Trendspotting: COVID-19 Related Investor Lawsuit Court Decisions
By Robin Wechkin, Sara B. Brody, and Sarah Hemmendinger
In the first three years of the pandemic—2020 through 2022—six or seven new filings per year targeted companies developing COVID-19-related products, principally tests and vaccines. As the cases have worked their way through the courts, the results have been mixed. Decisions on motions to dismiss were evenly split in 2021 and favored defendants in 2022. The 2023 decisions again tilted toward defendants. The 2023 decisions also show, as in previous years, that the strongest claims have arisen from difficulties companies experienced in manufacturing vaccines in 2020 and 2021. A manufacturer experienced the single defeat in the 2023 COVID-19 cases in In re Emergent BioSolutions Inc. Sec. Litig., 2023 WL 5671608 (D. Md. Sept. 1, 2023). Vaccine developers succeeded in obtaining dismissal or affirmance of dismissal in Nandkumar v. AstraZeneca PLC, 2023 WL 3477164 (2d Cir. May 16, 2023) and In re Ocugen, Inc. Sec. Litig., 2023 WL 2351695 (E.D. Pa. Mar. 3, 2023).
Emergent, which arises from high-profile manufacturing failures, is the most significant COVID-19 decision from 2023. Between April and June 2020, long before COVID-19 vaccines had been tested and approved, Emergent obtained manufacturing contracts worth more than $1.5 billion. Its counterparties were both the U.S. government and private vaccine developers, including Johnson & Johnson and AstraZeneca.
Problems arose early. By April 2020, the FDA had already issued a Form 483; in June 2020, the agency told Emergent that it did not consider the company’s Bayview facility ready to support commercial operations. Meanwhile, Johnson & Johnson and AstraZeneca flagged problems with contamination, mold, and inadequate training and quality review systems. On July 6, 2020, Emergent nevertheless announced that it was scaling up to produce hundreds of millions of vaccine doses. But audits in the second half of 2020 continued to reveal problems, including the risk of contamination.
On March 31, 2021, the New York Times reported that Emergent had voluntarily destroyed batches of vaccines, and that 15 million doses had been contaminated when ingredients for the Johnson & Johnson product were mixed up with ingredients for the AstraZeneca product. The company responded that the destruction was limited to a single batch. But problems continued, and the government temporarily put Johnson & Johnson in charge of the Bayview facility.
In November 2021, Emergent reported that the government had terminated a major contract. The company also reversed previously recorded revenue. A congressional committee later determined that more than 400 million doses were ultimately destroyed. The committee also concluded that Emergent had hidden evidence of contamination from government investigators and had failed to remediate multiple deficiencies Johnson & Johnson and AstraZeneca brought to its attention.
Wrongdoing By Omission
In one of only three pre-approval trial court decisions to go against companies in 2023, the District of Maryland denied Emergent’s motion to dismiss. The court concluded that most of the company’s statements about its manufacturing capabilities were true but were rendered misleading by the omission of information about the destruction of doses and the FDA’s June 2020 communication that it did not believe Emergent was ready to begin commercial operations.
In concluding that plaintiffs had adequately alleged scienter — a legal term meaning knowledge of or intentional wrongdoing — the court notably rejected two arguments often advanced by drug developers. The first argument was that plaintiffs’ theory of fraud was counterintuitive: Emergent would not have “invested immense time, effort, and money in what [it] secretly knew would be a futile effort to manufacture COVID-19 drug substance.” The court rejected the argument because it did not accurately capture plaintiffs’ theory of fraud. Plaintiffs’ theory was not that Emergent knew its efforts would fail but rather that Emergent concealed or downplayed factors bearing on the risk of failure.
Emergent’s second scienter argument was that a holistic review of scienter allegations showed that the company “worked in good faith to manufacture vaccine drug substance in response to a pandemic, disclosed the risks, suffered an unfortunate contamination incident, and worked to address it.” The court did not question Emergent’s good faith in manufacturing vaccines but concluded that plaintiffs had adequately alleged that “while doing so, [the company] omitted the myriad known deficiencies at Bayview that undercut the success of that endeavor and did so with reckless disregard for how those omissions could mislead investors.”
