United States District Court, D. Minnesota
Robert Freedman, on behalf of himself and all others similarly situated, Plaintiff,
Saint Jude Medical, Inc., Daniel J. Starks, John C. Heinmiller, Eric S. Fain, Michael T. Rousseau, and Donald J. Zurbay, Defendants
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Gregg Levin and Joshua Littlejohn, Motley Rice LLC, Joshua D'Ancona, Kessler Topaz Meltzer & Check LLP, and James Anderson, Heins Mills & Olson PLC, appeared for the Lead Plaintiff.
Daniel Ring and Laura Hammargren, Mayer Brown LLP, appeared for the Defendants.
JOAN N. ERICKSEN, United States District Judge.
This is a private securities fraud case and a putative class action against St. Jude Medical, Inc. and five of its officers. It began as two separate actions that were both filed in this District in December 2012. Those cases were consolidated under the Freedman caption in March 2013 and the Institutional Investor Group was appointed as the Lead Plaintiff. Order, ECF No. 38. Thereafter, the Lead Plaintiff filed an Amended Consolidated Complaint (" ACC" ). ECF No. 48. The ACC alleges that the Defendants committed fraud on the market from February 5, 2010 to November 20, 2012 and seeks relief for those who purchased stock during that class period.
The case is now before the Court on the Defendants' Motion to Dismiss the ACC for failure to meet the pleading requirements of the Private Securities Litigation Reform Act of 1995. ECF No. 63. See 15 U.S.C. § 78u-4(b)(3)(A). For the reasons discussed below, the motion will be granted in part and denied in part.
As the matter is before the Court on a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the factual context that follows is drawn from the allegations in the ACC and the documents it incorporates by reference. See In re K-tel Int'l., Inc. Sec. Litig., 300 F.3d 881, 889 (8th Cir. 2002) (" The court may consider, in addition to the pleadings, materials 'embraced by the pleadings' and materials that are part of the public record." ).
Saint Jude Medical (hereinafter, " SJM" ) is a corporation based in Minnesota that develops, manufactures, and distributes medical devices worldwide. At all times relevant to this case, Daniel Starks served as SJM's Chairman, President, and Chief Executive Officer, and Michael Rousseau served as Group President.
The other individual defendants' positions were affected by a restructuring that took place in August 2012 in which SJM reorganized its operations from four divisions down to two. Donald Zurbay, who had served as Corporate Controller before the realignment, became Vice President for Finance and Chief Financial Officer, while John Heinmiller, who had previously served as Executive Vice President and CFO, retained the former title. Also, Eric Fain, who had been President of SJM's Cardiac Rhythm Management Division (" CRMD" ) before realignment, became President of the newly-created Implantable Electronic Systems Division (" IESD" ) afterwards.
II. Regulatory controls.
At the core of the claims the Lead Plaintiff asserts against SJM and these five officers are the safety and reliability of two generations of leads developed and manufactured by the company's CRMD and IESD. Leads are custom-designed, insulated wires that connect implanted devices like a pacemaker or an implantable cardioverter defibrillator (" ICD" ) to the patient's heart, transmitting information about the beating of the heart to the device and, in turn, delivering therapeutic electrical impulses
from the device to the heart. Because defibrillation and pacing leads thus provide " life-supporting or life-sustaining" therapy, the Food and Drug Administration categorizes them as Class III medical devices. 21 C.F.R. § 860.93. As such, these leads are subject to the most stringent regulatory controls, including premarket approval and post-market surveillance. See id. § 860.3(c)(2).
Among the controls that apply to all medical device manufacturers are the FDA's Quality System regulations. See id. Pt. 820. These provisions, which incorporate Current Good Manufacturing Practices (" CGMP" ), require medical device manufacturers to utilize processes and procedures that will ensure the safety and effectiveness of their products. Id. § 820.1(a). Rather than " prescribe in detail how a manufacturer must produce a specific device," however, the regulations describe the essential elements of a quality system -- such as verification and validation of a device's design with objective evidence, as well as maintenance of a " design history file" documenting the device's development -- and provide the framework within which the manufacturer must " develop and implement specific procedures tailored to their particular processes or devices." 61 Fed. Reg. 52,602, 52,603 (Oct. 7, 1996). The FDA conducts inspections of manufacturers' procedures, facilities, and records to ensure compliance.
