Fujisawa Pharmaceutical Co., Ltd. v. Kapoor

• Decision Date: 16 June 1997
• Docket Number: No. 96-3133,96-3133
• Citation: 115 F.3d 1332
• Parties: Fed. Sec. L. Rep. P 99,476, RICO Bus.Disp.Guide 9293 FUJISAWA PHARMACEUTICAL COMPANY, LTD., and Fujisawa USA, Inc., Plaintiffs-Appellants, v. John K. KAPOOR, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1332

115 F.3d 1332

Fed. Sec. L. Rep. P 99,476, RICO Bus.Disp.Guide 9293

FUJISAWA PHARMACEUTICAL COMPANY, LTD., and Fujisawa USA Inc., Plaintiffs-Appellants, v. John K. KAPOOR, Defendant-Appellee.

No. 96-3133.

United States Court of Appeals Seventh Circuit.

Argued May 12, 1997.

Decided June 16, 1997.

Robert J. Kopecky, Chaim T. Kiffel, Kirkland & Ellis, Chicago, IL, Kenneth I. Schacter (argued), Peter C. Neger, Mary Gail Gearns, Ted Poretz, Richards & O'Neil, New York City, Jeffrey N. Cole, Cole & Staes, Chicago, IL, for Plaintiffs-Appellants.

Dan K. Webb, George C. Lombardi, W. Gordon Dobie (argued), Jennifer J. Demmon, Hal B. Merck, Winston & Strawn, Kathleen L. Leyden, Franczek, Sullivan, Mann, Crement, Hein & Relias, Chicago, IL, for Defendant-Appellee.

Before POSNER, Chief Judge, and EASTERBROOK and EVANS, Circuit Judges.

POSNER, Chief Judge.

Between 1984 and 1989, Fujisawa Pharmaceutical Company, a large manufacturer of drugs, purchased stock in Lyphomed, Inc., a manufacturer of both proprietary and generic drugs that was controlled by its principal shareholder and executive, John Kapoor. By 1986, Fujisawa had displaced Kapoor as Lyphomed's largest shareholder, owning 30 percent of its shares; and in 1990 Fujisawa merged Lyphomed into a wholly owned subsidiary of Fujisawa that is, along with Fujisawa itself, a plaintiff in this case (we shall refer to both plaintiffs, collectively, as Fujisawa). By this time Fujisawa had sunk some $800 million into the purchase of Lyphomed stock. On August 17, 1992 (and the date is not a detail), Fujisawa brought this suit against Kapoor under the federal securities laws and RICO, charging that between 1983 and 1990 Kapoor had concealed from Fujisawa the fact that between 1980 and 1986 Lyphomed had filed a large number of fraudulent "ANDAs" with the Food and Drug Administration.

An "ANDA" (Abbreviated New Drug Application) is a request to be allowed to produce a generic drug upon the expiration of the patent covering the proprietary original. 21 U.S.C. § 355(j); 21 C.F.R. §§ 314.92-.99. The abbreviation lies in the fact that, since the proprietary version had been approved upon a showing that it was safe and effective (the showing required for approval of an application for a new drug), the producer of the generic version need only show that it is equivalent to the proprietary version. 21 U.S.C. § 355(j)(2)(A). On February 4, 1991, the FDA, suspicious of the accuracy of some of the data in Lyphomed's ANDAs, began an investigation that eventually resulted in the withdrawal of a number of its generic drugs from the market and a temporary ban on the submission of new ANDAs by the company. Both measures hurt Fujisawa-Lyphomed's generic-drug division.

The suit claims that Kapoor, by concealing Lyphomed's troubles with the FDA from Fujisawa while the latter was buying stock in Lyphomed, much of it from him personally, committed securities frauds in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the SEC's Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, and made false statements in reports required by the Act, in violation of section 18, 15 U.S.C. § 78r. The district judge granted summary judgment for Kapoor on the securities counts on the ground that they were barred by the one-year statute of limitations applicable to them. Fujisawa later tried to amend its complaint to add a claim under section 20A of the '34 Act, 15 U.S.C. § 78t-1 (a provision, added in 1988, directed against insider trading), which has a five-year statute of limitations. § 78t-1(b)(4). The judge held section 20A inapplicable to the facts alleged by Fujisawa, and so denied as futile the motion to amend. She dismissed the RICO count on the ground that there was no evidence of the required "pattern" of racketeering activity, 18 U.S.C. § 1962(c), and relinquished jurisdiction over Fujisawa's supplemental state-law claims. 936 F.Supp. 455 (N.D.Ill.1996).

