Kococinski v. Collins et al
Filing
23
MEMORANDUM OPINION AND ORDER granting defendants' 8 Motion to Dismiss; granting 13 Motion for Joinder (Written Opinion). Signed by Judge John R. Tunheim on March 25, 2013. (DML)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
CHARLOTTE KOCOCINSKI,
Derivatively On Behalf of Medtronic, Inc.,
Civil No. 12-633 (JRT/JJG)
Plaintiff,
v.
ARTHUR D. COLLINS, JR.,
WILLIAM A. HAWKINS, GARY ELLIS,
RICHARD H. ANDERSON,
DAVID CALHOUN, VICTOR J. DZAU,
SHIRLY ANN JACKSON,
JAMES T. LENEHAN, DENISE M. O’LEARY,
KENDALL J. POWELL, ROBERT C. POZEN,
JEAN-PIERRE ROSSO, JACK W. SCHULER,
MICHAEL R. BONSIGNORE,
GORDON M. SPRENGER,
WILLIAM R. BRODY, OMAR ISHRAK,
MEMORANDUM OPINION AND
ORDER GRANTING
DEFENDANTS’ MOTION TO
DISMISS
Defendants,
and
MEDTRONIC, INC.,
Nominal Defendant.
Francis A. Bottini, Jr., BOTTINI & BOTTINI, INC., 7817 Ivanhoe
Avenue, Suite 102, La Jolla, CA 92037; and Garrett D. Blanchfield, Jr.,
REINHARDT WENDORF & BLANCHFIELD, 332 Minnesota Street,
Suite E-1250, St. Paul, MN 55101, for plaintiff.
Peter W. Carter and Michelle S. Grant, DORSEY & WHITNEY LLP,
50 South Sixth Street, Suite 1500, Minneapolis, MN 55402, for defendants.
Patrick S. Williams, BRIGGS & MORGAN, PA, 80 South Eighth Street,
Suite 2200, Minneapolis, MN 55402, for nominal defendant.
This is a shareholder derivative action brought by Charlotte Kococinski on behalf
of nominal party Medtronic, Inc. (“Medtronic”) against many of Medtronic’s current and
26
former directors and officers, alleging that defendants breached fiduciary duties and
violated securities laws by failing to prevent and misleadingly concealing Medtronic’s
illegal marketing of one of its drugs. Kococinski brought the present action without first
making a demand on Medtronic’s current Board of Directors (“Board”) to address the
alleged misconduct. Defendants move to dismiss on the basis that Kococinski failed to
adequately plead that such a demand would have been futile. For the reasons explained
below, the Court finds that Kococinski has failed to establish that demand was futile
because she has not established that at least half of the Board faces a substantial
likelihood of personal liability for the challenged conduct. Therefore, the Court will
grant defendants’ motion to dismiss.1
BACKGROUND2
I.
THE PARTIES
Medtronic is a Minnesota corporation that manufactures medical devices. (Compl.
¶ 2, Mar. 12, 2012, Docket No. 1.) Kococinski is a Pennsylvania citizen who is a current
Medtronic shareholder and has owned Medtronic stock at all relevant times. (Id. ¶ 14.)
1
The Court will dismiss without prejudice and allow Kococinski to amend her complaint.
If Kococinski elects to amend her complaint, the Court urges her to consider exercising her
statutory right to examine Medtronic’s books and records in order to potentially bolster her
allegations. See Minn. Stat. § 302A.461, subd. 4. Kococinski may file an amended complaint
within 60 days of this Order.
2
On a motion to dismiss, “[t]he court may consider, in addition to the pleadings,
materials ‘embraced by the pleadings’ and materials that are part of the public record.” In re Ktel Int'l, Inc. Sec. Litig., 300 F.3d 881, 889 (8th Cir. 2002) (quoting Porous Media Corp. v. Pall
Corp., 186 F.3d 1077, 1079 (8th Cir. 1999)). The facts set forth come from those sources.
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Defendants are eleven of the twelve current members of the Board (“the Directors”),3 two
former Medtronic CEOs and Chairmen of the Board, one current Medtronic executive
who is not on the Board, and three former Board members.4 (Id. ¶¶ 16-32.) Omar Ishrak,
one of the current Board members named in the complaint, has been the Chairman of the
Board and Medtronic’s CEO since 2011. (Id. ¶ 32.) Ishrak is the only current Board
member that is employed by Medtronic. The other ten Director defendants (the “outside
directors”) are “independent” under the rules of the New York Stock Exchange, meaning
they have no material relationship to Medtronic other than serving on the Board. (Decl.
of Peter W. Carter, Ex. 1 (“2011 Proxy Statement”) at 11, May 25, 2012, Docket No. 11.)
II.
THE INFUSE BONE GRAFT
Kococinski’s allegations focus on Medtronic’s INFUSE Bone Graft (“Infuse”),
which is a surgically-implanted medical device that stimulates bone growth.5 (Id. ¶¶ 23.) The Federal Food and Drug Administration (“FDA”) approved Infuse for a limited
number of surgical applications. (Id. ¶¶ 3, 48.) FDA-approved uses for a medical device
3
The Director defendants are Richard H. Anderson, David Calhoun, Victor J. Dzau,
Shirley Ann Jackson, James T. Lenehan, Denise M. O’Leary, Kendall J. Powell, Robert C.
Pozen, Jean-Pierre Rosso, Jack W. Schuler, and Omar Ishrak.
4
These defendants are Arthur D. Collins, Jr., William A. Hawkins, Gary Ellis,
Michael R. Bonsignore, Gordon M. Sprenger, and William R. Brody.
5
According to the complaint, Medtronic’s business is divided into seven segments –
Spinal, Cardiac Rhythm Disease Management, Cardiovascular, Neuromodulation, Diabetes,
Surgical Technologies, and Physio-Control. (Compl. ¶ 34.) The Spinal segment includes “Core”
Spinal products and “Biologics” Spinal products and Medtronic reports the performance of Core
Spinal and Biologics Spinal separately. (Id. ¶ 37.) Infuse accounted for much of Medtronic’s
Biologics Spinal sales between 2002 and 2008. (Id.)
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are known as “on-label” uses. (Id. ¶ 3.) “Off-label” uses for a medical device are uses
that have not been approved by the FDA. (Id. ¶ 4.) A physician may use a medical
device off-label; however, it is illegal for a manufacturer to promote a device for off-label
use. (Id.) Infuse generates approximately $800 million in revenue each year, which
accounts for six percent of Medtronic’s total annual sales. (Id. ¶¶ 2, 37.) The vast
majority of Infuse sales (approximately eighty-five percent) involved off-label use of the
device. (Id. ¶ 4.)
