Zimmer (NYSE:ZMH) escaped a 2nd lawsuit over its Durom metal-on-metal hip implant last month when a federal judge nixed the plaintiff’s attempt to file a revised complaint.
Jonathan DeWald, who invested in the Zimmer Common Stock Fund set up for employees, sued Zimmer in 2009, alleging that the company violated the Employee Retirement Income Security Act by concealing the problems that led to the eventual suspension of the Durom device in 2008.
Judge Sarah Evans Barker of the U.S. District Court for Southern Indiana originally dismissed the 1st lawsuit late last year, ruling that its allegations "would not support a finding that the Defendants should have been tipped off to the fact that Zimmer’s stock had become ‘so risky or worthless’ that it warranted removal of the stock as a plan investment option," according to court documents.
"In reaching this conclusion, we noted the relatively modest stock price declines as well as the ample opportunity over several months when each of the plan participants could have diverted their contributions away from the Zimmer Stock Fund," Barker wrote.
ZMH shares lost 4% in April 2008 after president & CEO David Dvorak affirmed the medical device company’s fiscal guidance "despite ‘the negative financial impact we’ll experience as a result of lost sales, inventory losses, and remediation costs in our [orthopedic surgical products] business,’ because the company also anticipated a positive financial impact from a number of ‘other planned actions,’" according to the documents. The stock dropped another 7% 2 months later when Zimmer announced the suspension of sales and marketing of the Durom cup and lowered its earnings outlook to $4.05-$4.10 from $4.20-$4.25. In October of that year the shares lost 13.5% of their value when Zimmer said it would establish a $47.5 million fund to deal with Durom legal claims.
DeWald asked to file a 2nd, amended complaint to address the faults of the 1st lawsuit, contending that new allegations that "defendants knew or should have known about: (1) quality issues existing at Zimmer’s Dover, Ohio manufacturing facility as of January 29, 2008; (2) numerous 483 observations issued by the Food & Drug Administration against Zimmer as well as the recall of 5 separate products (the Pulsavac Plus, Pulsavac 2, Pulsavac 3, Hemovac Infection Control Kits and Hemovac Autotransfusion Systems) as of January 29, 2008; and (3) Zimmer’s problems with the Durom Cup," Barker wrote.
"Plaintiff’s theory is that defendants’ failure to disclose these issues and/or their potential to adversely affect the stock price of Zimmer stock constituted a violation of defendants’ fiduciary duty under ERISA," Barker wrote. "Defendants rejoin that defendants had no fiduciary obligation under ERISA to provide this information to participants in the plan and in any event plaintiff has failed to allege that the public statements were made with knowledge of their falsity. We find this rejoinder persuasive in both regards. … We also agree with defendants that plaintiff’s [2nd amended complaint] fails to allege that any public statement was made by and [sic] defendant with knowledge of its falsity. The ERISA standard for pleading state of mind is high, requiring an allegation that the misstatement be ‘deliberate’ in order to support a failure to disclose claim."
The legal win follows Zimmer’s November estimate that it’s still on the hook for some $230 million of the $388.2 million in estimated losses accrued for Durom-related claims. The Warsaw, Ind.-based company had canceled its Durom Acetabular Component from the Australian Register of Therapeutic Goods earlier last month.
