Loss Causation Under Dura: A Possible Split Among The Circuits

The Fifth Circuit recently dismissed a class action securities complaint for failure to adequately plead loss causation as required by Dura Pharm. Inc. v. Broudo, 544 U.S. 336 (2005) (discussed here). Catogas v. Cyberonics, Inc., No. 07-20787 (5th Cir. Sept. 8, 2008). In doing so, the court appears to have come into conflict with the approach if not the holding of the Ninth Circuit’s recent decision in In re: Gilead Sciences Sec. Litig., Case No. 06-16185 (9th Cir. Aug. 11, 2008), discussed here.

In Cyberonics, the court reviewed the dismissal of a putative securities fraud class action complaint. The complaint alleged two key claims. One involved whether the company had made false and misleading statements regarding the likelihood that the FDA would approve a new device for the treatment of depression. The second focused on the stock option practices of the company. Plaintiffs only appealed the dismissal of the second claim regarding the stock options.

In reviewing the decision of the district court, the key question for the Fifth Circuit was whether a press release which discussed the stock option question as well as the medical device issue constituted a corrective disclosure under Dura. The court began its analysis by noting that under Dura, “there must be sufficient allegations that the misrepresentations caused plaintiffs’ loss; it is insufficient to simply allege that the misrepresentation ‘touches upon’ a later economic loss,” quoting Dura (emphasis added by court). Rather, plaintiff must allege that the market reacted negatively to a corrective disclosure that revealed the falsity of the prior representations. To support this conclusion, the court cited Glaser v. Enzo Biochem, Inc., 464 F.3d 474 (4th Cir. 2006) for the proposition that “‘Dura requires plaintiffs to plead loss causation by alleging that the stock price fell after the truth of a misrepresentation about the stocks was revealed.'”

Applying these principles, the court concluded that a press release discussing the stock option question pointed to by plaintiffs was not a corrective disclosure within the meaning of Dura, as claimed by plaintiffs. Rather, the press release essentially contained nothing new about the question, although it did discuss the stock option issue. Finding that plaintiffs failed to plead a corrective disclosure, the court affirmed the dismissal of the complaint based on Dura.

This approach contrasts with the one taken by the Ninth Circuit in Gilead Sciences. There, the circuit court reversed the dismissal of a securities fraud complaint which had been dismissed based on Dura as discussed here. In its opinion, the Ninth Circuit noted that loss causation is much more important at trial than at the pleading stage, although the court did not go so far as to conclude that loss causation is not a pleading issue. The thrust of Gilead Sciences however, seems at odds with the Fifth Circuit’s decision in Cyberonics. The Ninth Circuit’s decision also seems at odds with Dura, which discusses the question of loss causation in terms of pleading and the requirements for writing a complaint under Federal Civil Rule 8(a). This sets up a potential split among the circuits over loss causation which could eventually require Supreme Court review that could clarify a number of questions about Dura and loss causation.