III.
2006 WHISTLEBLOWER SETTLEMENTS AND THE CORPORATE
INTEGRITY AGREEMENT
In 2006, Medtronic announced that it had settled two whistleblower lawsuits
relating to Infuse with the Department of Justice (“DOJ”) for $40 million. (Id. ¶ 38.)
Both whistleblower suits alleged that Medtronic had engaged in illegal marketing and
sales practices, including the payment of improper consulting fees to physicians who
promoted Medtronic’s spinal products, including Infuse.
(Id.)
Medtronic was not
required to admit to any wrongdoing or illegal activity, (id. ¶ 59), but as part of the
settlement Medtronic entered into a five-year Corporate Integrity Agreement (“CIA”),
which implemented oversight procedures that were intended to guarantee “top-level
attention to corporate compliance measures,” (id. ¶ 44.) The CIA required Medtronic to
adopt procedures to ensure stricter regulatory compliance, including ensuring that any of
the company’s arrangements with doctors would not violate federal law. (Id. ¶ 45.)
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IV.
ADDITIONAL SCRUTINY OF MEDTRONIC’S ALLEGEDLY ILLEGAL
PROMOTION OF INFUSE AND THE SCOPE OF OFF-LABEL SALES
Kococinski also presents evidence of a series of events that occurred beginning in
2007 that allegedly shed light on the Board’s knowledge of details surrounding the
marketing and sales of Infuse. First, articles appeared in the Wall Street Journal and The
New York Times on September 27, 2007, that reported on a letter United States Senator
Charles Grassley sent to then-CEO of Medtronic William Hawkins requesting a briefing
from Medtronic on payments Medtronic made to physicians in connection with
promoting off-label uses of Infuse.
(Id. ¶ 94.)
One of the articles suggested that
Medtronic may have continued making illegal payments to physicians for several months
after the DOJ settlement and the adoption of the CIA. (Id.) A Medtronic spokesperson
responded with an article in the Minneapolis-St. Paul Business Journal asserting that
Medtronic’s payments to doctors had been “fully compliant with the law and industry
standards.” (Id.)
On July 1, 2008, the FDA issued a public health notification to healthcare
practitioners, warning of serious complications caused by off-label use of Infuse in the
cervical spine and recommending that practitioners “either use approved alternative
treatments or consider enrolling as investigators in approved clinical studies.”
(Id.
¶ 118.) In the wake of the news coverage and FDA notification, on November 18, 2008,
Medtronic reported that its financial results for the second quarter of 2009 (which ended
in October 2008) declined $30 million from the previous quarter, stemming from a
decline in Infuse sales. (Id. ¶¶ 124-25.) Medtronic also disclosed on November 18 that
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it had “recently received a subpoena from the Department of Justice looking into offlabel use of Infuse.” (Id.)
Next, a series of news stories published between December 2008 and August 2009
revealed more information about the financial arrangements Medtronic allegedly had
with several doctors and surgeons for the purpose of promoting Infuse for off-label uses.
(Id. ¶¶ 129-43.)
Much of the information provided in these articles was initially
uncovered by Senator Grassley’s inquiry into Medtronic’s physician consulting
arrangements.6 (See, e.g., id. ¶ 131.) For example, a December 12, 2008 Minneapolis
StarTribune article reported on prior agreements between surgeons at the Twin Cities
Spine Center and Medtronic that allegedly provided financial incentives for surgeons
who promoted Medtronic’s products for off-label uses. (Id. ¶ 130.) And on January 16,
2009, the Wall Street Journal reported on Medtronic’s payments to a surgeon at the
University of Wisconsin who authored some of the preliminary studies that led to the
FDA’s approval of Infuse. (Id. ¶ 131.) According to the article, the surgeon received
between $2.6 and $4.6 million per year from Medtronic, a sum far greater than what he
reported to the university. (Id.) On May 13, 2009, The New York Times reported that
the United States Army’s investigation into a study authored by a former Army surgeon
and professor at Washington University in St. Louis concluded that the study made false
claims that overstated the benefits of Infuse in treating wounded soldiers. (Id. ¶ 132.)
6
Kococinski provided to the Court a United States Senate report that was released on
October 25, 2012, highlighting the results of Senator Grassley’s investigation.
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The Wall Street Journal later reported that the surgeon who authored the study had
received almost $850,000 in payments from Medtronic over the course of ten years,
primarily during the years when he was attempting to publish his study with medical
journals.7 (Id. ¶ 137.)
Medtronic’s 2009 Form 10-K stated that the company had received subpoenas
from the United States Attorney’s Office for the District of Massachusetts and the
New Jersey Attorney General requesting documents related to the Army study described
above and to Medtronic’s financial arrangements with certain physicians. (Id. ¶ 149.)
V.
ALLEGEDLY MISLEADING FINANCIAL REPORTS
Kococinski alleges that a series of Medtronic’s financial reports signed by current
and former Medtronic directors and officers between November 2006 and September
2008 were false or misleading.
(See id. ¶¶ 56-112.)
A representative example is
Medtronic’s 2007 Form 10-K, which was signed by eleven defendants, including six
current directors (Anderson, O’Leary, Pozen, Lenehan, Rosso, and Schuler). (Id. ¶ 86.)
The 2007 Form 10-K stated more than once that the growth of Medtronic’s Biologics
sales was “based on continued strong acceptance of [Infuse.]” (Id.) The 2007 Form 10K also referred to the CIA, which Medtronic entered into as part of the 2006
whistleblower settlements. (Id. ¶ 87.) Specifically, the 2007 Form 10-K stated that the
CIA “further strengthens [Medtronic’s] employee training and compliance systems
7
The articles revealed multiple other surgeons with various financial ties to Medtronic,
several of which were not included in the list Medtronic had previously provided to Senator
Grassley. (Compl. ¶¶ 131, 136, 139-42.)
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surrounding sales and marketing practices” and “reflects Medtronic’s assertion that the
Company and its current employees have not engaged in any wrongdoing or illegal
activity.” (Id.)
Kococinski alleges that the 2007 Form 10-K and the other similar financial reports
filed between November 2006 and September 2008 were false and misleading because
they failed to disclose that “(a) [Eighty-five percent] of Infuse’s revenues were dependent
upon off-label uses of the product; (b) off-label uses of Infuse were causing a significant
and increasing number of medical complications to patients; and (c) [Medtronic] was
engaging in an unlawful campaign to market and encourage off-label uses of [Infuse] in
direct violation of the [CIA].” (Id. ¶ 6.)8 Further, because of the scope of Infuse’s sales
and the scrutiny described above (much of which arose after the allegedly false and
misleading reports), Kococinski contends that the directors knew that the financial
reports were false and misleading when they issued them.
