What is behind the rise in securities litigation

The biotech industry is under legal fire. While 2024 has been a year of resilience in terms of performance for the industry, there’s been a sharp increase in the number of class action lawsuits against biotech and medtech companies. Indeed, Justin Kozak, life sciences practice lead at Founder Shield noted that there has been a 4.7% increase in biotech securities litigation from 2023.

“Of the 222 federal court securities class action lawsuits in 2024, 47 were against biotechnology and medical device companies — a whopping 21.1%. These lawsuits have been increasing in number, with 2024 having the most since 2020. Unfortunately, this rise in litigation has outpaced the industry’s growth rate,” said Kozak.

Before diving into the reasons behind the surge, it’s important to understand what securities class action lawsuits are. These lawsuits occur when investors collectively sue a company, typically alleging that it engaged in fraud or misconduct that led to financial losses.

Many securities class actions in biotech are tied to financial misconduct, like clinical trial failures or misleading financial disclosures.

Kozak gave the example of Frequency Therapeutics, which faced a lawsuit after its clinical trial for a hearing loss drug failed to produce the expected results. Investors alleged that the company had misrepresented the trial’s prospects.

“Another case is Kiromic BioPharma, for which the U.S. Securities and Exchange Commission (SEC) filed charges against this company for failing to disclose crucial information about the clinical hold on two of its drug applications. This lack of transparency misled investors about the progress of the clinical trials,” added Kozak. 

Case in point, the biotech industry is at risk of increasing litigation. But what is driving this surge and what can companies do to mitigate legal risks?

What’s driving this surge in biotech lawsuits?

This litigation surge doesn’t only concern biotech but it does hit it harder than other industries at the moment. “While the surge in litigation is notable in biotech, it’s not unique to this industry. Many sectors — financial, manufacturing, healthcare — are seeing increased lawsuits. Many factors drive this broader trend, such as increased regulation, evolving legal standards, and a growing litigation culture. So, while the rise in litigation is a broader trend, the biotech industry faces specific challenges that amplify it,” said Kozak.

So, what makes the companies within the biotech industry more prone to securities class action lawsuits? 

First, the U.S. Food and Drug Administration (FDA) has intensified its focus on patient safety and data integrity, leading to stricter enforcement actions. This heightened scrutiny increases the risk of litigation for biotech companies. As Kozak noted, “Increased regulatory scrutiny is definitely a major contributor. Agencies like the FDA are intensifying their focus on patient safety and data integrity, leading to more enforcement actions and a higher risk of lawsuits.”

The complexity of intellectual property (IP) in biotech, especially with emerging technologies like CRISPR, also leads to frequent patent disputes. “Patent disputes are common in biotech, especially with new technologies. Companies are more likely to sue to protect their innovations as competition grows. New therapies and medical devices can have unforeseen side effects, exposing companies to lawsuits from patients who allege harm,” said Kozak.

Innovation often outpaces regulation, and few technologies evolve as rapidly as artificial intelligence (AI). As AI becomes more integrated into drug discovery, it raises new legal and ethical questions. In 2024, securities class action litigation regarding “AI washing” — where companies falsely advertise AI capabilities to mislead shareholders — has grown more prominent. 

While there hasn’t been any example in the biotech industry specifically, a notable lawsuit would be Innodata’s. The company was accused of portraying its Goldengate software as sophisticated AI when it relied on low-wage labor, and Evolv Technologies, which allegedly misrepresented the efficacy of its security screening AI.

In 2024, we questioned whether we were in an AI bubble about to burst, comparing the hype to the 1990s dot-com bubble episode, where speculative investment in companies associated with the internet made stock prices skyrocket — often without regard to the companies’ actual profitability or business models. 

Indeed, AI’s intricates are more opaque than any technology we’ve fully integrated into the industry yet. There’s some part of the reasoning behind an AI-driven conclusion that is difficult to trace precisely — we call this the black box concept and it is making misrepresentation much more likely than in a fully transparent technology. 

