Harrison v. Mako Surgical Corporation et al
Filing
48
ORDER granting 36 Defendants' Motion to Dismiss. Motion for leave to file Second Amended Complaint due by 6/5/2013. Signed by Judge James I. Cohn on 5/15/2013. (npd)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 12-60875-CIV-COHN/SELTZER
IN RE MAKO SURGICAL CORPORATION
SECURITIES LITIGATION
_______________________________________/
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS
THIS CAUSE is before the Court on Defendants’ Motion to Dismiss the
Consolidated Amended Class Action Complaint [DE 36] (“Motion”). The Court has
reviewed the Motion, Plaintiffs’ Response [DE 43] (“Response”), Defendants’ Reply [DE
46], the record in the case, and is otherwise advised in the premises.
I. BACKGROUND
This federal securities class action was commenced on May 10, 2012, by James
H. Harrison against Defendants MAKO Surgical Corporation (“MAKO”), Maurice R.
Ferré, M.D. (“Ferré”), MAKO’s president, chief executive officer, and chairman of the
board of directors, and Fritz L. LaPorte (“LaPorte”), MAKO’s senior vice president of
finance and administration, chief financial officer, and treasurer (collectively
“Defendants”). See Complaint [DE 1]. On May 18, 2012, Brian Parker filed a second
federal securities class action complaint against the same Defendants. See Complaint
[DE 1] in Case No. 12-60954-COHN/SELTZER. On August 2, 2012, the Court entered
an order consolidating these actions, appointing Oklahoma Firefighters Pension and
Retirement System and Baltimore County Employees' Retirement System (collectively
“Plaintiffs”) as lead plaintiffs of a class of all persons who purchased or otherwise
acquired the publicly-traded common stock of MAKO Surgical Corporation between
January 9, 2012 and May 7, 2012, and approving their selection of Labaton Sucharow
LLP as lead counsel for the class and Robbins Geller Rudman & Dowd LLP as liaison
counsel for the class. See DE 24. Plaintiffs filed a consolidated amended class action
complaint on September 12, 2012. See DE 33. Defendants have now filed the instant
Motion which seeks to dismiss the Amended Complaint.
MAKO, a surgical device company founded in November 2004, markets and
develops surgical robot technology. Am. Compl. ¶ 1. MAKO’s RIO Robotic Arm
Interactive Orthopedic System (“Rio System”) performs robotically-assisted orthopedic
procedures, known as MAKOplasty to treat early to mid-range osteoarthritic knee and
hip disease. Id. On January 9, 2012, MAKO announced its annual guidance of 56 to
62 RIO systems and 10,000 to 13,000 MAKOplasty procedures. Id. ¶ 5. Plaintiffs
contend that the high 2012 guidance drove up the price of MAKO common stock almost
8% to $31.07 per share. Id. Ferré and LaPorte reaffirmed this guidance on multiple
occasions in early and mid-March. Id. Accordingly, MAKO’s stock price continued to
rise, reaching a high of $44.98 on March 26, 2012. Id.
Plaintiffs contend that the “2012 annual guidance announced in January 2012
and reiterated in March 2012 was materially false and misleading when made because
Defendants were aware of many undisclosed, adverse facts, all of which, individually
and when taken together, seriously undermined the validity of the issued guidance and
showed that Defendants lacked a reasonable basis for announcing it.” Id. ¶ 6.
According to Plaintiffs, the 2012 annual guidance should not have been premised upon
MAKO’s strong 2011 results because the 2011 RIO systems sales “were artificially
inflated.” Id. Specifically, Plaintiffs contend that the 2012 annual guidance should not
have been based on the 2011 results because (1) MAKO had deferred recognition of 42
6 RIO systems sold in 2010 until 2011, id. ¶ 7; (2) 11 of the 2011 RIO systems sales
resulted from a bulk-order contract that was unlikely to contribute to any material
increase in 2012 procedures, id. ¶ 8; and (3) a number of 2011 RIO systems sales
resulted from the September 2011 launch of the total hip application, sales which were
unlikely to be replicated given the low surgeon interest in the new hip application. Id. ¶¶
9-10. Plaintiffs also contend that without these three “anomalous factors artificially
boosting 2011 results,” MAKO struggled to attain its 2011 RIO sales and procedures
goals. Id. ¶ 11. Defendants also concealed from their investors the fact that
approximately 25% of RIO systems sites accounted for 95% of MAKO’s utilization. Id. ¶
12. Defendants were aware of declining RIO system sales and the limited prospects for
future sales at the time they issued the 2012 annual guidance. Id. ¶¶14-16.
During a May 7, 2012 earnings call, MAKO announced that it had sold only 4
RIO systems during the first quarter and downgraded its expected yearly sales by 4
units. Id. ¶ 18. After this earnings call, the stock price plummeted $15.12 per share to
$26.27. Id. ¶ 20. On July 9, 2012, MAKO issued a press release which further
decreased its 2012 projected sales by ten units, or 20%. Id. ¶ 21. MAKO’s stock price
dropped by $10.60 per share, or approximately 43% to $14.01. Id. ¶ 22. Plaintiffs
allege that individual defendants Ferré and LaPorte, because of their high-level
positions at MAKO and involvement in its day-to-day operations, were aware of
confidential information regarding MAKO’s business, including material, adverse, nonpublic information about MAKO. Id. ¶ 33. Plaintiffs bring a claim for securities fraud
pursuant to Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a78pp (“Exchange Act”), and Rule 10b-5 against all Defendants (Count 1) and a claim
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for control person liability pursuant to Section 20(a) of the Exchange Act against
Defendants Ferré and LaPorte (Count II). Defendants have now moved to dismiss the
Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure
and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 (“PSLRA”).
