Lebanon County Employees' Retirement Fund v. Collis ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LEBANON COUNTY EMPLOYEES’ )
RETIREMENT FUND and TEAMSTERS )
LOCAL 443 HEALTH SERVICES & )
INSURANCE PLAN, )
)
Plaintiffs, )
)
v. ) C.A. No. 2021-1118-JTL
)
STEVEN H. COLLIS, RICHARD W. )
GOCHNAUER, LON R. GREENBERG, JANE )
E. HENNEY, KATHLEEN W. HYLE, )
MICHAEL J. LONG, HENRY W. MCGEE, )
ORNELLA BARRA, D. MARK DURCAN, )
and CHRIS ZIMMERMAN, )
)
Defendants, )
)
and )
)
AMERISOURCEBERGEN CORPORATION, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: September 23, 2022
Date Decided: December 22, 2022
Samuel L. Closic, Eric J. Juray, Robert B. Lackey, PRICKETT, JONES & ELLIOTT, P.A.,
Wilmington, Delaware; Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER &
GROSSMANN LLP, Wilmington, Delaware; Lee D. Rudy, Eric L. Zagar, KESSLER
TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Jeroen van Kwawegen, Eric
J. Riedel, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New
York; Frank R. Schirripa, Daniel B. Rehns, Kurt Hunciker, Hillary Nappi, HACH ROSE
SCHIRRIPA & CHEVERIE LLP, New York, New York; Gregory Mark Nespole, Daniel
Tepper, LEVI & KORSINSKY, LLP, New York, New York; Brian J. Robbins, Craig W.
Smith, ROBBINS LLP, San Diego, California; Counsel for Plaintiffs.
Stephen C. Norman, Jennifer C. Wasson, Tyler J. Leavengood, POTTER ANDERSON &
CORROON LLP, Wilmington, Delaware; Michael S. Doluisio, Carla Graff, DECHERT
LLP, Philadelphia, Pennsylvania; Matthew L. Larrabee, Hayoung Park, DECHERT LLP,
New York, New York; Michael D. Blanchard, Amelia Pennington, MORGAN, LEWIS &
BOCKIUS LLP, Boston, Massachusetts; Counsel for Defendants.
LASTER, V.C.
Over the past two decades, an opioid epidemic has devastated America. Much of it
has been driven by prescription opioids. As one of three major wholesale distributors of
prescription opioids in the United States, nominal defendant AmerisourceBergen
Corporation (“AmerisourceBergen” or the “Company”) has faced a barrage of lawsuits
over its alleged role as a contributor to the opioid epidemic. In 2021, AmerisourceBergen
agreed to pay over $6 billion as part of a nationwide settlement to resolve multidistrict
litigation brought against the Company and the other major opioid distributors (the “2021
Settlement”). AmerisourceBergen has paid hundreds of millions to settle other lawsuits
and has incurred over $1 billion in defense costs. Those financial figures do not attempt to
quantify the reputational harm that the Company has suffered, nor the damage from lost
opportunities or management distraction. Those harms obviously pale in comparison to the
human toll of the opioid epidemic.
The plaintiffs own stock in AmerisourceBergen. They seek to shift the responsibility
for the harms that AmerisourceBergen has suffered to the individuals who they believe
caused the Company to suffer harm. They contend that the Company’s officers and
directors breached their fiduciary duties to the Company and should be held personally
liable for the consequences of their actions.
The plaintiffs advance two theories of breach. Their first theory relies on the settled
principle that corporate fiduciaries cannot consciously ignore evidence indicating that the
corporation is suffering or will suffer harm. Most plainly, corporate fiduciaries cannot
knowingly ignore red flags evidencing legal non-compliance. This type of theory is
sometimes called a prong-two Caremark claim. Taking a functional approach, Chancellor
McCormick has helpfully referred to this type of claim as a “Red-Flags Theory” or a “Red-
Flags Claim.” City of Detroit Police & Fire Ret. Sys. v. Hamrock, 2022 WL 2387653, at
*17 (Del. Ch. June 30, 2022).
For their Red-Flags Theory, the plaintiffs start from the proposition that as a
distributor of opioids, AmerisourceBergen was obligated to comply with extensive
regulatory frameworks imposed by federal and state law. The federal regulatory
frameworks require that a distributor report any suspicious orders to the federal Drug
Enforcement Agency (the “DEA”). A distributor must either not fill a suspicious order or
first conduct due diligence sufficient to ensure that the order will not be diverted into
improper channels.
The plaintiffs contend that as the Company’s legal troubles grew, its officers and
directors were confronted with a steady stream of red flags indicating that the Company
was not complying with its anti-diversion obligations. Those red flags took the form of
congressional investigations, subpoenas from prosecutors, lawsuits by state attorneys
general, and an eventual torrent of civil lawsuits. Meanwhile, as the opioid epidemic raged,
the Company continued to report suspicious orders at incomprehensibly low rates. The
plaintiffs contend that based on those red flags, the defendants knew that the Company was
violating its opioid diversion obligations and needed to implement stronger systems of
oversight. Yet the Company’s officers and directors consciously ignored the red flags and
did not take any meaningful action until the 2021 Settlement.
For their second theory, the plaintiffs invoke the admonition that “Delaware law
does not charter law breakers.” In re Massey Energy Co., 2011 WL 2176479, *20 (Del.
2
Ch. May 31, 2011). “As a result, a fiduciary of a Delaware corporation cannot be loyal to
a Delaware corporation by knowingly causing it to seek profit by violating the law.” Id.Chancellor McCormick has helpfully described this type of theory as a “Massey Theory”
or a “Massey Claim.” Hamrock, 2022 WL 2387653, at *17.
For their Massey Claim, the plaintiffs seek an inference that the Company’s officers
and directors took a series of acts which, when viewed together, support a pleading-stage
inference that they knowingly pursued a business plan that prioritized profits over
compliance. The plaintiffs allege that between 2010 and 2015, the Company’s officers and
directors aggressively expanded the Company’s distribution networks without devoting
comparable resources to anti-diversion control. As the decisive evidence of this strategy,
they point to the 2015 implementation of a revised order monitoring program (the “Revised
OMP”), which management and the directors knew was designed to tank the rate of
suspicious order reporting and evade the federal anti-diversion frameworks. The
Company’s officers and directors then maintained their illegal business strategy through
the 2021 Settlement.
The defendants have moved to dismiss the plaintiffs’ claims for failing to support
an inference of demand futility. The plaintiffs argue that the demand is futile because their
claims present facts supporting a reasonable inference that at least half of the directors in
office when the lawsuit was filed face a substantial threat of liability.
Standing alone, the avalanche of investigations and lawsuits without any apparent
response until the 2021 Settlement would support a well-pled Red-Flags Claim. Likewise,
the series of decisions that culminated in the Revised OMP, along with the decision to keep
3
that framework in place until the 2021 Settlement, would support a well-pled Massey
Claim.
The defendants maintain that the documents they produced after a hard-fought
books-and-records action, and which the complaint incorporates by reference, reveal that
the board adopted the Revised OMP on the advice of management. The documents also
show that in 2017, the board received a presentation on the Company’s anti-diversion
controls. In 2018, the Audit Committee conducted its first-ever review of the Company’s
anti-diversion controls. And in 2019, the Audit Committee conducted a similar review. The
defendants say those actions foreclose any reasonable inference of wrongdoing, whether
framed as a Red-Flags Theory or a Massey Theory.
If that were the sum of the matter, then the pleading-stage record would support two
competing inferences. The plaintiff-friendly inference is that the defendants knew that
AmerisourceBergen was reporting astoundingly low levels of suspicious orders,
understood that was the whole purpose of the Revised OMP, and went through the motions
of providing oversight, while consciously deciding not to take any action until the 2021
Settlement so that they could use changes to the Revised OMP and their oversight policies
as part of the settlement currently. The defendant-friendly inference is that the defendants
were doing their jobs, believed that the Revised OMP complied with applicable law, and
did not take any action because they did not believe they were doing anything wrong. At
the pleading stage, the court must adopt the plaintiff-friendly inference, so the complaint
would survive the motion to dismiss.
