In re Ariz. Theranos, Inc., Litig.

• Decision Date: 10 April 2018
• Docket Number: No. 2:16–cv–2138–HRH, No. 2:16–cv–2775–HRH,No. 2:16–cv–2660–HRH,C/w No. 2:16–cv–2373–HRH, No. 2:16–cv–3599–HRH,2:16–cv–2138–HRH,2:16–cv–2660–HRH
• Citation: 308 F.Supp.3d 1026
• Parties: IN RE ARIZONA THERANOS, INC., LITIGATION
• Court: U.S. District Court — District of Arizona

308 F.Supp.3d 1026

IN RE ARIZONA THERANOS, INC., LITIGATION,

No. 2:16–cv–2138–HRH

C/w No. 2:16–cv–2373–HRH

No. 2:16–cv–2660–HRH

No. 2:16–cv–2775–HRH

No. 2:16–cv–3599–HRH

United States District Court, D. Arizona.

Signed April 10, 2018

ORDER

H. Russel Holland, United States District Judge

Motions to Dismiss

Defendants move to dismiss plaintiffs' second amended consolidated class action complaint.¹ These motions are opposed.² Oral argument was requested and has been heard.

Background

Plaintiffs are A.R., B.B., B.P., D.L., L.M., M.P., R.C., R.G., S.J., and S.L. A.R. is alleged to be a resident of California.³ The other plaintiffs are alleged to be residents of Arizona.⁴ Defendants are Theranos, Inc. ("Theranos"); Elizabeth Holmes; Ramesh Balwani; Walgreens Boots Alliance, Inc.; and Walgreen Arizona Drug Company.⁵

In 2003, Theranos was founded by Holmes.⁶ Balwani was the President and Chief Operating Officer of Theranos until he resigned in 2016.⁷

"Theranos initially focused on development of a hand–held device that would use a tiny needle to obtain a small drop of blood for analysis. By 2008, the project had grown into attempting to develop what is now known as the ‘Edison’ device."⁸ "The Edison device ... was supposedly able to take a few drops of blood from a patient's finger placed into a ‘nanotainer’ capsule, and reliably conduct hundreds of blood tests, all outside a lab."⁹ However, the project did not apparently get that far because the blood drawn from clients such as plaintiffs was actually tested at laboratories. Plaintiffs allege that Theranos did 90 percent of the blood testing at its Scottsdale lab, which "only performed analyses on venipuncture tests" and that Theranos "outsourced a limited number of ‘highly complex’ tests to third-party, university-affiliated labs[.]"¹⁰ Plaintiffs further allege that "all the finger stick blood samples [the Edison blood tests] were analyzed at the Newark[, California] facility[.]"¹¹

Plaintiffs allege that the Theranos defendants knew that "the Edison technology was ... still in development and not ready-for-market"¹² and that "none of the testing services ... were reliable or certified,"¹³ but that in 2012, "Theranos entered into a partnership agreement with Walgreens, under which Walgreens invested $140 million in Theranos ... and agreed to place and operate clinics, which it called ‘Wellness Centers,’ at Walgreen Pharmacies in Arizona and California."¹⁴ Through the Wellness Centers, "Walgreens, along with Theranos, sold blood and other clinical testing services to individuals."¹⁵ Plaintiffs allege that Walgreens entered into this agreement with Theranos even though "Walgreens was aware of numerous serious red flags about the [blood] tests that put it on notice about the unreliability of the tests[.]"¹⁶

Plaintiffs allege that

[d]efendants Walgreens and Theranos knowingly and intentionally concealed vital information from consumers, their doctors, and the public at large, including that the "Edison" "tiny" blood technology was, throughout the time the "tiny" blood draws were being administered, still in-development, not ready-for-market, and nowhere near in a position to serve the purpose of providing reliable blood test results.¹⁷

Plaintiffs further allege that Walgreens and Theranos "embarked on a pervasive promotional campaign that misrepresented and clearly portrayed the ‘tiny’ blood tests as being market-ready and serving the purpose of providing reliable blood test results."¹⁸

As for non-Edison tests, plaintiffs allege that defendants "concealed material information about the unreliability of all of the testing services, and about the grossly deficient nature of the testing facilities and equipment."¹⁹ Plaintiffs further allege that Walgreens and Theranos "made pervasive misrepresentations, including through their broad marketing campaign, falsely touting" the non-Edison blood tests "as ... meeting the highest standards of reliability, [being] industry-leading in quality, and [being] developed and validated under, and compliant with federal guidelines."²⁰

