I’m interested in this district court opinion issued in May regarding Section 10(b) claims against Mylan.  Plaintiffs claim that Mylan’s Morgantown, West Virginia manufacturing facility was dramatically out of compliance with FDA manufacturing requirements – to the point where it was ultimately forced to halt production and recall certain products – and misled the public about it.  The court allowed the case to go forward based on a single statement by a Mylan spokesperson, but dismissed claims based on Mylan’s other statements.  See In re Mylan NV Sec. Litig., 2023 WL 3539371 (W.D. Pa. May 18, 2023).

Now, the first thing to note here is that the court found that plaintiffs properly alleged “clear circumvention of quality controls at Mylan to cut corners for time pressure and in a way that jeopardized the quality of the medications.”  The court accepted the allegations “of widespread compliance and product-quality issues at Morgantown that were driven by outsized production demands imposed by management. …[T]hese issues were directly communicated to management and high-level executives at Mylan but not meaningfully addressed until after repeated serious warnings from the FDA.”

Having said that, the court began by holding that Mylan’s statements on its general public-facing website were not made “in connection with” the purchase or sale of a security, and therefore could not form the basis of a claim.

Now, I’ve recently blogged a lot about the “in connection with” requirement, and how courts have had some trouble assessing it when someone speaks about one company in a way that’s expected to influence trading in a different company.

That’s not this case, though.  In this case, the statements were made about Mylan – just not, in the court’s view, purchases and sales of Mylan securities.  Here’s the court’s reasoning:

Rule 10b-5 states that to be actionable, an alleged misrepresentation must be made “in connection with the purchase or sale of any security[.]” 15 U.S.C. § 78j(b). This “in connection with” requirement is met “where material misrepresentations are disseminated to the public in a medium upon which a reasonable investor would rely” in deciding whether to buy or sell a security….

After careful consideration, the Court concludes that the statements from Mylan’s website are not the type of statements upon which a reasonable investor would rely.

To start, the alleged misstatements appeared on Mylan’s general website, not its investor-relations page. While certainly not dispositive, this fact suggests that investors visiting Mylan’s website would view the information contained on the separate investor-relations page to have more value to them, since it was specifically targeted to them. The information on the other pages within Mylan’s website drives this point.

These other pages included things like descriptions of products, general statements about safety and quality, and narratives regarding the company’s history. Essentially, these pages are all about promoting Mylan, its brand, and its products. “No reasonable investor would rely upon these promotional phrases in making investment decisions.” In re Medtronic Inc., Sec. Litig., 618 F. Supp. 2d 1016, 1030 (D. Minn. 2009) (holding that information published “about the Fidelis lead on its website to promote it to physicians” was not made in connection with the sale of securities), aff’d sub nom. Detroit Gen. Ret. Sys. v. Medtronic, Inc., 621 F.3d 800 (8th Cir. 2010).

The nature of the statements themselves further underscores this fact. They are best characterized as statements of “corporate optimism, “mere puffing,” or “generalized statements of optimism.”

Now, first, the court’s mixing two concepts here – puffery, and “in connection with.”  Puffery, I’ll address separately.

But “in connection with” … I mean, I looked at the Medtronic case that the court cites, and from my read, the court did not hold that website statements are not “in connection with” securities sales; rather, the court simply held they were either puffing or not false.

Moreover, in In re Carter-Wallace Sec. Litig., 150 F.3d 153 (2d Cir. 1998), the Second Circuit held that even product advertisements in medical journals might be relied upon by investors, and since then, courts have generally accepted that all public statements by a company, no matter where they appear, were fair game for fraud on the market cases.

The SEC has specifically warned companies that their general websites might be relied upon by investors as sources of information.  See Commission Guidance on the Use of Company Websites, 73 Fed. Reg. 45862 (Aug. 7, 2008) (“companies should be mindful that they ‘are responsible for the accuracy of their statements that reasonably can be expected to reach investors or the securities markets regardless of the medium through which the statements are made, including the Internet.’ Accordingly, a company should keep in mind the applicability of the antifraud provisions of the federal securities laws, including Exchange Act Section 10(b) and Rule 10b-5, to the content of its Web site.”).

And at least one study has found that after companies air product advertisements on television, retail investors seek out financial information about the company and trade in that company’s stock.

