On May 8, 2018, Judge Claudia Wilken of the United States District Court for the Northern District of California granted class certification in an action asserting claims under Section 10(b) of the Securities Exchange Act based on allegations that the medical device manufacturer Thoratec and certain of its officers misrepresented the performance of its primary product. Cooper v. Thoratec Corp., 2018 WL 2117337 (N.D. Cal. May 8, 2018). Plaintiffs alleged that defendants made false and misleading statements about the rate of thrombosis suffered by users of its product, first in 2011 and continuing after a New England Journal of Medicine study revealed in November 2013 that thrombosis rates had increased since the clinical trials (which caused Thoratec’s stock to drop by six percent). After the company disclosed the impact of higher thrombosis rates in 2014, the stock lost a quarter of its value.
The Court first considered the Rule 23(a) requirements for class certification, of which the only disputed factor was whether the named plaintiffs, who had purchased their shares prior to the release of the November 2013 study, could adequately represent a class that included investors who purchased shares after that study. The Court found that because defendants were alleged to have made similar misrepresentations about thrombosis rates both before and after November 2013, the entire class was pursuing the same theory of liability and the named plaintiffs’ interests were therefore aligned with those of investors who purchased shares after November 2013. Id. at *3.
The Court also addressed the predominance requirement under Rule 23(b)(3). Defendants sought to rebut the “fraud-on-the-market” presumption of reliance under Basic Inc. v. Levinson, 485 U.S. 224 (1988), by arguing that the alleged misrepresentations had not resulted in any “price impact.” First, defendants contended—and plaintiffs did not dispute—that the first alleged misstatement, on the first day of the class period, had not had a statistically significant impact on the price of Thoratec stock. The Court concluded, however, that defendants’ proffered evidence of lack of price impact was irrelevant because plaintiffs alleged a “price maintenance” theory. Specifically, the Court found that plaintiffs’ allegations were fairly read to aver that defendants’ initial class-period misrepresentation led investors to believe that users were experiencing thrombosis rates consistent with the status quo, and had the true higher rates been reported, the share price would have fallen sooner. Id. at *4. In other words, the alleged misrepresentation operated to prolong the stock’s artificially inflated price.
In addition, the Court rejected defendants’ attempt to rebut the Basic presumption of reliance by arguing that the truth had already been in the market or that the alleged disclosures did not relate to the alleged misrepresentations. Defendants pointed to a report issued the month prior to the New England Journal of Medicine Study that had suggested that the thrombosis rate for users of Thoratec’s device had increased, yet had no impact on Thoratec’s stock price. The Court noted that this prior report was a “one-page web document that lists no authors and is not a published study,” stated that the “magnitude of the increase was relatively small,” and was (according to plaintiffs) merely web-published for physicians. Id. at *5. Thus, the prior study did not establish that the market was aware of the true thrombosis rates prior to the release of the New England Journal of Medicine report, and thus could not “sever the link” between defendants’ alleged misrepresentations and the alleged corrective disclosures.
Similarly, the Court rejected defendants’ argument that the ultimate disclosures in 2014—in which defendants disclosed a label change, lowered 2014 guidance, and missed earnings and revenues due to concern over high thrombosis rates—did not “match” specific alleged misrepresentations from 2011 because they did not reveal any new facts known to defendants in 2011. The Court found that defendants’ statements following the release of the November 2013 study could reasonably be read to suggest to the market that the impact of the November 2013 study on implanting physicians (and thus Thoratec’s bottom line) would be minimal, such that defendants’ August 2014 disclosure that the publication had in fact substantially impacted earnings corrected earlier misleading statements. The Court noted, however, that it was “concerned about a sufficient link” between the 2011 misrepresentations and the August 2014 statement, and that, in the future, a subclass based on misrepresentations made in 2013 and the August 2014 disclosures might be appropriate. Id.