Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 1 of 247 PageID #: 2455 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE AKORN, INC., ) ) Plaintiff and Counterclaim Defendant, ) ) v. ) C.A. No. 2018–0300–JTL ) FRESENIUS KABI AG, ) QUERCUS ACQUISITION, INC., and ) FRESENIUS SE & CO. KGAA, ) ) Defendants and Counterclaim Plaintiffs. ) MEMORANDUM OPINION Date Submitted: September 25, 2018 Date Decided: October 1, 2018 William M. Lafferty, Thomas W. Briggs, Jr., John P. DiTomo, Richard Li, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Robert H. Baron, Daniel Slifkin, Michael A. Paskin, Justin C. Clarke, CRAVATH, SWAINE & MOORE LLP, New York, New York; Counsel for Plaintiff and Counterclaim Defendant. Donald J. Wolfe, Jr., Michael A. Pittenger, T. Brad Davey, Matthew F. Davis, Jacob R. Kirkham, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Stephen P. Lamb, Daniel A. Mason, Brendan W. Sullivan, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Lewis R. Clayton, Andrew G. Gordon, Susanna M. Buergel, Jonathan H. Hurwitz, Daniel H. Levi, Paul A. Paterson, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Counsel for Defendants and Counterclaim Plaintiffs. LASTER, V.C. Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 2 of 247 PageID #: 2456 Pursuant to an agreement and plan of merger dated April 24, 2017 (the “Merger Agreement”), Fresenius Kabi AG agreed to acquire Akorn, Inc. In the Merger Agreement, Akorn made extensive representations about its compliance with applicable regulatory requirements and committed to use commercially reasonable efforts to operate in the ordinary course of business between signing and closing. Both Fresenius and Akorn committed to use their reasonable best efforts to complete the merger, and Fresenius committed to take all actions necessary to secure antitrust approval, without any efforts- based qualification. The parties agreed to a contractually defined “Outside Date” for closing, set initially at April 24, 2018. If the need for antitrust approval was the only condition to closing that had still not been met at that point, then the Outside Date would extend automatically to July 24, 2018. If the merger closed, then each share of Akorn common stock would be converted into the right to receive $34 per share. Closing, however, was not a foregone conclusion. First, Fresenius’s obligation to close was conditioned on Akorn’s representations having been true and correct both at signing and at closing, except where the failure to be true and correct would not reasonably be expected to have a contractually defined “Material Adverse Effect.” If this condition was not met and could not be cured by the Outside Date, then Fresenius could terminate the Merger Agreement. Fresenius could not exercise this termination right, however, if Fresenius was in material breach of its own obligations under the Merger Agreement. Second, Fresenius’s obligation to close was conditioned on Akorn having complied in all material respects with its obligations under the Merger Agreement. Once again, if 1 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 3 of 247 PageID #: 2457 this condition was not met and could not be cured by the Outside Date, then Fresenius could terminate the Merger Agreement. Here too, Fresenius could not exercise the termination right if Fresenius was in material breach of its own obligations under the Merger Agreement. Third, Fresenius’s obligation to close was conditioned on Akorn not having suffered a Material Adverse Effect. The failure of this condition did not give Fresenius a right to terminate. Once the Outside Date passed, however, either Fresenius or Akorn could terminate, as long as the terminating party’s own breach of the Merger Agreement had not been a principal cause of or resulted in the parties’ failure to close before the Outside Date. Akorn and Fresenius entered into the Merger Agreement shortly after announcing their results for the first quarter of 2017. During the second quarter of 2017, Akorn’s business performance fell off a cliff, delivering results that fell materially below Akorn’s prior-year performance on a year-over-year basis. The dismal results shocked Fresenius, because on the same date that the parties signed the Merger Agreement, Akorn had reaffirmed its full-year guidance for 2018 at Fresenius’s request. Akorn’s performance fell well below the guidance, forcing management to adjust Akorn’s full-year guidance downward. Fresenius consulted with Akorn about the reasons for the sudden decline, which Akorn attributed to unexpected competition and the loss of a key contract. Akorn’s CEO reassured Fresenius that the downturn was temporary, but Akorn’s performance continued to slide in July and again in August 2018. By September, Fresenius’s management team had become concerned that Akorn had suffered a Material 2 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 4 of 247 PageID #: 2458 Adverse Effect, although its legal counsel was not certain at that point that Fresenius could satisfy the high burden imposed by Delaware law. In October 2017, Fresenius received a letter from an anonymous whistleblower who made disturbing allegations about Akorn’s product development process failing to comply with regulatory requirements. In November 2017, Fresenius received a longer version of the letter that provided additional details and made equally disturbing allegations about Akorn’s quality compliance programs. The letters called into question whether Akorn’s representations regarding regulatory compliance were accurate and whether Akorn had been operating in the ordinary course of business. Fresenius provided the letters to Akorn. Although Fresenius understood that Akorn would have to investigate the allegations in the ordinary course of business, Fresenius informed Akorn that Fresenius also needed to conduct its own investigation into the allegations. Under the Merger Agreement, Fresenius had bargained for a right of reasonable access to Akorn’s officers, employees, and information so that Fresenius could evaluate Akorn’s contractual compliance and determine whether the conditions to closing were met. Invoking this right, Fresenius had expert attorneys and advisors investigate the issues raised by the whistleblower letters. Fresenius’s investigation uncovered serious and pervasive data integrity problems that rendered Akorn’s representations about its regulatory compliance sufficiently inaccurate that