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Kessman v. Myriad Genetics, Inc.

United States District Court, D. Utah, Central Division

March 25, 2019

MATTHEW KESSMAN, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
MYRIAD GENETICS, INC., MARK CHRISTOPHER CAPONE, PETER D. MELDRUM, R. BRYAN RIGGSBEE, and JAMES S. EVANS, Defendants.

          MEMORANDUM DECISION AND ORDER

          DALE A. KIMBALL UNITED STATES DISTRICT JUDGE.

         This matter is before the court on Defendants Myriad Genetics, Inc., Mark Christopher Capone, Peter D. Meldrum, R. Bryan Riggsbee, and James S. Evans' Motion to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The court held a hearing on the motion on March 8, 2019. At the hearing, Plaintiffs were represented by Austin P. Van, and Defendants were represented by Erik A. Christiansen. The court took the matter under advisement. The court considered carefully the memoranda and other materials submitted by the parties, as well as the law and facts relating to the motion. Now being fully advised, the court issues the following Memorandum Decision and Order.

         BACKGROUND

         I. Myriad's Genetic Testing

         Founded in 1991 and headquartered in Salt Lake City, Utah, Myriad Genetics, Inc. (“Myriad”) develops and markets molecular diagnostic products to provide physicians with information to guide the care of their patients as well as prevent, detect, or delay disease. Myriad's stock trades on the NASDAQ Global Select (“NASDAQ”) under the ticker symbol “MYGN.” Peter D. Meldrum (“Meldrum”) was Myriad's CEO and President from November 1991 to June 2015. Mark Christopher Capone (“Capone”) has served as Myriad's CEO and President since July 2015. James S. Evans (“Evans”) was Myriad's CFO from November 2007 to October 2014. R. Bryan Riggsbee (“Riggsbee”) has served as Myriad's CFO and Treasurer since June 2014 and as an Executive Vice President since October 2014.

         Important to Myriad's growth and success is its research and discoveries regarding cancer-related genes. BRCA1, a gene located on chromosome 17, and BRCA2, a gene located on chromosome 13, are both tumor suppressor genes. Women with mutations of either gene have an increased risk of contracting breast and ovarian cancer. BRCA1 and BRCA2 mutations are also associated with an increase in prostate and colon cancers in men. Broadly speaking, mutations of these genes come in two types: (1) sequence and (2) large rearrangement-also known as duplication/deletion. Sequence mutations are small changes in the DNA sequence of a gene, while large rearrangement mutations are duplications, deletions, insertions, or inversions of large chunks of DNA.

         In 1996, Myriad began offering a diagnostic test called “BRAC Analysis, ” which was designed to detect sequence mutations in BRCA1 and BRCA2. A few years later, Myriad added a second testing component that could detect five recurring large arrangements in BRCA1, and Myriad renamed the test “Comprehensive BRAC Analysis.” In 2006, Myriad developed another test-the BRAC Analysis Rearrangement Test-that could detect large cancer-associated rearrangements in the BRCA1 and BRCA2 genes that were previously undetected by the standard BRAC Analysis testing. That same year, Myriad began offering BRAC Analysis Large Arrangement Test (“BART”) as a standalone, full gene rearrangement test for both genes. The Comprehensive BRAC Analysis test, including BART, is now called “Integrated BRAC Analysis.” Myriad derives a significant portion of its yearly revenue from its BRAC Analysis and BART tests, and providers generally order both tests together.

         II. Billing Practices for Myriad's Genetic Testing

         Physicians, healthcare providers, and medical suppliers, such as Myriad, are subject to the Healthcare Common Procedure Coding System (“HCPCS”). This system provides a standardized coding system for describing the specific items and services provided in healthcare, and it applies to clinical laboratory tests and other medical diagnostic procedures, including Myriad's genetic testing. The HCPCS dictates which billing codes physicians, healthcare providers, and suppliers should use when submitting claims to the Centers for Medicare and Medicaid Services (“CMS”), an agency within the Department of Health and Human Services (“HHS”). In order to prevent improper payment procedures, CMS developed a program called the National Correct Coding Initiative (“NCCI”). The program provides billing entities such as medical providers with a list (the “NCCI Correct Coding List”) that contains HCPCS code pairs that should not be reported together. For code pairs that generally should not be reported together, a provider can utilize certain modifiers to override the prohibited pair. The “-59” modifier is used in a variety of circumstances including when a code represents a service that is separate and distinct from another service with which it would usually be bundled. Additionally, it can be used to override code pair prohibitions. CMS has noted that the -59 modifier is commonly misused.

         In 2011, CMS developed almost 100 new codes to describe the molecular pathology procedures used to test various genes, two of which were BRCA1 and BRCA2. Two of Myriad's BRCA1 and BRCA2 genetic tests were given codes. Myriad's Comprehensive BRAC Analysis test is represented by the code 81211, and Myriad's BART test is represented by the code 81213. In April 2013, CMS included the pair 81211 and 81213 on the NCCI Correct Coding List because the two codes represented “mutually exclusive procedures” for billing purposes. Accordingly, a provider was to bill under billing codes 81211 and 81213 only when one or the other was performed, but when both tests were performed, they were to be billed together under the single code 81211. Nevertheless, if providers billed using both codes, they would need to include a -59 modifier to override the pair prohibition and bill for both services. In 2016, CMS implemented a third code, 81162, which providers were to use when Myriad's Integrated BRAC Analysis test-the test that includes the Comprehensive BRAC Analysis test (81211) plus the BART test (81213)-was ordered. Thus, beginning in 2016, providers were to use code 81162 where the tests represented by codes 81211 and 81213 were ordered together instead of 81211 and 81213 individually.

