Skibbe v. Curaleaf Holdings, Inc. et al
MEMORANDUM DECISION AND ORDER dated 2/15/21 that defendants' 42 Motion to Dismiss is Granted. ( Ordered by Judge Brian M. Cogan on 2/15/2021 ) *Forwarded for judgment. (Guzzi, Roseann)
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
: MEMORANDUM DECISION
IN RE CURALEAF HOLDINGS, INC.
: AND ORDER
: 19-cv-4486 (BMC)
COGAN, District Judge.
This securities action is before me on defendants’ motion to dismiss. Plaintiffs allege
that defendants misled investors about the legality of their cannabidiol (“CBD”) products,
causing loss when the truth was revealed. Because plaintiffs’ claims are premised on the
nondisclosure of information that was actually disclosed and further amendment to the complaint
would be futile, the motion is granted and the case dismissed.
Regulation of cannabis products
CBD is a chemical compound derived from plants in the cannabscae family. Both
marijuana and hemp contain CBD and can be used to make CBD products, such as oils.
Marijuana has a higher delta-9-tetrahydrocannabinol (“THC”) content (up to 30%) and can come
from both the cannabis indicia and cannabis sativa families of plants; hemp is derived only from
the latter family and has a lower THC content (less than 0.3%).
CBD has been incorporated into a variety of products – beverages, lotions, supplements,
vape pens, bath bombs, pet treats, and more. Retailers claim that it provides various health
benefits, ranging from treatment of pain and anxiety to cancer and Alzheimer’s disease, but the
Unless otherwise noted, the below facts are taken from plaintiffs’ Amended Complaint and assumed to be true for
purposes of this motion. See Kolbasyuk v. Capital Mgmt. Servs., LP, 918 F.3d 236, 239 (2d Cir. 2019).
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FDA has warned that there is little to no scientific evidence supporting such claims. Further, the
FDA has warned that CBD has the potential to cause liver injury, male reproductive toxicity, and
changes in alertness and mood, among other harm and side effects.
There is a conflict between state and federal regulation of cannabis and cannabis-based
products. Marijuana is listed in Schedule I of the Controlled Substances Act (“CSA”), meaning
it is categorized as a drug with no currently accepted medical use and a high potential for abuse.
But 33 states and Washington D.C. have legalized the use of medical marijuana, 11 of those
states and Washington D.C. have legalized recreational marijuana, and 17 states have legalized
the use and possession of CBD, although “legalization” means different things in different states.
Most states also regulate hemp.
On August 29, 2013, U.S. Attorney General James M. Cole issued a memorandum
advising the federal government to exercise prosecutorial discretion in enforcing federal
marijuana laws. This memorandum was rescinded on January 4, 2018 by the issuance of a new
memorandum from U.S. Attorney General Jeff Sessions, who similarly instructed prosecutors to
weigh relevant considerations in deciding whether to prosecute marijuana offenses. On
December 20, 2018, the Agriculture Improvement Act of 2018 (“Farm Act”) was enacted. The
Farm Act amended the CSA by removing hemp from the definition of marijuana and thus from
Schedule I of the CSA, allowing hemp to be grown under federal law in some circumstances.
That same day, the FDA issued a statement confirming that it retained the authority to
regulate cannabis or cannabis-derived compounds, including CBD products. The FDA explained
that such compounds are “subject to the same authorities and requirements as FDA-regulated
products containing any other substance.” The FDA further explained that it:
continue[s] to be concerned at the number of drug claims being made about
products not approved by the FDA that claim to contain CBD . . . . [T]he FDA
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requires a cannabis product (hemp-derived or otherwise) that is marketed with a
claim of therapeutic benefit, or with any other disease claim, to be approved by
the FDA for its intended use before it may be introduced into interstate
commerce. . . . Cannabis and cannabis-derived products claiming in their
marketing and promotional materials that they’re intended for use in the
diagnosis, cure, mitigation, treatment, or prevention of diseases . . . are considered
new drugs or new animal drugs and must go through the FDA drug approval
process for human or animal use before they are marketed in the U.S.
