Hochstadt v. Boston Scientific Corp.

• Decision Date: 27 April 2010
• Docket Number: Civil Action No. 08-12139-DPW.
• Citation: 708 F.Supp.2d 95
• Parties: Robert HOCHSTADT and Edward Hazelrig, Jr., on behalf of themselves, the Boston Scientific Corp. 401(k) Retirement Savings Plan, and all other similarly situated, Plaintiffs,v.BOSTON SCIENTIFIC CORP. et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

708 F.Supp.2d 95

Robert HOCHSTADT and Edward Hazelrig, Jr., on behalf of themselves, the Boston Scientific Corp. 401(k) Retirement Savings Plan, and all other similarly situated, Plaintiffs,v.BOSTON SCIENTIFIC CORP. et al., Defendants.

Civil Action No. 08-12139-DPW.

United States District Court D. Massachusetts.

April 27, 2010.

COPYRIGHT MATERIAL OMITTED

Stuart J. Baskin, Kirsten Nelson Cunha, Christopher R. Fenton, John Gueli, Shearman & Sterling LLP, Lori G. Feldman, Milberg LLP, New York, NY, for Plaintiffs.

Joy Hochstadt, Joy Hochstadt, P.C., New York, NY, Anne Hoffman, Lynch, Brewer, Hoffman & Fink LLP, Boston, MA, for Defendants.

MEMORANDUM AND ORDER

DOUGLAS P. WOODLOCK, District Judge.

Before me is a motion seeking preliminary review ¹ of a settlement agreement resolving two putative class actions ² against Boston Scientific Corporation (“Boston Scientific” or the “Company”) and alleged fiduciaries ³ of Boston Scientific Corporation's 401(k) Retirement Savings Plan (the “Plan”) (collectively, the “Defendants”). Both class actions are based on the allegation that Defendants breached their fiduciary duty to the Plan and to the Plan's participants, in violation of the Employee Retirement Income Security Act (“ERISA”), by imprudently selecting Boston Scientific stock as an investment, despite their knowledge that the stock price was artificially inflated. The proposed settlement class consists of participants in the Plan whose individual Plan accounts held an interest in Boston Scientific common stock at any time between May 7, 2004 and January 26, 2006 (the “Class Period”). For the reasons set forth more fully below, I will certify the settlement class and authorize the publication of the proposed class notice.

I. BACKGROUND

A. Facts

Boston Scientific develops, manufactures, and distributes medical devices whose products are used in the cardiovascular and endosurgery health care arena. During the Class Period, Boston Scientific administered the Plan in the interest of its participants.

The Plan qualifies as an “employee pension benefit plan” within the meaning of ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A). Participants in the Plan make voluntary contributions and the Company makes matching contributions. Throughout the Class Period, participants could contribute to the Plan between 1% and 25% of their pre-tax annual compensation and between 1% and 10% of their compensation on an after-tax basis each year. Effective January 1, 2005, the Company provided a matching contribution equal to 200% of the employee's contribution for up to 2% of the employee's earnings, plus 50% of the next 4% of the employee's earnings. During the Class Period, the Plan offered approximately ten separate investment options, including Boston Scientific stock.

Plaintiffs ⁴ allege that Defendants issued several misleading public disclosures, which caused the Company stock to be inflated artificially during the Class Period (the “Inflation Claim”). Plaintiffs further contend that, despite their knowledge that Boston Scientific stock was not a prudent investment for the Plan, Defendants continued to accept the Company matching contributions in Boston Scientific stock throughout the Class Period, thereby causing losses to the Plan's participants (the “Prudence Claim”).

The alleged misleading disclosures are based on four events.⁵ First, Plaintiffs contend that Defendants failed to disclose adequately the 1998 investigation conducted by the Department of Justice (“DOJ”) concerning defective NIR stents. This investigation led the DOJ to file a civil complaint in 2005 charging Boston Scientific with distributing in interstate commerce medical devices that were altered and misbranded between 1998 and 2005 and resulted in the payment by Boston Scientific of $74 million.

Second, Plaintiffs allege that Defendants misrepresented the seriousness of the litigation with Medinol Ltd., one of Boston Scientific's suppliers, as to which Defendants agreed to pay a $750 million settlement in 2005.

Third, Plaintiffs contend that Defendants failed to disclose adequately concerns associated with the 2004 recall of TAXUS stent systems when Defendants knew or should have known before the recalls took place that the TAXUS product contained dangerous manufacturing defects, which would lead to massive liabilities adversely affecting the Company stock.

The last subject as to which Defendants allegedly made misrepresentations concerns a series of “warning letters” sent between 2005 and 2006 by the U.S. Food and Drug Administration (“FDA”) to Boston Scientific in connection with FDA violations by several of its manufacturing facilities.