VI.
MEDTRONIC’S STOCK REPURCHASES
Kococinski also points to stock repurchases of over $2.8 billion that the Board
authorized between 2005 and 2007. (Id. ¶¶ 154-61.) Kococinski alleges that the Board
8
Kococinski also points to several investor conference calls that occurred between
November 2006 and September 2008 during which Medtronic’s officers allegedly reinforced the
false and misleading nature of the financial reports. For example, during a conference call on
August 18, 2008, then Chairman and CEO-Hawkins stated that the continued growth in
Biologics was due to FDA approval of “two smaller kit sizes of Infuse” and that the company
expected long-term growth for its Spinal products based on “a series of expanded indications for
. . . Infuse.” (Compl. ¶¶ 109-11.) Hawkins was not on Medtronic’s board of directors at the time
that Kococinski’s complaint was filed and no current member of the Board participated in these
investor conference calls described in the complaint. (See id. ¶¶ 64-68, 71-73, 77-83, 109-11.)
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knew that the value of Medtronic’s stock was artificially inflated because of the false and
misleading financial reporting but authorized the repurchases nonetheless.9 (Id. ¶¶ 15658.) Kococinski therefore asserts that the Directors who authorized the repurchases, a
group that includes ten current Directors, caused Medtronic to materially overpay for its
own stock, breaching their fiduciary duties and committing corporate waste. (Id. ¶ 161.)
VII.
THE 2011 PROXY STATEMENT
Kococinski also emphasizes Medtronic’s July 15, 2011 Proxy Statement, which
was issued by defendants Ellis, Anderson, Calhoun, Dzau, Jackson, Lenehan, O’Leary,
Powell, Pozen, Rosso, Schuler, and Ishrak, and solicited Medtronic shareholders to vote
at the 2011 annual meeting. (Id. ¶ 150.) The 2011 Proxy Statement included a report
from Medtronic’s five-member audit committee,10 which explained the committee’s
responsibility to oversee Medtronic’s financial reporting. (Id. ¶ 151.)
The audit committee’s report stated that the committee “represents and assists the
Board of Directors in its oversight of the integrity of Medtronic’s financial reporting.”
(Id.) It explained that the committee “also has responsibility for Medtronic’s compliance
with legal and regulatory requirements.” (Id.) In this capacity, the audit committee
“recommended to the Board of Directors . . . the inclusion of the audited financial
9
The weighted average price of the repurchased shares between November 2006 and
November 2008 was $50.39; however, after the series of events described above, Medtronic’s
share price was only $31.60 on November 18, 2008. (Compl. ¶¶ 159-60.)
10
The audit committee members at the time were Calhoun, Jackson, Lenehan, O’Leary,
and Pozen.
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statements in Medtronic’s Annual Report on Form 10-K for fiscal year 2011 for filing
with the Securities and Exchange Commission.” (Id.)
Kococinski asserts that the 2011 Proxy Statement was false and misleading
because the audit committee failed to disclose that Medtronic had continued to promote
and illegally market Infuse for off-label use and because it did not reveal the extent of
Medtronic’s revenue that was generated by off-label use of Infuse.
(Id. ¶ 152.)
Kococinski claims that if this information had been disclosed, shareholders may not have
voted to reelect the eleven Directors who were up for reelection. (Id. ¶ 153.)
ANALYSIS
I.
DEMAND FUTILITY
This district recently dismissed a derivative action featuring similar allegations
brought by another Medtronic shareholder for failure to make a demand and failure to
establish demand futility.
See Markewich v. Collins, 622 F. Supp. 2d 802, 803-05
(D. Minn. 2009). Kococinski’s demand futility arguments overlap with, but are not
identical to, the arguments raised in Markewich.
Federal Rule of Civil Procedure 23.1 sets forth special pleading requirements that
apply to derivative complaints brought by shareholders to enforce the rights of the
corporation. Specifically, Rule 23.1 requires that a plaintiff “state with particularity . . .
any effort by the plaintiff to obtain the desired action from the directors or comparable
authority and . . . the reasons for not obtaining the action or not making the effort.” Fed.
R. Civ. P. 23.1(b)(3). As with other motions to dismiss, “[t]he well-pleaded factual
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allegations of the derivative complaint are accepted as true,” Rales v. Blasband, 634 A.2d
927, 931 (Del. 1993), and the plaintiff is “entitled to all reasonable factual inferences that
logically flow from the particularized facts alleged,” Brehm v. Eisner, 746 A.2d 244, 255
(Del. 2000). Here, because it is undisputed that Kococinski did not make a demand on
the Board prior to bringing this action, (Compl. ¶ 186), the issue at this stage is whether
Kococinski has successfully alleged that such demand would have been futile and is
therefore excused under Minnesota law.11
Prior to bringing a derivative action on behalf of a corporation, a plaintiff is
ordinarily required to make a demand on the corporation’s board of directors. See, e.g.,
Winter v. Farmers Educ. Coop. Union of Am., 107 N.W.2d 226, 233 (Minn. 1961). The
Minnesota Supreme Court has long stressed the importance of a shareholder’s demand on
the board of directors:
The demand upon the managing directors and shareholders is important in
that it gives the management of the corporation an opportunity to consider
the merits of the dispute and to determine, in the interests of the corporation
and shareholders, whether it might be disposed of without the expense and
delay of litigation. The demand requirement as a condition precedent to a
shareholder’s derivative suit is one not lightly to be dispensed with.
Id. (footnote omitted). More recently, the Minnesota Supreme Court elaborated on the
value of the demand requirement:
The substantive decision about whether to pursue the claims advanced in a
shareholder’s derivative action involves the weighing and balancing of
legal, ethical, commercial, promotional, public relations, fiscal and other
factors familiar to the resolution of many if not most corporate problems.
11
The demand futility issue is governed by Minnesota law in this case because Medtronic
is a Minnesota corporation. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 108-09 (1991).
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The careful balancing of those factors is best done by the board of directors,
which is familiar with the appropriate weight to attribute to each factor
given the company’s product and history.
Janssen v. Best & Flanagan, 662 N.W.2d 876, 883 (Minn. 2003) (citation and internal
quotation marks omitted).
Nonetheless, the demand requirement is excused “where it is plain from the
circumstances that it would be futile.” Winter, 107 N.W.2d at 234. Because of the
scarcity of case law from Minnesota elaborating on the demand futility standard, this
district has looked to the Delaware courts for guidance.
See Markewich ex rel.
