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West Virginia Pipe Trades Health & Welfare Fund v. Medtronic, Inc.

United States District Court, D. Minnesota

January 30, 2018

WEST VIRGINIA PIPE TRADES HEALTH & WELFARE FUND, EMPLOYEES' RETIREMENT SYSTEM OF THE STATE OF HAWAII, and UNION ASSET MANAGEMENT HOLDING AG, Plaintiffs,
v.
MEDTRONIC, INC., WILLIAM A. HAWKINS, GARY L. ELLIS, RICHARD E. KUNTZ, JULIE BEARCROFT, RICHARD W. TREHARNE, and MARTIN YAHIRO, Defendants.

          Christopher M. Wood and Shawn A. Williams, ROBBINS GELLER RUDMAN & DOWD LLP, Carolyn G. Anderson, ZIMMERMAN REED, PLLP, William H. Narwold, MOTLEY RICE LLC, for plaintiffs.

          Steven M. Farina, WILLIAMS & CONNOLLY LLP, Theresa M. Bevilacqua, DORSEY & WHITNEY LLP, for defendants.

          ORDER CERTIFYING CLASS

          JOHN R. TUNHEIM CHIEF JUDGE UNITED STATES DISTRICT COURT.

         Plaintiffs West Virginia Pipe Trades Health & Welfare Fund, Employees' Retirement System of the State of Hawaii, and Union Asset Management Holding AG (collectively, “Plaintiffs”) bring this consolidated class action against Medtronic and several of its officers and employees (collectively, “Medtronic”), alleging that Medtronic engaged in a scheme to defraud investors in violation of federal securities laws.

         Plaintiffs have moved to certify class. The proposed class is defined as:

All persons or entities who purchased or otherwise acquired the publicly traded common stock of Medtronic between September 8, 2010 and August 3, 2011 (the “Class Period”), and who were damaged by defendants' alleged violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Class”). Excluded from the Class are defendants and their families, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns, and any entity in which defendants have or had a controlling interest.

         Medtronic opposes class certification and also argues that, if the Court grants Plaintiffs' motion to certify class, the end of the class period should be shortened from August 3, 2011, to June 28, 2011.

         The Court will grant Plaintiffs' motion to certify class but will modify the class period to end on June 28, 2011.

         BACKGROUND

         I. INFUSE AND THIS ACTION

         This case centers on Medtronic's INFUSE product. INFUSE is the “trade name of rhBMP-2, ” which is a bone morphogenetic protein (“BMP”) that induces the body to develop new bone tissue. (Consolidated Class Action Compl. (“Compl.”) ¶ 7, Nov. 4, 2013, Docket No. 28.) INFUSE is an alternative to replacement bone-tissue grafts and was the first BMP to reach the market. (Id.) The FDA approved INFUSE for what the plaintiffs allege are somewhat limited treatment purposes: certain treatment of degenerative disc disease, dental surgery, and certain shin fractures. (Id. ¶ 8.) INFUSE was never approved, however, “for any spinal fusion indication other than [the disc] surgeries.” (Id.) INFUSE is a key part of Medtronic's “spinal segment” of business, which generated more than $3.5 billion in revenue in 2008, 2009, and 2010. (Id. ¶ 20.) Relevant to this case, Medtronic also sought FDA approval for AMPLIFY, a second-generation BMP. (Id. ¶¶ 22, 24.)

         The lead plaintiffs in this case 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.) They bring this action against Medtronic and several of its officers and employees. (Id. ¶¶ 47-52.)

