Karim Khoja v. Orexigen Therapeutics, Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

KARIM KHOJA, on behalf of himself No. 16-56069

and all others similarly situated,

Plaintiff-Appellant, DC No.

3:15-cv-00540-

v. JLS

OREXIGEN THERAPEUTICS, INC.;

JOSEPH P. HAGAN; MICHAEL A. OPINION

NARACHI; PRESTON KLASSEN,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of California

Janis L. Sammartino, District Judge, Presiding

Argued and Submitted November 6, 2017

Pasadena, California

Filed August 13, 2018

Before: A. Wallace Tashima, and Marsha S. Berzon,

Circuit Judges, and Robert E. Payne,* District Judge

Opinion by Judge Tashima

*

The Honorable Robert E. Payne, United States District Judge for the

Eastern District of Virginia, sitting by designation.

2 KHOJA V. OREXIGEN THERAPEUTICS

SUMMARY**

Securities Fraud

The panel affirmed in part and reversed in part the district

court’s dismissal, for failure to state a claim, of a securities

fraud action under the Securities Exchange Act of 1934.

Defendant Orexigen Therapeutics, Inc., a small

biotechnology firm, developed Contrave, an obesity drug

candidate. Count I alleged that Orexigen and its executives

misrepresented and/or omitted material facts to conceal the

truth and/or adverse material information about a drug trial

called the Light Study, in violation of § 10(b) of the Act and

SEC Rule 10b-5. Count II alleged a fraudulent scheme under

SEC Rules 10b-5(a) and (c), and Count III alleged control

person liability on the part of the executives under § 20(a) of

the Act.

The district court relied, in part, on documents that it

judicially noticed or incorporated into the complaint by

reference. The panel held that under Federal Rule of

Evidence 201, a court may take judicial notice of matters of

public record without converting a motion to dismiss into a

motion for summary judgment, but a court cannot take

judicial notice of disputed facts contained in such public

records. The panel concluded that the district court abused its

discretion in judicially noticing certain facts but properly took

judicial notice of the date of Orexigen’s international patent

application for Contrave. The panel reversed and remanded

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

KHOJA V. OREXIGEN THERAPEUTICS 3

for clarification on Exhibit D, reversed the district court’s

judicial notice of Exhibit E, and affirmed the judicial notice

of Exhibit V.

The panel held that incorporation-by-reference is a

judicially created doctrine that treats certain documents as

though they are part of the complaint itself. The doctrine

prevents plaintiffs from selecting only portions of documents

that support their claims, while omitting portions of those

very documents that weaken or doom their claims. The panel

held that a defendant may seek to incorporate a document into

the complaint if the plaintiff refers extensively to the

document or the document forms the basis of the plaintiff’s

claim. But if a document merely creates a defense to the

well-pled allegations in the complaint, then that document did

not necessarily form the basis of the complaint. And it is

improper to assume the truth of an incorporated document if

such assumptions only serve to dispute facts stated in a well-

pleaded complaint. The panel held that the district court

abused its discretion by incorporating certain documents into

the complaint and properly incorporated others. Specifically,

the panel reversed the district court’s incorporation-by-

reference of Exhibits B, C, F, H, R, S, and U, and it affirmed

the incorporation of Exhibits A, I K, L, N, O, P, and T.

The panel affirmed in part and reversed in part the district

court’s dismissal of Count I for failure sufficiently to allege

falsity and materiality, and it affirmed the district court’s

dismissal of Count II on the basis that the substance of the

claim could not be discerned. Where affirming, the panel

granted leave to amend the complaint. As to Count III, the

panel reversed so that the district court could reconsider those

claims in light of the reversal of claims in Count I and any

amendments to the complaint.

4 KHOJA V. OREXIGEN THERAPEUTICS

The panel specified that its disposition of the appeal

pertained only to claims against the executive defendants.

With respect to Orexigen, appellate proceedings remained

stayed pending resolution of bankruptcy proceedings. The

panel instructed the Clerk to administratively close the docket

with respect to Orexigen, pending further order of the court.

COUNSEL

Ramzi Abadou (argued), Khan Swick & Foti, San Francisco,

California; Lewis Khan, Alexander Burns, and Scott St. John,

Khan Swick & Foti LLC, Madisonville, Louisiana; for

Plaintiff-Appellant.

Jessica Valenzuela Santamaria (argued) and John C. Dwyer,

Cooley LLP, Palo Alto, California; Mary Kathryn Kelley and

Dane R. Voris, Cooley LLP, San Diego, California; for

Defendants-Appellees.

OPINION

TASHIMA, Circuit Judge:

This is an appeal from the dismissal by the district court

of an action under the Securities Exchange Act of 1934,

15 U.S.C. §§ 78a et seq. We must decide whether the district

court erred in dismissing the action. We conclude that it did,

in part. We also conclude that, in dismissing the action, the

district court abused its discretion by improperly considering

materials outside the Complaint. We also address and clarify

when and how the district court should consider materials

KHOJA V. OREXIGEN THERAPEUTICS 5

extraneous to the pleadings at the motion to dismiss stage via

judicial notice and the incorporation-by-reference doctrine.

BACKGROUND

I. Facts Alleged in Complaint

Appellee Orexigen Therapeutics, Inc. (“Orexigen”) is a

small biotechnology firm that develops obesity drugs.1 At all

relevant times, Orexigen employed Michael Narachi (CEO

and Director), Joseph Hagan (Chief Business Officer,

Treasurer, and CFO), and Preston Klassen (Head of Global

Development) (collectively, the “Executive Defendants”).2

A. Contrave and the “Light Study”

Contrave is Orexigen’s primary drug candidate. It was

developed to treat obesity in patients. Obese patients are at

risk for major adverse cardiovascular events (“MACE”). To

develop Contrave, Orexigen partnered with Takeda

Pharmaceutical Co. Ltd. (“Takeda”).

The Food and Drug Administration (“FDA”) required

Orexigen to conduct a trial of Contrave, called the “Light

Study.” Because obese persons are already at risk for MACE,

1

After oral argument in this appeal, Orexigen filed a voluntary

petition for bankruptcy under Chapter 11, in the United States Bankruptcy

Court for the District of Delaware, No. 18-10518-KG. Therefore,

pursuant to the automatic stay, 11 U.S.C. § 362(a), this opinion does not

address or decide Plaintiff’s appeal as against defendant-appellee

Orexigen.

2

Unless necessary to distinguish them, we refer to the Executive

Defendants and the company collectively as “Orexigen.”

6 KHOJA V. OREXIGEN THERAPEUTICS

the Light Study would assess if Contrave increased that risk.

Once 25 percent of a pre-determined amount of MACE

occurred, an “interim analysis” would assess if patients on

Contrave were more likely to suffer MACE than those on a

placebo (“25 percent interim results”). As required by the

FDA, an Executive Steering Committee (“ESC”), separate

from Orexigen, oversaw the Light Study. Dr. Steven Nissen,

from the Cleveland Clinic, headed the ESC. A Data

Monitoring Committee (“DMC”) was also created to monitor

the trial and report its results.

FDA guidelines require that trial results remain

confidential. Orexigen entered into a data access plan

(“DAP”) with the ESC and the DMC. Orexigen agreed that

when it received the 25 percent interim results, only “those

individuals at [Orexigen] who needed to facilitate its

regulatory filings with the FDA” would have access to them.

Orexigen initiated the Light Study in June 2012.

B. Orexigen Leaks Positive 25 Percent Interim Results

In November 2013, subject to the DAP, the DMC shared

the 25 percent interim results with Orexigen. The results

were unexpectedly positive. Rather than increase the risk of

MACE, “Contrave reduced cardiovascular events by

41 [percent] compared with a placebo.”

The Light Study administrators requested that Orexigen

produce a list of individuals who knew of the 25 percent

interim results. Orexigen revealed that over 100 people with

a financial interest in the Light Study knew of the 25 percent

interim results.

KHOJA V. OREXIGEN THERAPEUTICS 7

As a sanction for Orexigen’s apparent leak, the FDA

required that four Orexigen executives, including Klassen,

sign an agreement forbidding Orexigen from disclosing the

25 percent interim results again. Another DAP further

limited which Orexigen employees had access to interim

results. Although the Light Study would continue, the FDA

also required that Orexigen perform an entirely new trial to

study Contrave’s cardiovascular effects.

During a June 4, 2014, meeting about the leak, the FDA

reminded Narachi and Klassen that the leaked results –

representing only 25 percent of the pre-determined amount of

MACE required for the study – have “a high degree of

uncertainty and were likely to change with the accumulation

of additional data.”

C. Orexigen Files Patent Application Containing

Interim Results Confidentially, Then Requests

Publication.

Less than a month later, on July 2, 2014, Klassen

submitted a provisional patent application (“2014 Patent

Application”) for Contrave to the United States Patent and

Trademark Office (“USPTO”). The 2014 Patent Application

contained the 25 percent interim results. Orexigen filed the

2014 Patent Application pursuant to 35 U.S.C. § 122, which

renders patent applications confidential.

In December 2014, the European Medicines Agency

(“EMA”) informed Orexigen that, in March 2015, the EMA

would review a draft decision to grant marketing

8 KHOJA V. OREXIGEN THERAPEUTICS

authorization for Contrave in Europe.3 Orexigen then

requested that the USPTO publish the 2014 Patent

Application, thus rescinding its earlier request to keep it

confidential. On February 11, 2015, the USPTO informed

Orexigen that it would publish the 2014 Patent Application –

which contained the confidential interim results – on March

3, 2015.

D. Orexigen Reveals Interim Results Again.

When the USPTO published the 2014 Patent Application,

Orexigen filed a Form 8-K (“March 2015 Form 8-K”) with

the Securities and Exchange Commission (“SEC”). That

filing described the 2014 Patent Application, including the

Light Study and the 25 percent interim results.

Securities Analysts responded immediately and positively

to the revelations about Contrave. One called the 25 percent

interim results the “holy grail” for cardiometabolic disease

treatment.

Orexigen’s stocks surged. The day before the 25 percent

interim results were revealed, Orexigen’s stock closed at

$5.79 per share. After the revelation, the stock peaked at

$9.37 per share, and closed at $7.64 per share on an unusually

high trading volume. Soon after, on March 13, 2015, and

pursuant to Orexigen’s Incentive Award Plan, Narachi and

Klassen registered six million Orexigen shares.

It was not all good news, though. A March 3, 2015,

Forbes article reported that a senior FDA official stated that

3

In Europe, Contrave is marketed under a different name,

“Mysimba.”

