The Supreme Court of Canada has tossed out a securities class-action lawsuit against Montreal-based drug company Theratechnologies Inc., in a ruling that some lawyers say could make it harder for plaintiffs across the country to file this kind of legal action.
Theratechnologies found itself facing allegations that it failed to properly disclose issues around a new drug, called tesamorelin, after the U.S. Food and Drug Administration asked some questions in 2010 about potential side effects.
Those questions about the drug, which is meant to reduce excess abdominal fat in HIV patients, were publicized and Thera's stock tumbled. The drug later won FDA approval and the share price recovered. And Thera argued that it had already disclosed all of the necessary information to shareholders about the drug and its clinical trials, and did not need to issue a press release about the FDA's questions.
Under most provinces' securities legislation, shareholders who bought stock on the "secondary market," such as a stock exchange, need to get special permission from a judge to launch a securities class action, and must show that their case has a "reasonable possibility" of success.
It's a screening mechanism meant to eliminate groundless so-called "strike suits," common in the United States. Quebec adopted these amendments to its securities legislation in 2007, after Ontario brought in its similar secondary-market securities class-action regime in 2005, which essentially made this kind of case possible. Since then, courts have been slowly establishing just what the ground rules should be for this kind of lawsuit.
In the Thera case, lower courts in Quebec had given the go-ahead to securities class action lawsuit, which was launched on behalf of shareholders by a numbered holding company that held stock in the pharmaceutical firm and is owned by an investor named Roger St-Germain.
But the Supreme Court ruled Friday that to pass this screening test, plaintiffs must provide "sufficient evidence" to show a "realistic chance" of success, although this stage of such cases must not balloon into a miniature trial.
The court said the plaintiffs had not produced evidence that the FDA's questions about the drug qualified as a "material change" in Thera's "operations, capital or business," as required under the province's securities act.
Thera, the court said, had already disclosed the results of clinical trials, including the potential side effects, and the plaintiffs did not provide any evidence that the FDA's questions were anything other than a "routine" part of the drug approval process.
The Supreme Court is also expected to rule later this year on the threshold for securities class actions in Ontario, when it issues a decision in a putative class action against the Canadian Imperial Bank of Commerce.
Pierre Lefebvre, a Montreal lawyer with Fasken Martineau DuMoulin LLP who acted for Thera in the case, said the 7-0 decision raises the bar for plaintiffs both in Quebec and other provinces, because it confirms that the process of seeking authorization from a court for this kind of lawsuit is a "real test, a real threshold" and not just a "speed bump."
Andrea Laing, a lawyer with Blake Cassels & Graydon LLP who defends corporate clients against class actions but was not involved in this case, said the decision will see lower courts apply "more rigour" in ruling on securities class actions.
Lawyer Dimitri Lascaris, a veteran plaintiffs-side securities class action lawyer with Siskinds LLP who acted for a Quebec investors' rights group that intervened in the Thera case, agreed that the case "modestly" raises the bar for plaintiffs. But he said that bar still remains relatively low and argued that the case's effect on future Ontario cases was unclear.