679 F.3d 952
7th Cir.2012Background
- Two pension funds owning Zimmer stock allege falsity and omissions about the Durom Cup and Dover quality-control problems.
- Durom Cup allegedly failed at unacceptably high rates in the US; Zimmer attributed failures to surgical technique and temporarily paused US sales.
- Dorr publicly reportedDurom Cup failures; Zimmer revised instructions and training but continued sales elsewhere.
- Dover plant quality-control issues allegedly known in late 2007; 2008 forecasts and earnings guidance allegedly misrepresented in January and April 2008.
- District court dismissed under PSLRA Tellabs standard; proposed amendments deemed futile; district court retained scienter as basis for dismissal.
- Seventh Circuit affirmed, holding plaintiffs failed to show cogent inference of scienter; statements not shown to be knowingly false; no FDA finding of defect; expert evidence insufficient to prove fraud.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Materiality and falsity of Durom Cup statements | Plaintiffs contend Zimmer misled investors about design/ manufacturing defects. | Zimmer attributed issues to surgical technique and did not knowingly misrepresent. | No cogent inference of scienter; statements not shown to be knowingly false. |
| Dover quality-control problems and earnings forecasts | Hidden Dover problems would have degraded earnings outlook. | Quality issues existed but not fraud; projections were reasonable. | Insufficient to show scienter; forecasts adjusted as problems emerged. |
| January 29, 2008 analyst call statement on FDA warnings | Dvorak understated risk by implying no FDA warning letters; 483s omitted. | Answer was evasive but not fraudulent; question/answer lacked precision. | Evasive but not fraudulent; no strong inference of scienter. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Supreme Court 2007) (requirement that inference of scienter be cogent and at least as compelling as opposing inference)
- Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (Supreme Court 2011) (Supreme Court addresses materiality and scienter after changing market information litigation landscape)
- Bronston v. United States, 409 U.S. 352 (Supreme Court 1973) (evasive answers insufficient for perjury conviction)