IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re BIOSANTE PHARMACEUTICALS, ) Case No. 12 C 3480

INC. DERIVATIVE LITIGATION, )

) Judge Joan B. Gottschall

)

MEMORANDUM OPINION AND ORDER

BioSante is a specialty pharmaceutical company focused on developing products for

female sexual health and oncology. BioSante developed LibiGel, a low-dose transdermal

testosterone gel. LibiGel was meant to treat women with hypoactive sexual desire disorder

(“HSDD”), which is a form of female sexual dysfunction (“FSD”). This shareholder derivative

action against BioSante’s board of directors (Louis Sullivan, Steven Simes, Fred Holubow, Ross

Mangano, Edward Rosenow, Stephen Sherwin, and John Potts) is based on many of the same

events underlying a direct putative class action securities case captioned Lauria v. BioSante, et

al., 12 C 772, also assigned to this court. LibiGel’s failure to perform well in Phase III efficacy

trials caused BioSante’s stock price to drop and is at the heart of both actions. The defendants

seek to dismiss the complaint in its entirety.1

 For the following reasons, the motion to dismiss is

granted, and the plaintiffs are given 28 days to amend their complaint if they choose to do so. 

1

 The plaintiffs also filed a motion for leave to file supplemental authority based on the

Seventh Circuit’s recent decision in Westmoreland Cnty. Emp. Ret. Sys. v. Parkinson, — F.3d

—, No. 12-3342, 2013 WL 4266586, at *4 (7th Cir. Aug. 16, 2013). The motion is granted. 

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I. BACKGROUND2

BioSante, a Delaware corporation, is a specialty pharmaceutical company focused on

developing products for female sexual health and oncology. At all times relevant to this action,

BioSante’s primary product in development was LibiGel, a transdermal testosterone gel for the

treatment of HSDD. 

The plaintiffs contend that the defendants “breached their fiduciary duty of loyalty by

making or causing to be made false and misleading statements about the commercial viability,

efficacy, and market potential for LibiGel.” Compl. at ¶ 2. They also allege that the defendants

breached their duties of oversight by “recklessly and/or negligently disregard[ing] the wrongs

complained of . . . .” Id. at ¶ 91. Specifically, the plaintiffs assert that the defendants failed to

inform shareholders that the “placebo effect” would prevent LibiGel from being approved for

sale. 

The placebo effect, in this context, is a function of psychological factors related to female

sexual desire. Generally, women who enroll in sexual dysfunction studies are already interested

in improving their sex lives. In most cases, the studies reinforce this desire by requiring

participants to record their sexual experiences. As a result, placebos often perform as well as

medication, and, the plaintiffs argue, a common result is that drugs designed to treat HSDD do

not meaningfully outperform placebos in the treatment of female sexual dysfunction. 

2

 The following facts are drawn from the shareholder derivative complaint and are

accepted as true for the purposes of the defendants’ motion to dismiss. The facts alleged in the

complaint in this case are not entirely consistent with the facts alleged in the complaint filed in

the direct action. At the motion to dismiss stage, the court accepts the facts as they are alleged; it

will not attempt to reconcile the two complaints and will proceed based solely on the shareholder

derivative action complaint.

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The plaintiffs assert that BioSante failed to structure the LibiGel trials in a manner that

would minimize the placebo effect, or to inform shareholders that the manner in which the trials

were conducted was likely to enhance the placebo effect. Claiming that the placebo effect

destroyed the prospects of every previous effort to bring to market a drug to treat female sexual

dysfunction, the plaintiffs take issue with BioSante’s representations that it expected LibiGel to

be the first drug approved to treat HSDD and criticize the lack of disclosures about the placebo

effect. 

The plaintiffs also stress that during LibiGel’s Phase III clinical trials, the FDA

recommended against approving Flibanserin (another treatment for female sexual dysfunction)

because the placebo effect prevented Flibanserin’s manufacturer from demonstrating that its

medication worked. In response to the FDA’s announcement about Flibanserin, BioSante issued

a press release stating that “[g]iven the recommendation of the Advisory Committee [about

Flibanserin], we believe that LibiGel is positioned to be the first product approved for the

treatment of HSDD.” Id. at ¶ 43. 

