United States District Court, D. Arizona
Richard Di Donato, individually and on behalf of all others similarly situated, Plaintiff,
Insys Therapeutics, Inc.; Michael L. Babich; Darryl S. Baker; John N. Kapoor; and Alec Burlakoff, Defendants.
V. Wake Senior United States District Judge
the Court are Lead Plaintiff’s Motion for Class
Certification (Doc. 159) and Defendants’ Motion for
Leave to File Sur-Reply in Further Opposition to Lead
Plaintiff’s Motion for Class Certification (Doc. 170).
10, 2019, Defendant Insys Therapeutics Inc.
(“Insys”) commenced a voluntary case under
chapter 11 of title 11 of the United States Code (11 U.S.C.
§ 101 et seq.) in the United States Bankruptcy
Court for the District of Delaware, and this action is
automatically stayed with respect to Insys. (Doc. 230.) This
action is not stayed as to the proceedings against the
Defendants other than Insys. (Doc. 258.) This Order,
therefore, applies only to Defendants Michael L. Babich,
Darryl S. Baker, and John N. Kapoor. Claims against Defendant
Alec Burlakoff were dismissed. (Doc. 107 at 41.)
is a publicly traded pharmaceutical company headquartered in
Arizona that makes and sells Subsys, a very expensive
sublingual fentanyl spray approved by the Food and Drug
Administration to treat breakthrough pain in adult cancer
patients already taking opioid pain medication. Babich,
Baker, and Kapoor served as high-level executives at Insys
during 2014 through 2016. During that time, Insys reported
increasing revenues each quarter and attributed most of its
upward trajectory to the sale of Subsys. Insys touted its
unique programs within the oncology setting for increasing
sales and claimed that it was taking market share from
competing products for breakthrough cancer pain by building
awareness among oncologists. However, as alleged, Insys
actively discouraged promoting Subsys for cancer patients,
less than 1% of Subsys prescriptions were written by
oncologists, and Insys paid doctors bribes and kickbacks in
exchange for prescribing Subsys off-label.
executives publicly attributed the drug’s success to
vigorous marketing efforts and the company’s diligent
negotiations with pharmacy benefit managers, third-party
payers, and insurers. Insys created an “Insurance
Reimbursement Center, ” sometimes called the
“Prior Authorization Unit, ” ostensibly to
interact with third-party payers to obtain prior
authorization and insurance coverage for Subsys
prescriptions. Employees of the “Insurance
Reimbursement Center” allegedly falsified patient
diagnoses, lied to insurance companies, and posed as
employees of the prescribing doctors.
alleges that Defendants made the following materially false
and misleading statements:
268. More specifically, Defendant Babich stated:
I think Q4 is a great indication of what we can
do with the product moving forward, as well. I
think that is important for folks-our sales force expansion
was based on opportunity.
We keep hitting new highs in the number of new
doctors that we activate on a weekly basis. We have some very
unique programs within the oncology
setting that we continue to execute on and any growth that we
see in this overall TIRF class is specifically coming from
So we feel that this is our market to continue to grow and to
continue to dominate, like we are doing at this point with
our market share. I’ve always talked about, from a
market share, our next total is 50% market share. You can see
that in Q4 the Actiq generic continued to decline, so we
continued to take market share from the generic.
And I think that’s a testament to the fact
that we have a clinically superior product to the Actiq
generic out there. So I think long term we can
eventually get to that 60% market share for this product.
. . . .
272. Furthermore, with respect to the continued growth of
Subsys, the FY14 Form 10-K also explained:
some of the key factors in generating continued
growth in Subsys usage include taking market share from other
competing TIRF products and expanding the usage of Subsys for
BTCP by building awareness among oncologists of its rapid
onset of action, improved bioavailability, most complete
range of dosage strengths and ease of administration relative
to other TIRF products.
(Doc. 77 at 103-05; see Doc. 107 at 41.)