Plaintiffs oppose the Motion.
II. DISCUSSION
A. Legal Standard.
1. Motions to Dismiss Generally.
Under Fed. R. Civ. P. 12(b)(6), a court shall grant a motion to dismiss where,
based upon a dispositive issue of law, the factual allegations of the complaint cannot
support the asserted cause of action. Glover v. Liggett Grp., Inc., 459 F.3d 1304, 1308
(11th Cir. 2006). Indeed, “[f]actual allegations must be enough to raise a right to relief
above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Thus, a complaint must contain “sufficient factual matter, accepted as true, to ‘state a
claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Twombly, 550 U.S. at 570).
Nonetheless, a complaint must be liberally construed, assuming the facts alleged
therein as true and drawing all reasonable inferences from those facts in the plaintiff’s
favor. Twombly, 550 U.S. at 555. A complaint should not be dismissed simply because
the court is doubtful that the plaintiff will be able to prove all of the necessary factual
allegations. Id. Accordingly, a well pleaded complaint will survive a motion to dismiss
“‘even if it appears that a recovery is very remote and unlikely.’” Id. at 556.
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2. Securities Fraud Claims Under Section 10(b) of the Exchange Act.
Section 10(b) of the Exchange Act makes it unlawful to:
use or employ, in connection with the purchase or sale of any security registered
on a national securities exchange or any security not so registered, or any
securities-based swap agreement any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the Commission
may prescribe as necessary or appropriate in the public interest or for the
protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5 prohibits “mak[ing] 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.” 17
C.F.R. § 240.10b-5(b). To state a fraud claim under Section 10(b) and Rule 10b-5, a
plaintiff must allege: “(1) the existence of a material misrepresentation or omission, (2)
made with scienter, (3) in connection with the purchase or sale of a security, (4) on
which the plaintiff relied, and (5) which was causally connected to (6) the plaintiff's
economic loss.” Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d
783, 789 (11th Cir. 2010) (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42
(2005)). The circumstances of the fraudulent conduct must be alleged with particularity.
Id. (citing Fed. R. Civ. P. 9(b); Garfield v. NDC Health Corp., 466 F.3d 1255, 1262
(11th Cir. 2006)). Additionally, “[c]omplaints alleging falsity shall specify each statement
alleged to have been misleading [and] the reason or reasons why the statement is
misleading.” Id. (quoting15 U.S.C. § 78u-4(b)(1) (internal quotation marks omitted)).
The complaint must also “present facts from which a reasonable person would deem
the inference of scienter cogent and at least as compelling as any opposing inference
one could draw from the facts alleged.” Id. (quoting Tellabs, Inc. v. Makor Issues &
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Rights, Ltd., 551 U.S. 308, 324 (2007) (internal quotation marks omitted)).
3. Control Person Liability Claims Under Section 20(a) of the Exchange Act.
Section 20(a) of the Exchange Act provides that:
[e]very person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same extent as such controlled person
to any person to whom such controlled person is liable (including to the
Commission in any action brought under paragraph (1) or (3) of section 78u(d) of
this title), unless the controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause of action.
15 U.S.C. §78t(a). To state a claim under Section 20(a), Plaintiffs must allege that (1)
MAKO committed a primary violation of the securities law; (2) Ferré and LaPorte “had
the power to control the general business affairs” of MAKO; and (3) that Ferré and
LaPorte “had the requisite power to directly or indirectly control or influence the specific
corporate policy which resulted in primary liability.” See Phila. Fin. Mgmt. of S.F., LLC
v. DJSP Enters., Inc., No. 10-61261, 2011 WL 4591541, at *10 (S.D. Fla. Sept. 30,
2011) (quoting Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008)). If
Plaintiffs cannot state a securities fraud claim under Section 10(b) and Rule 10b-5, the
control person liability claim against Ferré and LaPorte would also be subject to
dismissal. See Jabil Circuit, Inc., 594 F.3d at 797.
B. Whether Plaintiffs Have Adequately Plead a Securities Fraud Claim Under
Section 10(b) and Rule 10b-5.
Defendants argue that Plaintiffs have failed to state a claim for a violation of
Section 10(b). Motion at 6. Specifically, Defendants contend that MAKO’s 2012
Annual Guidance and related statements all fall within the PSLRA’s safe harbor for
forward-looking statements. Id. at 7. Defendants argue that these statements fall
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within the safe harbor because they were identified as forward-looking and were
accompanied by appropriate cautionary language. Id. at 10-14. Additionally,
Defendants contend that the safe harbor applies despite Plaintiffs’ allegations that
MAKO failed to disclose certain adverse information about its 2011 sales. Id. at 14.
Alternatively, Defendants argue that their statements are protected under the second
prong of the safe harbor because Plaintiffs have failed to allege facts demonstrating
that Defendants knew the original or revised guidance was false. Id. at 15-18. Finally,
Defendants contend that Plaintiffs’ allegations amount to little more than corporate
mismanagement, not securities fraud. Id. at 18-20.
