United States District Court, N.D. Indiana, South Bend Division
RAJESH M. SHAH, et al Plaintiffs,
ZIMMER BIOMET HOLDINGS, INC., et al Defendants.
OPINION AND ORDER
P. SIMON, JUDGE
September 26, 2018, I denied the motion to dismiss filed in
this securities fraud case by defendants Zimmer Biomet
Holdings, Inc. (ZBH) and several of its officers and
directors (collectively “ZBH”). [DE 119.] An
avalanche of filings followed. First, ZBH filed two motions:
1) a Motion to Amend the Court's Opinion and Order to
Include a Certification Under 28 U.S.C. § 1292(b); and
2) a Motion to Stay Proceedings Pending Appeal. [DE 120.]
After extensions to respond, a sur-reply and (and
“sur-sur-reply”), a notice of supplemental
authority and a response, the briefing was completed - or so
I thought. [See DE 121, 124, 125, 126, 145, 147,
149-1, and 155.] Additional briefing followed. [See
DE 165, 167, and 171.] On January 28, 2019, an oral argument
was held on the various motions, which are now ripe for
decision. [DE 174.]
summary, ZBH wants to take an interlocutory appeal from my
denial of their motion to dismiss and they seek a stay of
discovery while the matter remains pending before the Seventh
Circuit. Defendants seek an immediate appeal on two issues:
the first is to what extent plaintiffs may base certain
claims on a securities regulation known as Item 303; and
second, to what extent can plaintiffs in a securities fraud
case rely on allegations cribbed from another lawsuit to
bolster their scienter allegations? As explained more fully
below, because ZBH has failed to meet all of the requirements
for an interlocutory appeal, its motion will be denied.
order will assume some familiarity with the basic facts of
this case on the part of the reader as set out in my prior
Opinion and Order on the motions to dismiss [DE 119]. See
Shah v. Zimmer Biomet Holdings, Inc., 348 F.Supp.3d 821
(N.D. Ind. 2018). In short, this a securities fraud case in
which plaintiffs have alleged that throughout 2016, ZBH lied
to investors and issued false or misleading financial
projections which the company knew would be impossible to
achieve because of known issues at a facility ZBH calls
“North Campus” - one of company's largest
manufacturing centers. Plaintiffs allege that ZBH learned of
these problems early in the year through its own internal
audits but did not change the information it fed to the
market even thought it had a duty to disclose. Plaintiffs
further alleged that these issues were inevitably going to be
discovered by the FDA - the company's regulator - during
an audit later that year and that it was only a matter of
time before the problems began to impact ZBH's revenue.
more: plaintiffs allege that when the company's financial
misses materialized and were disclosed to investors, the
company concocted a cover-up regarding the source of the
problem which was only corrected after outside investment
analysts caught wind of the company's problems at North
Campus through their industry contacts. Finally, plaintiffs
allege that because of these problems and revelations,
ZBH's stock plummeted, erasing over a billion dollars in
market capitalization. Plaintiffs are individuals and
organizations which traded in the company's stock during
this period. They seek to represent a nationwide class of
similarly situated persons.
appeals are discouraged because they bog down the efficient
movement of litigation. They're akin to the frustration
of watching a football game getting interrupted by replay
challenges to a referee's decision - only the
“replay” in the legal context comes a lot slower.
Such appeals are not forbidden, but the bar is set very high
to obtain one. Under 28 U.S.C. § 1292(b), a party
“must show that ‘exceptional circumstances'
justify a departure from the basic policy of postponing
appellate review until after the entry of a final
judgment.'” Hoffman v. Carefirst of Ft. Wayne,
Inc., 2010 WL 3940638, at *2 (N.D. Ind. Oct. 6, 2010)
(quoting Coopers & Lybrand v. Livesay, 437 U.S.
463, 475 (1978)). It's a procedure that should be used
sparingly and is “not intended as a vehicle to provide
early review of difficult rulings in hard cases.”
Giguere v. Vulcan Materials Co., 1988 WL 119064, at
*1 (N.D. Ill. Nov. 3, 1988). It would be swell if the Court
of Appeals could answer all the thorny legal questions early
on in a case and make my job as a district court judge less
demanding. But that's not how our system is designed to
work, even in high-stakes complex cases such as this one.
the general principles outlined above, there are four
statutory requirements which must be met before an
interlocutory appeal of an issue is allowed: the issue must
be (1) a question of law, (2) the question must be
“controlling”, (3) the question must be
“contestable”, and (4) practically speaking,
“its resolution must promise to speed up the
litigation.” Ahrenholz v. Bd. Of Trustees of Univ.
of Ill., 219 F.3d 674, 675 (7th Cir. 2000). These are
four independent requirements, meaning that they all must be
satisfied or no interlocutory appeal may be taken.
Id. And even then, when all four requirements have
been met, an interlocutory appeal is not mandatory but is
instead still within the discretion of the trial court.
