Opinion
No. 99 C 6584
August 16, 2000
MEMORANDUM OPINION AND ORDER
On October 7, 1999 Plaintiff Gayle Stahl filed a class action suit on behalf of all shareholders of ALZA Corporation ("ALZA") against ALZA, Abbott Laboratories ("Abbott"), Miles White as CEO of Abbott. and Ernest Mario as CEO of ALZA, alleging violations of § 14(a) and § 20(a) of the Securities Exchange Act of 1934. In the class action complaint, Plaintiffs alleged that proxy materials filed with the SEC on August 18, 1999 in connection with a planned merger between ALZA and Abbott were false and misleading because those materials failed to disclose the extent of Abbott's problems complying with Food and Drug Administration ("FDA") regulations. Abbott disclosed the compliance issues on September 28, 1999, one week after ALZA stockholders voted to approve the proposed merger. Plaintiffs sought an injunction setting aside the merger vote and preventing any merger from proceeding absent a new vote by the shareholders. On November 19, 1999, Abbott and ALZA announced that the merger would not proceed without a new vote. On December 6, 1999, this court determined that the litigation was moot. Plaintiffs now ask the court for an award of attorney's fees in the amount of $3.2 million on the basis that the litigation created a benefit to ALZA's shareholders. For the reasons set below, the court denies the motion.
FACTUAL BACKGROUND
In March 1999, the FDA sent a warning letter to Abbott concerning its production of certain in vitro diagnostic products at Abbott's Diagnostic Division in Abbott Park, Illinois, a facility responsible for 22% of Abbott's total sales in 1998. (Plaintiffs' Counsel's Memorandum in Support of Their Joint Motion for an Award of Attorney's Fees and for Reimbursement of Litigation Expenses (hereinafter "Plaintiffs' Memo"), at 3, 4.) The letter notified Abbott that it could be subject to regulatory action if it did not promptly correct certain alleged regulatory deviations. ( Id. at 4.)
On June 21, 1999, Abbott and ALZA announced plans to merge. Under the terms of the merger, Abbott would acquire all of ALZA's outstanding common stock and ALZA shareholders would acquire 1.2 shares of Abbott common stock, then trading at $44.125 per share, for each share of ALZA common stock that they owned. ( Id.) The merger announcement warned that the transaction was subject to approval by ALZA stockholders and regulatory agencies. (Memorandum of Defendants Abbott Laboratories and Miles White in Opposition to Plaintiffs' Petition for Attorney's Fees (hereinafter "Abbott's Memo"), at 3.)
On July 6, 1999, Abbott and ALZA submitted documents to the FTC and the Antitrust Division of the Justice Department. ( Id. at 4.) This action triggered a 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") during which the merger could not be completed. ( Id.) In August, the FTC alerted both parties to its concerns about the anticompetitive effects of the proposed merger as it related to certain drugs for the treatment of prostate cancer and requested additional information, thereby extending the waiting period for consummating the merger until the parties had satisfied the FTC's concerns. ( Id.)
On August 19, 1999, Abbott and ALZA each filed a Proxy Statement and Prospectus which encouraged shareholders to vote in favor of the proposed merger at the shareholders meeting on September 21, 1999. These materials made no reference to the FDA's concerns regarding the Abbott Park facility. (Plaintiffs' Memo, at 4.) Bruce Cozzadd, ALZA's Executive Vice President and Chief Operating Officer, testified that he and other ALZA executives had seen the FDA warning letter in early June 1999, but that ALZA viewed disclosure of this issue to be Abbott's responsibility. (Cozzadd Dep., at 18-20, 41.) The proxy statement did disclose the FTC communications and advised shareholders that no merger would be complete without approval from all necessary regulatory agencies, including the FTC. (Abbott's Memo, Ex. 2, Proxy Statement, at 46.)