The FDA’s website, referred to in the statement, states its position that “[s]elling unapproved
[CBD] products with unsubstantiated therapeutic claims is not only a violation of the law, but
also can put patients at risk, as these products have not been proven to be safe or effective.” It
also notes that the FDA has approved only one drug containing CBD (Epidiolex, for the
treatment of seizures). The website further explains that CBD products cannot be sold as dietary
supplements and that it is illegal to sell a food (including any animal food) to which CBD has
Defendants’ products and disclosures
Curaleaf Holdings, Inc. (“Curaleaf Holdings” or the “Company”) was created in a reverse
takeover between the Canadian company Lead Ventures, Inc. (renamed Curaleaf Holdings, Inc.)
and the Delaware corporation PalliaTech, Inc. (renamed Curaleaf, Inc. (“Curaleaf”)). This action
is brought on behalf of purchasers or acquirers of Curaleaf Holdings securities on the OTCQX, a
United States market for companies already listed on a qualified international stock exchange.
Curaleaf Holdings is listed on the Canadian Stock Exchange (“CSE”).
On October 26, 2018, the same day that the Company announced the completion of the
business combination, it filed its Listing Statement with the System for Electronic Document
Analysis and Retrieval (“SEDAR”). SEDAR is the Canadian equivalent of the Electronic Data
Gathering, Analysis, and Retrieval system (“EDGAR”) in the United States – it is the filing
system designed to facilitate the electronic filing of securities information and allow for the
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public dissemination of Canadian securities information collected in the securities filing
process. 2 The Listing Statement is a document that “must be used for all initial applications for
Listing and for Issuers resulting from a fundamental change” and “contains comprehensive
disclosure about the issuer.” 3
Disclosures and public statements
The October 26, 2018 Listing Statement – filed with SEDAR that day, with the CSE on
November 2, 2018, and with the OTCQX on January 15, 2019 – included the following
discussion about the cannabis industry:
Curaleaf Holdings, Inc. will derive a substantial portion of its revenues from the
cannabis industry in certain states of the United States, which industry is illegal
under United States federal law. Curaleaf Holdings, Inc. will be directly involved
(through its licensed subsidiaries) in the cannabis industry in the United States
where local state laws permit such activities. . . .
The United States federal government regulates drugs through the Controlled
Substances Act (21 U.S.C. § 811), which places controlled substances, including
cannabis, in a schedule. Cannabis is classified as a Schedule I drug. Under
United States federal law, a Schedule I drug or substance has a high potential for
abuse, no accepted medical use in the United States, and a lack of accepted safety
for the use of the drug under medical supervision. The United States Food and
Drug Administration has not approved marijuana as a safe and effective drug for
In the United States marijuana is largely regulated at the state level. State laws
regulating cannabis are in direct conflict with the federal Controlled Substances
Act, which makes cannabis use and possession federally illegal. Although certain
states authorize medical or adult-use cannabis production and distribution by
licensed or registered entities, under U.S. federal law, the possession, use,
cultivation, and transfer of cannabis and any related drug paraphernalia is illegal
and any such acts are criminal acts under federal law. The Supremacy Clause of
the United States Constitution establishes that the United States Constitution and
federal laws made pursuant to it are paramount and in case of conflict between
federal and state law, the federal law shall apply. . . .
Available at: www.sedar.com.
Form 2A - Listing Statement, CSE (last visited Feb. 15, 2021), https://thecse.com/en/resources/form-2a-listingstatement#:~:text=The%20Listing%20Statement%20must%20be,comprehensive%20disclosure
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There is no guarantee that state laws legalizing and regulating the sale and use of
cannabis will not be repealed or overturned, or that local governmental authorities
will not limit the applicability of state laws within their respective jurisdictions.
