Ontario Provincial Council of Carpenters' Pension Trust Fund v. Walton ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ONTARIO PROVINCIAL COUNCIL OF )
CARPENTERS’ PENSION TRUST FUND, )
POLICE & FIRE RETIREMENT SYSTEM OF )
THE CITY OF DETROIT, AND NORFOLK )
COUNTY RETIREMENT SYSTEM, Derivatively )
on Behalf of WALMART INC., )
)
Plaintiffs, )
)
v. ) C.A. No. 2021-0827-JTL
)
S. ROBSON WALTON, GREGORY B. PENNER, )
STEUART WALTON, TIMOTHY P. FLYNN, )
THOMAS W. HORTON, MARISSA A. MAYER, )
DOUG MCMILLON, STEVEN S. REINEMUND, )
PHYLLIS HARRIS, and JAY JORGENSEN, )
)
Defendants, )
)
and )
)
WALMART INC., )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 13, 2023
Date Decided: April 26, 2023
Gregory V. Varallo, Mae Oberste, & Daniel E. Meyer, BERNSTEIN LITOWITZ
BERGER & GROSSMANN LLP, Wilmington, Delaware; Mark Lebovitch & Edward G.
Timlin, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New
York; Leslie R. Stern, Nathaniel L. Orenstein, & Steven L. Groopman, BERMAN
TABACCO, Boston, Massachusetts; Counsel for Police & Fire Retirement System of the
City of Detroit and Norfolk County Retirement System.
Ned Weinberger & Mark Richardson, LABATON SUCHAROW LLP, Wilmington,
Delaware; David MacIsaac, LABATON SUCHAROW LLP, New York, New York;
Counsel for The Ontario Provincial Council of Carpenters’ Pension Trust Fund.
Raymond J. DiCamillo & John M. O’Toole, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Sean M. Berkowitz & Nicholas J. Siciliano, LATHAM &
WATKINS LLP, New York, New York; Andrew W. Stern & Charlotte K. Newell,
SIDLEY AUSTIN LLP, New York, New York; William M. Regan & Allison M. Wuertz,
HOGAN LOVELLS US LLP, New York, New York; Frank R. Volpe, SIDLEY AUSTIN
LLP, Washington, District of Columbia; Counsel for Defendants and Nominal Defendant.
LASTER, V.C.
Walmart Inc. operates over 5,000 pharmacies that dispense prescription opioids.
Until April 2018, Walmart also acted as a wholesale distributor of prescription opioids.
From 2006 to 2012 alone, Walmart distributed over five billion opioid pills.
Based on its involvement with prescription opioids, Walmart currently faces
thousands of lawsuits from private litigants, state attorneys general, and the U.S.
Department of Justice. In November 2022, Walmart announced that it had agreed to a $3.1
billion nationwide opioid settlement (the “Nationwide Settlement”) designed to resolve
substantially all of the opioid lawsuits pending in federal multidistrict litigation (the
“Opioid MDL”), plus potential lawsuits by state, local, and tribal governments. Walmart
has incurred millions of dollars in defense costs and suffered reputational harm.
The plaintiffs own stock in Walmart. They seek to shift responsibility for the harm
that Walmart has suffered to the fiduciaries whom they say caused it. They maintain that
the directors and officers of Walmart breached their fiduciary duties to the corporation and
its stockholders by (i) knowingly causing Walmart to fail to comply with a settlement
between the U.S. Drug Enforcement Agency (“DEA”) and Walmart (the “DEA
Settlement”); (ii) knowingly causing Walmart to fail to comply with its obligations under
the federal Controlled Substances Act and its implementing regulations (collectively, the
“Controlled Substances Act”) when acting as a dispenser of opioids through its retail
pharmacies, and (iii) knowingly causing Walmart to fail to comply with its obligations
under the Controlled Substances Act when acting as a wholesale distributor of opioids for
its retail pharmacies.
As to each of the three categories of alleged misconduct, the plaintiffs have
advanced three species of claims: a Massey Claim, a Red-Flags Claim, and an Information-
Systems Claim.1 The Massey Claim asserts that Walmart’s directors and officers knew that
Walmart was failing to comply with its legal obligations and made a conscious decision to
prioritize profits over compliance. The Red-Flags Claim asserts that a series of red flags
put Walmart’s directors and officers on notice of Walmart’s noncompliance or potential
corporate trauma, yet the directors and officers consciously ignored them. The Information-
Systems Claim asserts that Walmart’s directors and officers knew that they had an
obligation to establish a monitoring system to address a core compliance risk, yet
consciously failed to make a good faith effort to fulfill that obligation.
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 the
complaint alleges facts supporting a reasonable inference that at least half of the directors
1
This theory has been called a “prong one” Caremark claim, but that sterile
nomenclature carries little informational content, and when not immersed in a Caremark
case, I have difficulty remembering which theory is prong one and which is prong two. In
one decision, I called the prong one theory a “Reporting-Systems Theory” or a “Reporting-
Systems Claim.” Collis, 287 A.3d at 1176. More recently, I called it an “Information-
Systems Theory” or an “Information-Systems Claim.” In re McDonald’s Corp. S’holder
Derv. Litig. (McDonald’s Officers), 289 A.3d 343, 359–60 (Del. Ch. 2023). Either works.
As between the two, the reporting-systems label is narrower and could imply only humans
reporting up the chain. Oversight systems should be broader and include technology. The
more expansive label of information-systems therefore seems preferable. Traditionalists
may stick to prong one and prong two. Lawyers communicating with me can assist my
comprehension by using the more descriptive labels.
2
in office when the lawsuit was filed face a substantial threat of liability or, in the alternative,
lack independence.
This decision denies the motion to dismiss as to claims relating to the DEA
Settlement and claims relating to Walmart’s compliance with its obligations as a dispenser
under the Controlled Substances Act. The motion is granted as to the claims relating to
Walmart’s compliance with its obligations as a distributor under the Controlled Substances
Act.
I. FACTUAL BACKGROUND
The facts are drawn from the operative complaint, the documents it incorporates by
reference, and pertinent public documents that are subject to judicial notice. 2 At this stage
2
The operative complaint incorporates by reference documents produced in federal
proceedings involving Walmart. The operative complaint also incorporates documents
filed with the U.S. Securities and Exchange Commission (the “SEC”). The court may
consider both sets of documents at this stage of the proceedings. See, e.g., In re Rural Metro
Corp. S’holders Litig., 2013 WL 6634009, at *7 (Del. Ch. Dec. 17, 2013) (“Applying
[Delaware] Rule [of Evidence] 201, Delaware courts have taken judicial notice of publicly
available documents that ‘are required by law to be filed, and are actually filed, with federal
or state officials.’” (quoting In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563,
584 (Del. Ch. 2007))); Aequitas Sols., Inc. v. Anderson, 2012 WL 2903324, at *3 n.17 (Del.
Ch. June 25, 2012) (taking judicial notice of a pleading filed in a related action); Prather
v. Doroshow, Pasquale, Krawitz & Bhaya, 2011 WL 1465520, at *1 n.2 (Del. Super. Ct.
Apr. 14, 2011) (“For purposes of the instant motion to dismiss, this Court takes judicial
notice of the federal docket of the Pennsylvania litigation and the foregoing decision of the
Court of Appeals for the Third Circuit.”); In re Career Educ. Corp. Deriv. Litig., 2007 WL
2875203, at *9 (Del. Ch. Sept. 28, 2007) (“When considering a motion to dismiss, the court
also may take judicial notice of publicly filed documents, such as documents publicly filed
in litigation pending in other jurisdictions.” (footnote omitted)).
Citations in the form “Compl. ¶ —” refer to the paragraphs of the operative
complaint. Citations in the form “Ex. [number] at —” refer to exhibits that the defendants
3
of the proceedings, the complaint’s allegations are assumed to be true, and the plaintiffs
receive the benefit of all reasonable inferences, including inferences drawn from the
documents.
Before filing suit, the plaintiffs used Section 220 of the Delaware General
Corporation Law to obtain books and records. Walmart certified that between the
documents it produced and those it listed on its privilege log, “Walmart’s production is
complete with respect to every category of documents that Walmart is required to
produce.”3 Given this certification, if the record lacks documentation relating to a particular
event, and if it is reasonable to expect that documentation would exist if the event took
place, then the plaintiffs are entitled to a reasonable inference that the event did not occur.4
filed with their opening brief in support of their motion to dismiss. See Dkt. 30. Citations
in the form “Ex. [letter] at —” refer to exhibits that the plaintiffs filed with their answering
brief. See Dkt. 40. Citations in the form “PSB Ex. [letter] at —” refer to exhibits that the
plaintiffs filed with their supplemental brief. See Dkt. 64. Page citations refer to the internal
pagination or, if there is none, then to the last three digits of the control number.
3
Final Order and Judgment at 7, See Police & Fire Ret. Sys. of the City of Det. v.
Walmart, Inc., C.A. No. 2020-0478-JTL, Dkt. 39 (Del. Ch. Oct. 29, 2020).
4
See D.R.E. 803(7) (treating as non-hearsay and permitting fact-finder to consider
the absence of a record of a regularly conducted activity, such as board or committee
meetings); see also Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1119 n.7 (Del.
1994) (“[T]he production of weak evidence when strong is, or should have been, available
can lead only to the conclusion that the strong would have been adverse.”); Smith v. Van
Gorkom, 488 A.2d 858, 878 (Del. 1985) (“It is a well established principle that the
production of weak evidence when strong is, or should have been, available can lead only
to the conclusion that the strong would have been adverse.” (citing Interstate Circuit v.
United States, 306 U.S. 208, 226 (1939) and Deberry v. State, 457 A.2d 744, 754 (Del.
1983))), overruled on other grounds by Gantler v. Stephens, 965 A.2d 695 (Del. 2009);
accord Young v. Red Clay Consol. Sch. Dist., 159 A.3d 713, 791 n.510 (Del. Ch. 2017)
4
The confidentiality agreement governing the Section 220 production included an
incorporation-by-reference condition. Relying on that condition, the defendants submitted
eighty-two exhibits with their opening brief, plus another five exhibits with their
supplemental brief. The defendants relied on the exhibits to contest the account in the
complaint.
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 is
a reasonable one. 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. The doctrine
does not change the pleading standard that governs a motion to dismiss. 5 If the complaint
contains well-pled allegations that could support different interpretations, then the court
must credit the plaintiffs’ interpretation. If the record could support different inferences,
and if the plaintiff seeks a reasonable inference, then the court must grant the plaintiff the
inference.6
(quoting Kahn v. Lynch and Smith v. Van Gorkom); Chesapeake Corp. v. Shore, 771 A.2d
293, 300–01 & n.7 (Del. Ch. 2000) (same).
5
See, e.g., In re CBS Corp. S’holder Class Acton & Deriv. Litig., 2021 WL 268779,
at *18 n.257 (Del. Ch. Jan. 27, 2021 (collecting authorities).
6
See Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
5
Many of the documents in the record can support several reasonable interpretations
or inferences.7 At this stage of the case, the plaintiffs receive the benefit of their reasonable
interpretations and inferences.
Walmart laid the foundation for the plaintiffs to seek damaging inferences by
redacting documents extensively. In many cases, only a few words survive. The resulting
documents indicate that a topic was addressed, but the redactions deprive the court of
insight into the context, the substance of the discussion, and any decision that might have
been made. For a typical document, one possible inference is that the substance of the
discussion and any decision would favor the plaintiffs’ theory of the case. Another possible
inference is that the substance of the discussion and any decision would favor the
defendants’ position. At this stage, the court must draw the inference that favors the
plaintiffs.8
In some cases, Walmart made partial-sentence redactions, purportedly for non-
responsiveness. The court has acknowledged that when producing books and records, a
7
See, e.g., Ex. 6 at ’035, ’044–47; Ex. 39 at ’330, ’332, ’336; Ex. 46 at ’601; Ex. 49
at ’822, ’825; Ex. B at 8–9.
8
See In re McDonald’s Corp. S’holder Deriv. Litig. (McDonald’s Directors), —
A.3d —, 2023 WL 2293575, at *33 (Del. Ch. Mar. 1, 2023) (“When the documents from
a Section 220 production contain gaps, a plaintiff can seek inferences about what the
redacted material might say. A court can credit those inferences, and that outcome could
be worse for the defendants than if the Company had produced the documents without
redactions.”).
6
company may redact “material unrelated to the subject matter of a demand.”9 Measured
under that standard, a partial-sentence redaction is dubious, because it depends on the
premise that the author incoherently injected an unrelated topic into an otherwise
responsive sentence.10 The partial-sentence redactions played into the plaintiffs’ hands.
On many occasions, Walmart redacted or withheld documents for privilege. The
Delaware Rules of Evidence provide that “[t]he claim of a privilege, whether in the present
proceeding or upon a prior occasion, is not a proper subject of comment by judge or
counsel” and that “[n]o inference may be drawn therefrom.”11 The parties have not
addressed whether this rule applies only at trial or also at earlier stages, such as a motion
to dismiss. To be safe, this decision assumes the rule applies and therefore does not
speculate or draw inferences about the content of the privileged communication.12
In their briefs, the defendants argued that the existence of the privileged documents
and passages showed that the Board and its committees received reports on compliance
issues. That seems like a fair inference to draw, and this decision assumes that to be the
9
Okla. Firefighters Pension & Ret. Sys. v. Amazon.com, Inc., 2022 WL 1760618,
at *13 (Del. Ch. June 1, 2022).
10
See McDonald’s Officers, 289 A.3d at 355 & n.2.
11
D.R.E. 512(a).
12
See ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at *39 n.300 (Del. Ch.
July 21, 2017) (“Sprint withheld relevant materials on grounds of attorney-client privilege.
Aurelius requested an adverse inference against Sprint in post-trial briefing, but this is
improper.”), aff’d, 184 A.3d 1291 (Del. 2018).
7
case.13 What the court cannot do is draw the defense-friendly inference that the content of
the discussions favored the defendants, such as by reflecting an assessment that Walmart’s
compliance efforts were on track. Another reasonable inference is that the content of the
discussions favored the plaintiffs, such as by reflecting an assessment that Walmart’s
compliance efforts were off track. The passages and documents for which Walmart asserted
privilege could inferably cloak reports that Walmart had not devoted sufficient resources
to compliance, had failed to implement or was behind schedule in implementing key
initiatives, and would not be able to fulfill its obligations without a significant investment
of resources that would cut into profits.
Although this decision does not draw inferences from any of the passages or
documents for which Walmart has asserted privilege, it does draw inferences from an
absence of non-privileged documents containing discussions or decisions about the
business issues necessarily involved in (i) taking the steps necessary to comply with the
DEA Settlement and the Controlled Substances Act, (ii) responding to red flags of
noncompliance, and (iii) assessing the effectiveness of the compliance efforts. Legal advice
undoubtedly is an input into those discussions and decisions, but if directors and officers
13
See Conduent State Healthcare, LLC v. AIG Specialty Ins. Co., 2023 WL
2256052, at *5 (Del. Super. Ct. Feb. 14, 2023) (citing D.R.E. 512(a)) (“The parties were
strictly instructed that information contained in the logs could be used for the sole and very
limited purpose of demonstrating, for example, that a meeting took place on a certain date,
who attended the meeting, and the general topic of the meeting.”).
8
are doing their jobs, then there will be non-privileged discussions and decisions about what
are inherently and ultimately business decisions (which the business judgment rule
generally will protect). Walmart represented that its Section 220 production was complete,
so when there are no indications of non-privileged discussions, the plaintiffs are entitled to
an inference that the discussions and decisions did not occur.
A. Walmart And Its Governance
Walmart is a Delaware corporation with its principal place of business in
Bentonville, Arkansas. Walmart operates three primary business segments: Sam’s Club,
Walmart International, and Walmart U.S. As of 2022, the Walton family controls
approximately 47.51% of Walmart’s voting shares, either directly or through Walton
Enterprises, LLC and the Walton Family Holdings Trust.
Walmart has a board of directors (the “Board”) charged with overseeing the
business and affairs of the corporation. The Board’s duties include “overseeing the
Company’s policies with respect to compliance with applicable laws and regulations and
adopting policies of corporate conduct designed to assure compliance with applicable laws
and regulations and to assure maintenance of necessary accounting, financial, and other
controls.” Ex. 4 at 3. The Board meets at least four times per year. Id. at 4.
The Board has established six committees: the Executive Committee, the Audit
Committee, the Compensation and Management Development Committee, the Nominating
and Governance Committee, the Strategic Planning and Finance Committee, and the
9
Technology and eCommerce Committee. Id. at 5. The Executive Committee and the Audit
Committee are the most pertinent to this decision.
The Executive Committee “[i]mplements policy decisions of the Board” and “[a]cts
on the Board’s behalf between Board meetings.” Ex. 80 at 28. The Executive Committee
meets “as often as it determines to be necessary or appropriate.” Ex. 70 at 50. The
Executive Committee’s Chairperson “may direct appropriate members of management and
staff to prepare draft agendas and related background information for each Executive
Committee meeting.” Id. The Chairperson must approve the agenda and materials before
they are distributed to the other committee members. Id. “At the request of the Board or as
the Chairperson determines necessary, reports of meetings of the Executive Committee
shall be made to the Board at its next regularly scheduled meeting.” Id.
The Audit Committee oversees and monitors “compliance by the Company with
legal and regulatory requirements.” Ex. 5 at 1. The Audit Committee meets at least
quarterly and reports to the Board. The Audit Committee meets “no less than annually”
with Walmart’s ethics and compliance executives “regarding the implementation and
effectiveness of the Company’s ethics and compliance programs.” Id. at 8.
B. Walmart’s Legal Obligations As A Dispenser Of Prescription Opioids
Through its Health and Wellness Division, Walmart operates one of the largest
pharmacy chains in the United States, with more than 5,000 retail pharmacies located in its
Walmart and Sam’s Club stores. The Health and Wellness Division has generated at least
8% of Walmart’s annual revenues since 2011. Ex. 2 at 33. Through its retail pharmacies,
10
Walmart dispenses prescription opioids under a DEA license that requires compliance with
the Controlled Substances Act.14 In its public filings, Walmart acknowledges that its
business depends on complying with its legal obligations. See, e.g., Ex. 1 at 22.
The Controlled Substances Act establishes a closed system for controlled
substances, in which everyone from the manufacturer to the physician to the distributor to
the pharmacist must register with the DEA and fulfill statutory and regulatory obligations.
Registered manufacturers may sell controlled substances only to registered distributors.
Registered distributors may distribute controlled substances only to registered pharmacy
dispensers. And a registered dispenser may dispense controlled substances only under a
legitimate prescription written by a registered prescriber.15
As a “dispenser,”16 Walmart must establish and maintain effective controls and
procedures to guard against theft and diversion of controlled substances.17 The regulations
for dispensers include specific requirements that pharmacies must meet. A pharmacy must
14
21 C.F.R. § 1301.11(a).
15
See 21 U.S.C. § 822.
16
See 21 C.F.R. § 1300.01 (“Dispenser means an individual practitioner,
institutional practitioner, pharmacy or pharmacist who dispenses a controlled substance.”
(emphasis added)); see 21 U.S.C. § 802(10) (a dispenser is “a practitioner who so delivers
a controlled substance to an ultimate user”).
17
21 C.F.R. § 1301.71(a); see In re Nat’l Prescription Opiate Litig. (Opioid MDL
Abatement Decision), — F. Supp. 3d —, 2022 WL 3443614, at *29 n.71 (N.D. Ohio Aug.
17, 2022), appeal pending, Trumbull Cnty. v. Purdue Pharma, L.P., No. 22-3753 (6th Cir.).
11
implement security measures to maintain control over its inventory of controlled
substances (the “Inventory Control Requirement”).18 The security measures must enable
the pharmacy to identify instances of loss or theft and notify the DEA.19
A pharmacist can fill only legitimate prescriptions for controlled substances. Under
the Controlled Substances Act, a prescription is legitimate if “issued for a legitimate
medical purpose by an individual practitioner acting in the usual course of his professional
practice.”20 A pharmacist has a responsibility not to knowingly fill an illegitimate
prescription.21 The prevailing professional standard requires that a pharmacist identify and
investigate any red flags, such as large, repeat orders, early refills, or prescriptions from
out-of-state prescribers.22 Pharmacists must use their professional judgment and refuse to
fill orders that they determine are suspicious, report the refusal to the DEA, and maintain
internal records regarding red-flagged prescriptions (the “Refusal-To-Fill Obligation”).23
18
21 C.F.R. § 1301.75.
19
Id. § 1301.76.