the deviation between Akorn’s actual condition and its as-represented condition would reasonably be expected to result in a Material Adverse Effect. During the course of the investigation, tensions escalated between the parties. Matters came to a head 3 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 5 of 247 PageID #: 2459 after Akorn downplayed its problems and oversold its remedial efforts in a presentation to its primary regulator, the United States Food and Drug Administration (“FDA”). As one of Akorn’s own experts recognized at trial, Akorn was not fully transparent with the FDA. Put more bluntly, the presentation was misleading. From Fresenius’s standpoint, Akorn was not conducting its operations in the ordinary course of business, providing an additional basis for termination. During this same period, Akorn’s business performance continued to deteriorate. In mid-April 2018, Fresenius sent Akorn a letter explaining why conditions to closing could not be met and identifying contractual bases for terminating the Merger Agreement. Fresenius nevertheless offered to extend the Outside Date if Akorn believed that further investigation would enable Akorn to resolve its difficulties. Akorn declined. On April 22, 2018, Fresenius gave notice that it was terminating the Merger Agreement. Fresenius asserted that Akorn’s representations regarding regulatory compliance were so incorrect that the deviation would reasonably be expected to result in a Material Adverse Effect. Fresenius also cited Akorn’s failure to comply in all material respects with its contractual obligations under the Merger Agreement, including Akorn’s obligation to use commercially reasonable efforts to operate in the ordinary course of business in all material respects. Fresenius also cited the section in the Merger Agreement that conditioned Fresenius’s obligation to close on Akorn not having suffered a Material Adverse Effect. Akorn responded by filing this action, which seeks a declaration that Fresenius’s attempt to terminate the Merger Agreement was invalid and a decree of specific 4 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 6 of 247 PageID #: 2460 performance compelling Fresenius to close. Fresenius answered and filed counterclaims, contending it validly terminated the Merger Agreement and is not required to close. This post-trial decision rules in favor of Fresenius and against Akorn. First, Fresenius validly terminated the Merger Agreement because Akorn’s representations regarding its compliance with regulatory requirements were not true and correct, and the magnitude of the inaccuracies would reasonably be expected to result in a Material Adverse Effect. Second, Fresenius validly terminated because Akorn materially breached its obligation to continue operating in the ordinary course of business between signing and closing. Third, Fresenius properly relied on the fact that Akorn has suffered a Material Adverse Effect as a basis for refusing to close. If Fresenius had been in material breach of its own obligations under the Merger Agreement, then Fresenius could not have exercised either of the termination rights on which it relied. Akorn tried to prove that Fresenius failed to use its reasonable best efforts to complete the merger and breached its obligation to take all actions necessary to obtain antitrust approval. By piecing together bits of documents and testimony, Akorn’s skilled counsel weaved a tale of buyer’s remorse. I have taken this theory seriously, and there is some evidence to support it. Having weighed the evidence and evaluated the credibility of the witnesses, I find that Fresenius fulfilled its contractual obligations. In prior cases, this court has correctly criticized buyers who agreed to acquisitions, only to have second thoughts after cyclical trends or industrywide effects negatively impacted their own businesses, and who then filed litigation in an effort to escape their agreements without consulting with the sellers. 5 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 7 of 247 PageID #: 2461 In these cases, the buyers claimed that the sellers had suffered contractually defined material adverse effects under circumstances where the buyers themselves did not seem to believe their assertions. This case is markedly different. Fresenius responded to a dramatic, unexpected, and company-specific downturn in Akorn’s business that began in the quarter after signing. After consulting with Akorn about the reasons for the decline and receiving unconvincing answers, Fresenius appropriately began evaluating its contractual rights under the Merger Agreement. While doing so, Fresenius continued to move forward with the transaction. Later, Fresenius received whistleblower letters that made alarming allegations about data integrity kenneth69@example.org. Once again, Fresenius consulted with Akorn, then relied on an informational access covenant in the Merger Agreement to conduct an investigation. That too was proper, because buyers obtain informational rights so they can continue to evaluate the seller after signing and determine whether to close. Akorn did prove that for approximately a one-week period during February 2018, Fresenius embarked on a strategy for achieving antitrust approval that would have breached its contractual obligation to take all steps necessary to satisfy that condition to closing. Fresenius promptly reversed course, and the parties were on the cusp of receiving antitrust approval when Fresenius terminated the Merger Agreement. If all other conditions to closing had been met on the initial Outside Date such that it would have extended automatically to June 24, 2018, then the parties easily would have obtained antitrust approval. Fresenius technically breached its contractual obligation, but it was not a material 6 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 8 of 247 PageID #: 2462 breach sufficient to deprive Fresenius of its ability to exercise the termination rights on which it relied. Any second thoughts that Fresenius had about the Merger Agreement were justified by unexpected kenneth69@example.org. The parties agreed to provisions in the Merger Agreement that addressed those events, and Fresenius properly exercised its rights under those provisions. As a result, the Merger Agreement terminated on April 22, 2018. I. FACTUAL BACKGROUND A five-day trial took place on July 9–13, 2018. The parties introduced 1,892 exhibits into evidence and