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Fujisawa Pharmaceutical Co., Ltd. v. Kapoor
Citations: 16 F. Supp. 2d 941; 1998 U.S. Dist. LEXIS 12804; 1998 WL 513088Docket: 92 C 5508
Court: District Court, N.D. Illinois; August 12, 1998; Federal District Court
Fujisawa Pharmaceutical Co. Ltd. and Fujisawa USA, Inc. (FUSA) filed a lawsuit against John Kapoor under the Racketeer Influenced and Corrupt Organizations Act and various state law claims. Kapoor sought summary judgment on all claims, which was partially granted and partially denied. Fujisawa, a Japanese pharmaceutical company, and FUSA, its Delaware subsidiary, alleged that between 1984 and 1989, Kapoor's company, Lyphomed, submitted false applications and information to the FDA regarding thirty-five abbreviated new drug applications (ANDAs). These applications allegedly misrepresented data, failed to disclose adverse test results, and involved destroyed test results, violating FDA regulations. Fujisawa claimed Kapoor was aware of these violations. In 1983, Lyphomed's initial public offering did not disclose ongoing ANDA violations. Fujisawa subsequently purchased shares from Lyphomed and Kapoor without being informed of these issues. By March 1988, Fujisawa owned 28% of Lyphomed. In 1987 and 1988, the FDA cited Lyphomed for Good Manufacturing Practices issues, which included receiving multiple Form 483s, indicating significant compliance problems during inspections. Responses to these observations are typically provided by the company to the FDA for resolution. The FDA may take further actions, including issuing a regulatory letter, if a company’s response is deemed unacceptable. Lyphomed received a serious regulatory letter preventing new approvals for its pharmaceutical products until it addressed GMP deficiencies, which it eventually did. In response to this situation, Dr. Kapoor and Lyphomed reassured stockholders, including Fujisawa, who subsequently increased their investment and made a tender offer for the remaining shares. Lyphomed merged with FUSA on April 6, 1990. However, in February 1991, the FDA began investigating Lyphomed's ANDAs and discovered allegedly false information in submissions dating from 1980 to 1989. By May 1991, FUSA was placed on the FDA's Alert List, halting the processing of new drug applications. The first Form 483 was issued in November 1991, leading FUSA to audit Lyphomed’s ANDAs and withdraw several products from the market. Fujisawa alleges Dr. Kapoor committed securities and mail fraud by not disclosing Lyphomed’s FDA violations and fraudulent ANDA submissions, constituting a pattern of racketeering under RICO. Additional state-law violations are claimed, including fraud and breach of fiduciary duty. There is a four-year statute of limitations for civil RICO cases, beginning when a plaintiff knows or should know of their injury. Fujisawa filed its complaint on August 17, 1992, and if it was aware of its injury by August 17, 1988, its claim is time-barred. Dr. Kapoor argues that Fujisawa had access to necessary documents prior to August 1988, creating a genuine issue regarding the timing of when Fujisawa should have discovered the fraud. The Seventh Circuit clarifies that a defrauded purchaser is not presumed to be aware of all company files upon acquisition without suspicious circumstances. Dr. Kapoor contends that Lyphomed’s earlier FDA issues should have alerted Fujisawa, but these were related to manufacturing, not R&D data. Testimony indicates that the manufacturing problems did not suggest R&D fraud, and Dr. Kapoor assured Fujisawa's Board representative that these issues were unrelated to other company functions. Dr. Kapoor claims that prior to August 1988, Lyphomed employees warned Fujisawa about the rapid pace of Lyphomed's ANDA submissions. Douglas Cary, a former Lyphomed employee and competitor, expressed concerns but testified he never alleged that Lyphomed submitted false or misleading data to the FDA. Jeff Yordon, another Lyphomed employee, conveyed doubts about Dr. Kapoor's management style but did not raise issues regarding research and development (R&D) data or ANDAs. Dr. Kapoor references the Harman securities fraud class action initiated in January 1988, which was related to manufacturing issues rather than misleading ANDA submissions. The Harman complaint asserts that Lyphomed misrepresented its ability to submit ANDAs due to known manufacturing problems, not due to inaccuracies in the ANDAs themselves. Dr. Kapoor asserts that the Harman suit's allegations do not implicate R&D improprieties. While Dr. Kapoor presents evidence that might have alerted Fujisawa to potential ANDA fraud before August 1988, Fujisawa contends that there is a genuine factual dispute regarding whether this evidence was adequate. To establish a civil RICO claim, Fujisawa must