First Circuit Dismisses a Putative Class Action Over Clinical Trials

The Court of Appeals for the First Circuit has dismissed a putative class action involving clinical trials against a biotechnology company, its chief executive and its chief development officer.

The July decision in Quinones v. Frequency Therapeutics, Inc., which affirms a district court decision, centers on the shareholder plaintiffs’ failure to prove scienter. Scienter refers to knowledge or intent to commit wrongdoing. Law firm A&O Shearman writes about the case on its website.

“The district court determined that plaintiffs’ amended complaint adequately alleged certain misstatements but failed to demonstrate that those statements were made with the required degree of scienter, and on that basis dismissed the amended complaint,” the law firm writes. The appeals court affirmed both elements of that ruling.

The case focuses on a clinical trial for what the company hoped would be a treatment for tinnitus, aka disturbing ringing or buzzing in the ears. Among the plaintiff allegations was that the company misrepresented the results of that trial, including by failing to acknowledge what it knew to be flaws in the protocol.

The appeals court said that a key plaintiff witness had not made the case that defendants knew about the study results prior to an investor presentation that was germane to the plaintiffs’ claims.

The court also rejected the plaintiffs’ claim that the CEO had sold stock based on knowledge of flaws in the study, noting that the CEO “also received additional shares during the same period,” and that he had kept the vast majority of his holdings. The court concluded that the pleaded facts in their totality were insufficient to establish an inference of scienter.

The plaintiffs’ argument in the putative class action was that the court should view each of several factual allegations as a “brushstroke” that could be seen in their totality to form a “portrait” of scienter. The Court memorably dismissed that strategy, declaring that plaintiffs can’t  “amalgamate a series of sketchy brushstrokes and call it a van Gogh.”