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In re Medtronic, Inc. Securities Litigation: US District Court : SECURITIES - securities fraud complaint regarding defibrillator leads dismissed

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
________________________________________________________________________
In re Medtronic Inc.,
Securities Litigation Class Action
Civ. No. 07-4564 (RHK/AJB)
MEMORANDUM OPINION
AND ORDER
Mark A. Strauss, Ira M. Press, Kirby McInerney LLP, New York, New York, Jonathan F.
Mack, Zelle Hofmann Voelbel & Mason LLP, Minneapolis, Minnesota, for Plaintiffs.
Jeffrey B. Rudman, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts,
Michael G. Bongiorno, Wilmer Cutler Pickering Hale and Dorr LLP, New York, New
York, Patrick S. Williams, Briggs and Morgan, PA, Minneapolis, Minnesota, for
Defendants.
INTRODUCTION
Plaintiffs claiming securities fraud are required under the Private Securities
Litigation Reform Act (the Reform Act) to allege the defendants fraudulent acts and
mental state with particularity. 15 U.S.C. 78u-4(b). These requirements exist because
securities fraud actions . . . if not adequately contained, can be employed abusively to
impose substantial costs on companies and individuals whose conduct conforms to the
law. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2504 (2007).
Investors in Medtronic, Inc. (Medtronic), a Minnesota-based medical device
manufacturer, have filed this class-action lawsuit alleging corporate and individual
malfeasance behind the companys stock-price collapse in 2007. Specifically, Plaintiffs
2
filed a Consolidated Class Action Complaint1 accusing Medtronic and three of its highranking
officers and directors2 of making material and fraudulent misrepresentations and
omissions regarding the efficacy of Medtronics Sprint Fidelis defibrillator lead.
Defendants have moved to dismiss the Complaint on the ground that it does not
comply with the strictures of the Reform Act. After a detailed review, the Court agrees.
BACKGROUND
The following facts are set forth in the Complaint or in documents relied upon
therein. Medtronic is a Minnesota corporation with its principal place of business in
Minneapolis. (Compl. 33.) Throughout the time period relevant to this litigation (the
Class Period),3 Defendant Arthur D. Collins (Collins) was a director of Medtronic
and Chairman of the Board. (Id. 34.) Collins was also the Chief Executive Officer
(CEO) of Medtronic from April 2002 to August 23, 2007. (Id.) Defendant William A.
Hawkins (Hawkins) is a director of Medtronic and is the current President and CEO,
serving in this capacity since August 23, 2007. (Id. 35.) Prior to accepting his present
position, Hawkins served as President and Chief Operating Officer during the Class
Period. (Id.) Defendant Gary L. Ellis (Ellis) was Senior Vice President and Chief
Financial Officer of Medtronic throughout the Class Period. (Id. 36.)
1 Hereinafter referred to as the Complaint.
2 Medtronic and the individual Defendants are hereinafter referred to collectively as the
Defendants. The individual Defendants are Arthur D. Collins, William A. Hawkins, and Gary
L. Ellis. (Compl. 34-36.)
3 The Class Period in this case is March 21, 2007 through October 15, 2007. (Compl. 1.) All
Plaintiffs purchased Medtronic securities during this time. (Id.)
3
Medtronic manufactures medical devices, including implantable cardioverter
defibrillators (ICDs). (Id. 2.) ICDs are small devices implanted in patients chests to
monitor heart rates and correct heart rhythm disorders. (Id. 2, 46.) Complex wires
called leads connect the ICD to the patients heart muscle. (Id. 4.) If a lead detects
that the patients heart is out of rhythm, the ICD sends an electric shock to the heart
muscle through the lead to correct the problem. (Id.) However, if a lead fractures or
breaks, it may induce an unnecessary shock, or a shock may not be given when needed.
(Id. 5.)
Defibrillator leads were traditionally thick in diameter to ensure an extended
lifespan. (Id. 49.) However, they were difficult to implant and created a risk of blood
clots and tissue growth in the area surrounding the lead. (Id. 50.) To respond to this
problem, Medtronic developed the Sprint Fidelis lead (the Fidelis lead), which had a
smaller diameter. (Id. 51.) The Fidelis lead soon became the worlds most popular lead
and by 2007, Medtronic held a more than 50 percent market share in the defibrillator
market. (Id. 3, 54.)
However, problems with the Fidelis lead soon began to surface. In January 2007,
two patients at the Minneapolis Heart Institute (the Heart Institute) suffered
unnecessary shocks from their ICDs utilizing the Fidelis lead. (Id. 58.) An
investigation conducted by a physician at the Heart Institute, Dr. Robert G. Hauser,
concluded that the shocks were caused by fractures in the leads and that the Fidelis lead
was fracturing at a significantly higher rate than other Medtronic leads. (Id. 11-14;
4
Bongiorno Decl. Ex. D.) The results of this study4 were communicated to Medtronic on
February 15, 2007, prior to its publication in July, 2007. (Compl. 11; Bongiorno Decl.
Ex. D.)
The Hauser Study analyzed the survival rate of the Fidelis lead in comparison to
the survival rate of another popular Medtronic lead, the Sprint Quattro. (Compl. 14,
63; Bongiorno Decl. Ex. D.) Of the 583 patients implanted with the Fidelis lead in
Dr. Hausers database, six experienced lead failure. (Bongiorno Decl. Ex. D.) In
addition, the Hauser Study searched the Food and Drug Administration (FDA)
Manufacturers and User Facility Device Experience database (the MAUDE database)
for adverse event reports concerning the Fidelis lead, finding frequent complaints [of]
fracture and inappropriate shocks. (Id.; Compl. 14.) The study also reviewed the
returned product analysis done by Medtronic. (Bongiorno Decl. Ex. D.) The Hauser
Study noted that it is a single-center study and may not reflect experiences at other
centers. However, the manufacturers return products data and the MAUDE database
findings indicate otherwise. (Bongiorno Decl. Ex. D.)
Dr. Hauser met with Medtronic on February 15, 2007, to discuss his findings.
(Compl. 59.) At this meeting, Warren Watson, a Medtronic vice president and
engineer, stated that the study did not present enough evidence to demonstrate a problem
with the Fidelis lead. (Id. 60-61.) Watson also expressed his view that the results of
the Hauser Study could be the product of physician error. (Id. 61.)
4 Hereinafter referred to as the Hauser Study.
5
In addition to the Hauser Study, Plaintiffs allege that Defendants were aware that
numerous hospitals and clinics across the country were discontinuing implantation of
the Fidelis [lead] after encountering fracture problems, and that at least five patient
deaths linked to fractured Fidelis leads occurred during the Class Period. (Id. 15-16,
85-90.) Upon being confronted with this information regarding the Fidelis lead, Plaintiffs
claim that Medtronic undertook a fraudulent campaign to defend their product. (Id.
19-20.) Moreover, in May 2007, Medtronic filed a supplemental premarket approval
application with the FDA containing design and manufacturing changes for the Fidelis
lead. (Id. 91-92.) According to Plaintiffs, Medtronic filed this application to correct
known defects endemic to the Fidelis lead. (Id. 92.)
On October 15, 2007, Medtronic voluntarily recalled the Fidelis lead. (Id. 6.)
Medtronic stated that its decision to suspend sales of the Fidelis lead stemmed from its
review of 30 months of performance data from 25,000 patients implanted with the Fidelis
lead indicating that the lead was viable in 97.7 percent of cases, lower than the 99.1
percent viability rate for the Sprint Quattro lead. (Id. 7, 127.) Medtronic noted that
while these results were not yet statistically significant, the fracture rate would become
statistically significant over time if the current rates remain[ed] constant. (Id. 127.)
During the recall announcement, Medtronic noted that pulling the Fidelis lead
from the market would cause the company to suffer a revenue loss of 0 to 0
million. (Id. 7.) Additionally, Medtronics share price dropped from a close of .33
on Friday, October 12, 2007, to a close of .00 on Monday, October 15, 2007, an 11.2
6
percent decline. (Id. 8.) Medtronics stock continued to decline to a low of .54 on
Wednesday, November 7, 2007. (Id. 9.)
