JEFFREY T. MILLER, District Judge.
This is a purported securities fraud class action on behalf of persons who purchased NuVasive, Inc. securities between October 22, 2008, and July 30, 2013. Plaintiff alleges Defendants violated federal securities laws and pursues remedies under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and the regulations promulgated thereunder, including Rule 10b-5. Defendant NuVasive, Inc. ("NuVasive") and several of its officers, Defendants Alexis V. Lukianov, Kevin C. O'Boyle, and Michael J. Lambert (collectively, "Individual Defendants") have filed a motion to dismiss Plaintiff Mauss's amended complaint (the "FAC") under Federal Rule of Civil Procedure ("Rule") 12(b)(6) for failure to state a claim. (Dkt. No. 24). Plaintiff has filed an opposition to Defendants' motion, (Dkt. No. 26), and Defendants have filed their reply. Having carefully considered the parties' briefing, the court finds this matter suitable for resolution on the papers without oral argument pursuant to Civil Local Rule 7.1.d.1. The motion to dismiss is GRANTED WITH LEAVE TO AMEND for the reasons set forth below.
NuVasive designs, develops, and markets a range of products relating to the surgical treatment of spine disorders. In order to sustain and grow its business, the Plaintiff alleges NuVasive faces constant pressure to innovate, promote and market its products, establish relationships with surgeons and hospitals, and convince spine surgeons to choose its products over those of its competitors. NuVasive and other medical device companies are subject to an extensive regulatory framework intended to protect patients and government-funded health care programs, such as Medicare and Medicaid, from fraud and abuse. Thus, sales and marketing practices and other conduct that can be commonplace in other industries may be unacceptable or illegal when soliciting business that ultimately is paid for, in whole or in part, by governmental healthcare programs. Failure to adhere to these laws and regulations can result in civil and criminal penalties, or even exclusion from participation in governmental health care programs.
Because NuVasive and its customers — mainly hospitals and surgeons — rely primarily on third-party reimbursement for the earned surgical and monitoring fees, Plaintiff alleges exclusion from participation in programs, such as Medicare and Medicaid, can be fatal to its business. Consequently, if hospitals and physicians cannot recover adequate payments from programs like Medicare and Medicaid, either because NuVasive is ineligible to participate or because there is a disagreement about reimbursement, it is unlikely that they will continue to use NuVasive's products and services.
Plaintiff alleges that despite NuVasive's recognition that "[h]ealthcare fraud and abuse laws apply to our business," "Defendants determined to sustain [NuVasive's] revenues and expand its customer base by employing numerous, aggressive and questionably-ethical sales and marketing practices that constitute violations of federal and state laws, including but not limited to, the Anti-Kickback Statute, the False Claims Act, and other applicable healthcare fraud and abuse laws." (FAC ¶ 6). Generally, Plaintiff alleges Defendants engaged in three specific practices in violation of applicable healthcare fraud and abuse laws.
First, Plaintiff alleges Defendants "lured surgeons to utilize NuVasive products and services and encourage other surgeons to do the same by devising so-called educational and training programs and clinical studies, which included, among other things, all-expense paid trips to New York, San Diego, Puerto Rico, and other locations, first-class flights on private jets, tickets to Broadway shows and NFL games, expensive cocktail receptions and dinners, luxury hotel stays, and gift cards." (
Second, Plaintiff alleges Defendants violated applicable health care and abuse laws following losses in revenue in its monitoring business due to changes in rules for billing and coding its Intra-Operative Monitoring ("IOM") services.
Third, Plaintiff alleges that Defendants took aggressive action when coding disputes threatened to impact revenues for NuVasive's eXtreme Lateral Interbody Fusion® ("XLIF procedure"),
In various public filings, Plaintiff alleges Defendants indicated that the Anti-Kickback Statute "prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration, direct or indirect, in cash or in kind, in return for or to induce the referral of patients for items or services covered by Medicare, Medicaid and certain other governmental health programs." Despite knowing their conduct violated the law, Defendants nevertheless claimed in these filings that they "believe[d] that [their] operations materially compl[ied] with the antikickback statutes. . . ." Likewise, Plaintiff alleges Defendants knew that by compromising the independent judgment of physicians, promoting the use of equipment that was not medically necessary, and manipulating and exploiting loopholes in the billing coding system and encouraging customers to do the same, improper claims would be submitted for payment to Medicare and Medicaid in violation of the False Claims Act.
Ultimately, Plaintiff alleges the Defendants' thinly-veiled kickback scheme and deceptive billing practices caught the attention of regulators. On July 30, 2013, NuVasive disclosed in its Form 10-Q for its second quarter in 2013 that it had "received a federal administrative subpoena from the Office of the Inspector General of the U.S. Department of Health and Human Services (OIG) in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. The subpoena seeks discovery of documents for the period January 2007 through April 2013." After releasing this news, NuVasive securities declined $3.28 per share or over 12%, to close at $22.84 per share on July 31, 2013.
