Sabbagh v. Cell Therapeutics Inc et al

Filing 63

ORDER denying (55) Motion for Limited Discovery, signed by Judge Marsha J. Pechman.(SC)

1 2 3 4 5 6 7 8 9 10 IN RE CELL THERAPEUTICS, INC. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 The above-entitled Court, having received and reviewed 1. Defendant's Motion for Order Permitting limited Discovery and Modifying the August 26, 2010 Order (Dkt. No. 55) 2. Lead Plaintiff's Opposition to Defendant's Motion for Order Permitting Limited Discovery and Modifying the August 26, 2010 Order (Dkt. No. 56) 3. Reply in Support of Defendant's Motion for Order Permitting Limited Discovery and Modifying the August 26, 2010 Order (Dkt. No. 59) and all attached declarations and exhibits, and finding no need for oral argument, makes the following ruling:
ORDER ON MOTION FOR LIMITED DISCOVERY- 1

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE CASE NO. C10-414MJP ORDER ON MOTION FOR LIMITED DISCOVERY

CLASS ACTION LITIGATION THIS DOCUMENT RELATES TO: ALL ACTIONS

1 2 IT IS ORDERED that the motion is DENIED.

3 Background 4 The factual basis of Plaintiffs' complaint concerns Cell Therapeutic Inc.'s (CTI's)

5 departure from a testing protocol which had been approved by the Food and Drug Administration 6 (FDA) and the FDA's rejection of the protocol results because CTI had not done what they 7 originally said they were going to do. The nature of the fraud alleged centers around allegations 8 that CTI management knew that varying from the procedures which the FDA had approved 9 would invalidate the results, and that the company's failure to advise the FDA or their 10 stockholders of the departure from the protocol was intentional and deceptive. The complaint 11 contains the statements of five Confidential Witnesses (CWs) who provide the basis for the 12 allegations that the concealment was knowing and fraudulent. 13 Defendants have declarations from three persons whom they believe to be among the

14 CWs ­ each of the three asserts that their statements to Plaintiffs' investigators have been taken 15 out of context, misrepresented or (in some cases) fabricated. Defendants now seek permission to 16 depose the persons they believe to be the remaining two CWs to further develop this alleged 17 misrepresentation as a grounds for dismissal, prior to a ruling on their motion to dismiss. 18 Discussion 19 Defendants seek permission to conduct limited discovery prior to submission of their

20 motion to dismiss. The discovery would consist of deposing the remaining two CWs (or at least, 21 the people they believe to be the other two CWs) to determine if the statements attributed to 22 them in the complaint are in fact what they said to Plaintiffs' investigator. 23 24
ORDER ON MOTION FOR LIMITED DISCOVERY- 2

1

Defendants' main support for this motion comes from a 2nd Circuit case called Campo v.

2 Sears Holdings Corp., and they cite from both the District Court (635 F.Supp.2d 323 (S.D.N.Y. 3 2009)) and appellate (371 Fed.Appx. 212 (2nd Cir. 2010)) opinions. Despite Plaintiffs' 4 characterization of the case as somehow supporting their position, the Court reads the Campo 5 District Court ruling as exactly what Defendants are looking for: an endorsement of the right of 6 Defendants to depose CWs to "determine whether they supported the allegations in the 7 Complaint" or whether Defendants were entitled to dismissal. 635 F.Supp.2d at 330.1 The Court 8 does agree with Plaintiffs that the language in the 2nd Circuit Campo opinion (which again 9 appears to support the practice of deposing CWs prior to bringing a motion to dismiss, this time 10 by conflating the requirements of FRCP 11 with prior rulings concerning scienter) is dicta ­ the 11 appellate court noted that the Plaintiffs had waived the argument by not raising it until their 12 reply, therefore it was not an issue representing a case or controversy before that court. 371 Fed. 13 Appx. at 216, fn 4.2 14 The Court further agrees with Plaintiffs that Campo is not binding on this district or this

