) ("Private securities fraud actions, however, if not
adequately contained, can be employed abusively to impose substantial costs
18
on companies and individuals whose conduct conforms to the law.-). The
importance of providing uniform and consistent guidance in this Circuit is
especially compelling given that on average more securities class actions are
brought here than in any other circuit. See Cornerstone Research, Securities
Class Action Case Filings, 2007: A Year in Review 18 (2008 ). The panel's
reluctance to evaluate loss causation meaningfully at the motion to dismiss
stage stands in stark contrast to Corinthian and undermines the goal of weeding
out groundless suits before costly discovery ensues.
Compounding this problem was the panel's failure to apply the more
stringent pleading standard in Federal Rule of Civil Procedure 9(b), instead
applying Rule 8(a)'s more lenient standard. The panel stated that it need not
decide which standard applies to pleading loss causation because the
Complaint satisfied both standards. Gilead, slip op. at 10334. In reversing
dismissal of the Complaint, the panel was obliged to show how the allegations
meet the more stringent Rule 9(b) particularity standard as well as the more
lenient Rule 8(a) notice standard. Although the panel referred to Rule 9(b), it
is apparent that, in actuality, the panel analyzed the Complaint only under the
Rule 8 ( a) standard , as articulated by the Supreme Court in Twombly. See
Gilead, slip op. at 10335-37. According to the panel, "[s]o long as the
19
complaint alleges facts that, if taken as true, plausibly establish loss causation,
a Rule 12(b)(6) dismissal is inappropriate." Gilead, slip. op. at 10336. Indeed,
the panel cites Twombly four times in its analysis.
The panel's failure to apply Rule 9(b) is of great consequence because
the loss causation allegations would not survive such scrutiny. The Complaint
fails to cite to any public statement , analyst report, or other document
suggesting that anyone linked Gilead's third-quarter results (and the
subsequent stock drop) to the FDA letter or off-label marketing concerns.
Though plaintiffs allege that physicians stopped prescribing Viread after the
FDA letter became public , they fail to identify a single such doctor, as a
confidential witness or otherwise. Though they allege that competitors were
able to compete more effectively after the letter, they fail to identify a single
such competitor. Though they allege that there was a "marked drop" in
prescriptions, they fail to identify a single patient who stopped using the drug.
Though they allege that wholesalers observed the drop in sales and drew down
their inventories as a result , they fail to identify any such wholesaler or any
document suggesting this was the case. The Complaint simply fails to allege
its attenuated loss causation theory with the particularity that Rule 9(b)
requires.
20
For these reasons, rehearing en banc should be granted. The Court
should take this opportunity to address these important issues concerning loss-
causation pleading and to clarify the nature and scope of the courts'
gatekeeping function, so that courts will take a consistent approach in the many
securities actions filed in this Circuit.
III. PETITION FOR PANEL REHEARING
For of the same reasons set forth above in support of rehearing en banc,
panel rehearing also is warranted under Rule 40(a)(2).
IV. CONCLUSION
For the foregoing reasons, Gilead respectfully petitions for rehearing en
banc and for panel rehearing.
Dated : September 2, 2008 COOLEY GODWARD KRONISH LLP
tephen C. Neal
Attornevs for Defendants-Appellees
21
CERTIFICATION OF COMPLIANCE PURSUANT TOCIRCUIT RULES 35-4 AND 40-1
I certify that pursuant to Circuit Rules 35-4 and 40-1, the attached
petition for rehearing en banc and for panel rehearing is proportionately
spaced, has a typeface of 14 points or more, and contains 4,195 words.
Dated : September 2, 2008 COOLEY GODWARD KRONISH LLP
rant P. Fondo
Attornevs for Defendants-Appellees
FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: GILEAD SCIENCES SECURITIES
LITIGATION.
RICK HARTMAN , on behalf ofhimself and all others similarlysituated; TRENT ST. CLARE; TERRY
JOHNSON,
Plaintiffs-Appellants
V.
GILEAD SCIENCES, INC.; JOHN C.
MARTIN; JOHN F. MILLIGAN; MARK
L. PERRY; NORBERT W.
BISCHOFBERGER; ANTHONY
CARRACIOLO; JOHN EICHLER,
Defendants-Appellees.
No. 06-16185
D.C. No.CV-03-04999-MJJ
OPINION
Appeal from the United States District Court
for the Northern District of California
Martin J. Jenkins, District Judge, Presiding
Argued and Submitted
December 6, 2007-San Francisco, California
Filed August 11, 2008
Before: Alex Kozinski, Chief Judge, Michael Daly Hawkins,
and Robert E. Cowen,* Circuit Judges.
