On December 28, 2016, the 8th U.S. Circuit Court of Appeals in St. Paul, Minnesota, said a lower court judge erred in finding that a group shareholders sued too late, by waiting more than two years after learning information that could suggest an intent to defraud.
The plaintiff Medtronic shareholders, include the West Virginia Pipe Trades Health and Welfare Fund, the Employees’ Retirement System of the State of Hawaii and Germany’s Union Asset Management Holding AG.
After the FDA warned of off-label use, The Spine Journal accused surgeons of improperly taking money for publishing studies and then an investigation by the U.S. Senate, the shareholders sued the company in June 2013. They accused the company of defrauding shareholders by covering up negative side effects of Infuse for nearly a decade and that those activities inflated the company’s stock price, and caused the shareholders to lose hundreds of millions of dollars.
The circuit judge ruled that it was not until The Spine Journal article was published that reasonable shareholders might have inferred that problems with Medtronic’s studies reflected an intent to defraud. He also said shareholders properly alleged that they relied on Medtronic’s alleged misconduct.
“A company cannot instruct individuals to take a certain action, pay to induce them to do it, and then claim any causal connection is too remote when they follow through, ” wrote Circuit Judge Raymond Gruender for the appellate court.
“In this way, ” he continued, “Medtronic’s alleged manipulative conduct directly caused the biased clinical trial results that the market relied upon.”
The shareholders had appealed the district court’s dismissal of the case after the court ruled in Medtronic’s favor, determining that plaintiffs’ claims were time-barred. In the appellate brief, plaintiffs argued that they did not know, and through the exercise of reasonable diligence could not have known, of the facts forming the basis of their claims, particularly scienter [a legal term that refers to intent or knowledge of wrongdoing], more than two years before June, 2013, when the complaint was filed.
Medtronic argued that a reasonable plaintiff would have discovered the facts constituting the alleged violation no later than June 23, 2011. “Indeed, by June 23, 2011, Plaintiffs could have pleaded enough facts to allege all the elements of their current claim — a deceptive or manipulative act, with scienter, that affected the market, induced their reliance, and caused their injury. At least a dozen news articles revealed these facts prior to June 23, 2011.”
Medtronic further asserted that these articles did not merely raise suspicions, as the shareholders claim; “they reported facts about the payments to physicians, the more favorable results reported by those physicians, and the billions of dollars in sales at stake. Further, Plaintiffs’ case rests on many of the same facts as Minneapolis Firefighters’ Relief Association v. Medtronic, ” and that “[t]aken together, the articles and prior litigation revealed facts sufficient for Plaintiffs to state a claim prior to June 23, 2011.”
The circuit court disagreed and remanded the case back to the district court for further proceedings.