These holdings suggest that securities defendants should take care to refine common scienter arguments. Refined arguments might emphasize (1) that a company would not pour resources into drug development (or any other endeavor) if it did not believe the likelihood of success was sufficiently high to justify the expenditures, and (2) that a company approached drug development and communications with investors about development with the same degree of earnestness and good faith.
Companies were successful in the two other COVID-19 cases decided in 2023. In AstraZeneca, plaintiffs faulted the company for not providing more complete information about a vaccine trial while it was ongoing. Some patients were given half-doses not because the protocol called for this but because that was what the manufacturer had provided. Plaintiffs alleged that by not revealing that information until it reported trial results, the company created a false impression that the trial was “on track.” The Southern District of New York granted the company’s motion to dismiss in 2022, and the Second Circuit affirmed dismissal in a short unpublished decision in 2023. The district court, in notably crisp terms, rejected plaintiffs’ argument that when a company does not disclose adverse facts, investors may reasonably conclude that no such facts exist: “Were that the standard, every omission would be actionable.” That is a useful concept and precedent. The Second Circuit’s affirmance, though cursory, clinches the value of the district court’s decision.
‘Immaterial Puffery’ Not Tantamount To Fraud
The third 2023 COVID-19 decision is Ocugen. Ocugen worked on treatments for blindness, but had never had a drug approved, and by 2020 had fallen on hard times. The company reported a going concern qualification in November 2020. The next month, Ocugen switched course dramatically, announcing that it was partnering with Bharat, an Indian biotech company developing an inactivated whole-virion COVID-19 vaccine called Covaxin. While Bharat conducted clinical trials in India, Ocugen took steps to prepare to apply for an Emergency Use Authorization (EUA) based on the Indian trial data. Ocugen projected great success: submission of an application in the first half of 2021, distribution of 100 million doses in the U.S. the same year, and significant revenue from that distribution.
None of that came to pass. In late 2020 and early 2021, the FDA granted EUAs for the Pfizer/ BioNTech, Moderna, and Johnson & Johnson vaccines, and issued guidance to companies seeking EUAs for subsequent vaccines. In May 2021, in keeping with FDA instructions, Ocugen provided a “master file” to the agency before submitting an EUA application. The FDA’s response was that Ocugen should instead submit a BLA. That deprived Ocugen of the advantages of the expedited EUA process, and the company’s stock price fell steeply.
Plaintiffs alleged fraud, attacking Ocugen’s highly optimistic projections. Much as in earlier COVID-19 cases in which companies made very confident statements about success during the first months of the pandemic, the court was notably sensitive to circumstances. In this case, that favored the company. The court reasoned that the public gained a heightened awareness of risk in drug development during the pandemic, and that against that background, plaintiffs failed to plead materiality. Reasonable investors, the court held, would understand that forecasts of success in this area are speculative, and that they amount to no more than puffery. “[I]n the height of an unprecedented global pandemic, reasonable investors would certainly appreciate that FDA approval and vaccine distribution was a ‘risky endeavor’ even if Defendants omitted a caveat to this effect. Accordingly, any reasonable investor would be able to discern Defendants’ projections related to vaccine distribution as immaterial puffery.”
The court also rejected plaintiffs’ contention that the company knew it would never obtain an EUA. Plaintiffs argued that Ocugen had failed to comply with new FDA guidance on EUAs, and therefore knew that its EUA application would be rejected. But the court held that the FDA guidance was just that — non-binding guidance — and that nothing suggested that a vaccine could not succeed on the EUA pathway unless a company had satisfied every factor in the guidance.
The court’s approach to guidance, like its approach to highly optimistic projections, is notably defendant friendly. Whether either approach will have traction outside the unique context of the pandemic is a different question.
About The Authors:
Robin E. Wechkin is Counsel with Sidley Austin LLP in Seattle.
Sara B. Brody is a partner with Sidley in San Francisco. She is co-leader of the firm’s Securities and Shareholder Litigation practice group and heads the Northern California litigation practice.
Sarah Hemmendinger is a partner with Sidley in San Francisco.