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Class Actions: Theranos’ Ascent and Eventual Descent

*The views expressed in this article do not represent the views of Santa Clara University.

Credit: Stuart Isett | Fortune Global Forum

Thanks to the Hulu series, The Dropout, (and the ABC News podcast by the same name) many have already been introduced to the Elizabeth Holmes story: Stanford student fascinated with microfluidics drops out of school to found a healthcare start-up that runs tests with a mere finger-prick, as opposed to the many vials that are typically required.

The Rise of Theranos

Holmes founded Theranos Inc. (“Theranos”) in 2003 and immediately took Silicon Valley by storm, having been touted by Inc. as the “Next Steve Jobs.” Theranos built its technology with the goal “to revolutionize health care.” According to a case study from the McCombs School of Business at the University of Texas at Austin, the company promised to be able to perform over 240 tests from just a drop of blood from the finger for a much more cost-efficient solution to traditional methods of drawing blood or further lab work. Id.

During the rise of Theranos, Holmes grew the company to an evaluation of over $9 billion. She gathered some of the most successful investors and venture capitalists ranging from media tycoon, Rupert Murdoch, who invested $5.8 million in the Series A funding round, to Oracle founder, Larry Ellison, as well as Redwood City investment firm, ATA Ventures, who led both Series B and C funding rounds with a combined $37.6 million. In addition, both Partner Fund Management and Fortress Investment Group spearheaded a $100 million debt financing in December of 2017.

Once Theranos amassed even more value, the company partnered with some of the leaders in the healthcare field, including Walgreens, intending to reach consumers. The partnership with Walgreens began in 2010, when the company agreed to implement Theranos testing centers in over forty of their locations in Arizona, California, and Pennsylvania.

Theranos also had a star-studded cast for its Board of Directors which included two former U.S. Secretaries of State, Henry Kissinger and George Schultz, former U.S. Secretary of Defense, William Foege, and former CEO of Wells Fargo, Richard Kovacevich, among others. Theranos and its tests were slated for success.

The Downfall of Theranos

The only problem? The tests didn’t work. With a failure rate of 51.3%, Theranos’ blood-diagnostics system was incapable of producing reliable results, and thus, not ready for consumer use.

The series, starring Amanda Seyfried, illustrates Holmes’s journey and the “no-fail” mantra that led to her downfall. As her pool of investors grew, so did the pressure to deliver a market-ready product, where the science didn’t support it. Rather than come clean about Theranos’ many problems, the Silicon Valley innovator concealed the product’s ineffectiveness and pushed forward with patient testing.

Since October 2016, Theranos has seen multiple lawsuits filed against them. Partner Fund Management brought a suit to recover $96.1 million of their original investment in Theranos which was then settled out of court. This was followed by mass layoffs of 340 employees.

Similarly, Walgreens, another large partner of the biotech giant, attempted to recover $140 million in a breach of contract action in November 2016. Again, this settled out of court and was followed by another 155 layoffs. Theranos was subsequently forced to close its last blood testing lab as a result of the majority of its employees being laid off in a 3-month period.

The Centers for Medicare and Medicaid Services (CMS) came to a settlement agreement with Theranos to have the company pay $30,000 and barred them from owning or operating clinical labs for two years in 2017.

In January of this year, Holmes was convicted and found guilty of three counts of wire fraud and one count of conspiracy to defraud investors. She, however, was acquitted of all charges related to the faulty Theranos tests. While Holmes and her ex-COO and President, Ramesh “Sunny” Balwani have been indicted and subsequently convicted for multiple counts of fraud, there is still the unsettled matter of damages on behalf of the patients that relied on the defective technology, the Edison machine, for information about their health.

In re Arizona Theranos, Inc.

The plaintiffs of this suit are customers who purchased Theranos blood tests between 2013 and 2016. The complaint is centered around the claim that because the technology was still in the testing phase, Walgreens “committed battery on customers whose blood was drawn by Walgreens employees with fingerpricks because those customers consented under false pretenses.” Among the damages sought are monetary relief (to include refunds for the tests) punitive damages for fraud, and damages for dignitary harm.

The Court has certified the Class, which includes all purchasers of Theranos testing services between November 2013 and June 2016, whether the services were purchased out-of-pocket, through insurance, or any other source. The Court has also certified three subclasses: an Arizona subclass for all purchasers of Theranos testing services in Arizona between November 2013 and June 2016; a California subclass for all purchasers in California between September 2013 and June 2016; and a Walgreens Edison subclass that covers everyone who was subjected to tiny blood draws known as “fingerpricks” by a Walgreens employee between November 2013 and March 2015.

According to Arizona’s attorney general, around 175,000 consumers purchased tests from Theranos through Walgreens for around $60 a test. For a fraction of the price, Theranos offered patients the chance to do blood work efficiently, at their local drug store, alleging the proprietary technology was capable of running over 240 tests - from calcium to cancer.

Over the years, scores of patients received inaccurate and alarming results, at times used to make crucial treatment decisions. In 2015, a patient in Arizona tested positive for HIV using a Theranos blood test, only to discover months later that she did not have the virus. Another woman used the Edison machine to test her hemoglobin levels, which indicated that she was diabetic. Her provider urged her to take another test with a third-party machine, revealing healthy hemoglobin levels. Had her doctor treated her with the medication typically prescribed for diabetic patients, the woman would have been at risk for side effects such as muscle pain, vomiting, and respiratory illness. Because most of these patient records are missing, this is likely just the tip of the iceberg.

This lawsuit, however, does not include damages incurred for emotional distress, and compensation for plaintiffs who decided to “opt out” by proceeding with their separate claims against Defendants Theranos, Inc., Walgreens, Elizabeth Holmes, and/or Ramesh Balwani. The deadline for opting out was set for September 12, 2022, meaning that anyone who did not opt out is now bound by the outcome of this lawsuit.

In April 2017, the Arizona Attorney General alleged that Theranos was misrepresenting its product and service in advertising. As part of a third settlement agreement, Theranos later agreed to pay $4.65 million to its former Arizona customers. The Court has yet to schedule the trial, but it is expected to occur sometime in 2023 and will take place in the United States District Courthouse located in Phoenix, Arizona.


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