LYNCH, Chief Judge.
In this securities class action, plaintiff Mississippi Public Employees' Retirement System alleges that senior management of Boston Scientific Corporation (BSC), a publicly traded manufacturer of medical devices in which plaintiff invested, withheld material information and made misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5.
In an earlier opinion, we reversed a Rule 12(b)(6) dismissal of plaintiff's complaint, finding that the inference of scienter advanced by the plaintiff was at least as cogent and compelling as the contrary inference, satisfying the "strong inference" pleading standard of the Private Securities Litigation Reform Act. See Miss. Pub. Emps.' Ret. Sys. v. Boston Scientific Corp. (BSC I), 523 F.3d 75 (1st Cir.2008). After the district court permitted discovery, the defendants filed a motion for summary judgment, testing whether the evidence, and not merely the allegations, withstood scrutiny. The district court found that the evidence did not and granted defendants' motion. See In re Boston Sci. Corp. Sec. Litig., 708 F.Supp.2d 110 (D.Mass.2010). The plaintiff appealed, and as is common in litigation, the shape of the case has changed since we last reviewed it.
Plaintiff's central claim is that defendants were aware that BSC would likely need to implement a significant recall of its TAXUS Express 2 Paclitaxel-Eluting Coronary Stent System ("Taxus"), and that through affirmative statements and omissions, defendants intentionally or recklessly misled the investing public about the existence, cause, and degree of this risk. As to omissions, plaintiff argues that starting in November 2003, defendants chose not to disclose or implement a manufacturing
The district court found that on the undisputed facts, drawing all inferences in plaintiff's favor, no reasonable jury could find sufficient evidence of three key elements of securities fraud.
We assume some familiarity with our prior opinion and focus on the facts and claims that are key to this appeal.
In treating coronary artery disease (i.e., clogged arteries), physicians often use stents in angioplasty procedures as an alternative to open heart surgery. A stent delivery system consists of three central components: (1) a catheter, which is a long hollow plastic tube used to guide the stent along the inside of the arteries, (2) a balloon that is laser welded to the end of the catheter, and (3) the stent itself, which is "crimped" (or collapsed) on the deflated balloon. During an implant procedure, the balloon is inflated, which expands and deploys the stent and clears the blockage. After the stent is deployed and apposed to the artery wall, the balloon is deflated and withdrawn.
BSC makes two different stent systems. There is the Taxus system, on which plaintiff's claims rest, and the Express
We begin with an overview of the Express
BSC began selling the Express
In early 2003, BSC received 11 reports of complaints that the balloon on Express
BSC initiated a Site Level Correction Action (SLCA) at Maple Grove led by Paul Weiss, and a corresponding Corrective and Preventative Action (CAPA) at Galway led by Niamh O'Byrne. SLCA and CAPA investigations are commenced to investigate issues that are systemic or could disrupt business operations. As part of their investigations, Paul Weiss and Niamh O'Byrne opened a Product Inquiry Report (PIR). A PIR is used to investigate and make recommendations for in-house actions or field actions to BSC's Field Action Committee (FAC), which has ultimate responsibility for instituting field actions such as recalls. Although the multiple-batch no-deflate complaints were about Express
On May 15, 2003, the PIR team issued a report on the primary cause of the no-deflate problem. The team found that the problem was due to a condition known as "focal necking" or "focal neckdown," where the "distal outer" (the portion of the catheter that is welded to the balloon) becomes elongated or stretched, preventing the withdrawal of the fluid used to inflate the balloon. The team further found that this focal necking had two primary causes: (1) excessive heat at the laser bond of the balloon and the distal outer, which could be caused by a laser that was too hot or misaligned, and (2) a subsequent excessive tensile force exerted in the area of the bond, which could occur either during or after manufacturing.
While the team could not identify the specific cause of the tensile force, it was able to identify several in-house actions to prevent or lessen the incidence of focal necking. To address issues with the laser weld, it recommended reducing the laser energy settings, increasing the magnification of the alignment camera, and retraining operators. For the same reason, the team also recommended using only distal outers manufactured in Maple Grove, which were found to be more robust than those manufactured in Galway, and launching an investigation to understand why the Galway distal outers appeared more prone to focal necking.
The PIR team also reported on the frequency of the no-deflate issue. For Express
The team was asked at a May 22 meeting to determine the scope of the no-deflate issue in case a recall was needed, and it found no factors that could be used to identify some devices as being higher-risk. It considered data on numerous parameters of the focally necked devices—including laser weld, elongation, type of resin used, and extrusions—but found no correlations from which to scope the problem. On May 23, the team issued a PIR with the same conclusions and recommendations that it had reached in the May 15 report.
On May 27, the FAC accepted the PIR team's recommendations and conclusions. It agreed that a recall was not warranted at the time, finding that "the product in the field was within all of its established specifications, the frequency of issues reported [from] the field were extremely low, and the consequences, while potentially severe in some cases are not outside those expected with this type of procedure." The Chairman of the FAC, Paul Sandman, later testified that the FAC did not institute a recall because "there weren't any factors that indicated that these failures were caused by a manufacturing problem."