4
But there is a final factor that fatally undermines the complaint. In 2022, the United
States District Court for the Southern District of West Virginia (the “West Virginia Court”)
issued a post-trial decision in which the City of Huntington and the Cabell County
Commission asserted that AmerisourceBergen and the other major opioid distributors had
failed to comply with their anti-diversion obligations, thereby fueling the opioid epidemic
in those localities. After a two-month trial, during which seventy witnesses testified either
live or by deposition, the court rejected the plaintiffs’ theory and found that the defendants
had not violated their anti-diversion obligations. The court expressly found that
AmerisourceBergen had complied with its anti-diversion obligations.
Although the federal court’s findings are not preclusive, they are persuasive. Both
the Red-Flags Theory and the Massey Theory depend on an inference that the officers and
directors knowingly failed to cause the Company to comply with its anti-diversion
obligations, either because they consciously ignored red flags that put them on notice of
violations or because they intentionally adopted a business plan that prioritized profits over
compliance. In light of the West Virginia Court’s thorough analysis, it is not possible to
infer that the Company failed to comply with its anti-diversion obligations, nor is it possible
to infer that a majority of the directors who were in office when the complaint was filed
face a substantial likelihood of liability on the plaintiffs’ claims. Demand is therefore not
futile, and the plaintiffs lack standing to assert their claims on the Company’s behalf.
I. FACTUAL BACKGROUND
The facts are drawn from the complaint and the documents that the complaint
incorporated by reference. Before filing this lawsuit, the plaintiffs spent two years litigating
5
a books-and-records action in which AmerisourceBergen raised a host of defenses,
including arguments that sought to defend preemptively against the merits of an eventual
derivative action. The plaintiffs prevailed at the trial level and on appeal. See Lebanon
Cnty. Empls.’ Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752 (Del. Ch. Jan. 13,
2020), aff’d, 243 A.3d 417 (Del. 2020). After that hard-fought and resource-intensive
victory, the plaintiffs obtained books and records under the terms of a confidentiality order,
which provided that if the plaintiffs relied on the documents in a future action, then all of
the documents “will be deemed incorporated by reference in any complaint subject to the
conditions set forth in Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016),
subject to Delaware law.” C.A. No. 2019-0527-JTL, Dkt. 64 ¶ 9 (Del. Ch. May 8, 2020).
Relying on the incorporation-by-reference condition, the defendants submitted
sixty-one exhibits in support of their opening brief, plus another seven exhibits in support
of their reply brief. The defendants ask the court to consider the sixty-eight exhibits when
evaluating the allegations of the complaint.1
The incorporation-by-reference doctrine does not enable a court to weigh evidence
on a motion to dismiss. It permits a court to review the actual documents to ensure that the
plaintiff has not misrepresented their contents and that any inference the plaintiff seeks to
1
Citations in the form “Ex. — at —” refer to exhibits that the defendants submitted.
Page citations refer to the internal pagination or, if there is none, then to the last three digits
of the control number. Citations in the form “Compl. ¶ ___” refer to the paragraphs of the
complaint.
6
have drawn is a reasonable one.2 The doctrine limits the ability of a plaintiff to take
language out of context, because the defendants can point the court to the entire document.
But the doctrine does not change the pleading standard that governs a motion to dismiss.
If there are factual conflicts in the documents or the circumstances support competing
interpretations, and if the plaintiff had made a well-pled factual allegation, then the court
must credit the allegation. See Savor, Inc. v. FMR Corp., 812 A.2d 894, 896 (Del. 2002).
The plaintiff also remains entitled to “all reasonable inferences.” Id. at 897. Consequently,
if a document supports more than one possible inference, and if the inference that the
plaintiff seeks is reasonable, then the plaintiff receives the inference. Id.At this stage of the proceeding, the well-pled allegations of the complaint are
deemed to be true. The plaintiff is entitled to all reasonable inferences that the well-pled
allegations support. To the extent that factual allegations or documents incorporated by
reference support competing inferences, the plaintiffs are entitled at this stage to the
inference that favors their claims.
The factual background for this decision emphasizes the facts pertinent to the
demand futility analysis. The factual background therefore de-emphasizes or omits certain
facts that figured into the court’s analysis of the defendants’ timeliness defense.
2
See In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169–70 (Del. 2006);
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 70 (Del. 1995); In re Gardner
Denver, Inc., 2014 WL 715705, at *2 & n.17 (Del. Ch. Feb. 21, 2014).
7
A. AmerisourceBergen’s Legal Obligations As An Opioid Distributor
In the United States, AmerisourceBergen is one of the “Big Three” wholesale
distributors of pharmaceutical products, along with Cardinal Health, Inc. and McKesson
Corporation.3 AmerisourceBergen and McKesson each control approximately one-third of
the market, and Cardinal Health controls another fifth.
As an opioid distributor, AmerisourceBergen serves as a middleman between the
companies who manufacture opioids and the pharmacies that fill prescriptions. When
acting as a distributor, AmerisourceBergen must comply with the Comprehensive Drug
Abuse Prevention and Control Act of 1970 and its implementing regulations (collectively,
the “Controlled Substances Act”). To obtain and maintain a license to distribute opioids, a
company must maintain “effective controls against diversion of [opioids] into other than
legitimate medical, scientific, research, and industrial channels.” 21 U.S.C. § 823(b)(1). A
distributor must also “design and operate a system to disclose to the registrant suspicious
orders of [opioids].” 21 C.F.R. § 1301.74(b). “Suspicious orders include orders of unusual
3
The Company has conducted its pharmaceutical distribution business through two
subsidiaries: AmerisourceBergen Drug Corporation (the “Drug Company”) and
AmerisourceBergen Specialty Group, LLC (the “Specialty Group”). The Drug Company
distributed healthcare products and supplies, including opioids, and provided pharmacy
management and other consulting services to institutional healthcare providers such as
hospitals and retail pharmacies. The Specialty Group served the specialty pharmaceuticals
market, focusing on products involving biotechnology, blood plasma, and oncology. The
Specialty Group also provided pharmaceutical distribution and related services to
physicians and institutional healthcare providers. While important for many reasons, the
distinctions between AmerisourceBergen and its subsidiaries are not relevant to this
decision, which refers only to AmerisourceBergen.
8
size, orders deviating substantially from a normal pattern, and orders of unusual
frequency.” Id.A distributor must report suspicious orders to the DEA. Once a distributor has
reported a suspicious order, it must either (i) decline to ship the order or (ii) ship the order
only after conducting due diligence and determining that the order is not likely to be
diverted into illegal channels. See Masters Pharm., Inc. v. Drug Enf’t Admin., 861 F.3d
206, 212–13 (D.C. Cir. 2017). The DEA can suspend or revoke the license of any
distributor that fails to maintain controls or respond appropriately to suspicious orders.
See 21 U.S.C. § 824.
The DEA may determine that substantial compliance with the order-diversion
requirements is sufficient. 21 C.F.R. § 1301.71(b). “A registrant’s regulatory obligations
. . . do not require strict compliance. Only substantial compliance is required.” In re Nat’l
Prescription Opiate Litig., 2021 WL 3917174, at *3 (N.D. Ohio Sept. 1, 2021).
B. The Ongoing Opioid Crisis
The United States remains mired in an opioid epidemic that has spanned more than
two decades, killed hundreds of thousands of Americans, and affected the lives of millions
more. In the late 1990s, the pharmaceutical industry made a massive push to increase the
use of prescription opioids to treat pain management. Manufacturers made new
formulations of extended-release opioids, which they marketed as non-addictive and
superior to existing pain management options. Doctors responded by writing more
prescriptions for opioids, often without appreciating or advising patients about the risk of
addiction.
9
A vicious cycle developed in which increasing levels of opioid abuse generated
greater demand for opioids. Between 1999 and 2014, the sale of prescription opioids in the
United States nearly quadrupled. The medications proved far more addictive and dangerous
than the pharmaceutical industry led the nation to believe, and the expanded use of the
medications resulted in widespread misuse. As many as 29% of the patients who were
prescribed opioids for chronic pain misused them, and as many as 12% developed an
opioid-use disorder.
