Shoemaker v. Cardiovascular Systems, Inc. et al
MEMORANDUM OPINION AND ORDER. 1. Defendants' Motion to Dismiss Plaintiffs' Class Action Complaint (Doc. No. 52 ) is GRANTED consistent with the memorandum above. 2. Plaintiffs' Amended Complaint (Doc. No. 48 ) is DISMISSED WITHOUT PREJUDICE.3. Plaintiffs' request for leave to amend is GRANTED. 4. Plaintiffs shall file an amended complaint within 90 days of the date of this order. (Written Opinion) Signed by Judge Donovan W. Frank on 3/29/2017. (BJS)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Sandra K. Shoemaker,
individually and on behalf of all others
Civil No. 16-568 (DWF/KMM)
OPINION AND ORDER
Cardiovascular Systems, Inc.,
and Laurence L. Betterley,
Bryan L. Bleichner, Esq., Jeffrey D. Bores, Esq., Karl L. Cambronne, Esq., Chestnut
Cambronne, PA; and Naumon A. Amjed, Esq., and Ryan T. Degnan, Esq., Kessler Topaz
Meltzer & Check LLP, counsel for Plaintiff Sandra K. Shoemaker.
Angus Ni, Esq., Jeremy Robinson, Esq., Bernstein Litowitz Berger & Grossmann LLP;
and Gregg M. Fishbein, Esq., Kate M. Baxter-Kauf, Esq., Richard A. Lockridge, Esq.,
Lockridge Grindal Nauen PLLP, counsel for City of Miami Fire Fighters’ & Police
Officers’ Retirement Trust.
David R. Marshall, Esq., Leah C. Janus, Esq., Fredrikson & Byron, PA; and Michael C.
Tu, Esq., Robert M. Stern, Esq., Orrick, Herrington & Sutcliffe LLP, counsel for
This matter is before the Court on a Motion to Dismiss Plaintiffs’ Amended Class
Action Complaint (“Complaint”) brought by Defendants Cardiovascular Systems, Inc.
(“CSI”) and Laurence L. Betterley (“Betterley”). (Doc. No. 52.) For the reasons set forth
below, the Court grants the Motion to Dismiss without prejudice and grants Plaintiffs’
request for leave to amend their Complaint.
CSI is a publicly traded company that primarily develops and manufactures
medical devices for the treatment of peripheral arterial disease and coronary artery
disease. (Doc. No. 48 (“Am. Compl.”) ¶ 20.) Betterley has been CSI’s Chief Financial
Officer since April 2008. (Id. ¶ 22.) David L. Martin, recently deceased, was CSI’s CEO
and one of its directors during the relevant time period. (Id. ¶ 23.) Plaintiffs are
shareholders of CSI who allege that Defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the “Exchange Act”). Plaintiffs seek to represent a
class of shareholders who “purchased or otherwise acquired” CSI’s common stock
between September 12, 2011 and January 21, 2016. (Am. Compl. at 1.)
CSI’s Business Model
Around 88% of CSI’s business comes from the sale of devices used to treat
peripheral arterial disease (“PAD”). (Id. ¶ 26.) PAD “typically refers to the chronic
obstruction of the arteries supplying the lower extremities due to plaque deposition on the
walls of the arteries resulting in inadequate blood flow to the limbs.” (Doc. Nos. 55-70
(“Luken Decl.”) ¶ 11, Ex. 10 at 2.) The effect of PAD, if left untreated, “may continue to
progress to Critical Limb Ischemia (“CLI”), a condition in which the amount of
oxygenated blood being delivered to the limb is insufficient to keep the tissue alive.”
(Id.) CLI can lead to a number of adverse health effects up to and including death. (Id.)
In fact, within a year of a CLI diagnosis, 25% to 30% of patients will die. (Id.)
During the relevant period, CSI received FDA approval to sell three different PAD
devices for PAD therapy. (Am. Compl. ¶ 34.) The FDA authorized the sale of CSI’s
Diamondback 360® Peripheral Orbital Atherectomy System in August 2007; CSI’s
Stealth 360® Orbital Atherectomy System in March 2011; and CSI’s Diamondback 360®
60 cm Peripheral Orbital Atherectomy System in February 2014. (Luken Decl. ¶ 11,
Ex. 10 at 2.)
CSI has also developed devices to treat coronary artery disease (“CAD”). CAD is
the most common type of heart disease in the United States. (Id. at 3.) CAD occurs
when “plaque builds up on the walls of arteries that supply blood to the heart.” (Id.) In
October 2013, the FDA gave premarket approval for CSI’s Diamondback 360® Coronary
OAS to treat CAD. (Id. at 2.)
AKS, FCA, and Off-Label Promotions
CSI operates in a heavily regulated market, which prohibits some conduct that
would be legal in less regulated industries. Under the Food, Drug, and Cosmetic Act
(“FDCA”), the Food and Drug Administration (“FDA”) is vested with, among other
things, the responsibility of approving labels for medical devices, which outline the
devices’ approved uses. James M. Beck & Elizabeth D. Azari, FDA, Off-Label Use, and
Informed Consent: Debunking Myths and Misconceptions, 53 Food & Drug L.J. 71, 71
(1998). Once approved for particular uses, a physician can still prescribe the device for
other, off-label uses. Id. at 78. Such off-label uses are a “common and integral feature of
medical practice.” Id. at 79. But even though a physician may prescribe an off-label use,
manufacturers may not promote those uses. Id. at 102 & n.235. If a manufacturer is
found to have promoted an off-label use, the manufacturer can face a number of
penalties, including up to a year in prison and a $1,000 fine. See 21 U.S.C. § 333.
