On 13 August 2018, the Ninth Circuit, in Khoja v. Orexigen Therapeutics, ruled on the kinds of evidence, outside the complaint, that a court may rely on when considering a motion to dismiss a securities case. The general rule is that a court, in deciding a motion to dismiss, must assume that the facts alleged in the complaint are true and cannot consider evidence outside the complaint. The Khoja opinion provides important guidance as to the scope of the exceptions to that rule (at least in the Ninth Circuit).
The court addressed two means by which courts may consider outside evidence: (1) judicial notice of matters of public record; and (2) incorporation by reference, a doctrine that allows courts to consider a document upon which a plaintiff relies so significantly in its complaint that it is appropriate to treat the document as if it were incorporated by reference in the complaint. On the first point, the Ninth Circuit held that courts may take judicial notice of matters in the public record, but only as to facts not in dispute. On the second, the court held that documents that form the basis of a plaintiff's complaint, or are relied upon heavily by the plaintiff, may be treated as if they were incorporated by reference. But if a document does not "necessarily" form the basis of the complaint and instead just creates a defence to the plaintiff's allegations, the "incorporation by reference" doctrine will not apply. In other words, defendants may not rely on that doctrine to "present their own version of facts at the pleading stage." If they were permitted to do so, said the court, it would become "nearly impossible for even the most aggrieved plaintiff to demonstrate a sufficiently 'plausible' claim for relief."
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