Two pension funds that own shares of Zimmer Holdings Inc. were unable to prove that Zimmer defrauded its investors by suppressing information, the 7th Circuit Court of Appeals ruled.
In Plumbers and Pipefitters Local Union 719 Pension Fund and Carpenters Pension Fund of West Virginia v. Zimmer Holdings, Inc.; David C. Dvorak; and James T. Crines, No. 11-1471, the two pension funds claimed that Zimmer had downplayed difficulties in manufacturing some of its products and the high failure rate one surgeon reported.
Zimmer makes orthopedic reconstructive devices, including the Durom Acetabular Component, better known as the Durom Cup. The device is used to replace the socket in a hip joint.
One well-known surgeon, Dr. Lawrence Dorr, reported unacceptably high failure rates after using the Durom Cup in his patients. Zimmer attributed that failure rate – which was substantially higher than what other surgeons reported – to improper surgical technique. It stopped selling the device in the United States while preparing new instructions for implantation, but continued to sell the Durom Cup in Europe, where the failure rate was said to be less than 1 percent.
The plaintiffs argue that Zimmer knowingly misrepresented the reasons for the high failure rate Dorr reported, and that the problem stemmed from poor quality or design. The plaintiffs also content that Zimmer delayed revealing quality control problems in its Dover, Ohio, plant by reporting misleading earnings projections.
The 7th Circuit held that Zimmer did not try to hide the failures Dorr had encountered and had announced three months prior to Dorr’s findings that it was aware the Durom Cup was challenging to implant and that changes in labeling or training might be required.
In January 2008, Zimmer projected 10 percent to 11 percent revenue growth for the year and net earnings of $4.20 to $4.25 per share. In July, it cut that projection to 8.5 percent to 9 percent growth and net earnings of $4.05 to $4.10 per share. The plaintiffs maintain that Zimmer committed fraud by not using these lower estimates in January.
The District court dismissed the complaint, finding that it flunked the pleading standards of the Private Securities Litigation Reform Act of 1995. The 7th Circuit affirmed the District court.
“Plaintiffs point to many other supposedly false statements and a host of detail that supposedly shows that one or another statement was knowingly false,” Judge Frank Easterbrook wrote on behalf of the appellate panel. “The district court’s two lengthy opinions address all of these other statements.”