Next, the plaintiffs point to the fact that during LibiGel’s clinical trials, the American

Psychological Association (“APA”) revised the diagnostic manual used by psychiatrists by 

narrowing the definition of HSDD and its symptoms. Specifically, the APA removed “hypo”

from the definition of HSDD because it incorrectly implied that “a biological deficiency of

testosterone” caused HSDD. Id. at ¶ 70. According to the plaintiffs, the revision undermined

LibiGel, which is a testosterone supplement. 

The defendants knew that these changes would negatively affect doctors’ ability to

diagnose patients with female sexual dysfunction which, in turn, would severely limit the market

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for LibiGel. Thus, the defendants repeatedly explained that they were attempting to structure

LibiGel’s development in a way that would cause the FDA to state “that in fact female sexual

dysfunction is a diagnosable condition with measurable endpoints and that women deserve an

option, a therapeutic option.” Id. at ¶¶ 71-72. They did not, however, publicly address the

impact that the changes would likely have on LibiGel’s market potential.

On December 14, 2011, BioSante announced that LibiGel had failed to outperform a

placebo in its Phase III efficacy tests. This news caused BioSante’s share price to plummet. 

Shareholders filed a putative class action securities case against BioSante and Simes (BioSante’s

Vice Chairman, President and Chief Executive Officer). See Lauria v. BioSante Pharm., et al.,

No. 12 C 772 (N.D. Ill.). Shareholders also filed the instant action, which is a derivative action

against BioSante’s board of directors. 

The plaintiffs did not serve a pre-suit demand on BioSante’s board prior to filing this

action. They assert that a pre-suit demand would have been futile because: 

(1) The defendants are unwilling or unable to meet their duties as fiduciaries by filing

suit themselves because they “have professional relationships with, are friends

with, and have entangling financial alliances, interests and dependencies with the

other defendants”; 

(2) The defendants had access to “the information, reports, and clinical data about

LibiGel and its prospects” and nevertheless approved false and misleading

statements about LibiGel’s performance in clinical trials and its chances of

success;

(3) “[N]one of the director defendants can exercise independent business judgment in

deciding whether or not to bring and vigorously prosecute this action because

they each face [a] substantial likelihood of personal liability for breaching their

fiduciary duty of loyalty” and either participated in the wrongdoing or are

interdependent with other defendants who acted wrongfully; 

(4) As members of the Audit and Finance Committee, defendants Sullivan, Holubow,

and Mangano were privy to material information not disclosed to the investing

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public and were responsible for BioSante’s financial and legal affairs, so are

directly responsible for the breaches of fiduciary duty alleged in the complaint; 

(5) Simes was privy to materially adverse information withheld from shareholders

and was personally responsible for disseminating misleading information in

announcements and public filings and acted “to preserve his position of control

and the prerequisites thereof,” including nearly $2M in compensation and will not

initiate litigation that will cause him financial harm; and 

(6) Any action brought by the board would expose them all to civil and potentially

criminal liability so the board members all have a conflict of interest. 

Id. at ¶¶ 87-102. In their federal complaint, the plaintiffs assert claims for breach of fiduciary

duty (Count I), abuse of control (Count II), and unjust enrichment (Count III) against all of the

defendants.

 II. LEGAL STANDARD

For purposes of a motion to dismiss, the court takes all facts alleged in the complaint as

true and draws all reasonable inferences from those facts in the plaintiff’s favor, although

conclusory allegations that merely recite the elements of a claim are not entitled to this

presumption of truth. Virnich v. Vorwald, 664 F.3d 206, 212 (7th Cir. 2011). A motion to

dismiss should be granted if the plaintiff fails to “state a claim to relief that is plausible on its

face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S.