20
Id. § 1306.04(a).
21
See id. §§ 1306.04(a) & 1306.06.
22
“[D]ispensers of controlled substances are obligated to check for and conclusively
resolve red flags of possible diversion prior to dispensing those substances.” See In re Nat’l
Prescription Opiate Litig. (Opioid MDL Dismissal Ruling), 477 F. Supp. 3d 613, 629 (N.D.
Ohio 2020), clarified on denial of recons., 2020 WL 5642173 (N.D. Ohio Sept. 22, 2020).
23
See Compl. ¶¶ 9, 92–93.
12
A pharmacy-registrant like Walmart must (1) employ properly licensed
pharmacists, (2) work collaboratively with the pharmacists to dispense controlled
substances properly to avoid diversion, and (3) collect and maintain specific records and
data regarding its dispensing activities.24 The records that registrants must maintain are
extensive (the “Recordkeeping Requirement”).25 For a dispenser, the Recordkeeping
Requirement includes maintaining information on
the number of units or volume [of controlled substances that are] dispensed,
including the name and address of the person to whom it was dispensed, the
date of dispensing, the number of units or volume dispensed, and the written
or typewritten name or initials of the individual who dispensed or
administered the [controlled] substance on behalf of the dispenser.26
Many of the red flags that the DEA expects pharmacists to examine are “very difficult, if
not impossible, for a human pharmacist to identify consistently absent a system to
aggregate, analyze, and provide feedback to the pharmacist about the prescription,”
because “some prescriptions are not suspicious on their face but raise bright red flags when
compared with other prescriptions in a database.”27
A pharmacy-registrant like Walmart must provide its pharmacists with the time and
other resources necessary to carry out their obligations, including the Refusal-To-Fill
24
Opioid MDL Dismissal Ruling, 477 F. Supp. 3d at 630.
25
See 21 C.F.R. pt. 1304.
26
Id. § 1304.22(c).
27
Opioid MDL Dismissal Ruling, 477 F. Supp. 3d at 630.
13
Obligation. For example, a pharmacy-registrant may provide pharmacists with access to a
computerized recordkeeping system so that the pharmacists can investigate red flags.28 A
pharmacy is not legally required to provide access to a computerized recordkeeping
system—”[i]t remains true, however, that a pharmacy may not fill a prescription that it
knows or has reason to know is invalid and may not remain deliberately ignorant or
willfully blind of the prescription information it has (including computerized reports it
generates).”29 “Pharmacies may not do nothing with their collected data and leave their
pharmacist-employees with the sole responsibility to ensure only proper prescriptions are
filled.”30
The Controlled Substances Act does not mandate strict compliance with its
requirements. Substantial compliance is sufficient.31
28
See id. at 629–31.
29
In re Nat’l Prescription Opiate Litig., 2020 WL 5642173, at *3 (N.D. Ohio Sept.
22, 2020).
30
Id. (cleaned up).
31
In re Nat’l Prescription Opiate Litig., 2021 WL 3917174, at *3 (N.D. Ohio Sept.
1, 2021) (citing 21 C.F.R. § 1301.71(b)).
14
C. The Order To Show Cause And Walmart’s Response
On November 13, 2009, the DEA issued an order to show cause against a Walmart
pharmacy in San Diego, California (the “Order to Show Cause”). Ex. A. The Order To
Show Cause asserted that the San Diego pharmacy:
(1) improperly dispensed controlled substances to individuals based on
purported prescriptions issued by physicians who were not licensed to
practice medicine in California;
(2) dispensed controlled substances to individuals located in California based
on Internet prescriptions issued by physicians for other than a legitimate
medical purpose and/or outside the usual course of professional practice
in violation of federal and state law; and
(3) dispensed controlled substances to individuals that [the San Diego
pharmacy] knew or should have known were diverting controlled
substances.
Id. § II. Walmart disputed the factual assertions and “disagreed with DEA’s position that
the DEA registration of [the San Diego pharmacy] should be revoked.” Id.
Also in 2009, Walmart commissioned McKinsey & Company to conduct a risk
assessment for the Health and Wellness Division. Ex. 6 at ’037. Walmart has claimed the
review triggered various actions, including a host of “new compliance projects.” Id. That
is a defense-friendly inference. Documents regarding those projects were either not
produced as part of Walmart’s Section 220 production or were so heavily redacted that no
inference can be drawn about the substance of the redacted text.
In November 2010, the President of the Walmart Stores segment sent a
memorandum to the Audit Committee to provide an update on “Health & Wellness
15
Transforming Compliance and Quality Assurance.” See Ex. 39. Senior officers, including
Robson Walton, were copied. Id. at ’330.
In his memo, the President gave a mixed report on Walmart’s compliance efforts.
To the good, he stressed some positive steps:
Since our last report we have restructured our field operations management
structure to improve oversight. We have built a dedicated Professional
Affairs group headed by a vice president to oversee quality and compliance
assurance. This group includes a new staff of auditors and quality assurance
specialists. It also includes a credentialing team to assure compliance with
licensure laws. We have also established a group to train professionals in the
field including pharmacy technicians. A process for tracking key
performance indicators of thousands of pharmacy technicians will be in place
in all stores within the next 6 months.
Id. But after that leadup, the President gave a more conservative assessment of existing
efforts and the work yet to come: “Frankly, we are not satisfied with our progress
addressing many challenges that we know to exist.” Id.
The memo identified two significant challenges. The first challenge, identified in a
single sentence, was redacted. The redaction was marked “NR/ACP/AWP,” for non-
responsive, attorney-client privilege, attorney work product. Because the single sentence
redaction appears in an otherwise responsive paragraph, the redaction is dubious, and with
three possibilities provided, the basis for it is unclear. At the pleading stage, the plaintiffs
are entitled to an inference that the redacted text referenced a compliance failure that
Walmart was not addressing. The second challenge was implementing ConnexUs, a
dispensing software program that would assist pharmacists in managing their work and
16
complying with legal requirements. Referring to both challenges, the President noted that
“these are areas where we’ve still got work to do.” Id.
The memo attached an eight-page presentation on compliance. Virtually all of the
presentation was redacted as non-responsive. That claim is dubious for a presentation that
dealt with the status of compliance in the Health and Wellness Division.
D. The DEA Settlement
In February 2011, Walmart and the DEA entered into the DEA Settlement. See Ex.
A. The DEA Settlement required Walmart to implement and maintain a compliance
program for all of its pharmacies. The principal provision states:
Walmart agrees to maintain a compliance program, updated as necessary,
designed to detect and prevent diversion of controlled substances as required
by the Controlled Substances Act (“CSA”) and applicable DEA regulations.
This program shall include procedures to identify the common signs
associated with the diversion of controlled substances including but not
limited to, doctor-shopping, requests for early refills, altered or forged
prescriptions, prescriptions written by doctors not licensed to practice
medicine in the jurisdiction where the patient is located, and prescriptions
written for other than a legitimate medical purpose by an individual
practitioner acting outside the usual course of his professional practice. The
program shall also include procedures to report thefts and significant losses
of controlled substances . . . and the routine and periodic training of all
Walmart employees, including new employees, responsible for controlled
substances regarding their responsibilities under the CSA and regarding
relevant elements of the compliance program.
Id. § III.4.a.
Through this paragraph, Walmart committed to the DEA to establish and maintain
a compliance system that would result in its pharmacies being able to satisfy the Inventory
17
Control Requirement, the Recordkeeping Requirement, and the Refusal-To-Fill
Obligation.
Other sections of the DEA Settlement identified additional features that Walmart’s
compliance program needed to include, as well as problems that it had to address. For
example:
• Walmart committed to notifying the local DEA office within seven business days
of any refusal-to-fill decision by one of its pharmacists. Id. § III.4.b.
• Walmart committed to having a system that would record and maintain identifying
information from a person picking up a controlled substance prescription in a form
that would be readily retrievable. Id. § III.4.c.
• Walmart committed to instituting policies and procedures to block early refills of
controlled substances. § III.4.i.
Walmart expressly agreed that the obligations in the DEA Settlement “do not fulfill the
totality of its obligations under the CSA and its implementing regulations.” Id. § III.4.a.
The term of the DEA Settlement ran from March 11, 2011 to March 11, 2015. Id. at
§ III.13. Because the DEA Settlement spoke of maintaining a compliance program and
updating it as necessary, it is plain that the DEA was not setting March 11, 2015 as a
deadline date by which Walmart had to achieve compliance. Instead, the DEA Settlement
required that Walmart work in good faith to achieve compliance earlier, then remain in
compliance for the remainder of the term of the DEA Settlement, while updating its
systems as necessary.
18
E. Walmart’s Efforts To Comply With The DEA Settlement
By August 2011, Walmart had created a summary overview of its formal
compliance program for the Health and Wellness Division. See Ex. 15. The summary
described a reporting structure, concepts, and principles that tracked what a Fortune 500
company’s compliance program should have. The summary included an “Index of Health
and Wellness Procedures” that included more than 150 procedures for pharmacies to
follow. Id. at 16–19. Walmart produced a number of the policies that were in effect at that
time, which told pharmacy employees how to handle a variety of tasks.32
On paper, the effort to establish a compliance system that would satisfy the DEA
Settlement seemed off to a good start. The problem lay in the funding and staffing for the
work necessary to create the controlled substance monitoring program that would provide
the infrastructure for the words on the paper. The team responsible for doing the work
estimated that it needed $40 million to accomplish the tasks. Management only provided a
budget of $11 million. Ex. 82 at ’364. In an internal email, a team member described that
amount as “just enough to cover [existing] compliance projects” with “all development
[projects] to be evaluated on a project by project basis.” Id. at ’363. Another team member
stated that they faced a “Sophie’s Choice” that required selecting “one high need project
32
See Exs. 17, 19, 21, 22, 23, 25–29, 31–32, 37, 39. Walmart also produced some
policies that were adopted later. Ex. 18 (June 2015); Ex. 20 (Aug. 2012); Ex. 24 (Oct.
2014); Ex. 30 (Aug. 2014); Ex. 33 (Apr. 2017). These documents and other exhibits support
an inference that Walmart’s compliance program became more detailed over time.
19
over another.” Id. at ’363. Walmart did not produce a final budget for the Health and
Wellness Division as part of its Section 220 document production, entitling the plaintiffs
to an inference that a budget sufficient to fund the projects necessary to comply with the
DEA Settlement did not exist.
Two entries on Walmart’s privilege log indicate that management reported to the
Audit Committee on the Health and Wellness compliance program in November 2011. Ex.
14 at Item Nos. 34 & 41. The privilege log describes the discussions as addressing
“Walmart’s Health & Wellness Compliance Program, including compliance with DEA
regulations and agreements, controlled-substance training, and an inventory variance
reporting tool.” Ex. 14 Item No. 34 at 4. There are no non-privileged documents in the
Section 220 production reflecting any non-privileged discussion or decisions about the
business issues associated with achieving compliance with the DEA Settlement, such as
the amount of money that the team responsible for implementing the projects needed to
accomplish its work. Read together, the internal email about a lack of funding, the privilege
log entries regarding an Audit Committee meeting, and the absence of any indication of
responsive action support a pleading-stage inference, favorable to the plaintiffs, that
management told the Audit Committee about the budgeting issue and that the Audit
Committee took no action in response.
F. The 2012 Memo
In January 2012, nine months into the term of the DEA Settlement, Walmart’s Chief
Administrative Officer updated the Audit Committee and the Executive Committee about
20
compliance efforts in the Health and Wellness Division. Ex. 6 (the “2012 Memo”). The
cover memorandum acknowledged that compliance efforts had fallen behind schedule and
stated bluntly that “[s]ignificant compliance issues remain unresolved.” Id. at ’035.
Walmart’s central compliance group (“Corporate Compliance”) had taken the effort away
from the Health and Wellness Division, and the memo gives the impression of a full reboot.
To that end, the memo advises that a “Five-year Health & Wellness compliance strategy is
being developed.” Id. The strategy did not already exist, nor had it been implemented. It
was being created.
A supporting slide deck elaborated on those high-level points. Reinforcing the
impression of a full reboot, one slide stated under “The Path Forward” that a “New
compliance plan [is] being developed.” Id. at ’037. The next slide identified four phases of
planned activity that the program “will involve”: (1) “Develop Commitments,” (2) “Assess
Gaps,” (3) “Mitigate Risks,” and (4) “Maintain and Monitor.” Id. at ’038. It is reasonable
to infer at the pleading stage that none of those stages had happened yet. Along similar
lines, the slide stated that the “Proposed Health & Wellness Compliance Plan” would start
with creating a “Road map of Health & Wellness regulatory obligations” and a “Road map
of business activities that require controls.” Id. at ’039.
The slide deck observed that the project needed “[s]easoned leadership that strikes
the proper balance between business and compliance considerations.” Id. at ’040. At the
pleading stage, the plaintiffs are entitled to an inference that the memo’s reference to a
21
“proper balance between business and compliance considerations,” meant limiting
compliance efforts when they threatened profitability.
An appendix to the slide deck identified a list of items that Walmart had completed
during fiscal years 2011 and 2012. See id. at ’044–’045. Walmart starts its fiscal year on
February 1 of the prior year, so fiscal year 2011 ran from February 1, 2010 to January 31,
2011, and fiscal year 2012 ran from February 1, 2011 to January 31, 2012. Significant
portions of the appendix are redacted. The reasonable inference is that the Health and
Wellness Division had accomplished some things, but their effort had fallen far short, so
Corporate Compliance took over and restarted the project. The list of completed activities
conspicuously omits significant items identified in the DEA Settlement, such as testing for
doctor shopping, flagging requests for early refills, or checking for altered or forged
prescriptions.
Read together, the 2012 Memo and accompanying materials support a pleading-
stage inference that the Health and Wellness Division had created a summary of what a
nice compliance program would look like, then never did the work to implement one. It
was now 2012, and Corporate Compliance was proposing to develop a five-year plan to
implement a new compliance program. That implementation would not be accomplished
until 2017, two years after the DEA Settlement expired in March 2015. To state the
obvious, Walmart would not comply with the DEA Settlement.
The 2012 Memo and accompanying materials were presented to the Audit
Committee and the Executive Committee, so those committees knew. Minutes from an
22
Audit Committee meeting in February 2012 reflect that the Audit Committee received a
report—from the Chief Administrative Officer who authored the 2012 Memo—on the state
of Walmart’s Health and Wellness compliance efforts, the transition to Corporate
Compliance, and the proposed five-year plan that Walmart was developing. Ex. 7. Minutes
from an Audit Committee meeting in March 2012 reflect that the Audit Committee
received another report on the state of Walmart’s “Health and Wellness Compliance
landscape.” Ex. 8 at 6.
The Board met six times during fiscal year 2013. The pleading-stage record does
not include any meeting minutes for any Board meeting. The plaintiff-friendly inference is
that the Board was not monitoring compliance with the DEA Settlement or the Controlled
Substances Act and was relying on the Audit Committee to fulfill its monitoring duties.
G. Maximizing Sales Through Opioid Prescriptions
During the same period that Walmart failed to invest in and build out a system of
compliance, Walmart used the filling of opioid prescriptions to enhance its bottom line.
One initiative was to incentivize pharmacists to fill more prescriptions. Walmart
implemented Pharmacy Facility Incentive Plans that paid bonuses to pharmacists based on
the number of prescriptions filled, the amount of profit generated, and customer relations
metrics. Walmart advocated within the National Association of Chain Drug Stores DEA
Compliance Working Group for permission to include controlled substances within the
pharmacist incentive programs, insisting that “[i]ncentive programs should be entirely
agnostic as to the type of prescriptions (controlled substances or non-controlled drugs)
23
filled.” Compl. ¶ 120. Walmart opposed a proposal to treat “[e]xcessive volume and rate
of growth of dispensing controlled substances” as a red flag. Id. ¶ 120 n.50. Consistent with
those positions, Walmart’s Pharmacy Facility Incentive Plan for 2012 did not distinguish
between prescriptions for controlled substances and other prescriptions. As pharmacists
filled more prescriptions, their incentive payments increased.
Walmart also introduced a Management Incentive Plan that provided for bonuses to
eligible employees once the number of prescriptions filled in a year exceeded 190,000. The
plan did not contain any metrics for patient safety or red flag detection. Id. ¶ 120.
Through these incentive plans, Walmart provided pharmacists with financial
inducements to fill more prescriptions and to disregard their Refusal-To-Fill Obligation.
Walmart also imposed direct pressure on pharmacists by setting a goal of filling a
prescription in less than twenty minutes, and that target was later reduced to fifteen
minutes. That short period did not enable a pharmacist to perform the due diligence and fill
out the forms necessary to investigate a prescription and, if warranted, refuse to fill it. Id.
¶ 119.
Walmart also took steps to bring more users of prescription opioids to its
pharmacies. Walmart collaborated with McKesson on trial offers, savings cards, and e-
coupons for opioids such as OxyContin, Butrans, Hysingla, Ultram, Magnacet, and
Nucynta. For the Magnacet loyalty program, Walmart and CVS handled 49% of all claims.
For Nucynta, Walmart was in the top four pharmacies by the number of claims. Walmart
24
also partnered with Purdue Pharma on direct mail campaigns to sell Butrans, using
Walmart’s prescription data to target patients who had used opioids. Id. ¶¶ 115–116.
Walmart’s opioid marketing campaigns not only generated sales for its pharmacies,
but also helped cross-sell other products. By bringing customers into its stores to fill opioid
prescriptions, Walmart had the opportunity to sell them other products. Id. ¶ 119.
The complaint’s allegations support a pleading-stage inference that Walmart sought
to increase the number of opioid prescriptions that it filled as a means of increasing profits.
Walmart did not exhibit comparable initiative on the compliance front. The plaintiff-
friendly inference is that Walmart had a business plan of prioritizing profits over
compliance.
H. The Whistleblower
In August 2012, a whistleblower notified the Chairman of the Board and Walmart’s
Global Ethics Office about concerns regarding controlled substance prescriptions. The
whistleblower was a full-time floater pharmacist who filed a qui tam complaint in 2013
that outlined his concerns. He asserted that the following events took place during the six
weeks between July 14 and August 30, 2012:
• He observed Walmart pharmacists filling prescriptions that bore red flags, failing to
comply with the Recordkeeping Requirement, and failing to comply with the
Refusal-To-Fill Obligation.
• He received significant pushback from the Health and Wellness Division about his
complaints and was terminated.
25
The complaint was not unsealed until 2018.33
The plaintiff-friendly inference is that the whistleblower put the Chairman of the
Board and Walmart’s Global Ethics Office on notice about the consequences that were
flowing from a business strategy that prioritized filling opioid prescriptions over building
the compliance infrastructure and investing in the resources necessary to comply with the
DEA Settlement and the Controlled Substances Act. That red flag reached the highest
levels of Walmart management, including the member of the Board entrusted with primary
responsibility for Walmart’s governance.
I. Reports To Senior Officers, The Audit Committee, And The Board
The next event for which Walmart provided responsive documents in the Section
220 production took place on November 8, 2012, when the “Global Compliance and Ethics
Committee” met. That was a committee of compliance executives and employees, so this
decision calls it the Employee Compliance Committee.
Walmart produced a copy of the meeting minutes, which comprise seven pages. All
of the substantive portions of the minutes were redacted for non-responsiveness and
33
The defendants argue that the plaintiffs waived any arguments based on the
whistleblower by not spelling them out in their answering brief. The complaint was 135
pages long and contained 316 numbered paragraphs. The plaintiffs could not reproduce
every factual assertion in their brief, nor did they have to. Like the defendants, the plaintiffs
made legal arguments in their brief based on their complaint. The complaint, the documents
it incorporates by reference, and documents subject to judicial notice establish the factual
record for a motion to dismiss. The briefs spell out the legal arguments for and against
dismissal. The plaintiffs did not waive their factual allegations about the whistleblower.
26
attorney-client privilege with the exception of the following sentence: “Ms. Harris then
provided an update to the Committee on the overall status of Health and Wellness
Compliance projects.” Ex. 11 at 2. “Ms. Harris” presumably refers to defendant Phyllis
Harris, who was then the Senior Vice President and Chief Compliance Officer for the
Walmart Stores segment. See Compl. ¶ 56. Without any substantive text to draw on, one
possible inference is that the report was good (as in, “we are making great progress”).
