Opinion
NO. 3:16-cv-02475
08-02-2019
ZWICK PARTNERS, LP and Aparna Rao, individually and on behalf of all others similarly situated, Plaintiffs, v. QUORUM HEALTH CORP., et al., Defendants.
Corey D. Holzer, Marshall Dees, Holzer & Holzer, LLC, Atlanta, GA, J. Alexander Hood, II, Jeremy A. Lieberman, Michael J. Wernke, Pomerantz LLP, New York, NY, James A. Holifield, Jr., Holifield Janich Rachal & Associates, PLLC, Knoxville, TN, Patrick V. Dahlstrom, Pomerantz LLP, Chicago, IL, Paul Kent Bramlett, Robert P. Bramlett, Bramlett Law Offices, Nashville, TN, Marc C. Gorrie, for Plaintiffs. Brandon R. Keel, Jessica Perry Corley, Lisa R. Bugni, King & Spalding LLP, Atlanta, GA, Gary A. Orseck, Jack A. Herman, Lauren M. Cassady, Wendy Liu, William J. Trunk, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, James Auman Haltom, John Thompson Baxter, Nelson, Mullins, Riley & Scarborough, LLP, Jason W. Callen, Lauren Patten, Robert Jackson Walker, Butler Snow LLP, Nashville, TN, for Defendants.
Corey D. Holzer, Marshall Dees, Holzer & Holzer, LLC, Atlanta, GA, J. Alexander Hood, II, Jeremy A. Lieberman, Michael J. Wernke, Pomerantz LLP, New York, NY, James A. Holifield, Jr., Holifield Janich Rachal & Associates, PLLC, Knoxville, TN, Patrick V. Dahlstrom, Pomerantz LLP, Chicago, IL, Paul Kent Bramlett, Robert P. Bramlett, Bramlett Law Offices, Nashville, TN, Marc C. Gorrie, for Plaintiffs.
Brandon R. Keel, Jessica Perry Corley, Lisa R. Bugni, King & Spalding LLP, Atlanta, GA, Gary A. Orseck, Jack A. Herman, Lauren M. Cassady, Wendy Liu, William J. Trunk, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, James Auman Haltom, John Thompson Baxter, Nelson, Mullins, Riley & Scarborough, LLP, Jason W. Callen, Lauren Patten, Robert Jackson Walker, Butler Snow LLP, Nashville, TN, for Defendants.
MEMORANDUM OPINION AND ORDER
WAVERLY D. CRENSHAW, JR., CHIEF UNITED STATES DISTRICT JUDGE
Pending before the Court is Plaintiffs' Motion for Leave to Amend the Second Amended Complaint. (Doc. No. 217.) Defendants have responded in opposition, and Plaintiffs have replied. (See Doc. Nos. 226, 232.) For the reasons stated herein, Plaintiffs' motion will be denied.
I. Relevant Procedural and Factual Background
The following procedural and factual background is largely drawn from the Court's prior combined order granting Defendants' Partial Motions to Dismiss and granting Plaintiffs' Motion for Class Certification. (See Doc. No. 209.)
A. Procedural Background
On September 9, 2016, Rao filed an initial complaint against Quorum Health Corp. ("Quorum"), Thomas D. Miller, and Michael J. Culotta (two Quorum executives) (collectively the "Quorum Defendants"), alleging that they violated the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). (Doc. No. 1 at 11-18.) Rao brought his claims on behalf of himself and a putative class who purchased or otherwise acquired Quorum securities pursuant to Quorum's "spinoff" from Community Health Systems, Inc. ("CHSI") on April 29, 2016 or on the open market between May 2, 2016 and August 10, 2016. (Id. at 2.) As explained in more detail in section B infra, the Quorum Defendants' alleged securities violations centered on certain "false and misleading" statements about the financial status of both CHSI and Quorum prior to, and right after, Quorum's "spinoff" from CHSI, resulting in an artificially inflated price for Quorum stock. (Id. at 2-3.)
