United States v. Holmes - No. 5:18-cr-00258-EJD-1, 2021 U.S. Dist. LEXIS 98060 (N.D. Cal. May 21, 2021)

Rule:

Even if evidence is relevant, it must be excluded if its probative value is substantially outweighed by a danger of unfair prejudice, confusing the issues, or misleading the jury. Evidence is unfairly prejudicial when it has an undue tendency to suggest decision on an improper basis, commonly, though not necessarily, an emotional one. Unfair prejudice can result from evidence that makes it more likely for a juror 'to defer to findings and determinations relevant to credibility made by an authoritative, professional factfinder rather than determine those issues for themselves.

Facts:

Holmes founded Theranos, a health care and life sciences company, in 2003. Holmes served as the company's Chief Executive Officer.Balwani was a board member, President, and Chief Operating Officer of Theranos. Theranos' stated mission was to revolutionize medical laboratory testing through its allegedly innovative methods of drawing and testing blood and diagnosing patients. During the company's first ten years, its scientists worked toward developing proprietary technology that could run clinical tests using only tiny drops of blood. Theranos also worked toward developing a method for drawing a few drops of capillary blood from a patient's finger using a small lancet. The blood was then stored in a "nanotainer." Theranos sought to develop a second device called the Theranos Sample Processing Unit ("the TSPU," "Edison," or "miniLab") that could quickly and accurately analyze blood samples stored in the nanotainer. The Government contends that the promises of these devices were never realized; the devices "consistently" produced inaccurate and unreliable results. Despite this, Defendants began a publicity campaign to promote the company and its devices In September 2013, Theranos offered blood testing at Walgreens' "Wellness Centers" in California and Arizona. The Government argues that Defendants conspired to commit and committed fraud through two fraudulent schemes: one to defraud investors and another to defraud doctors and patients. For the former, defendants allegedly made materially false and misleading statements and failed to disclose material facts to investors. Based on the false statements, investors invested money in Theranos. For the latter,  Defendants advertised and marketed Theranos technology to doctors and patients, and falsely claimed that the tests were accurate and reliable. Despite knowing that Theranos' technology suffered from recurring accuracy and reliability problems, Defendants allegedly advertised the tests as accurate and reliable. Defendants also allegedly provided patients with reports that contained or were likely to contain: (1) inaccurate and unreliable results; (2) improperly adjusted reference ranges defining a normal or healthy result for a given test; (3) improperly removed "critical" results, i.e., results suggesting a patient needed medical attention; and (4) results generated from improperly validated assays, further decreasing the reliability of those tests. Holmes then filed multiple motions in limine to exclude certain pieces of evidence offered by the Government.

Issue:

Should Holmes’ motion in limine to exclude evidence of CMS survey findings and sanctions be granted?

Answer:

No.

Conclusion:

FACTUAL BACKGROUND: CMS "audits laboratories to identify non-compliance with [the mandates of the Clinical Laboratory Improvement Amendments of 1988 ('CLIA')]." Because Theranos "perform[ed] clinical diagnostic testing on human samples," its laboratories were required to be in compliance with CLIA. In September and November 2015, CMS conducted a recertification and complaint survey of Theranos' Newark lab. According to Holmes, usually a state agency carries out recertification surveys, but in this case CMS decided to carry out the survey "due to the media attention Theranos was receiving at the time and due to complaints CMS had received about Theranos." On January 25, 2016, CMS issued a letter and a Form 2567 summarizing the findings of the survey. These documents stated that "Theranos' California laboratory was in violation of various CLIA requirements," and "warned Theranos that if it did not remediate these deficiencies within 10 days, CMS would impose sanctions." CMS did impose sanctions on Theranos' Newark laboratory. Shortly thereafter, CMS surveyed Theranos' Arizona laboratory, cited it for various CLIA violations and imposed sanctions. Theranos appealed both sets of sanctions, but Theranos and CMS made settlements before the adjudication of these appeals. Holmes moves to exclude "evidence relating to the findings of surveys of Theranos' clinical laboratories conducted by [CMS] in 2015 and 2016, including survey findings and sanctions imposed by CMS."

Re: relevance — The evidence of CMS survey findings and sanctions meets Rule 401's low bar for relevancy. Although the purpose of the CMS survey was not to assess either the accuracy or reliability of Theranos technology, the CMS survey findings and sanctions indicate violations of federal regulations that themselves are meant to ensure, among other things, the accuracy and reliability of certain kinds of clinical laboratory work. The evidence therefore appears to be relevant to questions about Holmes's state of mind, intent, and knowledge regarding the alleged misrepresentations about the accuracy and reliability of Theranos' blood tests.

Re: unfair prejudice — The Court does not see that the evidence in question raises the same kind of unfair prejudice concerns indicated in Wolf, White Eagle, and Christo, which Holmes cited. In each of these cases except Riddle, the courts found Rule 403 violations when parties relied on evidence of violations of civil regulations to prove similar criminal violations. Here, the Government is attempting to introduce evidence of violations of civil regulations for the purposes of showing Holmes's state of mind, intent, and knowledge, not for the purpose of arguing that Holmes is guilty of committing a criminal violation parallel to the civil violations indicated by the CMS survey findings and sanctions. Riddle is inapposite because in that case the court found that the evidence in question was largely irrelevant to the charges brought. Having weighed the risk of unfair prejudice against the probative value of the evidence, the Court at this time finds that the evidence is more probative than prejudicial.

Re: inadmissible hearsay — Holmes raised the similar argument in her motion in limine to exclude FDA inspection evidence, which the Court reaffirmed for this motion. There, the Court ruled that the FDA inspection was a "matter observed while under a legal duty to report." FDA's inspection report consists largely of observations and, in that sense, is comparable to reports prepared by non-law enforcement civil government employees such as city building inspectors, medical examiners, and prison case managers. There are portions of the report that go beyond mere observations and include some level of analysis by FDA inspectors; however, those portions comprise only a minor portion of the report.