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Fannon v. Guidant Corp.

October 21, 2009


Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:05-cv-1658-SEB-WTL-Sarah Evans Barker, Judge.

The opinion of the court was delivered by: Wood, Circuit Judge.


Before BAUER, FLAUM and WOOD, Circuit Judges.

This case involves the claims of a plaintiff class that believes the defendant corporation defrauded them. The class asserts that the corporation knew that it had flawed products, but in the face of that knowledge made false or misleading public statements about the products and about a pending merger. In addition, the plaintiffs charge, the individual defendants sold nearly $89 million in company stock during the period covered by the class's allegations. The district court dismissed the case on the pleadings with prejudice, concluding that the class complaint failed to raise the strong inference of scienter required by the Private Securities Litigation Reform Act ("PSLRA") and Rule 9 of the Federal Rules of Civil Procedure. The court also rejected the plaintiffs' motion under FED. R. CIV. P. 59(e) to reconsider based on newly discovered evidence, and their related motion under FED. R. CIV. P. 15(a) to amend their complaint.

On appeal, the plaintiffs have limited themselves to three principal arguments: first, that the district court abused its discretion by immediately dismissing their first consolidated complaint with prejudice (rather than without prejudice, so that the plaintiffs could try again to submit a legally sufficient pleading); second, that the court abused its discretion when it denied their motion for leave to amend their complaint; and finally, that it abused its discretion by denying their motion under Rule 59(e) to reconsider its dismissal. Notably, the plaintiffs have not urged us directly to review the district court's assessment of the legal sufficiency of their complaint, and so we do not have any issue before us that we review de novo and we need not again consider the standards for pleading a securities fraud case. Instead, each of the rulings before us is one that lies within the district court's discretion, and our review is deferential. With that in mind, we conclude that the district court did not abuse its discretion, and we therefore affirm its judgment.


Because factual detail is so important in PSLRA cases, we begin with an overview of the underlying events. We present the alleged facts in the light most favorable to the putative class, without vouching for them otherwise. Guidant is a multinational corporation that develops, manufactures, and markets medical devices. Among those devices are implantable cardioverter defibrillators ("ICDs") and pacemakers that are used to monitor the heart and to deliver electricity to treat cardiac abnormalities. The plaintiffs represent a putative class (that was never certified) of investors who purchased Guidant stock between December 1, 2004, and October 18, 2005.

Beginning in 1994, Guidant launched the "Ventak" line of ICDs. In February 2002, Guidant discovered a design flaw in one model, the Ventak Prizm 2 DR, after it received some reports of device failures. By April 2002, it had addressed those flaws and begun producing a corrected version of the device. But it did not recall the defective products. Instead, it continued selling its inven-tory of defective units without disclosing either to physicians or the public the design flaw or malfunctions that had led to device failures. Guidant was aware of at least 25 reports of device short-circuiting in the older units in circulation.

Two years after Guidant redesigned the Prizm 2 DR, in the spring and summer of 2004, it entered into negotiations with Johnson & Johnson ("J&J") for a possible merger. The two companies executed a confidentiality agreement as part of those early discussions. On December 1, 2004 (the first day of the class period), Guidant issued a press release containing "highly positive news" about growth prospects for its ICD and pacemaker businesses. The release expressed Guidant's confidence about the continued worldwide growth of that market and Guidant's expected performance in it. This press release, the plaintiffs assert, was false and misleading, because Guidant knew at the time that there were unresolved liability issues related to the defects in its devices, but the release was silent about this problem. In the week following the issuance of the December 1 press release, Guidant's share price rose more than $5, from about $65 to around $70.

An announcement of a merger agreement between Guidant and J&J followed soon afterwards, on December 15, 2004. The second release stated that J&J was to acquire Guidant for approximately $25 billion in cash and stock; this reflected an imputed price of $76 per share for Guidant's stock. The December 15 release touted the strength of the worldwide market for cardiovascular products. Guidant and J&J filed that release with the Securities and Exchange Commission ("SEC"), as a Form 8-K. According to the plaintiffs, Guidant's share price had jumped from $65 to $75 in anticipation of the merger announcement. This second release, however, was also silent about the liability risks that Guidant faced from its defective products.

On three occasions-December 21, 2004, January 7, 2005, and January 19, 2005-Guidant filed Form 425s with the SEC to provide updated information to investors about the J&J merger. Those updates were just as silent as everything else had been about the problems with Guidant's ICDs. Between the end of January 2005 and March 13, 2005, Guidant issued other statements about the company's performance and the merger. These statements too said nothing about the liability risks it faced.

Sadly, those risks were realized when, on March 13, 2005, 21-year-old Joshua Oukrop died after his Ventak Prizm 2 DR short-circuited. Guidant learned of Oukrop's death three days later, on March 16. It acknowledged to Oukrop's physician, Dr. Barry Marron, that the ICD had short-circuited and that it knew of 25 other such cases. It also told Dr. Marron that approximately 24,000 ICDs similar to the one implanted in Oukrop had been sold. When Dr. Marron asked Guidant whether the other recipients would be told of the defect, Guidant said no, it did not want to "alarm" anyone.

True to its word, when Guidant filed a preliminary proxy statement with the SEC on March 24, 2005, it said nothing about the fact that one patient had recently died as a result of the malfunction of its product. The same omissions occurred in other SEC filings and Guidant press releases from March to July 2005. On April 27, 2005, Guidant's shareholders approved the sale to J&J at a price of $76 per share. Not until May 23, 2005, did Guidant disclose in a letter to physicians that there were reported problems with its ICD and pacemaker devices. That action was prompted by an article that the New York Times was about to publish, revealing the full story of the flaws. Guidant's May 23 letter informed the doctors that it had learned of the defects in 2002, had fixed them in later devices, and did not recommend replacement of the defective devices because of the low risk of failure and the risk attendant to additional surgery. On May 25, 2005, Guidant issued a press release to the same effect.

The Food and Drug Administration ("FDA") issued a national recall for the Guidant devices on June 17, 2005. Guidant issued a physician communication and a press release on the same day. That press release disclosed that there had been 15 reports of failure in the Contak Renewal and Contak Renewal 2 defibrillators, out of approximately 16,000 implanted worldwide, and two memory error incidents among its four models of AVT defibrillators, out of about 21,000 implanted worldwide. After the FDA-ordered recall, Guidant's share price dropped $3.36 immediately, falling to $70.33. That alone represented a loss of $1.09 billion to Guidant investors. Further press statements downplaying the significance of the defects followed in June and July, while Guidant's share price dropped another $2.10. In October 2005, J&J announced that it was reconsidering the merger; this announcement also hit Guidant's share price hard, dropping it in one day from $72.38 to $64.10. J&J began renegotiating the terms of the merger, but eventually ...

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