United States Court Of Appeals for the
Second Circuit
TEACHERS’ RETIREMENT SYSTEM OF LOUISIANA, CHRISTINE FLECKLES,
Plaintiffs-Appellants, L. NORMAN SHOWERS, on behalf of himself and all others similarly situated,
MICHAEL FEITERLAND, PAUL SCHAPKA, MICHAEL FEITLER, ANTHON JOHNSON, Plaintiffs, – v. –
PFIZER, INC., HENRY A. McKINNELL, GAIL CAWKWELL, JOSEPH M. FECZKO, KAREN L. KATEN, Defendants-Appellees.
JOHN L. LAMATTINA, Defendant.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
BRIEF FOR DEFENDANTS-APPELLEES PFIZER INC., HENRY A. McKINNELL, GAIL CAWKWELL, AND JOSEPH M. FECZKO
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Beth A. Wilkinson Charles E. Davidow Alexandra M. Walsh 2001 K Street, NW Washington, DC 20006-1047 (202) 223-7300
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Andrew J. Ehrlich 1285 Avenue of the Americas New York, New York 10019-6064 (212) 373-3000
GIBSON, DUNN & CRUTCHER LLP Miguel A. Estrada Mark A. Perry 1050 Connecticut Avenue, NW Washington, DC 20036-5306 (202) 955-8500 SIMPSON THACHER & BARTLETT LLP Lynn K. Neuner 425 Lexington Avenue New York, New York 10017-3954 (212) 455-2000 DLA PIPER LLP (US) John R. Wellschlager 6255 Smith Avenue Baltimore, Maryland 21209-3600 (410) 580-3000
Attorneys for Defendant-Appellee Pfizer Inc. (additional counsel listed on inside cover)
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SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Jennifer L. Spaziano 1440 New York Avenue, NW Washington, DC 20005 202-371-7000
Attorneys for Defendant-Appellee Henry A. McKinnell
BAKER & HOSTETLER LLP George A. Stamboulidis 45 Rockefeller Plaza New York, New York 10111 212-589-4200
Attorneys for Defendant-Appellee Gail Cawkwell
ALLEN & OVERY LLP Pamela R. Chepiga 1221 Avenue of the Americas New York, New York 10020 212-610-6300
Attorneys for Defendant-Appellee Joseph M. Feczko
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CORPORATE DISCLOSURE STATEMENT
Pursuant to Federal Rule of Appellate Procedure 26.1, Defendant-
Appellee Pfizer Inc. (“Pfizer”) states that it has no parent corporation, and that no
publicly-held corporation owns ten percent or more of its stock.
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ............................................................................... 1
STATEMENT OF ISSUES PRESENTED ................................................................ 4
STATEMENT OF THE CASE .................................................................................. 5
A. Factual Background .................................................................... 5
B. Early Procedural History ............................................................. 7
C. The District Court’s Summary Judgment Order Limits Plaintiffs’ Damages Case ...................................... 8
D. Plaintiffs Submit A Supplemental Expert Report On Damages .................................................................... 9
1. Fischel’s Original Event Study Methodology ................................................................... 10
2. Fischel’s New Methodology And The 9.7% Adjustment ............................................................ 13
3. Fischel’s Failure To Address The Exclusion Of The Pharmacia Statements ....................................................................... 17
4. Fischel’s Reply Report ................................................... 18
E. The District Court Grants Defendants’ Daubert Motion ......................................................................... 19
F. The District Court Denies Plaintiffs’ Motion For Leave To Amend ................................................................ 20
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SUMMARY OF ARGUMENT ............................................................................... 21
STANDARD OF REVIEW ..................................................................................... 24
ARGUMENT ........................................................................................................... 25
I. The District Court Reasonably Concluded That Fischel’s Testimony Failed To Satisfy Rule 702 and Daubert .......................... 25
A. The District Court Reasonably Excluded Fischel’s Testimony Based On His 9.7% Adjustment ................................................................................ 26
1. Plaintiffs Provided No Basis To Find The 9.7% Adjustment Reliable ....................................... 26
2. The Adjustment Was Properly Subject To Daubert Review ........................................... 29
B. The District Court Reasonably Concluded That Fischel’s Failure To Account For Its Pharmacia Ruling Rendered His Opinion Unhelpful To the Jury ............................................................... 34
1. The District Court’s Findings Regarding The Discovery Record Were Sound .................................................................... 35
2. Plaintiffs’ Post-Hoc Rationalizations Provide No Basis For Reversal ....................................... 40
(a) Plaintiffs’ Maintenance Arguments ..................... 40
(b) Plaintiffs’ PSLRA Argument ............................... 43
II. The District Court Reasonably Denied Plaintiffs’ Motion For Leave To Amend ................................................................................. 45
A. The District Court Was Not Required To Accept Fischel’s Last-Minute Offer To Drop The 9.7% Adjustment ............................................................... 46
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B. Plaintiffs Have Shown No Abuse Of Discretion .................................................................................. 50
III. The District Court Correctly Excluded Nine Pharmacia Statements Under Janus ...................................................................... 57
CONCLUSION ........................................................................................................ 61
CERTIFICATE OF COMPLIANCE ....................................................................... 63
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TABLE OF AUTHORITIES
Page(s) CASES
Abrams v. Interco Inc., 719 F.2d 23 (2d Cir. 1983) ............................................................................ 45
Amorgianos v. Nat’l R.R. Passenger Corp., 303 F.3d 256 (2d Cir. 2002) .............................................................. 24, 31, 45
Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2d Cir. 2012) ............................................................................ 25
Anderson v. City of Bessemer, 470 U.S. 564 (1985)....................................................................................... 36
Andler v. Clear Channel Broad., Inc., 670 F.3d 717 (6th Cir. 2012) ......................................................................... 32
Auto-Owners Ins. Co. v. Uniden Am. Corp., 503 F. Supp. 2d 1087 (E.D. Wis. 2007) ........................................................ 48
Bazemore v. Friday, 478 U.S. 385 (1986)....................................................................................... 32
Brennan’s Inc. v. Dickie Brennan & Co., 376 F.3d 356 (5th Cir. 2004) ......................................................................... 32
Bricklayers & Trowel Trades Int’l Pension Fund v. Credit Suisse Sec. LLC, 752 F.3d 82 (1st Cir. 2014) ...................................................................... 31, 46
Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750 F.3d 227 (2d Cir. 2014) .......................................................................... 41
City of N.Y. v. Mickalis Pawn Shop, LLC, 645 F.3d 114 (2d Cir. 2011) .......................................................................... 45
Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993)................................................................................passim
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DeMarco v. Lehman Bros. Inc., No. 03 Civ. 3470 (JSR), 2004 WL 2674611 (S.D.N.Y. Nov. 23, 2004) ...... 46
Design Strategy, Inc. v. Davis, 469 F.3d 284 (2d Cir. 2006) .......................................................................... 54
Dickenson v. Cardiac & Thoracic Surgery of E. Tenn., 388 F.3d 976 (6th Cir. 2004) ......................................................................... 50
Dunning v. Bush, 536 F.3d 879 (8th Cir. 2008) ......................................................................... 50
Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005)................................................................................. 41, 43
Ehrenhaus v. Reynolds, 965 F.2d 916 (10th Cir. 1992) ....................................................................... 51
Fezzani v. Bear, Stearns & Co. Inc., 716 F.3d 18 (2d Cir. 2013) ............................................................................ 58
FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282 (11th Cir. 2011) ..................................................................... 41
First State Orthopaedics v. Concentra, Inc., 534 F. Supp. 2d 500 (E.D. Pa. 2007) ............................................................. 56
Frank v. United States, 78 F.3d 815 (2d Cir. 1996), vac’d on other grounds, 521 U.S. 1114 (1997) ............................................. 57
Gen. Elec. Co. v. Joiner, 522 U.S. 136 (1997)....................................................................................... 24
Gillum v. United States, 309 F. App’x. 267 (10th Cir. 2009) ............................................................... 50
Hunt v. CNH Am. LLC, 511 F. App’x. 43 (2d Cir. 2013) .................................................................... 47
Irwin v. Dep’t of Veterans Affairs, 498 U.S. 89 (1990) ......................................................................................... 56
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Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) ............................................................................... 8, 58
Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999)................................................................................. 26, 45
Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147 (2d Cir. 2007) .......................................................................... 42
Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005) .......................................................................... 43
United States v. Local 1804-1, Int’l Longshoremen’s Ass’n, 44 F.3d 1091 (2d Cir. 1995) .......................................................................... 24
Manpower, Inc. v. Ins. Co. of Pa., 732 F.3d 796 (7th Cir. 2013) ......................................................................... 32
Miller v. Wolpoff & Abramson, LLP, 321 F.3d 292 (2d Cir. 2003) .......................................................................... 25
Milward v. Acuity Specialty Prods. Grp., Inc., 639 F.3d 11 (1st Cir. 2011) ............................................................................ 32
In re Moody’s Corp. Sec. Litig., No. 07 Civ. 8375, 2013 WL 4516788 (S.D.N.Y. Aug. 23, 2013) ................. 42
Nimely v. City of N.Y., 414 F.3d 381 (2d Cir. 2005) .......................................................................... 33
In re Omnicom Grp., Inc. Sec. Litig., 541 F. Supp. 2d 546 (S.D.N.Y. 2008), aff’d, 597 F.3d 501 (2d Cir. 2010) ................................................................. 43
In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010) .......................................................................... 45
SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (2d Cir. 2013) .......................................................................... 59
Powerweb Energy, Inc. v. Hubbell Lighting, Inc., No. 12 Civ. 220, 2014 WL 1572746 (D. Conn. Apr. 17, 2014) .................... 51
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SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) ............................................................................ 10
Red Rock Commodities, Ltd. v. Standard Chartered Bank, 140 F.3d 420 (2d Cir. 1998) .......................................................................... 44
Sauer v. Burlington N. R.R. Co., 106 F.3d 1490 (10th Cir. 1997) ..................................................................... 44
In re Se. Milk Antitrust Litig., 739 F.3d 262 (6th Cir. 2014) ......................................................................... 32
Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393 (2010)....................................................................................... 56
Sherrod v. Lingle, 223 F.3d 605 (7th Cir. 2000) ......................................................................... 51
Smith v. Ford Motor Co., 215 F.3d 713 (7th Cir. 2000) ......................................................................... 48
Softel, Inc. v. Dragon Medical & Scientific Commc’ns, Inc., 118 F.3d 955 (2d Cir. 1997) .................................................................... 50, 51
Steele v. Aramark Corp., 535 F. App’x 137 (3d Cir. 2013) ................................................................... 50
Stollings v. Ryobi Techs., Inc., 725 F.3d 753 (7th Cir. 2013) ......................................................................... 32
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008)....................................................................................... 44
Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196 (2d Cir. 2008) .......................................................................... 31
In re TMI Litig., 199 F.3d 158 (3d Cir. 2000) .......................................................................... 55
Toney v. Rosewood Care Ctr., Inc. of Joliet, 62 F. App’x 697 (7th Cir. 2003) .................................................................... 56
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In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512 (S.D.N.Y. 2011) ........................................................... 40
Walker v. Soo Line R.R. Co., 208 F.3d 581 (7th Cir. 2000) ......................................................................... 48
Weisgram v. Marley Co., 528 U.S. 440 (2000)....................................................................................... 55
United States v. Williams, 506 F.3d 151 (2d Cir. 2007) .......................................................................... 26
In re Williams Sec. Litig., 558 F.3d 1130 (10th Cir. 2009) ..................................................................... 46
Zerega Avenue Realty Corp. v. Hornbeck Offshore Transp., LLC, 571 F.3d 206 (2d Cir. 2009) .......................................................................... 51
ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012) .......................................................................... 56
STATUTES AND OTHER AUTHORITIES
Private Securities Litigation Reform Act of 1995 ....................................... 40, 43, 44
Section 10(b) of the Securities Exchange Act of 1934 .....................................passim
Federal Rule of Civil Procedure 26 ................................................................... 50, 51
Federal Rule of Evidence 702 ...........................................................................passim
Bruegger & Dunbar, “Estimating Financial Fraud Damages with Response Coefficients,” 35 J. Corp. L. 11, 29 (2009) .................................................... 43
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PRELIMINARY STATEMENT
When the District Court granted partial summary judgment for
Defendants, Plaintiffs and their expert faced a strategic crossroads. The Court had
rejected two of the seven dates that Plaintiffs’ expert, Professor Daniel Fischel, had
used to quantify stock price inflation attributable to Defendants’ alleged fraud—
and therefore to calculate damages in the case. Accordingly, portions of Fischel’s
original expert report, and the entirety of the day-by-day schedule of price inflation
he had calculated, were invalid and had to be redone.