The FAC also directed that the PIR be "clarified to state that the issue involves units within specification, and indistinguishable from a visual standpoint, being subjected in the field to a level of tensile force exceeding that for which the product was designed." It is unclear whether this was meant to supplement, or replace, the PIR's statement that the tensile event may have also occurred during manufacturing.
In implementing the PIR team's suggestions, BSC sought to harmonize the robustness of the stent systems produced at Galway with those produced at Maple Grove. The changes focused on the properties of the distal outers and the proximal welding process. As to the proximal welding process, BSC increased the magnification used to line up the stent system components, making it identical with that in Maple Grove, and retrained the Galway operators on the proper alignment of the laser weld and the proper handling of the catheters to avoid tensile forces on the product. These changes were implemented in May. As to the quality of the distal outers, Galway immediately switched to using Maple Grove distal outers in its production,
Because none of these changes affected device design or performance specification, BSC determined that prior FDA approval was not required, and implemented them
Although BSC determined that a recall was not necessary, it nevertheless decided to further investigate the no-deflate issue. Internal correspondence from this period shows that the no-deflate issue was seen by some in the company as "urgent" and a "severe compliance risk." So in Galway, a "six sigma" team was initiated on May 28, 2003 to investigate the cause of focal necking.
Over the next four months, the Maple Grove team developed a proposal that focused on the elongation properties of the distal outer. Elongation served as an "indirect measure of the molecular orientation and crystallinity of the polymer material" used in the distal outer. By setting a length that the distal outer could be stretched before breaking, BSC aimed to ensure that each of its distal outers had material properties that would "increase its robustness to subsequent thermal processing that occurs when the outer is laser welded to the balloon component of the delivery system."
On October 3, 2003, BSC filed a supplement to its Express
Finally, BSC notified the FDA in this supplement of all of the May 2003 corrective actions that it had taken, explaining its determination that these changes did not require FDA approval. It also reported on the success of these measures, noting that the fifteen no-deflate complaints for Express
The FDA approved BSC's request on October 24, 2003.
At the same time that BSC was implementing the elongation specification, the six sigma team was completing its report on the laser shift. It found that by shifting the location of the laser used to bond the balloon to the distal outer, from .4 mm
This validation work was assigned to Kevin Griffin, a Process Development Engineer at Maple Grove. On September 2, Griffin created a plan estimating that a proposal could be submitted to the FDA in November. However, he stated even at this time that the plan was "a bit optimistic."
At this point, as of the beginning of the Class Period in November, there had been only two no-deflate complaints for the tens of thousands of Express
During this time period, BSC was also working to have Taxus approved for sale in the United States, after having distributed it outside the United States since February 2003. It established a "Taxus PMA Council," which oversaw the filing of five separate modules to the FDA between February and June 2003 and continued to meet throughout the summer to monitor the PMA progress and amendments.
On October 7, 2003, the Taxus PMA Council decided that no additional manufacturing changes to the Taxus PMA would be submitted after October 31 unless they were considered "critical" and approved by the Council, as these changes could jeopardize the FDA's review of the Taxus PMA. The Taxus Council was aware that a separate team of engineers was also working on a laser shift for the Express
On November 20, 2003, the first day of the Class Period, a company press release announced that the FDA's circulatory devices
It is important to note that the units being manufactured for the U.S. launch incorporated the October 2003 distal outer elongation specification, as well as a new manufacturing process known as "cone puffing," which had not been used on the units produced for sale outside the United States. Cone puffing involves inflating one cone of the balloon so that it goes over one end of the stent. This technique was implemented to better secure the stent's placement on the device, preventing the stent from becoming dislodged during implantation. There is no evidence that anyone at this point suspected or had reason to suspect that cone puffing could contribute to focal necking.
In the following months, research on validating the laser shift continued. A December 24, 2003 memo from Kevin Griffin reported that although the team had "learned a lot about what affects focal necking, there is still uncertainty due to test method repeatability, other known contributors (like heat shrink) that are not well understood yet, and the underlying polymer science is still being investigated." He stated that on an "aggressive" research time frame, validation could be completed by February 20, 2004.
On March 4, 2004, the FDA approved Taxus for sale in the United States, and within the first couple of weeks following the U.S. launch, Boston Scientific received about a dozen no-deflate complaints on Taxus (but not Express
While the team was ultimately unable to identify any such lots, the co-chair of this team issued a memo on March 23 suggesting that BSC add a criterion for the minimum outer diameter ("minOD") of the distal outer at the location of the laser weld to eliminate the subjective nature of prior visual inspections, and add an in-process inspection to measure the minOD to ensure that it met the criterion. The memo also noted that based on simulations with surgeons, it appeared that surgeons were not exerting the degree of tensile force on the devices that would be necessary to cause the necking. It concluded: "We don't know where in our processing the tensile forces are occurring to cause the focal neck.... The loading of the balloon protector after folding and after cone puffing has been highly suspected, but we have not been able to draw [a] direct correlation to focal necking."
