By Jonathan Stempel and Toni Clarke
(Reuters) - A U.S. federal appeals court on Wednesday revived a lawsuit accusing Medtronic Plc of defrauding shareholders by covering up negative side effects from its Infuse bone growth product.
The 8th U.S. Circuit Court of Appeals in St. Paul, Minnesota said a lower court judge erred in finding that the plaintiff shareholders sued too late, waiting more than two years after learning information that could suggest an intent to defraud.
Medtronic and its lawyers did not immediately respond on Wednesday to requests for comment.
The plaintiffs include the West Virginia Pipe Trades Health and Welfare Fund, the Employees' Retirement System of the State of Hawaii and Germany's Union Asset Management Holding AG. Their lawyers did not immediately respond to requests for comment.
Medtronic developed Infuse as an alternative to bone grafts.
While U.S. regulators approved its use in 2002 for some spinal fusion surgeries, doctors soon began prescribing it widely for unapproved uses, which eventually comprised 85 percent of sales.
But on June 28, 2011, an issue of The Spine Journal said clinical studies by doctors with financial ties to Medtronic understated Infuse's risks.
Then in October 2012, a report from the U.S. Senate Finance Committee found that Medtronic was "heavily involved" in shaping the content of such studies.
The shareholders said this deception inflated Medtronic's stock price, and caused them to suffer hundreds of millions of dollars of losses as the truth came out.
Writing for the appeals court, Circuit Judge Raymond Gruender said shareholders might have had reason to be suspicious before The Spine Journal issue was published.
But he said reasonable shareholders could have inferred merely that problems with the studies resulted not from fraud, but from "the nature of corporate-sponsored research."
Gruender also rejected Medtronic's claim that the shareholders failed to properly allege that they relied on the company's alleged misconduct.
"A company cannot instruct individuals to take a certain action, pay to induce them to do it, and then claim any causal connection is too remote when they follow through," he wrote.
"In this way," the judge continued, "Medtronic's alleged manipulative conduct directly caused the biased clinical trial results that the market relied upon."
Medtronic is now based in Ireland, but has offices in Minneapolis.
In March 2012, the company agreed to pay $85 million to settle a separate shareholder lawsuit accusing it of concealing the extent of Infuse's off-label use. (http://www.reuters.com/article/us-medtronic-settlement-idUSBRE82T1A920120330)
The case is West Virginia Pipe Trades Health & Welfare Fund et al v. Medtronic Inc et al, 8th U.S. Circuit Court of Appeals, No. 15-3468.
(Reporting by Jonathan Stempel in New York; Editing by Marguerita Choy)