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Ganem v. Invivo Therapeutics Holdings Corp.

United States Court of Appeals, First Circuit

January 9, 2017

EDMOND GANEM, Plaintiff, Appellant,
v.
INVIVO THERAPEUTICS HOLDINGS CORP.; FRANK REYNOLDS, Defendants, Appellees. BATTLE CONSTRUCTION CO., INC., individually and on behalf of all others similarly situated; STEVE ADAMS, Plaintiffs,

         APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Richard G. Stearns, U.S. District Judge]

          Thomas G. Shapiro, with whom Patrick J. Vallely and Shapiro Haber & Urmy LLP were on brief, for appellant.

          Michael G. Bongiorno, with whom James W. Prendergast, Andrew S. Dulberg, Wilmer Cutler Pickering Hale and Dorr LLP, Richard J. Rosensweig, Paul F. Beckwith, Derek B. Domian, and Goulston & Storrs PC were on brief, for appellee InVivo Therapeutics Holdings Corp.

          Richard J. Rosensweig for appellee Frank Reynolds.

          Before Howard, Chief Judge, Selya and Lipez, Circuit Judges.

          LIPEZ, Circuit Judge.

         Following a drop in the share price of InVivo Therapeutics Holdings Corporation's ("InVivo") common stock, investors filed suit against the company and its former chief executive officer ("CEO"), Frank Reynolds, alleging securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), as well as the Securities and Exchange Commission's ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5. On behalf of himself and a putative class of shareholders, lead plaintiff Edmond Ganem ("Ganem") alleges that InVivo and Reynolds inflated the value of InVivo's common stock for about five months in 2013 by issuing false or materially misleading press releases concerning the approval of human clinical trials for a new medical device the company was developing, by, inter alia, failing to identify the caveats and conditions imposed by the Food and Drug Administration ("FDA") for the clinical trials. The district court, in a well-reasoned opinion, granted defendants' motion to dismiss the complaint. We affirm, agreeing with the district court that Ganem has failed to allege false or misleading statements sufficient to state a claim under Section 10(b) and Rule 10b-5, and, having failed to plead a viable claim of a primary violation, Ganem's control person claim against Reynolds under Section 20(a) was also properly dismissed.

         I.

         A. Factual Background

         According to InVivo's 2012 annual report to the SEC ("Form 10-K"), which was filed in early March 2013, the company focuses on "develop[ing] and commercializ[ing] new technologies for the treatment of spinal cord injuries." The report identified InVivo's "Lead Product Under Development" as "biopolymer scaffolding, " a device that would attach to a patient's body at the point of a spinal injury to prevent additional damage to the spinal cord. The report outlined the company's strategy for marketing the device, including the steps for securing the required approval from the FDA.

         The report explained that InVivo would first need to obtain an Investigational Device Exception ("IDE") to permit it to conduct human clinical trials. Such a clinical study was a prerequisite for obtaining either Pre-Market Approval ("PMA") or a Humanitarian Device Exemption ("HDE"), either of which would permit the company to sell the product in the United States. InVivo stated that it "plan[ned] to conduct an initial clinical study to evaluate the device in five spinal cord injury patients with acute thoracic injuries. We are also planning a larger follow-on human study in acute spinal cord injury patients after the initial study is completed."

          In the report, InVivo qualified the above statements, noting that "forward-looking statements" -- such as "statements about our plan to conduct an initial clinical study to evaluate our product" -- are necessarily contingent because they "involve substantial known and unknown risks." InVivo stated that "[t]he start of clinical trials can be delayed or take longer than anticipated for many and varied reasons, many of which would be outside of our control."

         On March 29, 2013, the Acting Director of the FDA's Office of Device Evaluation sent an eleven-page letter to InVivo. Because Ganem's claims rely on the proposition that InVivo later misrepresented the content of the letter, we quote from it at some length:

The [FDA] has reviewed your amendment to your [IDE] application to conduct an early feasibility study . . . . Your application to begin your study is approved with conditions . . . . You may begin your investigation, using a revised informed consent document which corrects deficiency number 1 and 3, at an institution in accordance with the investigational site waiver granted below. Your investigation is limited to 3 institutions and 1 subject.
Your IDE application has been approved with conditions as a staged study; you may enroll one subject at this time. You should follow this subject for 3 months before requesting approval for an additional subject, who should also be followed for three months before requesting another subject. This will result in a total of 5 subject[s] enrolled over a minimum 15 month period. . . .
A feasibility study is a preliminary study which is not expected to provide the primary support for the safety and effectiveness evaluation of a medical device for the purposes of a marketing application. . . . FDA believes that additional modifications, as outlined in "Study Design Considerations" below, are needed for your study design to support a future study.
This approval is being granted on the condition that, within 45 days from the date of this letter, you submit information correcting the following issues[.]

         The FDA listed thirteen issues for which it required further information before the initial study could begin.[1] Then, under "Study Design Considerations, " the FDA stated that "[w]e recommend, but do not require, that you modify your study to address the following issues" so that ...


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