Two days later, on March 25, BSC received notice that one hospital in which a no-deflate had required surgical removal of the stent decided to cease using Taxus at all of its facilities until it had determined whether this was an isolated incident or a product defect.
At the end of March, the design, testing, and validation work on the laser shift for both Express
As the minOD was determined to be important independent of the laser shift, BSC also added a "reticle inspection" to measure the minOD, which did not require FDA approval and was implemented on April 28-29. The reticle inspection involved a magnification tool with guidelines to assist in measuring the bond width, because bonds of a certain minimum width were found to be robust against focal necking regardless of the location of the laser.
On April 16, 2004, the FDA contacted BSC to schedule a teleconference and to express concern regarding a type of complaint regarding Taxus that BSC had not yet addressed to the FDA in any of its PMA filings. The FDA had received a number of reports in which the balloon deflated but was difficult to remove, in some cases because the balloon was stuck to the distal end of the stent.
This issue, known as "sticky stent," was different from the no-deflate problem and was caused by the fact that the Taxus stent, unlike the Express
During BSC's first quarter analyst conference call on April 20, 2004, Paul LaViolette, Senior Vice President at BSC, was asked about the sticky stent issue. An analyst with Bank of America Securities asked if LaViolette had "any thoughts on why we are hearing this occur in the U.S., while over the last 12 months we didn't hear much about this occurring in Europe." LaViolette replied that BSC had received similar complaints internationally when Taxus launched in 2003, but that once physicians became accustomed to using Taxus, "essentially all complaint activity subsided." He said that "if you look at international utilization today, and if you look at complaints for any kind of removal difficulty, there are virtually no ongoing complaints," and that this "confirms for us what we understand about this particular issue, which is that there are some things to get used to." He also stated that were "no discussions related to any kind of field action."
On April 24, the Boston Globe reported that BSC had received 27 reports of difficulty implanting Taxus stents. The article differentiated between the sticky stent and no-deflate problems, reporting: "A Boston Scientific spokesman said that in most of the reported cases the balloons ... seemed to stick to the coating of the stent, creating a potential blockage. In about six of the cases the balloon wouldn't deflate, or would only deflate slowly." It also reported:
On April 26, 2004, The Wall Street Journal also reported on these 27 reports of difficulties with Taxus:
The article also reported that "[c]opies of 21 of these reports reviewed by The Wall Street Journal showed that most of the complaints appeared to be minor annoyances, requiring the doctor to fiddle a bit to remove or deflate the balloon."
On April 27, 2004, Goldman Sachs released a report reiterating its buy rating for BSC, explaining that it had "conducted a review of the most recently available adverse event reports (MDR's) for the Taxus stent in the FDA database" and "conclude[d] that the nature of the adverse events is within the scope of what can be expected in the early stages of a new interventional product launch." It reported that "the current rate of adverse events on a worldwide basis is extremely rare at 0.01% or 11.8 per 100,000 cases" and explained that although "there is a tendency for under-reporting of events ... we believe that the event rate is so low that even with under-reporting there is no significant issue." The report stated that Goldman Sachs had been in "extensive conversations" with BSC management, and that management was "consistent in its stance that the performance reports are far and few between, and not unexpected in the early stages of a broad U.S. launch."
In the meantime, progress continued on the laser weld shift, and on May 5, the FDA approved the Special PMA Supplement for Taxus and Express
The day that the FDA approved these changes, they were reported in a Merrill Lynch analyst report stating that BSC had "a manufacturing fix to address the issue of `no deflates' submitted to the FDA to further reduce dependence on operator technique." Two days later, the Boston Globe ran a story that covered both this manufacturing solution to the no-deflate problem, as well as the sticky stent issue. As to the no-deflate problem, the article stated:
As the article makes clear, Donovan differentiated between the no-deflate and sticky stent issues, explaining that the manufacturing change is "meant to address the problem of balloons failing to deflate," while the company "has no plans for manufacturing changes to address the other problem." The article reported that the company "believes the withdrawal problems are probably because of doctors' unfamiliarity with the new system."
On May 25, 2004, BSC learned that a patient had died due to complications from
While the PIR update was ongoing, a June 22 Dow Jones Newswires article about Taxus reported that some doctors had experienced "a `stickiness' that makes it somewhat difficult to withdraw auxiliary equipment after the stent is inserted," and that there had been "a smattering of reports of patients undergoing emergency surgery to deal with complications that arose during procedures with the stent." The article stated: "These issues will work themselves out once physicians get used to the product, the company says, and it recently made a manufacturing change to deal with one problem doctors cited." The article quoted Paul Donovan, spokesman for Boston Scientific, as saying: "We had a similar experience in Europe where there was a learning curve early on and some initial problems, and then people got used to the product and the number of complaints subsided and the issue went away." The article then went on to more clearly differentiate between the no-deflate issue and the stickiness issue, stating: "Problems doctors have reported with Taxus include trouble getting the balloon to deflate and difficulty withdrawing the balloon catheter. Boston Scientific is making a change in its manufacturing process that will result in the balloons deflating more easily, Donovan said." The article also quoted one doctor as saying that he had not seen any Taxus devices that would not deflate, but that he experienced stickiness 60-70% of the time. It quoted multiple doctors saying that with practice, the stickiness issue was not a problem. The article also reported Donovan as saying that "[t]here won't be a recall" and describing the number of complaints as "tiny."
