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Shoemaker v. Cardiovascular Systems, Inc.

United States District Court, D. Minnesota

March 29, 2017

Sandra K. Shoemaker, individually and on behalf of all others similarly situated, Plaintiffs,
Cardiovascular Systems, Inc., and Laurence L. Betterley, Defendants.

          Bryan L. Bleichner, Esq., Jeffrey D. Bores, Esq., Karl L. Cambronne, Esq., Chestnut Cambronne, PA; and Naumon A. Amjed, Esq., and Ryan T. Degnan, Esq., Kessler Topaz Meltzer & Check LLP, counsel for Plaintiff Sandra K. Shoemaker.

          Angus Ni, Esq., Jeremy Robinson, Esq., Bernstein Litowitz Berger & Grossmann LLP; and Gregg M. Fishbein, Esq., Kate M. Baxter-Kauf, Esq., Richard A. Lockridge, Esq., Lockridge Grindal Nauen PLLP, counsel for City of Miami Fire Fighters' & Police Officers' Retirement Trust.

          David R. Marshall, Esq., Leah C. Janus, Esq., Fredrikson & Byron, PA; and Michael C. Tu, Esq., Robert M. Stern, Esq., Orrick, Herrington & Sutcliffe LLP, counsel for Defendants.


          DONOVAN W. FRANK United States District Judge


         This matter is before the Court on a Motion to Dismiss Plaintiffs' Amended Class Action Complaint (“Complaint”) brought by Defendants Cardiovascular Systems, Inc. (“CSI”) and Laurence L. Betterley (“Betterley”). (Doc. No. 52.) For the reasons set forth below, the Court grants the Motion to Dismiss without prejudice and grants Plaintiffs' request for leave to amend their Complaint.


         CSI is a publicly traded company that primarily develops and manufactures medical devices for the treatment of peripheral arterial disease and coronary artery disease. (Doc. No. 48 (“Am. Compl.”) ¶ 20.) Betterley has been CSI's Chief Financial Officer since April 2008. (Id. ¶ 22.) David L. Martin, recently deceased, was CSI's CEO and one of its directors during the relevant time period. (Id. ¶ 23.) Plaintiffs are shareholders of CSI who allege that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Plaintiffs seek to represent a class of shareholders who “purchased or otherwise acquired” CSI's common stock between September 12, 2011 and January 21, 2016. (Am. Compl. at 1.)

         I. CSI's Business Model

         Around 88% of CSI's business comes from the sale of devices used to treat peripheral arterial disease (“PAD”). (Id. ¶ 26.) PAD “typically refers to the chronic obstruction of the arteries supplying the lower extremities due to plaque deposition on the walls of the arteries resulting in inadequate blood flow to the limbs.” (Doc. Nos. 55-70 (“Luken Decl.”) ¶ 11, Ex. 10 at 2.) The effect of PAD, if left untreated, “may continue to progress to Critical Limb Ischemia (“CLI”), a condition in which the amount of oxygenated blood being delivered to the limb is insufficient to keep the tissue alive.” (Id.) CLI can lead to a number of adverse health effects up to and including death. (Id.) In fact, within a year of a CLI diagnosis, 25% to 30% of patients will die. (Id.)

         During the relevant period, CSI received FDA approval to sell three different PAD devices for PAD therapy. (Am. Compl. ¶ 34.) The FDA authorized the sale of CSI's Diamondback 360® Peripheral Orbital Atherectomy System in August 2007; CSI's Stealth 360® Orbital Atherectomy System in March 2011; and CSI's Diamondback 360®60 cm Peripheral Orbital Atherectomy System in February 2014. (Luken Decl. ¶ 11, Ex. 10 at 2.)

         CSI has also developed devices to treat coronary artery disease (“CAD”). CAD is the most common type of heart disease in the United States. (Id. at 3.) CAD occurs when “plaque builds up on the walls of arteries that supply blood to the heart.” (Id.) In October 2013, the FDA gave premarket approval for CSI's Diamondback 360® Coronary OAS to treat CAD. (Id. at 2.)