Medtronic, Inc. v. Collins, 622 F. Supp. 2d 802, 808 (D. Minn. 2009); In re Patterson
Cos., Sec., Derivative & ERISA Litig., 479 F. Supp. 2d 1014, 1038 (D. Minn. 2007);
In re Xcel Energy, Inc., 222 F.R.D. 603, 606 (D. Minn. 2004). The Delaware Supreme
Court has stated that demand is excused when a plaintiff “alleges particularized facts
creating a reasonable doubt that a majority of the Board would be disinterested or
independent in making a decision on a demand.” Rales, 634 A.2d at 930. Relevant to the
present case, a director is interested and lacks independence if he or she faces “a
substantial likelihood” (as opposed to “a mere threat”) of personal liability based on the
plaintiff’s allegations. Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984), overruled on
other grounds by Brehm, 746 A.2d 244. The “substantial likelihood” standard does not
require plaintiffs “to demonstrate a reasonable probability of success on the claim”
because such a showing would be too onerous at the motion to dismiss stage. La. Mun.
Police Emps.’ Ret. Sys. v. Pyott, 46 A.3d 313, 351 (Del. Ch. 2012). Rather, “[p]laintiffs
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need only ‘make a threshold showing, through the allegation of particularized facts, that
their claims have some merit.’” Id. (quoting Rales, 634 A.2d at 934).
While Delaware law provides guidance, the Court must also adhere to the
principles outlined by the Minnesota Supreme Court in Winter.
See Reimel v.
MacFarlane, 9 F. Supp. 2d 1062, 1067 (D. Minn. 1998). The Winter court stated that “a
demand should be made on the board of directors unless the wrongdoers constitute a
majority of the board[.]” 107 N.W.2d at 266-67.
However, Winter did not adopt a
per se rule that demand is excused “whenever a majority of the board is accused of
wrongdoing,” because such a rule would allow a plaintiff to easily circumvent the
demand requirement regardless of the strength of the allegations against the directors.
Markewich, 622 F. Supp. 2d at 807. Rather, “[t]he derivative suit is recognized as an
extraordinary remedy available to the shareholder as the corporation’s representative only
when there is no other road to redress.” Winter, 107 N.W.2d at 233 (internal quotation
marks omitted). Demand is futile only when a plaintiff demonstrates that the board of
directors is “so conflicted that there existed no possibility that it would respond to a
demand or that any such response would have been preordained.” In re Patterson, 479
F. Supp. 2d at 1039. “The critical question is whether plaintiff has shown that the board
was somehow so conflicted that it could not have properly responded to a demand that it
address the allegations of mismanagement and wrongdoing.” In re Xcel Energy, 222
F.R.D. at 607-08.
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Here, the parties agree that if a majority of the Board12 faces a substantial
likelihood of liability for various claims in the complaint, then demand is excused as
futile. The Court finds this to be a fair characterization of the burden Kococinski faces in
establishing demand futility under Minnesota law.13
In the present case, the Court finds that the demand futility analysis is affected by
an exculpatory clause in Medtronic’s articles of incorporation. In Minnesota, a director’s
personal liability for a breach of fiduciary duty may be limited by a corporation’s articles
of incorporation. Minn. Stat. § 302A.251, subd. 4. Medtronic’s Articles of Incorporation
contain an exculpatory clause which limits its directors’ liability to the full extent allowed
by Minnesota law. (See Decl. of Peter W. Carter, Ex. 6, May 25, 2012, Docket No. 11.)
The clause provides that Medtronic’s directors will not be liable for breaches of fiduciary
duty unless they breach the duty of loyalty, act in bad faith, engage in intentional
12
Where the board contains an even number of directors, demand is futile if half of the
board is interested or lacks independence. See In re InfoUSA, Inc. Shareholders Litig., 953 A.2d
963, 989-90 (Del. Ch. 2007). The Court considers the board’s composition “at the time th[e]
action was filed.” Rales, 634 A.2d at 937.
13
The Court notes that under Minnesota law, it is possible that demand may not be futile
if one disinterested director is available to serve on a special litigation committee. See Minn.
Stat. § 302A.241, subd. 1. In fact, it is arguable that demand is never futile in Minnesota because
section 302A.241, subdivision 1, may allow a board with no disinterested members to appoint an
independent nonboard member to serve on a special litigation committee. See 18 John H.
Matheson & Philip S. Garon, 18 Minnesota Practice, Corporation Law & Practice § 10.3 (2d ed.
2012) (“[T]he MBCA permits the board of a Minnesota corporation to establish a special
litigation committee, which may consist solely of non-directors. Therefore, it is arguable that
demand in Minnesota is never futile since someone not implicated in the lawsuit (i.e., one or
more outsiders) always can be commissioned to investigate . . . .” (footnote omitted)). Because
the parties focused on the substantial likelihood of liability standard and because the Court will
find that demand was not excused even under that standard, the Court need not consider whether
section 302A.241 renders demand an absolute requirement.
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misconduct, or commit a knowing violation of law. See id. In other words, Medtronic’s
directors cannot face liability for breaching the duty of care.
See Markewich, 622
F. Supp. 2d at 809. Thus, Kococinski cannot circumvent the demand requirement by
alleging facts supporting an inference of negligence or even gross negligence, because
such allegations would constitute only a breach of the exculpated duty of care. Id.
Kococinski “instead has the more difficult burden of pleading a non-exculpated claim to
avoid dismissal.” Id.14
For the reasons explained below, the Court will find that Kococinski has failed to
allege particularized facts establishing that a majority of the Board faces a substantial
likelihood of liability. Therefore, Kococinski has not established that demand was futile
and the Court will grant Defendants’ motion to dismiss.
II.
KOCOCINSKI’S DEMAND FUTILITY ALLEGATIONS
Kococinski alleges that demand was futile in the present case for several reasons.
First, Kococinski alleges that demand is futile as to the ten outside directors (i.e., those
with no material relationship to Medtronic other than serving on the Board) because they
14
Kococinski asserts that it is improper to consider the exculpatory clause at the motion
to dismiss stage. However, the Court finds that considering the exculpatory clause at this stage is
appropriate because the clause dictates whether the Directors actually face a risk of liability on
Kococinski’s various claims. If the clause would protect the Directors from liability on
Kococinski’s claims, there is no reason to question the Directors’ ability to objectively consider a
demand. See Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (“Where directors are contractually
or otherwise exculpated from liability for certain conduct, then a serious threat of liability may
only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on
particularized facts.” (internal quotation marks omitted)).
