GORDON J. QUIST, District Judge.
Table of Contents
I. BACKGROUND .................................................................815
FDA Regulation .........................................................816
The Warning Letters and Stryker's Quality Systems Improvement Plan .....816
The Trident Hip Recall .................................................818
Stryker's Earnings Record ..............................................818
Plaintiffs'Fraud Claim .................................................819
II. DISCUSSION .................................................................819
A. Pleading Standards .....................................................819
B. Section 10(b) and Rule 10b-5 Claims ....................................820
C. Lack of Actionable Statements or Omissions .............................821
1. Operational Results ................................................823
2. February 28, 2007 Compliance Statement .............................824
3. July 19, 2007 Conference Call ......................................826
4. Daily Device Bulletin ..............................................827
5. January 22, 2008, Press Release ....................................828
6. Puffery and Vague Statements .......................................829
7. Forward Looking-Statements .........................................829
D. Scienter ...............................................................832
E. Loss Causation .........................................................835
F. Plaintiffs'§ 20(a) Claims .........................................835
III. CONCLUSION .................................................................835
Plaintiffs, on behalf of themselves and a class of purchasers of the common stock of Stryker Corporation, allege that Stryker and two of its officers, Stephen P. MacMillan and Dean H. Bergy, committed securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Plaintiffs' basic premise is that Stryker achieved its longstanding and highly-touted 20% annual earnings growth goal by systematically cutting corners on quality and regulatory compliance spending, which exposed Stryker to unnecessary risks of product recalls and hid millions of dollars in regulatory compliance costs. Plaintiffs allege that once Food and Drug Administration (FDA) inspections began to
Defendants have moved to dismiss Plaintiffs' Amended Complaint (AC) pursuant to Fed. R. Civ. 12(b)(6) and 9(b) and the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. §§ 78u-4, 78u-5. In this Court's judgment, one might mistakenly but reasonably conclude that the Seventh Circuit had this case in mind in an opinion issued more than twenty years ago:
DiLeo v. Ernst & Young, 901 F.2d 624, 627-28 (7th Cir.1990). Because Plaintiffs allege, at most, poor management decisions, see In re Eaton Vance Corp. Secs. Litig., 206 F.Supp.2d 142, 152 (D.Mass. 2002) (noting that "an accusation of poor management ... is not the subject of federal securities laws"), the Court will grant Defendants' motion and dismiss the Amended Complaint.
Plaintiffs seek to represent a class of investors who purchased the publicly-traded common stock of Stryker during the period of January 25, 2007, through November 13, 2008. Defendant Stryker is a medical technology company headquartered in Kalamazoo, Michigan. (AC ¶¶ 2, 22.) The company produces a broad array of medical equipment and devices, which are divided into two reportable business segments, Orthopaedic Implants and Medical/Surgical (MedSurg) Equipment. (Id. ¶ 55.) The Orthopaedic Implant segment includes surgical implant devices such as hips and knees, spinal and craniomaxillofacial implant systems, and bone cement products, and accounted for 57% of Stryker's sales as of the end of the company's 2006 fiscal year. (Stryker 2007 10-K at 5-6, Defs.' Ex. 14.)
As a medical device manufacturer, Stryker is heavily regulated by the FDA pursuant to the Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act and the Safe Medical Devices Act of 1990. (AC ¶ 60.) The FDA's Quality System Regulations provide standards for Stryker's product design and manufacturing processes, require the maintenance of certain records, and provide for FDA inspections of the company's facilities. (Id.) These regulations include 21 C.F.R. Part 820, which sets forth the FDA's current Good Manufacturing Practices (cGMP). Following an inspection, the FDA may issue a Form 483 if it observes conditions indicating regulatory violations. (Id. ¶ 61.) According to the FDA,
FDA Form 483 Frequently Asked Questions http://www.fda.gov/ICECI/EnforcementActions/ucm256377.htm (last visited Mar. 30, 2012); see also Pub. Pension Fund Group v. KV Pharm. Co., 705 F.Supp.2d 1088, 1100 (E.D.Mo.2010) (noting that the first page of every Form 483 states that it lists observations made during an inspection that do not constitute final agency action). If a manufacturer's responses and/or corrective measures are inadequate, the FDA may issue a warning letter. (AC ¶ 67.)
During the class period, Stryker received warning letters for three of its facilities-its orthopaedic implant manufacturing facility in Cork, Ireland; its orthopaedic implant manufacturing facility in Mahwah, New Jersey; and its Biotech division in Hopkinton, Massachusetts. (Id. ¶¶ 5, 7, 9, 66, 69-73, 75, 77-81.) According to MacMillan during a conference call, the FDA inspections and warning letters resulted from the FDA's increased scrutiny of the medical device industry as a whole beginning in 2007. (5/8/08 Conference Call Tr. at 15, Defs.' Ex. 8; AC ¶¶ 143, 148, 169.)
