## Facts

- Abbott Laboratories’ Diagnostic Division had a long history of FDA inspections identifying manufacturing and quality-control deficiencies, with repeated warnings and remedial efforts.
- Abbott filed a Form 10-K on March 9, 1999, reporting its financial condition as of year-end 1998.
- On March 17, 1999, the FDA sent Abbott a letter demanding compliance with regulatory requirements and threatening severe consequences.
- In September 1999, the FDA took a harder position, seeking substantial penalties and operational changes.
- On September 29, 1999 (after market close), Abbott issued a press release describing the FDA’s position, stating Abbott was in “substantial” compliance, and disclosing ongoing settlement talks; the stock fell over 6% the next trading day.
- On November 2, 1999, Abbott entered a consent decree requiring removal of 125 diagnostic products from the market until quality control improved and payment of a $100 million civil fine.
- Abbott recorded a $168 million charge for the fine and inventory; the stock fell an additional $3.50 the next business day.
- A putative class of purchasers of Abbott securities between March 17 and November 2, 1999 sued Abbott and its CEO, alleging the stock price was inflated by delayed disclosure of the seriousness of the FDA situation.

## Issues

1. Whether § 10(b) and Rule 10b-5 imposed a duty on Abbott to disclose the March 17 FDA letter and ongoing regulatory negotiations before Abbott chose to speak.
2. Whether Abbott’s public statements (including the March 9, 1999 10-K, later communications, and CEO remarks) were materially false or misleading in light of the FDA’s enforcement posture.
3. Whether federal securities law effectively requires “continuous disclosure” of material developments absent a misleading statement or a specific disclosure obligation.

## Decision

- The Seventh Circuit affirmed the Rule 12(b)(6) dismissal for failure to state a claim.
- The court held plaintiffs did not plead an actionable false statement or misleading omission attributable to Abbott or its CEO.
- The court rejected the theory that securities law requires continuous, real-time disclosure of all material regulatory developments.
- The court concluded that the March 9, 1999 10-K could not be misleading for omitting an FDA letter sent on March 17, 1999.
- The court treated the challenged CEO statements and similar optimistic assurances as either true when made or non-actionable corporate optimism.
- The court found the September 29 press release did not support liability on the pleadings because plaintiffs did not plausibly allege that the “substantial compliance” characterization was objectively false when made, and the release disclosed the existence of the dispute and negotiations.

## Legal Principles

- § 10(b) and Rule 10b-5 target deception through misrepresentation or misleading half-truths; silence is not actionable absent a duty to disclose.
- Federal securities law does not impose a free-standing duty of continuous disclosure of all material information; an issuer generally may remain silent unless required to speak (e.g., to avoid making prior statements misleading or to satisfy a specific reporting rule).
- A disclosure document is not fraudulent for failing to describe an event that had not yet occurred at the time of filing.
- General statements of corporate optimism or evaluative characterizations lacking concrete, verifiable content are commonly non-actionable as “puffery.”
- Stock-price movement following later disclosures may indicate market importance of the news, but it does not substitute for pleading a false statement or a legally required earlier disclosure.

## Conclusion

The Seventh Circuit held that investors could not convert delayed disclosure of a worsening regulatory dispute into securities fraud without identifying a materially false statement or a misleading half-truth that triggered a duty to disclose; because plaintiffs failed to plead such deception, the complaints were properly dismissed.


Gallagher v. Abbott Labs., 269 F.3d 806 (7th Cir. 2001)