United States District Court, D. Minnesota
WEST VIRGINIA PIPE TRADES HEALTH & WELFARE FUND, EMPLOYEES' RETIREMENT SYSTEM OF THE STATE OF HAWAII, and UNION ASSET MANAGEMENT HOLDING AG, Plaintiffs,
MEDTRONIC, INC., WILLIAM A. HAWKINS, GARY L. ELLIS, RICHARD E. KUNTZ, JULIE BEARCROFT, RICHARD W. TREHARNE, MARTIN YAHIRO, THOMAS A. ZDEBLICK, J. KENNETH BURKUS, and SCOTT D. BODEN, Defendants
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Shawn Williams and Christopher M. Wood, ROBBINS GELLER RUDMAN & DOWD LLP, San Francisco, CA; David P. Abel, MOTLEY RICE LLC, Mount Pleasant, SC; and Anne T. Regan, ZIMMERMAN REED, PLLP, Minneapolis, MN, for plaintiffs.
Peter Carter, Kristin Zinsmaster, and Theresa Bevilacqua,, DORSEY & WHITNEY LLP, Minneapolis, MN, for defendants Medtronic, Inc., Hawkins, Ellis, Kuntz, Bearcroft, Treharne, and Yahiro.
John W. Lundquist, Chelsea Brennan, and Lousene Hoppe, FREDRIKSON & BYRON, PA, Minneapolis, MN, for defendants Zdeblick, Burkus, and Boden.
MEMORANDUM OPINION AND ORDER ON DEFENDANTS' MOTION TO DISMISS
JOHN R. TUNHEIM, United States District Judge.
Investor Plaintiffs bring this consolidated class action alleging that various defendants -- Medtronic, certain of its current and former officers and executives and paid consultants (collectively, " Defendants" ) -- issued false and misleading statements and engaged in a scheme to mislead investors regarding Medtronic's financial condition, particularly with respect to the safety and efficacy of its product INFUSE. Plaintiffs allege that studies initially demonstrating the safety and efficacy of INFUSE were shown to be inaccurate by new studies published in a medical journal called The Spine Journal in May and June 2011, which revealed that the incidence of adverse events experienced with its use was between ten and fifty times the rates previously published. Plaintiffs allege that Medtronic, together with physician consultants, engaged in a scheme to defraud investors by manipulating the early studies. Plaintiffs also allege that once the new, accurate studies were published, certain Defendants made false statements defending the reliability of the early studies. Plaintiffs allege that as a result of the scheme to defraud and misleading statements, Medtronic's stock traded at artificially inflated prices during the Class Period, but then dropped almost twenty-five percent from its high point during the Class Period when the truth was revealed.
Plaintiffs bring Count I for violation of Section 10(b) of the Securities and Exchange Act of 1934 (" Exchange Act" ), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5(b), through false and misleading statements against Medtronic, several of its executives, and a physician consultant named Dr. Thomas Zdeblick. They also bring Count II for a scheme and course of conduct intended to mislead in violation of Section 10(b) and Rule 10b-5 against all Defendants -- including two additional physician consultants -- and Count III for violation of Section 20(a) of the Exchange Act as control persons against Medtronic and the individual Medtronic executives.
Defendants move to dismiss all of Plaintiffs' claims. The Court will grant the motion in part and deny the motion in part. With respect to Count I, the Court concludes that Plaintiffs fail to allege that Defendants made materially false statements, with the exception of Defendant William Hawkins' statements regarding ongoing work with the FDA. With regard to Count II, the Court concludes that Plaintiffs' claims against the physician Consultant Defendants are barred by the statute of limitations, but will deny the motion with respect to Count II against the Medtronic Defendants. Because Count III for control person liability is derivative of other violations of the Exchange Act and the Court permits some claims to proceed against Medtronic and its officers, the Court will deny the motion with respect to Count III.
I. BRIEF BACKGROUND OF INFUSE
Before reciting Plaintiffs' specific allegations, the Court will first provide an overview of INFUSE and Plaintiffs' allegations. Medtronic developed the INFUSE bone graft as part of its spinal therapies. (Consolidated Class Action Compl. (" Compl." ) ¶ 7, Nov. 4, 2013, Docket No. 28.) INFUSE is the " trade name of rhBMP-2," which is a bone morphogenetic protein (" BMP" ) which induces the body to develop new bone tissue. ( Id.) INFUSE is an alternative to grafting replacement bone tissue and was the first BMP to reach the market. ( Id.) INFUSE was approved by the FDA in July 2002 for the treatment of degenerative disc disease, but Plaintiffs allege that its " approval indication was narrow: it was to be used only in single-level fusions, only between L4 and S1 . . . and only via an anterior approach." ( Id. ¶ 8 (emphasis in original).) INFUSE was later also approved for dental surgery and for the repair of certain shin fractures, but Plaintiffs allege that it has " never been approved for any spinal fusion indication other than [the lower back] surgeries." ( Id.) INFUSE is part of Medtronic's " spinal segment," which generated more than $3.5 billion in revenue in 2008, 2009, and 2010, which was approximately 22-23% of the company's revenue in those years. ( Id. ¶ 20.)
