Columbia Laboratories Prevails in Securities Lawsuit

A Ropes & Gray team for a second time has won dismissal of a Section 10(b)(5) securities fraud claim filed in the District of New Jersey against client Columbia Laboratories, Inc. (Columbia) and two of its officers. Co-defendant Watson Pharmaceuticals Inc. (Watson) and five Watson executives joined Ropes & Gray’s briefs and were also dismissed from the case.

Ropes & Gray previously secured dismissal of the plaintiffs’ amended complaint, which alleged that the defendants misled investors about the clinical study supporting Columbia’s application to the U.S. Food and Drug Administration (FDA) to market a drug for the prevention of preterm birth. The FDA did not approve the application, allegedly causing a drop in Columbia’s share price. (Watson partnered with Columbia in the drug’s development, which prompted its inclusion in the lawsuit.) The plaintiffs claimed fraud, asserting that (1) the defendants did not tell the public that, for approval, the FDA allegedly had required the study’s data to yield an especially high level of statistical significance, one which was not achieved; and (2) the defendants did not disseminate the study’s subgroup data, which allegedly contained stark variances suggesting “flaws” in the testing procedures and results. Judge Faith S. Hochberg held that the plaintiffs’ pleading did not create a compelling inference of scienter, an essential element of a securities fraud case. She was persuaded by Ropes & Gray’s argument that it was nonsense to allege that Columbia would have continued to press and invest in a new drug application that it knew was doomed to failure. 

On Oct. 21, Judge Hochberg dismissed the plaintiffs’ second amended complaint. In the new complaint a former employee of Watson states that Watson’s senior management informed him while the drug application was pending that it would not be approved. The plaintiffs extrapolated that, given its collaboration with Watson, Columbia also must have known about impending failure.

The judge disagreed. She adopted Ropes & Gray’s argument that the Watson employee’s allegations are “not supported by any factual particulars.” Additionally Ropes & gray convinced her that, even if Watson had known about looming FDA rejection, the case law forbids attributing a Watson employee’s knowledge to Columbia.

In short, the plaintiffs’ new material did not “add any appreciable weight to [the] scienter allegations.”  The judge concluded by reiterating her previous findings that (1) the plaintiffs had not sufficiently pleaded that heightened statistical significance was required of Columbia’s study, (2) Columbia had no duty to disclose subgroup data, and (3) no defendant had a motive to deceive investors.

The judge instructed the plaintiffs that they would have to move the court before filing any further amendment.

The Ropes & Gray team was led by business & securities litigation partner John Donovan and included business & securities litigation associate Thomas Brown.