Jackson v. Halyard Health, Inc. et al
Filing
80
MEMORANDUM OPINION AND ORDER: re: 67 MOTION to Strike Document No. [56-2 and 56-3] filed by Ronald Jackson, 55 MOTION to Dismiss the Corrected Amended Class Action Complaint filed by Robert E. Abernathy, Steven E. Voskuil, Halyard Health, I nc., 58 MOTION to Dismiss Corrected Amended Class Action Complaint filed by Kimberly-Clark Corporation, Thomas J. Falk, Mark A. Buthman. For the reasons stated above, Defendants' motions to dismiss the Corrected Amended Class Action Complaint are granted in their entirety, and Plaintiff's motion to strike certain documents is denied as moot in light of the disposition of the Defendants' motions to dismiss. The Clerk of Court is requested to enter judgment in Defendants' favor and close this case. This Memorandum Opinion and Order resolves Docket Entry Nos. 55, 58, and 67. SO ORDERED. (Signed by Judge Laura Taylor Swain on 3/30/2018) (ama)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------x
RONALD JACKSON, individually and on
behalf of all others similarly situated,
Plaintiff,
-v-
No. 16-CV-05093-LTS
HALYARD HEALTH, INC., ROBERT E.
ABERNATHY, STEVEN E. VOSKUIL,
KIMBERLY-CLARK CORPORATION,
THOMAS J. FALK, and MARK A.
BUTHMAN,
Defendants.
-------------------------------------------------------x
MEMORANDUM OPINION AND ORDER
Plaintiff Ronald Jackson (“Plaintiff”), individually and on behalf of all other
persons similarly situated, brings this putative federal securities class action against Halyard
Health, Inc. (“Halyard”), former Halyard Chief Executive Officer (“CEO”) Robert E. Abernathy
(“Abernathy”), Halyard Chief Financial Officer (“CFO”) Steven E. Voskuil (“Voskuil,” together
with Abernathy, the “Halyard Individual Defendants,” and together with Abernathy and Halyard,
the “Halyard Defendants”), Kimberly-Clark Corporation (“Kimberly-Clark”), Kimberly-Clark
Executive Chairman and CEO Thomas J. Falk (“Falk”), and Former Kimberly-Clark CFO Mark
A. Buthman (“Buthman,” together with Falk, the “Kimberly-Clark Individual Defendants,” and
together with Falk and Kimberly-Clark, the “Kimberly-Clark Defendants”) on behalf of a
proposed class consisting of all persons other than Defendants who: (1) purchased or otherwise
acquired Kimberly-Clark securities on or after August 8, 2014 (the “Kimberly-Clark Class
Period”) and subsequently received Halyard securities pursuant to Kimberly-Clark’s spinoff of
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
1
Halyard, effective as of October 31, 2014; and/or (2) purchased or otherwise acquired Halyard
securities between October 21, 2014 and April 29, 2016, both dates inclusive (the “Halyard Class
Period” and, together with the Kimberly-Clark Class Period, the “Class Period”), seeking to
recover damages, allegedly caused by Defendants’ violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated under
Section 10(b).1 (Corrected Amended Class Action Complaint (“CACAC”), Docket Entry No.
50.)
The Court has jurisdiction of this action pursuant to 28 U.S.C. §§ 1331 and 1337,
and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
Before the Court are two motions to dismiss the remaining two counts of the
CACAC, one filed by the Halyard Defendants and one filed by the Kimberly-Clark Defendants,
as well as a motion by Plaintiff to strike two exhibits filed in connection with the Halyard
Defendants’ motion. (See Docket Entry Nos. 55, 58, and 67.) The Court has reviewed
thoroughly all of the parties’ submissions. For the following reasons, Defendants’ motions to
dismiss are granted in their entirety, and Plaintiff’s motion to strike is denied as moot in light of
the disposition of the Defendants’ motions to dismiss.
1
Plaintiff’s CACAC, filed on December 12, 2016, also includes claims for relief for
violations of Sections 11 and 15 of the Securities Act of 1933, and on February 13, 2017,
the Court ordered those claims, Counts III and IV, dismissed with prejudice pursuant to
Fed. R. Civ. P. 41(a)(1)(A)(ii), following the submission of a stipulation and agreement
by the parties. (Docket Entry No. 52.)
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
2
BACKGROUND
For the purposes of these motions, the Court takes as true the following facts
drawn from the CACAC (Docket Entry No. 50), the documents incorporated by reference
therein, and public filings of which the Court may take judicial notice.2
The Parties
Halyard sells health and healthcare supplies and solutions around the world,
including the MicroCool Breathable High Performance Surgical Gown (“MicroCool”), a product
“intended to protect healthcare providers from contact with highly infectious diseases like
hepatitis, HIV and Ebola.” (CACAC ¶¶ 2-4.) Halyard markets its products to hospitals and
healthcare providers, and through third-party distribution channels. (Id. ¶ 22.) In October 2014,
Halyard was spun off from Kimberly-Clark, a personal care, consumer tissue and professional
products manufacturer, where it was the Health Care operating segment, focused on, among
other priorities, the sale of surgical and infection prevention products for the operating room.