         The only remaining allegation is that before and during the Class Period, Medtronic 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. (Id. ¶¶ 162-65.) Plaintiffs allege that early INFUSE clinical studies revealed safety risks that threatened Medtronic's goals for the product and, as a result, Medtronic “embarked on a scheme with physician investigators and authors to conceal the significant safety risks from the public and physician community.” (Id. ¶¶ 15, 163.) They allege that Medtronic did so by “forg[ing] relationships, including financial relationships, with physician authors who published research articles in respected medical journals and knowingly concealed in those original articles, or omitted altogether, known facts regarding INFUSE's adverse side effects observed in clinical trials, ” and that these research articles “overstated apparent disadvantages of alternate bone graft procedures . . . as opposed to treatment with INFUSE.” (Id. ¶ 16.) Plaintiffs also allege that Medtronic and the consulting physicians “knew but failed to disclose that Medtronic had paid millions of dollars to the same physician authors and that during the drafting process[ ] Medtronic employees heavily edited the articles and specifically excised true facts learned during clinical trials about the efficacy and side effects of INFUSE, which would have alerted the public and physicians using INFUSE about its harmful side effects and lack of clinical benefit.” (Id. ¶ 17.)

         II. POSSIBLE CORRECTIVE DISCLOSURES

         One critical dispute is which public disclosures made the market aware of Medtronic's alleged wrongdoing - especially the alleged scheme to manipulate early clinical studies. The parties cite three possible dates for the corrective disclosure.

         On June 28, 2011, The Spine Journal devoted an entire issue to critical studies of INFUSE, disclosing the financial conflicts of interest by the researchers who had published initial studies finding that the product was safe. (Id. ¶ 4.) The Spine Journal reported that for twelve of the studies, “the median-known financial association between the authors and Medtronic Inc. was found be approximately $12, 000, 000-$16, 000, 000 per study (range, $560, 000-$23, 500, 000).” (Id. ¶ 30.) Moreover, The Spine Journal reported that the incidence of adverse events experienced in connection with INFUSE's use was between 10 and 50 times the rates published in industry-supported studies. (Id. ¶¶ 18, 30.) Medtronic argues that the June 28, 2011, issue of The Spine Journal constitutes the corrective disclosure.

         On July 5, 2011, Wells Fargo and J.P. Morgan published analyst reports detailing the potential market effects of the disclosures in The Spine Journal. (Decl. of Shawn A. Williams (“Williams Decl.”) ¶ 2, Ex. 7, Mar. 24, 2017, Docket No. 197; Decl. of Christopher M. Wood (“Wood Decl.”) ¶ 2, Ex. 3, June 27, 2017, Docket No. 331.) The Wells Fargo report began, “We believe the InFuse papers published in The Spine Journal on June 28 will have broader implications for [Medtronic] and its spine business than the Street currently expects.” (Williams Decl. ¶ 2, Ex. 7 at 283.) Wells Fargo predicted that “The Spine Journal papers will reduce InFuse sales by 30-50%” and would likely lead the FDA to “announce a formal review of InFuse.” (Id., Ex. 7 at 284.) Similarly, the J.P. Morgan report focused on the “scathing criticism of Medtronic's Infuse” contained in The Spine Journal. (Wood Decl. ¶ 2, Ex. 3 at 33.) J.P. Morgan reported that “in the wake of the June issue of The Spine Journal, ” surgeons reported that they were less likely to use INFUSE. (Id., Ex. 3 at 35.) Both reports focused almost exclusively on the disclosures contained within The Spine Journal.

         Finally, on August 3, 2011, Medtronic announced that it hired Yale for $2.5 million and released the INFUSE data for Yale researchers to conduct a review. (Compl. ¶ 117.) Plaintiffs argue that the August 3, 2011, announcement about the decision to hire Yale constitutes the corrective disclosure.

         DISCUSSION

         I. STANDARD OF REVIEW

         The district court is “accorded broad discretion to decide whether [class] certification is appropriate.” Prof'l Firefighters Ass'n of Omaha, Local 385 v. Zalewski, 678 F.3d 640, 645 (8th Cir. 2012) (quotation omitted). To certify a class, a plaintiff must show that the numerosity, commonality, typicality, and adequacy of representation requirements of Federal Rule of Civil Procedure 23(a) are met and that the class comports with one of the three types of classes identified in Rule 23(b). Mathers v. Northshore Mining Co., 217 F.R.D. 474, 483 (D. Minn. 2003). The Court accepts the substantive allegations in the plaintiff's complaint as true when determining if the proposed class is acceptable. Id. In determining the propriety of a class action, the focus is on whether the class satisfies Rule 23 and not whether the proposed action will prevail. Id. The Court must undertake a “rigorous analysis” to assure that these requirements are met. Gen. Tel. Co. v. Falcon, 457 U.S. 147, 161 (1982).

