On Friday, December 12, the Fourth Circuit affirmed the dismissal of the securities class action against Inspire Pharmaceuticals. The court found that plaintiffs failed to raise the “strong inference” of wrongful intent that was necessary to support their securities fraud claims.
The Fourth Circuit stated that in Tellabs, the Supreme Court made clear that raising a “strong inference” of scienter is no small burden, and that the PSLRA “unequivocally raised the bar for pleading scienter.” The Fourth Circuit further observed that
in defining just how “strong” an inference of scienter must be, the Court gave that standard teeth, using adjectives like “cogent,” “compelling,” “persuasive,” “effective,” and “powerful.” Id. at 2510. The Court held that the test applied by the Seventh Circuit below-requiring only that a reasonable person could infer that scienter existed-did not demand a strong enough inference of scienter to satisfy the statutory language. See id. at 2509-10. Instead, the Court held that an inference of scienter can only be strong-and compelling, and powerful-when it is weighed against the opposing inferences that may be drawn from the facts in their entirety. See id.
After reviewing the facts, the Court concluded that
no strong inference of scienter exists because the inference that defendants acted with the nonfraudulent intent to protect their competitive advantage is more powerful and compelling than the inference that defendants acted with an intent to deceive.
Finally, the court found that plaintiffs’ Section 11 claims sounded in fraud, and were not pleaded with the particularity required under Rule 9(b).