The FDA issued the Cork warning letter on March 15, 2007, following an inspection that occurred in late 2006. In connection with that inspection, the FDA issued a Form 483 on November 3, 2006, prior to the beginning of the class period. (AC ¶¶ 65, 66.) The warning letter found that the orthopaedic devices manufactured at Cork were adulterated within the meaning of the Food, Drug and Cosmetic Act and that the methods, facilities, and controls used in manufacturing, packing, storing were not in conformity with cGMP. Among other things, the warning letter cited Stryker for failing to establish and maintain adequate procedures for implementing corrective and preventative actions and for controlling nonconforming products. Finally, the warning letter noted Stryker's failure to complete certain remedial measures by January 20, 2007. (Id. ¶ 66.) Stryker did not disclose the warning letter to investors, but the FDA published a redacted version on its website on June 19, 2007. (Id.)
Stryker received the Biotech division warning letter on or about April 25, 2008, and issued a press release on May 2, 2008, announcing its receipt of the letter. (Id. ¶¶ 77-78.) The press release stated that the warning letter was "`related to quality systems and compliance issues' including `Stryker Biotech's handling of a past clinical study, its quality system including medical device reporting procedures, and the integrity of hospital Institutional Review Board ... documentation used to approve implantation of Humanitarian Use Devices.'"
In January 2008, during Stryker's quarterly earnings conference call, MacMillan announced Stryker's Quality System Improvement Plan (QSIP), a new initiative for investing in and improving Stryker's quality and compliance systems. (1./23/08 Conference Call Tr. at 6.) The focus of the QSIP was to "increase accountability for quality," "[e]stablish[] new company-wide standard operating procedures for quality processes that will be implemented consistently at each division," and "[r]eorganize[] quality functions at the plant, division and corporate levels and increase[] third-party monitoring at all levels." (02/05/08 Press Release, Defs.' Ex. 7.) An additional component of the program "[t]ied a significant portion of senior management's compensation to meeting quality improvement measures." (Id.) Regarding the QSIP, MacMillan explained during the January conference call that:
(1/23/08 Conference Call Tr. at 18.) Also during the conference call, Bergy confirmed
On January 22, 2008, Stryker announced a recall of Trident PSL and Acetabular Cup hip implants manufactured at the Cork facility. Stryker initiated the recall based on a deviation from Stryker's internal specifications and processes. (1/22/08 Press Release, Defs.' Ex. 2.) In the quarterly earnings conference call the following day, MacMillan opined that the recall would be resolved in a matter of weeks rather than months and indicated that the product was already back in production. (AC ¶ 163.) As it turns out, however, the company continued to feel the logistical impact of the recall for many months. During the quarterly earnings conference call on April 17, 2008, Bergy disclosed that the recall had resulted in a revenue loss of $15 to $20 million in the first quarter. MacMillan explained that although the company was "able to get back into production very quickly," they had "underestimated the complexity ... [of] pull[ing] stuff out of every market in the world, get[ting] it back in with the right sizing, the right fits and the right number of sets." (Id. ¶ 170 (bolding omitted).) In fact, as late as October 16, 2008, Stryker revealed that hip sales were still declining due to the January 2008 Trident hip recall. (Id. ¶ 185.)
For a number of years, Stryker maintained a goal of growing earnings per share (EPS) 20% annually. As of 2007, Stryker had met that goal every year since going public in 1979, with the exception of 1999-the year after it purchased Pfizer's Howmedica orthopaedic business for $1.9 billion. (Id. ¶¶ 3, 56.) As of 2008, Stryker was one of 20 Fortune 500 companies that had achieved double-digit revenue growth seven straight years. (5/8/08 Analyst Meeting Tr. at 4.)
During Stryker's quarterly earnings conference call on January 25, 2007, Defendant MacMillan confirmed that for its 2006 fiscal year Stryker achieved its sixth consecutive year of double-digit sales growth and EPS growth of approximately 21%. (Id. ¶ 127.) In a press release issued earlier that day, and during a meeting with securities analysts on February 6, 2007, Stryker and Defendant MacMillan projected another year of double-digit sales growth and 20% EPS growth. (Id. ¶¶ 126, 130.) In fact, Stryker attained double-digit sales growth and a 20% increase in EPS for 2007. (Id. ¶ 158.)
In a press release issued on January 23, 2008, and later that same day during a conference call, Stryker and MacMillan announced full-year guidance for 2008 of double-digit sales growth and 20% EPS
On December 19, 2008, after the end of the class period, Stryker issued a press release revising its 2008 guidance as a result of lower-than-expected fourth quarter sales, particularly due to a rapid contraction of hospital capital budgets, which depressed demand for Stryker's MedSurg Equipment products. (12/19/08 Press Release at 3, Defs.' Ex. 20.) The press release further cited changes in foreign currency exchange rates and a restructuring change relating to simplification of Stryker's Japanese distribution business. (Id.) Consequently, adjusted diluted net earnings per share for 2008 were expected to be in the range of $2.82 to $2.84, an increase of 18%. (Id.)
Plaintiffs allege that Defendants fraudulently maintained a scheme of achieving 20% EPS growth cutting corners on quality control spending, effectively deferring hundreds of millions of dollars in quality and compliance costs and exposing the company to unnecessary risks due to product recalls. Plaintiffs support their allegations with statements from 17 confidential witnesses (CWs), who provide anecdotal observations of incidents of poor quality standards and disregard for regulatory compliance requirements at Stryker's Cork, Mahwah, Biotech division, and other facilities. (AC ¶¶ 111-125.) Plaintiffs allege that Stryker hid the extent of these quality and compliance deficiencies, allowing the per share price to artificially inflate to a class period high of $76.48 on December 26, 2007. (Id. ¶ 13.) Plaintiffs contend that the price of Stryker's stock declined during the class period as Defendants slowly revealed the truth about Stryker's pervasive quality problems and systematic non-compliance with FDA regulations, allowing high-level company insiders to sell hundreds of thousands of their personally-owned Stryker stock, generating proceeds of more than $312 million. (Id. ¶ 14.)
