Freedman v. St. Jude Med., Inc.

• Decision Date: 10 March 2014
• Docket Number: Civil No. 12–3070 (JNE/JJG).
• Citation: 4 F.Supp.3d 1101
• Parties: Robert FREEDMAN, on behalf of himself and all others similarly situated, Plaintiff, v. SAINT JUDE MEDICAL, INC., Daniel J. Starks, John C. Heinmiller, Eric S. Fain, Michael T. Rousseau, and Donald J. Zurbay, Defendants.
• Court: U.S. District Court — District of Minnesota

4 F.Supp.3d 1101

Robert FREEDMAN, on behalf of himself and all others similarly situated, Plaintiff,

v.SAINT JUDE MEDICAL, INC., Daniel J. Starks, John C. Heinmiller, Eric S. Fain, Michael T. Rousseau, and Donald J. Zurbay, Defendants.

Civil No. 12–3070 (JNE/JJG).

United States District Court, D. Minnesota.

Signed March 10, 2014.

Gregg Levin and Joshua Littlejohn, Motley Rice LLC, Joshua D'Ancona, Kessler Topaz Meltzer & Check LLP, and James Anderson, Heins Mills & Olson PLC, appeared for the Lead Plaintiff.

Daniel Ring and Laura Hammargren, Mayer Brown LLP, appeared for the Defendants.

ORDER

JOAN N. ERICKSEN, District Judge.

This is a private securities fraud case and a putative class action against St. Jude Medical, Inc. and five of its officers. It began as two separate actions that were both filed in this District in December 2012. Those cases were consolidated under the Freedman caption in March 2013 and the Institutional Investor Group was appointed as the Lead Plaintiff. Order, ECF No. 38. Thereafter, the Lead Plaintiff filed an Amended Consolidated Complaint (“ACC”). ECF No. 48. The ACC alleges that the Defendants committed fraud on the market from February 5, 2010 to November 20, 2012 and seeks relief for those who purchased stock during that class period.

The case is now before the Court on the Defendants' Motion to Dismiss the ACC for failure to meet the pleading requirements of the Private Securities Litigation Reform Act of 1995. ECF No. 63. See15 U.S.C. § 78u–4(b)(3)(A). For the reasons discussed below, the motion will be granted in part and denied in part.

Background

As the matter is before the Court on a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the factual context that follows is drawn from the allegations in the ACC and the documents it incorporates by reference. See In re K-tel Int'l., Inc. Sec. Litig., 300 F.3d 881, 889 (8th Cir.2002) (“The court may consider, in addition to the pleadings, materials ‘embraced by the pleadings' and materials that are part of the public record.”).

I. Defendants.

Saint Jude Medical (hereinafter, “SJM”) is a corporation based in Minnesota that develops, manufactures, and distributes medical devices worldwide. At all times relevant to this case, Daniel Starks served as SJM's Chairman, President, and Chief Executive Officer, and Michael Rousseau served as Group President.

The other individual defendants' positions were affected by a restructuring that took place in August 2012 in which SJM reorganized its operations from four divisions down to two. Donald Zurbay, who had served as Corporate Controller before the realignment, became Vice President for Finance and Chief Financial Officer, while John Heinmiller, who had previously served as Executive Vice President and CFO, retained the former title. Also, Eric Fain, who had been President of SJM's Cardiac Rhythm Management Division (“CRMD”) before realignment, became President of the newly-created Implantable Electronic Systems Division (“IESD”) afterwards.

II. Regulatory controls.

At the core of the claims the Lead Plaintiff asserts against SJM and these five officers are the safety and reliability of two generations of leads developed and manufactured by the company's CRMD and IESD. Leads are custom-designed, insulated wires that connect implanted devices like a pacemaker or an implantable cardioverter defibrillator (“ICD”) to the patient's heart, transmitting information about the beating of the heart to the device and, in turn, delivering therapeutic electrical impulsesfrom the device to the heart. Because defibrillation and pacing leads thus provide “life-supporting or life-sustaining” therapy, the Food and Drug Administration categorizes them as Class III medical devices. 21 C.F.R. § 860.93. As such, these leads are subject to the most stringent regulatory controls, including premarket approval and post-market surveillance. See id. § 860.3(c)(2).