Plaintiffs allege that it was Medtronic's goal to have INFUSE entirely replace iliac crest bone grafting (" ICBG" ) as the standard of care in spinal fusion, but that in order for that to happen it would need to have clinical studies documenting its safety and efficacy, including that INFUSE achieved better results with fewer adverse side effects for patients than traditional grafting techniques. ( Id. ¶ 9.) Such clinical studies -- their development and Medtronic's response when their validity was challenged -- are at the heart of this dispute.
In addition to INFUSE, Plaintiffs allege that Medtronic also " concealed known risks" associated with a second-generation BMP called AMPLIFY. ( Id. ¶ 22.) AMPLIFY involved the same bone-growth-inducing
protein as INFUSE, but in a higher dosage -- 40mg, whereas INFUSE's maximum was 12mg. ( Id.) Some of Plaintiffs' allegations involve Medtronic's response when questions about AMPLIFY's safety were raised during its review by the FDA. AMPLIFY has not been approved by the FDA.
Plaintiffs make two substantive claims. First, Plaintiffs allege that Defendants made materially false statements during the Class Period in order to assure investors of the continued viability of INFUSE as a product and the prospect of AMPLIFY. Plaintiffs allege that these materially false statements artificially inflated Medtronic's stock price, which led investors to buy it, but that when the truth was revealed the value dropped. Second, Plaintiffs allege that before and during the Class Period, Defendants engaged in a scheme or course of conduct to manipulate the early clinical studies, which propelled INFUSE to success despite omitting many of INFUSE's adverse effects. Plaintiffs' claim for control person liability is derivative of these first two claims.
II. THE PARTIES
The lead Plaintiffs in this consolidated class action are several institutional investors: West Virginia Pipe Trades Health & Welfare Fund, Union Asset Management Holding AG, and Employees' Retirement System of the State of Hawaii, all of which allege that they purchased Medtronic common stock during the Class Period and were damaged by the conduct alleged in the complaint. ( Id. ¶ ¶ 43-45.)
Plaintiffs bring this action against Medtronic and several of its officers and employees, including: William Hawkins, former Chair of the Board of Directors and CEO, ( id. ¶ 47); Gary Ellis, Chief Financial Officer, ( id. ¶ 48); Richard Kuntz, Chief Scientific, Clinical and Regulatory Officer, ( id. ¶ 49); Julie Bearcroft, Director of Technology Management in Medtronic's Biologics Marketing Department, ( id. ¶ 50); Richard Treharne, Senior Vice President of Clinical and Regulatory Affairs, ( id. ¶ 51); and Martin Yahiro, Medtronic Senior Director of Regulatory Affairs, ( id. ¶ 52). The Court refers to the individual Medtronic Defendants as the " Individual Defendants" and the collection of the Individual Defendants plus Medtronic as the " Medtronic Defendants."
The complaint also alleges violations by three consultants (the " Consultant Defendants" or " physician consultants" ). Dr. Thomas Zdeblick was a physician consultant for Medtronic, whom Plaintiffs allege authored some of the medical journal articles with false and misleading statements, and was the Editor-in-Chief of the Journal of Spine Disorders. ( Id. ¶ 53.) Dr. Kenneth Burkus was a physician consultant for Medtronic, whom Plaintiffs allege authored some of the medical journal articles with false and misleading statements. ( Id. ¶ 54.) Dr. Scott Boden was a physician consultant for Medtronic, whom Plaintiffs allege authored some of the medical journal articles with false and misleading statements. ( Id. ¶ 55.)
Plaintiffs bring Count I for false and misleading statements in violation of section 10(b) and 10b-5 against only Medtronic, Hawkins, Ellis, Kuntz, and consultant Zdeblick. Plaintiffs bring Count II for scheme liability under 10(b) against all Defendants, and Count III for control person liability against only the Medtronic Defendants.
