IN RE: PHILIP MORRIS INTERNATIONAL INC. SECURITIES LITIGATION

Background

Lead plaintiffs Union Asset Management Holding AG and Teamsters Local 710 Pension Fund brought a putative class action against Philip Morris International, or PMI, and six current or former company officers: André Calantzopoulos, Martin G. King, Patrick Picavet, Jacek Olczak, Manuel C. Peitsch, and Frank Lüdicke. Plaintiffs alleged that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by withholding information about health risks associated with iQOS, a device that heats tobacco to produce an aerosol.

The case concerned four scientific studies that used an open-ended chemical analysis to compare iQOS aerosol with smoke from conventional cigarettes. The studies identified 80 compounds that were either present at higher concentrations in iQOS aerosol or not found in cigarette smoke; four were classified as possible or probable carcinogens, and eight presented potential genetic-toxicity concerns. PMI submitted the studies to the Food and Drug Administration in a December 2017 amendment to its application but did not previously include them in its application or disclose them publicly.

Plaintiffs challenged statements made between July 2016 and December 2017 about iQOS’s potential to reduce harm, the results of PMI’s clinical studies, and the chemical composition of iQOS aerosol. They argued that the four studies contradicted or substantially undermined those statements. Defendants moved to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Court’s Analysis

Statements about reduced risk. The court treated statements that iQOS had the potential to reduce risk or was likely to cause less harm than cigarettes as opinions about how to interpret scientific data. An opinion is not misleading merely because the speaker knows facts pointing in another direction. The court found that PMI had a reasonable basis for its statements because eight clinical studies involving adult smokers showed reductions in certain clinical risk markers. Plaintiffs did not allege that PMI’s interpretation of those clinical studies was irrational or unreasonable.

The court also held that the four studies did not substantially undermine the risk-related statements. The Food and Drug Administration reviewed the overall scientific record, including the four studies, and concluded that iQOS aerosols contained considerably lower levels of potential carcinogens and toxic chemicals than cigarette smoke. The agency authorized iQOS as a modified-risk tobacco product through an exposure-modification order, although it did not find sufficient evidence to issue a risk-modification order demonstrating actual risk reduction. The court concluded that this distinction did not conflict with statements about iQOS’s potential or likelihood of reducing harm.

Statements about clinical studies. The court found that Plaintiffs did not claim that PMI’s descriptions of its clinical studies were literally false. Instead, Plaintiffs argued that reporting the positive clinical results implied that PMI had disclosed all material scientific information about iQOS. The court rejected that theory because Plaintiffs identified no statement suggesting that PMI had disclosed all of its scientific data. It also found that the four undisclosed studies measured the presence of chemicals in aerosol, not the effects of those chemicals on human health, and therefore did not plausibly contradict statements about clinical risk markers.

Statements about aerosol composition. The court described Plaintiffs’ challenge to statements that iQOS aerosol had reduced toxicity and no new hazards as a closer question because those statements concerned the same type of aerosol studies that Plaintiffs said PMI withheld. Nevertheless, the court held that PMI’s interpretation of the data was reasonable. The Food and Drug Administration, after reviewing the studies and other information, concluded that iQOS aerosol contained fewer toxic chemicals and lower levels of potential carcinogens than cigarette smoke. The court therefore found that the omitted information did not make PMI’s statements false or misleading.

Scienter. Scienter means the required wrongful state of mind for a securities-fraud claim, such as knowing or reckless misconduct. The court held that Plaintiffs had not pleaded facts creating the required strong inference of scienter as to PMI or any individual defendant. Plaintiffs alleged that the study results would have been evident shortly after the studies ended, but they did not allege particular facts showing that any individual defendant knew the results when making the challenged statements. The court also rejected an inference based only on the defendants’ senior positions. The court found the opposing inference—that the defendants did not intentionally withhold contradictory information—more compelling.

Section 20(a) claims. Plaintiffs also asserted control-person claims under Section 20(a). Those claims depended on proving a primary violation of Section 10(b). Because the court found that Plaintiffs had not adequately pleaded a Section 10(b) violation, it concluded that the Section 20(a) claims also were not sufficiently pleaded.

Disposition

The court stated that Plaintiffs had failed to adequately plead falsity and scienter. It granted Defendants’ motion to dismiss with prejudice, dismissed Plaintiffs’ claims, directed the clerk to terminate docket items 137 and 139, and closed the case. The opinion identifies the related docket numbers as 1:18-cv-08814 (RA) and 1:18-cv-09856 (RA), in addition to the master file number.