Mart v. Tactile Systems Technology, Inc.

Background

Brian Mart and St. Clair County Employees’ Retirement System brought a proposed class action under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The defendants were Tactile Systems Technology, Inc. and several officers and outside directors. The proposed class consisted of people who bought Tactile securities between May 7, 2018, and June 8, 2020.

The complaint alleged that Tactile’s revenue growth was partly driven by two illegal sales programs. One allegedly provided benefits to doctors serving as “Key Opinion Leaders” in exchange for referrals. The other allegedly paid or otherwise benefited non-physician healthcare providers who referred patients. The complaint claimed these practices violated the federal Anti-Kickback Statute and the False Claims Act. It also alleged that Tactile submitted false medical-necessity information to Medicare and overstated the potential market for its Flexitouch device.

The plaintiffs claimed that Tactile and the individual defendants misled investors by attributing revenue growth to legitimate sales, stating that Tactile complied with the law, describing a large potential market, and making statements about a related lawsuit alleging illegal conduct. The complaint also alleged that individual defendants sold Tactile stock while possessing important information that had not been disclosed to the public.

Count I: Statements and omissions under Section 10(b) and Rule 10b-5(b)

The court applied the heightened pleading requirements of the Private Securities Litigation Reform Act. Those requirements call for specific identification of misleading statements or omissions and particular facts supporting a strong inference that defendants acted with intent to deceive or with severe recklessness.

The court disregarded allegations from an anonymous former Tactile employee who had left the company three years before the proposed class period. It also disregarded allegations attributed to two unidentified industry executives quoted in short-seller reports. The court considered allegations about Medicare audit results and pre-filled medical-necessity documents because the complaint provided supporting information. The court also considered allegations derived from a related whistleblower lawsuit because the plaintiffs had reviewed documents from that case and relied on multiple sources rather than simply repeating the other lawsuit’s allegations.

The court found that the complaint adequately alleged the underlying kickback violations and false medical-necessity claims. But the complaint did not adequately connect individual defendants to information about the medical-necessity documents, Medicare audits, or false claims based on medical necessity. Claims based on alleged misstatements about those matters therefore could not proceed under Count I.

The complaint adequately alleged that statements about Tactile’s revenue, legal compliance, and required disclosures under Securities and Exchange Commission Regulation Item 303 were misleading to the extent they failed to disclose alleged kickback-related conduct. It also adequately alleged that Tactile’s 2018 and 2019 estimates of the total addressable market for Flexitouch were actionable. The court rejected claims based on Flexitouch’s efficacy, false claims based on lack of medical necessity, and Tactile’s 2020 estimate concerning chronic venous insufficiency.

The court found a strong inference of the required wrongful mental state—called scienter—for Gerald Mattys, Robert Folkes, Bryan Rishe, William Burke, Richard Nigon, and Kevin Roche. The court relied in part on allegations about unusual insider trading and defendants’ access to information about the alleged kickback programs. It found no strong inference of scienter as to Lynn Blake or Brent Moen. The court therefore granted in part and denied in part the motion to dismiss Count I, and the conclusion states that Count I against Blake and Moen is dismissed.

Count II: Scheme liability

Count II alleged that defendants used a deceptive scheme in violation of Section 10(b) and Rule 10b-5(a) and (c). The court found that the complaint sufficiently alleged scheme liability against Rishe, Folkes, and Mattys based on allegations that they directed or closely managed Flexitouch sales and the alleged kickback-related conduct.

The complaint did not sufficiently identify deceptive conduct by the outside directors Burke, Nigon, and Roche beyond their committee membership and alleged failure to ensure compliance. The plaintiffs’ briefing also did not identify allegations supporting scheme liability against Blake or Moen. Count II against Burke, Nigon, Roche, Blake, and Moen is dismissed.

Count III: Control-person liability under Section 20(a)

Section 20(a) imposes potential liability on a person who controlled a primary violator of the securities laws. The court allowed Count III to proceed against Mattys, Blake, and Moen because the parties did not dispute that they were controlling persons while serving as Tactile’s chief executive officer or chief financial officer. The court also allowed the claim against Folkes and Rishe to proceed based on allegations that they were senior managers involved in Tactile’s operations and sales strategy.

The complaint did not adequately allege that outside directors Burke, Nigon, and Roche had the power to control Tactile’s day-to-day operations or the specific conduct at issue. Count III against Burke, Nigon, and Roche is dismissed.

Count IV: Insider trading under Section 20A

Section 20A requires, among other things, a sale or purchase while possessing material, nonpublic information and trading by the plaintiff at the same time or within the legally required period. The court rejected the plaintiffs’ proposed interpretation that trading at any time during the period of nondisclosure was “contemporaneous.”

The complaint specifically alleged that Rishe sold Tactile shares on December 10, 2019, the same day the lead plaintiff bought Tactile shares. The court found that the complaint adequately alleged Rishe possessed material, nonpublic information and had committed an independent securities-law violation. The Section 20A claim against Rishe may proceed.

The complaint did not identify purchases by the plaintiff or other proposed class members occurring on or near the dates of the other individual defendants’ sales. The Section 20A claims against Mattys, Blake, Folkes, Burke, Nigon, and Roche are dismissed.

Disposition

Judge Nancy E. Brasel ordered that defendants’ motion to dismiss was GRANTED IN PART and DENIED IN PART. Counts I, II, III, and IV remain pending except that: Count I against Blake and Moen is dismissed; Count II against Burke, Nigon, Roche, Blake, and Moen is dismissed; Count III against Burke, Nigon, and Roche is dismissed; and Count IV is dismissed against all individual defendants except Rishe.