*The Honorable Robert E. Cowen, Senior United States Circuit Judge
for the Third Circuit, sitting by designation.
10319
10320 IN RE GILEAD SCIENCES SECURITIES LITIGATION
Opinion by Judge Hawkins
10322 IN RE GILEAD SCIENCES SECURITIES LITIGATION
COUNSEL
Susan K. Alexander (briefed and argued), Lerach, Coughlin,Stoia, Geller, Rudman & Robbins LLP, San Francisco, Cali-fornia, for the plaintiffs-appellants.
John C. Dwyer (briefed and argued), Grant Fondo and JeffreyM. Kaban (appeared only), Cooley, Godward, Kronish, LLP,Palo Alto, California, for the defendants-appellees.
OPINION
HAWKINS, Circuit Judge:
A group of individual investors brought this securities fraudaction on behalf of themselves and a proposed class compris-ing all individuals (collectively, the "Investors") who pur-chased Gilead Sciences, Inc.'s ("Gilead") publicly tradedsecurities between July 14, 2003, and October 28, 2003
IN RE GILEAD SCIENCES SECURITIES LITIGATION 10323
("class period"). They allege that Gilead misled the investingpublic by representing that demand for its most popular prod-uct was strong without disclosing that unlawful marketingwas the cause of that strength.
The district court dismissed under Rule 12(b)(6) of CivilProcedure, holding that the Investors failed to sufficientlyallege loss causation. We have jurisdiction under 28 U.S.C.
1291, and we reverse.
FACTS AND PROCEDURAL HISTORY
1. The Complaint's Allegations
The Investors' Fourth Amended Complaint ("complaint")alleges violations of sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934, 15 U.S.C. §S 78j(b), 78t(a), and SECRule IOb-5, 17 C.F.R. § 240.10b-5. The complaint names asdefendants Gilead and some of its top officers ("Officers").
Taking its allegations as true, the complaint tells the fol-lowing story about Gilead and its marketing practices.'
Gilead is a biopharmaceutical company that specializes indeveloping and marketing treatments for life-threatening dis-
eases. One of the company's commercial products is Viread,
an antiretroviral agent used in combination with other drugs
to treat HIV.
Gilead's fortunes, as reflected in its stock price, dependedheavily on Viread's conunercial success. Sales of Vireadamounted to about 65% of Gilead's total revenues at all rele-
'We recount only those facts necessary for understanding the loss cau-
sation issue. The complaint, which spans over seventy pages, offers much
on the issue, weGreater detail. Because we disagree with the district court
frequently quote the complaint to demonstrate that the Investors did in fact
explicate the causal logic underlying their theory.
10324 IN RE GILEAD SCIENCES SECURITIES LITIGATION
vant times of this action. "Wall Street analysts looked to salesof Viread, Gilead's most important and most promoted drug,to gauge whether the Company's business was on track andgrowing. If Gilead failed to publicly report healthy, growingViread sales, its stock price would be greatly diminished."
Although Gilead had a clear incentive to aggressively pro-mote Viread, it was required to comply with federal law,including the Food and Drug Administration's ("FDA") mar-keting regulations. Generally, those regulations prohibit themarketing of drugs for non-FDA-approved uses, commonlyreferred to as "off-label" uses. "For example, it would be con-sidered off-label for a company to market a FDA-approvedHIV/AIDS drug as also being effective for fighting HepatitisB infection ... if such use of the drug had not been reviewedand approved by the FDA and included in the" drug's FDA-approved package labeling. While physicians are free to pre-scribe drugs for off-label uses,' they rely on the FDA-approved prescribing information to determine which drugscan be used safely and effectively by patients with specifichealth problems. The FDA approved Viread for use inapproximately 40% of the available HIV patient pool. Repeat-edly violating the FDA's off-label marketing regulations in aneffort to have Viread prescribed to some of the remaining60% of available HIV patients, Gilead and its officers:
implemented a scheme to promote and marketViread with off-label, false, and misleading state-ments in violation of the Federal Food, Drug, andCosmetic Act. In order to gain market share, artifi-cially increase perceived demand, and increase sales,Gilead officers, executives, and clinical personnel,
2See 21 U.S.C. § 396; Buckman Co. v. Plaintiffs' Legal Comm., 531
U.S. 341. 350-51 & n .5 (2001) ( explaining that the FDA is charged with
the difficult task of regulating the marketing and distribution of medical
devices without intruding upon decisions statutorily committed to the dis-cretion of health care professionals").