Unless and until the United States Congress amends the Controlled Substances
Act with respect to medical and/or adult-use cannabis (and as to the timing or
scope of any such potential amendments there can be no assurance), there is a risk
that federal authorities may enforce current federal law. If the federal government
begins to enforce federal laws relating to cannabis in states where the sale and use
of cannabis is currently legal, or if existing applicable state laws are repealed or
curtailed, Curaleaf Holdings, Inc.’s business, results of operations, financial
condition and prospects would be materially adversely affected.
The Listing Statement further explained that “[v]iolations of any federal laws and
regulations could result in significant fines, penalties, administrative sanctions, convictions or
settlements arising from civil proceedings conducted by either the federal government or private
citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of
business activities or divestiture.” This could have a “material adverse effect” on the Company,
including to its “reputation and ability to conduct business,” its licenses, “the listing of its
securities on the CSE, its financial position, operating results, profitability or liquidity or the
market price of its publicly traded shares.”
The Listing Statement provided additional disclosures specific to the Company’s CBD
products. The Company’s products “are not approved by the [FDA] as ‘drugs’ or for the
diagnosis, cure, mitigation, treatment, or prevention of any disease. Accordingly, the FDA may
regard any promotion of the cannabis-based products as the promotion of an unapproved drug in
violation of the [FDCA].” The Listing Statement proceeded to explain that the FDA has issued
letters to a number of companies selling CBD products in recent years “warning them that the
marketing of their products violates the FDCA.” Any FDA enforcement against the company
“could result in a number of negative consequences, including fines, disgorgement of profits,
recalls or seizures of products, or a partial or total suspension of the [Company’s] production or
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distribution of its products,” and “[a]ny such event could have a material adverse effect on the
Resulting Issuer’s business, prospects, financial condition, and operating results.”
On October 29, 2018, Curaleaf Holdings began trading on the CSE. A press release from
that date included comments from defendant Lusardi that the Company was committed to
aggressive organic growth, that the Curaleaf brand was “a premium mainstream cannabis brand”
and the products met the “highest standards for safety, effectiveness, [and] quality.”
On November 21, 2018 – the proposed beginning of the class period – Curaleaf Holdings
issued a press release announcing that the Company had launched “a line of premium hempbased CBD products,” described as “natural,” having undergone “strict laboratory testing,”
meeting “the strictest quality standards” and “supporting overall wellness.” The CBD products
were advertised and sold on the Company’s website, which stated that the products could treat
chronic pain, anxiety, depression, PTSD, Parkinson’s disease, and Alzheimer’s disease, reduce
opioid-related withdrawal, counteract the growth and spread of cancer, and deter heart disease.
The first press release did not discuss FDA approval, nor did another issued that same day, nor
did press releases issued on November 26 and 28 and December 4, 5, and 14 – all of which
contained similar language regarding “premium” products and “highest standard for safety,
effectiveness,” and quality.
On November 26, 2018, on a 2018 3Q earnings call, Lusardi discussed the new CBD
product line, explaining that “[t]he interstate regulations for CBD are vastly different than that of
our THC products, which will give us the opportunity to offer these products through
ecommerce, major third party retailers, pharmacy chains and grocery stores, in addition to vape
shops and dispensaries.” He discussed the Company’s plans for rapid growth and indicated that
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the 2018 Farm Act would be “a catalyst for more and more retailers and more and more outlets
to take on” CBD products.
On November 29, 2018, Curaleaf Holdings filed its Management Discussion and
Analysis (“MD&A”) for the nine months ending September 30, 2018 with the CSE
(subsequently filed with OTCQX on January 15, 2019). This document only addressed the risk
factors that applied to the Company’s business before the completion of the reverse takeover and
thus only addressed risks within the mining industry. 4 “For details of the risks and uncertainties
relating to the Company subsequent to completion of the Business Combination,” it referred
readers to “the Company’s Listing Statement, dated October 26, 2018, which is available under
the Company’s SEDAR profile.”
On December 20, 2018, the Farm Act was enacted. A slew of press releases followed,
each of which referred to the safety, effectiveness, and quality of the Company’s cannabis
products and none of which disclosed that the products were not FDA-approved.