On the evening of June 22, the PIR team investigating the multiple-complaint lot of Taxus issued a PIR reporting three field complaints and four "out-of-box" failures (where the devices had become focally necked during manufacturing) for this lot. It reported that an examination of all remaining Taxus devices in the warehouse from lots manufactured adjacent to this lot found no problems. The PIR team recommended recalling the one lot. This recommendation was sent to the Field Action Committee, which after conducting its review, decided on June 30 to institute the recall.
On June 30, 2004, an email from BSC's Regulatory Affairs Vice President Russell Felkey reported that he had spoken with someone at the FDA who inquired "why BSC isn't conducting a field action to remove product remaining in the field that was manufactured prior to our PMA Supplement that included corrective action for no-deflate." Felkey explained that he had told the FDA that the company was prepared to discuss this possibility fully, but that he had not "disclose[d] the pending recall since we haven't fully completed the approval process."
On July 1, BSC advised the FDA that it would be recalling the Maple Grove lot identified in the June 22 PIR. Later that day, it received a report from Galway that it also had a lot with multiple out-of-box failures. BSC informed the FDA of this, and on July 2, it recalled both lots.
During a July 2 conference call with analysts, CEO Jim Tobin explained that the recall affected only "two batches out of about 1,200 ... that we've produced so far," emphasizing "we've learned a lot from this ... that will help us avoid a repeat as we go forward." When asked if
He explained that the complaints were from lots produced before the introduction of the laser shift and that there had not yet been any complaints from devices manufactured after the manufacturing change, but emphasized that this "doesn't mean we won't." Management made clear that there had only been 20,000 of the newer devices shipped, so that if these lots "had a problem at the same rate we've been having, you would have expected maybe zero or one, two at the most. We haven't had any. What does that tell you? Nothing, because the sample is too small."
When asked how many pre-manufacturing change lots were in circulation, Tobin stated: "I don't know the number of lots, but the number of units is probably in the 100,000 range—somewhere around there." He stated that he did not believe that the limited recall was "a tip of the iceberg sort of situation, but it is what it is." Tobin explained: "We're looking at those batches for which we have complaints, which is 25 batches, or some number like that, out of 1,223. Of those 25, these two we're not happy with and we're pulling them back. The analysis is not complete, so it is possible that you would find another batch or two, but unlikely, I would say."
In discussing the laser shift, Vice President and CFO Larry Best
Market analysts labeled the July 2 recall a minor event. A July 5 Goldman Sachs report stated: "In our opinion, the recall is a minor issue, which should have a negligible impact on the company's market position.... Based on management's comments, we believe that the issue has already been resolved and the recall is a remnant of a prior manufacturing process." It explained:
Similar details and evaluations were reported in a Harris Nesbitt analyst report on July 6.
Following the recall, BSC continued its investigation, as Jim Tobin stated it would in the July 2 conference call. Examining all devices remaining in inventory from any batch that had even a single no-deflate complaint, a team at Maple Grove made two discoveries. First, it found that by using laser pixel software that recorded detailed information regarding the precise location of the laser for each batch of catheters, it could identify lots in which a "laser event" affecting the laser alignment, as measured by pixel shifts, made the laser bonds more susceptible to tensile forces. Second, it found that the cone puffing process—in particular, the sliding of a protector over the stent prior to puffing—could create significant tensile forces on the distal outer when the balloon was atypically large, and that cone puffing was a "large differentiator between [Taxus] and Express
Based on these two discoveries, BSC instituted another recall on July 16. This recall focused on devices that had been produced prior to the implementation of the reticle inspection in April 2004. Using laser pixel and cone puffing data for the pre-reticle inspection lots at Maple Grove, it was able to identify eight lots at risk for focal necking. In Galway, however, BSC did not have the laser software being piloted in Maple Grove, so as a precaution, it decided to recall all Taxus devices that had been manufactured at Galway prior to the introduction of the reticle inspection.
The recall covered 85,000 of the more than 500,000 Taxus devices that it had shipped.
Following the announcement of the expanded recall, BSC's stock price dropped. Plaintiff claims the investing shareholders
Our review of a grant of summary judgment is de novo. City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 756 (1st Cir. 2011). Summary judgment is required when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).
For plaintiff to prevail on its claim that defendants violated Section 10(b) and Rule 10b-5, it must prove six elements: "(1) a material misrepresentation or omission; (2) scienter, or a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation." Waters Corp., 632 F.3d at 756. This case turns on the second of these requirements, scienter, and the question of whether plaintiff has produced sufficient competent evidence that defendants acted with scienter to survive their motion for summary judgment.
