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Mauss v. Nuvasive, Inc.

United States District Court, S.D. California

August 19, 2014

BRAD MAUSS, individually and on behalf of all other persons similarly situated, Plaintiff,


JEFFREY T. MILLER, District Judge.

This is a purported securities fraud class action on behalf of persons who purchased NuVasive, Inc. securities between October 22, 2008, and July 30, 2013. Plaintiff alleges Defendants violated federal securities laws and pursues remedies under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and the regulations promulgated thereunder, including Rule 10b-5. Defendant NuVasive, Inc. ("NuVasive") and several of its officers, Defendants Alexis V. Lukianov, Kevin C. O'Boyle, and Michael J. Lambert (collectively, "Individual Defendants") have filed a motion to dismiss Plaintiff Mauss's amended complaint (the "FAC") under Federal Rule of Civil Procedure ("Rule") 12(b)(6) for failure to state a claim. (Dkt. No. 24). Plaintiff has filed an opposition to Defendants' motion, (Dkt. No. 26), and Defendants have filed their reply. Having carefully considered the parties' briefing, the court finds this matter suitable for resolution on the papers without oral argument pursuant to Civil Local Rule 7.1.d.1. The motion to dismiss is GRANTED WITH LEAVE TO AMEND for the reasons set forth below.


NuVasive designs, develops, and markets a range of products relating to the surgical treatment of spine disorders. In order to sustain and grow its business, the Plaintiff alleges NuVasive faces constant pressure to innovate, promote and market its products, establish relationships with surgeons and hospitals, and convince spine surgeons to choose its products over those of its competitors. NuVasive and other medical device companies are subject to an extensive regulatory framework intended to protect patients and government-funded health care programs, such as Medicare and Medicaid, from fraud and abuse. Thus, sales and marketing practices and other conduct that can be commonplace in other industries may be unacceptable or illegal when soliciting business that ultimately is paid for, in whole or in part, by governmental healthcare programs. Failure to adhere to these laws and regulations can result in civil and criminal penalties, or even exclusion from participation in governmental health care programs.

Because NuVasive and its customers - mainly hospitals and surgeons - rely primarily on third-party reimbursement for the earned surgical and monitoring fees, Plaintiff alleges exclusion from participation in programs, such as Medicare and Medicaid, can be fatal to its business. Consequently, if hospitals and physicians cannot recover adequate payments from programs like Medicare and Medicaid, either because NuVasive is ineligible to participate or because there is a disagreement about reimbursement, it is unlikely that they will continue to use NuVasive's products and services.

Plaintiff alleges that despite NuVasive's recognition that "[h]ealthcare fraud and abuse laws apply to our business, " "Defendants determined to sustain [NuVasive's] revenues and expand its customer base by employing numerous, aggressive and questionably-ethical sales and marketing practices that constitute violations of federal and state laws, including but not limited to, the Anti-Kickback Statute, the False Claims Act, and other applicable healthcare fraud and abuse laws." (FAC ¶ 6). Generally, Plaintiff alleges Defendants engaged in three specific practices in violation of applicable healthcare fraud and abuse laws.[2]

First, Plaintiff alleges Defendants "lured surgeons to utilize NuVasive products and services and encourage other surgeons to do the same by devising so-called educational and training programs and clinical studies, which included, among other things, all-expense paid trips to New York, San Diego, Puerto Rico, and other locations, first-class flights on private jets, tickets to Broadway shows and NFL games, expensive cocktail receptions and dinners, luxury hotel stays, and gift cards." (Id. at ¶ 7). Plaintiff further asserts Defendants "created a network of prominent physicians, " known within NuVasive as high-end rollers, "who received rewards and special treatment, such as all-expense paid travel, concierge services, and speaking engagements, based upon the number of patients they referred to [NuVasive] and their promotion and publication of peer-reviewed papers touting the benefits of NuVasive products and services. Certain physicians were also paid exorbitant consulting fees and commissions, often in excess of $1 million per year per doctor, for participating in clinical trials and utilizing NuVasive products in surgeries." (Id. at ¶¶ 8-9). Plaintiff alleges Defendants engaged in this wrongful and illegal conduct, knowing that the resulting increases in sales and revenues would be paid, in part, by governmental healthcare programs, including Medicare and Medicaid.

Second, Plaintiff alleges Defendants violated applicable health care and abuse laws following losses in revenue in its monitoring business due to changes in rules for billing and coding its Intra-Operative Monitoring ("IOM") services.[3] Specifically, Plaintiff alleges, "[Defendants] responded by, among other things, (1) having sales representatives place monitoring equipment in operating rooms, when the equipment was redundant and not medically necessary; (2) allowing doctors to remotely monitor several patients simultaneously, and then generating separate invoices for the same time billed; (3) developing marketing materials to instruct customers on coding monitoring services so as to take advantage of loopholes in coding procedures; and (4) improperly coding monitoring services in claims submissions to Medicare and Medicaid." (Id. at ¶ 11).