“TIRF” refers to “Transmucosal
Immediate-Release Fentanyl.” “BTCP” refers
to “breakthrough cancer pain.”
also alleges that Insys stock prices declined because of news
or announcements to investors that revealed the
company’s prior statements to have been false or
misleading. On November 4, 2015, CNBC published an article on
its website revealing that the Department of Health and Human
Services classified Subsys as commonly prescribed for
unintended uses. In the context of publicized fraud
allegations against Insys employees and collaborating
healthcare providers, the article constituted a partial
disclosure of the company’s underlying fraud. On
December 3, 2015, and January 25, 2016, the Southern
Investigative Reporting Foundation partially disclosed fraud
by Insys in articles about the company’s “Prior
Authorization Unit” and Babich’s resignation.
seeks to certify a class (the “Class”) pursuant
to Federal Rules of Civil Procedure 23(a) and 23(b)(3)
consisting of all persons and entities who purchased or
otherwise acquired Insys common stock during the period from
March 3, 2015, through January 25, 2016 (the “Class
Period”), and were damaged thereby. Excluded from the
Class are Defendants; present and former directors or
executive officers of Insys and members of their immediate
families; any of the foregoing individuals’ or
entities’ legal representatives, heirs, successors, or
assigns; and any entity in which any Defendant has or had a
controlling interest or which is related to or affiliated
with any Defendant.
of Plaintiff’s Second Amended Complaint alleges against
all Defendants securities fraud in violation of Section 10(b)
of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5
promulgated thereunder by the SEC, 17 C.F.R. §
240.10b-5. Count II alleges control-person liability for
Defendants Babich, Baker, and Kapoor under Section 20(a) of
the Exchange Act. (See Docs. 77, 107.)
DEFENDANTS’ MOTION FOR LEAVE TO FILE SUR-REPLY
move for leave to file a sur-reply to respond to arguments
and evidence included for the first time in Plaintiff’s
reply in support of his motion for class certification. (Doc.
170.) Defendants respond not only to “new”
arguments and evidence included in Plaintiff’s reply,
but also to issues that were “not addressed in any
meaningful detail” in Plaintiff’s opening brief.
Plaintiff contends that each of the arguments Defendants
describe as “new” is a response to arguments or
concessions Defendants did not make until they filed their
response to the class certification motion or to
Defendants’ attempt to rebut the presumption that
proposed class members relied on Defendants’
misstatements. Defendants attached their proposed sur-reply
to be filed if leave were granted. Plaintiff’s
opposition brief responds both to the motion and the content
of the proposed sur-reply.
new evidence is presented in a reply brief, the district
court should not consider the new evidence without giving the
non-movant an opportunity to respond. Provenz v.
Miller, 102 F.3d 1478, 1483 (9th Cir. 1996). Here, both
sides have addressed any “new” evidence and
arguments presented in Plaintiff’s reply brief. Because
Plaintiff has responded to the content of Defendants’
proposed sur-reply, there is no prejudice or unfairness in
allowing Defendants’ proposed sur-reply to be filed. In
deciding Plaintiff’s motion for class certification,
the Court considers both Defendants’ sur-reply and
Plaintiff’s opposition brief along with all of the
other related submissions.
party seeking class certification must affirmatively
demonstrate his compliance with [Federal Rule of Civil
Procedure 23.]” Wal-Mart Stores, Inc. v.
Dukes, 564 U.S. 338, 350 (2011). The party must prove
compliance with Rule 23 in fact. Id.
“[C]ertification is proper only if the trial court is
satisfied, after a rigorous analysis, that the prerequisites
of Rule 23(a) have been satisfied.” Id.
(internal quotation marks omitted). Although the class
certification analysis might include some overlap with the
merits of the plaintiff’s underlying claim, merits
questions may be considered only to the extent that they are
relevant to determining whether the Rule 23 prerequisites for
class certification are satisfied. Id. at 351;
Amgen Inc. v. Connecticut Ret. Plans & Trust
Funds, 568 U.S. 455, 466 (2013).
Rule 23(a), the party seeking certification must prove:
(1) the class is so numerous that joinder of all members is
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are
typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately
protect the interests of the class.
do not dispute that the proposed class satisfies Rule 23(a).