Scienter is an intention "to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); see also SEC v. Ficken, 546 F.3d 45, 47-48 (1st Cir.2008). Under this circuit's precedent, proving scienter requires "a showing of either conscious intent to defraud or `a high degree of recklessness.'" ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir.2008) (quoting Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002)). Recklessness in this context means "a highly unreasonable omission, involving not merely simple, or even inexcusable[] negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it." SEC v. Fife, 311 F.3d 1, 9-10 (1st Cir.2002) (quoting Greebel v. FTP Software, Inc., 194 F.3d 185, 198 (1st Cir.1999)) (internal quotation marks omitted).
Although this case turns on scienter, it is important to identify the related requirement of materiality. See BSC I, 523 F.3d at 87 ("Knowingly omitting material information is probative, although not determinative, of scienter."). As the Supreme Court recently stated in Matrixx Initiatives, Inc. v. Siracusano, ___ U.S. ___, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011), the "materiality requirement is satisfied when there is `a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.'" Id. at 1318 (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978,
The Court explained that it was "`careful not to set too low a standard of materiality,' for fear that management would `bury the shareholders in an avalanche of trivial information.'" Id. (quoting Basic, 485 U.S. at 231, 108 S.Ct. 978). But at the same time, the Court rejected the use of a bright line rule that "reports of adverse events associated with a pharmaceutical company's products cannot be material absent a sufficient number of such reports to establish a statistically significant risk that the product is in fact causing the events." Id. at 1318-19. The Court explained that because "medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well." Id. at 1321.
The Court cautioned, however, that it was not holding that all adverse events must be disclosed. It stressed that Rule 10b-5 and Section 10(b) "do not create an affirmative duty to disclose any and all material information." Id. It explained that "disclosure is required under these provisions only when necessary `to make... statements made, in the light of the circumstances under which they were made, not misleading.'" Id. (quoting 17 C.F.R. § 240.10b-5(b)); see also Basic, 485 U.S. at 239 n. 17, 108 S.Ct. 978 ("Silence, absent a duty to disclose, is not misleading under Rule 10b-5."). The Court explained that "[e]ven with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market." Matrixx, 131 S.Ct. at 1322.
We understand plaintiff's case to rest in general on the claim that the defendants were aware of a risk that no-deflate problems with U.S. Taxus devices would require a significant recall; that the company's statements and omissions misled the market about the nature, cause, and degree of this risk; and that these facts support an inference that defendants acted with scienter. Specifically, plaintiff argues that a reasonable inference of defendants' scienter is established by evidence that on three issues, defendants had "knowledge of facts or access to information contradicting their public statements." Evidence that "defendants published statements when they knew facts suggesting the statements were inaccurate or misleadingly incomplete is classic evidence of scienter." Aldridge, 284 F.3d at 83. Here, however, plaintiff's evidence considered individually and as a whole makes clear that no reasonable jury could find that defendants recklessly misled the market about a significant risk of Taxus no-deflates or the need for a recall, much less that they intentionally did so.
Plaintiff argues that defendants' failure to implement the planned laser shift in November recklessly created a significant risk that the newly launched U.S. Taxus devices would need to be recalled and is evidence that defendants "acted with scienter in not disclosing the existence of the fix" sooner than they did.
At its core, this argument rests on the premise that the laser shift was not only the ultimate solution to the problem of focal necking, but also the criterion that defined whether or not a device needed to be recalled. This premise is flawed for a number of reasons. First, there is no
The July 16, 2004 decision about which lots of Taxus to recall was not based on whether they had been produced using the new laser alignment. Rather, the decision was based on whether the lots had been produced before or after the introduction of the reticle inspection at the end of April. The recall covered all Galway-manufactured devices that were manufactured before this, and none that were manufactured after it. Likewise, no devices manufactured in Maple Grove after this were recalled. While BSC was able to limit the recall of Maple Grove lots manufactured pre-reticle inspection by using manufacturing data not available in Galway, the introduction of the reticle inspection was nevertheless the defining moment in time. Therefore, although the laser shift was a manufacturing solution to focal necking that eliminated the need for some of BSC's other solutions, it was not determinative of whether a product needed to be recalled.
Plaintiff nevertheless contends that defendants were required to disclose the laser shift sooner than they did. It claims that BSC "was prepared to submit its change to the FDA by November 2003," but that "the process was aborted" by the Taxus PMA Council in order to keep the Taxus release on schedule, thereby misleading the market about the risk that it would be introducing a new product that had a manufacturing defect. It argues that "the decision to build inventory without the permanent fix in place made the recalls not just foreseeable, but probable."
