United States District Court, N.D. California
ORDER DENYING PLAINTIFFS' MOTION FOR CLASS
CERTIFICATION RE: ECF 177
NATHANAEL M. COUSINS UNITED STATES MAGISTRATE JUDGE.
lawsuit accuses life sciences company Theranos of defrauding
investors by touting revolutionary blood testing technology
that never existed. Plaintiffs Robert Colman and Hilary
Taubman-Dye seek to certify under Federal Rule of Civil
Procedure 23(b)(3) a class of “indirect
investors”-those who purchased interests in entities
that bought Theranos stock-for their claims of fraud,
misrepresentation, and market manipulation.
Plaintiffs' six claims have a reliance element, an
individualized issue that defeats predominance under Rule
23(b)(3) and makes class treatment unwarranted. While common
issues predominate the remaining claim for market
manipulation under California law, the totality of weaknesses
in the proposed class make individual actions superior, on
balance, to a class action. The Court therefore DENIES
Plaintiffs' motion for class certification.
Theranos, Inc. is a private life sciences company founded in
2003 by defendant Elizabeth Holmes. Holmes is Theranos's
Chief Executive Officer and Chairwoman. Defendant Ramesh
“Sunny” Balwani is the former President, Chief
Operating Officer, and board member of Theranos.
and proposed class representatives Robert Colman and Hilary
Taubman-Dye purchased securities in third-party investment
funds, purportedly for the express purpose of having the
third-party funds use their investments to acquire Theranos
lawsuit centers on Theranos's grand claim that it
developed revolutionary technology allowing for
comprehensive, low-cost, and accurate blood tests using just
a few drops of blood pricked painlessly from a patient's
finger. After allegedly developing its technology and raising
venture capital for the first ten years of its existence,
Theranos began its public-facing operations in 2013. Theranos
posted its first press release to its website on July 29,
2013, announcing as board members then-U.S. Marine General
James “Mad Dog” Mattis and former Wells Fargo
chairman and CEO Richard Kovacevich. See Kathrein
Decl. Ex. Z (ECF 177-6). These names joined an
already-illustrious board that included the likes of former
U.S. Secretary of State Henry Kissinger, former U.S. Senator
Samuel Nunn, and former U.S. Secretary of Defense William
Perry, among others. See id.
September 8, 2013, the Wall Street Journal published a
purportedly revelatory account of Theranos's technology
and Holmes's vision for the company. See
Kathrein Decl. Ex. AA (ECF 177-6). The article proclaims that
Holmes's “inventions, which she is discussing in
detail here for the first time, could upend the industry of
laboratory testing and might change the way we detect and
treat disease.” Id. The day after the article
was published, Theranos announced a partnership with
Walgreens, revealing plans to roll out Theranos's
pinprick testing at “Wellness Centers” inside
Walgreens stores nationwide, and claiming “consumers
can now complete any clinician-directed lab test with as
little as a few drops of blood and results available in a
matter of hours.” Kathrein Decl. Ex. BB (ECF 177-6).
2013 to 2015, Theranos issued numerous press releases and
Holmes gave dozens of interviews. These public statements
heralded Theranos's technology and approach to
preventative medicine. E.g., Kathrein Decl. Ex. W
(ECF 217-24) (Holmes stating in a March 13, 2015, interview
with George Shultz that Theranos has “shifted the
model” by lowering costs for full-service laboratory
testing and “redeveloped the lab infrastructure to make
it possible to run any combination of lab tests from tiny
droplets of blood”). The interviews and press releases
consistently emphasized the technology's low cost,
accuracy, comprehensiveness, and the small amount of blood
needed to do it all. See, e.g., Kathrein
Decl. Exs. L, M, W, Y, AA, BB (ECF 217-13, 217-14, 217-24,
217-26, 177-6); Perla Decl. Exs. 13-17 (ECF 191-13-191-17);
see also Perla Decl. Exs. 13, 14 (ECF 191-13,
191-14) (announcing additional prestigious board
members). Holmes made similar claims in direct
correspondence with potential investors, sometimes directing
them to the public media coverage Theranos was receiving.