On March 20, 2019, Curaleaf Holdings held a 2019 4Q call in which its Executive
Director discussed the Company’s successful rapid growth but also acknowledged the quickly
changing legal regime around cannabis in the United States, referring to an “evolving landscape
in the hemp industry,” legal “conflict between the federal government and the states,” and the
expectation that “numerous pieces of legislation will be introduced over the next quarter.”
Although not annexed to the Amended Complaint, I may take judicial notice of this document and the statements
contained within because it is referenced in the complaint and plainly relevant and there is no apparent dispute as to
its authenticity or accuracy. See Faulkner v. Beer, 463 F.3d 130, 134 (2d Cir. 2006). Further, “[i]n securities fraud
cases, . . . a court may consider ‘public disclosure documents required by law to be, and that have been, filed with
the SEC . . . ., and documents that plaintiffs either possessed or knew about and upon which they relied in bringing
the suit.’” In re Keyspan Corp. Sec. Litig., 383 F. Supp. 2d 358, 372 (E.D.N.Y. 2003) (quoting Rothman v. Gregor,
220 F.3d 81, 88 (2d Cir. 2000)). This reasoning extends to public disclosure documents filed with foreign
exchanges like the CSE.
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On April 23, 2019, Curaleaf Holdings filed its Management’s Discussion and Analysis of
Financial Condition and Results of Operations for the Year Ended December 31, 2018 with
SEDAR (subsequently filed with OTCQX on May 14, 2019 and CSE on December 13, 2019).
Its disclosures contained a section titled “Regulatory Action and Approvals from the Food and
Drug Administration” detailing the possible risks to the Company from the FDA regulatory
regime. It noted that the Company’s products are not approved by the FDA and “the FDA may
regard any promotion of the cannabis-based products as the promotion of an unapproved drug in
violation of the” FDCA. It further disclosed that the “FDA has asserted that CBD is not a lawful
ingredient in foods and beverages, supplements and pharmaceuticals (unless FDA-approved),
although FDA has generally refrained from taking enforcement action against those products.”
Explaining that the FDA has issued warning letters to companies selling CBD products, the
disclosure noted that any enforcement action could result in a variety of negative consequences.
“The Company sells and distributes certain products containing CBD. There is a risk that the
FDA or state or local Departments of Health will seek to stop the Company from selling its CBD
products or seek to have the claims made for those products revised.”
On May 10, 2019, the Company announced a new hemp-based CBD product for pets,
called “Bido,” claiming that the product supports a pet’s overall wellness, is natural and safe, and
has the potential to manage pain and anxiety. Many more press releases followed, each of which
referred to the safety, effectiveness, and quality of its cannabis-based products and none of which
disclosed that the products were not FDA-approved.
The warning letter
On July 22, 2019, the FDA issued a warning letter to Curaleaf regarding several CBD
products sold on its website. The FDA determined that these products are unapproved new drugs
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and misbranded drugs sold in violation of the FDCA. The letter detailed dozens of the
Company’s claims about the products demonstrating that they are intended for use in the
diagnosis, cure, mitigation, treatment, or prevention of disease and/or intended to affect the
structure or any function of the body and thus constituted unapproved new and misbranded
drugs. Further, to the extent that the Company intended to market its CBD products as dietary
supplements, the FDA explained that is impermissible because the “FDA has concluded . . . that
CBD products are excluded from the dietary supplement definition” under the Act, subject to an
exception that does not apply here. Further, the letter explained that the Bido products are
unapproved new animal drugs that are considered unsafe and adulterated under the FDCA, and
detailed dozens of the Company’s claims about these products demonstrating that they are
intended to mitigate, treat, or prevent disease in animals. Accordingly, the FDA concluded that
“introducing or delivering [any of the listed] products for introduction into interstate commerce
for such uses violates” the FDCA.
The letter instructed the Company to “take prompt action to correct the violations cited in
this letter” and noted that “[f]ailure to promptly correct these violations may result in legal action
without further notice, including, without limitation, seizure and injunction.”
The Company’s share price fell in the days following the issuance of the warning letter.
