First Circuit Affirms The Dismissal Of A Putative Securities Fraud Class Action Against Medical Robotics Company In Connection With The FDA's Issuance Of A Warning Letter

• Published date: 02 September 2020
• Law Firm: Shearman & Sterling LLP
• Author: Shearman & Sterling LLP

On August 25, 2020, the United States Court of Appeals for the First Circuit affirmed the dismissal of a putative securities fraud class action asserting violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the 'Securities Act') as well as Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the 'Exchange Act') and Rule 10b-5 against a medical robotics company (the 'Company') as well as certain of its officers. Yan v. ReWalk RoboticsLtd., et al., No. 19-1614, 2020 WL 5014858 (1st Cir. Aug. 25, 2020). Plaintiffs alleged that the Company made false or misleading statements and omissions in its IPO registration statement (the 'Registration Statement') and subsequent quarterly and annual disclosures concerning its dealings with the Food and Drug Administration (the 'FDA') regarding one of the Company's devices. The First Circuit affirmed the district court's dismissal of the Securities Act claims, finding that plaintiffs failed to allege a material misstatement or omission. Although it disagreed with the district court's reasoning in dismissing the Exchange Act claims for lack of standing, the First Circuit nevertheless found that the Exchange Act claims were properly dismissed because plaintiffs failed to sufficiently allege a material misstatement or scienter.

The Company designs and manufactures robotic exoskeletons that offer greater mobility to individuals with spinal cord injuries, including an exoskeleton that is intended for use in a home or general community setting ('the device'). The device is subject to regulation by the FDA, which approved the device so long as the Company conducted a post-market surveillance study of the safety of the device outside institutional settings. Although the safety of the device had been demonstrated in institutional settings, such as hospitals and rehabilitation centers, there was limited data on its safety in the home or community settings'the intended environment for the device. The FDA ordered the Company to submit the proposed study plan for approval and begin the study within fifteen months.

Upon submitting the proposed study plan for approval, but before receiving FDA approval of that plan, the Company issued its Registration Statement and a month later went public. The Registration Statement allegedly touted the device as, among other things, a 'breakthrough product' with 'compelling clinical data,' but noted that the FDA had ordered the performance of a post-market surveillance study and failure to comply may result in the device's removal from the market.

According to plaintiffs, the Company missed certain deadlines for submitting plans for its post-market surveillance study, and, when it did submit such plans, the FDA deemed them inadequate. As a result, one year after its IPO, the FDA issued a warning letter to the...