Weiner ex rel. Situated v. Tivity Health, Inc.

• Decision Date: 18 March 2019
• Docket Number: Case No. 3:17-cv-01469
• Citation: 365 F.Supp.3d 900
• Court: U.S. District Court — Middle District of Tennessee
• Parties: Eric WEINER, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. TIVITY HEALTH, INC., Donato Tramuto, Glenn Hargreaves and Adam Holland, Defendants.

365 F.Supp.3d 900

Eric WEINER, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.TIVITY HEALTH, INC., Donato Tramuto, Glenn Hargreaves and Adam Holland, Defendants.

Case No. 3:17-cv-01469

United States District Court, M.D. Tennessee, Nashville Division.

Filed March 18, 2019

Eduard Korsinsky, Levi & Korsinsky, LLP, Alice Buttrick, Cohen, Milstein, Sellers & Toll PLLC, New York, NY, James A. Holifield, Jr., Holifield Janich Rachal & Associates, PLLC, Knoxville, TN, Benjamin A. Gastel, James Gerard Stranch, IV, Branstetter, Stranch & Jennings, PLLC, Nashville, TN, Christina D. Saler, Cohen Milstein Sellers & Toll PLLC, Philadelphia, PA, Elizabeth Aniskevich, Steven J. Toll, Times Wang, Cohen, Milstein, Sellers & Toll, PLLC, Washington, DC, for Plaintiff.

Jessica Perry Corley, Lisa R. Bugni, King & Spalding LLP, Atlanta, GA, Joseph B. Crace, Jr., Bass, Berry & Sims, Nashville, TN, Wallace Wordsworth Dietz, Bass, Berry & Sims, Nashville, TN, for Defendant.

MEMORANDUM OPINION

Waverly D. Crenshaw, Jr., Chief United States District JudgeThis is a putative class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), brought by Eric Weiner on behalf of himself and all those who purchased Tivity Health, Inc. ("Tivity") securities between March 6, 2017 and November 6, 2017. In addition to Tivity, Defendants include Donato Tramuto, its Chief Executive Officer; Glenn Hargreaves, its interim Chief Financial Officer from March 6 until June 14, 2017; and Adam Holland, who replaced Hargreaves on June 14, 2017, and became Tivity's Chief Financial Officer. Now pending before the Court is Defendants' Motion to Dismiss (Doc. No. 38), to which Weiner has responded in opposition (Doc. No. 47) and Defendants have replied (Doc. No. 50). For the reasons that follow, the Motion to Dismiss will be denied.

I. Factual Allegations

The First Amended Complaint (Doc. No. 32) alleges the following facts:

Tivity is a health services company that offers fitness and health improvement programs to its customers. Tivity focuses on the senior population, and its flagship product called "SilverSneakers" is responsible for 82% of Tivity's overall annual revenues. (Doc. No. 32 ¶ 25).

SilverSneakers provides seniors enrolled in Medicare Advantage, Medicare Supplement, and Group Retiree health plans with access to a national network of approximately 15,000 fitness centers with which Tivity has formed contractual relationships. (Id.).¹ Thus, instead of offering or administering health insurance plans, Tivity generates its revenue by offering programs like SilverSneakers to health plans for a fee. In return, plan customers are given access to fitness centers as part of their coverage. (Id. ¶ 31).

One of Tivity's most important health plan customers was United Healthcare, Inc. ("UHC"). (Id. ¶ 1). Indeed, UHC alone was responsible for more than 10% of Tivity's revenues in fiscal year 2016, and the second largest customer in terms of revenue. (Id. ¶ 2).

Tivity knew that there was a risk that health plans like UHC would seek to directly compete because of the low barriers to entry into the market, and the revenues that could be generated by offering a fitness program benefit for Medicare Advantage beneficiaries. In fact, in Security and Exchange Commission ("SEC") filings, Tivity identified "two important risks facing its business." (Id. ). Those were: (1) "health plan customers like UHC were responsible for a significant percentage of its revenues" ; and (2) better-resourced entities, including its own health plan customers (although never specifically identifying which customers), might compete with Tivity's product offerings. What Tivity did not disclose to the public, and what serves as the basis for Weiner's complaint, was that this potentiality had become a reality when UHC entered the market.

