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Jackson v. Halyard Health, Inc.

United States District Court, S.D. New York

March 30, 2018

RONALD JACKSON, individually and on behalf of all others similarly situated, Plaintiff,
v.
HALYARD HEALTH, INC., ROBERT E. ABERNATHY, STEVEN E. VOSKUIL, KIMBERLY-CLARK CORPORATION, THOMAS J. FALK, and MARK A. BUTHMAN, Defendants.

          MEMORANDUM OPINION AND ORDER

          LAURATAYLORSWAIN UNITED STATES DISTRICT JUDGE

         Plaintiff Ronald Jackson (“Plaintiff”), individually and on behalf of all other persons similarly situated, brings this putative federal securities class action against Halyard Health, Inc. (“Halyard”), former Halyard Chief Executive Officer (“CEO”) Robert E. Abernathy (“Abernathy”), Halyard Chief Financial Officer (“CFO”) Steven E. Voskuil (“Voskuil, ” together with Abernathy, the “Halyard Individual Defendants, ” and together with Abernathy and Halyard, the “Halyard Defendants”), Kimberly-Clark Corporation (“Kimberly-Clark”), Kimberly-Clark Executive Chairman and CEO Thomas J. Falk (“Falk”), and Former Kimberly-Clark CFO Mark A. Buthman (“Buthman, ” together with Falk, the “Kimberly-Clark Individual Defendants, ” and together with Falk and Kimberly-Clark, the “Kimberly-Clark Defendants”) on behalf of a proposed class consisting of all persons other than Defendants who: (1) purchased or otherwise acquired Kimberly-Clark securities on or after August 8, 2014 (the “Kimberly-Clark Class Period”) and subsequently received Halyard securities pursuant to Kimberly-Clark's spinoff of Halyard, effective as of October 31, 2014; and/or (2) purchased or otherwise acquired Halyard securities between October 21, 2014 and April 29, 2016, both dates inclusive (the “Halyard Class Period” and, together with the Kimberly-Clark Class Period, the “Class Period”), seeking to recover damages, allegedly caused by Defendants' violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated under Section 10(b).[1] (Corrected Amended Class Action Complaint (“CACAC”), Docket Entry No. 50.)

         The Court has jurisdiction of this action pursuant to 28 U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.

         Before the Court are two motions to dismiss the remaining two counts of the CACAC, one filed by the Halyard Defendants and one filed by the Kimberly-Clark Defendants, as well as a motion by Plaintiff to strike two exhibits filed in connection with the Halyard Defendants' motion. (See Docket Entry Nos. 55, 58, and 67.) The Court has reviewed thoroughly all of the parties' submissions. For the following reasons, Defendants' motions to dismiss are granted in their entirety, and Plaintiff's motion to strike is denied as moot in light of the disposition of the Defendants' motions to dismiss.

         Background

         For the purposes of these motions, the Court takes as true the following facts drawn from the CACAC (Docket Entry No. 50), the documents incorporated by reference therein, and public filings of which the Court may take judicial notice.[2]

         The Parties

         Halyard sells health and healthcare supplies and solutions around the world, including the MicroCool Breathable High Performance Surgical Gown (“MicroCool”), a product “intended to protect healthcare providers from contact with highly infectious diseases like hepatitis, HIV and Ebola.” (CACAC ¶¶ 2-4.) Halyard markets its products to hospitals and healthcare providers, and through third-party distribution channels. (Id. ¶ 22.) In October 2014, Halyard was spun off from Kimberly-Clark, a personal care, consumer tissue and professional products manufacturer, where it was the Health Care operating segment, focused on, among other priorities, the sale of surgical and infection prevention products for the operating room. (Id.) On or about October 21, 2014, Halyard stock began trading on the New York Stock Exchange, and Kimberly-Clark shareholders “receive[d] one share of Halyard common stock for every eight shares of Kimberly-Clark common stock held as of the close of trading on October 23, 2014, the record date for the spin-off.” (Id. ¶ 15.) MicroCool was manufactured, marketed, and sold first by Kimberly-Clark, from mid-2011 until the spin-off, and then by Halyard, from October 2014 up through the time of the initiation of this action. (Id. ¶ 22.)

