Appeal from the United States District Court for the District of Minnesota.
The opinion of the court was delivered by: Melloy, Circuit Judge.
Before BYE, MELLOY, and SHEPHERD, Circuit Judges.
Plaintiff Mark Brown appeals the district court's dismissal of his complaint against Medtronic, Inc., several of its directors, a retirement plan committee, and various fiduciaries. Brown alleges class-action claims pursuant to the Employee Retirement and Income Security Act of 1973 ("ERISA") and seeks to serve as the representative plaintiff. His claims relate to purported breaches of fiduciary duties associated with information disclosures or non-disclosures surrounding two Medtronic products: Infuse-brand bone graft material ("Infuse") and Sprint Fidelis-brand lead wires for implantable defribillators and pacemakers ("Fidelis"). Brown alleges generally that Medtronic stock became an imprudent investment after the defendants obtained certain adverse information regarding performance of Fidelis and business practices surrounding Infuse. He alleges specifically that the defendants breached fiduciary duties by failing to adequately disclose the information, making a disclosure that deceptively downplayed the information, and imprudently continuing to invest in Medtronic stock after receipt of the adverse information.
The district court held Brown lacked constitutional standing. We affirm the judgment of the district court, albeit on slightly different grounds. We hold Brown lacks constitutional standing to bring Infuse-related claims, possesses standing to bring Fidelis-related claims, but, ultimately, fails to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).
Medtronic manufactures and markets a broad assortment of medical devices through several different business units. Infuse and Fidelis are two of Medtronic's many products. Regarding Infuse, Brown alleges Medtronic promoted Infuse for uses not approved by the FDA and improperly paid reviewing physicians for favorable reviews. Brown alleges information regarding these Infuse-related actions came to light through a September 4, 2008 Wall Street Journal article. He alleges Medtronic stock price dropped following publication of the article because the price had been artificially inflated due to the previously undisclosed actions. He also alleges the present defendants breached their fiduciary duties at an earlier time by participating in, or turning a blind eye towards, these activities and continuing to invest in Medtronic stock. Although he alleges defendants knew of the alleged actions prior to publication of the Wall Street Journal article, he does not allege that any issues surrounding Infuse caused Medtronic stock price to drop prior to September 2008.
Regarding Fidelis, Brown alleges that the defendants failed to respond properly to a February 2007 report from a physician, Dr. Hauser, who observed an approximate 1% failure rate in Fidelis leads among approximately 600 patients. Dr. Hauser reported his concerns to Medtronic personnel, including a vice president, in February 2007. Dr. Hauser then published his concerns in a medical journal in March 2007. In April 2007, Medtronic issued a "Dear Doctor" letter relaying Dr. Hauser's concerns and discussing Medtronic's investigation into the concerns. In the letter, Medtronic suggested physician error in implantation might be partially responsible for some failures and suggested techniques to minimize failures. Medtronic subsequently collected data from approximately 25,000 patients. In October 2007, Medtronic stopped marketing Fidelis, issued a recall of non-implanted devices, and instructed physicians to cease new uses of Fidelis.
Medtronic stock price had climbed to about $57 per share prior to the October 2007 Fidelis recall and dropped by 10-12% shortly after the recall to around $50--51 per share. Brown alleges Medtronic failed to react appropriately to Dr. Hauser's February report and attempted to cover up a product defect by issuing the Dear Doctor letter suggesting physician error was partially to blame. He also alleges it was imprudent to wait until October to recall Fidelis.
Brown does not allege company stock was an imprudent investment prior to February 2007. Also, he admits that some degree of stock-price drop likely would have occurred even if Medtronic had immediately made a public disclosure of Dr. Hauser's report or immediately taken more dramatic corrective action. Brown's counsel made clear in arguments to the district court, however, that Brown alleges more than merely a stock price drop due to decreased earning expectations associated with the negative Fidelis information. Brown alleges that the broader market perceived Medtronic's eventual response as delayed and as a cover-up and that the market essentially punished Medtronic by devaluing its stock through the application of a "liar's discount." Accordingly, Brown alleges the stock price drop that occurred in October 2007 was due in part to the adverse product data and recall but also in part to this alleged "liar's discount" or general loss of faith in Medtronic's veracity and goodwill.
Medtronic's stock price, like the broader market, subsequently fluctuated in ensuing months. In Fall 2008, like the broader market, Medtronic stock temporarily dropped in value by about 40%.
Medtronic employed Brown from 1974 through May 2008. During this time Brown participated in an employee stock ownership plan ("ESOP"). On February 15, 2007, the date Brown proposes as the beginning of the class period, Brown held approximately 2000 units of a plan fund that invested almost exclusively in Medtronic common stock.*fn1 The closing price on February 15, 2007 was slightly over $54. After February 15, 2007, and until his separation from Medtronic in Spring 2008, Brown continued to purchase shares, acquiring 324 additional shares. He alleges that the average price he paid for these additional shares was slightly less than $51 per share. Brown does not indicate the exact dates of his purchases, and therefore, it is not clear how many shares he purchased before and after the various events he alleges to be material to his claims. Brown liquidated his shares in transactions in May and June 2008. He sold the majority of his shares for slightly less than $50 per share and a small minority of his shares for about $51 per share.
Brown brings five claims. Claims 1 and 4 allege breaches of fiduciary duties through imprudent ESOP investment in Medtronic stock. Claim 2 alleges breaches of fiduciary duties through material misrepresentations and nondisclosures. Claims 3 and 5 are derivative of the other claims with Claim 3 alleging "divided loyalties" by fiduciaries and Claim 5 alleging corporate fiduciaries failed to properly appoint, monitor, and inform members of the retirement plan committee.*fn2 The district court looked at the dates of share-price changes and the dates of Brown's purchases and sales of shares and determined that Brown was a net beneficiary of any artificial price inflation caused by the defendants' actions or failures to act. Accordingly, the district court held Brown lacked standing because he suffered no constitutionally cognizable ...