Case Name: Glenridge v. Questcor

Case Number: 111CV203554

Defendants Glenridge Pharmaceuticals, LLC (“Glenridge”), Kenneth Greathouse (“Greathouse”), Stuart Rose (“Rose”), and Lloyd Glenn (“Glenn”) (collectively, the “Glenridge Defendants”) move for summary judgment against plaintiff Questcor Pharmaceuticals, Inc.’s (“Questcor”) First Amended Complaint (“FAC”) and, in the alternative, summary adjudication of Questcor’s claims.

A. Statute of Limitations

The Glenridge Defendants’ motion does not attack the merits of Questcor’s claims. Rather, the main thrust of the motion is that Questcor’s causes of action are time-barred. The Glenridge Defendants argue that the statute of limitations began to run when Questcor suspected that someone might have done something wrong to cause injury and that, as early as 2004, Questcor suspected that Greathouse had breached a fiduciary duty to Questcor. The Glenridge Defendants also argue that Questcor’s possession of Greathouse’s emails, starting in 2003, started the running of the statute of limitations.

In support of their arguments, the Glenridge Defendants provide the following relevant evidence. From at least May 2000 to March 2002, Mr. Casamento (“Casamento”) was Questcor’s President, Chief Executive Officer, and Chairman of the Board of Directors. (Separate Statement of Undisputed Material Facts in Support of the Motion for Summary Judgment or, in the Alternative, Adjudication Filed by Glenridge Pharmaceuticals LLC, Kenneth Greathouse, Stuart Rose, and Lloyd Glenn (“UMF”), No. 1.) In July 2000, Greathouse met with Casamento and fully explained to Casamento his role with Glenridge. (UMF, No. 2.) During the meeting on or about July 19, 2000, Greathouse and Casamento agreed that in exchange for Greathouse suggesting to Aventis that Questcor be allowed to substitute in for Glenridge in a deal that Glenridge and Aventis had already negotiated, Questcor would pay consideration to Glenridge should Questcor consummate a deal with Aventis. (UMF, No. 3.) On July 27, 2001, Questcor and Aventis signed the Asset Purchase Agreement consummating Questcor’s purchase of Acthar from Aventis. (UMF, No. 4.)

On August 27, 2001, Questcor proposed that the royalty pursuant to the Royalty Agreement would decrease over time, from “5% for the first twelve months, 4% for the second twelve months and 3% thereafter.” (UMF, No. 7.) On August 28, 2001, Rose wrote to Casamento that the proposal was accepted. (UMF, No. 8.) Glenridge and Questcor signed the Royalty Agreement on January 18, 2002. (UMF, No. 18.)

With regard to Questcor’s knowledge of Greathouse’s participation in the discussions surrounding the Royalty Agreement, the Glenridge Defendants present evidence that Rose had numerous conversations with Casamento prior to January 2002 wherein Rose told Casamento that he needed to obtain approval from all Glenridge partners before he could agree to some terms. (UMF, No. 21.) One of Questcor’s Board members, Virgil Thompson, was “of the belief that Mr. Greathouse represented Questcor vis-à-vis a transaction with Glenridge.” (UMF, No. 22.) Prior to the execution of the Royalty Agreement, Greathouse and Rose each told Questcor’s attorney that they had spoken with each other about the Royalty Agreement negotiations and Questcor’s attorney never objected. (UMF, Nos. 23-24.) Questcor’s attorney copied Greathouse on communications relating to the draft Royalty Agreement. (UMF, No. 25.)

When Greathouse left Questcor in 2003, Questcor thought it was important to keep a file of Greathouse’s emails, which Questcor saved onto its network. (UMF, No. 26.) Greathouse’s emails that Questcor relied on in its FAC had been in Questcor’s possession since at least 2003. (UMF, No. 27.)

In the fall of 2004, Albert Hansen (“Hansen”) became the Chairman of the Board and Interim CEO of Questcor, following the departure of Casamento. (UMF, No. 30.) While Hansen was with Questcor he was concerned that “Questcor had a royalty agreement with a company Glenridge whose principal, Ken Greathouse, was also a Questcor vice president.” (UMF, No. 31.) With respect to the Royalty Agreement, Hansen wanted “to hire a law firm to investigate, but Questcor didn’t have the money to do that.” (UMF, No. 33.)

