In re Abbott Laboratories Derivative Shareholders

• Decision Date: 28 March 2003
• Docket Number: No. 01-1952.,01-1952.
• Citation: 325 F.3d 795
• Parties: In re ABBOTT LABORATORIES DERIVATIVE SHAREHOLDERS LITIGATION.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 795

325 F.3d 795

In re ABBOTT LABORATORIES DERIVATIVE SHAREHOLDERS LITIGATION.

No. 01-1952.

United States Court of Appeals, Seventh Circuit.

Argued October 23, 2001^*.

Decided March 28, 2003.

Rehearing and Rehearing En Banc Denied May 27, 2003^**.

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Terry Rose Saunders, Chicago, IL, Robert P. Frutkin (argued), Philadelphia, PA, for Plaintiffs-Appellants.

Michele Odorizzi (argued), Mayer, Brown, Rowe & Maw, Chicago, IL, Phil C. Neal, Neal, Gerber & Eisenberg, Chicago, IL, for Defendants-Appellees.

Before WOOD, Jr., CUDAHY, and KANNE, Circuit Judges.

HARLINGTON WOOD, JR., Circuit Judge.

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. § 820, and the requirements of the "Current Good Manufacturing Practice" ("CGMP"), as defined in 21 C.F.R. § 820.1. These regulations expressly assign corporate management the responsibility to assure compliance with the CGMP. 21 C.F.R. § 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 vitro¹ 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 adulterated² 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, detailing 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 directors³ and current CEO. 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 30 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, a news service providing national and international financial information. 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 would include the cessation of manufacturing and sale for a period of time of a number of diagnostic products."

On September 29, 1999, BLOOMBERG NEWS reported that shares of Abbott Laboratories "fell 6.3 percent [to $37.25] after U.S. regulators threatened to halt sales of some Abbott diagnostic products on concerns about quality controls," stating this was the latest setback "in a string of manufacturing problems for Abbott" dating from 1998 and that "the FDA has given them a swift kick to prod them into fixing things." The article noted that ADD represented approximately 22 percent, or $2.79 billion, of Abbott's total sales in 1998, with an operating profit of $448 million, or 13 percent of the company's total profit. Although the article quoted a stock analyst as having a "buy" rating on the stock, the analyst also stated that he did not understand "why [Abbott] seems to have dragged their feet fixing the problems. Wall Street punishes companies that have run-ins with the FDA."

On September 30, 1999, Abbott filed a disclosure form with the Securities and Exchange Commission ("SEC"), acknowledging it had received notification by the FDA of noncompliance with the QSR at two of its facilities. Abbott also reported they disagreed with the findings of noncompliance and would fight any legal suit. On November 2, 1999, the FDA filed a complaint for an injunction, detailing its problems with Abbott over the prior six-year period. On the same date, both parties signed a consent decree which prohibited Abbott from the continued manufacture of certain in vitro diagnostic devices until independent experts and FDA inspectors deemed the two facilities in conformity with the CGMP and FDA regulations. The decree also stated that Abbott would pay a $100 million fine, the largest penalty ever imposed for a civil violation of FDA regulations at that time.

In addition, under a proposed master compliance plan, Abbott was ordered to destroy under FDA supervision certain inventories of specific in vitro diagnostic kits and withdraw those kits from the U.S. market until compliance had been achieved. The suspension of these kits would result in a loss of approximately $250 million in annual revenue. In a press release following the consent decree, Abbott announced that it would take a $168 million charge against Abbott's earnings in the third quarter of 1999 to cover the FDA fine and the loss from the unmarketable test kits.

Plaintiffs also maintain that these problems with the FDA caused the collapse of Abbott's acquisition of Alza Corporation ("Alza"), a drug delivery company, in a planned acquisition valued at approximately $7.3 billion, which plaintiffs assert was in the best interest of Abbott. Alza shareholders were to exchange one share of Alza stock for 1.2 shares of Abbott stock. Plaintiffs allege that the directors had a motive to conceal Abbott's...