Yan v. Rewalk Robotics Ltd.

          MEMORANDUM AND ORDER ON LEAD PLAINTIFF'S REQUEST TO ADD JOANNE GELLER AS NAMED PLAINTIFF

          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 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. On August 23, 2018, the Court dismissed the Securities Act claim on the ground that the complaint failed to identify a false or misleading statement in the registration statement. As to the claims under the Exchange Act, however, the Court denied the motion to dismiss without prejudice. It noted that the lead plaintiff, Wang Yan, purchased shares only in September 2014, at the time of the initial public offering, and could therefore assert claims personally only under the Securities Act. And it provided plaintiff an opportunity to seek the appointment of a substitute or supplemental lead plaintiff or to take other steps to establish standing.

         Yan has elected to seek to amend the complaint to add Joanne Geller as a named plaintiff as to the Exchange Act class. For the following reasons, the motion will be denied.

         I. Background

         A. Factual Background

         The allegations in the consolidated amended complaint are set out in the Court's Memorandum and Order dated August 23, 2018. Familiarity with that opinion is assumed. The factual background relevant to the motion to amend is set forth below.

         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 United States headquarters in Marlborough, Massachusetts. (Id. ¶ 26).

         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 proceeding 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).^[1] 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 to a patient. (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). 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 letter stated that although the plan was deficient, because less than six months had elapsed since the issuance of the Section 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. (CAC ¶ 7).

         ReWalk failed to do so in a timely fashion. (Id. ¶ 8). It eventually filed a response on November 6, 2014. (Id.). 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 the company 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 Section 522 order, ReWalk was required to begin its surveillance study “not later than 15 months after the day on which [a Section 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).

         In the meantime, on December 21, 2015, proposed plaintiff Joanne Geller purchased 1, 000 shares of ReWalk common stock at $14.80 per share. (Jafri Decl. Ex. A).

         ReWalk's closing stock price on February 29, 2016, the day before the FDA released the letter, was $10.48. (CAC ¶ 19). The closing price the following day, on March 1, 2016, was $9.07, reflecting a 13% decline in value. (Id.). The stock price steadily declined thereafter, and ReWalk shares were trading in August 2018 at around $0.75 to $1.25.^[2]

         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 United States clinical areas, according to CW-3, ReWalk had only recruited eight subjects from three areas by June 2017. (Id. ¶ 117-18).^[3]

         B. Procedural Background

         Plaintiffs in this action initially filed suit in California state court on September 20, 2016. (Docket No. 37, Ex. 4 at 2). The California action was dismissed for lack of personal jurisdiction over the defendants. (Id.).^[4]

         On October 31, 2016, plaintiff Shane Vesey filed suit against defendants in the Massachusetts Superior Court. (Id. Ex. 1). On November 30, 2016, plaintiff Phanindra Chittavajhula also filed suit against defendants in the Superior Court. (Id. Ex. 2). Both cases were putative class actions alleging violations of the federal Securities Act relating to omissions in ReWalk's registration statement and final prospectus. The state court ...