Ninth Circuit Criticizes Overuse Of Extrinsic Documents By Defendants Seeking To Dismiss Securities Fraud Cases

On August 13, 2018, the Ninth Circuit Court of Appeals issued a decision in Khoja v. Orexigen Therapeutics, Inc., No. 16-56069, 2018 WL 3826298 (9th Cir. Aug. 13, 2018) reversing the United State District Court for the Southern District of California’s (“District Court”) dismissal under Fed. R. Civ. P. 12(b)(6) of a securities class action brought against Orexigen Therapeutics, Inc. (“Orexigen”).  Among the issues it considered on appeal, the Ninth Circuit focused on whether it was proper for the District Court to consider extrinsic documents offered by the defendants under the judicial notice and incorporation by reference doctrines.

Plaintiff, Kasim Khoja, alleged that defendants, Orexigen and certain of its executives, violated Section 10(b) of the Securities Exchange Act of 1934 by making false and misleading statements concerning its clinical trial of Contrave—a drug designed to treat obesity—referred to as the “Light Study.”  Id. at *2-3.  Defendants sought dismissal of these claims, and in doing so asked the District Court to consider 22 documents under the judicial notice doctrine or, alternatively, the incorporation by reference doctrine.  Id. at *5.  The District Court granted 21 out of 22 of defendants’ requests.  Id.

Under Rule 12(b)(6), “district courts may not consider material outside the pleadings when assessing the sufficiency of a complaint.”  Id.  If a court considers “matters outside the pleading[,]” then the court must convert the 12(b)(6) motion into “a motion for summary judgment under Rule 56.”  Id.  The two narrow exceptions to this rule are the incorporation-by-reference doctrine and judicial notice under Federal Rule of Evidence 201.  Id. at *6.  Judicial notice under Fed. R. Evid. 201 “permits a court to notice an adjudicative fact if it is not subject to reasonable dispute.  A fact is not subject to reasonable dispute if it is generally known, or can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.”  Id. at *7.  The incorporation-by-reference doctrine permits a court to consider a document only “if the plaintiff refers extensively to the document [in the complaint] or the document forms the basis of the plaintiff’s claim.”  Id. at *9.

Prior to analyzing the District Court’s consideration of extrinsic documents, the Ninth Circuit highlighted “a concerning pattern in securities cases like this one: [defendants] exploiting procedures to improperly defeat what would otherwise constitute adequately stated claims at the pleading stage.”  Id. at *6.  The court noted that the “overuse and improper application” of these doctrines “can lead to unintended and harmful results” including “premature dismissals of plausible claims that may turn out to be valid after discovery.”  Id.  The Ninth Circuit lambasted the improper application of the doctrines because it allows defendants to improperly “present their own version of the facts at the pleading stage” rendering it “near impossible for even the most aggrieved plaintiff to demonstrate a sufficiently plausible claim for relief.”  Id.

The full Ninth Circuit opinion is linked below:

Khoja v. Orexigen Therapeutics, Inc., No. 16-56069, Slip Op. (9th Cir. Aug. 13, 2018)