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 TREHARNE, and MARTIN YAHIRO, Defendants.
A. WILLIAMS AND CHRISTOPHER M. WOOD, ROBBINS GELLER RUDMAN
& DOWD LLP, WILLIAM H. NARWOLD, MOTLEY RICE LLC, AND
CAROLYN G. ANDERSON, ZIMMERMAN REED, PLLP, FOR PLAINTIFFS.
G. PETROSINELLI AND SARAH LOCHNER O'CONNOR, WILLIAMS
& CONNOLLY LLP, AND THERESA BEVILACQUA, DORSEY &
WHITNEY LLP, FOR DEFENDANTS.
MEMORANDUM OPINION AND ORDER
R. TUNHEIM CHIEF JUDGE
retirement and investment funds (“Plaintiffs”)
bring this consolidated class action alleging that Medtronic,
Inc., (“Medtronic”) and a number of its officers
and employees (“Individual Defendants”) engaged
in a scheme to defraud investors. In particular, Plaintiffs
allege that Medtronic artificially inflated its stock price
by manipulating early clinical studies of two
bone-morphogenetic-protein (“BMP”) products -
INFUSE and AMPLIFY. Individual Defendants William A. Hawkins,
Gary L. Ellis, Richard E. Kuntz, Dr. Julie Bearcroft, Dr.
Richard Treharne, and Dr. Martin Yahiro move for summary
judgment for the scheme-liability claims and control-person
claims brought against them. The Court will grant in part and
deny in part the Individual Defendants' Motion for
is the “trade name of rhBMP-2, ” which is a BMP
that induces the body to develop new bone
tissue. (Am. Comp. (“Compl.”) ¶
7, Nov. 4, 2013, Docket No. 28.) INFUSE is an alternative to
grafting replacement bone tissue and was the first BMP to
reach the market. (Id.) The FDA approved INFUSE in
2002 for what Plaintiffs allege are somewhat limited
treatment purposes: degenerative disc disease, dental
surgery, and certain shin fractures. (Id. ¶ 8.)
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.) Medtronic also sought FDA approval for AMPLIFY, a
second-generation BMP. (Id. ¶¶ 22, 24.)
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 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, including: William
Hawkins, former Chair of the Board of Directors and Chief
Executive Officer (“CEO”), (id. ¶
47); Gary Ellis, Chief Financial Officer (“CFO”),
(id. ¶ 48); Richard Kuntz, Chief Scientific,
Clinical, and Regulatory Officer, (id. ¶ 49);
Dr. Julie Bearcroft, Director of Technology Management in
Medtronic's Biologics Marketing Department, (id.
¶ 50); Dr. Richard Treharne, Senior Vice President of
Clinical and Regulatory Affairs, (id. ¶ 51);
and Dr. Martin Yahiro, Medtronic Senior Director of
Regulatory Affairs, (id. ¶ 52). The Complaint
also alleges violations by three consultants
(“Consultant Defendants”): Dr. Thomas Zdeblick,
(Id. ¶ 53); Dr. Kenneth Burkus, (id.
¶ 54); and Dr. Scott Boden, (Id. ¶ 55).
contend that Medtronic engaged in a scheme to manipulate the
early clinical studies by omitting many of INFUSE's
adverse events. (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 “failed to disclose that
Medtronic had paid millions of dollars to the same physician
authors” and “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.)
28, 2011, The Spine Journal released an issue
devoted to concerns regarding INFUSE. (Id. ¶
103; see also Decl. of Christopher M. Wood
(“Wood Decl.”) ¶ 54, Ex. 26, Apr. 7, 2015,
Docket No. 103.) Plaintiffs contend that, “[t]aken as a
whole, the June 28, 2011 issue of The Spine Journal
began to inform the market, for the first time, that the
research supporting the safety and efficacy of INFUSE was not
reliable.” (Compl. ¶ 103.) That same day,
Medtronic filed its FY11 Form 10-K, which included a
statement about The Spine Journal articles and
“conceded that the articles would have an impact on
future sales.” (Id. ¶¶ 112.)
Plaintiffs contend that these disclosures led to a drop in
the value of Medtronic stock. (Id. ¶¶
allege that Medtronic and the Individual Defendants violated
Section 10(b) of the Exchange Act by making false and
misleading statements to investors (Count I) and by engaging
in a scheme to pay physician authors to conceal adverse
events associated with INFUSE and AMPLIFY (Count II).
(Id. ¶¶ 157-65.) Additionally, Plaintiffs
allege that the Individual Defendants are liable under
Section 20(a) of the Exchange Act as control persons of
Medtronic (Count III). (Id. ¶¶ 166-70.)
not the Individual Defendants' first effort to dismiss
this case. On September 14, 2014, the Court granted in part
and denied in part Defendants' motions to dismiss.
W.Va. Pipe Trades Health & Welfare Fund v. Medtronic,
Inc., 57 F.Supp.3d 950 (D. Minn. 2014). The Court
granted the Consultant Defendants' motion after
concluding that the applicable date for the statute of repose
is June 27, 2008. Id. at 977-80. However, Medtronic
and the Individual Defendants did not move to dismiss based
on the statute of repose, and their motion was granted in
part and denied in part. Id. at 980-84.
