United States District Court, D. Minnesota
Sandra K. Shoemaker, individually and on behalf of all others similarly situated, Plaintiffs,
Cardiovascular Systems, Inc., and Laurence L. Betterley, Defendants.
L. Bleichner, Esq., and Jeffrey D. Bores, 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.
Ni, Esq., and Jeremy Robinson, Esq., Bernstein Litowitz
Berger & Grossmann LLP; Gregg M. Fishbein, Esq., Kate M.
Baxter-Kauf, Esq., and Richard A. Lockridge, Esq., Lockridge
Grindal Nauen PLLP; Alfred L. Fatale, III, Esq., and Ross M.
Kamhi, Esq., Labaton Sucharow LLP; and David A. Goodwin,
Esq., Gustafson Gluek PLLC, counsel for City of Miami Fire
Fighters' & Police Officers' Retirement Trust.
R. Marshall, Esq., and Leah C. Janus, Esq., Fredrikson &
Byron, PA; and Michael C. Tu, Esq., Daniel Streim, Esq., and
Robert M. Stern, Esq., Orrick, Herrington & Sutcliffe
LLP, counsel for Defendants.
MEMORANDUM OPINION AND ORDER
DONOVAN W. FRANK UNITED STATES DISTRICT JUDGE
plaintiffs in this case are shareholders of a publicly
traded, medical-device company that allegedly violated
securities laws by making material misstatements regarding
illegal kickbacks paid to doctors. This matter is before the
Court on the defendants' motion to dismiss. For the
reasons discussed below, the Court grants the defendants'
Systems, Inc. (“CSI”) is a publicly traded
company that primarily develops and manufactures medical
devices for the treatment of peripheral arterial disease and
coronary artery disease. Defendant Laurence Betterley has
been CSI's Chief Financial Officer since April 2008.
David L. Martin, recently deceased, was CSI's CEO and one
of its directors during the relevant time period. 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.
88% of CSI's business comes from the sale of devices used
to treat peripheral arterial disease (“PAD”). 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.)
devices are heavily regulated, including under the federal
Anti-Kickback Statute (“AKS”). 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” either to
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 either to 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)). 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 the 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
(“FCA”) where a claim submitted to the government
includes items or services resulting from a violation of the
AKS. Id. § 1320a-7b(g).
Qui Tam Complaint
15, 2013, a former district sales manager, who worked for CSI
from 2012 until February 2013, filed a qui tam 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 alleged 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. (Id. ¶¶ 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 alleged that CSI gave illegal kickbacks
in the form of free products, such as deals where physicians
would buy six devices and get one free. (Id. ¶
69.) CSI also 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 alleged 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.)
first, the Qui Tam Complaint was filed under seal, concealing
its existence from CSI. 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. On July 8, 2015, the Qui Tam Complaint
was unsealed. On June 29, 2016, CSI settled the Qui Tam
Complaint in exchange for $8 million and agreeing to a
Corporate Integrity Agreement. CSI did not admit any
wrongdoing as part of the settlement. (Doc. No. 74
(“Robinson Decl.”) ¶ 12, Ex. 5
(“Settlement Agreement”) at 2.)
aftermath of the announcement of the Qui Tam Complaint,
CSI's stock price fell. Shareholders filed suit in the
Central District of California and in the District of
Minnesota. On March 26, 2016, this Court appointed Plaintiffs
as Co-Lead Plaintiffs. (Doc. No. 25.) And on June 28, 2016,
Plaintiffs filed their consolidated complaint. (Doc. No. 48.)
Plaintiffs' consolidated complaint, they claimed 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; 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. The consolidated
complaint included statements from fourteen confidential
witnesses allegedly corroborating Plaintiffs' complaint.
On August 29, 2016, Defendants filed a motion to dismiss,
which the Court granted with leave to amend.
Plaintiffs' First Amended Complaint (“FAC”)
(Doc. No. 86), they adopt an entirely new theory of
misconduct: CSI provided marketing services for doctors in
exchange for referring others who will purchase CSI devices.
Plaintiffs draw their new theory from an employee
whistleblower case in California (“Babyak
Action”). In the Babyak Action, the employee was
allegedly retaliated against for complaining of illegal and
unsafe conduct, including illegal kickbacks for referrals.
marketing-for-referrals scheme was allegedly hatched by an
Area Sales Director, Todd Goldberg, who was hired on April
30, 2014 (9 days before CSI announced the Qui Tam Complaint).
Goldberg allegedly directed CSI district sales managers to
offer marketing services for doctors who referred CSI
devices, which he called the Triangle Offense. In discovery
for the Babyak Action, different CSI employees stated that
the Triangle Offense was Goldberg's idea. Plaintiffs
allege that the referral scheme was slowly phased out between
May 9, 2014 and August 2015. But ...