I\ RzE GILE AD SCIENCES SELL RI T IE: Li-. Iu.^ Io\ 10 32^,
with the express knowledge and approval of the[Officers], routinely and consistently provided Gile-ad's sales and marketing team with off-label infor-mation and encouraged, expected, and directed thetasto use it to sell Viread ... .
Gilead's management began preparing Gilead's sales stafffor off-label marketing as early as September 2001, onemonth before Viread received FDA approval. Managementcontinued to encourage off-label marketing throughout 2002and the first half of 2003.
These training efforts produced their intended effect.According to two confidential witnesses who served as Gileadsalespeople,' Viread "off-label marketing took three forms:(1) marketing to HIV patients co-infected with Hepatitis B:(2) marketing Viread as a first-line or initial therapy for HIVinfection; and (3) marketing against Viread's safety profile."Ultimately, 75% to 95% of Viread sales resulted from off-label marketing efforts.
The company and its Officers emphasized to the public that
they carefully complied with federal and state regulations,
when in fact they knew that they were acting unlawfully by
aggressively marketing Viread for off-label uses.
The first sign of trouble came on March 14, 2002, when the
FDA sent an "Untitled Letter" to Gilead that accused the com-pany of understating the risks of Viread-a form of improperoff-label marketing. The letter ordered Gilead to "itntnedi-ately cease" this practice. On March 21, 2002, per the FDA'srequest, Gilead sent a reply that acknowledged receipt of theFDA's letter and agreed to immediately stop off-label market-
3One of the confidential witnesses served as "a member of Gilead's
Field Marketing Advisory Committee, a select committee of Gilead sales
and marketing staff that periodically met to discuss theories and strategies
for marketing and selling Viread."
10326 IN RE GILEAD SCIENCES SECURITIES LITIGATION
ing. This was not done. In fact, Gilead's off-label marketingincreased, either at the Officers' direction or with their knowl-edge and tacit encouragement.
By June 2003, Gilead's off-label marketing put it in theposition to raise Viread's price. Consistent with standardindustry practice, Gilead informed national drug wholesalersof this plan in advance of the price increase. The wholesalers(there are the three major ones that purchase approximatelyninety percent of drug manufacturers' drugs) typically stock-pile drugs in advance of price increases so that they can resellat a higher price to retailers after the increase takes effect.
Because Gilead had "illegally inflated sales and artificiallyinflated demand for Viread, the major drug wholesalers stock-piled mass quantities of Viread in advance of the June 2003price increase. This wholesaler stockpiling would not haveoccurred but for the off-label marketing and the resulting cre-ation of an artificially increased demand for Viread." Thestockpiling furthered Gilead's fraudulent scheme by confirm-ing "the impression that Viread was in high demand and thatGilead's financial and operational results were strong."
On July 14, 2003, Gilead issued a press release announcingthat it anticipated its second quarter financial results wouldexceed analysts' expectations, and explaining that the compa-ny's success "was driven primarily by strong sales growth ofViread .... Increasing Viread sales reflect broader prescrib-ing patterns in all commercial markets, as well as increases inU.S. wholesaler inventory levels in the second quarter inanticipation of a Viread price increase."
These statements were materially false and misleadingbecause Gilead and its Officers' "marketing and promotionalactivities for Viread were not in compliance with FDAapproved guidelines, violated federal laws, and created seri-ous public health and safety implications for Viread users."Gilead's promotional scheme was designed to, and did, create
I^ :,E GILEAD SCEyCes SECSRITIEs LITIG.ATIOy 1032-
the impression that demand for Viread was strong. This cam-paign was misleading, however, because it was unlawful off-label marketing that was driving prescription volume4 -andGilead had already been ordered to cease such marketing.
While securities analysts, for the most part, reacted favor-ably to the July 14. 2003, press release, Gilead and its Offi-cers felt the need to respond to some analysts' concern thatsecond quarter revenues were primarily attributable to thewholesaler stockpiling, and not a result of strong demand. Onthe same day that the press release was issued, a Gileadspokeswoman, acting with the knowledge and approval ofGilead and its officers, told Bloomberg News that "[t]he mainreason for the jump in Viread sales is an increase in prescrip-tions, not inventory stocking." This statement was misleading.It created the impression that demand for Viread was strong,which it was, but for reasons that were not well-understood bythe public. Omitting the role of off-label marketing in a pressrelease highlighting the drug's success made a true statement(that demand was strong) also a misleading one.
Gilead's financial news had a marked effect on its stockprice. On July 14, the price of Gilead shares closed at $67.25,up $7.97 from the previous day's closing price of $59.28 pershare. This 13.4% increase represented a near-record high.
