Habelt v. iRhythm Technologies, Inc.

Background

The Public Employees’ Retirement System of Mississippi brought the proposed investor class action against iRhythm Technologies, Inc. and its former or current chief executives Kevin King, Michael Coyle, and Douglas Devine. Plaintiffs alleged that the defendants violated Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 by making 18 false or materially misleading statements about iRhythm’s efforts to obtain reimbursement rates for its Zio XT heart-monitoring service. Plaintiffs also asserted a controlling-person claim under Section 20(a) against King, Coyle, and Devine.

The allegations concerned a federal regulatory process for setting Medicare reimbursement rates. CMS initially proposed rates above $375 for the service, but later declined to set a national rate and left rate-setting to regional Medicare contractors. Novitas then announced rates between $73.82 and $89.36, later revised the rate to $115, and ultimately adopted a rate exceeding $210 for 2022. Plaintiffs alleged that iRhythm’s stock price fell after several of these regulatory developments and that the defendants knew their efforts to obtain favorable rates were unlikely to succeed.

Motion to Dismiss

Defendants moved to dismiss the Second Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legal claim. Defendants argued that the challenged statements were not actionable, that the complaint did not plead a strong inference of scienter—a deliberate intent to deceive, manipulate, or defraud—and that it did not adequately plead loss causation, meaning a connection between the alleged misconduct and the investors’ losses.

The court took judicial notice of several government rules, public company filings, and other public documents. It also treated investor-call transcripts extensively quoted in the complaint as part of the complaint under the incorporation-by-reference doctrine. The court denied as moot the remaining requests for judicial notice because it did not need those documents to decide the motion.

Court’s Analysis

The court held that statements numbered 1, 3 through 8, 10 through 11, and 13 through 18 were not actionable under Ninth Circuit precedent concerning statements made during regulatory proceedings. In that setting, the court concluded, investors could not reasonably rely on predictions about the outcome of a government rate-setting process as though those predictions were facts requiring further disclosure.

The court independently held that most of those statements were protected by the Private Securities Litigation Reform Act’s safe harbor for forward-looking statements. The statements concerned future reimbursement rates, regulatory outcomes, business effects, or plans for dealing with regulators. The court found that iRhythm had provided meaningful warnings that reimbursement rates could change, could fall below historical levels, and could harm revenue. One portion of Statement 1 concerning the submission of more than 500,000 invoices was treated as a present factual statement rather than a forward-looking statement.

The court then considered Statements 1, 2, and 12. It held that Statements 1 and 2 about the information iRhythm supplied to CMS were not materially misleading because the surrounding statements explained the types of billing information involved and did not suggest that iRhythm had provided invoices breaking down the component costs of the service. The court held that Statement 12, concerning the possible effect of reimbursement changes on future revenue, was also not materially misleading because the same filing disclosed that Novitas’s rates were below historical rates and warned of possible revenue loss.

Because none of the 18 statements was actionable, the court concluded that the complaint failed to state a securities-fraud claim. The court also held, as an independent ground, that the allegations did not create the strong inference of scienter required in a private securities-fraud case. The allegations from a confidential witness showed that obtaining the desired reimbursement rate could be difficult, but did not show that defendants believed their efforts would fail or intended to deceive investors. The court likewise rejected reliance on prior regulatory events, testimony from litigation involving competitors, and King’s stock sales, which were made under a written trading plan.

Disposition

The court held that further amendment would be futile because the complaint’s central theory was defective and the alleged statements could not support the claims. Judge Edward M. Chen granted Defendants’ motion to dismiss, dismissed the complaint with prejudice, directed the Clerk to enter judgment, and closed the case.