lodged fifty-four deposition transcripts—forty from fact witnesses and fourteen from experts. Nine fact witnesses and seven experts testified kenneth69@example.org. The parties prepared for trial during eleven weeks of highly expedited litigation. Despite the massive effort this entailed, the parties required assistance with only one significant discovery dispute, which involved contentious privilege issues. This case exemplifies how professionals can simultaneously advocate for their clients while cooperating as officers of the court. The parties were aided in this effort by a discovery facilitator who helped them craft and live by a detailed discovery plan. My task is to make factual findings based on the record the parties generated. For that purpose, Fresenius bore the burden of proving by a preponderance of the evidence the facts supporting the exercise of its termination rights. Akorn bore the burden of proving by a preponderance of the evidence the facts necessary to establish its claim that Fresenius could not exercise those rights because Fresenius was in material breach of its own 7 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 9 of 247 PageID #: 2463 obligations. Akorn bore the burden of proving by clear and convincing evidence the facts necessary to justify a decree of specific performance. Fresenius would have borne the burden of proving the facts necessary to establish its affirmative defense of unclean hands. In this case, however, there was no meaningful distinction between its contractual arguments and its unclean hands defense. Fresenius simply repackaged its contractual arguments as an equitable theory. In my view, the Merger Agreement governs the parties’ relationship. If there were issues or actions that could support a defense of unclean hands and which did not come within the analytical framework of the Merger Agreement, then I would have analyzed that defense. In this case, however, the facts fit neatly within the analytical framework of the Merger Agreement and point to a contract-based outcome. Under those circumstances, applying the doctrine of unclean hands would either duplicate the contractual outcome or create uncertainty by departing from the result that the parties sought to achieve for themselves. This decision therefore does not address the defense of unclean hands. Based on these allocations of the burden of proof, the evidence supported the following findings of fact. A. Fresenius Defendant Fresenius Kabi AG is a pharmaceutical company headquartered in Germany.1 It employs approximately 37,000 people worldwide, has seventy manufacturing 1 PTO ¶ B.2. Citations in this form refer to stipulated facts in the pre-trial order. See Dkt. 165. Citations in the form “[Name] Tr.” refer to witness testimony from the trial transcript. Citations in the form “[Name] Dep.” refer to witness testimony from a 8 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 10 of 247 PageID #: 2464 sites around the world, and is worth about €6.5 billion.2 Its particular areas of focus lie in clinical nutrition, injectable drugs, IV solutions, and medical devices.3 Fresenius Kabi is a signatory to the Merger Agreement. Fresenius Kabi is the parent corporation of defendant Quercus Acquisition, Inc., a wholly owned acquisition subsidiary. Under the Merger Agreement, Quercus would merge with and into Akorn in a reverse triangular merger (the “Merger”). Although a necessary party for purposes of Akorn’s request for specific performance, Quercus does not play a meaningful role in the dispute. Fresenius Kabi is also the parent corporation of non-party Fresenius Kabi USA, LLC (“Fresenius USA”), another wholly owned subsidiary.4 In the United States, Fresenius Kabi operates through Fresenius USA. Fresenius Kabi viewed the Merger as a way to expand its business in the United States, and personnel from Fresenius USA figure prominently in the record. Fresenius Kabi is itself a wholly owned subsidiary of defendant Fresenius SE & Co. KGaA (“Fresenius Parent”), a German company whose shares trade publicly on the deposition transcript. Citations in the form “JX –– at ––” refer to a trial exhibit with the page designated by the last three digits of the control or JX number or, if the document lacked a control or JX number, by the internal page number. If a trial exhibit used paragraph numbers, then references are by paragraph. 2 Henriksson Tr. 933, 1027; see PTO ¶ B.2. 3 Henriksson Tr. 933–34. 4 PTO ¶ C.2. 9 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 11 of 247 PageID #: 2465 Frankfurt Stock Exchange.5 Through various business segments, Fresenius Parent offers products and services for hospitals, dialysis, and outpatient treatment.6 Fresenius Parent has been in existence for more than a century, operates in more than 100 countries, and employs approximately 277,000 people worldwide.7 For its fiscal year 2017, Fresenius Parent had sales of approximately €34 billion and an operating profit of nearly €5 billion.8 Fresenius Parent is a signatory to the Merger Agreement for the purpose of causing Fresenius Kabi to comply with its obligations.9 The resulting three-tiered corporate structure puts Fresenius Parent at the top, then Fresenius Kabi, then Fresenius USA. The corresponding human hierarchy starts with the Supervisory Board of Fresenius Parent, which plays the same role as the board of directors of a Delaware corporation. Because it is a German company, Fresenius Parent also has a Management Board, consisting of the senior executives of that entity. Since July 2016, Stephan Sturm has served as the top executive at Fresenius Parent and Chairman of the Management Board.10 Since 2013, Mats Henriksson has served as CEO of Fresenius 5 Id. ¶¶ B.2–3. 6 Id. ¶ B.3. 7 Sturm Tr. 1171, 1195. 8 Id. at 1171. 9 JX 1 § 8.16. 10 Sturm Tr. 1169–71. 10 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 12 of 247 PageID #: 2466 Kabi.11 He also serves as a member of the Management Board of Fresenius Parent.12 For many years, John Ducker has served as President and CEO of Fresenius USA.13 Although critically important for many purposes, distinguishing among the Fresenius entities is generally not necessary in this decision. It therefore refers only to Fresenius, unless context requires a more specific referent. B. Akorn Plaintiff Akorn is a specialty generic pharmaceuticals company organized under the laws of the State of Louisiana and headquartered in Lake Forest, Illinois.14 Akorn’s stock trades publicly on NASDAQ under the symbol “AKRX.”15 Akorn is defined as the “Company” in the Merger Agreement, and this decision sometimes uses that term. During the events giving rise to this litigation, Raj Rai was its President and CEO. Akorn’s business model focuses on selectively targeting products with complex manufacturing processes or that are deliverable in alternative dose forms, such as 11 Henriksson Tr. 933–34. 