(Id.) On or about October 21, 2014, Halyard stock began trading on the New York Stock
Exchange, and Kimberly-Clark shareholders “receive[d] one share of Halyard common stock for
every eight shares of Kimberly-Clark common stock held as of the close of trading on October
23, 2014, the record date for the spin-off.” (Id. ¶ 15.) MicroCool was manufactured, marketed,
and sold first by Kimberly-Clark, from mid-2011 until the spin-off, and then by Halyard, from
October 2014 up through the time of the initiation of this action. (Id. ¶ 22.)
2
See Citadel Equity Fund Ltd. v. Aqulia, Inc., 168 F. App’x 474, 476 (2d Cir. 2006)
(holding that SEC filings are amenable to judicial notice).
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
3
Mr. Abernathy served at all relevant times as Halyard’s CEO, and Mr. Voskuil
served at all relevant times as Halyard’s CFO. (Id. ¶¶ 16-17.) Mr. Falk served at all relevant
times as Kimberly-Clark’s Executive Chairman and CEO, and Mr. Buthman served as KimberlyClark’s CFO from 2003 to 2015. (Id. ¶¶ 19-20.)
Plaintiff alleges that he “acquired Halyard securities at artificially inflated prices
during the Class Period and was damaged upon the revelation of” certain “alleged corrective
disclosures.” (Id. ¶ 14.)
MicroCool and AAMI Level 4 Classification
Kimberly-Clark received approval to manufacture, market, and sell MicroCool
from the Food and Drug Administration (“FDA”) “through a 510(k) approval process,” which is
allegedly a “far less costly and rigorous” process “than the FDA’s Pre-Market Approval process
for a device or pharmaceutical, and requires less supporting clinical data.” (Id. ¶ 24 (emphasis
omitted).) The MicroCool 510(k) summary, prepared on December 13, 2010, and filed by
Kimberly-Clark, states that MicroCool meets the Level 4 requirements of the Association for the
Advancement of Medical Instrumentation (“AAMI”) Liquid Barrier classification, a system of
liquid barrier performance classification for protective apparel. (Id. ¶¶ 25-26 (quotation marks
omitted) (quoting https://www.accessdata.fda.gov/cdrh_docs/pdf10/K103406.pdf).) Level 4
“provide[s] the highest liquid barrier protection defined by the AAMI” system. (Id. ¶ 26.) The
December 2010 summary further represented that MicroCool had been “tested in compliance
with the requirements of” a variety of tests that can demonstrate Level 4 performance, including
specifications set forth in a document discussing the standards for establishing minimum barrier
performance, and ASTM F1670/F1671, standard test methods for “measuring the resistance of”
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
4
materials used in protective clothing “to penetration by liquids.” (Id. ¶ 27, n. 1-2.) KimberlyClark announced on May 16, 2011, that the FDA allowed it to market MicroCool as meeting the
AAMI Level 4 standard. (Id. ¶ 28.)
Plaintiff alleges that Defendants were required to comply with FDA Regulation
820 (“Reg. 820”), 21 C.F.R. § 820, “which governs quality system regulation,” and that
Defendants violated Sec. 820.75 of Reg. 820, which requires manufacturers to “establish[] by
objective evidence that a process consistently produces a result or product meeting its
predetermined specifications.” (Id. ¶ 32.) Plaintiff alleges that Defendants “failed to ‘validate’
MicroCool in accordance with Reg[.] 820,” by failing to establish through objective evidence the
existence of a manufacturing process that produced consistent results, and violated Reg. 820 on
an ongoing basis because a sleeve-sealing process at the manufacturing plant was so unreliable
as to be incapable of validation. (Id. ¶¶ 32-33, 42.) Plaintiff does not allege that Reg. 820
required any specific government or public reporting.
Alleged MicroCool Deficiencies and Scienter Allegations
According to Plaintiff, “many” MicroCool gowns failed to meet the standards
required to meet the AAMI Level 4 standard “during ASTM F1671 tests of numerous random
samples taken from multiple separate manufacturing lots of the gowns.” (Id. ¶ 34.) Plaintiff
does not allege the specific time period during which certain MicroCool gowns failed AAMI
Level 4 tests. Plaintiff does proffer a detailed test report completed by Intertek Laboratory, dated
December 27, 2012 (the “Intertek Report”), a full two years after Kimberly-Clark prepared its
510(k) summary, as an example, and alleges that Kimberly-Clark learned when it received those
test results in January 2013 that, “of approximately 96 random samples of the” gowns, “over 48”
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
5
gowns failed the test and “no fewer than 32 of those gowns experienc[ed] catastrophic failures.”
(Id. ¶¶ 35-36.) Plaintiff alleges that, following receipt of this report, Defendants “continued to
market MicroCool as providing the highest level of protection against the transmission of
infectious diseases.” (Id. ¶ 38.)
