A couple of recent decisions discuss the concept of judicial notice. The first case, Khoja v. Orexigen Therapeutics, Inc., 899 F. 3d 988 (9th Cir. 2018) involved a securities fraud action under the Securities Exchange Act of 1934.
Orexigen Therapeutics, Inc. developed Contrave, an obesity drug candidate. Kareem Khoja was an Orexigen investor who sued Orexigen and represented a class of similarly situated Orexigen investors. After several related actions were consolidated Khoja, acting on behalf of the putative investor class, filed the Complaint at issue.
Count I alleged that Orexigen and its executives misrepresented or omitted material facts to conceal the truth and adverse material information about a drug trial called “The Light Study” in violation of Section 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 certain Orexigen executives under Section 20(a) of the Act.
Orexigen moved to dismiss the Complaint for failure to state a claim under Sections 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 in the Complaint itself. The district court granted the motion for all but one document.
The Ninth Circuit provided guidance on both judicial notice and incorporation by reference. 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. Usually when matters outside the pleadings are presented to and not excluded by the court, a 12(b)(6) motion converts into a motion for summary judgment under Rule 56.
There are two exceptions to this rule: the incorporation by reference doctrine and judicial notice under Fed. R. Evid. 201. Each of these procedures permits district courts to consider materials outside the complaint, but each does so for different reasons and in different ways.
The appeals court noted what it called a “concerning pattern” in securities cases exploiting these procedures improperly to defeat what would otherwise constitute adequately stated claims at the pleadings stage. The appellate court noted that defendants face a temptation to pile on numerous documents to their motions to dismiss in order to undermine the complaint and dismiss the case at an early stage. However, the unscrupulous use of extrinsic documents to resolve competing theories against the complaint risks premature dismissals of plausible claims that might turn out to be valid after discovery. This risk is especially significant in SEC fraud matters where there is already a heightened pleadings standard and the defendants possess materials to which the plaintiffs do not yet have access.
Judicial notice under Rule 201 permits a court to notice and adjudicate a fact if it is not subject to reasonable dispute. 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. Accordingly, 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. 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, perhaps, doom their claims.
Although the doctrine is straightforward in purpose, it is not always easy to apply. For example, how extensively must the complaint refer to a document? The Ninth Circuit has held that the mere mention of the existence of a document is insufficient to incorporate the contents of a document under United States v. Richey, 342 F.3d 903 (9th Cir. 2003). As the Khoja court observed, a more difficult question is whether a document can ever form the basis of a plaintiff’s claim if the complaint does not mention the document at all.
There are those rare instances when assessing the sufficiency of a claim requires the document at issue be reviewed, even at the pleadings stage. 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, the defendants could use the doctrine to insert their own version of events into the complaint to defeat otherwise cognizable claims.
The appellate court noted that a court may assume a document’s contents are true for purposes of a motion to dismiss under Rule 12(b)(6). While this is generally true, it is improper to assume the truth of an incorporated document if such assumptions only serve to dispute the facts stated in a well-pleaded complaint. After a careful review of the documents considered by the district court, the appellate court affirmed in part and reversed in part dismissal of Khoja’s Complaint. The appellate court remanded with instructions regarding the judicial notice and incorporation by reference of Orexigen’s exhibits to its motion to dismiss.
The next decision discussed was penned by Judge Easterbrook, acting in his capacity as a motions judge for the Court of Appeals for the Seventh Circuit. The case is In the Matter of Stephen Robert Lissy. 905 F. 3d 495 (7th Cir. 2018). In that case, the appellant submitted a document styled Request for Judicial Notice. Judge Easterbrook denied the Request and published a brief explanation to forestall other similar applications.
Judge Easterbrook pointed out that Rule 201(b) of the Federal Rules of Evidence permits a court to take judicial notice of an adjudicative fact that is not subject to reasonable dispute, because it is generally known within the trial court’s territorial jurisdiction or can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.
The request at issue asked the court to take judicial notice of four documents. Two of the documents were orders entered by a state court in Wisconsin. Because they were public records, they were appropriate subjects of judicial notice.
The third document was a power of attorney filed in the state court. Judge Easterbrook pointed out that merely because a document is in a state court’s record does not make it an appropriate subject of notice for several reasons. Its providence may be disputed. Is it authentic? Are the signatures real or forged? Is it the original or perhaps a duplicate admissible under Rule 1003? Is the document even relevant? According to Judge Easterbrook, if the power of attorney had been submitted in the current proceeding, it would not be subject to judicial notice. It did not get privileged status simply because it was filed in the state suit.
The fourth document was a lawyer’s motion filed in the same state case. The document was not subject to judicial notice because it was not evidence of an adjudicative fact. By way of example, Judge Easterbrook pointed out that a lawyer’s appellate brief in the Seventh Circuit is not evidence. Neither is a lawyer’s motion in state court. If the document were being offered merely to show that it had been filed, that fact might be subject to judicial notice but the request did not suggest that appellant wanted the Seventh Circuit to take notice that a particular document was filed on a specific date in some other tribunal.
Judge Easterbrook said that readers might wonder why he was not granting the request with respect to the two documents while denying it with respect to the other two. The reason was that the request was unnecessary. The right place to propose judicial notice, once the case is in a court of appeals, is in a brief. When evidence is not subject to reasonable dispute, there is no reason to multiply the paperwork by filing motions or requests. Instead, attorneys should just refer to the evidence in a brief and explain why it is relevant and subject to judicial notice.
If this assertion is questionable, the opposing litigant can protest. Rule 201(e) provides that on timely request, the party is entitled to be heard on the propriety of taking judicial notice and the nature of the fact to be noticed. That timely request and the opportunity to be heard both belong in the next brief. Thus, if an appellant proposes judicial notice, the appellee’s objection can be presented in its own brief. If an appellee proposes judicial notice, the appellant’s reply brief provides the opportunity to be heard in opposition. There is no need to engage in motion practice requiring the attention of judicial appellate judges in deferred briefing. The request in this case was denied as unnecessary with respect to the two judicial orders and denied as unnecessary and not meritorious with respect to the other documents.