Some two weeks later, the FDA issued a July 29 WarningLetters that chastised Gilead for statements made by one of its
4The Investors concluded that between $86.7 million and $109.82 mil-
lion of Viread's S 115.6 million in domestic sales during the second quarter
of 2003 could be attributed to off-label marketing.
5The Complaint explains:
According to the FDA's website and the FDA's Regulatory Pro-
cedures Manual, warning letters such as this are written commu-
nications from the [FDA] to a company notifying the company
that the [FDA] considers one or more promotional pieces or prac-
tices to be illegal.... A warning letter is much more serious than
an untitled letter.
10-1128 I' RE GILEAD SCIENCES SECURITIES LITIGATION'
sales representatives at the 15th National HIV/AIDS UpdateConference in March and April of 2003. The letter stated thatthe employee "made oral statements that minimized the riskinformation and broadened the indication for Viread." Itreminded Gilead of the Untitled Letter, expressed the "signifi-cant public health and safety concerns raised by these repeti-tive promotional activities," and ordered Gilead to makecorrective disclosure. Gilead made such disclosure to the con-ference attendees on November 7, 2003.
On August 7. 3003, the FDA made public its Warning Let-ter. Gilead's shareholders and the investing public did not findit very significant, though, because they failed to appreciatethe extent of Gilead's off-label marketing, and thus could notforesee the letter's impact on Viread's sales.
The public's underestimation of Viread's troubles wasreflected in Gilead's share price. Notwithstanding the publicrevelation of the letter, shares closed at higher prices thanthey opened on both August 7 and August 8. Indeed, by theend of August, the stock was trading a few dollars higher thanit had been at the beginning of the month, without havingexperienced any significant fluctuations.
Yet. "[u]nbeknownst to investors, the disclosure of theFDA Warning Letter had a detrimental effect on Viread sales.Physicians, now alerted to Gilead's illegal marketing effortsand to the safety problems with Viread, were less eager toprescribe it to their patients." Competitors invoked the letterin efforts to persuade physicians to switch from Viread totheir products. In the remaining weeks of August, there wasa "marked drop in prescriptions and sales" of Viread.Although the Investors lack precise sales figures, a MorganStanley analyst report shows that Viread prescriptions experi-
enced a "sharp drop" in August 2003, followed by "flattenedgrowth" for the remainder of the third quarter. The prescrip-tions would have suffered further decline were it not for cer-
l\ RE GILEAD SCIENCES SECURITIES LITIGATION 10329
taro side-effects that made it dangerous for some patients todiscontinue using the drug.
The wholesalers observed the initial drop in sales and pre-scriptions of Viread, and the ensuing slow growth. BecauseViread was underperfonning relative to the expectations gen-erated by the second quarter reports, the wholesalers drewdown much more of their excess inventory than they had orig-inally planned, letting supply of Viread drop to the lowestlevel in four quarters, and well below the industry average forother drugs.
Although wholesalers recognized Viread's struggles, thepublic continued to misunderstand the significance of theWarning Letter. Gilead did nothing to correct that misunder-standing. In its Form 10-Q reporting on the 2003 second quar-
ter, issued on August 14, Gilead persisted in emphasizing theincreased volume of Viread's second quarter sales without
discussing the role of off-label marketing. Although the Form
10-Q did briefly address the Warning Letter, it failed to reveal
the activities that gave rise to that letter, or the impact the let-ter would have on sales of Viread.
The Officers exploited the public's ignorance. In the days
between the receipt and public disclosure of the Warning Let-
ter, two of the Officers each sold over $3 million worth of
stock. On August 7, the day the FDA disclosed the letter, Gil-
ead's Senior Vice President/Chief Financial Officer sold
nearly 5700,000 worth of shares. Throughout August, while
the market misapprehended Gilead's impending troubles, the
Officers continued to sell off substantial numbers of shares.
This activity was "unusual and suspicious" because this was
the first month in which all of the Officers sold stock. More
to the point, this was proof that the Officers acted with knowl-
edge or with deliberate recklessness when they issued materi-
ally false and misleading documents and statements that were
disseminated to the investing public.
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Not until October 28, 2003, did the public finally realizethe impact of the off-label marketing and the Warning Letter.After the markets closed that day, Gilead issued a press
release detailing third quarter financial results. The public
learned that Viread sales fell significantly below expectations
because there had been substantially more overstocking bywholesalers than previously reported. Accordingly, third quar-
ter prescriptions were filled by wholesalers' existing inven-
tory, and wholesalers did not reorder Viread at a
commensurate level. Market analysts attributed the disap-
pointing sales to "lower end-user demand." That lower end-
user demand, as noted, was a direct result of the Warning Let-
ter, which had exposed Gilead's unlawful off-label marketing
efforts to physicians.
