Miss. Pub. Employees' Ret. System v. Boston Scientific Corp..

• Decision Date: 04 August 2011
• Docket Number: No. 10–1663.,10–1663.
• Citation: 649 F.3d 5
• Parties: MISSISSIPPI PUBLIC EMPLOYEES' RETIREMENT SYSTEM, Plaintiff, Appellant,Jack Yopp, Individually and on Behalf of All Others Similarly Situated, et al., Plaintiffs,v.BOSTON SCIENTIFIC CORPORATION, James R. Tobin, Paul A. LaViolette, Fredericus A. Colen, Lawrence C. Best, Stephen F. Moreci, Robert G. MacLean, Peter M. Nicholas, Paul W. Sandman, James H. Taylor, Jr., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

649 F.3d 5

MISSISSIPPI PUBLIC EMPLOYEES' RETIREMENT SYSTEM, Plaintiff, Appellant,Jack Yopp, Individually and on Behalf of All Others Similarly Situated, et al., Plaintiffs,

v.BOSTON SCIENTIFIC CORPORATION, James R. Tobin, Paul A. LaViolette, Fredericus A. Colen, Lawrence C. Best, Stephen F. Moreci, Robert G. MacLean, Peter M. Nicholas, Paul W. Sandman, James H. Taylor, Jr., Defendants, Appellees.

No. 10–1663.

United States Court of Appeals, First Circuit.

Heard Feb. 10, 2011.Decided Aug. 4, 2011.

Carolyn G. Anderson, with whom Anne T. Regan, Patricia A. Bloodgood, Zimmerman Reed, PLLP, David S. Nalven, Hagens Berman Sobol Shapiro, LLP, Richard A. Lockridge, Gregg M. Fishbein, Nathan D. Prosser, Lockridge Grindal Nauen, PLLP, James E. O'Neil, Law Offices of James E. O'Neil, Mike Moore, and Moore Law Firm were on brief, for appellant.Stuart J. Baskin, with whom John Gueli, Kirsten Cunha, Shearman & Sterling LLP, William H. Paine, Timothy Perla, and Wilmer Cutler Pickering Hale & Dorr LLP were on brief, for defendants.Before LYNCH, Chief Judge. BOUDIN and THOMPSON, Circuit Judges.LYNCH, Chief Judge.

In this securities class action, plaintiff Mississippi Public Employees' Retirement System alleges that senior management of Boston Scientific Corporation (BSC), a publicly traded manufacturer of medical devices in which plaintiff invested, withheld material information and made misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities Exchange Commission Rule 10b–5, 17 C.F.R. § 240.10b–5.

In an earlier opinion, we reversed a Rule 12(b)(6) dismissal of plaintiff's complaint, finding that the inference of scienter advanced by the plaintiff was at least as cogent and compelling as the contrary inference, satisfying the “strong inference” pleading standard of the Private Securities Litigation Reform Act. See Miss. Pub. Emps.' Ret. Sys. v. Boston Scientific Corp. ( BSC I ), 523 F.3d 75 (1st Cir.2008). After the district court permitted discovery, the defendants filed a motion for summary judgment, testing whether the evidence, and not merely the allegations, withstood scrutiny. The district court found that the evidence did not and granted defendants' motion. See In re Boston Sci. Corp. Sec. Litig., 708 F.Supp.2d 110 (D.Mass.2010). The plaintiff appealed, and as is common in litigation, the shape of the case has changed since we last reviewed it.

Plaintiff's central claim is that defendants were aware that BSC would likely need to implement a significant recall of its TAXUS Express 2 Paclitaxel–Eluting Coronary Stent System (“Taxus”), and that through affirmative statements and omissions, defendants intentionally or recklessly misled the investing public about the existence, cause, and degree of this risk. As to omissions, plaintiff argues that starting in November 2003, defendants chose not to disclose or implement a manufacturing solution to a “no-deflate” problem with Taxus because doing so would have caused a delay in the FDA's approval of the device. This, in turn, would have hampered BSC's business strategy of building up sufficient Taxus inventory to flood the market upon its launch. As to affirmative statements, plaintiff claims that defendants “lulled” the market by repeatedly saying that the problems were due to doctor inexperience with the stent system, rather than manufacturing, and that recalls were unlikely.

The district court found that on the undisputed facts, drawing all inferences in plaintiff's favor, no reasonable jury could find sufficient evidence of three key elements of securities fraud.¹ We affirm on the sole ground that plaintiff has failed to produce evidence that would permit a reasonable inference that defendants acted with scienter.

I.

We assume some familiarity with our prior opinion and focus on the facts and claims that are key to this appeal.