Plaintiff alleges that, in addition to the Intertek Report, two confidential witnesses
(“CWs”) “confirm” that, as a “vast amount of MicroCool gowns . . . failed to demonstrate AAMI
Level 4 protection during independent testing,” the “Defendants could not properly validate the
process for manufacturing MicroCool gowns to ensure that the process would consistently yield
gowns that in fact provided AAMI Level 4 protection.” (Id. ¶ 39.) These CWs are alleged to be
an individual who worked as an administrative assistant in Halyard’s Global Strategic Marketing
department from April 2013 to March 2015 (“CW1”), who reported to first the Director of
Global Strategic Marketing and then to that position’s manager, and an individual who was first
a Technical Team Leader, from 2005 to 2009, and then an Engineering and Project Manager at
Kimberly-Clark’s manufacturing plant in Villanueva, Honduras, from 2009 to November 2014
(“CW2”). (Id. ¶¶ 40-41.)
According to CW1, MicroCool had problems with sleeves separating from seams,
which led health care professional customers to file complaints. (Id. ¶ 40.) Plaintiff alleges that
CW1 attended meetings with “senior leadership of the company where the issue was discussed
‘quite a bit.’” (Id.)
Plaintiff alleges that “CW2 was involved with developing a sleeve sealing process
for the MicroCool gowns,” and that “the sleeve sealing process at the Honduras plant [at which
MicroCool gowns were assembled] could not be relied upon to consistently perform as expected
and produce gowns that would pass the AAMI 1671 test required for Level 4 protection.” (Id. ¶
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
6
42.) According to CW2, he, together with “members of the Research and Engineering team [at
the Honduras facility,] reported the sleeve sealing problems to senior management in both
Honduras and the United States,” including Kimberly-Clark’s Global Strategic Marketing
Director, at an unspecified time, and that the problems were “‘well known at the company.’” (Id.
¶ 43.) Plaintiff proffers that CW2 alleges that, after the Director of Product Supply was advised
of the “unreliable sleeve sealing process at the plant” during a teleconference, that individual
“told CW2 to ‘shut up and keep going and make it work.’” (Id. ¶ 44.) CW2 also alleges that,
beginning in 2009, Kimberly-Clark sent MicroCool samples to Intertek labs each month to
determine if the gowns continued to meet Level 4 protection standards, and that CW2 received
the monthly test results. (Id. ¶¶ 45-46.) Plaintiff alleges, based on information from CW2, that
the “results regularly showed gowns failing tests at a rate of between 10 and 35 percent” and that
those rates “did not meet minimum standards required for AAMI Level 4 protection.” (Id. ¶ 46.)
Plaintiff further alleges that the results were shared with Halyard’s “quality department,” and
“were discussed in meetings” with unspecified “senior management that CW2 attended.” (Id.)
Plaintiff alleges, based on information from CW2, that “CW2 confirmed that [Halyard] was fully
aware that its sleeve sealing process was unreliable but nevertheless sold the MicroCool gowns
as offering AAMI Level 4 protection.” (Id. ¶ 48.)
Plaintiff further alleges that, during the Class Period and prior to the spinoff of
Halyard, Mr. Falk received $67,036,901 in proceeds from his sales of Kimberly-Clark stock, and
Mr. Buthman received $8,802,174 in proceeds from his sales of Kimberly-Clark stock, sales that
“were abnormal as compared to previous sales of Kimberly-Clark stock by” those individuals.
(Id. ¶ 85.)
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
7
Alleged Materially Misleading Statements and Omissions Issued During the Class Period
Plaintiff alleges that, “[t]hroughout the Class Period,” “Defendants publicly
represented on [Halyard and Kimberly-Clark’s] websites, in publicly disseminated marketing
materials, and on product [labeling] that MicroCool provided an AAMI Level 4 standard of
protection” amidst a global outbreak of the Ebola virus in 2014. (Id. ¶ 49.) Specifically,
Plaintiff alleges that Kimberly-Clark marketed its “Personal Protection Equipment,” including
MicroCool, for “pandemic preparedness” purposes on its website at an unspecified point in time,
in a published letter to customers on August 14, 2014, and in a “Kimberly-Clark Ebola Virus
Disease . . . Precautions Brief” on September 19, 2014. (Id. ¶¶ 52-54.) At all relevant times,
Halyard’s website included a Personal Protection Guide for preparation for a pandemic that
recommended MicroCool “as a solution that offered ‘AAMI Level 4 / Liquid Barrier
Protection[,]’” and represented that the gowns “provided adequate protection for situations that
entailed a high exposure risk in terms of ‘fluid amount,’ ‘fluid spray or splash’ and ‘pressure on
gown[.]’” (Id. ¶ 63.)
Plaintiff complains that, in a number of public filings with the Securities and
Exchange Commission (“SEC”), ranging from October 21, 2014, to February 29, 2016,
Kimberly-Clark and Halyard failed to disclose that MicroCool “consistently failed effectiveness
tests and failed to meet industry standards,” that the companies “had knowingly provided
defective MicroCool surgical gowns to healthcare providers,” and that “the public statements
were materially misleading and omitted material information at all relevant times.” (See id. ¶¶
59-78.) Plaintiff alleges that Kimberly-Clark and Halyard made representations about the
companies’ health care segment, including that it “offer[s] surgical and infection prevention
products for the operating room” and “is a global leader in education to prevent healthcare-
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
8
associated infections,” and that the MicroCool gown is one of Halyard’s “more important
marks,” is “innovative, cost-effective and [a] high quality product[],” and is a “principal source
of revenue” for Halyard. (See id. ¶¶ 59, 61, 67, 74.) Plaintiff alleges that the public filings at
issue contained signed certifications by the Kimberly-Clark Individual Defendants and Halyard
Individual Defendants (together, the “Individual Defendants”). (Id. ¶¶ 60, 65, 67, 69, 71, 73,
77.)