Plaintiffs claim that several statements made by the Defendants during the Class
Period (March 21, 2007 through October 15, 2007) were either affirmative
misrepresentations or false and misleading in light of omitted information regarding the
propensity of the Fidelis lead to fracture. (Id. 97-119.) The challenged statements are
contained in: (1) a physician letter; (2) a direct-to-consumer advertising campaign for
Medtronic ICDs; (3) Medtronics website promoting the Fidelis lead to physicians; (4) a
May 2007 press release; (5) an Annual Report on Form 10-K; (6) statements made by
Medtronic spokesperson Rob Clark; (7) an August 2007 press release; and (8) a Quarterly
Report on Form 10-Q. (Id.) Generally speaking, the challenged statements refer to the
Fidelis leads fracture rate, the cause of the Fidelis lead fracturing, the general qualities of
the Fidelis lead as durable and reliable, or the ability of the Fidelis lead to produce
positive financial results for Medtronic. (Id.) Plaintiffs claim that Defendants were
aware that these statements were materially false and misleading when made in light of
the undisclosed information regarding the Fidelis leads fracture rate. (Id. 148.)
Medtronic now moves to dismiss the Complaint, arguing that Plaintiffs have not
pleaded their claims in conformity with the Reform Act.
STANDARD OF DECISION
Although allegations of fraud are generally subject to the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b), certain aspects of private securities
fraud lawsuits fall under the more demanding pleading requirements of the Reform Act.
7
Under the Reform Act, a complaint based on material misstatements or omissions must
specify each statement alleged to have been misleading, [and] the reason or reasons why
the statement is misleading. 15 U.S.C. 78u-4(b)(1)(B). Additionally, a complaint
alleging securities fraud must state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind regarding each act or
omission alleged to violate the securities laws. Id. 78u-4(b)(2). On a motion to
dismiss an action covered by the Reform Act, the Court views factual allegations in the
light most favorable to the plaintiff, see Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546
(8th Cir. 1997), and assumes the truth of particularly pleaded allegations, see Fla. State
Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 666 (8th Cir. 2001). However,
the Court disregards catch-all or blanket assertions. Id. at 660 (internal quotations and
citation omitted).
ANALYSIS
Plaintiffs allege that Defendants violated Section 10(b) of the Exchange Act of
1934, 15 U.S.C. 78j(b) (Section 10(b)), Securities and Exchange Commission
(SEC) Rule 10b-5, 17 C.F.R. 240.10b-5 (Rule 10b-5), and Section 20(a) of the
Exchange Act of 1934, 15 U.S.C. 78t (Section 20(a)). However, because Rule 10b-5
is coextensive with Section 10(b), see Cent. Bank of Denver, N.A. v. First Interstate Bank
of Denver, N.A., 511 U.S. 164, 173 (1994); Ernst & Ernst v. Hochfelder, 425 U.S. 185,
195-97 (1976), the Court will analyze the Section 10(b) and Rule 10b-5 claims together.
8
I. Section 10(b)/Rule 10b-5 claim
Plaintiffs contend that Defendants violated Section 10(b)/Rule 10b-5 by making a
series of material and fraudulent misrepresentations and omissions regarding the risks
posed by the Fidelis lead. Under Section 10(b), it is 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
[SEC] may prescribe. 15 U.S.C. 78j(b). Rule 10b-5, in turn, makes it unlawful for
any person:
(a) To employ any device, scheme or artifice to defraud,
(b) To make any untrue statement of material fact or to omit to state a material
fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, or
(c) To 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.
To state a violation under Section 10(b)/Rule 10b-5, Plaintiffs must allege:
(1) misrepresentations or omissions of material fact; (2) causation; (3) scienter; and (4)
economic harm. In re K-tel Intl, Inc. Sec. Litig., 300 F.3d 881, 888 (8th Cir. 2002).
Both falsity and scienter must be alleged with particularity. In re Navarre Corp. Sec.
Litig., 299 F.3d 735, 742 (8th Cir. 2002). Defendants argue that the Complaint must be
dismissed because it fails to plead the material falsity of the challenged statements or
omissions with particularity and because it does not give rise to a strong inference of
scienter.
9
A. Materially false or misleading statements and omissions
The principal allegation in the Complaint is that Defendants failed to disclose
material information regarding the risks posed by the Fidelis lead, which rendered a
series of statements false and misleading. (Compl. 1-27, 97-119.) In response,
Defendants argue that they need not have disclosed such information because it was not
statistically significant, and therefore not material; if such omissions are not material, the
challenged statements cannot be considered false or misleading. (Def. Mem. at 12-14.)
Additionally, the Defendants contend that many of the challenged statements were
immaterial puffery, and therefore not actionable. (Id. at 12.)
An omitted fact is material if there is a substantial likelihood that the disclosure
of the omitted fact would have been viewed by the reasonable investor as having
significantly altered the total mix of information made available. TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976). This standard has been expressly adopt[ed]
for claims arising under Rule 10b-5. Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988).
Statements or omissions are not material where they present or conceal such
insignificant data that . . . [they] simply would not matter to a reasonable investor.
Parnes, 122 F.3d at 547. Thus, a claim based on an omission of fact faces an
insuperable bar to relief when alleged omissions are immaterial. In re Amdocs Ltd.
Sec. Litig., 390 F.3d 542, 547 (8th Cir. 2004) (internal quotations and citation omitted).
The trier of fact is uniquely competent to determine materiality, as that inquiry
requires delicate assessments of inferences a reasonable investor would draw from a
given set of facts. In re Control Data Corp. Sec. Litig., 933 F.2d 616, 621 (8th Cir.
10
1991) (internal quotations and citations omitted). However, [w]here a reasonable
investor could not have been swayed by an alleged misrepresentation, . . . a court may
determine, as a matter of law, that the alleged misrepresentation is immaterial. Parnes,
122 F.3d at 546.
1. Statistical significance and materiality
Defendants contend that the information allegedly possessed by Medtronic
regarding the propensity of the Fidelis lead to fracture was not statistically significant,
and therefore not material. (Def. Mem. at 11-19.) Medical device and drug
manufacturers need not disclose isolated reports of [harm] suffered by users of their
[products] until those reports provide statistically significant evidence that the ill effects
may be caused by -- rather than randomly associated with -- use of the [products] and are
sufficiently serious and frequent to affect future earnings. In re Carter-Wallace, Inc.
Sec. Litig., 150 F.3d 153, 157 (2d Cir. 1998) (Carter-Wallace I).
In Carter-Wallace I, the Second Circuit held that statements made by a drug
manufacturer regarding its drug Felbatol, when the manufacturer knew of several
reported Felbatol-linked deaths, were not materially misleading until [the manufacturer]
had information that Felbatol had caused a statistically significant number of . . . deaths
and therefore had reason to believe that the commercial viability of Felbatol was
threatened. Id. As the Carter-Wallace court stated in a later decision, until a
connection between Felbatol and any illness could be made, we would not expect [the
manufacturer] to abandon its product on what, at the time, would have been speculation.
11
In re Carter-Wallace, Inc. Sec. Litig., 220 F.3d 36, 42 (2d Cir. 2000) (Carter-Wallace
II).
Similarly, in Oran v. Stafford, a securities fraud class action was brought against
American Home Products Corp. (AHP) after two of its drugs were withdrawn from the
market. 226 F.3d 275, 279 (3d Cir. 2000). The plaintiffs claimed that AHP made
material misrepresentations and omissions regarding the safety of the drugs while failing
to disclose several studies linking the drugs to heart-valve damage. Id. AHP was made
aware that a Belgian cardiologist and several Mayo Clinic cardiologists had documented
heart-valve abnormalities in several of their patients using these drugs. Id. at 279-80.
AHP had also received hundreds of adverse reaction reports of patients displaying
symptoms often associated with heart and lung problems. Id. at 279. AHP did not
immediately release these reports, but eventually made an announcement noting a
concern that its drugs had important implications regarding valvular disease, but that
no conclusive evidence had established a causal link. Id. at 280.
The Oran plaintiffs contended that statements made by AHP regarding the safety,
effectiveness, commercial success, and continued viability of its drugs were materially
false and misleading in light of the cardiologists and adverse reaction reports. Id. at 280-
81. The court held that such statements were not materially misleading because
plaintiffs never clearly explain[ed] how the accumulation of additional anecdotal data,
short of statistical significance, would have added anything to the disclosures already
made. Id. at 284.
