Shoemaker v. Cardiovascular Sys., Inc.

• Decision Date: 10 January 2018
• Docket Number: Civil No. 16–568 (DWF/KMM)
• Citation: 300 F.Supp.3d 1046
• Parties: Sandra K. SHOEMAKER, individually and on behalf of all others similarly situated, Plaintiffs, v. CARDIOVASCULAR SYSTEMS, INC., and Laurence L. Betterley, Defendants.
• Court: U.S. District Court — District of Minnesota

300 F.Supp.3d 1046

Sandra K. SHOEMAKER, individually and on behalf of all others similarly situated, Plaintiffs,

v.CARDIOVASCULAR SYSTEMS, INC., and Laurence L. Betterley, Defendants.

Civil No. 16–568 (DWF/KMM)

United States District Court, D. Minnesota.

Signed January 10, 2018

Bryan L. Bleichner, Esq., and Jeffrey D. Bores, Esq., Chestnut Cambronne, PA; and Naumon A. Amjed, Esq., and Ryan T. Degnan, Esq., Kessler Topaz Meltzer & Check LLP, counsel for Plaintiff Sandra K. Shoemaker.

Angus Ni, Esq., and Jeremy Robinson, Esq., Bernstein Litowitz Berger & Grossmann LLP; Gregg M. Fishbein, Esq., Kate M. Baxter–Kauf, Esq., and Richard A. Lockridge, Esq., Lockridge Grindal Nauen PLLP; Alfred L. Fatale, III, Esq., and Ross M. Kamhi, Esq., Labaton Sucharow LLP; and David A. Goodwin, Esq., Gustafson Gluek PLLC, counsel for City of Miami Fire Fighters' & Police Officers' Retirement Trust.

David R. Marshall, Esq., and Leah C. Janus, Esq., Fredrikson & Byron, PA; and Michael C. Tu, Esq., Daniel Streim, Esq., and Robert M. Stern, Esq., Orrick, Herrington & Sutcliffe LLP, counsel for Defendants.

MEMORANDUM OPINION AND ORDER

DONOVAN W. FRANK, United States District Judge

INTRODUCTION

The plaintiffs in this case are shareholders of a publicly traded, medical-device company that allegedly violated securities laws by making material misstatements regarding illegal kickbacks paid to doctors. This matter is before the Court on the defendants' motion to dismiss. For the reasons discussed below, the Court grants the defendants' motion.

BACKGROUND

Cardiovascular Systems, Inc. ("CSI") is a publicly traded company that primarily develops and manufactures medical devices for the treatment of peripheral arterial disease

and coronary artery disease. Defendant Laurence Betterley has been CSI's Chief Financial Officer since April 2008. David L. Martin, recently deceased, was CSI's CEO and one of its directors during the relevant time period. Plaintiffs are shareholders of CSI who allege that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). Plaintiffs seek to represent a class of shareholders who "purchased or otherwise acquired" CSI's common stock between September 12, 2011 and January 21, 2016.

I. Factual Background

Around 88% of CSI's business comes from the sale of devices used to treat peripheral arterial disease

("PAD"). PAD "typically refers to the chronic obstruction of the arteries supplying the lower extremities due to plaque deposition on the walls of the arteries resulting in inadequate blood flow to the limbs." (Doc. Nos. 55–70 ("Luken Decl.") ¶ 11, Ex. 10 at 2.)

Medical devices are heavily regulated, including under the federal Anti–Kickback Statute ("AKS").¹ The AKS is a criminal statute that prohibits, among other things, "knowingly and willfully offer[ing] or pay[ing] any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person" either to refer an individual to the person for medical services or to purchase any good that that will be repaid in whole or in part by a federal health care program. 42 U.S.C. § 1320a–7b(b)(2)(B). In short, a violation of the AKS requires: (1) a remuneration to a person or entity in a position either to purchase goods subject to reimbursement by a federal health care program or to refer a patient whose care will be reimbursed by a federal health care program; and (2) that the remuneration could reasonably induce such referral or such purchase. See Jones–McNamara v. Holzer Health Sys. , 630 Fed.Appx. 394, 401 (6th Cir. 2015) (citing OIG Supplemental Compliance Program Guidance for Hospitals, 70 Fed. Reg. 4858, 4864 (Jan. 31, 2005) ).² Courts and the OIG have concluded that a "remuneration" is "virtually anything of value." Id. (quoting OIG Compliance Program Guidance for Ambulance Suppliers, 68 Fed. Reg. 14245, 14252 (Mar. 24, 2003) ). A person guilty of violating the AKS faces up to five years in prison and a fine up to $25,000. 42 U.S.C. § 1320a–7b(b). A violation of the AKS may also be a violation of the federal False Claims Act³ ("FCA") where a claim submitted to the government includes items or services resulting from a violation of the AKS. Id. § 1320a–7b(g).

II. Procedural History

A. Qui Tam Complaint

On July 15, 2013, a former district sales manager, who worked for CSI from 2012 until February 2013, filed a qui tam⁴ action against CSI. (Doc. No. 48–2 ("Qui Tam Complaint") ¶ 9.) The Qui Tam Complaint alleged that CSI had illegally promoted its PAD devices for off-label purposes and had given illegal kickbacks to physicians for prescribing the PAD devices. (See id. ¶ 10.)

