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Yan v. ReWalk Robotics Ltd.

United States District Court, D. Massachusetts

August 23, 2018

WANG YAN, individually and on behalf of all other similarly situated parties, Plaintiff,
v.
REWALK ROBOTICS LTD., LARRY JASINSKI, AMI KRAFT, AMIT GOFFER, JEFF DYKAN, HADAR RON, ASAF SHINAR, WAYNE B. WEISMAN, YASUSHI ICHIKI, ARYEH DAN, GLENN MUIR, BARCLAYS CAPITAL INC., JEFFERIES LLC, and CANACCORD GENUITY INC., Defendants.

          MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

          F. DENNIS SAYLOR, IV UNITED STATES DISTRICT JUDGE

         This is a putative class action alleging violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act of 1934. The plaintiff class purchased common stock of ReWalk Robotics, Ltd. between September 12, 2014 (the date of its initial public offering (“IPO”)) and February 29, 2016. The consolidated amended complaint alleges that ReWalk, its officers and directors, and the IPO underwriters concealed material information in its IPO registration statement about ReWalk's failure to comply with FDA regulations, in violation of the Securities Act. It also alleges that after the IPO, ReWalk and certain officers continued to make material false statements after the initial offering, in violation of the Exchange Act. It relies in part on statements by three former ReWalk employees acting as confidential witnesses.

         Defendants have moved to dismiss the complaint for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. §§ 78u-4, 78u-5. Defendants contend that the complaint fails to set forth a Securities Act violation because it does not identify a misleading statement or omission in the registration statement. They also argue that the complaint fails to set forth an Exchange Act violation because the lead plaintiff lacks standing and the information allegedly omitted was not material and was in fact disclosed. In addition, they contend that the complaint fails to allege specific facts that give rise to a strong inference of scienter and that it fails to plead loss causation.

         Because the complaint here fails to identify a false or misleading statement in the registration statement, to the extent it alleges violations of the Securities Act, it will be dismissed.

         The claims under the Exchange Act, however, present different issues. As a threshold matter, the lead plaintiff in this case, Wang Yan, purchased shares only in September 2014, at the time of the initial public offering; he can therefore assert claims personally only under the Securities Act. Under normal circumstances, he would not have standing to assert claims under the Exchange Act, and those claims would accordingly be dismissed.

         This case, however, is subject to the requirements of the PSLRA. That statute requires the appointment of a lead plaintiff, who may not be the party who actually filed the complaint (as here), but who normally has the largest financial interest in the litigation. Under some circumstances, courts have permitted lead plaintiffs appointed under the PSLRA to assert claims as to which they have no personal stake (and, therefore, would not have standing under a traditional legal framework).

         The complicating factor here is that the lead plaintiff, Yan, has no valid claims remaining after dismissal of the Securities Act claims. Because standing has a constitutional dimension, in addition to the requirements of the PSLRA, it is at least somewhat unclear whether Yan can continue to act as lead plaintiff. Under the circumstances, and because the parties have not briefed or otherwise addressed the issue, the Court will not address the Exchange Act claims at this time. Instead, plaintiffs will be given an opportunity to persuade the Court that Yan remains an appropriate plaintiff; to seek the appointment of a substitute or supplemental lead plaintiff; or to take such other steps as they believe may be proper under the circumstances. In the meantime, the Court will grant the motion to dismiss as to the Securities Act claims, and deny it as to the Exchange Act claims without prejudice to its renewal once the standing issue has been resolved.

         Accordingly, and for the reasons set forth below, defendants' motion to dismiss will be granted in part as to Counts One and Two, and denied in part without prejudice as to Counts Three and Four.

         I. Background

         A. Factual Background

         The facts are set forth as described in the consolidated amended complaint.[1]

         1. Overview

         Defendant ReWalk Robotics, Ltd., formerly known as Argo Medical Technologies, Inc., is a medical device company. It designs and develops exoskeletons, which are devices that help persons with spinal-cord injuries walk. (CAC ¶ 2). The company is incorporated in Israel and has its U.S. headquarters in Marlborough, Massachusetts. (Id. ¶ 26). It was founded by Amit Goffer, who served as CEO and Chief Technical Officer from 2001 until 2012. (Id. ¶ 30). Goffer resigned from the company on November 18, 2015. (Id.).

         At the time of its IPO in September 2014, ReWalk's CEO was Larry Jasinski and its CFO was Ami Kraft. (Id. ¶¶ 27, 29). Hadar Ron, Jeff Dykan, Asaf Shinar, Wayne Weisman, Yasushi Ichiki, Glenn Muir, and Aryeh Dan were all members of ReWalk's Board of Directors. (Id. ¶¶ 31-37). In January 2015, Kevin Hershberger replaced Kraft as CFO. (Id. ¶ 28).

         ReWalk currently sells two distinct products: ReWalk Personal, which is designed for everyday use, and ReWalk Rehabilitation, which is designed for clinical rehabilitation centers. (Id. ¶ 46). Both devices are regulated in various jurisdictions by the FDA, the European Union, or other governmental agencies. (Id. ¶ 94). This litigation concerns only the ReWalk Personal device, which the Court will refer to as the “device.”

