Ninth Circuit Reverses Dismissal of Securities Fraud Claim

Per In re Gilead Sciences Securities Litigation, --- F.3d ----, 2008 WL 3271039 (9th Cir. Aug. 11, 2008):

Based on our own review, we find the complaint sufficiently alleges a causal relationship between (1) the increase in sales resulting from the off-label marketing, (2) the Warning Letter's effect on Viread orders, and (3) the Warning Letter's effect on Gilead's stock price.

Perhaps what truly motivated the dismissal was the district court's incredulity. The court expressly identified two allegations it was unwilling to accept. First, it could not make “the unreasonable inference that a public revelation on August 8 caused a price drop three months later on October 28.” Order Granting Defs.' Mot. to Dismiss at 11. Second, with respect to the Warning Letter's impact on Viread sales, the court found “a slowing increase in demand, alone, too speculative to adequately demonstrate loss causation.” Id. at 12 n. 10.

As an initial matter, we note that a district court ruling on a motion to dismiss is not sitting as a trier of fact. It is true that the court need not accept as true conclusory allegations, nor make unwarranted deductions or unreasonable inferences. Sprewell, 266 F.3d at 988. But so long as the plaintiff alleges facts to support a theory that is not facially implausible, the court's skepticism is best reserved for later stages of the proceedings when the plaintiff's case can be rejected on evidentiary grounds. “[A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.” Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007) (internal quotation marks omitted).

There is no exception to this rule for the element of loss causation. The Third Circuit has stated that “loss causation becomes most critical at the proof stage,” and has cited scholarly authority stating that it is normally inappropriate to rule on loss causation at the pleading stage. McCabe v. Ernst & Young, LLP, 494 F.3d 418, 427 n. 4 (3rd Cir.2007) (internal quotation marks omitted). Similarly, the Second Circuit has held that loss causation “is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss.” Emergent Capital Inv. Mgmt., LLC. v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir.2003). But see Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172-77 (2d Cir.2005) (failure to plead any facts supporting loss causation warranted 12(b)(6) dismissal of complaint).

We agree. So long as the complaint alleges facts that, if taken as true, plausibly establish loss causation, a Rule 12(b)(6) dismissal is inappropriate. This is not “a probability requirement ... it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of” loss causation. Bell Atl., 127 S.Ct. at 1965.