The market was "stunned" by the third quarter results.Share prices closed at $59.46 on October 28, before the pressrelease was circulated. It may be the case that the market hadalready begun to slowly incorporate the information regardingViread's off-label marketing into the share price. But thethird-quarter earnings release made the effect of that informa-tion inescapably clear. The day after the press release wasissued, trading volume of Gilead shares was up 1,400% fromits average daily level. The day opened with Gilead's priceper share at $50.69, and closed with a price of $52 per share,a 12% decrease from the previous day's closing price.
Summing it all up,
At all relevant times, the material misrepresenta-tions . . . directly or proximately caused or were asubstantial contributing cause of the damages sus-tained by [the Investors]. . . . [Gilead and the Offi-cers] made or caused to be made a series ofmaterially false or misleading statements about Gile-ad's sales, business, product marketing and promo-tion, prospects, operations and financial results.These material misstatements had the cause and
IN RE GILEAD SCIENCES SECURITIES LITIGATION 10331
effect of creating in the market an unrealisticallypositive assessment of Gilead . . . thus causing theCompany's publicly traded securities to be overval-ued and artificially inflated at all relevant times.
11. The District Court's Decision
The district court dismissed the complaint with prejudice.
Based on the Investors' allegations and judicially-noticed
documents that had been referenced in the complaint, thecourt concluded that the Investors had failed to adequatelyplead loss causation as that requirement was articulated inDura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).
Specifically, the district court found the complaint failed to
connect the following chain of events . . . : 1) that[Gilead's and the Officers'] alleged failure to dis-close the off-label marketing scheme caused a mate-rial increase in sales; 2) that practitioners materiallydecreased their demand for Viread due to the publi-cation of the FDA Warning Letter; and most impor-tantly, 3) that the alleged decrease in sales due to theFDA letter proximately caused Gilead's stock todecrease three months later[.]
The district court rested its decision exclusively on losscausation, and did not consider whether the Investors suffi-ciently alleged falsity or scienter.
DISCUSSION
1. Standards of Review
"We review de novo the district court's dismissal of a com-plaint for failure to state a claim under Federal Rule of CivilProcedure l2(b)(6). On review. we accept the plaintiffs' alle-gations as true and construe them in the light most favorable
10332 IN Re GILEAD SCIENCES SECURITIES LITIGA T ION'
to plaintiffs." Gompper v. VJSX Inc., 298 F.3d 893, 895 (9thCir. 2002) (citation omitted). "The court need not, however,accept as true allegations that contradict matters properly sub-ject to judicial notice or by exhibit. Nor is the court requiredto accept as true allegations that are merely conclusory,unwarranted deductions of fact, or unreasonable inferences."Spreti+'ell v. Golden State Warriors, 266 F.3d 979, 988 (9thCir. 2001) (citation omitted), amended on other grounds, 275F.3d 1187 (9th Cir. 2001). The complaint is properly dis-missed if it fails to "plead `enough facts to state a claim torelief that is plausible on its face.' " I,Veber v. Dep 't of Veter-ans Affairs, 521 F.3d 1061, 1065 (9th Cir. 2008) (quoting BellAll. Corp. iv. Twombly, 127 S. Ct. 1955, 1974 (2007)).
II. Applicable law
(1) Section 10(b) of the Securities Exchange Act of 1934makes it unlawful "[t]o use or employ, in connection with thepurchase or sale of any security . . . any manipulative ordeceptive device or contrivance in contravention of such rulesand regulations as the Commission may prescribe." 15 U.S.C.§ 78j(b). Pursuant to this section, the Securities and ExchangeCommission promulgated Rule lOb-5, which makes it unlaw-ful:
(a) To employ any device, scheme, or artifice todefraud,
(b) To make any untrue statement of a material factor to omit to state a material fact necessary in orderto make the statements made, in the light of the cir-cumstances under which they were made, not mis-leading, or
(c) To engage in any act, practice, or course of busi-ness which operates or would operate as a fraud ordeceit upon any person. in connection with the pur-chase or sale of any security.
1V RE GILEAD SCIENCES SECURITIES LITIGATION 10,33
17 C.F.R. § 240.IOb-5.
121 We have identified five basic elements of a Rule lOb-5claim: "(1) a material misrepresentation or omission of fact,(2) scienter, (3) a connection with the purchase or sale of asecurity, (4) transaction and loss causation, and (5) economicloss." In re Daou Svs., Inc., 411 F.3d 1006, 1014 (9th Cir.2005) (citing Dina Pharms., 544 U.S. at 341-42).
