Court Nixes Impax Lab. Suit Alleging FDA Red Flags

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By Michael Greene

Sept. 4 — The U.S. District Court for the Northern District of California Sept. 3 put the brakes on a shareholder derivative lawsuit accusing current and former directors of Impax Laboratories Inc. of breaching their fiduciary duties by failing to comply with FDA requirements.

Applying Delaware law, Judge Haywood S. Gilliam Jr. concluded that the plaintiffs failed to plead particularized allegations that a pre-suit demand on the company's board would have been futile.

“The Court finds that Plaintiffs have failed to allege particularized facts, rather than inferences supported only by hindsight, that establish a reasonable doubt that the Director Defendants ‘could have properly exercised [their] independent and disinterested business judgment in responding to a demand,'” Gilliam wrote.

Accordingly, the court granted the defendants' motion to dismiss but will allow the plaintiffs to amend their complaint if they are able to bring specific allegations.

Red Flags, Duty to Act

The plaintiffs argued, among other claims, that demand was excused because a majority of the company's directors faced a substantial likelihood of liability for their failure to take corrective actions in response to problems identified by the Food and Drug Administration.

Under Delaware law, directors can be subject to liability for failing to act after learning about “proverbial red flags”—evidence of illegality, the court observed.

The court reasoned that a May 2011 “Warning Letter” sent by the FDA to Impax identifying actual violations of the law likely qualified as a “red flag,” reasonably creating a known duty to act on the part of the director defendants.

However, the court concluded that even assuming that the defendant directors had a duty to act, the plaintiffs failed to allege a failure to act.

Actions Taken

Specifically, the court found allegations in the complaint suggested that the defendant directors “did take some actions in response to the May 2011 Warning.”

The court was also persuaded by the fact that the FDA never instituted an enforcement action against the company.

“Given that the FDA issues Warning Letters only ‘for violations of regulatory significance, i.e., those that may actually lead to an enforcement action if the documented violations are not promptly and adequately corrected,' the lack of an enforcement action implies that the violations were in fact eventually corrected—or, at the very least, that the FDA was satisfied with the actions taken by Impax to correct the noticed violations,” Gilliam wrote.

Accordingly, the court found that the plaintiffs relied on hindsight inferences, instead of specific allegations of action or inaction on the part of the defendants.

The court also concluded that the plaintiffs failed to plead particularized facts supporting their allegations that the directors knowingly disseminated false statements and deliberately adopted a business strategy based on non-compliance with regulatory requirements.

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