         II. AKS, FCA, and Off-Label Promotions

         CSI operates in a heavily regulated market, which prohibits some conduct that would be legal in less regulated industries. Under the Food, Drug, and Cosmetic Act (“FDCA”), the Food and Drug Administration (“FDA”) is vested with, among other things, the responsibility of approving labels for medical devices, which outline the devices' approved uses. James M. Beck & Elizabeth D. Azari, FDA, Off-Label Use, and Informed Consent: Debunking Myths and Misconceptions, 53 Food & Drug L.J. 71, 71 (1998). Once approved for particular uses, a physician can still prescribe the device for other, off-label uses. Id. at 78. Such off-label uses are a “common and integral feature of medical practice.” Id. at 79. But even though a physician may prescribe an off-label use, manufacturers may not promote those uses. Id. at 102 & n.235. If a manufacturer is found to have promoted an off-label use, the manufacturer can face a number of penalties, including up to a year in prison and a $1, 000 fine. See 21 U.S.C. § 333.

         Medical devices are also regulated by the federal Anti-Kickback Statute (“AKS”).[1]The AKS is a criminal statute that prohibits, among other things, “knowingly and willfully offer[ing] or pay[ing] any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person” to either refer an individual to the person for medical services or to purchase any good that that will be repaid in whole or in part by a federal health care program. 42 U.S.C. § 1320a-7b(b)(2)(B). In short, a violation of the AKS requires: (1) a remuneration to a person or entity in a position to either purchase goods subject to reimbursement by a federal health care program or to refer a patient whose care will be reimbursed by a federal health care program; and (2) that the remuneration could reasonably induce such referral or such purchase. See Jones-McNamara v. Holzer Health Sys., 630 F. App'x 394, 401 (6th Cir. 2015) (citing OIG Supplemental Compliance Program Guidance for Hospitals, 70 Fed. Reg. 4858, 4864 (Jan. 31, 2005)).[2] Courts and the OIG have concluded that a “remuneration” is “virtually anything of value.” Id. (quoting OIG Compliance Program Guidance for Ambulance Suppliers, 68 Fed. Reg. 14245, 14252 (Mar. 24, 2003)). A person guilty of violating AKS faces up to five years in prison and a fine up to $25, 000. 42 U.S.C. § 1320a-7b(b). A violation of the AKS may also be a violation of the federal False Claims Act[3] (“FCA”) where a claim submitted to the government includes items or services resulting from a violation of the AKS. Id. § 1320a-7b(g).

         The AKS has a number of safe harbors, including for providing discounts. Id. § 1320a-7b(b)(3)(A). The safe harbor, however, does not offer protection if, among other things, the documentation provided to physicians does not accurately reflect the discount. 42 C.F.R § 1001.952(h)(2); United States v. Carroll, 320 F.Supp.2d 748, 756 (S.D. Ill. 2004) (quoting OIG Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute, 64 Fed. Reg. 63518, 63527 (Nov. 19, 1999)); see also U.S. ex rel. Banigan v. Organon USA Inc., 883 F.Supp.2d 277, 296 (D. Mass. 2012) (noting that discounts are not covered if they are not passed on to Medicaid).

         III. Qui Tam Allegations

         On July 15, 2013, a former district sales manager, who worked for CSI from 2012 until February 2013, filed a qui tam[4] action against CSI. (Doc. No. 48-2 (“Qui Tam Complaint”) ¶ 9.) The Qui Tam Complaint alleged that CSI had illegally promoted its PAD devices for off-label purposes and had given illegal kickbacks to physicians for prescribing the PAD devices. (See Id. ¶ 10.) The Qui Tam Complaint was expressly incorporated by reference into the Complaint. (Am. Compl. at 1 n.1.)[5]

         The Qui Tam Complaint alleges that CSI gave illegal kickbacks to physicians in the form of free trips to training programs at desirable locations in exchange for the physicians buying PAD devices. (Qui Tam Complaint ¶¶ 50-52.) Additionally, CSI allegedly marketed the PAD devices as a revenue generator for physicians as compared to less expensive alternatives. (Id. ¶ 59.) CSI also allegedly encouraged physicians to use the PAD devices when they were not medically necessary. (Id. ¶ 63.) In addition, the Qui Tam Complaint alleges that CSI gave illegal kickbacks in the form of free products, such as deals where the physicians buy six devices and get one free. (Id. ¶ 69.) CSI allegedly offered illegal kickbacks in the form of referrals to doctors in exchange for use of PAD devices. (Id. ¶¶ 74, 80-81.) Finally, the Qui Tam Complaint alleges that CSI selected physicians to be paid speakers for CSI's Speaker Bureau based on which physicians used the most PAD devices and who would drive others to use PAD devices. (Id. ¶ 88.)