12 Sturm Tr. 1172. 13 Henriksson Tr. 935–36; Bauersmith Tr. 575–76. 14 PTO ¶ B.1. Attentive readers will have noted that none of the parties to the Merger Agreement is a Delaware entity. Even Quercus, the acquisition subsidiary, is a Louisiana corporation. The parties nevertheless chose Delaware law to govern the Merger Agreement (excluding internal affairs matters governed by Louisiana law) and selected the courts of this state as their exclusive forum for litigation. See JX 1 §§ 8.06 & 8.07. 15 PTO ¶ B.1. 11 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 13 of 247 PageID #: 2467 injectables, eye drops, oral liquids, inhalants, and nasal sprays.16 Akorn’s management team believes this strategy carries less risk and generates more consistent profit margins than other generic drug company strategies.17 Akorn has manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland; and Paonta Sahib, India. Akorn has research and development centers in Vernon Hills, Illinois, and Cranbury, New Jersey.18 Akorn’s primary regulator is the FDA.19 Akorn’s quality operations function is responsible for ensuring that Akorn’s plants and R&D centers meet FDA requirements.20 To carry out this function, Akorn’s Global Quality Compliance (“GQC”) team conducts periodic audits; Akorn also retains consultants who evaluate its sites and processes.21 Akorn’s quality operations function is also responsible for ensuring that Akorn complies with FDA requirements when making submissions to the FDA, such as when filing an Abbreviated New Drug Application (“ANDA”) to seek approval for a new generic 16 See Rai Tr. 455–56; PTO ¶ B.1. 17 See Rai Tr. 456–57; see also Bauersmith Tr. 614; Bauersmith Dep. 111–12. 18 Wasserkrug Tr. 7–8. 19 Id. at 18–19. 20 Id. at 8–9, 15–16. 21 See id. at 14–15, 18; Pramik Tr. 219–220; Kaufman Tr. 272; Chesney Tr. 1240– 41. 12 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 14 of 247 PageID #: 2468 drug.22 When reviewing an ANDA, the FDA relies on data submitted by the applicant. To ensure that data is reliable, the FDA imposes rigorous data integrity requirements on pharmaceutical companies.23 From the FDA’s standpoint, “ensuring data integrity is an important component of [the pharmaceutical] industry’s responsibility to ensure the safety, efficacy, and quality of drugs, and of [the] FDA’s ability to protect the public health.”24 The FDA’s data integrity requirements place the burden on the pharmaceutical company to “prove the origin, transmission, and content of the company’s data and that data is what it is purported to be.”25 “A properly designed and managed data integrity program strives to mitigate the risk of purposeful data manipulation or fraud by putting controls in place that limit to the greatest extent possible the opportunities to manipulate data . . . .”26 To minimize those risks, the FDA’s data integrity requirements impose strict requirements that data regarding testing and manufacturing be attributable, legible, contemporaneously recorded, original or a true copy, and accurate (“ALCOA”), as well as complete, consistent, enduring, and available.27 The FDA’s data integrity requirements are part of its current Good Manufacturing Practices (“cGMP”), which are designed to ensure 22 See Wasserkrug Tr. 22. 23 JX 1251 ¶¶ 17–20. 24 JX 112 at 1. 25 JX 143 at 1; accord Kaufman Tr. 323; Kaufman Dep. 196; see Wasserkrug Tr. 9. 26 JX 1252 ¶ 2.1. 27 See JX 1247 ¶ 35; Wasserkrug Tr. 8–9, 22; Franke Dep. 33–36. 13 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 15 of 247 PageID #: 2469 the systematic safety, quality, and reliability of drug products.28 These requirements are set out in federal regulations and clarified by FDA guidance.29 A critical component of a modern data integrity system is the company’s IT infrastructure.30 The FDA requires that computer systems have adequate “access controls” that restrict who may access electronic data, as well as “change controls” designed to “ensure that no unnecessary changes are made, that all changes are documented, and that the possible effect of a change is evaluated prior to its implementation.”31 The FDA also requires that lab equipment have “audit trails” to document who uses the equipment, when, and for what purpose.32 Data integrity also requires ensuring the authenticity of entries in laboratory notebooks.33 Notebooks contain original source data that should be contemporaneously recorded by chemists. Notebooks must be preserved, and missing notebooks are “an important data integrity issue” because “that data is no longer available” and cannot be 28 Wasserkrug Tr. 8, 12; JX 1251 ¶ 22; JX 1249 ¶ 26. 29 See, e.g., 21 C.F.R. Pt. 211. See generally Wasserkrug Tr. 12–13; JX 934 at 3; JX 1247 ¶¶ 34–35; JX 1251 ¶¶ 22–23. JX 439 at ‘436 (IT is a “core component of a 21st century quality control 30 management structure”); see Pramik Dep. 26. 31 JX 1249 ¶ 96 n.141; see 12 C.F.R. § 211.68(b); Pramik Dep. 27; JX 934 at 3. 32 JX 1247 ¶ 36; see 12 C.F.R. § 211.192; Franke Dep. 56; JX 934 at 3. 33 See 21 C.F.R. §§ 211.68(b) & 211.194(a); JX 934 at 3; JX 1251 ¶ 83; see also JX 1247 ¶¶ 39–40; Wasserkrug Tr. 22 (describing FDA site visits to inspect notebooks and batch records “to assure the ALCOA principles of that data”). 14 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 16 of 247 PageID #: 2470 verified.34 At Akorn, each notebook is assigned to a particular individual; making unsigned entries in another analyst’s notebook violates fundamental principles of data integrity.35 The FDA’s data integrity rules require that all test data—both failing results and passing ones—be properly recorded.36 The FDA forbids the practice of “testing into compliance,” or running tests again and again until passing results are secured and recording only the passing results.37 FDA regulations require that potential data integrity violations be promptly investigated and remediated. FDA guidance calls for “potential data falsification” to be “fully investigated” by the firm’s “quality system to determine the effect of the event on patient safety, product quality, and data reliability; to determine the root cause; and to ensure the necessary corrective actions are taken.”38 The FDA is required to inspect manufacturing facilities on a risk-based schedule39 and typically inspects Akorn’s sites at least once a year.40 The FDA may also conduct 34 Franke Dep. 51–52. 