The increased abuse of opioids had tragic consequences. The Centers for Disease
Control and Prevention reported that there had been nearly 218,000 overdose deaths related
to prescription opioids between 1999 and 2017. Between 2000 and 2015, the rate of opioid
overdose deaths in the United States more than tripled. The number of opioid-related deaths
reached 69,710 in 2020, and opioid overdoses comprised the vast majority of drug
overdoses in the country.
To help fight the epidemic, the DEA increased its scrutiny of distributors.
AmerisourceBergen and its competitors supplied drugs to pharmacies using “just-in-time”
delivery. That meant that most pharmacies received drug deliveries every day—sometimes
multiple times a day. Because deliveries were so frequent, the distributors knew exactly
how many opioid pills they were delivering to each pharmacy. The distributors thus were
uniquely positioned to assess whether pharmacies were facilitating the diversion of
prescription opioids.
10
C. The Independent Pharmacy Strategy
After some run-ins with the DEA over poor anti-diversion controls in 2007,
AmerisourceBergen worked with the DEA to establish an industry-standard order
monitoring program (the “2007 OMP”). As part of that process, AmerisourceBergen
engaged Davis Polk & Wardwell LLP to assess the Company’s compliance program. Ex. 45
at ’664. In August 2010, the Audit Committee reviewed Davis Polk’s report, which concluded
that the Company’s compliance program “was functioning effectively,” although the firm
“made [a] few process improvement suggestions that were implemented, including better
tracking of compliance issues.” Id.The complaint depicts 2010 as the high-water mark for AmerisourceBergen’s anti-
diversion compliance. The plaintiffs allege that in early 2010, management received the
go-ahead from the board to maximize the value that the Company could extract from the
independent pharmacy market (the “Independent Pharmacy Strategy”). Independent
pharmacies offered a significant source of profits because they had less market power than
chain pharmacies and therefore could not bargain as effectively for lower prices. Their
smaller size also meant that they had fewer resources to devote to monitoring suspicious
orders and could more easily become pill mills.
During 2011, management continued to pursue the Independent Pharmacy Strategy.
Management focused on improving the efficiency of the Company’s sales force and
expanding the number of independent pharmacies that the Company served. The strategy
worked, with sales to independent pharmacies increasing year-over-year by 11.7%.
11
Management and the directors did not devote similar resources to improving the
Company’s anti-diversion efforts. Instead, management emphasized cost control, expense
reductions, and efficiency gains.
At the time, Chris Zimmerman was in charge of diversion control. On April 22,
2011, he sent an email to the five senior members of the diversion control team that
contained a set of lyrics for a song titled “Pillbillies,” a parody of the theme song for The
Beverly Hillbillies. The parody described opioid addicts visiting Florida pain clinics to buy
“Hillbilly Heroin.” Another email that circulated among the senior compliance staff
included the lyrics for the song “OxyContinVille,” a parody of Jimmy Buffet’s
“Margaritaville,” which described addicts driving from Kentucky to Florida “Lookin’ for
pill mills.” On May 6, 2011, Zimmerman emailed the diversion control leadership team
about recently enacted Florida legislation that was designed to crack down on pill mills.
He offered the following prediction: “Watch out Georgia and Alabama, there will be a
mass exodus of Pillbillies heading north.” Compl. ¶ 110.
In March 2012, Zimmerman was promoted to the positions of Chief Compliance
Officer and Senior Vice President in charge of Corporate Securities and Regulatory Affairs
(“Regulatory Affairs”), a position he held until October 2018. During that period,
Zimmerman and his division were responsible for overseeing the Company’s order
monitoring program and anti-diversion efforts. Zimmerman personally was responsible for
bringing issues to the attention of the Audit Committee.
Zimmerman’s communications with his team support a pleading-stage inference
that he was not a suitable individual to hold these critical positions. But the complaint does
12
not support an inference that the directors knew about Zimmerman’s callous and
inappropriate communications with his team.
In early 2012, management reported to the board that the DEA had suspended
Cardinal Health’s controlled substances license for a distribution facility in Lakeland,
Florida based on its dealings with four independent pharmacies. In the face of the DEA’s
enforcement actions, management doubled down on the Independent Pharmacy Strategy
and sought to further increase AmerisourceBergen’s market share by offering “a ‘light
touch’ franchise model” and “friendly landings” for pharmacies looking to transfer
ownership. Id. ¶ 119. The model amounted to the easy onboarding for new independent
pharmacies and minimal compliance-related diligence by AmerisourceBergen.
Two months after reporting on the DEA’s enforcement action against Cardinal
Health, management reported that the Company had received subpoenas from the DEA
and the United States Attorney’s Office for the District of New Jersey that sought
documents concerning the Company’s order monitoring program. In June 2012, the
Attorney General of West Virginia named AmerisourceBergen as a defendant in a lawsuit
that alleged violations of state law related to the distribution of opioids. By August 2012,
the Company considered regulatory compliance to be the number two risk factor facing the
drug distribution business for the 2013 fiscal year. Ex. 47 at ’464.
In November 2012, the Audit Committee received a report on the Company’s
regulatory compliance efforts, including its anti-diversion controls. The report informed
the committee members that AmerisourceBergen’s levels of suspicious order reporting
were extremely low:
13
AmerisourceBergen Averaged 215,000,000
Line Orders from 2009-2012
Suspicious Orders Reported
2009 0.000864% [1,858]
2010 0.001085% [2,322]
2011 0.001870% [4,020]
2012 0.002564% [5,512]
The committee also learned that the Company was expending far fewer resources
on compliance than peer companies. Its staff of fourteen internal audit personnel was less
than one-third the average of forty-six internal audit staff at other Fortune 500 companies.
AmerisourceBergen’s internal audit expenditure of $1.85 million compared similarly to the
$7.1 million average at other Fortune 500 companies.
D. The Walgreens Alliance
During 2013, management sought to increase the Company’s sales further through
an alliance with Walgreens. AmerisourceBergen estimated that the alliance would increase
its orders for controlled substances by 213%. By increasing order flow, the alliance would
increase the risk of order diversion. Not only that, but Walgreens was already having
problems with the DEA. In June 2013, Walgreens agreed to pay an $80 million fine to the
DEA for allowing opioids to be diverted for misuse.
Anticipating the significant expansion in its distribution business, management
reported to the board that the diversion control group in Regulatory Affairs would increase
from just five employees to seven, and the investigations group would increase from only
four employees to six. Management thus planned to increase order-diversion resources at
14
a lower rate than sales and in the context of an alliance with a company that had recent
problems with diversion control.
As 2013 wore on, it became clear that the regulatory and enforcement environment
was intensifying. The DEA and the United States Attorney’s Office for the District of New
Jersey continued their investigations into the Company, and the United States Attorneys
for the District of Kansas and the Northern District of Ohio served subpoenas of their own.
During its meeting in October 2014, the Audit Committee learned that the United States
Attorney’s Office for the District of New Jersey had subpoenaed the Company’s outside
auditor as part of its grand jury investigation. Board minutes throughout 2014 contain
references to reports on the Company’s order monitoring program.
E. The Revised OMP
In 2015, against a backdrop of increasing legal scrutiny and already low levels of
suspicious order reporting, management and the board implemented the Revised OMP. The
plaintiffs contend that the Revised OMP was plainly intended to reduce the number of
suspicious orders that the Company would report to the DEA. The plaintiffs assert that,
when viewed in conjunction with the Company’s efforts to expand its opioid distribution
business through measures like the Independent Pharmacy Strategy and the Walgreens
alliance, and in the context of intensifying regulatory risk, the adoption of the Revised
OMP evidences a knowing breach of fiduciary duty, in which the directors prioritized
profits over compliance.
In March 2015, Zimmerman gave a presentation to the Audit Committee about the
Revised OMP. He was assisted by David May, the Director of Diversion Control and
15
Federal Investigations. May had joined AmerisourceBergen in 2014 after working for the
DEA for thirty years.
