On March 30, 2018, the United States District Court for the
Southern District of New York dismissed a class action against
Halyard Health, Inc. ("Halyard") and its executives,
along with Kimberly-Clark Corporation ("Kimberly-Clark")
and its executives, that alleged securities fraud under Sections
10(b) and 20(a) of Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5. Jackson v.
Halyard Health Inc., et al., 1:16-cv-05093 (S.D.N.Y. Mar. 30,
2018). Halyard sells health and healthcare supplies and
solutions. Plaintiff alleged that he acquired Halyard
securities at inflated prices and suffered losses when Halyard
disclosed that one of its products, the MicroCool Breathable High
Performance Surgical Gown ("MicroCool"), intended to
protect healthcare providers from contact with highly infectious
diseases, was ineffective during the 2014 Ebola virus
outbreak. The Court dismissed the action on the ground that
the plaintiff failed to adequately plead facts sufficient to give
rise to a strong inference of scienter as required by the Private
Securities Litigation Reform Act of 1995.
Halyard was spun off from Kimberly-Clark in October 2014.
MicroCool was manufactured, marketed, and sold by Kimberly-Clark
from mid-2011 through the spin-off. Kimberly-Clark received
approval to sell MicroCool from the Food and Drug Administration
("FDA") through a 510(k) approval process. The
MicroCool 510(k) summary stated that MicroCool met the Level 4
requirements of the Association for the Advancement of Medical
Instrumentation ("AAMI") Liquid Barrier classification, a
medical safety standard that measures the resistance of materials
used in protective clothing to penetration by pathogens.
Plaintiff alleged that defendants were aware that MicroCool did not
consistently meet minimum standards required for AAMI Level 4
protection but nevertheless continued to market MicroCool as
protecting against the transmission of infectious diseases.
As an example, plaintiff proffered a test report by Intertek
Laboratory, dated December 27, 2012 (the "Intertek
Report"), showing that over 48 of approximately 96 gowns
failed the test. Plaintiff also cited two confidential
witnesses who confirmed the gowns failed to demonstrate the claimed
protection during independent testing. In May 2016, the news
program 60 Minutes featured a segment reporting that
Halyard and Kimberly-Clark "knowingly provided defective
[MicroCool] surgical gowns to U.S. workers at the height of the
Ebola crisis." Halyard's stock fell 14.4 percent
following the broadcast.
The Court held that the complaint did not adequately allege facts
giving rise to a strong inference of scienter. The Court
first held that the complaint failed to allege that defendants had
a motive to commit fraud because the stock sales plaintiff pointed
to as irregular were not unusual. The Court then held that
plaintiff did not specifically identify any defendant who received
the 2012 report from Intertek Laboratory (or any other
substantiated report of issues with MicroCool), or identify anyone
whose scienter could be imputed to the company who did receive the
report. The Court further held that plaintiff failed to point
to anything that would suggest any defendant acted with an
"extreme departure from the standards of ordinary care"
by not knowing about problems with MicroCool. The Court also
rejected confidential witnesses allegations as insufficient because
they referred only to what "senior management" or
"senior executives" knew or learned and did not add
detail to the conclusory allegations of scienter otherwise included
in the complaint.
The Court's decision stands as a reminder that arguments
regarding failures to plead scienter sufficiently often prove
powerful at the motion to dismiss stage.
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