Another possible inference is that the report was bad (as in, “we are falling further behind
in our compliance efforts, know we are not complying with the DEA Settlement, and know
we will not be able to achieve compliance”). There are no non-privileged documents
reflecting the Employee Compliance Committee making any business decisions or taking
any action. At the pleading stage, the absence of evidence about action by the Employee
Compliance Committee supports a plaintiff-friendly inference that the Employee
Compliance Committee failed to take action to promote compliance with the DEA
Settlement.
In March 2013, Harris and Jay Jorgensen, Senior Vice President and Global Chief
Compliance Officer for Walmart, reported to the Audit Committee on the status of various
compliance projects. It is reasonable to infer that Jorgensen and Harris reported on the state
of compliance with the DEA Settlement.
The written report gave each project a color to indicate its status: green for “on
schedule,” yellow for “watch list,” and red for “major issues.” See Ex. 46 at ’601. The
report stated that the “diversion analytics tool to monitor suspicious controlled substance
27
activity remains in a status of red.” Id. Walmart needed that tool to “monitor and detect
drug diversion indicators and suspicious activity related to controlled substances.” Id. at
’604. Monitoring and detecting drug diversion and suspicious activity was a central
requirement of the DEA Settlement. The Audit Committee was on notice that Walmart was
not creating one.
Development of the order monitoring tool had stopped because of a problem with
Walmart’s Data Centralization project, which also had a status of red. Walmart had
purchased a limited amount of database capacity, and until a decision was made to buy
more capacity, nothing else could be done. Without a decision to buy more capacity,
Walmart would have a read-only database that could not support “several critical business
and compliance initiatives.” Id. at ’601.
It is reasonable to infer that the Audit Committee knew from Harris’s written and
oral reports that Walmart was not complying with the DEA Settlement and had not
allocated the resources necessary to achieve compliance. There is no indication in the
pleading-stage record of the Audit Committee engaging in any discussion of the business
need to acquire more database capacity, nor is there any indication that the Audit
Committee made a decision to acquire more capacity. There is no indication of any
business-oriented discussion about the state of the drug diversion analytics system. At the
pleading stage, the plaintiffs are entitled to an inference that the Audit Committee knew
that a critical requirement for the DEA Settlement was in a status of red and took no action
in response.
28
Walmart’s privilege log contains entries indicating that the Employee Compliance
Committee met on July 18, 2013 and on October 10, 2013. The descriptions on the log
refer to discussions about the “Health and Wellness compliance program, including
controlled-substance related compliance initiatives pertaining to dispensing and
documentation controls, and diversion analytics.” Ex. 14 at Item Nos. 143, 144, 158, 159.
Once again, there are no non-privileged documents reflecting the Employee Compliance
Committee making any business decisions or taking any action. At the pleading stage, the
absence of evidence supports a plaintiff-friendly inference that the Employee Compliance
Committee knew about and did not take any action to address problems with Walmart’s
compliance system, such as the code-red status of the diversion analytics tool to monitor
suspicious controlled substance activity.
During a two-day meeting of the Board in September 2013, the Audit Committee,
two members of the Executive Committee, and Walmart’s CEO had a “legal, compliance,
and ethics session.” Ex. 47 at 18. Jorgensen presented a report on health and wellness
compliance. The Board meeting minutes span eighteen pages. Walmart redacted
everything except for the following: “Mr. Williams reported that the [Audit] Committee
had conducted a legal, compliance and ethics session. He stated that during this session,
the Committee had received [REDACTED] . . . reports regarding Walmart’s health and
wellness compliance initiatives. . . .” Id. Mr. Williams is inferably Christopher J. Williams,
then a director and Chair of the Audit Committee.
29
One inference from the redacted portion is that Mr. Williams told his fellow
directors that everything was on track. Another inference is that Mr. Williams told his
fellow directors that key aspects of Walmart’s program were not on track, that those
components were in a status of red, and that Walmart was not complying with the DEA
Settlement. At this stage of the proceedings, the plaintiffs are entitled to the latter inference.
In October 2013, the Health and Wellness Division prepared an assessment of
Walmart’s controlled substances risk. Dkt. 40 at 15. The assessment showed the status of
various compliance projects and reported that the project to “[d]esign & operate a systems
[sic] to detect suspicious orders and report to the DEA when discovered” remained in red.
Ex. C. at ’751. The summary reported that the project to “[e]stablish additional maximum
order limits of highly abused drugs” was in yellow. Id. Neither project had a delivery date.
For both, the delivery date was marked “TBD.” Id.
Developing and maintaining a system to detect suspicious orders and report them to
the DEA was one of Walmart’s core obligations under the DEA Settlement. The four-year
term of the DEA Settlement was scheduled to end on March 11, 2015. As of October 2013,
Walmart had used up two years and seven months of the four-year term. Walmart had only
seventeen months left to implement the mandates in the DEA Settlement, including a full-
scale suspicious order monitoring system.
Although Walmart had failed to implement a suspicious order monitoring system,
Walmart had succeeded in attracting more customers with opioid prescriptions. In a June
2012 Health and Wellness Division survey, pharmacists reported that they “lacked
30
sufficient staff to handle the workload and did not have enough time to conduct their duties
in a manner that protected patient safety.” Compl. ¶ 125. Only 59% of pharmacy employees
reported that their locations had sufficient staff. In February 2013, a pharmacy manager in
Oklahoma reported that a particular clinic had been writing prescriptions for a large number
of narcotic pain relievers. She emphasized that “[o]ther chain and independent pharmacies
in the area have stopped accepting prescriptions from this clinic, which is causing them to
funnel in to [sic] our Wal-Mart stores.”34 She added:
Not a single one of us ever feel comfortable about filling these prescriptions,
and if questioned, we wouldn’t be able to justify this type of prescribing. . . .
I think that if we continue this we are going to be in serious trouble and
quickly trigger an investigation. We do not want to continue filling from this
clinic. Other pharmacies are stopping and I feel that it is imperative that we
follow suit. It will look bad if we are the ones allowing these drugs to be
abused or even on the street.
Compl. ¶ 187. These allegations support a reasonable inference that Walmart was not
providing its pharmacists with the time and other resources they needed to fulfill their
Refusal-To-Fill Obligation.
34
Compl. ¶ 187 (citing Pls.’ Trial Ex. P-26892_00001, In re Nat’l Prescription
Opiate Litig., No. 1:17-MD-2804-DAP (N.D. Ohio Oct. 28, 2021), ECF No. 4094-34). See
e.g., Nelson v. Emerson, 2008 WL 1961150, at *2 n.2 (Del. Ch. May 6, 2008) (taking
judicial notice of “documents filed in the related federal court proceedings” in addressing
a motion to dismiss). See generally In re Career Educ. Corp. Deriv. Litig., 2007 WL
2875203, at *9 (Del. Ch. Sept. 28, 2007) (“When considering a motion to dismiss, the court
also may take judicial notice of publicly filed documents, such as documents publicly filed
in litigation pending in other jurisdictions.”(footnote omitted)).
31
J. Walmart Prioritizes Internal Inventory Diversion.
Until January 2014, Walmart’s pharmacists were using a jerry-rigged combination
of two different computer systems to review orders. A pharmacist primarily used
ConnexUs, a workflow management system that tracked prescriptions as they moved
through the order-fulfillment process. A pharmacist could use ConnexUs to determine
whether a licensed prescriber wrote the prescription, but ConnexUs did not have any
capability to identify other red flags. To check for red flags, the pharmacist needed to log
into a second, state-run prescription monitoring program that tracked early refills and other
indicia of illegitimate prescriptions. In states that did not offer a state-run prescription
monitoring program, Walmart’s pharmacists had nothing to access.
It is reasonable to infer that this patchwork system did not satisfy Walmart’s
obligations as a dispenser under the Controlled Substances Act and the DEA Settlement.
Walmart’s pharmacists did not have the time or resources to fulfill their Refusal-To-Fill
Obligation, and they did not have access to a Walmart computer system that could help
them identify and conduct due diligence on red flags.
In March 2014, Walmart publicly disclosed improvements to its Health and
Wellness compliance program that included “[c]reating a diversion analytics tool to deter,
detect, and remedy attempts at pharmaceutical diversion in U.S. Walmart and Sam’s Club”
stores. Compl. ¶ 352; Dkt. 40 at 51; accord Wal-Mart Stores, Inc., Definitive Additional
Materials (Schedule 14A), at 9 (Apr. 23, 2014). Walmart’s new system only monitored for
theft and loss of controlled substances within Walmart. Put differently, the new system
32
addressed the Inventory-Control Requirement, but did not address other aspects of
Walmart’s obligations as a pharmacy operator, such as supporting its pharmacists in their
efforts to comply with their Refusal-To-Fill Obligation. It is reasonable to infer that
Walmart took steps to meet the compliance obligation that helped its bottom line, while
not taking steps to meet compliance obligations that did not confer that benefit. See Compl.
¶ 191.
Also in March 2014, the head of compliance for the Health and Wellness Division
reported to the Audit Committee on the division’s compliance priorities for fiscal year
2015. See Ex. B. Supporting slides included a photograph dated July 12, 2012, from a
Walmart pharmacy in Tampa, Florida that depicted scores of patrons waiting in line at 7:00
a.m., two hours before the pharmacy opened, with a “very high number of prescriptions for
Oxycodone.” Compl. ¶ 185. The presentation reported that after the July 2012 incident, the
compliance team “began to assess our processes” to avoid the “risk of our pharmacies
becoming the pharmacy of choice for ‘pill mills.’” See Ex. B.
The Audit Committee meets quarterly, so it is reasonable to infer that Walmart had
done nothing until three months before the Audit Committee meeting in March 2014, to
address the risk that its pharmacists were filling prescriptions for pill mills. The photograph
pre-dated the Audit Committee meeting by over eighteen months, yet the head of
compliance reported that his team had just started to assess Walmart’s processes. Instead,
Walmart had been following a business strategy that sought to increase opioid prescription
33
traffic at its pharmacies, while reducing the ability of its pharmacists to meet their Refusal-
To-Fill Obligation.
It is reasonable to infer that the Audit Committee knew that Walmart was facing
problems complying with its obligations as a dispenser of prescription opioids. To the
good, the compliance officer told the Audit Committee that after seeing the photograph,
the compliance team had implemented additional operational controls in Florida, where the
controls appeared to have some effect. See id. at 11. It is not clear whether the controls
were implemented throughout the company. For that snapshot in time, the members of the
Audit Committee could believe that management was taking action. At the very least, they
had been shown another red flag regarding the state of Walmart’s compliance systems and
the consequences of a business strategy that sought to increase the number of opioid
prescriptions that its pharmacists filled.
K. Additional Reports On Walmart’s Failures To Comply With The DEA
Settlement And The Controlled Substances Act
In May 2014, the Audit Committee received a fourteen-page report that summarized
the status of compliance efforts in the Health and Wellness Division. Ex. 49. The report
was authored by Jorgensen, Harris, and James Langman, Vice President of Health and
Wellness Compliance for the U.S. The report discussed Walmart’s new diversion analytics
tool and explained that it had been operational since November 2013. That was the tool
that addressed internal inventory diversion. With the tool in place, the compliance team
uncovered major instances of internal opioid diversion, including a shortfall of 16,000
34
dosage units from a pharmacy in Indiana and a shortfall of 4,689 dosage units from two
pharmacies in Maryland. Id. at ’822–23.
The report provided a high-level discussion of Walmart’s obligations under the
Controlled Substances Act and observed that Walmart had experienced a 114% increase in
incidents relative to the prior year. Id. at ’824. The report attributed those figures to the
new analytics tool identifying internal theft, plus enhanced communication about how to
report a controlled substance theft or loss. Another indicator of increasing problems was
the number of violations that regulators identified. During fiscal year 2014, state and
federal regulatory agencies made 2,096 visits to Walmart pharmacies, with 547 visits
(26%) resulting in violations of recordkeeping requirements, associate licensing
requirements, equipment deficiencies, prescription discrepancies, incomplete logs, or
instances of internal diversion. Id. at ’825.
The report generally conveys a feel-good message that everything is fine. The report
did not mention the DEA Settlement, Walmart’s obligations under it, or the status of
Walmart’s efforts to comply with those obligations. Only ten months remained before the
term of the DEA Settlement ended.
In June 2014, the Health and Wellness Division evaluated the progress of the
suspicious order monitoring project. See Ex. D. The assessment recognized that the project
was part of the DEA Settlement and that a suspicious order monitoring system still was not
in place. The assessment included the following question: “Is the Risk being mitigated
today by manual, systemic, or a combination of both today [sic] (regardless of optimal or
35
not)?” Id. at ’701. The assessment gave a pointed answer: “No.” Id. The suspicious order
monitoring project had “no process in place.” Id. The report stated that the project was
“Board Informed,” supporting an inference that the Board had been informed of the
situation. Id.
In October 2014, a survey of Walmart’s pharmacists generated grim results. Only
43% of pharmacy employees reported having sufficient staffing to handle the workload. In
the October 2014 survey, “a substantial proportion of pharmacy employees reporting that
they felt rushed with processing prescriptions.” Ex. E ¶ 121. It is reasonable to infer that
Walmart was not supporting its pharmacists in complying with the Refusal-To-Fill
Obligation. Walmart was continuing to prioritize profits by seeking to fill prescriptions.
One month later, in November 2014, the Board reviewed Walmart’s compliance
with the DEA Settlement and the Controlled Substances Act. Walmart withheld the
meeting minutes in their entirety, noting on its privilege log that the discussion involved
the “Health & Wellness compliance program, including compliance with the Controlled
Substances Act.” Compl. ¶ 222; see Ex. 14 at Item No. 49. There are no documents from
the Section 220 production indicating that the Board had any business discussions or made
any business decisions about compliance with the DEA Settlement. Given what other
documents show about the state of Walmart’s noncompliance with the DEA Settlement, it
is reasonable to infer that the Board knew about Walmart’s noncompliance and took no
action other than to receive legal advice.
36
In February 2015, just one month before the DEA Settlement expired, a pharmacist
in Texas wrote to one of Walmart’s compliance directors for controlled substances. The
pharmacist expressed concern about filling prescriptions for a pill-mill doctor. Compl. ¶¶
27, 124, 260. The compliance director responded by candidly explaining how Walmart had
approached the DEA Settlement:
The [DEA Settlement] that requires the reporting of Refusal to fill expires in
30 days. We have not invested a great amount of effort in doing analysis on
the data since the agreement is virtually over. Driving sales and patient
awareness is a far better use of our Market Directors and Market manager’s
time.
Id. ¶ 27. That statement openly prioritized profits (“Driving sales”) over compliance.
Similarly, during the Opioid MDL, a former employee testifying as Walmart’s
30(b)(6) representative stated that Walmart chose not to adopt a more rigorous system in
connection with the DEA Settlement and the Controlled Substances Act because it “didn’t
make sense for the business.” Id. ¶ 240. That testimony likewise indicates that Walmart
prioritized profits over compliance.
On March 11, 2015, the DEA Settlement expired. There are no documents from
December 2014 or from January, February, or March 2015 indicating that the Board
discussed any business issues or made any business decisions regarding the DEA
Settlement. That noteworthy absence stands out against the background of the October
2014 pharmacy survey, the exchange between the pharmacist and the compliance director,
and the testimony of the employee. Considered together, it is reasonable to infer that the
Board knew that Walmart was not complying with the DEA Settlement, that the Board was
37
not enabling pharmacists to comply with their Refusal-To-Fill Obligation, and that the
Board did nothing in response.
L. Walmart Continues To Undermine The Refusal-To-Fill Obligation.
After the DEA Settlement term expired, Walmart’s pharmacists continued to lack
an internal system that they could use to access information about prescriptions as part of
fulfilling their Refusal-To-Fill Obligation. See Compl. ¶ 251. Walmart did introduce a
software program called Archer that captured information about prescriptions that
pharmacists refused to fill. But Walmart prohibited other pharmacists from accessing that
information, thus limiting the pharmacists’ ability to investigate red flags and to make
informed decisions about whether to refuse to fill a prescription. As of March 4, 2016, even
regional directors could not access the information. Id. ¶ 253. As of July 9, 2018,
pharmacists still could not access the information. Id. ¶ 255.
In November 2016, the successor committee to the Employee Compliance
Committee held a meeting. Ex. 13. For simplicity, this decision continues to refer to the
committee using the same name. The minutes of the meeting are redacted virtually in their
entirety. Only one substantive sentence survived: “Mr. Jorgensen noted that the materials
for the Committee’s October 13, 2016 meeting included U.S. Health and Wellness
Compliance training materials.” Id. at ’683. That elliptical statement supports competing
inferences. One is that Jorgensen provided a positive update about the state of the training
program. Another is that Jorgensen reported on inadequacies in the training program. At
this stage of the proceedings, the plaintiffs receive the benefit of the latter inference.
38
Walmart’s privilege log contains entries suggesting that the Employee Compliance
Committee met on twenty other occasions from 2016 through 2020. Walmart withheld all
of the relevant meeting minutes, noting on its privilege log only that the discussions
involved “controlled substances,”35 “opioids,”36 or Walmart’s “Health & Wellness
compliance program.”37 There are no indications that the committee had any business
discussions, made any business decisions, or took any type of action. If Walmart’s
assertions of privilege are to be believed, then as the opioid epidemic raged, Walmart’s
senior compliance employees did nothing except receive and consider legal advice. They
knew about the problem and took no action whatsoever. Although that seems highly
unlikely, that is the record that Walmart created through its highly redacted Section 220
production.
The fact that so many meetings took place supports an inference that the officers
and employees on the Employee Compliance Committee closely monitored Walmart’s
compliance with its obligations under the Controlled Substances Act. At the same time, the
allegations in the complaint, together with other documents in the record, support an
inference that Walmart was failing to comply with its obligations as a dispenser of
prescription opioids and, in particular, was undermining its pharmacists’ ability to fulfill
35
See Ex. 14 at Item Nos. 123–124, 126–130, 133–138, 140, 142.
36
See id. at Item Nos. 131–132.
37
See id. at Item Nos. 123–124, 126–127, 139–141.
39
the Refusal-To-Fill Obligation. The court therefore must infer that the Employee
Compliance Committee knew about Walmart’s failure to fulfill its obligations as a
dispenser of prescription opioids. The absence of any indication that the Employee
Compliance Committee did anything except gather to receive and discuss legal advice,
supports a pleading-stage inference that the members of the committee consciously ignored
Walmart’s compliance failures.
M. Walmart’s Obligations As A Distributor Of Prescription Opioids
The discussion to this point has focused on Walmart’s role as a dispenser of
prescription opioids through its retail pharmacies. Until April 2018, Walmart engaged in
the wholesale pharmaceutical distribution business, and it supplied its retail pharmacies
with prescription opioids under a DEA license that required compliance with the
Controlled Substances Act.38
While operating as a wholesale distributor of prescription opioids, Walmart had an
obligation to maintain “effective control against diversion of [opioids] into other than
legitimate medical, scientific, and industrial channels.”39 Walmart also had more specific
obligations. A distributor must “design and operate a system” to identify “suspicious orders
of controlled substances” and report them to the DEA (the “Reporting Requirement”).40
38
21 C.F.R. § 1301.11(a).
39
21 U.S.C. § 823(b)(1).
40
21 C.F.R. § 1301.74(b).
40
“Suspicious orders include orders of unusual size, orders deviating substantially from a
normal pattern, and orders of unusual frequency.”41 Once a distributor has reported a
suspicious order, the distributor must either decline to ship the order or conduct due
diligence to determine whether the order is likely to be diverted into illegal channels. The
distributor can only ship the order if it determines after conducting due diligence that the
order is not likely to be diverted into illegal channels (the “Shipping Requirement”).42
From the early 2000s until April 2018, Walmart distributed opioids to its pharmacies
from its distribution center in Bentonville, Arkansas, which was the only distribution center
that handled those products. Between 2006 and 2012, the Bentonville distribution center
shipped an increasing number of opioid pills each year, with the total shipped exceeding
five billion pills across the six-year period. Before November 2010, Walmart had no
written policies or procedures in place to govern monitoring for suspicious orders in its
distribution business. Instead, Walmart charged its hourly wage employees—who had no
medical, pharmaceutical, or public health training—with the responsibility for identifying
41
Id.42
See Masters Pharm., Inc. v. Drug Enf’t Admin., 861 F.3d 206, 212 (D.C. Cir.
2017) (discussing distributor obligation under Southwood Pharm., Inc., 72 Fed. Reg.
36,487, 36,501 (Drug Enf’t Admin. July 3, 2007)).