12
Statistical significance, however, is not a bright-line rule because materiality is a
flexible, fact-based determination. In re Bayer AG Sec. Litig., No. 03 Civ. 1546 WHP,
2004 WL 2190357, at *9 (S.D.N.Y. Sept. 30, 2004). In Bayer, the court held that adverse
event reports lacking statistical significance, when considered in conjunction with an
internal corporate consensus that a drugs potential dangers were putting the brand at
risk, were enough to find materiality, id. at *9-10 (internal quotations and citation
omitted); adverse event reports, coupled with other evidence, can demonstrate that
defendants viewed the adverse event reports as sufficiently serious and frequent to affect
future earnings. Id. (internal quotations and citation omitted).
Other courts have interpreted Bayer to stand for the principle that omitted
information may become material even in the absence of statistically significant
evidence in light of other indications that the risk associated with adverse . . . events is
legitimate and serious enough to threaten . . . sales. In re Elan Corp. Sec. Litig., 543 F.
Supp. 2d 187, 210 (S.D.N.Y. 2008); see also In re Bausch & Lomb, Inc. Sec. Litig., No.
06-CV-6294, 2008 WL 4911796, at *20 (W.D.N.Y. Nov. 13, 2008). The Supreme Court
has noted that [a]ny approach that designates a single fact or occurrence as always
determinative of an inherently fact-specific finding such as materiality, must necessarily
be overinclusive or underinclusive. Basic, 485 U.S. at 236.
2. Puffery
Defendants also argue that many allegedly false and misleading statements are
puffery and therefore not actionable. (Def. Mem. at 12.) Statements are considered to
be puffery when they are so vague and such obvious hyperbole that no reasonable
13
investor would rely upon them. Parnes, 122 F.3d at 547. [S]oft, puffing statements
generally lack materiality because the market price of a share is not inflated by vague
statements predicting growth. . . . [Moreover,] they are certainly not specific enough to
perpetrate a fraud on the market. Id. (quoting Hillson Partners Ltd. Pship v. Adage,
Inc., 42 F.3d 204, 211 (4th Cir. 1994)).
3. The challenged statements
The Complaint alleges that Defendants made several false and misleading
statements regarding the risks posed by the Fidelis lead. Each statement is addressed
below.
a. The physician letter
Plaintiffs contend that several statements contained in a physician letter sent on
March 21, 2007, were materially false and misleading. (Compl. 97-98.) In this letter,
Medtronic informed physicians that it had received reports from a limited number of
implanting physicians indicating they have experienced higher than expected conductor
fracture rates in their centers with Sprint Fidelis leads. (Compl. 97.) Medtronic stated
that it was investigating these reports, and had reviewed them with an Independent
Physician Quality Panel, but that the current overall Sprint Fidelis performance was
consistent with other leads. (Id.) Furthermore, Medtronic noted that its investigation
suggested that variables within the implant procedure may contribute significantly to
these fractures. (Id.) In support of its contention that the Fidelis leads performance
was in line with other Medtronic leads, Medtronic noted that its System Longevity
Study and returned product analysis indicated performance levels of 98.9 percent and
14
99.86 percent respectively. (Id.) Finally, Medtronic stated that it would communicate
additional information as it was learned. (Id. at 127.)
Plaintiffs contend that this letter was materially false and misleading because it
falsely suggested that Fidelis lead fracturing was the result of physician error (variables
within the implant procedure), and that the lead was performing consistently with other
Medtronic leads. (Compl. 98.) Moreover, Plaintiffs contend that the letter was
misleading in that it did not mention: (1) the Hauser Study; (2) the necessity of a recall;
(3) the several patient deaths linked to Fidelis lead fracturing; (4) the unreliability of the
studies relied upon by Medtronic; (5) the discontinuance by several hospitals and clinics
of their purchasing of the Fidelis lead; (6) the fact that there were an excessive number
of fractures in the Fidelis lead that were higher than normally expected;5 and (7) certain
conflicts of interest present within the Independent Physician Quality Panel.6 (Id.)
5 These quotations come from statements Medtronic made on October 15, 2007, during two
conference calls addressing the Fidelis lead recall. (Compl. 125-28.) During this conference
call, a Medtronic representative, Dr. Steinhaus, stated, As I said earlier, we did have some
reports of fractures that were seen to be an excessive number earlier this year and we put out a
letter in March. (Id. 128.) A different representative referred to this statement later in the
conference call stating, as Dr. Steinhaus commented, we saw higher than normal expected rates
in the springtime, we looked into those. (Id.) Plaintiffs quote portions of these statements and
characterize them as admissions indicating Medtronics belief during the Class Period that
Fidelis lead fracturing was a serious threat to stock prices. (Mem. in Oppn at 21.) However,
when read in context, it becomes clear that such statements refer to the information already
discussed in the physician letter. (Compl. 97.) Therefore, these quotations, plucked out of
context, do not demonstrate Medtronics belief during the Class Period that reports such as the
Hauser Study were a serious threat to Medtronics stock price.
6 Defendants argue that they had no duty to disclose the alleged conflicts within the Independent
Physician Quality Panel. (Def. Mem. at 18-19.) Plaintiffs failed to argue in their brief or at oral
argument that any such conflicts were material. Plaintiffs have waived this argument.
Nevertheless, the Court finds that such information is not material as Plaintiffs have not pleaded
sufficient facts indicating that Panel conflict would influence the reasonable investor. See In re
15
i. No statistical significance
In large part, Plaintiffs argue that the physician letter was materially false and
misleading because it omitted information allegedly known by Defendants regarding the
risk of Fidelis lead fracture. However, Plaintiffs do not argue that this information
demonstrated to a degree of statistical significance that the Fidelis lead was fracturing at
an excessive rate. The lack of statistical significance supports Defendants contention
that this information was not material, and therefore its omission cannot render
statements in the physician letter materially false or misleading. See Oran, 226 F.3d at
283-84; Carter-Wallace I, 150 F.3d at 157. Indeed, [e]ven if scientists suspected that
[the Fidelis lead] might cause severe adverse events and Defendants knew of these
suspicions, these facts would not have required Defendants to conclude that these effects
were real before such a relationship was established using accepted statistical methods
and standards of proof. Elan, 543 F. Supp. 2d at 213.
Additionally, the physician letter discloses that Medtronic received reports from a
limited number of implanting physicians indicating they have experienced higher than
expected conductor fracture rates in their centers with Sprint Fidelis leads, and that
Medtronic was investigating these reports. (Compl. 97.) There is nothing misleading
in these accurate, factual statements. Plaintiffs never clearly explain how the
accumulation of additional anecdotal data, short of statistical significance, would have
added anything to the disclosures already made. Oran, 226 F.3d at 284. Accordingly,
Intrabiotics Pharm., Inc. Sec. Litig., No. C 04-02675 JSW, 2006 WL 2192109, at *9-10 (N.D.
Cal. Aug. 1, 2006).
16
the Court determines that Medtronics failure to disclose additional statistically
insignificant information cannot have been materially misleading in light of the other
information disclosed in the physician letter.
ii. No other indications
Besides that the allegedly omitted facts lack statistical significance, Plaintiffs
assert no other indications of materiality demonstrating that the undisclosed
information was a sufficiently serious threat to Medtronics future earnings so as to
require disclosure. See Elan, 543 F. Supp. 2d at 210 ([I]nformation may become
material even in the absence of statistically significant evidence in light of other
indications that the risk associated with adverse . . . events is legitimate and serious
enough to threaten drug sales.).7 Plaintiffs argue that they allege more than isolated
adverse event reports they argue that they also allege five Fidelis lead-related deaths,
Medtronics application to the FDA for approval of design and manufacturing changes,
7 Plaintiffs rely on In re Amylin Pharmaceuticals, Inc. Securities Litigation and In re Regeneron
Pharmaceuticals Securities Litigation to argue that adverse event reports need not be statistically
significant to constitute material omissions, even without other indications of materiality.
Both cases are distinguishable. In Amylin, the court found that while there was no statistically
significant data signifying safety issues with a certain prescription drug, statements made by the
defendants noting that there were no clinically important safety issues and no major safety
concerns were materially false and misleading in light of clinical trial results associated with
severe adverse events. No. 01CV1455 BTM (NLS), 2003 WL 21500525, at *10 (S.D. Cal.
