In re Dynavax Security Litigation: Consolidated Class Action Dismissed with Leave to Amend
In In re Dynavax Sec. Litig., No. 4:16-cv-06690-YGR, 2017 BL 320563 (N.D. Cal. Sept. 12, 2017), the United States District Court for the Northern District of California granted Dynavax Technologies Corporation, Eddie Gray, Michael S. Ostrach, and Robert Janssen’s (collectively, “Defendants”) motion to dismiss lead plaintiff Kwok Pang’s (“Plaintiff”) consolidated class action complaint with leave to amend. The court found Plaintiff’s complaint failed to establish that Defendants failed to disclose facts, which would have been sufficient to demonstrate materially false and misleading statements under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder.
According to the complaint, in late 2013 or early 2014, Defendant Dynavax was engaged in a Phase III clinical trial (“the clinical trial”) for its HEPLISAV-B vaccine, in an effort to obtain FDA approval by providing a larger safety database specifically assessing the possibility of rare autoimmune side effects. On January 7, 2016, Defendants issued a press release announcing “top-line results” from the clinical trial that were consistent with expectations. According to Plaintiffs’ allegations, although Defendants discussed some Adverse Events of Special Interest (“AESIs”), Defendants failed to report “a numerical imbalance in a small number of cardiac events,” not seen in prior trials. Plaintiff filed a complaint alleging that Defendants made materially false and misleading statements by reporting certain positive aspects of the clinical trial but failing to report other AESIs. Specially, Plaintiff alleged the statements made in the January 7, 2016, press release were false. Plaintiff further alleged that Defendants’ failure to mention the occurrence of “cardiac AESIs” rendered the discussion of AESIs misleading.
Section 10(b) of the Exchange Act makes it unlawful to make any untrue statement of material fact or to omit a material fact necessary to make the statements made not misleading. Section 10(b) and Rule 10b-5 create a duty to include all facts necessary to render a statement accurate and not misleading. Absent a duty to disclose, silence is not misleading. Under the Private Securities Litigation Reform Act (“PSLRA”), a plaintiff has a heightened pleading standard; the complaint must specify each statement alleged to have been misleading, the reasons why the statement is misleading, and, if the allegation is made on information and belief, state with particularity the facts on which that belief is formed. The PSLRA also requires that, for each act or omission alleged, the complaint states with particularity the facts giving rise to a strong inference that the defendant acted with the required state of mind.
The court found that Plaintiffs failed to meet the heightened pleading standard and pled facts that, even if found true, would be insufficient to demonstrate materially false and misleading statements. The court determined the clinical trial was analyzing a specified list of AESIs, referred to as “other AESIs,” and the cardiac events were not among the defined AESIs of the study. Due to this specification, Defendants were not required to report the cardiac events with the “other AESIs” to ensure that the statements were not untrue or misleading. Following a hearing, Plaintiffs conceded the complaint misconstrued the term “AESIs”, but maintained that Defendants’ failure to disclose the cardiac events during the press releases was still misleading, even if not considered AESIs. The court, however, ruled that the complaint failed to plead these new allegations and was therefore inadequate under Section 10(b). The court encouraged the Plaintiffs to include in their amended complaint the specific facts of each statements they allege to be misleading, why they believe those statements to be misleading, and what that belief is based upon, as the heightened pleading burden requires.
For the above reasons, the United States District Court for the Northern District of California granted Defendant’s motion, dismissing Plaintiffs’ complaint with leave to amend.
The primary materials for this case may be found on the DU Corporate Governance website.