In opposition, Plaintiffs first argue that Defendants’ misstatements do not fall
within the PSLRA’s safe harbor because they were not accompanied by meaningful
cautionary language or are statements of present or historical fact. Response at 7-13.
Plaintiffs also argue that the Amended Complaint, as plead, raises a strong inference of
scienter as to MAKO, LaPorte, and Ferré. Id. at 13-20. The Court will address each of
these issues individually below.
1. Whether the Alleged False and Misleading Statements Fall Within the PSLRA’s Safe
Harbor for Forward-Looking Statements.
Defendants contend that the statements Plaintiffs allege are false and
misleading are actually protected under the PSLRA’s safe harbor for forward-looking
statements. Motion at 7. Plaintiffs disagree, arguing that the challenged statements
would not fall within the safe harbor because they were not accompanied by meaningful
cautionary language or are statements of present or historical fact. Response at 7-13.
Under the PSLRA, a defendant cannot be held liable for certain forward-looking
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statements if the statement is “identified as a forward-looking statement, and is
accompanied by meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those in the forward-looking
statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i). “Congress enacted the safe-harbor provision
in order to loosen the ‘muzzling effect’ of potential liability for forward-looking
statements, which often kept investors in the dark about what management foresaw for
the company.” Harris v. Ivax Corp., 182 F.3d 799, 806 (11th Cir.1999). Forwardlooking statements include:
(A) a statement containing a projection of revenues, income (including income
loss), earnings (including earnings loss) per share, capital expenditures,
dividends, capital structure, or other financial items;
(B) a statement of the plans and objectives of management for future operations,
including plans or objectives relating to the products or services of the issuer;
(C) a statement of future economic performance, including any such statement
contained in a discussion and analysis of financial condition by the management
or in the results of operations included pursuant to the rules and regulations of
the Commission;
(D) any statement of the assumptions underlying or relating to any statement
described in subparagraph (A), (B), or (C);
(E) any report issued by an outside reviewer retained by an issuer, to the extent
that the report assesses a forward-looking statement made by the issuer; or
(F) a statement containing a projection or estimate of such other items as may
be specified by rule or regulation of the Commission.
15 U.S.C. § 78u-5(i)(1).
If a statement falls within the forward-looking statement safe harbor, a defendant
may not be found liable for securities fraud regardless of any fraudulent intent when
making the statement. Jabil Circuit, Inc., 594 F.3d at 795 ( “So long as the language
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accompanying the projections is meaningfully cautionary, the law requires us to be
unconcerned with the speaker's state of mind at the time he makes the projections.”).
Defendants argue that their 2012 Annual Guidance falls within the forwardlooking statements safe harbor because “the guidance concerns future economic
performance.” Motion at 8. Defendants further argue that statements that are not
themselves forward-looking also fall within the safe harbor as “assumptions underlying
those statements, or [ ] related statements of current or historical fact.” Id. at 9. To
make this determination, the Court will examine the statements identified as false and
misleading in the Amended Complaint individually below.
a. January 9, 2012, March 6, 2012, and May 7, 2012 Press Releases.
In the January 9, 2012 Press Release, MAKO stated that it “anticipate[d] that it
will sell 56 to 62 RIO systems and that its customers will perform 11,000 to 13,000
MAKOplasty procedures in 2011.” Am. Compl. ¶ 156. Plaintiffs allege that this
guidance was “materially false and misleading when made because Defendants lacked
a reasonable basis for making it and were aware of undisclosed, adverse facts tending
to seriously undermine the validity of the issued guidance.” Id. ¶ 159. On March 6,
2012, Defendants issued an additional press release which stated that:
“We are pleased with our strong operating results for the fourth quarter and the
full year 2011, particularly our 91% growth in revenue from the prior year. In
addition, we believe the increased level of RIO system sales, initial interest in our
hip application, increased MAKOplasty procedure volume and utilization trends
point to the clinical value of our technology” said Maurice R. Ferré, M.D.,
President and Chief Executive Officer of MAKO. “We anticipate that our positive
results in 2011 will carry forward into 2012 as we continue to drive the adoption
of MAKOplasty.”
Am. Compl. ¶ 163. Plaintiffs allege that these statements regarding increased RIO
9
systems sales and financial results were “materially false and misleading and lacked a
reasonable basis when made because they failed to disclose the adverse facts, among
others, which were known to Defendants at that time . . . as well as the fact that there
was a materially slowed sales trend for RIO systems and procedures . . . at the
beginning of 2012.” Id. ¶ 164.
In the May 7, 2012 Press Release, Defendants disclosed that RIO systems sales
“were at the low end of our expectations” and advised that “MAKO now anticipates
selling 52 to 58 RIO systems in 2012, which compares to prior guidance of 56 to 62 RIO
systems sales. MAKOplasty procedure guidance remains unchanged at 11,000 to
12,000 expected procedures in 2012.” Id. ¶ 183. According to Plaintiffs, this revised
guidance “was still artificially inflated with respect to both metrics, and thus materially
false and misleading when made because Defendants lacked a reasonable basis for
making it and were aware of undisclosed, adverse facts tending to seriously undermine
the validity of the issued guidance.” Id. ¶ 184.
In the Motion, Defendants contend that the January 9, 2012, March 6, 2012, and
May 7, 2012 Press Releases contained the following the statement which advised
investors that the guidance contained forward-looking statements:
This press release contains forward-looking statements regarding, among other
things, statements related to expectations, goals, plans, objectives and future
events. MAKO intends such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in Section 21E
of the Securities Exchange Act of 1934 and the Private Securities Reform Act of
1995.