May 1, 2003). In Regeneron, statements informing the public that a newly developed drug was
safe and well tolerated were held to be materially false and misleading when the drug was
efficacious only at toxic dose levels. No. 94 Civ. 1785 (CLB), 1995 WL 228336, at *4-6
(S.D.N.Y. Mar. 10, 1995). Here, by contrast, Medtronic never affirmatively made a false or
misleading statement regarding the safety of the Fidelis lead, but instead disclosed explicitly that
concerns had come to light regarding Fidelis lead fracturing. Following this disclosure,
Medtronic continued to promote a product it considered safe until additional data was
accumulated. Medtronic never affirmatively represented any other state of affairs.
17
the Hauser Study, the discontinuation of Fidelis lead purchasing by several hospitals and
clinics, unpublished data indicating decreased Fidelis lead vitality, the strong market
reaction to the Fidelis lead recall, and private admissions that Medtronic had a problem
with the Fidelis lead but was working on a remedy. (Mem. in Oppn at 17, 20-22.)
Yet, these so-called other indications, when reviewed separately or in their totality, are
insufficient to demonstrate materiality.8
First, several of Plaintiffs other indications of materiality were present in Oran
and Carter-Wallace I, and found to not be statistically significant and therefore not
material. The Oran defendants had received more than one report from cardiologists
regarding the health risks posed by certain AHP prescription drugs, as well as hundreds
of adverse reaction reports. 226 F.3d at 279-80. In Carter-Wallace I, the defendants had
received reports of several deaths related to their drug Felbatol, which were found not to
be statistically significant. 150 F.3d at 155-57. Therefore, applying the principles of
Oran and Carter-Wallace I, which this Court does, the opinion of Dr. Hauser and the five
patient deaths linked to Fidelis lead fracturing are not other indications of materiality.
8 Plaintiffs argued in passing during oral argument, but not in their brief, that Medtronic tried to
offer funding to Dr. Hauser to persuade him not to publish his study and that this information is
an additional fact demonstrating materiality. This allegation is contained in the products liability
Master Consolidated Complaint for Individuals asserted against Medtronic in the Multi-District
Litigation, which Plaintiffs attempt to incorporate into their Complaint in this case. (Compl.
133.) Even if the Court were to consider this allegation, and it will not, such a bald assertion
provides no basis to support a materiality finding. The source of this information, according to
Plaintiffs, is an anonymous person at the Minneapolis Heart Institute who was privy to
communications between Dr. Hauser and Medtronic. Plaintiffs do not explain when or how
Medtronic allegedly offered Dr. Hauser funding or how this anonymous person was privy to
these alleged communications. There is simply insufficient detail for the Court to consider this
naked allegation. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir. 2008).
18
Second, Medtronics FDA application for design and manufacturing change
approval does not indicate the materiality of the omitted information regarding Fidelis
lead fracturing. Plaintiffs plead no facts showing that the FDA application was made in
response to a fracturing concern, but merely suspect that such a connection may exist.9
This vague and conclusory allegation is insufficient to demonstrate materiality.
Moreover, an improvement or upgrade does not mean that the prior [design] was
necessarily [flawed]. Abrams v. Baker Hughes Inc., 292 F.3d 424, 433 (5th Cir. 2002);
see also In re Medtronic, Inc. Sprint Fidelis Leads Products Liability Litig., __ F. Supp.
2d __, No. 08-1905 (RHK/JSM), 2009 WL 35467, at *12 (D. Minn. Jan. 5, 2009) (Kyle,
J.).
Third, the allegation that Medtronic had access to information from the CareLink
database demonstrating decreased Fidelis lead vitality is inaccurate, as the Complaint
itself indicates that the analysis of such data, which involved a lengthy process where
25,000 patients implanted with the lead were analyzed, was not completed until
immediately prior to the Fidelis lead recall. (Compl. 127-28.) Therefore, Medtronic
did not have access to information indicating decreased Fidelis lead vitality, but instead
only had access to raw data, which on its face did not provide substantive information.
Fourth, the fact that a limited number of hospitals and clinics discontinued their
purchasing of the Fidelis lead does not indicate that the information regarding Fidelis
9 Indeed, the Complaint only states that the FDA application sought changes to improve the def-
1 leg strength and handling characteristics of the Fidelis lead. (Compl. 92.) Plaintiffs do not
explain what this language means.
19
lead fracturing was material. The Complaint alleges that five hospitals and clinics, in
addition to the Heart Institute, suspended purchasing.10 The suspension of sales by such a
limited number of purchasers in a worldwide market does not necessarily indicate that
Fidelis lead fracturing was sufficiently serious during the Class Period to affect stock
prices. For example, Plaintiffs allege no facts indicating that these select hospitals and
clinics purchased a significant number of Fidelis leads.
Fifth, the markets reaction to the Fidelis lead recall does not indicate materiality.
It is true that the fact that a firm's stock price . . . significantly change[s] [upon the
release of information] is strong evidence of materiality. No. 84 Employer-Teamster
Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 949 (9th Cir.
2003). However, the markets reaction to the Fidelis lead recall is not indicative of how
the market would react to the information alleged to have been fraudulently omitted. In
fact, the Hauser Study was published during the Class Period in July 2007 (Bongiorno
Decl. Ex. D), but neither party notes the impact, if any, this information had on the price
of Medtronic securities.11 Moreover, there is no allegation in the Complaint, beyond
unsupported conclusory statements, that Medtronic intended to remove the Fidelis lead
from the market during the Class Period. Therefore, the market reaction to the recall is
10 These hospitals and clinics are: the Childrens Memorial Hospital in Chicago, Brigham and
Womens Hospital in Boston, New York Hospital and Long Island Jewish Medical Center in
New York, and Western Pennsylvania Hospital in Pittsburgh. (Compl. 86.)
11 Plaintiffs also argue that materiality is shown by an analyst report discussing recall concerns.
(Mem. in Oppn at 16-17.) However, fears regarding the financial impact of a recall do not
address the materiality of statistically insignificant information that does not yet warrant a recall.
20
irrelevant to the materiality of information allegedly possessed by Medtronic during the
Class Period.
Finally, the alleged admission indicating that Medtronic had learned of a
problem with the Fidelis lead and was working on a remedy, is not additional
information indicating materiality. During a second meeting with the doctors from the
Heart Institute, Reggie Groves, a Medtronic employee, indicated that she was aware of an
issue with the Fidelis lead, but that it did not yet warrant a recall. (Compl. 93-94.)
This statement is fully consistent with statements contained in Medtronics physician
letter and does not indicate a consensus that such reports were putting the brand at
risk. Bayer, 2004 WL 2190357, at *9-10.12 In sum, Plaintiffs alleged other
indications of materiality, when reviewed separately or in their totality, are insufficient
to demonstrate materiality.
iii. Study inadequacies
Plaintiffs further allege that the physician letter is materially false and misleading
because Defendants failed to disclose the inadequacies of the Longevity Study and
Returned Product Analysis that were relied upon in the letter. (Compl. 72-73.) The
Court does not agree. As the Fifth Circuit stated, where a company accurately reports
the results of a scientific study, it is under no obligation to second-guess the methodology
of that study. Nathenson v. Zonagen, Inc., 267 F.3d 400, 420 (5th Cir. 2001) (internal
12 Plaintiffs asserted during oral argument that Groves statement regarding a remedy referred
to Medtronics FDA application for design and manufacturing changes, therefore supporting the
contention that Medtronic submitted the application to address known problems with the Fidelis
lead. However, this ambiguous statement, plucked from its context, provides no basis to support
the inference that the FDA application was made to address the propensity of the Fidelis lead to
fracture.
21
quotations and citation omitted). Plaintiffs cite no decision holding that the publication
of a statistical study is materially false or misleading when purported shortcomings of the
study are not disclosed. Moreover, Plaintiffs do not assert that the results of these studies
were fabricated or otherwise disbelieved by Defendants when the physician letter was
published. Therefore, the inadequacy of the studies relied upon by Defendants is
insufficient to allege fraud. In re Sepracor, Inc. Sec. Litig., 308 F. Supp. 2d 20, 36 (D.