While it is certainly much more difficult to misrepresent the capacity of an AI platform specialized in drug discovery than a broader AI software, the hype coupled with the black box concept is certainly an important litigation risk.

Beyond technology and regulation becoming stricter, market dynamics also have a role to play in the litigation surge. “Biotech stocks can be volatile, especially after clinical trial results. This volatility can trigger securities class action lawsuits from investors who believe they were misled,” explained Kozak.

The industry has never been more prone to mergers and acquisitions (M&A) too.”The growing number of mergers and acquisitions in the sector also leads to more litigation, as shareholders and competitors challenge these deals,” said Kozak.

While Kozak thinks predicting the future of litigation is always tricky, overall, the surge in biotech litigation is likely to persist in 2025. “However, the industry’s maturation and evolving legal landscape could moderate the trend in the long term,” he said.

Which companies are more at risk and what are the consequences? 

The immediate consequences of a class action lawsuit for a biotech company are quite evident: costly procedures. “The impact of a securities class action can be severe, especially for early-stage biotechs with limited resources. Legal costs can mount quickly, and settlements and judgments can be very costly. These strains can weigh heavily on a company’s finances,” explained Kozak. 

There’s also the risk toward the reputation of the company as investors may lose trust in the company, even if the lawsuits end favorably. Kozak also noted that beyond the company itself, the management team can be at risk. “Executives can be held liable, forced to pay fines or penalties, and even face jail time.”

For the broader biotech industry, a surge in litigation also means investors are going to be more cautious when deciding if they want to back a company or not. Any concern a company may have — costly procedures arming the finance, reputation, or management instability — are shared by the investor.

According to Kozak, while lawsuits concern biotechs of all sizes, early-stage companies are more vulnerable to them. “They may have limited resources and less established compliance programs, which can make them easier targets for lawsuits.”

Because earlier-stage biotechs struggle more when faced with a lawsuit, these cases attract more attention. Kozak noted that every biotech company has a unique risk profile and rather than the size of the company it’s the area it operates in and the technology it develops that make it more likely to face litigations. 

“Companies involved in gene editing or personalized medicine face complex intellectual property disputes. Those developing novel therapeutics and drugs for rare diseases may face challenges in clinical trials and product liability if expectations are not met.”

So, if you are at the head of a recently founded biotech startup developing a novel therapeutics for rare diseases, what can you do to remain out of the list of 2025 biotech securities class action lawsuits?

Common legal mistakes biotechs make and how to avoid them

As Kozak said, every biotech company has its unique risk profile which also means zero risk doesn’t exist. But if we had to narrow down what makes a biotech company more liable than another we’d have to look at noncompliance with regulations, weak IP protection, and lack of clinical trial oversight.

Kozak indicated that failing to establish and maintain robust compliance programs that address all relevant regulations (FDA, etc.), industry standards, and ethical guidelines can lead to violations, regulatory actions, and lawsuits.

The answer is for biotechs to invest in comprehensive compliance programs that cover all relevant regulations. “Conduct regular audits, provide employee training, and establish strong internal controls,” advised Kozak.

Another clear pain point is a lack of IP strategy. This includes failing to conduct thorough patent searches, secure strong patents, and actively monitor and enforce IP rights. Kozak advises: “To mitigate this risk, leaders must conduct thorough patent searches, secure strong patents, and actively monitor and enforce IP rights. Engage experienced IP counsel to develop and execute a comprehensive IP strategy.”

Last but not least, Kozak pointed to clinical trials. “Overlooking rigorous clinical trial design, ethical conduct, and data integrity can lead to legal challenges. Failing to ensure patient safety and data accuracy can result in lawsuits and regulatory scrutiny.” Ethical conduct, data integrity, and patient safety in clinical trials must be a priority. Companies must also implement robust data management systems and independent oversight mechanisms.

Biotech is an industry made of complex technologies and an increasing number of M&A — as we noted these are factors putting biotech companies at risk of litigation. In this context, vetting every common litigation risk, might be more than just a security but a necessity.