Motion at 10-11; see also January 9, 2012 Press Release, Exhibit D to Defendants’
Motion [DE 36-4] at 3; March 6, 2012 Press Release, Exhibit E to Defendants’ Motion
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[DE 36-5] at 4; May 7, 2012 Press Release, Exhibit F to Defendants’ Motion [DE 36-6]
at 4. Defendants also point to additional cautionary language contained within the
press releases and their various SEC filings. Motion at 11-12.1 These warnings
included that the RIO System “has a lengthy sales cycle” and that low sales could
“contribute to substantial fluctuations in our quarterly revenue and substantial variation
from our projections.” Motion at 11-12 (quoting 2010 Form 10-K, Exhibit A to
Defendants’ Motion [DE 36-1] (“2010 10-K”) at 47-48). MAKO also warned that
surgeons could be slow to adapt the RIO system technology. Id. at 12 (quoting 2010
10-K at 43; 2011 Form 10-K, Exhibit B to Defendants’ Motion [DE 36-2] (“2011 10-K”) at
44-55). According to Defendants, these warnings “provided meaningful cautionary
warnings about the difficulties of projecting RIO system sales and MAKOplasty
procedures,” thus falling within the safe harbor. Motion at 14.
Plaintiffs contend that Defendants have failed to demonstrate that this safe
harbor applies. Response at 6. According to Plaintiffs, any warning regarding
decreased sales was meaningless because it is “the kind of generic risk factor that
could apply to any medical device company (or any company that sells products).” Id.
at 7. Similarly, Plaintiffs argue that MAKO’s warnings regarding its variable sales cycle
are also generic because they are “applicable to essentially all medical device as well
1
When deciding a motion to dismiss based on the statutory safe harbor,
the Court must consider “any statement cited in the complaint and any cautionary
statement accompanying the forward-looking statement, which are not subject to
material dispute, cited by the defendant.” DJSP Enters., Inc., 2011 WL 4591541, at *15
n.14 (quoting 15 U.S.C. § 78u-5(e)). The Court also may take judicial notice of SEC
filings. Id. at *3 n.5 (citing Thompson v. RelationServe Media, Inc., 610 F.3d 628, 631
n.5 (11th Cir. 2010)).
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as many other businesses and was not tailored to the specific, known risks underlying
the poor RIO system sales and procedures.” Id. at 8. Finally, Plaintiffs contend that
MAKO’s warning regarding the failure of its technology to be adopted by surgeons is
“too generic to be meaningful to MAKO investors assessing risk.” Id. at 9.
Here, the Court finds that meaningful, cautionary language accompanied the
forward-looking statements in the Press Releases. First, the Court finds that the
statements identified by Plaintiffs in the Press Releases are clearly forward-looking
because they involve revenue projections. See Harris, 182 F.3d at 805 (“Forward looking statement[s] include ‘statements of future economic performance.’”) (quoting 15
U.S.C. § 78u-5(i)(1)(C)). Second, the Court disagrees with Plaintiffs’ assessment that
the cautionary language was “mere boilerplate.” See Response at 13-17. The
cautionary language accompanying the Press Releases is “detailed and informative; it
tells the reader in detail what kind of misfortunes could befall the company and what the
effect could be.” See Harris, 182 F.3d at 807. As the Eleventh Circuit said in Harris v.
Ivax Corp., “[t]he statute requires the warning only to mention important factors that
could cause actual results to differ materially from those in the forward-looking
statement. . . . It does not require a listing of all factors.” 182 F.3d at 807 (internal
citation marks and quotations omitted) (emphasis in original). Notably, the warnings in
Defendants’ Press Releases and referenced SEC filings warned investors of precisely
what happened here: that projected system sales and procedures might be lower than
projected due to the economic downturn, variable sales, and a reluctance on the part of
orthopedic surgeons to adopt the new technology. See, e.g., Motion at 11-12. The
Eleventh Circuit has said “when an investor has been warned of risks of a significance
12
similar to that actually realized, she is sufficiently on notice of the danger of the
investment to make an intelligent decision about it according to her own preferences for
risk and reward.” Harris, 182 F.3d at 807.
Defendants’ reliance upon Police Retirement System of St. Louis v. Intuitive
Surgical, Inc., No. 5:10-cv-03451-LHK, 2012 WL 1868874 (N.D. Cal. May 22, 2012), is
well-placed. Intuitive Surgical, also a manufacturer of robotic surgery devices, was
sued by investors based upon allegedly false and misleading statements related to its
projected sales. Id. at *1-2. In ruling upon a motion to dismiss, the court found that
statements regarding projected revenue were forward-looking and that the company’s
SEC filings identified that “actual results could vary based on risks and uncertainties . . .
[such as] failure to achieve ‘market acceptance’ by slow adoption of the da Vinci
System, unforeseen national and global economic downturns, and inability of
institutions and doctors to obtain sufficient reimbursement for use of the da Vinci
System.” Id. at *11. Accordingly, the court granted the motion to dismiss because
these statements fell within the safe harbor. Id.; see also In re St. Jude Med., Inc., Sec.