544, 570 (2007)). The factual allegations in a complaint must “raise a right to relief above the

speculative level.” Twombly, 550 U.S. at 555–56. The complaint must also offer “enough facts

to raise a reasonable expectation that discovery will reveal evidence” that supports the plaintiff’s

allegations. Id. at 556.

Allegations of fraud are subject to a heightened pleading standard. Fed. R. Civ. P. 9(b).

This means the plaintiffs must, at a minimum, provide the time, place, and content of the alleged

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false representations, the method by which the representations were communicated, and the

identities of the parties to those representations. Slaney v. Int’l Amateur Athletic Fed’n, 244 F.3d

580, 597 (7th Cir. 2001); see also Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 569 (7th Cir.

2012) (“[T]he plaintiff must allege the who, what, when, where, and how of the alleged fraud.”)

(internal quotations omitted).

III. ANALYSIS

The parties agree that Delaware substantive law controls as BioSante is a Delaware

corporation. The defendants ask the court to dismiss the complaint with prejudice, arguing that

the plaintiffs have not: (1) sufficiently pleaded demand futility; or (2) alleged a viable claim

under In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 971 (Del. Ch. 1996).

A. Demand Futility

In a derivative suit, an individual shareholder sues to enforce the corporation’s right to

proceed against officers, directors, and third parties. Kamen v. Kemper Fin. Servs., Inc., 500

U.S. 90, 95-96 (1991). However, given “the basic principle of corporate governance that the

decisions of a corporation — including the decision to initiate litigation — should be made by

the board of directors or the majority of shareholders,” most jurisdictions require a shareholder

to make a pre-suit demand on the corporation’s board of directors so the directors can exercise

their business judgment and determine whether litigation is in the corporation’s best interest. In

re Abbott Labs. Deriv. S’holders Litig., 325 F.3d 795, 806 (7th Cir. 2003) (quoting Kamen, 500

U.S. at 96).

Under the Federal Rules of Civil Procedure, a complaint in a derivative action must

“state with particularity: (A) any effort by the plaintiff to obtain the desired action from the

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directors or comparable authority and, if necessary, from the shareholders or members; and (B)

the reasons for not obtaining the action or not making the effort.” Fed. R. Civ. P. 23(b)(3); see

also Westmoreland, 2013 WL 4266586, at *4 (federal procedural law governs the degree of

detail that the plaintiff must furnish when it explains why it did not make a demand, and state

substantive law governs whether those reasons are sufficient).

1. Tests for Demand Futility Under Delaware Law

Delaware courts recognize three tests for determining if a demand on a board of directors

would be futile. First, the Aronson test applies if a shareholder is challenging a specific decision

made by the board of directors. Aronson, 473 A.2d at 814. Under Aronson, shareholders must

“make a pre-suit demand of the board of directors, unless ‘under the particularized facts alleged,

a reasonable doubt is created that: (1) the directors are disinterested and independent [or] (2) the

challenged transaction was otherwise the product of a valid exercise of business judgment.” 

Westmoreland Cnty. Emp. Ret. Sys., 2013 WL 4266586, at *4 (quoting Aronson, 473 A.2d at

814). “[I]f either prong is satisfied, demand is excused.” Id. (quoting Brehm v. Eisner, 746 A.2d

244, 256 (Del. 2000)).

Second, Rales v. Blasband, 634 A.3d 927, 934 (Del. 1993), applies to claims based on

allegedly deficient board oversight, such as the failure to prevent the company from making

inaccurate statements. Under Rales, a pre-suit demand is unnecessary if the complaint’s

allegations create a reasonable doubt that at the time the complaint was filed, the board of

directors could have properly exercised independent and disinterested business judgment in

responding to a demand. Id. at 934. This turns on whether the plaintiff alleged particularized

facts showing that: “(1) the conduct at issue makes any of the directors ‘interested’ and, if so,

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whether other directors were compromised in their ability to act independently of the interested

directors; or 2) at least half of the directors face a sufficiently substantial threat of personal

liability as to the conduct alleged in the complaint to compromise their ability to act impartially

on a demand.” In re Abbott Depakote S’holder Derivative Litig., No. 11 C 8114, 2013 WL

2451152, at *5 (N.D. Ill. June 5, 2013) (quoting Desimone v. Barrow, 924 A.2d 908, 928 (Del.