As one particular component of a quality system, manufacturers are required to have procedures in place for handling complaints, which includes conducting an investigation whenever information suggests that a device may have failed to meet any of its specifications. 21 C.F.R. § 820.198. Relatedly, leads are also covered by the FDA's Medical Device Reporting (" MDR" ) program, which is a mechanism for detecting and tracking problems with regulated products in the field. See 21 C.F.R. Pt. 803. Under MDR regulations, " device user facilities" -- essentially, hospitals and other health care centers -- are required to report to both the FDA and the manufacturer whenever a lead is believed to have caused or contributed to a patient's death. Id. § 803.30(a)(1). User facilities are also required to report to the manufacturer when a serious injury occurs that may reasonably be attributed to a lead. Id. § 803.30(a)(2).
In turn, when the manufacturer receives information about an adverse event involving its lead -- whether from a user facility or through a complaint from any other source -- it is required to conduct its own investigation and report to the FDA if the incident involved either (1) a death or serious injury to a patient attributable to the lead or (2) a malfunction of the lead that could cause a death or serious injury if it were to recur in the same or a similar product. Id. § 830.50. The adverse event reports that are sent to the FDA are compiled in the agency's Manufacturer and User Facility Device Experience (" MAUDE" ) database, which is publicly accessible online. See U.S. Food and Drug Administration, MAUDE -- Manufacturer and User Facility Device Experience, http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfmaude/search.cfm (last updated Jan. 31, 2014).
III. SJM's leads.
As for the two generations of SJM leads that are at issue here, the older of the two is characterized by the all-silicone insulation that houses the lead wires. SJM produced two series of defibrillation leads with this type of silicone rubber insulation: the Riata models, which were first approved by the FDA in 2001, and the Riata ST models, which were approved in 2006. SJM also produced a family of silicone-insulated
pacing leads, marketed as the QuickSite and QuickFlex.
In contrast, the insulation in the newer generation of SJM leads is a proprietary blend of silicone and polyurethane known by the trade name Optim. SJM's series of Optim-insulated defibrillator leads was first approved by the FDA in 2006 as the Riata ST Optim; the name was changed in 2008 to the Durata. SJM also introduced Optim-insulated pacing leads, called the QuickFlex µ and Quartet.
IV. FDA attention in 2009-10.
All of these leads were developed and manufactured at the SJM facility in Sylmar, California, headquarters for the company's CRMD and, after realignment, the IESD. This facility was inspected by the FDA in June and July of 2009. At the conclusion of the inspection, the FDA's Lead Inspector issued a Form 483, which is a report prepared in the field that documents the inspectors' observations of objectionable conditions at a facility. While the issuance of a Form 483 does not constitute a final agency determination that the facility is in violation of the Food, Drug, and Cosmetic Act or its regulations, it is intended to prompt the management of the facility to take corrective action to obviate the need for the FDA to resort to more formal enforcement actions, the next step towards which would be the issuance of a Warning Letter.
In this particular Form 483, the FDA inspectors noted deficiencies in SJM's quality system at Sylmar, particularly its documentation of and procedures for validating, verifying, reviewing, and approving design changes in its CRMD products, including Riata and Durata leads. The inspectors also focused on SJM's handling of complaints and adverse event reports, noting shortcomings in SJM's review and investigation of incidents of death or injury involving patients implanted with Riata and Durata leads as well as with the timeliness, completeness, and accuracy of the information it submitted to the FDA.
The following year, in May and June of 2010, the FDA inspected SJM's manufacturing facility in Arecibo, Puerto Rico, which produces leads and other devices. This inspection also resulted in the issuance of a Form 483, which identified deficiencies in SJM's MDR reporting and quality control procedures at that facility.
V. Failures of silicone-insulated leads.
By 2010, along with these criticisms of its quality system from the FDA, the Lead Plaintiff alleges that SJM was aware that serious flaws with its silicone-insulated leads had manifested in the field. One of these flaws was a susceptibility to premature inside-out abrasion, in which the movement of the wires within the core of the lead causes wear on the silicone insulation. Insulation abrasion increases the risk that the lead will malfunction, and if the action of the wires abrades completely through the outer silicone coating, an " externalized conductor" can result. Abrasion or an externalized conductor can be difficult to detect with non-invasive methods, and even if it is discovered, explanting and replacing a compromised lead presents its own dangers to the patient. The Lead Plaintiff alleges that SJM had received reports of inside-out abrasion and externalized conductors as early as 2005, which prompted it to conduct an internal audit in 2008 that confirmed 246 cases of insulation breach in Riata leads.
The other flaw that had arisen with SJM's silicone-insulated leads in the field was electrical malfunction that was not caused by externalized conductors. This problem had been implicated in reports of the deaths of patients implanted with Riata
and Riata ST leads that were submitted to SJM and the FDA's MAUDE database as early as 2006.
