United States District Court, E.D. North Carolina, Southern Division
PHILLIP J. SINGER, Individually and on Behalf of All Other Persons Similarly Situated, Plaintiff,
TRANS1, INC., KENNETH REALI, JOSEPH P. SLATTERY, RICHARD RANDALL, and MICHAEL LUETKEMEYER, Defendants.
JAMES C. FOX, Senior District Judge.
This matter is before the court on the defendants' Motion to Dismiss Plaintiff's Second Amended Complaint [DE-63] pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). The matter has been fully briefed and is ripe for ruling. For the reasons stated herein, the motion is ALLOWED.
I. PROCEDURAL AND FACTUAL BACKGROUND
Joel Caplin initiated this action on January 24, 2012, by filing a Class Action Complaint [DE-1] alleging claims for violations of the federal securities laws. On April 2, 2012, Phillip J. Singer moved for appointment as lead plaintiff [DE-21], which the court granted on May 8, 2012 [DE-27]. On July 11, 2012, Singer filed an Amended Class Action Complaint [DE-29].
In its Order of September 19, 2013 [DE-48], the court dismissed Singer's Amended Class Action Complaint with prejudice. However, on October 17, 2013, the court granted Singer's Motion to Alter or Amend the Order and Judgment of Dismissal with Prejudice [DE-50]. Singer then filed a Second Amended Class Action Complaint ("SAC") [DE-55]. TranS1, Inc., and the individual defendants-who were TranS1 executives during the relevant time period -have now moved to dismiss the SAC.
The court has previously reviewed the facts of this case in great detail. See Order of May 5, 2014 [DE-54]; Order of September 19, 2013 [DE-48]. However, given the present motion to dismiss, the court highlights certain allegations from the SAC. Those allegations, which the court must accept as true for purposes of this motion, show the following.
TranS1 is a publicly-traded medical device company that designs, markets, and sells medical devices used in spinal procedures. See SAC [DE-55] ¶ 2. Its primary product and main source of revenue is the AxiaLIF line of products. See id. ¶¶ 2-3. AxiaLIF generates revenue when surgeons use it during patient surgeries and then seeking reimbursement. Id. ¶ 4. Surgeons will only purchase AxiaLIF as long as insurance companies reimburse them for AxiaLIF. Id. When submitting for reimbursement, surgeons must label their procedures with codes, known as Current Procedural Terminology ("CPT") codes. Id. The American Medical Association ("AMA") issues the CPT codes and generally adopts those codes from recommendations made by the National Association of Spine Surgeons ("NAS"). Id.
In 2008, NAS concluded that AxiaLIF was not an anterior procedure, as it had previously been coded. Id. ¶ 5. Based on the NAS's conclusion, the AMA changed AxiaLIF's CPT code to a Category III code effective January 2009. Id. The change classified AxiaLIF as an experimental procedure. Id. Insurance companies generally do not reimburse surgeons performing procedures with a Category III CPT code. Id. ¶ 6.
The plaintiff alleges that, due to the negative financial implications of the Category III code classification for AxiaLIF, the defendants "embarked on a campaign to encourage surgeons to disregard the Category III code and employ alternate, wholly inapplicable, CPT codes to receive reimbursement." Id. ¶ 7. Specifically, the SAC alleges that the defendants did the following:
(1) form[ed] a reimbursement committee to "coach" surgeons on how to avoid using the assigned Category III CPT code and utilize an inapplicable CPT code meant for anterior procedures;
(2) [held] conference calls with distributors during which they were trained on how to convince surgeons to use the CPT code for anterior procedures rather than the mandatory Category III code;
(3) creat[ed] a template setting forth specific steps surgeons should take to avoid using the assigned Category III coding and fraudulently obtain reimbursement;
(4) draft[ed] and dispers[ed] a Reimbursement Guide setting forth alternate codes to use in place of the mandatory Category III code;
(5) promot[ed] the use of the anterior CPT code rather than the assigned Category III code at the Company's National Meeting held in January 2009, attended by Defendant Randall; and
(6) knowingly misrepresent[ed] AxiaLIF as having been "approved for marketing" by the FDA for non-adjunct to fusion use in spinal fusion surgeries.
Id. The court now considers these allegation categories in turn.
a. Reimbursement Committee
The "Defendants formed a reimbursement committee" intended to train surgeons on how to avoid using the Category III CPT code. Id. ¶ 32. This committee, headed by Amy Conners,  and under the "Defendants' direction... drafted presentations for surgeons detailing exactly which non-experimental codes to use, and in what manner, so that insurance companies would reimburse them for the AxiaLIF procedure." Id. During these presentations, Conners would show "surgeons how to input the numbers in a certain order to ensure reimbursement for the procedure." Id. ¶ 51. Conners's presentation would not teach surgeons to omit the Category III CPT code, but rather how to "bury" the code in the "bottom part of the reimbursement request so that insurance companies might overlook it." Id. ¶¶ 51, 54. Conners also made presentations to TranS1's board about reimbursement issues. Id. ¶ 51. Finally, Conners created a hotline that surgeons could call for tips on how to code the procedure. Id.
b. Conference Calls
TranS1 held "periodic conference calls with distributors about coding and told distributors what to tell surgeons about coding." Id. ¶ 56. During these calls, "Trans1 told distributors to use an ALIF' code, despite the fact that [AxiaLIF] did not qualify as an anterior procedure." Id. When some surgeons expressed concerns, "distributors were supposed to tell them: We have seen other surgeons use this code and be successful.'" Id. ¶ 57.
In a conference call held on February 23, 2009, the SAC alleges that Defendants Randall and Luetkemeyer made the following statements:
Defendant Randall: On the reimbursement front, we remain diligent about helping our surgeons obtain appropriate reimbursement for our procedure. We have an 800 number and a call-in resource center up and running to assist surgeons with reimbursement issues that may arise.
As many of you know, a portion of our surgeon fee migrated from an unlisted code to a category three CPT tracking code in January 2009. While we remain focused on supporting our surgeons through this transition, we do not anticipate that this will create any significant additional headwind with regards to adoption.
Defendant Luetkemeyer: Doug, what we said in the script was that the conversion from unlisted to category three, we didn't see giving us any significant additional headwind. I think the metric that we've provided in the past is that we feel, and it's hard to really quantify it, but we feel that unlisted code gave us about a 5% kind of headwind and it's probably consistent again this year. We don't feel that moving from unlisted to category three is going to provide any significant additional headwind.
Id. ¶ 69. In another conference call on April 27, 2009, Defendant Randall stated that
[o]n the reimbursement front, we remain diligent about helping our surgeons obtain appropriate reimbursement for our procedure. We have an 800 number and call-in resource center, up and running to assist surgeons with reimbursement issues that may arise.
We have also added two additional reimbursement specialists in the field to work with our surgeon customers and their billing specialists, to help them determine the appropriate coding for the fusion procedures they are performing.
As a strong case volume this quarter would suggest, we have not seen a drop off in procedure volumes as a result of the current weak economic conditions. Having said that, we have begun to see some insurance companies raising the bar on whether to pay for fusion surgery in general or asking ...