Approximately seven months later, Plaintiffs (now including Zwick) filed a Second Amended Complaint against Defendants (including CHSI and the individual defendants who worked for CHSI), alleging that they acquired Quorum stock at artificially inflated prices between May 2, 2016, and August 10, 2016. (Doc. No. 92 at 3-4). As with the original complaint, Plaintiffs alleged that the prices of Quorum stock between May 2, 2016 and August 10, 2016 were artificially inflated because Defendants made false and misleading statements about the financial status of both CHSI and Quorum prior to, and right after, the spinoff. (Id. at 4-10.) Specifically, Plaintiffs alleged that the goodwill and long-lived assets of Quorum were impaired on the date of the spin-off, but Defendants failed to test for or otherwise disclose those impairments. (Id. ) Plaintiffs alleged that, by not recording those impairments on a timely basis, Defendants materially overstated the value of Quorum's assets, and, by extension, Quorum's stock price. (Id. ) Plaintiffs asserted that the truth was finally revealed on August 10, 2016, when Quorum publicly announced that it recognized these financial impairments and negatively adjusted its financial outlook, causing a severe decline in Quorum's stock price. (Id. ) Plaintiffs claimed that Defendants' false and misleading statements violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10(b)-5 promulgated thereunder. (Id. )
In response to Plaintiffs' Second Amended Complaint, the Quorum Defendants and CHSI Defendants (CHSI, Wayne T. Smith, and Larry Cash) filed separate Motions to Dismiss. (See Doc. Nos. 113, 116.) The Court denied Defendants' respective Motions to Dismiss. (Doc. No. 144.) The Court found that Plaintiffs had sufficiently alleged that the CHSI Defendants, either alone or in concert with Quorum, made the ultimate determination of the content of, and whether and how to communicate, the allegedly false representations. (Id. ) Further, as to the actual statements, the Court determined that Defendants' assurances of financial health (through their failures to test for and take additional impairments) did not "fairly align with the information in [Defendants'] possession at the time," and those allegations stated a claim for which relief could be granted. (Id. ) Finally, the Court noted that Plaintiffs sufficiently alleged scienter and reliance on Defendants' failures to test for and take impairments. (Id. at 20-21.)
The Court then entered the Initial Case Management Order setting the deadline for amended pleadings as September 14, 2018. (Doc. No. 155.) One month later, on July 13, 2018, Plaintiffs filed their Motion to Certify Class. (Doc. No. 161.) Defendants filed a response in opposition on August 31, 2018. (Doc. No. 167.) On September 14, 2018, Plaintiffs filed a Third Amended Complaint. (Doc. No. 169.) In response to Plaintiffs' Third Amended Complaint, Quorum Defendants filed a Partial Motion to Dismiss (Doc. No. 174), CHSI Defendants filed a separate Partial Motion to Dismiss (Doc. No. 176), and Defendants filed a joint supplemental response to Plaintiffs' Motion to Certify Class (Doc. No. 179).
Thereafter, the Court entered a Memorandum Opinion and Order granting Defendants' Partial Motions to Dismiss and granting Plaintiffs' Motion for Class Certification. (See Doc. No. 209.) In brief, the Court first found that the alleged misrepresentations identified by Plaintiffs were non-actionable and entitled to safe-harbor under the Private Securities Litigation Reform Act of 1995 ("PSLRA") because the statements were: (1) forward-looking; and (2) accompanied by meaningful cautionary language. (Id. at 15.) Second, the Court found that class certification was appropriate because: (1) Plaintiffs' action met the requirements of Federal Rule of Civil Procedure 23(a) ; (2) the fraud-on-the-market presumption was satisfied, establishing reliance sufficient to meet the Rule 23(b)(3) predominance requirement; and (3) a class action was superior to other methods of handling the litigation. (Id. at 16-34.) Nearly two months after the Court issued its Order, Plaintiffs filed the instant Motion for Leave to Amend. (Doc. No. 217.)