September 30, 2015, the Court granted summary judgment
against Plaintiffs on all remaining claims based on the
statute of limitations. W.Va. Pipe Trades Health &
Welfare Fund v. Medtronic, Inc., 139 F.Supp.3d 976 (D.
Minn. 2015). Defendants also argued that the statute of
repose barred this action but the Court did not reach that
issue. Id. at 988 n.11.
appealed the dismissal of their claims of scheme liability
and control-person liability. See W.Va. Pipe Trades
Health & Welfare Fund v. Medtronic, Inc., 845 F.3d
384 (8th Cir. 2016). Defendants sought to defend
against reversal by arguing that Plaintiffs merely repackaged
allegations of false statements into a scheme-liability
claims in contradiction of Supreme Court precedent.
Id. at 388; see Janus Capital Grp., Inc. v.
First Derivative Traders, 564 U.S. 135 (2011);
Stoneridge Investment Partners, LLC, v.
Scientific-Atlanta, Inc., 552 U.S. 148 (2008). The
Eighth Circuit disagreed, stating:
[Plaintiffs] allege conduct beyond mere misrepresentations or
omissions actionable under Rule 10b-5(b). [Plaintiffs']
scheme liability claim alleges that Medtronic shaped the
content of medical journals by “pa[ying] physicians . .
. to induce their complicity in concealing adverse events and
side effects associated with the use of INFUSE and
overstating the disadvantages of alternative bone graft
procedures.” Although the scheme liability claim also
includes allegations that Medtronic edited language in the
clinical studies that the physicians ultimately published,
the act of paying physicians to induce their
complicity is the allegation at the heart of the scheme
liability claim. Paying someone else to make a
misrepresentation is not itself a misrepresentation. Thus,
[Plaintiffs] do not merely repackage allegations of
misrepresentation as allegations of a scheme. Janus
and KV Pharmaceuticals require some conduct other
than a misrepresentation to support a scheme liability claim.
They do not hold that the alleged scheme can never involve
any misrepresentation in order for the scheme liability claim
to survive. See, e.g., In re Smith Barney,
884 F.Supp.2d at 161 (sustaining scheme liability claim where
alleged conduct included but was not limited to misleadingly
disclosing fees). Accordingly, because Medtronic's
alleged deceptive conduct goes beyond mere misrepresentations
or omissions, Janus does not bar [Plaintiffs']
scheme liability claim.
W.Va. Pipe Trades, 845 F.3d at 393 (emphasis added).
The Eighth Circuit reversed and remanded the case back to the
Individual Defendants again move for summary judgment.
STANDARD OF REVIEW AND APPLICABLE LAW
Standard of Review
judgment is appropriate where there are no genuine issues of
material fact and the moving party can demonstrate that it is
entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a).
A fact is material if it might affect the outcome of a suit,
and a dispute is genuine if the evidence is such that it
could lead a reasonable jury to return a verdict for either
party. Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 248 (1986). A court considering a motion for summary
judgment must view the facts in the light most favorable to
the nonmoving party and give that party the benefit of all
reasonable factual inferences to be drawn from those facts.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
474 U.S. 574, 587 (1986). The nonmoving party may not rest on
mere allegations or denials but must show through the
presentation of admissible evidence that the specific facts
exist and create a genuine issue for trial.
Anderson, 477 U.S. at 256. But “[w]here the
moving party fails to satisfy its burden to show initially
the absence of a genuine issue concerning any material fact,
summary judgment must be denied even if no opposing
evidentiary matter is presented.” Foster v.
Johns-Manville Sales Corp., 787 F.2d 390, 393
(8th Cir. 1996).
statute of repose is an affirmative defense and, therefore,
the Individual Defendants bear the burden of proving this
defense at trial. Integrity Floorcovering, Inc. v.
Broan-Nu Tone LLC, 503 F.Supp.2d 1136, 1139 (D. Minn.
Where, as here, the movant is seeking summary judgment on a
claim as to which it bears the burden of proof, it must lay
out the elements of the claim, cite the facts which it
believes satisfies these elements, and demonstrate why the
record is so one-sided as to rule out the prospect of a
finding in favor of the non-movant on the claim.
Hotel 71 Mezz Lender LLC v. Nat'l Ret. Fund, 778
F.3d 593, 601 (7th Cir. 2015); see also
Simmons, Inc. v. Koronis Parts, Inc., No. 00-1984, 2001
WL 1095008, at *2 (D. Minn. Sept. 17, 2001).
10(b) of the Exchange Act makes it unlawful for “any
person . . . [t]o use or employ, in connection with the
purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe.”