Litig., 629 F. Supp. 2d 915, 923 (D. Minn. 2009) (“Plaintiffs respond, claiming
defendants' projections fall beyond the safe harbor's ambit. . . . They further maintain
any ‘cautionary language’ was not meaningful or specific enough to afford safe-harbor
protection. Plaintiffs are wrong. Defendants' ‘cautionary language,’ touching
cost-conscious reductions in ICD procedures, alternative therapies, and fears or
reticence about ICDs themselves, accurately predicted real-world events which
decreased ICD sales.”).
Plaintiffs’ citation of FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282
13
(11th Cir. 2011), for the proposition that Defendants’ warnings were generic is
misplaced. In FindWhat.com, the Eleventh Circuit held that where “[t]he Form 10–K's
cautionary language consisted only of general warnings about risks inherent to the
Company's business model, and was not ‘specifically tailored’ to risks from click fraud,”
the defendant had failed to provide meaningful cautionary language. Id. at 1299
(emphasis added). By contrast here, Defendants’ warnings were specifically tailored to
factors which could lead to decreased RIO systems sales and MAKOplasty
procedures.2 Moreover, the Court disagrees with Plaintiffs’ contention that these
statements do not fall within the safe harbor because, at the time Defendants issued
the 2012 guidance, “it was already known internally that surgeons were not in fact
adopting the RIO system and MAKOplasty at the rates Defendants had projected and
2
Similarly, the Court is not persuaded by Plaintiffs’ reliance upon Yanek v.
STAAR Surgical Co., 388 F. Supp. 2d 1110 (C.D. Cal. 2005). In Yanek, the court found
that the cautionary language in the press releases was inadequate where “[t]he risks
associated with the ‘acceptance of new products’ by consumers and ‘general domestic
and international economic conditions,’ for instance, are factors that are so broad that
they apply to any business that sells products to consumers.” Id. at 1123. By contrast,
here, MAKO specifically disclosed in its 2010 10-K that “[o]ur RIO system has a lengthy
sales cycle because it is a major piece of capital equipment, the purchase of which will
generally require the approval of senior management at hospitals, inclusion in the
hospital’s budget process for capital expenditures and, in some instances, a certificate
of need from the state or other regulatory clearance,” all of which might contribute to
difficulty in forecasting sales and “substantial fluctuations” in quarterly revenue. 2010
10-K at 47-48. MAKO also disclosed that “We believe MAKOplasty represents a
fundamentally new way or performing arthoplasty. ... The orthopedic market has been
traditionally slow to adopt new products and treatment practices.” 2011 10-K at 44.
Thus, the warnings Defendants provided were specifically tailored to a niche product:
i.e. whether the RIO systems would be purchased by hospitals and the MAKOplasty
procedures adopted by orthopedic surgeons. The Court strongly disagrees with any
assertion by the Plaintiffs that these warnings were boilerplate or could apply to any
new product like the warnings discussed in Yanek.
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that the market for the system was already saturated.” See Response at 10. As
Defendants point out, allegations relating to assumptions underlying MAKO’s 2012
annual guidance are protected by the safe harbor. See Motion at 14. The Eleventh
Circuit’s opinion in Elhert v. Singer, 245 F.3d 1313 (11th Cir. 2001), is instructive on this
point. In Elhert, the court stated that:
[t]he PSLRA safe-harbor requires only that the cautionary language mention
“important factors that could cause actual results to differ materially from those in
the forward-looking statement.” 15 U.S.C. § 77z-2(c). It does not require that the
prospectus list all factors that might influence the company's financial future. See
Harris, 182 F.3d at 807. As this Court held in Harris, “[M]ust the cautionary
language explicitly mention the factor that ultimately belies a forward-looking
statement? We think not.... [W]hen an investor has been warned of risks of a
significance similar to that actually realized, she is sufficiently on notice of the
danger of the investment to make an intelligent decision about it according to her
own preferences for risk and reward.” Id. In this case, the warnings actually given
were not only of a similar significance to the risks actually realized, but were also
closely related to the specific warning which Plaintiffs assert should have been
given. Because we conclude that adequate cautionary language accompanies
the forward-looking statement, we hold that Defendants are protected from
liability under the safe-harbor.
245 F.3d at 1319-20; see also Jabil Circuit Inc., 594 F.3d at 796 (“However we cast
forward-looking statements accompanied by meaningful cautionary language, an
allegation that the speaker knew the statements were false does not convert those
statements, mitigated by adequate warnings of risks, into actionable frauds.”). Here,
because Defendants specifically warned about the potential for variable RIO systems
sales and reluctance of orthopedic surgeons to adopt the MAKOplasty technology–the
risks actually realized–they are shielded from liability under the safe harbor, regardless
of any allegations in the Amended Complaint that Defendants knew these statements
were false when made.
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b. Oral Statements Made During Earnings Calls and Conferences.
In the Amended Complaint, Plaintiffs also allege that certain statements made
during earnings conference calls and at conferences are false and misleading. See
Am. Compl. ¶¶ 165-177, 185-209. Defendants contend that the majority of these oral
statements were disclosed as forward-looking statements. Motion at 10. In their
Response, however, Plaintiffs allege that certain statements fall outside the safe harbor
because they were statements of current or historical fact and were not specifically
identified as forward-looking. Response at 11-13. The parties appear to dispute only
whether two statements made by Dr. Ferré during the May 7, 2012 Earnings
Conference Call are entitled to protection under the safe harbor as forward-looking
statements. See Motion at 9-10; Response at 12-13.3 Accordingly, the other oral
statements identified in the Amended Complaint would fall within the safe harbor as
forward-looking statements for the reasons discussed above. Thus, the Court will
examine whether the oral statements made at the May 7, 2012 Earnings Conference
Call are forward-looking.
