7th Circuit: Investors can’t sue medical device manufacturer

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Investors could not sue a medical device manufacturer for fraudulently downplaying the significance of one surgeon’s report that one of the company’s hip replacement parts had a high failure rate, the 7th Circuit has ruled in affirming a dismissal.

The plaintiffs are two union pension funds that have invested in Zimmer Holdings, a manufacturer of orthopedic reconstructive devices. The plaintiffs filed a class action under the Private Securities Litigation Reform Act, alleging that they and other investors were injured when Zimmer fraudulently attempted to protect its stock price by downplaying one prominent surgeon’s report that the Durom Cup socket used for hip replacements had an unacceptably high failure rate.

Zimmer withdrew the Durom Cup from the U.S. market for a short period, but returned the device for sale in this country after attributing the failures to poor surgical technique.

The court concluded that the plaintiffs’ complaint failed to adequately plead that Zimmer executives knew they were making false statements about the Durom Cup for the purpose of showing scienter under the Act.

“Corporate executives who know that one group of surgeons experiences success, and another group failure, with the very same medical device could believe that the different outcomes had been caused by differences in the way the surgeons had implanted the device. That’s what Zimmer’s executives said they had concluded. …

“The complaint does not establish an inference of scienter that is ‘at least as compelling as any opposing inference of nonfraudulent intent.’ Indeed, even today plaintiffs have not supplied a cogent reason to think that Zimmer’s statements were false, let alone knowingly false. The Food and Drug Administration has never concluded that the Durom Cup was defectively designed or made, indeed never even issued a warning or caution concerning the Durom Cup,” the court said.

U.S. Court of Appeals, 7th Circuit. Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, No. 11-1471.