Deveny v. Entropin — California Class Action Defense Cases

Jun 20, 2006 | By: Michael J. Hassen

California Holds In Class Actions Case That Inquiry Notice Triggers California Securities Law Claims Limitation Period And Website Posting Is Insufficient To Establish Inquiry Notice

On May 10, 2006, a California court published its opinion in a class action case that addressed two issues of first impression in California: (1) whether inquiry notice or actual notice commences the statute of limitations period for alleged violations of California’s securities laws, and (2) whether referring investors to the company website establishes inquiry notice as to all information contained on the website. Deveny v. Entropin, Inc., 139 Cal.App.4th 408 (Cal.App. 2006).

Briefly, from August 1998 through June 2002, Entropin released very reports and press releases touting the progress of its development of “a topical solution intended to treat impaired range of motion associated with shoulder and back injuries.” Id., at 810-11. The press releases issued between February and June 2002 stated that the drug “‘provided statistically significant improvement for soft tissue afflictions for both the shoulders and the lower back.’” Id., at 811-12 (citation omitted). But in September 2002, the company revealed that the clinical trials had been a failure, that the drug was “ineffective,” and that the company was “abandoning the drug.” Needless to say, “the market price of Entropin securities collapsed.” Id., at 812.

In January 2003, a putative class action alleging securities fraud was filed in California state court. The complaint alleged violations of California’s securities laws, as well as a federal law claim for violating Section 11 of the Securities Act of 1933. Id., at 812. The company filed a motion for summary judgment, relying in part of the “undisputed fact” that certain information was available on the company’s website. Id., at 813. The trial court granted summary judgment and plaintiffs appealed. Id., at 814.

The California Court of Appeal for the Fourth District, Division 2, first examined whether “inquiry notice rather than actual notice applied to plaintiffs’ claims.” Id., at 815. After observing that the California securities laws at issue were governed by the statute of limitations period contained in California Corporations Code section 25506, Deveny noted that “no published California case has yet addressed whether Corporations Code section 25506 requires actual notice or inquiry notice to trigger the running of the one-year statute of limitations, and our own research has not revealed any such case.” Id. Federal courts that had addressed the issue, however, had held that inquiry notice was sufficient, id. (citations omitted). Deveny ultimately concluded that inquiry notice commenced the running of the limitations period under California Corporations Code section 25506. Id., at 815-17. (By its express terms, inquiry notice triggers the one-year limitations period under federal law, 15 U.S.C. § 77m.)

Deveny then examined whether information provided on the company’s website satisfied the inquiry notice requirement. (For present purposes, we omit the Court’s discussion of California’s “sham pleading” doctrine.) The appellate court explained at page 823:

Whether merely referring investors to a company website for general information is sufficient to establish inquiry notice as a matter of law as to all information available on that website is a question of first impression in this state. Indeed, our research revealed only one federal case that addressed a similar contention, and that case concluded that issues of fact precluded summary judgment on the issue of notice. (Medimatch, Inc. v. Lucent Technologies Inc. (N.D. Cal. 2000) 120 F.Supp.2d 842 (Medimatch).)

Deveny discussed Medimatch at length, and observed that Medimatch “specifically rejected the argument that a ‘web site posting was tantamount to the traditional practice of national publication through the print media.’” Deveny, at 823 (quoting Medimatch, at 853 n.6).

Deveny concluded that Medimatch was “correctly decided,” id. However, the court’s holding is extremely limited:

We conclude that under these circumstances, posting information on the company’s website concerning ambiguous scientific data and referring investors to that website for general information was not, as a matter of law, sufficient to put investors on inquiry notice in the absence of a showing that the investors actually saw that information. Rather, an issue of material fact exists that precludes summary judgment on the issue. And a rule that allows a company to provide notice simply by posting information to a website, in the absence of a more compelling showing than exists in the present circumstances, could foster the practical concealment of damaging information.

Deveny, at 823-24 (italics added).

The California Court of Appeal reversed the judgment based on its conclusion that triable issues of material fact existed. However, a class action defendant should carefully examine the facts surrounding website information and disclosures before assuming that the website fails to provide inquiry notice. Deveny rejected the notion that websites provide inquiry notice as a matter of law, but left the door open as to whether website information could be deemed adequate notice under the specific facts of a different case.

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