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Shah v. Zimmer Biomet Holdings, Inc.

United States District Court, N.D. Indiana, South Bend Division

February 20, 2019

RAJESH M. SHAH, et al Plaintiffs,



         On 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.]

         In 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.


         This 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.

         There's 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.


         Interlocutory 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.

         Beyond 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. 15, 2018).

         Here, 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 Ahrenholz factors.

         I. Whether a Private Securities Fraud Action May be Based on Item 303 of SEC Regulation S-K.

         The 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.

         Much of 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).

         ZBH also notes that the Supreme Court granted certiorari in Leidos, Inc. v. Indiana Pub. Ret. Sys., 137 S.Ct. 1395 (March 27, 2017)[1], 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.

         An 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) ...

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