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(1) “face a substantial likelihood of liability for disregarding the settlement agreement
with the Department of Justice and allowing the Company to continue to illegally market
Infuse for off-label uses,”15 (Compl. ¶ 188); (2) “face a substantial likelihood of liability
for causing the Company to issue false and misleading statements about the source of
Infuse’s revenues and the Company’s compliance with the CIA” when they “knew, or
were reckless in not knowing” that the statements were false and misleading, (id. ¶ 189);
and (3) “face a substantial likelihood of liability for causing the Company to make the
share repurchases . . . at artificially inflated prices as a result of the false and misleading
statements,” (id. ¶ 190.) Second, Kococinski alleges that demand is futile as to the five
outside directors that served on the audit committee for knowingly issuing or approving
false and misleading statements in breach of their fiduciary duties. (Id. ¶¶ 191-92.)
Third, Kococinski alleges that demand is futile as to Ishrak because “he is a high-ranking
officer and his principal employment is with Medtronic.” (Id. ¶ 193.)16 Finally, although
15
Although this allegation appears in the complaint, Kococinski’s brief focuses on the
claim that the Directors knowingly issued false and misleading financial reports and explicitly
states that “Plaintiff is not alleging a claim for ‘failure of oversight’ for continuing to allow the
Company to illegally market Infuse for off-label use.” (Pl.’s Mem. in Opp. at 23, July 24, 2012,
Docket No. 15.) Thus, the Court will not address the failure of oversight claim in detail.
However, the Court notes that failure of oversight “is possibly the most difficult theory in
corporation law upon which a plaintiff might hope to win a judgment.” In re Caremark Int’l Inc.
Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996). To prevail, a plaintiff must demonstrate
“that the directors were conscious of the fact that they were not doing their jobs.” Guttman v.
Huang, 823 A.2d 492, 506 (Del. Ch. 2003). Kococinski has not presented particularized facts
that support a reasonable inference that the directors consciously “fail[ed] to attend to their duties
in good faith.” Id.
16
The Court need not determine whether demand was futile as to Ishrak because the
Court will not find that demand was futile as to any of the other directors and Kococinski must
(Footnote continued on next page.)
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it does not appear in the portion of the complaint outlining reasons why demand is
allegedly futile, Kococinski’s brief makes clear that she intends to allege that demand is
futile because all Directors face a substantial likelihood of liability for issuing the 2011
Proxy Statement that contained false and misleading statements. (Id. ¶ 198.)17
____________________________________
(Footnote continued.)
establish that demand was futile as to at least half of the directors. See In re InfoUSA, 953 A.2d
at 989-90.
17
Kococinski asserts that demand is futile for two additional reasons, neither of which is
sufficient. First, Kococinski alleges that demand is futile as to all Directors because their
Directors and Officers Liability Insurance would not protect them from an action brought
directly by Medtronic, but it would protect them against a derivative suit, and they cannot be
expected to file the claims that would deprive them of insurance coverage. (Compl. ¶ 194.) This
argument is consistently rejected as a basis for finding demand futility. See, e.g., In re Am. Int’l
Grp., Inc. Derivative Litig., 700 F. Supp. 2d 419, 433 (S.D.N.Y. 2010) (“[D]emand futility based
on the existence of an ‘insured vs. insured’ exclusion in the Company’s directors’ and officers’
liability insurance policies is an argument that has been rejected repeatedly under Delaware law.”
(internal quotation marks omitted)); Markewich, 622 F. Supp. 2d at 808 n.6. Kococinski’s
allegation is generic and essentially asks the Court to assume that the outside directors would act
in bad faith. The Court finds that Kococinski’s claim regarding the Directors’ insurance
coverage does not establish demand futility.
Second, Kococinski alleges that Medtronic has suffered significant losses due to the
Directors’ wrongdoing but the Directors have not filed any lawsuits against themselves, in
breach of their fiduciary duties. Finding demand futility on the basis that the Board has not yet
filed a lawsuit would dramatically undermine the demand requirement. (Compl. ¶ 196.) It would
render demand futile in almost every case because if a board of directors had already
commenced a lawsuit addressing the conduct that a potential derivative plaintiff wanted to
challenge, there would be little reason for the derivative plaintiff to commence the same action.
See Richardson v. Graves, C.A. No. 6617, 1983 WL 21109, at *3 (Del. Ch. June 17, 1983) (“The
mere fact that they have not elected to sue before the derivative action was filed should not of
itself indicate ‘interestedness.’ As a matter of fact, it is the Board’s inaction in most every case
which is the raison d’etre for Rule 23.1.”). Additionally, the Minnesota Supreme Court has
stressed that the demand requirement “gives the management of the corporation an opportunity
to consider the merits of the dispute and to determine, in the interests of the corporation and
shareholders, whether it might be disposed of without the expense and delay of litigation.”
Winter, 107 N.W.2d at 233. Thus, the Court will not find demand futility on the basis that the
Board has not yet taken action.
- 17 -
A.
Knowingly False and Misleading Financial Reports
One of Kococinski’s primary allegations is that demand is futile because the
Directors face a substantial likelihood of liability for knowingly issuing false and
misleading financial statements like the 2007 Form 10-K. This District recently analyzed
the very same allegedly false and misleading statements regarding Infuse in a securities
class action. See Minneapolis Firefighters’ Relief Ass’n v. Medtronic, Inc., Civ. No. 086324, 2010 U.S. Dist. LEXIS 10029 (D. Minn. Feb. 3, 2010).
In Minneapolis
Firefighters, the issue was whether plaintiffs had sufficiently alleged that the officer
defendants knowingly made untruthful material statements about Infuse.
The court
concluded that three categories of statements (each of which is alleged in the present
case) were sufficient to survive a motion to dismiss: “[1] statements that attributed the
growth in Infuse sales to on-label uses of Infuse, [2] statements predicting increased
Infuse sales from additional on-label uses, and [3] statements about Medtronic’s efforts to
comply with the Corporate Integrity Agreement.” Id. at *27.18
Here, the Court will assume without deciding that the analysis in Minneapolis
Firefighters was correct and that the 2007 Form 10-K and other similar financial reports
were false and misleading. However, the existence of false and misleading financial
18
On the other hand, the court held that the following categories of statements were not
misleading enough to be actionable: (1) statements about the general importance of complying
with regulations (but not referring to the CIA specifically), Minneapolis Firefighters, 2010 U.S.
Dist. LEXIS 10029, at *20-21; (2) statements about newly approved on-label uses of Infuse (as
opposed to statements suggesting that future growth would be based on on-label uses), id. at *2324; and (3) statements about competitors’ aggressive marketing practices, id. at *26-27.