Medical devices are also regulated by the federal Anti-Kickback Statute (“AKS”). 1
The AKS is a criminal statute that prohibits, among other things, “knowingly and
willfully offer[ing] or pay[ing] any remuneration (including any kickback, bribe, or
rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to
induce such person” to either refer an individual to the person for medical services or to
purchase any good that that will be repaid in whole or in part by a federal health care
program. 42 U.S.C. § 1320a-7b(b)(2)(B). In short, a violation of the AKS requires:
(1) a remuneration to a person or entity in a position to either purchase goods subject to
reimbursement by a federal health care program or to refer a patient whose care will be
reimbursed by a federal health care program; and (2) that the remuneration could
reasonably induce such referral or such purchase. See Jones-McNamara v. Holzer Health
Sys., 630 F. App’x 394, 401 (6th Cir. 2015) (citing OIG Supplemental Compliance
Program Guidance for Hospitals, 70 Fed. Reg. 4858, 4864 (Jan. 31, 2005)). 2 Courts and
the OIG have concluded that a “remuneration” is “virtually anything of value.” Id.
(quoting OIG Compliance Program Guidance for Ambulance Suppliers, 68 Fed. Reg.
14245, 14252 (Mar. 24, 2003)). A person guilty of violating AKS faces up to five years
42 U.S.C. § 1320a-7b.
The Office of the Inspector General (“OIG”) for the Department of Health and
Human Services offers guidance on the AKS.
in prison and a fine up to $25,000. 42 U.S.C. § 1320a-7b(b). A violation of the AKS
may also be a violation of the federal False Claims Act 3 (“FCA”) where a claim
submitted to the government includes items or services resulting from a violation of the
AKS. Id. § 1320a-7b(g).
The AKS has a number of safe harbors, including for providing discounts. Id.
§ 1320a-7b(b)(3)(A). The safe harbor, however, does not offer protection if, among other
things, the documentation provided to physicians does not accurately reflect the discount.
42 C.F.R § 1001.952(h)(2); United States v. Carroll, 320 F. Supp. 2d 748, 756 (S.D. Ill.
2004) (quoting OIG Clarification of the Initial OIG Safe Harbor Provisions and
Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute,
64 Fed. Reg. 63518, 63527 (Nov. 19, 1999)); see also U.S. ex rel. Banigan v. Organon
USA Inc., 883 F. Supp. 2d 277, 296 (D. Mass. 2012) (noting that discounts are not
covered if they are not passed on to Medicaid).
Qui Tam Allegations
On July 15, 2013, a former district sales manager, who worked for CSI from 2012
until February 2013, filed a qui tam 4 action against CSI. (Doc. No. 48-2 (“Qui Tam
Complaint”) ¶ 9.) The Qui Tam Complaint alleged that CSI had illegally promoted its
PAD devices for off-label purposes and had given illegal kickbacks to physicians for
31 U.S.C. § 3729.
A qui tam action is one filed by a private person on behalf of the government.
Qui Tam, Black’s Law Dictionary (10th ed. 2014).
prescribing the PAD devices. (See id. ¶ 10.) The Qui Tam Complaint was expressly
incorporated by reference into the Complaint. (Am. Compl. at 1 n.1.) 5
The Qui Tam Complaint alleges that CSI gave illegal kickbacks to physicians in
the form of free trips to training programs at desirable locations in exchange for the
physicians buying PAD devices. (Qui Tam Complaint ¶¶ 50-52.) Additionally, CSI
allegedly marketed the PAD devices as a revenue generator for physicians as compared
to less expensive alternatives. (Id. ¶ 59.) CSI also allegedly encouraged physicians to
use the PAD devices when they were not medically necessary. (Id. ¶ 63.) In addition,
the Qui Tam Complaint alleges that CSI gave illegal kickbacks in the form of free
products, such as deals where the physicians buy six devices and get one free. (Id. ¶ 69.)
CSI allegedly offered illegal kickbacks in the form of referrals to doctors in exchange for
use of PAD devices. (Id. ¶¶ 74, 80-81.) Finally, the Qui Tam Complaint alleges that CSI
selected physicians to be paid speakers for CSI’s Speaker Bureau based on which
physicians used the most PAD devices and who would drive others to use PAD devices.
(Id. ¶ 88.)
In addition, the Qui Tam Complaint alleges that CSI marketed its PAD devices for
off-label uses. Specifically, CSI allegedly informed physicians at training events that its
The Court would caution future plaintiff’s counsel from fully incorporating by
reference other complaints. Here, while some allegations in the Qui Tam Complaint are
repeated by confidential witnesses in the Amended Complaint, other allegations are not
and appear only in the Qui Tam Complaint. Counsel, then, is certifying that to the best of
his or her “knowledge, information, and belief, formed after an inquiry reasonable under
the circumstances . . . the factual contentions have evidentiary support or, if specifically
so identified, will likely have evidentiary support after a reasonable opportunity for
further investigation or discovery.” 15 U.S.C. § 78u-4(c); Fed. R. Civ. P. 11(b)(3).