See, e.g., Kathrein Decl. Exs. I, J, M (ECF
217-10, 217-11, 217-14).
Theranos was garnering this favorable public attention,
investors bought stock. Theranos had already conducted three
series of stock sales (Series A Preferred, Series B
Preferred, and Series C Preferred), and from January 2013 to
October 2016, Theranos sold Series C-1 and C-2 Preferred
Stock to over 30 individuals and investment entities.
See White Decl. ¶¶ 5-6 (ECF 216-1). The
Series C-1 and C-2 stock investments ranged in value from
approximately $50, 000 to approximately $125 million. See
Id. ¶ 6. One of these investors was Lucas Venture
Group XI, LLC, which purchased 471, 333 shares of Series C-1
stock for just over $7 million. Id.; see
Kathrein Decl. Ex. X (ECF 217- 25 at 2). During this 2013 to
2016 period, investors also purchased Theranos stock from
other investors. For example, Celadon Technology Fund VII,
LLC purchased 410, 000 shares of Series C Preferred Stock
from another investor on December 15, 2015. See
Kathrein Decl. Ex. X (ECF 217-25 at 12).
relevant to this case, Plaintiffs and others indirectly
invested in Theranos by purchasing ownership interests in
funds that owned or planned to purchase Theranos stock. Among
these indirect investors, Colman claims to have spent $500,
000 to purchase a membership interest in Lucas Venture Group
XI, LLC, for the purpose of funding Lucas Venture Group
XI's subsequent purchase of 471, 334 shares of
Theranos's Series C-1 Preferred Stock. Colman Decl.
¶ 1 (ECF 217-35). Similarly, Taubman-Dye asserts she
purchased an ownership interest in Celadon Technology Fund
VII, LLC for the purpose of funding Celadon's
corresponding purchase of 410, 000 shares of Theranos Series
C-1 Preferred Stock. Taubman-Dye Decl. ¶ 1 (ECF 217-36).
Taubman-Dye invested just over $100, 000. Id.
to Plaintiffs' evidence, other indirect investors
contributed anywhere from $15, 000 to $17, 350, 200 to
finance purchases of Theranos shares. Kathrein Decl. Exs.
CC-FF (ECF 177-7). These include, for example, investments
• Peer Ventures Group IV, LP, with investment amounts
ranging from $15, 000 to $17, 350, 200, id. Ex. CC;
• Lucas Venture Group XI, LLC, with investment amounts
ranging from $15, 000 to $1 million, id. Ex. DD;
• Lucas Venture Group IV, LP, with investment amounts
ranging from $250, 000 to $10 million, id. Ex. EE;
• Black Diamond Ventures XII-B, LLC, with investment
amounts ranging from $100, 000 to $1 million, id.
identify a complete list of the funds in which indirect
investors invested (excluding family trusts or family
Decl. Ex. A (ECF 217-2).
October 15, 2015, the Wall Street Journal published an
article challenging Theranos's validity by reporting
Theranos was not actually using its revolutionary technology
for the tests it offered. See Am. Compl. ¶ 51.
Theranos vehemently defended itself against this and
subsequent similar accusations, but significant public
fallout-and litigation-ensued. Prominently, Walgreens sued
Theranos for breach of contract. Walgreens Co. v.
Theranos, Inc., No. 16-cv-1040-UNA (D. Del. Nov. 8,
2016). And an investor group that purchased nearly $100
million of Series C stock, Partner Investments, LP, sued
Theranos for securities fraud. Partner Investments, L.P.
et al. v. Theranos, Inc., et al., No. 12816-VCL (Del.