KHOJA V. OREXIGEN THERAPEUTICS 9

the FDA was “very disappointed by Orexigen’s actions.”4

The FDA official further warned that the 25 percent interim

results should not be misinterpreted. On March 5, 2015,

another Forbes article quoted an FDA official “condemning

Orexigen’s SEC filing as ‘unreliable,’ ‘misleading,’ and

‘likely false.’” Two days later, shares of Orexigen’s common

stock slid almost six percent to close at $8.01 and, the

following day, slid 16 percent to as low as $6.76 in intraday

trading.

Weeks later, on March 26, 2015, the ESC informed

Orexigen that, as the Light Study reached 50 percent

completion (“50 percent interim results”), the Light Study no

longer indicated a heart benefit from Contrave, contrary to

what the earlier 25 percent interim results suggested. Also,

because Orexigen again disclosed the 25 percent interim

results in the March 2015 Form 8-K, the ESC voted

unanimously to halt the Light Study.

Dr. Nissen, the Chair of the ESC, worked with Takeda to

draft a press release disclosing the new Light Study data and

the termination of the Light Study. Takeda approved the

press release, but Orexigen did not.

E. Orexigen Does Not Reveal New Developments in

SEC Filings or During Investor Call.

On May 8, 2015, Orexigen filed two forms with the SEC:

a press release on a Form 8-K (“May 2015 Form 8-K”), and

its Quarterly Report on Form 10-Q (“May 2015 Form 10-Q”).

4

Unless otherwise noted, we omit the Complaint’s emphasis of any

quoted material.

10 KHOJA V. OREXIGEN THERAPEUTICS

The May 2015 Form 8-K described the Light Study,

stating, in part, “[t]he clinical trial program also includes a

. . . trial known as the Light Study.” The May 2015 Form 10-

Q stated that “additional analysis of the interim results or new

data from the continuing Light Study . . . may produce

negative or inconclusive results, or may be inconsistent with

the conclusion that the interim analysis was successful.”

That same day, Orexigen hosted a conference call with

investors and analysts. An analyst asked “what is the fate of

the Light Study on this point. Has that been terminated?”

Klassen said that the “Light Study is continuing and we are

continuing to engage both Orexigen and Takeda with the

FDA and with ESC and DMC regarding ultimately the status

of the study, but it’s an ongoing entity as of right now.”

Regarding the 50 percent interim results, an analyst asked

“I assume you’re not going to be releasing that; are you going

to be sending it to the FDA?” Klassen responded:

[W]e’re in ongoing discussions related to that

and I don’t think we’re going to go into the

details, because again that’s a look that [the]

DMC does. As a plan, they look at the 25%

to 50% and 75%, but it’s really on the 25%

analysis that was used for regulatory

purposes. So if any of that status changes,

then we would of course announce that.

Narachi said, in part:

So, if the decision is made to terminate the

trial early and focus resources on the next

[trial], which is what we have been

KHOJA V. OREXIGEN THERAPEUTICS 11

advocating, then I think results would come

out sooner . . . if you decide to stop the study

now there will be additional events, so these

details are being discussed and worked out

and as we make formal decisions there, you’ll

learn more about the availability of data from

the study.

(Emphasis in Comp.)

Again referencing the Light Study, an analyst asked “if

you could provide an estimate of the time or the strategy for

disclosure around the fate of the Light Study – is that

something that you need to disclose . . . ?” Narachi said:

I think that that would be something we

disclose. As [Klassen] said, there are active

discussions between FDA, the [ESC] and

DMC . . . [and] Takeda and Orexigen. And as

soon as we understand specifically what the

status is, so for example, if there was a

decision to terminate the trial and move on

and focus resources on the new [trial], that

would be a disclosure that we would make.

(Emphasis in Comp.)

F. Light Study’s 50 Percent Interim Results and Status

Revealed

Four days after that call, on May 12, 2015, Dr. Nissen

issued a statement. He said, in part, “Following premature

disclosure of interim study results, the 9,000-patient Light

[Study] . . . has been halted by the [ESC].” He further

12 KHOJA V. OREXIGEN THERAPEUTICS

revealed that the most recent results did not suggest a heart

benefit from Contrave.

Orexigen learned that Dr. Nissen would issue such a

statement, and then issued its own. Orexigen’s statement

said, “Today some of the 50% interim analysis of the Light

Study was disclosed by a third party. Because most of our

management team remains blinded to the 50% data, we are

unable to comment.”

II. Procedural History

Karim Khoja is an Orexigen investor who represents a

class of similarly situated Orexigen investors. On August 20,

2015, after numerous related actions were consolidated,

Khoja, acting on behalf of the putative investor class, filed the

operative Complaint alleging three securities violations.

Counts I and II allege violations of §10(b) of the

Securities Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule

10b-5, 17 C.F.R. § 240.10b-5, against Orexigen (including

the individually named Executive Defendants). Count I

alleges that Orexigen and the executives misrepresented

and/or omitted material facts “to conceal the truth and/or

adverse material information” about the Light Study. Count

II alleges a fraud scheme under SEC Rules 10b-5(a) and (c).

Count III is against only the Executive Defendants.

Under § 20(a) of the Securities Exchange Act, 15 U.S.C.

§ 78t, Count III claims that, as “controlling” individuals,

those executives are liable for the violations in Counts I and

II.

KHOJA V. OREXIGEN THERAPEUTICS 13

Orexigen moved to dismiss the Complaint for failure to

state a claim under §§ 10 and 20 of the Exchange Act.

Concurrently, Orexigen requested judicial notice of

22 documents or, alternatively, that the district court treat

those documents as incorporated into the Complaint itself.

The district court granted this motion for all but one

document.

The district court then dismissed the Complaint for failure

to state a claim. It dismissed two claims under Count I with

prejudice. It granted Khoja leave to amend the others.

Instead of amending the Complaint, Khoja requested

entry of judgment in order to pursue the instant appeal.

Judgment dismissing the action was entered on June 27,

2016. Khoja timely appealed.

JURISDICTION

We have jurisdiction to review final judgments of district

courts. 28 U.S.C. § 1291. Khoja timely appealed the

judgment. Fed. R. App. P. 4(b)(4). Accordingly, we have

jurisdiction of this appeal.

STANDARD OF REVIEW

We review dismissal for failure to state a claim de novo.

Dougherty v. City of Covina, 654 F.3d 892, 897 (9th Cir.

2011). The decision to take judicial notice and/or incorporate

documents by reference is reviewed for an abuse of

discretion. United States v. 14.02 Acres of Land More or

Less in Fresno Cty., 547 F.3d 943, 955 (9th Cir. 2008)

(judicial notice); Davis v. HSBC Bank Nev., N.A., 691 F.3d

1152, 1160 (9th Cir. 2012) (incorporation by reference).

14 KHOJA V. OREXIGEN THERAPEUTICS

DISCUSSION

I. Judicial Notice and Incorporation-by-Reference

Doctrine.

In dismissing the Complaint, the district court relied, in

part, on 21 documents that it judicially noticed or

incorporated into the Complaint by reference. To assess

whether the district court erred in dismissing any claims,

then, we must first determine whether the district court

properly considered those documents at the motion to dismiss

stage.

Generally, district courts may not consider material

outside the pleadings when assessing the sufficiency of a

complaint under Rule 12(b)(6) of the Federal Rules of Civil

Procedure. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th

Cir. 2001). When “matters outside the pleading are presented

to and not excluded by the court,” the 12(b)(6) motion

converts into a motion for summary judgment under Rule 56.

Fed. R. Civ. P. 12(d). Then, both parties must have the

opportunity “to present all the material that is pertinent to the

motion.” Id.

There are two exceptions to this rule: the incorporation-

by-reference doctrine, and judicial notice under Federal Rule

of Evidence 201. Both of these procedures permit district

courts to consider materials outside a complaint, but each

does so for different reasons and in different ways. We

address each seriatim.

Before doing so, however, we note a concerning pattern

in securities cases like this one: exploiting these procedures

KHOJA V. OREXIGEN THERAPEUTICS 15

improperly to defeat what would otherwise constitute

adequately stated claims at the pleading stage.

Properly used, this practice has support. The Supreme

Court stated in Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

that, in assessing securities fraud claims, “courts must

consider the complaint in its entirety, as well as other sources

courts ordinarily examine when ruling on Rule 12(b)(6)

motions to dismiss, in particular, documents incorporated into

the complaint by reference, and matters of which a court may

take judicial notice.” 551 U.S. 308, 322 (2007).

Thus, judicial notice and incorporation-by-reference do

have roles to play at the pleading stage. The overuse and

improper application of judicial notice and the incorporation-

by-reference doctrine, however, can lead to unintended and

harmful results. Defendants face an alluring temptation to

pile on numerous documents to their motions to dismiss to

undermine the complaint, and hopefully dismiss the case at an

early stage. Yet the unscrupulous use of extrinsic documents

to resolve competing theories against the complaint risks

premature dismissals of plausible claims that may turn out to

be valid after discovery. This risk is especially significant in

SEC fraud matters, where there is already a heightened

pleading standard, and the defendants possess materials to

which the plaintiffs do not yet have access. See In re Rigel

Pharm., Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir. 2012)

(observing that plaintiffs asserting “claims under section

10(b) and Rule 10b-5 must not only meet the requirements of

Rule 8, but must satisfy the heightened pleading requirements

of both Federal Rule of Civil Procedure 9(b) and the Private

Securities Litigation Reform Act”); see also Hsu v. Puma

Biotechnology, Inc., 213 F. Supp. 3d 1275, 1281–82 (C.D.

Cal. 2016) (describing “practical reality” of “inappropriate

16 KHOJA V. OREXIGEN THERAPEUTICS

efforts by defendants” in SEC matters to “expand courts’

consideration of extrinsic evidence at the motion to dismiss

stage,” which is “particularly troubling in the common

situation of asymmetry, where a defendant starts off with sole

possession of the information about the alleged

wrongdoing”). If defendants are permitted to present their

own version of the facts at the pleading stage – and district

courts accept those facts as uncontroverted and true – it

becomes near impossible for even the most aggrieved

plaintiff to demonstrate a sufficiently “plausible” claim for

relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007))

(articulating standard for “plausible” claim for relief at

pleading stage). Such undermining of the usual pleading

burdens is not the purpose of judicial notice or the

incorporation-by-reference doctrine.

Accordingly, we aim here to clarify when it is proper to

take judicial notice of facts in documents, or to incorporate by

reference documents into a complaint, and when it is not.

A. Judicial Notice

Judicial notice under Rule 201 permits a court to notice an

adjudicative fact if it is “not subject to reasonable dispute.”

Fed. R. Evid. 201(b). A fact is “not subject to reasonable

dispute” if it is “generally known,” or “can be accurately and

readily determined from sources whose accuracy cannot

reasonably be questioned.” Fed. R. Evid. 201(b)(1)–(2).