- 18 -
statements, by itself, is insufficient to establish a substantial likelihood of liability for a
non-exculpated claim on the part of outside directors. See, e.g., Xcel Energy, 222 F.R.D.
at 607-08 (holding that “false or misleading statements by [defendant’s] management”
do not demonstrate that “the board was somehow so conflicted that it could not have
properly responded to a demand” (emphases added)); Wood v. Baum, 953 A.2d 136, 142
(Del. 2008) (“The Board’s execution of [the company]’s financial reports, without more,
is insufficient to create an inference that the directors had actual or constructive notice of
any illegality.”). In order to establish a substantial likelihood of liability for a nonexculpated claim, such as a breach of the duty of loyalty,19 Kococinski must plead facts
that would at least support a reasonable inference that the directors knew that the
statements were false and misleading when issued. Absent such a showing, Kococinski
can make out no more than a breach of the exculpated duty of care, which is insufficient
to survive the instant motion to dismiss. See Zirn v. VLI Corp., 681 A.2d 1050, 1062
(Del. 1996) (“A good faith erroneous judgment as to the proper scope or content of
required disclosure implicates the duty of care rather than the duty of loyalty.”).
Here, the complaint offers no direct evidence that the Directors actually knew how
Infuse was marketed or the composition of Infuse’s sales. Kococinski did not inspect
19
See, e.g., Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) (“The issue . . . is whether
[defendants] breached their more general fiduciary duty of loyalty and good faith by knowingly
disseminating to the stockholders false information about the financial condition of the
company.”); In re Reliance Sec. Litig., 91 F. Supp. 2d 706, 732 (D. Del. 2000) (holding that
allegations that “permit the inference that [Directors] may have knowingly withheld material
information from the company’s shareholders . . . may rise to a violation of the directors’ duty of
loyalty”).
- 19 -
Medtronic’s books and records pursuant to Minn. Stat. § 302A.461, subd. 4, and thus
cannot allege that the Directors actually discussed these issues at a particular meeting, nor
can she allege that the Directors reviewed documents relating to these issues.20 Rather,
Kococinski must rely on the various facts alleged in the complaint to support a reasonable
inference that the Directors knew that the financial reports were false and misleading.
The Court will consider Kococinski’s theories in turn.
1.
Core Operations
The Court must determine whether the fact that Infuse represented six percent of
Medtronic’s revenues supports a reasonable inference that the outside directors knew that
the financial reports were false and misleading.
Some courts, particularly in the
securities fraud context, have held that knowledge of facts critical to a company’s core
business operations can be imputed to a company’s top officers. See In re Forest Labs.,
Inc. Derivative Litig., 450 F. Supp. 2d 379, 390-91 (S.D.N.Y. 2006) (compiling cases).
For example, the Minneapolis Firefighters court found that scienter (a required element
of securities fraud) was successfully alleged because Infuse represented six percent of
Medtronic’s total sales, which “is enough to raise at least a plausible inference that senior
20
See Pyott, 46 A.3d at 342-43 (“[T]he Delaware courts have long exhorted potential
derivative plaintiffs to use Section 220 to investigate their claims and obtain corporate books and
records before filing derivative litigation.”); Markewich, 622 F. Supp. 2d at 810 n.9 (“Prior to
filing the Complaint in this case, Plaintiff could have inspected Medtronic's books and records to
amass a more robust factual predicate to survive a motion to dismiss, but chose not to do so.”);
In re InfoUSA, 953 A.2d at 973 (“Plaintiffs have followed this Court’s oft-issued advice and
brought their action based upon documents received as part of a request for books and records
under 8 Del. C. § 220. As a result, the amended consolidated complaint overflows with detail.”).
- 20 -
management would have known about [it].”21 2010 U.S. Dist. LEXIS 10029, at *29
(emphasis added). Kococinski attempts to rely on Minneapolis Firefighters and the “core
operations” theory to establish knowledge on the part of Medtronic’s outside directors.
The Court finds that the distinction between senior officers and outside directors is
critical in the present case. Under Minnesota law, “[d]irectors are entitled to rely on the
day-to-day judgments of a corporation’s management.” Markewich, 622 F. Supp. 2d at
811 (citing Minn. Stat. § 302A.251, subd. 2). In fact, some courts have determined that a
core operations theory of proving knowledge is never applicable to outside directors. See
In re Forest Labs., 450 F. Supp. 2d at 390-91 (“While it is true that . . . knowledge of
facts critical to the continued viability of major transactions or ‘core’ business operations
have been imputed to a company and its ‘key’ or ‘top’ officers, there is no authority to
support the attribution of knowledge to Outside Directors who are not alleged to be
directly involved in the day-to-day operations of the company.” (emphasis in original)).
Only in rare cases has a core operations theory been applied to outside directors,
and those cases involved operations that were substantially more “core” than six percent
of a company’s business. See Cosmas v. Hassett, 886 F.2d 8, 10-11, 13 (2d Cir. 1989)
(holding that scienter was properly alleged where the issue was whether directors knew
of import restrictions that would eliminate $5 million of a company’s $6 million in
backlog sales because those sales “represent a significant part of [the company]’s
business”); In re Biopure Corp. Derivative Litig., 424 F. Supp. 2d 305, 308 (D. Mass.
21
While scienter in a securities class action is not necessarily identical to the showing of
knowledge Kococinski must make in the present case, it is at least analogous.
- 21 -
2006) (holding that knowledge of an FDA clinical hold was properly alleged because it
was a case “in which a company’s primary product or service is in jeopardy”).22 Here,
Infuse accounts for only six percent of Medtronic’s revenues. The Court does not hold
that a core operations theory can never support a reasonable inference of knowledge on
the part of an outside director, but in the present case, the allegedly false and misleading
information is not sufficiently vital to Medtronic’s business to support an inference of
outside directors’ knowledge in the absence of more direct evidence. See In re Forest
Labs., 450 F. Supp. 2d at 390-93 (“Although [the drugs] do comprise an overwhelming
majority of [the company]’s business, [eighty two percent,] it cannot follow that every
fact pertaining to those drugs may reasonably be imputed to Outside Directors.”).
2.
Red Flags
The Court must next determine whether the various red flags and evidence
gathered from newspaper articles support a reasonable inference that Medtronic’s outside
directors knew that Medtronic’s financial statements were false and misleading. As
noted above, Kococinski has not presented any direct evidence that the outside directors
actually knew that the financial reports were false and misleading. For this reason, the
22
A final case cited by Kococinski, Pfeiffer v. Toll, 989 A.2d 683, 693 (Del. Ch. 2010)
overruled on other grounds by Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del.
2011), is distinguishable because it was decided “under the plaintiff-friendly Rule 12(b)(6)
standard” and actually distinguished other cases that, like the present case, “were decided under
Rule 23.1’s particularity standard and in a procedural posture where the plaintiff sought to
establish demand futility by showing that the directors faced a substantial risk of liability.” Id. at
692-93. It also appears that the information at issue in Pfeiffer related to the company’s entire
business, and was substantially more “core” than Medtronic’s marketing strategies for a drug
representing six percent of its revenue. See id. at 693.