41
anything that looked suspicious. Walmart did not provide any standards, training, or
processes to assist these unqualified employees in making that determination.43
In November 2010, Walmart implemented its first written policy for its distribution
business. Titled “Identifying and Reporting Purchases of Controlled Substances,” it
contemplated employees at the Bentonville distribution center reviewing a monthly report
by hand and identifying any orders for controlled substances that constituted more than
3.99% of a single pharmacy’s total drug purchases during the prior month. Compl. ¶ 139.
The November 2010 policy did not identify other criteria that could render an order
suspicious. The employees were instructed to “forward the reports to the appropriate
[Walmart] Drug Diversion Coordinator for further review.” Id. ¶ 140. There were no
further written policies about what the Drug Diversion Coordinator was supposed to do.
The Executive Committee and the Audit Committees were briefed on this policy during a
meeting that same month. Id. ¶ 141.
Walmart later determined that it needed a computerized system. Rather than
obtaining a specialized compliance system, Walmart repurposed an existing inventory tool
called Reddwerks that had not been designed for compliance. To flag suspicious orders,
Walmart implemented “hard limits” on orders of more than 2,000 dosage units of
43
Compl. ¶¶ 133-134; see In re Nat’l Prescription Opiate Litig. (Opioid MDL SJ
Decision), 2020 WL 425965, at *1 (N.D. Ohio Jan. 27, 2020).
42
oxycodone and 5,000 dosage units of other opioid medications. Id. ¶ 174. The Reddwerks
system had no ability to flag suspicious orders based on other criteria. Id. ¶ 176.
Walmart was supposed to flag orders that exceeded those hard limits and report
them to the DEA, but Walmart chose a more profit-friendly approach. Walmart adopted a
practice of cutting back flagged orders to the hard-limit thresholds and filling them as if
they were non-suspicious orders. Walmart then passed along the balance of the orders to
another distributor to fill. Walmart thus ensured that the full order was filled, even though
the order exceeded the hard limits. Id. ¶¶ 101, 173–175, 177.
The cutback system resulted in Walmart reporting almost no suspicious orders to
the DEA. At this stage of the proceedings, the plaintiffs are entitled to an inference that
Walmart knowingly circumvented its own suspicious order monitoring system.
In January 2014, Walmart hired an external consulting outfit, MuSigma, to evaluate
the repurposed Reddwerks system and its hard limits. MuSigma identified serious flaws
and recommended modifications to enable the tool to do more than simply cap
prescriptions at hard limits. The modifications would have cost $185,000. Walmart rejected
the proposal. See id. ¶ 218–220. The modifications would have cost $185,000. Walmart
rejected the proposal. One of the largest companies in the world rejected a proposal to
43
update a key component of its order monitoring system that would have cost only a bit
more than a single pharmacist’s annual pay.44
Walmart did not contemplate implementing a true suspicious order monitoring
system until 2015. At a meeting on February 5, 2015, the Audit Committee reviewed
Walmart’s compliance objectives for fiscal year 2016. Compl. ¶ 224. Shortly before, the
Global Chief Compliance Offer (Jorgensen) sent a memorandum to the Audit Committee,
copying then-CEO Doug McMillon, that identified Walmart’s compliance objectives.
Walmart redacted the vast majority of the memo as non-responsive. Walmart produced text
indicating that management set compliance objectives based on data-collection efforts, risk
assessments in all retail markets, and progress made in prior years. Ex. 51 at ’065. Walmart
produced text for only the following objective: “In the U.S., implement controlled
substance suspicious-order monitoring enhancements (which include both software and
personnel changes) in the U.S. distribution facilities.” Id. at ’002.
44
According to salary.com, a Walmart pharmacist makes between $76 and $84 per
hour. Hourly Wage for Walmart Inc. In Store Pharmacist Salary in the United States,
salary.com, https://perma.cc/2U57-H4TG (last visited Apr. 25, 2023). Assuming a forty-
hour week and fifty workweeks per year, a Walmart pharmacist earns between $152,000
and $168,000. That is the same ballpark as the amount that Walmart declined to spend to
update Reddwerks. I acknowledge that the salary.com figure is a 2023 figure and that I
have not adjusted the Reddwerks expense for inflation.
44
The Audit Committee signed off on the plan, which called for implementation to
begin in August 2015. The full Board met the following day, and the Audit Committee
reported that it had approved Walmart’s compliance objectives. See Compl. ¶¶ 228–233.
N. The Board Acknowledges An “Opioid Crisis” In The Midst Of A Barrage Of
Lawsuits.
During 2016 and 2017, Walmart faced a barrage of lawsuits based on its roles as a
dispenser and distributor of prescription opioids. By the end of 2017, thousands of plaintiffs
had filed cases against Walmart, and proceedings were underway to consolidate the suits
in the Opioid MDL. During the same period, on December 7, 2016, Walmart learned that
the U.S. Attorney for the Eastern District of Texas was conducting a criminal investigation
into Walmart. Compl. ¶ 258.
At a November 2, 2017 Audit Committee meeting, Jorgensen provided an update
on “a recent health and wellness compliance matter.” Ex. 60 at 4. Without any context for
guidance, it is reasonable to infer that Jorgensen was reporting to the Audit Committee on
compliance issues related to Walmart’s exposure from its role in the opioid crisis.
After Jorgensen introduced the topic, another senior compliance executive
discussed “modifications to the Company’s process for reporting suspicious controlled
substance orders from its pharmacies.” Id. Over two years earlier, in February 2015, the
Audit Committee had approved management’s first plan to modify Walmart’s suspicious
order monitoring system for its pharmacies. The November 2017 references support a
plaintiff-friendly inference that Walmart’s system had proven inadequate, created a serious
45
risk of legal noncompliance and corporate harm, and that corrective action was required. It
had taken over two years for that issue to reach the Audit Committee.
The Board also met in November 2017, and the minutes of that meeting span sixty-
eight pages. Ex. 61. Only three sentences of substantive text survived the redaction tool.
The first reads: “Timothy P. Flynn, Chair of the Audit Committee, then provided the Audit
Committee report.” Id. at 15. The following partially redacted text appears on the next
page: “He concluded his report by stating that the Audit Committee had received updates
from management regarding various other matters including . . . [REDACTED] . . .
enhanced processes and training for pharmacists regarding filling prescriptions of
controlled substances.” Id. at 16. The redactions were marked for non-responsiveness,
attorney-client privilege, and attorney work product. The unredacted text provides no basis
to infer that the Board or Audit Committee had any business-oriented discussion about
compliance issues or made any business decisions about compliance issues.
A few pages later, the minutes read: “Dr. James I. Cash, Jr., Chair of the Nominating
and Governance Committee (the ‘NGC’), then presented the NGC report.” Id. at 18. The
next few pages are completely redacted for non-responsiveness before the following text
appears:
Next, Dr. Cash . . . [REDACTED – NOT RESPONSIVE] . . . noted that in
2018 an external advisor would be engaged to conduct the Board evaluation
process, including questionnaires and interviews with all Directors and
members of executive management of the Company beginning in February.
Dr. Cash concluded his report by stating that a speaker had been engaged for
a director education presentation in December regarding trends in healthcare
regulations, including with regard to the opioid crisis.
46
Id. at 21–22.
The director education session about trends in healthcare regulations, including with
regard to the opioid crisis, took place in December 2017. Ex. 62. After introductory
remarks from Cash and Jorgensen, the Board, the “Executive Council,” the “Walton
Family,” and Walmart’s general counsel received an hour-long presentation on “the state
of health care in the US; and the opioid crisis” from Michael Leavitt, the former Secretary
of the U.S. Department of Health and Human Services. Id. at ’693. After the presentation,
the group engaged in a thirty-minute discussion. McMillon closed the meeting.
Walmart redacted the entire director education presentation on the basis of the
attorney-client privilege and work product doctrine. Because of those redactions, the only
possible inference is that during a meeting specifically called to address the opioid crisis,
Walmart’s directors and senior executives and unidentified members of the Walton family
did not discuss any business issues, consider any business initiatives, or make any business
decisions. All they did was receive and consider legal advice. Although that is hard to
believe, Walmart’s redactions necessarily lead to that inference.
In November 2017, after the Audit Committee and Board meetings but before the
director education session, Walmart management decided to stop acting as a distributor of
prescription opioids. Walmart wound down that business and, starting in April 2018, began
to rely exclusively on third-party distributors. The complaint alleges that management did
not tell the Audit Committee about its decision until September 2018, nearly one year after
they made the decision and four months after Walmart exited the business. See Compl. ¶
47
271; Ex. 75. That allegation is difficult to credit, but nothing in the record supports a
contrary inference. For example, there are no minutes in which Walmart management
reports to the Audit Committee in November or December 2017 about the decision to exit
from the opioid distribution business.
The events of November 2017 and December 2017 support competing
interpretations. The defense-friendly view interprets the documents as showing the Audit
Committee, Board, and management were monitoring opioid issues, including Walmart’s
suspicious order monitoring system. From that perspective, the directors could take
comfort in the proposal from Walmart’s compliance team to improve the system, and the
information session with Secretary Leavitt provided already-educated board members,
executives, and members of the Walton Family with additional insight into a situation that
they already were handling well.
The plaintiff-friendly view interprets the record as showing that after approving
management’s plan for an updated suspicious order monitoring system in August 2017, the
directors checked out. During 2016 and 2017, as more and more plaintiffs filed lawsuits
against Walmart, the directors did nothing. In December 2016, when Walmart learned that
the U.S. Attorney for the Eastern District of Texas was conducting a criminal investigation
into the company, they did nothing. It was not until November 2017 that management
raised an issue about Health and Wellness compliance and proposed enhancements to
Walmart’s systems.
48
At that point, knowing that Walmart had suffered a serious compliance failure, the
directors, senior management, and the Walton Family scheduled an education session with
Secretary Levitt to educate themselves on an issue they had not previously understood.
Even then, however, the directors did nothing but listen to lawyers. They did not consider
any business issues or make any business decisions. Only management took action by
deciding to exit the distribution business. No one did anything about the pharmacy
business.
O. The Opioid MDL
In December 2017, the federal cases that thousands of plaintiffs had filed across the
country were consolidated into the Opioid MDL. The bellwether complaint against
Walmart in the Opioid MDL alleged that Walmart failed to:
• “adequately train their pharmacists and pharmacy technicians on how to properly
and adequately handle prescriptions for opioid painkillers”;
• “put in place effective policies and procedures to prevent their stores from
facilitating diversion and selling into a black market”;
• “conduct adequate internal or external reviews of their opioid sales to identify
patterns regarding prescriptions that should not have been filled”;
• “effectively respond to concerns raised by their own employees regarding
inadequate policies and procedures regarding the filling of opioid prescriptions”;
and
49
• “take meaningful action to investigate or to ensure that they were complying with
their duties and obligations under the law with regard to controlled substances.”
Compl. ¶ 289.
Walmart responded in January 2018 by sending an internal newswire on “Opioid
Stewardship” to its pharmacists. Ex. 63. The newswire reminded pharmacists to comply
with state-specific requirements for opioid training, to review an internal Walmart
procedure about dispensing naloxone, and to watch a video. Id. at ’913. There is no
indication in the record that Walmart did anything to alter the system of compensation
plans and other incentives that were driving the business model of filling as many
prescriptions as possible.
P. Walmart Tries To Avoid Criminal Prosecution.
In May 2018, the U.S. Attorney for the Eastern District of Texas informed Walmart
that it planned to criminally indict the company for its role in the opioid epidemic.
Walmart’s directors had ignored those red flags, but the threat of a criminal indictment
generated a response.
First, Walmart amended its pharmacy operating manual. Rewriting procedures and
creating new documents is relatively easy, and the new manual detailed a number of
prescriber and patient red flags. Walmart also sought to capture the public-relations high
ground by issuing a press release titled, “Walmart Introduced Additional Measures to Help
Curb Opioid Abuse And Misuse.” Ex. H. The press release promised that within the next
sixty days, Walmart would restrict initial acute opioid prescriptions to no more than a
50
seven-day supply. That was a step Walmart could have taken in 2014, when the Audit
Committee saw the photograph showing a Walmart pharmacy with scores of patrons
waiting in line at 7:00 a.m., two hours before the pharmacy opened, to fill their
prescriptions for Oxycodone. Or Walmart could have taken that step in 2016 or 2017, when
plaintiffs were filing the thousands of lawsuits that led to the Opioid MDL, or in December
2016, when Walmart learned that the U.S. Attorney’s Office was conducting a criminal
investigation. Walmart also announced in its press release that in just under two years
(starting in January 2020), it would require e-prescriptions for controlled substances.
Next, Walmart sought to negotiate a settlement with the Eastern District of Texas.
Those efforts proved unsuccessful, and in July 2018, the U.S. Attorney’s Office reiterated
its intention to indict Walmart.
After the failure to achieve a settlement, the Board implemented a policy under
which pharmacists gained access to the refusal-to-fill information in Walmart’s pharmacy
management system. In an email dated July 29, 2018, Jacob Creel, Walmart’s Director for
U.S. Ethics and Compliance for Health and Wellness Practice Compliance, explained that
although Walmart’s Archer system collected and stored refusal-to-fill forms, Walmart’s
pharmacists “do not have easy access to this information, especially if the pharmacist is
from another store,” even though it “could be used to clear red flags, or identify red flags
51
that may indicate that the prescription was not issued for a legitimate medical reason.”45
Walmart also announced that its pharmacists would have access to NarxCare, a controlled
substance tracking tool, in states where the system was available. Still seeking to capture
the public-relations high ground, Walmart issued a press release announcing these
initiatives. See Ex. 65 at ’995; see also Ex. 12 at 4.
Having taken these steps, Walmart contacted its friends in Washington, D.C. In
August 2018, Walmart’s counsel sent a letter to senior DOJ officials asking them to quash
the indictment. Throughout the balance of 2018 and well into 2019, Walmart continued its
lobbying efforts. In September 2019, Walmart’s counsel sent another letter, this time to the
co-head of an opioid working group made up of DOJ officials and fifteen U.S. Attorneys’
Offices. The group was evaluating potential lawsuits against Walmart and other
participants in the opioid epidemic, and Walmart threatened to stop producing documents
to the group.
Around the same time, Walmart hired Rachel Brand, the DOJ’s former Associate
Attorney General. Brand became the point-person for an “internal investigation regarding
controlled substances.” Ex. 71. Brand updated the Audit Committee on the investigation
during Audit Committee meetings in April, May, and July 2018. See Exs. 71–73. Both
45
Compl. ¶ 255 (citing Plaintiffs Trial Exhibit P-26705_00001, In re: Nat’l
Prescription Opiate Litig., No. 1:17-MD-2804-DAP (N.D. Ohio Nov. 8, 2021), ECF No.
4128-31).
52
Flynn and Brand updated the full Board during a “Legal Private Session” on November 8,
2019. Ex. 74 at 6. Walmart redacted or withheld everything about the investigations based
on the attorney-client privilege and work product doctrine.
Shortly thereafter, the U.S. Attorney for the Eastern District of Texas was instructed
by the highest levels of the DOJ to drop the criminal indictment and any civil complaint
against Walmart. In October 2019, the head of the Civil Division of the U.S. Attorney’s
Office for the Eastern District of Texas resigned in protest.
Q. The ProPublica Article
In March 2020, ProPublica published an article detailing Walmart’s role in the
opioid epidemic. Before the article was published, Walmart’s stockholders did not know
about the DEA Settlement. The article revealed that between 2000 and 2018, the DEA sent
fifty letters of admonition to Walmart about its dispensing practices. The article reported
that multiple pharmacists had raised concerns about pill-mill doctors, well before the DEA
Settlement expired.
On April 14, 2020, the Board met virtually. There was no discussion of compliance
issues in the Health and Wellness Division. Ex. 78.
On September 14, 2020, Walmart issued a nine-page report summarizing “important
components of Walmart’s response to the opioid crisis and the Board’s oversight of
Walmart’s activities related to the dispensing of prescription opioid medications in the
United States.” See Ex. 12 at 1. The report asserted that “[a]s a whole and through its
committees, Walmart’s Board of Directors oversees Walmart’s risk management policies
53
and practices, including related [sic] to prescription opioids.” Id. According to the report,
the Board oversaw Walmart’s “risk tolerance” and received “regular reports from Board
committee chairpersons and members of senior management regarding risk related
matters.” Id. The report discussed the Audit Committee’s oversight of global compliance
and emphasized that the committee consisted “solely of independent directors.” Id. Taken
at face value, the report describes a good compliance program. The report does not identify
when the various components of the program went into effect. The report did not engage
with the compensation programs and other incentive structures that can overwhelm the
most well-intentioned compliance program.
When it came to identifying steps that Walmart actually took to respond to the
opioid crisis, the report highlighted the availability of NarxCare. The report then discussed
Walmart’s deference to its pharmacists’ discretion in refusing to fill orders:
We support our pharmacists when they exercise their professional judgment
not to fill a controlled substance. Individual Walmart pharmacists may refuse
to fill a particular prescription of concern (known as a “refusal to fill” or
“RTF”), based on the presence of certain unresolved “red flags” (warning
signs that a prescription might not be for a legitimate medical purpose) or
combinations of unresolved red flags. If a pharmacist has more general
concerns about a prescriber’s controlled-substance prescribing practices, the
pharmacist may refuse to fill all controlled-substance prescriptions written
by that provider (a “blanket refusal to fill” or “BRTF”).
Id. at 4.
The policy that Walmart claimed to follow contrasts starkly with the allegations
regarding Walmart’s actual practices. At best, the press release described the policy that
the Board believed it had implemented in July 2018 when it faced a threat of indictment.
54
R. The DOJ Sues Walmart, And Walmart Sues The DOJ.
In October 2020, Walmart sued the DOJ and the Attorney General in the U.S.
District Court for the Eastern District of Texas. Walmart, Inc. v. Barr, No. 4:20-cv-817-
SDJ (E.D. Tex.). Walmart sought the following declaratory judgments:
• Pharmacists may be liable under the Controlled Substances Act and its regulations
only when they fill a prescription that they know was not issued for a legitimate
medical purpose by a prescriber acting in the usual course of the prescriber’s
professional practice or when pharmacists knowingly abandon all professional
norms;
• The Controlled Substances Act does not require pharmacists to second-guess a
registered and licensed doctor’s decision that a prescription serves a legitimate
medical purpose;
• The Controlled Substances Act and its regulations do not require pharmacists to
refuse to fill entire categories of prescriptions without regard to individual facts and
circumstances;
• The Controlled Substances Act and its regulations do not require pharmacists to
document in writing why filling a prescription was appropriate;
• Pharmacies do not have an affirmative obligation under the Controlled Substances
Act and its regulations to analyze and share aggregate prescription data across its
stores and with line pharmacists;
• Pharmacies do not have an affirmative obligation under the Controlled Substances
Act and its regulations to impose corporation-wide refusals-to-fill for particular
doctors;
• The Controlled Substances Act and its regulations do not require distributors not to
ship suspicious orders after reporting them;
• The Controlled Substances Act and its regulations did not impose monetary
penalties for failure to report suspicious orders to DEA during the time Walmart
self-distributed; and
55
• Defendants must follow their own regulations and may not base any enforceable
legal positions on the alleged violation of agency guidance rather than obligations
found in a statute or duly promulgated rule or regulation.46
Each of these declarations sought judicial approval for the business plan that Walmart had
followed. The federal judge overseeing the Opioid MDL had ruled against Walmart on
many of these issues. Through its complaint, Walmart sought to relitigate those losses.
Two months later, the DOJ filed a civil complaint against Walmart in the U.S.
District Court for the District of Delaware (the “DOJ Action”).47 The DOJ sought
injunctive relief to restrain Walmart’s continuing violations of the law and alleged that
Walmart repeatedly violated the Controlled Substances Act, both as a pharmacy operator
and as a wholesale distributor. Compl. ¶¶ 300, 350; Dkt. 40 at 24.
The DOJ alleged that from June 2013 to November 2017, while acting as a
distributor of controlled substances, Walmart shipped an estimated 37.5 million orders to
its pharmacies. Walmart reported only 2,014 suspicious orders to the DEA. By comparison,
Walmart’s backup distributor, McKesson Corporation, reported more than 13,000
suspicious orders from Walmart’s pharmacies during the same period, despite shipping far
fewer doses. Compl. ¶ 25.
46
Compl. ¶¶ 281, 286; accord Walmart Inc. v. U.S. Dep’t of Justice, 21 F.4th 300(5th Cir. 2021).