Ch. Mar. 23, 2017). More recently, the U.S. Securities and
Exchange Commission brought civil fraud claims against
Theranos, Holmes, and Balwani. Sec. and Exch. Comm'n
v. Holmes, No. 18-cv-01602-EJD (N.D. Cal. Mar. 14, 2018)
(action against Theranos and Holmes); Sec. and Exch.
Comm'n v. Balwani, No. 18-cv-01603-BLF (N.D. Cal.
Mar. 14, 2018) (action against Balwani). Holmes and Theranos
settled the charges against them without admitting or denying
wrongdoing. See ECF 9, 10 in Case No.
filed their original class action complaint on November 28,
2016. See ECF 1. Defendants moved to dismiss the
complaint, which the Court granted in part and denied in part
by dismissing Plaintiffs' securities fraud claim under
California Corporations Code §§ 25401 and 25501 and
denying the motion on the remaining claims. See ECF
63. Defendants then moved to limit Plaintiffs' putative
class, which the Court granted by excluding from any class
definition the set of direct investors listed in Appendix A
to that motion, ECF 102-1. See ECF 143. Fearing
Defendants' financial insolvency in the wake of
settlements in other actions, Plaintiffs moved on July 14,
2017, to provisionally certify a mandatory limited fund class
and to enjoin Defendants' funds. ECF 109. The Court
denied the request. See ECF 124.
then filed an amended class action complaint, alleging six
causes of action against all defendants:
(1) securities fraud under California Corporations Code
§§ 25400(d) and 25500;
(2) violation of California's Unfair Competition Law,
California Business and Professions Code § 17200;
(3) fraud and deceit under California Civil Code §§
1709 and 1710 and common law;
(4) fraudulent concealment under California Civil Code §
1710 and common law;
(5) constructive fraud under California Civil Code §
1573 and common law; and
(6) negligent misrepresentation under California Civil Code
§ 1710 and common law.
See Am. Compl. (ECF 173).
now move for class certification under Federal Rule of Civil
Procedure 23, specifically Rule 23(b)(3). ECF 177. Plaintiffs
define the class they seek to certify as:
All persons or entities who, from July 29, 2013, through
October 5, 2016, purchased or acquired securities of an
entity for the express purpose of making corresponding
purchases of Theranos securities.
Cert. Mot. at i, 1, 8. Plaintiffs propose as class
representatives themselves (Robert Colman and Hilary
Taubman-Dye) and another purported indirect investor, BF Last
Investments, LLC. See id.; Reply Br. at 4.
Defendants oppose the motion. ECF 188.
Court has federal subject matter jurisdiction under 28 U.S.C.
§ 1332(d)(2), and all parties have consented to
magistrate judge jurisdiction under 28 U.S.C. § 636(c).
ECF 6, 23, 25, 26.
parties seeking certification, Plaintiffs bear the burden of
demonstrating compliance with Federal Rule of Civil Procedure
23. See Comcast Corp. v. Behrend, 569 U.S. 27, 33
(2013). “Rule 23 does not set forth a mere pleading
standard.” Wal-Mart Stores, Inc. v. Dukes, 564
U.S. 338, 350 (2011). Instead, Plaintiffs must affirmatively
demonstrate compliance with all four requirements of Rule
23(a), and at least one of the sub-sections of Rule 23(b).
Id.; see Zinser v. Accufix Research Inst., Inc., 253
F.3d 1180, 1186 (9th Cir. 2001), amended by 273 F.3d
1266 (9th Cir. 2001).
23(a) imposes four prerequisites: (1) the class must be
“so numerous that joinder of all members is
impracticable” (numerosity); (2) there must be
“questions of law or fact common to the class”
(commonality); (3) the claims or defenses of the named
plaintiffs must be “typical of the claims or defenses
of the class” (typicality); and (4) the named parties
must show that they “will fairly and adequately protect
the interests of the class” (adequacy). Fed.R.Civ.P.
certify a Rule 23(b)(3) class, as sought here, Plaintiffs
must also show that “questions of law or fact common to
class members predominate over any questions affecting only
individual members” (predominance); and that a class
action is “superior to other available methods for
fairly and efficiently adjudicating the controversy”
(superiority). Fed.R.Civ.P. 23(b)(3).