- 22 -
present case is distinguishable from cases Kococinski highlights in which courts have
held that demand was futile.
For example, Louisiana Municipal Police Employees’ Retirement System v. Pyott
involved illegal off-label marketing of a drug and the allegations were quite similar to the
present case. 46 A.3d 313, 323 (Del. Ch. 2012). However, unlike the complaint in the
present case, the complaint in Pyott was supported by internal documents obtained
through a Delaware statute similar to Minn. Stat. § 302A.461, id. at 359, including an
email from the company’s general counsel to the Board that specifically alerted the Board
to illegal marketing that had occurred and warned the Board that “the chance of receiving
Agency action . . . on this matter is . . . very high,” id. at 320. The internal documents
revealed that, shortly after receiving this email, the Board approved a 2007-2011
Strategic Plan that “explicitly linked the number of sales representatives . . . to increased
off-label sales” and led to the company tripling the payroll for the sales force. Id. at 32021. Finally, the complaint in Pyott “plead[ed] that the Board regularly monitored Botox
sales and cite[d] specific occasions where the Board was made aware of growth in
average daily sales and the revenue mix across different usage categories.” Id. at 354.
To the contrary, in the present case, Kococinski has provided no evidence of what the
outside directors actually discussed and considered.
A similarly distinguishable case is InfoUSA, where the issue was whether SEC
filings misrepresented the nature of immense benefits that were provided to the
- 23 -
company’s CEO. 953 A.2d at 990. The complaint described a report prepared by one
board members that outlined the nature of the benefits in detail.23 The Court explained:
The [Report] was distributed to [the directors] . . . shortly before the
company released its 2004 10–K . . . . The 10–Ks affirmatively stated that
payments made to [the CEO] involved “usage of aircraft and related
services.” Yet the [Report] indicates that almost $600,000 worth of the
payments constituted compensation for the use of personal residences, the
American Princess yacht, travel services or payments to contractors. No
conceivable definition of candor will shoehorn such payments into services
“related” to the use of aircraft. . . . The Court may reasonably infer, based
upon these allegations, that the directors who signed the 2004 and 2005 10–
Ks did so knowing that the information contained therein fell far below the
standards of candor expected from them.
Id. at 990-91. In the present case, Kococinski has not produced comparable evidence of
specific information that the outside directors actually reviewed and discussed.24
In the absence of direct evidence, Kococinski relies on a variety of red flags that
purportedly support an inference that the outside directors actually knew the details of
Infuse’s marketing and sales. Kococinski focuses on Medtronic’s $40 million settlement
with the DOJ and the accompanying CIA, the series of newspaper articles revealing
details of Senator Grassley’s investigation and Medtronic’s financial arrangements with
various surgeons, and additional investigations by state and federal authorities. For the
23
As in Pyott, the plaintiffs in InfoUSA took advantage of the Delaware statute that
allows potential plaintiffs to inspect a company’s books and records. See id., at 973.
24
See also In re Forest Labs., Inc. Derivative Litig., 450 F. Supp. 2d at 390 (“The
Complaint does not identify any types of reports, studies, or analyses made available to the
Board, or board meeting minutes reflecting conversations from which the Court may infer that
the Outside Directors had actual knowledge of the Danish Study or any other alleged inside
information.”).
- 24 -
reasons explained below, the Court finds that none of these red flags allow a reasonable
inference that the outside directors knew that the financial reports, like the 2007 Form 10K, were false and misleading at the time they were made.
This district has already held that Medtronic’s $40 million settlement with the
DOJ “do[es] not establish the knowledge of the [outside directors]” because “Plaintiff
‘has not pleaded facts indicating that the challenged settlements were anything other than
routine business decisions in the interest of the corporation.’”
Markewich, 622
F. Supp. 2d at 812 (quoting White v. Panic, 783 A.2d 543, 553 (Del. 2001)). Further, the
CIA that accompanied the DOJ settlement applied directly to Medtronic’s management,
not to its outside directors. (Pl.’s Mem. in Opp. at 32.) Even if the Board considered the
merits of the DOJ’s allegations, the settlement at most put the Board on notice that
Medtronic may have illegally marketed Infuse in the past, but not that such behavior
continued during the time of the challenged financial statements. Neither the settlement
nor the accompanying CIA support a reasonable inference that the outside directors knew
the detailed information about Infuse that rendered the financial statements false and
misleading.25
The Court also finds that none of the additional facts Kococinski presents that
were not included in the Markewich complaint support a reasonable inference that the
25
Kococinski again relies on Minneapolis Firefighters, which held that scienter was
sufficiently alleged as to Medtronic’s officers because Medtronic’s $40 million settlement with
the DOJ and the accompanying CIA represented Medtronic’s “agree[ment] that its senior
management would monitor Medtronic’s activities in this regard.” 2010 U.S. Dist. LEXIS
10029, at *30 (emphasis added). This holding does not apply to Medtronic’s outside directors.
- 25 -
outside directors actually knew that the financial reports were false and misleading.
Kococinski’s additional facts are drawn from a series of newspaper articles revealing
improper financial arrangements that Medtronic had with physicians across the country.
Much of the information was uncovered by Senator Grassley’s investigation of
Medtronic and Kococinski places particular emphasis on a September 30, 2008 letter that
Senator Grassley allegedly sent to then-CEO and Chairman of the Board Hawkins
requesting a list of the physicians receiving payments related to Infuse. Kococinski
claims it is reasonable to infer that Hawkins would have shared that letter with the Board,
which at the time included more than half of the current Directors.26
Yet, the fact that the Board may have known that Senator Grassley’s investigation
was underway does not support a inference that the Board actually knew that illegal
conduct was occurring related to Infuse.
The same is true of the more recent
investigations opened by various state and federal authorities. While these red flags may
tend to establish that Medtronic employees were marketing Infuse illegally and that
Medtronic’s officers likely knew the details of Infuse’s marketing and sales, they are
insufficient, in the absence of more direct evidence, to support an inference that the
26
Kococinski’s claim that the letter was likely shared with the Board does not appear in
the complaint, which is problematic because Kococinski is required to plead with particularity
the reasons why demand was futile. See Markewich, 622 F. Supp. 2d at 812-13. However, even
with the benefit of the inference that the letter reached the entire Board, Kococinski still fails to
establish demand futility.
- 26 -
outside directors actually knew these details.27 Kococinski’s presentation of these red
flags falls short of pleading particularized facts supporting an inference that the outside
directors actually knew the financial reports were false and misleading.
