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Mauss v. Nuvasive, Inc.

United States District Court, S.D. California

July 12, 2016

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



         Defendants move to dismiss Plaintiff’s fifth amended complaint for failure to state a claim (Doc. No. 73), and both parties request judicial notice of several items (Doc. Nos. 73, 77). These matters were fully briefed and found suitable for resolution without oral argument pursuant to Local Civil Rule 7.1.d.1. For the reasons set forth below, the requests for judicial notice are granted, and Defendant’ motion to dismiss is denied in part, and granted in part.


         A. Procedural History

         This case is a putative securities-fraud 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 August 2013. (Doc. No. 1). Brad Maus was appointed as lead plaintiff in December 2013. (Doc. No. 15).

         Plaintiff filed a first amended complaint in February 2014. (Doc. No. 22). The first amended complaint was dismissed for failure to state a claim because it did not link the allegedly false statements to the asserted reasons for their falsity, and it did not identify which Defendant made the statements. (Doc. No. 29.)

         Plaintiff filed a second amended complaint in September 2014. (Doc. No. 30). The second amended complaint was dismissed because the loss-causation allegations were insufficient under Loos v. Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014), which had recently held that the announcement of an investigation, without more, is insufficient to establish loss causation. (Doc. No. 38). At that point, Plaintiff’s loss-causation theory rested solely on the announcement that the company was being investigated for possible false or improper claims submitted to Medicare or Medicaid. Additionally, although the claims were premised on alleged misrepresentations about the company’s compliance with federal healthcare laws, Plaintiff had not provided enough details about the violations and the relevant laws to make it possible to assess whether the challenged statements were false.

         Plaintiff filed a third amended complaint in December 2014. (Doc. No. 39). Soon thereafter, the parties sought leave for Plaintiff to file a fourth amended complaint (Doc. No. 44), which the court granted (Doc. No. 45). Plaintiff filed a fourth amended complaint (“FAC”) in February 2015. (Doc. No. 47.) The FAC was also dismissed because the court found the loss-causation allegations insufficient under Loos v. Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014). However, the court took note of several new developments: the company’s announcement that Defendant Lukianov resigned for failure to comply with certain of the company’s expense-reimbursement and personnel policies; the company’s announcement that it agreed to pay the Department of Justice (the “DOJ”) $13.8 million to settle the investigation; the DOJ’s announcement of the settlement and the underlying allegations regarding false claims and kickbacks; and the filing and purported settlement of a qui tam action in Maryland, which also involved allegations of false claims and kickbacks. In its previous order dismissing Plaintiff's FAC, the court held:

. . . [A]bsent something more substantial from Defendants, Plaintiff’s theory-that Defendants engaged in illegal practices and did not disclose the true risk of regulatory scrutiny to investors, who bought their shares at an artificially inflated price and were harmed when the foreseeable result of that risk materialized, beginning with the investigation and culminating with Lukianov’s resignation and the settlement-appears to be enough to support a claim.

(Doc. No. 69, p. 28). Additionally, the court found the scienter allegations against Defendant O’Boyle insufficient and dismissed the claims against him. The court granted Plaintiff leave to file a fifth amended complaint incorporating the new developments. Plaintiff filed a fifth amended complaint (“5AC”) (Doc. No. 70).

         B. The Operative Complaint

         Like the complaints before it, the 5AC asserts two claims, for (1) securities fraud, in violation of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5, against all Defendants; and (2) control-person liability under Section 20(a) of the Securities and Exchange Act, against Defendants Lukianov, O’Boyle, and Lambert. Lukianov was NuVasive’s Chief Executive Officer and Chairman of the Board of Directors at all relevant times. O’Boyle was the company’s Executive Vice President and Chief Financial Officer through November 2009. Lambert has been Chief Financial Officer since November 2009.

         Plaintiff alleges, in sum, that Defendants engaged in illegal sales, marketing, and billing practices that exposed the company to an increased risk of regulatory liability under the federal Anti-Kickback Statute and the False Claims Act, but they did not disclose that risk to investors, who bought their shares at an inflated price and were harmed when the concealed risk materialized. He provides the following account:

         NuVasive develops and markets products and services for use in the surgical treatment of spine disorders. To sustain and grow its business, NuVasive faces constant pressure to innovate, promote its products, establish relationships with surgeons and hospitals, and convince surgeons to choose its products over those of its competitors. At the same time, the company is subject to an extensive regulatory framework that is designed to protect patients and government-funded healthcare programs from fraud and abuse. Under that framework, sales and marketing practices and other conduct that are commonplace in other industries may be illegal when soliciting business that is ultimately paid for, in whole or in part, by government healthcare programs. Failure to adhere to the applicable laws and regulations can result in civil and criminal penalties and exclusion from participation in government healthcare programs.