B. Factual Background
Plaintiffs' "Third Amended Complaint" (which they seek to amend through the instant motion) largely reiterated the allegations in their prior complaints. Plaintiffs maintained that their suit was a federal securities class action on behalf of a class consisting of all persons other than Defendants who purchased or otherwise acquired Quorum securities between May 2, 2016 and August 10, 2016 (the "Class Period") and sought to recover damages caused by Defendants' violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. (Doc. No. 169 at 4.)
CHSI is the nation's largest operator of general acute-care hospitals. (Id. at 5.) Quorum is an independent operator and manager of general acute-care hospitals and outpatient services that was "spun off" from CHSI in April 2016. (Id. ) Plaintiffs alleged that CHSI spun off Quorum to generate cash to pay down excess debt. (Id. ) Plaintiffs alleged that, to generate these funds via the Quorum spin-off, Defendants needed to convince investors to purchase $400 million of bonds issued by Quorum and convince lenders to loan Quorum $800 million concurrent with the spin-off. (Id. ) Therefore, it was important for Defendants to make Quorum appear as profitable as possible. (Id. )
Plaintiffs alleged that Quorum, as a company, consisted of 38 rural community hospitals in 16 states and Quorum Health Resources, which provided management and consulting services. (Id. ) Plaintiffs maintained that the future prospects for these hospitals were "bleak" because they were performing even worse than CHSI's average hospitals and faced unique competition from larger hospitals that CHSI's other, more urban hospitals did not. (Id. ) Plaintiffs also alleged that Defendants concealed the truth about the high operating costs that Quorum was set to incur as an independent company, especially when CHSI had negotiated to provide some of these ancillary services to Quorum at inflated prices. (Id. )
Plaintiffs maintained that, prior to the spin-off, Defendants told investors that the costs associated with being a stand-alone company would be only $8 million higher annually than when Quorum was a part of CHSI. (Id. at 6.) Further, Defendants allegedly stated that the costs associated with these ancillary services provided by CHSI to Quorum, which would be provided to the newly independent Quorum through Transition Services Agreements ("TSAs") with CHSI, would only be $5 million higher annually than amounts previously allocated to Quorum by CHSI. (Id. ) Moreover, pre-spinoff, Defendants identified that Quorum's annual adjusted EBITDA for the year ending December 31, 2016 was a range from $265 million to $275 million. (Id. at 6-7.) Plaintiffs alleged that these statements were false and misleading because Defendants knew that the increased costs of Quorum operating as a stand-alone company would be much higher than stated and the hospitals making up Quorum were ill-positioned, all of which would translate into a lower EBITDA range. (Id. at 7.)
EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, is a commonly reported measure of a company's pre-tax earnings calculated on a cash basis. Murray Energy Holdings Co. v. Mergermarket USA, Inc., Case No. 2:15-cv-2844, 2016 WL 3365422, at *1 n.2 (S.D. Ohio Jun. 17, 2016).
Plaintiffs alleged that, as a result of these negative financials, Quorum's goodwill and long-lived assets were impaired as of the date of the spin-off on April 29, 2016, but Defendants concealed that impairment from investors. (Id. ) In preparation for the spin-off, a Form 10 was filed with the Securities and Exchange Commission ("SEC"), stating that Quorum's assets included $876 million in property and equipment and $514.7 million in goodwill, with $508.4 million of that value attributed to its hospital operations reporting unit. (Id. ) Plaintiffs alleged that these values were materially false because they did not reflect proper impairment. (Id. at 7-8.) Plaintiffs alleged that certain factors, known to Defendants, demonstrated significant impairment to Quorum's goodwill and long-lived assets, including: (1) the substantial increase in costs associated with Quorum operating as a stand-alone company; (2) a sustained decrease in share price and market capitalization for Quorum and CHSI; (3) a decline in overall financial performance for CHSI and Quorum; (4) the poor position and worse-expected future performance of Quorum's hospitals; (5) a deterioration in the overall hospital management industry; and (6) increased competition from larger hospitals. (Id. at 8.)