         Mr. Abernathy served at all relevant times as Halyard's CEO, and Mr. Voskuil served at all relevant times as Halyard's CFO. (Id. ¶¶ 16-17.) Mr. Falk served at all relevant times as Kimberly-Clark's Executive Chairman and CEO, and Mr. Buthman served as Kimberly-Clark's CFO from 2003 to 2015. (Id. ¶¶ 19-20.)

         Plaintiff alleges that he “acquired Halyard securities at artificially inflated prices during the Class Period and was damaged upon the revelation of” certain “alleged corrective disclosures.” (Id. ¶ 14.)

         MicroCool and AAMI Level 4 Classification

         Kimberly-Clark received approval to manufacture, market, and sell MicroCool from the Food and Drug Administration (“FDA”) “through a 510(k) approval process, ” which is allegedly a “far less costly and rigorous” process “than the FDA's Pre-Market Approval process for a device or pharmaceutical, and requires less supporting clinical data.” (Id. ¶ 24 (emphasis omitted).) The MicroCool 510(k) summary, prepared on December 13, 2010, and filed by Kimberly-Clark, states that MicroCool meets the Level 4 requirements of the Association for the Advancement of Medical Instrumentation (“AAMI”) Liquid Barrier classification, a system of liquid barrier performance classification for protective apparel. (Id. ¶¶ 25-26 (quotation marks omitted) (quoting https://www.accessdata.fda.gov/cdrhdocs/pdf10/K103406.pdf).) Level 4 “provide[s] the highest liquid barrier protection defined by the AAMI” system. (Id. ¶ 26.) The December 2010 summary further represented that MicroCool had been “tested in compliance with the requirements of” a variety of tests that can demonstrate Level 4 performance, including specifications set forth in a document discussing the standards for establishing minimum barrier performance, and ASTM F1670/F1671, standard test methods for “measuring the resistance of” materials used in protective clothing “to penetration by liquids.” (Id. ¶ 27, n. 1-2.) Kimberly-Clark announced on May 16, 2011, that the FDA allowed it to market MicroCool as meeting the AAMI Level 4 standard. (Id. ¶ 28.)

         Plaintiff alleges that Defendants were required to comply with FDA Regulation 820 (“Reg. 820”), 21 C.F.R. § 820, “which governs quality system regulation, ” and that Defendants violated Sec. 820.75 of Reg. 820, which requires manufacturers to “establish[] by objective evidence that a process consistently produces a result or product meeting its predetermined specifications.” (Id. ¶ 32.) Plaintiff alleges that Defendants “failed to ‘validate' MicroCool in accordance with Reg[.] 820, ” by failing to establish through objective evidence the existence of a manufacturing process that produced consistent results, and violated Reg. 820 on an ongoing basis because a sleeve-sealing process at the manufacturing plant was so unreliable as to be incapable of validation. (Id. ¶¶ 32-33, 42.) Plaintiff does not allege that Reg. 820 required any specific government or public reporting.

         Alleged MicroCool Deficiencies and Scienter Allegations

         According to Plaintiff, “many” MicroCool gowns failed to meet the standards required to meet the AAMI Level 4 standard “during ASTM F1671 tests of numerous random samples taken from multiple separate manufacturing lots of the gowns.” (Id. ¶ 34.) Plaintiff does not allege the specific time period during which certain MicroCool gowns failed AAMI Level 4 tests. Plaintiff does proffer a detailed test report completed by Intertek Laboratory, dated December 27, 2012 (the “Intertek Report”), a full two years after Kimberly-Clark prepared its 510(k) summary, as an example, and alleges that Kimberly-Clark learned when it received those test results in January 2013 that, “of approximately 96 random samples of the” gowns, “over 48” gowns failed the test and “no fewer than 32 of those gowns experienc[ed] catastrophic failures.” (Id. ¶¶ 35-36.) Plaintiff alleges that, following receipt of this report, Defendants “continued to market MicroCool as providing the highest level of protection against the transmission of infectious diseases.” (Id. ¶ 38.)

