By Brad Rosen, J.D.
An Eighth Circuit panel revived an investors’ class action suit against Medtronic finding that its scheme liability claim was not barred by the statute of limitations. Additionally, the court rejected Medtronic’s alternative argument that scheme liability was barred as a matter of law because the investors sought to hold it secondarily liable for the fraudulent statements of others. The court reversed the district court’s grant of summary judgment and remanded the matter for further proceedings (West Virginia Pipe Trades Health & Welfare Fund v. Medtronic, Inc., December 28, 2016, Gruender, R.).
Background. The investor appellants are retirement and investment funds who brought a consolidated class action for securities fraud against Medtronic and related parties in connection with the development, marketing and promotion of its INFUSE product. INFUSE causes the body to develop new bone tissue and is part of the company’s multi-billion dollar spinal line of products. Medtronic obtained FDA approval for INFUSE for certain uses in 2002. Medtronic sponsored the initial FDA clinical trials. Additionally, 13 articles supporting approval were authored by physician consultants who had financial interests in INFUSE.
In 2008, the FDA issued a public health notification warning of certain life threatening side effects associated with the off label use of INFUSE. A party unrelated to this matter brought a class action against Medtronic for its promotion of those uses. Thereafter, INFUSE has been under continued public scrutiny and controversy. In 2010, a number of articles appeared in the Milwaukee Journal Sentinel expressing concerns that that those physicians who had a financial ties to Medtronic were more likely to report favorable results and would withhold unfavorable developments. In letters to the editor, Physicians connected with Medtronic disputed those claims.
In 2011, the U.S. Senate Finance Committee launched an investigation into Medtronic and INFUSE. In October 2012, the committee issued its investigative report finding that Medtronic “was heavily involved in drafting, editing, and shaping the content of medical journal articles authored by its physician consultants who received significant amounts of money through royalties and consulting fees from Medtronic.” The investors filed suit on June 27, 2013 alleging several securities laws violations.
Appellate review and the statute of limitations. Ultimately, all claims were dismissed by the district court. The only claim brought on appeal was the claim for scheme liability. The primary question before the court was whether the investor appellants satisfied the applicable statute of limitation by bringing this case within “2 years after the discovery of the facts constituting the violation.” Accordingly, the threshold question for the court was whether the investors had discovered the operative facts prior to June 27, 2011. While acknowledging that appellants had reason to be suspicious of Medtronic’s conduct concerning INFUSE prior to June 27, 2011, the court held that a reasonably diligent plaintiff would not have discovered facts sufficient to prove and allege scienter based on public information prior to that time. Rather, the court concluded that facts rising to the level of scienter did not become apparent until October 2012 when the Senate Finance Committee issued it highly critical report of Medtronic.
Attack on secondary liability also rejected. Medtronic also asserted that as a matter of law, it could not be held secondarily liable for the misrepresentations or omissions of others. The appellate court rejected this contention as well, finding that the investors’ claims went well beyond mere misrepresentations or omission, and observed that “Medtronic shaped the content of medical journals by paying physicians … to induce their complicity in concealing adverse events and side effects associated with the use of INFUSE …” Finally, the court found that the investors relied on Medtronic’s deceptive conduct finding that “A company cannot instruct individuals to take a certain course of action, pay to induce them to do it, and then claim any causal connection is too remote when they follow through.”
The case is No. 15-3468.