Plaintiffs alleged that Defendants belatedly tested for goodwill and long-lived assets impairment on June 20, 2016, under the auspices of the significant stock price decline and corresponding decline in market capitalization. (Id. at 9.) However, Plaintiffs alleged that the impairment indicators requiring an impairment of goodwill and long-lived assets existed prior to Quorum's spin-off and the filing of its Q1 results, not after. (Id. ) Plaintiffs also alleged that Quorum and CHSI experienced declining financial performance prior to the spinoff, which should have triggered goodwill and long-lived asset impairment. (Id. ) Specifically, in Q3 2015, Q4 2015, and Q1 2016, CHSI and Quorum (as a subsidiary) experienced significant declines in year-over-year results, drastically missed analyst expectations and management's own projections, and had substantial declines in adjusted EBITDA. (Id. at 9-10.) Plaintiffs maintained these factors should have caused Defendant to test for goodwill and long-lived assets impairment before the spinoff, but Defendants did not. (Id. at 10.) Testing would have required Defendants to "write down" $205 million of Quorum's $508.4 million in goodwill and record approximately a $45.4 million impairment to long-lived assets. (Id. at 10-11.)
Plaintiffs reiterated that the reason for Defendants' false and misleading statements was for CHSI to dump its worst performing hospitals, improve its own performance, and generate cash to pay down its debt. (Id. at 11.) Because of Defendants' allegedly false and misleading statements, Quorum's stock price was inflated throughout the Class Period. (Id. ) Plaintiffs alleged that the proverbial bubble burst on August 10, 2016, when Quorum issued a press release and filed a quarterly report on Form 10-Q with the SEC announcing the company's financial and operating results for the three months that ended June 20, 2016. (Id. ) In its filings, Quorum revealed that: (1) it incurred $28 million in annualized stand-alone costs ($20 million higher than previously disclosed to investors); (2) its 38 hospitals had significantly underperformed market expectations, triggering a $45 million decline to Quorum's adjusted EBITDA in 2016; (3) it had a quarterly earnings miss of 54%; (4) it was forced to revise downward its guidance for annual adjusted EBITDA for 2016 to a range of $185 million to $200 million, a 30.5% decrease from the previously issued guidance; and (5) it incurred substantial net losses and operating losses. (Id. at 11-13.) Plaintiffs alleged that, when these filings were made public, Quorum's share price fell almost 50% to close at $5.03 on August 11, 2016. (Id. at 13.)
Shortly after the plunge, Plaintiffs alleged that individual defendants Michael Culotta and Thomas Miller held a conference call, and, during the call, stated that there were indicators of impairment pre-spin-off, but there was a "lack of focus" on the indicators. (Id. ) Plaintiffs maintained that CHSI's Q2 2016 financial results confirmed that the impairments should have been considered prior to the spinoff, as CHSI also took an impairment charge of approximately $1.6 billion related to goodwill. (Id. at 14.) Plaintiffs asserted that the coordination of these impairments by Quorum and CHSI in the quarter immediately following the spin-off belies any claim by Defendants that the indicators of impairment did not manifest until after the spin-off. (Id. ) Accordingly, Plaintiffs, on behalf of themselves and the proposed class, alleged that Defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10(b)(5) promulgated thereunder. (Id. at 71-76.) As previously stated, the Court entered an opinion granting the Defendants' Partial Motion(s) to Dismiss and Plaintiffs' Motion to Certify Class. (See Doc. No. 209.)
II. Plaintiffs' Motion Amend (Doc. No. 161)
A. Briefing
Class representative Zwick Partners LP now seeks to amend the Third Amended Complaint. (Doc. No. 217.) Plaintiffs assert that this "is the quintessential case where justice requires leave to amend the pleading." (Doc. No. 215 at 8.) Plaintiffs argue that the basis for these amendments is a "treasure trove" of newly discovered evidence produced by Defendants in discovery. (Id. ) In short, Plaintiffs seek to amend the Third Amended Complaint in three ways: (1) to revive the guidance claims that the Court previously dismissed in its order; (2) to assert a new claim based on Defendants' alleged falsification of Quorum's Q1 2016 financial statements; and (3) to add two new individual defendants. (See id. at 11-33.)
