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Colman v. Theranos, Inc.

United States District Court, N.D. California

May 31, 2018

ROBERT COLMAN, et al., Plaintiffs,
THERANOS, INC., et al., Defendants.



         This 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.

         Five of 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.

         I. Background

         A. Parties

         Defendant 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.

         Plaintiffs 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 securities.

         B. Factual Background

         This 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.

         On 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).

         From 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).[1] 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).

         While 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).

         Most 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.

         According 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 in:

• 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. Ex. FF.

         Plaintiffs identify a complete list of the funds in which indirect investors invested (excluding family trusts or family investment vehicles):

         (Table Omitted.)

         Kathrein Decl. Ex. A (ECF 217-2).

         On 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. 18-cv-01602-EJD.

         C. Procedural History

         Plaintiffs 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.

         Plaintiffs then filed an amended class action complaint, alleging six causes of action against all defendants:[2]

(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).

         Plaintiffs 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.

         Class 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.

         This 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.

         II. Legal Standards

         As the 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).

         Rule 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. 23(a)(1)-(4).

         To 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).

         The 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.

         III. Discussion

         The 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) requirements.

         A. Class Definition

         The 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.

         The 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 order.[3]

         Defendants' 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.

         Thus, 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 ...

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