See Swint v. Chambers County Comm'n, 514 U.S.
35, 47 (1995) (“Congress thus chose to confer on
district courts first line discretion to allow interlocutory
appeals.”); MetLife Investors USA Inc. Co. v.
Estate of Lindsey, 2018 WL 925252, at *2 (N.D. Ind. Feb.
ZBH contends there are two issues which should be certified
for interlocutory appeal. First, ZBH contends that I should
certify the question of whether a private plaintiff may
sustain a private right of action under Section 10(b) of the
Securities Exchange Act of 1934 (and the related Rule 10b-5,
used interchangeable throughout this opinion) based upon a
company's disclosure obligations under what is known as
Item 303 of SEC Regulation S-K. In short, does Item 303
impose a duty to disclose for purposes of a Section 10(b)
claim? Second, ZBH seeks certification of the question
whether plaintiffs can rely in their complaint on factual
allegations taken from the complaint in another lawsuit. I
will address each under the rubric of the four
Whether a Private Securities Fraud Action May be Based on
Item 303 of SEC Regulation S-K.
first question ZBH asks me to certify for interlocutory
appeal relates to whether ZBH had a duty to disclose some of
the information that plaintiffs contend was improperly
concealed from the public during the class period.
Specifically, ZBH frames the question as “whether and
to what extent a private right of action can [be] based on
disclosures required by Item 303 of Regulation S-K, 17 C.F.R.
§ 229.303(a)(3)(ii).” [DE 121 at 1.] Item 303
requires companies to “[d]escribe any known trends or
uncertainties that have had or that the registrant reasonably
expects will have a material favorable or unfavorable impact
on net sales or revenues or income from continuing
operations.” 17 C.F.R. § 229.303(a)(3)(ii). As a
secondary question, ZBH wants the Seventh Circuit to
elaborate upon what Item 303's “reasonably
expects” language means and what standard should apply
if it were to find that Item 303 may serve as a basis for a
Section 10(b) claim. [DE 121 at 7-8, DE 133 at 3-4.] Because
the secondary question presupposes the first, if ZBH does not
satisfy the four required elements for the main question, I
need not address the secondary one.
ZBH's argument is predicated on the fact that the Second,
Third and Ninth Circuits have taken varying approaches on
this issue. See Stratte-McClure v. Morgan Stanley,
776 F.3d 94 (2nd Cir. 2015) (holding that Item 303 may be the
basis for a duty to disclose and thus a Section 10(b) claim
so long as materiality element is likewise is satisfied);
Oran v. Stafford, 226 F.3d 275 (3rd Cir. 2000)
(holding that a violation of Item 303 does not automatically
give rise to a Section 10(b) or Rule 10b-5 violation); In
re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th
Cir. 2014) (holding that Item 303 cannot be the source of a
duty to disclose for purposes of a Section 10(b) claim). The
Seventh Circuit has not weighed in on this specific question,
but has signaled some support for the use of Item 303 as the
basis of a duty to disclose. See Gallagher v. Abbott
Labs., 269 F.3d 806, 810 (7th Cir. 2001).
also notes that the Supreme Court granted certiorari in
Leidos, Inc. v. Indiana Pub. Ret. Sys., 137 S.Ct.
1395 (March 27, 2017), in which this question was presented. But
the case settled while pending before the Supreme Court and
so the appeal was dismissed. Leidos, Inc. v. Indiana Pub.
Ret. Sys., 138 S.Ct. 2670 (2018). ZBH makes much of the
Supreme Court's grant of certiorari. But “[t]he
grant of certiorari on an issue does not suggest a view on
the merits. We don't know how the Supreme Court is going
to decide the issues on which it has granted review . . .,
and the Supreme Court probably does not know given the fact
that briefing has not even been completed in that
case.” Schwab v. Sec'y, Dep't of
Corr., 507 F.3d 1297, 1299 (11th Cir. 2007);
Fireking Sec. Prod., LLC v. Am. Sec. Prod. Co., 2017
WL 4867159, at *2 (S.D. Ind. Apr. 24, 2017) (“A
district court attaches no significance to the fact that the
Supreme Court has granted or denied certiorari in
any given case.”). Of course, this doesn't mean the
circuit split ZBH has now identified is any less real.
initial problem with ZBH's argument is that it did not
really make this argument when it originally moved to dismiss
Plaintiffs' Second Amended Complaint (“SAC”).
A party that fails to raise an issue in its initial motion to
dismiss cannot then raise it in a motion for an interlocutory
appeal of an order denying that motion. E.g.,
Young v. Dart, 2009 WL 2986109, at *2 (N.D. Ill.
Sept. 15, 2009) (finding party forfeited defense and
interlocutory appeal on said defense where it was not raised
in motion to dismiss or summary judgment); Murgia v.
Reed, 338 Fed.Appx. 614, 615 n.1 (9th Cir. 2009)