PAD Devices, which were allegedly approved to be used on certain blood vessels in
certain parts of the body, could also be used for other vessels in other body parts. (Id.
¶¶ 97, 101, 106.)
Qui Tam Settlement and Aftermath
At first, the Qui Tam Complaint was filed under seal, concealing its existence
from CSI. (See Am. Compl. ¶ 8; Memo. at 7.) 6 On May 9, 2014, CSI announced that the
U.S. Attorney’s Office for the Western District of North Carolina had sent CSI notice that
it was investigating the Qui Tam Complaint. (Am. Compl. ¶ 10.) On July 8, 2015, the
Qui Tam Complaint was unsealed. (Memo at 7; Luken Decl. ¶ 26, Ex. 25.) On June 29,
2016, CSI settled the Qui Tam Complaint in exchange for $8 million and agreeing to a
Corporate Integrity Agreement. (Opp. at 9.) CSI did not admit any wrongdoing as part
of the settlement. (Doc. No. 74 (“Robinson Decl.”) ¶ 12, Ex. 5 (“Settlement Agreement”)
In the aftermath of the announcement of the Qui Tam Complaint, CSI’s stock
price fell. (Am. Compl. ¶ 124.) Shareholders filed suit in the Central District of
California and in the District of Minnesota. (Memo. at 8.) On March 26, 2016, this Court
appointed Plaintiffs as Co-Lead Plaintiffs. (Doc. No. 25.) And on June 28, 2016,
Plaintiffs filed this Complaint. (Doc. No. 48.)
Defendants’ Memorandum in Support of their Motion to Dismiss (Doc. No. 54) is
cited as “Memo.” Plaintiffs’ Memorandum in Opposition to Defendants’ Motion to
Dismiss (Doc. No. 73) is cited as “Opp.” Defendants’ Reply brief (Doc. No. 76) is cited
Plaintiffs claim that in early 2012, Kevin Kenny (Executive Vice President of
Sales and Marketing) and Jim Breidenstein (Vice President of Sales) implemented a
scheme whereby CSI began violating the AKS and the FCA by: (1) providing kickbacks
to physicians for using PAD devices, which took the form of either referrals, discounted
products, or assistance in establishing office-based laboratories; (2) encouraging
physicians to use PAD devices when they were not medically necessary; (3) hiding
products so they would be reordered or channel stuffing; 7 and (4) promoting the product
for off-label uses. The scheme was allegedly in place from when Breidenstein joined CSI
in 2012 until May 9, 2014, when CSI received notice of the Qui Tam Complaint. (See
Am. Compl. ¶¶ 34, 60.)
In addition to allegations from the Qui Tam Complaint, Plaintiffs also used an
investigator who successfully contacted fourteen former CSI employees. The former
employees did not sign declarations regarding CSI’s sales practices. Instead, Plaintiffs
have attributed the information in the form of confidential witness statements. In
response to the statements, CSI claims that it spoke with eight of the fourteen witnesses.
And according to CSI, each of the eight refuted their attributed statements, and two
signed declarations. (Memo. at 20.) The confidential witnesses (“CWs”) make the
Channel stuffing is a practice of over shipping goods to inflate sales.
CW1 was a District Sales Manager in New York from 2010 to 2012. According
CSI provided free products through “‘buy some get some free’
deals,” but recorded them as lost inventory. (Am. Compl. ¶ 57.)
CSI targeted third-party physicians to refer patients to physicians
who used PAD devices. (Id. ¶ 69.)
Physicians used PAD devices when they were not medically
necessary. (Id. ¶ 88.)
CSI provided physicians with documents that promoted CSI’s PAD
devices as revenue generators. (Id. ¶ 90.)
CW2 was a Sales Specialist in Florida from 2012 to 2014. According to CW2:
CSI trained sales representatives and physicians to use PAD devices
with smaller, unapproved catheters. (Id. ¶ 43.)
CSI provided physicians with documents that promoted CSI’s PAD
devices as revenue generators. (Id. ¶¶ 43, 91.)
CSI gave away free products in buy-some, get-some-free deals.
(¶¶ 58-59.) The deals were regularly touted by Breidenstein. (Id.)
CSI marketed its referral network, including by inviting physicians
to dinner. (Id. ¶ 70.)
CSI offered free products to office-based laboratories and otherwise
supported their operations. (Id. ¶ 82.)
Physicians performed medically unnecessary procedures to use more
CSI PAD devices, which was encouraged by “CSI officials.” (Id.
CW3 was an executive and Vice President from 2006 until 2012, and he heard
about the existence of illegal sales practices, which were implemented by Breidenstein
and Kenny. (Id. ¶ 60.)
CW4 was a referral marketer from 2008 until 2010. In 2010, he became a District
Sales Manager until 2012. He worked in the Southeastern United States. According to
CSI “incentivized sales representatives to offer buy one, get one free
deals at the end of the quarter.” (Id. ¶ 61.)
Before becoming a salesperson, CW4 would arrange meetings and
lunches between physicians who would potentially refer patients to
the physicians using PAD devices. (Id. ¶ 71.)