Mass. 2004).
iv. Blaming Fidelis lead fracturing on
physician error
Plaintiffs argue that the statement in the physician letter blaming reported
problems on physician error was materially false and misleading on its face without
regard to any omitted information. (Mem. in Oppn at 1, 24.) Specifically, the letter
stated that variables within the implant procedure may contribute significantly to these
fractures. (Compl. 97.) To support their argument, Plaintiffs rely on Mississippi
Public Employees Retirement System v. Boston Scientific Corp., 523 F.3d 75 (1st Cir.
2008). In that case, the defendants stated that problems associated with their medical
device were connected with doctor unfamiliarity, but later admitted that they initiated a
manufacturing change to address a problem with the device itself. Id. at 87. The court
held that a jury could find that assertions blaming product failures on doctor unfamiliarity
were misleading unless accompanied by disclosure of the manufacturing change. Id.
However, Mississippi Public is distinguishable because Plaintiffs here have pleaded no
facts indicating that Medtronic sought design changes to address what it believed was a
22
defect in the Fidelis lead. Simply put, nothing in the Complaint suggests that
Medtronics investigation did not actually indicate that the single-center reports of Fidelis
lead fracturing may be attributable to implant procedures.13
b. All other challenged statements
The analysis above regarding the material falsity of statements contained in the
physician letter applies with equal force to all other challenged statements contained in
Medtronics direct-to-consumer advertising campaign, website, press releases, SEC
filings, and spokesperson statements. The information Plaintiffs claim was fraudulently
omitted from these statements was not material as it was not statistically significant. See
Oran, 226 F.3d at 283-84; Carter-Wallace I, 150 F.3d at 157. Moreover, there is nothing
to suggest that such undisclosed information constituted a sufficiently serious threat to
Medtronics stock price as to render such information material. See Bayer, 2004 WL
2190357, at *9-10. Accordingly, no challenged statement is actionable. However, there
are additional reasons why the remaining statements are not materially false and
misleading, as described below.
i. A direct-to-consumer advertising
campaign
In January 2007, Medtronic began a direct-to-consumer advertising campaign
promoting its defibrillators, 90 percent of which used the Fidelis lead. (Compl. 99-
100.) The advertisements stated in part that Medtronic defibrillators would provide
13 Indeed, if Medtronics own statistical data indicated that Fidelis performance was in line with
other Medtronic leads, and Medtronic had only received a limited number of reports of fracturing
from implanting physicians, a reasonable explanation for this contradictory information may be
the improper implantation procedures of the reporting physicians.
23
10,000 more kisses and other similar statements suggesting that a defibrillator would
help prolong the lifespan of persons suffering from heart conditions. (Id. 99, 104-05.)
Such statements are not actionable -- they are promotional phrase[s] used to
champion the [Fidelis lead] but [are] devoid of any substantive information. Parnes, 122
F.3d at 547 (quoting Searls v. Glasser, 64 F.3d 1061, 1066 (7th Cir. 1995)). Indeed, their
lack of specificity precludes [the ads] from being deemed material; [the ads contain] no
useful information upon which a reasonable investor would base a decision to invest.
Id. (quoting Searls, 64 F.3d at 1066).
ii. Information on Medtronics website
Throughout the Class Period, Medtronic published information about the Fidelis
lead on its website to promote it to physicians. (Compl. 107.) The website stated that
the Fidelis lead has Outstanding Electrical Performance, is durable and reliable, and
is designed to resist fracture. (Id.) Plaintiffs contend that these statements are
materially false and misleading because the Fidelis lead was neither durable or reliable
nor fracture resistant. (Id. 108.)
No reasonable investor would rely upon these promotional phrases in making
investment decisions. See Parnes, 122 F.3d at 547. Moreover, during the Class Period,
physicians visiting the Medtronic website would presumably have received the abovereferenced
physician letter disclosing that Medtronic had received reports from a limited
number of implanting physicians indicating they have experienced higher than expected
conductor fracture rates with the Fidelis lead. (Compl. 97.) Therefore, these
statements were not false in light of disclosures already made.
24
iii. Press releases, Annual Report on
Form 10-K, and Quarterly Report on
Form 10-Q
On May 22, 2007, a press release announced positive financial results for
Medtronic in the fourth quarter and fiscal year, and specifically noted earnings growth
and discussed expansion in product lines utilizing the Fidelis lead. (Id. 109.) In its
subsequent Annual Report on Form 10-K, Medtronic reconfirmed the financial results
reported in this press release. (Id. 110.) In this report, Medtronic further noted that its
financial growth was aided by continued strong performance of [the] Sprint Fidelis
leads, which had strong market acceptance. (Id.)
On August 21, 2007, another Medtronic press release announced Medtronics first
quarter financial results, touting the strong performance of Medtronic products. (Id.
116.) This release also stated that Medtronic is well positioned in some of the most
attractive worldwide markets, and [has a] top flight leadership team that will help take
Medtronic to the next level. (Id.) In its subsequent Quarterly Report on Form 10-Q,
Medtronic reaffirmed the financial results of this press release, predicting that
Medtronics future financial performance would be strong. (Id. 117.) The Quarterly
Report also predicted future growth in defibrillator demand. (Id. 118.) Plaintiffs
contend that all these press releases and reports were materially false and misleading
because positive statements regarding Medtronics financial status were lacking in any
reasonable basis given the undisclosed information regarding Fidelis lead fracturing. (Id.
112, 119.)
25
Statements in the press releases and reports regarding the strong performance
and market acceptance of the Fidelis lead and Medtronics belief in its future economic
growth were not false and misleading. Plaintiffs do not allege that Medtronics sales,
including sales of the Fidelis lead, were not producing economic success during the Class
Period. Moreover, Plaintiffs do not allege that the few hospitals and clinics that
discontinued their purchasing of the Fidelis lead harmed the leads overall market
performance. Therefore, these statements are accurate historical data and not actionable.
In re Sofamor Danek Group, Inc., 123 F.3d 394, 401 (6th Cir. 1997).
In addition, the statement that Medtronic is well positioned in some of the most
attractive worldwide markets, and [has a] top flight leadership team that will help take
Medtronic to the next level is no more than a promotional phrase used to champion the
company [that] is devoid of any substantive information. Parnes, 122 F.3d at 547
(internal quotations and citation omitted). [S]tatements containing simple economic
projections, expressions of optimism, and other puffery are insufficient to establish
securities fraud. Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir. 2000).
iv. Statements made by Medtronic
spokesperson Rob Clark
On July 30, 2007, an article in the Minneapolis Star Tribune newspaper reported
the findings of the Hauser Study, quoting statements made by Medtronic spokesperson
Rob Clark. (Compl. 113-14.) Clark stated that the study must be taken in context as
it is a single-center study and cannot represent the total performance experience of the
Fidelis lead. (Id. 114.) Plaintiffs contend that this statement is materially false and
26
misleading because it fails to disclose information indicating that the Fidelis lead was
prone to fracturing. (Id. 115.) However, Clarks statement is an accurate factual
statement. Indeed, the Hauser Study itself states that it is a single-center study and may
not reflect the experiences at other centers. (Bongiorno Decl. Ex. D.)
In sum, the statements made by Medtronic during the Class Period did not create
an impression of a state of affairs regarding the Fidelis lead that materially differed from
the one that actually existed. Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006
(9th Cir. 2002). Therefore, Plaintiffs have failed to plead a materially false or misleading
statement with particularity.14
B. Scienter
Defendants also argue that the Complaint must be dismissed because it does not
create a strong inference of scienter. (Def. Mem. at 20-36.) The Court agrees. While
not expressly required by the language of Section 10(b)/ Rule 10b-5, a defendant's mental
state is nonetheless an acknowledged essential element of a 10(b) or Rule 10b-5
claim. Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1534 (8th Cir. 1996). The
Reform Act requires a complaint to state with particularity facts giving rise to a strong
14 In their Motion papers, the parties vigorously dispute the continued viability of the Group
Pleading Doctrine since the passage of the Reform Act. (Def. Mem. at 37; Mem. in Oppn at
34-35.) The Eighth Circuit has yet to address this issue. See In re Hutchinson Tech., Inc. Sec.
Litig., 536 F.3d 952, 961 n.6 (8th Cir. 2008). The Group Pleading Doctrine presumes that
statements in prospectuses, registration statements, annual reports, press releases, or other
group-published information, are the collective work of those individuals with direct
involvement in the everyday business of the company. In re Oxford Health Plans, Inc., 187
F.R.D. 133, 142 (S.D.N.Y. 1999) (internal quotations and citation omitted). However, because
the Court finds that no challenged statement is materially false or misleading, the Court need not
address whether the challenged statements can be imputed to the individual Defendants.
