Rosenbloom v. Pyott (Allergan)

Ninth Circuit Appellate Victory

On September 2, 2014, the Ninth Circuit issued a significant – and rare – reversal in plaintiffs’ favor in the Rosenbloom v. Pyott (“Allergan”) derivative lawsuit appeal.  A three-judge Ninth Circuit panel unanimously concluded that the district court had abused its discretion when it dismissed the action for plaintiffs’ purported failure to show that a pre-lawsuit “demand” upon Allergan’s board of directors should be excused.  Notably, the Allergan reversal joins another reversal in Lynch v. Rawls (“Finisar”), 429 F. App’x 641 (9th Cir. 2011), as the two most prominent demand-futility decisions in the Ninth Circuit – with both wins resulting from the efforts of Robbins Geller litigators and appellate specialists.

The Allergan lawsuit had its genesis in a shareholder derivative action brought on behalf of nominal defendant Allergan against various Allergan insiders, including the pharmaceutical company’s board of directors and its Chief Executive Officer and board Chairman, David Pyott.  Plaintiffs alleged that defendants illegally promoted Allergan’s flagship drug “Botox” for therapeutic uses not approved by the Food and Drug Administration; such unapproved uses of prescription drugs are known in the medical and pharmaceutical communities as “off-label” uses.  Although physicians are permitted to prescribe drugs for off-label uses, under federal law pharmaceutical companies are prohibited from promoting and marketing them as such.

Despite that prohibition, the Allergan defendants engaged in the systematic, decade-long illegal marketing and promotion of therapeutic Botox for off-label uses.  Among the illegal actions were the intentional targeting of medical specialists in off-label fields and promoting Botox as a treatment for afflictions like “spasticity,” pain, and migraine headaches – all off-label uses, and all years away from FDA approval.  The promotion efforts worked: over the years, therapeutic Botox became a star performer for Allergan, adding up to $500 million annually to the company’s coffers.

The board’s illegal actions led to severe consequences for Allergan and its shareholders.  The FDA issued several warning letters to Allergan, numerous whistleblowers filed qui tam actions against Allergan, and the FBI began investigating Allergan’s off-label marketing.  In September 2010, Allergan pleaded guilty to the off-label promotion of Botox, and the United States Department of Justice announced $600 million in sanctions to be paid by Allergan to resolve civil and criminal claims and penalties.  Plaintiffs commenced the underlying shareholder derivative lawsuit against Allergan’s board of directors that same month.

Despite being presented with a detailed 89-page complaint explaining defendants’ extensive promotion of Botox for off-label uses, the district court dismissed the underlying lawsuit with prejudice in January 2012.  The lower court held that plaintiffs had not presented any “evidence” that Allergan’s board of directors had expressly decided to promote off-label Botox sales, and that plaintiffs’ pre-lawsuit demand upon the board was not excused.  Plaintiffs appealed the dismissal to the Ninth Circuit Court of Appeals.

Following appellate briefing and oral argument, a three-judge Ninth Circuit panel reversed the dismissal in a unanimous, published decision.  Writing for the court, Judge Stephen Reinhardt explained that the district court had “misapplied governing . . . law and improperly drew inferences against Plaintiffs rather than in their favor,” as is required at the pleading stage.  Moreover, contrary to the district court’s conclusion that plaintiffs had offered no “evidence” of the board’s culpable actions, Judge Reinhardt noted that plaintiffs had actually presented “a battery of particularized factual allegations that strongly support an inference at this stage of the litigation that the Board knew of and did nothing about illegal activity.”  Taken together – and with the inferences viewed in plaintiffs’ favor – the complaint’s factual allegations painted a vivid picture that Allergan’s board of directors was “committed to very aggressive off-label promotion of Botox.”

Robbins Geller appellate partner Joseph D. Daley, who briefed and argued the appeal, applauded the Ninth Circuit’s ruling:  “Demand-futility dismissals are notoriously difficult to get overturned – especially given the deferential standard of review that applies to the lower court’s rulings, and particularly in the Ninth Circuit.  Here, the rare reversal secured is a testament to the complaint’s detailed allegations compiled by Robbins Geller litigation partners Aelish M. Baig and Travis E. Downs III.”

The Ninth Circuit’s decision is reported at Rosenbloom v. Pyott, 765 F.3d 1137 (9th Cir. 2014).