One obvious path available to Fischel and Plaintiffs was to do what
Fischel had previously testified he would do if any of his dates were rejected:
disregard price movements on those dates and prepare a new schedule of price
inflation using the methodology he had urged before. That approach, however,
would have substantially reduced Plaintiffs’ claimed damages. Alternatively,
Plaintiffs could invent a new methodology that would minimize the reduction of
damages, but also would contradict Fischel’s prior deposition testimony and lack
any legal or academic support.
Plaintiffs, represented by some of the most experienced counsel in the
securities bar, and Fischel, among the best-known economic experts in securities
litigation, opted for the second, riskier path. In a one-page Supplemental Report
containing only a single, cryptic sentence of relevant “explanation,” Plaintiffs and
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Fischel unveiled a brand new methodology that yielded a substantially higher
damages claim than Fischel’s original methodology would have yielded if applied
to the remaining five dates. In fact, a consequence of this new methodology was
that by starting with seven dates and removing the two invalid ones, Fischel
produced a higher damages claim than if he had started with only the five dates
that survived summary judgment in the first place. This was Plaintiffs’ strategic
choice—to try to recoup some of the damages lost through the District Court’s
summary judgment decision by adopting a novel and inconsistent methodology,
while providing no meaningful explanation that could be used to challenge it.
Plaintiffs’ gambit backfired. After a year of litigation over Fischel’s
Supplemental Report, the District Court excluded it. Noting both the flaws in
Fischel’s new methodology and the lack of explanation in his report, the Court
ruled that Plaintiffs had failed to carry their Daubert burden to establish that
Fischel’s testimony was the result of a reliable methodology, reliably applied.
Further, the Court held that Fischel’s testimony completely ignored a different
portion of the summary judgment ruling, which held—contrary to Fischel’s
assumption—that Defendants were not liable for certain statements made by a
distinct non-party entity, Pharmacia Corporation.
Facing the undeniable fact that their case could not go forward
without Fischel’s testimony, Plaintiffs sought to retrace their steps and follow the
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path they had spurned a year earlier. They proposed yet another amended report
that would add 20 pages of previously withheld explanation and argument. The
new proposed report continued to advocate Fischel’s new methodology—which he
had testified under oath was “necessary”—but offered, as a backup, to scrap it and
revert to the old methodology (thereby admitting that the new one was not
necessary, after all) if doing so would spare Fischel from exclusion. The new
report offered an entirely new day-by-day schedule of price inflation during the
Class Period. It did all of this after the Final Pretrial Conference, and despite the
fact that admitting the new report would require another round of discovery,
another round of Daubert briefing, another ruling by the Court, and postponement
of the trial. By denying Plaintiffs’ motion for leave to amend, the District Court
acted well within its discretion.
Plaintiffs now come to this Court claiming that the District Court
abused its discretion by failing to relieve them of the foreseeable consequences of
the litigation risk they chose to take in hopes of magnifying their recovery. They
are entitled to no relief. Sophisticated parties represented by experienced counsel
are permitted to make strategic choices—on behalf of themselves and those they
have been found adequate to represent. But they are not entitled to a do-over when
their tactics do not work out as planned. The courts are not obliged to spare them
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from the consequences of their strategic choices. Nor may they use the specter of
harm to the class they represent to immunize them from those consequences.
The practical implications of Plaintiffs’ contrary position are both
immense and perverse. Were Plaintiffs to prevail here, experts (and the parties
they work for) would have no reason to proffer their most complete and reliable
analysis in the first instance. Instead, they would be encouraged to take the most
aggressive possible positions and withhold explanations that could expose
vulnerabilities, retreating only when necessary to avoid exclusion—even if, as
here, doing so would disrupt the court’s trial preparations. Daubert challenges,
revised reports, supplemental expert discovery, and trial delays would multiply.
And already-overworked courts would bear much of the burden.
STATEMENT OF ISSUES PRESENTED
1. Whether the District Court acted within its discretion in ruling
that Plaintiffs failed to establish the admissibility of Fischel’s testimony under Rule
702 and Daubert.
2. Whether the District Court acted within its discretion in
declining to permit Fischel to offer new opinions, new explanations, and new
methodologies after the Daubert ruling.
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3. Whether the District Court properly ruled at summary judgment
that Defendants could not be held liable for certain alleged misstatements made by
a non-party.
STATEMENT OF THE CASE
A. Factual Background
This litigation began in 2004. At that time, newly available data from
a study conducted by the National Cancer Institute (“NCI”) indicated a potential
association between high-dosage use of Celebrex, a medicine sold by Pfizer, and
an increased risk of heart attack and stroke. (A477.) Celebrex, which has been
approved by the Food and Drug Administration (“FDA”) since 1998, is intended to
treat arthritis pain without causing the gastrointestinal side effects associated with
alternate treatments like aspirin, ibuprofen, and naproxen. (SA5.)
Pfizer received this new NCI data on the evening of December 16,
2004. (A476.) The next morning, before the stock market opened, Pfizer issued a
press release reporting these results. (Id.) Over the following two trading days,
Pfizer’s stock price declined amid concerns that this new data might result in the
withdrawal of Celebrex from the market. (A931-32 ¶¶ 19, 21.) Shareholder class-
action complaints were filed within days asserting that Pfizer had known about, but
failed to disclose, these potential risks of Celebrex and another Pfizer medicine,
Bextra, in advance of the NCI study. In the following months, as concerns about
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Celebrex’s withdrawal proved unfounded, Pfizer’s stock price rebounded. (A932
¶ 21; A568-69, 41:22-42:15.)
Plaintiffs’ attempt to persuade this Court that they have a strong
liability case (Pl.Br. 9-16) is both irrelevant to the questions presented and
misleadingly incomplete. For example, in April 2005, the FDA concluded, based
on findings of an independent Advisory Committee, that Celebrex should remain
available for patient use. (A440.) The FDA observed that long-term clinical trials
did not suggest that the use of Celebrex was associated with any greater risk of
serious adverse cardiovascular events than traditional treatments. (A425; A428-
29; A432.) Based on its review of hundreds of previous studies, the FDA found
that the NCI study was the first and only clinical trial to indicate a potential
association between Celebrex and heart attack/stroke risk to a degree of statistical
significance. (A428-29.)1
Pursuant to the FDA’s conclusions, a new warning was added to the
label for Celebrex, as well as for every other prescription medicine in its class
(A438), and Celebrex remains available for patient use to this day. All four of the
individual defendants in this appeal—all alleged to have knowingly concealed
1 The FDA recommended that Bextra, another Pfizer medicine in the same class
as Celebrex, be removed from the market, but did so based on the risk of serious skin reactions. (A441.)
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Celebrex’s alleged risk of heart attack and stroke—used Celebrex themselves or
within their immediate families. (ECF 590, at 3.)
B. Early Procedural History
The shareholder suits filed upon the release of the NCI study results
were consolidated and subsequently transferred to the Honorable Laura Taylor
Swain. Plaintiffs’ consolidated amended complaint asserts claims under Sections
10(b), 20(a), and 20A of the Securities Exchange Act against Pfizer and five of its
employees.2 The Complaint alleges that Defendants made statements that
concealed the risks ultimately revealed by the NCI study, and contends that these
alleged misstatements caused investors economic loss by artificially inflating
Pfizer’s stock price. (A153-375.)
The District Court managed the litigation carefully and deliberately.
On July 1, 2008, it denied in part Defendants’ motion to dismiss. (A110-43.) In
October 2009, the Court conducted a five-day Daubert hearing concerning certain
of both parties’ medical and scientific experts (not including Fischel, who had not
yet submitted a report), and denied cross-motions to exclude their testimony. (ECF
193, at 2-3.) On March 29, 2012, over Defendants’ opposition, the District Court
2 One originally-named Defendant, John LaMattina, was dismissed by stipulation
of the parties. (ECF 657.)
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certified an investor class of purchasers of Pfizer stock from October 31, 2000 until
October 19, 2005, based, in part, on a report provided by Fischel. (A376, A404.)
C. The District Court’s Summary Judgment Order Limits Plaintiffs’ Damages Case
On March 28, 2013, the District Court granted in part and denied in
part Defendants’ motion for summary judgment. (SA1-29.) Two portions of that
ruling are relevant to this appeal.
First, the District Court observed that Plaintiffs had identified seven
dates on which Pfizer’s stock price allegedly dropped as the result of releases of
information concerning Celebrex and Bextra that Defendants had purportedly
failed to disclose (hereinafter, “corrective disclosures”). (SA19-21.) Plaintiffs
pointed to these price drops as evidence that Defendants’ alleged misstatements
had artificially inflated Pfizer’s stock price. The Court ruled that, with respect to
two of the seven drops, Plaintiffs’ claims failed as a matter of law because the
events that occurred on the days of the drops did not reveal relevant information
concerning Celebrex or Bextra. (SA22.) It denied Defendants’ challenges to the
remaining disclosure dates. (SA21.) Plaintiffs do not appeal this portion of the
District Court’s ruling.
Second, the Court held that nine of the alleged misstatements pled in
the Complaint were not actionable against the Defendants under Janus Capital
Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), because they were
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made by a “separate and independent entity,” Pharmacia. (SA27-28.) Although
Pfizer acquired Pharmacia on April 16, 2003, the nine excluded statements were
made before that acquisition. (Id.) One, made on February 1, 1999, is the very
first alleged misstatement in the Complaint. (A271 ¶ 348.) The District Court
recognized that before Pfizer’s acquisition of Pharmacia, the companies had a co-
promotion agreement that allowed them to approve each other’s press releases
concerning Celebrex and Bextra. (SA28.) Based on that agreement, the District
Court concluded that a jury could find Defendants liable for certain Pharmacia
statements. (Id.) However, for nine particular statements made by, and attributed
to, Pharmacia—none of which was a press release—the Court concluded that
Defendants were not shown to have had “ultimate authority” over those statements
under Janus. (Id.)
Apart from these two rulings, the District Court largely denied
Defendants’ motion for summary judgment. (SA28-29.) On July 22, 2013, it
issued a scheduling order for the additional work required before trial. (ECF 512.)
The Final Pretrial Conference was held on May 23, 2014, and trial was scheduled
to begin on September 9, 2014. (A104.)
D. Plaintiffs Submit A Supplemental Expert Report On Damages
The District Court’s summary judgment order invalidated the
predicate of Fischel’s analysis—that the seven alleged corrective disclosure dates
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were all valid—and thus also invalidated all of his day-by-day calculations
regarding the amount of alleged inflation present in Pfizer’s stock price during the
Class Period. Accordingly, as explained below, every one of Fischel’s 1,292 daily
inflation figures was wrong. (A1065-97.) Plaintiffs recognized that, as a result,
Fischel had to redo his analysis and submit a new report.
Although Fischel’s Supplemental Report took six weeks to prepare, it
was less than one page long. (A1775.) It did not address the District Court’s
exclusion of the Pharmacia statements. Its discussion of the District Court’s
rejection of two corrective disclosure dates consisted of a single sentence. (Id. ¶
2.) Because Plaintiffs’ appellate brief does not explain Fischel’s methodology or
his revision, some background is necessary to understand the issues that led to the
Daubert ruling.