Specifically, the Qui Tam Complaint alleged that CSI gave illegal kickbacks to physicians in the form of free trips to training programs at desirable locations in exchange for the physicians buying PAD devices. (Id. ¶¶ 50–52.) Additionally, CSI allegedly marketed the PAD devices as a revenue generator for physicians as compared to less expensive alternatives. (Id. ¶ 59.) CSI also allegedly encouraged physicians to use the PAD devices when they were not medically necessary. (Id. ¶ 63.) In addition, the Qui Tam Complaint alleged that CSI gave illegal kickbacks in the form of free products, such as deals where physicians would buy six devices and get one free. (Id. ¶ 69.) CSI also allegedly offered illegal kickbacks in the form of referrals to doctors in exchange for use of PAD devices. (Id. ¶¶ 74, 80–81.) Finally, the Qui Tam Complaint alleged that CSI selected physicians to be paid speakers for CSI's Speaker Bureau based on which physicians used the most PAD devices and who would drive others to use PAD devices. (Id. ¶ 88.)

At first, the Qui Tam Complaint was filed under seal, concealing its existence from CSI. On May 9, 2014, CSI announced that the U.S. Attorney's Office for the Western District of North Carolina had sent CSI notice that it was investigating the Qui Tam Complaint. On July 8, 2015, the Qui Tam Complaint was unsealed. On June 29, 2016, CSI settled the Qui Tam Complaint in exchange for $8 million and agreeing to a Corporate Integrity Agreement. CSI did not admit any wrongdoing as part of the settlement. (Doc. No. 74 ("Robinson Decl.") ¶ 12, Ex. 5 ("Settlement Agreement") at 2.)

B. Class Actions

In the aftermath of the announcement of the Qui Tam Complaint, CSI's stock price fell. Shareholders filed suit in the Central District of California and in the District of Minnesota. On March 26, 2016, this Court appointed Plaintiffs as Co–Lead Plaintiffs. (Doc. No. 25.) And on June 28, 2016, Plaintiffs filed their consolidated complaint. (Doc. No. 48.)

In Plaintiffs' consolidated complaint, they claimed that in early 2012, Kevin Kenny (Executive Vice President of Sales and Marketing) and Jim Breidenstein (Vice President of Sales) implemented a scheme whereby CSI began violating the AKS and the FCA by: (1) providing kickbacks to physicians for using PAD devices, which took the form of either referrals, discounted products, or assistance in establishing office-based laboratories; (2) encouraging physicians to use PAD devices when they were not medically necessary; (3) hiding products so they would be reordered or channel stuffing;⁵ and (4) promoting the product for off-label uses. The scheme was allegedly in place from when Breidenstein joined CSI in 2012 until May 9, 2014, when CSI received notice of the Qui Tam Complaint. The consolidated complaint included statements from fourteen confidential witnesses allegedly corroborating Plaintiffs' complaint. On August 29, 2016, Defendants filed a motion to dismiss, which the Court granted with leave to amend.

In Plaintiffs' First Amended Complaint ("FAC") (Doc. No. 86), they adopt an entirely new theory of misconduct: CSI provided marketing services for doctors in exchange for referring others who will purchase CSI devices. Plaintiffs draw their new theory from an employee whistleblower case in California ("Babyak Action"). In the Babyak Action, the employee was allegedly retaliated against for complaining of illegal and unsafe conduct, including illegal kickbacks for referrals.

The marketing-for-referrals scheme was allegedly hatched by an Area Sales Director, Todd Goldberg, who was hired on April 30, 2014 (9 days before CSI announced the Qui Tam Complaint). Goldberg allegedly directed CSI district sales managers to offer marketing services for doctors who referred CSI devices, which he called the Triangle Offense. In discovery for the Babyak Action, different CSI employees stated that the Triangle Offense was Goldberg's idea. Plaintiffs allege that the referral scheme was slowly phased out between May 9, 2014 and August 2015. But when CSI executives learned about the Triangle Offense, they reprimanded Goldberg on April 30, 2015, for failing to obtain approval. (Doc. No. 86–4.)

In addition to the discovery from the Babyak Action, Plaintiffs rely on two confidential witnesses. The first confidential witness was a district sales manager in Los Angeles, California, from September 2014 until August 2016 who heard Goldberg talk about the Triangle Offense. The second confidential witness was a district sales manager in Arizona ("Arizona DSM") from 2008 until 2013, and "confirmed CSI's referral-marketing practices." (FAC ¶ 61.)

III. Alleged Misstatements

Plaintiffs allege that CSI made various misstatements and omissions each premised on the same factual predicate: CSI engaged in widespread illegal activity. Broadly, Plaintiffs allege six categories of misstatements:

(1) Statements about past sales growth that Defendants falsely attributed to legitimate practices;

(2) Statements about future sales growth that were falsely attributed to legitimate practices;

(3) Statements about CSI's revenues made while omitting the truth about the Company's illegal referral marketing scheme;

(4) Statements about CSI's legal and regulatory compliance;

(5) Falsely signed...