In February 2005, James Fares (“Fares”) joined Questcor as its CEO. (UMF, No. 35.) One of the first issues that Fares discussed with the Board when he joined Questcor was the Royalty Agreement. (UMF, No. 36.) The reason that Fares and the Board discussed Greathouse was because members of the Board were concerned that the Royalty Agreement might have been an “inappropriate transaction.” (UMF, No. 38.) The Board was “concerned about the inappropriateness of having an officer bring in a product and . . . realize a gain for it.” (UMF, No. 39.) Fares too was concerned whether the Royalty Agreement was an “inappropriate transaction” given the timing of when Greathouse was hired and when Acthar was licensed. (UMF, No. 40.) The Board asked Fares to conduct an “investigation” of the Royalty Agreement and whether Greathouse had violated a duty to Questcor. (UMF, Nos. 41-44.) Questcor’s investigation of the Royalty Agreement persisted for more than a year and Questcor considered litigation against Greathouse. (UMF, Nos. 59-60.)

On November 26, 2007, Donald Bailey (“Bailey”) became Questcor’s President and CEO. (UMF, No. 70.) In 2008, Questcor, under Bailey as CEO, conducted an investigation into the Royalty Agreement. (UMF, No. 71.) Bailey told the Board that “there seems to be something not right her” about the Royalty Agreement. (UMF, No. 74.) Following Bailey’s report about his investigation, Questcor decided to not move forward. (UMF, No. 75.)

On May 27, 2009, Questcor received a subpoena from the Attorney General of the State of New York (the “Subpoena”). (UMF, No. 77.) Among other things, the Subpoena called for Questcor to describe under oath “the reasons and justifications for all royalty arrangements with Glenridge.” (UMF, No. 78.) In responding to the subpoena, Questcor produced an email from Greathouse to Rose dated January 15, 2002, an email from Greathouse to Rose dated January 16, 2002, and an email from Greathouse to Casamento, dated January 17, 2002, that Questcor relied upon in two motions for summary judgment or adjudication. (UMF, Nos. 81-83.)

As an initial matter, Questcor argues that the statute of limitations does not apply to its first cause of action for declaratory relief. A claim for declaratory relief seeking to declare a contract’s invalidity is considered a defensive claim and the statute of limitations does not apply to such a claim. (See Pringle v. Water Quality Ins. Syndicate (2009) 646 F. Supp. 2d 1161, 1171-1172, citing Styne v. Stevens (2001) 26 Cal. 4th 42, 51-53.) Questcor does not seek any restitution in its declaratory relief claim; it only requests prospective relief in the form of a judicial declaration that the Royalty Agreement is void or voidable and that Questcor is not obligated to make future royalty payments to the Glenridge Defendants. (FAC, Prayer for Relief, ¶ 1.) Consequently, the Glenridge Defendants’ motion cannot be granted with regard to the first cause of action for declaratory relief on the grounds that it is time-barred.

With respect to the other causes of action in the FAC, where the gravamen of a complaint is fraud, the statute of limitations period is three years. (City of Vista v. Robert Thomas Sec. (2000) 84 Cal. App. 4th 882; see also Fuller v. First Franklin Financial Corp. (2013) 216 Cal. App. 4th 955 [three year limitations period for a cause of action for breach of fiduciary duty where the gravamen of the claim is deceit].) Questcor agrees that a three year limitations period applies to its breach of fiduciary duty claim. (Questcor’s Opposition to Motion for Summary Judgment or, in the Alternative, Summary Adjudication, p. 12:25.)