         Because NuVasive and its customers-mainly hospitals and surgeons-rely primarily on third-party reimbursement for surgical and monitoring fees, exclusion from participation in government healthcare programs could be fatal to NuVasive’s business. If hospitals and physicians cannot recover adequate payments from programs like Medicare or Medicaid because NuVasive is ineligible to participate or because there is a disagreement about reimbursement, they are unlikely to use NuVasive’s products and services.

         Plaintiff alleges that Defendants knew and recognized in public filings 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 government health programs. They also knew that by compromising the independent judgment of physicians, promoting the use of equipment that was not medically necessary, 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. Nevertheless, Plaintiff claims, Defendants determined to sustain NuVasive’s revenues and expand its customer base by employing numerous aggressive sales and marketing practices that violated the Anti-Kickback Statute and False Claims Act.

         Plaintiff identifies four specific practices that he claims violated these laws. First, NuVasive lured surgeons to use its products and services and to encourage other surgeons to do the same by devising purported educational and training programs and clinical studies that 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. Defendants also 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 on the number of patients they referred to NuVasive and their promotion and publication of peer-reviewed papers touting the benefits of NuVasive’s products and services.

         Second, in the course of these interactions with physicians, Defendants knowingly marketed NuVasive products and services for uses that were not approved or cleared by the Food and Drug Administration (“FDA”). This off-label marketing further increased NuVasive’s revenues and resulted in submission of false and improper claims to government healthcare programs in violation of the False Claims Act and FDA regulations.

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

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

         Plaintiff supports this account with the alleged statements of various confidential witnesses who observed and raised concerns about the company’s apparent indifference to healthcare laws and regulations. For example, CW1 was Defendant Lukianov’s executive assistant from December 2009 through September 2012, and had access to the company’s sales and marketing-related programs and expenses, including Lukianov’s expense reports. CW1 became aware of millions of dollars in gifts given to doctors who used NuVasive products extensively, including flights on private jets to meetings with Lukianov in San Diego or New York, and all-expense-paid vacations to destinations like Puerto Rico. According to CW1, twenty or so doctors who were Lukianov’s favorites, some identified by name, participated in Medicare and Medicaid, used the entire line of NuVasive products to the exclusion of all others, were known within the company as “high end rollers, ” and received more gifts than others.

         CW6, a NuVasive accounting manager from June 2010 to April 2012 who audited the company’s expenses every quarter offers a similar account. According to CW6, surgeons were flown on private jets or first-class flights to San Diego, New York, Puerto Rico, and other destinations for luxury trips, costing between $80, 000 and $200, 000 per month, which Lukianov partook in and submitted as expenses. A 2011 look-back audit requested by the board of directors revealed that half of the expenses under review were inappropriate, including expense reports that did not comply with the requirements set forth in the Patient Protection and Affordable Care Act, and other expenses that violated the company’s internal compliance policy, which was designed to maintain compliance with the regulations. For example, the audit identified $40, 000 spent on NFL tickets and other entertainment, which was categorized as “employee recognition, ” when, in fact, the money had been used to entertain doctors.

         The audit results were provided to the executive leadership team and the Board of Directors. Additionally, CW1 and CW6 informed Defendant Lambert, NuVasive’s Chief Financial Officer, that inappropriate expenses were being billed to the company. In early 2010, CW1 began informing Lambert of inappropriate expenses. Lambert nevertheless “approved the expenses anyway. Always.” (Id. ¶ 76). CW6 also didn’t see any change in the company. Instead, steps were taken to conceal the expenses after the audit. At the direction of the Controller and General Counsel, CW6 was instructed to categorize inappropriate travel and entertainment expenses for doctors with nondescript code names like “Wolverine, ” and senior executives, including Lukianov and Lambert, began approving each others’ expense reports.

         Nevertheless, 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. According to Plaintiff, those statements were false or misleading, in sum, 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 promoted its products and services, which were unapproved and/or uncleared by the FDA; (3) 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; (4) the Company provided guidance to its customers as to how to code NuVasive’s products and procedures in order to take advantage of loopholes and maximize ...

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