Ch. 2007)). 

If a company’s articles of incorporation include an exculpatory provision immunizing

directors from liability for a breach of the duty of care, the plaintiff must also plead

particularized facts showing that a majority of the board breached their duties of loyalty or acted

in bad faith. Id. at *6. To satisfy this burden, a plaintiff must allege that the directors

intentionally acted against the corporation’s interests, willfully violated the law, or demonstrated

a conscious disregard for their duties. Id. (citing In re Walt Disney Co. Deriv. Litig., 906 A.2d

27, 67 (Del. 2006)).

Third, when a plaintiff alleges that directors knowingly failed to exercise their oversight

duties, the Delaware Supreme Court’s opinions in In re Walt Disney Co. Deriv. Litig. and Stone

ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 367 (Del. 2006), control. These cases

allow plaintiffs to avoid a pre-suit demand if their complaint “allege[s] inactivity coupled with

specific ‘red flags’ suggesting that the company’s internal controls are inadequate and that these

inadequacies give rise to substantial risk of illegal activity occurring.” In re Abbott Depakote

S’holder Deriv. Litig., 2013 WL 2451152, at *6. However, if plaintiffs allege “that a majority of

the directors served when the illegal conduct occurred [and] knew the company was committing

illegal acts and did nothing to remedy the situation, demand futility should be analyzed under the

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standard set forth in Aronson.” Id. (citing In re Abbott Labs. Deriv. S’holders Litig., 325 F.3d at

806).

2. The Plaintiffs’ Allegations

The defendants contend that the Rales standard applies because the plaintiffs have

alleged that BioSante’s officers or BioSante itself – not the board of directors – made the alleged

misrepresentations, so based on the complaint, the board made errors of omission.3 They then

assert that the allegations supporting this theory are insufficient. The plaintiffs discuss the tests

generally but do not specify which one applies. However, they appear to be hedging their bets,

as they argue that the board faces a substantial likelihood of personal liability (relevant for

Rales) and that the board’s actions were not an exercise of valid business judgment (relevant for

Aronson). 

The court’s inquiry begins and ends with the plaintiffs’ allegations about the board’s

alleged malfeasance. The allegations are germane under both Rales and Aronson, so the court

need not decide which test applies. The defendants argue that the plaintiffs’ allegations are

conclusory because the complaint merely alleges that the defendants were involved in “drafting,

producing, reviewing, and/or disseminating the false and misleading statements,” “approved

false and misleading statements regarding LibiGel’s performance in clinical trials and its

3

 It is unclear how BioSante itself (as opposed to its officers or directors) could make any

representations, as a corporation can only act through its officers or agents. See Nat’l Spiritual

Assembly of Baha’is of U.S. Under Hereditary Guardianship, Inc. v. Nat’l Spiritual Assembly of

Baha’is of U.S., Inc., 628 F.3d 837, 848 (7th Cir. 2010) (“incorporeal abstractions act through

agents”) (internal citations omitted). For present purposes, the court has summarized the

defendants’ position that BioSante took an independent action, see Df. Memo. at 7; Df. Reply at

2, and will not discuss it further as it does not affect the disposition of the motion to dismiss. 

However, the defendants should clarify this point as necessary in any later filings.

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prospects for success,” and “participated in, approved, and/or permitted the wrongs alleged

herein to have occurred, participated in efforts to conceal or disguise those wrongs from

BioSante’s shareholders, or recklessly and/or negligently disregarded the wrongs” alleged in the

complaint. Compl. at ¶¶ 28, 90-91.

In contrast, the plaintiffs assert that their complaint demonstrates that in the face of

contrary information, the board caused BioSante to represent that LibiGel would be profitable

and the first FDA approved treatment for HSDD. In support, they direct the court’s attention to

¶¶ 3-9, 35-48, and 52-82 of their complaint. Paragraphs 3-9 are in the “nature and summary of

the action” section of the complaint and allege, in broad-brush terms, that the defendants

collectively were overly optimistic about LibiGel’s potential, and failed to disclose that the

changes to the definition of HSDD and the placebo effect could have a severe, negative effect on

BioSante’s ability to bring LibiGel to the market.