On July 26, 2019, Curaleaf Holdings issued a press release reporting that it had responded to the
FDA, removed the statements highlighted in the warning letter, and discontinued many of the
products referred to within it.
In deciding a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure, the Court must “constru[e] the complaint liberally, accept all factual allegations in
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the complaint as true, and draw all reasonable inferences in the plaintiff’s favor.” Elias v.
Rolling Stone LLC, 872 F.3d 97, 104 (2d Cir. 2017) (quoting Chase Grp. All. LLC v. City of
New York Dep’t of Fin., 620 F.3d 146, 150 (2d Cir. 2010)). To survive a motion to dismiss, a
complaint must plead “enough facts to state a claim to relief that is plausible on its face,” Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), and to “allow the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009).
Section 10(b) and Rule 10b-5 of the Exchange Act
“To state a cause of action under section 10(b) and Rule 10b-5, a plaintiff must plead that
the defendant made a false statement or omitted a material fact, with scienter, and that plaintiff’s
reliance on defendant’s action caused plaintiff injury.” San Leandro Emergency Med. Grp.
Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir. 1996). Under the Private
Securities Litigation Reform Act (“PSLRA”), the complaint must specify each statement alleged
to have been misleading and the reasons why the statement is misleading. 15 U.S.C. § 78u4(b)(1). “Specificity is also required by the Federal Rules of Civil Procedure, which provide that
‘[i]n all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with
particularity.’” In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 69 (2d Cir. 2001) (quoting Fed.
R. Civ. P. 9(b)).
Failure to disclose
Plaintiffs allege that throughout the class period, public statements made by the Company
were false and misleading because defendants failed to fully disclose the illegality of the sale of
CBD products under federal law due to the lack of FDA approval. Defendants contend that the
Company repeatedly disclosed that its cannabis-based products are not approved by the FDA as
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drugs, that the FDA may regard their promotion as the promotion of an unapproved drug in
violation of federal law, and the risk that the Company could be subject to an FDA enforcement
action with significant negative consequences. Defendants argue that these disclosures are fatal
to plaintiffs’ allegations that defendants deliberately withheld material information from
investors. I agree.
“Even at the pleading stage, dismissal is appropriate where the complaint is premised on
the nondisclosure of information that was actually disclosed.” In re Keyspan Corp. Sec. Litig.,
383 F. Supp. 2d 358, 377 (E.D.N.Y. 2003) (citing Debora v. WPP Group, P.L.C., No. 91 Civ.
1775, 1994 WL 177291, at *5 (S.D.N.Y. May 5, 1994) (“A complaint fails to state a § 10(b)
claim when the alleged omission has actually been disclosed.”); Sable v. Southmark/Envicon
Capital Corp., 819 F. Supp. 324, 333 (S.D.N.Y. 1993) (“The naked assertion of concealment of
material facts which is contradicted by published documents which expressly set forth the very
facts allegedly concealed is insufficient to constitute actionable fraud.”) (citation and quotation
Here, starting on its first day in existence, the Company publicly and repeatedly
acknowledged the very information that plaintiffs contend it concealed: its cannabis-based
products are not approved by the FDA and thus the FDA may regard their promotion as violating
established law. After describing the complex and contradictory nature of cannabis regulation in
the United States and the risks attendant to operating a company that derives its revenues from
the cannabis industry, the Listing Statement – the key disclosure document filed in connection
with the Company going public – expressly disclosed that:
the Company’s cannabis-based products “are not approved by the [FDA] as ‘drugs’”
the FDA may regard their promotion “as the promotion of an unapproved drug in
violation of the [FDCA]”
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the “FDA has issued letters to a number of companies selling products that contain
CBD . . . warning them that the marketing of their products violates the FDCA”
an “FDA enforcement action against the [Company] could result in a number of
negative consequences, including fines, disgorgement of profits, recalls or seizures of
products, or a partial or total suspension of the [Company’s] production or
distribution of its products,” and
“[a]ny such event could have a material adverse effect on the [Company’s] business,
prospects, financial condition, and operating results.”