Throughout the applicable class period from October 22, 2008 through July 30, 2013, the FAC alleges Defendants violated federal securities laws and seeks remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 against Nuvasive and the Individual Defendants. In particular, Plaintiff alleges Defendants made false and/or misleading statements during conference calls with investors and in NuVasive's quarterly and annual reports. Plaintiff also alleges Defendants failed to disclose material adverse facts about NuVasive's business, operations, and prospects. Specifically, Defendants made false and/or misleading statements and/or failed to disclose that: (1) Defendants' education and training programs and expenses related thereto were a contrivance to disguise improper and illegal gifts, payments, and other remuneration to doctors in exchange for referrals of business; (2) Defendants utilized kickbacks, in the form of gifts, entertainment, improper commissions and consulting fees, and other remuneration, in order to induce doctors, including certain prominent physicians referred to by NuVasive insiders as high-end rollers, to utilize its products and services and to encourage other doctors to do the same; (3) Defendants employed improper sales and billing practices to sustain revenues, including submitting false claims to Medicare and Medicaid with knowledge that its customers ultimately would submit claims for reimbursement to governmental healthcare programs, including Medicare and Medicaid; (4) Defendants provided guidance to its customers as to how to code NuVasive products and procedures in order to take advantage of loopholes and maximize reimbursement by third party payers, including Medicare and Medicaid; (5) Defendants did not employ adequate internal controls to detect and prevent fraudulent and abusive marketing, sales, and billing practices so as to maintain compliance with applicable laws; (6) a substantial portion of NuVasive's earnings and revenues were thereby earned as a result of violations of the Anti-Kickback Statute, the False Claims Act, and other healthcare fraud statutes; and (7) as a result of Defendants' practices, there was a substantial risk that NuVasive would encounter regulatory scrutiny.
As a result of Defendants' misleading statements and omissions, and the precipitous decline in the market value of NuVasive's securities, the FAC alleges Plaintiff and other class members have suffered significant losses and damages. Based on these general allegations and more specific allegations provided in the FAC, Plaintiff asserts two causes of action: (1) Violations of Section 10(b) and Rule 10b-5 promulgated thereunder against all Defendants; and (2) Violations of Section 20(a) of the Securities Exchange Act against the individual Defendants.
On August 28, 2013, Danny Popov filed this class action against Defendants. On October 28, 2013, Movant Mauss brought a motion to appoint lead counsel and lead plaintiff pursuant to § 21D(a)(3)(B) of the Securities Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(a)(3)(B). On December 27, 2013, the court granted the motion to name Pomerantz Grossman Huffman Dahlstrom & Gross LLP as lead counsel with Glancy Binkow and Goldberg acting as liaison counsel and to appoint Mauss as lead plaintiff. Plaintiff Mauss filed the operative FAC on February 13, 2014.
A Rule 12(b)(6) motion to dismiss challenges the legal sufficiency of the pleadings.
Because Plaintiff has alleged securities fraud claims governed by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Plaintiff must also satisfy the heightened pleading standards set forth by Rule 9(b) of the Federal Rules of Civil Procedure and by the PSLRA, the latter of which has imposed "formidable pleading requirements to properly state a claim and avoid dismissal under Fed. R. Civ. P. 12(b)(6)."
Section 10(b) of the Exchange Act makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange ("SEC") ] Commission may prescribe . . . ." 15 U.S.C. § 78j(b). Pursuant to that section, the SEC promulgated Rule 10b-5, which makes it unlawful, among other things, "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading[]" in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5(b). Thus, to state a claim for private securities fraud under Section 10(b) and Rule 10b-5, a plaintiff must allege: "(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss."
Rule 9(b) requires a plaintiff alleging fraud or mistake to "state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b);
In addition to Rule 9(b)'s heightened pleading requirements for allegations of fraud, the PSLRA requires a plaintiff alleging securities fraud to "plead with particularity both falsity and scienter."
Defendants seek dismissal of Plaintiff's Section 10(b) claim on the basis that (1) Plaintiff has failed to plead falsity with regard to Defendants' alleged material misrepresentations and omissions as the FAC does not specify with particularity what statements are false and the reasons why they are, and (2) Plaintiff has failed to plead sufficient facts to establish scienter. Defendants also seek dismissal of Plaintiff's Section 20(A) claim for failure to establish an underlying securities violation through Section 10(b).
Defendants argue Plaintiff has failed to sufficiently allege falsity by identifying specific statements as misleading and then offering a specific reason why the statements are misleading.
"In the context of securities fraud, the term `puzzle pleading' refers to a pleading that requires a defendant and the court to `match up' the statements that form the basis of the plaintiff's claims with the reasons why those statements are misleading."