In ruling on a motion to dismiss, a court must "construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff." In re Travel Agent Comm'n Antitrust Litig., 583 F.3d 896, 903 (6th Cir.2009) (internal
In a fraud case such as this, the plaintiff's complaint must meet the more rigorous pleading standards of Rule 9(b). Pursuant to Fed.R.Civ.P. 9(b), "[i]n allegations of fraud ... a party must state with particularity the circumstances constituting fraud...." The Sixth Circuit interprets Rule 9(b) as requiring a plaintiff to "allege the time, place, and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud." Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir.1993).
The PSLRA imposes additional pleading requirements upon securities fraud plaintiffs. Section 21D(b)(1) provides that securities plaintiffs must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). In addition, with regard to the element of scienter, Section 21D(b)(2) of the PSLRA provides that "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (italics added). If either one of these requirements is not met, "the court shall, on the motion of any defendant, dismiss the complaint...." 15 U.S.C. § 78u-4(b)(3). See PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 682 (6th Cir.2004) (noting that "not only must the complaint make particular factual allegations, but the inference of scienter which those allegations generate must be strong").
Plaintiffs allege that Defendants violated Section 10(b) of the Exchange Act and Rule 10b-5, which prohibit "fraudulent, material misstatements or omissions in connection with the sale or purchase of a security."
Defendants' motion to dismiss focuses upon three aspects of Plaintiffs' claims. First, Defendants contend that none of the statements Plaintiffs cite as false or misleading are actionable. Second, Defendants argue that the allegations in the Amended Complaint fail to raise a strong inference of scienter, as required by the PSLRA. Finally, Defendants contend that the Amended Complaint fails to allege loss causation.
A misrepresentation or omission is actionable under the securities laws only if it pertains to material information and the defendant had a duty to disclose. City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669 (6th Cir.2005). In general, a corporation "does not commit securities fraud merely by failing to disclose all nonpublic material information in its possession." Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir.1996), superceded by statute on other grounds as recognized in Greebel v. FTP Software, Inc., 194 F.3d 185, 197 (1st Cir.1999); see also Murphy v. Sofamor Danek Group, Inc. (In re Sofamor Danek Group, Inc.), 123 F.3d 394, 400 (6th Cir.1997) ("Before liability for non-disclosure can attach, the defendant must have violated an affirmative duty of disclosure." (citing Basic Inc. v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 987 n. 17, 99 L.Ed.2d 194 (1988))). Moreover, "a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact." In re Time Warner, Inc. Sec. Litig., 9 F.3d 259 (2d Cir.1993). "As a general matter, an affirmative duty [to disclose] arises only when there is insider trading, a statute requiring disclosure, or an inaccurate, incomplete, or misleading prior disclosure." Winer Family Trust v. Queen, 503 F.3d 319, 329 (3d Cir.2007) (citing Oran v. Stafford, 226 F.3d 275, 285-86 (3d Cir.2000)); accord City of Monroe, 399 F.3d at 669 (listing instances giving rise to a duty of
Two other general principles are relevant to liability for some of the statements or omissions alleged in this case. First, the Sixth Circuit distinguishes between "hard" and "soft" information for purposes of materiality. "Hard information is typically historical information or other factual information that is objectively verifiable." Id. at 401 (internal quotations omitted). In contrast, "soft" information "includes predictions and matters of opinion." Id. Such information must be disclosed only if it is "`virtually as certain as hard facts.'" Id. at 402 (quoting Starkman v. Marathon Oil Co., 772 F.2d 231, 241 (6th Cir.1985)). In Sofamor, the defendant was a medical technology company that derived substantial revenues from spinal fusion devices. Although the defendant acknowledged in its disclosures that the FDA had not approved its products for use in the pedicle portion of the vertebra and said that it did not encourage the practice by physicians, the FDA issued warning letters to the defendant and other companies for supporting medical education programs supporting the use of screws in the pedicle of the spine. Id. at 397-98. The plaintiffs alleged that the sales and earnings figures the defendant reported for the class period were "incomplete and misleading because they attributed the company's success to such things as increased sales volume without properly explaining how the sales were being achieved." Id. at 400. In particular, the plaintiffs alleged that the defendant should have disclosed that a substantial portion of its increased sales were due to its illegal promotion of its products for unapproved use in the pedicle area of the spine. The Sixth Circuit held that the defendant's reported sales and earnings data were "`hard' numbers, the accuracy of which has never been challenged by the plaintiffs." Id. at 401 (footnote omitted). Thus, the court said that the numbers must be taken as true. As for the legality of the defendant's promotion techniques, the court concluded that such information was "soft information"-it was a matter of opinion that was not objectively verifiable. Id. at 401-02. More recently, the Sixth Circuit, applying the hard/soft information dichotomy, has held that a company's statements of "legal compliance" constitute "soft" information because companies generally "have no duty to opine about the legality of their own actions." Ind. State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935, 942 (6th Cir.2009). Thus, a defendant's "general statements that it complied with state law and regulations and had a policy of complying with the law" are not actionable in absence of sufficient allegations demonstrating that the statement was "made with knowledge of its falsity." Id. at 945-46 (footnote omitted); see also Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 575 (6th Cir.2008) (stating that the company had no duty to disclose that certain payments created a voidable contract because information referred to "the consequences of the payment, not the payment itself," and such "consequences are the type of predictions and soft information that do not give rise to a duty of disclosure").