35 Sherwani Dep. 54–57; Silverberg Dep. 54–55. 36 Wasserkrug Dep. 86–87; see 21 C.F.R. § 211.194(a); JX 934 at 3. 37 Wasserkrug Dep. 52–53, 86–87; JX 1252 at 3. 38 JX 112 at 9–10 (citing 21 C.F.R. §§ 211.22(a), 211.125(c), 211.192, 211.198, 211.204); see Rai Dep. 26 (acknowledging that Akorn “absolutely” has “responsibilities to investigate and remediate data integrity problems”). 39 21 U.S.C. § 360(h)(3). 40 See Wasserkrug Tr. 20. 15 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 17 of 247 PageID #: 2471 directed “for cause” inspections.41 At the conclusion of an inspection, the FDA holds a close-out meeting and shares its observations.42 The FDA may provide only oral observations, or it may document observations in a Form 483, which is a written report from the FDA documenting “observations [that] are intended to denote significant conditions that constitute violations of cGMPs.”43 The company has an obligation to respond to the FDA’s observations within fifteen business days with a root cause analysis, impact assessment, and a set of corrective and preventative actions (“CAPAs”).44 If the FDA determines that the company has proposed adequate CAPAs, it will typically classify the inspection as voluntary action indicated (“VAI”).45 If the FDA determines that the remedial measures are insufficient, it may classify the inspection as official action indicated (“OAI”).46 An OAI classification can lead to further regulatory action, such as follow-up inspections or the issuance of a Warning Letter.47 After the issuance of a Warning Letter, the FDA typically will not approve new product applications from the facility until the 41 JX 934 at 4; JX 1249 ¶ 55; Wasserkrug Tr. 23. 42 Wasserkrug Tr. 24. 43 JX 1249 ¶ 56; see JX 1247 ¶ 48; Wasserkrug Tr. 24. 44 Wasserkrug Tr. 24–25; see JX 1249 ¶ 58. 45 JX 1247 ¶ 52; Wasserkrug Tr. 25–26. 46 JX 1247 ¶ 53; Wasserkrug Tr. 26. 47 Wasserkrug Tr. 13, 25–28, 72; JX 1247 ¶ 53. 16 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 18 of 247 PageID #: 2472 observations are remediated.48 If the FDA has concerns about a company’s data or a submission, it may send the company a Complete Response Letter (“CRL”) which, as its name indicates, requires a complete response.49 Data integrity violations are particularly serious because they “break trust” between the offending company and the FDA.50 The FDA may require the withdrawal of an ANDA if the FDA finds that it contains an untrue statement of material fact.51 In cases of repeated, intentional submission of inaccurate data, the FDA may invoke its Application Integrity Policy (“AIP”), which “halts all ongoing scientific review of pending applications to the agency until specific milestones are accomplished by the company.”52 Exiting from the AIP is a time-consuming and expensive process that involves an independent investigation, corrective action plan, recall or retesting of products, and withdrawal and resubmission of applications.53 If systemic issues remain uncorrected, the FDA may seek a court-enforced permanent injunction. In extreme cases, the FDA may bar a company from making 48 JX 1249 ¶ 61; Wasserkrug Tr. 28; see also JX 1247 ¶ 53; Chesney Dep. 149. 49 Chesney Dep. 148–49. 50 JX 1251 ¶ 19. 51 See 21 U.S.C. § 355(e); JX 934 at 4. 52 JX 1251 ¶ 33; see JX 1247 ¶ 53; JX 1355. 53 JX 1251 ¶ 34. 17 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 19 of 247 PageID #: 2473 submissions, exclude it from other federal programs, or refer matters for criminal prosecution.54 At the time the Merger Agreement was signed, Mark Silverberg was the head of Akorn’s quality function, holding the title of Executive Vice President, Global Quality Affairs.55 Silverberg had been Akorn’s most senior quality official for over ten years. In that role, he reported directly to Rai, Akorn’s CEO. The record demonstrated that Silverberg was not a suitable individual to be responsible for Akorn’s quality efforts. One year before the Merger Agreement was signed, Akorn’s board of directors and Rai concluded that Silverberg was not up to task of carrying out his duties and needed to retire.56 Silverberg nevertheless remained at his post until nearly one year after the signing of the Merger Agreement, on March 1, 2018, when Kim Wasserkrug, previously the head of quality at Akorn’s Decatur site, took over the quality function. Silverberg was shifted to the role of “Quality Advisor.”57 His new role had no substantive responsibilities (other than to help with this litigation), came with a 20% 54 See JX 934 at 5; JX 1249 ¶ 61. 55 See JX 204 at ‘056; Rai Tr. 498–99. 56 See JX 115; JX 132; JX 137; see also JX 121; JX 890 at ‘274. 57 JX 955 at ‘702. 18 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 20 of 247 PageID #: 2474 diminution in pay, and was originally to last for the lesser of 90 days or until the Merger closed. It was a constructive termination for cause.58 Akorn took employment action against Silverberg only after learning that in August 2017, during the period between signing and closing, Silverberg submitted a response to a CRL that he had been told—and I believe knew—would result in the submission of fabricated data to the FDA.59 If he had not signed off on the CRL, Akorn would have had to withdraw the ANDA, which would have been a red flag for Fresenius that could have put the Merger in jeopardy. In my judgment, Silverberg submitted the false CRL in an effort to avoid inviting any scrutiny of Akorn’s data integrity deficiencies until after the Merger closed, when it would be Fresenius’s problem.60 Akorn ultimately withdrew the ANDA in March 2018.61 But for an investigation that Fresenius was conducting into two whistleblower letters it received, Akorn would not have withdrawn the ANDA or taken See Rai Tr. 496 (“Q. And, of course, as we all know, [Silverberg] was fired, right, 58 by Akorn? A. Yes.”); Wasserkrug Tr. 105 (“In my mind, he was fired, but yes.”). 59 See Wasserkrug Tr. 105 (agreeing that Silverberg was fired “because he failed to direct the withdrawal of an ANDA submitted to the FDA for the drug azithromycin after being told that the submission contained likely false or fabricated data” and “for knowingly resubmitting that inaccurate data, or highly likely inaccurate data, to the FDA in a CRL response back in August of 2017”). 