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Mauss v. Nuvavsive, Inc.

United States District Court, S.D. California

December 9, 2014

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


JEFFREY T. MILLER, District Judge.

Before the court is Defendants' motion to dismiss Plaintiff's second amended complaint for failure to state a claim. (Doc. No. 31.) Plaintiff filed an opposition, (Doc. No. 35), and Defendants replied, (Doc. No. 36). Having considered the filings, the court finds this matter suitable for resolution on the papers without oral argument pursuant to Civil Local Rule 7.1.d.1. For the reasons set forth below, the court dismisses the second amended complaint with leave to amend.


A. Procedural History

This case is a putative class action on behalf of those who purchased NuVasive securities between October 22, 2008, and July 30, 2013. Danny Popov filed the initial complaint in this case on August 28, 2013. (Doc. No. 1.) On October 28, 2013, Brad Mauss filed a motion to be appointed lead plaintiff pursuant to § 21(D)(a)(3)(B) of the Securities Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3)(B). (Doc. No. 6.) The court granted the motion on December 27, 2013. (Doc. No. 15.)

Plaintiff filed a first amended complaint ("FAC") on February 13, 2014, (Doc. No. 22), which the court dismissed for failure to state a claim, (Doc. No. 29). The FAC did not meet the heightened requirements for pleading falsity and scienter in a securities-fraud case, as it did not link the challenged statements to the asserted reasons for their falsity, and it did not identify which Defendants made the statements. (Id. at 9-15.)

B. The Second Amended Complaint

Plaintiff filed the instant second amended complaint ("SAC") on September 8, 2014. (Doc. No. 30.) The SAC asserts two causes of action: (1) securities fraud, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission ("SEC") Rule 10b-5, against all Defendants; and (2) control-person liability, pursuant to Section 20(a) of the Securities Exchange Act, against Defendants Lukianov, O'Boyle, and Lambert. (Id. ¶¶ 299-311.) Lukianov is NuVasive's Chief Executive Officer and Chairman of the Board of Directors. (Id. ¶ 25.) O'Boyle was NuVasive's Executive Vice President and Chief Financial Officer through November 2009. (Id. ¶ 26.) Lambert has been NuVasive's Chief Financial Officer since November 9, 2009. (Id. ¶ 27.)

The thrust of the complaint is that Defendants engaged in questionable sales and marketing practices, which they misrepresented or failed to disclose in public filings and statements between October 22, 2008, and July 30, 2013, when NuVasive announced that it had been subpoenaed in an investigation concerning possible improper claims submitted to Medicare and Medicaid. Plaintiff supports these claims with the alleged statements of various confidential witnesses who attest to their knowledge of the company's conduct and the individual Defendants' roles in it. (Id. ¶¶ 50-104.)

The complaint provides the following general account, which the court takes as true to the extent that the allegations are well pleaded: NuVasive develops and markets products relating to the surgical treatment of spine disorders. (Id. ¶ 2.) To sustain and grow its business, 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. (Id. ¶ 3.) As a medical-device company, NuVasive is subject to an extensive regulatory framework that is intended to protect patients and government-funded health-care programs, such as Medicare and Medicaid, from fraud and abuse. (Id. ¶ 4.) Thus, sales and marketing practices and other conduct that is commonplace in other industries may be unacceptable or illegal when soliciting business that is ultimately paid for, in whole or in part, by government healthcare programs. (Id.) Failure to adhere to these laws and regulations can result in civil and criminal penalties or exclusion from participation in government healthcare programs. (Id.)

Because NuVasive and its customers-mainly hospitals and surgeons-rely primarily on third-party reimbursement for surgical and monitoring fees, exclusion from participation in programs such as Medicare and Medicaid can be fatal to the company's business. (Id. ¶ 5.) 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 use NuVasive's products and services. (Id.)

Despite Defendants' 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 questionable sales and marketing practices that constitute violations of federal and state laws, including the Anti-Kickback Statute, the False Claims Act, and other healthcare-fraud and abuse laws. (Id. ¶ 6.)

Plaintiff alleges that Defendants engaged in three specific practices that violated these laws. First, NuVasive lured surgeons to use its products and services and to 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. ¶ 7.) Further, Defendants created a network of prominent physicians, known within the company 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. (Id. ¶ 8.) 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 using NuVasive products in surgeries. (Id. ¶ 9.) Plaintiff alleges that Defendants engaged in these practices knowing that the resulting increases in sales and revenues would be paid, in part, by government healthcare programs, including Medicare and Medicaid. (Id. ¶ 10.)

Second, following losses in revenue in its monitoring business due to changes in rules for billing and coding its intra-operative monitoring services, NuVasive responded by having sales representatives place monitoring equipment in operating rooms when the equipment was redundant and not medically necessary; by allowing doctors to remotely monitor several patients simultaneously and then generating separate invoices for the same time billed; by developing marketing materials to instruct customers on coding monitoring services so as to take advantage of loopholes in coding procedures; and by improperly coding monitoring services in claims submissions to Medicare and Medicaid. (Id. ¶ 11.)

Third, when coding disputes threatened to impact revenues for NuVasive's Extreme Lateral Interbody Fusion ("XLIF") procedure, which was NuVasive's most lucrative and well-known line of business, the company waged a heated battle with third-party payers, insisting that those payers, including Medicare and Medicaid, accept the coding designation assigned by NuVasive. (Id. ¶ 12.) Ultimately, NuVasive decided to continue to use the coding that resulted in the highest reimbursement for the XLIF procedure. (Id.)

In various public filings, press releases, and investor calls beginning on October 22, 2008 (the beginning of the proposed class period), Defendants stated that figures representing the company's financial condition were accurate and that the company was in compliance with regulatory requirements, including the Anti-Kickback Statute and the False Claims Act. (Id. ¶¶ 13, 105-269.) According to Plaintiff, those statements were false or misleading because they failed to disclose that

(1) the Company utilized kickbacks, in the form of gifts, entertainment, improper commissions and consulting fees, and other remuneration, in order to induce doctors to utilize its products and services and to encourage other doctors to do the same in violation of federal and state laws and regulations; (2) the Company employed improper sales and billing practices to sustain revenues related to its monitoring business and XLIF procedure, including by submitting false or otherwise improper claims to Medicare and Medicaid; (3) the Company 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 ...

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