What more need the Company disclose about this risk? The Listing Statement says it all.
Plaintiffs argue that the Listing Statement does not disclose that selling a CBD-based
product is “illegal” under federal law. But “illegal” and in “violation” of federal law mean the
same thing. The information that plaintiffs contend was not disclosed was clearly disclosed from
the Company’s inception. There is no requirement that a Company disclose its risk in any magic
words preferred by plaintiffs.
The Company disclosed the relevant information regularly and repeatedly. The Listing
Statement was filed in October 2018. In November 2018, the Company’s MD&A referred to the
Listing Statement for details of its risks and uncertainties. About a month before the Company
was listed on the OTCQX market (which occurred on February 19, 2019), the Company filed
these same disclosures with OTC Markets, including the Listing Statement and its specific
warnings about the Company’s cannabis-based products. On April 23, 2019, the Company filed
another MD&A with SEDAR containing the same warnings about CBD products from the
Listing Statement, an additional explanation about the effect of the new Farm Act on the hemp
industry, and underscoring that “[t]here is a risk that the FDA or state or local Departments of
Health will seek to stop the Company from selling its CBD products or seek to have the claims
made for those products revised.”
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Plaintiffs further argue that the Company only disclosed the risk that the FDA “could
potentially” take regulatory action against it for its unapproved cannabis-derived products,
ignoring “unambiguous” guidance from the FDA that CBD products were illegal. But “a
defendant that makes specific cautionary statements, such that no reasonable investor would
have been misled about the nature of the risk, is not liable when that risk materializes, contrary to
the defendant’s optimistic statements.” In re Delcath Sys., Inc. Sec. Litig., 36 F. Supp. 3d 320,
334 (S.D.N.Y. 2014). Here, the Company clearly disclosed the risk that the FDA could act
against it and that the FDA had done so to other companies selling similar products. Describing
this risk in terms of potentiality rather than certainty – when certainty of enforcement could not
be known anyway – does not violate securities law.
Perhaps recognizing the weakness of their claim that the Listing Statement did not
adequately disclose this information, plaintiffs focus primarily on various press releases that they
contend should also have noted that the Company’s products were “illegal” under federal law.
But not every public statement made by the Company need contain the full roster of disclosures
detailed in the Company’s securities filings. See In re Keyspan, 383 F. Supp. 2d at 378-79
(securities laws require disclosure only of information that is not otherwise in the public domain,
and there can be no liability for failure to disclose where securities filings adequately disclose the
relevant information); see also Emerson v. Mut. Fund Series Tr., 393 F. Supp. 3d 220, 247-49
(E.D.N.Y. 2019) (plaintiffs could not have lacked the necessary information to adequately
understand the Company’s risks where the risks were disclosed in securities filings); La Pietra v.
RREEF America, LLC., 738 F. Supp. 2d 432, 441-42 (S.D.N.Y. 2010) (no basis for plaintiffs to
claim that defendants failed to disclose riskiness when the prospectus described the business
strategy and possible negative consequence); In re Cross Media Mktg. Corp. Sec. Litig., 314 F.
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Supp. 2d 256, 268 (S.D.N.Y. 2004) (reasonable investor would have reviewed securities filings
and not been misled by forward-looking, optimistic statements in press releases). The issue can
be described in terms of materiality because additional disclosure would not alter the “total mix”
of information available to a reasonable investor, Halperin v. eBanker USA.com, Inc., 295 F.3d
352, 357 (2d Cir. 2002); or as the lack of a duty to disclose matters of public record, In re
Keyspan, 383 F. Supp. 2d at 378-79. Either way, the Company’s on-point public disclosures are
fatal to plaintiffs’ claims, and those claims cannot be revived merely because the disclosures
were not repeated in every press release issued by the Company.