On September 13, 1999, Abbott and ALZA announced publicly that they were in negotiations with the FTC but that they hoped, pending approval by the FTC and shareholders, to complete the merger by the end of the year. ( Id., Ex. 3, at 1-2.) On September 20, 1999, ALZA shareholders voted to approve the ALZA-Abbott merger. (Abbott's Memo 1, at 5; Plaintiffs' Memo, at 4.)
One week later, on September 28, 1999, Abbott issued a statement disclosing that it had "been notified by the government of alleged noncompliance with the Food and Drug Administration's Quality System Regulation at Abbott's Diagnostic Division Facilities in Lake County, Illinois" and that it was in the process of negotiating a consent decree with the FDA. (Abbott's Memo, Ex. 4, at 1-2.) The following day, on September 29, ALZA requested additional information from Abbott and advised Abbott that ALZA would further investigate the merger in light of the FDA action. (Abbott's Memo, at 5-6.) In response to ALZA's requests, Abbott indicated that it was at a sensitive juncture in the negotiations with the FDA, but that it would provide ALZA with full information as soon as possible. (Cozzadd Dec. ¶ 24.)
On October 4, 1999, the ALZA Board of Directors met formally for the first time to discuss concerns raised by the FDA investigation. ( Id. ¶ 27.) A second formal ALZA board meeting took place on October 8. ( Id. ¶ 26.) Between September 28 and December 16, the ALZA board formally met thirteen times and was in frequent informal contact with each other and with management. ( Id.) During this time, ALZA was considering a number of options regarding how to proceed with the deal in light of the FDA investigation. For example, ALZA examined the Material Adverse Effect ("MAE") provision of the merger agreement to determine if the FDA/Abbott consent decree constituted an MAE pursuant to which ALZA could withdraw from the agreement. ( Id. ¶ 25.) ALZA also considered suing Abbott for breach of the merger agreement, an action which, pursuant to the merger agreement, would have to be filed in Delaware. ( Id. ¶ 28.)
On October 7, 1999, Gayle Stahl filed the first of four class action lawsuits against ALZA, Abbott, Miles White, Abbott's CEO, and Ernest Mario, ALZA's CEO, on behalf of all shareholders of ALZA as of August 16, 1999 who were eligible to vote at the shareholders meeting. (Plaintiffs' Memo, at 5.) The complaint alleged that, in failing to disclose Abbott's problems with the FDA, the Proxy Statement and Prospectus were materially misleading. Plaintiff sought an injunction barring the merger until Defendants made corrective disclosures and ordered a re-vote. ( Id.) ALZA was served with the summons and complaint on October 15, 1999. (Cozzadd Dec. ¶ 27.) On October 19, 1999, this court entered and continued Plaintiff's motion for a preliminary injunction and motion for expedited discovery until October 27. (Plaintiffs' Memo, at 5-6.) ALZA joined Plaintiffs' motion for expedited discovery, claiming that it had no choice but to do so. Specifically, ALZA asserts that it viewed Plaintiffs' motion for expedited discovery as an act that limited its options in a manner detrimental to the interests of the stockholders. (Cozzadd Dec. ¶ 32.) Although his rationale is not transparent, Cozzadd suggests that ALZA's options for further negotiation or potential litigation with Abbott were limited by Stahl's discovery requests. On October 27, the court held a hearing and entered an expedited discovery schedule. (Plaintiffs' Memo, at 6-7.)
On November 2, 1999, the FDA announced a consent decree requiring Abbott to pay $100,000,000 and to stop manufacturing and distributing many in vitro diagnostic tests until problems at the Diagnostic Division were corrected. ( Id. at 7.) The following day, all parties agreed to stay all proceedings and discovery until November 17, 1999. (Plaintiffs' Memo, Ex. B, 11/3/99 Letter from Defendant Abbott's Counsel to Plaintiff's Counsel, at 1-2.) The parties notified the court of this agreement on November 4. (Plaintiffs' Memo, at 8.) Once the consent decree was made public, ALZA concluded that the impact on Abbott was significant enough that ALZA had no choice but to renegotiate the terms of the proposed merger. (Cozzadd Dec. ¶ 34.) According to the merger agreement, any modification of the exchange ratio made pursuant to renegotiations would require a new vote of ALZA stockholders. ( Id. ¶ 35.)