Second, statements that constitute "immaterial puffery" are not actionable because such "loosely optimistic statements [are] insufficiently specific for a reasonable investor to `find them important to the total mix of information available.'" City of Monroe, 399 F.3d at 671 (quoting In re Ford Motor Co. Sec. Litig., Class Action, 381 F.3d 563, 570-71 (6th
In a number of instances, Plaintiffs allege that Defendants' statements regarding their operational results for 2006, 2007, and the first quarter of 2008 were false and misleading. (AC ¶¶ 126-27, 130, 142-44, 147-48, 158, 160, 168, 170.) These statements concern historical facts based on "hard" numbers, which Plaintiffs do not challenge as being false or inaccurate. In fact, Plaintiffs concede that they were "correctly stated." (Pls.' Mem. in Opp'n at 16.) Plaintiffs contend, however, that such information was misleading because Defendants failed to disclose certain information, including that: (1) the company's financial results were achieved by cutting corners on quality controls and regulatory compliance spending; (2) the company's Cork, Mahwah, and Biotech division facilities were in material noncompliance with FDA regulations regarding cGMP; (3) the company had received a warning letter for the Cork facility and a Form 483 for the Mahwah facility, and the FDA's scrutiny of Stryker's regulatory compliance extended beyond orthopaedic manufacturing facilities into Stryker's biotech division; and (4) the impact of the Trident hip recall and the extent of QSIP spending that would be required to remediate the company's regulatory violations were greater than what Defendants represented. (See, e.g., AC ¶¶ 128, 135, 145, 150, 158, 164.) Contrary to Plaintiffs' assertion, accurately reported financial information is not rendered misleading by a failure to disclose conditions that might render future results less favorable. See Sofamor Danek, 123 F.3d at 401 n. 4 ("It is clear that a violation of federal securities laws cannot be premised upon a company's disclosure of accurate historical data. The disclosure of accurate historical data does not become misleading if less favorable results might be predictable by the company in the future."); McDonald v. Kinder-Morgan, Inc., 287 F.3d 992, 998 (10th Cir.2002) ("It is well-established that the accurate reporting of historic successes does not give rise to a duty to further disclose contingencies that might alter the revenue picture in the future."); Stratte-McClure v. Stanley, 784 F.Supp.2d 373, 385 (S.D.N.Y.2011) (noting that "reports of current results do not constitute assurances about future results"). Because information concerning Stryker's alleged regulatory noncompliance, receipt of warning letters, costs associated with the Trident hip recall and QSIP spending, and the like, did not render Stryker's financial results misleading, Stryker had no duty to
Plaintiffs allege that Stryker made a false and misleading statement in its Form 10-K filed on February 28, 2007, when it stated: "The Company believes that the manufacturing and quality control procedures it employs meet the requirements of [the FDA's Quality System] regulations." (AC ¶ 132.) Plaintiffs contend that this statement was materially false or misleading because as of the date it was made: (1) Defendants had been on notice of "continual" patient complaints concerning Stryker's hip implants for at least two years; (2) the FDA had issued a Form 483 to Stryker in November of 2006 identifying serious quality control deficiencies and contamination problems at the Cork facility; and (3) Stryker had missed the FDA's January 20, 2007, deadline to remediate certain problems outlined in the Form 483, which resulted in the issuance of the March 15, 2008, warning letter. (Pl.'s Mem. in Opp'n at 9-10.)
The Court rejects Plaintiffs' argument because the compliance statement at issue in the instant case is similar to, but even more equivocal than, the defendants' "legal compliance" statements the Sixth Circuit held inactionable in Omnicare, supra. The company in Omnicare made several general statements that it complied with federal and state law and that it had a policy of complying with the laws. Omnicare, 583 F.3d at 941, 945. The court held that the statements were inactionable for two reasons. First, it noted that the plaintiffs failed to show that Omnicare made the statement with knowledge of its falsity. It noted that only one of the confidential witness statements the plaintiffs cited showed that any defendant had knowledge of anything that could be considered illegal, and even that witness's statement as to a single defendant did not concern the illegal practices with which the company was subsequently charged. Id. at 946. The court further observed that even if the statement did involve the illegal drug recycling and dosage substitution practices at issue, the statements failed to show when the defendants became aware of the wrongdoing or when it was occurring. Id. Second, the court said that Omnicare had no duty to disclose its "illegal" operations because its statement was merely "a generic claim that they complied with the law without providing any specifics and generally refusing to discuss the case." Id. at 947. Because the legality of Omnicare's actions would be determined by a third party, its claim of legal compliance was merely "soft" information for which no disclosure was required. Id.