In late 2016, Tivity became aware that UHC had launched (or was in the process of launching) its Optum Fitness Advantage program to compete directly with SilverSneakers in select states, including Washington and New Jersey. Nevertheless, during the open enrollment period for electing health plan coverage that ran from October to the beginning of December, 2016, Tivity did not disclose that information to its shareholders. To the contrary, it touted its relationship with UHC by highlighting the parties' successful contract renewal negotiation. (Id. 4). Further, "[i]nstead of informing the investing public that one of Tivity's most important customers was becoming a competitor, [Tivity] inserted new risk language into the Company's public filings stating that there was a chance that ‘health plan customers could attempt to offer services themselves that compete directly with our offerings or stop providing our offerings to their members.’ " (Id.) (emphasis added by Weiner). The FY16 Form 10-K containing this "new" language² was filed on March 6, 2017, (Id. ¶ 57), some six months after UHC had already begun to offer its competing services. (Id. ¶ 59). According to Weiner, Tivity and the individual Defendants knew of UHC's entry into the field because:

(1) before and during the open enrollment period for 2017, which ran between October and December 2016, Tivity executives were forwarded an aggressive letter from UHC to a fitness center that stated that UHC was launching Optum Fitness Advantage and that suggested that the fitness center would lose all SilverSneakers members, not just those insured by UHC;

(2) before January 2017, UHC informed Tivity that it would not be renewing SilverSneakers in at least New Jersey and Washington state;

(3) in January 2017, UHC began operating Optum Fitness Advantage in New Jersey and Washington state; and

(4) by early 2017, Tivity knew that UHC was sending letters about Optum Fitness Advantage to partners outside of New Jersey and Washington state.

(Id.).

Despite the foregoing, Defendants continued to paint a rosy picture of its relationship with UHC. For example, in a press release issued and dated April 27, 2017 relating to First Quarter 2017 results, Tramuto was quoted as saying: "We are also pleased to announce a three-year renewal of our SilverSneakers contract with UHC Group, continuing a 20-year relationship with a partner who shares our commitment to active lifestyles." (Id. ¶ 60). Tramuto also spoke about an "A-B-C-D strategy" that touted the "collaborat[ion] with partners," and the "deepen[ing] relationship" with partners, even though UHC had introduced a competitive program that was necessarily causing Tivity to lose members of its SilverSneakers program. Shortly thereafter, in an earnings call, Tramuto reiterated that the renewal of Tivity's contract with UHC was on "favorable terms"; their relationship "continues to be very strong;" and Tivity was "very pleased with the terms that we have" with UHC. (Id. ¶¶ 64, 65). Responding to an analyst's question as to whether there was "any big switch between the way that contract [between Tivity and UHC] is structured," Tramuto stated, "No. And as I shared, it's favorable terms." (Id. ¶ 66). Likewise, in a Form 10-Q signed by Hargreaves on May 4, 2017, Tivity represented that "[t]here have been no material changes to our risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016." (Id. ¶ 68). Holland made the same representation on behalf of Tivity when he became Chief Financial Officer in a Form 10-Q dated August 4, 2017 for the period ending June 30, 2017. (Id. ¶ 70).

Allegedly to counteract the effects of UHC's rollout of a competing program, Tivity's "executive management formed a committee to develop a strategic plan" that would "combat UHC's competitive threat." (Id. ¶¶ 52, 71). The plan was referred to as "Project Success" and, among the committee members was Caroline Khalil, Vice President of Network Partnership and Programming, who communicated with a "Former High-Level Manager" and other select colleagues about the program and UHC's entry into the market. (Id. ¶¶ 52, 53). According to that unnamed Former High-Level Manager, this was a "chaotic time" at Tivity because "senior management was unable to reach a consensus on the messaging." (Id. ¶ 54). Ultimately, however, it was determined that fitness center partners could be verbally informed that UHC was coming on board as a competitor, but that information was not to be publicly disclosed until after open-enrollment began in October 2017.

Tivity continued to represent that its relationship with UHC was the same, including stating during a conference call on October 26, 2017 that there was "improved performance across [the] functional areas" and a "contract renewal rate of over 99% for 2018." (Id. ¶ 76). Also in the Form 10-Q signed by Holland for the quarter ending September 30, 2017, it was again represented that there had been "no material changes to ... risk factors." (Id. ¶ 78).

On Monday, November 6, 2017, UHC announced that, beginning January 1, 2018, customers enrolled in its Medicare Advantage plans in 11 states could participate in its Optum Fitness Advantage program at no additional costs. When this news broke publically, Tivity's stock price plummeted by more than 34%, from a close of $ 48.05 per share on Friday, November 3, 2017, to a close of $ 31.60 per share the following Monday. This drop of $ 16.45 per share was based upon a trade volume of 9,034,800 shares, and was about 18 times more than the daily average of approximately 490,000 shares. "In response to this news, Defendants tried to reassure the marked by explaining that Tivity's 2018 guidance remained unchanged because Tivity had already factored UHC's actions into that guidance. " (Id. ¶ 84) (emphasis in original).

Weiner claims that during the proposed class period he purchased 20,658 shares of Tivity common stock, but ended up losing more than $ 107,000 when UHC's competing program came to light. (Id. ¶ 11). Others, however, were a lot...