Alleged Harm to Investors and the Spring 2016 Stock Drop
Plaintiff alleges that certain “deficiencies, particularly with the seams of the
MicroCool gowns,” rendered wearers vulnerable to exposure to infectious diseases, and that the
gowns’ “inability . . . to consistently provide the claimed AAMI Level 4 protection was well
known to Defendants during the relevant period, but was concealed from investors.” (Id. ¶ 4.)
Plaintiff further alleges that the Defendants “aggressively marketed MicroCool as providing
AAMI Level 4 protection” during the spread of the Ebola epidemic, and that “[i]nvestors were
misled by Defendants’ failure to disclose that: (i) the [] Micro-Cool surgical gowns consistently
failed effectiveness tests and failed to meet industry standards[,] and (ii) Kimberly-Clark and
Halyard had knowingly provided defective MicroCool surgical gowns to healthcare providers.”
(Id. ¶¶ 5-6.)
The television news program 60 Minutes featured a segment on May 1, 2016,
“report[ing] that Kimberly-Clark and Halyard had knowingly provided defective surgical gowns
to U.S. workers at the height of the Ebola crisis,” and the former Global Strategic Marketing
Director for MicroCool, among other products, “admitted” to the television news program that
the “gowns were prone to leaks and failed to meet the industry safety standards for the treatment
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
9
of Ebola.” (Id. ¶ 7.) The television program “also described an independent test in December
2012, requested by Cardinal Health, Inc., a competitor of Kimberly-Clark and later of Halyard,
in which 77% of the MicroCool gowns tested failed,” and tests and laboratory reports conducted
in February and March 2013, requested by Kimberly-Clark, “in which some 21% of the
MicroCool gowns tested failed.” (Id. ¶ 80.) Following this broadcast, Halyard stock fell 14.4%,
from $31.50 on April 28, 2016, to $26.95 on May 2, 2016, a drop that Plaintiff attributes to the
60 Minutes segment, and Plaintiff and members of the putative class allegedly suffered losses
and damages due to the decline in the market value of Halyard’s securities. (Id. ¶¶ 8-9.)
DISCUSSION
When deciding a motion to dismiss a complaint for failure to state a claim
pursuant to Federal Rule of Civil Procedure 8(a) and 12(b)(6), the Court accepts as true the nonconclusory factual allegations in the complaint, drawing all reasonable inferences in favor of the
plaintiff. Ashcroft v. Iqbal, 556 U.S. 662 (2009); Roth v. Jennings, 489 F.3d 499, 501 (2d Cir.
2007). To survive a motion to dismiss, a complaint must plead “enough facts to state a claim to
relief that is plausible on its face.” Bell Atl. v. Twombly, 550 U.S. 544, 570 (2007). However, a
“pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause
of action will not do.” Iqbal, 556 U.S. at 678 (internal quotation marks and citations omitted).
Plaintiff asserts that Defendants violated Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder, which make it unlawful to, inter alia, “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 the light of the circumstances under which they were made, not misleading .
. . in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5. Claims
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
10
alleging fraud-based violations of the federal securities laws are subject to additional pleading
requirements. Plaintiff’s Section 10(b) claims are subject to the heightened pleading standards of
both Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of
1995 (the “PSLRA”). In re Scholastic Corp., 252 F.3d 63, 69-70 (2d Cir. 2001). Rule 9(b)
requires that fraud allegations be stated with particularity. Fed R. Civ. P. 9(b). To satisfy the
particularity requirement of Rule 9(b), the complaint must: “(1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent.” Stevelman v. Alias
Research, Inc., 174 F.3d 79, 84 (2d Cir. 1999) (internal quotation marks and citation omitted).
Similarly, under the PSLRA, when a plaintiff seeks money damages that require proof of
scienter, “the complaint [must] . . . state with particularity facts giving rise to a strong inference
that the defendant acted with the requisite state of mind.” 15 U.S.C.S. § 78u-4(b)(2) (LexisNexis
2008).
Count I: Section 10(b) and Rule 10b-5 Allegations
In Count I, Plaintiff asserts that the Defendants are liable for violating Section
10(b), and Rule 10b-5 promulgated thereunder, by making various untrue statements of material
facts, omitting to state material facts and that, in so doing, they acted knowingly or with reckless
disregard for the truth. (See CACAC ¶¶ 97-108.) Both the Halyard Defendants and KimberlyClark Defendants argue that Count I should be dismissed for failure to state a claim upon which
relief may be granted because Plaintiff has failed to plead an actionable misstatement or
omission, a strong inference of scienter, and an adequate allegation of loss causation. (See
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
11
Halyard Defs. Opening Br., Docket Entry No. 57, at 5-21; Kimberly-Clark Defs. Opening Br.,
Docket Entry No. 59, at 11-23.)
