Appeal from the United States District Court for the District of Minnesota.
The opinion of the court was delivered by: Bye, Circuit Judge
Before BYE, MELLOY, and SHEPHERD, Circuit Judges.
Detroit General Retirement System and Stanley Kurzweil (collectively referred to as DGRS), investor class representatives, appeal the district court's dismissal of their claims against Medtronic, Inc. and three of its officers, Art D. Collins, William A. Hawkins, and Gary L. Ellis, for failure to plead fraud with particularity as required by law. DGRS appeals the dismissal, along with a denial of its motion for leave to amend the complaint and its motion for reconsideration. We affirm.
Medtronic, Inc. designed, manufactured, marketed, and sold the Fidelis lead, a Food and Drug Administration (FDA)-approved medical device wire that connects an internally implanted defibrillator to a patient's heart and delivers electricity if a shock is needed. Fidelis was thinner and more flexible than earlier defibrillator leads, and therefore tolerated by a range of patients who did not do well with bulkier traditional leads. The Fidelis was considered an improvement on Medtronic's existing Quattro lead, and clinical studies in humans were not required for its approval. The Fidelis quickly became the most popular defibrillator lead on the market and by 2007 the devices had been implanted in more than 260,000 patients.
On February 15, 2007, Doctor Robert G. Hauser met with a vice president at Medtronic and informed the company he was concerned about the failure rate of the Fidelis leads at his heart clinic and he would no longer implant the device in his patients. On February 27, 2007, Hauser provided Medtronic with a study he and his colleagues had completed at the clinic, which he planned to publish in a prominent medical journal. The study found Fidelis leads had higher failure rates than the Quattro leads, concluded Fidelis leads were prone to early failure because of a tendency to fracture, and recommended against use of the device.
On March 21, 2007, Medtronic sent a letter to physicians informing them some clinics had reported higher than normal failure rates and fracturing in the Fidelis leads and informing the doctors that Medtronic was investigating the reports. The company disclosed the types of fractures reported, offered suggestions for how to prevent the fractures, and requested feedback from the doctors regarding problems with implanting the devices according to recommendation. Medtronic stated that the performance of Fidelis was "in line with other Medtronic leads" and the company's investigation "suggests that variables within the implant procedure may contribute significantly to these fractures." The letter cited a Medtronic post-market clinical surveillance study (the longevity study) and Medtronic's analysis of returned Fidelis leads. Medtronic continued to promote and sell the Fidelis leads, and company reports indicated the market for the device was strong.
On May 5, 2007, Medtronic filed an application with the FDA to modify the design of the Fidelis lead. At a meeting with doctors at the Heart Institute on July 19, 2007, Medtronic representatives stated the company had identified a problem and was working on a possible remedy but was not going to pull the product from the market. On July 30, 2007, the Minneapolis Star Tribune published a story on the Hauser study, which was published the same month, in which a Medtronic spokesman, Rob Clark, said the study "must be taken in context as it hails from one center and does not represent the total performance experience of the Fidelis lead."
On October 15, 2007, Medtronic announced it was suspending sales of the Fidelis lead because of the potential for fractures. The company recommended that physicians stop implanting existing Fidelis leads. The press release stated the failure rate for the Fidelis lead was greater than the failure rate for the Quattro leads and while the difference was not statistically significant, it had the potential to become significant over time and the company believed pulling the leads from the market was in the best interest of patients. The release mentioned that the company had identified five deaths in which Fidelis fracture may have been a contributing factor.
Medtronic held a press conference at which representatives explained the sequence of events, starting with fracture reports early in the year which prompted the March letter, followed by a six month period of investigation into reports of device failure, and culminating with the company's decision to recall the device. Medtronic again stated the difference in the failure rate for the Fidelis compared to other models was not statistically significant but would become significant over time if it continued. Representatives disclosed the predicted impact of the recall on the business of the company, expressing particular concern for the Japanese market because Fidelis was the only approved Medtronic lead in that market. At a subsequent conference, Medtronic representatives detailed the time line for the decision, starting with the reports of excessive fractures early in the year which prompted the March letter and caused Medtronic to examine the following six months of data from the lead analysis studies as well as data on 25,000 patients from Medtronic's CareLink database.
Medtronic's stock price dropped just over 11% from its pre-recall price of $56.33 in the days following the recall, falling to a low of $45.54 on November 7, 2007. On October 15, 2007, a products liability class action was filed against Medtronic, alleging the company knew about the failures as early as March of 2007 and failed to pull the device from the market in a timely manner. DGRS filed the instant suit, alleging Medtronic had engaged in securities fraud by misleading investors as to the seriousness of the problem with the Fidelis leads. Medtronic responded with a Rule 12(b)(6) motion to dismiss for failure to state with particularity a legitimate basis for the claims of fraud. The district court dismissed the case and this appeal followed.
II. DISMISSAL UNDER 12(b)(6)
This court reviews de novo a dismissal for failure to state a claim.
Fed.R.Civ.P. 12(b)(6); Ferris, Baker Watts, Inc. v. Ernst & Young, LLP, 395 F.3d 851, 853 (8th Cir. 2005). The court accepts as true all factual allegations, but is "not bound to accept as true a legal conclusion couched as a factual allegation." Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. at 1949. The complaint "must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id., quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "The court may consider, in addition to the pleadings, materials embraced by the pleadings and materials that are part of the public record." In re K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 889 (8th Cir. 2002) (quotation omitted).
The [Private Securities Litigation] Reform Act provides that, to survive a motion to dismiss, a securities plaintiff must satisfy two heightened pleading standards. 15 U.S.C. § 78u-4(b)(3). First, the plaintiff must plead falsity by specifying each allegedly misleading statement and the reasons why each statement is misleading. 15 U.S.C. § 78u-4(b)(1). If falsity is alleged based upon information and belief, the complaint must state with particularity all facts on which the belief is formed. Id. In addition, the plaintiff must plead scienter by "stat[ing] ...