60 In a submission made after post-trial argument, Akorn informed the court that the database of a stand-alone high accuracy liquid particle counter had been deleted at the Somerset site on August 22, 2018. Dkt 201 at 1. In a moment of brazen candor, Akorn argued that if Fresenius had not “repudiated the Merger Agreement itself, the deal would have closed months earlier and the risk of such an event would have fallen on Fresenius.” Dkt. 209 at 7; see also Wasserkrug Dep. 157; Wasserkrug Tr. 139; JX 590 at ‘472. 61 See JX 1070 at ‘771; Wasserkrug Tr. 43–44. 19 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 21 of 247 PageID #: 2475 any action against Silverberg. After constructively firing Silverberg, Akorn did not use the opportunity to deliver any type of message to its employees about the importance of data integrity or its intolerance for inaccurate submissions to the FDA.62 During his ten years heading up the quality compliance function, Silverberg placed “a lot of pressure” on employees “to just get things done and get products out [the] door.”63 In an employee survey conducted in January 2016 that went to Rai and other members of senior management, a whistleblower submitted the following comment: Our current Executive Vice President of Quality Assurance is not fostering a willingness to change the current Akorn culture. Instead of acknowledging and embracing our compliance gaps and working collaboratively with other groups to change and mature our quality systems, he actively works to prevent collaboration and transparency. He has actually counselled his staff to not speak to Global Quality Compliance staff and to not share information with GQC. This is not in line with our new mission and values statement. He has also provided misleading information to regulatory bodies including the US FDA.64 The comment was exceptional both in its content and its source: it came from someone who worked in Akorn’s headquarters in Lake Forest, where Silverberg himself worked along with Rai and the executive team. Yet Akorn did not investigate it. During the same period when the problems with the azithromycin CRL were unfolding, Silverberg instructed the head of quality at Akorn’s Swiss site not to open an investigation into a 62 Rai Tr. 497, 502–03. 63 JX 870 at ‘895 (“[T]here was a lot of pressure from Mark S to just get things done and get products out [the] door.”). 64 JX 246 at ‘573. 20 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 22 of 247 PageID #: 2476 quality issue he reported, not to put Silverberg’s response in any file relating to the matter, and not to put FDA-sensitive subjects in emails.65 On Silverberg’s watch, Akorn did very little to address data integrity issues. In June 2016, Ron Johnson, an Akorn board member with FDA experience,66 wrote to Silverberg to express concerns about Akorn’s state of compliance: I continue to be concerned that our position always seems to be that FDA got it wrong and we are just fine. I do not think we are fine, I think there are signals that we are missing. As the leader of the quality function, I do not understand how you can tolerate the continued non-compliance by employees, supervisors and quality assurance staff. . . . We have dogged [sic] a bullet a number of times, but at some point, our number will be up unless we, once and for all, fix the underlying reasons why our people do not adhere to procedures. Why do we not see an effort to do this?67 Silverberg’s initial response was “I think we should communicate live (on the phone).” 68 In December 2016, during a meeting of the board of directors’ Quality Oversight 65 See JX 623 (Silverberg stating, “Please do not incorporate this correspondence into any related complaint investigations or files[,]” and instructing, “Please do not put FDA sensitive subjects into emails as such.”); JX 667 (Silverberg: “Let’s discuss by phone please at your earlier convenience.”); JX 778 at ‘557 (Silverberg instructing Sherwani in connection with the azithromycin investigation, “No more emails.”). Stuart testified that during Cravath’s investigation into the azithromycin problems, discussed below, they determined that Silverberg subsequently ordered an investigation into the issue. Stuart Tr. 868–69. 66 See, e.g., JX 470 at 14 (April 2017 consultant report quoting unnamed FDA official: “Ron Johnson [a board member at Oak] is ex-FDA and highly respected. He gives the company excellent credibility.”) (alteration in original). 67 JX 1403 at ‘004. 68 Id. 21 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 23 of 247 PageID #: 2477 Committee, Johnson again “expressed his concern around the repetitiveness of issues between sites and across sites identified during audits & external inspections.”69 Also in December 2016, Akorn received a “Compliance Gap Analysis Summary and Recommendation Report” for its Decatur facility from John Avellanet of Cerulean Associates LLC, who had inspected the facility during a four-day visit in September 2016.70 The report was blunt: “Overall, the review found that the data integrity controls at . . . Akorn’s Decatur, Illinois site . . . are insufficient to support compliance with current data integrity expectations and [FDA] regulatory requirements.”71 The report warned that “[a]s a result, Akorn currently shoulders significant regulatory and negative public perception risk.”72 Cerulean identified seven critical, seven major, and at least five minor nonconformities at the Decatur site.73 The report defined a critical nonconformity as one that is “reasonably likely to directly impact (e.g., either immediately cause, enable, or be a non-compliance) the regulatory compliance status of the organization.”74 The report warned that “[h]istorically, these findings have consistently resulted in public enforcement 69 JX 235 at ‘598; see Rai Tr. 515–16. 70 See JX 231; Wasserkrug Tr. 31–32. 71 JX 231 at ‘062. 72 Id. 73 Id. at ‘062, ‘067. 74 Id. at ‘067. 