Gottlieb v. Collins, Court File. No. 27-CV-07-24661

Decision Date28 July 2008
Docket NumberCourt File. No. 27-CV-07-24661,Court File No. 27-CV-08-63
PartiesFEIVEL GOTTLIEB, Derivatively On Behalf of MEDTRONIC, INC., Plaintiff, v. ARTHUR D. COLLINS, JR., WILLIAM A. HAWKINS, RICHARD H. ANDERSON, DAVID L. CALHOUN, SHIRLEY ANN JACKSON, AMES T. LENHEHAN, DENISE M. O'LEARY, KENDALL J. POWELL, ROBERT C. POZEN, JEAN-PIERRE ROSSO and JACK W. SCHULER. Defendants, and MEDTRONIC, INC., a Minnesota Corporation, Nominal Defendant. ALAN WEINBERG, Derivatively On Behalf of MEDTRONIC, INC., Plaintiff, v. ARTHUR D. COLLINS, JR., WILLIAM A. HAWKINS, RICHARD H. ANDERSON, DAVID L. CALHOUN, SHIRLEY ANN JACKSON, AMES T. LENHEHAN, DENISE M. O'LEARY, KENDALL J. POWELL, ROBERT C. POZEN, JEAN-PIERRE ROSSO and JACK W. SCHULER. Defendants, and MEDTRONIC, INC., a Minnesota Corporation, Nominal Defendant.
CourtMinnesota District Court

WILLIAM R. HOWARD, Judge of District Court.

The above-captioned matter came before the Honorable William R. Howard, Judge of District Court, on and a hearing was held upon Medtronic, Inc.'s (Medtronic) motion to stay the state derivative case which was filed by Plaintiffs, Feivel Gottlieb and Alan Weinberg, on behalf of Medtronic shareholders. The Plaintiff was represented by Vernon J. Vander Weide. The Defendant was represented by Patrick S. Williams, Briggs & Morgan, P.A., and Jeffrey B. Rudman, Michael G. Bongiorno, and Wilmer C. Pickering, Hale & Dorr LLP. Upon review of the arguments presented and the submissions from the parties, the Court hereby makes the following:

FINDINGS OF FACT

1. Medtronic is a Minnesota corporation headquartered in Hennepin County that manufactures medical products and therapies. One division of Medtronic, Rhythm Disease Management (CRDM), produces implantable cardioverter defibrillators, including the Sprint Fidelis lead (SFL). The SFL is an electrical wire that carries an electrical signal from an implantable cardioverter defibrillator to the heart to correct irregular heartbeats. Upon approval by the Food and Drug Administration in September of 2004, this device remained in the medical marketplace until it was recalled in October 15, 2007.

2. During the first 2½ years of distributing the SFLs, Medtronic published the profitability of the devices in its Annual Report. During May and June of 2006, 70 injuries resulted from defective SFLs and during the same period in 2007, the number of injuries increased to 258. Until the recall in October 15, 2007, Medtronic did not mention any defects or health risks arising from the SFLs. However, Medtronic published a "Dear Doctor" letter in April of 2007, suggesting the problems with the devices resulted from improper implantations by the physicians. During the same period, the Plaintiffs were allegedly unaware of any defects in the SFLs.

3. After the market closed on June 25, 2007, Medtronic issued its annual Fiscal 2007 Form 10-K, which was signed by Arthur Collins and Gary Ellis and stated the SFLs were performing successfully in the market and that the expansion of heart failure markets supported the use of these devices (this report is used as evidence to support the claims made by the federal and state plaintiffs).

4. Due to the increasing number of injuries, Medtronic suspended distribution of the SFLs on October 15, 2007. Shortly thereafter, on October 30, 2007, a Wall Street Journal article was published in regards to the SFL defects. The article referred to a report by Dr. Robert G. Hauser, a senior consulting cardiologist at the Minneapolis Heart Institute. Under the advice of Dr. Hauser, who researched the trends associated with the SFLs and reported injuries, the Minneapolis Heart Institute discontinued its use of the devices. The article reported that in February of 2007, Dr. Hauser also advised Warren Watson, Medtronic's VP and engineer, that there were serious problems with SFLs. Mr. Watson however, did not find sufficient evidence to believe Dr. Hauser's contentions.

5. In light of the decline in Medtronic's stock resulting from the SFL recall, Stanley Kurzweil, who invested in Medtronic, filed a federal securities class action suit against Medtronic's directors, including Arthur Collins, William Hawkins, and Gary Ellis on November 8, 2007. Kurzweil alleged the Defendants violated the Securities Exchange Act of 1934 15 U.S.C. §§ 78j & 78t and SEC Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. The factual assertions underlying Kurzweil's allegations were that Medtronic (1) misrepresented information pertaining to the SFLs, (2) belated disclosure of the true facts concerning problems discovered in the SFLs, and (3), misrepresented with scienter.

