Federal appeals court upholds Boston Scientific win in securities lawsuit

A federal appeals court disappointed a group of Boston Scientific Corp. (NYSE:BSX) shareholders hoping to recoup losses stemming from a recall of the Taxus Express drug-eluting stent, upholding a lower court decision to dismiss a securities fraud lawsuit.

The U.S. Court of Appeals for the First Circuit upheld last year’s ruling by Judge Douglas Woodlock of the U.S. District Court for Massachusetts to toss the class-action suit led by the Mississippi Public Employees’ Retirement System. In a single-page order, a three-judge circuit court panel dismissed the suit, awarded legal costs to Natick, Mass.-based Boston Scientific and sealed its opinion for seven days, unless the parties object to making the records public.

In April 2010, Woodlock ruled that the defendants failed to prove that Boston Scientific, ranked 10th on the MassDevice Big 100 list of the world’s largest medical device makers, concealed problems with the Taxus Express that led to a partial recall in 2004. The lawsuit involved cases of “no-deflate” in which the balloon catheter used to deploy the stents failed to deflate. The company discovered the problem as it geared up to launch the product in Europe in 2003 and prepared to apply for pre-market approval in the U.S. from the Food & Drug Administration and instituted a series of changes to its manufacturing process aimed at correcting the flaw, according to court documents. The defendants appealed Woodlock’s decision last spring.

The FDA approved the stent in March 2004; within first few weeks following the product launch, Boston Scientific received about 12 no-deflate reports and notice that one hospital was suspending its use of the device until “until it is determined if this is a product defect or an isolated incident,” according to court documents. BSX reported the no-deflate problems to the press in April of that year, saying that there was a very low rate of occurrence.

At the end of May a no-deflate incident caused the death of a patient, according to the documents, and the company received a second no-deflate report about one batch of the stents. The company recalled that batch in late June 2004 and another batch in July, representing a total of 200 stents. Boston Scientific said in a press release that the FDA received reports of one death and 16 serious injuries associated with no-deflates and eight reports that did not lead to injury. Of the 445,000 implantations as of July 2, 2004, the company said, there were 30 no-deflate complaints worldwide.

But on July 16 the company voluntarily recalled 96,000 stents, acknowledging in a press release three deaths and 43 serious injuries from deflation failures. Share prices plunged 10.3 percent on the news.

An FDA investigation of the manufacturing plants in Ireland and Minnesota that produced the stents found no violations, but Boston Scientific recalled another 3,000 stents that August. During the period covered by the suit — Nov. 20, 2003 to July 15, 2004 — former company executives including CEO James Tobin, co-founder and chairman Peter Nicholas, cardiovascular division president Paul LaViolette, chief technology officer Fredericus Colen and CFO Lawrence Best sold or gifted a total of $225.1 million in company stock.

Woodlock ruled that the evidence presented in the case showed that the company “had good reason to believe” that its manufacturing fixes had the problem under control in the fall of 2003 and “that the Taxus devices being manufactured at that time did not suffer from a no-deflate manufacturing defect,” according to court documents.

“Also of importance is the fact that the total number of complaints reported on Taxus stents by the end of the Class Period remained very small, roughly 45 complaints out of approximately 500,000 stents, an incidence rate of 0.009 percent. There is nothing in the record to suggest this incidence rate is out of proportion sufficiently to raise red flags given the type of procedure involved,” Woodlock wrote. “On this record, a reasonable jury could not find that the Defendants knew of or recklessly disregarded a ‘significant risk’ of no-deflate incidents. … Nor could a reasonable jury find that the Defendants were aware of a significant prospect for recalls until shortly before those recalls were undertaken.”

Woodlock also ruled that the insider trades the executives made were transacted during “open windows” following company earnings releases or under so-called “Rule 10b5-1” trading plans controlled by independent brokers. The executives also cleared the sales with Boston Scientific’s legal department before enacting the trades, the judge wrote, and either did not sell the share for personal benefit (Nicholas gifted $8.2 million worth of his stake), used the trades to boost their take in the company, made trades that conformed to normal sales patterns or “occurred during a period where the no-deflate issue was reasonably believed to have been resolved” or were not in a position to conceal news of the problems with the stents.

On the corporate level, Woodlock found no wrongdoing in Boston Scientific’s handling of the problems with the stent.

“[T]he evidence demonstrates a measured effort, in furtherance of a prudently cautious approach, by a corporation seeking to understand and correct the limitations of a product and to respond with appropriate adjustments. Even viewing the evidence in the light most favorable to Plaintiff, the corporate process evidenced in the record establishes a reasonable effort in light of developing information to address, rather than ignore, risks inherent in the launch of a product such as the Taxus stents,” he wrote, adding that the market was kept apprised of developments as the problems were investigated.

“[T]he record evidence establishes that the mere fact the Company stock price was inflated before the July 16 recall is insufficient in itself to prove that the alleged misrepresentations caused the economic loss alleged by Plaintiff,” Woodlock wrote.