Thus, the
complaint does not establish that the Board was “so conflicted that it could not have
properly responded to a demand that it address the allegations,” In re Xcel Energy, 222
F.R.D. at 608, and it is not “plain from the circumstances that [demand] would be futile,”
Winter, 107 N.W.2d at 234.
3.
The Audit Committee
The Court must also determine whether the five outside directors that sat on
Medtronic’s Audit Committee face a substantial likelihood of liability for the allegedly
false and misleading financial statements. Kococinski does not provide a particularized
allegation about the Audit Committee’s knowledge. Rather, she generically states that
the Audit Committee members have knowledge “[a]s a result of (a) their access to and
review of internal corporate documents; (b) conversations and connections with other
corporate officers, employees and directors; and (c) attendance at management and Board
27
Again, even if these facts could allow a jury to find that the directors were negligent
because they should have known about Infuse’s marketing and sales and should have known
that the financial reports were false and misleading, such allegations are insufficient because the
directors cannot face liability for a breach of the duty of care. See Benihana of Tokyo, Inc. v.
Benihana, Inc., 891 A.2d 150, 192 (Del. Ch. 2005) aff’d 906 A.2d 114 (Del. 2006) (“Director
liability for breaching the duty of care is predicated upon concepts of gross negligence.” (internal
quotation marks omitted)).
- 27 -
meetings.” (Compl., ¶192.)28 Committee membership alone cannot support a reasonable
inference of knowledge on the part of an outside director.
See Markewich, 622
F. Supp. 2d at 811 (surveying Delaware law and concluding that “it is well settled that
committee membership is an insufficient basis on which to infer knowledge”). The
members of the Audit Committee, like the other outside directors, cannot face liability for
a breach of the exculpated duty of care. At most, Kococinski’s allegations tend to
establish that the Audit Committee members should have known that the statements were
false and misleading.
However, in the absence of more direct and particularized
allegations, the complaint does not support a reasonable inference that the Audit
Committee members actually knew that the statements were false and misleading. See
Xcel Energy, 222 F.R.D. at 607 (holding that an audit committee’s “heightened duty to
monitor the corporation’s activities and investigate the facts underlying its public
statements” is insufficient to establish knowledge and could not substitute for the
required particularized facts establishing the directors’ knowledge).
B.
Share Repurchases
The Court must next address Kococinski’s contention that the ten outside director
defendants face a substantial likelihood of liability for causing Medtronic to repurchase
$2.8 billion of its own stock at artificially inflated prices between November 2006 and
28
Kococinski also sets forth the Audit Committee’s Charter, which explains those
directors’ duties to “review and approve quarterly and annual financial statements, earnings press
releases, and the Company’s internal controls over financial reporting.” (Compl. ¶ 164.)
- 28 -
November 2008. The Court finds that the share repurchase allegation fails to establish
demand futility for the same reason that Kococinski’s allegations regarding false and
misleading financial statements fail.
That is, there is insufficient evidence that the
outside directors actually knew the underlying information that rendered the stock
artificially inflated.29
C.
2011 Proxy Statement
Finally, the Court must determine whether Kococinski has successfully established
demand futility on the basis that the Directors face a substantial likelihood of liability for
issuing the 2011 Proxy Statement, which Kococinski alleges was materially false and
misleading. For the reasons below, the Court will find that demand was not futile
because of Kococinski’s allegations relating to the 2011 Proxy Statement.
Rule 23.1 provides that the complaint must “state with particularity” the reasons
for not making a demand on the board of directors.
See Fed. R. Civ. P. 23.1(b).
Kococinski appropriately devoted a section of her complaint to explaining the various
29
There appear to be other potential flaws with the share repurchase claim, which the
Court need not address. For example, Kococinski has not suggested what motive there might
have been for the Directors to repurchase shares they knew were overvalued and likely to fall in
price. See In re Textron, Inc., 811 F. Supp. 2d 564, 576 (D.R.I. 2011) (“The complaint . . .
contains no allegations that any of the board members other than [the CEO] received any
personal benefit or engaged in any impermissible self-dealing when they approved and
implemented the repurchase program.”); In re Am. Int’l Grp., Inc. Derivative Litig., 700
F. Supp. 2d 419, 441 (S.D.N.Y. 2010) (“This Court previously dismissed a [waste of corporate
assets] claim on the grounds that the plaintiffs had failed to plead any particularized allegation
regarding what motive the directors of a public company might possibly have to repurchase
shares that they knew were overvalued and were likely to fall in price.”).
- 29 -
reasons she contended that demand would have been futile. (See Compl. ¶¶ 188-96.)
However, Kococinski did not refer to the 2011 Proxy Statement in this section of the
complaint and nowhere in the complaint does Kococinski allege, even generally, that the
directors’ potential liability for the 2011 Proxy Statement is one of “the reasons for . . .
not making the effort” of a demand on the Board.
Fed. R. Civ. P. 23.1(b)(3)(B).
Although the 2011 Proxy Statement is discussed in the complaint and is the basis for
Count I, Kococinski’s failure to plead, even generally, that the 2011 Proxy Statement
rendered demand futile prevents the Court from finding demand futility on that basis.30
For all of the reasons described above, the Court finds that Kococinski has failed
to establish demand futility and will grant defendants’ motion to dismiss.
30
Medtronic did not address the 2011 Proxy Statement in its opening brief, likely
because it addressed only those arguments Kococinski included in the demand futility section of
her complaint. Therefore, briefing on the substance of the 2011 Proxy Statement was cursory.
The Court notes that the 2011 Proxy Statement argument may have substantive weaknesses that
would not be cured by including it in the demand futility section of the complaint. For one, in
light of the increasing public scrutiny of Medtronic’s Infuse marketing, it is possible that the
omissions from the 2011 Proxy Statement were not materially misleading because there may not
be a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of information made
available.” See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also United
Paperworkers Int’l Union v. Int’l Paper Co., 985 F.2d 1190, 1199 (2d Cir. 1993) (“[W]hen the
subject of a proxy solicitation has been widely reported in readily available media, shareholders
may be deemed to have constructive notice of the facts reported, and the court may take this into
consideration in determining whether representations in or omissions from the proxy statement
are materially misleading.”). If Kococinski elects to amend her complaint, this issue and other
issues concerning the 2011 Proxy Statement can be explored more thoroughly.
- 30 -
ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that Defendants’ Motion to Dismiss [Docket No. 8], in which
Medtronic joins [Docket No. 13], is GRANTED and Plaintiff’s complaint [Docket
No. 1] is DISMISSED without prejudice. Kococinski may file an amended complaint
within sixty (60) days of this Order.
DATED: March 25, 2013
at Minneapolis, Minnesota.
____s/
____
JOHN R. TUNHEIM
United States District Judge
- 31 -
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