The Company was still using the 2007 OMP, which flagged orders using static
thresholds. The Revised OMP added a second test that compared an individual order’s size
against “[d]ynamic thresholds refreshed annually based upon actual consumption data over
the most recent 12-month period.” Compl. ¶ 166. It thus added an additional trigger that
would fail only if a current order was inconsistent with the customer’s recent pattern of
orders. Ultimately, both tests needed to fail for an order to be flagged for investigation.
As depicted in a Venn diagram presented to the Audit Committee, the double-trigger
would inevitably result in only a small fraction of AmerisourceBergen’s orders being
flagged for investigation:
16
Ex. 39 at 9.
The Audit Committee reported on this presentation to the full board the next day.
After the board meeting, the Revised OMP went into effect.
Between 2014 and 2015, the level of suspicious orders that AmerisourceBergen
reported to the DEA declined by 86%, dropping from 14,003 to 1,892. Over the same
period, AmerisourceBergen’s total orders increased by 8.6%, from 20,777,594 to
22,560,562.
Between 2015 and 2016, the level of suspicious orders that AmerisourceBergen
reported to the DEA declined by another 92%, dropping from 1,892 to 139. Over the same
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period, AmerisourceBergen’s total orders increased by 6.7%, from 22,560,562 to
24,067,791.
The following table shows the impact of the Revised OMP.
Percentage of Orders Flagged and Reported to the DEA
2013 2014 2015 2016
Orders Placed 13,580,197 20,777,594 22,560,562 24,067,791
Orders of Interest 60,499 78,707 83,407 48,888
Orders Reported 24,103 14,003 1,892 139
Percent of All Orders
0.445% 0.379% 0.370% 0.203%
Flagged (derived)
Percent of All Orders
0.177% 0.067% 0.008% 0.0006%
Reported (derived)
The Revised OMP was not the only problem with the order monitoring system. In
August 2015, AmerisourceBergen engaged FTI Consulting, Inc. to conduct a review of
how AmerisourceBergen went about investigating orders of interest. FTI identified a series
of deficiencies, including a lack of resources, a lack of formal training, inconsistent
policies, and communication breakdowns. The report identified the Company’s regulatory
obligations related to diversion control as one of the “Gaps & Risks” that needed to
be addressed.
F. 2017: More Red Flags
In January 2017, the Audit Committee was informed that AmerisourceBergen had
entered into a $16 million settlement with the State of West Virginia to resolve claims
18
regarding opioid distribution. The Audit Committee was advised that other West Virginia
County Commissions and cities had filed similar complaints. In March 2017, the full board
received an update on the lawsuits that various West Virginia cities and communities had
filed against AmerisourceBergen.
In May 2017, the Audit Committee received a further report which listed Legal
Contingencies as an “Area of Emphasis.” See Ex. 5, at ’510–14. During the meeting, the
Audit Committee received a presentation from management on the Revised OMP. See Ex.
3 at ’960; Ex. 4 at ’023. Lead director Jane E. Henney asked management to provide “an
in-depth review of the Company’s compliance program” at the board’s meeting in August.
Compl. ¶ 197.
Also in May 2017, the Energy and Commerce Committee of the United States
House of Representatives (the “House Committee”) opened a bipartisan investigation into
large opioid shipments to small-town pharmacies in West Virginia. Two months later,
United States Senator Claire McCaskill of Missouri, then the Ranking Member of the
Senate Committee on Homeland Security and Governmental Affairs, requested documents
and information related to AmerisourceBergen’s anti-diversion efforts.
During the board’s meeting in August 2017, Zimmerman and May provided a
presentation that the directors had asked for about the Company’s anti-diversion efforts.
The directors also received sixteen pages of written materials. The presentation described
the Revised OMP and its “Data Driven Risk Adjusted Framework.” Id. ¶ 213. Zimmerman
and May explained that the program established “individual customer order and peer group
parameters relying on widely accepted methodology for identifying statistical outliers.” Id.
19
The presentation noted that orders exceeding the program parameters became “orders of
interest” that were “reviewed and adjudicated by trained personnel,” with the Company
canceling and reporting any orders that were determined to be suspicious. Id. The
presentation added that management was creating a new opioid task force that would focus
on developing “proactive initiatives to address issues surrounding controlled substances.”
Id. ¶ 210.
The presentation identified a total of eighteen individuals assigned to diversion
control, including a Senior Director of Diversion Control and Federal Investigations, a
Director of Diversion Control, a DEA Consultant, three Regulatory Affairs Investigators,
three Diversion Control Program Specialists, a Diversion Control Analyst, and many
others. The presentation also described a Diversion Control Advisory Committee,
comprising nine senior employees who met quarterly to provide “oversight, guidance and
recommendations for improvement to the Diversion Control Program.” Ex. 41 at 12.
During the meeting, a compliance employee provided an overview of the seven
elements of an effective compliance program. Zimmerman explained how the Company’s
compliance program satisfied each element. Management also reported that the healthcare
regulatory practice group at Reed Smith LLP had reached the same conclusion while also
recommending improvements to make the program even more robust.
The plaintiffs point out that whatever the content of the presentation, the reality was
that the Revised OMP was flagging an infinitesimal level of suspicious orders. The
plaintiffs contend that directors operating in good faith, against a backdrop of the opioid
crisis and in the context of heightened levels of regulatory scrutiny, could not have accepted
20
these figures as the legitimate outcomes of a functioning system. The plaintiffs maintain
that the board should have questioned the microscopic levels of suspicious order reporting
and sought to improve the system.
Instead, the board focused on how to change the public perception of the opioid
crisis and AmerisourceBergen’s role in it. The discussion explored how public relations
efforts could improve the balance of media coverage and how lobbyists could reach
key audiences.
AmerisourceBergen’s order reporting statistics for 2017 as a whole resembled its
numbers for 2015 and 2016. AmerisourceBergen received 24,319,706 opioid orders. The
Company flagged 87,224 for examination, representing a rate of 0.359%. The Company
determined that only 176 orders were actually suspicious, reflecting a rate of 0.0007% of
total orders and 0.2% of flagged orders.
During 2017, a consortium of attorneys general from forty-one states requested
documents and information from AmerisourceBergen and other opioid distributors as part
of an investigation into their distribution practices. In December 2017, the Judicial Panel
on Multidistrict Litigation consolidated what was then nearly two hundred pending opioid-
related cases into a multidistrict litigation in the United States District Court of the
Northern District of Ohio (the “Opioid MDL”).
G. 2018: More Red Flags
In January 2018, after AmerisourceBergen failed to respond to a November 2017
records request, the State of Delaware filed a complaint alleging that AmerisourceBergen
“routinely and continuously violated [Delaware] laws and regulations,” including
21
regulations requiring distributors to reject suspicious orders, conduct due diligence of
customers, and maintain inventory security and control systems to prevent diversion.
Compl. ¶ 250. In February, the Cherokee Nation filed a complaint against
AmerisourceBergen for having fueled the opioid crisis in Oklahoma. By this point,
AmerisourceBergen faced 840 cases in state and federal courts, as well as the investigations
being conducted by the Department of Justice and by the United States Attorneys’ Offices
for New Jersey, New York, Colorado, and West Virginia.
During a meeting in April 2018, the Audit Committee reviewed an audit of the
Revised OMP, which the minutes described as something that the Audit Committee was
doing “for the first time.” Id. ¶ 221. Management staunchly defended the Revised OMP.
When testifying before the House Committee on May 8, 2018, the Company’s CEO denied
that AmerisourceBergen had contributed to the nation’s opioid epidemic while maintaining
that the Company’s order management program was fully compliant with the law.
Two months later, in July 2018, Senator McCaskill published a report titled Fueling
an Epidemic, Report Three: A Flood of 1.6 Billion Doses of Opioids into Missouri and the
Need for Stronger DEA Enforcement. The report concluded that AmerisourceBergen,
McKesson, and Cardinal Health consistently failed to meet their reporting obligations
regarding suspicious orders. The report observed that AmerisourceBergen was the most
egregious of the three, and that the Company reported suspicious orders far less frequently
than its competitors. Between 2012 and 2017, AmerisourceBergen shipped approximately
650 million dosage units to Missouri customers and reported only 224 orders as suspicious.