Because the district court addressed only loss causationunder Rule lOb-5, we will limit our consideration to thatissue, "following the general rule [that] a federal appellatecourt does not consider an issue not passed upon below." Mi1-ler vv. Thane Int'l, Inc., 519 F.3d 879, 892 (9th Cir. 2008)(alteration in original; internal quotation marks omitted). Aplaintiff bears the burden of proving that a defendant'salleged unlawful act "caused the loss for which the plaintiffseeks to recover damages." 15 U.S.C. § 78u-4(b)(4). To estab-lish loss causation, "the plaintiff must demonstrate a causalconnection between the deceptive acts that form the basis forthe claim of securities fraud and the injury suffered by theplaintiff." Daou, 411 F.3d at 1025. The misrepresentationneed not be the sole reason for the decline in value of thesecurities, but it must be a " `substantial cause.' " Id. (quotingRobbins v. Koger Props., Inc., 116 F.3d 1441, 1447 n.5 (11thCir. 1997)).
Rule 9(b) of Civil Procedure provides: "In alleging frauda party must state with particularity the circumstances
constituting fraud ...." Gilead and the Officers contend thatthe Investors' loss causation arguments should be subject tothis heightened pleading requirement, although they recognizethat the Supreme Court has not decided the issue. See DuraPharrns.. 544 U.S. at 346. The Investors argue that Rule8(a)(2)'s "short and plain statement" requirement should con-trol loss causation pleading.
We need not resolve this issue today. Rule 9(b) imposes theheightened requirement so that the fraud-action defendant
10-1-14 N RE GILEAD SCIENCES SECURITIES LITIGATION
"can prepare an adequate answer from the allegations." Odornv. Wicrosoft Corp., 486 F.3d 541, 553 (9th Cir. 2007) (inter-nal quotation marks omitted). As we explain below, the Inves-tors' complaint offers "sufficient detail to give defendantsample notice of [their] loss causation theory, and to give ussome assurance that the theory has a basis in fact." Berson v.Applied Signal Tech., Inc., 527 F.3d 982, 989-90 (9th Cir.2008). Therefore, under either Rule 8 or Rule 9, the Investorshave sufficiently pleaded loss causation.
111. The Sufficiency of the Complaint
The district court identified Din-a Pharmaceuticals as theauthority that doomed the Investors' complaint. Dura featuredplaintiffs who alleged that they "paid artificially inflatedprices" for Dura's securities and "suffered damages thereby."Dura. 544 U.S. at 339-40 (alterations, emphasis, and quota-tion marks omitted). The court below had held that loss causa-tion was established merely by demonstrating that shareprices on the date of purchase were inflated. Broudo v. DuraPharins., Inc., 339 F.3d 933, 938 (9th Cir. 2003).
(3] The Supreme Court reversed, and held that an inflatedpurchase price alone is not enough to establish loss causation.Dur-a, 544 U.S. at 342. More is required of plaintiffs-particular allegations as to "what the relevant economic lossmight be," and "what the causal connection might be"between the fraud alleged and the economic losses actuallysuffered. Id. at 347.
141 The complaint in this case is meaningfully different
from that in Dura Phar-nmaceuticals. The Investors here iden-tify a specific economic loss: the drop in value on October 29,
2003, that followed the October 28 press release. They also
allege that this loss was caused by Gilead's misrepresenta-
tions. They provide abundant details of Gilead's off-label
marketing, and they assert that this led to higher demand for
IN RE GILEAD SCIENCES SECERITIES LITIGATION 10335
Viread, which in turn inflated Gilead's stock price.' As sum-marized in the complaint's introduction,
[T]he market was not told that off-label marketingwas the cornerstone of demand. This mistakenimpression of demand led to, among other things,wholesaler overstocking in reaction to an anticipatedprice increase. When the truth about [Gilead's andthe Officers'] off-label marketing was disclosed,however, [they] could no longer maintain the salesgrowth levels that investors had come to expect, andGilead's stock price dropped accordingly.
Assuming, then, that the Investors' theory is sound and thatthey can prove all that they allege. the district court erred byholding that Dura Pharmaceuticals compelled dismissal ofthis action.
The dismissal order below, though, suggests that the districtcourt was unwilling to make these assumptions. The districtcourt found that the complaint contained "too many logicaland factual gaps."
151 Based on our own review, we find the complaint suffi-
ciently alleges a causal relationship between (1) the increase
in sales resulting from the off-label marketing, (2) the Warn-
ing Letter's effect on Viread orders, and (3) the Warning Let-
ter's effect on Gilead's stock price.
