Plumbers v. Allscripts–misys Healthcare Solutions Inc.

• Court: U.S. District Court — Northern District of Illinois
• Writing for the Court: RUBEN CASTILLO, District Judge.
• Citation: Plumbers v. Allscripts–misys Healthcare Solutions Inc., 778 F.Supp.2d 858 (N.D. Ill. 2011)
• Decision Date: 08 March 2011
• Docket Number: No. 09 C 4726.,09 C 4726.
• Parties: PLUMBERS AND PIPEFITTERS LOCAL UNION NO. 630 PENSION–ANNUITY TRUST FUND, on behalf of itself and all others similarly situated, Plaintiff,v.ALLSCRIPTS–MISYS HEALTHCARE SOLUTIONS, INC., et al., Defendants.

778 F.Supp.2d 858

PLUMBERS AND PIPEFITTERS LOCAL UNION NO. 630 PENSION–ANNUITY TRUST FUND, on behalf of itself and all others similarly situated, Plaintiff,

v.ALLSCRIPTS–MISYS HEALTHCARE SOLUTIONS, INC., et al., Defendants.

No. 09 C 4726.

United States District Court, N.D. Illinois, Eastern Division.

March 8, 2011.

Brian O. O'Mara, Debra J. Wyman, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Lori Ann Fanning, Marvin Alan Miller, Miller Law LLC, Chicago, IL, for Plaintiffs.James Wallace Ducayet, Walter C. Carlson, Sidley Austin LLP, Victor David Quintanilla, U.S. Court of Appeals, Chicago, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

RUBEN CASTILLO, District Judge.

The Plumbers and Pipefitters Local Union No. 630 Pension–Annuity Trust Fund (“Plaintiff” or the “Pension Fund”) brings this putative class action on behalf of itself and those who purchased Allscripts Healthcare Solutions, Inc. (“Allscripts” or the “Company”) ¹ common stock between May 8, 2007 and February 13, 2008 (the “Class Period”). (R. 47, Second Am. Compl.) In its complaint, Plaintiff alleges that Allscripts, William J. Davis (“Davis”), Allscripts' Chief Financial Officer, and Glen E. Tullman (“Tullman”), Allscripts' Chief Executive Officer and the Chairman of its Board (collectively, “Defendants”), violated the Securities Exchange Act of 1934 (the “Exchange Act”) and its implementing regulations. ( Id.) Presently before the Court is Defendants' motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). (R. 51, Defs.' Mot.) For the reasons stated below, Defendants' motion is granted in part and denied in part.

RELEVANT FACTS

I. Prior to Class Period Allegations

Allscripts develops and sells software applications to healthcare organizations. (R. 47, Second Am. Compl. ¶ 2.) According to the Company, more than 150,000 physicians, 700 hospitals, and nearly 7,000 post- acute and homecare organizations utilize Allscripts software applications. ( Id.) Allscripts products include electronic health records (“EHR”) systems and various other healthcare-related software applications. ( Id.) In the years preceding the Class Period, Allscripts enjoyed profitable operations as a result of the market's embrace of its leading product: Touchworks Version 10.1.1. ( Id. ¶ 19.) This version of Touchworks had been certified by the Commission for Healthcare Information Technology, a private-sector initiative that was recognized in the industry as the certification authority for EHR products. ( Id.)

Touchworks Version 11, an upgrade to the successful Version 10.1.1, was originally scheduled for release in late 2006. ( See id. ¶ 3.) Because of a several month delay, Version 11 was not released until May 2007. ( Id. ¶¶ 3, 70.)

II. Class Period AllegationsA. May 2007 statements

On May 8, 2007, Allscripts announced its financial results for the first quarter of the 2007 fiscal year. ( Id. ¶ 24.) In its announcement, Allscripts noted that total revenue, revenue from software and related services, gross margin percentage, and net income all increased when compared to the same period in 2006. ( Id.) Based on these results, Tullman stated the following: “[Allscripts'] revenue growth, visibility to sales opportunities and solid bottom-line performance give us confidence in our ability to deliver solid results during the remainder of 2007.” ( Id.)

During a conference call with analysts that same day, Tullman announced Allscripts' intention to raise sales projections for the remainder of the 2007 fiscal year. ( Id. ¶ 25.) As detailed by Davis, the Company stated that its clinical sales guidance would exceed $230 million, a $20 million increase over its prior projection; its previously-issued revenue projection of $300 million and earnings guidance were unchanged. ( Id.) Also during this conference call, Tullman stated that Version 11 was the “the most tested product in [Allscripts'] history.” ( Id.) Additionally, Tullman made the following comment: “Market validation at [Version 11] is a transformational product has been overwhelming. [Version 11] will allow Allscripts to become what I call the Bloomberg of health care.” ( Id. ¶ 26.)