Stryker's statement in the 10-K was, like the statement in Omnicare, a generic statement that did not refer to any particular investigation or facility. This was in line with Stryker's policy of not commenting on discussions with the FDA. (1/22/08 Press Release ("Stryker does not normally comment on discussions with the FDA")). Instead, it referred broadly to Stryker's company-wide procedures. Moreover, the statement was couched in terms of a belief, and thus was an expression of opinion that is actionable only "`if the speaker does not believe the opinion and the opinion is not factually well grounded.'" Ford Motor Co., 381 F.3d at 572 (quoting Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir.2001) (en banc)). Plaintiffs fail to allege sufficient facts to show that Defendants did not believe the compliance statement or knew that it was false. While Plaintiffs rely heavily on confidential witness statements to demonstrate that quality and regulatory issues were widespread, as discussed more fully below, none of the CWs is alleged to
Plaintiffs' assertion regarding "continual" patient complaints about hip implants did not render Stryker's compliance statement misleading for two reasons. First, the alleged patient complaints concerned hip implants manufactured at the Mahwah facility which the FDA had not even inspected as of February 28, 2007. Second, Plaintiffs fail to allege any basis for inferring that Defendants were aware of such complaints or, more importantly, had connected such complaints to violations of FDA regulations. See Kushner v. Beverly Enters., Inc., 317 F.3d 820, 831 (8th Cir. 2003) ("Absent a clear allegation that the defendants knew of the scheme and its illegal nature at the time they stated the belief that the company was in compliance with the law, there is nothing further to disclose.") Similarly, Defendants were under no duty to disclose the Cork Form 483, nor did it render the compliance statement false or misleading. As noted above, the FDA does not consider observations contained in a Form 483 as a final agency determination of noncompliance. The Form 483 thus was not the final word on whether the Cork facility was in compliance with FDA regulations. See McGuire v. Dendreon Corp., No. C07-800MJP, 2008 WL 1791381, at *7 (W.D.Wash. Apr. 18, 2008) ("Plaintiffs inappropriately conflate the CMC inspection and issuance of a Form 483 with a finding of non-compliance... because the Form 483 is not a final agency determination of non-compliance.").
Plaintiffs also cite the fact that the FDA ultimately issued a warning letter based, in part, on Stryker's failure to remediate certain problems by a January 28, 2007, deadline in the Form 483. But nothing in Plaintiffs' allegations suggests that Defendants were aware that the failure to meet the deadline would automatically result in the issuance of a warning letter. Moreover, the warning letter itself was issued two weeks after the Form 10-K was issued.
Plaintiffs liken this case to three cases, each of which is distinguishable. In Wilkof v. Caraco Pharmaceutical Laboratories, Ltd., No. 09-12830, 2010 WL 4184465 (E.D.Mich. Oct. 21, 2010), the defendant received a warning letter from the FDA in October 2009. On March 31, 2009, it commenced a voluntary recall. On June 15, 2009, it stated it was substantially cGMP compliant, but nine days later, the government filed a complaint for forfeiture of drugs located in its Michigan facilities. The FDA indicated that the aim of the seizure was to prevent the company from distributing drugs until there was assurance that the company complied with cGMPs. This case is distinguishable because Defendants in the instant case did not represent they were compliant after receipt of a warning letter and in the face of an imminent seizure. In the second case, Chamberlain v. Reddy Ice Holdings,
Plaintiffs cite the following statement by Bergy during the July 19, 2007, conference call as materially misleading: "We continue to feel that certainly over the short and medium term, that [20% EPS growth] is something that we can clearly deliver." (AC ¶ 144 (bolding omitted).) Plaintiffs contend that this statement — which implied that Stryker could deliver 20% EPS beyond 2007 was misleading because the FDA issued the Mahwah Form 483 one week earlier, on July 12, 2007, thus indicating that Stryker's problems were not limited to the Cork facility. Plaintiffs further assert that Defendants also knew that Stryker was facing a serious global quality and regulatory compliance problem, as evidenced by the company's ultimate decision to implement the QSIP. The Court disagrees.
Plaintiffs fail to cite any applicable authority supporting their argument. As stated above, Defendants were under no duty to disclose the Mahwah Form 483 because it did not constitute a final agency determination. At that point, any information in the Form 483 was "soft" information as to the existence of regulatory violations at the Mahwah facility. Moreover, Defendants did not mention the Mahwah facility investigation during the conference call. Defendant MacMillan did reference the Cork warning letter, stating:
(Id. ¶ 143 (bolding omitted).) This statement conveyed to investors that Stryker still had room for improvement and stressed the seriousness of the violations. Defendants were not required to disclose that Stryker was facing a global problem, as Plaintiffs argue. As the Court has already found, the CW statements Plaintiffs
Plaintiffs allege that statements in a July 20, 2007, article in the Daily Device Bulletin, endorsed by Defendants, was materially misleading. The article stated, in pertinent part:
(Id. ¶ 140 (bolding omitted).) Plaintiffs argue that the Mahwah Form 483, which the FDA issued only a week prior to the article, on July 12, 2007, rendered the statement false because the Form 483 meant that Stryker's operations were not in full compliance with FDA regulations. Plaintiffs also contend that the January 2008 Trident hip recall and the fact that the Cork warning letter was not lifted until May 2010 show that this statement was false when made.