There is no evidence in the record that supports this claim. The evidence is that as of November 2003, BSC had not validated the .8 mm laser shift and was not prepared to submit this documentation to the FDA, as it needed to do before implementing the change. Although plaintiff is correct that on September 2, the engineer leading the laser shift team, Kevin Griffin, "proposed a validation plan for the laser shift that would be completed and submitted to the FDA by November 7, 2003," the email to which Griffin attached this plan also stated that it was "a bit optimistic." Likewise, while six sigma team leader Peter Delmer testified that the laser shift had been "confirmed" as a manufacturing solution to focal necking by October 2003, he also testified that at this point, "an awful lot more work would have to be done in order to implement" the manufacturing change. Further, the additional work that Griffin and Delmer said was required was in fact done. In October, the team had only recommended shifting the laser from.4 mm to .6 mm, rather than the .8 mm
Moreover, Griffin's validation plan was created for Express
Moreover, no inference of scienter can be drawn from the fact that BSC management decided at the end of November that it did not immediately need to disclose or implement the laser shift. At this point, there had been only two no-deflate complaints for the tens of thousands of Express
Plaintiff also claims that later, "in the March-May 2004 time period, no Defendant affirmatively disclosed any ... information" about "the approval of manufacturing changes" and "the fact that some pre-manufacturing change inventory remained in the field." However, it is clear that the market knew that BSC was implementing a manufacturing change to address no-deflates on May 5, when the FDA approved the Special PMA Supplement requesting permission to make the change. The FDA approval, which was publicly available on its website, informed the market that BSC was making a "modification of a manufacturing process to address complaints related to failure of the delivery system balloon to properly deflate following stent deployment." The change was also reported later that day in a Merrill Lynch analyst report, which stated that the company was implementing "a manufacturing fix to address the issue of `no deflates.'" It would have been clear to the market that the stents produced prior to this date did not incorporate this modification.
Plaintiff also claims that from April 2004 through the July 16 recall, BSC misled and
Plaintiff claims that Senior Vice President Paul LaViolette misrepresented the cause of problems with the stent system, and lulled the market, when he said during the first quarter analyst conference call on April 20, 2004 that "essentially all complaint activity subsided" as physicians became accustomed to using Taxus. This statement was in response to a specific question in which an analyst asked about the sticky stent problem (not the no-deflate problem) and why there had been no reports of such a problem in Europe over the past 12 months. LaViolette explained that there had in fact been sticky stent complaints when Taxus was first launched in Europe, but that these complaints subsided as physicians became accustomed to using Taxus. He did not say that physician technique was the cause of the no-deflate problem.
Plaintiff also focuses on statements by BSC spokesman Paul Donovan, who was reported in a Boston Globe article on April 24 as saying that "a few doctors in Europe reported similar problems when Taxus was initially approved for use there last year, but the complaints ended as doctors became more comfortable with the stents." This was true as to the sticky stent problem, and as the article reported, Donovan differentiated between the two problems. In discussing the 27 complaints that had been received, he explained that "in most of the reported cases the balloons ... seemed to stick to the coating on the stent, creating a potential blockage. In about six of the cases the balloon wouldn't deflate, or would only deflate slowly."
It is true that not every article was as clear in differentiating between the 27 complaints, but no inference of scienter can be drawn from this fact. Plaintiff cites an April 26 Wall Street Journal article that stated:
Even so, the article went on to state that "[c]opies of 21 of these reports reviewed by The Wall Street Journal showed that most of the complaints appeared to be minor annoyances, requiring the doctor to fiddle a bit to remove or deflate the balloon," apparently referring to the same break-down of complaints reported in the Boston Globe article. The fact that this Wall Street Journal article was not as clear as the Boston Globe in reporting that there were two different issues—no-deflate and sticky stent—and that physician familiarity solved the latter, does not support a claim that defendants recklessly misled the market as to the cause of the complaints. This is especially so given that reports and statements issued over the next month clearly noted the different problems and solutions.
On May 5, the market had clear notice that BSC was not attributing the no-deflate problem to physician mishandling when the FDA announced approval of BSC's request for a "modification of a
That physician experience and technique could solve complaints of stent stickiness continued to be clearly reported to the market in the following month. On June 22, a Dow Jones Newswires article stated: "Problems doctors have reported with Taxus include trouble getting the balloon to deflate and difficulty withdrawing the balloon catheter." As to the former, it noted that "Boston Scientific is making a change in its manufacturing process that will result in the balloons deflating more easily." It quoted one doctor as saying that he had not seen any Taxus stent systems that would not deflate, but that he experienced stickiness with them 60-70% of the time. It also quoted multiple doctors saying that with practice, the stickiness issue was not a problem.
Given that market analysts and BSC management regularly differentiated between the two problems and their causes, there is no basis for plaintiff's contention that "[e]ven on July 2," after the first recall, "market analysts continued to believe that doctors' techniques were the problem behind no-deflate." In fact, the July 2, 2004 Merrill Lynch analyst report
Plaintiff claims that the July recalls were foreseeable and that BSC should have disclosed the risk sooner. They state that "a recall of Taxus was not merely in the universe of risks recognized by Defendants, it was a certain risk known to the Defendants, thus transforming this case from one of mere negligence to one of deliberate indifference." Plaintiff's proposed inference of scienter is not only based on what defendants failed to say about the introduction of the laser shift, discussed above, but also on what they did say about the risk of recall. Plaintiff argues that defendants affirmatively misled the market about this risk.