III. FALSE AND MISLEADING STATEMENTS
In Count I, Plaintiffs allege that the Medtronic Defendants and Zdeblick violated Section 10(b) and Rule 10b-5 by making
statements which were knowingly or recklessly false and materially misleading.
A. The Statements
Plaintiffs point to three distinct statements or categories of statements in support of their claims under Count I for false and misleading statements.
1. Commentary on Clinical Studies in 10-Qs
First, Plaintiffs allege that the September 8, 2010 and December 8, 2010 10-Q forms " included substantially identical false Sarbanes Oxley certifications of both Defendants Hawkins and Ellis" which stated, among other things, that Medtronic's " clinical studies were well-planned and designed to show both the efficacy and safety of its therapies." ( Id. ¶ ¶ 71-72.) Plaintiffs also point to Medtronic's March 9, 2011 filing of its third quarter 2011 (" 3Q11" ) 10-Q, which they allege " again falsely stated that the Company's 'well-planned studies' showed the safety and efficacy of its products and therapies." ( Id. ¶ 78.) The complaint quotes from the disclosure: " We work to improve patient access through well-planned studies which show the safety, efficacy, and cost-effectiveness of our therapies, and our alliances with patients, clinicians, regulators, and reimbursement agencies." ( Id. (emphasis omitted).) According to Plaintiffs, this was the first time that Medtronic disclosed that it had received a non-approval letter from the FDA about AMPLIFY. ( Id. ¶ 79.)
Plaintiffs allege that the 3Q11 10-Q " caused the Company's stock price to decline from a close of $39.80 on March 9, 2011, to a close of $38.63 on March 10, 2011." ( Id. ¶ 82.) Plaintiffs include in their allegations commentary from various news outlets about the impact of AMPLIFY on Medtronic's stock and the viability of INFUSE, including a New York Times article from April 11, 2011. ( Id. ¶ 83.) Later, on May 24, 2011, Medtronic issued a press release announcing its fourth quarter 2011 and fiscal year 2011 financial results and later that day held a conference call, during which Plaintiffs allege that Medtronic, " specifically, Ellis, falsely stated that [Medtronic] set high standards for quality in the industry." ( Id. ¶ 85.)
2. Interactions and Status with the FDA
Second, Plaintiffs allege that on February 22, 2011, after releasing Medtronic's 3Q11 financial results, Medtronic hosted a conference call for analysts and investors during which Hawkins was asked about whether the FDA might delay its approval of AMPLIFY and whether any delay might negatively impact INFUSE sales. ( Id. ¶ 73.) Plaintiffs allege that Hawkins' responses " falsely suggested that approvability had not yet been determined, and . . . that even if there were a delay, it would not impact [Medtronic]'s current business." ( Id.) Plaintiffs point specifically to the following exchange:
[HAWKINS:] [W]e are continuing to work with the FDA to figure out kind of where they are on this . . . . So as we learn more, we will let you know . . . . [If] there was a reason for the FDA to delay this anymore, it is not going to have a significant impact. It won't have any really impact on our current business. It is really all upside for us.
[ANALYST:] [J]ust to clarify that, Bill. You don't feel that not having -- like posterior lumbar fusion is probably the biggest off-label to use of INFUSE. And you don't think not getting AMPLIFY approved could result in a retrenchment.
[HAWKINS:] No . . . . I don't see anything that would change as the result of AMPLIFY not getting approved.
( Id. (emphasis omitted).) Plaintiffs allege that this statement was " knowingly materially false and misleading because . . . [Medtronic] had received a letter from the FDA before January 28, 2011, stating that AMPLIFY would not be approved." ( Id. ¶ 74.) Later in the complaint, Plaintiffs explain that in Medtronic's 3Q11 10-Q, it " disclosed for the first time that . . . it had received a non-approval letter from the FDA concerning AMPLIFY: In the third quarter of fiscal year 2011, the FDA sent Medtronic a letter advising that they were not able to approve AMPLIFY at that time without additional information from Medtronic." ( Id. ¶ 79.)
3. Statements about Correlation with Retrograde Ejaculation
Plaintiffs allege that the truth about INFUSE began to be revealed when, on May 25, 2011, The Spine Journal published a retrospective data analysis of spinal fusion patients over a period of three years, which demonstrated that there was a 7.2% incidence of retrograde ejaculation in INFUSE patients, compared with .6% incidence in patients who did not receive INFUSE. ( Id. ¶ ¶ 89-90.) Plaintiffs allege that other articles published around that time, including another published by The Spine Journal and that Bloomberg and The New York Times, also reported on these studies. ( Id. ¶ ¶ 91-92.)
