iRhythm Securities Ruling Poised to Shape Who Is Lead Plaintiff

Investors participating in the early stages of securities class actions may need to stay involved if they want to challenge adverse judgments, in the wake of a recent Ninth Circuit decision.

iRhythm Technologies Inc. shareholder, Mark Habelt, filed the proposed class suit but didn’t become lead plaintiff. The divided appeals court panel ruled this month that he was a non-party lacking standing to appeal.

“This situation is quite unusual and interesting,” said David Marcus, a professor at the UCLA School of Law. The issue appears to be one of first impression, he said.

The ruling could affect lead-plaintiff determinations under the Private Securities Litigation Reform Act, Marcus said. And it could provide a road map for investor plaintiffs who aren’t in a lead role but want to maintain their ability to appeal.

The suit stemmed from iRhythm’s statements about its medical device pricing. The heart monitor company allegedly told investors that Medicare reimbursement dollar amounts—and pricing for other customers based on those rates—would stay the same. But the government reduced its rate, allegedly affecting iRhythm’s revenue projections and its stock price.

Habelt’s complaint was the first filed over this issue, according to the appeals court. But the trial court chose a different lead plaintiff to represent the proposed class under the PSLRA, a process that usually looks to the candidate with the largest financial interest.

After the district court dismissed the complaint in 2022, the lead plaintiff didn’t file an appeal, but Habelt did.

Court Splits on Party Status

The US Court of Appeals for the Ninth Circuit said it lacked jurisdiction to hear the appeal because Habelt was without standing. He was no longer a party and there weren’t circumstances that would allow an exception, Judge Holly A. Thomas said for the 2–1 panel.

Thomas pointed to the Public Employees’ Retirement System of Mississippi’s superseding complaint, which didn’t mention Habelt. And an exception doesn’t apply because Habelt didn’t participate sufficiently in the lower court case by, for example, seeking the lead plaintiff position—and because fairness considerations don’t favor an exception, she said.

The dissenting member of the panel pointed to different facts. Habelt filed the first complaint, remained in the caption, had claims that were covered by the retirement system’s complaint, never tried to remove himself as a party, and wasn’t notified of a change, Judge Mark J. Bennett said.

Further, even if Habelt is a nonparty, the circumstances are exceptional enough to allow him to appeal, Bennett said.

Allowing an appeal would be “procedurally odd,” said Ann Lipton, a professor at Tulane University Law School in New Orleans. “The point of the PSLRA lead plaintiff process is to commit these decisions to the lead plaintiff—and the decision the lead plaintiff made was to let it lie,” she said in an email. “Habelt’s appeal, on the class’s behalf, does not fit well within that scheme.”

But the grounds for throwing out the appeal are “awfully technical,” she said. What purpose is served by requiring something like a formal intervention request “from someone who filed a complaint and reasonably never believed his action was dismissed?” she said.

“I thought it was correctly decided,” said Susan Hurd of Alston & Bird LLP in Atlanta, who represents companies defending securities class actions.

“There’s a ‘snooze-you-lose’ practical problem with waiting in the shadows,” Hurd said in an interview. “The plaintiff could bring claims on his own. File your own suit.” But that’s where fairness factors start to matter, she said—for example, if a fresh suit is time-barred.

Marcus, too, said the majority opinion “makes sense if the smaller investor remains able to file and litigate their own case.” But statutes of limitations and particularly the five-year statute of repose in the Securities Act might thwart such an investor, he said in an email.

Adequate Representation

The legal development carries implications for courts choosing a lead plaintiff and for investors who aren’t selected.

The “lead plaintiff should be one who will adequately represent the interests of all class members,” said Marcus, whose research specialties include complex litigation. A willingness to appeal could be part of that, but “meritless appeals should be discouraged,” he said.

“At most, I would imagine, an assessment of whether the lead plaintiff will commit to appealing would have to be something like, ‘Will the lead plaintiff commit to bringing reasonable appeals that serve the interests of the class?’ a capacious standard that probably most applicants for lead plaintiff status could meet,” he said.

Lipton said the decision provides fodder for investors and their attorneys who want to keep options open for appeals. It “invites fights among counsel” to make sure that their clients “are included in complaints just in case there’s an issue for future appeals,” Lipton said.

And investors “are now on notice they can intervene, I suppose, but courts sometimes dismiss without giving much warning before an intervention motion needs to be filed,” she said.

Habelt didn’t oppose the request by the retirement system to be lead plaintiff, and he didn’t seek to intervene in the case. “As a result, he is presumed to have conceded the appropriateness of lead plaintiff’s selection and his willingness to be bound in the existing action by the strategy calls made by that plaintiff and its counsel,” defense practitioner Hurd said.

One lesson from the Ninth Circuit, Hurd said—"likely what any court would do"— is that “you can’t have people hanging back and then jumping in.”

The case is Habelt v. iRhythm Techs., Inc., 2023 BL 361278, 9th Cir., No. 22-15660, 10/11/23.