47
See U.S. v. Walmart Inc., No. 1:20-cv-01744-CFC (D. Del.).
56
In response, Walmart publicly accused the DOJ of “blaming pharmacists for not
second-guessing the very doctors the Drug Enforcement Administration (DEA) approved
to prescribe opioids.” See Public Statement, Walmart Inc., Walmart Statement in Response
to DOJ Lawsuit (Dec. 22, 2020). Walmart bragged about having sued the federal
government, claiming: “Walmart already sued the Department and DEA to stand up for
our pharmacists, and we will keep defending our pharmacists as we fight this new lawsuit
in court.” Id. Walmart claimed it “always empowered pharmacists to refuse to fill
problematic opioids prescriptions,” unlike the “DEA’s well-documented failures in
keeping bad doctors from prescribing opioids in the first place.” Id.S. Liability In Opioid MDL And Dismissal Of The Suit Against The DOJ
On November 23, 2021, after six weeks of trial, a jury in the Opioid MDL found
that two Ohio counties “prove[d]” that Walmart “engaged in intentional and/or illegal
conduct which was a substantial factor” in the “oversupply of legal prescription opioids,
and diversion of those opioids into the illicit market outside of appropriate medical
channels.”48 The jury found that “widespread prevalence of opioid use disorder . . . and
addiction” was “the direct and foreseeable result of the oversupply of legal prescription
opioids, and diversion of these opioids . . . , caused by [Walmart’s] wrongful conduct.” Id.
at *13. The jury also found that Walmart engaged in improper dispensing conduct” as
“evidenced by [its] systemic failures to investigate and resolve red-flag prescriptions . . . .”
48
Opioid MDL Abatement Decision, 2022 WL 3443614 at *4.
57
Id. at *30. “[S]pecific evidence . . . demonstrated that [Walmart] dispensed massive
quantities of red-flagged prescriptions without taking adequate measures to investigate or
otherwise ensure the prescriptions were appropriately dispensed.” Id. From this, “[t]he jury
reasonably concluded that [Walmart] dispensed opioids without having in place effective
controls and procedures to guard against diversion—controls and procedures they knew
were required and knew they had not adequately employed.” Id. at *32.
During the trial, the jury heard from Susanne Hiland, a Walmart employee from the
Health and Wellness Division, who observed that Walmart did not provide enough funding
to pursue anti-diversion initiatives. During her testimony, Hiland confirmed that, as late as
March 4, 2016, regional directors did not have access to refusal-to-fill reports. Hiland also
confirmed that pharmacists could not determine from Walmart’s prescription-filling
system whether another Walmart pharmacy had refused to fill the prescription. Compl. ¶
253–254.
In advance of the trial, the judge in the Opioid MDL had denied Walmart’s motion
for summary judgment. He held that record evidence concerning the suspicious order
monitoring program that Walmart had in place in February 2015 “suggests obvious
deficiencies that a layperson could plainly recognize.” Opioid MDL SJ Decision, 2020 WL
425965, at *2 n.12; see Compl. ¶¶ 295–296.
Walmart issued a fervid response to the jury’s verdict:
We will appeal this flawed verdict, which is a reflection of a trial that was
engineered to favor the plaintiffs’ attorneys and was riddled with remarkable
legal and factual mistakes. . . . Plaintiffs’ attorneys sued Walmart in search
58
of deep pockets while ignoring the real causes of the opioid crisis—such as
pill mill doctors, illegal drugs, and regulators asleep at the switch—and they
wrongly claimed pharmacists must second-guess doctors in a way the law
never intended and many federal and state health regulators say interferes
with the doctor-patient relationship. As a pharmacy industry leader in the
fight against the opioid crisis, Walmart is proud of our pharmacists, who are
dedicated to helping patients in the face of a tangled web of conflicting
federal and state opioid guidelines.49
Walmart once again portrayed itself as a champion of its pharmacists. By contrast, the
pleading-stage record supports an inference that during the term of the DEA Settlement
and continuing at least through the threatened criminal indictment in 2018, Walmart
pursued a business strategy that sought to maximize the number of prescriptions that its
pharmacists filled as a tool for generating higher profits, while at the same time depriving
its pharmacists of the resources they needed to perform their jobs.
After the jury verdict, the federal court held a bench trial to determine the
appropriate remedy. In August 2022, the court directed Walmart, CVS, and Walgreens to
pay $650.6 million into an abatement fund.50 The court entered an injunction order
requiring Walmart to adopt reforms to remediate deficient controls and reporting systems
49
See Public Statement, Walmart Inc., Statement by Walmart Inc. with respect to
the Jury Verdict in the Liability phase of a Single, Two County Trial in the Multidistrict
Litigation in the U.S. District Court for the Northern District of Ohio involving Opioids
(Nov. 23, 2021).
50
Judgment Order, In re Nat’l Prescription Opiate Litig., No. 1:17-MD-2804 (N.D.
Ohio Aug. 22, 2022), 2022 WL 4099669, appeal pending, Trumbull Cnty., Ohio v. Purdue
Pharma, L.P., No. 22-3753 (6th Cir.).
59
that failed to achieve substantial compliance with the Controlled Substances Act.51 The fact
that the federal court ordered Walmart to remediate its controls supports an inference that
Walmart’s controls and reporting systems were still noncompliant in August 2022.
Meanwhile, on February 4, 2021, the U.S. District Court for the Eastern District of
Texas dismissed Walmart’s complaint against the DOJ on the grounds that the DOJ
enjoyed sovereign immunity. Walmart lost again on appeal. See Walmart Inc. v. U.S. Dep’t
of Justice, 21 F.4th 300, 305 (5th Cir. 2021).
T. The Books And Records Action
On May 4, 2020, two months after the Pro Publica article, two of the three plaintiffs
sent Walmart a demand to inspect books and records under Section 220. Walmart rejected
the demand in its entirety. See Compl. ¶¶ 57–63.
On June 17, 2020, Plaintiff Police and Fire Retirement System of the City of Detroit
pursued its enforcement actions.52 Plaintiff Norfolk County Retirement System pursued its
enforcement action on the same date. 53 Plaintiff Ontario Provincial Council of Carpenters’
51
Injunction Order, In re Natl Prescription Opiate Litig., No. 1:17-MD-2804 (N.D.
Ohio Aug. 17, 2022), ECF No. 4611-1, appeal pending, Trumbull Cnty., Ohio v. Purdue
Pharma, L.P., No. 22-3753 (6th Cir.).
52
See Verified Complaint Pursuant to 8 Del. C. 220 to Compel Inspection of Books
and Records, Police & Fire Ret. Sys. of City of Detroit v. Walmart Inc., C.A. No. 2020-
0478-JTL, Dkt. 1 (Del. Ch. June 17, 2020).
53
See Verified Complaint Pursuant to 8 Del. C. 220 to Compel Inspection of Books
and Records, Norfolk Cnty. Ret. Sys. v. Walmart Inc., C.A. No. 2020-0482-JTL, Dkt. 1
(Del. Ch. June 17, 2020).
60
Pension Trust Fund filed its enforcement action on August 21, 2020.54 The three plaintiffs
agreed to coordinate their Section 220 actions. On October 19, 2020, the court found that
Walmart lacked any reasonable basis to dispute the proper purpose element for production
under Section 220 and that the plaintiffs were entitled to many of Walmart’s books and
records that they requested. See Walmart, C.A. No. 2020-0478-JTL, Dkt. 37 at 50–51. By
final order dated October 29, 2020, the court required Walmart to produce various
categories of documents. See Walmart, C.A. No. 2020-0478-JTL, Dkt. 39.
On January 27, 2021, Walmart purported to complete its production of books and
records and produced a certification of completeness. The plaintiffs asserted that
Walmart’s Section 220 production and its privilege log were utterly deficient. After
additional correspondence between the parties, Walmart produced a revised privilege log
on April 9, 2021, and a supplemental production on April 12, 2021.
U. This Litigation
The plaintiffs filed their initial complaint on September 27, 2021. Dkt. 1. The
complaint was thorough and evidenced considerable effort. It was 135 pages long and
contained 316 numbered paragraphs. It was not a pastiche of prolix invective, but rather a
detailed effort to assert viable derivative claims.
54
See Verified Complaint Pursuant to 8 Del. C. 220 to Compel Inspection of Books
and Records, Ontario Provincial Council of Carpenters’ Pension Trust Fund v. Walmart
Inc., C.A. No. 2020-0697-JTL, Dkt. 1 (Del. Ch. Aug. 21, 2020).
61
The defendants moved to dismiss the complaint in its entirety, and the plaintiffs
filed an amended complaint as contemplated by Court of Chancery Rule 15(aaa). The
plaintiffs filed the currently operative complaint on February 22, 2022. Dkt. 23. It is 162
pages long and contains 379 numbered paragraphs. It names as defendants eight members
of the Board and two Walmart officers who were not on the Board. Three members of the
Board also served as company officers, as defined by Walmart’s bylaws.
In Count I, the operative complaint asserts that the directors breached their fiduciary
duties by consciously failing to ensure that Walmart complied with the Controlled
Substances Act and the DEA Settlement. Compl. ¶ 363. The complaint alleges that the
directors also failed to make a good faith effort “to implement and monitor internal
reporting policies and systems.” Id. ¶ 364.
In Count II, the operative complaint asserts that the officers breached their fiduciary
duties in the same manner as the directors. An additional, officer-specific theory asserts
that the officers breached their fiduciary duties “by failing to inform the Board about
Walmart’s regulatory compliance failures in dispensing and self-distributing opioids.” Id.
¶ 375.
On June 24, 2022, Walmart moved to dismiss the amended complaint in its entirety.
Walmart argued that the plaintiffs’ claims were time-barred, that the plaintiffs had not
established demand futility under Rule 23.1, and that the claims against two of the officer
defendants should be dismissed under Rule 12(b)(6). Alternatively, Walmart requested a
62
stay of litigation pending resolution of the DOJ Action. On September 28, 2022, the court
heard oral argument on this motion.
V. The Nationwide Settlement
On November 15, 2022, Walmart announced that it had agreed to the Nationwide
Settlement, which it described as “a $3.1 billion nationwide opioid settlement framework
designed to resolve substantially all opioid lawsuits and potential lawsuits by state, local,
and tribal governments, if all conditions are satisfied.”55 If the conditions for the
Nationwide Settlement are met, then Walmart’s directors and officers will be released from
liability to the signatory plaintiffs. PSB Ex. A § I.P.
The Nationwide Settlement did not resolve all of the opioid cases involving
Walmart. Most notably, the DOJ Action remains pending.
In the Nationwide Settlement, Walmart denied all claims and allegations of
wrongdoing. At the same time, Walmart agreed to implement expansive procedures and
controls, including procedures to avoid diversion of controlled substances. It is reasonable
to infer that before the Nationwide Settlement, even though Walmart had taken some steps
to improve its oversight policies, its controls remained inadequate. Otherwise, the controls
could not have been part of the consideration for the settlement.
55
Press Release, Walmart, Inc., Walmart Announces Nationwide Opioid Settlement
Framework (Nov. 15, 2022).
63
By letter dated as of November 21, 2022, the court asked the parties to address
whether the settlement had implications for the court’s consideration of the pending
motions. The parties submitted supplemental briefs on that topic on January 13, 2023.
This decision addresses the defendants’ motion to dismiss the complaint pursuant
to Court of Chancery Rule 23.1—on the grounds that the plaintiff did not make a demand
on the board and failed to plead that demand would have been futile—and pursuant to
Court of Chancery Rule 12(b)(6). This decision also addresses the defendants’ request to
stay the proceedings.
II. LEGAL ANALYSIS
The director defendants have moved to dismiss the complaint under Court of
Chancery Rule 23.1 for failure to plead demand futility. 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
jurisprudence. See Lebanon Cnty. Empls’ Ret. Fund v. Collis (Collis Demand Decision),
2022 WL 17841215, at *13 (Del. Ch. Dec. 22, 2022).
64
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
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, rather than
shareholders, manage the business and affairs of the corporation.” Aronson v. Lewis, 473
A.2d 805, 811 (Del. 1984).56 “Directors of Delaware corporations derive their managerial
56
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. Brehm, 746 A.2d 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.
65
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). “The board’s authority to govern corporate affairs
extends to decisions about what remedial actions a corporation should take after being
harmed, including whether the corporation should file a lawsuit against its directors, its
officers, its controller, or an outsider.” Zuckerberg, 262 A.3d at 1047.
“In a derivative suit, a stockholder seeks to displace the board’s decision-making
authority over a litigation asset and assert the corporation’s claim.” Id. (cleaned up). Unless
the 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. Id.
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 id. at 1048.
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.
66
“When considering a motion to dismiss a complaint for failing to comply with Rule
23.1, the Court does not weigh the evidence, must accept as true all of the complaint’s
particularized and well-pleaded allegations, and must draw all reasonable inferences in the
plaintiff’s favor.” Zuckerberg, 262 A.3d at 1048. 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.”).
The plaintiffs in this case chose not to make a pre-suit demand that asked the Board
to consider asserting the claims in their complaint. The question under Rule 23.1 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, a Delaware court proceeds on a claim-
by-claim and director-by-director basis.57 As to each claim, the court asks for each director,
(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
57
See, e.g., Khanna v. McMinn, 2006 WL 1388744, at *14 (Del. Ch. May 9, 2006)
(“This analysis is fact-intensive and proceeds director-by-director and transaction-by-
transaction.”); Beam v. Stewart, 833 A.2d 961, 977 n.48 (Del. Ch. 2003) (“Demand futility
analysis is conducted on a claim-by-claim basis”), aff’d, 845 A.2d 1040 (Del. 2004).
67
(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” for purposes
of that claim. Id. If another set of claims arises out of a different nucleus of operative facts
or concerns a different transaction, then the court moves on to the next claim and repeats
the process.
How to organize the analysis in this case presents a challenge. The plaintiffs have
advanced three species of claims:
• The plaintiffs assert that Walmart’s directors and officers knew that Walmart was
not complying with the Controlled Substances Act and the DEA Settlement and
made conscious decisions to prioritize profits over legal compliance, thereby
intentionally choosing to violate the law (the “Massey Claim”).
• The plaintiffs assert that Walmart’s directors and officers were put on notice by a
steady stream of red flags indicating that Walmart was failing to comply with its
obligations under the Controlled Substances Act and the DEA Settlement, yet
consciously ignored those warnings (the “Red-Flags Claim”).
• The plaintiffs assert that Walmart’s directors and officers knew they had an
obligation to establish information systems sufficient to enable them to monitor
Walmart’s compliance with the Controlled Substances Act and the DEA Settlement,
yet consciously failed to make a good faith effort to fulfill that obligation (the
“Information-Systems Claim”).
The plaintiffs seek to apply these claims to three categories of alleged wrongdoing.
• The plaintiffs maintain that the directors and officers breached their fiduciary duties
in connection with Walmart’s failures to fulfill its obligations as an opioid dispenser
under the DEA Settlement (the “DEA Settlement Issues”).
68
• The plaintiffs maintain that the directors and officers breached their fiduciary duties
in connection with Walmart’s failures to comply with its obligations as an opioid
dispenser under the Controlled Substances Act (the “Pharmacy Issues”).
• The plaintiffs maintain that the directors and officers breached their fiduciary duties
in connection with Walmart’s failures to comply with its obligations as an opioid
distributor under the Controlled Substances Act (the “Distributor Issues”).
Three different legal theories applied to three categories of wrongdoing work out to nine
separate claims.58
Now add the directors. When the plaintiffs filed this action, the Board had twelve
members (the “Demand Board”). Eight are defendants: S. Robson Walton, Gregory Penner,
Steuart Walton, Douglas McMillon, Steven Reinemund, Timothy Flynn, Marissa Mayer,
and Thomas Horton. Four are not defendants: Carla Harris, Sarah Friar, Cesar Conde, and
Randall Stephenson. To adequately allege demand futility, the plaintiffs must plead
particularized facts that provide a reason to doubt that at least six members of the Demand
Board could have objectively considered a demand to assert the claims advanced in the
complaint.
58
This decision makes one simplifying assumption. During the term of the DEA
Settlement, both the DEA Settlement Issues and the Pharmacy Issues are in play. The
plaintiffs understandably prioritize the DEA Settlement during its term of existence:
Through that agreement, Walmart made specific and enforceable commitments to its
primary regulator about establishing and maintaining a compliance system, and Walmart
agreed to a time frame for accomplishing its commitments. This decision therefore focuses
on the DEA Settlement Issues for the period of time when the DEA Settlement was in
effect. There is no need to review the same time period a second time under the guise of
the Pharmacy Issues.
69
The plaintiffs seek to establish that the eight directors named as defendants could
not have properly considered a demand. A thorough and methodical march through the
combinations would result in seventy-two different units of analysis (3 claims * 3 issues *
8 directors). That would be painful to write and even more painful to read.
In an attempt to make the analysis more manageable, this decision starts by
discussing the common features that unite a Massey Claim, a Red-Flags Claim, and an
Information-Systems Claim. At bottom, each is a means of identifying bad faith conduct,
and although the claims nominally target different types of culpable action, the difference
is one of degree, not of kind. Treating each type of claim as distinct can be analytically
helpful. In a case like this one, it can be burdensome. The more efficient path is to examine
each category of underlying misconduct and ask whether the particularized facts support
an inference that the directors acted in bad faith, using the three species of claims as
paradigms to guide the analysis, rather than as forms of action that the allegations must fit.
A. Three Similar Claims
A Massey Claim, a Red-Flags Claim, and an Information-Systems Claim each rest
on the same concept: a breach of the duty of loyalty grounded on bad faith action. Each
also strives to address situations where the defendant fiduciaries have not made a single,
easily identifiable decision, such as a decision to sell the company or approve a self-
interested transaction. “Instead, there will be a period of time (perhaps prolonged) marked
by a combination of inaction and occasional action, followed by a corporate trauma in
which the corporation suffers substantial harm.” Ontario Provincial Council of
70
Carpenters’ Pension Tr. Fund v. Walton (Walmart Laches), 2023 WL 2904946, at *18
(Del. Ch. Apr. 12, 2023). The core question in that setting is whether there is a basis to
hold the corporate fiduciaries accountable for allowing the trauma to happen. Id.Intuitively, the concept of allowing a corporate trauma to happen sounds like
negligence, perhaps even gross negligence, but in any event an inquiry grounded in the
duty of care. Corporate fiduciaries might have caused the trauma by making decisions that
led to a tragic outcome, but disinterested and independent directors who were not also
sociopaths would not intentionally cause a corporate trauma to happen. It follows that the
duty of oversight generally derives from the duty of care, rather than from the duty of
loyalty. In Graham v. Allis Chalmers Manufacturing Co., the Delaware Supreme Court’s
initial foray into this area, the justices seemed to envision that oversight liability might
result from a breach of either the duty of loyalty or the duty of care. 188 A.2d 125, 130
(Del. 1963). In his landmark decision in Caremark, Chancellor Allen also seemed to
contemplate both paths, and he most often framed the duty of oversight in the language of
care. In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 960, 964, 967, 671 (Del. 1996).
In one passage, however, he posited that liability only would exist if the oversight failure
was sufficiently egregious such that a court could infer that the directors had acted in bad
faith. Id. at 971. Writing as a member of this court, Chief Justice Strine took up the question
and held that liability for a breach of the duty of oversight always derives from the duty of
loyalty, with no room for care. See Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003).
The Delaware Supreme Court subsequently adopted that formulation and held that a breach
71
of the duty of loyalty, such as action in bad faith, is a “necessary condition to liability.”
Stone, 911 A.2d at 369–70.
An Information-Systems Claim, a Red-Flags Claim, and a Massey Claim each
operate within that loyalty-based framework. An Information-Systems Claim and a Red-
Flags Claim become loyalty-based through the premise that a conscious decision not to act
is just as much of a decision as an affirmative act and thus can be the product of bad faith.
The Massey Claim looks for or implies an affirmative decision to violate the law, which is
similarly a decision to act in bad faith. See Walmart Laches, 2023 WL 2904946, at *21.