Accordingly, “[a] court may take judicial notice of

matters of public record without converting a motion to

dismiss into a motion for summary judgment.” Lee, 250 F.3d

at 689 (quotation marks and citation omitted). But a court

KHOJA V. OREXIGEN THERAPEUTICS 17

cannot take judicial notice of disputed facts contained in such

public records. Id.

The district court judicially noticed three exhibits attached

to Orexigen’s Motion to Dismiss. We address each, in turn.

1. September 11, 2014 Investors’ Conference Call

Transcript.

The district court judicially noticed a September 11, 2014,

investors’ conference call transcript (Ex. D) that was

submitted with one of Orexigen’s SEC filings.

An investor call transcript submitted to the SEC generally

qualifies as a “source[] whose accuracy cannot reasonably be

questioned.” Fed. R. Evid. 201(b); see, e.g., In re Wash.

Mut., Inc. Sec., Derivative & ERISA Litig., 259 F.R.D. 490,

495 (W.D. Wash. 2009) (taking judicial notice of uncontested

conference call transcripts in securities fraud action); In re

Pixar Sec. Litig., 450 F. Supp. 2d 1096, 1100 (N.D. Cal.

2006) (same).

But accuracy is only part of the inquiry under Rule

201(b). A court must also consider – and identify – which

fact or facts it is noticing from such a transcript. Just because

the document itself is susceptible to judicial notice does not

mean that every assertion of fact within that document is

judicially noticeable for its truth.

Here, the district court did not clearly specify what fact or

facts it judicially noticed from this transcript. The district

court only indicated it would not “take notice of the truth of

the facts cited” within the exhibit.

18 KHOJA V. OREXIGEN THERAPEUTICS

If the district court judicially noticed that there was an

investors’ conference call on September 11, 2014, that would,

in theory, be permissible under Rule 201(b) because that fact

“can be accurately and readily determined” from the

transcript.5

Orexigen sought judicial notice of the transcript because

it “reveals what investors already knew[] about the decision

to conduct” another study besides the Light Study to assess

Contrave’s heart risks. Then, in its motion to dismiss the

Complaint, Orexigen relied on the transcript to demonstrate

that it “previously disclosed . . . that the FDA had determined

that the Light Study would not serve as the” definitive trial

for Contrave. Arguably, such a disclosure would be

significant to Khoja’s claim that Orexigen materially

misrepresented the status of the Light Study in May 2015. If

Orexigen already told investors that the Light Study would

not serve as the definitive trial, then Orexigen could argue

that it did not necessarily mislead investors when it failed to

inform them about the Light Study’s termination.

Yet, from the transcript, it is unclear what exactly

Orexigen “previously disclosed” about the Light Study. At

one point, Klassen informed investors that, given recent “data

confidentiality issues[,] . . . continuing doing the Light Study

unchanged was not an option.” At another point, though,

Klassen said, “[i]n the meantime,” while a new study began,

“the Light Study is ongoing.”

5

It is unclear, however, how this fact would be relevant. See

21B Charles Alan Wright & Kenneth W. Graham, Jr., Federal Practice

and Procedure § 5104, at 156 (2d ed. 2005) (“An irrelevant fact could

hardly be an ‘adjudicative fact’. . . .”).

KHOJA V. OREXIGEN THERAPEUTICS 19

Reasonable people could debate what exactly this

conference call disclosed about the Light Study. Klassen’s

statements are not entirely consistent; his former statement

suggests the Light Study was no longer underway, but his

latter statement suggests the opposite. It is improper to

judicially notice a transcript when the substance of the

transcript “is subject to varying interpretations, and there is a

reasonable dispute as to what the [transcript] establishes.”

Reina-Rodriguez v. United States, 655 F.3d 1182, 1193 (9th

Cir. 2011). In that scenario, there is no fact established by the

transcript “not subject to reasonable dispute,” and the fact

identified does not qualify for judicial notice under Rule

201(b).

To the extent that the district court judicially noticed the

September 11, 2014, investors’ call transcript for the purpose

for which was offered, i.e., to determine what the investors

knew about the status of the Light Study at that time, the

district court abused its discretion.

2. December 18, 2014, EMA Report About

Contrave.

The district court judicially noticed a December 18, 2014,

EMA report (“2014 EMA report”) (Ex. E) about Contrave.

Again, the district court did not expressly state what fact it

noticed from that report. The rest of the district court’s order,

however, sheds some light on the district court’s reasoning.

Based on the 2014 EMA Report, the district court

concluded that the EMA already knew of the favorable,

25 percent interim results before Orexigen sought publication

of the 2014 Patent Application, which contained the

25 percent interim results. Therefore, contrary to Khoja’s

20 KHOJA V. OREXIGEN THERAPEUTICS

theory, Orexigen could not hope to influence the EMA by

improperly publishing the confidential, 25 percent interim

results through the 2014 Patent Application.

It thus appears that the district court judicially noticed the

fact that the 2014 EMA Report shows that the EMA learned

of the 25 percent interim results from Orexiten by December

18, 2014. Judicially noticing that fact was improper.

To be sure, as an agency report, the 2014 EMA Report is

generally susceptible to judicial notice. See United States v.

Ritchie, 342 F.3d 903, 907–09 (9th Cir. 2003) (observing

“[c]ourts may take judicial notice of some public records,

including the records and reports of administrative bodies”

(internal quotation marks and citation omitted)). But, again

ascertaining this factor is only part of the inquiry under Rule

201(b). Here, like the September 2014 transcript, there is a

reasonable dispute as to what the report establishes.

First, we look to what the 2014 EMA Report states.

Regarding Contrave, the 2014 EMA Report states, “The

Applicant has submitted the first interim report of the [Light

Study].” and then summarizes te Light Study’s interim

results. These statements indicate that, somehow, the EMA

knew of the 25 percent interim results when the EMA

published the instant report on December 18, 2014. Thus, the

district court could have correctly noticed the fact that, based

on the 2014 EMA Report, the EMA knew about the

25 percent interim results before Orexigen sought to publish

its 2014 Patent Application.

Even so, the 2014 EMA report alone, does not establish

who told the EMA about the 25 percent interim results. This

gap is important. If Orexigen already provided the 25 percent

KHOJA V. OREXIGEN THERAPEUTICS 21

interim results directly to the EMA, then, as the district court

found, it would make little sense for Orexigen to go through

the ruse of publishing the 2014 Patent Application. However,

the report lists the “Applicant” only as “Orexigen

Therapeutics Ireland Limited” (“Orexigen Ireland”). If

Orexigen Ireland revealed the 25 percent interim results to the

EMA without consulting the Orexigen defendants in this

case, then Orexigen Ireland unwittingly foiled Orexigen’s

alleged scheme to reveal those results by publishing the 2014

Patent Application. Then, Orexigen’s alleged scheme –

although botched – could remain theoretically actionable

under Rule 10b-5.

Of course, Orexigen Ireland may have obtained the

25 percent interim results from Orexigen, or Orexigen could

have explicitly advised Orexigen Ireland to submit those

results to the EMA, or Orexigen Ireland’s actions could be

imputed to Orexigen. The report does not particularly point

to any of these inferences. Therefore, the district court could

not reasonably conclude on a motion to dismiss what the

2014 EMA Report revealed about Orexigen’s alleged scheme

to publish the 2014 Patent Application. The district court

abused its discretion in judicially noticing that fact on the

basis of the 2014 EMA Report.

3. International Patent Application.

The district court judicially noticed Orexigen’s

international patent application for Contrave to the World

International Property Organization (“WIPO application”)

(Ex. V). Again, the district court did not explicitly state what

it judicially noticed about the WIPO application. Based on

the district court’s order, however, it appears that the district

court noticed only the filing date of the WIPO application.

22 KHOJA V. OREXIGEN THERAPEUTICS

To start, the date “can be accurately and readily

determined from” the WIPO application, which was

published by a foreign government agency. Fed. R. Evid.

201(b)(2). Neither party disputes the WIPO application’s

authenticity, or its accuracy. Id. The WIPO application is,

thus, “verifiable with certainty, and of the same type as other

governmental documents which courts have judicially

noticed.” United States v. Camp, 723 F.2d 741, 744 n.** (9th

Cir. 1984); see also GeoVector Corp. v. Samsung Elecs. Co.,

234 F. Supp. 3d 1009, 1016 n.2 (N.D. Cal. 2017) (taking

judicial notice of Korean patent application).

The district court did not abuse its discretion by judicially

noticing when Orexigen filed the WIPO Application.

B. Incorporation-by-Reference.

Unlike rule-established judicial notice, incorporation-by-

reference is a judicially created doctrine that treats certain

documents as though they are part of the complaint itself.

The doctrine prevents plaintiffs from selecting only portions

of documents that support their claims, while omitting

portions of those very documents that weaken – or doom –

their claims. Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th

Cir. 1998), superseded by statute on other grounds as

recognized in Abrego Abrego v. Dow Chem. Co., 443 F.3d

676, 681–82 (9th Cir. 2006) (observing “the policy concern

underlying the rule: Preventing plaintiffs from surviving a

Rule 12(b)(6) motion by deliberately omitting references to

documents upon which their claims are based”).

Although the doctrine is straightforward in its purpose, it

is not always easy to apply. In Ritchie, we said that a

defendant may seek to incorporate a document into the

KHOJA V. OREXIGEN THERAPEUTICS 23

complaint “if the plaintiff refers extensively to the document

or the document forms the basis of the plaintiff’s claim.”

Ritchie, 342 F.3d at 907. How “extensively” must the

complaint refer to the document? This court has held that

“the mere mention of the existence of a document is

insufficient to incorporate the contents of a document” under

Ritchie. Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038

(9th Cir. 2010) (citing Ritchie, 342 F.3d at 908–09). A more

difficult question is whether a document can ever “form[] the

basis of the plaintiff’s claim” if the complaint does not

mention the document at all.

To be sure, there are those rare instances when assessing

the sufficiency of a claim requires that the document at issue

be reviewed, even at the pleading stage. For example, in

Knievel v. ESPN, 393 F.3d 1068 (9th Cir. 2005), we affirmed

the incorporation of materials that the complaint did not

reference at all. Evel Knievel alleged that ESPN defamed

him and his wife on its website by posting a picture of them

and another woman with an arguably suggestive caption. Id.

at 1070. In the complaint, Knievel only referenced the

allegedly defamatory photo and caption. Id. at 1076. ESPN

then submitted the surrounding photos and captions to show

a reasonable person would not view the caption at issue as

defamatory. Id. A defamation claim requires showing that

the statement at issue, given its context, “is capable of

sustaining a defamatory meaning.” Id. at 1073 (internal

quotation maks omitted). Therefore, even though the

complaint did not “allege or describe the contents of the

surrounding pages,” it was proper to incorporate them

because the claim necessarily depended on them. Id. at 1076;

see also Parrino, 146 F.3d at 706 (incorporating employee

health plan where the claims were premised upon plaintiff’s

coverage under the plan).