CSI employees hid customers’ PAD devices in hospitals to cause
reorders. (Id. at 87.)
CW5 was a Field Clinical Specialist from 2014 until 2015. Plaintiffs do not allege
where CW5 worked. According to CW5, sales representatives encouraged physicians to
use PAD devices even when unnecessary. (Id. ¶ 44.)
CW6 was a Regional Manager from 2009 to 2012. Plaintiffs did not disclose in
which region CW6 worked. CW6 allegedly stated:
CSI encouraged office-based laboratories to unnecessarily use PAD
devices and offered them free devices and large discounts. (Id.
Breidenstein and Kenny were the ones giving the “unethical
marching orders.” (Id. ¶ 103.)
CW6 was allegedly terminated for not engaging in the illegal
practice. (Id. ¶ 103.)
CW7 was a District Sales Manager in Ohio from 2010 to 2012. According to
CW7, CSI routinely offered “buy so many, get so many free deals to customers.” (Id.
CW8 was a Regional Sales Manager in Florida from 2015 to 2016. According to
CW8, after Breidenstein’s departure, CSI was a “different place.” (Id. ¶ 118.)
CW9 was a shipping and receiving clerk in Minnesota from 2011 to 2013. CW9
was responsible for shipping and receiving PAD devices. Apparently, CW9 saw an
increase in PAD shipments near the end of the quarter and determined that these
shipments were returned. (Id. ¶¶ 94-95.) CW9 allegedly implemented a test where he
would mark certain packages to track that the same packages were being returned. (Id.
CW10 was a District Sales Manager in Florida from 2014 to 2015. According to
Buy-some, get-some-free deals were quid pro quo, and the offers
were individualized to each customer. (Id. ¶ 63.)
Physicians used PAD devices when they were not medically
necessary. (Id. ¶ 88.)
CSI provided physicians with documents that promoted CSI’s PAD
devices as revenue generators. (Id. ¶ 91.)
CW11 was a District Sales Manager in Massachusetts from 2010 to 2013.
According to CW11:
Breidenstein implemented “shady” sales practices to drive sales,
including buy-some, get-some-free deals. (Id. ¶ 64.)
CSI encouraged physicians to open office-based laboratories. (Id.
CW11 heard of CSI encouraging physicians to use multiple PAD
devices. (Id. ¶ 92.)
CW12 was a District Sales Manager in Alabama from 2012 to 2014. According
CSI encouraged buy-some, get-some-free deals, including with
office-based laboratories. (Id. ¶ 65.)
CSI marketed PAD devices as revenue generators for physicians.
(Id. ¶¶ 90-91.)
Physicians used PAD devices when they were not medically
necessary. (Id. ¶ 88.)
CW13 was a District Sales Manager in Colorado and Wyoming from 2011 to
2014. According to CW13:
Educational programs were really referral opportunities for CSI to
let referring physicians know of local physicians who used CSI
devices. (Id. ¶ 72.)
Physicians used PAD devices when they were not medically
necessary. (Id. ¶ 89.)
CW14 was a District Sales Manager in New York from 2012 to 2013. According
CSI would help physicians set up office-based laboratories,
including helping the newly formed labs receive preferred pricing
from other suppliers. (Id. ¶ 84.)
Physicians used PAD devices when they were not medically
necessary. (Id. ¶ 92.)
Breidenstein implemented a sales approach of selling products as
aggressively as possible. (Id. ¶ 103.)
Plaintiffs allege that CSI made various misstatements and omissions each
premised on the same factual predicate: CSI engaged in widespread illegal activity.
Broadly, Plaintiffs allege six categories of misstatements:
(1) Statements about past sales growth that Defendants falsely attributed to
(2) Statements about future sales growth that were falsely attributed to
(3) Statements about CSI’s revenues made while omitting the truth about
the Company’s illegal sales practices;
(4) Statements about CSI’s legal and regulatory compliance;
(5) False signed Sarbanes-Oxley Act (“SOX”) certifications guaranteeing
the accuracy of the Company’s financial statements; and
(6 ) Statements and omissions about losses that CSI suffered after
discontinuing its illegal sales tactics, as well as costs incurred from salesforce reorganizations necessitated by the end of illegal sales activities.
These include both affirmative falsehoods as to the causes of those losses as
well as omissions as to their true causes.
(Opp. at 11 (internal citations omitted).) Defendants moved to dismiss on a number of
grounds, including that Plaintiffs have failed to adequately plead facts demonstrating
In deciding a motion to dismiss pursuant to Rule 12(b)(6), a court assumes all
facts in the complaint to be true and construes all reasonable inferences from those facts
in the light most favorable to the complainant. Morton v. Becker, 793 F.2d 185, 187 (8th
Cir. 1986). In doing so, however, a court need not accept as true wholly conclusory
allegations, Hanten v. Sch. Dist. of Riverview Gardens, 183 F.3d 799, 805 (8th
Cir. 1999), or legal conclusions drawn by the pleader from the facts alleged, Westcott v.
City of Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990). A court may consider the
complaint, matters of public record, orders, materials embraced by the complaint, and
exhibits attached to the complaint in deciding a motion to dismiss under Rule 12(b)(6).
Porous Media Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999).
