Mart v. Tactile Sys. Tech., Inc.
| Decision Date | 31 March 2022 |
| Docket Number | Case No. 20-CV-2074 (NEB/BRT) |
| Parties | Brian MART, individually and on behalf of all others similarly situated, and St. Clair County Employees’ Retirement System, Plaintiffs, v. TACTILE SYSTEMS TECHNOLOGY, INC., Gerald R. Mattys, Lynn L. Blake, Brent A. Moen, William W. Burke, Robert J. Folkes, Richard J. Nigon, Bryan F. Rishe, and Kevin H. Roche, Defendants. |
| Court | U.S. District Court — District of Minnesota |
Daniel E. Gustafson, Daniel C. Hedlund, Gustafson Gluek PLLC, June Pineda Hoidal, Zimmerman Reed LLP, Mpls, MN, Lucas Gilmore, Pro Hac Vice, Hagens Berman Sobol Shapiro LLP, Berkeley, CA, Ashley M. Price, Nicole Quaid Gilliland, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, San Diego, CA, for Plaintiffs.
Anderson Tuggle, Matthew B. Kilby, Wendy Jo Wildung, Faegre Drinker Biddle & Reath LLP, Minneapolis, MN, for Defendants.
Nancy E. Brasel, United States District Judge This putative class action alleges claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5 against Tactile Systems Technology, Inc. ("Tactile") and several of its officers and outside directors. Defendants now move to dismiss. For the reasons below, the Court grants in part and denies in part the motion.
Tactile manufactures and sells pneumatic compression devices ("PCD") for at-home treatment of lymphedema2
and chronic venous insufficiency ("CVI"). One of Tactile's devices—the Flexitouch—generates 90% of Tactile's revenues. (Id. ¶¶ 30–31.) Tactile's business relies in part on so-called third-party payers, including the Centers for Medicare & Medicaid Services ("Medicare") and the Veterans Association ("VA"), which pay for the device for patients. (Id. ¶ 33.) The VA represented 18% of Tactile's revenues in 2017; that percentage declined to 13% by 2020. (Id. ) During the same period, Tactile's revenues from Medicare grew from 8% to 16%. (Id. )
Based in part on strong sales to the VA and Medicare, Tactile announced several consecutive quarters of over 30% revenue growth in 2018 and 2019. (E.g. , Compl. ¶¶ 79, 81 (1Q18—35% year-over-year); id. ¶ 85 (2Q18–30% year-over-year); id. ¶¶ 87–88 (3Q18–claiming 27% and 31% year-over-year); id. ¶ 89 (); id. ¶¶ 95–96 (); id. ¶¶ 105–06 (1Q19–40% year-over-year); id. ¶ 109 (2Q19–32% year-over-year); id. ¶ 111 (3Q19–37% year-over-year).) Tactile publicly attributed its sales growth to the VA and Medicare, also noting that the market for Flexitouch was untapped, suggesting room for more growth. (See id. ¶¶ 133–208 (passim).)
As a general matter, the Complaint alleges that investors who traded Tactile stock between May 7, 2018, and June 8, 2020 ("Class Period") suffered damages under the Exchange Act because Tactile: (1) hid that illegal kickback schemes were a source of its revenue growth; (2) hid that false claims to federal healthcare programs also contributed to revenue growth; and (3) misrepresented the Flexitouch market size to investors.
According to the Complaint, Tactile participated in two illegal kickback schemes designed to induce prescriptions of Tactile's Flexitouch. (Compl. ¶¶ 36–48.)
In the first scheme, Tactile gave perks and benefits to doctors recruited to be "Key Opinion Leaders" ("KOLs") in exchange for Flexitouch "referrals." (Id. ¶ 37.) The KOLs organized speaking events and identified "warm" leads before the event. (Id. ¶¶ 40–41.) Tactile hosted these events at luxury hotels and expensive restaurants. (Id .) At one event, the bill far exceeded the permitted gift allowance for the four VA employees attending.3 (Id. ¶ 40.) The Department of Health and Human Services Office of the Inspector General had flagged these kinds of "speaking arrangements" as high risk for fraud and abuse in a "Special Fraud Alert," and the U.S. Department of Justice and Office of Inspector General had investigated numerous cases in which compensation for "speaking events" was found to be illegal remuneration. (Id. ¶ 39.)
In the second scheme, Tactile implemented a "trainer" program to obtain referrals from non-physician healthcare providers, such as therapists. (Id. ¶¶ 43–44.) These healthcare providers trained patients on how to use the Flexitouch at home. (Id. ) Tactile allegedly dismissed trainers who failed to provide enough referrals. (Id. ¶¶ 44–45.) Tactile's compliance officer allegedly "documented that Tactile's arrangements with therapists [for its trainer program] posed a high ‘Business Risk’ for ‘kickbacks.’ " (Id. ¶ 44.)