24 KHOJA V. OREXIGEN THERAPEUTICS

However, if the document merely creates a defense to the

well-pled allegations in the complaint, then that document did

not necessarily form the basis of the complaint. Otherwise,

defendants could use the doctrine to insert their own version

of events into the complaint to defeat otherwise cognizable

claims. See In re Immune Response Sec. Litig., 375 F. Supp.

2d 983, 995–96 (S.D. Cal. 2005) (declining to incorporate

numerous exhibits in SEC action where the complaint did not

mention or rely on them, but the defendants instead “offer[ed]

the documents as evidence that Defendants did not commit a

securities violation”); Glob. Network Commc’ns, Inc. v. City

of New York, 458 F.3d 150, 156–57 (2d Cir. 2006) (finding

error where the court relied on documents the complaint did

not mention to resolve an issue in defendant’s favor, even

though the complaint had not raised the issue). Submitting

documents not mentioned in the complaint to create a defense

is nothing more than another way of disputing the factual

allegations in the complaint, but with a perverse added

benefit: unless the district court converts the defendant’s

motion to dismiss into a motion for summary judgment, the

plaintiff receives no opportunity to respond to the defendant’s

new version of the facts. Without that opportunity to

respond, the defendant’s newly-expanded version of the

complaint – accepted as true at the pleading stage – can easily

topple otherwise cognizable claims. Although the

incorporation-by-reference doctrine is designed to prevent

artful pleading by plaintiffs, the doctrine is not a tool for

defendants to short-circuit the resolution of a well-pleaded

claim.

For this same reason, what inferences a court may draw

from an incorporated document should also be approached

with caution. We have stated that, unlike judicial notice, a

court “may assume [an incorporated document’s] contents are

KHOJA V. OREXIGEN THERAPEUTICS 25

true for purposes of a motion to dismiss under Rule 12(b)(6).”

Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006) (quoting

Ritchie, 342 F.3d at 908). While this is generally true, it is

improper to assume the truth of an incorporated document if

such assumptions only serve to dispute facts stated in a well-

pleaded complaint. This admonition is, of course, consistent

with the prohibition against resolving factual disputes at the

pleading stage. See In re Tracht Gut, LLC, 836 F.3d 1146,

1150 (9th Cir. 2016) (“At the motion to dismiss phase, the

trial court must accept as true all facts alleged in the

complaint and draw all reasonable inferences in favor of the

plaintiff.”); see also Sgro v. Danone Waters of N. Am., Inc.,

532 F.3d 940, 942, n.1 (9th Cir. 2008) (finding it proper to

consider disability benefits plan referenced in complaint, but

declining to accept truth of the plan’s contents where the

parties disputed whether defendant actually implemented the

plan according to its terms).

With these principles in mind, we turn to the documents

at issue here. The district court incorporated eighteen

documents, fifteen of which Khoja objects to on appeal.

1. Analyst Reports and Blog Entries.

a. March 6, 2015, Wall Street Journal blog post.

The district court incorporated a March 6, 2015, Wall

Street Journal blog post titled “Orexigen Data is ‘Unreliable

and Premature’: FDA’s Jenkins Explains.” (Ex. C) The

Complaint quotes this post once in a two-sentence footnote

explaining the meaning and significance of a DAP. This

footnote is the only reference to the blog post in the

Complaint. For “extensively” to mean anything under

Ritchie, it should, ordinarily at least, mean more than once.

26 KHOJA V. OREXIGEN THERAPEUTICS

See Coto, 593 F.3d at 1038. Otherwise, the rule would

simply require a complaint to “refer” to the document. In

theory, a reference may be sufficiently “extensive” if a single

reference is relatively lengthy. Here, the quotation comprises

only a few lines in a footnote of a 67-page complaint. It

conveys only basic historic facts about the DAP. It is not

sufficiently extensive under Ritchie.

Nor did the blog post form the basis of any claim in the

Complaint. Although the blog post shares a discussion with

Dr. Jenkins about the unreliability of the earlier 25 percent

interim results, the claims do not rely on what exactly Dr.

Jenkins said to this particular blogger. Rather, the claims

concern whether Orexigen misled investors about the

reliability of the interim results and the status of the Light

Study. Cf. Branch v Tunnell, 14 F.3d 449, 453–54 (9th Cir.

1994), overruled on other grounds by Galbraith v. County of

Santa Clara, 307 F.3d 1119 (9th Cir. 2002) (incorporating

transcript of testimony plaintiff relied on to allege defendant

submitted a false affidavit where the transcript actually

proved defendant did not do so). Accordingly, the March 6,

2015, Wall Street Journal blog post (Ex. C) did not satisfy

Ritchie. The district court abused its discretion by

incorporating it.

b. March 4, 2015, Blog Post, “Fat Chance:

FDA Chastises Orexigen.”

The district court incorporated another blog post: a

March 4, 2015 Wall Street Journal post titled “Fat Chance:

FDA Chastises Orexigen for Disclosing Interim Trial Data.”

(Ex. I)

KHOJA V. OREXIGEN THERAPEUTICS 27

The Complaint only identifies and quotes this blog post

once. The quotation – nearly a page and a half – is lengthy

and conveys numerous facts: FDA officials were upset about

the release of interim results; the FDA “considers the

preliminary data ‘far too unreliable to conclude anything

further about cardiovascular safety’”; the Light Study may be

at risk because of the disclosures; and Orexigen violated the

Light Study’s confidentiality once before.

Although the claims do not turn on the blog post itself,

Khoja did more than merely mention it. See Coto, 593 F.3d

at 1038. Per Ritchie, it was not an abuse of discretion to

incorporate it.

c. March 3, 2015, Market Reports.

The Complaint quoted two reports (Ex. K & L) to

demonstrate how analysts positively reacted to the interim

results upon release of the allegedly misleading March 2015

Form 8-K: (1) a March 3, 2015, RBC Capital Markets report

titled “Orexigen Therapeutics Inc. LIGHT interim data reveal

Contrave positive CV effect; extend IP by 7 years”; and (2) a

March 3, 2015, Leerink Partner report titled “OREXIGEN

THERAPEUTICS, INC 25% Interim LIGHT Analysis Shows

Stat. Sig. Contrave Benefit on CV Outcomes.”

The quotes are not as extensive as the quotations of the

March 4, 2015, blog post, discussed above. Nonetheless, the

reports form the basis of Khoja’s claim that the market relied

on Orexigen’s claims about the 25 percent interim results

after “numerous securities analysts” followed and wrote

reports about Orexigen. The district court did not abuse its

discretion by incorporating these reports. See, e.g., Patel v.

Parnes, 253 F.R.D. 531, 546–50 (C.D. Cal. 2008)

28 KHOJA V. OREXIGEN THERAPEUTICS

(incorporating analyst reports to show when the alleged

misrepresentations were provided to the market and their

materiality).

d. March 3, 2015, Forbes Web Article – “The

FDA Is Forcing Orexigen to Do a Second

Safety Study Because of Contrave

Disclosures.”

The Complaint quotes the article (Ex. N) to show that the

FDA “warned patients and physicians that it was ‘critical that

the[] interim data [] not be misinterpreted.’” (Alterations in

original.) Then, “immediately after” this article, Orexigen

submitted its own statement “to maintain the artificial price

inflation in [Orexigen’s] securities.” Khoja thus claims that

Orexigen’s response to the article was truly part of its scheme

to inflate its stock values. Because the article triggered the

alleged scheme, the article formed the basis of the scheme.

Accordingly, the district court did not abuse its discretion by

incorporating the article.

e. March 5, 2015 Forbes web article titled “Top

FDA Official Says Orexigen Study Result

‘Unreliable,’ ‘Misleading.’”

The Complaint describes and quotes this article (Ex.O):

After the close of trading on March 5, 2015,

in a report entitled “Top FDA Official Says

Orexigen Study Result ‘Unreliable,’

‘Misleading’” published on Forbes.com, top

FDA official Dr. John Jenkins criticized

Orexigen and its decision to release interim

trial data. In the report, he criticized the

KHOJA V. OREXIGEN THERAPEUTICS 29

released data as “unreliable,” “misleading,”

and “likely false.” Dr. Jenkins also said that

the results must be kept confidential to avoid

compromising the trial’s integrity so

researchers can get a clear sense of any

cardiovascular risk that comes with the drug.

The report also warned that if “Orexigen

cannot find a way to set things right, it could

face fines, civil penalties, or even the

withdrawal of Contrave from the market.

The Complaint then alleges that, “[a]s a result of the FDA’s”

statements in the article, “the price of Orexigen stock

plummeted.”

These are more than passing reference to the article. See

Ritchie, 342 F.3d at 908. The Complaint alleges the loss in

Orexigen’s stock price occurred because of this article’s

revelations. Put differently, the article revealed the

materiality of Orexigen’s alleged misrepresentations and

omissions about the 25 percent interim results. Because such

materiality forms the basis of Count I, the district court did

not abuse its discretion by incorporating this article.

f. April 6, 2015 Leerink Partner report –

“OREXIGEN THERAPEUTICS, INC Meeting

with Mgmt Highlights Partnering Goals, Next

Steps for CV Studies.”

The Complaint does not name this report (Ex. P), but

appears to quote from it. Per the Complaint, the article

“relayed a highly positive report about the 25% interim

results based [on] [Orexigen’s] representations that ‘. . .

Contrave is, at worst, CV safe or, at best, cardioprotective[.]’”

30 KHOJA V. OREXIGEN THERAPEUTICS

This single brief quotation is likely not extensive enough

under Ritchie. Nonetheless, the Complaint uses the article to

allege that Narachi and Hagan said that Contrave was “at

best, cardioprotective” even though they allegedly knew by

then that the data revealed no benefit. Count I is not based

specifically on this alleged misrepresentation. The statement,

however, represents another occasion when Narachi and

Hagan may have misrepresented the benefits of Contrave,

which evinces the same scheme alleged in Count I.

Therefore, the article – to the extent it contains an alleged

misrepresentation – forms the basis of Count I. The district

court did not abuse its discretion by incorporating this article.

2. SEC Filings and Attachments.

a. February 27, 2015 Form 10-K

The Complaint certainly quotes Orexigen’s February 27,

2015, SEC filing. (Ex. B) But that is not the SEC filing that

Orexigen submitted to the district court, and which the

district court incorporated here. The date “February 27,

2015” does not even appear on the document that Orexigen

submitted. Accordingly, the Complaint did not refer to this

document, and the document did not form the basis of any

claims. The district court abused its discretion by

incorporating it.

