Bloomberg News

J&J Directors Win Dismissal of Investor ‘Red Flags’ Suit

October 04, 2011

(Adds history of J&J recalls in seventh paragraph.)

Oct. 4 (Bloomberg) -- Johnson & Johnson directors won dismissal of a shareholder lawsuit accusing them of ignoring “red flags” foreshadowing product recalls and government probes of manufacturing defects and marketing practices.

Investors filed complaints claiming that leadership at J&J, the world’s second-largest health-care products company, missed a series of signs about quality problems, as well as kickbacks, illegal marketing of drugs and bribes paid to doctors outside the U.S.

U.S. District Judge Freda Wolfson dismissed an amended complaint, ruling that investors failed to allege directors acted in bad faith in neglecting to properly oversee the New Brunswick, New Jersey-based company. She said investors hadn’t shown directors deliberately ignored various illegal activities at J&J.

“The court does not find a sufficient basis for inferring that a majority of the directors faced a substantial likelihood of personal liability in connection with what appears to be serious misconduct on J&J’s part,” Wolfson ruled Sept. 29 in federal court in Trenton, New Jersey.

Wolfson said investors described the red flags to 10 directors as U.S. Food and Drug Administration warning letters, an FDA report, state attorney general subpoenas, whistleblower lawsuits, a criminal guilty plea, a settlement with the Justice Department, and a Justice Department subpoena.

“We are pleased Judge Wolfson granted our motion to dismiss the consolidated shareholder derivative lawsuit,” J&J spokesman William Price said in an e-mail. “We do not agree with the allegations in the complaint and will dispute them in court if and when the case moves forward.”

Recalls

Recalls have dogged J&J the past two years, led by the withdrawal of more than 40 brands of children’s Tylenol, Motrin and other medicines with foul odors or faulty ingredients. J&J shut one factory for an overhaul last year and signed a consent decree in March expanding U.S. oversight at three plants.

J&J argued in court papers that its flood of product recalls last year stemmed from poor management, staffing cuts and breakdowns in integrating the consumer unit it bought from Pfizer Inc. It said top executives aren’t to blame.

A report by a special committee of J&J board members, filed in response to investor lawsuits, said the company’s McNeil unit suffered from “an adversarial relationship” between some quality-control and production staff as well as “an emphasis on production volume” over compliance. The panel urged J&J’s board to create a new regulatory and compliance panel.

In January 2010, the Justice Department sued J&J, claiming the company paid kickbacks to influence sales of its antipsychotic drug Risperdal to nursing home patients. J&J claims that payments it made to Omnicare Inc., the largest U.S. pharmacy for nursing home patients, were allowable rebates and not illegal kickbacks.

Omnicare

In her 67-page opinion, Wolfson said that while the company got a federal subpoena over Omnicare in September 2005, investors couldn’t show that three directors who sat on the board’s Public Policy Committee knew of the probe or discussed it with other directors.

While all the board members on the committee were named as defendants, investors offered “no allegations regarding meeting dates, who was actually present at the meetings, or what subjects were discussed,” Wolfson wrote. “Without this sort of factual detail, the court cannot infer that a majority of the board knew about the substance of the 2005 subpoenas.”

The “pertinent question is not whether the board knew about the subpoena but whether the subpoena is a determination of wrongdoing,” Wolfson wrote.

The judge ruled that the shareholders could file an amended version of the complaint with greater detail.

The suing shareholders include the Minneapolis Firefighters’ Relief Association and the Hawaii Laborers Pension Fund. They asked Wolfson to order top executives and directors to pay damages to the company for mismanagement and to adopt new corporate governance procedures.

The case is In Re Johnson & Johnson Derivative Litigation, 10-cv-2033, U.S. District Court, District of New Jersey (Trenton).

--Editors: Peter Blumberg, Andrew Dunn

To contact the reporters on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Reg Gale at Rgale5@bloomberg.net.


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