15 circuit. In the first place, the opinion of an S.D.N.Y. District Court has (at most) persuasive 16 value. In the second place, the 2nd Circuit's language favoring the practice is dicta. Thirdly, as 17 Plaintiffs point out, Defendants point to no other court which has cited the Campo holding to 18 affirm the practice which Defendants are encouraging the Court to adopt here. In fact, Plaintiffs 19 20 21 22 23 24
Without citation to authority, the District Court judge in Campo stated: "With respect to allegations derived from confidential witnesses, the Court considers only those allegations that later were corroborated by those witnesses in depositions." 635 F.Supp.2d at 330. The 2nd Circuit also claims that their dicta approval of deposing CWs before a dismissal motion is supported by Tellabs, the Supreme Court opinion requiring an inference of scienter from a complaint that is "cogent and at least as compelling as any opposing inference of nonfraudulent intent." 551 U.S. at 314. This is an overbroad reading of Tellabs, which is confined to discussions of inferences drawn from the allegations of the complaint.
2 1

ORDER ON MOTION FOR LIMITED DISCOVERY- 3

1 point to other District Court rulings which specifically reject the argument that limited use of 2 depositions is permissible at this juncture in cases of this sort. See In re ProQuest Sec. Litig., 3 527 F.Supp.2d 728, 740 (E.D.Mich. 2007) and In re Applied Micro Circuits Corp. Secs. Litig., 4 2002 U.S. Dist. LEXIS 22403 at *31. 5 And finally, it is this Court's finding that neither the Federal Rules nor the Private

6 Security Litigation Reform Act (PSLRA) supports the practice. FRCP 12(b) prohibits the 7 consideration of "material beyond the pleadings in ruling on a Rule 12(b)(6) motion." Lee v. 8 City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). The only exceptions to that rule are 9 taking "judicial notice of matters of public record" and "material which is properly submitted as 10 part of the complaint." Id. at 688-89 (quotations omitted). The only permissible way under the 11 FRCP's to consider extrinsic evidence such as Defendants propose is to convert Defendants' 12 pending motion to dismiss to a motion for summary judgment. FRCP 12(d). That has not been 13 requested and the Court is not inclined to do so sua sponte. 14 Similarly, the PSLRA requires that "all discovery and other proceedings shall be stayed

15 during the pendency of any motion to dismiss" (15 U.S.C. § 78u-4(b)(3)(B)), a stay which 16 continues in effect "until the court has sustained the legal sufficiency of the complaint." 17 McGuire v. Dendreon Corp., 2009 U.S. Dist. LEXIS 24243 (W.D.Wash., Mar. 11, 2009). 18 Exceptions to this automatic stay are only permissible if "the court finds upon motion of any 19 party that particularized discovery is necessary to preserve evidence or to prevent undue 20 prejudice to that party." 15 U.S.C. § 78u-4(b)(3)(B). 21 There has been no issue raised of preservation of evidence. In fact, Defendants make no

22 argument at all that they qualify for either of the PSLRA exceptions, relying entirely on Campos 23 to support their position. There is no issue of "undue prejudice" if Defendants are required to 24
ORDER ON MOTION FOR LIMITED DISCOVERY- 4

1 wait until after their motion to dismiss to complete the discovery required to make this argument. 2 And, of course, once the motion to dismiss is ruled upon and assuming that Plaintiffs' case 3 survives that motion, Defendants will be free to conduct whatever discovery the law permits 4 them. If, after deposing the remaining witnesses, they still believe that their allegations have 5 merit they are of course entitled to bring whatever motions they deem appropriate. 6 Conclusion 7 The motion for limited discovery (and the accompanying request to modify the

8 scheduling order) is DENIED. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
ORDER ON MOTION FOR LIMITED DISCOVERY- 5

The clerk is ordered to provide copies of this order to all counsel. Dated: November 18, 2010.

Marsha J. Pechman United States District Judge

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