To survive a motion to dismiss, a complaint must contain “enough facts to state a
claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007). Although a complaint need not contain “detailed factual allegations,” it must
contain facts with enough specificity “to raise a right to relief above the speculative
level.” Id. at 555. As the United States Supreme Court reiterated, “[t]hreadbare recitals
of the elements of a cause of action, supported by mere conclusory statements,” will not
pass muster under Twombly. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing
Twombly, 550 U.S. at 555). In sum, this standard “calls for enough fact[s] to raise a
reasonable expectation that discovery will reveal evidence of [the claim].” Twombly, 550
U.S. at 556.
In addition to these general pleading standards, the PSLRA imposes a heightened
pleading standard in cases alleging securities fraud. Lustgraaf v. Behrens, 619 F.3d 867,
873 (8th Cir. 2010). Under the PSLRA, complaints in a securities fraud action must
“specify each statement alleged to have been misleading, the reason or reasons why the
statement is misleading,” and must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind” (the “scienter
requirement”). 15 U.S.C. § 78u-4(b)(1)-(2); see also Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 321 (2007). One purpose of the PSLRA was to “put an end
to the practice of pleading fraud by hindsight.” Elam v. Neidorff, 544 F.3d 921, 927 (8th
Cir. 2008). But the heightened pleading standard does not amount to an obligation on
securities fraud plaintiffs to ultimately prove their allegations, as that “is an altogether
different question” from adequately pleading securities fraud. Matrixx Initiatives, Inc. v.
Siracusano, 131 S. Ct. 1309, 1325 (2011).
Plaintiffs allege that Defendants violated the anti-fraud provisions of Section 10(b)
of the Exchange Act and SEC Rule 10b-5. Section 10(b) of the SEC Act makes it
“unlawful for any person, directly or indirectly . . . [t]o use or employ, in connection with
the purchase or sale of any security . . . any manipulative or deceptive device or
contrivance in contravention of” SEC rules. 15 U.S.C. § 78j(b). SEC Rule 10b-5 states
that it is:
unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce . . . [t]o employ any device, scheme,
or artifice to defraud, [t]o make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading, or [t]o engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5(a)-(c). A plaintiff asserting liability under Section 10(b) and/or
Rule 10b–5 must adequately allege: “‘(1) a material misrepresentation or omission by
the defendant; (2) scienter; (3) a connection between the misrepresentation or omission
and the purchase or sale of a security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation.’” Minneapolis Firefighters’ Relief
Ass’n v. MEMC Elec. Materials, Inc., 641 F.3d 1023, 1028 (8th Cir. 2011) (quoting
Stoneridge Inv. Partners, LLC v. Sci.-Atl., Inc., 552 U.S. 148, 157 (2008)).
The parties have submitted a number of documents related to the motion to
dismiss. On a motion to dismiss, courts are not strictly limited to the allegations of the
complaints and documents attached to it. Dittmer Props., L.P. v. F.D.I.C., 708 F.3d
1011, 1021 (8th Cir. 2013). Instead, courts can consider “matters incorporated by
reference or integral to the claim, items subject to judicial notice, matters of public
record, orders, items appearing in the record of the case, and exhibits attached to the
complaint whose authenticity is unquestioned without converting the motion into one for
summary judgment.” Id. (quoting Miller v. Redwood Toxicology Lab., Inc., 688 F.3d
928, 931 n.3 (8th Cir. 2012) (internal quotation marks omitted)).
Defendants have requested judicial notice or otherwise submitted: (1) SEC filings,
including CSI’s 10-Ks, 8-Ks, press releases, and earnings calls that occurred around the
Class Period; (2) instructions for CSI’s Stealth 360® Orbital Atherectomy System, which
was approved in March 2011 and treats PAD; (3) some of CSI’s internal policies;
(4) former CEO Martin’s 10b5-1 trading plans and modifications; and (5) declarations
disputing some of Plaintiffs’ confidential witnesses. (See Luken Decl.) Plaintiffs
submitted declarations from members of Plaintiffs’ litigation team discussing their use of
confidential witnesses in drafting their complaint. Plaintiffs also request the court
consider: (1) CSI’s settlement agreement for the Qui Tam Complaint; (2) the corporate
integrity agreement, which was part of the settlement and outlines procedures for CSI to
monitor for AKS & the FCA violations; and (3) instructions for CSI’s Diamondback
360® Coronary Orbital Atherectomy System, which was approved in October 2013 and
treats CAD. (See Robinson Decl.) Plaintiffs allege that all of these documents are
publicly available from the SEC (for the settlement agreement) or from the FDA (for the
instructions). (Doc. No. 75.) Defendants do not oppose Plaintiff’s motion for judicial
notice. And Plaintiffs oppose Defendants’ submissions only to the extent that Defendants
try to resolve factual disputes. (Opp. 12-14.)
Here, the Court takes judicial notice of the public statements and SEC filings,
including the settlement agreement and corporate integrity agreement. See Fla. State Bd.
of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 663 (8th Cir. 2001). The Court also
takes judicial notice of the documents outlining CSI’s internal policies, which are
contemplated by the Complaint and neither party disputes their authenticity. Dittmer
Props., 708 F.3d at 1021. Additionally, the Court takes judicial notice of the device
instructions. Garross v. Medtronic, Inc., 77 F. Supp. 3d 809, 818 (E.D. Wis. 2015). The
Court also takes judicial notice of Martin’s 10b5-1 trading plan and modifications.
Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 593 n.14 (S.D.N.Y. 2011). The Court,
however, will not consider the parties’ declarations, which address the veracity of the
confidential witnesses or their accounts. Courts cannot resolve fact disputes on a motion
to dismiss. Similarly, Rule 201 allows a court to take judicial notice of only those facts
that are not in dispute. Kushner v. Beverly Enters., Inc., 317 F.3d 820, 832 (8th Cir.
2003) (citing Fed. R. Evid. 201). Thus, because the statements of the confidential
witnesses are in dispute, the Court cannot consider the declarations at this stage.
False And Misleading Statements
Plaintiffs’ case is premised on the notion that Defendants engaged in widespread
illegal sales practices. And as a result of these illegal activities, Plaintiffs contend, a
number of Defendants’ public statements were false and misleading. The PSLRA
imposes a heightened pleading requirement for securities fraud cases. Pub. Pension Fund
Grp. v. KV Pharm. Co., 679 F.3d 972, 980 (8th Cir. 2012). As part of that heightened
pleading requirement, a plaintiff must “specify each statement alleged to have been
misleading [and] the reason or reasons why the statement is misleading[.]”
Id. (alterations in the original) (quoting 15 U.S.C. § 78u–4(b)(1)). To satisfy this
heightened pleading standard, “the circumstances of the fraud must be stated with
particularity, including such matters as the time, place and contents of false
representations, . . . [t]his means the who, what, when, where, and how.” Id. (alteration
in the original) (internal quotation marks omitted).
At the outset, the parties disagree whether Plaintiffs have adequately pleaded that
CSI engaged in illegal conduct. In fact, Plaintiffs argue that their Complaint can survive
a motion to dismiss even without alleging facts that, if true, would violate either the AKS
or the FCA. (Opp. at 13.) The better view, however, is that Plaintiffs must plead
particular facts that, if true, would constitute illegal conduct. See In re Key Energy
Servs., Inc. Sec. Litig., 166 F. Supp. 3d 822, 863, 872 (S.D. Tex. 2016) (concluding that
the plaintiffs’ claim failed in part because they failed “to plead any facts showing that
there were FCPA violations”); see also Minneapolis Firefighters’ Relief Ass’n v.
Medtronic, Inc., No. Civ. 08-6324, 2010 WL 11469576, at *4 (D. Minn. Feb. 3, 2010)
(“Plaintiffs have come forward with evidence that, if believed, establishes that Medtronic
purposefully promoted the off-label use of Infuse. Defendants’ Motion cannot be granted
on this basis.”). But see Sapssov v. Health Mgmt. Assocs., Inc., 22 F. Supp. 3d 1210,
1226 (M.D. Fla. 2014) (“The Court finds that plaintiffs in this case need not allege a
violation of the FCA in order to properly plead their securities fraud cause of action.”),
aff’d, 608 F. App’x 855 (11th Cir. 2015). Congress passed the PSLRA to protect against
meritless strike suits. Tellabs, 551 U.S. at 313. Allowing shareholders to sue based on
conclusory allegations that a company has engaged in widespread illegal conduct without
adequately pleading facts that demonstrate illegal conduct would just allow strike suits by
another name. Thus, for Plaintiffs’ Section 10(b) and Rule 10b-5 claims to survive a
motion to dismiss, Plaintiffs must allege facts that, if true, would constitute illegal
Plaintiffs rely on confidential witnesses and the Qui Tam Complaint to support
their general assertion that CSI violated the AKS and FCA by: (1) promoting off-label
uses of CSI’s PAD devices; (2) offering discounts to physicians for purchasing PAD
devices; and (3) working to cause referrals of patients to physicians who prescribed PAD
Plaintiffs support the allegations in their complaint with statements from
confidential witnesses. Unlike other factual allegations in a complaint, courts are not
required to wholly accept as true statements from a confidential witness. Recognizing
that confidential witnesses could have a variety of reasons for speaking to plaintiff’s
counsel, courts routinely evaluate and disregard the statements on a motion to dismiss.
Minneapolis Firefighters’ Relief Ass’n v. MEMC Elec. Materials, Inc., 641 F.3d 1023,
1030 (8th Cir. 2011) (citing Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 757-58 (7th
Cir. 2007)). Courts may consider a number of factors when deciding what weight to give
statements from confidential witnesses. In re Nash Finch Co., 502 F. Supp. 2d 861, 874
(D. Minn. 2007). A complaint can be supported with statements from a confidential
witness when the witness is “described in the complaint with sufficient particularity to
support the probability that a person in the position occupied by the source would possess
the information alleged.” Id. (quoting Cal. Pub. Employees’ Ret. Sys. v. Chubb Corp.,
394 F.3d 126, 146 (3d Cir. 2004)). Things courts consider include “the level of the detail
provided by the confidential witnesses, the corroborative nature of the other facts alleged
(including from other sources), the coherence and plausibility of the allegations, the
number of sources, the reliability of the sources, and similar indicia.” Id. In Nash Finch,
the court concluded that it was probable that the confidential witnesses possessed the
alleged information “based on job title, job description, and time period.” Id.