In ¶¶ 35-48, the plaintiffs generally allege that the defendants collectively promoted

LibiGel by issuing positive press releases and making positive statements while concealing

information indicating that there was a substantial risk that LibiGel would not be approved. 

They also assert that the defendants collectively did not disclose that the Phase II trial results

were misleadingly positive because they were skewed by the placebo effect.

In ¶¶ 52-82, the plaintiffs allege that the defendants collectively issued a series of press

releases supporting LibiGel, including one that discussed HSDD but did not disclose the

“controversy surrounding the condition, which could, and ultimately did, impact LibiGel’s Phase

III efficacy trials,” Compl. at ¶¶ 52-61. They also allege that Simes made misleading comments

about LibiGel’s Phase II trial results, Next, they assert that the defendants collectively were

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aware of the controversy about HSDD in the medical community but did not disclose the

substantial risk this posed to LibiGel’s prospects for approval and its market potential. In

addition, they blame the defendants collectively for failing to structure the Phase III efficacy

trials to minimize the placebo effect. The plaintiffs conclude by alleging that the “defendants

stated” they were disappointed in the Phase III results and provide the actual quote about

disappointment, which was made by Simes, not the board as a group. See Compl. at ¶ 83.

Under Delaware law, general allegations that director defendants failed to make adequate

disclosures about specific risks faced by the corporation are insufficient. See In re Citigroup Inc.

S’holder Deriv. Litig., 964 A.2d 106, 134 (Del. Ch. 2009). Instead, a plaintiff must point to “an

actual disclosure that was misleading or any statement that was made misleading as a result of an

omission of a material fact.” Id. For example, in In re Citigroup, the court held that the

allegation that the board “abdicated its fiduciary duties by not disclosing information on the fair

value of [financial instruments]” and “abdicated its fiduciary duties . . . to ensure the integrity of

[the corporation’s] financial statements and financial reporting process, including earnings press

releases and financial information provided to analysts and rating agencies” were insufficient. 

Id. In support, the In re Citigroup court explained that these allegations did not suggest that the

director defendants prepared the financial statements or were directly responsible for the alleged

misstatements or omissions. Id.

The allegations here are similarly vague. Essentially, the plaintiffs assert that the

individual directors must have known about the placebo effect, the change to the definition of

HSDD, and alleged flaws with the Phase II clinical study that made it look misleadingly positive. 

They then conclude that the directors were responsible for a failure to disclose these damning

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facts about LibiGel, which would have caused investors to abandon ship before the release of the

poor Phase III efficacy trial results. 

The complaint, however, does not include any specific facts indicating that the directors

should have been on notice that the Phase II studies were skewed by the placebo effect or,

indeed, that the Phase II studies had a demonstrable, verifiable design flaw or were affected by

the placebo effect. Moreover, the assumption that the Phase II studies were flawed and produced

falsely positive results appears to be inconsistent with the fact that LibiGel proceeded to Phase

III testing. See Riegel v. Medtronic, Inc., 552 U.S. 312, 344 n.15 (2008) (outlining the serial

nature of clinical drug trials). The allegations in the complaint also demonstrate that the FDA

did not change its requirements for the Phase III trials after the definition of HSDD was

narrowed. 

In addition, the plaintiffs have not alleged that the director defendants prepared the

allegedly misleading statements or that they were directly responsible for the alleged

misstatements or omissions. Instead, the plaintiffs generally assert that false statements and

omissions were made and the director defendants were responsible. In fact, however, the only

allegation tying the director defendants to a specific statement is the plaintiffs’ claim that the

director defendants stated they were disappointed in the Phase III results. Notably, the plaintiffs

then attribute the statement about disappointment to Simes, and do not explain how the other

director defendants are responsible for that statement. See Compl. at ¶ 83. Thus, the complaint

is dismissed based on the plaintiffs’ failure to show that they were not required to make a presuit demand.