Representations regarding health and wellness
In opposition to defendants’ motion to dismiss, plaintiffs appear to assert a new, slightly
different theory. In the Amended Complaint, plaintiff had described the suggestion that the
Company’s CBD products were “safe” or “effective” as misleading in terms of FDA approval;
plaintiffs alleged only that defendants “created the misleading impression that the CBD products
were safe, effective, had the health and medical benefits advertised and met medical/scientific
standards when, in fact, the products had not be approved by the federal agency responsible for
certifying the safety, effectiveness and quality of food and medical products sold in the U.S.”
Every allegedly misleading statement regarding safety, effectiveness, or quality featured in the
Amended Complaint’s Addendum similarly focused on the lack of FDA approval. However, in
their opposition brief, plaintiffs also argue that some of defendants’ statements were false and
misleading because “Curaleaf’s products did not have the health benefits touted” and were “not
beneficial for human and animal health.”
Defendants argue that the Court should not consider this claim but, if the Court is
inclined to do so, the claim should be dismissed because it cannot satisfy loss causation. I will
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consider the claim because it was set out in plaintiffs’ opposition motion and thus afforded
defendants the opportunity to address it on reply, and defendants identify no prejudice.
“Loss causation is ‘the causal link between the alleged misconduct and the economic
harm ultimately suffered by the plaintiff.’” Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172
(2d Cir. 2005) (quoting Emergent Cap. Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189,
197 (2d Cir. 2003)). To plead loss causation, plaintiffs must “allege facts sufficient to show that
the ‘relevant truth’ that had been concealed by [d]efendants’ purportedly false statements was
disclosed to the market, which in turn caused [the Company’s] stock price to decline.” Janbay v.
Canadian Solar, Inc., No. 10 CIV. 4430, 2012 WL 1080306, at *14 (S.D.N.Y. Mar. 30, 2012)
(citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342-43, 347 (2005)). “An alleged corrective
disclosure that does not reveal the falsity of [d]efendants’ challenged public statements cannot
establish loss causation, a pleading failure that ‘is fatal under Second Circuit precedent.’” Id.
(quoting Lentell, 396 F.3d at 175). The requirement to plead and prove loss causation exists
because “private securities fraud actions are ‘available, not to provide investors with broad
insurance against market losses, but to protect them against those economic losses that
misrepresentations actually cause.’” In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 510 (2d
Cir. 2010) (quoting Dura Pharms., 544 U.S. at 345).
Plaintiffs claim that the FDA warning letter “revealed” the “truth” that Curaleaf’s
products did not have the “overall wellness” health benefits touted. However, as to Curaleaf’s
products for human use, the letter does not contain any information demonstrating the falsity of
the Company’s advertising statements regarding the safety or effectiveness of its products.
Instead, the letter details the Company’s statements on its website to demonstrate that the
products “are intended for use in the diagnosis, cure, mitigation, treatment, or prevention of
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disease,” and thus constitute unapproved new drugs. The FDA notes that it “approves a new
drug on the basis of scientific data and information demonstrating that the drug is safe and
effective” but does not state anywhere that the Company’s CBD products for human use are not
safe and effective. The reason that this letter exists at all is because the FDA has not been
provided adequate information to determine whether the CBD products are safe or effective for
any use whatsoever. The letter doesn’t opine on whether the products are safe and effective; it
just explains that defendants cannot say that they are. And, for the reasons described above,
plaintiffs’ claims fail to the extent that they are based on the lack of FDA approval.
It is a slightly closer issue as to the Company’s statements about its CBD pet products.
Plaintiff notes that the Company advertised these products as being “natural and safe” and
effective at treating various ailments in pets, but the FDA’s letter stated that the products “are not
generally recognized, among experts qualified by scientific training and experience to evaluate
the safety and effectiveness of animal drugs, as safe and effective for use under the conditions
prescribed, recommended, or suggested in the labeling.” Further, because “[t]hese products are
not approved or index listed by the FDA . . . [they] are considered unsafe under” the FDCA.
Thus, technically, the Company made statements about the safety and effectiveness of their pet
products and the FDA’s letter reveals that the FDA believes that the products are not “generally
recognized” as safe and effective and that the FDA considers them “unsafe.”