Section 10(b) and Rule 10b-5 Pleading Requirements
“To maintain a private damages action under § 10(b) and Rule 10b-5, ‘a plaintiff
must prove’” each of the following elements: “(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.’” Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750
F.3d 227, 232 (2d Cir. 2014) (quoting Stoneridge Inv. Partners, LLC v. Scientific—Atlanta, Inc.,
552 U.S. 148, 157 (2008)). To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must
allege facts indicating that “the defendant, in connection with the purchase or sale of securities,
made a materially false statement or omitted a material fact, with scienter, and that the plaintiff’s
reliance on the defendant’s action caused injury to the plaintiff.” Lawrence v. Cohn, 325 F.3d
141, 147 (2d Cir. 2003) (quotation marks and citations omitted).
Plaintiff Fails to Plead Adequately that Each of the Defendants Acted with Scienter
As the Court finds that Plaintiff has failed to pled adequately that each of the
Defendants acted with scienter, a necessary element to maintain a private damages action under
§ 10(b) and Rule 10b-5, and a court can dismiss a complaint “based on Plaintiff’s failure to plead
scienter alone,” the Court will begin—and end—its Count I analysis with an examination of
Plaintiff’s scienter allegations. See Shemian v. Research In Motion Ltd., No. 11-CV-4068-RJS,
2013 WL 1285779, at *24 (S.D.N.Y. Mar. 29, 2013), aff’d, 570 F. App’x 32 (2d Cir. 2014).
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
12
A securities complaint will only survive a motion to dismiss “if a reasonable
person would deem the inference of scienter cogent and at least as compelling as any opposing
inference one could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 324 (2007). A court conducting a scienter inquiry, “however, must assess the
complaint in its entirety, and not scrutinize each allegation.” Employees’ Ret. Sys. v. Blanford,
794 F.3d 297, 305 (2d Cir. 2015) (citing Tallabs, Inc., 551 U.S. at 326). Scienter may “be
established by alleging facts to show either (1) that defendants had the motive and opportunity to
commit fraud, or (2) strong circumstantial evidence of conscious misbehavior or recklessness.”
ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198
(2d Cir. 2009) (citations omitted).
The “‘motive’ showing is generally met when corporate insiders allegedly make a
misrepresentation in order to sell their own shares at a profit,” and motives more “common” to
corporate officers, “such as the desire for the corporation to appear profitable and the desire to
keep stock prices high to increase officer compensation, do not constitute ‘motive’ for purposes
of this inquiry.” Id.
If there is no showing of improper motive, a plaintiff may establish scienter by
“strong circumstantial evidence of conscious misbehavior or recklessness” by, inter alia,
“sufficiently alleg[ing] that the defendants (1) benefitted in a concrete and personal way from the
purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to
information suggesting that their public statements were not accurate; or (4) failed to check
information they had a duty to monitor.” Id. at 199 (quotation marks and citation omitted). To
sufficiently “plead recklessness through circumstantial evidence, [a plaintiff] would have to
show, at the least, conduct which is highly unreasonable and which represents an extreme
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
13
departure from the standards of ordinary care to the extent that the danger was either known to
the defendant or so obvious that the defendant must have been aware of it.” Id. at 202-03
(quotation marks and citation omitted). “‘An allegation that a defendant merely ought to have
known’” about reports or statements containing contrary facts “‘is not sufficient to allege
recklessness.’” See In re Lululemon Sec. Litig., 14 F. Supp. 3d 553, 574 (S.D.N.Y. 2014), aff’d,
604 F. App’x 62 (2d Cir. 2015) (quoting Kuriakose v. Fed. Home Loan Mortg. Corp., 897 F.
Supp. 2d 168, 184 (S.D.N.Y. 2012)).
“Where the defendant at issue is a corporation, it is possible to plead corporate
scienter by pleading facts sufficient to create a strong inference either (1) that someone whose
intent could be imputed to the corporation acted with the requisite scienter or (2) that the
statements would have been approved by corporate officials sufficiently knowledgeable about
the company to know that those statements were misleading.” Loreley Fin. (Jersey) No. 3 Ltd. v.
Wells Fargo Sec., LLC, 797 F.3d 160, 177 (2d Cir. 2015) (internal quotation marks and citation
omitted). Plaintiff’s scienter allegations are focused entirely on the alleged knowledge of the
Individual Defendants.
In the CACAC, in a section titled “Additional Scienter Allegations,” Plaintiff
alleges that: Falk and Buthman received proceeds from “abnormal” sales of Kimberly-Clark
stock during the Class Period; the Individual Defendants were “core executives” who received
the Intertek Report in January 20133; issues with MicroCool’s sleeves “were well known
throughout” Kimberly-Clark and Halyard, and “often discussed in meetings with senior
3
Plaintiff cites a pleading filed in 2016 in a separate lawsuit for the proposition that
“Defendants” have admitted that they received the Intertek Report in January 2013. The
quoted pleading, however, states only that Kimberly-Clark received the Intertek Report.
(CACAC ¶¶ 36-37.)
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
14
executives, which included the Individual Defendants”4; that “senior management” “summarily
ignored” issues regarding the inability to “validate” MicroCool’s manufacturing process and the
gowns’ provision of AAMI Level 4 protection; and, finally, that the Defendants “doubled down
on their [allegedly] misleading statements and pursued an aggressive marketing campaign
focused on MicroCool’s AAMI Level 4 designation” to “take advantage of the Ebola” pandemic
scare. (CACAC ¶¶ 85-86.)