22 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 24 of 247 PageID #: 2478 actions (e.g. FDA Warning Letter, product recall, etc.) and have been significant factors in product liability litigation.”75 The report also warned that “[r]epeat non-conformities . . . pose an increased risk because they are indicators that an organization did not take adequate corrective actions and thus may not treat its responsibilities as seriously as appropriate.”76 The seven critical findings were:  “Failure to exercise sufficient controls to prevent data loss.”77  “Insufficient data integrity controls (both procedural and technical) to prevent unauthorized changes to electronic data.”78  “Insufficient registered record archival controls and retention for records involved in drug product manufacture, testing and release, and quality records.”79  “Failure to have sufficient controls over computerized equipment used in regulated processes and used to create, manipulate, edit, [and] store . . . regulated data for drug product safety and quality testing and release.”80  “Inadequate validation of computerized systems to ensure the ongoing suitability of systems for Akorn processes, data, and personnel.”81 75 Id. 76 Id. 77 Id. at ‘068. 78 Id. at ‘069. 79 Id. at ‘071. 80 Id. at ‘072. 81 Id. at ‘074. 23 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 25 of 247 PageID #: 2479  “Inadequate control over approved specifications for drug product and raw materials, and failure to ensure that product testing data is derived from compliance with established specifications and standards.”82  “Inadequate corrective action and preventative action and out-of-specification investigations, explanations, and corrective actions.”83 Specific deficiencies included that any Akorn employee could add, delete, or modify electronic data, which undermined “all of the test data [and] all of the production data” at the Decatur site,84 thereby “call[ing] into serious question the identity, strength, quality, safety, purity, and sterility of Akorn’s drug products.”85 Cerulean also found that Akorn had failed to use an audit trail function that would have enabled Akorn to determine whether employees had exploited their unlimited access, which also “rais[ed] questions over the integrity of the laboratory’s data since initial usage of the instruments.”86 In January 2017, Cerulean conducted a similar assessment at the Somerset site. Cerulean was not able to complete its inspection because of inadequate IT support. 87 In 82 Id. at ‘075. 83 Id. at ‘076. 84 Avellanet Dep. 111–15. 85 JX 231 at ‘075. 86 Id. at ‘070. Avellanet also found that Akorn was claiming a clearly fraudulent number of hours for training on quality issues. See id. at ‘077 (“The Akorn Decatur site alone averages 7,000 trainings a month. Assuming each individual works 7 days a week, with no vacations or sick leave, that’s 232 trainings a day.”); Avellanet Dep. 120–24. 87 Wasserkrug Tr. 131; Wasserkrug Dep. 156–57; Avellanet Dep. 142–45; see JX 439 at ‘430; JX 500; JX 504; JX 505; JX 509. 24 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 26 of 247 PageID #: 2480 May 2017, Cerulean provided Akorn with a preliminary report on the Somerset facility, which identified three additional critical findings and three major findings.88 This time, Avellanet believed that some of the violations were so severe that Akorn’s senior management should be concerned about potential criminal liability under the Park doctrine.89 Cerulean found that senior management had failed “to ensure an effective quality system” and that the IT department failed to “ensure the reliability of the controls around data used to make, test, [and] release” sterile drug products.90 As at Decatur, Cerulean determined that the latter deficiency raised “serious questions about the reliability of any data integrity controls and thus the trustworthiness of any electronic information used throughout Akorn to make safety, efficacy and quality decisions.”91 Cerulean also identified additional “critical” computer access and audit trail deficiencies at Somerset similar to those it kenneth69@example.org 88 JX 439 at ‘430. 89 Id. at ‘435–36; see United States v. Park, 421 U.S. 658 (1975). 90 JX 439 at ‘435–36. 91 Id. at ‘436. 92 See id. at ‘437 (citing Akorn’s “[f]ailure to have sufficient controls over computerized systems . . . used to create, manipulate, edit, [and] store” data used for product testing); id. at ‘438 (“Audit trails appear to be inconsistently reviewed . . . .”); see also JX 564 at ‘352 (Somerset employee complaining in August 2017 that quality-tracking software’s audit trails showed she had completed investigations for matters to which she was not even assigned: “It is alarming to me that in light of all the issues that we have presented with the Trackwise System, we are being told by IT that these issues do not warrant a re-validation of the system.”). 25 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 27 of 247 PageID #: 2481 Akorn made “no effort” to schedule a date for Cerulean to complete the inspection at the Somerset site.93 Akorn cancelled Cerulean’s previously scheduled assessment of its Amityville site.94 Silverberg and other members of senior management identified the Merger as the reason for not having Cerulean do any more work.95 I infer that they did not want Cerulean to identify any more data integrity gaps that could jeopardize their efforts to sell the Company. The only interest that Akorn’s executives showed in the Cerulean report was a request by Joseph Bonaccorsi, Akorn’s Executive Vice President, General Counsel, and Corporate Secretary, that Cerulean remove the reference to potential criminal liability for Akorn’s executives.96 Avellanet testified that Akorn’s data integrity issues were among the “top three worst” of the 120+ pharmaceutical companies that he has assessed,97 a notorious status given that his practice only involves companies that “have problems.”98 Avellanet testified that some of Akorn’s data integrity failures were so fundamental that he would not even 93 Wasserkrug Tr. 132; see Avellanet Dep. 139; see also JX 507 at ‘317 (“executive leadership” decided “that IT resources would not be engaged in the third party data integrity audit [Cerulean]”). 94 Avellanet Dep. 47; see JX 509 at ‘746. 95 Wasserkrug Tr. 132. Avellanet Dep. 203–07. Gill voiced the request on Bonaccorsi’s behalf. See 96 Bonaccorsi Dep. 175–78, 196; Avellanet Dep. 203–05. 97 Avellanet Dep. 172–73. 98 Kaufman Tr. 317–19; accord Avellanet Dep. 301. 