Court's “class-certification analysis must be
rigorous and may entail some overlap with the merits of the
plaintiff's underlying claim.” Amgen Inc. v.
Connecticut Ret. Plans & Trust Funds, 568 U.S. 455,
465-66 (2013) (internal quotations and citations omitted).
“That is so because the class determination generally
involves considerations that are enmeshed in the factual and
legal issues comprising the plaintiff's cause of
action.” Comcast, 569 U.S. at 33-34 (internal
quotations and citations omitted). However, the ultimate goal
under Rule 23 is to determine whether efficiency and justice
are best served by plaintiffs pursuing their claims on behalf
of a class as “an exception to the usual rule that
litigation is conducted by and on behalf of the individual
named parties only.” Wal-Mart, 564 U.S. at 348
(quoting Califano v. Yamasaki, 442 U.S. 682, 700-701
(1979)). The decision whether to certify a class is entrusted
to the sound discretion of the district court.
Zinser, 253 F.3d at 1186.
Court discusses the components of Plaintiffs' motion in
the following order: first, the class definition; second, the
Rule 23(a) requirements; and third, the Rule 23(b)(3)
Ninth Circuit has not adopted a threshold
“ascertainability” or “administrative
feasibility” test for putative class definitions.
Briseno v. ConAgra Foods, Inc., 844 F.3d 1121, 1124
n.4, 1126 (9th Cir. 2017). But nonetheless a class must not
be vaguely defined and must be “sufficiently definite
to conform to Rule 23.” Probe v. State
Teachers' Ret. Sys., 780 F.2d 776, 780 (9th Cir.
1986); accord Briseno, 844 F.3d at 1124 n.4.
Plaintiffs' proposed class definition has shifted through
multiple iterations of vaguery, so the Court discusses it
before delving into the Rule 23 issues.
amended class action complaint initially contemplated
certifying a class defined as: “All persons or entities
who, from July 29, 2013, through October 5, 2016, purchased
or acquired securities of an entity for the purpose of making
corresponding purchases of Theranos securities” (with
Defendants and their relevant affiliates excluded). Am.
Compl. ¶ 86. Plaintiffs' motion for class
certification offers the same definition, except that it adds
the word “express” before “purpose.”
Class Cert. Mot. at i, 1, 8. With little explanation, the
motion also states: “Alternatively, the Class could be
defined as all investors in the funds which have been
identified as having solicited investors for the purposes of
investing in Theranos stock during the Class Period.”
Id. at i, 1. Those funds are listed in Exhibit A to
the supporting Kathrein declaration, see ECF 217-2,
which is included in the background section of this
attack the definition by arguing it requires peering into
class members' state of mind and includes an infinite
chain of indirect investors. See Opp. at 10-11. In
response to the first argument, Plaintiffs specify in their
reply brief that “express purpose” effectively
means expressed purposed-i.e. that the investors
“expressly indicated, confirmed, or were
informed that their investment would correspond to purchases
of Theranos securities.” Reply Br. at 3 (emphasis in
original). Plaintiffs offer as the source of such expressed
purpose “the correspondence, operating documents,
and/or subscriptions of the funds.” Id. In
response to the second argument, Plaintiffs further narrow
the class to investors “removed from Theranos by one
level”-that is, investors who purchased on interest in
an entity that itself owns Theranos stock. Id.
by the Court's best understanding of Plaintiffs'
intent, and for purposes of this motion, the proposed class
is defined as:
All persons or entities who, from July 29, 2013, through
October 5, 2016, purchased or acquired securities of one of
the entities listed in Exhibit A, ECF 217-2, or other entity
that purchased Theranos stock, for the purpose- as expressed
in pre-purchase correspondence, operating documents, and/or