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Hensley v. Imprivata, Inc.

United States District Court, D. Massachusetts

May 16, 2017

MARK HENSLEY, Individually and on Behalf of All Others Similarly Situated, [1] Plaintiff,
IMPRIVATA, INC., et al., Defendants.


          LEO T. SOROKIN, United States District Judge

         Plaintiff Mark Hensley, on behalf of himself and a putative class of shareholders, alleges multiple Defendants deceived investors into buying Imprivata, Inc.'s (“Imprivata”), stock at artificially high prices from July 30, 2015, through November 2, 2015 (hereinafter, the “class period”), by materially misrepresenting Imprivata's sales outlook. See Doc. 33 at 1. For the reasons that follow, the Court ALLOWS: (1) the Motion to Dismiss filed by Defendants Imprivata, Omar Hussain, Jeffrey Kalowski, David Orfao, David Barrett, and Paul Maeder (Doc. 39); and (2) the Motion to Dismiss filed by Defendants General Catalyst Group II, L.P. (“GCG”), Highland Capital Partners VI Limited Partnership (“Highland Capital”), and Polaris Venture Partners III, L.P. (“Polaris”) (Doc. 40).


         A. Overview of Defendants

         1. Imprivata

         Imprivata is an “IT security company that provides authentication . . . technology solutions for the healthcare and other industries in the United States” and internationally. Doc. 33 at 6. It became a public company in June 2014. Id. at 2. Its “flagship product” is OneSign, an authentication system that helps companies manage who can access computer servers and files. Id. at 12. Imprivata “sells its products and solutions” to healthcare and non-healthcare organizations. Id. Sales to large hospitals comprise 75 percent of Imprivata's total sales, while “the small hospital market and the non-healthcare market comprise 25% of [its] total sales.” Id. at 14. In 2014, 88 percent of Imprivata's “revenue from new sales were attributable to sales to healthcare organizations, ” Doc. 44-8 at 3, meaning 12 percent of that revenue was attributable to sales to non-healthcare organizations.

         For Imprivata's first four quarters as a public company, i.e., from the third quarter of 2014 through the second quarter of 2015, [4] it exceeded its maximum revenue projections. Doc. 44-3 at 2. Indeed, in three of those four quarters, the company exceeded its maximum revenue projections (all of which were under thirty-million dollars) by over one million dollars, and in one of those three quarters it exceeded the maximum by two-million dollars. Id.

         In Q3 2015, however, the only full quarter during the class period, the company underperformed its initial minimum revenue projection: it initially projected it would earn at least $31 million, but only earned $29, 282, 000. Id.

         For at least three straight quarters afterward, from Q4 2015 through Q2 2016, Imprivata again exceeded its maximum revenue projections. Id. For Q4 2015, the company projected it would earn $32 million to $34 million, but it ultimately earned $34.2 million. Id. For Q1 2016, it projected it would earn $28.5 million to $30 million, but it ultimately earned $31, 521, 000. Id. And for Q2 2016, the company projected it would earn $32.5 million to $34 million, but it ultimately earned over $36 million. Id.

         2. The Remaining Defendants

         Hussain was at all relevant times the CEO of Imprivata. Doc. 33 at 2. Kalowski was at all relevant times the CFO of Imprivata. Id.

         After Imprivata went public, GCG, Highland Capital, and Polaris (collectively, “the Controlling Shareholder Defendants”) each owned 19.6 percent of Imprivata stock, meaning they collectively owned 58.8 percent. Id. at 8.

         Orfao was employed by GCG; Maeder was employed by Highland Capital; and Barrett was employed by Polaris. Id. at 7. At all relevant times, they were members of Imprivata's board of directors and had “power and authority to control the contents of [Imprivata's] public filings with the SEC.” Id.