Plaintiffs allege that even after these reports began to surface, Defendants continued to make material misrepresentations covering up the scheme and earlier research's understatement of the link with retrograde ejaculation. They point to a May 25, 2011 New York Times article which included a response to The Spine Journal article from Zdeblick, in which he stated that the study " was of limited value because it reflected the results of a retrospective look at patients rather than a clinical trial," that " [s]uch reports 'are notorious for being misleading,'" and stating that Defendant Zdeblick had " adamantly insisted that . . . financial relationships have not affected [his] scientific judgment." ( Id. ¶ 93 (emphasis omitted).)
Plaintiffs allege that after the May 25, 2011 articles, Medtronic's stock dropped from $40.88 on May 24, 2011 to $40.23 on May 25, 2011. ( Id. ¶ 95.) Plaintiffs allege that at this time, " Medtronic admitted that it knew of the infertility risks in the original studies but falsely claimed they were not statistically significant," pointing to a Star Tribune article in which a Medtronic spokesperson said that the original study that supported FDA approval of INFUSE did not indicate sterility problems " common enough to be statistically linked to the product." ( Id. ¶ 96.) The Star Tribune also reported Zdeblick's response to the reports, reporting that he stated in an email that the new study was " interesting, but a single publication in the medical literature does not constitute a truth. Retrospective trials are notorious for being misleading," and that the study has " numerous flaws" but that the study's findings were nonetheless " in line with other INFUSE studies." ( Id. ¶ 97 (alterations and internal quotations omitted).)
Plaintiffs allege that Defendants knew that this commentary -- from both Medtronic and Zdeblick -- on the new study was false because a report from an investigation by the United States Senate showed that " Medtronic and Zdeblick knew as early
as 2001 that retrograde ejaculation rates were higher in both investigational groups (i.e., INFUSE patients) than the control group," pointing to a 2001 PowerPoint presentation Zdeblick made to study investigators in February 2001, in which Zdeblick reported that there were rates of 10.3% and 6.3% of retrograde ejaculation in INFUSE patients as opposed to 1.5% for the control group, which Zdeblick labeled as " statistically different from control." ( Id. ¶ 99.) Plaintiffs allege that Zdeblick later admitted that this finding " should have been mentioned in [Medtronic]'s report about the initial trial of INFUSE in the Journal of Spinal Disorders in 2002," but that he " maintained that the risk of sterility linked to INFUSE wasn't reported in journal articles because it wasn't statistically significant." ( Id. ¶ 100.)
4. Required Financial Disclosures
In addition to these three statements, Plaintiffs also allege that Medtronic included material misstatements in its required financial disclosures. Plaintiffs allege that throughout the Class Period, Medtronic " frequently emphasized the Spine segment as an important revenue growth driver for [Medtronic] as a whole" and " knew that when the truth about INFUSE emerged, [Medtronic] would suffer material declines in sales." ( Id. ¶ ¶ 130-31.) Plaintiffs allege that Defendants:
violated SEC disclosure rules, notably Regulation S-K Item 303(a)(3)(ii) in the Management's Discussion and Analysis (" MD& A" ) section of [Medtronic]'s Class-Period financial statements by presenting a positive trend of increasing Spine segment and INFUSE (Biologics) revenue without any further disclosure that the reported results were in no way indicative of future results.
( Id. ¶ 132.) The parties do not focus their arguments on these allegations.
