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Ninth Circuit:
Named Plaintiff in Class Action Had No Standing to Appeal
Majority Says That Although the Name of the Man Who Brought the Initial Complaint Remained in the Caption, He Had Been Replaced by the Judge as the Actual Plaintiff; Dissenter Contends Party Status Was Not Lost
By a MetNews Staff Writer
Ninth U.S. Circuit Court of Appeals yesterday held, over a dissent, that a man who brought a putative class action and whose name appeared in the caption as the plaintiff lacked standing to appeal from a dismissal of with prejudice because the District Court had named an entity as the lead plaintiff and the man’s name did not appear in the body of an amended complaint.
Judge Holly A. Thomas authored the majority opinion, in which Senior Judge Carlos T. Bea joined. Judge Mark J. Bennett dissented.
Thomas wrote that the appeal by Mark Habelt—who brought an action against iRhythm Technologies, Inc. and its corporate officers under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), alleging that he and others were duped into investing in the company based on false representations—must be dismissed based on his lack of standing. District Court Judge Edward M. Chen had named the Public Employees’ Retirement System of Mississippi (“PERSM”) as the plaintiff and it did not appeal from the dismissal for failure to state a claim.
Not a Party
Habelt was not a party, Thomas declared.
“[W]hile a non-party may appeal under exceptional circumstances…, there are no extraordinary circumstances here that confer upon Habelt standing to appeal as a non-party,” she wrote. “Dismissal is therefore required.”
The fact that Habelt filed the initial complaint, the judge said, was not enough to confer party status on him. He did not participate in the litigation after PERSM was designated as plaintiff, she noted.
That Habelt’s name remained in the caption was inconsequential because the second amended complaint made no mention of him, and mere membership in the class did not confer standing because the class had not been certified.
Bennett’s Dissent
Bennett maintained that Habelt is a party, and even if he weren’t, his appeal should be decided on the merits.
He wrote:
“Here, four factors show that Habelt is a party. First, Habelt initiated the lawsuit by filing the first complaint….Second, Habelt remained in the caption of the operative Second Amended Complaint (SAC) filed by the Public Employees’ Retirement System of Mississippi (PERSM)….Third, Habelt’s claims are clearly covered by the substantive ‘allegations in the body of the’ SAC….And fourth, Habelt never evinced any intent to remove himself as a party, and the district court never provided notice that it was doing so….
“The majority insists that Habelt’s party status was extinguished when PERSM was appointed lead Plaintiff and filed a series of amended complaints. But nothing in the Private Securities Litigation Reform Act (PSLRA) or otherwise provides that the appointment of a lead plaintiff automatically extinguishes the involvement of other plaintiffs in the suit.”
The dissenter went on to say:
“The majority cites no authority suggesting that a PSLRA litigant who files an original class-action complaint as the named plaintiff and remains in the caption of later complaints is indistinguishable from unnamed members of the putative class simply because that litigant/named plaintiff was not designated the lead plaintiff or named in the body of the operative complaint. Instead, the majority appears to create a new rule that a litigant’s name must be specifically listed in the body of the operative complaint to be considered a party, regardless of the history of the litigation. We have never elevated form over substance to such an extent.”
Exceptional Circumstances
Even if Habelt were not a party, exceptional circumstances are present, conferring on him standing to pursue an appeal, Bennett said, explaining:
“When nothing in the PSLRA provides that appointment of a lead plaintiff extinguishes the involvement of other named plaintiffs (indeed the only one), there is no reason Habelt would think he had to do anything more than he did to remain in the suit. But even if that were untrue, and the PSLRA is a trap for the unwary, Habelt wasn’t unwary—he wasn’t a silent voice who should have assumed his silence equaled non-party status. He was the Plaintiff, who had the right to assume that a plaintiff (i.e., a party) who is never dismissed, remains a party absent something (like a statute, a court order, or a very clear binding case) telling him that some event or series of events stripped that status from him.”
Addressing the merits, he concluded that claims were validly stated as to three alleged misrepresentations and that the dismissal should be reversed as to those claims.
Chen had found on March 31, 2022, that “none of the 18 statements challenged in the SAC are actionable” and that “[t]he theory of fraud underlying the entire complaint fails as a matter of fact and law.”
Bennett said that three alleged misrepresentations did not, contrary to Chen’s view, either come under the PSLRA’s safe harbor provision, which exempts from liability certain “forward-looking statements,” nor constitute mere predictions as to the outcome of administrative proceedings before the Centers for Medicare and Medicaid Services (“CMS”).
iRhythm is a digital healthcare company. Its income is related to rates of compensation set by CMS.
According to the theory put forth by Habelt, then by PERSM, the company painted an unrealistically rosy picture as to the prospects of hiked rates.
In a footnote, Bennett mentioned Chen’s alternative holding that the operative pleading “contains no...allegations that Defendants ‘affirmatively represented’ information about studies, analyses, or other predicate requirements for regulatory approval that had not, in fact, been completed.” Bennett said:
“…I would find that portions of the alleged misrepresentations did exactly that. Thus, I would remand for the district court to reevaluate its scienter holding.”
The case is Habelt v. iRhythm Technologies, Inc. 22-15660.
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