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In the interest of completeness, the court also adds that BioSante attached a copy of its

certificate of incorporation to its motion to dismiss. The court can take judicial notice of

BioSante’s certificate of incorporation for purposes of a motion to dismiss. See Gordon v.

Goodyear, No. 12 C 369, 2012 WL 2885695, at *6 n.2 (N.D. Ill. July 13, 2012) (collecting

cases). Consistent with Delaware law, the certificate of incorporation contains a “provision

eliminating or limiting the personal liability of a director to the corporation . . . for breach of

fiduciary duty as a director,” except for breaches of the duty of loyalty, “intentional

misconduct,” or “acts or omissions not in good faith or which involve a knowing violation of

law.” See Del. Code Ann. Tit. 8, § 102(b)(7).

As noted above, when a company’s articles of incorporation immunize directors from

liability for a breach of the duty of care and the validity of the waiver clause is not contested, a

plaintiff must plead particularized facts showing that a majority (i.e., at least half) of the board

breached their duties of loyalty or acted in bad faith. In re Abbott Depakote S’holder Deriv.

Litig., 2013 WL 2451152, at *5-6. To do so, a plaintiff must allege that the directors

intentionally acted against the corporation’s interests, willfully violated the law, or demonstrated

a conscious disregard for their duties. Id. The current version of the complaint fails to meet this

standard as the only individualized allegations of wrongdoing are attributed to Simes. Thus, the

complaint is deficient as the complaint’s allegations are too general to allow the court “to

reasonably conclude [that] the directors’ conduct falls outside the exemption [in the articles of

incorporation].” See In re Abbott Labs. Deriv. S’holders Litig., 325 F.3d at 810-11.

B. Caremark

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The defendants’ second argument is that to the extent the plaintiffs are attempting to

assert a corporate mismanagement claim under In re Caremark Int’l Deriv. Litig., 698 A.2d 959

(Del. Ch. 1996), they have failed to do so. In their response to the motion to dismiss, the

plaintiffs clarify that they did not intend to assert a Caremark claim. Thus, the court will not

address the defendants’ arguments about Caremark. 

C. The Defendants’ Request to Dismiss With Prejudice

The defendants contend that the court should dismiss this action with prejudice, due to

(among other things) the plaintiffs’ failure to satisfy the pre-suit demand requirement or establish

that making a demand would have been futile. In support, the defendants cite to Delaware law

holding that if a defendant files a motion to dismiss and the plaintiff files an answering brief

opposing the motion instead of an amended complaint, a subsequent dismissal of the plaintiff's

claims pursuant to the defendant's motion will be with prejudice unless “dismissing with

prejudice would not be just under all the circumstances.” Braddock v. Zimmerman, 906 A.2d

776, 783 (Del. 2006). The plaintiffs do not challenge the application of Delaware procedural law

regarding leave to amend. 

The court need not opine on the applicability of this aspect of Delaware law as it finds

that the plaintiffs conceivably could correct the defects identified in this order by amending their

complaint. In an exercise of its discretion, the court will afford the plaintiffs one opportunity to

amend. See Pugh v. Tribune Co., 521 F.3d 686, 698 (7th Cir. 2008) (the decision to grant leave

to amend is reviewed under the abuse of discretion standard). Consistent with this order and

counsel’s Rule 11 obligations, the plaintiffs may file an amended complaint within 28 days of

the issuance of this order, if they choose to do so.

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IV. CONCLUSION 

For the above reasons, the plaintiffs’ motion for leave to file supplemental authority [Dkt.

43] and the defendants’ motion to dismiss the plaintiffs’ verified consolidated shareholder

derivative complaint [Dkt. 32] are granted. The plaintiffs may file an amended complaint within

28 days of the date of this order. 

ENTER:

 /s/ 

JOAN B. GOTTSCHALL

United States District Judge

DATED: September 11, 2013

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