Perhaps what truly motivated the dismissal was the districtcourt's incredulity. The court expressly identified two allega-tions it was unwilling to accept. First, it could not make "theunreasonable inference that a public revelation on August 8
'The complaint includes one concrete example of how Gilead's stock
price was directly inflated by Viread's sales performance: the 13.4% rise
in share value triggered by Gilead's positive statements about demand for
Viread on July 14, 2003, the first day of the class period.
10336 1\ RE GILEAD SCIENCES SECURITIES LITIGATION
caused a price drop three months later on October 28." OrderGranting Defs.' Mot. to Dismiss at 11. Second, with respectto the Warning Letter's impact on Viread sales, the courtfound "a slowing increase in demand, alone, too speculativeto adequately demonstrate loss causation." Id. at 12 n.10.
[6] As an initial matter, we note that a district court rulingon a motion to dismiss is not sitting as a trier of fact. It is truethat the court need not accept as true conclusory allegations,nor make unwarranted deductions or unreasonable inferences.Spreivell, 266 F.3d at 988. But so long as the plaintiff allegesfacts to support a theory that is not facially implausible, thecourt's skepticism is best reserved for later stages of the pro-ceedings when the plaintiff's case can be rejected on evidenti-ary grounds. "[A] well-pleaded complaint may proceed evenif it strikes a savvy judge that actual proof of those facts isimprobable, and that a recovery is very remote and unlikely."Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1965 (2007)(internal quotation marks omitted).
[7] There is no exception to this rule for the element of loss
causation. The Third Circuit has stated that "loss causation
becomes most critical at the proof stage," and has cited schol-
arly authority stating that it is normally inappropriate to rule
on loss causation at the pleading stage. McCabe v. Er-n7st &
Young, LLP, 494 F.3d 418. 427 n.4 (3rd Cir. 2007) (internal
quotation marks omitted). Similarly, the Second Circuit has
held that loss causation "is a matter of proof at trial and not
to be decided on a Rule 12(b)(6) motion to dismiss." Emer-
gent Capital Inv. Vgmt., LLC. V. Stonepath Group, Inc.. 343
F.3d 189, 197 (2d Cir. 2003). But see Lentell v. Vlerrill Liynnch
& Co., 396 F.3d 161, 172-77 (2d Cir. 2005) (failure to plead
any facts supporting loss causation warranted 12(b)(6) dis-
missal of complaint).
[8] We agree. So long as the complaint alleges facts that,if taken as true, plausibly establish loss causation, a Rule12(b)(6) dismissal is inappropriate. This is not "a probability
IN RE GILEAD SCIENCES SECURITIES LITIGAI ION 10337
requirement ... it simply calls for enough fact to raise a rea-sonable expectation that discovery will reveal evidence of'loss causation. Bell At!.. 127 S. Ct. at 1965.
The district court's concern about the elapse of timebetween the public issuance of the Warning Letter and thedrop in price recalls our holding in No. 84 Employer-TeamsterJoint Council Pension Trust Fund v. America West HoldingCorp., 320 F.3d 920 (9th Cir. 2003) (internal quotation marksomitted). There, a Rule IOb-5 defendant argued that itsalleged misrepresentations were per se immaterial because theinjurious drop in stock price took place more than one and ahalf months after the market learned the truth about the mis-representations. Id. at 934. We rejected "a bright-line rulerequiring an immediate market reaction" because "[t]he mar-ket is subject to distortions that prevent the ideal of a free andopen public market from occurring." Id. (internal quotationmarks omitted). Instead, we held that courts must engage ina "fact-specific inquiry." Id. (internal quotation marks omit-ted).
191 We believe that America West's discussion of material-ity applies with equal force to the loss causation requirement.A limited temporal gap between the time a misrepresentationis publicly revealed and the subsequent decline in stock valuedoes not render a plaintiff's theory of loss causation per seimplausible.
1101 Our review of the Investors' complaint convinces usthat the October drop in stock price was plausibly caused bythe Warning Letter. Importantly, the drop occurred immnedi-ately after Gilead disclosed less-than-expected revenuesresulting from the reduction in wholesalers' Viread invento-ries, which analysts ascribed to lower end-user demand. Thatlower end-user demand, in turn, is expressly alleged to havebeen caused by the Warning Letter. In this light, the marketdid react immediately to the corrective disclosure-the Octo-ber 28 press release. The Warning Letter, which discussed
10338 IN RL GILE:\D SIIENCES SECURITIES LITIGATION
only two instances of off-label marketing, would not neces-sarily trigger a market reaction because it did not containenough information to significantly undermine Gilead's July2003 pronouncements concerning demand for Viread. It is notunreasonable that physicians-the targets of the off-labelmarketing-would respond to the Warning Letter while thepublic failed to appreciate its significance.