         II. CLASS CERTIFICATION

         A. Rule 23(a)(1) Requirements

         To certify a class, a plaintiff must meet the four requirements in Rule 23(a). First, the class must be so numerous that joinder of all members is impracticable (“numerosity”). Fed.R.Civ.P. 23(a)(1). Second, there must be questions of law or fact common to the class (“commonality”). Id. at 23(a)(2). Third, the claims or defenses of the representative parties must be typical of the claims or defenses of the class (“typicality”). Id. at 23(a)(3). Fourth, the representative parties must fairly and adequately protect the interests of the class (“adequacy of representation”). Id. at 23(a)(4).

         1. Numerosity

         The Court must determine whether the proposed class “is so numerous that joinder of all members is impracticable.” Fed.R.Civ.P. 23(a)(1). The numerosity requirement is generally satisfied in class actions involving nationally traded securities. See City of Pontiac Gen. Emps.' Ret. Sys. v. Wal-Mart Stores, Inc., No. 5:12-cv-5162, 2016 WL 5400373 at *4 (W.D. Ark. Sept. 20, 2016). Medtronic has stipulated that Plaintiffs' proposed class satisfies the numerosity requirement. (Wood Decl. ¶ 2, Ex. 1 at 2.) During the class period, an average of 6.5 million shares of Medtronic stock were traded daily and 1, 187 major institutions owned Medtronic stock. (Williams Decl. ¶ 1, Ex. 1 ¶¶ 45, 53.) The Court will conclude that Plaintiffs' proposed class, therefore, satisfies the numerosity requirement.

         2. Commonality

         The Court must determine whether “there are questions of law or fact common to the class.” Fed.R.Civ.P. 23(a)(2). “While not every question of law and fact must be common to the entire class, Plaintiffs must show that the course of action giving rise to their cause of action affects all putative class members, or that at least one of the elements of that cause of action is shared by all of the putative class members.” In re GenesisIntermedia, Inc. Sec. Litig., 232 F.R.D. 321, 328 (D. Minn. 2005). Commonality is easily satisfied in securities cases. See Id. (“This case links a common legal theory- securities law violations-to a common group-purchasers of [the defendant's] shares.”) Medtronic does not challenge whether Plaintiffs meet the commonality requirement. The Court will conclude that Plaintiffs' proposed class satisfies the commonality requirement.

         3. Typicality

         The Court must determine whether “the claims or defenses of the representative parties are typical of the claims or defenses of the class.” Fed.R.Civ.P. 23(a)(3). Typicality suggests that “there are other members of the class who have the same or similar grievances as the [representative] plaintiff.” Chaffin v. Rheem Mfg. Co., 904 F.2d 1269, 1275 (8th Cir. 1990) (quotation omitted). “Factual variations in the individual claims will not normally preclude class certification if the claim arises from the same event or course of conduct as the class claims, and gives rise to the same legal or remedial theory.” Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1540 (8th Cir. 1996). Medtronic challenges whether Plaintiffs meet the typicality requirement with respect to the length of the class period, which is discussed at length in Part III. Plaintiffs, like all members of the proposed class, purchased Medtronic stock during the class period. According to Plaintiffs' allegations, all class members suffered damages as a result of Medtronic's fraudulent scheme. The Court will conclude that Plaintiff's claims are typical of the claims and defenses of the class.

         4. Adequacy of Representation

         The Court must determine whether “the representative parties will fairly and adequately protect the interests of the class.” Fed.R.Civ.P. 23(a)(4). Rule 23(a)(4) involves two questions: (1) whether the class representatives have common interests with the members of the class, and (2) whether the class representatives will vigorously prosecute the interests of ...


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