The Halyard Defendants assert that the CACAC fails to meet either prong of the
scienter analysis, as it (1) insufficiently pleads that the Halyard Defendants had the “motive and
opportunity to commit fraud,” (2) lacks any indication that the Halyard Defendants “benefitted in
some concrete and personal way from the purported fraud,” and (3) because the existence of the
Intertek Report and CW1 and CW2’s testimony do not give rise to a “strong inference of
scienter.” (Halyard Defs. Opening Br., Docket Entry No. 57, at 12-18.) The Kimberly-Clark
Defendants also assert that the CACAC fails to meet either prong of the scienter analysis,
because (1) allegations of Messrs. Falk and Buthman’s stock sales of Kimberly-Clark stock are
irrelevant and not pled with the requisite particularity, and (2) Plaintiff fails to specifically plead
direct or strong circumstantial evidence of scienter based on test results or CW1 and CW2’s
testimony. (Kimberly-Clark Defs. Opening Br., Docket Entry No. 59, at 16-22.)
Assessing the CACAC in its entirety, the Court concludes that Plaintiff has failed
to establish a “cogent inference of scienter” “at least as compelling as any opposing inference
one could draw from the facts alleged.” See Tellabs, Inc., 551 U.S. 308, 324, 326.
4
The CW allegations relating to sleeve discussions refer only to “senior leadership,”
“senior management,” and persons with titles other than those of the Individual
Defendants. (See CACAC ¶¶ 40, 43-46.)
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
15
To begin with, Plaintiff has not alleged facts showing that the Defendants had
“the motive and opportunity to commit fraud.” See ECA, 553 F.3d at 198. Plaintiff makes a
sole reference in the CACAC to alleged misrepresentations made by “corporate insiders” in
order to “sell their own shares at a profit,” arguing that certain sales of Kimberly-Clark stock by
Messrs. Falk and Buthman before the Halyard spinoff “were abnormal as compared to previous
sales of Kimberly-Clark stock by” them, and evidence a motive to commit fraud. (CACAC ¶ 85;
Pl.’s Mem. of Law in Opposition to Defs.’ Mots. To Dismiss the CACAC (“Pl. Br.”), Docket
Entry No. 64, at 34-35.) These allegations, which concern sales of Kimberly-Clark (not Halyard)
stock, fail to specify when the alleged sales were made and whether they were proximate in time
to any alleged acquisition of information or “misrepresentations” by Messrs. Falk and Buthman,
and are conclusory and fail to meet the heightened Rule 9(b) and PSLRA particularity standards
as to indicators of fraud or scienter. Nor does Plaintiff plead any facts to support an inference
that such sales were “abnormal” beyond his conclusory characterization of the alleged sales. The
allegations thus do not meet the “motive” standard, which “is generally met when corporate
insiders allegedly make a misrepresentation in order to sell their own shares at a profit.” See
ECA, 553 F.3d at 198.
Nor do Plaintiff’s conclusory allegations that the Defendants “doubled down on
their [allegedly] misleading statements and pursued an aggressive marketing campaign focused
on MicroCool’s AAMI Level 4 designation” to “take advantage of the Ebola” pandemic scare
(CACAC ¶¶ 5-6, 86) constitute anything more than an allegation that the Defendants had a
motive “common to corporate officers . . . the desire for the corporation[s] to appear profitable
and the desire to keep stock prices high” in light of global events beyond the Defendants’
control. See ECA, 553 F.3d at 198. Such allegations “do not constitute ‘motive’ for purposes of
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
16
this inquiry.” See ECA, 553 F.3d at 198. Finally, Plaintiff does not allege that the Halyard
Individual Defendants, Messrs. Abernathy and Voskuil, engaged in any stock sales—“abnormal”
or not—that evidence “motive and opportunity to commit fraud.” Plaintiff has accordingly failed
to allege plausibly that any of the Defendants had the “motive and opportunity to commit fraud.”
The Court next turns to an examination of whether Plaintiff has adequately
pleaded the required “strong inference” of scienter by alleging “strong circumstantial evidence of
conscious misbehavior or recklessness.” See id. at 199. Plaintiff argues that “each of the
Defendants knew, or at minimum were reckless in not knowing, that the MicroCool surgical
gowns consistently failed effectiveness tests, failed to meet industry standards, and were
manufactured using a process that could not be validated to ensure consistent efficacy according
to AAMI Level 4 criteria,” and, thus, the Defendants “knew facts or had access to information
suggesting that their public statements were not accurate.” (Pl. Br. at 29.) Though Plaintiff refers
to “Defendants” in his arguments regarding recklessness in his brief, it appears that he seeks to
establish scienter by alleging circumstantial evidence of recklessness based on the actions and
defined functions of each of the named Individual Defendants, who were the CEO and CFO of
each respective company at all relevant times, and to impute that scienter to the respective
corporate Defendants to establish “corporate scienter.” (See Pl. Br. at 29-33, 35-36.)