McKesson reported seventy-five times more suspicious orders on similar order volumes.
22
Cardinal Health reported twenty-three times as many suspicious orders on half the
order volume.
In December 2018, the House Committee released a report titled Red Flags and
Warning Signs Ignored: Opioid Distribution and Enforcement Concerns in West Virginia.
The report found that AmerisourceBergen, McKesson, and Cardinal Health failed to
address suspicious order monitoring in West Virginia. It concluded that beginning in 2013,
AmerisourceBergen’s reporting of suspicious orders declined significantly from a high of
792 orders in 2013 to a low of only three orders in 2016. The report inferred that the trend
for West Virginia reflected a broader nationwide decline, because on a per-capita basis,
West Virginia had the second-highest number of suspicious orders for all states. Stated
differently, in all but one other state, AmerisourceBergen was reporting fewer suspicious
orders on a per-capita basis.
Like the Senate report, the House report concluded that AmerisourceBergen’s
reporting failures were worse than its competitors. Between 2007 and 2017, McKesson
reported more than 10,000 suspicious orders to the DEA for West Virginia customers.
AmerisourceBergen only reported 2,000 suspicious orders during the same period.
The House report provided examples of how the Independent Pharmacy Strategy
and its program of “light touch” regulatory oversight operated in practice. For example, in
2011, AmerisourceBergen approved Westside Pharmacy as a new customer despite the fact
that two of the six prescribing “Pain Doctors” were located substantial distances away from
the pharmacy. AmerisourceBergen did not conduct any investigation into why Westside
Pharmacy was filling prescriptions for one doctor whose office was a four-hour round-trip
23
drive away or for a second doctor whose office was an eleven-and-a-half-hour round-trip
drive away. AmerisourceBergen discontinued supplying Westside Pharmacy with opioids
in 2012, then approved a new customer application for Westside Pharmacy in January
2016, without any reference to the pharmacy’s prior history with the Company.
AmerisourceBergen also did not consult public news reports that contained red flags about
the top prescribing physicians.
In another example, the House report described how AmerisourceBergen responded
inconsistently when pharmacies placed suspicious orders. AmerisourceBergen claimed
that repeated suspicious orders for a single customer would be considered a problem, yet
the Company continued to supply Beckley Pharmacy for nearly a year after reporting 109
suspicious orders filled by that pharmacy in five months from 2013 to 2014.
AmerisourceBergen’s order reporting statistics for 2018 resembled its numbers for
2015, 2016, and 2017. AmerisourceBergen received 26,520,195 opioid orders. The
Company flagged 75,431 for examination, representing a rate of 0.284%. The Company
determined that only 489 orders were actually suspicious, reflecting a rate of 0.0018% of
total orders and 0.6% of flagged orders.
H. 2019: Still More Red Flags
In February 2019, the board received a report detailing over 1,600 federal cases that
were pending in the Opioid MDL, numerous cases pending in state courts, an investigation
being undertaken by a coalition of state attorneys general, and subpoenas from numerous
United States Attorneys’ offices. The Attorney General for the State of Florida filed suit in
November 2018, and the Attorney General for the State of Georgia filed suit in January
24
2019. The directors also were informed that the United States Attorney’s Office for the
District of New Jersey had notified management that it was opening a
criminal investigation.
In March 2019, the Attorney General for the State of Washington filed suit. The
Attorney General for the State of New York filed its own action that same month.
In May 2019, the board received another legal update. By this point, the number of
federal cases consolidated in the Opioid MDL had climbed to 1,800, and there were over
270 cases in state court. The Company also faced thirteen investigations and lawsuits from
state attorneys general. The directors reviewed the status of discovery, the prospects for
bellwether trials, and the status of settlement discussions.
In August 2019, the Audit Committee received a presentation on “diversion control
and an Order Monitoring Program update.” Id. ¶ 226. The accompanying eighteen-page
presentation explained that the Company had a “[c]omprehensive program to prevent
diversion” that had continued to “evolve and expand,” including by “prohibiting sales of
schedule II controlled substances to secondary customers” and using “[e]nhance[d] data
analytics to monitor and predict trends.” Id. ¶ 227.
On October 21, 2019, on the eve of trial for one of the bellwether cases in the Opioid
MDL, AmerisourceBergen, McKesson, and Cardinal Health settled the case for a payment
of $215 million.
AmerisourceBergen’s order reporting statistics for 2019 resembled its numbers for
2015, 2016, 2017, and 2018, albeit with slight increases in the numbers of orders flagged
and reported. AmerisourceBergen received 27,030,389 opioid orders. The Company
25
flagged 66,009 for examination, representing a rate of 0.244%. The Company determined
that only 1,091 orders were actually suspicious, reflecting a rate of 0.004% of total orders
and 1.65% of flagged orders.
I. 2021: The Settlements
In the summer of 2021, AmerisourceBergen, McKesson, and Cardinal Health
offered a global settlement worth $21 billion to resolve all claims by the states and localities
in the Opioid MDL. On July 20, 2021, AmerisourceBergen, Cardinal Health, McKesson,
and Johnson & Johnson agreed to settle a case brought by the Attorney General of New
York for $1.18 billion. They simultaneously entered into the 2021 Settlement with various
other states and localities. The total settlement consideration was $26 billion.
AmerisourceBergen agreed to pay approximately $6.4 billion over eighteen years.
As part of the 2021 Settlement, AmerisourceBergen agreed to permanent injunctive
relief that remedied deficiencies in the Revised OMP and required direct board oversight
of the program. Among other things, AmerisourceBergen committed to improving its
monitoring of customer red flags, conducting more thorough due diligence, and using
model-based thresholds that would actually identify and stop suspicious orders. In addition,
AmerisourceBergen agreed to establish the position of Chief Diversion Control Officer and
form a management-level committee that would report regularly to the board on anti-
diversion efforts. AmerisourceBergen also agreed to create a board-level Compliance
Committee to directly oversee the new order management program.
In return for this package of relief, AmerisourceBergen and the individual
defendants received expansive releases of claims. The plaintiffs view the corporate
26
governance measures as steps that the directors could and should have taken years before,
but which they saved to use as settlement currency.
As of January 2021, anticipated opioid settlements had caused the Company to
suffer an operating loss of $5.135 billion (approximately $16.65 per share). Despite the
massive harm to AmerisourceBergen, the directors approved a raise of $14.3 million for
the Company’s CEO, reflecting an increase of 26%.
J. The West Virginia Decision
On July 4, 2022, the West Virginia Court issued its post-trial decision in litigation
that the City of Huntington and the Cabell County Commission filed against the Big Three
distributors. City of Huntington v. AmerisourceBergen Drug Corp. (West Virginia
Decision), — F. Supp. 3d —, 2022 WL 2399876 (S.D.W. Va. July 4, 2022). The cases had
been part of the Opioid MDL, then were remanded back to the West Virginia Court as the
bellwether cases for the lawsuits against distributors. Id. at *1. The trial ran from May 3,
2021, through July 12, 2021, during which seventy witnesses testified either live or by
deposition. Id. at *1–2.
Huntington and Cabell asserted that the defendants’ practices of wholesale
distribution of opioids in Huntington and Cabell created a public nuisance. As their
principal defense, the defendants argued that their activities complied with law and
therefore could not constitute a nuisance.
The evidence showed that West Virginia had been ground zero for the national
opioid epidemic and was the hardest-hit state in the country. The evidence showed that
Huntington and Cabell were among the West Virginia communities most affected by the
27
opioid epidemic. Id. at *8. The question was whether any of the defendants contributed to
the epidemic by failing to comply with their anti-diversion obligations and thus creating a
public nuisance.
To evaluate the sufficiency of AmerisourceBergen’s anti-diversion program, the
West Virginia Court reviewed the program’s development from its origins in 1996. Id. at
*13–16. The court discussed the events of 2007 which resulted in the 2007 OMP. Id. at
*14–16. The court also discussed events in 2014 and 2015 that led to the Revised OMP.