This apparent misstep – although ostensibly inadvertent

– highlights another risk in overuse of the incorporation-by-

reference doctrine. When parties pile on volumes of exhibits

to their motion to dismiss, hoping to squeeze some into the

complaint, their submissions can become needlessly

unwieldy. Simply reviewing these submissions demands

precious time. It is the parties’ duty to ensure their own

KHOJA V. OREXIGEN THERAPEUTICS 31

accuracy. Otherwise, as here, materials may be inserted into

pleadings when they should not be there.

b. SEC filings regarding Orexigen executive

compensation

The Complaint alleges that Executive Defendants Narachi

and Klassen financially benefitted from the “artificially

inflated” Orexigen stock prices after leaking the 25 percent

interim results. In particular, Orexigen’s “2007 Equity

Incentive Plan” permitted Narachi, Klassen, and Hagan to

register their inflated stocks. Also, Orexigen’s corporate

goals – and, by extension, these executives’ compensation

packages – depended on Contrave’s success.

According to Orexigen, Khoja relied on three SEC filings

(Exs. R, S & U) “to plead scienter against [the executive

defendants] based on Orexigen’s executive compensation and

registration of stock during the class period.”6 Orexigen

asked the district court to incorporate them “so that it may

consider portions of those documents omitted from the

[Complaint] which, among other things, show that such

awards were routinely granted on an annual basis.”

None of these documents qualified for incorporation. The

Complaint did not refer to any of these documents

extensively enough to warrant incorporation on that ground

alone. Khoja’s claims did not arise from these proxy

statements and incentive plans. Rather, Khoja’s references to

6

These filings include Orexigen’s April 22, 2015 Schedule DEF-14A

Proxy Statement (Ex. R), Orexigen’s 2007 Equity Incentive Award Plan

(“Award Plan”) (Ex. U), and Orexigen’s April 30, 2014 Schedule DEF-

14A Proxy Statement (Ex. S).

32 KHOJA V. OREXIGEN THERAPEUTICS

these documents merely demonstrated that there was some

financial incentive to misrepresent the success of Contrave to

the investors.

Also, in seeking incorporation of these documents,

Orexigen improperly asked the district court to engage in

fact-finding in the course of deciding the sufficiency of the

Complaint. It may be, as Orexigen argued, that those

documents show that such financial incentives were routine.

However, these nuances are irrelevant at the pleading stage.7

Asking the district court to conclude that the alleged financial

incentives were routine went beyond testing the sufficiency

of the claims and into the realm of factual disputes. The

district court abused its discretion by incorporating these

documents for that improper purpose.

c. March 13, 2015 Form S-8 Registration

Statement8

The Complaint references this Registration Statement

twice to allege that “Narachi and Klassen . . . register[ed] six

million Orexigen shares at an artificially inflated price of

$7.08” pursuant to Orexigen’s Award Plan. (Ex. T) The

Complaint also alleges that the Registration Statement

“incorporated by reference the Company’s materially

misleading March 3, 2015 Form 8-K.”

7

Orexigen’s proposition is also illogical. Assuming such awards

were “routinely granted,” it is unclear why that necessarily means that

executives would have no motive to commit securities fraud, especially if

“such awards” are, as alleged, incentive-based.

8

In its Request for Judicial Notice, Orexigen dated this Form S-8

Registration Statement as March 16, 2015. This was likely a mistake as

the date appearing on the document is March 13, 2015.

KHOJA V. OREXIGEN THERAPEUTICS 33

The Complaint thus refers to the document to establish

(1) the “artificially inflated price” of the shares, and (2) that

the Registration Statement incorporated the “materially

misleading” statements that allegedly caused the “artificially

inflated price.” These allegations form the basis of these

claims. Therefore, the district court did not abuse its

discretion by incorporating this document into the Complaint.

3. Agency Reports

a. September 10, 2014 FDA Report on Contrave.

The Complaint references this report (Ex. A) several

times.9 The Complaint quotes it to show that, around

November 2013, Light Study team members “requested that

Orexigen produce a list of individuals who ‘had knowledge

of the interim results or access to unblended interim data.’”

The Complaint quotes it again to describe Orexigen’s

violation of the DAP and the FDA’s critical reaction to that

violation.

Still, the claims do not rely on the report itself. They rely,

to an extent, on the historical facts asserted therein. Even so,

the numerous references were sufficiently extensive that

incorporation was justified under Ritchie. The district court

did not abuse its discretion by incorporating this report.

9

In its Request for Judicial Notice, Orexigen claimed that the

Complaint referenced this report at ¶10. Although ¶10 references an

“FDA Memorandum of Meeting,” that memorandum does not appear to

be the same report that Orexigen sought to incorporate here.

34 KHOJA V. OREXIGEN THERAPEUTICS

b. EMA’s December 19, 2014 Press Release –

“[Contrave] recommended for approval in

weight management in adults.”

Orexigen claimed that the Complaint “references” this

press release. (Ex.F) In fact, the Complaint does not

reference or identify this press release at all. The Complaint

only alleges facts that the press release happens to report:

Orexigen learned in December 2014 that the EMA adopted a

“positive opinion” for Contrave and recommended that the

European Commission authorize marketing in Europe.

Nothing in the Complaint connects this information with this

press release. The facts alleged could have come from other

sources. Therefore, the district court abused its discretion by

incorporating the press release.

4. USPTO ’371 Patent File History

According to Orexigen, Khoja “mischaracterize[d] the

content, purpose, and effect of many portions of the ’371

patent’s file history” in the Complaint.10 Orexigen asked the

district court to incorporate that history (Ex. H) “to obtain an

accurate understanding of” it.

Again, the Complaint does not refer to the particular

“USPTO file history” that Orexigen presented to the court.

Although the Complaint alleges facts that may appear there,

those facts could have come from other sources.

At the same time, Count II claims that the Executive

Defendants engaged in a scheme improperly to publish Light

10

The ’371 Patent is the patent that was issued as a result of the 2014

Patent Application.

KHOJA V. OREXIGEN THERAPEUTICS 35

Study results through a patent application. To the extent the

Complaint alleges that the timing of Orexigen’s actions

evinces a scheme, the USPTO file history is certainly relevant

because it sets forth the timeline. However, the sufficiency

of the alleged scheme itself does not depend on what the

entire USPTO file history says. Whether Orexigen has other

reasons or explanations for publishing the patent goes beyond

the sufficiency of the alleged scheme at the pleading stage.

It was, therefore, an abuse of discretion to incorporate the

entire USPTO ’371 patent file history.

To the extent the district court properly judicially noticed

or incorporated by reference any of the above documents, the

next issue is whether the district court properly considered

those documents in dismissing Khoja’s claims.

II. Dismissal for Failure to State a Claim Under The

Securities Exchange Act.

A. Legal Standard

Dismissal “is appropriate only where the complaint lacks

a cognizable legal theory or sufficient facts to support a

cognizable legal theory.” Mendiondo v. Centinela Hosp.

Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008).

“‘To survive a motion to dismiss, a complaint must

contain sufficient factual matter, accepted as true, to state a

claim to relief that is plausible on its face;’ that is, plaintiff

must ‘plead[ ] factual content that allows the court to draw

the reasonable inference that the defendant is liable[.]’”

Telesaurus VPC, LLC v. Power, 623 F.3d 998, 1003 (9th Cir.

2010) (quoting Iqbal, 556 U.S. at 678). “[T]he court [is not]

required to accept as true allegations that are merely

36 KHOJA V. OREXIGEN THERAPEUTICS

conclusory, unwarranted deductions of fact, or unreasonable

inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049,

1055 (9th Cir. 2008) (internal quotation marks and citation

omitted).

If a claim includes an element of fraud, it must also “state

with particularity the circumstances constituting fraud.” Fed.

R. Civ. P. 9(b). That is, the complaint must allege the “who,

what, when, where, and how” of the fraud. Vess v. Ciba-

Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003).

If a claim alleges securities fraud, the Private Securities

Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4, also

applies. When the alleged fraud is a material misstatement or

omission, “the complaint shall specify [1] each statement

alleged to have been misleading, [2] the reason or reasons

why the statement is misleading, and, [3] if an allegation

regarding the statement or omission is made on information

and belief, the complaint shall state with particularity all facts

on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1).

B. Count I - Material Misstatements and Omissions

(Rule 10b-5)

To plead a primary violation of SEC Rule 10b-5, a

complaint must allege “1) a material misrepresentation or

omission by the defendant [falsity]; 2) scienter; 3) a

connection between the misrepresentation or omission and

the purchase or sale of a security; 4) reliance upon the

misrepresentation or omission; 5) economic loss; and 6) loss

causation.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d at

876.

KHOJA V. OREXIGEN THERAPEUTICS 37

The district court’s dismissal of Count I was based on the

elements of falsity and materiality. Accordingly, the analysis

here is limited to those issues. In re Gilead Scis. Sec. Litig.,

536 F.3d at 1055 (limiting consideration of Rule 10b-5 claim

to sole issue the district court addressed because, generally,

“a federal appellate court does not consider an issue not

passed upon below”).

Falsity is alleged when a plaintiff points to defendant’s

statements that directly contradict what the defendant knew

at that time. See In re Atossa Genetics Inc. Sec. Litig.,

868 F.3d 784, 794–96 (9th Cir. 2017) (finding that plaintiff

pled falsity where defendants said a drug had “gone through

all of the FDA clearance process,” but it had not received

FDA clearance). Indeed, “[t]o be misleading, a statement

must be capable of objective verification.” Retail Wholesale

& Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard

Co., 845 F.3d 1268, 1275 (9th Cir. 2017).

Even if a statement is not false, it may be misleading if it

omits material information. In re NVIDIA Corp. Sec. Litig.,

768 F.3d 1046, 1054 (9th Cir. 2014). “Disclosure is required

. . . only when necessary ‘to make . . . statements made, in the

light of the circumstances under which they were made, not

misleading.’” Matrixx Initiatives, Inc. v. Siracusano,

563 U.S. 27, 44 (2011) (quoting 17 C.F.R. § 240.10b-5(b)).

As such, “companies can control what they have to disclose

under these provisions by controlling what they say to the

market.” Id. at 45. “But once defendants [choose] to tout

positive information to the market, they [are] bound to do so

in a manner that wouldn’t mislead investors, including

disclosing adverse information that cuts against the positive

information.” Schueneman v. Arena Pharm., Inc., 840 F.3d

38 KHOJA V. OREXIGEN THERAPEUTICS

698, 705–06 (9th Cir. 2016) (quotation marks and citation

omitted).

Whether its allegations concern an omission or a

misstatement, a plaintiff must allege materiality. “[A]

misrepresentation or omission is material if there is a

substantial likelihood that a reasonable investor would have

acted differently if the misrepresentation had not been made

or the truth had been disclosed.” Livid Holdings Ltd. v.

Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir.

2005).

The Supreme Court has eschewed brightline tests for

materiality. Matrixx Initiatives, 563 U.S. at 398 (citing Basic

Inc. v. Levinson, 485 U.S. 224, 236 (1988)). At a minimum,

“[p]laintiffs’ allegations must suffice to raise a reasonable

expectation that discovery will reveal evidence satisfying the

materiality requirement, and to allow the court to draw the

reasonable inference that the defendant is liable.” In re

Atossa Genetics Inc. Sec. Litig., 868 F.3d at 794.

The district court identified five statements that arguably

supported Khoja’s claims in Count I. We address each in

turn.

1. March 2015 Form 8-K.

The March 2015 Form 8-K announced the publication of

the 2014 Patent Application, the Light Study, and 25 percent

interim results. It stated:

The 371 Patent and the Provisional Patent

Applications contain claims related to a

positive effect of Contrave on CV outcomes.

KHOJA V. OREXIGEN THERAPEUTICS 39

The observed effects on CV outcomes were

unexpected and appear to be unrelated to

weight change. . . .

The 25% Interim Analysis was prospectively

designed to enable an early and preliminary

assessment of safety to support regulatory

approval. A larger number of MACE are

required to precisely determine the effect of

Contrave on CV outcomes.

The March 2015 Form 8-K also included a graph that showed

a lower occurrence of MACE in patients on Contrave than in

patients on placebos.

Khoja alleges that the chart and Orexigen’s description in

the March 2015 Form 8-K were false and misleading. First,

Orexigen failed to disclose that the interim results “were

‘unreliable,’ ‘likely false,’ and ‘misleading.’” Orexigen

further failed to disclose that it violated the DAP by releasing

the 25 percent interim results, and, as a result, could face

penalties. Finally, Orexigen omitted the fact that it had,

itself, requested the publication of the 2014 Patent

Application so that investors would see the positive, yet

unreliable interim results.

The district court dismissed these theories with prejudice.

First, the district court found that Orexigen did not

misrepresent the interim results. The district court reasoned

that Orexigen “did not claim that the results were statistically

significant.” Also, the court noted that Orexigen cautioned

that . . . “‘[a] larger number of MACE are required to

precisely determine the effect of Contrave on CV outcomes.’”

In other words, according to the district court, even though

40 KHOJA V. OREXIGEN THERAPEUTICS

Orexigen did not outright say that the 25 percent interim

results were unreliable, Orexigen sufficiently warned its

investors by saying the results were preliminary.

But per the Complaint, the FDA previously had told

Narachi and Klassen that “25 [percent] interim results have

‘a high degree of uncertainty and were likely to change with

the accumulation of additional data.’” The question is

whether Orexigen had a duty to reveal this when discussing

the interim results in the 2015 Form 8-K.

Our decision in Berson v. Applied Signal Technology,

Inc., 527 F.3d 982 (9th Cir. 2008) is instructive. There, the

defendant allegedly received several stop-work orders from

its government clients. Id. at 983. Such orders typically

signaled that the work would never be completed, thus

leading to an immediate loss of revenue. Id. Yet, the

defendants counted those orders in its “backlog report” of

work to be completed. Id. at 985–86. The backlog report

noted the “customers’ rights to ‘cancel’ or ‘modify’ existing

contracts,” but said “nothing about the right to simply stop

work and thus immediately interrupt the company’s revenue

stream.” Id. at 986 (quotation marks omitted). Instead, the

defendants spoke “entirely of as-yet-unrealized risks and

contingencies,” and failed to alert the investors that “some of

these risks may already have come to fruition.” Id. We

concluded that “[h]ad defendants released no backlog reports,

their failure to mention the stop-work orders might not have

misled anyone. But once defendants chose to tout the

company’s backlog, they were bound to do so in a manner

that wouldn’t mislead investors as to what that backlog

consisted of.” Id. at 987.

KHOJA V. OREXIGEN THERAPEUTICS 41

Similarly here, once Orexigen chose to tout the apparently

positive 25 percent interim results, Orexigen had the

obligation also to disclose that they were likely unreliable.

As the district court found, Orexigen claims it sufficiently

warned its investors about the reliability of the 25 percent

interim results. Orexigen points to qualifiers in the March

2015 Form 8-K that label the 25 percent interim results as

“early,” and “preliminary”; that emphasize “the effect of

Contrave . . . has not been established”; that “a larger number

of [MACE] are required to precisely determine the effect of

Contrave”; and that “[t]he interim analysis may not be

predictive of future results.” But telling investors that the

data might change is different from saying the data already

has “a high degree of uncertainty” and is likely to change.

Without this information, the “surprising” 25 percent interim

results appeared more promising than Orexigen allegedly

knew they were. Consequently, the March 2015 Form 8-K is

like the backlog report in Berson, which included work that

the defendants knew would likely never be completed. See

Berson, 527 F.3d at 987.

Khoja has thus pled a plausible claim that Orexigen had

a duty to disclose that the 25 percent interim results in the

March 2015 Form-8K were unreliable. See In re NVIDIA

Corp. Sec. Litig., 768 F.3d at 1052. It is possible that a jury

might find that Orexigen’s hedging about the preliminary

nature of the results was enough to satisfy that duty. For

pleading purposes, though, the Complaint sufficiently alleges

that Orexigen’s failure to disclose the unreliability of the

25 percent interim results in the March 2015 Form-8K was

misleading. The district court erroneously dismissed this

claim.

42 KHOJA V. OREXIGEN THERAPEUTICS

The district court also dismissed Khoja’s theory that the

March 2015 Form 8-K misled investors because Orexigen did

not disclose that it had violated the DAP by releasing the

25 percent interim results. Although Orexigen touted the

interim results and therefore created a duty to disclose the

corresponding adverse information, Orexigen never touted

having permission to publish the results. Even though

violating the DAP could have negative consequences for

Orexigen (and its investors), Orexigen did not have a duty to

share that information. The Complaint does not identify

earlier statements by Orexigen that suggest a duty either. The

district court properly dismissed this theory. See Matrixx

Initiatives, 563 U.S. at 44–45.

However, the district court dismissed this theory with

prejudice. Khoja has not yet amended the Complaint.11

Given our policy favoring leave to amend, Khoja should have

an opportunity to amend this claim on remand. Fed. R. Civ.

P. 15; see also Owens v. Kaiser Found. Health Plan, Inc.,

244 F.3d 708, 712 (9th Cir. 2001) (observing this circuit

views this rule with “extreme liberality” (internal quotation

marks omitted)).

11

We do not hold against Khoja the fact that he declined to amend the

Complaint to correct claims that were dismissed without prejudice, and

instead sought a final order expeditiously to appeal all claims. See

Edwards v. Marin Park, Inc., 356 F.3d 1058, 1064 (9th Cir. 2004)

(observing that plaintiff “made a reasonable choice to expedite the rest of

the case” by seeking a final order and declining to amend the complaint

given the district court’s order “dismissing most of her claims” and

granting leave to amend only one).

KHOJA V. OREXIGEN THERAPEUTICS 43

2. March 2015 Press Release.

The Complaint alleges that Orexigen’s March 3, 2015,

press release was misleading. The press release stated, in

part, “[t]his morning the USPTO published the patent and

supporting documentation.”

Khoja claims that Orexigen failed to reveal the extent of

its role in publishing the 2014 Patent Application. Khoja

appears to have two theories. First, Orexigen failed to reveal

that it supplied the 25 percent interim results in its 2014

Patent Application, thus violating the DAP. Khoja claims the

investors had a right to know about that violation because of

its possible negative consequences. Orexigen then submitted

the 2014 Patent Application confidentially to hide the DAP

violation from investors. Second, Orexigen failed to share

that Orexigen requested that the USPTO publish the 2014

Patent Application, thus facilitating another leak of the

interim results, and another violation of the DAP.

The district court rejected these theories. The district

court was, in part, correct to do so, but it did so for incorrect

reasons.

First, the district court held that Orexigen was required to

submit the 25 percent interim results to the USPTO because

of a patent theory called “enablement.”12 Without going into

12

“Enablement is the requirement that a patent teach a person skilled

in the art (the field of the invention) how to make and use the invention

without undue experimentation. In other words, a patent must describe the

invention clearly enough so that a skilled person in the field can replicate

the invention without having to perform experiments to determine how to

make and use the invention.” Audrey A. Millemann, Enablement Is Key

– Especially in Biotech Paatents, IPL. Blog (Apr. 17, 2015),

44 KHOJA V. OREXIGEN THERAPEUTICS

the nuances of patent law, “enablement” is sometimes a fact-

driven inquiry. See Dow Chems. Co. v. Nova Chems. Corp.

(Can.), 809 F.3d 1223, 1225 (Fed. Cir. 2015). On appeal,

Khoja argues that a factual question existed below as to

whether Orexigen needed to disclose data to demonstrate

enablement. In fact, the Complaint never mentioned

enablement, and neither did Orexigen. Khoja never had the

opportunity to assert that factual dispute below. Because the

district court imposed this fact-driven defense on Khoja,

Khoja should have had the opportunity to develop the record

and litigate the issue. See Fed. R. Civ. P. 12(b) (requiring

that parties have “reasonable opportunity to present all

material made pertinent to [the converted motion for

summary judgment]”); Bonilla v. Oakland Scavenger Co.,

697 F.2d 1297, 1301 (9th Cir. 1982) (recognizing that it is

reversible error when a court considers material outside the

pleading on a Rule 12(b)(6) motion and yet fails to convert it

into a motion for summary judgment); In re Tracht Gut,

836 F.3d at 1150 (“At the motion to dismiss phase, the trial

court must accept as true all facts alleged in the complaint

and draw all reasonable inferences in favor of the plaintiff.”).

As for seeking the publication of the 2014 Patent

Application, the district court held that Orexigen was

obligated to do so because it filed the WIPO Application for

Contrave on December 14, 2015. Once Orexigen filed the

WIPO Application, Orexigen was required to notify the

USPTO within forty-five days or the 2014 Patent Application

would be deemed abandoned under 35 U.S.C.

§ 122(b)(2)(B)(iii).

http://www.theiplawblog.com/2015/04/articles/patent-law/enablement-is-

key-especially-in-biotechpatents/.

KHOJA V. OREXIGEN THERAPEUTICS 45

Although possibly correct, this reasoning misses the point

of the claim. Even if Orexigen was “obligated” to publish the

2014 Patent Application, the issue is whether Orexigen

(1) misrepresented its role in the publication process, (2) had

a duty to disclose the fact that Orexigen first requested that

the USPTO keep the 2014 Patent Application confidential,

and (3) had a duty to disclose that Orexigen later rescinded

that request, thus disclosing the positive, but unreliable

25 percent interim results.