In 174 new proposed paragraphs, Plaintiffs claim that certain newly discovered evidence shows not only that Defendants purposely inflated Quorum's financial projections associated with the spin-off but also that Defendants' falsified Quorum's Q1 2016 financial results in order to better justify the financial projections and Quorum's position pre-spinoff. (Id. at 11.) Plaintiffs contend that the writing was on the wall for Quorum long before the spin-off. (Id. at 12.) They claim that documents uncovered in discovery show that CHSI curtailed capital investment in the hospitals that would eventually make up Quorum, stopped physician recruitment at those hospitals, and generally provided minimal focus on the transition efforts necessary to successfully set Quorum up as a stand-alone entity. (Id. )
Plaintiffs maintain that Defendants' own internal financial projections revealed that Quorum's deteriorating market position would not be sufficient to secure the $1.2 billion in investment Defendants sought. (Id. ) Accordingly, Plaintiffs allege that Defendants' solution was to falsify and inflate Quorum's financial projections, including inflating revenue growth and margins while also reducing the additional expenses Quorum was set to incur as a stand-alone company. (Id. ) Plaintiffs assert that discovery documents show that individual CHSI defendant W. Larry Cash instructed Lee Fleck, who was responsible for Quorum's financial model, to make "borderline absurd" changes to the model. (Id. at 13.) The net result of these changes was to increase Quorum's projected cash flow, margins, and EBITDA and to decrease the company's projected costs and leverage, thus increasing the size of the debt that could be sold on the market. (Id. at 13-14.) Plaintiffs allege that Defendants steadily inflated Quorum's financial projections in order to demonstrate the company's ability to pay back its debt, and this inflation included: (1) increasing net revenue growth by approximately 20%; and (2) increasing EBITDA growth by 27%. (Id. at 14-15.) Plaintiffs maintain that even the initial ranges for revenue and EBITDA, pre-manipulation, were inflated and had no reasonable basis. (Id. ) In all, once the manipulations were complete, the financial model projected Quorum's 2016 net revenue as $2.271 billion, adjusted EBITDA as $271 million, and totals costs associated with being a stand-alone company as $8 million. (Id. )
Plaintiffs argue that as Q1 2016 closed—just prior to Quorum's April 29, 2016 spin-off date—Defendants knew that the inflated projections making up Quorum's model would never materialize. (Id. at 16.) Therefore, Defendants manipulated Quorum's Q1 2016 financial results by decreasing expenses related to medical malpractice, workers compensation, and health insurance expenses, resulting in an increase to adjusted EBITDA of $7.1 million (14%). (Id. ) Plaintiffs argue that the Defendants' knowing manipulations of both Quorum's projections and Q1 2016 financial results make certain statements Defendants made in connection with the spin-off actionable as misrepresentations. (Id. at 16-17.) Specifically, Plaintiffs note that, given the Defendants' knowledge and manipulations, the following statements are actionable misrepresentations:
On March 22, 29, April 14, and May 11, Defendants stated that they expected Quorums 2016 annual net operating revenues to be between $2.2 billion and $2.3 billion and Adjusted EBITDA to be between $265 million and $275 million.
On June 23, 2016, Culotta told investors that he was "much more comfortable today than we did on May 2" concerning the previously issued guidance.
On March 22, 29, April 1, and 14, 2016, Defendants stated that Quorum's increased costs, as a stand-alone company, would be only $8.0 million (with $5 million from the Transition Services Agreements)
On March 22, 29, April 1, 14, and May 11, Defendants asserted, concerning their projections of net operating revenues, Adjusted EBITDA and costs as a stand-alone company that "we believe
that these forward-looking statements are based on reasonable assumptions..."
On May 3 and May 11, 2016, Defendants represented that for Q1 2016 Quorum's Adjusted EBITDA was $56 million, its income from operations was $21 million, it experienced a net loss of $5 million, its salaries and benefits expenses were $256 million and other operating expenses were $164 million.