Moreover, Defendants argue it is unclear from the structure of the FAC whether Plaintiff challenges every aspect of the referenced documents as false or simply challenges certain statements made in those documents. This is largely because many of the statements quoted by Plaintiff do not appear false on their face. For example, the FAC quotes the following statement from NuVasive's SEC filings: "Healthcare fraud and abuse laws apply to our business if a customer submits a claim for an item or service that is reimbursed under Medicare, Medicaid or most other federally-funded health care programs." (FAC ¶¶111, 126). Without further explanation, it is unclear whether Plaintiff considers this statement to be false or why, particularly because Plaintiff's claims are entirely predicated upon the applicability of various healthcare fraud and abuse laws to NuVasive. Perhaps this statement was included in the FAC as a basis for establishing Defendants' scienter rather than as a false statement by Defendants. However, its inclusion in the "Materially False and Misleading Statements During the Class Period" creates confusion of the type often associated with "puzzle pleading." Because the FAC does not specifically link the individually challenged statements to the asserted reasons for their falsity, it is not immediately clear which Defendants are involved and how they are involved. As a result, the FAC's allegations regarding false misrepresentations and fraudulent omissions are insufficient under the PSLRA.
Plaintiff argues the FAC is sufficient because it sets forth four categories of false and misleading statements in addition to containing three separately-labeled and clearly-identifiable sections explaining the reasons why each category of statements is false and misleading. Plaintiff's argument, however, suggests a clarity that is not reflected in the FAC. In the FAC, Defendants' actual statements and the respective reasons for their falsity are not included within the same section of the 93-page FAC. Plaintiff describes the factual background suggesting Defendants' statements were false and misleading in paragraphs 50 through 102. Thereafter, Plaintiff details the actual statements made by Defendants in paragraphs 103-193, along with brief summaries of the many reasons the statements are allegedly false and misleading in paragraphs 112 and 194. By separating the statements from the alleged reasons for their falsity, Plaintiff has placed the burden on Defendants and the court to "match up" the lengthy allegations in order to consider the merits of Plaintiff's claims. Over a 93-page FAC, this would prove to be quite an onerous and speculative task, particularly given the possibility that individual statements may or may not implicate more than one of Plaintiff's many allegations regarding falsity.
With regard to the Individual Defendants, the FAC poses an additional problem. While Defendant Lukianov has served as NuVasive's Chief Executive Officer throughout the time period at issue in the FAC, Defendants O'Boyle and Lambert have not. (FAC ¶¶ 25-27). Rather, Defendant O'Boyle served as Executive Vice President and Chief Financial Officer for NuVasive up until November 2009 at which point Defendant Lambert took over as Chief Financial Officer on November 9, 2009. (Id.) As currently pled, the FAC suggests the Individual Defendants are equally liable for all of the allegedly misleading statements made from 2008 through 2012, without offering any basis for holding Defendant O'Boyle liable for statements made after his departure from NuVasive or for holding Defendant Lambert liable for statements made prior to his arrival.
Additionally, Plaintiff offers factual allegations from confidential witnesses to demonstrate the falsity of Defendants' statements as well as provide an inference of their scienter at the time the statements were made. However, the FAC rarely provides any dates associated with their factual allegations.
For these reasons, the FAC fails to allege false or misleading statements by the Defendants. However, as it may be possible for Plaintiff to resolve these deficiencies, the Court grants Plaintiff leave to amend the FAC. Should Plaintiff choose to do so, a further amended complaint should specifically identify the allegedly misleading statements and link each one to the facts that establish that the statement was false or misleading when made by the particular defendant.
In addition to alleging material misrepresentations or omissions of fact, Plaintiff must also allege scienter, a mental state embracing intent to deceive, manipulate, or defraud.
Despite the lengthy factual background provided in the FAC as supported by statements from numerous confidential witnesses, Plaintiff has failed to allege falsity of Defendants' statements with particularity because it is unclear from the FAC which statements are at issue, which factual allegations support a finding of falsity for each specific statement, and which Defendant allegedly made each statement. Plaintiff's allegations regarding Defendants' scienter at the time of making the statements suffer from the same deficiencies. "Where plaintiffs fail to plead falsity, a fortiori they have not established that defendants knew those statements were false."
Finally, Defendants challenge Plaintiff's second cause of action under section 20(a) of the Exchange Act, which provides that joint and several liability may be imposed on persons who directly or indirectly control a violator of the securities laws. 15 U.S.C. § 78t(a). To establish "control person" liability under section 20(a) of the Exchange Act, a plaintiff must show that a primary violation of section 10(b) was committed and that each individual defendant "directly or indirectly" controlled the violator.
For the reasons set forth above, Defendants motion to dismiss is GRANTED WITH LEAVE TO AMEND. Should Plaintiff wish to file a second amended complaint, he must do so within twenty days of this order.
