Seventh Circuit slams door on shareholder lawsuit against Zimmer

John O'Brien May 21, 2012, 3:32pm


CHICAGO (Legal Newsline) - Zimmer Holdings, the maker of a hip replacement device, did not mislead its investors about problems associated with its product, a federal appeals court has ruled.

The U.S. Court of Appeals for the Seventh Circuit on Monday ruled against two unions that hoped to initiate a class action lawsuit against Zimmer, which makes the Durom Acetabular Component. The product is known as the Durom Cup and is used to replace the socket in a hip joint.

Attorneys representing the Plumbers and Pipefitters Local Union 719 Pension Fund and the Carpenters Pension Fund of West Virginia said the company hid problems with the Durom Cup from investors, but Seventh Circuit Judge Frank Easterbrook ruled that wasn't the case.

Surgeon Lawrence Dorr had reported high failure rates with the Durom Cup in 2008. Zimmer made public his research and promised to investigate, concluding that his failure rate was higher than other surgeons' and owed the figure to improper surgical technique.

"Zimmer did not try to hide the failures Dr. Dorr had encountered," Easterbrook wrote. "Dorr made a public announcement, and so did Zimmer, which added (what was anyway evident) that lower sales and more products-liability litigation might ensure.

"Three months before Dorr made his public statement in April 2008, Zimmer had announced that the Durom Cup was challenging to implant and that changes in labeling or training might be required. No one could predict how serious the problem would turn out to be, so Zimmer's decision not to try to quantify the effect (during a call with investors in January 2008) can't be treated as fraud."

The plaintiffs also claimed the company delayed revealing quality-control problems at a plant in Dover, Ohio. They said the company knew of the problems in 2007 but did not disclose them in the January 2008 call.

In April, the company closed some of the production lines in its plant for a month, estimating that recalls and lost sales would cost the company $70 million to $80 million.

In July 2008, Zimmer cut its revenue growth and net earnings projections. The plaintiffs said the company should have used those projections during the January call.

"(Q)uality control is an issue at all medical companiesk," Easterbrook wrote. "Knowing of 'problems,' which are common, differs from knowing that a facility must be closed and some of its products recalled."

Easterbrook added, "The allegations of this complaint concern the problems Zimmer faced in 2008; in a different year the headaches would have come from a different plant or a different product, but the fact that these particular problems occurred - and that information came out over time, as more news accumulated - does not imply that any manager was lying to investors."

The case was filed in Indiana's Southern District, and the Seventh Circuit's decision affirmed the decision of Judge Sarah Evans Barker.

The plaintiffs are represented by Robbins Geller Rudman & Dowd in San Francisco and Cohen & Malad in Indianapolis.

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