As to the first issue, per the Complaint, the March 2015

press release did not directly state that the USPTO

“independently published” the patent. Instead, the press

release stated simply that, “the USPTO published the patent

and supporting documentation.” This statement is not false.

Khoja does not contend, nor could he reasonably contend,

that USPTO did not publish the patent.

Orexigen also did not have a duty, absent a statement

suggesting otherwise, to tell its investors that it originally

requested that the 2014 Patent Application remain

confidential. Khoja does not allege that Orexigen ever

suggested anything about the 2014 Patent Application’s

confidentiality.

Nonetheless, Orexigen’s statement that “the USPTO

published the patent,” gives rise to a duty to elaborate. By

itself, this statement only indicates who published the patent

and nothing more. On the other hand, this statement

plausibly gives the impression that the USPTO published the

patent on its own. Ordinarily, this may be a fair impression

to give. As alleged here, though, the patent had remained

confidential until Orexigen sought its publication. And it was

confidential because Orexigen asked the USPTO to make it

46 KHOJA V. OREXIGEN THERAPEUTICS

confidential. Saying only that “the USPTO published the

patent” may have mislead Orexigen’s investors about why the

USPTO published the patent, and why it was not published

sooner.

This omission was arguably material. If the investors

knew that Orexigen had something to do with publishing the

2014 Patent Application, the investors would have known

that Orexigen had a direct role in revealing the 25 percent

interim results, thus violating the FDA’s rules again and

risking the integrity of the Light Study. Because such

violations might – and allegedly did – impact the financial

health of Orexigen, that information was likely material to

reasonable investors. Ultimately, a jury should assess

materiality as a question of fact. Fecht v. Price Co., 70 F.3d

1078, 1080–81 (9th Cir. 1995).

At a minimum, accepting the allegations in the Complaint

as true, and reading them in the light most favorable to Khoja,

we conclude that the Complaint alleges a plausible claim that

Orexigen materially misled its investors in the March 2015

press release. Specifically, by failing to inform investors

about Orexigen’s role in publishing the 2014 Patent

Application, Orexigen arguably gave the false impression that

it played no role in revealing the 25 percent interim results.

Therefore, because the district court relied, at least in part,

on a fact-driven defense not raised by either party to dismiss

Count I, we reverse. To the extent the district court dismissed

Count I because the March 2015 Press Release did not

affirmatively misrepresent that the USPTO “independently

published” the 2014 Patent Application, we would ordinarily

affirm. However, the district court dismissed this claim with

prejudice. Khoja should have an opportunity to amend this

KHOJA V. OREXIGEN THERAPEUTICS 47

claim. Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d

1048, 1052 (9th Cir. 2003) (observing that the liberal

application rule of Federal Rule of Civil Procedure 15 applies

to claims subject to the PSLRA, where plaintiffs must plead

“with an unprecedented degree of specificity” and “drafting

of a cognizable complaint can be a matter of trial and error”).

Accordingly, we also reverse the district court’s dismissal of

Count I on that basis.

3. May 2015 Form 8-K.

Khoja alleges that Orexigen’s May 2015 Form 8-K

included material misstatements, and omitted material

information. The May 2015 Form 8-K describes the clinical

trial program for Contrave and states, in pertinent part, “The

clinical trial program also includes a . . . trial known as the

Light Study.”

Khoja appears to have three theories about why this

statement is actionable. He alleges that the statement

(1) misrepresented “that the Light Study was ongoing,”

(2) omitted that the ESC terminated the Light Study weeks

earlier on March 26, 2015, and (3) omitted the 50 percent

interim results, which “demonstrated that [Orexigen’s] prior

representations about Contrave’s purported [heart] benefit

were false.”

As to the first and second theories, the district court found

that the ESC did not terminate the Light Study on March 26,

2015. Therefore, Orexigen could not have misrepresented or

omitted something that had not yet occurred. In reaching this

conclusion, the district court agreed with Orexigen that “the

ESC’s vote [on March 26, 2015] was merely a

recommendation.” The district court relied on the

48 KHOJA V. OREXIGEN THERAPEUTICS

Complaint’s allegation that “[t]he executive committee voted

unanimously to recommend that the trial be stopped.”

However, other portions of the Complaint indicate that

ESC’s vote was not merely a recommendation. The

Complaint quotes from a May 12, 2015 press release, which

stated “the 9,000-patient Light Trial – designed to study the

cardiovascular safety of . . . Contrave . . . – has been halted

by the trial’s [ESC].” (Emphasis in Comp.) The phrase “has

been halted by the trial’s [ESC]” clearly implies that (1) the

ESC has the authority to halt (or terminate) a study and

(2) the ESC already did precisely that with the Light Study.

Similarly, the Complaint alleges that, on March 26, 2015, the

ESC informed Orexigen that “the ESC had voted

unanimously to halt the Light Study as a result of

[Orexigen’s] improper March 3, 2015 disclosure breach.”

The Complaint’s allegations are based, in part, on discussions

that Khoja’s counsel had with Dr. Nissen. As the chair of the

ESC, Dr. Nissen likely would have had personal knowledge

of the termination decision, and, more importantly, when it

occurred.

At a minimum, then, these allegations support a plausible

inference that the ESC terminated the Light Study before

May 2015. By then stating that Contrave’s “clinical trial

program also includes . . . the Light Study,” Orexigen gave

the false impression that the Light Study was still underway.

The district court appears to have concluded that, even if

the Light Study was terminated on March 26, 2015,

“Orexigen had already reported to the press that it was

recommending ‘that [the Light Study] be stopped’” by the

time Orexigen filed the May 2015 Form 8-K. The district

court relied on a report that it incorporated by reference: the

KHOJA V. OREXIGEN THERAPEUTICS 49

April 6, 2015, Leerink Partner report. See, supra Part I.B.1.f.

The district court properly incorporated that report, but the

district court incorrectly inferred that the report amounted to

a “prior disclosure that [Orexigen] was recommending

termination of the Light Study.”

The report was published on April 6, 2015. This was only

days after “the ESC had voted unanimously to halt the Light

Study as a result of [Orexigen’s] improper March 3, 2015

disclosure breach.” Per the report, Orexigen “ha[d]

recommended” that the Light Study “be stopped” because it

“is not a post-marketing requirement and has less utility over

time[.]’” But, according to the Complaint, the Light Study

ended because the ESC unanimously voted to terminate it. In

other works, the Leerink report characterizes the Light Study

termination as a practical, voluntary decision by Orexigen,

but the Complaint portrays the termination as punishment by

the ESC.

Thus, contrary to what the district court found, it was far

from obvious that the April 6 report amounted to a prior,

accurate disclosure about the fate of the Light Study. See

Fecht, 70 F.3d at 1081 (“Only if the adequacy of the

disclosure or the materiality of the statement is so obvious

that reasonable minds could not differ are these issues

appropriately resolved as a matter of law.” (internal

quotation marks and alterations omitted)). Therefore, the

report could not plausibly rescue Orexigen from its alleged

misrepresentations in the May 2015 Form 8-K.

The district court’s reasoning here again demonstrates the

danger in incorporating documents en masse into complaints.

Once documents are incorporated into a complaint, a district

court faces competing, often inconsistent versions of the

50 KHOJA V. OREXIGEN THERAPEUTICS

facts. Although plaintiffs are ordinarily afforded the benefit

of every favorable inference, the incorporation-by-reference

doctrine can allow defendants to exploit that benefit for

themselves. Here, the district court accepted the statements

in the Leerink report as true, and concluded that they

absolved any earlier failure by Orexigen to make a more

thorough disclosure about the Light Study’s termination.

Although incorporation by reference generally permits courts

to accept the truth of matters asserted in incorporated

documents, we reiterate that it is improper to do so only to

resolve factual disputes against the plaintiff’s well-pled

allegations in the complaint. The incorporation-by-reference

doctrine does not override the fundamental rule that courts

must interpret the allegations and factual disputes in favor of

the plaintiff at the pleading stage. See Sgro, 532 F.3d at 942,

n.1 (finding it proper to consider a disability benefits plan

referenced in complaint, but declining to accept the truth of

the plan’s contents where the parties disputed whether

defendant actually implemented the plan according to its

terms); see also In re ECOtality, Inc. Sec. Litig., No. 13-

03791, 2014 WL 4634280, at *3 (N.D. Cal. Sept. 16, 2014)

(declining to assume the truth of incorporated documents

where it “would mean assuming the truth of all of

Defendants’ allegedly false or misleading statements,” which

would make it “impossible ever to successfully plead a fraud

claim”). For this additional reason, the district court erred in

dismissing Khoja’s claim that Orexigen misrepresented the

status of the Light Study in its May 2015 Form 8-K.

The district court also concluded that the May 2015 Form

8-K did not misrepresent or omit the 50 percent interim

results. Khoja does not clearly allege that the May 2015

KHOJA V. OREXIGEN THERAPEUTICS 51

Form 8-K misrepresented the 50 percent interim results,13 but

even if he intended to do so, the district court was correct.

The May 2015 Form 8-K did not mention the 50 percent

interim results, so it could not have made a misstatement

about them. Therefore, to the extent Count I is based on

alleged misstatements about the 50 percent interim results in

the May 2015 Form 8-K, the district court properly dismissed

that claim.

As for the omission of the 50 percent interim results, the

district court was incorrect. The district court found that

Orexigen did not materially omit those results because

Orexigen had no duty to disclose them. The district court

reasoned that Orexigen’s earlier statements about the

25 percent interim results remained accurate because those

results “still showed ‘a positive effect of Contrave on CV

outcomes.’”

This conclusion, however, reads the May 2015 Form 8-K

– and Khoja’s claim – too narrowly. Although the 25 percent

interim results were still technically accurate, the issue is

whether, having learned new information that diminished the

weight of those results, Orexigen was obligated to share that

information.

We conclude that Orexigen was so obligated. The

25 percent interim results were a boon to Orexigen. Upon

their release, stocks traded in unusually high volumes and at

13

The confusion likely arose from Khoja’s imprecise pleading of this

claim. He listed numerous facts that were “materially false and

misleading and/or [Orexigen] failed to disclose.” The “and/or” obscured

whether each following statement was supposedly omitted or

misrepresented.

52 KHOJA V. OREXIGEN THERAPEUTICS

higher prices. Analysts hailed Contrave as a potential miracle

drug. The Complaint sufficiently pled that, even if investors

understood that more results were necessary to confirm

Contrave’s potential heart benefit, the 25 percent interim

results clearly suggested a promising venture. Naturally, if

subsequent data indicated those earlier interim results were

not so promising after all, their value diminished. Because

the 50 percent interim results did precisely that, Orexigen had

a duty to disclose them. See Berson, 527 F.3d at 987.

