Medtronic must go back to court to fight accusations that it defrauded shareholders by covering up bad side effects from its bone growth product called Infuse.
A federal appeals court in St. Paul, Minn., has revived the 3-year-old lawsuit filed by three employee pension funds alleging stock fraud. The judges found an earlier decision by a lower court erred in finding the plaintiffs' statute of limitations had run out.
The suit alleges that Medtronic, its officers, senior managers and several physician researchers hid the risk of Infuse's off-label use, which made up 85% of its sales.
Medtronic spokesman Eric Epperson said in an email statement: "We're disappointed with the decision, but continue to believe the claims in this case are without merit. The plaintiffs are still a long way from proving liability in this case, and we are prepared to defend ourselves in court."
Infuse, which was approved by the Food and Drug Administration in 2002 for use in spinal fusion procedures of the lower back, has been a source of trouble for the Dublin-based medical device maker.
By 2008, the FDA had issued a public health notice about off-label uses, associating it with “life-threatening throat and neck swelling.”
On June 22, 2011, the Senate Finance Committee announced it was investigating Medtronic over Infuse and the company's financial ties with doctors. The committee didn't release its massive, 2,315-page investigative report on Infuse until more than a year later.
The Senate report said Medtronic “was heavily involved in drafting, editing and shaping the content of medical journal articles authored by its physician consultants who received significant amounts of money through royalties and consulting fees from Medtronic.”
In addition, Medtronic allegedly paid the physician-authors “to conceal adverse effects and to overstate the disadvantages of alternative procedures,” producing “biased clinical trial results that the market relied upon,” the appeals court decision said.
It was the committee's 2012 revelation of the physician pay program that was “at the heart” of the plaintiffs' claim that Medtronic's actions caused them to lose money when stock prices plummeted after the bad publicity.
By law, to support a claim that defendants operated a scheme of market deception meant there was evidence, the opinion said – that the defendants committed a deceptive act and did so acting with a legal concept called scienter. Scienter is defined as “a mental state embracing intent to deceive, manipulate or defraud.”
According to the appeals court, evidence inferred that the defendants' mental bent towards deception “did not become apparent until October 2012,” when the Senate committee's findings were released.
That put the suit brought forth by the West Virginia Pipe Trades Health & Welfare Fund, the Employees' Retirement System of the State of Hawaii and the Union Asset Management Holding AG within the filing deadline, the appeals court opinion said.
The lower court, in ruling the plaintiffs filed their suit too late, used allegations in an earlier lawsuit and the May 25, 2011, publication date of a negative article in Spine Journal, linking Infuse with male sterility, as “sufficient to demonstrate scienter,” thereby starting the two-year clock.
The appeals court disagreed.
“A company cannot instruct individuals to take a certain action, pay to induce them to do it, and then claim any causal connection is too remote when they follow through. In this way, Medtronic's alleged manipulative conduct directly caused the biased clinical trial results that the market relied upon,” wrote Judge Raymond Gruender for the three-judge bench.
Medtronic has already paid $85 million to settle a 2008 lawsuit by another pension fund manager, the Minneapolis Firefighters' Relief Association, which claimed the company's misrepresentations about Infuse inflated Medtronic's stock price.