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August 12, 1998

JOHN N. KAPOOR, Defendant.

The opinion of the court was delivered by: BUCKLO


 The plaintiffs, Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa"), and Fujisawa USA, Inc. ("FUSA"), sued the defendant, John Kapoor, under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq., and on a variety of state law grounds. Dr. Kapoor moves for summary judgment on all claims. For the following reasons, the motion is granted in part and denied in part.


 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 John Kapoor, its principal shareholder and executive. Lyphomed was acquired on April 5, 1990 and merged into FUSA.

 Under Dr. 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 1989, Fujisawa claims Lyphomed filed false applications and information with the FDA in connection with thirty-five of its ANDAs. Fujisawa claims many Lyphomed ANDAs violated FDA rules because they contained normalized data without disclosing that fact *fn2" and that 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 Dr. 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 ANDA violations. Pursuant to an agreement dated December 3, 1984, Fujisawa purchased 450,000 Lyphomed shares from Lyphomed and 320,000 from Dr. Kapoor. At that time, Dr. Kapoor did not disclose any information about Lyphomed's ANDA violations. Fujisawa continued to purchase additional shares in Lyphomed from both Lyphomed and Dr. Kapoor in several transactions. In making these transactions, Fujisawa allegedly relied on various Form 10-Ks filed by Lyphomed and signed by Dr. Kapoor, annual reports, and other statements issued by Dr. 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. *fn3" 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 Lyphomed cured the GMP deficiencies (which was subsequently done). In response to the letter, Dr. 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 submitted by Lyphomed between 1980 and 1989 containing allegedly false information. In May, 1991, FUSA was placed on the Alert List, meaning that the FDA would 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, withdrawing many of its products from the marketplace.

 In this suit, Fujisawa *fn4" alleges Dr. Kapoor committed securities and mail fraud by failing to disclose the fact that Lyphomed violated FDA rules and filed false information in its ANDAs. According to Fujisawa, the many acts of fraud constitute an illegal pattern of racketeering under RICO. The complaint also alleges state-law violations involving fraud, breach of fiduciary duties, breach of warranty, and constructive trust.

 Statute of Limitations5

 There is a four-year statute of limitations in civil RICO cases. Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 156, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987). In the Seventh Circuit, the limitations period begins to run "once there was a RICO violation and the plaintiffs knew or should have known that they were injured." McCool v. Strata Oil Co., 972 F.2d 1452, 1464 (7th Cir. 1992)(citation omitted). Fujisawa filed its complaint on August 17, 1992. Thus, if Fujisawa either knew or should have known it was injured by August 17, 1988, its claim is time-barred.

 Fujisawa alleges Dr. Kapoor was aware the ANDAs were fraudulent and thus, committed securities fraud and mail fraud. The issue is when Fujisawa should have discovered the ANDA fraud because at that point, Fujisawa should have known of its injury.

 Dr. Kapoor points to a variety of evidence to argue that Fujisawa should have discovered the fraud, and thus its injury, before August, 1988. Dr. Kapoor says Fujisawa had access to Lyphomed's documents before August, 1988. There is a genuine issue of material fact as to which documents Fujisawa had access to before the merger. (Rule 12(M) Statement & Rule 12(N) Response P 18). Further, the Seventh Circuit rejected "the suggestion that the defrauded purchaser of a company is presumed to be on notice of everything in the company's files, so that the statute of limitations begins to run at the moment of acquisition." Fujisawa, 115 F.3d at 1335. There must be suspicious circumstances to alert Fujisawa of the need to review ANDA documents. Id.

 Dr. Kapoor argues that Lyphomed's FDA problems in 1987 and 1988 should have alerted Fujisawa to the ANDA fraud. Lyphomed's 1987 and 1988 FDA problems, however, dealt with manufacturing concerns at its production plants and not with the R&D data that was submitted in the ANDAs. (Rule 12(N) Response P 170). Dr. Kapoor testified that the Form 483 issued by the FDA in relation to the manufacturing problems would not have alerted him to lying in the R&D area. (Rule 12(N) Response P 172; Kapoor 12/1/94 Dep. at 820). Further, according to Takashi Aoki, Fujisawa's representative on Lyphomed's Board of Directors during the 1980s, Dr. Kapoor repeatedly reassured him that Lyphomed's manufacturing problems had nothing to do with the rest of the company, particularly R&D. (Aoki Aff. P 15). *fn6"

 Dr. Kapoor argues that, prior to August 1988, Lyphomed employees told Fujisawa that Lyphomed was rushing ANDAs out too quickly. (Rule 12(M) Statement P 151). One of the individuals who expressed concerns about the speed of Lyphomed's ANDAs, Douglas Cary, was a former Lyphomed employee and a competitor of Lyphomed who was attempting to get Fujisawa to do business with his company. (Rule 12(N) Response P 151). Mr. Cary testified he was unaware of Lyphomed ever filing false or misleading data with the FDA and never informed Fujisawa that Lyphomed had filed false or misleading ANDAs. Id. Jeff Yordon, a Lyphomed employee, testified he told Fujisawa employees that he thought Lyphomed would fail under Dr. Kapoor's management. (Rule 12(M) Statement P 151). Mr. Yordon's comments, however, were directed towards Dr. Kapoor's management style and had nothing to do with R&D data or ANDAs. (Rule 12(N) Response P 151; Yordon Dep. at 133).

 Dr. Kapoor also notes that a securities fraud class action ("Harman suit"), in which Fujisawa participated, was filed against Lyphomed and Dr. Kapoor in January, 1988. The Harman suit, however, arose from the manufacturing problems Lyphomed encountered. (Rule 12(N) Response P 185). The complaint in the Harman suit alleges Lyphomed made false comments regarding its ability to submit timely ANDAs because Lyphomed knew the FDA was going to prohibit it from submitting new drug applications until it resolved its manufacturing problems, not because of misleading information contained in the ANDAs. (Harman 2d Amended Complaint P 26; APP-3371). Dr. Kapoor testified that none of the allegations in the Harman suit raised any ...

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