Colman v. Theranos, Inc.

ROBERT COLMAN, et al., Plaintiffs, v. THERANOS, INC., et al., Defendants.

Case No. 16-cv-06822-NC

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

May 31, 2018

ORDER DENYING PLAINTIFFS' MOTION FOR CLASS CERTIFICATION

Re: ECF 177

This lawsuit accuses life sciences company Theranos of defrauding investors by touting revolutionary blood testing technology that never existed. Plaintiffs Robert Colman and Hilary Taubman-Dye seek to certify under Federal Rule of Civil Procedure 23(b)(3) a class of "indirect investors"—those who purchased interests in entities that bought Theranos stock—for their claims of fraud, misrepresentation, and market manipulation.

Five of Plaintiffs' six claims have a reliance element, an individualized issue that defeats predominance under Rule 23(b)(3) and makes class treatment unwarranted. While common issues predominate the remaining claim for market manipulation under California law, the totality of weaknesses in the proposed class make individual actions superior, on balance, to a class action. The Court therefore DENIES Plaintiffs' motion for class certification.

I. Background

A. Parties

Defendant Theranos, Inc. is a private life sciences company founded in 2003 by defendant Elizabeth Holmes. Holmes is Theranos's Chief Executive Officer and Chairwoman. Defendant Ramesh "Sunny" Balwani is the former President, Chief Operating Officer, and board member of Theranos.

Plaintiffs and proposed class representatives Robert Colman and Hilary Taubman-Dye purchased securities in third-party investment funds, purportedly for the express purpose of having the third-party funds use their investments to acquire Theranos securities.

B. Factual Background

This lawsuit centers on Theranos's grand claim that it developed revolutionary technology allowing for comprehensive, low-cost, and accurate blood tests using just a few drops of blood pricked painlessly from a patient's finger. After allegedly developing its technology and raising venture capital for the first ten years of its existence, Theranos began its public-facing operations in 2013. Theranos posted its first press release to its website on July 29, 2013, announcing as board members then-U.S. Marine General James "Mad Dog" Mattis and former Wells Fargo chairman and CEO Richard Kovacevich. See Kathrein Decl. Ex. Z (ECF 177-6). These names joined an already-illustrious board that included the likes of former U.S. Secretary of State Henry Kissinger, former U.S. Senator Samuel Nunn, and former U.S. Secretary of Defense William Perry, among others. See id.

On September 8, 2013, the Wall Street Journal published a purportedly revelatory account of Theranos's technology and Holmes's vision for the company. See Kathrein Decl. Ex. AA (ECF 177-6). The article proclaims that Holmes's "inventions, which she is discussing in detail here for the first time, could upend the industry of laboratory testing and might change the way we detect and treat disease." Id. The day after the article was published, Theranos announced a partnership with Walgreens, revealing plans to roll out Theranos's pinprick testing at "Wellness Centers" inside Walgreens stores nationwide, andclaiming "consumers can now complete any clinician-directed lab test with as little as a few drops of blood and results available in a matter of hours." Kathrein Decl. Ex. BB (ECF 177-6).

From 2013 to 2015, Theranos issued numerous press releases and Holmes gave dozens of interviews. These public statements heralded Theranos's technology and approach to preventative medicine. E.g., Kathrein Decl. Ex. W (ECF 217-24) (Holmes stating in a March 13, 2015, interview with George Shultz that Theranos has "shifted the model" by lowering costs for full-service laboratory testing and "redeveloped the lab infrastructure to make it possible to run any combination of lab tests from tiny droplets of blood"). The interviews and press releases consistently emphasized the technology's low cost, accuracy, comprehensiveness, and the small amount of blood needed to do it all. See, e.g., Kathrein Decl. Exs. L, M, W, Y, AA, BB (ECF 217-13, 217-14, 217-24, 217-26, 177-6); Perla Decl. Exs. 13-17 (ECF 191-13-191-17); see also Perla Decl. Exs. 13, 14 (ECF 191-13, 191-14) (announcing additional prestigious board members).¹ Holmes made similar claims in direct correspondence with potential investors, sometimes directing them to the public media coverage Theranos was receiving. See, e.g., Kathrein Decl. Exs. I, J, M (ECF 217-10, 217-11, 217-14).

While Theranos was garnering this favorable public attention, investors bought stock. Theranos had already conducted three series of stock sales (Series A Preferred, Series B Preferred, and Series C Preferred), and from January 2013 to October 2016, Theranos sold Series C-1 and C-2 Preferred Stock to over 30 individuals and investment entities. See White Decl. ¶¶ 5-6 (ECF 216-1). The Series C-1 and C-2 stock investments ranged in value from approximately $50,000 to approximately $125 million. See id. ¶ 6. One of these investors was Lucas Venture Group XI, LLC, which purchased 471,333 shares of Series C-1 stock for just over $7 million. Id.; see Kathrein Decl. Ex. X (ECF 217-25 at 2). During this 2013 to 2016 period, investors also purchased Theranos stock from other investors. For example, Celadon Technology Fund VII, LLC purchased 410,000 shares of Series C Preferred Stock from another investor on December 15, 2015. See Kathrein Decl. Ex. X (ECF 217-25 at 12).

