Opinion ID: 223134
Heading Depth: 2
Heading Rank: 2

Heading: Plaintiff's Proposed Inference of Scienter

Text: We understand plaintiff's case to rest in general on the claim that the defendants were aware of a risk that no-deflate problems with U.S. Taxus devices would require a significant recall; that the company's statements and omissions misled the market about the nature, cause, and degree of this risk; and that these facts support an inference that defendants acted with scienter. Specifically, plaintiff argues that a reasonable inference of defendants' scienter is established by evidence that on three issues, defendants had knowledge of facts or access to information contradicting their public statements. Evidence that defendants published statements when they knew facts suggesting the statements were inaccurate or misleadingly incomplete is classic evidence of scienter. Aldridge, 284 F.3d at 83. Here, however, plaintiff's evidence considered individually and as a whole makes clear that no reasonable jury could find that defendants recklessly misled the market about a significant risk of Taxus no-deflates or the need for a recall, much less that they intentionally did so.
Plaintiff argues that defendants' failure to implement the planned laser shift in November recklessly created a significant risk that the newly launched U.S. Taxus devices would need to be recalled and is evidence that defendants acted with scienter in not disclosing the existence of the fix sooner than they did. At its core, this argument rests on the premise that the laser shift was not only the ultimate solution to the problem of focal necking, but also the criterion that defined whether or not a device needed to be recalled. This premise is flawed for a number of reasons. First, there is no evidence that the laser shift was itself sufficient to prevent focal necking in Taxus; the fall 2003 conclusion by the six sigma team that the laser shift would prevent focal necking for Express2 regardless of other causal factors did not apply to the causal factor of cone puffing, as cone puffing was not used in the manufacture of Express2 and its relevance to focal necking in Taxus was not known until the summer of 2004. Second, the implementation of the laser shift was not a determinative criterion in the recall. The July 16, 2004 decision about which lots of Taxus to recall was not based on whether they had been produced using the new laser alignment. Rather, the decision was based on whether the lots had been produced before or after the introduction of the reticle inspection at the end of April. The recall covered all Galway-manufactured devices that were manufactured before this, and none that were manufactured after it. Likewise, no devices manufactured in Maple Grove after this were recalled. While BSC was able to limit the recall of Maple Grove lots manufactured pre-reticle inspection by using manufacturing data not available in Galway, the introduction of the reticle inspection was nevertheless the defining moment in time. Therefore, although the laser shift was a manufacturing solution to focal necking that eliminated the need for some of BSC's other solutions, it was not determinative of whether a product needed to be recalled. [15] Plaintiff nevertheless contends that defendants were required to disclose the laser shift sooner than they did. It claims that BSC was prepared to submit its change to the FDA by November 2003, but that the process was aborted by the Taxus PMA Council in order to keep the Taxus release on schedule, thereby misleading the market about the risk that it would be introducing a new product that had a manufacturing defect. It argues that the decision to build inventory without the permanent fix in place made the recalls not just foreseeable, but probable. There is no evidence in the record that supports this claim. The evidence is that as of November 2003, BSC had not validated the .8 mm laser shift and was not prepared to submit this documentation to the FDA, as it needed to do before implementing the change. Although plaintiff is correct that on September 2, the engineer leading the laser shift team, Kevin Griffin, proposed a validation plan for the laser shift that would be completed and submitted to the FDA by November 7, 2003, the email to which Griffin attached this plan also stated that it was a bit optimistic. Likewise, while six sigma team leader Peter Delmer testified that the laser shift had been confirmed as a manufacturing solution to focal necking by October 2003, he also testified that at this point, an awful lot more work would have to be done in order to implement the manufacturing change. Further, the additional work that Griffin and Delmer said was required was in fact done. In October, the team had only recommended shifting the laser from.4 mm to .6 mm, rather than the .8 mm position that was ultimately implemented. It would have been inappropriate for the company to disclose that it was considering a manufacturing