A. First Dear Doctor letter.
With these reports from the field in hand, SJM issued a " Dear Doctor" advisory letter on December 15, 2010, to provide physicians with " performance information regarding lead abrasion failures identified in the Riata silicone insulated defibrillation leads as compared to our newer lead models utilizing the Optim(r) insulation material . . . ." The letter related that abrasion of the silicone insulation had been observed in .47% of the 227,000 Riata and Riata ST leads SJM had sold over the preceding nine years. SJM explained that the insulation abrasion seen in those leads can be caused by either inside-out wear or by other factors, such as movement of the insulated lead against the metal of the implanted pacemaker or ICD, against a part of the patient's anatomy, or against another lead. SJM also represented that its " newer generations of defibrillation leads utilizing the Optim insulation material have demonstrated a reduction in lead abrasion-related observations by greater than 80% (p < 0.0001) at 44 months of follow-up as compared to our silicone leads." The letter went on to announce that, " [b]ased on the above data and demonstrated superior abrasion resistance of defibrillation leads utilizing Optim insulation, [SJM] is completing the planned phase-out of all models of Riata and Riata ST silicone leads by December 31, 2010."
Following SJM's decision to discontinue sales of Riata and Riata ST, Dr. Ernest Lau, a heart device expert at Royal Victoria Hospital in Northern Ireland, conducted a study of these leads, and he presented the findings at the European Society of Cardiology Congress in August 2011. Dr. Lau reported that, upon screening a pool of patients implanted with Riata and Riata ST leads, 15% of them were found to have externalized conductors. Those findings were in sharp contrast to the data provided by SJM in its December 2010 Dear Doctor letter, in which the company stated that, of the .47% all-cause abrasion rate seen with Riata and Riata ST, approximately 10% of those reported abrasion events involved an externalized conductor.
B. Second Dear Doctor letter.
According to the Lead Plaintiff, in addition to being confronted with the results of Dr. Lau's study, SJM continued to receive reports of premature insulation abrasion and electrical malfunction in its silicone-insulated leads in the months after the issuance of its Dear Doctor letter. Then, on November 28, 2011, SJM issued another advisory letter " to provide updated estimates of failures associated with all cause insulation failure in our Riata(r) (8Fr) and Riata ST (7Fr) silicone endocardial defibrillation leads, with a specific emphasis on externalized conductors." In this letter, while referencing Dr. Lau's study and several other peer-reviewed publications, SJM upped the overall rate of all-cause insulation abrasion in the Riata family of silicone leads to .63% and indicated that approximately 15% of those abraded Riata leads exhibited an externalized conductor. SJM also stated that 99.9% of the 278,000 Durata and Riata ST Optim leads then on the market had not exhibited abrasion of any kind, and that there had been no reports of externalized conductors in any Optim-insulated leads.
A few weeks later, in December of 2011, the FDA classified SJM's removal of the silicone-insulated Riata and Riata ST leads from the market a year prior as a Class I recall, indicating that the FDA considers those leads " to be in violation of the law it administers" and that " there is a reasonable
probability that [their] use . . . will cause serious adverse health consequences or death." 21 C.F.R § 7.3(g), (m)(1).
By that time, SJM's silicone-insulated leads, thousands of which remained implanted in patients, were the subject of intense scrutiny, and concern was growing that SJM's Optim-insulated leads could be prone to the same problems. Dr. Robert Hauser, a Minneapolis Heart Institute cardiologist, was outspokenly critical of SJM's handling of the situation. In March of 2012, the online journal of the Heart Rhythm Society published a peer-reviewed article by Dr. Hauser and his colleagues, who had analyzed adverse event reports related to Riata and Riata ST leads from the FDA's MAUDE database. In contrast to the emphasis SJM had placed on externalized conductors in its Dear Doctor letter, Dr. Hauser concluded in his article that Riata and Riata ST leads " are prone to high-voltage failures that have resulted in death" which were not attributable to externalized conductors but rather " appeared to have been caused by insulation defects that resulted in short circuiting between high-voltage components."
C. Third Dear Doctor letter.
Shortly afterwards, on April 3, 2012, SJM issued a third Dear Doctor advisory letter to " proactively inform clinicians of the existence of visual observations of externalized conductors due to abrasion of the silicone insulation in [the silicone-insulated] QuickSite and QuickFlex leads." In the letter, SJM indicated that the reported rate of externalized conductors in these pacing leads was .023%, though it acknowledged under-detection of the anomaly and estimated that a higher rate -- 3-4% of the 101,000 QuickSite and QuickFlex leads then on the market -- may be more accurate. SJM, while noting that it had received no reports of externalized conductors in its new ...