27
inference that the defendant acted with the required state of mind. 15 U.S.C. 78u-
4(b)(2).
In deciding whether a strong inference of scienter has been adequately pleaded, a
court must determine whether all the facts alleged, taken collectively, give rise to a
strong inference of scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard. Tellabs, 127 S. Ct. at 2502. On a motion to dismiss,
while all inferences must be drawn in plaintiffs favor, inferences of scienter do not
survive if they are merely reasonable. . . . Rather, inferences of scienter survive a motion
to dismiss only if they are both reasonable and strong. Green Tree, 270 F.3d at 660
(internal quotations and citation omitted). Therefore, a court must consider, not only
inferences urged by the plaintiff, . . . but also competing inferences rationally drawn from
the facts alleged. Tellabs, 127 S. Ct. at 2504. The outcome of this comparison must
indicate that the inference of scienter [is] more than merely plausible or reasonable -- it
must be cogent and at least as compelling as any opposing inference of nonfraudulent
intent. Id. at 2504-05. Additionally, to proceed beyond the pleading stage, [a plaintiff]
must allege facts sufficiently demonstrating each defendants state of mind regarding his
or her alleged violations. Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1018 (11th
Cir. 2004) (emphasis added).
A strong inference of scienter may be established when the defendants
(1) benefited in a concrete and personal way from the purported fraud, (2) engaged in
deliberately illegal behavior, (3) knew facts or had access to information suggesting that
their public statements were not accurate, or (4) failed to check information they had a
28
duty to monitor. Kushner v. Beverly Enters., Inc., 317 F.3d 820, 827 (8th Cir. 2003).
Plaintiffs contend that scienter can be strongly inferred in this case because Defendants
knew facts, or had access to facts, suggesting that the Fidelis lead posed a significant
fracture risk. (Mem. in Oppn at 36-48.) Moreover, Plaintiffs contend that a strong
inference of scienter has been alleged in this case because evidence of insider trading
indicates that the individual Defendants derived personal benefit from their fraudulent
statements. (Id. at 48-49.)
1. Knowledge of facts indicating that public
statements were inaccurate
One of the classic fact patterns giving rise to a strong inference of scienter is that
defendants published statements when they knew facts or had access to information
suggesting that their public statements were materially inaccurate. Green Tree, 270 F.3d
at 665. Plaintiffs allege that Defendants knew of information regarding the fracture rate
of the Fidelis lead at the time the allegedly fraudulent statements were made, that
knowledge of this information creates a strong inference of scienter, and that such
knowledge can be imputed to Medtronic. (Mem. in Oppn at 36-48.)
a. The individual Defendants
Plaintiffs claim that the individual Defendants were aware that their statements
were materially false and misleading because they were aware of information such as the
Hauser Study, the unreliability of Medtronics internal statistics, the decision of several
29
hospitals and clinics to suspend their purchasing of the Fidelis lead,15 the FDA
application for design and manufacturing changes, and the five patient deaths linked to
Fidelis lead fracturing.16 (Mem. in Oppn at 36-37.)
Without allegations of particular facts demonstrating how the defendants knew
of the alleged information indicating the propensity of the Fidelis lead to fracture,
fraudulent intent cannot be shown. Kushner, 317 F.3d at 827. This is because
[c]orporate officials need not be clairvoyant; they are only responsible for revealing
those material facts reasonabl[y] available to them. Navarre, 299 F.3d at 743 (internal
quotations and citations omitted). In this case, Plaintiffs have not made a sufficient
showing of such knowledge, and accordingly the individual Defendants scienter has not
been established.
First, Plaintiffs allege that the individual Defendants must have been aware of
information indicating that the Fidelis lead was prone to excessive fracturing because of
their senior-level positions at Medtronic. (Mem. in Oppn at 42-43.) However, [a]
15 Plaintiffs request that the Court take judicial notice of an article published by Minnesota
Public Radio, in which Medtronic spokesperson Rob Clark is quoted as stating that Medtronic
had received reports that some medical centers had suspended their purchasing of the Fidelis
lead. (Strauss Decl. Ex. E.) This article is offered to establish the Defendants knowledge of
such discontinuances, but the Defendants dispute this knowledge. (Def. Mem. at 28-29.)
Because disputed facts are not the proper subject of judicial notice, the Court will not consider
statements in this article. See Kushner, 317 F.3d at 830 (quoting Fed. R. Evid. 201(b)).
16 Plaintiffs also claim that the Complaint establishes a strong inference of scienter because
Defendants admittedly knew about the higher than normal expected and excessive rates of
fracturing detected by springtime. (Mem. in Oppn at 36.) As noted above, Plaintiffs take
these statements, made during a conference call on the day the Fidelis lead was recalled, out of
context. (Compl. 125-28.) When the record of the conference call is read, it becomes clear
that the speakers were referring to the adverse reports already disclosed in the physician letter,
and not some additional information or knowledge that the Fidelis lead was prone to excessive
fracturing.
30
pleading of scienter may not rest on the inference that defendants must have been aware
of [information] based on their positions within the company. Abrams, 292 F.3d at 432.
Indeed, respective positions within the company prove nothing about fraud or
knowledge thereof but rather are exactly the type of generalized allegations the court
must disregard under the [Reform Act]. In re Patterson, Inc. Sec. Litig., 479 F. Supp. 2d
1014, 1032-33 (D. Minn. 2007) (Doty, J.) (internal quotations and citation omitted).
Plaintiffs further allege that Defendants must have been aware of information
regarding the propensity of the Fidelis lead to fracture because the Fidelis lead was a very
important product for Medtronic. (Mem. in Oppn at 42-43.) A court may infer that
individuals in top management of a corporation are aware of matters central to that
businesss operation. In re McLeodUSA Inc. Sec. Litig., No. C02-001-MWB, 2004 WL
1070570, at *6 (N.D. Iowa Mar. 31, 2004). However, Plaintiffs have not sufficiently
alleged that the Fidelis lead was central to Medtronics business. While Plaintiffs argue
that the Fidelis lead was generating one billion dollars in revenue and its recall had a
significant negative impact on Medtronics stock price (Mem. in Oppn at 42 n.27),
Defendants note that the Fidelis lead was one of many Medtronic products, with its recall
impacting only two percent of revenues. (Reply Mem. at 13 (citing Compl. 2, 109,
127).) Therefore, the Fidelis lead was not so important to Medtronics continued success
to support the inference that the individual Defendants must have known all information
regarding it.
Plaintiffs also argue that a strong inference of scienter is established for the
individual Defendants because they had access to information regarding the Fidelis lead
31
through their monitoring of sales and performance data. (Mem. in Oppn at 37, 45-46.)
Plaintiffs point to the statement in the physician letter that Medtronic was closely
monitoring the Fidelis lead and was in close contact with physicians. (Id. at 45.)
However, Plaintiffs argument fails because an allegation of data monitoring is not
sufficiently specific to support a strong inference of scienter. See In re Apple Computer,
Inc. Sec. Litig., 243 F. Supp. 2d 1012, 1026 (N.D. Cal. 2002) (noting that general
allegations about a hands-on management style and access to data is insufficient to
support a securities claim.) Indeed, in this case, there is no allegation in the Complaint
that any individual Defendant actually studied the sales and performance data of the
Fidelis lead. Moreover, Plaintiffs fail to explain why the simple review of sales and
performance data would convey to the reader that the Fidelis lead was fracturing at a
significant rate or posing a serious threat to Medtronic stock prices. Thus, such a broad
and unsubstantiated allegation fails to establish a strong inference of scienter.
Plaintiffs again rely upon Mississippi Public to support a finding of a strong
inference of scienter for the individual Defendants. However, Mississippi Public is easily
distinguished as that court relied heavily upon the companys own statements
indicating that it implemented manufacturing changes to address a known defect in its
product while publicly maintaining that the product was not defective. 523 F.3d at 87-88.
No similar allegation, beyond mere conclusory statements, is made here.17
17 Plaintiffs cite no facts indicating that Medtronic applied to the FDA for design and
manufacturing changes for the purpose of addressing Fidelis lead fracturing.
