Investors can’t sue Abbott Labs for ‘deception’ in baby formula contamination
(Legal Newsline) — A federal judge has shut down, for now, a class action lawsuit attempting to make Abbott Laboratories pay investors back for stock losses the company suffered amid a bacterial outbreak at a Michigan plant that led to widespread baby formula shortages and government investigations in the years immediately following the COVID-19 pandemic.
On July 24, U.S. District Judge Steven Seeger dismissed the lawsuit lodged against Illinois-based Abbott Laboratories over claims the company’s handling of the bacterial contamination at its Similac infant formula plant in Sturgis, Mich., amounted to an attempt to control reputational and economic damage, rather than to be forthright with the public and its shareholders over the alleged scope of the problem.
In the ruling, Seeger noted the incident was “bad for business” and likely harmed the company’s reputation, while costing Abbott at least $1 billion.
But he said the plaintiffs in this case aren’t suing about the company’s handling of the problem, or even about the contamination. Rather, he said, they are pressing claims that the company’s handling of the situation amounted to securities fraud, essentially to mislead both government investigators and investors about the true nature of the problems to entice them to keep their money invested in Abbott.
But neither “mismanagement of a manufacturing plant” nor “concealing information” from the federal Food and Drug Administration (FDA) amounts to “securities fraud,” the judge said.
“At best, the complaint alleges that Abbott mishandled the Sturgis facility and the FDA’s inspection,” Seeger said. “Mismanaging a plant that makes infant formula is bad. But it’s not securities fraud.”
The lawsuit had been lodged in 2022, one of a flurry of class actions seeking to somehow make Abbott Labs pay for the bacterial contamination that allegedly sickened some infants, including leading allegedly to two deaths, triggering government investigations, product recalls, a shut down of the Sturgis, Michigan, plant, and a shortage of baby formula product throughout the U.S.
The lawsuits all centered on the fallout from the detection of Cronobacter bacteria at the sprawling Sturgis plant. There, Abbott produces about 40% of its Similac-brand infant formula, which, in turn, accounts for a significant share of the national supply of the crucial product.
As news broke of problems at the plant and the resulting recalls, trial lawyers slammed Abbott with lawsuits.
The lawsuits took various forms. Some sued the company over the contamination itself.
Others claimed the company failed to properly warn the public about the potential harm from their products, asserting, if customers had known, they wouldn’t have purchased the baby formula.
Others claimed the company should pay for not doing enough to head off the contamination, leading to price spikes for baby formula.
But all of the lawsuits in some way alleged a common count: That Abbott knew of the problems at the plant and should have done more to fix them and inform someone of the risk.
However, the lawsuits have yet to produce any judgments or settlements forcing Abbottt to pay, as the company continues to defend itself in court and judges have expressed skepticism in several of the cases or have ordered their dismissal.
In the investors’ action, plaintiffs particularly took aim at Abbott’s response to the bacterial contamination and the product recalls.
According to court documents, Abbott allegedly omitted information from company financial statements and did not fully inform investors and the public about the extent of the problems, both at the Sturgis plant and the resulting impact on the supply of Similac baby formula.
According to court documents, the plaintiffs alleged the company essentially slow-walked the response, leading to a gradual, but pronounced stock price drop from about $122 a share to, ultimately, $113 a share, and a loss of at least $1 billion.
The investors claimed Abbott’s leadership engaged in an attempt to deceive in a bid to prevent a big hit and minimize damage.
After years of proceedings that involved hundreds of pages of filings and exhibits, Seeger said the plaintiffs have not yet succeeded in backing up their claims the company intended to deceive either the government or investors about the formula plant problems.
The company may have known about potential problems at the plant and may have known those problems could trigger government investigations or other regulatory actions, including product recall.
But the judge said that is not enough to establish Abbott intended to deceive anyone. Legally, such intent to deceive is known as “scienter.”
Likewise, the judge said actual government investigations aren’t proof of intent to deceive, either.
“Harming infants is bad for business,” Seeger wrote. “Not all press is good press. Shining a spotlight on a company’s regulatory shortcomings – and the negative impact on babies – is bad press.
“Even so, none of the allegations create an inference of scienter, let alone a strong one. Knowledge of potential problems at the Sturgis facility isn’t the same thing as knowledge of the falsity of statements about the Sturgis facility.
“To link it up, the complaint would need to establish that the Individual Defendants said or did something deceptive, when they knew the truth. And Plaintiffs never get there.”
Plaintiffs are represented in the action by attorneys from the firms of Bernstein Litowitz Berger & Grossman, of Chicago and New York; and Motley Rice, of Mt. Pleasant, South Carolina, and New York.
Abbott has been represented by attorneys with the firm of Kirkland & Ellis, of Chicago; Washington, D.C.; and Salt Lake City.
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