15 U.S.C. § 78j(b). SEC Rule 10b-5 implements Section
10(b). See Pub. Pension Fund Grp v. KV Pharm. Co.,
679 F.3d 972, 980 (8th Cir. 2010). Rule 10b-5
makes it unlawful to (a) “employ any device, scheme, or
artifice to defraud, ” (b) “make any untrue
statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading, ” or (c) “engage in any act,
practice, or course of business which operates or would
operate as a fraud or deceit upon any person” in
connection with the purchase or sale of any security. 17
C.F.R. § 240.10b-5.
brought under Rules 10b-5(a) and (c) are generally referred
to as scheme-liability claims, and are distinct from claims
under Rule 10b-5(b) because they are based on deceptive
conduct rather than deceptive statements. See KV Pharm.
Co., 679 F.3d at 986. To establish scheme liability, a
plaintiff must show that the defendant “(1) committed a
deceptive or manipulative act (2) with scienter, (3)
that the act affected the market for securities or was
otherwise in connection with their purchase or sale, and (4)
that defendants' actions caused the plaintiffs'
injuries.” In re Parmalat Secs. Litig., 414
F.Supp.2d 428, 432 (S.D.N.Y. 2006).
plaintiff cannot support a scheme liability claim by simply
repackaging a fraudulent misrepresentation as a scheme to
defraud. Rather, a plaintiff must allege some deceptive act
other than the fraudulent misrepresentation.” W.Va.
Pipe Trades, 845 F.3d at 392. “[A] defendant may
only be liable as part of a fraudulent scheme based upon
misrepresentations and omissions under Rules 10b-5(a) or (c)
when the scheme also encompasses conduct beyond those
misrepresentations or omissions.” KV Pharm.
Co., 679 F.3d at 987 (quoting WPP Lux. Gamma Three
Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1057
(9th Cir. 2011)).
15 U.S.C. § 78t(a), “[e]very person who, directly
or indirectly, controls any person liable under any provision
of this chapter . . . shall also be liable jointly and
severally with and to the same extent as such controlled
person to any person to whom such controlled person is
liable.” A control person is not liable if he or she
“acted in good faith and did not directly or indirectly
induce the act or acts constituting the violation or cause of
action.” Id. To assert a claim of control
liability, a plaintiff must establish (1) “that the
defendant . . . ‘actually participated in
(i.e., exercised control over) the
operations of the corporation in general, ” and (2) the
defendant “possessed the power to control the specific
transaction or activity upon which the primary violation is
predicated, ” although he or she “need not prove
that this later power was exercised.” Metge v.
Baehler, 762 F.2d 621, 631 (8th Cir. 1985)
(quoting with approval the test used by the district court in
Metge v. Baehler, 577 F.Supp. 810, 814 (S.D. Iowa
1984)). Whether an individual is a control person is
“an intensely factual question, involving scrutiny of
the defendant's participation in the day-to-day affairs
of the corporation and the defendant's power to control
corporate actions.” Cummings v. Paramount Partners,
LP, 715 F.Supp.2d 880, 907 (D. Minn. 2010).
Statute of Repose
brought under Section 10(b) of the Exchange Act may not be
brought later than five years after the alleged violation. 28
U.S.C. § 1658(b)(2). The Court has concluded that the
relevant date for the statute of repose is June 27, 2008.
W.Va. Pipe Trades, 57 F.Supp.3d at 978. Therefore,
for Plaintiffs to maintain their claims against the
Individual Defendants, the Individual Defendants must have
committed a deceptive act in furtherance of Medtronic's
alleged scheme after June 27, 2008.
parties dispute the reach of the statute of repose.
Plaintiffs argue that they should be able to hold the
Individual Defendants accountable for the entire course of
conduct - even for acts that occurred before June 27, 2008 -
under a continuing fraudulent scheme theory. According to
Plaintiffs' theory, if an Individual Defendant committed
any act in furtherance of the scheme after
June 27, 2008, Plaintiffs may maintain a scheme-liability
claim against that Individual Defendant for the
entire course of conduct.
are correct that “[s]ome district courts . . . have
applied [a continuing fraudulent scheme theory] to blunt the
statute of repose where a plaintiff alleges a series of
misrepresentation[s] or omissions, some inside and some
outside the repose period.” Howe v. Shchekin,
238 F.Supp.3d 1046, 1050 (N.D. Ill. 2017). But a majority of
courts have rejected the continuing fraudulent scheme theory
with respect to Section 10(b) claims. See id.;
see also Carlucci v. Han, 886 F.Supp.2d 497, 514
& n.9 (E.D. Va. 2012) (collecting cases).
rejecting this theory have grounded their reasoning in
Supreme Court statements suggesting that the nature of the
statute of repose is “unqualified.”
Carlucci, 886 F.Supp.2d at 515 (quoting Merck
& Co. v. Reynolds, 559 U.S. 633, 650 (2010)).
According to the Supreme Court, in contrast to statutes of
limitations, statutes of repose “are enacted to give
more explicit and certain protection to defendants, ”
representing a “legislative judgment that a defendant
should be free from liability after the legislatively
determined period of time.” Cal. Pub. Emps.'
Ret. Sys. v. ANZ Secs., Inc., 137 S.Ct. 2042, 2049
(2017) (quoting CTS Corp. v. Waldburger, 134 S.Ct.
2175, 2183 (2014)). “The purpose and effect of a
statute of repose . . . is to override customary tolling
rules arising from the ...