Sophisticated and well-advised individuals do not formally document bad faith
decisions, so rarely will there be direct evidence to support an Information-Systems Claim,
a Red-Flags Claim, or a Massey Claim. Instead, for each theory, “the court looks at a series
of fiduciary inactions and actions, made over time, to determine whether they support an
inference that the corporate fiduciaries were operating in bad faith.” Id.• A strong pattern of conduct can support an inference that the corporate fiduciaries
intentionally decided to cause the corporation to violate the law, typically because
the costs and other burdens associated with compliance would cut into profits. “The
inference that corporate fiduciaries made a decision to violate the law is the
foundation for a Massey Claim.” Id.• A less strong pattern of conduct can support an inference that the corporate
fiduciaries were put on notice that the corporation was violating the law or otherwise
headed for a corporate trauma, but willfully ignored the evidence and consciously
decided to do nothing. “That inference is the foundation for a Red-Flags Claim.” Id.• A final pattern of conduct addresses the situation where information did not reach
the corporate fiduciaries. If the corporate trauma resulted from a central compliance
area that fiduciaries acting in good faith would monitor, and if the corporate
fiduciaries did not have a monitoring system that reflects a good faith effort to bring
72
timely and actionable information to their attention, then the absence of such a
system may support an inference that the corporate fiduciaries willfully blinded
themselves to a known risk. “That inference is the foundation for an Information-
Systems Claim.” Id.In practice, the three theories are not so different after all. Each involves looking at
the pleading-stage record, using the innate human capacity to deploy the theory of mind,
and drawing inferences about what the corporate fiduciaries could have believed or
intended. See id.Because of their similarities, plaintiffs often try to plead the theories in the
alternative. Simultaneously advancing both a Red-Flags Claim and an Information-
Systems Claim can seem counterintuitive, because to successfully plead a Red-Flags Claim
requires facts supporting an inference that red flags reached the relevant fiduciary, and the
fact that the red flags reached the fiduciary may suggest that an information system existed.
But that will not always be so. Warnings or indications may reach the board episodically
or by happenstance, without the directors having implemented an appropriate board-level
system of protocols and processes designed to generate timely and actionable information.
See Marchand v. Barnhill, 212 A.3d 805, 809 (Del. 2019). Or a red flag may come from
outside the corporation. In Boeing, the first crash of the 737 MAX was a blazing red flag,
and the Boeing directors did not need an internal information system to learn about it. Nor
did that horrific form of notice suggest that the Boeing board had adequate reporting
systems in place. See In re Boeing Co. Deriv. Litig., 2021 WL 4059934, at *33–34 (Del.
73
Ch. Sept. 7, 2021). There would be no impediment to asserting both species of claims in
those types of scenarios.
An Information-Systems Claim and a Red-Flags Claim can also coexist when an
issue becomes more serious over time. Envision that a fiduciary may have failed to try to
put an information system in place for a particular risk. Time and attention are scarce
commodities, and that decision initially could be a proper exercise of business judgment.
The decision might then become dubious as evidence accretes indicating that the risk has
evolved into a core compliance risk. Once a tipping point is reached, the fiduciary’s failure
to implement an information system could support an Information-Systems Claim. After a
fortunate period without a corporate trauma, notwithstanding the absence of an information
system, a red flag may put the fiduciary on notice about an area of legal noncompliance or
a threat of serious harm. If the fiduciary does nothing and a corporate trauma results, then
an Information-Systems Claim may exist for the full period from the tipping point through
the corporate trauma, and a Red-Flags Claim may exist for the period after the red flag
through the corporate trauma.
Simultaneously advancing a Massey Claim with either a Red-Flags Claim or an
Information-Systems Claim poses fewer conceptual difficulties. A Massey Claim requires
an aggregation of pled facts sufficient to support an inference that a corporate fiduciary
made a conscious decision to violate the law. The facts may include hallmarks of other
claims, such as a persistent failure to implement a monitoring system for an obvious central
compliance risk or a pattern of chancing upon red flags, yet persistently failing to act or
74
resorting to only cosmetic action. The most telling indications include steps to encourage,
enable, or profit from noncomplaint behavior.59 At some point, a pattern that could provide
support for an Information-Systems Claim or a Red-Flags Claim may reach the level where
it supports an inference that the board was consciously condoning illegal conduct.
The line between the claims can also blur because of the distinction between legal
risk and illegality. A core part of a director’s job is to identify and assess risk, including
legal risk, and to make business judgments about whether a project is likely to increase the
long-term value of the corporation for the ultimate benefit of its stockholders. See generally
59
E.g., Collis Demand Decision, 2022 WL 17841215, at *8, 18 (discussing board
approval of double trigger for suspicious order reporting that cut suspicious orders by two
orders of magnitude); La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313, 352–53
(Del. Ch. 2012) (discussing board approval of business plan with targets that only could be
achieved through company promotion of off-label uses), rev’d on other grounds, 74 A.3d
612 (Del. 2013); In re Am. Int’l Grp., Inc., 965 A.2d 763, 794-99 (Del. Ch. 2009) (Strine,
V.C.) (multifaceted financial fraud), aff’d sub nom. Teachers’ Ret. Sys. of Louisiana v.
PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011). Cf. City of Birmingham Ret. &
Relief Sys. v. Good, 177 A.3d 47, 68–69 (Del. 2017) (Strine, C.J., dissenting) (considering
totality of company’s recidivist violations of regulatory restrictions, reliance on political
influence to reduce regulatory consequences, and regulators’ rejection of settlement with
company when deal was subjected to scrutiny). Other cases have upheld Massey-style
oversight claims involving accounting improprieties or complicity in self-dealing. See
Stewart v. Wilm. Tr. SP Servs. Inc., 112 A.3d 271, 281, 301 (Del. Ch. 2015) (denying
motion to dismiss by director who “went along without raising a peep” with a “fraudulent
scheme year after year”); ATR-Kim Eng. Fin. Corp. v. Araneta, 2006 WL 3783520, at *1,
*19 (Del. Ch. Dec. 21, 2006) (entering judgment against two directors who acted with
“complicity” and as “stooges” for a controlling stockholder and board chair who engaged
in self-dealing; holding outside directors liable for breach of the duty of loyalty in failing
to monitor the controlling shareholder); Saito v. McCall, 2004 WL 3029876, at *1, 7 (Del.
Ch. 20, 2004) (denying motion to dismiss oversight claim alleging that directors “presided
over a fraudulent accounting scheme”).
75
Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *17–21 (Del. Ch.
Apr. 14, 2017). Some projects involve more legal risk than others and, depending on the
outcome, can expose the corporation to civil liability. When directors make a business
decision that carries legal risk, but which otherwise involves legally compliant conduct,
then the business judgment rule protects that decision. The same principle applies to a
board’s decision to act or not act in response to red flags. “Simply alleging that a board
incorrectly exercised its business judgment and made a ‘wrong’ decision in response to red
flags, however, is insufficient to plead bad faith.” Melbourne Mun. Firefighters’ Pension
Tr. Fund v. Jacobs, 2016 WL 4076369, at *9 (Del. Ch. Aug. 1, 2016), aff’d, 158 A.3d 449(Del. 2017). To establish the requisite inference of bad faith, a plaintiff would have to plead
(and later prove) that the directors knew from the red flags that the corporate trauma was
coming and nevertheless forged ahead for reasons unrelated to the best interests of the
corporation. “The decision about what to do in response to a red flag is one that an officer
or director is presumed to make loyally, in good faith, and on an informed basis, so unless
one of those presumptions is rebutted, the response is protected by the business judgment
rule.” McDonald’s Directors, 2023 WL 2293575, at *17.
What a corporate fiduciary cannot do, however, is make a business judgment to
cause or allow the corporation to break the law. “Delaware law does not charter law
breakers.” In re Massey Energy Co., 2011 WL 2176479, *20 (Del. Ch. May 31, 2011). As
the Massey decision explains,
76
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.
Id. at *20 (footnoted omitted). “[I]t 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, 934–35 (Del. Ch. 2007) (cleaned up). “[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.” Metro Commc’n Corp. BVI v. Advanced
Mobilecomm Techs. Inc., 854 A.2d 121, 131 (Del. Ch. 2004).
The business judgment rule plays no role in a decision to proceed in a way that
violates the law. As a result, there is a fundamental difference between the following two
scenarios, each involving a legal assessment.
• In one hypothetical scenario, the lawyers say: “Although there is some room for
doubt and hence some risk that our regulator may disagree, we believe the company
is complying with its legal obligations and will remain in compliance if you make
the business decision to pursue this project.”
• In the other hypothetical scenario, the lawyers say: “The company is not currently
in compliance with its legal obligations and faces the risk of enforcement action,
and if you make the business decision to pursue this project, the company is likely
to remain out of compliance and to continue to face the risk of an enforcement
action. But the regulators are so understaffed and overworked that the likelihood of
an enforcement action is quite low, and we can probably settle anything that comes
at minimal cost and with no admission of wrongdoing.”
In the former case, the directors can make a business judgment to pursue the project. In the
latter case, the decision to pursue the project would constitute a conscious decision to
77
violate the law, the business judgment rule would not apply, and the directors would be
acting in bad faith.
Because of the similarities among the three types of claims, this decision does not
analyze each of the three categories of issues using each of the three legal frameworks. For
each category, the core question is whether the plaintiffs have alleged particularized facts
supporting an inference that the directors acted in bad faith. Reframed for purposes of
demand futility under the second prong of Zuckerberg, the question is whether there is
sufficient reason to think that the director acted in bad faith such that the director faces a
substantial likelihood of liability. For two of the directors who are members of the Walton
family, a question also arises about whether they can validly consider a demand to assert
claims that would result in Robson Walton, a patriarch of the Walton family, facing a
substantial likelihood of liability.
B. The DEA Settlement Issues
The first category of alleged wrongdoing involves the DEA Settlement Issues.
During the term of the DEA Settlement, the directors in office received a series of reports
about Walmart’s compliance with its requirements. The pleading-stage record supports an
inference that the directors learned that Walmart was not complying with the DEA
Settlement and could not achieve compliance before the agreement expired, yet
consciously chose not to take action to achieve compliance, such as by instructing
management to devote more resources to compliance initiatives. Walmart’s redactions to
its Section 220 documents contribute to this result, because they support an inference that,
78
as the reality of noncompliance became clearer and the term of the DEA Settlement
loomed, Walmart’s directors and officers did nothing other than talk with lawyers.
Walmart’s directors and officers did not have non-privileged discussions about the business
issues that the situation presented, nor did they make non-privileged business decisions
about what to do.
Importantly, the contention is not that Walmart did nothing on the compliance front.
The pleading-stage record shows that Walmart initially drafted an extensive set of policies
and procedures that described a nice-sounding compliance program for its pharmacies.
Walmart eventually created an inventory control system that targeted internal diversion.
But Walmart did not take the steps necessary to comply with the DEA Settlement. The
pleading-stage record supports an inference that the directors knew about the
noncompliance and allowed it to happen, meaning that they consciously condoned
illegality.
The pleading-stage record also points to a motive for the conscious decision not to
devote more resources to compliance: Walmart was driving opioid prescription traffic to
its pharmacies both to generate pharmacy sales and get customers into Walmart’s stores so
that they would buy other products. Walmart was simultaneously incentivizing and
pressuring its pharmacists to fill more prescriptions and do it faster. Devoting more
resources to achieving compliance with the DEA Settlement would have cost money and
undercut those initiatives.
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1. The Director-by-Director Analysis
For demand futility, the dispositive issue is whether the complaint alleges
particularized facts providing reason to doubt that a majority of the directors on the
Demand Board could make a disinterested and independent decision about whether to
assert claims relating to the DEA Settlement Issues. Conducting that inquiry requires a
director-by-director analysis.
a. S. Robson Walton
S. Robson Walton is the son of Walmart founder Sam Walton. He joined Walmart
in 1969 and became a director in 1978. He served as Chairman (later Chairperson) of the
Board from 1992 until 2015. Under Walmart’s bylaws, the Chairman is an executive officer
with particular responsibility for “focusing on oversight and governance matters.”60 As
Chairman, Walton served as an executive officer while the DEA Settlement was in effect.61
60
Wal-Mart Stores, Inc., Definitive Proxy Statement (Schedule 14A), at 33 (Apr.
23, 2014) (“Our Chairman, on the other hand, is charged with presiding over all meetings
of the Board and our shareholders, and providing advice and counsel to the CEO and our
company’s other officers regarding our business and operations, as well as focusing on
oversight and governance matters.”); see, e.g., id. (“Chairman: S. Robson Walton –
presides over meetings of the Board and shareholders; provides advice and counsel to the
CEO and other officers; focuses on oversight and governance matters”(formatting
omitted)).
61
See Walmart Inc., Amended and Restated Bylaws, Art. IV § 1 (“The officers of
the Corporation shall consist of a President, a Chief Financial Officer, a Secretary and a
Treasurer, and such other officers as the Board may appoint, including but not limited to a
Chairman of the Board, a Chief Executive Officer, a Chief Operating Officer, one or more
Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice
Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers.”).
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The plaintiffs have pled facts supporting an inference that Walton knew about the
DEA Settlement. He was Chairman when Walmart received the Order to Show Cause in
November 2009, and he was Chairman when Walmart entered into the DEA Settlement in
February 2011. Given Walton’s responsibilities as Chairman and the material risk that
losing Walmart’s DEA licenses posed to its business, it is inconceivable that Walton did
not know about those developments.
Through the DEA Settlement, Walmart committed to implement and maintain a
compliance system for its pharmacies during the term of the DEA Settlement, which ran
from March 11, 2011 to March 11, 2015. By August 2011, Walmart had created the
paperwork necessary for a nice-sounding pharmacy compliance program, including
policies and procedures for its pharmacists to follow. See Ex. 15. But by October 2011, the
actual implementation of the program had foundered due to inadequate funding. See Ex.
82. In January 2012, the Audit Committee and the Executive Committee received the 2012
Memo, which reported that compliance efforts had fallen behind schedule and stated
bluntly that “[s]ignificant compliance issues remain unresolved.” Ex. 6 at ’035. The 2012
Memo reported that “a proposed five-year plan” was “being developed,” implying that a
plan currently did not exist and forecasting that compliance could not be achieved until
2017, two years after the DEA Settlement expired. Id.
Walton was a member of the Executive Committee and received the 2012 Memo,
which called out Walton as a recipient. It is reasonable to infer that Walton, the other
members of the Executive Committee, and the members of the Audit Committee knew in
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January 2012 that Walmart was failing to meet its obligations under the DEA Settlement
and would not be able to achieve compliance within the term of that agreement.
In August 2012, Walton learned about more compliance issues when a
whistleblower notified him that pharmacists were filling prescriptions for controlled
substances that bore numerous red flags. That was the same behavior that led to the DEA
Settlement in the first place. There is no indication in the record that Walton took action in
response.
In April 2013, Walton attended a meeting of the Audit Committee. Ex. 10. Just a
month earlier, the committee received another report about compliance in the Health and
Wellness Division, this time from Harris. The report warned that the “diversion analytics
tool to monitor suspicious controlled substance activity remains in a status of red,” which
indicated that the project had “major issues.” Ex. 46 at ’601. The report also showed that
Walmart’s Data Centralization project was in a status of red because Walmart had only
purchased a limited amount of database capacity. One of the largest companies in the world
was failing to achieve a core compliance goal because it had skimped on database capacity.
It is reasonable to infer that the Audit Committee, Walton, and other meeting attendees
discussed the March 2013 report at the April 2013 Audit Committee meeting. A properly
motivated Audit Committee would have taken steps to ensure that the funds were provided.
The pleading-stage record provides no indication that Walton or the Audit Committee took
action.
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Walton next attended a two-day meeting of the Board in September 2013, where the
Chair of the Audit Committee reported to the Board about the status of Walmart’s
compliance initiatives. Ex. 47 at ’207; see Ex. 7. The minutes are heavily redacted and
provide no insight into the tenor of the discussion. At the pleading stage, the plaintiffs are
entitled to an inference that the report conveyed the same message that the Audit
Committee had received in March 2013, namely that key aspects of Walmart’s compliance
programs were not on track, that Walmart was not complying with the DEA Settlement,
and that Walmart could not achieve compliance during the settlement’s term. It is
reasonable to infer that all of the directors then in office learned about those issues from
that report. Walmart had used up two years and seven months of the four-year term and
had only seventeen months left to comply with the DEA Settlement.
Other than creating the paperwork for a nice-sounding pharmacy compliance
program, Walmart’s one compliance success was implementing an internal anti-theft
system for its pharmacies. By reducing internal theft, Walmart helped its bottom line.
For other aspects of pharmacy compliance, Walmart had a long way to go.
Evidencing what was happening with prescription opioids, the head of compliance for the
Health and Wellness Division provided the Audit Committee in March 2014 with a
photograph from July 2012. That picture is worth a thousand procedures. It depicted scores
of patrons waiting in line at 7:00 a.m., two hours before the pharmacy opened, with a “very
high number of prescriptions for Oxycodone.” Compl. ¶ 185. It was only in the lead-up to
a March 2014 meeting that the Health and Wellness compliance team “began to assess our
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processes” to avoid the “risk of our pharmacies becoming the pharmacy of choice for ‘pill
mills.’” See Ex. B at 8.
The time lag between the photograph and the report to the Audit Committee speaks
volumes and supports an inference that Walmart had done nothing meaningful to address
real-world problems at its pharmacies. Instead, Walmart had been taking steps to drive
prescription traffic to its pharmacies while reducing the ability of its pharmacists to meet
their Refusal-To-Fill Obligation. Management told the Audit Committee that after seeing
the photograph, the compliance team had implemented additional operational controls in
Florida, where the controls appeared to have had some effect. See id. at 10. There is no
indication that the Audit Committee took any action in response to this disturbing report,
such as requiring management to address what was happening in other states.
In June 2014, nine months before the DEA Settlement was scheduled to expire, the
Health and Wellness Division evaluated the progress of Walmart’s suspicious order
monitoring project. See Ex. D. The assessment noted that a suspicious order monitoring
system was not in place. Id. at ’701 (“Is the Risk being mitigated today by manual,
systemic, or a combination of both today (regardless of optimal or not)?”; “No.”). The
report identified the issue as “Board informed.” Id. It is reasonable to infer that as Chairman
of the Board, Walton was one of those on the Board who were informed.
In November 2014, Walton and the rest of the Board reviewed Walmart’s
compliance with the DEA Settlement. Walmart withheld the meeting minutes in their
entirety on the basis of privilege. See Ex. 14 at Item No. 49. By doing so, Walmart
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represented that the Board did not discuss any business topics, evaluate any business
considerations, or make any business decisions. It is reasonable to infer from documents in
the record that Walmart was not in compliance with the DEA Settlement, that the directors
knew about it, and that they took no action in response.
The complaint contains factual allegations and incorporates documents supporting
an inference that Walmart failed to achieve compliance with the DEA Settlement because
it prioritized profits:
• Walmart underfunded the internal team charged with implementing the compliance
projects necessary to comply with the DEA Settlement. Walmart provided only $11
million of funding rather than the $40 million that the team estimated was needed.
Ex. 82 at ’364.
• The slide deck that supported the 2012 Memo stated that the reboot of the Health
and Wellness Division’s compliance program needed “[s]easoned leadership that
strikes the proper balance between business and compliance considerations.” Ex. 6
at ’040.
• Compliance efforts broke down in late 2012 and early 2013 because Walmart had
failed to purchase enough database capacity to support a read-write database for
pharmacy compliance. Ex. 46 at ’601.
• In February 2015, one month before the DEA Settlement expired, one of Walmart’s
compliance directors for controlled substances told Walmart pharmacists that
Walmart prioritized profits over compliance. Compl. ¶ 27.
• A Walmart employee from the Health and Wellness Division testified in the Opioid
MDL trial that Walmart did not provide enough funding to pursue anti-diversion
initiatives. Id. ¶ 253–254.
• Walmart engaged in substantial efforts to drive prescription opioid traffic to its
pharmacies through trial offers, savings cards, e-coupons, and loyalty programs for
opioids. Id. ¶¶ 115–119.
85
• Walmart created incentives for pharmacists to fill more prescriptions, including
opioid prescriptions, while limiting the amount of time in which a pharmacist was
expected to fill a prescription. Id. ¶¶ 119–120.
• Walmart delayed implementing a computer system that could help pharmacists
identify red flags until 2015, then denied pharmacists access to the data in the
system. Id. ¶¶ 25, 253, 255.
To be sure, none of these documents creates a direct connection to Walton or the Board,
and there is no smoking gun at this stage of the case. Instead, the other documents in the
pleading-stage record help explain why the directors consciously accepted Walmart’s
noncompliance with the DEA Settlement.
Walton was the Chairman during the term of DEA Settlement, a member of the
Executive Committee, and a representative of the Walton family. It is reasonable to infer
that he understood the course that Walmart was taking and approved the failure to comply
with the DEA Settlement. It is reasonable to infer that he consciously accepted and
approved Walmart’s noncompliance with its obligations under the DEA Settlement.
