District Court Finds That Paid-Access Medical Journal Study Results Are Not Public Disclosure

On June 1, 2016, Judge Lonny R. Suko of the United States District Court for the Eastern District of Washington sustained investors’ securities fraud claims against IsoRay, Inc. and certain of its officers, finding, inter alia, that the plaintiffs had sufficiently alleged that an IsoRay press release materially misrepresented the findings of a medical journal study (the “Study”) concerning the company’s cancer drug.  In re IsoRay Sec. Litig., No. CV-15-5046-LRS, 2016 U.S. Dist. LEXIS 71953 (E.D. Wash. June 1, 2016).

According to the plaintiffs, after IsoRay issued the press release, its stock soared, only to plummet the following day after TheStreet.com published an article titled “IsoRay Takes Liberties with Lung Cancer Study Results To Prop Up Drug Price,” which claimed that the company mischaracterized the Study’s findings.  Id. at *3, 45-46.

In its motion to dismiss the plaintiffs’ securities class action complaint, IsoRay argued that the Study was already publicly available when the company issued the press release.  Id. at *24-25.  The Court described defendants’ argument as a “truth-on-the-market” affirmative defense, which “excuses a defendant’s failure to disclose material information where the information was made credibly available to the market by other sources.”  Id. at *27.  To prevail under this theory, the Court explained, “[d]efendants bear a ‘heavy burden’ of proving that information withheld or misrepresented was transmitted to the public with a degree of intensity and credibility to effectively counterbalance the misleading impressions created by insider one-sided representations.”  Id. at *28-29.  Judge Suko noted that due to the truth-on-the-market defense’s “intensely specific” nature, “courts rarely dismiss a complaint on this basis.”  Id. at *28.

Here, the Court concluded, the truth was not in the market, as “[i]t is debatable” whether the Study, released the day before IsoRay’s press release, “had been transmitted to the investing public with the same degree of intensity and credibility as the [p]ress [r]elease.”  Id. at *29.  Although the company’s press release provided a link to the Study, Judge Suko noted, the Study could not be accessed without paying a $35.95 subscription fee.  Id.  Despite the defendants’ claim that the abstract which summarized the study was available free of charge, the Court concluded that “there is a legitimate question whether [the abstract’s] availability could be deemed sufficient without the Study itself.”  Id.  The Court found that a reasonable investor might have relied on the press release considering the technical nature of the information contained in the Study and the fact that a fee was required to access the full Study.  Id. at *30-31.

Thus, the Court found that the plaintiffs’ allegations “g[a]ve rise to a reasonable inference of a substantial likelihood that the Study results omitted” from IsoRay’s press release “would have been viewed by reasonable investors as having significantly altered the ‘total mix’ of information made available.”  Id. at *33.