demonstrate Dr. Kapoor's conduct, an enterprise, and a pattern of racketeering activity. Fujisawa also needs to prove a securities fraud violation under Rule 10b-5, requiring evidence of a misstatement or omission of material fact made with scienter, which caused reliance and injury. Dr. Kapoor challenges Fujisawa's ability to prove scienter, materiality, and reliance. Scienter can be established through evidence that Dr. Kapoor knowingly misled Fujisawa or acted recklessly. Dr. Kapoor argues that Lyphomed staff identified by Fujisawa as aware of his alleged fraud testified to his lack of involvement. Fujisawa counters that some employees might have known of Dr. Kapoor's actions, citing a memorandum indicating a decision to normalize data for the Floxuridine ANDA, which was not disclosed to the FDA, leading to misleading representations about the data's integrity. The drug Floxuridine initially had a lower potency percentage, which degraded to a level that could have raised concerns from the FDA had non-normalized data been submitted. The FDA issued Form 483s in November 1991, citing unreported normalization as a key issue with Lyphomed's ANDAs. Chemist Jim Heinicke felt that normalizing the data without disclosure was dishonest. Dr. Kapoor contends that normalization was communicated to the FDA and that he was unaware it wouldn't be noted in the ANDA. However, given his role at Lyphomed and involvement in normalization, there is an inference he was aware of this omission. It remains uncertain if the FDA was ever informed about the normalization. Following a deficiency letter from the FDA regarding the Floxuridine ANDA, Lyphomed submitted additional data, but this was only in response to the FDA's request and did not explicitly mention normalization. Furthermore, a note from Lyphomed's marketing supervisor, David Noll, indicated a policy against submitting questionable data, attributed to Dr. Kapoor, who remarked that submitting such data could delay FDA approval. Dr. Kapoor claims this was specific to a misprepared batch of Vancomycin, while Noll suggested it could be a general guideline. Although out-of-specification data was submitted with the Vancomycin ANDA, the FDA later found deficiencies in Lyphomed's submissions for not reporting out-of-specification data. Other chemists at Lyphomed believed such data should not be reported. While no direct evidence of Dr. Kapoor instructing data falsification was presented, testimonies and statements could lead to a reasonable inference that he was aware of and accepted the practice of not reporting out-of-specification data. Dr. Kapoor contends that Fujisawa's fraud auditors affirm his innocence regarding the ANDAs. However, the auditors clarified that their primary aim was to determine whether fraud occurred, not to identify individuals involved. They noted Dr. Kapoor's name emerged in discussions about wrongdoing related to data normalization. Circumstantial evidence suggests Dr. Kapoor was aware that the Lyphomed ANDAs did not notify the FDA of normalized and out-of-specification data, making the ANDAs misleading and potentially fraudulent. On materiality and reliance, Dr. Kapoor argues that any misrepresentations he made concerning the ANDAs were not significant to Fujisawa's decision to acquire Lyphomed and that Fujisawa did not rely on these misstatements. Materiality is assessed based on whether a reasonable investor would consider the omitted or misrepresented facts significant in their investment decision. This determination is a mixed question of law and fact, requiring careful evaluation of what a reasonable shareholder would infer from the available facts. Dr. Kapoor asserts that the obvious nature of the ANDA fraud at the time of Fujisawa's investment negates its materiality and reliance on misstatements. He highlights the deletion of Section 4.15 from a draft merger agreement, which disclosed that no facts warranted the withdrawal of Lyphomed's products, as an indication that Fujisawa should have been aware of potential fraud. However, the outside directors of Lyphomed removed numerous warranties from the agreement and testified to their ignorance of the fraudulent ANDAs, undermining the claim that the deletion was a deliberate attempt to signal fraud. Fujisawa maintains that Section 4.15 was deleted because its content was already covered in Section 4.05 of the final agreement, which assured that Lyphomed's financial statements contained no material misstatements. Additionally, Dr. Kapoor claims that Fujisawa acknowledged in Section 1.01 of the final merger agreement that ANDA fraud would not be material to its decision to purchase Lyphomed. Fujisawa had the right to terminate the merger agreement with Lyphomed if a 'material adverse change' occurred before closing, as outlined in Paragraph (b) of Annex A. However, Section 