         III. Plaintiffs' Allegations

         Matthew Kessman (“Kessman”) filed the instant suit on April 20, 2018 alleging violations of (1) § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) (the “Exchange Act”) and SEC Rule 10b-5 (17 C.F.R. § 240.10b-5) against all Defendants; and (2) § 20(a) of the Exchange Act (15 U.S.C. § 78t) against Capone, Meldrum, Riggsbee, and Evans (collectively, the “Individual Defendants”). On June 25, 2018, this court designated Ethan Silverman (“Silverman”) and David K. Higgins (“Higgins”) as Lead Plaintiffs. Plaintiffs subsequently filed an Amended Complaint on August 31, 2018.

         In the Amended Complaint, Plaintiffs allege that Myriad and the Individual Defendants systematically overbilled Medicare for the BRCA1 and BRCA2 testing that Myriad performed. Plaintiffs claim that Myriad knowingly violated CMS's billing guidelines by billing 81211 and 81213 individually when a provider performed both tests instead of billing for both tests collectively under the single code 81211. Plaintiffs assert Myriad utilized the -59 modifier to override the prohibition on billing 81211 and 81213 together. Further, Plaintiffs claim that after CMS implemented the 81162 code in 2016, Myriad continued billing using the individual codes 81211 and 81213 instead of using 81162 to bill in situations when providers performed both tests. Relying on the testimony of six confidential witnesses formerly employed by Myriad, Plaintiffs assert that it was Myriad's standard practice to improperly use the -59 modifier and double bill Medicare in conjunction with tests billed under codes 81211, 81213, and 81162. In addition, Plaintiffs allege that the Individual Defendants had knowledge of Myriad's actions and each constituted a controlling person thereby incurring personal liability for Myriad's actions.

         Finally, on March 12, 2018, Myriad filed a disclosure on Form 8-K with the SEC, which stated in relevant part:

The company recently received a Subpoena from the Department of Health and Human Services, Office of Inspector General, in connection with an investigation into possible false or otherwise improper claims submitted for payment under Medicare and Medicaid. The Subpoena requested that the Company produce documents relating primarily to the Company's billing to government-funded healthcare programs for the Company's hereditary cancer testing. The time period covered by the Subpoena is January 1, 2014 through the date of issuance of the Subpoena.

         On this news, Myriad's share price fell $4.01, or 12.14%, to close at $29.01 on March 13, 2018. Plaintiffs claim that the subpoena and investigation and the corresponding drop in Myriad stock prices were the materialization of the risk posed by Myriad's alleged unlawful double billing practice. Thus, between May 7, 2014 and March 12, 2018 (the “Class Period”), Plaintiffs claim that Myriad misled investors into paying artificially inflated prices for Myriad's securities, which they would not have paid had they been aware of Myriad's alleged wrongful conduct.

         DISCUSSION

         Defendants move to dismiss Plaintiffs' Amended Complaint for failure to state a claim. Generally, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). When “faced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must . . . accept all factual allegations in the complaint as true, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007), and “all well-pleaded factual allegations in the . . . complaint are . . . viewed in the light most favorable to the nonmoving party, ” Pirraglia v. Novell, Inc., 339 F.3d 1182, 1187 (10th Cir. 2003). Further, “courts must consider the complaint in its entirety, ” including “documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Tellabs, 551 U.S. at 322.

         Notwithstanding the general pleading standard established by Twombly and Iqbal, the Private Securities Litigation Reform Act of 1995 (“PSLRA”) imposes heightened pleading requirements for § 10(b) plaintiffs. See In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d 1331, 1333 (10th Cir. 2012). The PSLRA's heightened standard “requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter.” Tellabs, 551 U.S. at 313. Consequently, § 10(b) plaintiffs “bear[] a heavy burden at the pleading stage.” In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1201 (10th Cir. 2015) (quoting Weinstein v. McClendon, 757 F.3d 1110, 1112 (10th Cir. 2014)).

         I. Plaintiffs' § 10(b) and SEC Rule 10b-5 Claim

         Under §10(b), it is unlawful to “use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . for the protection of investors.” 15 U.S.C. § 78j(b). In conjunction with § 10(b), SEC Rule 10b-5 prohibits “mak[ing] any untrue statement of a material fact.” 17 C.F.R. § 240.10b-5. Moreover, to state a claim for securities fraud under § 10(b), plaintiffs must adequately allege that:

(1) the defendant made an untrue or misleading statement of material fact, or failed to state a material fact necessary to make statements not misleading; (2) the statement complained of was made in connection with the purchase or sale of securities; (3) the defendant acted with scienter, that is, with intent to defraud or recklessness; (4) the plaintiff relied on the misleading ...

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