The Daily Device Bulletin article is a third-party statement and thus is not directly attributable to Defendants. A corporate insider may be liable for misleading statements in analyst reports only if the plaintiff alleges that the defendant intentionally fostered a mistaken belief concerning a material fact that was incorporated into reports or that the defendant adopted or placed his imprimatur on the report. In re Authentidate Holding Corp., No. 05CIV5323 (LTS)(DFE), 2006 WL 2034644, at *5 (S.D.N.Y. July 14, 2006) (citing Novak, 216 F.3d at 314); see also In re First Union Corp. Sec. Litig., 128 F.Supp.2d 871, 889 (W.D.N.C.2001) ("[L]iability may not be based on statements in analyst reports unless plaintiffs allege facts to establish that a specific false statement was actually made by a defendant or that the content of the analyst's report was controlled by the defendant.") (citing Raab v. Gen. Physics Corp., 4 F.3d 286, 288 (4th Cir.1993)).
Even if Plaintiffs had alleged sufficient facts showing that Defendants adopted the Daily Device Bulletin statements, there is no indication that the statement was false. First, Plaintiffs plead no facts to show that the statements in the article were made after July 12, 2007-the date the Mahwah warning letter was issued. Second, the statements are limited to compliance at the Cork facility; thus, investors would not understand the statement to refer to any of the company's other facilities. Third, for the reasons previously discussed, Stryker had no duty to disclose the Mahwah Form 483. Last, the Trident hip recall, initiated six months after the article was published, could not have caused the statements therein to be false or misleading. Furthermore, the company initiated the recall for noncompliance with its internal standards and the issue prompting the recall-manufacturing residuals-was not even an issue mentioned in the Cork warning letter. (AC ¶ 66.)
Plaintiffs allege that several statements in the company's press release addressing the Trident hip recall and products identified in the Mahwah warning letter were false or misleading because they downplayed and failed to disclose the true extent of the company's safety and compliance problems. Specifically, with regard to the products mentioned in the Mahwah warning letter, Plaintiffs claim that Defendants' assertion that "none of the `products mentioned in the [Mahwah] Warning letter present a safety issue to patients'" was false because Stryker had retroactively classified twenty-two product removals as product recalls. (Pls.' Mem. in Opp'n at 13-14.) Plaintiffs ignore, however, that Stryker had already removed the products from the market, and the issue was whether Stryker had failed to properly report the removals as recalls. (AC ¶ 73.) Moreover, Stryker did not state that there were no safety issues, but instead that it did "not believe there is any clinical evidence to indicate that the products ... present a safety issue to patients." (1/22/08 Press Release.) Plaintiffs fail to allege that such evidence existed or had
Certain statements the Plaintiffs cite are not actionable because they are mere puffery or vague statements of opinion. For example, statements that "the Company remains committed to ... manufacturing... medical products that are safe and effective and that comply with applicable laws and regulations, including those administered by the FDA," (AC ¶ 151), that quality and compliance investments "will make [Stryker] an even better Company" (Id. ¶ 169), and Stryker's move toward greater centralization and common standards across the company was "clearly what FDA expects," (Id.), are merely "[v]ague statements of opinion [that] are not actionable under the federal securities laws." Wenger v. Lumisys, Inc., 2 F.Supp.2d 1231, 1245 (N.D.Cal.1998). Plaintiffs argue that such vague and nonspecific statements by MacMillan during the April 17, 2008, conference call were nonetheless material because he made them in the context of reassuring investors that QSIP spending would not materially impact the company's EPS estimate for the year. The flaw in this argument, of course, is that the Amended Complaint contains no allegations suggesting that Defendants had reason to believe, even as of April 2008, that QSIP spending would cause the company to miss its 2008 guidance. It is thus difficult to see how these statements could be material.
Defendants assert that their statements concerning Stryker's guidance for 2007 and 2008 are protected by the PSLRA's "safe harbor" provision set forth in 15 U.S.C. § 78u-5. The safe harbor provision provides, in part:
15 U.S.C. § 78u-5(c)(1). "In other words, if the statement qualifies as `forward-looking' and is accompanied by sufficient cautionary language, a defendant's statement is protected regardless of the actual state of mind." Miller, 346 F.3d at 672; see also In re Humana, Inc. Secs. Litig., No. 3:08CV-00162-JHM, 2009 WL 1767193, at *10 (W.D.Ky. June 23, 2009). In the absence of meaningful cautionary language, the plaintiff must prove that the defendant made the forward-looking statements with actual knowledge that the statements were false or misleading. 15 U.S.C. § 78u-5(c)(1)(B). Thus, "the plaintiff must allege specific facts giving rise to a strong inference that the misleading statement was made with actual knowledge that the statement was misleading." Beaver Cnty. Ret. Bd. v. LCA-Vision Inc., No. 1:07-CV-750, 2009 WL 806714, at *10 (S.D.Ohio Mar. 25, 2009) (citing Miller, 346 F.3d at 672-73).
