Insurance and Government and Technology

Court files grow thick against Guidant: Shareholders, patients, employees air their grievances

July 18, 2005

"Attention, patients with Guidant heart defibrillators," the announcer's voice booms as the television commercial begins.

Nearly 50,000 of the devices were recalled June 17, and people using one may be at risk, according to the ad, which has run in Tennessee, Kentucky and central Indiana so far. It ends by urging viewers to call the Becker Law Office in Louisville for a free consultation.

That ad could spawn at least 10 wrongful-death lawsuits, according to Gregory Bubalo, a Louisville-based lawyer working with Becker on the campaign.

Bubalo has yet to file a claim against Guidant Corp., but he won't be the first when he does. The Indianapolis-based medical-device maker has been doused with a steady stream of litigation since its defibrillator problems came to light this spring.

Some of those claims might wind up hurting the company and affecting its $25 billion sale to Johnson & Johnson, analysts say. But they also see many reasons Guidant can wade through its latest legal morass, just as it did when a California subsidiary two years ago admitted covering up thousands of serious medical problems.

Guidant faces individual and classaction lawsuits from patients alleging an array of wrongdoing. Several complaints filed in U.S. District Court charge Guidant committed negligence and fraud by concealing defibrillator problems.

Another class-action case, filed by a shareholder, accuses the company and its executives of making false and misleading statements to prop up the stock price. It notes that several executives sold shares in the first half of this year, before the price fell below $70.

The stack of cases also includes a classaction suit filed by an employee who accuses Guidant and the company's board of directors of breaching their fiduciary duties to participants in the company's 401(k) and employee stock ownership plans.

Guidant spokesman Steve Tragash did not return a call seeking comment.

Analyst Mark Landy thinks many plaintiffs adopt a "shoot first and investigate later" mentality when they file such cases.

"And I think that, in many instances, the assumption that there's grounds for a classaction lawsuit gets way ahead of itself," said Landy, who works for Philadelphiabased Susquehanna International Group.

Alex Arrow, an analyst for New Yorkbased Lazard Capital Markets, said medical technology companies generally face two kinds of class action complaints: patient or investor.

Investor cases, he said, can arise "when any stock declines for almost any reason and rarely result in a material risk to the company."

Patient class actions can be another matter. They have the potential to be more costly, Arrow said, noting that it was too early to speculate on how the Guidant cases will fare.

"While we cannot calculate the amount of any potential award, we can factor them in as a risk factor, which may affect Johnson & Johnson's decision calculus," he said.

J&J last December agreed to buy Guidant. Analysts have said terms of that still-pending deal may change because of Guidant's recent string of bad news.

Companies normally carry insurance to protect against litigation, said Jan David Wald, an analyst for St. Louis-based A.G. Edwards & Sons. That dulls any impact unless the lawsuits fall outside insurance coverage or involve a particularly large number of people.

"Typically, these things turn out to be not all that problematic," he said.

Wald said he's seen no sign of financial impact on Guidant from lawsuits filed after the California subsidiary, Endovascular Technologies Inc., pleaded guilty in 2003 to 10 felony counts, including making false statements to government regulators.

Guidant shut down Endovascular and agreed to pay a $92.4 million fine.

The company still faces about 40 lawsuits related to Endovascular, with more likely to be filed, according to Guidant's first-quarter filing with the U.S. Securities and Exchange Commission.
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