1. Fischel’s Original Event Study Methodology
In his original report, Fischel used an event study3 to determine the
artificial inflation allegedly present in Pfizer’s stock price. (A934-40.) Under this
method, Fischel testified that he did not attempt to ascertain how or when the
3 In an event study, an expert “look[s] for ‘abnormal returns … when a stock
moves differently than predicted based upon market and industry factors’ and determines whether those abnormal returns are related to the alleged fraud.” SEC v. Razmilovic, 738 F.3d 14, 33 (2d Cir. 2013) (quoting district court opinion).
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alleged artificial inflation first entered Pfizer’s stock price. (A1121, 82:13-19;
A593, 139:3-13.) Instead, he identified dates during the Class Period on which
fraud-related inflation purportedly came out of Pfizer’s stock price because of the
revelation of information about Celebrex and Bextra that, according to Plaintiffs,
Defendants had previously concealed. (A932 ¶ 20.) The amounts the stock price
decreased as a result of these alleged corrective disclosures (as opposed to
unrelated market factors) are called “residual stock price declines.” (A935 ¶ 26.)
Fischel then worked backward in time, concluding that each of those residual price
declines represented inflation that was present in the stock price on all earlier days
in the Class Period. (A563, 18:11-22.) Thus, to calculate the price inflation on any
given day, he added up all of the residual stock price declines that came after that
day. (Id.) The more corrective disclosures that came later, the higher the alleged
inflation calculated for that day. (A563, 19:5-13; A939 ¶ 30.)
Fischel’s methodology contained a second, necessary step as well. He
acknowledged that simply adding up all of the residual price declines that came
after the day in the Class Period being measured would result in an overstatement
of damages. (A567, 45:2-8.) This is because it was possible that some of the
inflation that eventually came out of Pfizer’s stock price was not yet present in the
price on the day being measured (for example, if an alleged misstatement had not
yet been made).
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Thus, Fischel explained, to avoid overestimating inflation for any
particular day, he had to subtract any residual stock price increases resulting from
allegedly false statements about Celebrex or Bextra that introduced inflation into
the stock price for the first time after that day. (A569, 42:16-45:8.)4 He therefore
analyzed Pfizer’s stock price movements every day during the Class Period and
identified five dates on which he concluded that the price increased by more than
market forces could explain; the residual increase was, in his view, attributable to
the alleged fraud (“inflation-in” dates). (A929-38 ¶¶ 17, 22, 29 & Table 2; A568,
40:23-41:15.) Fischel determined what portion of the stock price increases on each
of those dates represented artificial inflation. (A938-39 ¶ 30 & n.14.)
Subtracting these residual price increases had the effect of reducing
overall damages. Instead of assuming that the inflation he calculated based on the
4 Professor Paul Gompers, Defendants’ economic expert, provided a simplified
example to help explain how Fischel’s original event study worked:
[I]f fraud-related inflation of $0.05 came out of the stock price on March 1, and fraud-related inflation of $0.10 came out of the stock price on April 1, then [Fischel] would conclude there must have been fraud-related inflation of $0.15 on dates in the class period prior to March 1…. [I]f fraud-related inflation of $0.03 came into the stock price on February 1 [via a mitigating price increase], then Fischel’s methodology would conclude that the fraud-related inflation before that date … was $0.12, rather than $0.15.
(A1151 ¶¶ 11-12.)
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seven corrective disclosure dates was present throughout the entire Class Period,
his damages figure was reduced because much of the inflation entered the price
only late in that Period. While Plaintiffs now claim that subtracting the inflation
increases was “Pfizer-friendly” (Pl.Br. 5), Fischel previously acknowledged that
this step was necessary to avoid “overstat[ing] alleged artificial inflation.” (A569,
44:11-45:8.)
As explained above, Fischel made no attempt to determine how or
when Pfizer’s stock price was first inflated. (A1121, 82:13-84:2.) He simply
assumed that Defendants were responsible for all inflation that was supposedly
present at the start of the Class Period, because that is what the Complaint alleged.
(A1120-21, 78:9-79:19, 82:2-11.)
2. Fischel’s New Methodology And The 9.7% Adjustment
The District Court’s summary judgment order rejected two of the
corrective-disclosure dates proposed by Plaintiffs, and thereby invalidated the
foundational step in Fischel’s calculation of inflation for each and every day of the
Class Period. With his existing inflation model no longer usable, Fischel had to
start over and “conform[]” his analysis. (Pl.Br. 3.)
Before summary judgment, Fischel was specifically asked in a
deposition what he would do if any of his corrective disclosure dates were rejected.
Fischel responded that he would eliminate the residual price declines on the
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rejected dates from his analysis and, as a result, the inflation he calculated for all
Class Period days before the rejected dates would be lower by an amount equal to
the stock price declines that were removed. (A1135-36, 38:9-39:5.) Had Fischel
done this in the wake of the District Court’s summary judgment ruling, he would
have reduced his inflation calculation by $0.67 per share for most of the Class
Period.5
But instead of just removing the $0.67 per share of residual stock
price declines and reducing all of his prior day-by-day calculations accordingly, as
he had testified he would, Fischel chose to switch methodologies. In addition to
removing the rejected corrective disclosure dates, he also changed all of the
residual stock price increases that his event study had previously measured on the
“inflation-in” dates. Although those dates received no mention in the summary
judgment opinion, and though he had received no new information about the
events or stock price movements on those dates, Fischel reduced the amount of
inflation added to the stock price on each inflation-in date by a uniform 9.7%. The
entirety of his explanation for that new step (the “9.7% Adjustment”) in his
Supplemental Report consisted of a single sentence:
5 Fischel had calculated a residual price decrease of $0.60 on the first eliminated
date, November 4, 2004, and (after adjustment) $0.07 on the second eliminated date, October 20, 2005. (A937-38.) See also Pl.Br. 21 ($0.67 per share price decline associated with rejected disclosure dates).
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Because eliminating the stock price declines related to Celebrex and Bextra on [the two rejected] dates reduces the total residual stock price decline I estimated related to these drugs (see Fischel Report Table 1 & ¶ 30) by 9.7 percent, I proportionally reduce the residual stock price increases I measured that are related to these drugs (see id. Table 2 & ¶ 30) by 9.7 percent.
(A1775 ¶ 2.)
Fischel did not explain the logic of this adjustment. Nor did he
explain how he could have previously concluded, based on an event-driven
analysis, that the price increases he measured for these inflation-in days were fully
attributable to Defendants’ alleged fraud, but nonetheless could now conclude—
without revisiting his earlier analysis in any way—that only (and precisely) 90.3%
of those price movements was fraud-related.
The effect of Fischel’s new methodology was to assume that less
inflation entered Pfizer’s stock price during the Class Period—and thus,
importantly, that more had been present for the entirety of the Class Period. The
impact on damages was predictable and substantial. Had Fischel simply
eliminated the residual price declines for the rejected days, his calculation of stock
price inflation for the first two-and-a half years of the Class Period would have
been $0.67 per-share lower than the $1.46 he initially calculated for that period
(A1065-81; see also Pl.Br. 21), or $0.79. Under his revised 9.7% Adjustment, the
inflation he calculated was only $0.29 per-share lower, making inflation for the
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period $1.17. (Compare A1065-81 (initial report table), with A2713-28
(Supplemental Report table).) For a company with more than six billion
outstanding shares of stock and more than 24 billion shares traded during the Class
Period (ECF 247 ¶ 13), increasing the price inflation for most of the Class Period
from $0.79 to $1.17—nearly 50%—results in a difference in the billions of
dollars.6
Fischel admitted in a subsequent deposition that he knew of no
instance in which another expert had made this type of adjustment, that he was
aware of no reference to it in the relevant literature, and that he had never
previously used it or subjected it to peer review. (A1110-15, 40:17-43:5, 50:11-
51:9.)
Defendants’ expert, Professor Paul Gompers, submitted a report
rebutting Fischel’s Supplemental Report. Gompers concluded that Fischel’s 9.7%
Adjustment had no economic justification and led to an analytical absurdity.
6 Fischel’s later proposed amended report implies that the 9.7% Adjustment
increased his inflation calculation from $0.96 to $1.17 per share (a 20% increase), rather than from $0.79 to $1.17, as described in text above. (Compare A2185-99 (proposed amended report table), with A2713-28 (Supplemental Report table).) The difference probably reflects his adjustment for the merger between Pfizer and Pharmacia and a correction of an error in his prior analysis identified at an earlier deposition. (A2231, n.16; A1897, 62:14-17.) In either case, the effect of Fischel’s adjustment on Plaintiffs’ damages claim is highly consequential.
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(A1150-62 ¶¶ 10-37.) He explained, in particular, that if Fischel had simply not
included the two corrective disclosure dates rejected by the District Court in his
original analysis, his calculation of inflation would have been lower than the result
Fischel reached under his new methodology, because no adjustment of the inflation
increases would have occurred. In other words, by including the erroneous
disclosure dates in his original analysis, and then removing those dates and
applying the 9.7% Adjustment, Fischel ended up with higher inflation numbers
than if he had used the correct dates from the beginning. (A1160-62 ¶¶ 33-37.)
Gompers observed that “[n]o valid scientific analysis can have its final results turn
on how many unsupported events an earlier version of the analysis contained.”
(A1162 ¶ 37.)
3. Fischel’s Failure To Address The Exclusion Of The Pharmacia Statements
Fischel also testified during his post-summary judgment deposition
that, apart from the ruling eliminating the two alleged corrective disclosures, he
had only “skimmed” the District Court’s summary judgment decision to which his
Supplemental Report responded. (A1104, 15:2-9.) Directed to the portion of the
decision that rejected liability for certain statements made by Pharmacia, Fischel
testified that he had no opinion about that ruling, and that it “did not cause [him] to
modify [his] analysis” of inflation. (A1119-20, 76:14-77:15, 81:20-25.) Fischel
confirmed that his analysis assumed that the inflation purportedly present in
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Pfizer’s stock price was caused by “statements [that] are attributable to
defendants.” (A1120, 78:16-22.) And he agreed that if “defendants are not liable
for … some or all of the statements,” then “for those statements where there was
no liability, there wouldn’t be any role for analyzing inflation or damages.”
(A1120, 79:5-19 (emphasis added).) But Fischel reiterated that his Supplemental
Report did not address that situation—which had come into being with the District
Court’s conclusion that certain statements made by Pharmacia were not
Defendants’ responsibility—and that the “jury would have to decide what to do.”
(A1119-20, 77:16-80:14.) Fischel’s report offered no guidance as to how the jury
should perform that analysis, which he testified “might not be simple
arithmetically.” (A1120, 79:21-80:14.)
4. Fischel’s Reply Report
After receiving Professor Gompers’ rebuttal report, Fischel responded
with yet another report, his third on the issues of loss causation and damages.
(A1212.) It contained no new analysis concerning the 9.7% Adjustment or the
Pharmacia ruling. Instead, in this report, Fischel asserted that he could have
omitted the inflation-in dates altogether—even though he had already testified that
doing so was improper—and that if he had done so, his damages estimate would
have been even higher. (Id. ¶ 2 & n.1; A569, 44:11-45:8.)
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E. The District Court Grants Defendants’ Daubert Motion
On September 30, 2013, Defendants moved to exclude Fischel’s
testimony under Federal Rule of Evidence 702 and Daubert. (A1465.) On May
21, 2014, the District Court granted that motion. With respect to the 9.7%
Adjustment, the Court observed that Fischel had “proffered no explanation of the
analytical basis” for this adjustment; that he had not explained “the relationships
among the events triggering the respective price decreases and increases”; and that
he had cited no research references or peer review support for his methodology.
(SA30-31.) After articulating the law governing its gatekeeping function, the
Court concluded that Fischel’s 9.7% Adjustment had “not been shown to be the
product of reliable principles and methods reliably applied.” (SA31.)
With respect to Fischel’s failure to address the holding that
Defendants were not liable for certain Pharmacia statements, the Court noted that
Fischel had not conformed his analysis to that ruling despite having testified that
his opinion was premised on a contrary assumption. (Id.) The Court also
concluded that, given this assumption, Fischel’s “failure to account in any way for
the impact of the excluded Pharmacia statements render[ed] his opinions unhelpful
to the jury in making calculations of damages proximately caused by Defendants’
alleged misrepresentations and omissions.” (SA32.) In addition, the Court
adopted “substantially the reasons set forth in Defendants’ [Daubert briefing]” in
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support of its ruling. (Id.; the cited memoranda appear at A1465 and A2127,
respectively.)
