Donato v. Insys Therapeutics, Inc.

          ORDER

          Neil V. Wake Senior United States District Judge

         Before 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).

         On June 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.)

         I. BACKGROUND

         Insys is a publicly traded^[1] 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.

         Company 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.

         Plaintiff 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 Subsys.

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.”

         Plaintiff 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.

         Plaintiff 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.

         Count I 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.)

         II. DEFENDANTS’ MOTION FOR LEAVE TO FILE SUR-REPLY

         Defendants 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.

         Where 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.

         III. RULE 23(a)

         “A 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).

         Under Rule 23(a), the party seeking certification must prove:

(1) the class is so numerous that joinder of all members is impracticable;

(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.

         Defendants do not dispute that the proposed class satisfies Rule 23(a).

         Numerosity. 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)).

         Plaintiff 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 23(a)(1).

         Commonality. 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).

         Typicality. 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).

         The 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 23(a)(3).

         Adequacy 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.

         Plaintiff 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.

         Defendants do not dispute that the proposed class satisfies Rule 23(a).

         IV. RULE 23(b)

         In 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:

         The 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 findings include:

(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.

         Defendants 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 case.

         The only remaining decision is whether “the questions of law or fact common to class members predominate over any ...