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Kapoor v. Fujisawa Pharmaceutical Co.

August 11, 1998


Mcnulty, P.j., and Rakowski, J., concur.

The opinion of the court was delivered by: Justice Tully

Appeal from the Circuit Court of Cook County.

Honorable David G. Lichtenstein, judge Presiding.

Plaintiff, John N. Kapoor, filed a five-count action against defendants which alleged: breach of a hold harmless agreement against Fujisawa USA, Inc. (FUSA); breach of a merger agreement against Fujisawa Pharmaceutical Co., Ltd. (Fujisawa) and FUSA; tortious interference with contract against the individual defendants; tortious interference with business expectancy against all defendants; and defamation against FUSA and Noboru Maeda. The trial court dismissed plaintiff's complaint pursuant to section 2-619(a)(3) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(3) (West 1996)), finding that there was another pending federal action between the "same parties" for the "same cause." Plaintiff appeals the trial court's order pursuant to Supreme Court Rule 301 (155 Ill. 2d R. 301).

For the reasons which follow, we affirm.


Plaintiff is the former Chairman and Chief Executive Officer of Lyphomed, Inc., a manufacturer of proprietary and generic drugs. *fn2 Defendant Fujisawa is a Japanese pharmaceutical company. Defendant FUSA is a Delaware corporation and a wholly-owned subsidiary of Fujisawa. The remaining individual defendants served at relevant times as officers and/or directors of Lyphomed, Fujisawa and/or FUSA. Between 1980 and 1986, Lyphomed filed false applications and information with the Food and Drug Administration (FDA) in connection with applications to manufacture and sell generic drugs. In 1983, Lyphomed filed an initial public offering with the Securities and Exchange Commission (SEC) but did not disclose its FDA violations. In December 1984, Fujisawa purchased Lyphomed shares from Lyphomed and plaintiff, who at that time did not disclose any information about Lyphomed's FDA violations. Fujisawa continued to purchase Lyphomed stock from Lyphomed and plaintiff in several transactions. According to Fujisawa, when it bought the stock, it relied on various forms, annual reports and other statements that plaintiff issued, none of which disclosed the FDA application violations. By 1986, Fujisawa replaced plaintiff as Lyphomed's largest shareholder. During 1987 and 1988, the FDA cited Lyphomed as having Good Manufacturing Practices (GMP) problems at some of its factories. The FDA later issued Lyphomed a regulatory letter which stated that Lyphomed would not receive any new approvals for generic or patented drugs until it cured the GMP problems. Plaintiff and Lyphomed then reassured Fujisawa that Lyphomed was addressing the problems. Lyphomed cured the problems.

On April 28, 1989, as part of a stipulation and settlement of certain derivative and class action suits against them - Murphy v. Kapoor et al. and Harman v. Lyphomed, Inc. *fn3 - plaintiff and Lyphomed entered into an indemnification agreement, pursuant to which Lyphomed agreed that it:

"shall indemnify [plaintiff] for all amounts paid by [him] or that [he is] legally obligated to pay in settlement of the Litigations for an amount up to $9.99 million (the "Settlement Amount") plus interest and for [his] reasonable expenses incurred in connection with the Litigations (including attorneys' fees) and shall further indemnify [him] and hold [him] harmless from and against any other claim, loss, liability or expense arising out of the Litigations, any facts alleged or Conclusions asserted therein, the settlement of the Litigations, their indemnification by [Lyphomed], and any subsequent litigation concerning any of the foregoing matters."

Murphy was a stockholder derivative action based on breach of fiduciary duty and gross negligence theories. The complaint alleged that, to obtain growth, plaintiff was responsible for Lyphomed operating "at or beyond capacity" and for Lyphomed's lack of adequate quality control procedures, which led to Lyphomed's failure to comply with FDA requirements. Harman was a class action which alleged that plaintiff and Lyphomed violated federal securities laws by failing to disclose discrepancies and alterations in Lyphomed's laboratory records and by concealing Lyphomed's FDA violations.

On August 31, 1989, Lyphomed, Fujisawa and FUSA executed a merger agreement, pursuant to which Fujisawa and FUSA agreed to honor Lyphomed's obligations under the April 28 indemnification agreement. In addition, Fujisawa and FUSA agreed to indemnify and hold harmless plaintiff and other Lyphomed officers and directors "to the fullest extent permitted by law" for claims asserted by Lyphomed or its shareholders based on acts or omissions that occurred before the effective date of the merger. In addition to the Lyphomed stock it bought earlier, Fujisawa purchased more Lyphomed stock on the open market, and acquired Lyphomed on April 5, 1990. It merged Lyphomed into FUSA the next day.

In August 1992, Fujisawa and FUSA sued plaintiff in the United States District Court for the Northern District of Illinois. Their complaint alleged that, as a result of Lyphomed's false and misleading FDA generic drug applications, FUSA was required to withdraw several drugs from the market and was unable to obtain FDA approval of other drugs. In addition, the complaint alleged that plaintiff knew of and participated in fraud against the FDA and failed to disclose material facts about the FDA generic drug applications to Fujisawa in connection with Fujisawa's purchase of Lyphomed's stock. The complaint asserted claims for violations of federal securities laws and the Racketeer Influenced and Corrupt Organizations (RICO) Act (18 U.S.C. § 1962(c)), as well as claims for state law fraud, breach of fiduciary duty, and breach of warranty. Fujisawa and FUSA alleged that they suffered damages of more than $100 million.

On July 25, 1996, the federal district court granted summary judgment for plaintiff on the securities fraud claims because they were time-barred. Finding that the complaint failed to plead adequately a "pattern" of racketeering by plaintiff, the court dismissed the RICO count for failure to state a claim upon which relief may be granted. In addition, the court declined to exercise supplemental jurisdiction over the remaining state law claims and dismissed them without prejudice. Fujisawa Pharmaceutical Co., Ltd., 936 F. Supp. at 458-67. On July 31, 1996, FUSA and Noboru Maeda issued a press release regarding the court's July 25 decision. On June 16, 1997, the Seventh Circuit Court of Appeals reversed the dismissal of the RICO claim, holding that FUSA had adequately pleaded a "pattern" of racketeering by plaintiff. Fujisawa Pharmaceutical Co., Ltd. v. Kapoor, 115 F.3d 1332 (7th Cir. 1997). According to the appellate court,

"always assuming that Fujisawa can actually prove the allegations of its complaint, Kapoor controlled Lyphomed and, if those allegations are believed, used his control to conduct the business of Lyphomed through a pattern of racketeering activity extending over six years and consisting of innumerable mail and wire frauds successfully designed to lure Fujisawa ...

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