Battle Construction Co. v. InVivo Therapeutics Holdings Corp.
Docket: Civil Action No. 14-13180-RGS
Court: District Court, D. Massachusetts; April 3, 2015; Federal District Court
A federal securities class action has been initiated against InVivo Therapeutics Holdings Corp. and its former CEO, Frank Reynolds, by lead plaintiff Edmond Ganem. The lawsuit claims that InVivo misrepresented FDA conditions regarding the approval of a clinical study for its Neuro-Spinal Scaffold product, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. InVivo, a Massachusetts-based biotechnology firm focused on spinal injury treatments, had announced FDA designations that led to a notable increase in stock price and trading volume. Following the initial FDA approval on April 4, 2013, and subsequent announcements regarding the clinical study, InVivo's stock rose significantly, prompting Reynolds to discuss expected capital gains and the removal of accounting liabilities. However, on August 27, 2013, InVivo's management disclosed that the clinical trial would not proceed as initially planned, contradicting earlier statements about its timeline. InVivo and Reynolds have moved to dismiss the claims, arguing that the allegations do not constitute an actionable claim under the relevant legal standards.
The Company is required to obtain FDA approval for each patient enrollment, anticipating a minimum of 21 months to complete the enrollment process from the first patient's date. InVivo's stock prices dropped significantly, falling from $3.45 to $2.07 and further to $1.71 within two days, alongside high trading volumes. In November 2013, InVivo projected the first patient enrollment in early 2014, but later revealed delays due to the need for revised study protocols and contract finalizations, pushing the enrollment to the second quarter of 2014. Further complications arose with the requirement for additional surgical training, resulting in the actual first patient enrollment occurring in October 2014.
Ganem, in the Amended Complaint, accuses InVivo of presenting an overly optimistic timeline for the clinical trial amid financial distress, suggesting the company was desperate for investment. He claims InVivo was rapidly depleting its resources, with analysts predicting imminent financial failure. Additionally, it is alleged that Reynolds misrepresented FDA permissions to inflate stock prices, profiting from substantial stock sales between April and June 2013.
The lawsuit, initiated by Battle Construction Co. Inc. on July 31, 2014, resulted in Ganem being appointed lead plaintiff on October 7, 2014, with an Amended Complaint filed shortly afterward. The defendants sought dismissal under the Private Securities Litigation Reform Act of 1995 (PSLRA) on December 12, 2014. Section 10(b) of the Securities Exchange Act prohibits deceptive practices in securities transactions, and Rule 10b-5 addresses false or misleading statements. Under the PSLRA, plaintiffs must detail the alleged violations and evidence of the defendant's intent to deceive. Defendants argue that the press releases in question are protected forward-looking statements under the “bespeaks caution” doctrine, as they contained adequate warnings about the uncertainty of future outcomes.
Defendants argue that their use of predictive language in press releases, such as "intends to," "plans," and "expects," along with cautionary statements in both the press releases and InVivo’s SEC Form 10-K, qualifies as forward-looking statements protected under the Safe Harbor provision. The April 5 press release specifically outlines expectations regarding FDA approval and the commencement of human clinical trials, acknowledging that these are subject to various risks and uncertainties. The Safe Harbor Statement identifies factors that could lead to actual results differing from these expectations, including the company's ability to obtain FDA approval, the outcomes of clinical trials, funding availability, and the efficacy of its products related to spinal cord injuries.
Plaintiff contends that defendants misrepresented facts by not disclosing the provisional nature of the FDA approval letter and by suggesting an unrealistic timeline for starting the study. They argue that the assertion of beginning the study "in the next few months" was impossible due to FDA requirements and administrative processes. Furthermore, the plaintiff highlights that the projected timeline of fifteen months for study data submission was unrealistic, as later revised to twenty-one months, which was also not met.
Plaintiff claims that these misrepresentations negate the defendants' protection under the Safe Harbor. However, it is established that a securities plaintiff cannot merely plead "fraud by hindsight," as required by Rule 9(b). The court's focus must remain on the FDA letter and InVivo's knowledge at the time of the press releases, where the plaintiff's argument falls short.
Approval for InVivo's investigation was granted by the FDA with specific conditions, including the submission of corrective information for thirteen issues within 45 days. However, the FDA permitted InVivo to begin enrolling subjects immediately, stating that they could enroll one subject without waiting for the additional information. The procedure required following the first subject for three months before enrolling subsequent subjects, totaling five subjects over a minimum of fifteen months. Plaintiffs criticized press releases for not clearly stating the conditional nature of the FDA's approval, but the FDA imposed no substantial barriers to initial enrollment.
Plaintiffs also contested the timeline given in the press releases stating the study would begin "in a few months" or "in mid-2013," arguing that InVivo did not adequately acknowledge the time needed to respond to the FDA and finalize agreements with host sites. The FDA's request for a response to the thirteen conditions within 45 days did not imply that InVivo believed it could not meet this timeline, and the site approval process was only viewed as prolonged in hindsight. Plaintiffs did not dispute claims that work for Institutional Review Board (IRB) approval was underway, nor did they provide evidence that InVivo doubted it could secure site approval in a reasonable timeframe.
Regarding the estimated study duration, plaintiffs argued that the projected fifteen-month timeline was unrealistic, yet this estimate originated from the FDA. The press releases reflected InVivo's optimistic belief regarding meeting the FDA's timeline rather than a material misrepresentation. Consequently, because the timeline was not implausible given the FDA's guidance, there was no material misrepresentation under Section 10(b) to support the claim. The failure to establish a primary violation resulted in the dismissal of the control person claim against Reynolds under Section 20(a). The court ordered the dismissal of the case, noting the Humanitarian Use Device designation established by the 1990 Safe Medical Devices Act to facilitate the market introduction of devices for rare diseases.
An investigational device exemption (IDE) from the FDA permits the use of an investigational device in clinical studies to gather safety and effectiveness data. Reynolds resigned on August 22, 2013, citing medical reasons. The plaintiff alleged that projections regarding InVivo's data submission to the FDA in 2014 were misleading, as they did not consider the necessary time for data analysis prior to submission. However, the FDA's approval letter did not specify any required analysis duration or quantity. The plaintiff's claims of scienter failed because there was no evidence to show that defendants were aware of the falsity of their statements in the April 5 and May 9, 2013 press releases. Merely asserting motive and opportunity is insufficient to establish strong inferences of scienter. The defendants argued that the general desire to raise capital is common among corporations and does not indicate a specific motive. Additionally, the risk inherent in biopharmaceutical investments should not lead to automatic inferences of wrongdoing. The concern is that inferring scienter from optimistic statements could deter innovation and lead to frivolous lawsuits, which the PSLRA aimed to prevent. Lastly, despite a minor increase in daily stock sales, Reynolds sold less than 7% of his InVivo stock during the class period and experienced a loss exceeding $21 million in value between August 26 and August 28, 2013.
