9th Circuit Clarifies the Use of Judicial Notice and the Incorporation-By-Reference Doctrine

The Ninth Circuit Court of Appeals recently clarified the parameters for using judicial notice and the incorporation by reference doctrine in the context of a motion to dismiss a complaint.

Federal Rule of Evidence 201 allows a court to take judicial notice of matters of public record while keeping it within the boundaries of a motion to dismiss.  Incorporation-by-reference is a judicially created doctrine that considers some documents as if they were incorporated into the complaint.

Increasingly, in bringing motions pursuant to Federal Rule of Procedure 12(b)(6) (a motion to dismiss a pleading for failing to state a claim), Defendants have been pushing the courts to take judicial notice of, and to incorporate-by-reference, many documents outside of the four-corners of a complaint.  Often, these documents include disputed facts.  “The overuse and improper application of judicial notice and incorporation by reference … can lead to unintended and harmful results” according to the Ninth Circuit panel (the “Court”) as stated in Khoja v. Orexigen Therapeutics, 899 F.3d 988 (9th Cir. 2018). The Khoja Court went further to point out another problem when defendants try to include piles of documents to be reviewed in connection with a pleadings motion: the fact that it wastes the resources and time of courts and the parties.

Specifically, in Khoja, the Court stated that “a [district] court may take judicial notice of matters of public record without converting the motion to dismiss into a summary judgment motion, but a court cannot take judicial notice of disputed facts contained in such public records.”  The Court concluded that, in order to allow facts to be judicially noticed, defendants should pin-point to specific facts within documents and there would have to be no reasonable dispute over these facts.  Id. at 994.

In its review of defendants’ motion to dismiss the complaint in Khoja, the district court judicially noticed three exhibits: an Investors’ Conference Call Transcript, an EMA Report, and an International Patent Application.  The Ninth Circuit determined that only the Patent Application should be judicially noticed and that the district court abused its authority in considering the other two exhibits.  In the case of the Investors’ Conference Call Transcript, the Court found that it is clear that it would qualify for judicial notice as its accuracy cannot be questioned.  However, the Court said the district court should have pointed to which facts were being judicially noticed and failed to do so.  In the case of the EMA Report, the fact noticed could be implied from the order but the Court determined that there was a reasonable dispute as to what the report established and, consequently, it was improperly noticed.  In the case of the International Patent Application, the Court found that the district court order narrowed its notice to the date of the application and, therefore, it did not abuse its discretion.

In the case of Incorporation-by-Reference, the Court stated that the spirit of the doctrine is to ensure that plaintiffs are not just cherry-picking favorable portions of documents and ignoring those that would go against their case.  If plaintiffs refer to a document in an “extensive” manner, defendants are consequently allowed to request to incorporate the document into the complaint for purposes of a motion to dismiss.

In Khoja, the district court incorporated eighteen documents and plaintiff objected to fifteen of them.  The documents incorporated were analyst reports and blog entries, SEC filings and attachments, and Agency reports.  The Court determined that a reference to a blog post by the Wall Street Journal included in a two-sentence footnote in the complaint cannot be considered “extensive.”  On the other hand, it was determined that the district court did not abuse its discretion incorporating a blog post that, even though it was mentioned only once, referenced a quotation that was almost one page and a half of that blog.  Two market reports were properly incorporated to demonstrate a positive reaction of analysts to a Form 8-K.  While the reports were not extensively quoted in the complaint, they showed an immediate reaction to relevant statements in the market.  A Forbes article was also incorporated by reference because, immediately after its publication, the defendant company – Orexigen – issued a statement that set the foundation of the case.  A subsequent Forbes article was properly incorporated because it revealed the materiality of Orexigen’s misrepresentations and omissions.  Finally, a Leerink Partner analyst report was properly incorporated because, even though it was extensively quoted, it evidenced an instance where defendants may have made misrepresentations.  Regarding SEC filings and attachments, the Court determined that the district court abused its discretion when it incorporated two out of three filings because they either did not contain anything related to the case or because the filing was not extensively quoted in the complaint.  The complaint relied on historical references included in a FDA Report and incorporating that FDA Report was proper.  In contrast, EMA’s press release was incorporated and the Court decided that the district court abused its discretion because the complaint did not reference or identify that press release.  Finally, in the case of the incorporation of a Patent File History, the Court determined that there was an abuse of discretion when incorporating an entire file.

In conclusion, defendants should be aware that judicial notice and incorporation by reference are valid legal tools, but they are tools that should not be abused.  At least in the Ninth Circuit, district courts will no longer take judicial notice of portions of public documents containing disputed facts, nor incorporate by reference documents that are not extensively referenced in, or otherwise provide a basis for the allegations in, a plaintiff’s complaint.