change before it was satisfied that the change would not itself cause other problems, and no inference of scienter can be drawn from this non-disclosure. Moreover, Griffin's validation plan was created for Express2 not Taxusa fact that plaintiff ignores in arguing that the Taxus PMA Council modified the plan. Although both the Express2 and Taxus systems were built using the same catheter, the teams worked independently and plaintiff cites no evidence that the validation plan and FDA submissions for Express2 were influenced by the Taxus PMA Council's decision to only allow critical modifications to the Taxus PMA after October 31. [16] On the contrary, when Griffin sent the validation plan to Paul Bulger and asked whether he should keep the Taxus reg folks involved, Bulger replied: I have informed Taxus regulatory of the proposed changes. They have not given any specific feedback or concerns. Since this is a change to the delivery system only, it should have a minimal impact to the Taxus PMA review. [17] Moreover, no inference of scienter can be drawn from the fact that BSC management decided at the end of November that it did not immediately need to disclose or implement the laser shift. At this point, there had been only two no-deflate complaints for the tens of thousands of Express2 and Taxus devices manufactured at Galway after the introduction of the May 2003 changes, and there had been only three no-deflates ever on Express2 devices manufactured at Maple Grove. Based on the information available, no inference of scienter can be drawn from defendants' conclusion that the preventive measures implemented in May had been effective in further reducing what was already, by industry standards, a very low rate of complications. Plaintiff also claims that later, in the March-May 2004 time period, no Defendant affirmatively disclosed any ... information about the approval of manufacturing changes and the fact that some pre-manufacturing change inventory remained in the field. However, it is clear that the market knew that BSC was implementing a manufacturing change to address no-deflates on May 5, when the FDA approved the Special PMA Supplement requesting permission to make the change. The FDA approval, which was publicly available on its website, informed the market that BSC was making a modification of a manufacturing process to address complaints related to failure of the delivery system balloon to properly deflate following stent deployment. The change was also reported later that day in a Merrill Lynch analyst report, which stated that the company was implementing a manufacturing fix to address the issue of `no deflates.' It would have been clear to the market that the stents produced prior to this date did not incorporate this modification.
Plaintiff also claims that from April 2004 through the July 16 recall, BSC misled and lulled the market by maintaining that the problems with Taxus were due to physician unfamiliarity with the device, rather than a manufacturing issue, and that [o]nly after the recalls did [BSC] admit that the defect in the catheter was manufacturing related. Plaintiff has produced no evidentiary support for its claim, having often conflated the no-deflate problem with the sticky stent problem and failed to differentiate between the problems and their causes. Plaintiff claims that Senior Vice President Paul LaViolette misrepresented the cause of problems with the stent system, and lulled the market, when he said during the first quarter analyst conference call on April 20, 2004 that essentially all complaint activity subsided as physicians became accustomed to using Taxus. This statement was in response to a specific question in which an analyst asked about the sticky stent problem (not the no-deflate problem) and why there had been no reports of such a problem in Europe over the past 12 months. LaViolette explained that there had in fact been sticky stent complaints when Taxus was first launched in Europe, but that these complaints subsided as physicians became accustomed to using Taxus. He did not say that physician technique was the cause of the no-deflate problem. Plaintiff also focuses on statements by BSC spokesman Paul Donovan, who was reported in a Boston Globe article on April 24 as saying that a few doctors in Europe reported similar problems when Taxus was initially approved for use there last year, but the complaints ended as doctors became more comfortable with the stents. This was true as to the sticky stent problem, and as the article reported, Donovan differentiated between the two problems. In discussing the 27 complaints that had been received, he explained that in most of the reported cases the balloons ... seemed to stick to the coating on the stent, creating a potential blockage. In about six of the cases the balloon wouldn't deflate, or would only deflate slowly. It is true that not every article was as clear in differentiating between the 27 complaints, but no inference of scienter can