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

United States District Court, D. Minnesota

March 2, 2018






         Plaintiffs 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 Summary Judgment.



         INFUSE is the “trade name of rhBMP-2, ” which is a BMP that induces the body to develop new bone tissue.[1] (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.)

         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 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).

         Plaintiffs 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.)

         On June 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. ¶¶ 113-16.)


         Plaintiffs 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.)

         This is 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.

         On 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.

         Plaintiffs 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 Court.

         The Individual Defendants again move for summary judgment.



         A. Standard of Review

         Summary 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).

         The 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. 2007).

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).

         B. Scheme Liability

         Section 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.

         Claims 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).

         “[A] 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)).

         C. Control-Person Liability

         Under 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).

         D. Statute of Repose

         Claims 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.

         The 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.

         Plaintiffs 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).

         Courts 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 ...

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