A. Stent Systems

In treating coronary artery disease (i.e., clogged arteries), physicians often use stents in angioplasty procedures as an alternative to open heart surgery. A stent delivery system consists of three central components: (1) a catheter, which is a long hollow plastic tube used to guide the stent along the inside of the arteries, (2) a balloon that is laser welded to the end of the catheter, and (3) the stent itself, which is “crimped” (or collapsed) on the deflated balloon. During an implant procedure, the balloon is inflated, which expands and deploys the stent and clears the blockage. After the stent is deployed and apposed to the artery wall, the balloon is deflated and withdrawn.

BSC makes two different stent systems. There is the Taxus system, on which plaintiff's claims rest, and the Express ² system, which is very similar to Taxus. The primary difference between them is that the stent in the Taxus system is coated with a polymer containing a drug to ease complications associated with stent implant, while the stent in the Express ² system is not coated. Both the Express ² and Taxus systems are built using the same Express ² catheter.

B. The Express ² System

We begin with an overview of the Express ² system and BSC's gradual improvement of it, as this background is necessary to understand the nature and basis of the plaintiff's claims about Taxus. BSC's improvements to the Express ² system can be categorized into three phases on the undisputed evidence.

1. Express ² Phase One: Reducing Process Variability

BSC began selling the Express ² system outside the United States in June 2001, and received FDA approval for U.S. sales in September 2002. The system was manufactured at company facilities in Maple Grove, Minnesota, and Galway, Ireland.

In early 2003, BSC received 11 reports of complaints that the balloon on Express ² devices had not deflated, including 3 from the same manufacturing lot. While BSC had received occasional complaints of this problem since the product's launch, the increased rate and the existence of multiple no-deflates from the same batch caused BSC to conduct an inquiry. Multiple-complaint lots meant that the problem was not dispersed throughout all devices, and consequently that the normal method of calculating frequency did not apply.

BSC initiated a Site Level Correction Action (SLCA) at Maple Grove led by Paul Weiss, and a corresponding Corrective and Preventative Action (CAPA) at Galway led by Niamh O'Byrne. SLCA and CAPA investigations are commenced to investigate issues that are systemic or could disrupt business operations. As part of their investigations, Paul Weiss and Niamh O'Byrne opened a Product Inquiry Report (PIR). A PIR is used to investigate and make recommendations for in-house actions or field actions to BSC's Field Action Committee (FAC), which has ultimate responsibility for instituting field actions such as recalls. Although the multiple-batch no-deflate complaints were about Express ², Taxus (which was only being sold outside the United States at the time) was included in the PIR because both systems were built using the same Express ² catheter.

On May 15, 2003, the PIR team issued a report on the primary cause of the no-deflate problem. The team found that the problem was due to a condition known as “focal necking” or “focal neckdown,” where the “distal outer” (the portion of the catheter that is welded to the balloon) becomes elongated or stretched, preventing the withdrawal of the fluid used to inflate the balloon. The team further found that this focal necking had two primary causes: (1) excessive heat at the laser bond of the balloon and the distal outer, which could be caused by a laser that was too hot or misaligned, and (2) a subsequent excessive tensile force exerted in the area of the bond, which could occur either during or after manufacturing.

While the team could not identify the specific cause of the tensile force, it was able to identify several in-house actions to prevent or lessen the incidence of focal necking. To address issues with the laser weld, it recommended reducing the laser energy settings, increasing the magnification of the alignment camera, and retraining operators. For the same reason, the team also recommended using only distal outers manufactured in Maple Grove, which were found to be more robust than those manufactured in Galway, and launching an investigation to understand why the Galway distal outers appeared more prone to focal necking.

The PIR team also reported on the frequency of the no-deflate issue. For Express ² devices manufactured in Galway, it found twenty no-deflates out of over 260,000 revenue shipments, with two lots producing three complaints each; for those manufactured in Maple Grove, it found only one no-deflate.² For Taxus devices, which were only manufactured in Galway at the time, it found zero no-deflates out of over 31,000 revenue shipments. Given this “low rate of occurrence combined with the limited severity in all but one case,” the PIR team concluded that “[n]o field action is recommended at this time.”

The team was asked at a May 22 meeting to determine the scope of the no-deflate issue in case a recall was needed, and it found no factors that could be used to identify some devices as being higher-risk. It considered data on numerous parameters of the focally necked devices—including laser weld, elongation, type of resin used, and extrusions—but found no correlations from which to scope the problem. On May 23, the team issued a PIR with the same conclusions and recommendations that it had reached in the May 15 report.

On May 27, the FAC accepted the PIR team's recommendations and conclusions. It agreed that a recall was not warranted at the time, finding that “the product in the field was within all of its established specifications, the frequency of issues reported [from] the field were extremely low, and the consequences, while potentially severe in some cases are not outside those expected with this type of...