be drawn from this fact. Plaintiff cites an April 26 Wall Street Journal article that stated: Boston Scientific said it has received 27 reports of difficulties removing or deflating the balloon used in the angioplasty.... It adds that it believes the problem will disappear once physicians gain experience using the Taxus. `This sort of thing does tend to happen as physicians gain experience with the device,' said company Senior Vice President Paul LaViolette. Even so, the article went on to state that [c]opies of 21 of these reports reviewed by The Wall Street Journal showed that most of the complaints appeared to be minor annoyances, requiring the doctor to fiddle a bit to remove or deflate the balloon, apparently referring to the same break-down of complaints reported in the Boston Globe article. The fact that this Wall Street Journal article was not as clear as the Boston Globe in reporting that there were two different issuesno-deflate and sticky stentand that physician familiarity solved the latter, does not support a claim that defendants recklessly misled the market as to the cause of the complaints. This is especially so given that reports and statements issued over the next month clearly noted the different problems and solutions. On May 5, the market had clear notice that BSC was not attributing the no-deflate problem to physician mishandling when the FDA announced approval of BSC's request for a modification of a manufacturing process to address complaints related to failure of the delivery system balloon to properly deflate following stent deployment. The day that the FDA approved the change, it was reported in a Merrill Lynch analyst report stating that the company has a manufacturing fix to address the issue of `no deflates' submitted to the FDA to further reduce dependence on operator technique. And two days later, the Boston Globe ran a story that covered both the laser-shift solution to the no-deflate issue, as well as the sticky stent problem. As to the no-deflate issue, the article stated: [T]o prevent the problem of balloons failing to deflate, Boston Scientific is making a small change in the laser-bonding process it uses to join the balloon and catheter before the stent is packaged around them, said spokesman Paul Donovan. The article makes clear that Donovan differentiated between the no-deflate and sticky stent issues, and their solutions, explaining that the manufacturing change is meant to address the problem of balloons failing to deflate, while the company has no plans for manufacturing changes to address the other problem, which was sticky stent. Likewise, a May 27, 2004 Goldman Sachs report stated that the worldwide rate of `withdrawal resistance' (balloons sticking to the stent) is only 0.03%, which has largely been controlled through additional physician training, while other issues, including the 0.0005% worldwide rate of `deflation difficulty' (balloons unwilling to deflate following dilatation), were more-or-less corrected with slight adjustments implemented to the balloon catheter. That physician experience and technique could solve complaints of stent stickiness continued to be clearly reported to the market in the following month. On June 22, a Dow Jones Newswires article stated: Problems doctors have reported with Taxus include trouble getting the balloon to deflate and difficulty withdrawing the balloon catheter. As to the former, it noted that Boston Scientific is making a change in its manufacturing process that will result in the balloons deflating more easily. It quoted one doctor as saying that he had not seen any Taxus stent systems that would not deflate, but that he experienced stickiness with them 60-70% of the time. It also quoted multiple doctors saying that with practice, the stickiness issue was not a problem. [18] Given that market analysts and BSC management regularly differentiated between the two problems and their causes, there is no basis for plaintiff's contention that [e]ven on July 2, after the first recall, market analysts continued to believe that doctors' techniques were the problem behind no-deflate. In fact, the July 2, 2004 Merrill Lynch analyst report that plaintiff cites in support of this claim contradicts it. The report highlighted the manufacturing solution to the problem of no-deflates, explaining that BSC identified a series of manufacturing events that increased the risk of no-deflate; that the recall was based on these manufacturing lots; and that BSC had introduced a manufacturing change in May that is meant to further reduce the incidence of `no deflates.' The report's only reference to the role of physician handling was a single sentence that noted that BSC was sending a letter to physicians to inform them of handling issues that can prevent or mitigate complications with no-deflate. This does not blame physicians for the problem. Rather, it says that physicians could be part of a solution that was being primarily achieved through a manufacturing change.