         In 2014, ReWalk submitted the device to the FDA for “de novo” classification. (Id. ¶ 47). “De novo” classification allows manufacturers to market devices that are low to moderate risk and not substantially similar to devices that are already being marketed. (Id.).

         On June 26, 2014, the FDA approved the ReWalk device for marketing. It designated the ReWalk device “Class II, ” requiring special controls. (Id. ¶¶ 48-49).[2] The FDA also ordered the company to conduct a “post-market surveillance” study to determine the product's risks, as required by Section 522 of the Food, Drug, and Cosmetic Act. (Id. ¶¶ 4, 48-49; 21 U.S.C. § 360L(a)(1)(A)). FDA regulations require manufacturers to report results of such studies, including important attributes such as the type of test subjects, methodology, data collection plan, and patient follow-up. 21 C.F.R. 822.10. The FDA required the study due to concerns that a malfunction could result in serious injury or death. (CAC ¶¶ 4, 49).

         The complaint alleges that defendants failed to disclose that ReWalk was either unprepared or unable to comply with the FDA's June 2014 directive that it perform post-market surveillance. (Id. ¶¶ 16, 68).

         Prior to the IPO, ReWalk filed a registration statement with the SEC, stating that it had developed a “breakthrough product” that would “deliver a natural gait and functional walking speed.” (Id. ¶ 90). The complaint alleges that the registration statement failed to disclose that the reason the FDA ordered the company to conduct a post-market surveillance study was that the ReWalk device posed a threat of serious injury or death. (Id. ¶¶ 85-95).

         The initial public offering of ReWalk occurred on September 12, 2014. (Id. ¶ 5). The company issued 3 million shares of common stock. (Id.). The IPO was underwritten by defendants Barclays Capital Inc., Jefferies LLC, and Canaccord Genuity Inc. (Id. ¶¶ 38-40). Lead plaintiff Wang Yan purchased 3, 600 shares of ReWalk in September 2014, shortly after the IPO. (Docket No. 7, Ex. C).

         Two weeks after the IPO, on September 29, 2014, the FDA contacted ReWalk to inform the company that its proposed post-market surveillance study was deficient. (CAC ¶ 7). Notably, the FDA's letter stated that although the plan was deficient, because less than six months had elapsed since the issuance of the 522 order, the study status would be marked as “Plan Pending” on the FDA's website. (Feldman Decl. Ex. F at 3). The FDA granted ReWalk 30 days to file a response, which it failed to do in a timely fashion. (CAC ¶¶ 7-8). ReWalk eventually filed a response on November 6, 2014. (Id. ¶ 8). On February 13, 2015, the FDA found that the November 6 submission was also deficient. (Id.). The FDA granted ReWalk another 30 days to file a further response, and ReWalk responded (late) on May 22, 2015. (Id. ¶¶ 8-10). ReWalk stated that it wanted to discuss an issue with the FDA before submitting a formal reply to the February 13 letter. (Id. ¶ 10).

         According to the complaint, during that time, ReWalk officials held quarterly earnings calls, during which they failed to disclose the company's failure to comply with the FDA's requirement. Specifically, those calls were made on February 12, 2015 (Q4 2014), May 7, 2015 (Q1 2015), August 6, 2015 (Q2 2015), November 11, 2015 (Q3 2015), and February 25, 2016 (Q4 2015). (Id. ¶¶ 99-110).

         On September 5, 2015, the FDA cautioned ReWalk that it still had not submitted a revised study plan addressing the deficiencies previously identified by the agency. (Id. ¶ 13). Having received no response, on September 30, 2015, the FDA issued a warning letter outlining the company's substantial failure to comply with the post-market surveillance requirement. (Id. ¶ 14). Specifically, the letter stated that under the 522 order, ReWalk was required to begin its surveillance study “not later than 15 months after the day on which [a 522 order] is issued.” (Pl. Ex. C at 2). The 15-month time frame had closed on September 28, 2015. (Id.). The letter went on to state that ReWalk had “committed a prohibited act under section 301(q)(1)(C) of the [Food, Drug, and Cosmetic Act]” and that the ReWalk device was “currently misbranded.” (Id.). The letter was eventually disclosed to the public by the FDA on March 1, 2016. (CAC ¶ 18).

         ReWalk's closing stock price the day before the FDA released the letter was $10.48. (Id. ¶ 19). The closing price the following day, on March 1, 2016, was $9.07, reflecting a 13% decline in value. (Id.). The stock price has steadily declined since, and ReWalk shares are currently trading at around $0.75 to $1.25.[3]

         At the end of March 2016, the FDA exercised its enforcement discretion and allowed ReWalk to continue to market its device, provided that it would initiate the post-market surveillance study by June 1, 2016. (Id. ¶ 114). The FDA approved ReWalk's proposed protocol for the study on May 5, 2016. (Id. ¶ 115). However, ReWalk did not file timely monthly reports to the FDA in June and July 2016. (Id. ¶ 116). Although the approved protocol required 60 subjects from twelve U.S. clinical areas, according to CW-3, ReWalk had only recruited eight subjects from three areas by June 2017. (Id. ¶ 117-18).