The one-year statute of limitations applicable to suits under Rule 10b-5 begins to run not when the fraud occurs, and not when the fraud is discovered, but when (often between the date of occurrence and the date of the discovery of the fraud) the plaintiff learns, or should have learned through the exercise of ordinary diligence in the protection of one's legal rights, enough facts to enable him by such further investigation as the facts would induce in a reasonable person to sue within a year. Law v. Medco Research, Inc., 113 F.3d 781, 785 (7th Cir.1997), and cases cited there. This is the doctrine known as "inquiry notice." The parties put opposite untenable glosses on it. Fujisawa contends that the statute of limitations doesn't begin to run until the victim has in hand all the facts he needs in order to bring suit immediately, and that this wasn't until shortly before it brought its suit, or perhaps even after--for it had not yet completed its investigation when it sued, so that it had to move to amend its complaint later. On this view, the potential plaintiff can complete his investigation, draft his complaint, and put the complaint in a drawer to be taken out in a year and filed if the price of the stock has fallen. Kapoor contends that the statute of limitations begins to run as soon as the victim has access to the facts that would show the fraud, which he contends means no later than 1990, when Fujisawa acquired Lyphomed and with it custody of copies of all the questionable applications that the FDA's investigation later brought to light.

Fujisawa's argument merges inquiry notice into discovery of the violation. We tried to clarify the distinction in Law v. Medco Research, Inc., supra, a case that, as it happens, arose indirectly from Kapoor's activities here alleged as fraud. (Medco, a licensor of Fujisawa-Lyphomed, was sued by investors for concealing Lyphomed's problems with the FDA that caused the agency to delay its approval of Medco's most important drug.) Inquiry notice, we emphasized in Law, must not be construed so broadly that the statute of limitations starts running too soon for the victim of the fraud to be able to bring suit within a year. The facts constituting such notice must be sufficiently probative of fraud--sufficiently advanced beyond the stage of a mere suspicion, sufficiently confirmed or substantiated--not only to incite the victim to investigate but also to enable him to tie up any loose ends and complete the investigation in time to file a timely suit. Cf. Tregenza v. Great American Communications Co., 12 F.3d 717, 721 (7th Cir.1993).

But the facts that put the victim of the fraud on notice can fall short of actual proof of fraud. How short may depend on the victim's access to the information that he will need in order to be able to plead a reasonably well substantiated and adequately particularized case of securities fraud, bearing in mind that before he files his suit he will not have the aid of compulsory process. The better his access, the less time he needs. "Suspicious circumstances, coupled with ease of discovering, without the use of legal process, whether the suspicion is well grounded, may cause the statute of limitations to start to run before the plaintiffs discover the actual fraud." Law v. Medco Research, Inc., supra, 113 F.3d at 785.

Kapoor fastens on ease of access to the necessary information. All of it was in documents that were in the possession of the victim itself, Fujisawa, as the controlling shareholder and later sole owner of Lyphomed. But more than bare access to necessary information is required to start the statute of limitations running. There must also be a suspicious circumstance to trigger a duty to exploit the access; an open door is not by itself a reason to enter a room. We reject 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 the acquisition. FDIC v. Manatt, 688 F.Supp. 1327, 1331 (E.D.Ark.1988), aff'd, 922 F.2d 486 (8th Cir.1991).

How suspicious the circumstance need be to set the statute of limitations running--how close, in other words, it needs to be to the proof that one would have to have in hand in order to be able to file suit on the spot without running afoul of Rule 9(b), which requires that fraud be pleaded with particularity, and without courting Rule 11 sanctions--will depend on how easy it is to obtain the necessary proof by a diligent investigation aimed at confirming or dispelling the suspicion. If, as Fujisawa argues, the very first suspicious circumstance was the opening of the FDA's investigation in February of 1991, then it is possible although unlikely that the statute of limitations would not have begun to run until sometime later than that, when the investigation brought to light the fraudulent applications. It is unlikely because Fujisawa had both better access to the relevant documents than the FDA and a greater incentive (unless it wanted to play ostrich) to find in them evidence that Kapoor had concealed information about Lyphomed's ANDAs that was highly material to the value of a company that Fujisawa had paid hundreds of millions of dollars to acquire. So the commencement of the FDA's investigation would have been the last possible signal to Fujisawa to loose the hounds on the trail of a fraud. Fujisawa should not have waited until the FDA's investigation hit pay dirt before beginning its own investigation.

In any event the FDA's investigation that began in February 1991 was not the first event that should have aroused Fujisawa's suspicions. The investigation was not a bolt from the blue; the facts that gave rise to it had long been known to Fujisawa; it should have begun suspecting fraud many years earlier. Its counsel have done an elaborate dance around the facts known to their client before August of 1991, arguing with great ingenuity that every single...