U.S. Court of Appeals for the Second Circuit

A Second Circuit panel on Wednesday refused to grant an investor in medical equipment firm Kimberly-Clark Corp. a second chance to argue that the company had knowingly touted a surgical gown that failed quality control testing.

The per curiam decision, from a three-judge panel of the U.S. Court of Appeals for the Second Circuit, upheld a lower court's ruling that an amended complaint against Kimberly-Clark and its spinoff Halyard Health Inc. would have been futile because the plaintiff had not alleged that the companies intended to make allegedly false statements regarding Halyard's MicroCool Breathable High Performance Surgical Gown, which is used for treating patients with highly infectious diseases.

U.S. District Judge Laura Taylor Swain dismissed the case in 2018 for plaintiffs' failure to establish scienter on the part of the companies' executives that could be attributed to either firm. Halyard, which has been terminated from the case, sold its surgical and infection prevention business to Owens & Minor Inc. in 2018, and has rebranded its medical device business as Avanos Medical Inc.

The plaintiff, Ronald Jackson, moved to set aside Swain's judgment and file an amended complaint after a California jury found in a consumer fraud case that Kimberly-Clark and Avanos had intentionally misled consumers about the gown's protective qualities.

Jackson cited testimony from three high-ranking employees, who claimed to have informed Kimberly-Clark CEO Thomas Falk about the gown's testing failures and compliance issues. He argued that both the testimony and the jury's verdict supported a "strong inference" of scienter against the firms' executives.

Swain, however, denied the motion, finding that the new allegations required her to speculate about what Falk was told and whether those warnings had rendered his inaction reckless.

The Second Circuit noted that the proposed amended complaint did not challenge actions by individual defendants, and did not identify any executives whose intent or knowledge could be imputed to the companies. Its reliance on the three employees who testified in California, the panel said, was similarly "misplaced" because the steps they took to raise concerns "belie any inference of fraudulent intent."

"In short, Jackson's proposed amended complaint sets forth allegations that three employees knew of problems with the MicroCool gown, but it provides no connective tissue between those employees and the alleged misstatements," the judges said in a 13-page unsigned opinion.

"We can therefore only guess what role those employees played in crafting or reviewing the challenged statements and whether it would otherwise be fair to charge the corporate defendants with their knowledge," the panel wrote.

Attorneys from both sides did not respond Wednesday to emails seeking comment on the decision.

Jackson was represented by Tamar Weinrib, Jeremy Lieberman, Marc Gross and Patrick Dahlstrom of Pomerantz.

Kimberly-Clark and its executives were represented by Eamon Joyce and Francesca Brody of Sidley Austin in New York and Christopher Lee from the firm's Chicago office. Avanos was represented by John Jordak Jr., Brett Jaffe and Elizabeth Gingold Clark of Alston & Bird in New York.

The case, on appeal to the Second Circuit, was captioned Jackson v. Abernathy.

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