F. The District Court Denies Plaintiffs’ Motion For Leave To Amend
On May 23, 2014, the District Court held a Final Pretrial Conference.
(A2150.) Plaintiffs admitted that they could not “go forward without a damages
expert obviously.” (A2151, 5:11-14.) At Plaintiffs’ request, the District Court set
a schedule for Plaintiffs to move for leave to amend Fischel’s Supplemental
Report.
On June 6, 2014, Plaintiffs submitted their motion, attaching Fischel’s
20-page proposed amended report plus exhibits. (A2164.) Plaintiffs claimed that
they had “misjudge[d] … the level of explanation” required to support Fischel’s
revised opinion and were now attempting to “supply the requisite information.”
(ECF 666, at 11.) The proposed amended report continued to apply the 9.7%
Adjustment, but also (and inconsistently) stated that if the Court “disagree[d]” with
the Adjustment, Fischel would be willing to drop it. (A2179 ¶ 24.)
On July 8, 2014, the District Court denied Plaintiffs’ motion for leave
to amend. It concluded that Fischel’s proposed amended report again failed the
Daubert test. In addition, it cited the facts that:
• the proposed report came “on the eve of trial”;
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• it included a “new approach” and explanations that had not
previously been disclosed;
• there was “no justification” for Fischel’s failure to disclose these
explanations earlier;
• certain explanations were inconsistent with Fischel’s prior
testimony; and
• allowing the amendment would prejudice the defense in the face of
an upcoming three-month trial.
(SA34-37.) Noting that Plaintiffs’ arguments were largely the same as those they
had raised in opposition to Defendants’ Daubert motion, the District Court likened
their motion to one for reconsideration and concluded that Plaintiffs could not
satisfy the standards governing such a motion. (SA34.) Because Plaintiffs were
unable to proffer admissible loss causation or damages evidence, the District Court
granted Defendants’ cross-motion for summary judgment. (SA37.)
SUMMARY OF ARGUMENT
The District Court properly applied well-established principles in
exercising its discretion to exclude Fischel’s testimony and to reject Plaintiffs’
belated attempt to remedy the flaws that led to the exclusion. Plaintiffs had
responded to the Court’s summary judgment ruling by submitting expert testimony
that was unexplained, unprecedented, and analytically flawed in order to pump up
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their damages claim. The District Court was within its discretion in finding that
Plaintiffs had failed to carry their burden to establish admissibility. The Court was
equally within its discretion when it declined to spare Plaintiffs the foreseeable
consequences of their ploy by letting them disavow the position they had
maintained as “necessary” for the prior year, start over, and make different
strategic and substantive choices shortly before trial was to commence.
The reasonableness of the District Court’s Daubert ruling is illustrated
by the way in which Plaintiffs argue for reversal. Rather than defend the
admissibility of Fischel’s testimony based on the record that was before the
District Court when it ruled on the Daubert motion, Plaintiffs rely on Fischel’s
Supplemental Report together with the 20 pages of explanation that Fischel offered
only after the Court issued its ruling. Rather than explain why Fischel’s 9.7%
Adjustment was, in fact, reliable, Plaintiffs claim that the adjustment is a mere
“calculation” immune from Daubert review altogether and that, “at a minimum,”
Fischel should have been permitted to testify without it—an offer he made only
after unsuccessfully test-driving his new, damages-enhancing methodology.
Rather than challenge the Court’s finding that Fischel’s opinion would not be
helpful to the jury because he failed to account in any way for the exclusion of the
Pharmacia statements, Plaintiffs offer post hoc rationalizations for Fischel’s failure
that are absent from his Supplemental Report, contrary to his deposition testimony,
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and unavailing. On the record that was actually before the District Court when it
ruled on the Daubert motion, the Court’s exclusion of Fischel’s testimony was
correct, and certainly within its discretion.
The District Court’s decision not to permit Fischel’s proposed
amendment was also within its discretion. Plaintiffs had adopted an aggressive
litigation strategy fully cognizant of the associated risks. In considering Plaintiffs’
request to be spared the consequences of their own tactical decisions, the District
Court weighed several considerations. Among them were the facts that Fischel had
withheld his newly-tendered explanations throughout a year of discovery; that
those explanations were inconsistent with his earlier sworn testimony; and that his
9.7% Adjustment continued to lack analytical or research support. The District
Court properly viewed Fischel’s offer to drop the adjustment he had sworn was
“necessary”—in exchange for being permitted to testify—as exacerbating
reliability concerns. And it concluded that, even if the proposed amendments had
been sufficient to satisfy Daubert (which the Court found was not the case),
considerations of “judicial economy” and prejudice to the defense warranted denial
of the proposed Amended Supplemental Report. (SA34-37.)
Reversing those conclusions would not only unduly disturb the
District Court’s sound exercise of discretion in this case, but would also encourage
parties and their experts to engage in similar tactics in future litigation—
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withholding explanations and taking unreasonably aggressive positions, assured of
their entitlement to a second try. It would undermine the certainty that Daubert
rulings are meant to provide. And it would severely complicate the ability of
district courts to manage their dockets effectively.
Plaintiffs’ challenge to the Pharmacia portion of the District Court’s
earlier summary judgment ruling—a two-page afterthought at the end of their
brief—also fails. The District Court correctly concluded that Plaintiffs proffered
no evidence upon which a reasonable jury could conclude that Defendants “made”
statements uttered by Pharmacia personnel, and thus that those statements provided
no basis for imposing liability. (SA28.)
STANDARD OF REVIEW
The exclusion of expert testimony is reviewed for “abuse of
discretion,” even where it is “outcome-determinative.” Gen. Elec. Co. v. Joiner,
522 U.S. 136, 142-43 (1997); see also Amorgianos v. Nat’l R.R. Passenger Corp.,
303 F.3d 256, 264 (2d Cir. 2002).
Denial of leave to amend an expert report—a matter squarely within a
district court’s authority to manage proceedings before it—is subject to the same
deferential standard of review. See generally United States v. Local 1804-1, Int’l
Longshoremen’s Ass’n, 44 F.3d 1091, 1095 (2d Cir. 1995). To the extent that
Plaintiffs’ motion for leave to amend is viewed as a motion for reconsideration
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(SA34), the standard of review for denial of that motion is also abuse of discretion.
See Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36, 52 (2d Cir.
2012).
Summary judgment decisions are reviewed de novo. See Miller v.
Wolpoff & Abramson, LLP, 321 F.3d 292, 300 (2d Cir. 2003).
ARGUMENT
I.
The District Court Reasonably Concluded That Fischel’s Testimony Failed To Satisfy Rule 702 and Daubert
The District Court granted Defendants’ Daubert motion and excluded
Fischel’s testimony on two independent grounds: (1) that Fischel’s 9.7%
Adjustment “ha[d] not been shown to be the product of reliable principles and
methods reliably applied”; and (2) that his “failure to account in any way for the
impact of the [Court’s] exclu[sion of the] Pharmacia statements render[ed] his
opinion unhelpful to the jury.” (SA31-32.) These exercises of the Court’s
discretion are well supported by the record.
In rendering this decision, the District Court exercised its duty to
serve as gatekeeper with respect to expert testimony. The Court was charged with
“the task of ensuring that an expert’s testimony both rests on a reliable foundation
and is relevant to the task at hand.” Daubert v. Merrell Dow Pharms., Inc., 509
U.S. 579, 597 (1993). It had to “make certain that an expert, whether basing
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testimony upon professional studies or personal experience, employs in the
courtroom the same level of intellectual rigor that characterizes the practice of an
expert in the relevant field.” Kumho Tire Co. v. Carmichael, 526 U.S. 137, 152
(1999).
A. The District Court Reasonably Excluded Fischel’s Testimony Based On His 9.7% Adjustment
Fischel’s explanation for the 9.7% Adjustment in his Supplemental
Report consisted of a single conclusory sentence providing no analytical basis.
(A1775 ¶ 2.) Neither that sentence nor Fischel’s subsequent testimony was
sufficient to demonstrate the reliability of this adjustment. And the argument on
which Plaintiffs now rely to sustain the adjustment—that it was not subject to
Daubert review in the first place—is contrary to established law.
1. Plaintiffs Provided No Basis To Find The 9.7% Adjustment Reliable
Plaintiffs bore the burden of showing that Fischel’s testimony
satisfied the admissibility requirements of Rule 702 and Daubert. See United
States v. Williams, 506 F.3d 151, 160 (2d Cir. 2007). Given Fischel’s deviation
from his own original methodology, his deposition testimony, and standard event
study principles, the District Court did not abuse its discretion in concluding that
Plaintiffs failed to carry that burden.
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As the District Court noted, Fischel’s Supplemental Report “proffered
no explanation of the analytical basis” for his adjustment other than a single
conclusory sentence. (SA30.) The Court correctly concluded that “[n]o
explanation of the relationships among the events triggering the respective price
decreases and increases was offered.” (SA30-31.) Fischel had originally examined
each of the “inflation-in” dates to determine whether the residual price increases on
those dates were attributable to new misleading information entering the market—
and where he concluded they were, he included the full amount of those residual
price increases in his calculations. (A937-38 ¶ 29 & Table 2; A568, 40:23-41:15.)
In his Supplemental Report, however, Fischel made no effort to determine whether
the Court’s exclusion of two corrective disclosure dates bore any connection in
substance to the inflation-in dates; he did nothing to tie those dates together such
that the exclusion of the corrective disclosure dates would justify a change to
(much less a uniform adjustment of) the inflation-in dates. He simply asserted that
only 90.3% of the residual price increases on those dates related to the alleged
fraud.
In subsequent deposition testimony, Fischel offered little explanation
for this arbitrary reduction of inflation-in price movements other than to invoke a
purported “equilibrium principle” that all price increases must, in the aggregate,
equal all price decreases from corrective disclosures. (Pl.Br. 22-23; A1109-10,
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37:22-38:8, 40:5-9.) But as Defendants explained in their Daubert briefing,
“equilibrium” was achieved simply by removing the $0.67 per share in rejected
dates from Fischel’s model—as Fischel had previously testified he would do—
because doing so automatically reduced the inflation present in the stock price
going back to the first day of the Class Period by a corresponding amount.
(A1484, 15 & n.4.) Thus, Fischel’s adjustment had nothing to do with restoring
equilibrium. Rather, it let him assume, contrary to his event study, that more price
inflation existed at the start of the Class Period and less entered during the Class
Period, and thus that more inflation was present for a longer time (such that
Plaintiffs’ resulting damages were higher).
Fischel identified “no research reference or peer review information”
to support his adjustment. (SA31.) Indeed, Fischel testified that he knew of no
instance in which another expert had employed this type of adjustment, that he was
aware of no reference to it in the relevant literature, and that he himself had never
previously used it or subjected it to peer review. (A1110-11, 40:17-42:24, 50:11-
51:9.) And with good reason: this adjustment is not an established component of
an event study; Fischel invented it for this case.
Neither Fischel nor Plaintiffs reconciled Fischel’s new position with
his earlier testimony that, if any corrective disclosure date were rejected, he would
only reduce his damages estimates by the amount of the residual price declines on
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the rejected dates. (A568, 38:19-39:25.) Plaintiffs provided no justification for
Fischel’s about-face at the time the District Court ruled on the Daubert motion.
Nor, significantly, have Plaintiffs offered any response—either in the
District Court or here—to the devastating analytical flaw in Fischel’s 9.7%
Adjustment identified by Professor Gompers. If Fischel had never included the
two invalid corrective disclosure dates in his original analysis, and simply started
with the five corrective disclosure dates that survived summary judgment, he
would not have applied his uniform, across-the-board 9.7% haircut. (A1162 ¶ 36.)