1.01 establishes that specific events listed in a Disclosure Schedule, including FDA investigations related to manufacturing practices and ANDA filings, would not be deemed 'material adverse changes.' Dr. Kapoor argues that Fujisawa did not view ANDA fraud as material to the acquisition. Nonetheless, Section 9.10(c) clarifies that the Disclosure Schedule does not dictate what is considered material to Fujisawa, indicating that the inclusion of any specific item does not imply materiality. Moreover, Fujisawa's representative, Mr. Aoki, stated that had Fujisawa known about the fraudulent ANDAs, the acquisition would not have proceeded. Lyphomed contends that Section 9.10(c) does not render the matters in the Disclosure Schedule immaterial, referencing a deposition from lawyer Janet Kelly, who indicated that Fujisawa made its offer despite known investigations into the generic drug industry. However, the issues faced by Lyphomed were primarily manufacturing-related, not related to R&D, and the negotiating team was unaware of the ANDA fraud. Dr. Kapoor also claims that Fujisawa should have been alerted to the fraud based on its access to information. Despite this access, evidence suggests Fujisawa had no reason to suspect such fraud existed, and uncovering it would have required an exhaustive review of numerous documents, a task deemed monumental. The Seventh Circuit has previously stated that investors should not need to conduct redundant investigations when the seller is aware of issues. Lastly, Dr. Kapoor points to Lyphomed's past FDA issues in 1987 and 1988 as indicators of potential future fraud; however, these past issues were related to manufacturing, not research and development, a distinction acknowledged by Dr. Kapoor himself. Dr. Kapoor contends that Fujisawa was aware of the 'Kapoor Policies' and therefore could not consider them material, though there is a dispute regarding Fujisawa's knowledge. The ruling indicates that the 'Kapoor Policies' do not convincingly demonstrate that Dr. Kapoor should have been aware of ANDA fraud at Lyphomed. Testimonies from Fujisawa employees, Mr. Aoki and Hirofumi Onosaka, affirm that Fujisawa was unaware of any fraud and that Dr. Kapoor assured them Lyphomed would not face further FDA issues, implying that Fujisawa would not have proceeded with the acquisition had it known of the fraud. The evidence suggests unresolved factual questions about the materiality of the fraud and Fujisawa's reliance on Dr. Kapoor's assurances. Fujisawa participated in a previous class action lawsuit against Lyphomed and Dr. Kapoor, resulting in a release from claims associated with that lawsuit. Dr. Kapoor claims this release bars the current suit; however, he waived this defense by not raising it in his answer. Additionally, the stock purchases at issue were not part of the class period covered by the Harman suit. Dr. Kapoor's assertion that the release broadly applies is countered by his own admission that the FDA issues leading to the Harman suit did not involve Lyphomed's R&D department. A general release only encompasses claims known or discoverable through reasonable inquiry, and the claims in this case could not have been reasonably discovered due to the extensive nature of Lyphomed's data. Dr. Kapoor also seeks summary judgment on Fujisawa's state law claims, including common law fraud and breach of fiduciary duty. He cites a recent Illinois Appellate Court ruling, which establishes a three-year statute of limitations for fraud claims under the Illinois Securities Law, starting from the date of the securities transaction. However, this period may extend to five years if Fujisawa could not have discovered the alleged violations despite reasonable diligence. Fujisawa's fraud claim can be based on securities transactions after August 17, 1987, as reasonable diligence would not have revealed the ANDA fraud before that date, while claims prior are time-barred. Dr. Kapoor contests the fraud claim, asserting he was unaware of any false statements and that his statements lacked materiality; however, genuine issues of fact remain, preventing summary judgment. Regarding breach of warranty, Fujisawa alleges Dr. Kapoor breached a 1984 stock purchase agreement, asserting this claim falls under the ten-year statute of limitations for contracts rather than the Illinois Securities Law. Dr. Kapoor has not disputed this assertion, leaving the applicability of the Securities Law unclear. For the breach of fiduciary duty claim, Dr. Kapoor argues it is also barred by a three-year statute of limitations, which begins when the relevant information is discovered or should have been discovered. A genuine issue of fact exists regarding whether Fujisawa should have known about the ANDA fraud prior to August 17, 1989. On the constructive trust claim, Dr. Kapoor