[Ill The district court also erroneously concluded that aslowing increase in demand is too speculative to establish losscausation. Had the Investors alleged that the Warning Lettereliminated all sales resulting from off-label marketing, itwould be very unlikely that demand would continue toincrease, since the complaint asserts that 75% to 95% of saleswere caused by off-label marketing. But they do not allegethat, and we see no reason why the court cannot proceed tothe evidentiary stages to determine the extent of the WarningLetter's impact on the growth of demand for Viread.
[12] The complaint specifically alleges that physicianswere less eager to prescribe Viread, and competitors used theWarning Letter to lure Viread customers to other drugs. Thisis "enough fact to raise a reasonable expectation that discov-ery will reveal evidence"-or the lack thereof-of the Warn-ing Letter's effect on demand. Bell 4tl., 127 S. Ct. at 1965.
CONCLUSION
For the foregoing reasons, the district court improperlygranted Gilead's and the Officers' Rule 12(b)(6) motion. TheInvestors have sufficiently alleged loss causation and eco-nomic loss. We leave it to the district court to determinewhether they have sufficiently alleged the other elements oftheir claims.
REVERSED and REMANDED.
CERTIFICATE OF SERVICE
I certify that on September 2, 2008, a copy of the foregoing PETITION
FOR REHEARING EN BANC AND FOR PANEL REHEARING was
served by First Class Mail on the following:
Jack G. Fruchter Marc M. UmedaAbraham, Fruchter & Twersky Robbins Umeda & Fink, LLP
One Penn Plaza, Suite 2805 610 West Ash Street, Suite 1800New York, NY 10119 San Diego, CA 92101
212/279-5050 619/525-3990212/279-3655 (Fax) 619/525-3991 (Fax)
Robert S. Green Laurence D. King
Green Welling LLP Linda M. Fong595 Market Street, Suite 2750 Kaplan, Fox & Kilsheimer LLPSan Francisco, CA 94105 350 Sansome Street, Suite 400
415/477-6700 San Francisco, CA 94104415/477-6710 (Fax) 415/772-4700
415/772-4707(Fax)Lori S. Brody James M. Orman
Kaplan, Fox & Kilsheimer LLP Law Offices of James M. Orman
1801 Century Park East, Suite 1460 1845 Walnut Street, 14th Floor
Los Angeles, CA 90067 Philadelphia, PA 19103310/439-6006 215/523-7800310/439-6004 (Fax) 215/523-9290 (Fax)
Lori G. Feldman Eric J. BelfiMilberg LLP Labaton Sucharow & Rudoff LLPOne Pennsylvania Plaza 100 Park Avenue
New York, NY 10119 New York, NY 10017212/594-5300 212/907-0878212/868-1229(Fax) 212/818-0477 (Fax)
Juan Carlos Sanchez Robert A. JigarjianClass Action Clearinghouse Jigarjian Law OfficeStanford Digital Law Project - Securities 128 Tunstead Avenue
559 Abbott Way San Anselmo, CA 94960Stanford, CA 94305 415/341-6660
650/725-0479Sanford Svetcov David J. George
Susan K. Alexander Robert J. RobbinsCoughlin Stoia Geller Rudman & Robbins Coughlin Stoia Geller Rudman &LLP Robbins LLP100 Pine Street, Suite 2600 120 East Palmetto Park Road, #500San Francisco, CA 94111-5238 Boca Raton, FL 33432
415/288-4545 561/750-3000415/288-4534 (Fax) 561/750-3364(Fax)
Douglas C. McDermott Samuel Rudman
McDermott Newman PLLC Coughlin Stoia Geller Rudman &1001 Fourth Avenue Robbins LLP
Suite 3200 58 South Service Road
Seattle, WA 98154 Suite 200206/749-9296 Melville, NY 11747206/749-9467 (Fax) 631/367-7100
631/367-1173 (Fax)Michael M. GoldbergGlancy & Binkow LLP1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067
310/201-9150310/201-9160 (Fax)
I further certify under Federal Rule of Appellate Procedure 25(B)(ii) that
an original and fifty copies of the foregoing PETITION FOR REHEARING
EN BANC AND FOR PANEL REHEARING were dispatched on
September 2, 2008, for delivery by Courier Service to the Clerk for the United
States Court of Appeals for the Ninth Circuit to the following address:
Mollie C. Dwyer
Clerk of the Court
United States Court of Appeals for the Ninth Circuit95 Seventh StreetSan Francisco, CA 94103-1526
Dated: September 2, 2008
/IS/Jocelyn McIntosh