As a result, his total damages calculation would have been lower throughout the
Class Period. (Id. ¶ 37.) Fischel applied the 9.7% Adjustment only to compensate
for the fact that the District Court had rejected his two invalid dates. The
consequence was that Fischel’s damages calculation was higher when he started
with seven dates and removed two, than it would have been had he gotten the five
corrective disclosure dates right in the first place. A methodology that rewards
mistakes is obviously unsound.
2. The Adjustment Was Properly Subject To Daubert Review
Perhaps the strongest indictment of Fischel’s 9.7% Adjustment is that
Plaintiffs do not attempt to defend it here. Instead, their primary argument—not
raised in their opposition to the Daubert motion in the District Court (see A1513-
22)—is that the adjustment should have been immune from Daubert scrutiny. In
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Plaintiffs’ view, even if the Court disagreed with the adjustment, Defendants’
“quibbles” provided no basis for excluding Fischel’s testimony. (Pl.Br. 39-43.)
At the outset, Plaintiffs are incorrect in arguing that the adjustment
was only “a calculation, not a revised methodology.” (Pl.Br. 4, 42-43.) Fischel
himself repeatedly acknowledged that his adjustment was a “methodology,” not a
mere calculation.7 Unlike his original event study, Fischel’s new methodology
disregarded historical events that actually occurred on the relevant dates, and
instead determined inflation on any given day by aggregating all of the subsequent
stock price decreases, but only an arbitrary percentage (90.3%) of the subsequent
stock price increases he had previously included. Far from being a “rational
extrapolation[]” or “arithmetical adjustment” to his original event study approach,
Fischel’s inflation-increasing adjustment was an entirely new approach. (Pl.Br. 24,
41.)8
7 See, e.g., A1104, 17:7-21 (Fischel referring to the “methodology that I proposed
in the supplemental report”); A1110, 39:19-40:16 (“I did make the adjustment that’s reflected in the supplemental report …. So that’s basically the methodology that I used and the reasons why I did it.”).
8 While Gompers did not object to the “mechanical exercise” Fischel used in his initial event study to isolate residual stock price movements, he did not find “no flaws in,” “concur[] in,” or “agree[] with” that event study. (Compare Pl.Br. 20, 27, 37 with A1650, 64:17-65:14.) And Gompers vigorously disputed the methodology reflected in Fischel’s Supplemental Report. (A1144-75.)
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Even if Plaintiffs were correct that the 9.7% Adjustment is not a new
“methodology,” the result would be no different. Rule 702 requires “reliable
principles and methods” and “reliabl[e] appli[cation of] the principles and methods
to the facts of the case.” An expert’s analysis must be reliable “at every step,” and
“‘any step that renders the analysis unreliable under the Daubert factors renders
the expert’s testimony inadmissible.’” Amorgianos, 303 F.3d at 267 (emphasis in
original, quoting In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 745 (3d Cir.
1994)) (noting that excluded expert “failed to apply his own methodology
reliably”). The law is no different for event studies. An expert who employs an
event study is not immune from Daubert scrutiny. See Teamsters Local 445
Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 208 n.15 (2d Cir.
2008) (“An event study may be rejected [] if it is methodologically unsound or
unreliable.”). That is true even if some portions of an event study may be
salvageable:
The district court was not obligated to prune away all of the problematic events in order to preserve [the expert’s] testimony …. Requiring judges to sort through all inadmissible testimony in order to save the remaining portions, however small, would effectively shift the burden of proof and reward experts who fill their testimony with as much borderline material as possible.
Bricklayers & Trowel Trades Int’l Pension Fund v. Credit Suisse Sec. (USA) LLC,
752 F.3d 82, 96 (1st Cir. 2014). Nor is it relevant, as Plaintiffs suggest (Pl.Br. 3,
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20-21, 34, 37, 39-40), that Defendants’ Daubert motion did not challenge the event
study in Fischel’s initial report; that report did not include the 9.7% Adjustment or
other defects that first appeared in the Supplemental Report after the summary
judgment ruling.
The cases cited by Plaintiffs say nothing different. (Pl.Br. 40-42.)
They stand for the unremarkable proposition that, where there are no other
reliability concerns about an expert’s opinion, an objection to the expert’s choice
of underlying “data inputs” or “variables” may not by itself warrant exclusion.9
But the District Court did not find Fischel’s factual inputs faulty. It excluded as
9 See Bazemore v. Friday, 478 U.S. 385, 400 (1986) (expert’s statistical
regression analysis of racial discrimination adequately “account[ed] for the major factors,” so did not need to include “all measurable variables”) (emphasis added); In re Se. Milk Antitrust Litig., 739 F.3d 262, 281 (6th Cir. 2014) (admitting antitrust expert who “[i]nclud[ed] some facts while omitting others”); Manpower, Inc. v. Ins. Co. of Pa., 732 F.3d 796, 808-09 (7th Cir. 2013) (given the “latitude” accorded to “statisticians employing regression analyses,” questions about the “reliability of the data itself” did not warrant Daubert exclusion of a “reasoned and founded” expert opinion); Stollings v. Ryobi Techs., Inc., 725 F.3d 753, 765-67 (7th Cir. 2013) (admitting expert where the “judge agreed that [the expert] correctly employed a valid methodology” but there was “uncertainty about” one of the expert’s “input[s]”); Andler v. Clear Channel Broad., Inc., 670 F.3d 717, 729 (6th Cir. 2012) (“it is not proper for the Court to exclude expert testimony merely because the factual bases for an expert’s opinion are weak”); Milward v. Acuity Specialty Prods. Grp., Inc., 639 F.3d 11, 22 (1st Cir. 2011) (addressing the “soundness of the factual underpinnings of the expert's analysis”); Brennan’s Inc. v. Dickie Brennan & Co., 376 F.3d 356, 374-76 (5th Cir. 2004) (affirming admission where dispute was over a “more accurate set of data” and defendants did not argue that expert’s “methodology was improper”).
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unreliable the untested, unscientific, and inadequately explained methodology that
Fischel used to translate those data points into a damages opinion. (SA31.)
Plaintiffs repeatedly attempt to portray the objections to Fischel’s
Supplemental Report as a mere battle-of-the-experts between Fischel and Gompers
that the District Court was required to leave to the jury. (Pl.Br. 37-38, 46.) That
characterization is flawed. While the parties’ experts certainly disagreed, the
District Court’s decision to exclude Fischel’s testimony was a necessary and
proper exercise of its role as gatekeeper—a role required by Daubert and its
progeny—not, as Plaintiffs contend, an improper usurpation of the role of the jury.
As the Supreme Court has recognized, “[e]xpert evidence can be both powerful
and quite misleading because of the difficulty in evaluating it.” Daubert, 509 U.S.
at 597 (quotations omitted); see also Nimely v. City of N.Y., 414 F.3d 381, 396-97
(2d Cir. 2005) (gatekeeping function of district court to ensure level of intellectual
rigor of expert testimony). Here, the District Court acted within its discretion in
preventing Fischel’s testimony from reaching the jury, given that Fischel’s new
methodology was not properly justified, lacked any support in economic
literature,10 was invented for purposes of litigation, and yielded a higher damages
10 Plaintiffs are mistaken in suggesting that the District Court applied a bright-line
test requiring experts to back their testimony with published studies. (Pl.Br. 41.) The Court considered the absence of “research reference or peer review information” supporting Fischel’s novel adjustment methodology as one of
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calculation than if the invalid corrective disclosure dates had been omitted from his
original analysis. These flaws are classic indicia of testimony warranting
exclusion.
B. The District Court Reasonably Concluded That Fischel’s Failure To Account For Its Pharmacia Ruling Rendered His Opinion Unhelpful To The Jury
In addition to rejecting the 9.7% Adjustment, the District Court cited
Fischel’s failure to account “in any way” for the Court’s ruling that Defendants
were not responsible for certain statements by Pharmacia or its employees as an
independent basis for his exclusion. (SA31-32.) It found, based on Fischel’s
deposition testimony and prior report, that his analysis was “premised on the
assumption that Defendants [we]re responsible for all of the alleged
misrepresentations and omissions alleged in the complaint.” (SA31.) The District
Court noted that its summary judgment decision, in which it held that Defendants
were not liable for certain misrepresentations and omissions made by Pharmacia,
invalidated that assumption. (SA30-31.) And it concluded that Fischel’s “failure
to account in any way for the impact of the excluded Pharmacia statements
render[ed] his opinions unhelpful to the jury in making calculations of damages
several bases for its ruling. (SA31.) That consideration was entirely proper under Daubert. See 509 U.S. at 594 (“The fact of publication (or lack thereof) in a peer-reviewed journal will thus be a relevant, though not dispositive, consideration in assessing the scientific validity of a particular technique or methodology on which an opinion is premised.”).
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proximately caused by Defendants’ alleged misrepresentations.” (SA32.) The
District Court’s reasoning and conclusions were well within its discretion.
1. The District Court’s Findings Regarding The Discovery Record Were Sound
Plaintiffs first contend that the District Court’s Daubert ruling was
wrong because the Court misread Fischel’s testimony. (Pl.Br. 48-49.) They claim
that “Professor Fischel did not testify on deposition that he assumed Defendants
were responsible for all the misstatements in the complaint,” and that the District
Court “cited to a nonexistent assumption.” (Pl.Br. 48.) This argument does not
fairly characterize the record. Fischel testified that his analysis assumed that
Defendants were responsible for all misstatements that “may have caused
inflation” of Pfizer’s stock price.11 Some, if not all, of Pharmacia’s statements
certainly fell in that “may have caused inflation” category. Indeed, the very first
statement that Plaintiffs allege was misleading—and the only such statement for
over a year—was a Pharmacia statement for which the Court held that Defendants
11 Q. To put it another way, your analysis doesn’t take account of who was
responsible for any allegedly false statements that may have caused inflation of the price of Pfizer’s stock; is that right?
A. As long as the statements are attributable to defendants, that’s correct.
(A1120, 78:16-22; see also id. 78:23-79:19; A1121, 82:2-11.)
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were not responsible. (A271 ¶ 348.)12 Fischel testified that he had assumed,
without doing any analysis of his own, that Defendants caused all of the inflation
present at the beginning of the Class Period—which necessarily includes inflation
caused by that Pharmacia statement. (A1121, 83:13-84:2.) Fairly read, Fischel’s
testimony demonstrates that he was relying on an assumption, rejected by the
District Court, that Defendants were responsible for all of the statements—
including Pharmacia statements—that allegedly caused inflation in Pfizer’s stock
price.
Even if Plaintiffs could proffer a plausible alternative reading of
Fischel’s testimony, the District Court’s reading of the record would not be subject
to second-guessing on appeal: “Where there are two permissible views of the
evidence, the factfinder’s choice between them cannot be clearly erroneous. This
is so even when the district court’s findings do not rest on credibility
determinations, but are based instead on physical or documentary evidence or
inferences from other facts.” Anderson v. City of Bessemer, 470 U.S. 564, 574
(1985) (citations omitted).
12 According to Fischel’s analysis, the pre-Class Period misstatements—including
that statement—were in the aggregate responsible for most of the approximately five years of positive inflation that Fischel calculated in his model. See A937 ¶ 29 (identifying no other inflationary statements until August 26, 2004, nearly four years after the start of the Class Period).
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Moreover, when Defendants deposed Fischel regarding his
Supplemental Report, counsel asked what impact, if any, the Pharmacia ruling had
on his opinion. Fischel confirmed that if Defendants “are not liable for … some or
all of the statements,” then “for those statements where there was no liability, there
wouldn’t be any role for analyzing inflation or damages.” (A1120, 79:5-19
(emphasis added).) When asked how his analysis addressed that situation—the
already-existing situation “where defendants are responsible for some of the
statements and not responsible for some of the statements that are allegedly
misleading”—Fischel admitted that it did not. (A1120, 79:21-80:14.) Instead, he
testified that “[t]he jury would have to decide what to do,” would have to modify
his methodology in some way not addressed in his reports, and would have to
make some calculations that “might not be simple arithmetically.” (Id.; see also
A1121, 83:23-84:21.)13 In light of this testimony, the District Court permissibly
concluded that Fischel’s analysis would not help the jury in assessing loss
causation and damages. (SA32; see also SA31, SA36.)
