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[W] In re Abbott Laboratories Derivative Shareholders Litigation

June 06, 2002

IN RE: ABBOTT LABORATORIES DERIVATIVE SHAREHOLDERS LITIGATION


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 7246--James B. Moran, Judge.

Before Harlington Wood, Jr., Cudahy, and Kanne, Circuit Judges.

The opinion of the court was delivered by: Harlington Wood, Jr., Circuit Judge.

OPINION WITHDRAWN per order dated August 2, 2002.

IN RE: ABBOTT LABORATORIES DERIVATIVE SHAREHOLDERS LITIGATION

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 7246--James B. Moran, Judge.

Before Harlington Wood, Jr., Cudahy, and Kanne, Circuit Judges.

The opinion of the court was delivered by: Harlington Wood, Jr., Circuit Judge.

ARGUED October 23, 2001

This shareholder derivative suit arises from a consent decree between Abbott Laboratories ("Abbott") and the Food and Drug Administration ("FDA"). The action was brought in federal court on behalf of Abbott shareholders against Abbott's board of directors alleging that the directors breached their fiduciary duties and are liable under Illinois law for harm resulting from a consent decree which required Abbott to pay a $100 million civil fine to the FDA, withdraw 125 types of medical diagnostic test kits from the United States market, destroy certain inventory, and make a number of corrective changes in its manufacturing procedures after six years of federal violations. The district court dismissed the original complaint for failure to plead demand futility with particularity under Fed. R. Civ. P. 23.1 and has now dismissed the amended complaint for the same reason. We reverse and remand for further proceedings.

I. BACKGROUND

Abbott, an Illinois corporation, is a diversified health care company that develops and markets pharmaceutical, diagnostic, nutritional, and hospital products. Abbott's Diagnostics Division ("ADD") manufactures hundreds of different kinds of diagnostic kits and devices, including tests which indicate the safety of donated blood, detect heart attacks, and identify cancerous tumors. These products are heavily regulated by the FDA and must be manufactured in accordance with the "Quality System Regulations" ("QSR"), 21 C.F.R. sec. 820, and the requirements of the "Current Good Manufacturing Practice" ("CGMP"), as defined in 21 C.F.R. sec. 820.1. These regulations expressly assign corporate management the responsibility to assure compliance with CGMP. 21 C.F.R. sec. 820.20. The FDA periodically inspects manufacturing plants to ensure compliance.

During a six-year period from 1993 until 1999, the FDA conducted thirteen separate inspections of Abbott's Abbott Park and North Chicago facilities. The inspections, some lasting for two months or longer, were conducted under a program designed not only to ensure that data and information concerning the in vitro diagnostic products are scientifically valid and accurate, but to ensure that the human subjects are protected from undue hazard or risk during the course of the scientific investigations. After each inspection, the FDA first sends a Form 483 to the manufacturer which notes any deviations under the CGMP, then discusses the findings with the manufacturer's representative, and requests a plan for correcting the violations.

In addition to the Form 483s and the ensuing follow-up after each inspection, the FDA sent four formal certified Warning Letters to Abbott. The first was sent by the FDA's district director to David Thompson, president of ADD, on October 20, 1993, noting that an FDA on-site inspection at the North Chicago facility from April 7 through May 4, 1993 had found adulterated*fn1 in vitro diagnostic products not in conformance with the CGMP. The letter stated, "Failure to correct these deviations may result in regulatory action being initiated by the Food and Drug Administration without further notice. These actions include, but are not limited to seizure, injunction, and/or civil penalties." All of the Warning Letters and follow-up letters contained that statement. A second Warning Letter from the district director was sent on March 28, 1994 to Thompson and copied to Duane Burnham, chairman of the board of directors and Chief Executive Officer ("CEO") of Abbott. After an inspection at the Abbott Park facility, the FDA reiterated that certain in vitro diagnostic test kits had failed to comply with the CGMP. A follow-up letter from the FDA's acting director to the manager of ADD, again copied to Burnham, was sent by overnight mail on October 11, 1994 which detailed the continuing deficiencies of certain diagnostic test kits. This letter also noted that the FDA had reviewed Abbott's responses to the 483s issued on June 10, 1994 and July 13, 1994, and requested "written documentation of any other specific steps you have taken or will be taking to correct these violations and to prevent the recurrence of similar violations in current and future studies."

On January 11, 1995, the Wall Street Journal published an article discussing the fact that the FDA had "uncovered a wide range of flaws in Abbott Laboratories' quality-assurance procedures used in assembling medical-diagnostic products, including kits to test for hepatitis and AIDS." The article also noted that Abbott stock had fallen fifty cents to $31.25 a share.

In July 1995, the FDA and Abbott entered into a comprehensive Voluntary Compliance Plan to work "together to achieve compliance in areas recognized by FDA and Abbott to be problematic" at the Abbott Park and North Chicago facilities. On February 26, 1998, the FDA district director sent the equivalent of a Warning Letter to Abbott, stating that although the FDA "recognize[d] Abbott Laboratories' efforts to meet all of the Compliance Plan commitments," after finding continued deviations from the regulations, the FDA was closing out the Compliance Plan.

On March 17, 1999, the FDA district director sent the fourth and final certified Warning Letter to Miles White, a member of Abbott's board of directors and current CEO.*fn2 This letter discussed the findings of adulterated in vitro diagnostic kits and other problems after an inspection at the Abbott Park facility from September 8 to November 4, 1998. The letter stated that the FDA would be conducting a re-inspection to determine the adequacy of Abbott's compliance.

On April 13, 1999, White sold thirty percent of his Abbott stock, totaling 89,895 shares sold at $52.72 per share, receiving $4,739,264. On June 15, 1999, the March 17 Warning Letter was reported in Bloomberg News. The article stated that Abbott was working with the FDA to resolve the problems and noted that Abbott shares had risen slightly to close at $43.25.

On September 28, 1999, Abbott issued a press release disclosing that it had been notified by the FDA of alleged noncompliance of the CGMP and QSR. The release stated that "[a]lthough Abbott believes that it is in substantial compliance with these regulations, the FDA disagrees," and noted that if the discussions were not successful, the FDA had advised the company that it would "file a complaint for injunctive relief which ...


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