Most relevant to this case, Plaintiffs and others indirectly invested in Theranos by purchasing ownership interests in funds that owned or planned to purchase Theranos stock. Among these indirect investors, Colman claims to have spent $500,000 to purchase a membership interest in Lucas Venture Group XI, LLC, for the purpose of funding Lucas Venture Group XI's subsequent purchase of 471,334 shares of Theranos's Series C-1 Preferred Stock. Colman Decl. ¶ 1 (ECF 217-35). Similarly, Taubman-Dye asserts she purchased an ownership interest in Celadon Technology Fund VII, LLC for the purpose of funding Celadon's corresponding purchase of 410,000 shares of Theranos Series C-1 Preferred Stock. Taubman-Dye Decl. ¶ 1 (ECF 217-36). Taubman-Dye invested just over $100,000. Id.

According to Plaintiffs' evidence, other indirect investors contributed anywhere from $15,000 to $17,350,200 to finance purchases of Theranos shares. Kathrein Decl. Exs. CC-FF (ECF 177-7). These include, for example, investments in:

• Peer Ventures Group IV, LP, with investment amounts ranging from $15,000 to $17,350,200, id. Ex. CC;

• Lucas Venture Group XI, LLC, with investment amounts ranging from $15,000 to $1 million, id. Ex. DD;

• Lucas Venture Group IV, LP, with investment amounts ranging from $250,000 to $10 million, id. Ex. EE;

• Black Diamond Ventures XII-B, LLC, with investment amounts ranging from $100,000 to $1 million, id. Ex. FF.

Plaintiffs identify a complete list of the funds in which indirect investors invested (excluding family trusts or family investment vehicles):

 Fund Close PurchaseDate # of Shares Price Investment Series Total Investment  Hall Black Diamond II, LLC  12/31/2013  325,000  $15  C-1  $4,875,000  Black Diamond Ventures XII-B, LLC  12/31/2013  356,660  $15  C-1  $5,349,900  Peer Ventures Group IV, L.P.  1/14/2014  1,169,995  $15  C-1  $17,549,925  2/5/2014  779,411  $17  C-2  $13,249,987  Lucas Ventures Group IV, L.P.  1/14/2014  33,334  $15  C-1  $500,010  Lucas Ventures Group XI, LLC  1/14/2014  471,333  $15  C-1  $7,069,995  Lucas Venture Group XV, LLC  1/6/2016  33,331  $18  Class A Common  $599,958  Lucas Ventures Group XVIII,LLC  7/14/2016  55,520  $14  C  $777,280  9/24/2016  14,439  $10  Class A Common  $144,390  11/2/2016  24,000  $7  C  $168,000  Mendenhall TF Partners  1/14/2014  87,500  $15  C-1  $1,312,500  Holbrook Meadow LLC  1/14/2014  30,005  $15  Preferred B  $450,075  Bendel Fund  12/29/2014  249,998  $17  C-2  $4,250,000  Celadon Technology Fund VII, LLC  12/15/2015  410,000  $19  Preferred C  $7,790,000  OPA Holdings SPV, LP (by purchase ofCassin Family Partners, LP)  12/31/2015  359,474  $15  Series B/C  $5,354,550 TOTAL     $69,441,570 

Kathrein Decl. Ex. A (ECF 217-2).

On October 15, 2015, the Wall Street Journal published an article challenging Theranos's validity by reporting Theranos was not actually using its revolutionary technology for the tests it offered. See Am. Compl. ¶ 51. Theranos vehemently defended itself against this and subsequent similar accusations, but significant public fallout—and litigation—ensued. Prominently, Walgreens sued Theranos for breach of contract. Walgreens Co. v. Theranos, Inc., No. 16-cv-1040-UNA (D. Del. Nov. 8, 2016). And an investor group that purchased nearly $100 million of Series C stock, Partner Investments, LP, sued Theranos for securities fraud. Partner Investments, L.P. et al. v. Theranos, Inc., et al., No. 12816-VCL (Del. Ch. Mar. 23, 2017). More recently, the U.S. Securities and Exchange Commission brought civil fraud claims against Theranos, Holmes, and Balwani. Sec. and Exch. Comm'n v. Holmes, No. 18-cv-01602-EJD (N.D. Cal. Mar. 14, 2018)(action against Theranos and Holmes); Sec. and Exch. Comm'n v. Balwani, No. 18-cv-01603-BLF (N.D. Cal. Mar. 14, 2018) (action against Balwani). Holmes and Theranos settled the charges against them without admitting or denying wrongdoing. See ECF 9, 10 in Case No. 18-cv-01602-EJD.

C. Procedural History

Plaintiffs filed their original class action complaint on November 28, 2016. See ECF 1. Defendants moved to dismiss the complaint, which the Court granted in part and denied in part by dismissing Plaintiffs' securities fraud claim under California Corporations Code §§ 25401 and 25501 and denying the motion on the remaining claims. See ECF 63. Defendants then moved to limit Plaintiffs' putative class, which the Court granted by excluding from any class definition the set of direct investors listed in Appendix A to that...