In re Ariz. Theranos, Inc.

• Decision Date: 13 June 2017
• Docket Number: No. 2:16-cv-2138-HRH, No. 2:16-cv-2660-HRH, No. 2:16-cv-2775-HRH, No. 2:16-cv-3599-HRH., Consolidated with No. 2:16-cv-2373-HRH,2:16-cv-2138-HRH
• Parties: IN RE ARIZONA THERANOS, INC., LITIGATION
• Court: U.S. District Court — District of Arizona

256 F.Supp.3d 1009

IN RE ARIZONA THERANOS, INC., LITIGATION,

No. 2:16-cv-2138-HRH

Consolidated with 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 June 13, 2017

ORDER

H. Russel Holland, United States District Judge

Motions to Dismiss

Defendants move to dismiss plaintiffs' first amended consolidated class action complaint.¹ The motions to dismiss are opposed.² Oral argument was not requested and is not deemed necessary.

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 defendant 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."⁸ "By 2008, the project had grown into what is now known as the 'Edison' device."⁹ "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."¹⁰ However, the project did not apparently get that far because the blood drawn from clients such as plaintiffs was actually tested at Theranos laboratories.

Plaintiffs allege that defendants knew that the Theranos blood tests "were unreliable, not ready-for-market, and failed to meet even basic industry standards,"¹¹ but that in 2012, "Theranos entered into a partnership agreement with Walgreens, under which Walgreens invested $140 million in Theranos ... and agreed to operate clinics, which it called 'Wellness Centers,' at Walgreen Pharmacies in Arizona and California."¹² Through the Wellness Centers, "Theranos, along with Walgreens, sold blood [tests] to individuals."¹³ Plaintiffs allege that Walgreens entered into this agreement with Theranos even though "Walgreens was aware of numerous serious red flags about the tests that put it on notice about the unreliability of the tests[.]"¹⁴

Plaintiffs allege that "[d]efendants intentionally concealed vital information from consumers, their doctors, and the public at large, about the tests' unreliability and about the deficient nature of the [Theranos] testing facilities and equipment."¹⁵ Plaintiffs allege that

[d]efendants also made pervasive misrepresentations—including in their marketing, in the stores where tests were sold, and in a steady stream of press releases and other media statements—falsely stating and asserting that Theranos tests met the highest standards of reliability, were industry-leading in quality, and had been developed under and validated under, and were compliant with, federal guidelines.¹⁶

Plaintiffs allege that "[d]efendants aggressively promoted Theranos tests as being ready-for-market, and encouraged consumers and their doctors to use and rely on them in making important health and treatment decisions, including, but not limited to, ... such ... matters as cancer, HIV, diabetes, kidney disease, and heart disease."¹⁷

But, plaintiffs allege that "[i]n reality, [d]efendants knew ... Theranos tests were dangerously unreliable, had not been validated as advertised, and did not meet federal guidelines as advertised."¹⁸ Plaintiffs allege that "in a hurry to get the tests to market and thereby assist [d]efendants in developing their still-in-development products and services, ... [d]efendants prematurely marketed and sold the [blood] tests to consumers who were, in essence, subject to beta testing and product development research without their knowledge and consent...."¹⁹ Plaintiffs allege that they "were misinformed about the essential purpose of [the blood tests] and thus they did not provide, and could not have provided, consent for such procedure[s] and intrusion."²⁰ Plaintiffs allege that "[o]ffering blood tests to the general public enabled [d]efendants to collect blood samples from human subjects without sacrificing the time and money necessary to recruit volunteers for formal clinical trials."²¹ Plaintiffs further allege that this helped defendants "evade regulatory scrutiny...."²²

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 the test results "from its proprietary Edison blood testing devices, which consisted of tens of thousands of test results."²³ Plaintiffs further allege that "[n]umerous additional test results ... have now been voided or belatedly 'corrected' by Theranos[.]"²⁴ Plaintiffs allege that "[a]s a result of revelations regarding problems with Theranos's technology and laboratory standards, Theranos test results have lost all credibility within the medical community."²⁵ 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.²⁶ Theranos is now working on developing a "miniLab" which is apparently a device that could run diagnostic tests on small amounts of blood.²⁷

In their first amended complaint, plaintiffs assert seventeen causes of action and seek damages and injunctive relief. Pursuant to Federal Rules of Civil Procedure 9(b), 12(b)(1), and 12(b)(6), defendants now move to dismiss all of plaintiffs' causes of action.

Discussion

"A suit brought by a plaintiff without Article III standing is not a 'case or controversy,' and an Article III federal court therefore lacks subject matter jurisdiction over the suit." Cetacean Community v. Bush, 386 F.3d 1169, 1174 (9th Cir. 2004). "In that event, the suit should be dismissed under Rule 12(b)(1)." Id.

" '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.' " Id. (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 ). "[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 about [the purportedly fraudulent] statement, and why it is false.' " Id. at 1055 (quoting Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010) ).

Arizona Consumer Fraud Act and Fraud Claims ²⁸ (First and Second Causes of Action)

"The Arizona Consumer Fraud Act ["CFA"] is a broadly drafted remedial provision designed to eliminate unlawful practices in merchant-consumer transactions."

State ex rel. Woods v. Hameroff, 180 Ariz. 380, 884 P.2d 266, 268 (1994). "Generally stated, claims under the CFA, like common law fraud claims, can be based on affirmative misrepresentations, concealment, or omission of material facts." Tavilla v. Cephalon, Inc., 870 F.Supp.2d 759, 776 (D. Ariz. 2012). An affirmative "misrepresentation causes injury where the consumer actually relies on" the statement, although the consumer's reliance does not need to be justifiable. Cheatham v. ADT Corp., 161 F.Supp.3d 815, 825–26 (D. Ariz. 2016). An omission is actionable under the CFA if it "is material and 'made with intent that a consumer rely thereon.' " Id. at 830 (quoting State ex rel. Horne v. AutoZone, Inc., 229 Ariz. 358, 275 P.3d 1278, 1281 (2012) ).

Under Arizona law, to prevail on a common law fraud claim, a plaintiff must show

(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on the truth; (8) his right to rely thereon; and (9) his consequent and proximate injury.

Peery v. Hansen, 120 Ariz. 266, 585 P.2d 574, 577 (1978). The "representation" may be an affirmative representation or an omission of fact that the defendant had a duty to disclose. Tavilla, 870 F.Supp.2d at 776. Under California law " '[t]he elements of common law fraud are: (1) a misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (or scienter); (3) intent to defraud,...