A First Time for Everything: The First Circuit Opines on Loss Causation and Vacates CVS Caremark Dismissal

On May 24, 2013, the First Circuit Court of Appeals vacated the dismissal of a Section 10(b) action against CVS Caremark Corp. and its top executives, holding that the complaint adequately alleged loss causation. Authored by Circuit Judge Jeffrey R. Howard, and joined by Associate Justice (Ret.) of the U.S. Supreme Court David H. Souter and District Court Judge Nancy Torresen, the opinion represents the first time the First Circuit has tackled the issue of loss causation following the Supreme Court’s decision in Dura Pharms. Inc. v. Broudo, 544 U.S. 336 (2005).

Led by a trio of Massachusetts public pension funds (City of Brockton Retirement System, Plymouth County Retirement System and Norfolk County Retirement System), the complaint alleged that CVS Caremark and its top executives misrepresented the company’s efforts to integrate CVS and Caremark following a highly publicized merger in 2007, which caused significant customer service problems and, ultimately, the loss of big contracts. The district court dismissed the action on loss causation grounds, concluding that numerous disclosures made by CVS Caremark’s CEO Thomas Ryan during a November 2009 investor conference call did not plausibly reveal that CVS Caremark had failed to properly integrate the merged entity.

Following an appeal led by Robbins Geller partner Douglas Wilens, with assistance from partners Samuel H. Rudman and Robert Rothman and co-counsel, the First Circuit determined that the district court’s three objections to the complaint’s loss causation allegations were “unpersuasive.”

First, the First Circuit noted that, to plead loss causation, a “corrective disclosure need not be a ‘mirror-image’ disclosure – a direct admission that a previous statement is untrue.” Indeed, “a defendant’s failure to admit to making a misrepresentation, or his denial that a misrepresentation was made, does not necessarily preclude loss causation.” The court then concluded that “the appropriate inquiry is whether the November 5 call, as a whole, plausibly revealed to the market that CVS Caremark had problems with service and the integration of its systems.” After reviewing various statements made by CEO Ryan regarding “service” issues causing the loss of a contract, the sudden retirement of a key executive, and other surprising news about CVS Caremark’s business problems, the court concluded that these disclosures sufficiently informed the market of the alleged misrepresentations, even though “the market did not perceive every detail of CVS Caremark’s struggles.”

Second, while the First Circuit acknowledged that news about certain lost contracts was publicly known prior to the November call, it found that “the real reason for the loss” – the “failed integration of CVS and Caremark” – was learned by the market for the first time on that call. “That information, not the loss of the contracts themselves, is the corrective disclosure at the heart” of the case. Thus, the court held that “this new information could plausibly have caused the Retirement Systems’ losses.” Third, the First Circuit agreed with the lead plaintiffs that market analysts, who participated in the November earnings call and reacted negatively to CEO Ryan’s statements, can play an important role in analyzing loss causation disclosures. The court reasoned that “[w]hen a plaintiff alleges corrective disclosures that are not straightforward admissions of a defendant’s previous misrepresentations, it is appropriate to look for indications of the market’s contemporaneous response to those statements.” Because, in this case, the “contemporaneous analyst reports” could constitute “a signal that the merger had failed to produce any value for CVS Caremark,” the court held that “the analyst reports should have been considered in deciding the motion to dismiss.”

Mass. Ret. Sys. v. CVS Caremark Corp., 716 F.3d 229 (1st Cir. 2013).