On May 11, 2016, Culotta and Miller stated that Quorum's Q1 2016 financial statements were prepared in accordance with GAAP; and provided certifications pursuant to the Sarbanes-Oxley Act of 2002 stating that the financial information contained in the Q1 2016 10-Q was accurate and disclosed any material changes to the Company's internal control over financial reporting;
On May 11, 2016, Miller stated that "We are pleased that our financial results for the first quarter were consistent with our expectations for the full year..."
On March 29, April 14 and June 23, 2016 Defendants held out Barrow Regional Medical Center as one of "QHC acquisitions" that was successful.
(Id. ) Given this newly uncovered evidence, Plaintiffs argue leave to amend should be granted. (Id. at 17.) Plaintiffs contend that this new information cures the deficiencies the Court previously identified in its prior order, and, because there has been no delay or bad faith and Defendants cannot demonstrate undue prejudice, good cause exists to permit them to amend. (Id. )
Defendants respond in opposition. (Doc. No. 226.) First, Defendants argue that the Court should deny Plaintiffs proposed amendment to revive the financial projection misrepresentations because such an amendment would be futile. (Id. at 19.) Defendants argue that the amendment would be futile because the Court, as a matter of law, already denied these very claims. (Id. ) Further, Defendants assert that, even if the proposed amendment was not futile, leave to amend should still be denied because the request is untimely and prejudicial. (Id. at 24.) Defendants argue that Plaintiffs proposed amendment is an attempt to revive the previously-dismissed claims and amounts to using the Court as a "sounding board," with the prior dismissal order a "template to reframe their case." (Id. ) Further, Defendants note that the majority of the "newly discovered evidence" that Plaintiffs rely on for the basis of their proposed amendments was in Plaintiffs' possession in 2018, and, at the very least, was produced in early 2019, long before the Court's partial dismissal order. (Id. at 25.) Also, Defendants note that, at present, an enormous amount of discovery has already been undertaken, and expert discovery is set to commence shortly. (Id. at 25-26.) Thus, Plaintiffs' proposed amendments, if allowed, would severely disrupt the trial schedule and necessitate, at the very least, a brand-new round of Rule 12(b)(6) briefing. (Id. at 26.)
Additionally, Defendants contend that, to the extent Plaintiffs seek to add a new theory of liability concerning the alleged falsification of Quorum's Q1 2016 financial results, such an amendment should not be allowed because Plaintiffs delayed in pursuing this claim. (Id. at 26-27.) Defendants explain that the documents underlying this claim were provided to Plaintiffs in November 2018, which negates a finding of good cause for Plaintiffs waiting until now to pursue the claim. (Id. at 27.) Further, Defendants would be prejudiced by the amendment because factual discovery has largely been completed and allowing this new claim would result in new depositions and discovery requests that would require serious delays in the case. (Id. at 29.) Also, adding the new claim would result in the Court having to revisit the issue of class certification. (Id. at 29-30.) In the alternative, Defendants also claim that Plaintiffs' new claim is futile because: (1) they have not identified a false or misleading statement; (2) they fail to plead loss causation in relation to the theory; and (3) they fail to allege facts giving rise to a strong inference of scienter. (Id. at 30-33.)
Finally, Defendants argue that Plaintiffs have not demonstrated that the amendment seeking to add two individual defendants (Hammons and Moody) is justified. (Id. at 33.) In brief, Defendants assert that Plaintiffs cannot demonstrate good cause for waiting until the close of factual discovery to name these individuals as defendants, as they have been known as key individuals since the inception of the case. (Id. at 33-34.) Also, the amendment would be prejudicial because all factual discovery has already taken place without these individuals being identified as defendants. (Id. at 34-35.) Lastly, Defendants argue that any claims against these defendants would be futile because: (1) the claims are time-barred; and (2) as to Moody, she is not alleged to have made, or controlled, any of the challenged statements. (Id. at 37-40.)
