Masters v. GlaxoSmithKline

Brief Fact Summary. GlaxoSmithKline, PLC (GSK)(Defendant), had a punitive securities fraud class action against brought against them by Masters (Plaintiff) who argued that three out of the four of his crucial claims should not have been dismissed on the statute of limitations grounds by reason of him not being on inquiry notice of those claims, seeing as not even two years had passed since his original complaint filing.

Synopsis of Rule of Law. When lawsuits are brought against the corporation claiming the behavior that is the foundation of securities fraud claims and when the corporation’s stock value declines due to the revelations of the lawsuits or ongoing litigation, an investor is placed on inquiry notice of a corporation’s probable violations of § 10(b) of the Securities Exchange Act and Rule 10(b).

Facts. In April 2005, Masters filed a putative securities fraud class action against GlaxoKlineSmith, PLC (GKS), alleging that GKS was in violation of the Securities Exchange Act § 10(b)-5 in four ways: (1) by making incorrect statements and omissions about the viability of GKS’s patents for its drugs Paxil and Augmentin, and, with respect to those patents,  participating in a bout of frivolous litigation (the “patent Claimâ€); (2) by repressing information regarding Paxil’s addictive nature and withdrawal effects (Paxil Withdrawal Claim); (3) overcharging Medicaid and Medicare for pharmacological products in violation of the Federal False Claims Act, causing numerous lawsuits to be brought against GSK (the “Overcharge Claimâ€); and (4) by misstating the safety and effectiveness of the use of Paxil in kids and teens (the Paxil Pediatric Claimâ€). GSK moved to dismiss, and the district court granted its motion as to all claims with the exception of the Paxil Pediatric Claim on statute of limitations grounds. § 10(b) and Rule 10(b)-5 claims limitations time frame is the earlier of: “(1) two years after the discovery of facts constituting the violation; or (2)5 years after such violation.†The former of these is also referred to as the “inquiry notice†period, and begins when “circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded.†In regards to the Paxil Withdrawal Claim, GSK was sued over Paxil’s withdrawal effects in 2001, which was made public that same year and was included in GSK’s SEC filings.  The complaint claimed the reason behind the decline in the price of GSK stock in 2001 was the lawsuits.  That same year, GSK also labeled Paxil so as to warn about discontinuation effects. In regard to the Patent Claim, GSK announced in 2002 that it was having varied results in one patent case and had lost another and later that year, the Federal Trade Commission condemned GSK’s behavior in public, over pursuing the Paxil patent. The complaint claimed that between March 2002 – 2003 GSK stock value declined multiple times in responding to changes in the patents litigation. Lastly, in regard to the Overcharge Claim, the complaint recognizes that lawsuits were filed against GSK in 2001 and informing the public about said lawsuits caused GSK’s share price to drop that year. The litigation was settled in April of 03. Masters appealed, and the court of appeals granted review.

Issue. When lawsuits are brought against the corporation claiming the behavior that is the foundation of securities fraud claims and when the corporation’s stock value declines due to the revelations of the lawsuits or ongoing litigation, is an investor is placed on inquiry notice of a corporation’s probable violations of § 10(b) of the Securities Exchange Act and Rule 10(b)?

Held. (Summary Order) Yes. When lawsuits are brought against the corporation claiming the behavior that is the foundation of securities fraud claims and when the corporation’s stock value declines due to the revelations of the lawsuits or ongoing litigation,  an investor is placed on inquiry notice of a corporation’s probable violations of § 10(b) of the Securities Exchange Act and Rule 10(b). As in this case, the eliciting of an inquiry notice is an issue that may be resolved on a motion to dismiss when the facts required when deciding when a reasonable investor of normal intellect would have been cognizant of the presence of fraud can be ascertained from the complaint and supplementary documents. Regarding the Paxil Withdrawal Claim, the disclosures, the litigation, and drop in GSK’s stock price were satisfactory to elicit inquiry notice. His argument that these were inadequate to be considered “storm warnings†is worthless, and even though the actions failed to assert fraud, the underlying factual allegations were satisfactorily acknowledged and acted as the foundation of Master’s securities fraud claim. In closing, even if the FDA’s warning label understated the full extent of Paxil’s purported withdrawal effects, the warning was lacking elements of being the “reassuring statement†that would alleviate a reasonable investor’s apprehensions. Correspondingly, the Patent Claim, the disclosures, litigation and supplementary price declines elicited inquiry notice too. Masters’ assertions that the limitations period was not elicited due to the trial courts’ decisions being on appeal and as a result of the price drops in GSK’s securities were not “sharp†enough to place an investor on notice are futile.  District court filings and opinions may be adequate to activate the limitations period and particular amount of price drop necessary prior to the limitations period can begin. The corporation’s CEO assertions of confidence of triumphing in litigation were not the type of “reassuring words†that could stop an inquiry notice but were the type that could be seen as simple terms of hope by a reasonable investor.  With regard to the Overcharge Claim, Master’s statement that it was the settlement of this litigation that elicited inquiry notice is denied. Precedent establishes that knowledge of a lawsuit may be satisfactory to elicit inquiry notice. So, all claims were properly dismissed. [The court went on to hold that the remaining Paxil Pediatric Clam was properly dismissed on different grounds.] Affirmed.

Discussion. Initially, the inquiry notice periods were shorter than the periods mentioned here.  They followed one year after the discovery of the facts establishing a violation or three years following the violation.  These periods lengthened in Section 804 of the Public Company Accounting Reform and Investor Protection Act of 2002 (in 2002)(Sarbanes-Oxley), which was passed as a response to key corporate and accounting scandals, (similar to Enron, Tyco International and Worldcom),  partially to build the public’s confidence the securities markets. It is obvious that the longer inquiry notice period extends the time when an investor may bringa securities fraud action but even with the time extension, investors must remain attentive and bring their actions in a timelyfashion, as evidenced here.