With respect to the Individual Defendants, Plaintiff, however, has failed to “show,
at the least, conduct which is highly unreasonable and which represents an extreme departure
from the standards of ordinary care to the extent that the danger was either known to [them] or so
obvious that the [D]efendant[s] must have been aware of it.” See ECA, 553 F.3d at 202-03.
Nowhere in the CACAC does Plaintiff specifically plead facts demonstrating or supporting
plausibly an inference that Abernathy, Voskuil, Falk, or Buthman was personally informed or
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
17
would reasonably have been informed about any alleged issues with the MicroCool gowns, their
failure to meet industry standards, or the ability of the manufacturing process to be validated to
ensure it complied with AAMI Level 4 criteria, nor that the Individual Defendants’ behavior was
an “extreme departure from the standards of ordinary care.”
Plaintiff’s conclusory allegation that the Individual Defendants, “core executives
of the Company” received the Intertek Report in January 2013, which “prov[ed] that a large
amount of the gowns failed testing for AAMI Level 4” (see CACAC ¶ 86), does not meet Rule
9(b) and the PSLRA’s heightened pleading requirement for particularity. Plaintiff does not plead
with the required specificity that any of the Individual Defendants, or any Kimberly-Clark or
Halyard employees who regularly came in contact with or met with the Individual Defendants,
personally received the Intertek Report or any other substantiated report of issues with the
MicroCool gowns, and that such reports would give rise to an affirmative obligation by the
Defendants to disclose alleged issues with the MicroCool gowns, so that a failure to do so would
constitute “an extreme departure from the standards of ordinary care.” See ECA, 553 F.3d at
202-03.5 Nor does Plaintiff allege with particularity that the Individual Defendants knew about
the “danger” of the MicroCool gowns, or that the danger was “so obvious that” they “must have
been aware of it.” See id. at 202-03. There is no allegation of a reporting or other duty, or a
statement made that was specifically contradictory of the alleged test results, that would support
an inference of an obligation on the part of any of the Individual Defendants to know of and act
5
The general characterization of their positions as “core” is insufficient to plead plausibly
that they personally received, reviewed or knew of the report at relevant times; the
“admission” cited in the CACAC acknowledges only that Kimberly-Clark received the
Intertek Report in 2013.
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
18
on the information in the testing reports. The CACAC thus fails to plead facts indicative of an
“extreme departure from the standards of ordinary care.” See id. at 202-03.
Nor do the allegations attributed to CW1 and CW2 give sufficient factual content
to Plaintiff’s argument for strong circumstantial evidence of scienter. “[C]onfidential sources
cannot be used to . . . merely parrot conclusory allegations contained in the complaint,” and, “as
with all allegations going to scienter, confidential source allegations must show that individual
defendants actually possessed the knowledge highlighting the falsity of public statements;
conclusory statements that defendants ‘were aware’ of certain information, and mere allegations
that defendants ‘would have’ or ‘should have’ had such knowledge is insufficient.” Glaser v.
The9, Ltd., 772 F. Supp. 2d 573, 590–91 (S.D.N.Y. 2011) (ellipses, brackets, quotation marks
and citations omitted). CW1 and CW2’s statements as set forth in the CACAC merely attest to
alleged knowledge of “senior management” or “senior executives” other than the Individual
Defendants, adding nothing to provide support for Plaintiff’s conclusory allegation that the “core
executives” who had knowledge of the problems included the Individual Defendants. (See id.;
see also CACAC ¶ 86.) Plaintiff does not allege that either CW1 or CW2 themselves attended
meetings with any of the Individual Defendants where the alleged issues were discussed. Vague
allegations that CW1 attended meetings with unspecified “senior leadership of the company
where the issue was discussed ‘quite a bit’” and that CW2 attests that certain test results were
shared with Halyard’s quality department, and “were discussed in meetings” with unspecified
“senior management that CW2 attended” (see id. ¶¶ 40, 46) are insufficient to establish strong
circumstantial evidence of scienter. See Glaser, 772 F. Supp. 2d at 594 (finding that statements
by confidential witnesses who were not alleged to have ever had any contact with the individual
defendants in that action were insufficient to support scienter). Nor does the CACAC include
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
19
any specific allegations as to the information actually discussed at the alleged meetings.
Plaintiff’s allegations attributed to confidential witness testimony do not demonstrate that the
Individual Defendants “actually possessed” adverse information regarding alleged issues with
the MicroCool gown, and Plaintiffs’ vague references to “senior leadership” and “senior
management” do not suffice to tie the Individual Defendants to any information that was
conveyed. See Glaser, 772 F. Supp. 2d at 590–91.
Nor does Plaintiff’s conclusory scienter allegation that the “Defendants knew, or
should have known, that MicroCool gowns did not provide the AAMI Level 4 protection
promised,” because of receipt of the Intertek Report and the CW testimony (CACAC ¶ 34) meet
the pleading standard, because “an allegation that a defendant merely ought to have known”
about reports or statements containing contrary facts “is not sufficient to allege recklessness.”
