W. Va. Pipe Trades Health & Welfare Fund v. Medtronic, Inc.

• Decision Date: 29 September 2014
• Docket Number: Case Civil No. 13–1686 JRT/FLN.
• Citation: 57 F.Supp.3d 950
• Parties: WEST VIRGINIA PIPE TRADES HEALTH & WELFARE FUND, Employees' Retirement System of the State of Hawaii, and Union Asset Management Holding AG, Plaintiffs, v. MEDTRONIC, INC., William A. Hawkins, Gary L. Ellis, Richard E. Kuntz, Julie Bearcroft, Richard W. Treharne, Martin Yahiro, Thomas A. Zdeblick, J. Kenneth Burkus, and Scott D. Boden, Defendants.
• Court: U.S. District Court — District of Minnesota

57 F.Supp.3d 950

WEST VIRGINIA PIPE TRADES HEALTH & WELFARE FUND, Employees' Retirement System of the State of Hawaii, and Union Asset Management Holding AG, Plaintiffs

v.MEDTRONIC, INC., William A. Hawkins, Gary L. Ellis, Richard E. Kuntz, Julie Bearcroft, Richard W. Treharne, Martin Yahiro, Thomas A. Zdeblick, J. Kenneth Burkus, and Scott D. Boden, Defendants.

Case Civil No. 13–1686 JRT/FLN.

United States District Court, D. Minnesota.

Signed Sept. 29, 2014.

Shawn Williams and Christopher M. Wood, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; David P. Abel, Motley Rice LLC, Mount Pleasant, SC; and Anne T. Regan, Zimmerman Reed, PLLP, Minneapolis, MN, for plaintiffs.

Peter Carter, Kristin Zinsmaster, and Theresa Bevilacqua, Dorsey & Whitney LLP, Minneapolis, MN, for defendants Medtronic, Inc., Hawkins, Ellis, Kuntz, Bearcroft, Treharne, and Yahiro.

John W. Lundquist, Chelsea Brennan, and Lousene Hoppe, Fredrikson & Byron, PA, Minneapolis, MN, for defendants Zdeblick, Burkus, and Boden.

MEMORANDUM OPINION AND ORDER ON DEFENDANTS' MOTION TO DISMISS

JOHN R. TUNHEIM, District Judge.

Investor Plaintiffs bring this consolidated class action alleging that various defendants—Medtronic, certain of its current and former officers and executives and paid consultants (collectively, “Defendants”)—issued false and misleading statements and engaged in a scheme to mislead investors regarding Medtronic's financial condition, particularly with respect to the safety and efficacy of its product INFUSE. Plaintiffs allege that studies initially demonstrating the safety and efficacy of INFUSE were shown to be inaccurate by new studies published in a medical journal called The Spine Journal in May and June 2011, which revealed that the incidence of adverse events experienced with its use was between ten and fifty times the rates previously published. Plaintiffs allege that Medtronic, together with physician consultants, engaged in a scheme to defraud investors by manipulating the early studies. Plaintiffs also allege that once the new, accurate studies were published, certain Defendants made false statements defending the reliability of the early studies. Plaintiffs allege that as a result of the scheme to defraud and misleading statements, Medtronic's stock traded at artificially inflated prices during the Class Period, but then dropped almost twenty-five percent from its high point during the Class Period when the truth was revealed.

Plaintiffs bring Count I for violation of Section 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b) and Rule 10b–5, 17 C.F.R. § 240.10b–5(b), through false and misleading statements against Medtronic, several of its executives, and a physician consultant named Dr. Thomas Zdeblick. They also bring Count II for a scheme and course of conduct intended to mislead in violation of Section 10(b) and Rule 10b–5 against all Defendants—including two additional physician consultants—and Count III for violation of Section 20(a) of the Exchange Act as control persons against Medtronic and the individual Medtronic executives.

Defendants move to dismiss all of Plaintiffs' claims. The Court will grant the motion in part and deny the motion in part. With respect to Count I, the Court concludes that Plaintiffs fail to allege that Defendants made materially false statements, with the exception of Defendant William Hawkins' statements regarding ongoing work with the FDA. With regard to Count II, the Court concludes that Plaintiffs' claims against the physician Consultant Defendants are barred by the statute of limitations, but will deny the motion with respect to Count II against the Medtronic Defendants. Because Count III for control person liability is derivative of other violations of the Exchange Act and the Court permits some claims to proceed against Medtronic and its officers, the Court will deny the motion with respect to Count III.