B. Legal Standard—Motion to Amend
Courts are to freely give parties leave to amend their pleadings "when justice so requires." Fed. R. Civ. P. 15(a)(2). In deciding whether to grant a motion to amend, courts should consider undue delay in filing, lack of notice to the opposing party, bad faith by the moving party, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and futility of amendment. Brumbalough v. Camelot Care Ctrs., Inc., 427 F.3d 996, 1001 (6th Cir. 2005). "In the absence of any apparent or declared reason—such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.—the leave sought should, as the rules require, be ‘freely given.’ " Pittman v. Experian Info. Sols., Inc., 901 F.3d 619, 640 (6th Cir. 2018) (quoting Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962) ). "[T]he grant or denial of an opportunity to amend is within the discretion of the District Court," however "outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion," but "abuse of that discretion and inconsistent with the spirit of the Federal Rules." Id. (quoting Foman, 371 U.S. at 182, 83 S.Ct. 227.)
"Although Rule 15(a) indicates that leave to amend shall be freely granted, a party must act with due diligence if it intends to take advantage of the Rule's liberality." United States v. Midwest Suspension & Brake, 49 F.3d 1197, 1202 (6th Cir. 1995) (citation omitted). The Court of Appeals "has required ‘at least some significant showing of prejudice’ to deny a motion to amend based solely upon delay." Prater v. Ohio Educ. Ass'n, 505 F.3d 437, 445 (6th Cir. 2007) (quotation omitted). "The longer the period of an unexplained delay, the less will be required of the nonmoving party in terms of a showing of prejudice." Phelps v. McClellan, 30 F.3d 658, 662 (6th Cir. 1994).
However, in order to amend a pleading after an established deadline, the case management order must first be amended under Rule 16(b). See Leary v. Daeschner, 349 F.3d 888, 909 (6th Cir. 2003) (citing Sosa v. Airprint Sys., Inc., 133 F.3d 1417, 1419 (11th Cir. 1998) ). Rule 16 was designed to ensure that "at some point both the parties and the pleadings will be fixed." Fed. R. Civ. P. 16 advisory committee's note to 1983 amendment. "[A] court choosing to modify the schedule upon a showing of good cause, may do so only ‘if it cannot reasonably be met despite the diligence of the party seeking the extension.’ " Leary, 349 F.3d at 906 (quoting Fed. R. Civ. P. 16(b)(4) advisory committee's note to 1983 amendment). "Another important consideration for a district court deciding whether Rule 16's ‘good cause’ standard is met is whether the opposing party will suffer prejudice by virtue of the amendment." Id. (citing Inge v. Rock Fin. Corp., 281 F.3d 613, 625 (6th Cir. 2002) ).
C. Analysis
At the outset, the Court notes that there is an inherent tension between the purpose of the PSLRA and repeated amendments of a complaint by Plaintiffs. See Miller v. Champion Enters. Inc., 346 F.3d 660, 672 (6th Cir. 2003) ("[I]t is correct to interpret the PSLRA as restricting the ability of plaintiffs to amend their complaint, and thus as limiting the scope of Rule 15(a) of the Federal Rules of Civil Procedure ... the purpose of the PSLRA would be frustrated if district courts were required to allow repeated amendments to complaints filed under the PSLRA."). The "purpose" of the PSLRA is to screen out lawsuits having no factual basis, to prevent harassing strike suits, and to encourage attorneys to use greater care in drafting their complaints. See In re Champion Enters., Inc. Secs. Litig., 145 F. Supp. 2d 871, 873–74 (E.D. Mich. 2001). This tension is further exacerbated where, as here, there is a further required finding of good cause under Rule 16 necessary to amend the case management order. See Inge, 281 F.3d at 625. Thus, Plaintiffs face significant procedural hurdles to show not only that good cause exists to yet again amend their Complaint past the time set forth to do so, but also to demonstrate leave to amend under Rule 15 will not frustrate the purposes of the PSLRA. The Court does not believe that Plaintiffs have made such a showing.