Generally, a cause of action accrues when the wrong is suspected even if its exact cause or the identity of the wrongdoer is unknown. (Kline v. Turner (2001) 87 Cal. App. 4th 1369, 1375.) The Glenridge Defendants’ evidence demonstrates that there were concerns at Questcor about Greathouse’s possible involvement in the Royalty Agreement negotiations going back to at least 2004 when Hansen was Interim CEO. Investigations were conducted in 2005 and again in 2008. Based on this evidence the statute of limitations for the breach of contract cause of action and the related aiding and abetting cause of action would have begun to accrue at least by 2004 when Questcor suspected the alleged wrong – i.e. Greathouse’s involvement in the negotiations. It is undisputed that Questcor initiated its action in Orange County on August 23, 2012. (UMF, No. 115.) Therefore, the Glenridge Defendants have met their initial burden of showing that the second cause of action for breach of fiduciary duty and third cause of action for aiding and abetting breach of fiduciary duty are time-barred.

In opposition, Questcor argues that the delayed discovery rule and fraudulent concealment doctrine toll the statute of limitations. Under the delayed discovery rule, the limitations period does not begin to run until a plaintiff discovers or could have discovered through the exercise of reasonable diligence all facts essential to her cause of action. (Sylve v. Riley (1993) 15 Cal. App. 4th 23, 26.) However, where a fiduciary relationship exists the usual duty of diligence to discover facts does not exist. (United States Liability Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal. 3d 586, 598.)

The fraudulent concealment doctrine applies as follows: “A defendant’s fraud in concealing a cause of action against him will toll the statute of limitations, and that tolling will last as long as a plaintiff’s reliance on the misrepresentations is reasonable.” (Grisham v. Philip Morris U.S.A., Inc. (2007) 40 Cal. 4th 623, 637.) Whether reliance was reasonable is a question of fact for the jury, and may be decided as a matter of law only if the facts permit reasonable minds to come to just one conclusion.” (Ibid.) In the context of a fiduciary relationship, failing to disclose material information is treated as fraudulent concealment. (Amen v. Merced County Title Co. (1962) 58 Cal. 2d 528, 534.)

Questcor provides evidence that Casamento and members of Questcor’s Board believed that Greathouse had been recused from the negotiations of the Royalty Agreement and did not participate in those negotiations. (Questcor Pharmaceuticals, Inc.’s Response to Defendants’ Separate Statement of Undisputed Material Facts; and Questcor’s Separate Statement of Additional Disputed Facts, Questcor’s Additional Disputed Material Facts in Opposition to Motion for Summary Judgment or, in the Alternative, Summary Adjudication (“AMF”), Nos. 28, 49-51, 57, 58-60.)

Questcor acknowledges that investigations were undertaken by Hansen and Fares in 2004 and 2005. However, Questcor contends that whether those investigations were reasonably diligent is a fact-intensive inquiry that depends on the circumstances of each investigation. (See Artal v. Allen (2003) 111 Cal. App. 4th 273, 280 [“Whether a plaintiff has exercised reasonable diligence necessarily depends on the facts of the individual case.”].) Questcor correctly cites to Hobart v. Hobart Estate Co. (1945) 26 Cal. 2d 412, 435, for the proposition that “[a] defrauded person . . . is not barred from maintaining an action merely because he commenced an investigation if it was incomplete or abandoned before discovery of the falsity, particularly if the defendant has a superior knowledge of the facts, or if it is difficult for the plaintiff to ascertain all the facts or he is not competent to judge the facts without expert assistance.”

As stated above, Hansen and Fares each investigated the propriety of the Royalty Agreement. (AMF, Nos. 63-64.) They did not find evidence of Greathouse’s wrongdoing. (AMF, No. 66.)

Neither Hansen nor Fares reviewed Greathouse’s archived emails stored on Questcor’s backup tapes. (AMF, No. 65.) Questcor provides evidence that it would have been virtually impossible to conduct a search of the backup tapes that targeted specific documents or emails until the date from the backup tapes had been restored to a readable and electronically searchable format. (Separately Bound Appendix of Evidence in Support of Questcor Pharmaceutical, Inc.’s Opposition to Motion for Summary Judgment or, in the Alternative, Summary Adjudication, Exhibit B (Declaration of Bhuvan Singh) (“Singh Declaration”), ¶ 6.) The total volume of data on the backup tapes is 2.183 terabytes, which is approximately 3.5 million documents. (Id., ¶ 4.) The tapes were restored beginning in August 2012. (Id., ¶ 5.) Restoring 2.1 terabytes of data to a searchable and readable format cost approximately $83,169. (Id., ¶ 4.) Once restored, the data and files on the backup tapes were organized into folders and subfolders, one of which was titled “KGreathouse.” (Id., ¶ 9.) The “KGreathouse” folder contained approximately 23,000 documents. (Ibid.)