On November 17, 1999, Abbott informed Plaintiff's counsel that the merger would not take place without a re-vote by the shareholders. (Plaintiffs' Memo, at 8.) Abbott and ALZA issued a press release on November 19 announcing that the merger would not proceed without the issuance of new proxy materials and a re-vote, and that the merger remained subject to FTC approval. (Abbott's Memo, Ex. 5.) Because this was the relief that the Plaintiff sought, the court determined that the lawsuit had been rendered moot and dismissed the case without prejudice to an attorneys' fee petition. (Plaintiffs' Memo, Ex. C, 12/6/99 Tr., at 9-10.)
On December 15, 1999, Abbott and ALZA met with the FTC in an unsuccessful attempt to resolve the FTC's concerns. (Abbott's Memo, at 7.) On December 16, Abbott and ALZA announced that there would be no merger, explaining in a press release that, "[t]he companies were not able to come to terms with the Federal Trade Commission to satisfy its conditions relating to the merger." ( Id., Ex 6.) Abbott asserts that ALZA's stock dropped 17% after the announcement that the merger would not proceed. ( Id., at 9 n. 4.)
Plaintiffs now seek an award of attorneys' fees, claiming that their lawsuit caused the benefit of a re-vote.
DISCUSSION
Under the "American Rule," parties are generally not entitled to recover attorney's fees from their opponents. See Alyeska Pipeline Serv. Co. v. Wilderness Society, 421 U.S. 240, 245 (1975). There are, however, three general situations in which fees may be shifted to the opposing party: (1) where authorized by statute; (2) where an agreement between the parties calls for fee-shifting; or (3) pursuant to a quantum meruit theory, where a party would be unjustly enriched. See id.; see also In re Fesco Plastics Corp., 996 F.2d 152, 157 (7th Cir. 1993).
The first two exceptions clearly do not apply in this case. The relevant sections of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), 78t(a) do not provide for fee shifting. Nor is there a contract between the parties providing for such an award. Thus, the quantum meruit doctrine is the only available avenue for Plaintiffs' fee claim in this case.
In support of their petition for fees, Plaintiffs rely most heavily on Lewis v. General Employment Enterprises, Inc., No. 91 C 0291, 1992 WL 80533, at *1 (N.D. Ill. Apr. 14, 1992) as the law of this jurisdiction concerning attorney's fees in § 14(a) lawsuits. In Lewis, the district court awarded fees to the plaintiffs who challenged a reincorporation proposal under federal securities laws despite the fact that claim was dismissed as moot after the corporation abandoned the challenged proposal. Replying on a Delaware Supreme Court case, Lewis recognized that attorney's fees could be awarded even where the plaintiff's claim was mooted by subsequent events, so long as certain conditions are met: (1) the suit was meritorious when filed; (2) the action creating the corporate benefit was taken by the defendants before a judicial resolution; and (3) the benefit was causally related to the lawsuit. See Lewis, 1992 WL 80533, at *2.
Defendants argue that the Lewis case is not controlling, as it relied on Delaware case law, rather than applicable federal law. See Lewis, 1992 WL 80533, at *2 (citing Allied Artists Pictures Corp. v. Baron, 413 A.2d 876, 878 (Del. 1980)). The court need not resolve this question, however, because it concludes that Plaintiffs are not entitled to an award of fees even under the rationale set forth in Lewis. The court assumes that Plaintiffs meet the first prong of the test and that the complaint would have survived a motion to dismiss. See Lewis, 1992 WL 80533 at *9 n. 6; see also In re First Interstate Bancorp Consolidated Shareholder Litig., No. 14623, 1999 WL 693165, at *7 (Del.Ch. Aug. 26, 1999). With respect to the second element, Defendants have not challenged the allegation that there were material omissions in the proxy materials, nor is there any genuine dispute concerning timing. Although Defendants contend this lawsuit conferred no benefit on ALZA's shareholders, they do not dispute that the agreement not to proceed with the merger absent a re-vote was reached before any judicial resolution was achieved in this litigation.