Plaintiff claims that starting in April 2004, BSC told the market "that there would be no recall of devices manufactured prior to the implementation of the FDA-approved manufacturing change," and that "[e]ven on June 22, the date the Company had determined a recall was necessary, the Company continued to make statements that there would be no recall." The evidence does not support these claims.
Plaintiff points to the fact that a June 22 Dow Jones Newswires article reported Paul Donovan as saying there would not be a recall, while a June 22 PIR recommended the recall of one batch of Taxus devices manufactured in Maple Grove. However, the PIR was not completed until the evening of June 22, while the article was published in the morning. It is also unclear from the article when Donovan made this statement. Further, standard company protocol required that PIR recommendations be evaluated and approved by the FAC, and the FAC did not make its final decision to institute the recall until about a week later on June 30.
Plaintiff also argues that CEO Jim Tobin misrepresented the known risk of a second recall when, during the analyst call on July 2, he said that he did not believe that the recall was a "tip of the iceberg sort of situation." Plaintiff argues that this statement is inconsistent with an email that Tobin sent earlier in the day in which he mentioned that he was "not totally confident" that everything was "under control," expressing concern that he had just learned that twenty more lots were being tested in Galway.
The two statements are not inconsistent and do not support an inference of scienter. Subsequent emails made clear that the company was assessing the risk of receiving additional complaints on the twenty lots for which there had been only one complaint, and was not in fact testing any of these devices in these lots. Further, plaintiff fails to note that Tobin expressly discussed this during the conference call. In response to a question about future recalls, Tobin explained: "We're looking at those batches for which we have complaints, which is 25 batches, or some number like that, out of 1,223. Of those
During the July 2 conference call, Tobin even expressly identified the risk that there could also be complaints for the lots produced after the introduction of the laser shift. He explained that BSC had not received any complaints about devices manufactured after the introduction of the laser shift, but emphasized that this "doesn't mean we won't." This discussion with analysts made clear that because only 20,000 post-laser shift devices had shipped, and the historical rate of error was very low, the fact that there had been no complaints so far meant "[n]othing, because the sample is too small." Defendants were clear about the risk of another small recall.
There is no evidence that management had reason to suspect a recall on the order of the second recall, much less that they recklessly or intentionally misled the market about it, such as to permit an inference of scienter. Rather, the evidence is that it was not until after July 2 that the company recognized the significance of the factors that provided the basis for the second recall. Defendants testified that it was not until after the first recall that the company recognized that the cone puffing process was creating tensile forces on the devices significant enough to cause focal-necking, and plaintiff fails to identify any evidence that draws this testimony into question.
Plaintiff argues that defendants' account of when they learned of the role of cone puffing is contradicted by an internal report circulated on March 23, 2004 stating that the "loading of the balloon protector after folding and after cone puffing has been highly suspected" as a source of "high tensile forces during processing." But plaintiff fails to note that the report then states "but we have not been able to draw direct correlation to focal necking" and concludes that additional research "activities need to be started to assess the tensile forces that are being applied at various processes (i.e. balloon folding & cone puffing)."
Plaintiff also argues that defendants' account of the role of cone puffing in no-deflates and the recall is contradicted by an email from BSC engineer Ken Pucel on August 24, 2004 stating that there was "too much uncertainty" to draw a definitive conclusion about whether cone puffing was causing the rate-increase for Taxus no-deflates. However, Pucel's email also stated that "there is good reason to suspect conepuffing," noting that Galway's no-deflate complaint rate increased from 15 ppm to 240 ppm after the introduction of cone puffing and concluding that the company "need[ed] to have a six sigma black belt further analyze the data." Even if this August email indicated what defendants knew in early July, rather than late August, it would do nothing to undermine
In considering defendants' motion for summary judgment, we must look at the record in the light most favorable to plaintiff and indulge all reasonable inferences in its favor. Evans Cabinet Corp. v. Kitchen Int'l, Inc., 593 F.3d 135, 140 (1st Cir.2010). Plaintiff, however, must nonetheless "put forth specific facts to support the conclusion that a triable issue subsists." Martínez-Rodríguez v. Guevara, 597 F.3d 414, 419 (1st Cir.2010). Evidence that "is merely colorable or is not significantly probative" cannot defeat the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). With respect to each issue on which plaintiff has the burden of proof at trial, it must "present definite, competent evidence to rebut the motion," Martínez-Rodríguez, 597 F.3d at 419 (quoting Vineberg v. Bissonnette, 548 F.3d 50, 56 (1st Cir.2008)) (internal quotation marks omitted), and as our review of the facts and plaintiff's claims makes clear, plaintiff has failed to produce evidence that would support a reasonable inference that defendants acted with scienter.
A statement or omission is only actionable if, at the relevant time, defendants knew, or were reckless in not knowing, of material information that they were obligated to disclose and acted intentionally or recklessly in failing to disclose it. See N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 45 (1st Cir.2008); see also ACA Fin., 512 F.3d at 62 (statements were not materially misleading where there was "nothing ... to establish that the defendants were aware of facts, at the time they made their predictions, that would have made those predictions unreasonable"); BSC I, 523 F.3d at 86 ("Securities actions raise questions of what corporate managers knew and when they knew it.").