Under the PSLRA, an oral forward-looking statement falls under the safe harbor:
(A) if the oral forward-looking statement is accompanied by a cautionary
statement–
3
Defendants concede that they are unable to establish whether a
statement LaPorte made at the March 14, 2012 Barclays Capital Global Healthcare
Conference was identified as a forward-looking statement. See Motion at 10 n.2.
Accordingly, the Court is unable to conclude that this statement falls under the safe
harbor as a forward-looking statement. The Court will separately examine whether this
statement is nonetheless protected under the safe harbor because Plaintiffs have failed
to plead facts demonstrating whether LaPorte knew the statement was false separately
in section B.2 below.
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(i) that the particular oral statement is a forward-looking statement; and
(ii) that the actual results might differ materially from those projected in the
forward-looking statement; and
(B) if–
(i) the oral forward-looking statement is accompanied by an oral statement that
additional information concerning factors that could cause actual results to
materially differ from those in the forward-looking statement is contained in a
readily available written document, or portion thereof;
(ii) the accompanying oral statement referred to in clause (i) identifies the
document, or portion thereof, that contains the additional information about those
factors relating to the forward-looking statement; and
(iii) the information contained in that written document is a cautionary statement
that satisfies the standard established in paragraph (1)(A).
15 U.S.C. § 78u-5(c)(2). The PSLRA’s safe harbor for forward-looking statements does
not apply to misstatements or omissions of historical or contemporaneous facts. In re
21st Century Holding Co. Sec. Litig., 2008 WL 5749572, at *12 (S.D. Fla. Nov. 7, 2008).
Here, Plaintiffs contend that two statements4 Ferré made during the May 7, 2012
Earnings Conference Call are statements of current or historical fact which cannot fall
within the safe harbor as forward looking statements. See Response at 12-13; Am.
Compl. ¶ 242(b)-(c). Defendants, however, contend that these statements may also be
considered forward-looking because they were included in an earnings conference call
with other statements that were forward-looking. Motion at 9. Plaintiffs disagree,
4
The statements Plaintiffs identified include: (1) “[W]e always have given
guidance where we feel is a number that we can make.” Am. Compl. ¶ 242(b); and (2)
“And here are various typical reasons on the count by count basis on system sales that
didn’t occur in the quarter. It’s important to note that none of these accounts fell out of
our sales funnel.” Id. ¶ 242(c). The Court agrees with Plaintiffs’ assessment that these
are statements of current or historical fact.
17
arguing that Defendants have misconstrued Harris’ holding and that such statements of
current or historical fact are not forward-looking merely because they were given
alongside other forward-looking statements. Response at 12-13.
In Harris, the Eleventh Circuit held that where a press release contained a list of
factors which would influence the defendant’s results, some of which were forwardlooking and some of which were statements of current or historic fact, the entire list was
to be treated as a forward-looking statement. 182 F.3d at 806. Defendants urge the
Court to read this opinion to mean that because some statements made during the
conference call were forward-looking, the entire conference call should be deemed
forward-looking. See Motion at 9. The Court disagrees with Plaintiffs that Defendants
have misread Harris. The Eleventh Circuit explicitly stated that they were extending the
safe harbor to “lists that contain both factual and forward-looking factors.” Harris, 182
F.3d at 806. It is apparent that these two statements were delivered during a larger
discussion of “factors underlying a projection or economic forecast,” and thus qualify as
forward-looking. See id. at 807; see also Reply at 5-6.
This result is supported by the Middle District of Florida’s holding in Edward J.
Goodman Life Income Trust v. Jabil Circuit, Inc., 560 F. Supp. 2d 1221 (M.D. Fla.
2008). In that case, the court held that where a conference call concentrated on
“success in the third and fourth quarters of fiscal year 2006 and the factors that might
affect that success,” statements of present and historic fact made during the
conference call also qualified as forward-looking. Jabil Circuit, Inc., 560 F. Supp. 2d at
1237. Accordingly, because Ferré’s statements of present or historical fact were
similarly delivered in the context of explaining MAKO’s revised guidance during the May
18
7, 2012 Earnings Conference Call, the Court finds that these statements fall within the
safe harbor as forward-looking statements.
2. Whether the Alleged False and Misleading Statements Fall Within the PSLRA’s Safe
Harbor Because the Person Making Them Did Not Know They were False or
Misleading.5
Alternatively, Defendants argue their statements fall under the PSLRA’s safe
harbor because the Plaintiffs have failed to allege facts showing that Defendants had
actual knowledge that the original or revised guidance was false or misleading. Motion
at 15. In support of this argument, Defendants contend that the confidential witnesses
Plaintiffs interviewed are not reliable and that the information provided by the
confidential witnesses does not establish scienter on the part of Ferré and LaPorte. Id.
at 16-18. In opposition, Plaintiffs contend that their confidential witnesses are reliable
and that the facts alleged in the Amended Complaint “amply support a strong inference
that Ferré and LaPorte had actual knowledge of current facts that seriously undermined
the accuracy of the 2012 annual guidance.” Response at 14-19. Additionally, Plaintiffs
argue that they have adequately plead scienter because they have alleged that “Ferré
and LaPorte closely monitored RIO sales and procedure volumes and associated
guidance” and that Ferré and LaPorte “were hands-on executives.” Id. at 19.