These two schemes allegedly violated the federal Anti-Kickback Statute ("AKS"), 42 U.S.C. § 1320a, et al. , which generally prohibits remuneration in return for recommending or arranging for the purchase, lease, or order of an item or service for which a federal health program may provide reimbursement. (Compl. ¶¶ 36–37, 164–65, 200–01.) The kickback schemes also allegedly violated the False Claims Act ("FCA"), 31 U.S.C. § 3729. (Id. ¶¶ 50–51.) Violations of the AKS or the FCA could result in exclusion from participating in federal healthcare programs. (Id. ¶¶ 48, 56, 200.) Thus, if Tactile was found to have violated the AKS or the FCA, it could lose nearly one-third of its business. (Id. ¶ 48, 56.) Defendants affirmed compliance with the AKS and the FCA in Tactile's SEC filings.
The Complaint next alleges that Defendants made false claims to Medicare about the medical necessity of its devices for patients, in violation of the FCA.4 (Compl. ¶¶ 52–53.). Medicare's Recovery Audit Contractor ("RAC") conducted an audit of PCDs and the medical necessity requirement. (Id. ¶¶ 55, 129.) In its first round of audits, the RAC auditor flagged 71% of Tactile's claims for failure to establish medical necessity; in the second round, that number rose to 81%. (Id. ¶ 55.) The Complaint also alleges that Tactile sales representatives routinely provided pre-filled forms to doctors and drafted medical necessity narratives with instructions to doctors to copy to their letterhead and sign. (Id. ¶ 54.)
In the last category of false statements, the Complaint alleges that Tactile made false and misleading statements about Flexitouch's market size. First, Tactile allegedly overstated the number of U.S. lymphedema
diagnoses, thus overstating the potential market, also known as the "total addressable market" ("TAM"). Tactile reported a TAM of $4–$5 billion; the actual market size was at least three times smaller. (Id. ¶¶ 35, 59–61, 64.) Second, Tactile's TAM calculation assumed that each lymphedema diagnosis (regardless of severity) would ultimately be severe enough to require using the Flexitouch. But lymphedema is often managed through other treatments that do not require PCDs. (Id. ¶¶ 28–29, 66–72.) And some third-party payers consider the Flexitouch "a treatment of last resort," further restricting the number of Flexitouch candidates. Thus, Tactile's use of all lymphedema diagnoses as the basis for its calculation allegedly falsely overstated Tactile's TAM. (Id. ¶¶ 66–72.)
The illegal kickback schemes have been the subject of a qui tam action brought by Veterans First Medical Supply, LLC ("VFMS") in the Southern District of Texas. In its amended qui tam complaint, VFMS alleged that Tactile violated the AKS and the FCA by paying illegal kickbacks to doctors to induce Flexitouch prescriptions and making false reimbursement claims. (Id. ¶ 90.) Tactile was served with that complaint in early February 2019. (Id. ¶ 91.)
Tactile disclosed the qui tam action in its 2018 Form 10-K filed on February 28, 2019. (Id. ¶ 93.) In its Form 10-K, Tactile stated that qui tam actions have "increased significantly in the healthcare industry in recent years" because the AKS and the FCA allow any person to sue on behalf of the government. (Id. ; ECF No. 66-22 at 55.) Tactile explained that the action was brought by one of its competitors, and that the government declined to intervene in the action. (Compl. ¶ 93.) Tactile maintained that the allegations were "without merit," and that it intended to "vigorously defend against the lawsuit." (Id. ; ECF No. 66-22 at 68.)
On March 20, 2019, the court unsealed the qui tam action after the market closed. (Compl. ¶ 101.) On March 22, securities analysts issued reports about the qui tam allegations, noting that Tactile's management "refut[ed] the notion" that it paid kickbacks to doctors.6 Tactile's stock price fell 7.5% that day. (Id. ¶ 103.) According to the Complaint, Defendants’ assertions that the qui tam allegations lack merit are also actionable misstatements.
In June 2020, a short-seller report appeared online entitled, "Strong Sell on Tactile Systems: Bloated Stock Needs Compression Therapy." (Compl. ¶ 116; ECF No. 66-3 ("June 2020 OSS Rep.").) The report by the anonymous "OSS Research" alleges details about Tactile's illegal sales practices and TAM statements. (Compl. ¶¶ 116–21.) Tactile's stock dropped 12.8% that same day. (Id. ¶ 122.) OSS Research published a second report in December 2020 raising similar issues. (Id. ¶¶ 128–29; ECF No. 66-4 ("Dec. 2020 OSS Rep.").)
Along with the allegations against Tactile, the Complaint alleges insider trading by all individual Defendants except Tactile Chief Financial Officer Brent A. Moen.7 After Tactile was served with the qui tam complaint but before Tactile disclosed the action in its 2018 Form 10-K, Tactile Chief Executive Officer Mattys...
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