         B. Relevant Information About the Healthcare Industry

         On August 4, 2014, the U.S. Department of Health and Human Services issued a rule stating that, on October 1, 2015, nearly all hospitals would need to switch from using codes in the International Classification of Diseases 9 (“ICD-9”) to using codes in the ICD-10, for purposes of medical billing. See 79 Fed. Reg. 45, 128 (to be codified at 45 C.F.R. pt. 162). This switch was a “significant change” that was “well known by those in the healthcare community for some time.” Doc. 33 at 14. Indeed, well before the August 4, 2014, rule was announced, “[a]ll segments of the health care industry ha[d] invested significant time and resources in financing, training, and implementing necessary changes to systems . . . in order to prepare for ICD-10.” 79 Fed. Reg. at 45, 129; see also Andrew Pollack, Who Knows the Code for Injury by Orca?, N.Y. Times, Dec. 30, 2013, at ¶ 1 (article about hospitals' preparations to switch to ICD-10).

         The Amended Complaint also alleges that the healthcare industry was undergoing “consolidation (i.e., smaller hospitals were getting bought by larger hospitals), ” Doc. 33 at 4, but does not state when this consolidation began.

         C. Imprivata's Acquisition of HT Systems

         On April 30, 2015, Imprivata acquired the company HT Systems, which makes a “palm-vein based identification technology” called PatientSecure. Id. at 2. PatientSecure “is able to distinguish vein patterns in patients' hands and thereby retrieve their correct medical records in a healthcare provider's electronic health record system when a patient checks into a hospital.” Id. at 13. “Imprivata represented the acquisition of HT Systems . . . as an opportunity for [it] to enter the emerging $2 billion patient identification market.” Id. In 2014, HT Systems' revenue was $6.1 million and it generated an operating profit. Doc. 44-10 at 5. Imprivata paid $19.1 million for the acquisition, which was 16.2% of its assets as of December 31, 2014. Doc. 33 at 13.

         The Amended Complaint relies, in part, on information from various unnamed former employees (“FEs”) at Imprivata. One such employee (“FE5” in the Amended Complaint) was an Imprivata sales manager in Florida from April 2015 through April 2016. Id. at 10. In terms of seniority, FE5 was three levels down from CEO Omar Hussain - such that she reported to someone who reported to someone who reported to Hussain. Id. However, she still “frequently interacted and met” with Hussain. Id. According to FE5, Imprivata acquired HT Systems “not simply for its PatientSecure product but for the pipeline of HT's many sales prospects who were supposedly interested in buying PatientSecure.” Id. at 18. However, FE5 states, Imprivata eventually discovered that “prospective customers had not even seen the device, much less agreed to purchase it, ” so “the sales pipeline was false.” Id. According to the Amended Complaint, FE5 “had frequent conversations with Hussain . . . and confirmed” that, “at least by the beginning of July of 2015, ” “all of the top executives at Imprivata were fully aware, . . . that in acquiring HT [Systems, ] Imprivata had spent a tremendous amount of cash in reliance on a sales opportunity that did not exist and for a product that customers were not interested in buying.” Id. at 18-19; see also id. at 18 (“FE5 stated that Defendant Hussain in particular was keenly aware that the acquisition of HT Systems and PatientSecure was a disaster by at least by the beginning of July of 2015.”). According to FE5, “as of July 2015, Imprivata had not booked any significant sales of PatientSecure.” Id. at 19.

         D. Other Allegations by FEs

         According to another FE (“FE1”), who worked as a Senior Product Marketing Manager from November 2014 to April 2015, id. at 9, “[b]y April 2015, only 25-30 units” of one of Imprivata's products, ConfirmID, had been sold. Id.

         FE2 worked as a sales representative from March 2013 to December 2015, and “was focused on sales to small hospitals and health facilities.” Id. at 9. According to FE2, “numerous potential Imprivata customers informed sales representatives that as much as they might like to invest in Imprivata's security products[, ] they would simply have no money to buy them because their budgets were consumed by the need to deal with the government's mandate that [nearly] all . . . healthcare providers convert their computer systems to use ICD-10 coding.” Id. at 16. FE2 states that “when Defendants issued their Q3 2015 sales forecast in July of 2015, there was absolutely no sales backlog.” Id.

