The opinion of the court was delivered by: BUCKLO
Defendant John Kapoor has moved for summary judgment on the complaint filed by the plaintiffs, Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa") and Fujisawa USA, Inc. ("FUSA"), arguing that their claims are barred by the statute of limitations. For the reasons explained below, I find that the claims of securities fraud are barred by the statute of limitations and consequently enter summary judgment in favor of Kapoor on those claims. I also find that Fujisawa's RICO allegations fail to state a claim on which relief can be granted and therefore dismiss the RICO count. Finally, I decline to exercise supplemental jurisdiction over the state law claims, which are dismissed without prejudice.
Fujisawa is a Japanese Pharmaceutical company. FUSA is a Delaware corporation and a wholly-owned subsidiary of Fujisawa. Between December of 1984 and August of 1989, Fujisawa purchased stock in Lyphomed, a pharmaceutical company run by the defendant, John Kapoor.
Lyphomed was acquired on April 5, 1990 and merged into FUSA.
Under Kapoor's management, Lyphomed produced both proprietary and generic drugs. A proprietary drug is a new patented drug, while generic drugs are versions of patented drugs ordinarily sold after the patent on the proprietary drug expires. Before a company can manufacture and sell a generic drug, it must submit an abbreviated new drug application ("ANDA") to the Food and Drug Administration ("FDA") for approval. An ANDA contains research and development ("R&D") data demonstrating to the FDA that the proposed generic product is equivalent to the patented product being copied and is therefore safe and effective for human use. Based on the information contained in the ANDA, the FDA decides whether to allow the company to produce the generic drug.
Beginning in 1980 and continuing through 1986, Lyphomed filed false applications and information with the FDA in connection with many of its ANDAs. In addition, many Lyphomed ANDAs violated FDA rules because they contained normalized data without disclosing that fact.
Finally, Lyphomed failed to disclose adverse test results and failed to record, or destroyed the results of, certain tests in violation of the FDA's ANDA regulations. Fujisawa alleges that Kapoor knew or should have known that Lyphomed had committed all these violations of FDA rules.
In March, 1983, Lyphomed filed an initial public offering with the Securities and Exchange Commission ("SEC"). This filing did not disclose Lyphomed's ongoing FDA violations. Pursuant to an agreement dated December 3, 1984, Fujisawa purchased 450,000 shares in Lyphomed from Lyphomed and 320,000 from Kapoor. At that time, Kapoor did not disclose any information about Lyphomed's FDA violations. Fujisawa continued to purchase additional shares in Lyphomed from both Lyphomed and Kapoor in several transactions. In making these transactions, Fujisawa allegedly relied on various Form 10-Ks filed by Lyphomed and signed by Kapoor, annual reports, and other statements issued by Kapoor. None of these documents disclosed the ANDA violations. By March 1988, Fujisawa owned twenty-eight percent of Lyphomed.
During 1987 and 1988, Lyphomed was cited by the FDA as having Good Manufacturing Practices ("GMP") problems at some of its plants.
By the end of 1988, Lyphomed had received eight FDA Observation Reports (known as Form 483s) and an FDA regulatory letter. Form 483s list observations made by an FDA inspector during an inspection of a plant. When a company receives a Form 483, it usually submits a written response to the FDA disputing or explaining the inspector's observations, or promising to correct the problem if the company agrees that it exists. Ordinarily, if the FDA finds the company's response acceptable, the FDA will take no further action. If the FDA finds the company's response unacceptable, the FDA may take further action such as the issuance of a regulatory letter.
The regulatory letter Lyphomed received as a result of the Form 483s was serious -- it informed Lyphomed that it would not be given any new approvals for generic or patented pharmaceutical products until it cured the GMP deficiencies, which it subsequently did. In response to the letter, Kapoor and Lyphomed reassured Fujisawa and other stockholders that Lyphomed was addressing the GMP concerns. Fujisawa then bought more Lyphomed shares on the open market and, in August of 1989, Fujisawa made a tender offer for the remaining shares of Lyphomed. Lyphomed merged into FUSA on April 6, 1990.