Therefore, we conclude that in relying on the alleged

omissions from the May 2015 Form 8-K, Count I sufficiently

pled a claim under SEC Rule 10b-5.

4. May 2015 Form 10-Q.

The Complaint asserts that, on the same day as the May

2015 Form 8-K, Orexigen also filed a misleading Form 10-Q.

Similar to the May 2015 Form 8-K, the Form 10-Q allegedly

failed to disclose the termination of the Light Study and the

50 percent interim results.

In dismissing this claim, the district court reasoned that

Khoja’s argument on this claim was “largely similar” to

Khoja’s argument for the May 2015 Form 8-K claim,

described above. Accordingly, the district court adopted the

same reasoning for dismissing both the May 2015 Form 8-K

and 10-Q claims. However, these two claims are different.

In fact, per the Complaint, the May 2015 Form 10-Q was

even more misleading than the Form 8-K.

In the May 2015 Form 10-Q, Orexigen represented that its

“share price might be impacted by announcements regarding

our clinical trials, including [ ] the Light Study[.]” (Emphasis

KHOJA V. OREXIGEN THERAPEUTICS 53

in Comp.) The Form 10-Q further indicated the possibility of

“new data from the continuing Light Study[.]” (Emphasis in

Comp.)

As discussed above, the Complaint sufficiently pled that

Orexigen knew the Light Study was terminated by May 2015,

when Orexigen submitted the instant Form 10-Q. If so,

suggesting that the Light Study was “continuing” was an

obvious, affirmative misrepresentation. Retail Wholesale,

845 F.3d at 1275–76.

Orexigen then went on to say that the “new data from the

continuing Light Study . . . may be inconsistent with the

conclusion that the interim analysis was successful.”

(Emphasis in Comp.) Yet, Orexigen allegedly knew already

that the “new data” revealed exactly that. The Complaint

therefore sufficiently pleads that Orexigen materially omitted

the 50 percent interim results from the May 2015 Form 10-Q.

Accordingly, we reverse the district court’s dismissal of

Count I to the extent it is premised on alleged omissions from

and misrepresentations in the May 2015 Form 10-Q.

5. May 2015 Earnings Conference Call.

The Complaint alleges that during the May 8, 2015,

conference call, Klassen and Narachi (1) misrepresented the

status of the Light Study and (2) omitted the 50 percent

interim results. Again, the district court concluded that “the

parties’ arguments . . . are largely repetitive of” those for the

May 2015 Forms 8-K and 10-Q and, therefore, found no

omissions or misstatements. And again, although these

claims deal with similar alleged misconduct, they are distinct.

54 KHOJA V. OREXIGEN THERAPEUTICS

Posed with specific questions about the fate of the Light

Study, Narachi said during the call that “if there was a

decision to terminate the trial and move on and focus

resources on the new [trial], that would be a disclosure that

we would make.”14 (Emphasis in Comp.) By expressing the

decision as a hypothetical, Narachi suggested that decision

had not yet occurred. As alleged in the Complaint, however,

Narachi knew the Light Study was already terminated.

Even accepting Orexigen’s position that the ESC had only

recommended terminating the Light Study, Orexigen was still

obligated to share that development. Narachi and Klassen

repeatedly discussed the status of the Light Study and the

possible “decision to terminate” it. ESC’s recommendation

to terminate the Light Study would have pertained directly to

the status of the Light Study. Without that information,

termination seemed only a remote possibility. With that

information, a reasonable investor would understand that

termination may be imminent. The Complaint sufficiently

alleged that Narachi and Klassen either materially

misrepresented or omitted that information.

Narachi’s and Klassen’s statements about the 50 percent

interim results are a closer question. Klassen stated that “I

don’t think we’re going to go into the details [about the 50

percent interim results], because again that’s a look that DNC

does.” Klassen was apparently trying to control what he

shared about the 50 percent interim results, and thereby avoid

14

Narachi said something similar twice more: “So, if the decision is

made to terminate the trial early and focus resources on the next [trial],

which is what we have been advocating, then I think results would come

out sooner . . . , if you decide to stop the study now there will be additional

events, so these details are being discussed . . . .” (Emphasis in Comp.)

KHOJA V. OREXIGEN THERAPEUTICS 55

a duty to share more. But he then went on to say, that “it’s

really on the 25 percent analysis that was used for regulatory

purposes. So if any of that status changes, then we would of

course announce that.” One could reasonably interpret

Klassen’s statement to mean that if the value of the

25 percent interim analysis changed in light of new data,

Orexigen would announce it. Yet Klassen allegedly knew the

50 percent interim results indicated that Contrave did not

have a heart benefit. Regardless of what Klassen meant, the

Complaint sufficiently alleged he had a duty to share the

50 percent interim results. As discussed above, by touting

and publishing the “surprisingly” positive 25 percent interim

results, Orexigen created its own obligation to report that

those results did not pan out after all.

Admittedly, Orexigen put itself into a corner; either fulfill

its duty to disclose by violating the DAP again, or risk

misleading the investors. Orexigen created this dilemma by

violating the DAP in the first place. Orexigen cannot ignore

the DAP to its benefit, then use it to conceal its own

misconduct. Orexigen cites no law to suggest that its

obligations under the DAP overrode its obligations under

§10 of the Securities Exchange Act and SEC Rule 10b-5.

See, e.g., X Corp. v. Doe, 805 F. Supp. 1298, 1310 n.24 (E.D.

Va. 1992), (finding that, “[t]o the extent” a confidentiality

agreement “prevented disclosure of evidence of fraud,” the

agreement “would be void as contrary to public policy”

where the party “cannot rely on any contract to conceal illegal

activity”), aff’d sub nom. Under Seal v. Under Seal, 17 F.3d

1435 (4th Cir. 1994).

For the reasons stated above, the Complaint sufficiently

alleged that Narachi misrepresented the status of the Light

Study and that Klassen omitted material information about

56 KHOJA V. OREXIGEN THERAPEUTICS

the 50 percent interim results. We reverse the district court’s

decision to the contrary.

C. Count II - Scheme Liability (SEC Rules 10b-5(a)

and (c))15

The Complaint alleges that Orexigen and the Executive

Defendants violated § 10(b) of the Securities Exchange Act,

and SEC Rules 10b-5(a) and (c). “Under Rule 10b-5(a) or

(c), a defendant who uses a ‘device, scheme, or artifice to

defraud,’ . . . may be liable for securities fraud.” WPP Lux.

Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1057

(9th Cir. 2011) (quoting 17 C.F.R. § 240, SEC Rules 10b-5(a)

and (c)). The scheme must “encompass[] conduct beyond

those misrepresentations or omissions.” Id.

Count II alleges Orexigen and its executives

“disseminated or approved the false statements specified” in

the Complaint, and engaged in a fraudulent scheme “to

conceal and then publish the interim Light Study data via the

2014 Patent Application.” Count II incorporates all of the

allegations in the Complaint, but does not specify what steps,

if any, Orexigen or the Executive Defendants took in

furtherance of the alleged scheme. The Complaint concludes

that their “misconduct is distinct from the materially

misleading statements pertaining to Count I,” but does not

explain how. Arguably, a scheme “to conceal and then

publish the interim Light Study data via the 2014 Patent

Application” is distinct from the fraudulent

misrepresentations therein. However, the Complaint does not

15

The district court dismissed Count II with prejudice against Hagan.

Khoja does not challenge that ruling on appeal.

KHOJA V. OREXIGEN THERAPEUTICS 57

articulate how such a scheme, by itself, is actionable under

SEC Rules 10b-5(a) and (c).

The district court dismissed Count II without prejudice

because it could not discern the substance of the claim. We

affirm, but as above, instruct that Khoja should be granted

leave to amend to cure that deficiency.

D. Count III - Controlling Individuals’ Liability

(§ 20(a) of the Securities Exchange Act)

The Complaint alleges that the Executive Defendants

were “controlling” individuals under § 20(a) of the Securities

Exchange Act. They could allegedly “influence and control

and did influence and control . . . the decision-making of

[Orexigen], including the content and dissemination of the”

misleading statements alleged in the Complaint. Therefore,

they might be liable under § 20(a).

The district court correctly noted that “‘Section 20(a)

claims may be dismissed summarily . . . if a plaintiff fails to

adequately plead a primary violation of section 10(b).’”

(quoting Zucco Partners, LLC v. Digimarc Corp., 552 F.3d

981, 990 (9th Cir. 2009), as amended (Feb. 10, 2009).

Because the district court found that Khoja’s claims under

§ 10(b) failed, the district court dismissed the claim under

§ 20(a). However, as set forth above, Khoja has sufficiently

pled a number of primary violations of § 10(b). Further, he

has been granted leave to amend as to others. On remand, the

district court should reconsider the sufficiency of Count III in

that light.

58 KHOJA V. OREXIGEN THERAPEUTICS

CONCLUSION

Accordingly, we affirm, in part, and reverse, in part, the

district court’s dismissal of Khoja’s Complaint, and

REMAND with instructions regarding the judicial notice and

incorporation by reference of Orexigen’s exhibits to its

Motion to Dismiss. Specifically, we REVERSE and

REMAND for clarification on Exhibit D consistent with this

opinion, we REVERSE the district court’s judicial notice of

Exhibit E, and AFFIRM the judicial notice of Exhibit V. We

REVERSE the district court’s incorporation-by-reference of

Exhibits B, C, F, H, R, S, and U. We AFFIRM the

incorporation of Exhibits A, I, K, L, N, O, P, and T.

As to Count I, we AFFIRM, in part, and REVERSE, in

part, the district court’s dismissal. Where AFFIRMING, we

GRANT LEAVE TO AMEND the Complaint.

As to Count II, we AFFIRM the district court’s dismissal,

but, again, with leave to amend the Complaint.

As to Count III, we REVERSE so the district court may

reconsider those claims in light of our reversal of the district

court’s dismissal of claims in Count I and in light of any

amendments to the Complaint.

Each party shall bear his own costs on appeal.

AFFIRMED in part, REVERSED in part, and

REMANDED.

The foregoing disposition of this appeal pertains only to

Plaintiff’s claims against the Executive Defendants , Narachi,

Hagan, and Klassen.

KHOJA V. OREXIGEN THERAPEUTICS 59

With respect Defendant-Appellee Orexigen, appellate

proceedings remain stayed pending resolution of the

bankruptcy proceedings. See footnote 1, supra. The Clerk

shall administratively close this docket with respect to

Orexigen pending further order of the Court, but the mandate

shall not issue with respect to Orexigen. Within 28 days after

resolution of the bankruptcy proceeding or the lifting of the

automatic bankruptcy stay, which occurs earlier, Orexigen

shall file a status report with the Clerk.