Rule 23(a)’s numerosity requirement is generally
assumed to have been met in class action suits involving
nationally traded securities. Zeidman v. J. Ray McDermott
& Co., 651 F.2d 1030, 1039 (5th Cir. 1981); see,
e.g., In re Infineon Techs. AG Sec. Litig., 266
F.R.D. 386, 393 (N.D. Cal. 2009). “Joinder
impracticability (numerosity) is rarely contested in class
actions brought on behalf of shareholders or traders in
publicly owned corporations. In class actions brought on
behalf of securities traders, federal trial courts are quite
willing to accept common sense assumptions in order to
support a finding of numerosity.” Zeidman, 651
F.2d at 1039 (quoting 5 J. Newburg, Class Actions §
8812, at 836 (1977)).
has submitted evidence, which Defendants do not dispute, that
during the Class Period there were between 70 and 72 million
shares of Insys common stock outstanding, an average of 4.5
million shares traded weekly, and at least 280 institutional
investors held Insys common stock. This satisfies Rule
To demonstrate “questions of law or fact common to the
class, ” plaintiffs’ claims must depend on a
common contention capable of classwide resolution such that
determination of the truth of the contention will resolve an
issue central to the validity of each of the claims.
Wal-Mart, 564 U.S. at 350. Plaintiff has identified
numerous common questions of law and fact, which include
whether Defendants’ statements misrepresented or
omitted facts, whether Defendants’ statements created
and/or maintained artificial inflation in the price of Insys
common stock, and whether alleged stock price declines are
causally connected to Defendants’ misrepresentations
and omissions. This satisfies Rule 23(a)(2).
The typicality requirement ensures that the interest of the
class representative aligns with the interests of the class.
Just Film, Inc. v. Buono, 847 F.3d 1108, 1116 (9th
Cir. 2017). Indicators of typicality include whether other
members have the same or similar injury, whether the action
is based on conduct that is not unique to the named
plaintiffs, and whether other class members have been injured
by the same course of conduct. Id. “Under the
rule’s permissive standards, representative claims are
‘typical’ if they are reasonably co-extensive
with those of absent class members; they need not be
substantially identical.” Hanlon v. Chrysler
Corp., 150 F.3d 1011, 1020 (9th Cir. 1998).
proposed class consists of all persons and entities who
purchased or otherwise acquired Insys common stock during the
Class Period and were damaged thereby. Plaintiff, like the
other members of the proposed class, purchased Insys common
stock during the Class Period at prices that Plaintiff
alleges were artificially inflated by Defendants’
materially false or misleading statements and allegedly
suffered damages when the concealed truth was revealed,
causing the stock price to decline. This satisfies Rule
of Plaintiff and Class Counsel. The final requirement
for class certification under Rule 23(a) is that “the
representative parties will fairly and adequately protect the
interests of the class.” “Resolution of two
questions determines legal adequacy: (1) do the named
plaintiffs and their counsel have any conflicts of interest
with other class members and (2) will the named plaintiffs
and their counsel prosecute the action vigorously on behalf
of the class?” Hanlon, 150 F.3d at 1020.
has certified that he is willing to serve as a representative
party on behalf of the class, including providing testimony
at deposition and trial, if necessary. (Doc. 34-1.) He
further certified that he will not accept any payment for
serving as a representative party on behalf of the class
beyond his pro rata share of any recovery, except directly
related reasonable costs and expenses as ordered by the
Court. He disclosed his Class Period purchase and sale
transactions in Insys securities that are the subject of this
action. Plaintiff submitted information regarding the
qualifications of Kessler Topaz Meltzer & Check, LLC, to
serve as Class Counsel and those of Bonnett, Fairbourn,
Friedman & Balint, P.C., to serve as Liaison Counsel
under Rule 23(g). Defendants do not dispute that Plaintiff
and his counsel will fairly and adequately protect the
interests of the class.
do not dispute that the proposed class satisfies Rule 23(a).
addition to satisfying Rule 23(a), the proposed class must
satisfy at least one of the three requirements stated in Rule
23(b). Plaintiff relies on Rule 23(b)(3), which requires
findings regarding both predominance and superiority:
court finds that the questions of law or fact common to class
members predominate over any questions affecting only
individual members, and that a class action is superior to
other available methods for fairly and efficiently
adjudicating the controversy. The matters pertinent to these
(A) the class members’ interests in individually
controlling the prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the
controversy already begun by or against class members;
(C) the desirability or undesirability of concentrating the
litigation of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.
do not dispute that Plaintiff has shown that a class action
is superior to other available methods for fairly and
efficiently adjudicating the controversy presented in this
only remaining decision is whether “the questions of
law or fact common to class members predominate over any