B. Allegations as to Falsity of Statements and Scienter
Plaintiffs allege that these above statements were materially and knowingly false and misleading for several reasons. First, they allege that Medtronic " did not 'set the standard for quality in the industry' and did not engage in well-planned studies showing the safety and efficacy of INFUSE or AMPLIFY," but instead that Medtronic edited and influenced the research studies which intentionally omitted and understated the adverse effects of INFUSE. ( Id. ¶ 87(a) (emphasis original).) Plaintiffs point to one instance in which consultant Defendant Burkus admitted that for a 2002 article he authored, he " could 'take credit for only a small fraction of the work that ha[d] gone into this paper,'" because Medtronic employees had significant input. ( Id. ¶ 87(a); see also id., Ex. D.) They point to another communication in which Burkus stated that his named co-authors on the study " did not write one word," ( see id., Ex. E), and allege that each of the early research articles was published without any indication that Medtronic had been involved in editing or drafting the articles, ( id. ¶ 87(a)). Plaintiffs proceed to list eleven articles which they claim Medtronic executives and employees participated in drafting or editing which failed to disclose adverse events known to or recklessly disregarded by Medtronic and the author physicians. ( Id. ¶ 87(b).) Plaintiffs allege that Medtronic knew but failed to disclose that it had paid $210 million to physician authors who published these articles and that " such payments, and Medtronic's involvement in the drafting and editing of these articles, were part of and/or advanced an undisclosed scheme to conceal or materially minimize adverse events" related to INFUSE. ( Id. ¶ 87(c).) Plaintiffs further allege that the Defendants knew, but failed to disclose,
Medtronic's involvement in the research even when the government and media sought to investigate the relationship between Medtronic and researchers and " while purporting to cooperate with . . . requests for information, were not in fact cooperating," but instead continued to conceal that the initial medical reports were actually " a result of the undisclosed scheme." ( Id. ¶ 87(d).) Plaintiffs also allege that Medtronic failed to disclose that its revenue and profits in the spine unit had been driven " not by the safety and efficacy of the treatments, but by defendants' fraudulent scheme and intentional concealment of the true side effects of INFUSE" and that, further, the " potential approval and resulting sales growth of AMPLIFY was based upon the initial and continued concealment of the known adverse events and risks" associated with INFUSE. ( Id. ¶ 87(e).)
According to Plaintiffs, Defendants also failed to disclose their knowledge that the clinical trials " were not designed to show [INFUSE]'s safety and efficacy, but to obscure and conceal known harmful side effects of INFUSE." ( Id. ¶ 87(f).) In this regard, Plaintiffs point to an email written in 2006 by Defendant Yahiro, claiming that it shows that Medtronic's efforts to get the FDA to loosen rules governing the disclosure of adverse events were driven by a " desire to obscure adverse events associated with INFUSE and INFUSE-related products." ( Id. ¶ 87(f).) The email states:
Thanks for your note. I think we're all on the same page regarding the ability to determine the exact cause of an event that could possibly be related to INFUSE (or just a result of cervical surgery). We agree it would be difficult to pin it on INFUSE, which is exactly why we wrote the stopping rule that way. What we don't want is a rule that would have specific events with incidence rates, etc., that would stop the trial when it would be hard to say it WASN'T INFUSE.
The way we wrote it, WE make the determination whether it was INFUSE related. This way, if a patient has an AE like severe cervical swelling, we can honestly say that it is not possible to know that the cause is definitely INFUSE and therefore the study need not be stopped.
( Id. ¶ 87(f) (citing id., Ex. C at 17-18).) Plaintiffs claim that Yahiro is explaining that Medtronic's proposal was written the way it was so that it would be difficult to " pin" the cause of an adverse event on INFUSE. ( Id. ¶ 87(f).) Rather than being designed to elicit information about adverse events, Plaintiffs allege that the INFUSE clinical trials were biased in favor of INFUSE. ( Id. ¶ 87(g).) They point to two independent reviews of Medtronic's study protocols in support of this argument, which they claim point to problems in the clinical studies, including that adverse events " were generally not actively elicited" and that it was not clear " whether investigators asked about specific symptoms" that would lead to accurate diagnoses of adverse events. ( Id. ¶ ¶ 87(g)-(h).) As an example of the scheme to defraud, Plaintiffs allege that Defendants were aware in June 2004 that Medtronic employee Bearcroft advised Defendant Burkus to " not include any 'significant detail' on adverse events" in one of his reports and instead that it was " appropriate to simply report the adverse events were equivalent in the two groups without the detail." ( Id. ¶ 87(h) (citing id., Ex. C).) According to Plaintiffs, it was later revealed that a table summarizing the adverse events was therefore removed. ( Id. ¶ 87(h).)
Plaintiffs also allege that Defendants knew and failed to disclose that future
sales growth of INFUSE depended on continued concealment of this scheme, given that, as early as 2004, Medtronic was receiving complaints about severe swelling in cases where INFUSE was used in the cervical spine and that Medtronic had begun to analyze any possible causal connection between INFUSE and swelling. ( Id. ¶ 87(i).) Plaintiffs point to an email exchange between Medtronic employee Defendant Treharne and physician consultant Boden in which Plaintiffs claim, " Treharne tried to convince Boden with an analysis that purported to show the lack of such causal relationship," but that " Boden remained unconvinced:"
While statistically your numbers do not suggest an increased incidence, I think there is a possibility that could be a misleading conclusion.
. . .
At this point, the statistics do not prove anything one way or another, but I am still concerned that there could be an association between BMP-2 and edema in these cervical cases. . . . I think continued warning needs to be advised to ...