Even if a forward-looking statement does not contain the necessary disclosures,
5
The Court has considered this alternative argument in favor of dismissal in
light of Defendants’ concession that they cannot establish whether LaPorte’s statement
made at the March 14, 2012 Barclays Capital Global Healthcare Conference was
identified as a forward-looking statement. Although the Court has confined its analysis
to the March 14, 2012 Barclays Capital Global Healthcare Conference statement, this
analysis would be equally applicable to the other forward-looking statements alleged in
the Amended Complaint.
19
it is also protected under the safe harbor if the plaintiff fails to establish that the
defendant made the statement with “actual knowledge” that it was “false or misleading.”
15 U.S.C. § 78u-5(c)(1)(B). Here, the only statement which the Court was unable to
conclude fell under the cautionary language provision of the safe harbor is LaPorte’s
statement at the March 14, 2012 Barclay Capital Global Healthcare Conference where
LaPorte stated that:
But we are seeing them continue to invest in capital that has a good economic
story and return on investment. I think that is where [we are] with our partial knee
business– and hopefully we can demonstrate that as well in hip– that we provide
that value and have continued to see in all those macroeconomic environment
considerations, to the extent we can predict them or understand where they
might be going, are all factored into our guidance.
See Am. Compl. ¶ 173. Before the Court can determine whether this statement falls
under another provision of the safe harbor, the Court must first determine whether it is
forward-looking. Plaintiffs allege in the Amended Complaint and in their Response that
this statement is a statement of current or historical fact and thus does not qualify for
any provision of the safe harbor. See Response at 12 n.9; Am. Compl. ¶ 242(a). The
Court disagrees and finds that this statement may be considered forward-looking. The
Amended Complaint itself supports this result. The conference was held on March 14,
2012, almost a week after MAKO filed its 2011 Form 10-K. Am. Compl. ¶ 172. The
very statement which Plaintiffs allege is a statement of current or historic fact was
delivered in response to an analyst’s question regarding MAKO’s confidence in its
“placement guidance” in the current capital spending environment. Id. ¶ 173. This
statement is forward-looking because it discusses assumptions underlying MAKO’s
20
future projected revenue. 15 U.S.C. § 78u-5(i)(1)(A), (D).6
Defendants first argue that the confidential witnesses Plaintiffs rely upon for their
allegations regarding Ferré and LaPorte’s actual knowledge that the statements in
Amended Complaint were false or misleading are unreliable. Motion at 16.
Specifically, Defendants point to the fact that three of the six confidential witnesses left
MAKO before the class period even started, id., and that all of the former MAKO
employee-witnesses held lower-level positions and did not have access to upper-level
management meetings and discussions. Id. at 17. Plaintiffs argue that it is irrelevant
that three of the confidential witnesses left MAKO before the commencement of the
class period because “Plaintiffs allege that Defendants had information as early as the
first quarter of 2011 that seriously undermined the validity of that guidance.” Response
at 14-15. Additionally, Plaintiffs contend that Defendants’ assertion that the confidential
witnesses were all “lower-level employees” is also inaccurate because CW1 was a
regional sales manager, CW3 once attended offsite Quarterly Business Review (“QBR”)
meetings led by Ferré and LaPorte, and CW4 “had direct contact with LaPorte
concerning the sharp drop in procedure volume in early 2012.” Id. at 16.
“[A]nonymous sources may be used to sustain complaints under the PSLRA so
long as the sources are described with sufficient particularity to support the probability
that a person in the position occupied by the source would possess the information
6
In their Reply, Defendants also assert that this statement was clearly
forward-looking because its truth or falsity was only discernable after it was made.
Reply at 6. Defendants point to the fact that MAKO made its sales goal for the third
quarter of 2012 as evidence that the statement was true and that hospitals were
continuing to invest in MAKO’s technology. Id. at 7.
21
alleged.” Marrari v. Med. Staffing Network Holdings, Inc., 395 F. Supp. 2d 1169, 1188
(S.D. Fla. 2005). When assessing the statements of confidential witnesses, courts may
consider factors such as “the position(s) held, the proximity to the offending conduct,
and the relevant time frame.” Mizzaro, 544 F.3d at 1240. In this case, the Court need
not resolve whether the confidential witness statements are reliable or not because the
“amended complaint, taken as a whole, [fails to] create[ ] a strong inference—one that
is cogent and compelling—that the individual defendants acted with the required
scienter.” Id. at 1247.
No allegations in the Amended Complaint establish that Ferré and LaPorte had
actual knowledge that the 2012 Guidance was false and misleading when made. For
example, the mere fact that CW1 reported to Steven J. Nunes, the Senior Vice
President of Sales and Marketing, who in turn reported to Ferré, does not establish that
Ferré was aware that the MAKOplasty procedures goals for Health Management
Associates (“HMA”) hospitals “were unrealistic and unattainable.” Am. Compl. ¶¶ 53,
58. Moreover, the mere conclusory allegation that this problem “was widely known
within MAKO at that time in 2011" fails to establish actual knowledge on the part of
Ferré and LaPorte. See id. ¶ 58. Additionally, the fact that CW1's statements are
corroborated by CW2, a regional sales manager, fails to establish actual knowledge on
the part of Ferré and LaPorte. See id. ¶ 59.
