Abrams v. MiMedx Group., Inc.: Motion to Dismiss Denied by District Court
In Abrams v. MiMedx Group, Inc., No. 113-CV-3074-TWT, 2014 WL 3952923 (N.D. Ga. Aug. 13, 2014), the district court held plaintiffs’ complaint stated an actionable federal securities fraud claim under F.R.C.P. 9(b) and the heightened pleading standards of the Private Securities Litigation Reform Act (“PSLRA”) of 1995.
According to the complaint, MiMedx Group, Inc. developed two injectable products, AmnioFix and EpiFix, which accelerated the healing process and decreased the growth of scar tissue. MiMedx stated these products would qualify as 361 HCT/Ps under Federal Drug Administration (“FDA”) regulations. 361 HCT/Ps are exempt from FDA regulation of drugs, devices, or biological products. For a cell or tissue based product to be a 361 HCT/P, the product can only be “minimally manipulated.” According to FDA regulations, if processing alters a tissue’s original characteristics, then the product is more than “minimally manipulated.”
On September 3, 2013, the FDA sent MiMedx an “Untitled Letter” asserting that AmnioFix and EpiFix did not meet the requirements for 361 HCT/P exemptions. MiMedx publicized the letter, which resulted in MiMedx stock falling from $6.06 per share to $3.85 per share.
On September 13, 2013, plaintiffs filed suit, and their amended complaint brought claims against MiMedx and its executives under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as under Rule 10b-5. Plaintiffs contend that MiMedx did not inform investors that AmnioFix and EpiFix could not qualify for 361HCT/P status, because MiMedx pulverizes or grinds amniotic tissues and cells when creating the products. Moreover, MiMedx did not disclose the FDA inspected MiMedx in 2012 to examine whether the injectable products qualified as 361 HCT/Ps. The plaintiffs sought to represent a class of all purchasers of MiMedx common stock from March 29, 2012 to September 4, 2013.
In December 2013, MiMedx announced it would seek FDA approval for AmnioFix and EpiFix as regulated biologics instead of 361 HCT/Ps. On December 4, 2013, MiMedx stock price rebounded to $6.76 per share.
Claims under Section 10(b) of the Exchange Act and Rule 10b-5 require proof of six elements: (1) a material misrepresentation or omission, (2) inference made with scienter, (3) a connection with the purchase or sale of a security, (4) reliance on the misstatement or omission, (5) economic loss, and (6) a causal connection between the material misrepresentation or omission and the loss. In addition, a private right of action alleging fraud under federal securities law must satisfy the heightened pleading standards of both F.R.C.P. 9(b) and the PSLRA. F.R.C.P. 9(b) requires a plaintiff to set forth precisely what statements or omissions were made in what documents or oral representations, who made the statements, the time and place of the statements, the content of the statements and manner in which they misled the plaintiff, and what benefit the defendant gained as a consequence of the fraud. The PLSRA requires a plaintiff to allege facts that demonstrate a “strong inference” of scienter.
MiMedx moved to dismiss the amended complaint arguing the plaintiffs failed to identify a culpable misrepresentation or omission of material fact, failed to plead economic loss and loss causation, and failed to properly allege a strong inference of scienter. Furthermore, MiMedx argued the court must dismiss the plaintiffs’ claim under §20(a), because the plaintiffs’ securities fraud claims failed.
First, the court considered whether the amended complaint identified misleading statements. MiMedx published boilerplate disclaimers that the FDA may not agree with MiMedx’s classification, but the FDA regulatory process was “evolving.” The court concluded MiMedx statements misled investors to believe MiMedx entered into formal discussions with the FDA.
Second, the court addressed whether the plaintiffs’ amended complaint adequately established loss causation and economic loss when it alleged MiMedx shares declined in value following the release of the September 3, 2013 letter from the FDA. The PSLRA’s “bounce-back” provision specifies damages shall not exceed the difference between the price the plaintiff paid for the stock and the mean trading price of that security during the 90-day period beginning on the date of disclosure. Thus, the computation of damages under the PSLRA allows defendants to mitigate damages when share prices have recovered, but it does not disqualify investors from recovering altogether, when the share prices rebound.
While MiMedx’s stock price rebounded to pre-disclosure levels by the end of November 2013, the court could not conclude that the plaintiffs suffered no economic loss from the alleged misrepresentations and omissions. Additionally, AmnioFix and EpiFix accounted for only 15 percent of MiMedx’s business, which suggested to the court other factors might account for the price rebound. Accordingly, the court did not grant the defendants' motion to dismiss on these grounds.
Lastly, the court analyzed whether the plaintiffs alleged particular facts supporting an inference of scienter. To adequately plead facts demonstrating scienter, a plaintiff must establish a defendant acted with the intent to defraud or severe recklessness in allowing fraudulent activity. In addition, to support a strong inference of scienter, a plaintiff must demonstrate that a reasonable person would be more likely to infer that the defendant acted with scienter than to infer otherwise. The complaint alleged management never sought to have the products classified as 361 HCT/Ps, and management was aware the FDA was investigating the products. Additionally, the allegations in the complaint supported an inference that the defendants knew, or should have known, the FDA would never approve AmnioFix and EpiFix for the Section 361 exemption because products developed from amniotic fluid are generally not 361 HCT/Ps. Lastly, MiMedx’s COO, William C. Taylor, sold a substantial amount of MiMedx shares following the FDA’s establishment inspection report, suggesting that Taylor knew MiMedx hid the status of AmnioFix and EpiFix from the market until then.
Accepting the allegations as true, the court concluded that a reasonable person would conclude that the defendants more likely than not acted with scienter. Ultimately, the court held the amended complaint stated a claim for relief under the PSLRA and Section 20(a).
In conclusion, the District Court denied the defendants' Motion to Dismiss for Failure to State a Claim.
The primary materials for this case may be found on the DU Corporate Governance website.