13 This testimony was not “about an entirely different issue,” as Plaintiffs contend.
(Pl.Br. 50.) It came in an unbroken line of questions and answers about how an expert’s inflation calculations must be adjusted when a defendant is found responsible for some alleged misstatements but not for others—the exact issue here. (A1119-21, 76:14-85:23.)
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Plaintiffs also contend that the District Court erred in finding that
Fischel failed to account for the Pharmacia ruling in any way. They assert that
Fischel did take the ruling into account before issuing his Supplemental Report, but
concluded that it had no impact, and thus Fischel had no obligation to explain his
thinking. (Pl.Br. 51-52.) That position cannot be squared with Fischel’s testimony
that the Pharmacia ruling could affect a proper analysis of inflation. (A1120-21,
79:5-19, 84:3-85:23.) It also contradicted Fischel’s testimony that he did not “have
an opinion” about the impact of the pre-Class Period Pharmacia statement.
(A1121, 83:18-84:2.)14 It is true that Fischel testified that the Pharmacia ruling
“did not cause [him] to modify [his] analysis in any way.” (Pl.Br. 26, 49; A1119,
77:8-15.) But it is equally clear that the reason the ruling had no effect is because
Fischel had not considered it before being deposed, likely because he had only
“skimmed” portions of the opinion. (A1104, 15:2-9; A1119, 76:14-77:15.) Once
again, the District Court’s reading of the record is not subject to second-guessing.
Finally, Plaintiffs claim that the District Court should have understood
from Fischel’s original report that the Pharmacia ruling would have no impact on
his analysis because, in that report, Fischel “had not associated any statistically
14 See also A1120, 81:14-25 (“I don’t have an opinion about the part of the court’s
opinion that you just referred me to about statements made by Pharmacia, other than what I said, that didn’t affect my analysis of inflation”).
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significant increase in Pfizer’s stock price” with eight of the nine excluded
Pharmacia statements. (Pl.Br. 49; see also id. at 25-26.) This argument is flawed,
even apart from its inconsistency with Fischel’s testimony and the fact that Fischel
did not give that answer when asked at his deposition. First, it ignores Plaintiffs’
own allegation that the pre-Class Period Pharmacia misstatement did cause
inflation, as well as Fischel’s assumption that this was the case. (A271 ¶ 348;
A275 ¶ 359; A593, 139:6-12.) Moreover, it is a non-sequitur. Plaintiffs
themselves argued in the District Court that a false statement can cause price
inflation, even if it does not cause the price to rise. It does so when it conceals
from the market information (here, allegedly negative drug trial evidence) that
would otherwise cause the stock price to decline—in Plaintiffs’ words, where
“false statements confirm market expectations or at least do nothing to undermine
the public’s perception, the fact that the stock price did not rise when the
statements were released does not negate an effect on price.” (ECF 418, at 39-40.)
The District Court appropriately expected Fischel to address the
impact of its Pharmacia ruling, which Fischel testified could affect his analysis.
Because he failed to do so, the District Court was within its discretion in
concluding that Fischel’s opinion would not assist the jury.
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2. Plaintiffs’ Post-Hoc Rationalizations Provide No Basis For Reversal
Plaintiffs advance two additional arguments for why there was no
need for Fischel to address the Pharmacia ruling. The first relies on “maintenance
theory,” i.e., that “where a company repeatedly makes statements … it is
reasonable to conclude that each misstatement played a role in causing the inflation
in the stock price (whether by adding to the inflation or helping to maintain it).” In
re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512, 562 (S.D.N.Y. 2011).
The second cites a provision of the Private Securities Litigation Reform Act of
1995 (“PSLRA”). (Pl.Br. 51-56.) The District Court rightly rejected the first, and
the second was never presented below.
(a) Plaintiffs’ Maintenance Arguments
Plaintiffs argue that even if Pharmacia’s statements contributed to
inflation, Fischel could ignore the District Court’s exclusion of those statements
because Pfizer’s statements alone were sufficient to “maintain” all of the inflation
that was present in the stock price “at the beginning of the Class Period.” (Pl.Br.
51-52.) That argument fails for at least three reasons.
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First, “maintenance theory” as Plaintiffs assert it is not the law. It has
not been addressed by the Supreme Court or this Court,15 and it is inconsistent with
the Supreme Court’s ruling that experts must disaggregate the full “tangle of
factors affecting price,” including all “facts, conditions, or other events”
contributing to price change other than the defendant’s “earlier misrepresentation.”
Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 343 (2005).
Second, Plaintiffs’ argument would require an unprecedented
expansion of maintenance theory even in those courts that recognize it. While
some courts have held that a defendant may be liable for maintaining inflation that
the defendant itself previously caused (because it bears responsibility in any
event),16 no court has concluded that a defendant can be liable for maintaining
15 Plaintiffs erroneously characterize Carpenters Pension Trust Fund of St. Louis
v. Barclays PLC, 750 F.3d 227 (2d Cir. 2014), as a “maintenance” case. (Pl.Br. 54.) The discussion they cite concerned whether certain disclosures were corrective of past misstatements, not whether “maintenance” is itself a basis of liability.
16 This distinction explains each of the authorities cited by Plaintiffs, including the Eleventh Circuit’s dictum in FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282, 1314-17 (11th Cir. 2011) (addressing allegation that a single defendant maintained inflation caused by its own pre-class period misrepresentations). See Pl.Br. 52-56 (collecting other single-speaker inflation maintenance cases).
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inflation caused by another speaker.17 In fact, this Court reached the opposite
conclusion in Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 158 (2d Cir.
2007), where it affirmed dismissal of a complaint that failed to disaggregate losses
caused by a defendant’s misstatements from those caused by a non-party’s
misstatements.
Finally, even in those courts that have allowed claims to proceed on a
“maintenance” theory, a plaintiff cannot assert that theory without evidence. In re
Moody’s Corp. Sec. Litig., No. 07 Civ. 8375, 2013 WL 4516788, at *9 (S.D.N.Y.
Aug. 23, 2013). Rather, its expert must provide some basis to conclude that a
defendant’s “alleged misstatements actually had that [maintenance] effect.” Id.
Fischel did nothing to analyze whether inflation caused by Pharmacia was
maintained by Defendants, such as analyzing the parties’ statements to determine
whether, in light of their content, analysts’ reactions, or market information and
conditions when they were made, one party maintained inflation caused by the
other. Nor did he rely on that theory in his Supplemental Report or his deposition
testimony. Even Fischel’s amended report—which was not before the Court at the
17 Nor is the District Court’s original summary judgment opinion, which cited
maintenance theory, “irreconcilable” with its subsequent Daubert holding. (Pl.Br. 27, 55.) While the District Court allowed Plaintiffs to pursue a claim that Pfizer maintained inflation caused by Pfizer’s alleged misrepresentations pre-dating the Class Period, it did not rule that Defendants could be held liable for inflation caused by Pharmacia’s nine rejected statements. (SA17-18.)
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time of its Daubert ruling—rests on the fact that “Plaintiffs allege that the
Defendants maintained” the inflationary effect of Pharmacia’s statements. (A2183
¶ 32 (emphasis added).)
A plaintiff bears the burden of proving that “the defendant’s
misrepresentations ‘caused the loss for which the plaintiff seeks to recover.’”
Dura Pharm., 544 U.S. at 345-46 (quoting 15 U.S.C. § 78u-4(b)(4)) (emphasis
added); see also Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 177 (2d Cir.
2005) (plaintiffs must establish that “it was defendant’s fraud—rather than other
salient factors—that proximately caused [their] loss”); In re Omnicom Grp., Inc.
Sec. Litig., 541 F. Supp. 2d 546, 554 (S.D.N.Y. 2008) (“Because the law requires
the disaggregation of confounding factors, disaggregating only some of them
cannot suffice.”), aff’d, 597 F.3d 501 (2d Cir. 2010). Where, as here, different
actors are “responsible for different misrepresentations that are, nonetheless,
revealed together in corrective disclosures,” that is simply “another species of
confounding information” that must be disaggregated. See Bruegger & Dunbar,
“Estimating Financial Fraud Damages with Response Coefficients,” 35 J. Corp. L.
11, 29 (2009) (A1332). But Fischel made no attempt to do so.
(b) Plaintiffs’ PSLRA Argument
Plaintiffs’ argument based on the PSLRA (Pl.Br. 56) fares no better.
They contend that disaggregation of damages was unnecessary because if
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Defendants are found to have acted knowingly (and not merely recklessly), they
are jointly and severally liable for the full amount of the class’s loss; and even if
they acted only recklessly, the jury would apportion fault between Pfizer and
Pharmacia, making disaggregation by Fischel unnecessary. Because Plaintiffs did
not advance this argument before the District Court, it is waived. See Red Rock
Commodities, Ltd. v. Standard Chartered Bank, 140 F.3d 420, 421 n.1 (2d Cir.
1998). In any event, it lacks merit.
The PSLRA does not excuse a plaintiff from satisfying the threshold
burden under Section 10(b), and the PSLRA itself, to prove that the alleged
securities fraud “caused the loss for which the plaintiff seeks to recover damages.”
15 U.S.C. § 78u-4(b)(4). Nor does the PSLRA excuse a plaintiff from proving
actual damages. See, e.g., Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.,
552 U.S. 148, 157-58 (2008). Defendants could not be jointly and severally liable
for, and the jury would have no role in allocating, any damages that Defendants are
not proven to have caused in the first place.18
18 Sauer v. Burlington N. R.R. Co., 106 F.3d 1490, 1494 (10th Cir. 1997), which
held that a defendant does not need expert testimony to show comparative negligence under the Federal Employers’ Liability Act, does Plaintiffs no good. Even if Sauer had any applicability to a securities fraud case, Plaintiffs would still face, and still fail to meet, their prima facie burden to offer admissible expert testimony on loss causation and damages.
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II.
The District Court Reasonably Denied Plaintiffs’ Motion For Leave To Amend
Plaintiffs contend that the District Court abused its discretion when it
declined to give them another try after the Daubert ruling. Courts, however, will
not allow parties “to ‘escape the consequences’ of their strategic decisions simply
because they have proven to be disadvantageous to them.” City of N.Y. v. Mickalis
Pawn Shop, LLC, 645 F.3d 114, 140 (2d Cir. 2011) (citation omitted); see also
Abrams v. Interco Inc., 719 F.2d 23, 30 (2d Cir. 1983) (Friendly, J.) (“We see no
reason why plaintiffs should be relieved of the consequences of their considered
strategy.”). The District Court acted well within its discretion in denying leave to
amend.
The potential downside of Plaintiffs’ strategy was undoubtedly known
both to their counsel and their expert. When an expert’s testimony fails the test of
Daubert, it must be excluded. See Amorgianos, 303 F.3d at 267 (unreliability
under Daubert “renders the expert’s testimony inadmissible”). If this exclusion
means that a plaintiff lacks the evidence necessary to prove its case, the result is
dismissal.19 Where a plaintiff tries to avoid that result by offering post-exclusion
19 See Kumho Tire Co. v. Carmichael, 526 U.S. 137, 158 (1999) (reinstating
district court order granting summary judgment based upon exclusion of unreliable expert evidence under Daubert); In re Omnicom Grp., Inc. Sec.
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support for the expert’s opinion or changing it altogether, the district court may
deny the motion,20 and the courts of appeals sustain such dismissals.21
A. The District Court Was Not Required To Accept Fischel’s Last-Minute Offer To Drop The 9.7% Adjustment
Plaintiffs argue that because Fischel ultimately offered to withdraw
his adjustment and proceed without it as an alternative—after he had been
excluded, and while still claiming the adjustment was the correct approach—the
District Court was required to accept the offer, grant leave to amend, and reverse
its Daubert ruling. (Pl.Br. 5-6, 29-30, 45-46.) The District Court did not abuse its
discretion in declining Fischel’s invitation to negotiate over the 9.7% Adjustment
Litig., 597 F.3d 501, 512-13 (2d Cir. 2010) (affirming summary judgment dismissing securities class action where plaintiffs’ economic expert failed to reliably isolate stock-price declines caused by fraud from the impact of other market forces); In re Williams Sec. Litig., 558 F.3d 1130, 1143 (10th Cir. 2009) (affirming summary judgment in federal securities class action based upon exclusion of expert’s unreliable loss causation analysis under Daubert).
