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without prejudice in an unpublished opinion confirming the many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