FUSA's present problems began in February of 1991 when the FDA initiated an investigation of Lyphomed's ANDAs. In the course of that investigation, the FDA unearthed many ANDAs containing false information which had been submitted by Lyphomed between 1980 and 1986. In May, 1991, FUSA was placed on the Alert List, meaning that the FDA will not process or approve any new drug applications or any ANDAs. The FDA issued its first Form 483 in November of 1991. In response, FUSA undertook its own audit of Lyphomed's ANDAs and has withdrawn many of its products from the marketplace.
In this suit, Fujisawa and FUSA allege that Kapoor committed securities and common law fraud by failing to disclose the fact that Lyphomed had violated FDA rules and filed false information in its ANDAs. The complaint also alleges that Kapoor's many acts of fraud constitute an illegal pattern of racketeering under RICO. Finally, the complaint relies on state-law theories of constructive trust, fraud, breach of fiduciary duties, and breach of warranty. Kapoor's motion for summary judgment argues that all of the plaintiffs' claims, except the breach of warranty claim, are barred by the statute of limitations.
The Securities Fraud Counts
At the beginning of the investigation, an FDA investigator told Fujisawa that "to the best of [his] knowledge, there is no evidence that [Shah and the other people who left Lyphomed to go to Quad] falsified data at Lyphomed." (Schmidt Dep. Exh. 126) Fujisawa was not completely at ease, however, because Gary Schmidt, Fujisawa's in-house counsel, thought there was a possibility of criminal liability for Lyphomed employees and "felt that as a company [Fujisawa] should support the individuals' rights to seek their own individual lawyers ... and that the lawyer could advise the individuals of any constitutional criminal rights that an employee would be entitled to." (Schmidt Dep. at 1759)
During the investigation, Fujisawa was not kept in the dark. It assigned one of its Regulatory Affairs employees, Deepak Naik, to escort the FDA inspectors around the premises and keep track of what the inspectors were examining and finding. As Floyd Benjamin, Fujisawa's Chief Operating Officer, explained, "we had regulatory affairs personnel with the FDA and pulling the same documents and identifying the issues that were being identified by [FDA Inspector John Bruederle] as they were being filed, so that report that we see in terms of efficiencies [sic] that were identified were over that whole period of time, but a lot of those items were found early on so we knew, as he knew, what was there. That's why we weren't surprised that it showed up on the [November 7, 1991 Form] 483." (Benjamin Dep. Vol. III at 235) When pressed by Fujisawa's questioning, Benjamin admitted that he couldn't remember exactly when he (or Fujisawa) learned of the discrepancies found in each particular ANDA -- he just knew it was sometime between February, 1991 (when the FDA investigation began) and November, 1991 (when the first Form 483 was issued). He also testified, however, that Fujisawa probably learned of each problem at the same time the FDA inspector found it "because [Fujisawa] had companion reviewers giving [it] the input based on what was found." (Benjamin Vol. III at 57)
Benjamin also testified that the problems noted in the November, 1991 Form 483 "were not new items. To [Fujisawa] these things had been identified earlier in the inspection. These were not things that just leaped out from February to November. A lot of these things were found in the first month or two of [FDA Inspector Bruederle's] review, so [Fujisawa] had had these items, [Fujisawa] knew about them." (Benjamin Dep. Vol. I at 216) In fact, in April, 1991, Benjamin made a presentation to Takashi Aoki, the Chairman of the Board and Chief Executive Officer of FUSA, in which Benjamin explained that the FDA's investigation "may provide debarment evidence" which could preclude Fujisawa from participating in pharmaceutical activities.
When the FDA placed Fujisawa on the Alert List in May, 1991, the FDA provided three reasons. First, the FDA noted a problem in Lyphomed's ANDA for Succinylcholine Chloride. Second, the FDA was worried about Shah's activities at Quad and his tenure at Lyphomed. Finally, the FDA noted that Dr. Kapoor had asserted his Fifth Amendment right in refusing to testify before a Congressional subcommittee.
By May, 1991, Fujisawa had itself noticed a discrepancy in the ANDA for Glucagon. A pre-ANDA Audit Report performed on one Glucagon ANDA in May, 1991 found that "data which were out of specification were excluded from stability reports [and] some data points [were] missing."
A similar finding was made at the same time for another Glucagon ANDA. Fujisawa asked the FDA to ...