Additionally, a complaint must allege in detail how the confidential witness came
to possess the information. In re Commtouch Software Ltd. Sec. Litig., Civ. No. 01-719,
2002 WL 31417998, at *10 (N.D. Cal. July 24, 2002). The complaint must contain
enough detail to determine whether the confidential witness has personal knowledge or
whether the witness is “merely regurgitating gossip and innuendo.” See id. at *3.
Here, Plaintiffs, for the most part, have failed to adequately plead the confidential
witnesses’ roles 8 or how they came into possession of the information. In particular,
Plaintiffs have failed to allege the job duties for the confidential witnesses. 9 As a result,
the Court disregards the statements of those confidential witnesses for whom Plaintiffs
did not provide a description of the witnesses’ job duties.
Additionally, Plaintiffs’ confidential witnesses, at times, merely relay office
gossip. For example, CW3 “heard” about allegedly illegal sales practices. (Am. Compl.
¶ 60.) Similarly, vague allegations from witnesses that CSI had implemented “shady”
Plaintiffs did allege facts regarding CW9’s job duties. (Am. Compl. ¶¶ 94.)
According to Plaintiffs, CW9 was a shipping-and-receiving clerk who was responsible
for shipping PAD devices. (Id.) CW9 apparently noticed that shipments increased at the
end of the quarter and many would be returned. (Id.) Plaintiffs’ suggestion, then, is that
CSI engaged in channel stuffing, a practice of over shipping goods to inflate sales. (See
id.) As alleged, however, Plaintiffs have failed to explain how a shipping-and-receiving
clerk could discern legitimate orders from illegitimate ones. Moreover, many of
Plaintiffs’ other confidential witnesses state that CSI would engage in a fire-sale at the
end of each quarter, which would seemingly result in additional shipments. (See, e.g., id.
¶¶ 58, 61, 65.) Plaintiffs have failed to reconcile the inconsistencies coming from CSI
employees who would purportedly be closer to the sales process. Thus, the Court
concludes that it is less probable that CW9 would possess information regarding CSI’s
sales practice. The Court therefore gives CW9’s statements less weight.
The circumstances of this case highlight the deficiency: Plaintiffs have provided
the Court with no basis to evaluate the confidential witnesses. Does a district manager in
New York have the same responsibilities as one in Wyoming? On what basis does a
district sales manager or sales specialist conclude that doctors were providing medically
unnecessary procedures? How does a sales specialist know kickbacks to healthcare
providers “absolutely occurred” and that Medicare fraud was “rampant?” See In re
Commtouch, 2002 WL 31417998, at *10; see also Ill. Farmers Ins. Co. v. Mobile
Diagnostic Imaging, Inc., No. 13-2820, 2014 WL 4104789, at *12 (D. Minn. Aug. 19,
2014) (“Of course, the conclusory statement that the scans were medically unnecessary is
not entitled to the assumption of truth.”).
practices or that CSI was a “different place” after Breidenstein left are not detailed
enough to be reliable. (Id. ¶¶ 64, 118.) Thus, the Court also disregards the confidential
witnesses’ statements to the extent they are vague or based on second-hand knowledge.
Plaintiffs are therefore left with more generalized allegations from the Qui Tam
Complaint of CSI’s off-label promotions, discounts, and referrals.
Plaintiffs allege that CSI’s PAD devices are FDA-approved for use with 6-French
catheters and to be used only below the waist. (Id. ¶¶ 40, 46.) The French Catheter Scale
is the common measurement scale used for catheters: the smaller the number, the smaller
the catheter size. (Id. ¶ 39.) Plaintiffs allege different instances of CSI purportedly
marketing PAD devices for smaller catheters or for use above the waist. Although the
Court is obligated to accept as true Plaintiffs’ factual allegations, the Court does not need
to accept Plaintiffs’ conclusory allegations or legal conclusions. Hanten, 183 F.3d at
805; Westcott, 901 F.2d at 1488. Moreover, under the PSLRA, Plaintiffs must plead
certain facts with particularity, including “how” a statement is false. KV Pharm. Co.,
679 F.3d at 980.
Here, Plaintiffs fail to plead with particularity the FDA’s restriction on CSI’s PAD
devices. Plaintiffs nakedly allege the FDA limitations, but they fail to buttress this
allegation with any support. Plaintiffs do not quote the purported limiting instructions.
Nor do Plaintiffs provide the instructions either as an attachment or in support of their
opposition brief. 10 Thus, Plaintiffs have failed to plead with particularity that CSI
promoted off-label use of its PAD devices.
Plaintiffs also allege that CSI promoted their PAD devices to be used to treat
blockages in coronary arteries. (Am. Compl. ¶ 46.) Plaintiffs point to allegations in the
Qui Tam Complaint that state CSI provided reimbursement coding to doctors for
coronary uses, but the coding document explicitly states that CSI does not sell any
devices for those codes. (Id. ¶ 48.) Other than the Qui Tam Complaint, Plaintiffs do not
cite any confidential witnesses, doctors, patients, or insurers to support this allegation. 11
Thus, Plaintiffs have failed to plead with particularity that CSI promoted off-label uses of
its PAD devices.
