District Of Minnesota Certifies Securities Fraud Class Action But Narrows The End Of Putative Class Period To The Date Of The Initial Corrective Disclosure

by Shearman & Sterling LLP
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On January 30, 2018, Judge John R. Tunheim of the United States District Court for the District of Minnesota granted class certification in a consolidated securities fraud class action against Medtronic and certain of its officers and employees.  West Virginia Pipe Trades Health & Welfare Fund v. Medtronic, Inc., et al., No. 13-cv-01686-JRT-FLN (D. Minn. Jan. 30, 2018).  Plaintiffs—institutional investors who purchased Medtronic stock during the proposed class period—allege that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by manipulating early clinical studies of INFUSE, an alternative to replacement bone-tissue graft, by knowingly concealing adverse side effects observed in clinical trials, and by failing to sufficiently disclose that it paid physician authors a total of $210 million to publish positive articles about INFUSE in medical journals.  Plaintiffs allege that Medtronic’s deception artificially inflated the company’s stock price, causing a large stock drop in August 2011, when the truth was revealed through a corrective disclosure.  Plaintiffs sought to certify a class of all purchasers of Medtronic stock between September 8, 2010 and August 3, 2011.  The Court certified the class, but shortened the class period end date to June 3, 2011, which is the date of the initial corrective disclosure.

The Court initially noted that other than the length of the putative class period, defendants did not contest plaintiffs’ assertions of numerosity, commonality, typicality, and adequacy of representation of the class.  Turning to whether questions of law or fact common to the proposed class predominate over questions affecting individual class members, the Court focused on the reliance element of a Section 10(b) claim, which requires, among other things, plaintiffs to establish that they relied on a misstatement or omission by defendants.  The Court considered whether the Supreme Court’s holding in Affiliated Ute—in which the Supreme Court concluded that a presumption of reliance should be afforded to plaintiffs in cases involving an alleged material omission or failure to disclose—applied to Medtronic’s failure to disclose the extent of its payments to physician authors.  The Court pointed to the Supreme Court’s holding that “all that is necessary [for the presumption of reliance to apply] is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of [the purchasing] decision.”  Finding that the thrust of the alleged scheme liability is omissions, not affirmative statements, the Court held that while some journal articles had disclosed that the authors had received outside funding “in excess of $10,000 from Medtronic,” that disclosure—in light of Medtronic’s total payment of $210 million to authors—did “not even begin to capture the size or scope” of the truth of the payments.  Accordingly, the Court concluded that plaintiffs were entitled to a presumption of reliance.

Having concluded that class questions predominated and that a class action was superior to other available methods for adjudicating this action, the Court turned to the length of the proposed class period.  The Court highlighted that in a securities class action, the class period ends when a corrective disclosure or curative information “is publicly announced or otherwise effectively disseminated to the market,” although district courts have reached differing conclusions as to whether a non-alleged event may constitute a corrective disclosure at the class certification stage or should instead only be considered on summary judgment.  The Court cited the Supreme Court’s conclusion in Amgen that merits questions may be considered at class certification to the extent they are relevant to determining whether class certification prerequisites are satisfied, and determined that corrective disclosures are “essential to defining the class itself” because they mark the end of the class period.  Moreover, citing the Supreme Court’s Halliburton II decision and various district court decisions throughout the country, the Court observed that courts “have regularly examined the date of corrective disclosure at the class-certification stage in order to decide whether the class period should be modified.”

The Court then turned to the three possible dates for corrective disclosure proposed by the parties.  Having found that the “payments to physicians are the crux of Plaintiffs’ scheme-liability claims,” the Court adopted defendants’ contention that the corrective disclosure occurred on June 28, 2011, which is the earliest of the three possible dates and when The Spine Journal published an article disclosing the payments made by Medtronic to the physician authors.  The Court emphasized that as of the date of The Spine Journal publication, “a reasonable investor would have known not to rely on the assumption that these studies were conducted without significant financial incentives.”  The Court also noted that the two analysts’ reports published on July 5, 2011 provided the same facts as—and even referred to—The Spine Journal publication, and therefore “did not provide any new information to the market or investors.”  The Court similarly found that Medtronic’s August 3, 2011 announcement that it would publicly release INFUSE data for Yale researchers to conduct a review was not a corrective disclosure because “it did not reveal any new hidden information to the public; it only reveal[ed] Medtronic’s prospective intent to salvage the viability of INFUSE.”  The Court thus certified the class, but ended the class period on June 28, 2011.

This decision serves as a reminder of the presumption of reliance at the class certification stage pursuant to Affiliated Ute in omission-based securities fraud cases, and the challenges defendants face if their disclosures amount to alleged omissions rather than affirmative misstatements.  However, the decision also demonstrates an opportunity for defendants at the class certification stage to seek to shorten the proposed class period based on earlier corrective disclosures, which potentially could reduce defendants’ overall damages exposure.  

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