         FE3 was the Director of Government and Commercial Sales for Imprivata between November 2013 and January 2016, and reported to the Senior Vice President of World Wide Sales, who reported to Hussain. Id. at 9. FE3 alleges Hussain and CFO Jeffrey Kalowski were “hands-on managers who regularly attended sales meetings and monitored sales by viewing the Company's” sales database. Id. at 15. FE3 also states that it was “well-documented in” the database that “non-healthcare sales were a complete failure throughout all of 2015.” Id. at 17.

         FE4 worked as a regional sales manager from January 2015 through January 2016. Id. at 9-10. According to FE4, “it was readily apparent” from Imprivata's sales tracking software “that sales in the Company overall were declining during 2015.” Id. at 15. FE4 reports that “Imprivata sales staff rarely achieved their sales quotas.” Id. at 16. FE4 further states that “by the spring of 2015 half of the sales force in the non-healthcare segment had left the Company, frustrated with its lack of success and sales.” Id. at 17.

         E. Imprivata's 2014 10-K

         On March 11, 2015, Imprivata filed its 10-K for the fiscal year ending December 31, 2014. See Doc. 44-8. The 10-K stated:

- “We have a history of losses, we expect to continue to incur losses and we may not be profitable in the future. . . . [O]ur profitability will be affected by, among other things, our ability to develop and commercialize new solutions, and products for those solutions, and enhance existing solutions and products.” Id. at 4.
- “We depend on sales of our Imprivata OneSign solution in the healthcare industry for a substantial portion of our revenue, and any decrease in its sales would have a material adverse effect on our business, financial condition and results of operation.” Id.
- “Healthcare organizations are currently facing significant budget constraints . . . . Although [they] are currently allocating funds for capital and infrastructure improvements to benefit from governmental initiatives, they may not choose to prioritize or implement access or authentication management solutions as part of those efforts at this time, or at all, due to financial and resource constraints.” Id.
- “In addition, our healthcare customers have been experiencing consolidation in response to developments generally affecting the healthcare industry. As a result, we may lose existing or potential healthcare customers for our solutions. If our existing customers combine with other healthcare organizations that are not our customers, they may reduce or discontinue their purchases of our solutions.” Id. at 5.
- “We do not anticipate that sales of our solutions in non-healthcare industries will represent a significant portion of our revenue for the foreseeable future.” Id.; see also Id. at 12 (“[W]hile add-on sales to non-healthcare customers have continued to increase, new sales to non-healthcare customers have been decreasing.”).
- “Developments generally affecting the healthcare industry, including new regulations[, as well as] changes in pricing for healthcare services or impediments to third-party reimbursement for healthcare costs, may cause deterioration in the financial or business condition of our customers and cause them to reduce their spending on information technology.” Id. at 6.
- “Our revenue and operating results have fluctuated, and are likely to continue to fluctuate, which may make our quarterly results difficult to predict, cause us to miss analyst expectations and cause the price of our common stock to decline.” Id. at 7.
- “Industry consolidation or new market entrants may result in increased competitive pressure, which could result in the loss of customers or a reduction in revenue.” Id. at 9.
- “If we do not achieve the anticipated strategic or financial benefits from our acquisitions, or if we cannot successfully integrate them, our business and operating results could be adversely affected. We have acquired, and in the future may acquire, complementary businesses, technologies or assets that we believe to be strategic. We may not achieve the anticipated strategic or financial benefits, or be successful in integrating any acquired businesses, technologies or assets.” Id. at 10.

         F. Alleged Misrepresentations

         1. First Alleged Misrepresentation

         On July 29, 2015, after the close of trading, Imprivata issued a press release announcing its earnings for Q2 2015.[5] Doc. 44-12. The release also contained “forward-looking statements . . ., including but not limited to . . . [Imprivata's] expected financial results for Q3 2015 and the full fiscal year 2015.” Id. at 10. The release stated:

These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts, and projections as well as the beliefs and assumptions of management. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond Imprivata's control. Imprivata's actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to . . . developments in the healthcare industry or regulatory environment; seasonal variations in the purchasing patterns of our customers; the lengthy and unpredictable sales cycles for new customers; . . . our ability to successfully integrate HT Systems and other businesses and assets that we may acquire . . ., and the other risks detailed in Imprivata's risk factors discussed in filings with the U.S. Securities and Exchange ...

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