         In addition, the Qui Tam Complaint alleges that CSI marketed its PAD devices for off-label uses. Specifically, CSI allegedly informed physicians at training events that its PAD Devices, which were allegedly approved to be used on certain blood vessels in certain parts of the body, could also be used for other vessels in other body parts. (Id. ¶¶ 97, 101, 106.)

         IV. Qui Tam Settlement and Aftermath

         At first, the Qui Tam Complaint was filed under seal, concealing its existence from CSI. (See Am. Compl. ¶ 8; Memo. at 7.)[6] On May 9, 2014, CSI announced that the U.S. Attorney's Office for the Western District of North Carolina had sent CSI notice that it was investigating the Qui Tam Complaint. (Am. Compl. ¶ 10.) On July 8, 2015, the Qui Tam Complaint was unsealed. (Memo at 7; Luken Decl. ¶ 26, Ex. 25.) On June 29, 2016, CSI settled the Qui Tam Complaint in exchange for $8 million and agreeing to a Corporate Integrity Agreement. (Opp. at 9.) CSI did not admit any wrongdoing as part of the settlement. (Doc. No. 74 (“Robinson Decl.”) ¶ 12, Ex. 5 (“Settlement Agreement”) at 2.)

         In the aftermath of the announcement of the Qui Tam Complaint, CSI's stock price fell. (Am. Compl. ¶ 124.) Shareholders filed suit in the Central District of California and in the District of Minnesota. (Memo. at 8.) On March 26, 2016, this Court appointed Plaintiffs as Co-Lead Plaintiffs. (Doc. No. 25.) And on June 28, 2016, Plaintiffs filed this Complaint. (Doc. No. 48.)

         V. Plaintiffs' Complaint

         Plaintiffs claim that in early 2012, Kevin Kenny (Executive Vice President of Sales and Marketing) and Jim Breidenstein (Vice President of Sales) implemented a scheme whereby CSI began violating the AKS and the FCA by: (1) providing kickbacks to physicians for using PAD devices, which took the form of either referrals, discounted products, or assistance in establishing office-based laboratories; (2) encouraging physicians to use PAD devices when they were not medically necessary; (3) hiding products so they would be reordered or channel stuffing;[7] and (4) promoting the product for off-label uses. The scheme was allegedly in place from when Breidenstein joined CSI in 2012 until May 9, 2014, when CSI received notice of the Qui Tam Complaint. (See Am. Compl. ¶¶ 34, 60.)

         In addition to allegations from the Qui Tam Complaint, Plaintiffs also used an investigator who successfully contacted fourteen former CSI employees. The former employees did not sign declarations regarding CSI's sales practices. Instead, Plaintiffs have attributed the information in the form of confidential witness statements. In response to the statements, CSI claims that it spoke with eight of the fourteen witnesses. And according to CSI, each of the eight refuted their attributed statements, and two signed declarations. (Memo. at 20.) The confidential witnesses (“CWs”) make the following allegations:

CW1 was a District Sales Manager in New York from 2010 to 2012. According to CW1:
• CSI provided free products through “‘buy some get some free' deals, ” but recorded them as lost inventory. (Am. Compl. ¶ 57.)
• CSI targeted third-party physicians to refer patients to physicians who used PAD devices. (Id. ¶ 69.)
• Physicians used PAD devices when they were not medically necessary. (Id. ¶ 88.)
• CSI provided physicians with documents that promoted CSI's PAD devices as revenue generators. (Id. ¶ 90.)
CW2 was a Sales Specialist in Florida from 2012 to 2014. According to CW2:
• CSI trained sales representatives and physicians to use PAD devices with smaller, unapproved catheters. (Id. ¶ 43.)
• CSI provided physicians with documents that promoted CSI's PAD devices as revenue generators. (Id. ¶¶ 43, 91.)
• CSI gave away free products in buy-some, get-some-free deals. (¶¶ 58-59.) The deals were regularly touted by Breidenstein. (Id.)
• CSI marketed its referral network, including by inviting physicians to dinner. (Id. ¶ 70.)
• CSI offered free products to office-based laboratories and otherwise supported their operations. (Id. ¶ 82.)
• Physicians performed medically unnecessary procedures to use more CSI PAD devices, which was encouraged by “CSI officials.” (Id. ¶¶ 88-90.)
CW3 was an executive and Vice President from 2006 until 2012, and he heard about the existence of illegal sales practices, which were implemented by Breidenstein and Kenny. (Id. ¶ 60.)
CW4 was a referral marketer from 2008 until 2010. In 2010, he became a District Sales Manager until 2012. He worked in the Southeastern United ...

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