As to the laser shift, the key issue is not whether defendants were aware that the change was being contemplated, as plaintiff suggests, but rather whether they
A company does not commit securities fraud merely by failing to disclose all non-public material information that it possesses. ACA Fin., 512 F.3d at 61. Disclosure is required only when necessary "to make ... statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b); Matrixx, 131 S.Ct. at 1321. Given the statements and disclosures that defendants did make, they had no obligation to disclose the fact that they were working on an improvement that would reduce the very small number of no-deflate complaints that they received, and of which the market was aware. Cf. Geffon v. Micrion Corp., 249 F.3d 29, 37 (1st Cir.2001) (finding that although the defendant "could have provided still more information" regarding an alleged omission, "its failure to do so does not mean that the omission was purposely deceptive in a manner actionable under Rule 10b-5").
The investing public was not only aware of the no-deflate complaints, but also of the risk of recall, which defendants openly discussed. "To the extent that the plaintiff's complaint is that the precise degree of risk was not stated, that failure is not sufficient to have rendered the statements misleading." Hill v. Gozani, 638 F.3d 40, 60 (1st Cir.2011) (emphasis added).
While a statement of risk "does not insulate the speaker from liability ... neither does it create liability simply because it does not disclose, at the level of detail the plaintiffs request in retrospect, all of the factors that contribute to the risk assessment." Id.; see also Backman, 910 F.2d at 16 (company disclosure that product was being sold below cost need not say how much below or that sales were below expectations). As we stated in Hill, "where the level of risk is unknown and the existence of a risk is disclosed, we shall hesitate to conclude that disclosure is misleading merely because it did not state that the risk was `serious.'" Hill, 638 F.3d at 60.
Our conclusion as to scienter does not change when we consider plaintiff's insider trading claims. Cf. Waters Corp., 632 F.3d at 760-62; Biogen IDEC, 537 F.3d at 55-57. Insider trading cannot establish scienter on its own, but rather can only do so in combination with other evidence. BSC I, 523 F.3d at 92. No such evidence exists here. While there were stock trades during this period, they did not suggest there was trading based on insider information. We agree with the district court that the nature and circumstances of defendants' trades would not in any event support an inference of scienter for the reasons the court identified. See In re Boston Sci. Corp., 708 F.Supp.2d at 126-27.
Because plaintiff failed to produce evidence that would support a reasonable inference
In addition to appealing the district court's grant of defendants' motion for summary judgment, plaintiff appeals the court's denial of its motion to compel production of certain documents that defendants claimed were privileged. Almost all of these documents were generated in connection with an internal company investigation of the July 2004 recalls that was instituted in late August 2004 at the request of BSC's general counsel, Paul Sandman, in response to inquiries by the SEC and DOJ. The district court reviewed these documents in camera. Concluding that they were protected by either or both attorney-client privilege and work product privilege, it denied plaintiff's motion to compel production.
When an appeal concerns "a claim of privilege, the standard of review depends on the precise issue being litigated." In re Keeper of Records (Grand Jury Subpoena Addressed to XYZ Corp.), 348 F.3d 16, 21 (1st Cir.2003). We review a district court's evidentiary decisions for abuse of discretion, its underlying findings of fact for clear error, and questions of law de novo. Id. The fact that the district court did not provide a detailed account of its reasoning does not change the standard. Id. at 21-22.
Attorney-client privilege protects communications made in confidence by a client and a client's employees to an attorney, acting as an attorney, for the purpose of obtaining legal advice.
Plaintiff argues that accidentally disclosed documents from BSC's internal "Recall Investigation Working Group" (RIWG) reveal that its investigation was a post-mortem on the recall to help the company avoid similar problems in the future and was unrelated to the provision of legal advice. The fact that communications between the RIWG and BSC's attorneys focused on ways to prevent similar mistakes in the future does not, however, remove them from attorney-client privilege. On the contrary, this type
Plaintiff also argues that defendants "funneled" documents unrelated to legal advice through attorneys to "cloak[] the documents with a claim of privilege," citing accidentally disclosed documents showing that RIWG members were instructed to and did send written communication to each other through BSC's general counsel and in-house counsel. In taking steps to protect attorney-client privilege—such as telling the RIWG that all written communication should go through BSC's attorneys and that RIWG members should not directly write to each other—BSC's general counsel did not manufacture privilege but rather protected it when the communications were made for the purpose of providing requested legal advice. Cf. Upjohn Co., 449 U.S. at 394-95, 101 S.Ct. 677 (employees were given "explicit instructions" by company management to treat communications as "highly confidential" by not sharing them with others during an investigation directed by in-house counsel).
There is nothing in the documents that plaintiff identifies or in the confidential documents that we have reviewed that provides a basis for reversing the district court's denial of plaintiff's motion to compel their production.
We affirm entry of judgment for defendants. Costs are awarded to defendants.