But, plaintiffs allege that "[i]n reality, as each of the [d]efendants contemporaneously knew, [the] Theranos tests were dangerously unreliable, had not been validated as advertised, and did not meet federal guidelines as advertised."²¹ With respect to the Edison tests, plaintiffs allege that

each of the [d]efendants knew ... that the Edison technology was still in development, not ready-for-market, and nowhere near in a position to serve ... the purpose of legitimate blood testing ... Nevertheless, in a hurry to begin marketing and administering the[ ] "tiny" blood draws, and thereby assisting in researching and developing the still-in-development technology, to advance the narrative that Theranos's "disruptive" technology had "revolutionized" the medical testing industry, and to woo and placate investors, potential investors, and co-investors by giving the false impression that they had a market-ready breakthrough project, Walgreens and Theranos prematurely marketed, sold, and administered, the "tiny" blood draws to tens of thousands of unwitting consumers who were, in essence, subjected to beta testing and product development research without their knowledge and consent....²²

Plaintiffs allege that "[n]one of the consumers who obtained test results from Theranos received what they paid for and what they reasonably expected. None of them received tests that they could reasonably rely on given the numerous problems [with the tests] that have come to light."²³ Plaintiffs further allege that "the tens of thousands of consumers who submitted to the ‘tiny’ blood draws ... did so under false pretenses and [were] substantially mistaken about the essential nature and purpose of those blood draws[.]"²⁴

Plaintiffs allege that in 2016, "[a]fter the Center for Medicare and Medicaid Services cited Theranos's Newark, California lab for numerous deficiencies," Theranos "voided ‘all’ blood-testing results from the Edison devices."²⁵ Plaintiffs further allege that "[n]umerous additional test results ... have now been voided or belatedly ‘corrected’ by Theranos[.]"²⁶ Holmes and Balwani have been "banned from owning or operating a blood-testing business for at least two years" and Theranos's license to operate a blood lab in California has been revoked.²⁷

In their first amended complaint, plaintiffs asserted seventeen causes of action and sought damages and injunctive relief. Defendants moved to dismiss all seventeen causes of action, and the court granted the motions in part and denied the motions in part.²⁸ Plaintiffs were given leave to amend as to a number of the dismissed claims.²⁹

Plaintiffs timely filed a second amended consolidated class action complaint ("SAC)" in which they assert fourteen causes of action. Pursuant to Rules 9(b) and 12(b)(6), Federal Rules of Civil Procedure, defendants now move to dismiss all of the claims asserted in plaintiffs' SAC.

Discussion

" ‘To survive a [ Rule 12(b)(6) ] motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Zixiang Li v. Kerry, 710 F.3d 995, 999 (9th Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). "A claim is facially plausible ‘when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ " Id. (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 ). "The plausibility standard requires more than the sheer possibility or conceivability that a defendant has acted unlawfully." Id." ‘Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief.’ " Eclectic Properties E., LLC v. Marcus & Millichap Co., 751 F.3d 990, 996 (9th Cir. 2014) (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 ).

"When considering plausibility, courts must also consider an ‘obvious alternative explanation’ for defendant's behavior." Id. (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 ).

"When faced with two possible explanations, only one of which can be true and only one of which results in liability, plaintiffs cannot offer allegations that are merely consistent with their favored explanation but are also consistent with the alternative explanation. Something more is needed, such as facts tending to exclude the possibility that the alternative explanation is true, in order to render plaintiffs' allegations plausible."

Id. at 996–97 (quoting In re Century Aluminum Co. Secs. Litig., 729 F.3d 1104, 1108 (9th Cir. 2013) ). A " ‘[p]laintiff's complaint may be dismissed only when defendant's plausible alternative explanation is so convincing that plaintiff's explanation is implausible.’ " Id. (quoting Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011) ).

"[T]he complaint must provide ‘more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.’ " In re Rigel Pharmaceuticals, Inc. Securities Litig., 697 F.3d 869, 875 (9th Cir. 2012) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "In evaluating a Rule 12(b)(6) motion, the court accepts the complaint's well-pleaded factual allegations as true and draws all reasonable inferences in the light most favorable to the plaintiff." Adams v. U.S. Forest Srvc., 671 F.3d 1138, 1142–43 (9th Cir. 2012).

" Rule 9(b) provides that ‘[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.’ " United States ex rel. Cafasso v. General Dynamics C4 Systems, Inc., 637 F.3d 1047, 1054–55 (9th Cir. 2011) (quoting Fed. R. Civ. P. 9(b) ). "To satisfy Rule 9(b), a pleading must identify ‘the who, what, when, where, and how of the misconduct charged, as well as what is false or misleading...