20 See, e.g., DeMarco v. Lehman Bros. Inc., No. 03 Civ. 3470 (JSR), 2004 WL 2674611, at *2 n.1 (S.D.N.Y. Nov. 23, 2004) (granting summary judgment after excluding plaintiffs’ loss causation expert under Daubert, and rejecting “ploy” to re-open discovery because plaintiffs’ expert wanted to make arguments that could have been made earlier).
21 See, e.g., Bricklayers, 752 F.3d at 97, aff’g 853 F. Supp. 2d 181, 194-95, 198 (D. Mass. 2012) (upholding grant of summary judgment after district court excluded plaintiffs’ economic expert and denied plaintiffs’ request to amend after the close of fact and expert discovery, with inadequate justification for the expert’s untimely attempt to address flaws in his economic analysis).
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(which did not in any event cure his failure to account for the exclusion of the
Pharmacia statements).
Fischel’s last minute flip-flop confirmed for the Court that Fischel’s
testimony was fundamentally unreliable—and thus provided a proper basis for the
Court’s conclusion that the amended report, like the Supplemental Report, failed
the test of Daubert. (SA36.) Fischel had opined for twelve months that he “had
to” make the 9.7% Adjustment, and that it was “required” to accurately measure
inflation. (A1113, 50:5-10; A1212; A1511; A1515; A1517-18; A1521.) Plaintiffs
had said that to proceed without it would be “absurd.” (A1518.) Even when
Fischel finally offered to drop the adjustment in his proposed amended report—
after the Daubert ruling—he continued to maintain that it was correct. (A2178-79,
¶ 23.) His single-paragraph offer simply (but inconsistently) asserted that deleting
the adjustment was an “appropriate alternative.” (A2179 ¶ 24.) He provided no
principled economic explanation for why the previously-essential adjustment had
suddenly become optional. This was pure expediency, an effort to bargain for
admissibility by offering to testify contrary to what he claimed to believe if that
would get him back into court.
A district court acts within its discretion to reject “internally
inconsistent” expert opinions under Daubert. See Hunt v. CNH Am. LLC, 511 F.
App’x. 43, 45-47 (2d Cir. 2013). Here, the situation the District Court confronted
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was not mere inconsistency but outright unreliability. Fischel’s offer—inviting the
Court to choose which methodology he would use—was irreconcilable with the
proper roles of the expert and the judge. As the District Court observed, it is not an
economist. (SA36.) And the Court was warranted in concluding that Fischel’s
willingness to jettison the methodology he had deemed economically “necessary”
demonstrated that his “proffered testimony [was] not deserving of an ‘expert
opinion’ label.” (Id.)
None of the cases cited by Plaintiffs is to the contrary. In all of those
cases, an expert offered alternative opinions from the outset to address multiple
different factual scenarios that a jury could find existed. (Pl.Br. 45-46.)22 Those
cases stand for the unremarkable proposition that experts may use alternative
methods where the underlying facts are uncertain, and where the methods are both
analytically sound and logically consistent—circumstances not present here. They
22 See, e.g., Smith v. Ford Motor Co., 215 F.3d 713, 718-21 (7th Cir. 2000)
(expert can testify as to possible causes for mechanical steering failure where jury would decide whether a design or manufacturing defect caused car crash, and where each of the hypothetical alternatives is “analytically sound”); Walker v. Soo Line R.R. Co., 208 F.3d 581, 589-90 (7th Cir. 2000) (expert could testify as to the alternative effects of lighting striking various locations where jury would decide if and where lighting struck); Auto-Owners Ins. Co. v. Uniden Am. Corp., 503 F. Supp. 2d 1087, 1094-96 (E.D. Wis. 2007) (expert could testify as to four possible causes of fire without pinpointing the “exact failure mechanism,” where jury would decide whether there was a design or manufacturing defect).
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provide no support for the notion that the District Court was required to allow
Fischel to present diametrically opposing methodologies addressing the same set of
underlying facts—let alone embrace a methodology that he had stridently rejected
as incorrect—and to do so for the first time only after an adverse Daubert ruling.
Finally, Fischel’s offer did nothing to alleviate the “judicial economy”
concerns that the District Court also took into account. (SA35.) It ignored the
resources that had already been devoted to adjudicating the dispute over Fischel’s
original methodology, and the additional resources and scheduling complications
that allowing him to change the methodology on the eve of trial would create.
If this Court were to agree with Plaintiffs that the District Court was
required to accept their expert’s fallback position after an adverse Daubert ruling
and on the eve of trial, litigants in future cases would face perverse incentives. The
threat of exclusion, and the expectation that exclusion orders are final, serve a
salutary purpose: they encourage parties and their experts to take reasonable,
principled positions from the outset, and reduce the need for parties to file Daubert
motions in the first place. Absent that threat of exclusion and expectation of
finality, parties would have every incentive to test-drive their expert’s most
aggressive position, knowing that they are assured of the ability to retreat if
necessary. Given those aggressive positions, the number of Daubert motions and
burden on the courts would undoubtedly increase.
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B. Plaintiffs Have Shown No Abuse Of Discretion
Plaintiffs argue that the District Court did not properly weigh the
circumstances and prejudice to the parties in denying leave to amend Fischel’s
Supplemental Report. (Pl.Br. 57-64.) In doing so, they ask this Court to overturn
the District Court’s factual findings concerning Fischel’s prior testimony and
reports; re-weigh the District Court’s analysis of prejudice caused by permitting
Fischel to submit another report, reopening expert discovery, and allowing another
round of Daubert litigation; and second-guess the District Court’s judgments about
case management and judicial economy in the face of an upcoming three-month
trial. These are matters properly committed to the broad discretion of the District
Court, which did not abuse that discretion.
Plaintiffs’ arguments mistakenly rely on the framework set forth in
Softel, Inc. v. Dragon Medical & Scientific Communications, Inc., 118 F.3d 955,
961 (2d Cir. 1997). (Pl.Br. 57-58.) The Softel analysis applies to an expert who
has been excluded as a sanction for missing a discovery deadline under the Federal
Rules of Civil Procedure.23 In that circumstance, Softel instructs that before
23 The other cases cited by Plaintiffs involve the same inapposite fact pattern. See
Steele v. Aramark Corp., 535 F. App’x 137 (3d Cir. 2013) (upholding exclusion of critical evidence for violation of Rule 26); Gillum v. United States, 309 F. App’x. 267, 270 (10th Cir. 2009) (analyzing sanction for Rule 26 violation); Dunning v. Bush, 536 F.3d 879, 889 (8th Cir. 2008) (reversing sanction under Rule 26); Dickenson v. Cardiac & Thoracic Surgery of E. Tenn., 388 F.3d 976,
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considering the admissibility of the belatedly proffered opinion, a district court
should assess whether the missed deadline should be excused based on the relative
prejudice to the litigants of permitting or excluding the opinion and the impact on a
trial date. See 118 F.3d at 961-63. This Court has never suggested that the same
analysis applies where, as here, there has been full expert discovery, Daubert
briefing, and a judicial decision to exclude the expert.24 In these circumstances,
considerations such as judicial economy and finality of rulings become paramount.
Those considerations shape the standards applicable to motions for
reconsideration, because such motions address the situation where a District Court
983 (6th Cir. 2004) (discovery sanction for violation of Rule 26); Sherrod v. Lingle, 223 F.3d 605 (7th Cir. 2000) (sanction for violating discovery deadline); Ehrenhaus v. Reynolds, 965 F.2d 916, 918-21 (10th Cir. 1992) (sanction for violation of discovery order); Powerweb Energy, Inc. v. Hubbell Lighting, Inc., No. 12 Civ. 220, 2014 WL 1572746, at *3-*6 (D. Conn. Apr. 17, 2014) (considering sanction for violation of scheduling order).
24 Zerega Avenue Realty Corp. v. Hornbeck Offshore Transp., LLC, 571 F.3d 206 (2d Cir. 2009), cited in Plaintiffs’ brief, is off-point. (Pl.Br. 57-58.) In Zerega, the district court precluded expert testimony not under Federal Rule of Evidence 702, but because the sponsoring party failed to comply with a scheduling order. Zerega involved a unique pre-trial deadline by which the district court sought to require each side to explain why its own experts satisfied Daubert. On appeal, this Court emphasized that the district court’s order was “susceptible to some misunderstanding,” and that it was reasonable for the parties to interpret the order as setting a deadline for “Daubert challenges to their opponent’s prospective experts, which [the precluded party] in fact made in a timely manner.” Id. at 213 n.4. The unusual facts presented by Zerega provide no support for allowing Fischel to submit a new analysis after his opinions had been rejected under Daubert.
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has already ruled and a party seeks reversal of that ruling. The District Court
properly invoked those standards here. It treated Plaintiffs’ motion for leave to
amend—which in substance asked the Court to reverse its Daubert ruling—as “in
essence, a motion for reconsideration of the in limine decision.” (SA34.) Because
Plaintiffs’ motion provided no information previously overlooked by the Court and
was not based on newly-discovered evidence, the Court justifiably held that
Plaintiffs were not entitled to “a second bite at the apple.” (Id.)
Plaintiffs’ argument also ignores the fact that the District Court did
not limit its holding to finding that amendment was unjustified on procedural
grounds; it concluded that the amended report itself failed to satisfy Daubert.
Noting Fischel’s invitation for the Court to select which methodology he should
employ, the Court held that the amended report’s “proffered damages analysis does
not meet the standard of Rule 702.” (SA36.) Even if the Softel factors applied
here and favored a grant of leave to amend (neither of which is the case), the
District Court was within its discretion in holding that the amended report still
failed the threshold established by Daubert.
Nor would the Softel factors help Plaintiffs even if they applied here.
(Pl.Br. 58-59, 62-64.) Fischel’s proposed amended report was dilatory not because
of a mere discovery deadline violation, but because it provided new opinions and
explanations that Plaintiffs conceded Fischel could—and should—have set forth
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more than a year earlier in his Supplemental Report.25 Instead, those explanations
were withheld while Plaintiffs staunchly defended Fischel’s one-sentence proffer
and his newly-invented adjustment through a year of hard-fought litigation,
offering to explain his opinion and retreat to a new, more defensible position only
after their strategy failed.
Plaintiffs are also wrong that, even if Fischel’s proposed amended
report was “untimely, any delay was harmless.” (Pl.Br. 62.) They contend that
allowing the amended report would not have necessitated additional discovery or
any delay of trial. But with his amendments, Fischel proposed to replace a one-
page report (A1775)—containing a single sentence regarding his 9.7% Adjustment
and no mention of his Pharmacia opinions—with a detailed 20-page report that was
replete with hypotheticals, examples, and purported analysis; that contained a
completely revised table of daily inflation; and that was inconsistent with his prior
positions. (A2164-83.)
25 See ECF 666 (Pls.’ Mem. in Support of Motion for Leave to Submit Amended
Supplemental Expert Report), at 2 (Fischel’s Supplemental Report “reduced the impact of the offsetting disclosures on Table 2 by 9.7%, although he did not explain the basis for this latter adjustment”); 11 (“Fischel’s failure to fully explain his opinions … was simply a misjudgment as to the level of explanation that was required to adequately describe and support his 9.7 percent adjustment ….”); 13 (“Fischel, concluded, but failed to explain ….”); 16 (“While Fischel determined that the Court’s dismissal of these nine statements did not require an adjustment to his calculation of damages, he failed to explain that determination to the Court.”).
