Since the initial coronavirus outbreak in the U.S. in March 2020, plaintiffs’ lawyers have filed a host of securities class action lawsuits against companies raising a variety of COVID-19-related allegations. Many of these cases have faced significant hurdles at the initial pleading stage, and in a number of cases the dismissal motions have been granted. The one categorical exception to these dismissal motion generalizations seems to be cases involving vaccine development companies. Two rulings in the past week seem to corroborate both of these observations. First, in a December 9, 2022 ruling in the securities suit pending against the diagnostic testing company Talis Biomedical, the court granted the defendants’ motion to dismiss (albeit with leave to amend). However, in a December 12, 2022 ruling in the securities case against the vaccine development company Novavax, the court denied the defendants’ dismissal motion in significant part. The rulings in these two cases are discussed below.
Talis Biomedical Corporation develops diagnostic tests for infectious diseases. Talis completed its IPO on February 11, 2021. In its offering documents, the company disclosed, among other things, that in January 2021 the company had submitted a request to the FDA for Emergency Use Authorization (EUA) for its Talis One platform for COVID-19 testing. The documents specifically stated that there “can be no assurance that the COVID-19 test we are developing… will be granted an Emergency Use Authorization,” adding that if the EUA is not granted, we will “be unable to sell this product in the near future.”
On March 8, 2021, Talis announced that it had withdrawn its EUA application for the Talis One COVID-19 test and that the company intends to implement its “previously planned validation study” and submit its EUA application in early second quarter 2021. The company’s share price declined 12% on this news.
On August 10, 2021, the company announced that its “development timelines have been extended by delays in launching of [the] COVID-19 test and manufacturing scale.” The company’s share price declined 6% on this news.
On August 30, 2021, the company announced that its CEO was stepping down. The company’s share price declined 11% on this news. On November 15, 2021 the company announced that Brian Blaser had been appointed CEO effective December 1, 2021. However, one week later, on December 8, 2021, Talis announced that Blaser had stepped down from his position. The company’s share price declined another 11% on this news. By the time the subsequent lawsuit was filed, the complaint alleges, the company’s share price had declined more than 76% below its IPO price.
On January 7, 2022, a plaintiff shareholder filed a securities class action in the Northern District of California against Talis and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased shares in connection with or traceable to the company’s February 2021 IPO. The complaint also asserts claims on behalf of investors who purchased shares after the IPO, alleging that the company made representations in subsequent SEC filings and public statements.
As the court’s opinion later put, the plaintiff alleges that the Registration statement and the subsequent public statements were false and misleading because (1) Talis was not capable of production Talis One to scale; (2) the Talis One was non-functional due to design issues; and (3) Talis had botched its crucial application for an Emergency Use Authorization (EUA) from the FDA. The defendants moved to dismiss.
In a detailed December 9, 2022 order (here), Northern District of California Judge Susan Illston granted the defendants’ motion to dismiss, with leave for the plaintiffs to amend. In granting the motion, Judge Illston said with that plaintiffs’ “allegations in support of falsity are based on [confidential witness] allegations that are conclusory, state opinions without factual support, sometimes based on vague hearsay and rumors, and are often vague or silent as to time period, and thus plaintiffs have not alleged facts showing that the challenged statements were false or misleading at the time of the IPO.”
Judge Illston reached similar conclusions with respect to the allegedly misleading post-IPO statements as well, concluding that the plaintiffs have failed to allege with particularity that any of the challenged statements were false and misleading when made. In addition, Judge Illston separately concluded that a number of the challenged post-IPO statements are protected by the PSLRA’s safe harbor for forward-looking statements.
Novavax is a vaccine development company. The company is seeking to develop a vaccine for COVID-19, NVX-CoV2373. Prior to the class period in the new lawsuit, the company allegedly had said that it intended to seek Emergency Use Authorization (EUA) from the Food and Drug Administration (FDA) in the second quarter of 2021. However, in May 2021, news sources reported that due to regulatory issues the company was delaying its EUA application until June 2021 at the earliest. The same day as the news reports, the company confirmed that it was unlikely to seek the EUA until July 2021 at the earliest.
On August 5, 2021, in the company’s quarterly earnings release (here), the company reported, among other things, that it expected to file the EUA for NVX-CoV2373 in the fourth quarter of 2021.
