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Grobler v. Neovasc Inc.

United States District Court, D. Massachusetts

November 22, 2016




         Plaintiff Sergio Grobler purchased shares in defendant Neovasc Inc., a company controlled by defendants Alexei Marko (as chief executive officer) and Christopher Clark (as chief financial officer). When Neovasc was hit with a $70 million jury verdict after being accused of theft of intellectual property, Grobler brought suit, claiming that defendants had misled investors about the likely outcome of the case. Grobler also sought to represent a class of similarly situated purchasers. Defendants have moved to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).


         The facts taken from Grobler's Complaint are assumed to be true for purposes of this motion. Neovasc is a Canadian medical device company that develops and manufactures cardiovascular products. In 2009, Neovasc solicited business from another medical device company, CardiAQ Valve Technologies, Inc. That summer, the two companies entered into an agreement under which Neovasc provided manufacturing services for CardiAQ. During the course of the relationship, CardiAQ disclosed proprietary information about its transcatheter mitral valve implantation technology. In February of 2010, CardiAQ relocated its headquarters to California and informed Neovasc that it would soon no longer require an outside manufacturer for its products. Shortly thereafter, in May of 2010, Neovasc filed a patent application disclosing transcatheter mitral valve implantation technology, listing Neovasc employees as the sole inventors. That patent, No. 8, 579, 964, was granted by the Patent and Trademark Office in November of 2013. Neovasc exploited the technology to develop its own transcatheter mitral valve device, marketed as the “Tiara.”

         Believing that Neovasc had appropriated its proprietary technology, CardiAQ brought suit against Neovasc in June of 2014 in the District of Massachusetts. CardiAQ asserted a variety of claims, including breach of a nondisclosure agreement, breach of the implied covenant of good faith and fair dealing, fraud, unfair and deceptive trade practices under Mass. Gen. Laws ch. 93A, § 11, and misappropriation of trade secrets. CardiAQ also sought a correction of inventorship on the '964 patent under 35 U.S.C. § 256. Although summary judgment was granted by the district court to Neovasc on the fraud count, the other claims went to trial. On May 19, 2016, the jury found that Neovasc had breached the nondisclosure agreement and the correlative duty of honest performance, but awarded no damages. The jury returned a split verdict on the trade secrets counts, concluding that Neovasc had misappropriated three trade secrets, but had not stolen the other three. It then awarded $70 million in damages to CardiAQ. The jury also found for CardiAQ on the Chapter 93A claim and the correction of inventorship claim (the district court subsequently granted Neovasc judgment as a matter of law on the Chapter 93A claim). Neovasc's stock price fell from $1.84 to $0.46 per share immediately after the verdict was announced.

         Grobler filed this putative class action on June 6, 2016. He seeks to represent a class of plaintiffs who purchased shares in Neovasc between January 26, 2015 (when Neovasc made a public offering of eight million shares) and the date of the jury verdict, May 19, 2016. Grobler alleges that Neovasc's stock price was artificially inflated by statements related to the CardiAQ litigation made by defendants in various Securities and Exchange Commission (SEC) filings and on an earnings call. Specifically, he singles out statements made in a supplemental prospectus to the January 2015 offering, which disclosed the CardiAQ theft-of-secrets lawsuit and stated that “we believe this allegation to be without merit.” Defs.' Ex. 1 at 8. The “without merit” language was repeated in multiple other SEC filings prior to the verdict. Grobler also points to a statement made by defendant Marko on an earnings call on March 29, 2016, during which he told his interlocutors that the lawsuit was “baseless” and that CardiAQ's claims had “no merit whatsoever.” Defs.' Ex. 17 at 15. In addition, Grobler asserts that various statements made in press releases and other public documents regarding the development of the Tiara device were misleading because they did not disclose that the company's prospects for future success were based on a larceny.

         Relying on the statements belittling the merits of CardiAQ's lawsuit and the adverse jury verdict, Grobler asserts claims under (1) section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 under that statute; and (2) section 20a of the Act. The court heard oral argument on the motion to dismiss on October 26, 2016. Following the oral argument, the judge overseeing the CardiAQ litigation granted enhanced damages to CardiAQ on its trade secrets claims, finding that “Neovasc's misappropriation was willful.” CardiAQ Valve Techs., Inc. v. Neovasc Inc., No. 14-cv-12405-ADB, 2016 WL 6465411, at *6 (D. Mass. Oct. 31, 2016). The judge awarded CardiAQ an additional $21 million in damages as a result. Id. at *7.


         In order to state a claim under section 10(b) and its corresponding rule, Grobler must allege “(1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.” Miss. Pub. Emps.' Ret. Sys. v. Boston Sci. Corp., 523 F.3d 75, 85 (1st Cir. 2008). The Private Securities Litigation Reform Act of 1995 (PSLRA) governs the pleading standards in securities fraud cases. Under these standards, a plaintiff must specify each statement or omission which is allegedly misleading, explain why each statement or omission is misleading, and provide factual support for any allegations of fraud. Greebel v. FTP Software, Inc., 194 F.3d 185, 193-194 (1st Cir. 1999).

         Although defendants contend that Grobler's Complaint fails to satisfy several of these elements, their chief argument is that the challenged statements are forward-looking, and thus fall within the “safe harbor” created by the PSLRA. 15 U.S.C. § 78u-5(c). Under the safe harbor provision, a party is immunized for otherwise materially misleading statements or omissions by satisfying either of two tests. The first, relied on by defendants, creates “a surprising rule that the maker of knowingly false and wilfully fraudulent forward-looking statements, designed to deceive investors, escapes liability for the fraud if the statement is ‘identified as a forward-looking statement and [was] accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.'” In re Stone & Webster, Inc., Sec. Litig., 414 F.3d 187, 212 (1st Cir. 2005) (quoting 15 U.S.C. § 78u-5(c)(1)(A)(i)).

         To determine whether a statement is sheltered by the safe harbor provision, “the aspect of the statement that is based on the present fact must be distinguished from the aspect of the statement that is a future projection.” N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 45 n.13 (1st Cir. 2008). Only those portions of a statement which are truly forward-looking find secure berths within the safe harbor; assertions “whose falsity consists of a lie about a present fact” are denied entrance. Stone & Webster, 414 F.3d at 213.

         Neovasc's and Marko's statements were undoubtedly forward-looking. It is an accepted truism that statements are forward-looking if their “accuracy can only be verified after they are made.” In re Vivendi Universal, S.A. Sec. Litig., 765 F.Supp.2d 512, 569 (S.D.N.Y. 2011); see also Stone & Webster, 414 F.3d at 212 (the safe harbor shields statements “which are later shown to have been inaccurate”). The statements that CardiAQ's claims were “without merit” or “baseless” fit this definition, because they were predictions about the future outcome of the pending litigation, and could only be invalidated by reference to the ultimate outcome of the case. In the run of events, these statements turned out to be only partially correct; Neovasc prevailed on some claims, but it lost on others.[1]

         Of equal significance, Neovasc's SEC filings included detailed and specific warnings about the possibility and the consequences of losing the CardiAQ litigation. Neovasc's January 26, 2015, prospectus supplement[2] for its share offering stated:

It is possible that as a result of future litigation our products currently marketed or under development may be found to infringe or otherwise violate third party intellectual property rights. A former customer has alleged that we have wrongfully used its confidential information in connection with the Tiara technology. While we believe this allegation to be without merit, the ultimate outcome of a litigation depends on numerous factors and our success in the event of any such litigation is not guaranteed. Intellectual property litigation proceedings, if instituted against us, could result in substantial costs, inability to market our ...

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