Lululemon, 14 F. Supp. 3d at 574. In Lululemon, the lead plaintiff brought a putative securities
fraud class action against an athletic apparel maker and its corporate officers, arising from the
company’s recall of yoga pants due to sheerness and color fastness issues, and the court granted
defendants’ motions to dismiss for a variety of reasons, including the plaintiff’s failure to
sufficiently allege scienter. See id. at 553, 576-77. The Lululemon court declined to infer from
allegations that the Lululemon CEO “received reports about quality problems and had access to
information about those problems that she did not, or could not, believe in what she said publicly
about the company’s products at the time she was saying it,” or to infer from the allegations that
the founder and director “‘would dip in and out of daily affairs’” and that “‘his fingerprints
[were] all over the company’s policies and principles’” that he had knowledge that certain
statements in a public filing regarding “the company’s quality and quality controls were false and
misleading.” See id. at 585. The Lululemon court found that those allegations did not
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
20
specifically identify the “reports or statements containing” contrary facts to which Defendants
had access and did not support “a strong inference of scienter.” See id.
Plaintiff here advances similar arguments: that it is “reasonable to presume that”
the Individual Defendants “would have been aware of the deplorable test results and validation
issues that called the efficacy of a key product into troubling question,” and that as “high-level
corporate officers who sign SEC filings,” the Individual Defendants “had a duty to familiarize
themselves with the facts relevant to the core operations of the company,” and that they “may not
ignore reasonably available data that would indicate that the statements they issued were
materially false or misleading.” (See Pl. Br., at 31-32.) Nowhere in the CACAC, however, has
Plaintiff alleged that the Individual Defendants had access to specifically identified reports or
statements containing facts contrary to the information set forth in the public filings which
contained signed certifications by the Individual Defendants: that Halyard “offer[s] surgical and
infection prevention products for the operating room” and “is a global leader in education to
prevent healthcare-associated infections,” that the MicroCool gown is one of Halyard’s “more
important marks,” and that the gown is “innovative, cost-effective and [a] high quality product,”
and a “principal source of revenue” for Halyard. (See id. ¶¶ 59, 61, 67, 74.) Plaintiff has not
pleaded facts sufficient to support a “cogent inference of scienter” on the part of the Individual
Defendants that is “at least as compelling as any opposing inference one could draw from the
facts alleged.” See Lululemon, 14 F. Supp. 3d at 585; see also Tellabs, Inc., 551 U.S. at 324,
326.
Finally, for substantially the reasons set forth above with respect to the Individual
Defendants, Plaintiff has failed to plead corporate scienter, as he has not pled “facts sufficient to
create a strong inference either (1) that someone whose intent could be imputed to the
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
21
corporation acted with the requisite scienter, or (2) that the statements would have been approved
by corporate officials sufficiently knowledgeable about the company to know that those
statements were misleading.” Loreley Fin. (Jersey) No. 3 Ltd., 797 F.3d at 177.
Given that Plaintiffs’ scienter allegations are inadequate, the CACAC fails to
meet the Rule 9(b) and PSLRA pleading standards and fails to state a claim upon which relief
may be granted. Therefore, it is unnecessary to examine the remaining elements of their Section
10(b) and Rule 10b-5 claim. Count I is, accordingly, dismissed.
Count II: Section 20(a) Liability
In Count II, Plaintiff asserts that the Individual Defendants are liable under
Section 20(a). A plaintiff must show “(1) a primary violation by a controlled person; (2) control
of the primary violator by the defendant; and (3) that the controlling person was in some
meaningful sense a culpable participant in the primary violation” in order to establish a claim for
control person liability under Section 20(a) of the Exchange Act. Boguslavsky v. Kaplan, 159
F.3d 715, 720 (2d Cir. 1998) (internal quotation marks omitted).
As explained above, Plaintiff has not stated a claim under Section 10(b) and Rule
10b-5 with respect to the Defendants. In the absence of plausible pleading of a primary
violation, Plaintiff cannot state a claim under Section 20(a). Count II is, accordingly, dismissed.
Plaintiffs’ Motion to Strike Docket Entry Nos. 56-2 and 56-3
The Halyard Defendants attached two press releases as exhibits (the “Challenged
Exhibits”) to a declaration in support of their motion to dismiss Plaintiff’s claims. (See Jordak
Decl., Exs. B, C, Docket Entry Nos. 56-2, 56-3.) Plaintiff now moves to strike the Challenged
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
22
Exhibits, and any references to those exhibits contained in the Halyard Defendants’ brief, to the
extent they are offered for the truth of the matter asserted.
Because the Court’s foregoing analysis does not rely on those documents, it
obviates the need to consider them. Plaintiffs’ motion to strike is therefore denied as moot.
CONCLUSION
For the reasons stated above, Defendants’ motions to dismiss the Corrected
Amended Class Action Complaint are granted in their entirety, and Plaintiff’s motion to strike
certain documents is denied as moot in light of the disposition of the Defendants’ motions to
dismiss.
The Clerk of Court is requested to enter judgment in Defendants’ favor and close
this case.
This Memorandum Opinion and Order resolves Docket Entry Nos. 55, 58, and 67.
SO ORDERED.
Dated: New York, New York
March 30, 2018
/s/ Laura Taylor Swain .
LAURA TAYLOR SWAIN
United States District Judge
HALYARD HEALTH MTD
VERSION MARCH 30, 2018
23
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?