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Given this proffer, the District Court acted reasonably in concluding
that the amended report could require a reopening of discovery and prejudice the
defense. Defendants would have been entitled to seek documentary discovery
regarding Fischel’s new analysis, to depose him again, to submit a report from
their expert in response, and to engage in another round of Daubert litigation, all
during preparations for a complex and fast-approaching three-month trial. See
Design Strategy, Inc. v. Davis, 469 F.3d 284, 297 (2d Cir. 2006) (“The prejudice to
the defendants in having to prepare for this evidence would have been severe, as
discovery would have had to be reopened to determine whether [plaintiff’s]
calculations were proper.”).
As the District Court recognized, this process would have required
that the impending trial be adjourned. (SA36-37.) Plaintiffs contend that the
“possibility” (in fact the near certainty) of a delay in trial is irrelevant to the
prejudice inquiry because Defendants themselves had previously sought a
continuance. (Pl.Br. 28, 34.) But Defendants were addressing what would be
necessary if the amended report were permitted. (A2153, 15:4-25.) That
acknowledgment does not diminish the prejudice to the defense. Defendants
played by the rules and their experts provided full and timely explanations of their
opinions. They expended substantial resources for years tailoring their defenses to
Fischel’s original report and then to his Supplemental Report. After a year of
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Daubert litigation, they obtained a definitive ruling. Defendants would clearly
suffer prejudice if this Court decided to undo that ruling and prolong the
proceedings so that Fischel could provide new opinions and explanations and, if
necessary, reverse his opinion.
Plaintiffs also ignore the judicial economy concerns that informed the
District Court’s decision. Wholly apart from prejudice to Defendants, the Court
was justified in declining to devote its resources to overseeing yet another round of
discovery, adjudicating another round of Daubert litigation, and clearing another
three-month period on its busy docket to give Plaintiffs another opportunity to try
to satisfy the Daubert standard they had failed to meet.
Litigants proceed at their own risk when they “initially present less
than their best expert evidence in the expectation of a second chance should their
first try fail.” Weisgram v. Marley Co., 528 U.S. 440, 455-56 (2000). The District
Court was not required to “provide [Plaintiffs] with an open-ended and never-
ending opportunity to meet a Daubert challenge until [they] ‘get[] it right,’” let
alone “the opportunity to meet a Daubert challenge with an expert’s submission
that is based on a new methodology.” In re TMI Litig., 199 F.3d 158, 159 (3d Cir.
2000).
Plaintiffs suggest that special dispensation was required because they
represent a class of investors. But “Federal Rule of Civil Procedure 23
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contemplates no special treatment for plaintiffs in class action suits.” First State
Orthopaedics v. Concentra, Inc., 534 F. Supp. 2d 500, 524-25 (E.D. Pa. 2007).
Class plaintiffs can win or lose a Daubert motion, or a case, just like any other
party. See Toney v. Rosewood Care Ctr., Inc. of Joliet, 62 F. App’x 697, 702 (7th
Cir. 2003) (affirming dismissal of class action, and noting that the class is subject
to the same rules as other litigants); see also Shady Grove Orthopedic Assocs., P.A.
v. Allstate Ins. Co., 559 U.S. 393, 408 (2010) (the class action mechanism is a
procedural device that is “substantively neutral” and leaves the “rules of decision
unchanged”).26 In a class action, just as in an individual action, a lawyer is an
agent, and the clients must live with the agent’s decisions. See, e.g., Irwin v. Dep’t
of Veterans Affairs, 498 U.S. 89, 92 (1990) (“Under our system of representative
litigation, ‘each party is deemed bound by the acts of his lawyer-agent ….’”).
Plaintiffs’ appointment as representatives of a certified class did not confer on
them any special immunity from the consequences of their strategic choices.
26 Plaintiffs’ reliance on ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir.
2012), is misplaced. (Pl.Br. 60-61.) There, the Third Circuit held that a district court had abused its discretion in denying plaintiff’s expert leave to amend a report it had excluded. However, the circumstances differed materially from the present case because, among other things: (1) the data the expert proposed to use in the amended report was also contained in the earlier report, and his methodology was unchanged; and (2) there was no case management issue, since the expert’s testimony would occur in a later, second phase of the trial.
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III.
The District Court Correctly Excluded Nine Pharmacia Statements Under Janus
Finally, Plaintiffs briefly challenge the District Court’s ruling that
Defendants cannot be held liable based on nine alleged misstatements made by
Pharmacia or its employees. (Pl.Br. 64-66.) Plaintiffs do not specify or discuss
any evidence supporting their position that there were genuine issues of fact, thus
failing to present a proper issue for appeal.27 In any event, the District Court’s
ruling was correct and should be affirmed.
In Janus, the Supreme Court held that the investment adviser of a
mutual fund could not be liable under Section 10(b) for false statements made in
the name of the mutual fund, a separate corporate entity. Though the investment
adviser prepared the allegedly misleading prospectus, the Supreme Court reasoned
that “[o]ne who prepares or publishes a statement on behalf of another is not its
maker.” 131 S. Ct. at 2302. The Court concluded that where a statement is made
27 Plaintiffs merely string-cite pages of their lower-court Rule 56.1 Statement and
“incorporate by reference the evidence cited therein.” (Pl.Br. 10 n.5, 65.) See Frank v. United States, 78 F.3d 815, 833 (2d Cir. 1996) (finding waiver of argument made by reference to document filed in district court, and holding that “[i]ssues not sufficiently argued are in general deemed waived and will not be considered on appeal”), vac’d on other grounds, 521 U.S. 1114 (1997).
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with attribution, that is “strong evidence that [the] statement was made by—and
only by—the party to whom it is attributed.” Id. at 2304, 2302.
Following Janus, this Court has held that even “knowingly
participating in, or facilitating,” securities fraud is insufficient to impose liability
under Janus. See Fezzani v. Bear, Stearns & Co. Inc., 716 F.3d 18, 24-25 (2d Cir.
2013) (financing fraudulent operations and parking securities is not actionable
where public statements are made by a “separate corporate entity”).
The Complaint does not name Pharmacia as a defendant or allege that
Pfizer has successor liability for Pharmacia’s statements. (A153.) Nonetheless,
Plaintiffs sought to hold Defendants liable for ten statements made by, and
attributed to, Pharmacia or its employees before Pfizer acquired Pharmacia: a
press release, a Form 8-K filing, and eight statements made by Pharmacia
employees during media interviews. (A271-78.) Defendants sought summary
judgment with respect to all ten statements. (SA27-28.)
The District Court denied Defendants’ motion with respect to the
press release because, prior to the merger, Pharmacia and Pfizer “had a co-promote
agreement, pursuant to which Pharmacia would not issue a press release without
Pfizer’s prior approval.” (SA28.) However, it granted the motion as to the
remaining nine statements. The Court noted that all of these statements were made
by Pharmacia, “a separate and independent entity,” or its employees, and that none
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of the statements was attributed to Pfizer. (Id.) It found no evidence that would
allow a reasonable factfinder to conclude that Pfizer had “ultimate authority” over
remarks by Pharmacia employees during media interviews. (Id.)
Plaintiffs contend that this ruling disregarded evidence that “all public
communications regarding Celebrex and Bextra were approved in advance by
Pfizer.” (Pl.Br. at 65.) This argument misstates their own position below. In the
District Court, the material fact that Plaintiffs asserted in support of their
position—and on which they rely now (id., citing A647-48)—was that “Pfizer had
the ability to review and approve all press releases issued by [Pharmacia]
regarding Celebrex.” (A647 ¶ 7 (emphasis added).) The District Court
specifically credited that claim in denying Pfizer’s motion for summary judgment
as to a Pharmacia press release discussing a Celebrex study. (SA28.) As the Court
also recognized, the right to approve press releases is not the same as a right to
approve “all public communications,” and thus did not extend to comments made
by Pharmacia employees in media interviews.28 The ability to have input into
talking points or to participate in discussions about media strategy—the substance
28 SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (2d Cir. 2013), is
inapposite because the defendant in that case had “ultimate control over both the content of the communications and the decision to late trade,” id. at 286-87, whereas Pfizer did not have “ultimate control” over extemporaneous interview responses by Pharmacia personnel.
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of the record citations in Plaintiffs’ brief (Pl.Br. 65)—falls far short of
demonstrating “ultimate control” as required by Janus.29
Plaintiffs’ argument that Pfizer was responsible for Pharmacia’s Form
8-K filing (Pl.Br. 65-66) also fails. Even if Pfizer had a right to approve the press
release contained in the filing, Pfizer did not make or control the 8-K filing itself.
The filing was made by and attributed to Pharmacia, not Pfizer, and the record
contained no evidence that Pfizer had authority over the filing or its contents.
29 Plaintiffs assert in a footnote—without any citation to the record—that there
was “testimony by Pfizer’s media relations director that all statements were Pfizer-approved.” (Pl.Br. 65 n.14.) The record does not support this reading. To the extent Plaintiffs are referring to the testimony appearing at A664 ¶ 62, the witness was speaking specifically of the “co-promote agreement” that, by Plaintiffs’ own description in the District Court, provided “the ability to review and approve all press releases by the Co-Promoter regarding Celebrex.” (A647 ¶ 7 (emphasis added).) Moreover, the deposition questioning focused on press releases and advertisements, not interviews. And the testimony of the Pharmacia speakers on which Plaintiffs relied below made no mention of any actual direction by Pfizer. See, e.g., ECF 421, Ex. 93.
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CONCLUSION
The District Court’s judgment should be affirmed.
Dated: February 18, 2015
Respectfully submitted,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP By: /s/ Beth A. Wilkinson
Beth A. Wilkinson Charles E. Davidow Alexandra M. Walsh
2001 K Street, NW Washington, DC 20006-1047 Tel: (202) 223-7300 Fax: (202) 223-7420
Andrew J. Ehrlich
1285 Avenue of the Americas New York, New York 10019-6064 Tel: (212) 373-3000 Fax: (212) 757-3990 [email protected] Counsel for Appellee Pfizer Inc.
GIBSON, DUNN & CRUTCHER LLP
Miguel A. Estrada Mark A. Perry
1050 Connecticut Avenue, NW Washington, DC 200 Tel: (202) 955-8500 Fax: (202) 467-0539 [email protected] Counsel for Appellee Pfizer Inc. SIMPSON THACHER & BARTLETT LLP
Lynn K. Neuner George S. Wang
425 Lexington Avenue New York, New York 10017-3954 Tel: (212) 455-2000 Fax: (212) 455-2502 [email protected] Counsel for Appellee Pfizer Inc.
Case 14-2853, Document 159, 02/20/2015, 1443189, Page72 of 74
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DLA PIPER LLP (US)
John R. Wellschlager 6225 Smith Avenue Baltimore, MD 21209-3600 Tel: (410) 580-3000 Fax: (410) 580-6100 [email protected] Counsel for Appellee Pfizer Inc.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Jennifer L. Spaziano
1440 New York Avenue, NW Washington, DC 20005-2111 Tel: (202) 371-7000 Fax: (202) 393-5760 [email protected] Counsel for Appellee Henry A. McKinnell
BAKER & HOSTETLER LLP
George A. Stamboulidis 45 Rockefeller Plaza New York, New York 10111-0100 Tel: (212) 589-4200 Fax: (212) 589-4201 [email protected] Counsel for Appellee Gail Cawkwell
ALLEN & OVERY LLP
Pamela R. Chepiga 1221 Avenue of the Americas New York, New York 10020 Tel: (212) 610-6300 Fax: (212) 610-6399 [email protected] Counsel for Appellee Joseph M. Feczko
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Certificate of Compliance With Federal Rule of Appellate Procedure 32(a)(7)(C)
1. This brief complies with the type-volume limitation of Fed. R. App. P.
32(a)(7)(B) because the brief contains 13,994 words, excluding the parts
exempted by Fed. R. App. P. 32(a)(7)(B)(iii), as counted by the Microsoft
Word processing system used to produce this brief.
2. This brief complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because
the brief is presented in a proportionally-spaced typeface, using Microsoft
Office Word Times New Roman and a 14-point font.
/s/ Beth A. Wilkinson Beth A. Wilkinson Counsel for Appellee Pfizer Inc.
Dated: February 18, 2015
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