CW3's statement that Ferré and LaPorte had access to Sales Logic, an internal
client relationship management program, does not establish their actual knowledge that
the 2012 Guidance was too high. See id. ¶ 64. The Court also is not persuaded by
Plaintiffs’ argument that CW3's attendance at QBR meetings, which Ferré and LaPorte
22
also attended, establishes that “Ferré and LaPorte were confronted with many facts
directly undermining MAKO’s 2012 guidance.” See Response at 16-17. CW3's
insistence that Ferré and LaPorte “must have known about and approved the deferred
recognition” of 4-6 RIO sales from 2010 to 2011 fails to establish actual knowledge on
the part of Ferré and LaPorte. See Am. Compl. ¶ 74. Taken collectively, the
allegations of the Amended Complaint fail to establish a strong inference of scienter on
the part of LaPorte and Ferré.7
The Court is also not persuaded by Plaintiffs’ argument that they have
established scienter through their allegations that MAKOplasty was MAKO’s “entire
business” and Defendants “were hands-on executives who closely monitored the
number of RIO systems sold and MAKOplasty procedures performed.” See Response
at 19. Ferré and LaPorte’s knowledge cannot be inferred based upon their positions in
the company. See Schultz v. Applica Inc., 488 F. Supp. 2d 1219, 1227 (S.D. Fla. 2007)
(“Plaintiffs have not alleged with particularity that Defendant Michienzi and Defendant
Polistina were directly informed of product defects such that they knew or should have
known that their statements were deceptive or likely to mislead investors at the time
they were made. Plaintiffs' conclusory allegations that these Defendants knew or
recklessly disregarded the falsity of their statements or omissions based on their
positions in the corporation is insufficient to meet the heightened pleading requirement
7
Moreover, taken collectively, Plaintiffs’ allegations regarding MAKO’s
faltering sales do not establish that the 2012 Guidance was false or misleading when
made. As Defendants point out, the 2012 Guidance projected a sales increase of 1629% whereas MAKO’s sales actually increased by 73% in 2010 and 45% in 2011.
Reply at 8.
23
for scienter.”) (footnote omitted). Thus, LaPorte’s statement at the March 14, 2012
Barclays Capital Global Healthcare Conference falls under the PSLRA’s safe harbor
because the Plaintiffs have failed to allege facts showing that Ferré and LaPorte had
actual knowledge that the original or revised guidance was false or misleading.8
C. Whether Plaintiffs Have Adequately Plead a Control Person Liability Claim
Under Section 20(a) of the Exchange Act.
Defendants also seek dismissal of Plaintiffs’ claim for control person liability
under Section 20(a) of the Exchange Act. Motion at 20. According to Defendants,
where there is no primary violation of the Exchange Act, there cannot be a control
person liability claim. Id. (citing Rosenberg v. Gould, 554 F.3d 962, 966-67 (11th Cir.
2009)). Because the Court finds that Plaintiffs have failed to state a claim for securities
fraud under Section 10(b) and Rule 10b-5, dismissal of the claim for control person
liability is also proper. See Jabil Circuit, Inc., 594 F.3d at 797.
D. Plaintiffs’ Request for Leave to Amend.
In the conclusion of their Response, Plaintiffs request that, if the Court grants the
Motion, they be granted leave to file a Second Amended Complaint. See Response at
20. As the Court held in DJSP Enterprises, Inc., “[t]his bare request is not sufficient to
raise the issue of whether Plaintiffs should be granted leave to amend their complaint
further.” 2011 WL 4591541, at *17 (citing Rosenberg, 554 F.3d at 967).9 Instead,
8
Because the Court has found that all statements alleged in the Amended
Complaint are protected by the PSLRA’s safe harbor, the Court need not consider
Defendants’ argument that many of Plaintiffs’ allegations amount to little more than
claims of corporate mismanagement. See Motion at 18-20.
9
Plaintiffs cite Roseberg v. Gould for the proposition that the court has
discretion to grant a request for leave to amend made in a brief opposing a motion to
24
when requesting leave to amend, a plaintiff must either attach a proposed amended
complaint or describe the substance of the proposed amendments. Id. Because
Plaintiffs have failed to identify to the Court the substance of the proposed amendment,
the Court cannot determine whether the proposed amendments would be futile.
Accordingly, rather than grant Plaintiffs’ request, the Court will establish a deadline for
Plaintiffs to file a motion seeking leave to file a Second Amended Complaint which
attaches the proposed Second Amended Complaint as an exhibit.
III. CONCLUSION
Based on the foregoing, it is ORDERED AND ADJUDGED as follows:
1.
Defendants’ Motion to Dismiss the Consolidated Amended Class Action
Complaint [DE 36] is GRANTED; and
2.
Plaintiffs shall file any motion for leave to file a Second Amended Complaint
which attaches the proposed Second Amended Complaint on or before June 5,
2013.
DONE AND ORDERED in Chambers at Fort Lauderdale, Broward County,
Florida, on this 15th day of May, 2013.
Copies provided to counsel of record via CM/ECF.
dismiss. See Response at 20 n.20. In fact, the Eleventh Circuit actually said that
“[w]here a request for leave to file an amended complaint simply is imbedded within an
opposition memorandum, the issue has not been raised properly” and that the Court
has discretion to deny that request. 554 F.3d at 967 (citing Posner v. Essex Ins. Co.,
178 F.3d 1209, 1222 (11th Cir.1999)).
25
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