The parties in Lewis agreed was that the Delaware Supreme Court case was controlling. See Lewis, 1992 WL 80533, at *2.
Defendants suggest that the Seventh Circuit's law justifying fee awards in civil rights cases where a plaintiff "prevails" on the basis of a defendant's voluntary action is the applicable standard here. That standard requires a plaintiff to show that the plaintiffs lawsuit caused the relief obtained and the plaintiffs claim must not have been frivolous, unreasonable or groundless. See Cady v. City of Chicago, 43 F.3d 326, 328-29 (7th Cir. 1994); Zinn by Blankenship v. Shalala, 35 F.3d 273, 274 (7th Cir. 1994).
Nevertheless, Plaintiffs fail the third part of the test because the Defendants have demonstrated that this lawsuit did not influence the outcome of the merger proceedings and did not influence Defendants' actions. Under the third element of the Lewis test, Plaintiffs must first demonstrate that they conferred a real benefit on the party against whom fees are sought. See Mills v. Electric Auto-Lite Company, 396 U.S. 375, 392 (1970) ("To allow the others to obtain full benefit form the plaintiff's efforts without contributing equally to the litigation expenses would be to enrich the others unjustly at the plaintiff's expense."). Plaintiffs contend that they are entitled to fees because the litigation created a benefit to ALZA. The benefit Plaintiffs claim credit for is "[D]efendants'' agreement not to close the merger absent a re-vote by ALZA shareholders." (Plaintiffs' Reply, at 2.)
Notably, as Abbott emphasizes, Plaintiffs "do not even suggest that Abbott has been benefitted in any way by this litigation or their work." (Abbott's Memo, at 8.)
Initially, Plaintiffs suggest that their lawsuit was responsible for preventing the merger altogether. (Plaintiffs' Memo, at 12.) It is apparent that even absent the lawsuit, the deal ultimately fell though because the FTC declined to authorize the parties' proposed merger. Any benefit Abbott might have received from the failure of the proposed merger could not have been causally connected to the Plaintiffs lawsuit. Accordingly, Plaintiffs' petition for fees against Abbott is denied.
Plaintiffs are correct in asserting that corporate remedial action or "corporate therapeutics" can constitute a benefit for the purpose of awarding fees. See e.g., Mills, 396 at 396-97 (benefit conferred by the plaintiff's lawsuit which promoted fair and informed corporate suffrage); Koppel v. Wien, 743 F.2d 129, 134-35 (2d Cir. 1984) (benefit conferred by the plaintiff's lawsuit, brought on behalf of participants in a real estate venture, which prevented a modification in the participation agreement thereby preserving the value of the participation rights); Lewis v. Anderson, 692 F.2d 1267, 1270-71 (9th Cir. 1982) (benefit conferred by plaintiff's lawsuit which prompted full disclosure thereby resulting in the resubmission of stock option plan to shareholders). Under this line of cases, a shareholder re-vote on a merger proposal after full disclosure can be considered a benefit to a corporation.
These cases cited by Plaintiffs, however, are factually distinguishable from the case here. Mills, Koppel, and Anderson all involved some wrongdoing on the part of the corporate board of general partners, and therefore, the benefit to the corporation or partnership is obvious — e.g., these lawsuits encouraged the corporation to act with greater care in the future and they corrected or prevented an abuse to the interests of the corporation. Here, in contrast, the ALZA Board of Directors arguably did not engage in any wrongdoing. Although ALZA knew of FDA communications with Abbott as early as June 1999 and did not disclose this knowledge to its shareholders, as soon as it became aware of the seriousness of the FDA compliance issues, and of the fact that Abbott was engaged in negotiating a consent decree with the FDA, it sought to protect its shareholders by investigating the matter. As such, there is no indication that Plaintiffs' lawsuit will have any effect on the Board's future business — once the Board was aware of the possibility of Abbott's financial liability to the FDA, it took action and explored corrective measures.