Plaintiff claims that the July recalls were foreseeable and that BSC should have disclosed the risk sooner. They state that a recall of Taxus was not merely in the universe of risks recognized by Defendants, it was a certain risk known to the Defendants, thus transforming this case from one of mere negligence to one of deliberate indifference. Plaintiff's proposed inference of scienter is not only based on what defendants failed to say about the introduction of the laser shift, discussed above, but also on what they did say about the risk of recall. Plaintiff argues that defendants affirmatively misled the market about this risk. Plaintiff claims that starting in April 2004, BSC told the market that there would be no recall of devices manufactured prior to the implementation of the FDA-approved manufacturing change, and that [e]ven on June 22, the date the Company had determined a recall was necessary, the Company continued to make statements that there would be no recall. The evidence does not support these claims. Plaintiff points to the fact that a June 22 Dow Jones Newswires article reported Paul Donovan as saying there would not be a recall, while a June 22 PIR recommended the recall of one batch of Taxus devices manufactured in Maple Grove. However, the PIR was not completed until the evening of June 22, while the article was published in the morning. It is also unclear from the article when Donovan made this statement. Further, standard company protocol required that PIR recommendations be evaluated and approved by the FAC, and the FAC did not make its final decision to institute the recall until about a week later on June 30. Plaintiff also argues that CEO Jim Tobin misrepresented the known risk of a second recall when, during the analyst call on July 2, he said that he did not believe that the recall was a tip of the iceberg sort of situation. Plaintiff argues that this statement is inconsistent with an email that Tobin sent earlier in the day in which he mentioned that he was not totally confident that everything was under control, expressing concern that he had just learned that twenty more lots were being tested in Galway. The two statements are not inconsistent and do not support an inference of scienter. Subsequent emails made clear that the company was assessing the risk of receiving additional complaints on the twenty lots for which there had been only one complaint, and was not in fact testing any of these devices in these lots. Further, plaintiff fails to note that Tobin expressly discussed this during the conference call. In response to a question about future recalls, Tobin explained: We're looking at those batches for which we have complaints, which is 25 batches, or some number like that, out of 1,223. Of those 25, these two we're not happy with and we're pulling them back. The analysis is not complete, so it is possible that you would find another batch or two, but unlikely, I would say. [19] During the July 2 conference call, Tobin even expressly identified the risk that there could also be complaints for the lots produced after the introduction of the laser shift. He explained that BSC had not received any complaints about devices manufactured after the introduction of the laser shift, but emphasized that this doesn't mean we won't. This discussion with analysts made clear that because only 20,000 post-laser shift devices had shipped, and the historical rate of error was very low, the fact that there had been no complaints so far meant [n]othing, because the sample is too small. Defendants were clear about the risk of another small recall. [20] There is no evidence that management had reason to suspect a recall on the order of the second recall, much less that they recklessly or intentionally misled the market about it, such as to permit an inference of scienter. Rather, the evidence is that it was not until after July 2 that the company recognized the significance of the factors that provided the basis for the second recall. Defendants testified that it was not until after the first recall that the company recognized that the cone puffing process was creating tensile forces on the devices significant enough to cause focal-necking, and plaintiff fails to identify any evidence that draws this testimony into question. Plaintiff argues that defendants' account of when they learned of the role of cone puffing is contradicted by an internal report circulated on March 23, 2004 stating that the loading of the balloon protector after folding and after cone puffing has been highly suspected as a source of high tensile forces during processing. But plaintiff fails to note that the report then states but we have not been able to draw direct correlation to focal necking and concludes that additional research activities need to be started to assess the tensile forces that are being applied at various processes (i.e. balloon folding & cone puffing). Plaintiff also argues that defendants' account of the role of cone puffing in no-deflates and the recall is contradicted by an email from BSC engineer Ken Pucel on August 24, 2004 stating that there was too much uncertainty to draw a definitive conclusion about whether cone puffing was causing the rate-increase for Taxus no-deflates. However, Pucel's email also stated that there is good reason to suspect conepuffing, noting that Galway's no-deflate complaint rate increased from 15 ppm to 240 ppm after the introduction of cone puffing and concluding that the company need[ed] to have a six sigma black belt further analyze the data. Even if this August email indicated what defendants knew in early July, rather than late August, it would do nothing to undermine defendants' evidence that the second recall was instituted in part because of new information they learned about the risk of focal necking due to cone puffing. [21]