Plaintiff also highlights other portions of answers provided by Tullman and Davis (collectively, “Individual Defendants”) in response to questions posed during this conference call. First, the Pension Fund questions the veracity of Davis' statement noting that there was “a very substantial amount of pent-up demand” for Version 11. ( Id. ¶ 27.) Second, it objects to a response by Davis in which he indicates that the delay in Version 11's release did not arise out of development issues, but rather work related to software design. ( Id.) Third, the Pension Fund challenges an answer provided by Tullman in which he states that Allscripts did not “expect issues to come up relative to the actual installation and—or conversion or transition to [Version 11].” ( Id. ¶ 28.) Approximately two weeks after this conference call, Version 11's general release took place. ( Id. ¶ 70.)

According to Plaintiff, the aforementioned statements, assurances, and projections made by Defendants in May 2007 were “materially false and misleading when made and failed to disclose material information concerning Allscripts' business and business practices.” ( Id. ¶ 32.) The crux of Plaintiffs challenge to these statements is the following: “based upon experience in the limited 2006 [Version 11] implementations, Allscripts' management knew by the beginning of the Class Period that the software was plagued by serious feature[ ], functionality and quality problems. These problems caused Allscripts to experience greatly increased implementation times on [Version 11] in the 2006 implementations as well as those implementations made during the Class Period.” ( Id. ¶ 32(a).)

Because Allscripts recognized revenue derived from Version 11 sales as the software was implemented,² these purported problems delayed the conversion of its sales backlog into revenue. ( Id.) Based on these alleged problems, Plaintiff claims that Davis and Tullman actually knew their forecasts were false and misleading when made, as there was “no reasonable basis in fact” for Allscripts' previously-issued revenue projection of $300 million. ( Id. ¶ 32(e).) Plaintiff alleges that the misleadingly rosy portrait painted by Defendants caused Allscripts stock to trade at artificially inflated prices. ³ ( Id. ¶ 33.)

B. August 2007 statements

On August 7, 2007, Allscripts announced its financial results for the second quarter of the 2007 fiscal year. ( Id. ¶ 34.) In a press release, Allscripts noted that total revenue, revenue from software and related services, and net income all increased when compared to the same period in 2006. ( Id.) Tullman also stated that investments in new technology and aggressive hiring positioned the Company to capitalize on the significant market opportunity during the second half of the year. ( Id.)

During a conference call that same day, Davis confirmed the revised clinical sales projections set forth in May 2007. ( Id. ¶ 35.) In response to a question related to the drivers of the Company's overall revenue projection, Davis stated: “we have clear visibility as to where we expect our revenue to come from. It is a function of increased productivity in terms of the implementation resources on the Touchworks side ... and incremental license opportunities[.]” ( Id.) It is this claimed increased productivity, along with Allscripts' “sufficient backlog,” which led Davis to believe in the feasibility of the Company achieving its 2007 revenue projection of $300 million. ( Id.)

Plaintiff also highlights other portions of the Individual Defendants' responses to analyst questions during this conference call. First, in response to a question concerning implementation times for Version 11, Davis noted that implementation times were “roughly consistent with the past.” ( Id. ¶ 36.) Additionally, Plaintiff draws the Court's attention to the following response provided by Tullman after he was asked to describe some of the successes Allscripts' customers were seeing:

We did in fact activate a number of other clients in the quarter. And specifically, we tried to make sure that we had a mixture so folks like Tennessee Oncology ... came up and a number of others as well, we were looking at—[George Washington University Medical Faculty Associates (“George Washington”) ] had on the order of 250 physicians. We are looking at a few thousand users probably by the end of August. That rollout is going very well.

( Id.)

Plaintiff alleges that the aforementioned representations made by Defendants in the August 2007 press release and conference call were “materially false and misleading when made and failed to disclose material information concerning Allscripts' business and business practices.” ( Id. ¶ 42.) As with its challenge to the representations made in May 2007, Plaintiff alleges that based on their experience with limited implementations of Version 11 in 2006, the Individual Defendants knew by the beginning of the Class Period that the software contained serious problems. ( Id. ¶ 42(a).) These problems, it asserts, “delay[ed] the conversion of sales backlog into revenue.” ( Id.) Plaintiff contends that based on the information available to them, the Individual Defendants “actually knew that their forecasts were false and misleading when made as there was no reasonable probability that the forecasted levels of revenue and earnings growth would in fact be achieved.” ( Id. ¶ 42(e).) Taken together, Plaintiff claims that Defendants' August 2007 representations caused Allscripts stock to continue trading at artificially inflated prices. ( Id. ¶ 43.)

C. November 2007 statements

Approximately three months later, on November 8, 2007, Allscripts announced its financial results for the third quarter of the 2007 fiscal year. ( Id. ¶ 44.) In its press release, the Company noted that...