26 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 28 of 247 PageID #: 2482 expect to see them “at a company that made Styrofoam cups,” let alone a pharmaceutical company manufacturing sterile injectable drugs.99 He believed that the “FDA would get extremely upset” about Akorn’s lack of data integrity “because this literally calls into question every released product [Akorn has] done for however many years it’s been this way.”100 Roughly contemporaneously, in June 2016, Akorn’s GQC team identified a critical data integrity failure at the Vernon Hills site that paralleled the problems identified by Cerulean: a failure to establish proper computer access controls and audit trials.101 In December 2017 and January 2018, an investigation by Lachman Consulting Services, a 99 Avellanet Dep. 173; see also id. at 111–12 (testifying that he had never before seen a company where any employee could make changes to electronic data “willy-nilly with no traceability or accountability”). 100 Id. at 116–17. Avellanet’s first report concerned Decatur, but the record evidence supports a finding that conditions at Decatur were representative of company-wide kenneth69@example.org. See JX 411 (Wasserkrug sending gap assessment to Sherwani: “I suspect you will have similar problems with your systems there.”). Witnesses for Akorn also claimed that its IT problems did not matter because Akorn was a paper-based company. See Wasserkrug Tr. 66. As one of Fresenius’s experts explained, that claim in itself is an alarming red flag, because in the current age, a company cannot operate compliantly using paper-based systems, and regardless, a company’s computerized systems still must be in compliance. George Tr. 1146. 101 JX 655 at ‘479 (“The program . . . is unable to record audit trails and cannot support accounts with unique user names and passwords for individual users. Analysts routinely log in as ‘Admin’ without a password.”); id. at ‘472 (“[T]he audit observations together with the areas of risk identified within Data Integrity; require Akorn to take immediate action to mitigate said risk.”); see Wasserkrug Tr. 109–12; see also JX 242 (GQC audit report on Amityville from October 2016 identifying “critical” deficiency related to data integrity). 27 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 29 of 247 PageID #: 2483 consultant hired by Fresenius, identified similar issues at all of the sites that Lachman visited. Beginning in March 2018, an investigation conducted by NSF International, a consultant hired by Akorn, found extensive issues at the sites it examined. Akorn did not do anything meaningful to address the issues raised by Cerulean until March 2018, after the investigation that Fresenius conducted into the whistleblower letters led to Akorn uncovering Silverberg’s false CRL response, self-reporting to the FDA, and committing to address its data integrity problems. Until Fresenius’s investigation forced its hand, Akorn was not devoting resources to data integrity. It is true that Silverberg facilitated the preparation of a data integrity plan for Decatur in August 2017, but he made clear in his contemporaneous communications that it was just so Akorn would have a document to show the FDA. When Akorn’s IT department opposed the plan, Silverberg reassured them that it was not meant to be implemented. In his jargon, it “serves to represent to outside authorities our cognizance of the subject, without committing IT to any near term work or responsibility.”102 In late 2017, Patty Franke, Decatur’s Quality Assurance Manager for Data Integrity and Compliance, 103 told Cerulean that Akorn was “making 0 progress on our DI remediation efforts” at Decatur, which she attributed to “the 102 JX 590 at ‘472; see Wasserkrug Tr. 136–38, 142–43. 103 Franke Dep. 25–26. 28 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 30 of 247 PageID #: 2484 culture and the message from management.”104 Wasserkrug testified that she was told that “a lot of this stuff would wait until the Fresenius merger occurred,” which was an excuse “we heard . . . actually quite often” in late 2017.105 To reiterate, Akorn only started making a concerted effort to address its data integrity issues in March 2018, after Fresenius had flagged Akorn’s data integrity problems and prompted Akorn to uncover Silverberg’s false CRL response, and after Akorn felt it had to try to get ahead of the problem by going to the FDA and committing to address its data integrity issues. At that point, Akorn formed an executive steering committee on data integrity remediation, which held its kickoff meeting on April 19, 2018.106 It took until June 7, 2018 for Akorn to assemble a list of the hundreds of deficiencies it had accumulated, many of which went back years.107 Over a year after receiving the Cerulean report, the Somerset facility had not taken any action to address the deficiencies it 104 JX 754 at ‘740. Separate from the periodic audits conducted by GQC and the consultant assessments, Akorn’s quality assurance personnel conduct ongoing site monitoring and represent “the eyes and ears” for each facility. See Wasserkrug Tr. 14. 105 Wasserkrug Dep. 157–58. 106 JX 1155; see Rai. Tr. 530. 107 See JX 1885; Rai Tr. 531–34; Wasserkrug Dep. 27–28. 29 Case 1:20-cv-01254-MN Document 5-52 Filed 10/02/20 Page 31 of 247 PageID #: 2485 identified.108 Decatur had only completed “32% of the corrective actions thus far.”109 By the time of trial, Akorn still did not have a remediation plan because it was still in the process of figuring out all of the deficiencies that the Company needed to address.110 In its post-trial briefs, Akorn attempted to paint a picture of compliance at Akorn that differed radically from what the evidence kenneth69@example.org. Notably absent from the witness list at trial was any representative from Akorn’s quality function who could speak to Company-wide conditions before March 2018. Wasserkrug testified, but she took over the company-wide quality function from Silverberg in March 2018 and could not speak to matters preceding her tenure, except at the Decatur site where she had been the site quality director.111 Silverberg was the obvious candidate, but neither he nor Jaspreet Gill, the head of Akorn’s GQC team, nor any other senior member of the quality function kenneth69@example.org. Rai made claims about quality, but having considered his answers and evaluated his demeanor while he was being cross-examined about his commitment to quality, I am forced to conclude that he does not regard it as a priority.112 Bonaccorsi gave testimony about the 108 JX 1077 at ‘065–66; see JX 1885 at ‘754; Wasserkrug Tr. 153–54 (“[I]n 2017, after getting the Somerset
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