         Plaintiff alleges that, in addition to the Intertek Report, two confidential witnesses (“CWs”) “confirm” that, as a “vast amount of MicroCool gowns . . . failed to demonstrate AAMI Level 4 protection during independent testing, ” the “Defendants could not properly validate the process for manufacturing MicroCool gowns to ensure that the process would consistently yield gowns that in fact provided AAMI Level 4 protection.” (Id. ¶ 39.) These CWs are alleged to be an individual who worked as an administrative assistant in Halyard's Global Strategic Marketing department from April 2013 to March 2015 (“CW1”), who reported to first the Director of Global Strategic Marketing and then to that position's manager, and an individual who was first a Technical Team Leader, from 2005 to 2009, and then an Engineering and Project Manager at Kimberly-Clark's manufacturing plant in Villanueva, Honduras, from 2009 to November 2014 (“CW2”). (Id. ¶¶ 40-41.)

         According to CW1, MicroCool had problems with sleeves separating from seams, which led health care professional customers to file complaints. (Id. ¶ 40.) Plaintiff alleges that CW1 attended meetings with “senior leadership of the company where the issue was discussed ‘quite a bit.'” (Id.)

         Plaintiff alleges that “CW2 was involved with developing a sleeve sealing process for the MicroCool gowns, ” and that “the sleeve sealing process at the Honduras plant [at which MicroCool gowns were assembled] could not be relied upon to consistently perform as expected and produce gowns that would pass the AAMI 1671 test required for Level 4 protection.” (Id. ¶ 42.) According to CW2, he, together with “members of the Research and Engineering team [at the Honduras facility, ] reported the sleeve sealing problems to senior management in both Honduras and the United States, ” including Kimberly-Clark's Global Strategic Marketing Director, at an unspecified time, and that the problems were “‘well known at the company.'” (Id. ¶ 43.) Plaintiff proffers that CW2 alleges that, after the Director of Product Supply was advised of the “unreliable sleeve sealing process at the plant” during a teleconference, that individual “told CW2 to ‘shut up and keep going and make it work.'” (Id. ¶ 44.) CW2 also alleges that, beginning in 2009, Kimberly-Clark sent MicroCool samples to Intertek labs each month to determine if the gowns continued to meet Level 4 protection standards, and that CW2 received the monthly test results. (Id. ¶¶ 45-46.) Plaintiff alleges, based on information from CW2, that the “results regularly showed gowns failing tests at a rate of between 10 and 35 percent” and that those rates “did not meet minimum standards required for AAMI Level 4 protection.” (Id. ¶ 46.) Plaintiff further alleges that the results were shared with Halyard's “quality department, ” and “were discussed in meetings” with unspecified “senior management that CW2 attended.” (Id.) Plaintiff alleges, based on information from CW2, that “CW2 confirmed that [Halyard] was fully aware that its sleeve sealing process was unreliable but nevertheless sold the MicroCool gowns as offering AAMI Level 4 protection.” (Id. ¶ 48.)

         Plaintiff further alleges that, during the Class Period and prior to the spinoff of Halyard, Mr. Falk received $67, 036, 901 in proceeds from his sales of Kimberly-Clark stock, and Mr. Buthman received $8, 802, 174 in proceeds from his sales of Kimberly-Clark stock, sales that “were abnormal as compared to previous sales of Kimberly-Clark stock by” those individuals. (Id. ¶ 85.)

         Alleged Materially Misleading Statements and Omissions Issued ...


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