6. On November 29, 2007, Feivel Gottlieb, the Plaintiff in this case, filed a state derivative action on behalf of Medtronic shareholders against the Defendants. Subsequently on December 14, 2007, Alan Weinberg filed a second state derivative action against the same Defendants. In both derivative suits, the Plaintiffs alleged breach of fiduciary duty, abuse of control, and gross mismanagement. On January 5, 2008, Iris Markewich filed a federal derivative action against Medtronic, alleging breach of fiduciary duty, abuse of control, gross mismanagement, inside selling, and misappropriation of information. The federal district court found the matters in the derivative and securities claims "related" and for this reason assigned both cases to the same judge.

7. One of the notable differences between the state and federal derivative suits, other than the jurisdiction, were the named defendants. Three of the Defendants named in the state derivative claims—Jackson, Lenehan and Rosso—were omitted from the Federal derivative suit.

8. On March 7, 2008, the Defendants moved to stay the state derivative suits until the federal court resolved securities and federal derivative proceedings. On April 10, 2008, the Plaintiffs filed a motion opposing the Defendants motion to stay the state proceedings.

CONCLUSION OF LAW

1. The state derivative claim should be stayed during the adjudication of the federal claims because the securities claim is handled by the same judge reviewing the federal derivative claim. The resolution of both suits can help the state court resolve the Plaintiff's derivative claim more efficiently.

IT IS HEREBY ORDERED:

1. Defendant's motion to stay the Plaintiff's derivative proceeding is GRANTED.

2. The following Memorandum is hereby incorporated and made a part of this Order.

LET JUDGMENT BE ENTERED ACCORDINGLY.

MEMORANDUM OF LAW

I. Standard for Motions to Stay

The defendants in both actions before this Court have requested the state court matters be stayed pending resolution of the federal suits. Minnesota courts apply two standards to decide whether to stay a proceeding: the first-to-file rule and the four-part test. Green Tree Acceptance, Inv. V. Midwest Fed. Sav. & Loan Ass'n of Mpls, 433, N.W.2d 142, 143 (Minn. Ct. App. 1988). Under the first-to-file rule, the first court to acquire jurisdiction over the case ought to proceed accordingly because courts often find that waiting for all other possible relevant claims to surface wastes a significant amount of time. Orthmann v. Apple River Campground, Inc., 765 F.2d 119, 121 (C.A. 8th Cir. 1985). Under the second test, to which the first-to-file rule is subject, a court will stay the second-filed claim when doing so will (1) establish a comprehensive solution, (2) promote judicial economy, (3) ensure convenience and low costs to the parties, and finally (4) avoid duplicate or inconsistent rulings. See Green Tree Acceptance, 433 N.W.2d at 142.

Plaintiffs object to the request to stay the state proceedings on three grounds: (1) that the federal court has stricter pleading standards for demand futility which will undermine their claim because fewer defendants were named in the federal derivative suit; (2) unlike the state court, the federal court does not have the power to grant equitable relief in derivative suits; and (3) the state derivative claim was filed before the federal derivative claim. For these reasons, the Plaintiffs maintain that staying their suit would be prejudicial.

II. The four-part test supports of the Defendant's motion to stay the Plaitntiff's state derivative claim.
A. Staying the Plaintiff's derivative claim would enable the federal court to serve a comprehensive solution.

The Defendant argues that allowing for a resolution of the federal derivative suit along with the securities action prior to beginning the state derivative claim is a more comprehensive approach because the federal court has exclusive jurisdiction over the securities claim and furthermore, has already entered a coordinated briefing schedule for the two suits, thereby reducing the number of brief submissions and hearings necessary to resolve the claims. All three claims in this situation center on the factual events regarding the distribution, defects, and suspension of the SFLs as well as the decreased value of Medtronic shares caused by the recall. More specifically, the factual history alleged in each claim relies on the same evidence, including the Wall Street Article, Dr. Hauser's report, and Medtronic's Annual report. Also, both federal claims reviewed by the same judge name similar Medtronic directors as the defendants. Finally, all three claims center on Medtronic's failure to disclose the SFL defects. The overall similarities lead the federal court to assign the securities and derivative claims to the same judge as "related" matters. The assigned federal judge has all of the facts of both the derivative suits and the class action suit before him.

B. Judicial economy is best served by staying the estate derivative case.

Courts have an important interest in preserving judicial resources. Courts have limited resources to work with. Courts have a duty to limit the number of those resources...

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