Whether framed as a Red-Flags Claim or a Massey Claim, Walton faces a
substantial risk of liability for acting in bad faith on the DEA Settlement Issues. He is not
capable of considering a demand to assert those claims.
b. Gregory Penner
Gregory Penner is Walton’s son-in-law. After marrying into the Walton family in
2006, he took on increasing responsibilities at Walmart. He joined the Board in 2008, held
a number of senior roles at Walmart from 2008 to 2014, and served as the Board’s Vice
Chairman from June 2014 to June 2015. Penner was thus a senior officer at Walmart during
86
the term of the DEA Settlement, and he served as Vice Chairman for the last nine months
of the DEA Settlement. Like the position of Chairman, the position of Vice Chairman is an
executive officer role. In June 2015, Penner succeeded Walton as Chairman, becoming the
first Chairman who is not part of the Walton family by blood. Compl. ¶ 46.
The allegations about Penner largely parallel the allegations against Walton. Penner
was on the Board for the same meetings and received the same information. The same
conclusion applies regarding his substantial risk of liability for the DEA Settlement Issues.
A reasonable doubt exists regarding his ability to consider a demand relating to those
issues.
Penner is also not disinterested regarding the DEA Settlement Issues because of his
family connections to Walton. “The existence of a very close family relationship between
directors should, without more, generally go a long (if not the whole) way toward creating
a reasonable doubt.”62 “While there is nothing wrong with family members serving
together on a board, . . . a ‘reasonable doubt’ is raised when a demand would require a
director to support a suit contrary to the interests of a close family member.” Mizel, 1999
WL 550369, at *4. Delaware precedents have treated similar degrees of familial
relationships between a director and a defendant who faces a substantial risk of liability as
62
Mizel v. Connelly, 1999 WL 550369, at *4 (Del. Ch. July 22, 1999) (Strine, V.C.);
Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 889 (Del. Ch.1999) (Strine, V.C.) (“Close
familial relationships between directors can create a reasonable doubt as to impartiality.”);
Grimes, 673 A.2d at 1216–17 (noting that a “familial interest” can disable a director).
87
sufficient to render the director unable to consider a demand.63 For that additional reason,
a reasonable doubt exists about Penner’s ability to consider a demand regarding the DEA
Settlement Issues.
c. Steuart Walton
Steuart Walton64 has been a director since June 2016. He is Sam Walton’s grandson,
Robson’s nephew, and Penner’s cousin-in-law. The complaint does not plead
particularized facts that could support Steuart facing a substantial likelihood of liability for
the DEA Settlement Issues, but his familial relationships with Robson and Penner raise a
reasonable doubt as to his independence.
63
See In re Cooper Co., Inc. S’holders Deriv. Litig., 2000 WL 1664167, at *6 (Del.
Ch. Oct. 31, 2000) (“The Complaint alleges that director Feghali was interested and/or
lacked independence because he was Steven Singer’s father in law. That family
relationship is sufficient to create a reason to doubt Mr. Feghali’s ability to impartially
consider a demand.”); Grace Bros., Ltd. v. UniHolding Corp., 2000 WL 982401, at *10
(Del. Ch. July 12, 2000) (Strine, V.C.) (finding reasonable doubt about whether a director
impartially could consider a demand adverse to the interests of his brother-in-law); Harbor
Fin., 751 A.2d at 889 (granting inference at pleading stage that reasonable doubt existed
as to director’s ability to consider a litigation demand impartially when the proposed
defendant was his brother-in-law). See generally Chaffin v. GNI Gp., Inc., 1999 WL
721569, at *5 (Del. Ch. Sept. 3, 1999) (“[M]ost parents would find it highly difficult, if not
impossible, to maintain a completely neutral, disinterested position on an issue, where his
or her own child would benefit substantially if the parent decides the issue a certain way”).
64
To avoid confusion with Robson Walton, this decision refers to Steuart by his
first name, without implying familiarity or disrespect.
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d. Doug McMillon
Doug McMillon has worked for Walmart since 1990. He was named Walmart’s next
CEO in November 2013, when he also became a member of the Board. He took over as
CEO on February 1, 2014. After becoming CEO, he joined the Executive Committee.
McMillon was thus a senior officer and later CEO during the term of the DEA Settlement.
He was a member of the Employee Compliance Committee and frequently attended Audit
Committee meetings, including at least five when senior management reported on Health
and Wellness compliance.65
It is reasonable to infer that McMillon knew about the DEA Settlement. It is also
reasonable to infer that McMillon learned about Walmart’s compliance issues during the
February 2012 Audit Committee meeting, which he attended. Ex. 7. He also attended the
Employee Compliance Committee meeting in November 2012, where Harris provided an
update on Health and Wellness Compliance projects. Ex. 11 at 2. He attended the two-day
September 2013 Board meeting when the Chairman of the Audit Committee reported on
the state of compliance efforts, and he received the May 2014 Audit Committee report that
showed Walmart was (i) facing ongoing diversion issues, (ii) had experienced a year-over-
year increase in incidents of 114%, and (iii) had over one-fourth of its visits from state and
federal regulators result in violations. Ex. 49 at 8–9, 10, 64. He was also a director when
65
Ex. 7 at ’095; Ex. 43 at ’511; Ex. 45 at ’203–04; Ex. 48 at ’117; Ex. 52 at ’181–
82.
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the June 2014 assessment acknowledged there was no suspicious order monitoring system
in place and that the Board had been informed. See Ex. D at 4.
For these reasons, McMillon faces a substantial threat of liability on the DEA
Settlement Issues and cannot consider a demand. It is also reasonable to infer that
McMillon is beholden to the Walton family, because the Walton family controls Walmart,
and McMillon’s position as CEO depends on pleasing the Walton family. The complaint
alleges that McMillon is a “tried-and-true company man.” Compl. ¶¶ 4, 70. He has been
well-compensated for his service, having made over $150 million as a Walmart executive.
Id. ¶ 70. Because of his loyalty to the Walton family and his position as CEO, there is
reason to doubt whether McMillon could consider a demand to assert claims over the DEA
Settlement Issues because of the risk they pose to Walton and Penner.
e. Steven Reinemund
Steven Reinemund joined the Board in 2010 and retired from the Board effective
June 1, 2022. He served on the Strategic Planning and Finance Committee from 2014 to
2017. Unlike the directors considered up to this point, who were either members of the
Walton family, insiders, or both, Reinemund was an outside director.
Reinemund served on the Board during the full term of the DEA Settlement. He is
thus similarly situated to Walton and Penner in terms of his knowledge about Walmart’s
degree of compliance with the DEA Settlement. Although he was an outside director and
was not a member of the Audit Committee, he otherwise received the same information,
made the same decisions, and failed to act in the same manner. He therefore also faces a
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substantial risk of liability, and there is reason to doubt whether Reinemund could consider
a demand.
The court reaches this conclusion reluctantly, because Reinemund is a person of
stature who has had an impressive career. He graduated from the United States Naval
Academy and served in the Marine Corps, rising to the rank of Captain. After leaving the
military, Reinemund enjoyed success in the business world, culminating in the position of
Chairman and CEO of PepsiCo from 2001 to 2003. From 2008 to 2014, he served as Dean
of the Wake Forest University Business School. In addition to serving as a director at
Walmart, he has served on the boards of other major public companies.
Why would an outside director like Reinemund ignore red flags about
noncompliance with the DEA Settlement, much less make a conscious decision not to
achieve compliance with the DEA Settlement? The answers likely lie in the redacted
portions of the documents in Walmart’s Section 220 production.
It would not be a stretch to think that the Board received legal advice along the
following lines: “The Controlled Substances Act requires substantial compliance, not strict
compliance, so the DEA is likely to require only substantial compliance with the DEA
Settlement. Walmart has taken some steps to comply with the DEA Settlement and the
Controlled Substances Act and has made progress toward compliance. Although the
company is not in full compliance and will not achieve full compliance before the DEA
Settlement expires, counsel is of the opinion that Walmart has achieved substantial
compliance.” If Reinemund relied on that type of advice in getting comfortable with
91
Walmart’s failure to achieve full compliance with the DEA Settlement, then he could be
fully protected under Sections 141(e) of the Delaware General Corporation Law. 8 Del. C.
§ 141(e). To my knowledge, no Delaware decision has addressed reliance on the advice of
counsel in the context of an oversight claim, but it seems logical that directors would be
fully protected in relying on advice of that sort, absent some blatant and obvious flaw in
the advice that would undercut good faith reliance. Cf. Boardwalk Pipeline P’rs, LP v.
Bandera Master Fund LP, 288 A.3d 1083 (Del. 2022).
At this stage of the case, it is also possible that counsel may have advised the
directors that Walmart had not achieved substantial compliance with the DEA Settlement,
or that the DEA would require a higher level of compliance, but that the risk of a DEA
enforcement action was low. The record shows that both during and after a meeting in
November 2014 to discuss the DEA Settlement, the directors made no business decisions
and took no action. If the directors consciously decided not to cause Walmart to comply
with its legal obligations based on that advice, then they consciously chose a path of
noncompliance and acted in bad faith.
Because of Walmart’s redactions, the record that might vindicate Reinemund and
his fellow directors does not yet exist. The court must draw the plaintiff-friendly inference
that Reinemund and his colleagues knew that Walmart was not in compliance with the
DEA Settlement, knew that Walmart could not achieve compliance by the time the DEA
Settlement terminated, and consciously did nothing to bring Walmart into compliance.
Those facts support a claim that Reinemund acted in bad faith. The court is therefore
92
compelled to conclude that a reasonable doubt exists about Reinemund’s ability to consider
a demand based on the DEA Settlement Issues.
f. Timothy Flynn
Timothy Flynn became a director and a member of the Audit Committee in July
2012. He became Chairman of the Audit Committee in June 2014. Flynn served on the
Board during the bulk of the term of the DEA Settlement, including the period when
Walmart’s noncompliance became clear.
Flynn is situated similarly to Reinemund. The only difference is that Flynn joined
the Board and the Audit Committee after the 2012 Memo, the Audit Committee meeting
where it was discussed, and the Board meeting where the Audit Committee reported on
those matters. Otherwise, he and Reinemund received the same information, made the same
decisions, and failed to act in similar ways.
Flynn is like Reinemund in another way too. He has had a distinguished career as
an accountant and business leader, including serving as CEO of KPMG LLP in the U.S.
from 2005 to 2008, and as Charmain of KPMG International from 2007 until 2011. In
addition to his service on the Board, Flynn has served as a member of the boards of other
major public companies and significant institutions.
As with Reinemund, it is hard to believe that an outside director like Flynn would
ignore red flags about noncompliance with the DEA Settlement, much less make a decision
not to comply with it. Once again, the answers likely lie in the redacted portions of the
documents in Walmart’s Section 220 production. Unfortunately, because of Walmart’s
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compulsive redacting of documents, the pleading-stage record supports an inference that
Flynn knew that Walmart was not in compliance with the DEA Settlement, knew that
Walmart could not achieve compliance by the time the DEA Settlement terminated, and
did nothing to bring the company into compliance. The court is therefore compelled to
conclude that a reasonable doubt exists about Flynn’s ability to consider a demand based
on the DEA Settlement Issues.
2. The Conclusion Regarding Demand Futility
The pleading-stage record supports an inference that the foregoing directors could
not consider a demand. The strongest precedent for a contrary outcome is Horman v.
Abney.66 There, the New York Attorney General launched an investigation into deliveries
of unstamped and untaxed cigarettes by United Parcel Services, Inc. (“UPS”). To resolve
the investigation, UPS entered into an Assurance of Discontinuance Agreement (the “UPS
Agreement”) that placed affirmative obligations on UPS to set up policies, programs, and
procedures to ensure compliance with New York state law. These measures included
“investigating shippers, creating a database of tobacco shippers and sharing that list with
the State of New York, auditing the shippers, refusing to ship untaxed cigarettes and
imposing progressive discipline against non-compliant shipping customers up to and
including a ban on those customers from using any UPS service.”67 UPS also agreed to
66
2017 WL 242571 (Del. Ch. Jan. 19, 2017).
67
Id. at *3.
94
conduct compliance audits, maintain associated records, implement a “UPS Cigarette
Policy,” and regularly train its employees on how to ensure enforcement of the policy.68
One year into the agreement, a UPS compliance officer told the UPS board of directors
(the “UPS Board”) that UPS had achieved compliance. Years later, the City and State of
New York filed suit against UPS in federal court, alleging that UPS had violated the UPS
Agreement and state and federal law. The enforcement action sought damages of at least
$180 million.69
Stockholders of UPS filed a derivative lawsuit that sought to hold the UPS Board
liable for breaching their fiduciary duty of loyalty by consciously failing to monitor and
manage UPS’s compliance with state and federal laws governing the transportation and
delivery of cigarettes. Vice Chancellor Slights dismissed the claim under Rule 23.1.
Because Horman involved an agreement that bears a resemblance to the DEA
Settlement, the dismissal in Horman is a natural precedent for the defendants. The facts of
Horman, however, are distinguishable in multiple ways.
First, the plaintiffs in Horman argued that after initially achieving compliance with
the UPS Agreement, the UPS Board began to “ignore their oversight responsibilities” to a
degree that caused UPS to “operate in violation of the [UPS Agreement] and applicable
68
Id.
69
Id. at *5.
95
state and federal laws governing the shipment of cigarettes.”70 In this case, there was no
initial period of compliance. Walmart never achieved compliance. Instead, compliance
personnel reported to the Board that Walmart was failing to achieve compliance.
Second, the plaintiffs in Horman argued that documents produced in response to
their Section 220 demand “reveal an absence of any Board minutes or other Board
materials relating to the monitoring of compliance with the [UPS Agreement] from January
1, 2010 to February 12, 2014,” and they sought an inference that the defendants “did
absolutely nothing to oversee UPS’s compliance with the [UPS Agreement] or cigarette
laws in any way.”71 In this case, the pleading-stage record shows reports to the Audit
Committee and the Board. The question is not whether the Walmart directors engaged in
monitoring, but rather whether the directors were put on notice of Walmart’s
noncompliance with the DEA Settlement. The pleading-stage record supports that
inference.
Third, the plaintiffs in Horman argued that the UPS Board should have engaged in
greater monitoring because of the UPS Agreement. Vice Chancellor Slights held that the
UPS Board made a good faith effort to engage in monitoring.72 Again, the issue in this case
70
Id. at *4.
71
Id. at *8.
72
Id. at *9-10.
96
is not whether the Board engaged in monitoring, but rather whether they ignored red flags
or consciously allowed Walmart to violate the law.
Fourth, in Horman, Vice Chancellor Slights held that allegations of the complaint
did not support an inference that the directors had ignored red flags. The plaintiffs cited the
UPS Agreement and three documents that went to the Audit Committee. The Vice
Chancellor declined to view the UPS Agreement as a red flag because UPS initially
achieved compliance. At the same time, he acknowledged that
[t]here might well be a reasonably conceivable scenario where the [UPS
Agreement] itself could have taken the form of a red flag. For instance, if
UPS had entered the [UPS Agreement] in 2005 and then continued a pattern
of non-compliant shipments immediately thereafter and through 2014, one
might reasonably infer that the Board had consciously disregarded UPS’s
commitments under the [UPS Agreement] and its own oversight
responsibilities.73
That is precisely what the pleading-stage record indicates happened in this case.
Turning to the reports to the Audit Committee, Vice Chancellor Slights declined to
draw an inference that the materials addressed instances of noncompliance or that the chair
of the Audit Committee informed the board about those instances.74 Citing a case from the
U.S. Court of Appeals for the Eighth Circuit, he observed that Delaware courts decline to
infer that directors must have known about an issue because someone was supposed to
73
Id. at *11.
74
Id. at *12-13.
97
report to them about it.75 Whether the pled facts support an inference that information was
provided depends on the case. The Delaware Court of Chancery has declined to presume
that officers or directors necessarily provide information to other directors, but that is not
a universally applicable rule.76 One Delaware decision has drawn an inference that a subset
of directors shared information with other directors,77 and the Delaware Supreme Court
has acknowledged that a plaintiff may establish an inference of director knowledge “by
establishing that certain . . . officers were in a reporting relationship to [the] directors, that
those officers did in fact report to specific directors, and that those officers received key
information regarding the [matter at issue].”78 In this case, the pleading-stage record
supports an inference that information flowed from management to the Audit Committee
and Executive Committee and from there to the full Board.
Finally, Vice Chancellor Slights declined to infer that the directors in Horman
consciously approved legal noncompliance by UPS in the pursuit of greater profit. The
court declined to credit that inference given the magnitude of the total deliveries that UPS
made relative to the number of illegal delivers: “UPS makes more than 18.3 million
75
Id. at *13 (citing Cottrell v. Dukes, 829 F.3d 983, 988 (8th Cir. 2016)).
76
See Desimone, 924 A.2d at 943.
77
Saito v. McCall, 2004 WL 3029876, at *7 n.68 (Del. Ch. Dec. 20, 2004),
overruled on other grounds by Lambrecht v. O’Neal, 3 A.3d 277 (Del. 2010)
78
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Tr. Fund IBEW, 95 A.3d
1264, 1273 (Del. 2014) (cleaned up).
98
package deliveries per day. The Complaint alleges that UPS made approximately 78,000
shipments of illegal cigarettes between 2010 and 2014. This is hardly a ratio that alone
would support an inference of bad faith.”79
This case is different. The pleading-stage record supports the existence of a
business plan to drive prescription traffic to Walmart’s pharmacies as a means of increasing
pharmacy revenue and getting customers into its stores. The record also supports an
inference that Walmart incentivized pharmacists to fill prescriptions quickly, set unrealistic
goals for the time to fill each prescription, and deprived pharmacists of information that
they could use to fulfill their Refusal-To-Fill Obligation. During the same period, Walmart
underfunded its efforts to comply with the DEA Settlement. The extent of the pleading-
stage record on this subject and the involvement of the directors supports an inference that
they knew Walmart was sacrificing compliance for profits.
Horman was a very different case. It does not help the defendants here.
Walton, Penner, Steuart, McMillon, Reinemund, and Flynn comprise half of the
Demand Board. They could not consider a demand. This decision therefore need not
consider whether Marissa Mayer or Thomas Horton could consider a demand. Demand is
futile as to claims based on the DEA Settlement Issues
79
Horman, 2017 WL 242571, at *14
99
C. The Pharmacy Issues
The next category of alleged wrongdoing involves the Pharmacy Issues, where the
timeframe starts after the DEA Settlement expired in March 2015. Although the court has
separated the DEA Settlement Issues from the Pharmacy Issues, that does not mean that
the analysis of the Pharmacy Issues starts from a clean state. The day that the DEA
Settlement expired did not result in Walmart suddenly being in compliance with the
Controlled Substances Act. Instead, the red flags of noncompliance remained unfurled.
Walmart was still seeking to drive prescription traffic to its pharmacies to generate sales
and get customers into its stores, and Walmart was still not interested in undermining that
business plan by making significant investments in compliance. Taken as a whole, the
allegations of the complaint support an inference that the directors consciously continued
Walmart’s business practice of failing to comply with the Controlled Substances Act until
the Nationwide Settlement in 2022.
1. Director-by-Director Analysis
To render demand futile for the Pharmacy Issues, the plaintiffs must tie the arc of
Walmart’s noncompliance to a sufficient number of directors to deprive the Demand Board
of a disinterested, independent majority. Conducting that inquiry again requires a director-
by-director analysis.
a. McMillon
For the Pharmacy Issues, the demand futility analysis begins with McMillon,
because he became Walmart’s CEO in February 2014 and led the company throughout the
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relevant period. He was a member of the Employee Compliance Committee and regularly
attended their meetings, where compliance issues were discussed. He also frequently
attended Audit Committee meetings. It is reasonable to infer that as CEO, McMillon was
responsible for the business strategy of increasing traffic at Walmart stores by incentivizing
and pressuring pharmacists to fill prescriptions quickly. It is also reasonable to infer that
as CEO, McMillon was responsible for the decision to sue the DOJ on the theory that
Walmart knew more about compliance than its regulator.
Based on the allegations of the complaint as a whole, it is reasonable to infer that
McMillon knew that after the DEA Settlement term expired, Walmart continued its
noncompliance with its obligations as a dispenser under the Controlled Substances Act.