Third, Plaintiff alleges that Defendants took aggressive action when coding disputes threatened to impact revenues for NuVasive's eXtreme Lateral Interbody Fusion® ("XLIF procedure"), [4] which was NuVasive's most lucrative and well-known line of business. In doing so, Defendants "waged a very heated battle with third-party payers, insisting that those payers, including Medicare and Medicaid, accept the coding designation assigned by NuVasive." (Id. at ¶ 12). Ultimately, NuVasive decided to continue to utilize the coding that resulted in the highest reimbursement for the XLIF procedure.

In various public filings, Plaintiff alleges Defendants indicated that the Anti-Kickback Statute "prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration, direct or indirect, in cash or in kind, in return for or to induce the referral of patients for items or services covered by Medicare, Medicaid and certain other governmental health programs." Despite knowing their conduct violated the law, Defendants nevertheless claimed in these filings that they "believe[d] that [their] operations materially compl[ied] with the antikickback statutes...." Likewise, Plaintiff alleges Defendants knew that by compromising the independent judgment of physicians, promoting the use of equipment that was not medically necessary, and manipulating and exploiting loopholes in the billing coding system and encouraging customers to do the same, improper claims would be submitted for payment to Medicare and Medicaid in violation of the False Claims Act.

Ultimately, Plaintiff alleges the Defendants' thinly-veiled kickback scheme and deceptive billing practices caught the attention of regulators. On July 30, 2013, NuVasive disclosed in its Form 10-Q for its second quarter in 2013 that it had "received a federal administrative subpoena from the Office of the Inspector General of the U.S. Department of Health and Human Services (OIG) in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. The subpoena seeks discovery of documents for the period January 2007 through April 2013." After releasing this news, NuVasive securities declined $3.28 per share or over 12%, to close at $22.84 per share on July 31, 2013.

Throughout the applicable class period from October 22, 2008 through July 30, 2013, the FAC alleges Defendants violated federal securities laws and seeks remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 against Nuvasive and the Individual Defendants. In particular, Plaintiff alleges Defendants made false and/or misleading statements during conference calls with investors and in NuVasive's quarterly and annual reports. Plaintiff also alleges Defendants failed to disclose material adverse facts about NuVasive's business, operations, and prospects. Specifically, Defendants made false and/or misleading statements and/or failed to disclose that: (1) Defendants' education and training programs and expenses related thereto were a contrivance to disguise improper and illegal gifts, payments, and other remuneration to doctors in exchange for referrals of business; (2) Defendants utilized kickbacks, in the form of gifts, entertainment, improper commissions and consulting fees, and other remuneration, in order to induce doctors, including certain prominent physicians referred to by NuVasive insiders as high-end rollers, to utilize its products and services and to encourage other doctors to do the same; (3) Defendants employed improper sales and billing practices to sustain revenues, including submitting false claims to Medicare and Medicaid with knowledge that its customers ultimately would submit claims for reimbursement to governmental healthcare programs, including Medicare and Medicaid; (4) Defendants provided guidance to its customers as to how to code NuVasive products and procedures in order to take advantage of loopholes and maximize reimbursement by third party payers, including Medicare and Medicaid; (5) Defendants did not employ adequate internal controls to detect and prevent fraudulent and abusive marketing, sales, and billing practices so as to maintain compliance with applicable laws; (6) a substantial portion of NuVasive's earnings and revenues were thereby earned as a result of violations of the Anti-Kickback Statute, the False Claims Act, and other healthcare fraud statutes; and (7) as a result of Defendants' practices, there was a substantial risk that NuVasive would encounter regulatory scrutiny.

As a result of Defendants' misleading statements and omissions, and the precipitous decline in the market value of NuVasive's securities, the FAC alleges Plaintiff and other class members have suffered significant losses and damages. Based on these general allegations and more specific allegations provided in the FAC, Plaintiff asserts two causes of action: (1) Violations of Section 10(b) and Rule 10b-5 promulgated thereunder against all Defendants; and (2) Violations of Section 20(a) of the Securities Exchange Act against the individual Defendants.

On August 28, 2013, Danny Popov filed this class action against Defendants. On October 28, 2013, Movant Mauss brought a motion to appoint lead counsel and lead plaintiff pursuant to § 21D(a)(3)(B) of the Securities Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(a)(3)(B). On December 27, 2013, the court granted the motion to name Pomerantz Grossman Huffman Dahlstrom & Gross LLP as lead counsel with Glancy Binkow and Goldberg ...

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