contends it is inappropriate as it serves as a remedy rather than a standalone claim. While the constructive trust claim is deemed superfluous, it may still be pursued as an equitable remedy if Fujisawa prevails on other claims. Consequently, summary judgment is granted on the constructive trust claim and partially on the common law fraud claim, while it is denied on Fujisawa's remaining claims. Dr. Kapoor contends that the distinction between manufacturing and R&D problems is misleading; however, evidence shows he treated them as separate issues. Despite Lyphomed's stock decline and Dr. Kapoor's diminished role following manufacturing issues, there is no proof that Lyphomed falsified Abbreviated New Drug Applications (ANDAs). Normalization is recognized as a valid scientific method, but failing to disclose its use can lead to misleading representations. Out-of-specification data, critical for determining the equivalency of generic drugs, was allegedly not submitted by Lyphomed for twenty-one of thirty-five ANDAs in question. Additionally, there are at least two cases where stability data was omitted, replaced with hyphens indicating data unavailability. Dr. Kapoor disputes the evidence for a "pattern of racketeering activity," but if Fujisawa can establish his involvement in ongoing ANDA fraud, it would support such a pattern. The admissibility of six laboratory notebook pages, which Dr. Kapoor claims were not produced during discovery, was debated, but the court found Fujisawa met discovery obligations, allowing these pages as evidence. A deleted section of the document outlines the Company’s (Lyphomed's) assurances regarding the absence of facts that could lead to regulatory actions or recalls by the FDA or other agencies concerning its pharmaceutical products. Lastly, it confirms that Lyphomed has filed all necessary SEC reports since January 1, 1988. All SEC Reports prepared by the Company, as of their respective filing dates and amended prior to the current date, complied with the Securities Act of 1933 and the Exchange Act. The Company provided copies of these reports to Acquisition. No SEC Report contained any misleading statements or omitted material facts necessary to ensure the statements were not misleading. The Company’s subsidiaries are not required to file any SEC documents. The consolidated financial statements included in the SEC Reports were prepared in accordance with generally accepted accounting principles (GAAP), consistently applied, and accurately represented the Company's consolidated financial position and operational results, with exceptions noted for interim statements due to normal audit adjustments. Acquisition is required to commence a cash offer for all outstanding shares of the Company's common stock at $31.87 per share within five business days following the public announcement of the agreement terms. The obligation to commence and accept shares for payment is contingent upon conditions outlined in Annex A, which states that no material adverse change will be determined from events listed in the previously delivered Disclosure Schedule. The relevance of the cited section of the Disclosure Schedule regarding the ANDA fraud remains unclear. Fujisawa was aware of the generic drug industry's uncertain future during the acquisition but lack of knowledge regarding specific ANDA fraud does not imply it was immaterial to the acquisition of Lyphomed. Additionally, expert testimony indicated that such reviews are rarely conducted in acquisitions of generic pharmaceutical companies. Dr. Kapoor referenced another case to assert that the ANDA fraud was foreseeable due to Lyphomed's prior FDA issues. The Medco case involved differing evidence from various companies, with the court recognizing that some future FDA regulatory issues were foreseeable due to manufacturing problems from 1987 and 1988. However, it did not find the specific ANDA fraud in this case to be "reasonably foreseeable," leading to a lack of persuasiveness in the Medco opinion on this point. Both parties referred to Dr. Kapoor's operating instructions as the "Kapoor Policies," which aimed for completion of 10 ANDAs monthly, prompt transfer of products to Regulatory Affairs, and quick responses to FDA deficiency letters. Fujisawa contends that these aggressive policies created an environment conducive to ANDA fraud. Dr. Kapoor claims summary judgment is warranted on the breach of warranty claim since he was allegedly unaware of any ANDA fraud in 1984, thus making no improper representations in the stock purchase agreement. However, a genuine issue of fact exists regarding his awareness of ANDA fraud as early as 1984. Additionally, Dr. Kapoor argues that the breach of fiduciary duty claim is insufficient due to his claimed ignorance of the ANDA fraud, but this argument is also unsuccessful.