Column: First-to-file shareholder rebuffed in bid to appeal dismissal of iRhythm class action

iRhythm Holdings

19/10/2023 21:35

(The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Alison Frankel
       Oct 19 (Reuters) - Having your name in the caption of a
securities class action doesn’t mean you have standing to appeal
if the case is dismissed, according to a decision last week from
the 9th U.S. Circuit Court of Appeals.
    In 2021, Mark Habelt was the first shareholder to file a
securities fraud class action against digital healthcare company
iRhythm Technologies  IRTC.O , accusing the company in federal
court in San Francisco of misleading investors with overly
optimistic statements about U.S. regulatory proceedings to set a
reimbursement rate for iRhythm’s premier heart monitoring
product. iRhythm’s share price dropped sharply when the
reimbursement rate was ultimately slashed from $311 to $115.
    Habelt did not ask to be appointed to lead the class action
when institutional investors emerged in the case. But even after
a Mississippi pension fund was designated lead plaintiff and
filed amended complaints on behalf of the class, Habelt’s name
remained on the pleadings.
    The March 2022 opinion tossing the prospective class action
-- for failing to identify an actionable misstatement and
failing to allege fraudulent intent -- is, in fact, captioned
Habelt v. iRhythm Technologies, Inc.
    The Mississippi pension fund opted not to appeal the
dismissal. Habelt stepped up. His lawyers from Block & Leviton
teamed up with the Mississippi fund’s lead counsel from
Pomerantz to ask the 9th Circuit to revive the case.
    iRhythm and its counsel from Wilson Sonsini Goodrich &
Rosati made it clear from the outset of the appeal that the
company would make an issue of Habelt’s standing. Wilson Sonsini
filed a motion to dismiss the appeal before the case was even
assigned to a merits panel of judges, arguing that the
Mississippi fund was the only named plaintiff in the amended
complaint at the heart of the case.
    “That Habelt’s name remains on the caption as an
administrative matter is not enough,” iRhythm’s motion argued.
“Habelt is not mentioned at all within the body of the
complaint, nor did he litigate the dispute below.” Habelt was
not even bound by the judgment against the Mississippi fund,
iRhythm said, because the shareholder class had not been
certified before the fund’s case was tossed. So Habelt,
according to the company, had no constitutional right to appeal.
    Habelt’s lawyers retorted that he was obviously a party to
the case: He initiated the litigation on behalf of the
shareholder class and never withdrew his appearance or took any
other action to suggest he had no interest in prosecuting the
case that bore his name.
    The 9th Circuit motions panel denied iRhythm’s dismissal
motion in December but said the company could renew its standing
arguments before the merits panel.
    The company, which did not respond to my query, did just
that in its main brief to the 9th Circuit. Habelt, in turn,
argued in his reply brief that he was always a party in the case
by virtue of filing the complaint that kicked off the
litigation.
    “He was never ‘unnamed’ or ‘absent,’” Habelt’s lawyers said.
And there’s no precedent, they argued, to support iRhythm’s
contention that Habelt should have sought to intervene in the
case in order to appeal its dismissal. Habelt, his lawyers said,
“reasonably believed that he was already a party, and no
authority requires him to move to intervene in his own case.”
    The 9th Circuit held otherwise in a split Oct. 11 decision.
Judges Carlos Bea and Holly Thomas said in Thomas’s majority
opinion that Habelt ceased to be a party when the Mississippi
fund was named lead plaintiff and filed an amended complaint
that made no mention of the investor who initiated the
litigation.
    The majority acknowledged that case law permits non-parties
to file appeals in some extraordinary circumstances but said
Habelt didn’t meet that test because he was not an active
participant in the shareholder case after kicking it off.
    Like iRhythm, the majority said that the proper way for
non-parties like Habelt to preserve their right to appeal is to
move to intervene in the litigation.
    “Habelt filed no motion to intervene,” Thomas wrote, so he
“lacks standing to appeal.”
    Judge Mark Bennett of the 9th Circuit disputed the
majority’s reasoning in a dissenting opinion that insisted
Habelt had standing to appeal both as a party and as a
prospective class member whose interests were affected by the
dismissal of the case.
    Habelt never showed any intention of walking away from the
case that bore his name throughout the litigation, Bennett said.
It’s true that he didn’t seek to be appointed lead plaintiff, he
said. But the law governing private securities litigation
doesn’t specify that the appointment of a lead plaintiff
extinguishes the interest of other named shareholders.
    Habelt “wasn't a silent voice who should have assumed his
silence equaled non-party status,” Bennett said. He “had the
right to assume that a plaintiff (i.e., a party) who is never
dismissed remains a party" unless someone tells him otherwise.
    Even if Habelt wasn’t officially a party, the dissent said,
he had a right to appeal a judgment that will impair his ability
to bring a new lawsuit against iRhythm because of the preclusive
effect of the class action dismissal and time limitations for
securities claims. In similar circumstances, Bennett said, the
2nd, 3rd, 4th and 5th Circuits have all allowed non-parties to
appeal when they have participated in the trial court and have a
stake in the outcome of the case.
    Bennett also said he would have revived the class action
based on the merits of Habelt’s appeal, which makes the majority
holding on Habelt's standing all the more consequential.
    You’re going to be hearing more about Bennett’s dissent:
Habelt lead counsel Omar Jafri told me by email that his side
intends to seek en banc reconsideration of the majority’s
decision.
    “The majority’s holding cannot be reconciled with Supreme
Court precedent or the law in other circuits,” Jafri said.
Habelt’s lawyers have until Nov. 8 to file the en banc petition.

 (Reporting By Alison Frankel)
 ((alison.frankel@thomsonreuters.com; 646-223-6491 (o)
917-848-7493 (c);))