Id. at *16. The West Virginia Court found that “[b]y 2008, each defendant had in place an
SOM [Suspicious Order Monitoring] program that blocked all suspicious orders they
identified.” Id. at *61.
The West Virginia Court next reviewed the plaintiffs’ evidence, finding that
“Plaintiffs did not prove that defendants failed to maintain effective controls against
diversion and design and operate sufficient SOM systems to do so. Relatedly, plaintiffs did
not prove that defendants’ due diligence with respect to suspicious orders was inadequate.”
Id. at *25.
The West Virginia Court analyzed the expert testimony on which the plaintiffs
relied and found that evidence “unpersuasive.” Id. The plaintiffs’ expert reviewed data on
AmerisourceBergen’s shipments into Huntington and Cabell between 2002 and 2018. The
expert offered six different analyses of the data, each of which was designed to demonstrate
that AmerisourceBergen identified only a fraction of the suspicious orders that should have
been flagged. Id. at *26–29. The West Virginia Court rejected each of the methods, finding
28
that they “were not convincing ways to achieve accurate results of the number of orders
that should have been flagged or blocked.” Id. at *26.
The West Virginia Court found that the plaintiffs had failed to prove that the Big
Three had acted unreasonably in supplying opioids in Huntington and Cabell. The court
reviewed the evidence regarding the causes of the opioid crisis and found most persuasive
the role of changing standards of care and the decisions that doctors made to prescribe
opioids to help patients with pain. The court found that the defendants were not responsible
for an oversupply of opioids. Instead, “[d]octors in Cabell/Huntington determined the
volume of prescription opioids that pharmacies in the community ordered from defendants
and then dispensed pursuant to those prescriptions.” Id. at *49.
The West Virginia Court found no evidence that any of the defendants distributed
through pill mills. Id. at *53. The court found “no evidence that Defendants ever distributed
controlled substances to any entity that it knew was dispensing for any purpose other than
to fill legitimate prescriptions written by doctors.” Id. And the court found that the levels
of prescription and distribution in Cabell County “matched almost perfectly,” with an
average of 141.2 opioid pills prescribed per person and an average of 142.19 opioid pills
distributed per person. Id. at *49.
Based on these findings, the West Virginia Court ruled that “[n]o culpable acts by
defendants caused an oversupply of opioids in Cabell/Huntington.” Id. *61. The court
explained that under the Controlled Substances Act, the distributors were charged with
preventing opioids from being sent to rogue pharmacies. The distributors were not expected
to address over-prescribing. Id. at *64. And the distributors were not responsible for
29
policing any diversion that occurred downstream from their pharmacy customers. Id. at
*65. The court found “no admissible evidence in this case that defendants caused diversion
that resulted in an opioid epidemic.” Id.
II. LEGAL ANALYSIS
The defendants have moved to dismiss the complaint under Court of Chancery Rule
23.1 for failure to plead demand futility. On a cold read, the relevant language in Rule 23.1
hardly suggests that it would play such an outsized role in corporate jurisprudence. In its
entirety, Rule 23.1(a) states:
In a derivative action brought by one or more shareholders or members to
enforce a right of a corporation or of an unincorporated association, the
corporation or association having failed to enforce a right which may
properly be asserted by it, the complaint shall allege that the plaintiff was a
shareholder or member at the time of the transaction of which the plaintiff
complains or that the plaintiff’s share or membership thereafter devolved on
the plaintiff by operation of law. The complaint shall also allege with
particularity the efforts, if any, made by the plaintiff to obtain the action the
plaintiff desires from the directors or comparable authority and the reasons
for the plaintiff’s failure to obtain the action or for not making the effort.
The innocuous language of the second sentence supports the edifice of Rule 23.1
motion practice.
Rule 23.1’s second sentence is the “procedural embodiment” of substantive
principles of Delaware law. Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). When a
corporation suffers harm, the board of directors is the institutional actor legally empowered
under Delaware law to determine what, if any, remedial action the corporation should take,
including pursuing litigation against the individuals involved. See 8 Del. C. § 141(a). “A
cardinal precept of the General Corporation Law of the State of Delaware is that directors,
30
rather than shareholders, manage the business and affairs of the corporation.” Aronson v.
Lewis, 473 A.2d 805, 811 (Del. 1984).4 “Directors of Delaware corporations derive their
managerial decision making power, which encompasses decisions whether to initiate, or
refrain from entering, litigation, from 8 Del. C. § 141(a).” Zapata Corp. v. Maldonado, 430
A.2d 779, 782 (Del. 1981) (footnote omitted). Section 141(a) vests statutory authority in
the board of directors to determine what action the corporation will take with its litigation
assets, just as with other corporate assets. See id.In a derivative suit, a stockholder seeks to displace the board’s authority over a
litigation asset and assert the corporation’s claim. Aronson, 473 A.2d at 811. Unless the
4
In Brehm v. Eisner, 746 A.2d 244, 253–54 (Del. 2000), the Delaware Supreme
Court overruled seven precedents, including Aronson to the extent that they reviewed a
Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or
otherwise suggested deferential appellate review. Id. at 253 n.13 (overruling in part on this
issue Scattered Corp. v. Chi. Stock Exch., 701 A.2d 70, 72–73 (Del. 1997); Grimes v.
Donald, 673 A.2d 1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d
950, 952 (Del. 1992); Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Grobow v. Perot,
539 A.2d 180, 186 (Del. 1988); Pogostin v. Rice, 480 A.2d 619, 624–25 (Del. 1984); and
Aronson, 473 A.2d at 814. The Brehm Court held that going forward, appellate review of
a Rule 23.1 determination would be de novo and plenary. Brehm, 746 A.2d at 254. The
seven partially overruled precedents otherwise remain good law. This decision does not
rely on any of them for the standard of appellate review. Having described Brehm’s
relationship to these cases, this decision omits their cumbersome subsequent history.
More recently, the Delaware Supreme Court overruled Aronson and Rales, to the
extent that they set out alternative tests for demand futility. United Food & Com. Workers
Union & Participating Food Indus. Empls. Tri-State Pension Fund v. Zuckerberg, 262
A.3d 1034, 1059 (Del. 2021). The high court adopted a single, unified test for demand
futility. Although the Zuckerberg test displaced the prior tests, cases properly applying
Aronson and Rales remain good law. Id. This decision therefore does not identify any
precedents, including Aronson and Rales, as having been overruled by Zuckerberg.
31
board of directors permits the stockholder to proceed, a stockholder only can pursue a cause
of action belonging to the corporation if (i) the stockholder demanded that the directors
pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused
because the directors are incapable of making an impartial decision regarding the litigation.
Zuckerberg, 262 A.3d 1047; Ainscow v. Sanitary Co. of Am., 180 A. 614, 615 (Del. Ch.
1935) (Wolcott, C.) (citing Sohland v. Baker, 141 A. 277 (Del. 1927)).
Rule 23.1 imposes a pleading requirement so that demand principles can be applied
at the outset of a case to determine whether the plaintiff has standing to sue. See
Zuckerberg, 262 A.3d 1047. To satisfy the pleading requirements of Rule 23.1, the plaintiff
“must comply with stringent requirements of factual particularity that differ substantially
from . . . permissive notice pleadings . . . .” Brehm, 746 A.2d at 254. Under the heightened
pleading requirements of Rule 23.1, “conclusionary [sic] allegations of fact or law not
supported by allegations of specific fact may not be taken as true.” Grobow, 539 A.2d
at 187.
The requirement of factual particularity does not entitle a court to discredit or weigh
the persuasiveness of well-pled allegations. “The well-pleaded factual allegations of the
derivative complaint are accepted as true on such a motion.” Rales, 634 A.2d at 931.
“Plaintiffs are entitled to all reasonable factual inferences that logically flow from the
particularized facts alleged, but conclusory allegations are not considered as expressly
pleaded facts or factual inferences.” Brehm, 746 A.2d at 255. Rule 23.1 requires that a
plaintiff allege specific facts, but “he need not plead evidence.” Aronson, 473 A.2d at 816;
accord Brehm, 746 A.2d at 254 (“[T]he pleader is not required to plead evidence.”).
