In W. Va. Pipe Trades Health & Welfare Fund v. Medtronic, Inc., 845 F.3d 384 (8th Cir. 2016), the Court of Appeals for the Eighth Circuit vacated the United States District Court for the District of Minnesota’s grant of Medtronic, Inc.’s (“Defendant”) motion for summary judgment against West Virginia Pipe Trades Health and Welfare Fund, Employees’ Retirement System of the State of Hawaii, and Union Asset Management Holding AG (collectively “Plaintiffs”), and remanded the case for further proceedings. The court held Plaintiffs’ scheme liability claim was not time barred, nor was it barred as a matter of law.

According to the allegations, Defendant developed INFUSE, an alternative bone grafting procedure, and obtained approval by the Food and Drug Administration (the “FDA”) in 2002 for use in lower back spinal fusion surgeries. In 2008, The FDA issued a public health notification following the discovery that up to 85% of INFUSE use was off-label. In 2010, several independent physicians published articles expressing concern that clinicians running clinical studies on the drug did not disclose medical risks associated with INFSUE due to financial ties with the Company.  On June 22, 2011, the Senate Finance Committee (the “Committee”), concerned over the allegations raised regarding Defendant’s relationship with the physicians, announced an investigation into Defendant and INFUSE. In October 2012, the Committee issued a report that, among other things, concluded that Defendant “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” Defendant.

On June 27, 2013, Plaintiffs filed a complaint alleging various violations, including false statement and scheme liability claims against Defendant, its officers, and the physicians. The district court dismissed Plaintiffs’ scheme liability claims against the physicians and dismissed some of the false statement claims against Defendant; however, it left three claims intact. Defendant moved for, and the district court granted, summary judgment against the remaining claims.  The court held the two-year statute of limitations barred the claims. On appeal by Plaintiffs for the scheme liability claim, Defendant sought dismissal, arguing Plaintiffs claims were barred because the claim “attempts to hold Defendant secondarily liable for the fraudulent statements of others.”

Under 28 U.S.C. § 1658(b), a scheme liability claim will be barred two years after discovery of the facts or five years from the date of the violation.  With respect to the two year period, discovery requires a showing that plaintiff could, through reasonable diligence, find sufficient information to plead scienter with regard to the alleged deceptive acts. Rule 10b-5 states it is unlawful “to 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.” 17 C.F.R. § 240.10b-5.

The Eighth Circuit Court found Plaintiffs timely filed their complaint. The court held Plaintiffs had not discovered facts demonstrating scienter until the Committee issued their report in October 2012. The court acknowledged Plaintiffs had reason to be suspicious of Defendant’s actions giving rise to a scheme liability claim prior to the investigation and report; however, only upon issuance had Plaintiffs discovered the facts necessary to pursue a scheme liability claim.

The court also found that Plaintiffs had adequately alleged a claim for scheme liability claim under Rule 10b-5. The Defendant asserted that the facts asserted by Plaintiffs set out a claim for aiding and abetting.  While the Securities and Exchange Commission could bring such a claim, private parties could not.  The court, however,  held that Plaintiffs claim sufficiently alleged a direct claim for scheme liability.  As the opinion provided:  “Paying someone else to make a misrepresentation is not itself a misrepresentation.”

Finally, Defendant argued that Plaintiffs had not sufficiently alleged reliance.  Defendant argued that Plaintiffs failed to demonstrate a causal connection between Defendant’s alleged deceptive acts and the information used by the market. The court, however, disagreed, finding that the “causal connection between [Defendant’s] alleged deceptive conduct and the information on which the market relied is not too remote to support a finding of reliance.”  Specifically, the court determined that investors had relied on the favorable results of the clinical trials and Defendant’s CEO referenced the clinical trials when speaking to investors.

Accordingly, the court vacated the order granting Defendant’s motion for summary judgment and remanded the case with Plaintiffs’ scheme liability claim intact.

The primary materials for this case may be found on the DU Corporate Governance website.