As to Plaintiffs' proposed amendment to revive their PSLRA claims regarding the allegedly false guidance claims, such a request essentially seeks reconsideration of the Court's prior opinion. In fact, Plaintiffs' argument in support (i.e., alleged newly discovered evidence demonstrates that these claims should be allowed to go forward) fits squarely within the standards set out by Federal Rule Civil Procedure 59. Regardless, viewing this amendment and Plaintiffs' other proposed amendments (seeking to add claims based on Quorum's Q1 2016 results and add two individual defendants) under Rules 15 and 16(b), the Court determines that Plaintiffs' lack of diligence and the significant prejudice that allowing the proposed amendments would inflict on the Defendants weighs against allowing amendment to the case management order (under Rule 16(b) ) or leave to amend (under Rule 15 ). See Leary, 349 F.3d at 909.
Plaintiffs acknowledge that discovery began in earnest in November 2018 and extended into January 2019. (Doc. No. 232 at 2.) The Court notes that the discovery materials were complicated and voluminous, but Plaintiffs had no reason to expect otherwise. From November 2018 (the date on which discovery production began) to March 29, 2019 (the date on which the Court ruled on Plaintiffs' Motion to Certify Class and Defendants' Partial Motions to Dismiss), Plaintiffs had ample time to alert the Court as to the new information revealed in discovery that could impact the Court's ruling. Yet, Plaintiffs chose to stand on their original arguments and only alert the Court to this "trove" of alleged newly discovered evidence after the Court took significant efforts to provide a detailed opinion based on the evidence before it. (See Doc. No. 209.) This strikes the Court as less than diligent. Plaintiffs then waited almost another two months before filing their pending motion and Proposed Third Amended Complaint. (Doc. No. 216.) Yet they stand mute as to why there was such a delay.
Moreover, the Court notes that Defendants would be significantly prejudiced if amendment was allowed. Factual discovery has largely been completed, opening expert reports are scheduled to be exchanged in September, dispositive motions are due at the end of this year, and trial is scheduled to begin July 7, 2020. (See Doc. No. 207, 225.) There is no question that granting Plaintiffs' proposed amendments will result in new class certification and dismissal motions from the parties, which, in turn, will require extension of dispositive motion deadlines and the trial date. This case has been pending since September 2016. (See Doc. No. 1.) At some point, Plaintiffs' claims must be solidified, and the parties must move on from the preliminary stages of litigation and begin to focus on discovery, dispositive motions, and trial. Allowing amendment and extending these deadlines even further would undoubtedly result in significant prejudice Defendants, as they would be required to: (1) engage in new class certification and Rule 12(b)(6) arguments; and (2) continue defending this suit well past the previously established deadlines. Moreover, allowing Plaintiffs to revise and amend their claims with the benefit of the Court's prior motion to dismiss Opinion strikes the Court as particularly prejudicial to Defendants. See PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 699 (6th Cir. 2004) (quoting Begala v. PNC Bank, Ohio, N.A., 214 F.3d 776, 784 (6th Cir. 2000) ) ("Plaintiffs [are] not entitled to an advisory opinion from the Court informing them of the deficiencies of the complaint and then an opportunity to cure those deficiencies.").
At bottom, Plaintiffs lack of diligence in informing the Court of its newly discovered evidence on the guidance and Q1 2016 results claims and the addition of these individual defendants, as well as the significant prejudice such amendments would foist on Defendants, suggests that: (1) good cause does not exist under Rule 16(b) ; and (2) leave to amend should not be allowed under Rule 15. Moreover, the purpose of the PSLRA would be frustrated, if not already in this case, by allowing Plaintiffs to pursue these amendments, which would result in the Plaintiffs' fourth complaint. Therefore, the Court concludes that good cause does not exist under Rule 16(b) to allow amendment of the case management order, and Plaintiffs have not demonstrated that they should be allowed leave to amend under Rule 15.
Of course, nothing in this opinion should be construed to limit Plaintiffs' ability to use the evidence generated in discovery in their pursuit of proving Defendants' liability either through dispositive motions or at trial.
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III. Conclusion
For the foregoing reasons, Plaintiffs' Motion Leave to Amend the Second Amended Complaint (Doc. No. 217) is DENIED .