32
The plaintiffs in this case chose not to make a pre-suit demand. The operative
question is therefore whether “demand is excused because the directors are incapable of
making an impartial decision regarding whether to institute such litigation.” Stone v. Ritter,
911 A.2d 362, 367 (Del. 2006).
When conducting a demand futility analysis, Delaware courts ask, on a director-by-
director basis:
(i) whether the director received a material personal benefit
from the alleged misconduct that is the subject of the litigation
demand;
(ii) whether the director faces a substantial likelihood of
liability on any of the claims that would be the subject of the
litigation demand; and
(iii) whether the director lacks independence from someone
who received a material personal benefit from the alleged
misconduct that would be the subject of the litigation demand
or who would face a substantial likelihood of liability on any
of the claims that are the subject of the litigation demand.
Zuckerberg, 262 A.3d at 1059. “If the answer to any of the questions is ‘yes’ for at least
half of the members of the demand board, then demand is excused as futile.” Id.
The plaintiffs rely only on the second basis for establishing director interestedness.
They contend that nine out of the ten directors in office when the plaintiffs filed their
lawsuit have served on the board since 2015 or earlier, with some directors serving since
as early as 2010. The plaintiffs claim that those directors face a substantial risk of liability
on the claims that the plaintiffs have asserted, because they ignored the red flags giving
rise to the Red-Flags Claim and made the business decisions giving rise to the Massey
33
Claim. When a plaintiff advances that type of argument, the demand analysis effectively
folds into an analysis of the strength of the underlying claims.
A. The Red-Flags Claim
The plaintiffs’ first theory is their Red-Flags Claim. That theory derives from the
Delaware Supreme Court’s decision in Graham v. Allis-Chalmers Manufacturing Co., 188
A.2d 125 (Del. 1963), “which had long been held out as embracing the protective ‘red
flags’ rule” that premised director liability on a failure to take action despite being aware
of red flags indicating wrongdoing. Martin Lipton & Theodore N. Mirvis, Chancellor Allen
and the Director, 22 Del. J. Corp. L. 927, 939 (1997). Under the rule in Allis-Chalmers,
directors had no duty to act “absent cause for suspicion.” 188 A.2d at 130. Most
significantly, the Allis-Chalmers court stated that directors had no duty “to install and
operate a corporate system of espionage to ferret out wrongdoing which they have no
reason to suspect exists.” Id. Under Allis-Chalmers, therefore, directors arguably had no
duty to set up a reasonable oversight system to facilitate board-level oversight. They only
needed to act when information came to their attention. Id.In the landmark Caremark decision, Chancellor Allen artfully explained why the
colorful language in Allis-Chalmers about a system of corporate espionage “could not be
generalized into a rule that, absent grounds for suspected law violation, directors had no
duty to assure that an information gathering and reporting system exists to provide senior
management and the board with material internal operating information, including as
regards legal compliance.” Lipton & Mirvis, supra, at 939. Caremark’s contribution was
34
to explain that a board’s fiduciary duties encompass the need to make a good-faith effort
to ensure that
information and reporting systems exist in the organization that
are reasonably designed to provide to senior management and
to the board itself timely, accurate information sufficient to
allow management and the board, each within its scope, to
reach informed judgments concerning both the corporation’s
compliance with law and its business performance.
In re Caremark Int’l Inc. Deriv. Litig, 698 A.2d 959, 970 (Del. Ch. 1996).
Caremark’s second major contribution was to explain when directors could be held
liable for failing to implement a reporting system to facilitate board oversight. In the words
of the original decision,
only a sustained or systematic failure of the board to exercise
oversight—such as an utter failure to attempt to assure a
reasonable information and reporting system exists—will
establish the lack of good faith that is a necessary condition to
liability. Such a test of liability—lack of good faith as
evidenced by sustained or systematic failure of a director to
exercise reasonable oversight—is quite high. But, a demanding
test of liability in the oversight context is probably beneficial
to corporate shareholders as a class, as it is in the board
decision context, since it makes board service by qualified
persons more likely, while continuing to act as a stimulus to
good faith performance of duty by such directors.
Id. at 971 (emphasis omitted).
In Stone, the Delaware Supreme Court adopted the reasoning of Caremark and
identified two types of Caremark claims. The high court wrote that the plaintiff must allege
particularized facts supporting a reasonable inference that either “(a) the directors utterly
failed to implement any reporting or information system or controls; or (b) having
implemented such a system or controls, consciously failed to monitor or oversee its
35
operations thus disabling themselves from being informed of risks or problems requiring
their attention.” Stone, 911 A.2d at 370. This framing has led to the claims being called
prong-one and prong-two Caremark claims. Technically, only a prong-one claim traces its
lineage to Caremark. A prong-two claim traces its lineage to Allis-Chalmers.
In this case, the plaintiffs have not advanced a prong-one Caremark theory. They
have advanced a Red-Flags Theory in which they assert that the defendants ignored red
flags by failing to take action to fix the Revised OMP and improve AmerisourceBergen’s
system of board oversight until they could use those changes as part of the currency for the
2021 Settlement.
Relying on this court’s decision in Reiter v. Fairbank, 2016 WL 6081823 (Del. Ch.
Oct. 18, 2016), the defendants argue that subpoenas and investigations do not rise to the
level of red flags. In Reiter, the plaintiff alleged that the board of a large bank ignored red
flags showing that the bank’s check-cashing business was failing to comply with anti-
money laundering (“AML”) regulations. The complaint alleged that the board knew about
six grand jury subpoenas that had been served on the company, had received reports stating
that the company’s AML risk was high, and had been told that the company’s AML
compliance program had been rated as inadequate. Id. at *13. The court dismissed the
complaint, holding that the plaintiff had not alleged “red flags of illegal conduct” but
merely “yellow flags of caution” which suggested “escalating AML compliance risk that
was occurring in tandem with heightened regulatory scrutiny.” Id. The Reiter decision also
found that the documentary record at the pleading stage showed that the directors engaged
in sufficient oversight of management’s efforts to negate any inference that they
36
consciously failed to respond to red flags, even if it was debatable whether they engaged
in sufficient oversight. Id. at *1, *14.
Whether allegations about investigations, subpoenas, and lawsuits rise to the level
of red flags “depends on the circumstances.” Fisher v. Sanborn, 2021 WL 1197577, at *12
(Del. Ch. Mar. 30, 2021). “A settlement of litigation or a warning from a regulatory
authority—irrespective of any admission or finding of liability—may demonstrate that a
corporation’s directors knew or should have known that the corporation was violating the
law.” Rojas v. Ellison, 2019 WL 3408812, at *11 (Del. Ch. July 29, 2019). In this case, the
complaint identifies over seventy examples of subpoenas, settlements, civil litigation,
congressional reports, and analyses of regulatory risks that put the directors on notice of
problems at the Company. The directors did not just see red flags; they were wrapped
in them.
The defendants also argue that the complaint does not support an inference that the
directors consciously disregarded their obligation to address the red flags. The defendants
advance arguments about actions that they took between 2007 and 2012. But for the
plaintiffs’ claim, the critical period started in 2015, after the Revised OMP went into effect.
During that period, the defendants can point to only three instances of board involvement.
The full board requested and received an in-depth review of the Company’s compliance
systems in 2017. The Audit Committee conducted its first-ever review of the Revised OMP
in 2018, then conducted another review in 2019. The defendants say that the court cannot
infer a conscious decision to ignore red flags when the directors received those reports.
37
Three instances are better than none, but they would not be enough to warrant
dismissal when evaluated against the panoply of allegations in the complaint. That is
particularly so when the content of the reports detailed the paltry number of suspicious
orders that the Company was identifying, yet the defendants did nothing in response. The
allegations of the complaint support a reasonable inference that the defendants knew that
some level of corrective action was required, but they did not want to do anything that
might imply that the Company’s existing systems were inadequate. Instead, they wanted
to save those measures to use as settlement currency when they could obtain a global
release. Until they could achieve a settlement, they went through the motions. See Massey
Energy, 2011 WL 2176479, at *19 (drawing inference that outside directors went “through
the motions” rather than making “good faith efforts to ensure that [the company] cleaned
up its act”).