That said, one of the ironies of the legal “reasonable investor” concept is that it is relatively impervious to evidence of how actual investors behave, which is why this Mylan opinion worries me as a bit of a camel’s nose.  Companies often issue investor-relevant information in places that are not designated specifically for investors.  As I blogged about FTX, the SEC’s complaint against Sam Bankman-Fried rested on statements made on FTX’s general website, to the media, and even in testimony before Congress, and while that says something about the (lack of) due diligence by FTX investors, I can’t say that the SEC is wrong, because investors’ lack of diligence almost certainly was due to exactly the air of legitimacy created by these statements in non-investor-specific locations. So it’s concerning that a court would just decide, as a matter of law, on a motion to dismiss, that general company websites are the equivalent of an investor no man’s land.

But now let’s talk about puffery.  Here’s what the website actually said:

“[T]here’s nothing generic about our standards. Our internal teams conduct reviews of all products, start to finish.” ECF 39, ¶ 254.

“[O]ur priorities are to meet or exceed industry standards. Our own teams conduct ongoing reviews to ensure quality and integrity of products, start to finish, and to continually improve for optimal quality and consistency.” Id. at ¶ 256.

“Mylan uses advanced testing and monitoring systems to assure product adheres to testing acceptance criteria that are in alignment with requirements established by standard-setting organizations around the world.” Id. at ¶ 258.

“Mylan utilizes state-of-the-art monitoring systems that can automatically evaluate and reject a product that does not meet specifications.” Id. at ¶ 260.

“Mylan assures product potency, purity, and drug release through expiration date by testing the stability of our products at specific intervals.” Id. at ¶ 262.

Let us all pause to laugh that Mylan explicitly saying it was not generic was deemed to be puffery, a legal term that is often defined in terms of whether a statement is too generic to convey useful information to investors. See, e.g. ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (“No investor would take such statements seriously in assessing a potential investment, for the simple fact that almost every investment bank makes these statements.”)).

Moving on. The court found that these statements were puffery, and also rejected claims based on statements in SEC filings.  In SEC filings, Mylan offered various warnings that it might fall out of compliance with regulatory requirements, including, for example:

[D]espite our efforts at compliance, from time to time we receive notices of manufacturing and quality-related observations following inspections by regulatory authorities around the world, as well as official agency correspondence regarding compliance. We may receive similar observations and correspondence in the future….

Although we have established internal quality and regulatory compliance programs and policies, there is no guarantee that these programs and policies, as currently designed, will meet regulatory agency standards in the future or will prevent instances of non-compliance with applicable laws and regulations.

Which, the court said, meant Mylan warned of the “very thing” that plaintiffs claimed was undisclosed:

Mylan’s compliance disclosures did not misleadingly “suggest that adverse consequences were only a possibility” and that the company was currently compliant despite allegedly “widespread” and “serious compliance issues.” ECF 39, ¶¶ 269, 275, 289, 296. Rather, they told investors the truth: Mylan faced serious business risk because of the heavily regulated industry in which it operated, and that maintaining adequate compliance would be a significant undertaking—an undertaking at which it would sometimes come up short…

Mylan also advised investors of the potentially severe consequences of any non-compliance,…

These added disclosures made it clear that, even under the best circumstances, there was uncertainty as to the very possibility of adequate compliance … in light of complex and shifting government regulations. That uncertainty was even more pronounced here since Mylan was telling investors that it, in fact, had already received (and would continue to receive) notices of non-compliance (quotations omitted)….

Considering what securities law refers to as the “total mix” of information available to investors, Mylan’s compliance disclosures did not misleadingly “suggest that adverse consequences were only a possibility” and that the company was currently compliant despite allegedly “widespread” and “serious compliance issues.”  Rather, they told investors the truth: Mylan faced serious business risk because of the heavily regulated industry in which it operated, and that maintaining adequate compliance would be a significant undertaking—an undertaking at which it would sometimes come up short.

Recall: The court would concluded that plaintiffs had in fact alleged “clear circumvention of quality controls at Mylan to cut corners for time pressure and in a way that jeopardized the quality of the medications” and that there were “widespread compliance and product-quality issues at Morgantown that were driven by outsized production demands imposed by management” communicated to management but unaddressed.

Despite that, the court concluded that Mylan’s usual warnings it operated in a heavily regulated industry and might fall short of compliance standards were not even misleading, and accurately characterized the risks of investing in Mylan.

I am reminded of the Seventh Circuit’s statement in Pommer v. Medtest, 961 F.2d 620 (7th Cir. 1992), “It is not enough that the other party must have recognized a risk. Risks are ubiquitous. Disclosures assist investors in determining the magnitude of risks.”

All I can say is, it seems there’s a disconnect between the standards courts apply when determining whether a statement is so banal as to be immaterial, and the standards they apply when determining whether general warnings of risk are misleading for failure to convey the magnitude of a specific existing risk.