By Jonathan Stempel and Toni Clarke
(Reuters) – A federal appeals court on Wednesday revived a lawsuit accusing Medtronic Plc of defrauding shareholders by covering up negative side effects from its Infuse bone growth product for nearly a decade.
The 8th U.S. Circuit Court of Appeals in St. Paul, Minnesota said a lower court judge erred in finding that the plaintiff shareholders sued too late, by waiting more than two years after learning information that could suggest an intent to defraud.
Medtronic did not respond to requests for comment.
The plaintiffs include the West Virginia Pipe Trades Health and Welfare Fund, the Employees’ Retirement System of the State of Hawaii and Germany’s Union Asset Management Holding AG.
Medtronic developed Infuse as an alternative to bone grafts, and the U.S. Food and Drug Administration approved it for use in some lower back spinal surgeries in 2002.
But off-label uses of Infuse eventually comprised 85 percent of sales. The FDA in 2008 warned against such uses, following reports of life-threatening complications.
Three years later, a June 28, 2011 article in The Spine Journal said clinical studies by doctors with financial ties to Medtronic understated Infuse’s risks.
Then in October 2012, the U.S. Senate Finance Committee found that Medtronic was “heavily involved” in shaping the content of such studies.
Shareholders sued Medtronic on June 27, 2013, saying its activities inflated the company’s stock price, and caused them to lose hundreds of millions of dollars as the truth came out.
In Wednesday’s decision, Circuit Judge Raymond Gruender said it was not until The Spine Journal article was published that reasonable shareholders might have inferred that problems with Medtronic’s studies reflected an intent to defraud.
Gruender also said shareholders properly alleged that they relied on Medtronic’s alleged misconduct.
“A company cannot instruct individuals to take a certain action, pay to induce them to do it, and then claim any causal connection is too remote when they follow through,” he wrote.
“In this way,” the judge continued, “Medtronic’s alleged manipulative conduct directly caused the biased clinical trial results that the market relied upon.”
Shawn Williams, a lawyer for the plaintiffs, said he was pleased with the decision, which returns the case to the lower court for further proceedings.
Medtronic is now based in Ireland, but has offices in Minneapolis.
In March 2012, the company agreed to pay $85 million to settle a shareholder lawsuit claiming it concealed the extent of Infuse’s off-label use. (http://www.reuters.com/article/us-medtronic-settlement-idUSBRE82T1A92012…)
The case is West Virginia Pipe Trades Health & Welfare Fund et al v. Medtronic Inc et al, 8th U.S. Circuit Court of Appeals, No. 15-3468.
(Reporting by Jonathan Stempel in New York; Editing by Marguerita Choy)