The allegations of the complaint fairly support two competing inferences. One
reasonable inference is that the directors received reports on the Revised OMP and the
Company’s anti-diversion control systems, determined that the Company’s existing
systems were adequate, and made a legitimate business judgment to do nothing. Another
reasonable inference is that the directors knew that the Company’s existing systems were
inadequate and consciously decided not to take any action in response to the red flags. This
case is at the pleading stage. At this stage of the case, the plaintiffs get the benefit of the
inference they seek.
If that were the state of the pleading-stage record, the Red-Flags Claim would
survive. But there is another factor that tips the outcome in favor of the defendants. In the
38
West Virginia Decision, the West Virginia Court found on the merits after a lengthy trial
that AmerisourceBergen had an adequate anti-diversion program in place. West Virginia
Decision, 2022 WL 2399876, at *61. The West Virginia Court found no evidence that
AmerisourceBergen distributed opioids to pill mills. Id. at *53. Based on its findings, the
West Virginia Court ruled that “[n]o culpable act by defendants caused an oversupply of
opioids in Cabell/Huntington.” Id. at *61.
The findings in the West Virginia Decision are not preclusive, but they are
persuasive. The Red-Flags Theory depends on an inference that the officers and directors
knowingly caused the Company to fail to comply with its anti-diversion obligations. The
West Virginia Court found that AmerisourceBergen did not fail to comply with its anti-
diversion obligations. That finding knocks the stuffing out of the plaintiffs’ claim.
The plaintiffs argue that the West Virginia Decision did not specifically address the
Revised OMP, but that is incorrect. The West Virginia Decision did address the Revised
OMP as part of the changes that the Company made in 2014 and 2015. See 2022 WL
2399876, at *16. The court’s discussion did not continue after that point, but that is
consistent with the plaintiffs’ allegation that the defendants did not make any further
changes in their order monitoring program until the 2021 Settlement. The West Virginia
Court’s analysis included the Revised OMP, and the West Virginia Court expressly found
AmerisourceBergen’s anti-diversion controls were legally compliant. Id. at *61.
A variant of this objection would be that the West Virginia Decision did not address
the full period leading up to the 2021 Settlement. To reiterate, the West Virginia Decision
addressed the Revised OMP, and that was the system in place until the 2021 Settlement.
39
The West Virginia Court also analyzed an expert opinion that covered
AmerisourceBergen’s sales in Huntington and Cabell County from 2002 through 2018. Id.
at *26. That period included the three years after the adoption of the Revised OMP. The
plaintiffs have not provided any reason to think that anything changed after that point.
Another possible objection would be that the West Virginia Decision only addressed
order diversion in Huntington and Cabell County, not elsewhere. But the West Virginia
Court found that the opioid problem in West Virginia was the worst in the nation and that
Huntington and Cabell County were among the worst localities in West Virginia. If there
was anywhere that AmerisourceBergen could have been held liable for not complying with
its order-diversion obligations, that was the place.
In light of the West Virginia Decision, it is not possible to infer that the Company
failed to comply with its anti-diversion obligations. It is therefore not possible to infer that
at least half of the directors who were in office when the complaint was filed face a
substantial likelihood of liability for ignoring red flags.
B. The Massey Claim
The plaintiffs’ second theory is their Massey Claim. They contend that between
2010 and 2015, management and the directors made a series of conscious decisions which
they knew would result in the Company failing to comply with its anti-diversion
obligations, thereby evidencing the defendants’ pursuit of a business plan that prioritized
profit over legal compliance. They claim that after 2015, management and the directors
adhered to the same business strategy and did not stray from it until the 2021 Settlement.
40
As with the Red-Flags Claim, the Massey Claim does not present at least half of the
directors with a substantial threat of liability.
A Massey Claim derives from the fundamental proposition that
Delaware law does not charter law breakers. Delaware law
allows corporations to pursue diverse means to make a profit,
subject to a critical statutory floor, which is the requirement
that Delaware corporations only pursue “lawful business” by
“lawful acts.” As a result, a fiduciary of a Delaware corporation
cannot be loyal to a Delaware corporation by knowingly
causing it to seek profit by violating the law.
Massey, 2011 WL 2176479, at *20 (footnoted omitted); accord Metro Commc’n Corp. BVI
v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 131 (Del. Ch. 2004) (“Under
Delaware law, a fiduciary may not choose to manage an entity in an illegal fashion, even
if the fiduciary believes that the illegal activity will result in profits for the entity.”).
“Delaware corporate law has long been clear on this rather obvious notion; namely, that it
is utterly inconsistent with one’s duty of fidelity to the corporation to consciously cause
the corporation to act unlawfully. The knowing use of illegal means to pursue profit for the
corporation is director misconduct.” Desimone v. Barrows, 924 A.2d 908, 934 (Del. Ch.
2007) (cleaned up).
Although sometimes lumped in with Caremark, a Massey Claim is technically not
a Caremark claim. Cf. Hamrock, 2022 WL 2387653, at *17 n.144 (questioning whether a
Massey Claim is a Caremark claim). Both a prong-one Caremark claim and a prong-two
Allis-Chalmers claim rest on the defendants’ failure to take action. A Massey Claim turns
on affirmative acts.
41
The plaintiffs contend that starting around 2010, management and the directors
made a series of decisions which, when taken together, support an inference that the
defendants were prioritizing profits over compliance. The process started with the
Independent Pharmacy Strategy and its light-touch, easy-onboarding model. It continued
with the Walgreens alliance, which management projected would more than double the
volume of the Company’s controlled-substances orders, but was not accompanied by a
similar increase in order-diversion resources. The clearest manifestation of the strategy was
the adoption of the Revised OMP, which used a double-trigger test to reduce the number
of orders of interest that the Company flagged for investigation. The Company already was
flagging low levels of orders, and with the adoption of the Revised OMP, the Company’s
rates of suspicious order reporting fell to microscopic levels.
As with the Red-Flags Claim, if this were the state of the record, then the court
would permit the claim to proceed past the pleading stage. When viewed as a whole, the
allegations support a reasonable inference that the managers and directors acted with the
intent necessary for a Massey Claim. The allegations about the Independent Pharmacy
Strategy are relatively weak and would not be sufficient standing alone. The allegations
regarding the Walgreens alliance and the failure to increase oversight personnel are
stronger, but those allegations would not be enough either, whether independently or in
conjunction with the Independent Pharmacy Strategy. What gets the plaintiffs the inference
they need is the Revised OMP and its seemingly apparent purpose of driving down the
already low number of suspicious orders that AmerisourceBergen was reporting.
42
As with the Red-Flags Claim, the defendants seek to defeat the Massey Theory by
arguing that the board received a report about the Company’s order monitoring system in
2017, and the Audit Committee reviewed the Revised OMP in 2018 and 2019. Yet the
directors took no action, despite the Company’s minuscule levels of suspicious order
reporting. For the directors to receive those reports and take no action while the Company
was facing a barrage of litigation and investigations supports a pleading-stage inference
that the Company’s fiduciaries had embarked on a strategy of prioritizing profits over
compliance and were sticking to it. That is not the only possible inference, but it is one to
which the plaintiffs would be entitled.
But as with the Red-Flags Claim, the West Virginia Decision is the plaintiffs’
undoing. A Massey Claim depends on a business plan that violates the law. The West
Virginia Court held that the Company’s business plan did not violate the law. Given the
West Virginia Decision, it is not possible to infer that management and the board
consciously embarked on a business plan that violated the law. It is therefore not possible
to infer that the Massey Claim poses a substantial threat of liability to the defendants.
III. CONCLUSION
The allegations of the complaint fail to support a basis for demand excusal. The
plaintiffs therefore lack standing to litigate their claims on behalf of the Company. The
action is dismissed. Under Rule 15(aaa), the dismissal is with prejudice solely as to
the plaintiffs.
43