Among the controls that apply to all medical device manufacturers are the FDA's Quality System regulations. See id. Pt. 820. These provisions, which incorporate Current Good Manufacturing Practices (“CGMP”), require medical device manufacturers to utilize processes and procedures that will ensure the safety and effectiveness of their products. Id. § 820.1(a). Rather than “prescribe in detail how a manufacturer must produce a specific device,” however, the regulations describe the essential elements of a quality system—such as verification and validation of a device's design with objective evidence, as well as maintenance of a “design history file” documenting the device's development—and provide the framework within which the manufacturer must “develop and implement specific procedures tailored to their particular processes or devices.” 61 Fed.Reg. 52,602, 52,603 (Oct. 7, 1996). The FDA conducts inspections of manufacturers' procedures, facilities, and records to ensure compliance.

As one particular component of a quality system, manufacturers are required to have procedures in place for handling complaints, which includes conducting an investigation whenever information suggests that a device may have failed to meet any of its specifications. 21 C.F.R. § 820.198. Relatedly, leads are also covered by the FDA's Medical Device Reporting (“MDR”) program, which is a mechanism for detecting and tracking problems with regulated products in the field. See 21 C.F.R. Pt. 803. Under MDR regulations, “device user facilities”—essentially, hospitals and other health care centers—are required to report to both the FDA and the manufacturer whenever a lead is believed to have caused or contributed to a patient's death. Id. § 803.30(1)(1). User facilities are also required to report to the manufacturer when a serious injury occurs that may reasonably be attributed to a lead. Id. § 803.30(a)(2).

In turn, when the manufacturer receives information about an adverse event involving its lead—whether from a user facility or through a complaint from any other source—it is required to conduct its own investigation and report to the FDA if the incident involved either (1) a death or serious injury to a patient attributable to the lead or (2) a malfunction of the lead that could cause a death or serious injury if it were to recur in the same or a similar product. Id. § 830.50. The adverse event reports that are sent to the FDA are compiled in the agency's Manufacturer and User Facility Device Experience (“MAUDE”) database, which is publicly accessible online. See U.S. Food and Drug Administration, MAUDE—Manufacturer and User Facility Device Experience, http:// www. accessdata. fda. gov/ scripts/ cdrh/ cfdocs/ cfmaude/ search. cfm (last updated Jan. 31, 2014).

III. SJM's leads.

As for the two generations of SJM leads that are at issue here, the older of the two is characterized by the all-silicone insulation that houses the lead wires. SJM produced two series of defibrillation leads with this type of silicone rubber insulation: the Riata models, which were first approved by the FDA in 2001, and the Riata ST models, which were approved in 2006. SJM also produced a family of silicone-insulated pacing leads, marketed as the QuickSite and QuickFlex.

In contrast, the insulation in the newer generation of SJM leads is a proprietary blend of silicone and polyurethane known by the trade name Optim. SJM's series of Optim-insulated defibrillator leads was first approved by the FDA in 2006 as the Riata ST Optim; the name was changed in 2008 to the Durata. SJM also introduced Optim-insulated pacing leads, called the QuickFlex and Quartet.

IV. FDA attention in 2009–10.

All of these leads were developed and manufactured at the SJM facility in Sylmar, California, headquarters for the company's CRMD and, after realignment, the IESD. This facility was inspected by the FDA in June and July of 2009. At the conclusion of the inspection, the FDA's Lead Inspector issued a Form 483, which is a report prepared in the field that documents the inspectors' observations of objectionable conditions at a facility. While the issuance of a Form 483 does not constitute a final agency determination that the facility is in violation of the Food, Drug, and Cosmetic Act or its regulations, it is intended to prompt the management of the facility to take corrective action to obviate the need for the FDA to resort to more formal enforcement actions, the next step towards which would be the issuance of a Warning Letter.

In this particular Form 483, the FDA inspectors noted deficiencies in SJM's quality system at Sylmar, particularly its documentation of and procedures for validating, verifying, reviewing, and approving design changes in its CRMD products, including Riata and Durata leads. The inspectors also focused on SJM's handling of complaints and adverse event reports, noting shortcomings in SJM's review and investigation of incidents of death or injury involving patients implanted with Riata and Durata leads as well as with the timeliness, completeness, and accuracy of the information it submitted to the FDA.

The following year, in May and June of 2010, the FDA inspected SJM's manufacturing facility in Arecibo, Puerto Rico, which produces leads and other devices. This inspection also resulted in the issuance of a Form 483, which identified deficiencies in SJM's MDR reporting and quality control procedures at that facility.

V. Failures of silicone-insulated leads.

By 2010, along with these criticisms of its quality system from the FDA, the Lead Plaintiff alleges that SJM was aware that serious flaws with its silicone-insulated leads had manifested in the field. One of these flaws was a susceptibility to premature inside-out abrasion, in which the movement of the wires within the core of the lead causes wear on the silicone insulation. Insulation abrasion increases the risk that the lead will malfunction, and if the action of the wires abrades completely through the outer silicone coating,...