         2. Confidential Witness Allegations

         As noted, the complaint alleges in substance that defendants failed to disclose ReWalk's failure to comply with various FDA regulations, both during and after the IPO. In support of those allegations, the complaint relies in part on statements from three confidential witnesses (“CWs”), who were formerly employed by ReWalk.[4]

         CW-1 was the Executive Assistant to CEO Jasinski between April 2015 and December 2016. (CAC ¶ 70). She described Jasinski as “micromanaging” ReWalk's day-to-day operations and involving himself in “every single aspect of the business.” (Id.). According to CW-1, ReWalk had a culture of procrastination, which was “exacerbated by Jasinski's micromanagement style.” (Id. ¶ 71).

         CW-1 sat in on weekly meetings between Jasinski and other high-ranking ReWalk officials. (Id. ¶ 72). She recalled a meeting where the FDA's September 30, 2015 warning letter was discussed. (Id.). Jasinski, CFO Hershberger, and other officials were concerned about possible consequences ReWalk could suffer if it failed to meet FDA requirements. (Id. ¶ 73). At some point, the warning letter was also brought to the attention of ReWalk's Board of Directors, chaired by defendant Dykan. (Id. ¶ 74).

         CW-2 was a Clinical Training Manager at ReWalk from November 2015 to August 2016. (Id. ¶ 75). CW-2 reported to ReWalk's Worldwide Training Manager and trained physical therapists at hospitals and rehabilitation centers on how to use the ReWalk device. (Id.).[5]

         In December 2015, Jasinski convened a company-wide teleconference to discuss ReWalk's plan for a post-market surveillance study. (Id. ¶ 76). At the teleconference, defendants “showed no sense of urgency at all to even start the post-market surveillance study before February 2016.” (Id.). Two months later, the FDA sent another letter to ReWalk citing deficiencies in the company's proposed post-market surveillance study. (Id. ¶ 77). Around that time, ReWalk hosted a company-wide meeting in its Marlborough headquarters. (Id. ¶ 78). At that meeting, “CW-2 noticed for the first time that there appeared to be some urgency at [ReWalk] to start post-market surveillance.” (Id.). The Worldwide Training Director instructed CW-2 to recruit subjects for such a study. (Id. ¶ 79). However, ReWalk did not recruit a sufficient number of subjects, in part because most insurance companies declined to reimburse users for the ReWalk device. (Id.).

         CW-3 was the Associate Director of Clinical Operations at ReWalk from February 2016 to June 2017. (Id. ¶ 80). CW-3 was hired to develop and execute ReWalk's post-market surveillance study. (Id. ¶ 81). CW-3 initially reported to John Hamilton, the Vice President of Regulatory and Clinical at ReWalk. (Id. ¶ 80). After Hamilton stepped down from his position in early 2017, CW-3 reported directly to Jasinski. (Id.).

         CW-3 stated that before the IPO, ReWalk hired Clinivation, a third-party contract research organization, to prepare documents necessary for a post-market surveillance study. (Id. ¶ 82). However, upon joining ReWalk, CW-3 reviewed Clinivation's work and concluded that it was “quite garbage.” (Id.). Eventually, CW-3 convinced Hamilton to terminate ReWalk's contract with Clinivation; however, Hamilton appeared to have “virtually no experience with clinical trials.” (Id. ¶ 83). Like CW-2, CW-3 stated that ReWalk's attempt to conduct a post-market surveillance study was hampered by its failure to recruit a sufficient number of subjects after insurance companies refused to reimburse users for the ReWalk device. (Id. ¶ 84).

         3. Defendants' Statements as to the Securities Act Claims

         The complaint alleges that the following paragraphs in ReWalk's September 12, 2014 IPO registration statement were false and misleading:

Compelling Clinical Data. We believe that ReWalk's clinical data differentiates us from our competitors. Clinical data published in established medical journals has demonstrated ReWalk's potential as a safe ambulatory device. We are not aware of any comparable clinical data generated in rigorous trials that has been published with respect to competing exoskeleton products. In addition, our interim analysis of an ongoing clinical study demonstrates improvements in secondary physical conditions, such as reduction in pain and spasticity and improvements in bowel and urinary tract function, body and bone composition, metabolism and physical fitness, as well as reduced hospitalizations and dependence on medications. We believe that continued results of this nature will greatly assist our ability to obtain regulatory clearances and third-party reimbursement.

(CAC ¶ 86).

Continue Clinical Studies to Further Demonstrate Health and Economic Benefits to Support Reimbursement. We intend to continue to work with hospitals, rehabilitation centers, patient advocacy and support groups and individual users to generate additional data regarding functionality and that supports the health and economic benefits of ReWalk. We will continue to engage and fund researchers and organizations to conduct clinical studies to demonstrate the functionality and utilization of ReWalk and to highlight economic benefits of reductions in medical complications ...

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