B. Procedural History

In January 2006, Plaintiffs Douglas Fletcher, Michael Lowe, Jeffrey Klunke, and Robert Hochstadt each filed separate class action complaints against Defendants. The four complaints were consolidated before Judge Tauro on April 3, 2006; a consolidated complaint was subsequently filed by Plaintiffs. In re Boston Scientific Corp. ERISA Litig., Civil Action No. 06-cv-10105-JLT (D.Mass.) (“ ERISA I ”).

On October 10, 2006, Defendants filed a motion to dismiss the Consolidated Complaint. Judge Tauro denied Defendants' motion in significant part on August 27, 2007.⁶ In re Boston Scientific Corp. ERISA Litig., 506 F.Supp.2d 73 (D.Mass.2007). Thereafter, the parties commenced fact discovery.

On March 12, 2008, Plaintiffs Fletcher, Lowe, Klunke and Hochstadt moved to certify the class under Federal Rule of Civil Procedure 23(a) and (b)(1). Klunke and Hochstadt later withdrew from the litigation. However, on June 30, 2008, Hochstadt filed a motion to intervene and asked to be reappointed as a class representative. On November 3, 2008, Judge Tauro denied the motion for class certification and Hochstadt's motion to intervene; he then dismissed the case because Plaintiffs Fletcher and Lowe lacked Article III standing. In re Boston Scientific Corp. ERISA Litig., 254 F.R.D. 24 (D.Mass.2008). On December 2, 2008, Plaintiffs Fletcher, Lowe, and Hochstadt filed a notice of appeal. In re Boston Scientific Corp. ERISA Litig. (1st Cir. No. 08-2568). The matter is currently stayed in the First Circuit, pending settlement developments.

On December 24, 2008, Plaintiffs Hochstadt and Hazelrig filed the instant action Hochstadt et al. v. Boston Scientific Corp. et al., Civil Action 08-cv-12139-DPW (D.Mass.) (“ ERISA II ”), seeking to sidestep the standing issue and the problem of Hochstadt's failure to reenter the case through intervention, which together ended ERISA I before Judge Tauro. Thereafter, the parties resumed fact discovery where they left off in ERISA I. In doing so, the parties agreed that all documents produced in ERISA I would be deemed produced in ERISA II.

Under the auspices of Settlement Counsel for the First Circuit, counsel for Plaintiffs Fletcher, Lowe, and Hazelrig and the Defendants in September 2009 agreed to settle ERISA I and ERISA II (collectively the “ERISA Actions”) for an amount of $8.2 million (the “Settlement Amount”) to be paid in cash by Boston Scientific and its insurer, St. Paul Mercury Insurance Company.

On December 1, 2009, Plaintiffs Fletcher, Lowe, and Hazelrig filed a motion for preliminary review see Note 1 supra, of the Proposed Settlement Agreement, contending that the agreement was an excellent result for the Settlement Class on whose behalf the ERISA Actions were brought. In their motion, they also sought certification of a mandatory class under Rule 23(b)(1) on the basis that the ERISA Actions involved Defendants' Plan-wide conduct and relief was sought on behalf of the Plan as a whole.

Plaintiff Hochstadt filed an opposition to this motion by Plaintiffs Fletcher, Lowe, and Hazelrig, alleging that Fletcher and Lowe had been found to lack standing to settle the ERISA Actions, that the settlement amount was insufficient and that the non-opt-out provision, the proposed plan of allocation and the class notice were inappropriate.

I held a hearing on January 13, 2010 in connection with my preliminary review of the Proposed Settlement Agreement. During that hearing, I requested the parties to file supplemental briefing on three points: (1) the participation of Plaintiffs Fletcher and Lowe in the class settlement in light of Judge Tauro's decision that they lacked Article III standing, (2) the proposed plan of allocation, which at the time did not separately take into consideration discrete disclosure events that occurred during the Class Period, and (3) the publication of the report of the independent fiduciary Plaintiff Hazelrig and Defendants agreed to retain to review the settlement agreement.

On February 17, 2010, Plaintiff Hazelrig and Defendants submitted the Amended Stipulation and Agreement of Settlement (the “Amended Settlement Agreement”) now before me. Pursuant to this amended agreement, Plaintiffs Fletcher and Lowe are now excluded from the Settlement Class, leaving Hazelrig the only settlement class representative.⁷ The Amended Settlement Agreement incorporates a revised plan of allocation (the “Revised Plan of Allocation”), a copy of which is attached hereto as Exhibit A, which now provides for the payment of settlement proceeds to class members separately based upon discrete disclosure events that occurred during the Class Period. A revised class notice has been prepared reflecting the Revised Plan of Allocation (the “Revised Class Notice”). In addition, Plaintiff Hazelrig and the Defendants have committed to ensure that the report of the independent fiduciary they will retain will be made publicly available at least thirty days before the deadline for objecting to the Amended Settlement Agreement.

II. PRELIMINARY CLASS CERTIFICATION

Before preliminarily determining whether the settlement is fair, I must determine whether to certify the class for settlement purposes. The Amended Settlement Agreement defines the Settlement Class as a non-opt-out class consisting of:

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