Rick Hartman, et al (investors) v. Gilead Sciences Securities
Filed August 11, 2008
Cite as 06-16185

Lower Court Ruling on Investor’s Fraud Suit Reversed, Case Remanded

The case stemmed from a complaint filed by Rickman Hartman and other investors against Gilead Sciences Inc for securities fraud, charging that the company misled the investing public by giving false information.

Gilead is a biopharmaceutical company that specializes in developing and marketing treatments for life-threatening diseases. One of the company’s commercial products is Viread, an antiretroviral agent used in combination with other drugs to treat HIV.

According to the complaining investors, the company violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. sections 78j(b), 78t(a), and SEC Rule 10b-5, 17 C.F.R. section 240.10b-5. The complaint named Gilead and some of its top officers as defendants.

The complaint has two main allegations:

• That the corporation misled investing public by representing that demand for its most popular product was strong without disclosing that unlawful marketing caused strength--under Federal Rule of Civil Procedure 12(b)(6) for failure to sufficiently allege loss causation


• The company failed to identify a specific economic loss and sufficient detail to give defendants ample notice of plaintiffs’ loss causation theory

In response, Gilead argued that it had a clear incentive to promote Viread, and that it was required to comply with federal law, including the Food and Drug Administration’s (“FDA”) marketing regulations. Generally, those regulations prohibit the marketing of drugs for non-FDA-approved uses, commonly referred to as “off-label” uses.

However, according to two confidential witnesses who served as Gilead salespeople, the company “off-label marketing” took three forms:

• marketing to HIV patients co-infected with Hepatitis B


• marketing Viread as a first-line or initial therapy for HIV infection


• marketing against Viread’s safety profile

Further, the witnesses said that 75% to 95% of Viread sales resulted from off label marketing efforts or marketing strategies, which they alleged, were a misrepresentation.

During appeal, the Ninth District court of appeal found that the district court erred in dismissing investors’ securities fraud action.

Further, the court held that the company misled the investing public by representing that demand for its most popular product was strong without disclosing that unlawful marketing was the cause of that strength, dismissal of the suit is reversed where, contrary to the ruling below, investors sufficiently alleged loss causation and economic loss.

In sum, the court therefore concluded, “material misrepresentations directly or proximately caused or were a substantial contributing cause of the damages sustained by the investors. The court also affirmed that the district court improperly granted Gilead’s and the Officers’ Rule 12 (b) (6) motions.

The court therefore reversed the decision of the district court and remanded the case for resolution.