In any event, because Defendants have established that the litigation did not cause the resulting benefit, the court assumes without deciding that Plaintiffs have adequately demonstrated a benefit. Plaintiffs point out that Lewis requires that Defendants bear the burden of disproving a causal relation between the litigation and their conduct. See Lewis, 1992 WL 80533, at *3 Plaintiff also correctly notes that the court must examine the chronology of events in determining whether it can be reasonably inferred that the lawsuit had an influence on Defendant's actions. See Lewis, 1992 WL 80533, at *5.
Here, although Defendants have not provided the court with overwhelming evidence in their favor, Plaintiffs fail to rebut Defendants' evidence with anything other than the timing of their suit. Even though Plaintiffs' lawsuit was filed before Defendants made any announcement about postponing the merger, the evidence shows that ALZA began to reconsider the proposed merger immediately after learning of the severity of Abbott's problems with the FDA and Abbott's potential liability to the FDA. (Cozzadd Dec. ¶ 27.) ALZA asked for information the day after it learned of the FDA compliance issues and the consent decree negotiations and held their first formal meeting shortly thereafter. ( Id.) In fact, the Board held its first meeting concerning the FDA problems before Plaintiffs filed their lawsuit, and its second meeting before ALZA was served with the complaint. ( Id. ¶¶ 26-27.) The catalyst of these two meetings could not have been the lawsuit which was subsequently served upon the corporation; it must have been concern about the finances of the merger and the fiduciary duty it owed to the corporation and the shareholders. It is unreasonable to assume that the Board could have instantly called off the merger without investigating the extent of the problems. It would have been virtually impossible for Defendants to collect information and make a decision concerning the merger before the lawsuit was filed.
Further, Cozzadd indicates that the lawsuit limited certain options that ALZA had been exploring and forced ALZA into the premature position of joining the expedited discovery request. ( Id. ¶ 32.) As Cozzadd's declaration establishes, the Board realized the potential problems and immediately began working to correct them to get the best merger deal for the corporation and the shareholders. Defendants have established that Plaintiffs' lawsuit did not influence the conduct of ALZA's Board; indeed Defendants contend that the lawsuit actually limited the options ALZA's Board was considering. As such, the court concludes that the lawsuit did not cause the re-vote; instead, acting pursuant to its fiduciary duties, the Board was responsible for negotiating a re-vote with Abbott.
Finally, Plaintiffs assert that Defendants must show that the lawsuit was not even a partial factor in making the decision. See United Handicapped Federation v. Andre, 622 F.2d 342, 346-47 (8th Cir. 1980) (finding substantial evidence, including testimony by directors, that the defendant's efforts were "accelerated" and "motivated" by the lawsuit). Here, however, Defendants have shown that their actions were motivated by concern for the corporation and the shareholders rather than by the lawsuit. Again, the Board met and requested information from Abbott immediately after learning about the possibility of Abbott's financial liability to the FDA. Also, almost immediately after learning about the signing of the consent decree with the FDA, and the heavy fine levied against Abbott for its non-compliance with FDA regulations, ALZA determined that the merger would not make financial sense for the corporation or the shareholders. (Cozzadd Dec. ¶ 34.) Absent evidence to the contrary, the court concludes that the Board's actions were motivated by legitimate financial concerns of the corporation and its recognition of its fiduciary duties to the shareholders, rather than by Plaintiffs' lawsuit.
CONCLUSION
For the foregoing reasons, Plaintiffs' motion for an award of attorney's fees and litigation expenses (Doc. 25-1) is denied.