32
Finally, Plaintiffs allege that Defendants admitted their knowledge of excessive
Fidelis lead fracturing when Medtronic employee Reggie Groves stated that Medtronic
had identified a problem and was working on a possible remedy. (Mem. in Oppn at
37.) However, Plaintiffs allege no facts indicating that the sentiment of Reggie Groves
was communicated to the individual Defendants or had pervaded Medtronic.
Additionally, this quotation is vague, ambiguous, and plucked from its context. Such
ambiguities count against inferring scienter. Tellabs, 127 S. Ct. at 2511.
The Complaint in this case is replete with blanket assertions of knowledge that do
not particularly state facts upon which such knowledge was based or increase the
reasonableness or strength of an inference that any defendant acted with an intent to
defraud the market. Patterson, 479 F. Supp. 2d at 1032. Therefore, a strong inference of
scienter has not been established for any of the three individual Defendants based on
knowledge of information contradicting public statements.18
b. Medtronic
Plaintiffs argue that a strong inference of scienter can be imputed to Medtronic
without adequately pleading scienter against any individual Defendant. (Mem. in Oppn
18 Plaintiffs also rely on several allegations contained in the Master Consolidated Complaint for
Individuals asserted against Medtronic in the Multi-District Litigation. (Mem. in Oppn at 37-
38.) Such allegations include that Medtronic employees attempted to offer funding to Dr. Hauser
in order to delay the publishing of the Hauser Study, that Medtronic misrepresented to the FDA
that the Fidelis design was based on and substantially similar to previously approved leads,
that members of Medtronics advisory committee noted that data cited in the physician letter was
inadequate to support the letters conclusions, and that Medtronic delayed the disclosure of 120
adverse event reports. (Id.) In their Complaint, Plaintiffs attempt to incorporate these
allegations. (Compl. 133.) Even were the Court to consider such allegations, they suffer from
the same flaw as all other scienter allegations already discussed: Plaintiffs do not sufficiently
plead the individual Defendants knowledge of such alleged actions.
33
at 40-42.) Specifically, Plaintiffs request that this Court adopt the collective corporate
scienter doctrine, which allows a plaintiff to demonstrate corporate scienter through the
sum of its employees activities and knowledge. In re WorldCom, Inc. Sec. Litig., 352
F. Supp. 2d 472, 497-500 (S.D.N.Y. 2005); see also United States. v. Bank of New
England, N.A., 821 F.2d 844, 856 (1st Cir. 1987).
In contrast, the Fifth Circuit has held that to determine corporate scienter, a court
must look to the scienter of individual corporate officials. See Southland Sec. Corp. v.
INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004). The scienter of
individual corporate officials is important because when subjective state of mind is an
element of a cause of action, such as fraud, the general common-law rule requires such a
state of mind to actually exist in an individual. Id. Therefore, a corporation should be
deemed to have the requisite scienter for fraud only if the individual corporate officer
making the statement has the requisite level of scienter. Id. (internal quotations and
citation omitted).
While the Eighth Circuit has not directly addressed the issue of collective
scienter, it has done so implicitly. In Kushner, after determining that the plaintiffs had
not established a strong inference of scienter for any individual corporate employee, the
court dismissed the complaint without mentioning or addressing the scienter of the
corporate defendant. 317 F.3d at 827-30. This result is consistent with Southland.
Therefore, the Court will not apply the collective scienter doctrine, requiring instead
that the Plaintiffs establish corporate scienter by adequately alleging the scienter of
individual corporate officers. Because Plaintiffs have not adequately pleaded scienter
34
against any individual Defendant or non-defendant Medtronic employee, corporate
scienter cannot be established.19
2. Competing inferences
Even if Defendants were aware of information indicating that the Fidelis lead was
prone to fracture during the Class Period, Defendants argue that the competing inference
of Medtronics good faith is the far more cogent and compelling inference on the
record, and therefore, Plaintiffs cannot establish a strong inference of scienter. (Def.
Mem. at 27.) Specifically, Defendants claim that during the Class Period, Medtronic
acted in good faith by waiting to make any decision until it had analyzed a much larger
body of data. (Id.) Plaintiffs do not contest that Medtronic conducted an extensive
statistical study of over 25,000 patients implanted with the Fidelis lead during the Class
Period, culminating with findings that led to the recall of the Fidelis lead. Thus, a strong
inference exists that Medtronic acted in good faith in addressing the reports of Fidelis
lead fracturing. See Higginbotham v. Baxter Intl, Inc., 495 F.3d 753, 760-61 (7th Cir.
2007) (Prudent managers conduct inquiries rather than jump the gun with half-formed
19 In Makor Issues & Rights, Ltd. v. Tellabs Inc., the Seventh Circuit noted that it is possible to
draw a strong inference of corporate scienter without being able to name the individuals who
concocted and disseminated the fraud. 513 F.3d 702, 710 (7th Cir. 2008). The court gave the
following example: Suppose General Motors announced that it had sold one million SUVs in
2006, and the actual number was zero. There would be a strong inference of corporate scienter,
since so dramatic an announcement would have been approved by corporate officials sufficiently
knowledgeable about the company to know that the announcement was false. Id. Therefore,
the Seventh Circuit has indicated that some fraudulent statements may be so flagrant as to
support an inference of corporate scienter even when the knowledge of individual officers and
directors cannot be determined. The Ninth and Second Circuits agree with this reasoning. See
Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d
Cir. 2008); Glazer Capital Mgmt. v. Magistri, 549 F.3d 736, 744-45 (9th Cir. 2008). However,
the case at bar presents no similarly obvious or flagrant fraud.
35
stories as soon as a problem comes to their attention. . . . Taking the time necessary to
get things right is both proper and lawful.).
Moreover, even if the individual Defendants were aware of the FDA application to
implement design and manufacturing changes in the Fidelis lead, such an application
does not necessarily imply knowledge that the Fidelis lead was prone to excessive
fracturing. An improvement or upgrade does not mean that the prior [design] was
necessarily [flawed]. A perfectly reasonable explanation for implementing [design
changes is] to improve [the product]. Abrams, 292 F.3d at 433. Therefore, Defendants
have presented a strong competing inference of good faith, cutting against any inference
of scienter.
3. Concrete and personal benefit to Defendants
A second way in which a strong inference of scienter can be established is by
demonstrating that a defendant derived concrete and personal benefits from the alleged
fraud. Kushner, 317 F.3d at 827. [M]otive and opportunity are generally relevant to a
fraud case, and a showing of unusual or heightened motive will often form an important
part of a complaint that meets the Reform Act standard. Green Tree, 270 F.3d at 660.
This is because strong motive is a reason to believe the defendants misrepresentation
was knowing or reckless. Id.
Plaintiffs argue that Defendants had the motive to commit securities fraud
because of their desire to maintain Medtronics 50 percent market-share in the lucrative
defibrillator market. (Mem. in Oppn at 36.) However, motives generally held by all
corporate officers and directors are insufficient to establish a strong inference of scienter.
36
Green Tree, 270 F.3d at 664. All corporate officers and directors want their corporations
to be financially successful. Therefore, this motive does not support a strong inference of
scienter.
Plaintiffs also argue that the individual Defendants insider stock sales
demonstrate a motive to commit securities fraud, and therefore create a strong inference
of scienter. (Mem. in Oppn at 48-49.) However, insider sales are not inherently
suspicious; they become so only when the level of trading is dramatically out of line with
prior trading practices at times calculated to maximize the personal benefit from the
undisclosed information. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 783
(8th Cir. 2008) (internal quotations and citations omitted). Thus, insider trades have to
be unusual, either in the amount of profit made, the amount of stock traded, the portion
of stockholdings sold, or the number of insiders involved, before they will give rise to the
required inference of scienter. Green Tree, 270 F.3d at 659.
In this case, insider stock sales by the individual Defendants during the Class
Period were not unusual or suspicious.20 When evaluating stock sales, . . . the
proportion of shares actually sold by an insider to the volume of shares he could have
sold is probative of whether the sale was unusual or suspicious. In re Silicon Graphics
Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999). Defendants note that during the Class
Period, Defendant Hawkins sold 1% of his stock holdings, Defendant Ellis sold .2% of
20 In their Complaint, Plaintiffs reference the stock sales of several non-Defendant insiders.
(Compl. 168-70.) In their brief and at oral argument, however, Plaintiffs do not allege that
such sales create a strong inference of scienter. Therefore, the Court need not address the stock
sales of any non-Defendant.