BACKGROUND

I. BRIEF BACKGROUND OF INFUSE

Before reciting Plaintiffs' specific allegations, the Court will first provide an overview of INFUSE and Plaintiffs' allegations. Medtronic developed the INFUSE bone graft as part of its spinal therapies. (Consolidated Class Action Compl. (“Compl.”) ¶ 7, Nov. 4, 2013, Docket No. 28.) INFUSE is the “trade name of rhBMP–2,” which is a bone morphogenetic protein (“BMP”) which induces the body to develop new bone tissue. (Id. ) INFUSE is an alternative to grafting replacement bone tissue and was the first BMP to reach the market. (Id. ) INFUSE was approved by the FDA in July 2002 for the treatment of degenerative disc disease, but Plaintiffs allege that its “approval indication was narrow: it was to be used only in single-level fusions, only between L4 and S1 ... and only via an anterior approach.” (Id. ¶ 8 (emphasis in original).) INFUSE was later also approved for dental surgery and for the repair of certain shin fractures, but Plaintiffs allege that it has “never been approved for any spinal fusion indication other than [the lower back] surgeries.” (Id. ) INFUSE is part of Medtronic's “spinal segment,” which generated more than $3.5 billion in revenue in 2008, 2009, and 2010, which was approximately 22–23% of the company's revenue in those years. (Id. ¶ 20.)

Plaintiffs allege that it was Medtronic's goal to have INFUSE entirely replace iliac crest bone grafting (“ICBG”) as the standard of care in spinal fusion, but that in order for that to happen it would need to have clinical studies documenting its safety and efficacy, including that INFUSE achieved better results with fewer adverse side effects for patients than traditional grafting techniques. (Id. ¶ 9.) Such clinical studies—their development and Medtronic's response when their validity was challenged—are at the heart of this dispute.

In addition to INFUSE, Plaintiffs allege that Medtronic also “concealed known risks” associated with a second-generation BMP called AMPLIFY. (Id. ¶ 22.) AMPLIFY involved the same bone-growth- inducing protein as INFUSE, but in a higher dosage—40mg, whereas INFUSE's maximum was 12mg. (Id. ) Some of Plaintiffs' allegations involve Medtronic's response when questions about AMPLIFY's safety were raised during its review by the FDA. AMPLIFY has not been approved by the FDA.

Plaintiffs make two substantive claims. First, Plaintiffs allege that Defendants made materially false statements during the Class Period in order to assure investors of the continued viability of INFUSE as a product and the prospect of AMPLIFY. Plaintiffs allege that these materially false statements artificially inflated Medtronic's stock price, which led investors to buy it, but that when the truth was revealed the value dropped. Second, Plaintiffs allege that before and during the Class Period, Defendants engaged in a scheme or course of conduct to manipulate the early clinical studies, which propelled INFUSE to success despite omitting many of INFUSE's adverse effects. Plaintiffs' claim for control person liability is derivative of these first two claims.

II. THE PARTIES

The lead Plaintiffs in this consolidated class action are several institutional investors: West Virginia Pipe Trades Health & Welfare Fund, Union Asset Management Holding AG, and Employees' Retirement System of the State of Hawaii, all of which allege that they purchased Medtronic common stock during the Class Period and were damaged by the conduct alleged in the complaint. (Id. ¶¶ 43–45.)

Plaintiffs bring this action against Medtronic and several of its officers and employees, including: William Hawkins, former Chair of the Board of Directors and CEO, (id. ¶ 47); Gary Ellis, Chief Financial Officer, (id. ¶ 48); Richard Kuntz, Chief Scientific, Clinical and Regulatory Officer, (id. ¶ 49); Julie Bearcroft, Director of Technology Management in Medtronic's Biologics Marketing Department, (id. ¶ 50); Richard Treharne, Senior Vice President of Clinical and Regulatory Affairs, (id. ¶ 51); and Martin Yahiro, Medtronic Senior Director of Regulatory Affairs, (id. ¶ 52). The Court refers to the individual Medtronic Defendants as the “Individual Defendants” and the collection of the Individual Defendants plus Medtronic as the “Medtronic Defendants.”

The complaint also alleges violations by three consultants (the “Consultant Defendants” or “physician consultants”). Dr. Thomas Zdeblick was a physician consultant for Medtronic, whom Plaintiffs allege authored some of the medical journal articles with false and misleading statements, and was the Editor–in–Chief of the Journal of Spine Disorders. (Id. ¶ 53.) Dr. Kenneth Burkus was a physician consultant for Medtronic, whom Plaintiffs allege authored some of the medical journal articles with false and misleading statements. (Id. ¶ 54.) Dr. Scott Boden was a physician consultant for Medtronic, whom Plaintiffs allege authored some of the medical journal articles with false and misleading statements. (Id. ¶ 55.)

Plaintiffs bring Count I for false and misleading statements in violation of section 10(b) and 10b–5 against only Medtronic, Hawkins, Ellis, Kuntz, and consultant Zdeblick. Plaintiffs bring Count II for scheme liability under 10(b) against all Defendants, and Count III for control person liability against only the Medtronic Defendants.

III. FALSE AND MISLEADING STATEMENTS

In Count I, Plaintiffs allege that the Medtronic Defendants and Zdeblick violated Section 10(b) and Rule 10b–5 by making statements which were knowingly or recklessly false and materially misleading.

A. The Statements

Plaintiffs point to three distinct statements or categories of statements in support of their claims under Count I for false and misleading statements.

1. Commentary on Clinical Studies in 10–Qs

First, Plaintiffs allege that the September 8, 2010¹ and December 8, 2010 10–Q forms “included substantially identical false Sarbanes Oxley certifications of both Defendants Hawkins and Ellis” which stated, among other things, that Medtronic's “clinical studies were well-planned and designed...