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Williams v. Globus Medical, Inc.

United States Court of Appeals, Third Circuit

August 23, 2017

AUSTIN J. WILLIAMS; MARK SILVERSTEIN, Individually and on behalf of all others similarly situated

          ARGUED: April 5, 2017

         On Appeal from the United States District Court for the Eastern District of Pennsylvania D.C. Civil Action No. 2-15-cv-05386 District Judge: Honorable: Wendy Beetlestone

          Jacob A. Goldberg [ARGUED] Keith R. Lorenze Rosen Law Firm Robert V. Prongay Jason L. Krajcer Charles H. Linehan Glancy Prongay & Murray Counsel for Appellant

          Cheryl W. Foung Wilson Sonsini Goodrich & Rosati Barry M. Kaplan [ARGUED] Gregory L. Watts Wilson Sonsini Goodrich & Rosati Marc J. Sonnenfeld Timothy D. Katsiff Morgan Lewis & Bockius Counsel for Appellees

          Before: CHAGARES, SCIRICA, and FISHER, Circuit Judges


          SCIRICA, Circuit Judge.

         In the spring of 2014, Globus Medical, Inc., a medical device company, terminated its relationship with one of its product distributors. Several months later, in August 2014, Globus executives alerted shareholders that sales growth had slowed, attributed this decline in part to the decision to terminate its contract with the distributor, and revised Globus's revenue guidance downward for fiscal year 2014. The price of Globus shares fell by approximately 18% the following day.

         Globus shareholders contend the company and its executives violated the Securities Exchange Act and defrauded investors by failing to disclose the company's decision to terminate the distributor contract and by issuing revenue projections that failed to account for this decision. The trial court dismissed the shareholders' suit, and the shareholders appealed. We will affirm.

         I. BACKGROUND

         A. Facts

         Globus is a publicly traded medical device company that designs, develops, and sells musculoskeletal implants, particularly for individuals with spine disorders. Globus relies on both in-house sales representatives and independent distributors to sell its products to surgeons and surgical staff nationwide. Vortex Spine, LLC, was one of Globus's independent distributors, serving as the exclusive distributor for Globus's spine implant products in certain portions of Louisiana and Mississippi. Vortex signed its initial Exclusive Distributorship Agreement with Globus in 2004, and the parties renewed the agreement in 2008 and 2010. The 2010 agreement was scheduled to expire on December 31, 2013.

         Globus's statements and actions in the wake of the December 31, 2013, expiration of the agreement have become the focus of this case. Plaintiffs allege that Globus decided to terminate its partnership with Vortex around the time of the expiration of the agreement. This was in line with the company's strategy to increase its reliance on in-house sales representatives in the hopes of controlling commission costs and strengthening its control over its sales team. Nonetheless, Globus extended the existing distributorship agreement for four months-through April 2014-and allegedly told Vortex the companies would use this period to negotiate terms for a new distributorship agreement. Plaintiffs contend Globus instead used this period to establish a new in-house sales position to cover the geographic territory being handled by Vortex.

          On February 26, 2014-in the midst of the period covered by the extension of the agreement with Vortex- Globus Chief Financial Officer Richard A. Baron projected "sales in the range of $480 million to $486 million, earnings per fully diluted share of $0.90 to $0.92 per share" for fiscal year 2014 during an earnings conference call. A51. A few weeks later, on March 14, 2014, Globus filed its 2013 10-K with the Securities & Exchange Commission. In a section of the 10-K titled "Risks Related to Our Business and Our Industry, " Globus cautioned, "If we are unable to maintain and expand our network of direct sales representatives and independent distributors, we may not be able to generate anticipated sales." A46. The risk disclosure added:

We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. If any of our direct sales representatives were to leave us, or if any of our independent distributors were to cease to do business with us, our sales could be adversely affected. Some of our independent distributors account for a significant portion of our sales volume, and if any such independent distributor were to cease to distribute our products, our sales could be adversely affected. In such a situation, we may need to seek alternative independent distributors or increase our reliance on our direct sales representatives, which may not prevent our sales from being adversely affected.


         Globus met with Vortex's founder and manager on April 18, 2014. Globus leadership notified him that Globus had designated a new in-house sales representative to handle distribution for the geographic territory covered by Vortex. Globus proposed a new agreement with Vortex which would require Vortex to turn over its customers to Globus in exchange for a royalty payment and would require Vortex's sales representatives to become Globus employees. Vortex rejected the proposed terms.

         Approximately ten days later, on another earnings conference call, CFO Baron again projected Globus would achieve $480 to $486 million in sales, with $0.90 to $0.92 earnings per fully diluted share for fiscal year 2014- estimates identical to those he projected in February 2014. The next day, April 30, 2014, Globus filed with the SEC its Quarterly Report on Form 10-Q for the period ended March 31, 2014. In a section titled "Quantitative and Qualitative Disclosure About Market Risk, " Globus stated, "We have evaluated the information required under this item that was disclosed in our 2013 Annual Report on Form 10-K and there have been no significant changes to this information." A49- 50.

         Months later, on August 5, 2014, Globus issued a press release announcing its results for the second fiscal quarter of 2014 and revising its revenue guidance. According to the release, Globus "now expect[ed] full year net sales to be in the range of $460 to $465 million" but added that its earnings per share guidance "remained unchanged." A53. In an earnings conference call held the same day, Globus Chief Operating Officer David M. Demski explained that "domestic sales growth in the quarter was below our historical standards" attributing this development, in part, to the fact that "early in the quarter we made the decision not to renew our existing contract with a significant U.S. distributor, negatively impacting our sales." A53. Demski observed that the company "understood the risks to our short-term results." A53. Globus shares fell $4.05 per share (17.9%) in the wake of the revised revenue guidance to close at $18.51 per share on August 6, 2014. Ultimately, at the fiscal year's end, Globus announced it had achieved $474.4 million in sales, with earnings per share at $0.97-meaning sales for the fiscal year ultimately finished just 1.17% below the initial projection made in February 2014 and earnings per share exceeded the projection by 5.4%.

         B. Procedural History

         Plaintiff Mark Silverstein filed this action in the United States District Court for the Eastern District of Pennsylvania on September 29, 2015, on behalf of "all those who purchased or otherwise acquired Globus securities traded on the New York Stock Exchange [between February 26, 2014 and August 5, 2014] and were damaged upon the revelation of the alleged corrective disclosure." A54. On January 14, 2015, the District Court granted the motion of ...

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