37
his holdings, and Defendant Collins sold 14% of his holdings.21 (Def. Mem. at 33-34.)
These percentages, standing alone, are insufficient to establish a strong inference of
scienter. See Navarre, 299 F.3d at 747 (noting that sales of ten percent and thirty-two
percent of an insiders stock holdings, standing alone, is insufficient to establish a strong
inference of scienter).
Instead of relying on such percentages, Plaintiffs claim that Defendants stock
sales were unusual and suspicious because of the sale dates and amount of stock sold
during the Class Period. (Mem. in Oppn at 48-49.) However, the amount of stock sold
by Defendants during the Class Period is insufficient to establish a strong inference of
scienter. While Plaintiffs claim that Collins Class Period sales were more than seven
times -- and Hawkins, more than four times -- their respective sales during the prior
fourteen-month period (Mem. in Oppn at 48), Defendants note that the trading of both
Hawkins and Ellis resulted in increased stock holdings during the Class Period. (Def.
Mem. at 33.) 22 When insiders increase their stock holdings during the Class Period, it
weakens the allegation of suspicious insider trading. See Possis, 519 F.3d at 783.
Moreover, a strong competing inference exists that Collins stock sales during the Class
Period were not unusual or suspicious, as he was exercising stock options soon to expire,
utilizing a majority of the profits derived from the stock sales to pay taxes incurred
21 The Defendants trading history is documented in public filings required to be filed with the
SEC, which [can be] considered on a motion to dismiss. Green Tree, 270 F.3d at 663.
Plaintiffs do not challenge these percentages.
22 Notably, Plaintiffs brief does not discuss the insider trading of Ellis.
38
through the exercise of the options. (Def. Mem. at 35.)23 Stock sales done in conjunction
with the exercise of an option or to pay taxes are not suspicious. See Campbell v.
Lexmark Intl Inc., 234 F. Supp. 2d 680, 687 (E.D. Ky. 2002); Ressler v. Liz Claiborne,
Inc., 75 F. Supp. 2d 43, 59-60 (E.D.N.Y. 1998).
Plaintiffs claim that the timing of Collins stock sales, in particular, is suspicious.
They note that Collins sold 338,896 shares on July 2, 2007 -- five days after the June 25,
2007, issuance of Medtronics 2007 Form 10-K. (Mem. in Oppn at 49.) Moreover,
Plaintiffs note that Collins also sold 38,000 shares on August 23, 2007, two days after
the August 21, 2007 press release and sold 69,566 shares on September 17 and 18,
2007, a week after the September 5, 2007, issuance of Medtronics false first quarter
Form 10-Q and weeks before the October 15, 2007, corrective disclosure. (Id.)
Plaintiffs are correct that the suspicious timing of stock sales can create an
inference of scienter. Silicon, 183 F.3d at 987. However, the timing of Collins stock
sales is explained largely by the expiration date of the options he exercised during the
Class Period. Moreover, even if the timing of Collins stock sales was considered by the
Court to be suspicious, such timing is insufficient to establish a strong inference of
scienter in the absence of any other information indicating unusual insider trading.
4. Conclusion: Plaintiffs fail to allege a strong
inference of scienter
All of Plaintiffs factual allegations, whether considered individually or in their
totality, do not establish a strong inference of scienter. Defendants senior positions at
23 Plaintiffs do not contest this fact.
39
Medtronic, the importance of the Fidelis lead to Medtronics business, Defendants
access to information databases, Defendants desire to maintain a 50 percent market share
in the defibrillator market, and the timing of Collins stock sales, do not create a strong
inference of scienter. Plaintiffs have not established that any individual Defendant was
actually aware of information indicating that the Fidelis lead posed a significant risk of
fracturing and such knowledge cannot be imputed to Medtronic. Moreover, the stock
sales of the individual Defendants were not unusual or suspicious. Finally, the competing
inference of Medtronics good faith is more compelling, based on the record, than an
inference of scienter. Therefore Plaintiffs Section 10(b)/Rule 10b-5 claim must also be
dismissed for failure to plead a strong inference of scienter.
II. Section 20(a) of the Exchange Act of 1934
Plaintiffs also allege that Defendants were controlling persons under Section
20(a) of the Exchange Act of 1934. (Compl. 193-96.) Section 20(a) imposes liability
upon persons that control violators of, among other things, Section 10(b)/Rule 10b-5:
Every person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder 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, unless the
controlling person acted in good faith and did not directly or indirectly induce
the act or acts constituting the violation or cause of action.
15 U.S.C. 78t(a).
To establish a prima facie case of control-person liability, a plaintiff must allege
(1) a primary violation by a controlled person; (2) control of the primary violator by the
defendant; and (3) that the controlling person was in some meaningful sense a culpable
40
participant in the primary violation. Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.
1998) (internal quotations and citation omitted). Defendants argue that Plaintiffs claim
under Section 10(b)/Rule 10b-5 is defective for failure to comply with the Reform Act,
and therefore Plaintiffs have not sufficiently pleaded a violation of Section 20(a). The
Court agrees. Because the Section 10(b) claim is not viable, the Court will grant the
motion as to the claims under Section 20(a).
III. Leave to replead
Plaintiffs request leave to replead if any of their claims are determined to be
deficient under the Reform Act. (Mem. in Oppn at 51.) They argue that an amendment
is appropriate as new facts have been revealed since the Complaint was filed.
Specifically, Plaintiffs claim that new facts are contained in the Master Consolidated
Complaint for Individuals in the Medtronic products liability lawsuit and an article
published by Minnesota Public Radio. (Id.) Such facts include the assertion that (1)
Medtronic offered Dr. Hauser funding to withhold the publication of the Hauser Study
and (2) that Medtronic admitted its knowledge that several hospitals and clinics had
suspended purchasing the Fidelis lead. (Id.)
The Federal Rules of Civil Procedure provide for liberality in granting leave to
amend. Fed. R. Civ. P. 15(a)(2) (The court should freely give leave when justice so
requires.) However, a court may deny a request for leave to amend when the
amendment would be futile or would cause undue delay or prejudice. Foman v. Davis,
371 U.S. 178, 182 (1962). Therefore, parties should not be allowed to amend their
41
complaint without showing how the complaint could be amended to save the meritless
claim. Wisdom v. First Midwest Bank, 167 F.3d 402, 409 (8th Cir. 1999).
In this case, the Court has already noted that allegations in the Master
Consolidated Complaint for Individuals in the products liability lawsuit are insufficient to
establish a strong inference of scienter.24 Moreover, the Minnesota Public Radio article
does not establish that any individual officer or director had knowledge of information
regarding excessive Fidelis lead fracturing and therefore cannot establish scienter.25
Thus, the addition of these allegations would not save the Complaint in this case. As
Plaintiffs point to no additional information they would add to the Complaint if given the
opportunity, the proposed amendment would be futile. Therefore, the Court denies
Plaintiffs request to replead.
CONCLUSION
The heightened pleading requirements of the Reform Act were passed to curb
frivolous, lawyer-driven litigation, while preserving investors ability to recover on
meritorious claims. Tellabs, 127 S. Ct. at 2509. Medtronic should not be required to
endure burdensome and expensive discovery when Plaintiffs cannot allege securities
fraud with particularity. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct.
1955, 1966-67 (2007). Accordingly, because the Complaint does not comply with the
requirements of the Reform Act, it must be dismissed.
24 Plaintiffs do not argue that the allegations in the products-liability complaint pertain to the
issue of materiality except for the allegation that Medtronic offered funding to Dr. Hauser to stop
the publication of his study. This allegation has already been considered and deemed as
insufficient to establish materiality.
25 Such information is not alleged to be relevant to the issue of materiality.
42
Based on the foregoing, and all the files, records and proceedings herein IT IS
ORDERED that Defendants Motion to Dismiss (Doc. No. 57) is GRANTED and
Plaintiffs Amended Complaint (Doc. No. 46) is DISMISSED WITH PREJUDICE.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: March 10, 2009
s/Richard H. Kyle
RICHARD H. KYLE
United States District Judge
 

 
 
 

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