But, again, the letter doesn’t state that the products cannot effectively treat the various
ailments or are categorically unsafe – just that they are not approved by the FDA to be advertised
as such under the applicable regulatory framework. The FDA’s letter is simply the
materialization of the risk that was disclosed. It is a public warning that the products are
unapproved and being sold and/or marketed in violation of the FDCA, and that the FDA may
Case 1:19-cv-04486-BMC Document 49 Filed 02/16/21 Page 17 of 19 PageID #: 1397
pursue enforcement against the Company. That the products were not FDA-approved was amply
disclosed, as was the risk that the FDA might issue a letter to the Company “warning them that
the marketing of their products violates the FDCA” as had been done to a number of companies
selling CBD products. The FDA does not say that any statement is false, only that such
statements cannot legally be made. Plaintiff’s new theory thus does not satisfy loss causation
based on a claim for false representation.
The problem with this new claim is that it is still fundamentally based on the lack of FDA
approval. That is clear enough from plaintiff’s arguments in their brief:
Once Curaleaf spoke about the medical benefits of its products, the Company had a
duty to fully inform investors that its products were not approved for medicinal use.
Plaintiff identified distinct instances where the Company states that its products were
of medicinal quality, yet had received no such approval from the FDA and were thus
Defendants have similarly made unsupported statements that its products were
beneficial for ‘human and pet health’ despite lacking any approval for such use or
(Emphasis added). I have already found that the lack of FDA approval cannot support plaintiffs’
securities fraud claim because that issue and its attendant risks were fully disclosed by
defendants. The only previously unknown information that may have been “corrected” by the
warning letter was the uncertainty as to whether the FDA would pursue any enforcement action
against the Company. That risk was adequately disclosed, and no reasonable investor can claim
to have been misled as to it. Accordingly, to the extent that plaintiffs would like to assert a claim
for securities fraud based on allegedly false statements about the Company’s products’ safety
and efficacy, that claim fails.
Case 1:19-cv-04486-BMC Document 49 Filed 02/16/21 Page 18 of 19 PageID #: 1398
In the absence of an underlying violation of the Exchange Act, plaintiffs’ claim for
control person liability under section 20(a) also fails. In re China Valves Tech. Sec. Litig., No.
11 CIV. 0796, 2012 WL 4039852, at *8 (S.D.N.Y. Sept. 12, 2012) (citing S.E.C. v. First Jersey
Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996)).
Leave to amend
A “‘court should freely give leave when justice so requires,’ and it is the usual practice
upon granting a motion to dismiss to allow leave to replead.” Cruz v. TD Bank, N.A., 742 F.3d
520, 523 (2d Cir. 2013) (citations omitted). However, a court need not grant leave to amend if
amendment would be futile. In re Am. Exp. Co. Shareholder Litig., 39 F.3d 395, 402 (2d Cir.
1994). “Proposed amendments are futile if they ‘would fail to cure prior deficiencies or to state a
claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure.’” IBEW Local Union No. 58
Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383, 389 (2d
Cir. 2015). “Thus, the standard for denying leave to amend based on futility is the same as the
standard for granting a motion to dismiss.” Id.
Plaintiffs seek leave to amend the complaint should I find that it fails to state a claim but
have not included any proposed amended pleading or indicated what they might allege to cure
the deficiencies. Plaintiffs have already been permitted to file one amended pleading through the
filing of the Amended Class Action Complaint. I cannot identify any further amendment that
would improve upon the complaint; repleading cannot change the fact that the lack of FDA
approval and risk of enforcement were adequately disclosed. Leave to amend is thus denied as
futile. See In re WorldCom, Inc. Sec. Litig., 303 F. Supp. 2d 385, 391 (S.D.N.Y. 2004).
Case 1:19-cv-04486-BMC Document 49 Filed 02/16/21 Page 19 of 19 PageID #: 1399
Defendant’s motion to dismiss is granted and the case dismissed.
Digitally signed by Brian
Dated: Brooklyn, New York
February 15, 2021
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