Under these circumstances, there is a question of fact as to whether it was reasonable for Hansen and Fares to fail to review the archived emails. Moreover, this is not a situation where there was some basis for a reasonable suspicion and Questcor did nothing. Rather, investigations were undertaken but failed to turn up evidence of wrongdoing. Consequently, there is a triable issue of material fact as to whether the investigations were reasonable and whether Questcor is entitled to the benefit of the delayed discovery rule.

In 2009, Questcor engaged outside counsel, Martha Gifford (“Gifford”), to prepare a response to a subpoena from the New York Attorney General. (AMF, No. 67.) Questcor produced documents to the New York Attorney General, including Greathouse’s emails. (AMF, No. 68.) Because Gifford was investigating the circumstances surrounding the negotiation and execution of the Royalty Agreement, she also interviewed Greathouse. (AMF, No. 69.) When asked about the negotiations, Greathouse disclaimed any involvement, stating that he had “recused himself from both sides of that process.” (AMF, No. 70.) It was not until February 12, 2012, that Greathouse admitted to participating in the negotiations. (AMF, No. 73.) This evidence raises a triable issue of material fact as to whether the statute of limitations should be tolled due to Greathouse’s fraudulent concealment.

B. Laches

The elements of laches are (1) the failure to assert a right, (2) for some appreciable period so as to amount to unreasonable delay, (3) which results in prejudice to the adverse party. (In re Marriage of Powers (1990) 218 Cal. App. 3d 626, 642.) The Glenridge Defendants argue that laches applies here because Questcor unreasonably delayed initiating its lawsuit and because the delay has prejudiced the Glenridge Defendants’ ability to defend the lawsuit due to the fading memory of key witnesses.

The Glenridge Defendants present evidence that some of Questcor’s Board Members who ratified the Royalty Agreement as well as Questcor’s attorney who drafted the agreement cannot recall details surrounding the negotiation of the Royalty Agreement. (UMF, Nos. 101-113.) The Glenridge Defendants contend it would be inequitable for the Glenridge Defendants to have to rebut Questcor’s claims for rescission when the memories of these key witnesses have faded.

In response, Questcor provides evidence from various individuals who were involved in the negotiation of the Royalty Agreement, including Casamento, who remember important details. (Separately Bound Appendix of Evidence in Support of Questcor Pharmaceutical, Inc.’s Opposition to Motion for Summary Judgment or, in the Alternative, Summary Adjudication, Exhibits A, D, F.) Accordingly, there is a triable issue of material fact as to whether Questcor’s claims should be barred by laches.

C. Waiver

The Glenridge Defendants argue that Questcor waived its right to seek to rescind the Royalty Agreement. “The general rule is that a defrauded party must exercise his election to rescind with reasonable promptness after discovering the fraud. A delay in rescission is evidence of a waiver of the fraud and an election to treat the contract as subsisting. Any acts indicating an intent to abide by the contract are evidence of an affirmance thereof and of a waiver of the right to rescind.” (Le Clercq v. Michael (1948) 88 Cal. App. 2d 700, 702.) However, whether there has been a waiver is usually regarded as a question of fact to be determined by the jury, or by the trial court if there is no jury. (Kay v. Kay (1961) 188 Cal. App. 2d 214, 217.) Based on the evidence discussed above regarding when Questcor discovered facts related to Greathouse’s involvement in the Royalty Agreement negotiations and Greathouse’s concealment of those facts, there is a triable issue of material fact as to whether Questcor intentionally relinquished its right to seek rescission of the agreement.

In sum, Questcor has raised triable issues of material fact and the Glenridge Defendants’ motion for summary judgment or, in the alternative, adjudication is DENIED.

Questcor Pharmaceuticals, Inc.’s Motion to Seal is GRANTED.