Plaintiffs also allege that CSI gave illegal discounts to physicians in the form of
agreements where the doctors bought some devices and received others free. Under the
AKS, however, manufacturers are allowed to provide discounts so long as the discount is
Plaintiffs provided the instructions for CSI’s CAD device, which provides that the
minimum catheter size used should be a 6-French, but no such restriction exists in the
PAD device instructions provided by Defendants. (Compare (Robinson Decl. ¶ 12, Ex. 7
at 3), with (Luken Decl. ¶ 2, Ex. 1 at 34).)
In fact, only CW2 and CW5 allegedly made any statements about off-label uses.
CW2, a Sales Specialist, apparently observed training and promotional materials for PAD
devices to be used in narrower blood vessels. Plaintiffs, however, have failed to
demonstrate that such use is off-label. CW5, a Field Clinical Specialist, made generic
allegations that sales representatives encouraged physicians to use PAD devices in every
instance, even when not indicated. (Am. Compl. ¶ 44.) But such generalized statements
are not particular enough to be given much weight. See Nash Finch, 502 F. Supp. 2d at
documented and passed on to the government. See 42 C.F.R § 1001.952(h). In their
Complaint, Plaintiffs do not allege with particularity that the discounts were not
documented or that the discounts were not passed on to the government. Thus, Plaintiffs
have failed to plead with particularity that Defendants violated the AKS by providing
discounts to physicians.
Referrals and Other Kickbacks
Plaintiffs also allege that CSI implement various schemes to cause physicians to
use CSI’s PAD devices, including helping establish office-based laboratories, trainings,
introducing doctors for referrals, and having lunches and dinners with doctors. The
elements of a violation of the AKS requires: (1) a remuneration to a person or entity in a
position to either purchase goods subject to reimbursement by a federal health care
program or to refer a patient whose care will be reimbursed by a federal health care
program; and (2) that the remuneration could reasonably induce such referral or such
purchase. See Jones-McNamara v. Holzer Health Sys., 630 F. App’x 394, 401 (6th Cir.
2015) (citing OIG Supplemental Compliance Program Guidance for Hospitals, 70 Fed.
Reg. 4858, 4864 (Jan. 31, 2005)). The OIG has interpreted “remuneration” as being
“virtually anything of value.” Id. Plaintiffs, however, have failed to allege with
particularity that the remuneration was directed toward a person capable of referring
patients or purchasing PAD devices. Moreover, Plaintiffs have failed to allege that the
remuneration could induce a person to refer a patient or purchase PAD devices. Plaintiffs
rely heavily on CSI introducing physicians to other physicians who would prescribe PAD
devices, but Plaintiffs fail to allege what remuneration was offered to the referring
physician or how such introductions violate the AKS. (See Am. Compl. ¶¶ 67-77.) Thus,
Plaintiffs have failed to adequately plead that CSI violated the AKS.
Plaintiffs’ claim for securities fraud is premised on allegedly illegal conduct that
was not disclosed, which therefore rendered various public statements misleading.
Because Plaintiffs’ claim is predicated on illegal conduct, Plaintiffs must plead facts that,
if true, would constitute illegal conduct. Here, Plaintiffs have failed to adequately plead
that CSI was engaged in illegal conduct. The Court therefore dismisses Plaintiffs’
Complaint without prejudice and grants their request for leave to amend the Complaint.
Section 20(a) of the Exchange Act
Plaintiffs argue that Betterley is liable under Section 20(a) of the Exchange Act,
which establishes joint and several liability for “[e]very person who, directly or
indirectly, controls any person liable” for violations of the securities laws, “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 claim under Section 20(a) for control person liability is derivative of a primary
claim, and therefore the failure to satisfactorily plead a Section 10(b)/Rule 10b-5 claim
also precludes a Section 20(a) claim. See, e.g., Lustgraaf, 619 F.3d at 874. Because the
Court dismisses without prejudice Plaintiffs’ primary claim, the Court likewise dismisses
Plaintiffs’ Section 20(a) claim with leave to amend. 12
The PSLRA requires that “upon final adjudication of the action, the court shall
include in the record specific findings regarding compliance by each party and each
attorney representing any party with each requirement of Rule 11(b) of the Federal Rules
(Footnote Continued on Next Page)
Based upon the foregoing, IT IS HEREBY ORDERED:
Defendants’ Motion to Dismiss Plaintiffs’ Class Action Complaint (Doc.
No. ) is GRANTED consistent with the memorandum above.
Plaintiffs’ Amended Complaint (Doc. No. ) is DISMISSED
Plaintiffs’ request for leave to amend is GRANTED.
Plaintiffs shall file an amended complaint within 90 days of the date of this
Dated: March 29, 2017
s/Donovan W. Frank
DONOVAN W. FRANK
United States District Judge
(Footnote Continued From Previous Page)
of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.” 15
U.S.C. § 78u-4(c)(1). While the PSLRA does not define “final adjudication,” a court’s
dismissal without prejudice with leave to amend is not a “final adjudication.”
See Hilkene v. WD-40 Co., Civ. No. 04-2253, 2007 WL 470830, at *1 (D. Kan. Feb. 8,
2007) (collecting cases); see also In re Charter Commc’ns, 519 F.3d 730, 731 (8th Cir.
2008) (noting that final adjudication occurred at the entry of a Rule 54(b) final
judgment). Thus, the Court concludes that it is not mandated to make such a finding at
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