On September 15, 2021, Judge Stanley R. Chesler of the United
States District Court for the District of New Jersey dismissed a
putative class action against a medical device manufacturer (the
"Company") and certain of its officers alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. Industriens Pensionsforsikring A/S v.
Becton Dickinson & Co., No. 20-cv-02155 (D.N.J. Sept. 15,
2021). Plaintiff alleged the Company made misleading
statements concerning regulatory approval of one of its medical
devices, its regulatory compliance program, and financial
projections. The Court dismissed plaintiff's claims
without prejudice in an unpublished opinion confirming the many
challenges to pleading securities fraud claims based on alleged
misrepresentations regarding U.S. Food and Drug Administration
("FDA") approval processes.
The Company's infusion pumps—external medical devices controlled by software that deliver fluids to a patient—received approval from the FDA in 1995. Over the years, the infusion pumps were the subject of numerous safety concerns and recalls that prompted periodic changes to the software controlling the pumps. On October 25, 2017, the FDA released guidance clarifying when software changes made to existing devices require FDA approval. In November 2017, the Company determined that an application for changes to its infusion pump products to the FDA was required and submitted one. After learning that the FDA was not going to accept its November 2017 application, including because there had been previous updates without regulatory approval, the Company withdrew the application. Following an FDA inspection of the Company's devices in late 2018, the Company concluded that its prior software modifications required but never received FDA approval. The Company promptly filed a "catch-up" application covering the unapproved changes. On February 6, 2020, the Company disclosed that the FDA required the Company to obtain clearance for historical software changes and that the Company was required to halt all sales of its infusion pumps.
In granting the motion to dismiss, the Court described "the heart" of plaintiff's allegations as the alleged failure to disclose either that the FDA required or would require an application be filed and approved before the Company could continue to market and sell infusion pumps or that the Company already determined approval was required. According to plaintiff, the infusion products suffered from "pervasive" defects that the Company tried to fix without FDA clearance, which placed the products at imminent risk of adverse FDA action.
Consistent with a long line of precedent assessing alleged misstatements by medical device and pharmaceutical companies, the Court emphasized that defendants did not have any obligation to predict whether the FDA would conclude that approval was required. While plaintiff acknowledged as much, it alleged that defendants subjectively believed an application was required and that the failure to disclose this belief was a misleading omission. The Court rejected this, however, holding that the allegations did not support the contention and that there was no allegation the FDA had made clear to the Company that new applications were required.
With respect to the specific misstatements, the Court first rejected plaintiff's assertion that the Company's description of its software changes as "upgrades," "enhancements," and "improvements" was misleading because they in fact were remediations to address threats to patient safety. The Court held that plaintiff's "disagreement with the terms [used by the Company] amounts to mere pedantry." The Court also noted that the statements must be evaluated in context of all available information and that investors would have been aware there were a number of problems with the infusion product that created obvious potential risks of regulatory action.
Second, the Court held that warnings by the Company that failure to comply with FDA requirements might impact the sale of products was not misleading based on the allegation that the risk had already materialized. According to the Court, the disclosed risk was an agency determination of non-compliance, which had not happened as of the time of the risk disclosure. In a similar vein, the Court rejected plaintiff's argument that the Company's statement regarding "substantial progress in its compliance efforts" was misleading because "no reasonable investor could rely on such a simple and generic assertion about [the Company's] compliance efforts."
Third, the Court rejected plaintiff's claims based on the Company's projected revenue because the challenged statements were forward-looking, and the Company was "not obligated to predict that the FDA would take regulatory action." The Court also held that facts pleaded in the Complaint did not suffice to allege the Company lacked a reasonable basis for the projections.
Finally, the Court rejected plaintiff's allegations as to purported misstatements in a product recall notice that advised users that the Company would undertake "comprehensive education and support" concerning software issues and patch "an upcoming software release." The Court held that plaintiff failed to plead facts indicating "that the devices that had been delivered and installed were or became unusable."
The Court also held that the Complaint failed to plead facts giving rise to a strong inference of scienter as required by the PSLRA. First, the Court rejected as "conclusory" the allegation that the individual defendants "knew or had access to information reflecting" that the infusion pump devices did not meet FDA requirements. Allegations attributed to confidential witnesses could not be stretched far enough to reach the individual defendants, according to the Court.
As additional support for an inference of scienter, plaintiff invoked the "core operations doctrine," pointing to defendants' positions as high-ranking executives and the importance of the infusion products to the Company's business, and pointed to stock sales by two of the individual defendants. The Court noted that allegations based on the core operations doctrine are routinely rejected and that, in any event, the infusion products were not a key driver of the Company's total revenue. With respect to the stock sales, the Court acknowledged that stock sales pursuant to a 10b5-1 plan entered into during the alleged class period did not "immunize those sales from impacting the scienter analysis." However, the individual defendants sold only 14% and 18% of their holdings and continued to maintain significant holdings. The Court also held that the timing of the sales was not unusual and that the lack of stock sales by all individual defendants cut against the inference that there was a "coordinated attempt to defraud the shareholders."
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