Forward-looking statements under the PSLRA include statements "concerning a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items" and "any statement of the assumptions underlying or relating to" such statements. 15 U.S.C. § 78u-5(i)(1)(A), (D). Plaintiffs do not dispute that Defendants' EPS and gross margin projections were forward-looking statements accompanied by cautionary language. They contend, however, that the cautionary language is merely "boilerplate" that is insufficient to invoke the protection of the safe harbor.
Before considering the sufficiency of the cautionary language attending each forward-looking statement, the Court addresses whether Defendants' 2007 EPS estimates can even be considered false or misleading. Plaintiffs allege that Defendants' EPS and sales growth projections for 2007 were false and misleading for a number of reasons. (AC ¶¶ 126, 128, 130-31, 134-35, 142-45, 147-48, 150.) Plaintiffs concede, however, that Stryker attained its 2007 guidance, achieving 20% EPS growth and double-digit sales growth. (¶ 158.) The fact that Stryker actually met its sales and earnings guidance critically diminishes Plaintiff's allegations that statements regarding 2007 guidance were false and misleading. See Miller, 346 F.3d at 677 n. 10 ("In addition, we note that Champion did actually have earnings of $0.59 per share in the second quarter as announced on July 21, 1999, therefore undermining the notion that these statements were either false or misleading."); In re IAC/InterActiveCorp Secs. Litig., 478 F.Supp.2d 574, 587 (S.D.N.Y.2007) ("Even if these cautionary statements were insufficient to render the earnings projection immaterial as a matter of law, the fact that IAC reported earnings of $1.02 billion-within the projected range-largely eviscerates any unstated claim that the earnings projection was false or misleading.").
To invoke the safe harbor, "[t]he cautionary statements must contain substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statements, such as, for example, information about the issuer's business." Helwig v. Vencor, Inc., 251 F.3d 540, 558-59 (6th Cir.2001) (internal quotation marks omitted); see also Southland
The forward-looking statements at issue were made during Stryker's July 19, 2007
(Pls.' Mem. in Opp'n at 24) (quoting 7/19/07 Conference Call Tr. at 3.)
Plaintiffs claim that these warnings were vague and "untethered to any hard facts." (Id. at 25.) As Defendants note, however, several of the risk factors mentioned, including changes in economic conditions affecting the level of demand for Stryker's products, changes in financial markets, and changes in foreign exchange markets, were the precise factors that caused Stryker to miss its 2008 earnings projection.
Even if QSIP spending caused the earnings miss, as Plaintiffs contend, Stryker adequately warned of these risks. In quoting Stryker's cautionary language, Plaintiffs fail to consider the introductory statement that other "factors may be discussed in this call." In all three conference calls, Defendants sufficiently warned investors of the risks associated with increased FDA compliance scrutiny. For example
Accordingly, the Court concludes that Stryker's cautionary statements and warnings regarding FDA regulation and the fact and extent of compliance and quality systems spending were sufficiently meaningful and substantive to warrant safe harbor protection.
A securities fraud plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the requisite state of mind." 15 U.S.C. § 78u-4(b)(2). This pleading requirement is "exacting." Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir.2008) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 127 S.Ct. 2499, 2504, 168 L.Ed.2d 179 (2007)). The requisite state of mind is scienter, which the Supreme Court has defined as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 1381 n. 12, 47 L.Ed.2d 668 (1976). The Sixth Circuit holds that scienter includes recklessness, see La. Sch. Emps. Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 478 (6th Cir.2010), which is "a mental state apart from negligence and akin to conscious disregard." Id. (internal quotation marks omitted). Recklessness is defined as "`highly unreasonable conduct which is an extreme departure from the standards of ordinary care. While the danger need not be known, it must at least be so obvious that any reasonable man would have known of it.'" P.R. Diamonds, 364 F.3d at 681 (quoting Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1025 (6th Cir.1979)).
A court must follow a three-step process in assessing whether a plaintiff has alleged facts giving rise to a strong inference of scienter. Tellabs, 551 U.S. at 322-23, 127 S.Ct. at 2509. First, the court must, as with any Rule 12(b)(6) motion, "accept all factual allegations in the complaint as true." Id. at 322, 127 S.Ct. at 2509. Second, the court "must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Id. Finally, "the court must take into account plausible opposing inferences." Id. at 323, 127 S.Ct. at 2509. At this step, the court must compare competing inferences, taking into account "plausible, nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff." Id. at 324, 127 S.Ct. at 2509. "A complaint will survive... [dismissal] only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any plausible opposing inference one could draw from the facts alleged." Id. (footnote omitted).
The Sixth Circuit has identified a non-exhaustive list of factors that bear on the issue of scienter:
Helwig, 251 F.3d at 552.
