Trial Court Did Not Abuse Its Discretion In Dismissing Securities Complaint With Prejudice
FANNON v. GUIDANT CORP. (October 21, 2009)
Guidant Corporation is a worldwide manufacturer of medical devices, including pacemakers and implantable cardioverter defibrillators ("ICDs"). In the 1990s, Guidant released a new ICD model. Within a few years, it discovered a design flaw. Although it corrected the flaw in new production runs, it never recalled the flawed units nor did it advise doctors or the public of the flaw. In 2004 and 2005, Guidant and J&J were involved in merger negotiations. Guidant issued several press statements and filed several SEC forms without mentioning its potential liability arising from the flawed devices. After a young man died and the New York Times prepared to report on the flaws, Guidant disclosed the problems in a letter to physicians. Shortly thereafter, the FDA issued a national recall. Guidant's stock price fell and J&J reconsidered its merger intentions. Eventually, Boston Scientific agreed to buy Guidant. Guidant's share price fluctuated between $63 and $80 during this time period. A number of class-action suits were filed, beginning in 2005. Some were voluntarily dismissed -- a second set was consolidated in the district court. Almost a year after the first complaints were filed, plaintiffs in the consolidated cases filed a consolidated complaint. A few days later, plaintiffs filed an amended consolidated complaint. Almost two years later, the court dismissed the complaint on the ground that it failed to meet the stringent scienter pleading requirements of the Private Securities Litigation Reform Act. The court also denied plaintiffs leave to amend and denied a rule 59(e) motion to set aside the judgment and allow for an amended complaint. Plaintiffs appeal.
In their opinion, Judges Bauer, Flaum and Wood affirmed. The Court first noted that the plaintiffs, in their appeal, do not challenge the district court's evaluation of the merits of the complaint. They only challenge the court's decisions to dismiss the complaint with prejudice and to not allow an amendment. The Court recognized the jurisprudence which advises that a better course in PSLRA cases is to dismiss without prejudice. The Court also recognized the specific factual backdrop of the case -- that numerous individual cases had been filed, that a consolidated complaint was filed a year later, that the consolidated complaint was amended and that the dismissal came two years after that. Given the amount of time and number of opportunities, the Court concluded that the district court did not abuse its discretion in dismissing with prejudice. With respect to the court's denial of the Rule 59(e) motion, the Court also concluded that it was not an abuse of discretion. The Court relied on the facts that plaintiffs made a strategic decision not to insert new evidence prior to the original ruling on the motion to dismiss and also that the court below was of the opinion that the amended complaint did not adequately address the deficiencies of the original complaint.