Finally, on October 19, 2021, Politico published an article entitled “They Rushed the Process: Vaccine Maker’s Woes Hamper Global Inoculation Campaign.” Among other things, the Politico article reported that Novavax “faces significant hurdles in proving it can manufacture a shot that meets regulators’ quality standards” with respect to NVX-CoV2373. The article cited an anonymous source as stating that Novavax’s issues “are more concerning than previously understood” and that it could take until the end of 2022 to resolve its manufacturing issues and win regulatory authorizations.
On November 12, 2021, a plaintiff shareholder filed a securities class action lawsuit in the District of Maryland against the company and certain of its directors and officers. The complaint alleges that the defendants made misleading statements or failed to disclose that: “(i) Novavax overstated its manufacturing capabilities and downplayed manufacturing issues that would impact its approval timeline for NVX-CoV2373; (ii) as a result, Novavax was unlikely to meet its anticipated EUA regulatory timelines for NVX-CoV2373; (iii) accordingly, the Company overstated the regulatory and commercial prospects for NVX-CoV2373; and (iv) as a result, the Company’s public statements were materially false and misleading at all relevant times.” The defendants filed a motion to dismiss.
In a December 12, 2022 order (here), District of Maryland Theodore Chung granted the defendants’ motion in part and denied it in part. In granting the motion, in part, Judge Chung noted that the plaintiff had failed to allege any misleading statements or omissions as to two of the individual defendants, and so granted the motion as to those individuals. In addition, with respect to a number of the company’s statements about its efforts to develop the vaccine, Judge Chung concluded that the plaintiff’s allegations do not support the conclusion that the statements were false or contained omissions of material fact.
However, Judge Chung did find that a number of the alleged misrepresentations or omissions were actionable. In particular, Judge Chung found that in a number of statements about the company’s supposed progress with the vaccine, the company’s CEO omitted information concerning manufacturing concerns and contamination issues in the company’s contracted manufacturing facilities, omissions that Judge Chung concluded were materially misleading.
Judge Chung also concluded, as to the statements he had found that the plaintiff had adequately alleged falsity, that the plaintiffs had also adequately alleged scienter, based on a number of factors including the individual defendants’ inside trading and the centrality of the vaccine development to the company’s core operations. Interestingly, in reaching this conclusion, Judge Chung chose to disregard the defendants’ contention that the trades in question had been made pursuant to a written Rule 10b5-1 trading plan. In disregarding the argument, Judge Chung noted that the court had not been provided with information about when the defendants had entered into the plan or the specific terms of the plan. Without the information, Judge Chung said, he did not find that the trading plans negate the inference of scienter.
While many COVID-related securities suits have been filed since the initial coronavirus outbreak in the U.S. in March 2020, relatively few cases have actually reached the ruling stage on the defendants’ motions to dismiss. Nevertheless, the extent to which the dismissal motions that have been ruled upon have been granted is noteworthy — dismissal motions have been granted in a number of COVID-19 related cases, including, for example, the cases pending against the cruise ship lines (as discussed, for example, here); as well as in cases filed against, among others, AstraZeneca (here); Sorrento Therapeutics (here); The Geo Group (here); and Velocity Financial (here). Indeed, the dismissal of the COVID-19-related lawsuit against online education firm K-12, Inc. was recently affirmed by the Fourth Circuit.
However, there have been some notable cases where the motions to dismiss have been denied, in addition to the denial in part of the dismissal motion in the case against Novavax, as discussed above. Indeed, two of the cases where the dismissal motions were denied have now been settled. In August 2022, Inovio Pharmaceuticals announced that it had reached an agreement to settle the COVID-19-related securities suit that had been filed against the company for cash and stock totaling $44 million. Also in August, Vaxart announced that it had agreed to settle the COVID-19 related securities suit pending against the company for $12 million.
One thing that the two settled cases have in common with the Novavax case, beyond the fact that the dismissal motion was denied in all three cases, is that all three of the companies involved are vaccine development companies. (To be sure, not all of the cases against vaccine development companies have survived dismissal motions; the case against AstraZeneca noted above as dismissed related to the company’s efforts to develop a COVID-19 vaccine.)
Probably the most interesting thing about the COVID-19 cases is that here we are well into the third year of the pandemic and the COVID-19-related cases continue to be filed, notwithstanding the passage of time and overall rather poor track record in these cases. By my count, since the initial coronavirus outbreak in the U.S. in March 2020, there have been a total of 61 coronavirus-related securities class action lawsuits filed, of which 18 were filed in 2022. The outcomes of the dismissal motions notwithstanding, the COVID-19-related filings have been one of the most important securities class action litigation phenomena over the course of the last three years, with all signs suggesting that it will continue as we head into 2023.