Having reviewed the entire Amended Complaint, this Court finds that the allegations do not give rise to a strong inference of scienter. Again, Plaintiffs' theory is that Stryker engaged in a scheme of systematically cutting corners on quality and regulatory compliance spending in order to maintain 20% annual EPS growth, which resulted in the company experiencing serious problems and deficiencies in these areas. Plaintiffs allege that once these issues and problems began to surface, first through the Cork inspection and warning letter and later through the Mahwah and Biotech division inspections and warning letters, Defendants minimized the true extent of the problems and remedial costs, while continuing to project 20% EPS growth, in order to maintain the stock's artificial inflation. But Plaintiffs' theory is undermined by their own allegations, which show that following two difficult inspections by the FDA, Stryker adopted a company-wide quality improvement initiative based on what it had learned from these inspections — that the FDA was expecting more from, and increasing its regulatory scrutiny of, medical technology companies like Stryker. The QSIP was not simply directed at facilities for which the FDA issued warning letters, but was a global program designed to centralize the company's quality and regulatory systems across the board. Defendants disclosed their initial estimate of QSIP spending in January 2008 and continued to update investors on increases in costs as they became known. Plaintiffs do not allege that Defendants ever possessed information, other than what they learned as the QSIP unfolded, about the cost of the QSIP. The most plausible inference, then, is that Defendants learned of the true cost of the program only as it was implemented. See Winer Family Trust, 503 F.3d at 328 ("The District Court found the most plausible inference from these events was that after the March 28, 2002 walking tour, Pennex realized that the cost of renovations would be more extensive than previously estimated. This was disclosed to investors in the April 17 filing. Accordingly, the District Court held that the amended complaint failed to allege facts giving rise to a strong inference that, as of February 20, 2002, Queen knew that the Tabor Facility would require anything more than minimal improvements.").
More problematic for Plaintiffs is that the missed projection of which they complain did not even occur during the class period. That is, Stryker met its 20% EPS projections for 2007 and for the first three
Plaintiffs' most compelling argument is that Defendants had actual knowledge of the regulatory issues cited in the Forms 483 for the Cork and Mahwah facilities and should have disclosed those issues prior the issuance of the warning letters. As set forth above, however, Defendants were not required to disclose the Forms 483 because they did not constitute final agency action and thus were not conclusive as to the FDA's findings. Moreover, Plaintiffs ignore that Stryker had a policy of not commenting while in discussions with the FDA. Plaintiffs also fault Defendants for failing to disclose the need for a company-wide quality improvement initiative earlier than they did, but they fail to explain why Defendants acted improperly in fully investigating the matter before disclosing the QSIP. See Plumbers & Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 673 F.Supp.2d 718, 738 (S.D.Ind.2009) ("It is difficult to see how Defendants' decision to investigate quality systems problems further before fully disclosing them in April was improper, never mind actionable.").
Plaintiffs also argue that Defendants' intent can be inferred from their high level positions in the company and access to company information. They contend that an inference of scienter arises because Stryker's 20% EPS annual growth goal and the additional QSIP costs would have been matters of significant concern to Defendants. This argument fails. "Contrary to Plaintiffs' assertions, fraudulent intent cannot be inferred merely from the Individual Defendants' positions in the Company and alleged access to information." PR Diamonds, 364 F.3d at 688. Moreover, Plaintiffs fail to allege the existence of any internal Stryker documents that contradicted their 20% projection for 2008, a Helwig factor that might have supported an inference of scienter.
Plaintiffs also point to stock sales by insiders during the class period and earnings-based bonuses management bonuses as a basis for inferring scienter, but neither fact provides a particularly compelling inference of scienter.
Regarding insider sales, Plaintiffs contend that "high level Company insiders sold hundreds of thousands of their personally-held shares of Stryker common stock, generating proceeds of more than $312 million." (AC ¶ 14.) Insider trading at a suspicious time on or in an unusual amount is a factor relevant to scienter. Konkol v. Diebold, Inc., 590 F.3d 390, 399 (6th Cir.2009). "Insider trading, however, `is suspicious only when it is dramatically out of line with prior trading practices at time calculated to maximize the personal benefit from undisclosed inside information.'" Id. (quoting Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981,1005 (9th Cir.2009)). Here, the Amended Complaint fails to allege that MacMillan sold any stock during the class period. This fact
Regarding earnings-based bonuses, courts generally hold that they are common among executives and have limited probative value as to scienter. See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1038 (9th Cir.2002); In re ArthroCare Corp. Secs. Litig., 726 F.Supp.2d 696, 723 (W.D.Tex.2010) (noting that incentive compensation is usually not a basis for fraud, because "[i]f it were, nearly all corporations and their executives would be subject to securities fraud allegations").
Defendants also contend that the Amended Complaint fails to allege loss causation. "In a securities action, the plaintiff bears the burden of proving loss causation, as well as pleading it." Omnicare, 583 F.3d at 944 (citation omitted). Loss causation requires a causal connection between the material misrepresentation and the loss. Id. The Court notes that the last quarter of 2008 was a world-wide economic disaster. But in light of the foregoing analysis of other issues, an extensive analysis loss causation is unnecessary. Plaintiffs simply fail to show such a causal connection.
In order to plead a violation of § 20(a) of the Exchange Act, a plaintiff must allege facts establishing that the defendant controlled another person who committed an underlying violation of the Act and that the defendant "culpably participated" in that underlying violation. See D.E. & J Ltd. P'ship, 284 F.Supp.2d at 750 (citing In re Rospatch Sec. Litig., 760 F.Supp. 1239, 1248 (W.D.Mich.1991)). Given Plaintiffs' failure to properly plead a primary violation of § 10b and rule 10b-5, the claim of control person liability necessarily fails and must be dismissed.
For the foregoing reasons, the Court will grant Defendants' motion to dismiss and dismiss Plaintiffs' Amended Complaint with prejudice.
An Order consistent with this Opinion will enter.
