This week, we highlight a decision that examines the First Amendment implications of a California statute regulating a horseshoeing school, and another that assesses the plausibility of a securities-fraud complaint alleging that the defendants promoted a medical device they knew the FDA would reject.
PACIFIC COAST HORSESHOEING SCHOOL, INC. v. KIRCHMEYER
The Court holds that California’s Private Postsecondary Education Act—which requires anyone without a high-school degree to pass an examination before enrolling in certain postsecondary schools—regulates speech based on its content and is thus subject to heightened scrutiny under the First Amendment.
Panel: Judges Melloy (8th Cir.), Bybee, and N. Randy Smith, with Judge Bybee writing the opinion.
Key Highlight: “[W]hen the Act is viewed in its entirety, it becomes clear that it controls more than contractual relations. It also regulates what kind of educational programs different institutions can offer to different students. Such a regulation squarely implicates the First Amendment.”
Background: Plaintiff Esteban Narez wished to enroll in a horseshoeing school to become a professional farrier. But because Narez lacked a high school diploma or GED, California’s Private Postsecondary Education Act of 2009 (“PPEA”) prohibited him from doing so unless he demonstrated an “ability-to-benefit” from the program by passing an examination prescribed by the U.S. Department of Education. Narez and the horseshoeing school sued two California-state officials claiming that the PPEA’s ability-to-benefit requirement violates the First Amendment. The district court granted the defendants’ motion to dismiss the claim under Federal Rule of Civil Procedure 12(b)(6) on the ground that the Act’s requirement only regulates conduct—namely, the forming of an enrollment agreement.
Result: The Ninth Circuit reversed and remanded, holding that the PPEA’s ability-to-benefit requirement is a content-based regulation of speech, not a mere regulation of conduct. The Court reasoned that the Act “regulates what kind of educational programs different institutions can offer to different students,” which “squarely implicates the First Amendment.” It further emphasized that the law differentiates between speech and speakers because it contains numerous exceptions to the ability-to-benefit requirement that turn on: (1) the content of what is being taught; and (2) the identity of the speaker. For example, the Act exempts programs that provide “solely avocational or recreational” education, like golf programs, from the ability-to-benefit program. Likewise, the Act exempts certain speakers, like bona fide trade, business, professional, or fraternal organizations that are offering educational programs solely to their membership.
The Court declined, however, to decide whether the PPEA’s ability-to-benefit requirement violated the First Amendment. The Court observed that content-based restrictions on commercial speech are sometimes permissible and that the parties did not brief whether the PPEA regulates commercial speech. Accordingly, the Court remanded for the district court “to determine whether this case involves commercial or non-commercial speech, whether California must satisfy strict or intermediate scrutiny,” and “whether it can carry its burden under either standard.”
NGUYEN v. ENDOLOGIX, INC.
The Court rejects as implausible a securities-fraud claim premised on allegations that a company knew its efforts to win regulatory approval for a new medical device would fail.
Panel: Judges Bybee, Collins, and Bress, with Judge Bress writing the opinion.
Key Highlight: “Under the facts alleged, plaintiff’s core theory—that the company invested in a U.S. clinical trial and made promising statements about FDA approval, yet knew from its experience in Europe that the FDA would eventually reject the product—has no basis in logic or common experience.”
Background: Endologix manufactures medical devices used to treat abdominal aortic aneurysms. In the course of developing a new device, executives made a series of optimistic statements to investors about the chances of getting approval from the Food and Drug Administration to market the device in the United States. But after Endologix eventually abandoned its efforts to get FDA approval for the product, the plaintiff filed a putative class action against Endologix and two of its executives alleging securities fraud. The district court dismissed for failure to state a claim.
Result: The Ninth Circuit affirmed. The Court explained that under the heightened pleading standard imposed by the Private Securities Litigation Reform Act, a plaintiff alleging securities fraud must plead facts giving rise to a “strong inference” that the defendant intentionally misled investors. The plaintiff here failed to meet that standard, the Court said, because the complaint’s core theory didn’t make sense: if the defendants knew their product was destined to be rejected by the FDA, there was no apparent reason to inflate stock prices in the short-term. The defendants did not attempt to sell off stock or the company itself. Quoting a previous decision by the Fourth Circuit (written by Judge Bress’s former boss, Judge Wilkinson), the Court concluded that it was “improbable that [a company] would stake its existence on a drug and a clinical trial that the company thought was doomed to failure.”
The Court rejected the plaintiff’s reliance on a confidential witness who previously worked at Endologix. The complaint alleged that this witness, along with others at the company, was aware of “serious and unsolvable problems” with the device that previously arose in the European market. But the Court held that the confidential witness’s statements were too conclusory to give rise to a “strong inference” of scienter. “Strong rhetoric,” the Court said, is no substitute for “particular facts.” And while one study published in England raised concerns about the device, executives had discussed that study on a conference call with investors. The Court thus concluded that it was more plausible that Endologix’s sunny appraisal of FDA approval prospects was the result of promising clinical trials in the U.S., and not an attempt to mislead investors.