That said, the first event to take place after the DEA Settlement term expired is helpful to
McMillon and the defendants. At meetings in February 2015, approximately one year after
the DEA Settlement expired, the Audit Committee and the Board reviewed Walmart’s
compliance objectives for fiscal year 2016 and approved an effort to enhance its suspicious
order monitoring system. Management’s proposal suggested an effort to comply with one
aspect of the Controlled Substances Act.
But then came the barrage of lawsuits in 2016 and 2017 and the news in December
2016 that the U.S. Attorney’s Office for the Eastern District of Texas was conducting a
criminal investigation into Walmart’s pharmacies. In November 2017, management
reported to the Audit Committee and the Board about compliance problems in the Health
and Wellness Division. Viewed collectively and evaluated at the pleading stage, those
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events negate the positive impact of the decisions made in February 2015 and support an
inference that Walmart was still not complying with its legal obligations.
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). When
considering an avalanche of lawsuits against another defendant in the Opioid MDL, this
court held that the lawsuits “put the directors on notice of problems at the Company. The
directors did not just see red flags; they were wrapped in them.” Collis Demand Decision,
2022 WL 17841215, at *16. The same reasoning applies here.
It is reasonable to infer that McMillon and the other directors knew about the red
flags from the avalanche of lawsuits. Not only that, but McMillon attended an Audit
Committee meeting on November 2, 2017 when Jorgensen and other executives reported
on Health and Wellness compliance issues. Ex. 60 at 4. McMillon also attended the Board
meeting the next day, when Flynn as Chair of the Audit Committee reported to the full
Board. Ex. 61 at 15–16.
The next question is whether McMillon and his fellow directors consciously
disregarded their obligations to respond to the red flags. Here again, McMillon and his
fellow directors were not completely inactive, because the directors scheduled an education
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session about the opioid crisis for December 2017. But that event is ultimately not helpful
to McMillon and the directors at this stage, because Walmart withheld or redacted
everything about the director education session. Walmart’s withholding of those
documents constitutes a representation that after a briefing on the opioid crisis, the directors
did not consider a single business issue, engage in any business discussions, or make any
business decisions.
After that, there is no indication that the directors took any action to address
compliance issues at its pharmacies until May 2018, when the U.S. Attorney’s Office for
the Eastern District of Texas threatened to criminally indict Walmart for its role in the
opioid crisis. As CEO, McMillon necessarily knew about that threat, and it is reasonable
to infer that McMillon led the response.
From a compliance standpoint, Walmart amended its pharmacy operating manual.
Rewriting procedures and creating new documents is relatively easy. That was what
Walmart did in response to the Order To Show Cause in 2009, and it’s what Walmart did
again in response to the indictment threat. The new manual detailed a number of prescriber
and patient red flags for pharmacists to consider. Walmart also issued a press release in
which the company promised that within the next sixty days, it would restrict initial acute
opioid prescriptions to no more than a seven-day supply. Ex. H. Walmart could have taken
that step years before, in 2014, when the Audit Committee saw the photograph showing a
Walmart pharmacy with scores of patrons waiting in line at 7:00 a.m., two hours before the
pharmacy opened, to fill their prescriptions for Oxycodone. Rather than suggesting that the
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Walmart directors were responding appropriately to a massive red flag, the belated action
reinforces the inference that Walmart’s directors and officers had not been engaging in
good faith efforts to comply with the law.
Further supporting that inference, Walmart only took another incremental step
toward compliance in July 2018, after failing to negotiate a settlement with the U.S.
Attorney’s Office. At that point, the Board adopted a policy under which pharmacists could
access the refusal-to-fill information in Walmart’s pharmacy management system.
Walmart could have given the pharmacists access when it implemented the Archer system
in 2015, but that would have resulted in pharmacists using the data and taking more time
to fill prescriptions. They also likely would have rejected some prescriptions based on the
information they saw. That was not good for Walmart’s bottom line. Walmart wanted
pharmacists filling prescriptions quickly. The belated granting of access to that information
further reinforces the inference that Walmart’s directors and officers had not been engaging
in good faith efforts at compliance.
Walmart’s most effective strategy was to contact its friends in Washington and
convince the bigwigs at the DOJ to quash the indictment. It is reasonable to infer that one
of the reasons that the DOJ quashed the indictment was Walmart’s agreement to have a
former DOJ Associate Attorney General, whom Walmart had hired as its Executive Vice
President of Global Governance, conduct an internal investigation. See Ex. 71. It is
reasonable to infer that McMillon signed off on the hiring of the new Executive Vice
President and the plan to conduct an internal investigation. It is reasonable to infer that
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McMillon monitored the progress of the investigation, because he attended Audit
Committee meetings in April, May, and July 2018 where the committee received reports
on that topic. McMillon also attended the full Board meeting in November 2019 where the
directors received a final report. See Exs. 71–74.
In the abstract, having a distinguished former prosecutor conduct an internal
investigation is a good thing. But at this stage of the case, the court cannot draw any
inferences from that effort, because Walmart redacted or withheld everything about the
investigations based on the attorney-client privilege or work product doctrine. Because
Walmart withheld everything, the court must infer that the investigation did not result in
any business decisions by McMillon or his fellow Walmart directors or any changes in
Walmart’s business practices. The plaintiffs are entitled to an inference that Walmart
continued engaging in the noncompliant practices that had led to the thousands of suits that
were consolidated in the Opioid MDL and that had caused the U.S. Attorney for the Eastern
District of Texas to threaten to criminally indict the company.
In October 2020, Walmart sued the DOJ. That was a major move that McMillon
necessarily approved. At this stage of the proceedings, it is reasonable to infer that the
decision to sue the DOJ was an effort to deflect attention away from Walmart’s own
violations of the Controlled Substances Act. In that lawsuit, Walmart sought declarations
validating the practices it had followed and rulings in its favor on many issues that Walmart
had lost in the Opioid MDL. Like the defendants in Massey, Walmart was claiming that it
knew more about compliance than its regulators. Massey, 2011 WL 2176479, at *21.
105
Jury findings rendered in 2021 in the Opioid MDL provide further support for the
inference that, under McMillon’s leadership, Walmart did not change its policies and
continued violating the law. In a recent decision, this court considered findings of fact made
by a federal court when evaluating the strength of a plaintiffs’ allegations regarding illegal
conduct. See Collis Demand Decision, 2022 WL 17841215, at *3. There, the plaintiffs had
alleged facts that would have supported a Red-Flags Claim and a Massey Claim against the
directors of an opioid distributor, except for post-trial factual findings by the U.S. District
Court for the Southern District of West Virginia. After a two-month trial, during which
seventy witnesses testified either live or by deposition, that court held that the distributor
had not violated their anti-diversion obligations. In light of those findings, the plaintiffs’
allegations could not support a reasonable inference of noncompliance. Id. at *17, 19.
For Walmart, the situation is reversed. In November 2021, a jury in the bellwether
case of the Opioid MDL found that Walmart engaged in “improper dispensing conduct” as
“evidenced by [its] systemic failures to investigate and resolve red-flag prescriptions”;
“dispensed massive quantities of red-flagged prescriptions without taking adequate
measures to investigate or otherwise ensure the prescriptions were appropriately
dispensed”; and “dispensed opioids without having in place effective controls and
procedures to guard against diversion—controls and procedures they knew were required
and knew they had not adequately employed.” Opioid MDL Abatement Decision, 2022 WL
3443614 at *4, *30, *32.
106
In denying Walmart’s motion for judgment as a matter of law notwithstanding the
verdict, the federal judge presiding over the Opioid MDL found that “Walmart knew it was
required to resolve red flags before dispensing opioids,” and “[d]espite this knowledge,
there was evidence that Walmart knew it did not have sufficient policies in place to ensure
compliance.” In re Nat’l Prescription Opiate Litig. (Opioid MDL JNOV Ruling), 589 F.
Supp. 3d 790, 804 (N.D. Ohio 2022). The judge determined that “a jury could reasonably
conclude that [Walmart] intentionally dispensed opioids under circumstances which it
knew or was substantially certain would interfere with public health or public safety.” Id.
at 806.
As part of the remedy against Walmart, the federal judge issued an injunction
requiring Walmart to adopt substantially compliant reforms to remediate deficient controls
and reporting systems under the Controlled Substances Act. Opioid MDL Abatement
Decision, 2022 WL 3443614, at *32. The court explained that “[t]he evidence at trial”
showed that Walmart “failed at these tasks of resolution / documentation / rejection of
suspicious prescriptions,” and he entered an injunction requiring that Walmart carry out
those tasks. Id. at *37. It is reasonable to infer from the court’s order that Walmart’s
controls and reporting systems were not in compliance with the Controlled Substances Act.
And that is not all. In November 2022, Walmart agreed to implement extensive
procedures and controls as part of the Nationwide Settlement. Although Walmart denied
any liability, it is reasonable to infer that before the Nationwide Settlement, similar
procedures were not in place, because otherwise the changes could not have been part of
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the consideration for the settlement. It is also reasonable to infer that Walmart did not fix
its compliance problems until it entered into the Nationwide Settlement, which provided
its directors and officers with a broad release.
McMillon was at the helm throughout this period. It is reasonable to infer that he
faces a substantial threat of liability on the Pharmacy Issues and therefore cannot consider
a demand.
b. Walton
The next director is Walton, who served as Chairman of the Board until June 2015,
when Penner succeeded him. He remained a director after giving up the chairmanship. He
was thus a director throughout the relevant period for the Pharmacy Issues.
Walton was a director during the onslaught of lawsuits in 2016 and 2017. He was a
director in December 2016, when Walmart learned that the U.S. Attorney’s Office for the
Eastern District of Texas was conducting a criminal investigation into Walmart’s
pharmacies. He was present at the Board meeting in November 2017 when the Audit
Committee reported on the compliance issues associated with the Opioid MDL, and he
attended the director education session in December 2017. That was the meeting when the
directors learned about the opioid crisis and yet engaged in no non-privileged discussions
of business issues and made no non-privileged business decisions. The plaintiffs are
entitled to a pleading-stage inference that in the face of powerful evidence of
noncompliance, Walton and his fellow directors did nothing.
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Walton was a director in 2018 when the U.S. Attorney for the Eastern District of
Texas threatened to criminally indict Walmart. He was a director when Walmart crafted its
response. He was also a director when Walmart sued the DOJ, evidencing a belief that it
knew more about compliance than its regulators.
Walton was a director in 2021 when the jury in the Opioid MDL ruled against
Walmart. And he was a director in 2022 when the federal judge issued an injunction against
Walmart. He was also a director when Walmart entered into the Nationwide Settlement.
Based on the events that took place between 2016 and 2022, it is reasonable to infer
that Walton faces a substantial risk of personal liability for having acted in bad faith. During
that period, Walton was presented with extensive evidence that Walmart was failing to
comply with its legal obligations under the Controlled Substances Act, yet the pleading-
stage record supports an inference that he and the other directors did not take action to fix
Walmart’s compliance problems until Walmart entered into the Nationwide Settlement that
provided its directors and officers with a release.
c. Penner
Penner was a director throughout the period covered by the Pharmacy Issues. He
succeeded Walton as Chairman in 2015, and he joined the Executive Committee in 2016.
All of the reasons that Walton faces a substantial likelihood of liability apply equally to
Penner. In addition, as with the DEA Settlement Issues, Penner is not disinterested
regarding the Pharmacy Issues because of his familial connections to Walton.
109
d. Steuart
Steuart became a director in 2016, early in the period covered by the Pharmacy
Issues, at a time when Walmart faced the deluge of lawsuits that became the Opioid MDL,
and shortly before Walmart learned that the U.S. Attorney’s Office for the Eastern District
of Texas was conducting a criminal investigation into its pharmacies. All of the reasons
why Walton and Penner face a substantial likelihood of liability apply equally to Steuart.
As with the DEA Settlement Issues, Steuart also is not disinterested regarding the
Pharmacy Issues because of his familial connections to Walton and Penner.
e. Flynn
Flynn was a director and Chair of the Audit Committee throughout the period
covered by the Pharmacy Issues. All of the reasons that Walton, Penner, and Steuart face
a substantial likelihood of liability apply equally to Flynn. In addition, as Chair of the Audit
Committee, Flynn was more deeply involved in the compliance issues that management
identified in November 2017 and the internal investigation that Walmart conducted in 2018
and 2019. Walmart redacted or withheld everything about the investigations on the basis
of the attorney-client privilege and the work product doctrine, so the court must infer that
the investigation did not result in any business decisions by Flynn or other Walmart
directors and no changes in Walmart’s business practices.
For Flynn, the Pharmacy Issues create the same conundrum as the DEA Settlement
Issues, because it is again hard to believe that an outside director like Flynn would ignore
red flags about noncompliance with the Controlled Substances Act or endorse conscious
110
noncompliance. As before, the answers likely lie in the redacted portions of the documents
in Walmart’s Section 220 production. Unfortunately, because of Walmart’s redaction
practices, the pleading-stage record supports an inference that Flynn knew that Walmart
was not in compliance with the Controlled Substances Act and did not make a good faith
effort to bring the company into compliance until the Nationwide Settlement. The court is
therefore compelled to conclude that a reasonable doubt exists about Flynn’s ability to
consider a demand based on the Pharmacy Issues.
f. Thomas Horton
For purposes of the DEA Settlement issues, this decision did not consider Horton.
In lieu of considering whether Reinemund could consider a demand to assert claims over
the Pharmacy Issues, this decision examines Horton, because he was both a director and
member of the Audit Committee throughout the relevant period.
Like Reinemund and Flynn, Horton is a distinguished individual who has achieved
great success in business. From 2011 to 2013, Horton served as Chairman, President, and
CEO of American Airlines, Inc. and its parent corporation, AMR Corp. From 2013 to 2014,
Horton served as Chairman and CEO of American Airlines Group, Inc., which became the
world’s largest airline as a result of the merger of AMR and US Airways.
Because of his term of service and membership on the Audit Committee, all of the
reasons why Flynn faces a substantial likelihood of liability apply equally to Horton. The
same caveats about Horton ignoring red flags and consciously condoning violations of law
also apply. Nevertheless, given the pleading-sage record, the court must draw an inference
111
that there is reason to doubt Horton’s ability to consider a demand because of a substantial
threat of liability on the Pharmacy Issues.
2. The Conclusion Regarding Demand Futility
McMillon, Walton, Penner, Steuart, Flynn, and Horton comprise half of the Demand
Board, rendering demand futile as to the Pharmacy Issues. This decision does not consider
whether Mayer or Reinemund could consider a demand regarding the Pharmacy Issues.
D. The Distributor Issues
The final category of alleged wrongdoing involves the Distributor Issues. This
category of alleged wrongdoing predated the DEA Settlement, then continued until April
2018, when Walmart completed its exit from the business. Walmart’s obligations as a
distributor were not affected by the DEA Settlement, which only addressed Walmart’s
duties as a dispenser.
The complaint supports an inference that Walmart failed to comply with its
obligations as a distributor, including by chronically violating both the Reporting
Requirement and the Shipping Requirement. According to the complaint:
• Before November 2010, Walmart had no written policies or procedures in place to
govern monitoring for suspicious orders in its distribution business. Walmart relied
on untrained employees, operating without any guidance, to bring orders to
management’s attention if something did not seem right.
• Starting in November 2010, Walmart implemented a policy that contemplated
having employees at the Bentonville distribution center review a monthly report,
identify any orders for controlled substances that constituted more than 3.99% of a
single pharmacy’s total drug purchases during the prior month, and send the reports
to the appropriate Drug Diversion Coordinator. The November 2010 policy did not
identify other criteria that could render an order suspicious, and the Section 220
112
production is devoid of guidance about what the Drug Diversion Coordinator was
supposed to do.
• From 2011 until 2015, Walmart implemented a cutback system that flagged orders
that exceeded hard limits. Walmart shipped the orders up to the limits, then referred
the excess orders to another distributor to ship the balance.
• In 2014, a consulting firm proposed to modify the Reddwerks system that Walmart
was using so the tool could do more than just implement the hard limits. The
modifications would have cost $185,000. Walmart rejected the proposal.
Those allegations support an inference that Walmart violated its legal obligations.80
What the plaintiffs have failed to do is tie those allegations to the members of the
Demand Board. The complaint alleges that shortly after November 2010, when Walmart
implemented its initial policy about reviewing reports for orders that exceeded 3.99% of a
pharmacy’s total drug purchases during the prior month, management briefed the
Executive Committee and the Audit Committee on the policy. Compl. ¶ 141. The
complaint’s allegations do not support an inference that the directors knew that the policy
failed to comply with Walmart’s obligations as a distributor, nor that it would have
constituted a red flag that Walmart was violating the law.
Walmart’s use of the cutback system seems like a blatant violation of both the
Controlled Substances Act and Walmart’s own policy regarding suspicious orders. But the
80
Accord Opioid MDL SJ Decision, 2020 WL 425965, at *2 (“Walmart argues
Plaintiffs cannot show its opioid distributions substantially caused their alleged injuries. .
. . Plaintiffs have produced evidence upon which a jury could reasonably conclude
Walmart’s distribution activities caused Plaintiffs’ alleged injuries.”).
113
plaintiffs have not shown that any member of the Demand Board knew about the cutback
system.
The complaint also alleges that in February 2015, Walmart’s Global Chief
Compliance Offer informed the Audit Committee that Walmart was undertaking an
initiative to “implement controlled substance suspicious-order monitoring enhancements
(which include both software and personnel changes) in the U.S. distribution centers.” Ex.
51 at ’002. That information would have been reassuring for the directors. It would not
have suggested that Walmart was failing to comply with its obligations as a distributor, nor
constitute a red flag that Walmart was violating the law. Both the Audit Committee and the
Board signed off on the plan to move forward with the enhancements. See Compl. ¶¶ 228–
233.
The barrage of legal actions that Walmart faced during 2016 and 2017 included
claims based on its role as a distributor. As with the Pharmacy Issues, those lawsuits were
a crimson flag, but management responded. In November 2017, Walmart management
made the decision to stop acting as a distributor of prescription opioids and wound down
that business, with the exit completed in April 2018. The Audit Committee learned that
Walmart had exited from the business in September 2018.
It is reasonably conceivable that between the beginning of the onslaught of lawsuits
and September 2018, Walmart’s directors should have done something about the
distribution business. But the plaintiffs have not alleged particularized facts regarding what
the directors should have done or failed to do during this period. Not only that, but
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management began winding down the distribution business in November 2017. The
plaintiffs would have to explain what causally related harm resulted from the directors not
taking action before the management team did.
In a last-ditch effort, the plaintiffs argue that the decision to exit the opioid
distribution supports a reasonably conceivable inference that the Board “never attempted
to bring Walmart’s distribution operations into compliance with [the Controlled Substances
Act].” Compl. ¶ 269; see also id. ¶ 270 (“The fact that Walmart would rather pay for
distribution from third parties, rather than bring its distribution facilities into CSA
compliance, underscores how broken the status quo was (and had been for years).”). How
does that allegation translate into a claim? Walmart exited the business and ended its
noncompliance. That Walmart did so by paying for third-party distribution does not alter
the fact that Walmart took action to address its compliance failures. The plaintiffs have not
alleged that Walmart continued violating the Controlled Substances Act by using third-
party distributors. By exiting the business, the officers made a protected business judgment.
See, e.g., McDonald’s Directors, 2023 WL 2293575, at *17 (“When making those
decisions [about which risks to monitor], officers and directors are presumed to act loyally,
in good faith, and with due care (i.e., on an informed basis). Unless one of those
presumptions is rebutted, the decision is protected by the business judgment rule.”).
The plaintiffs thus have failed to allege facts supporting a claim regarding the
Distributor Issues that could result in a substantial risk of liability for any of the members
of the Demand Board. The plaintiffs have not pled facts that would support a Red-Flags
115
Claim or a Massey Claim. There might be the makings of an Information-Systems Claim,
but the plaintiffs would have to deal with the reports to the Board in November 2010 and
February 2015.
Perhaps the plaintiffs could have pled a viable Information-Systems Claim by
arguing that the defendants had an obligation to develop a board-level reporting system
with systematized procedures that reflected a good faith effort to bring to the Board’s
attention instances of illegality or criminality in the opioid distribution operation. Although
it is difficult to make an assessment based on the highly redacted documents in the
pleading-stage record, there are indications that Walmart’s compliance reports were less
focused on surfacing incidents of illegal or criminal conduct and more geared to providing
positive readouts about training programs, policies, and procedures, and other compliance
success stories.
Scholars have suggested that well-intended compliance programs can become
Panglossian protective devices, while the business leaders with P&L responsibility
relentlessly respond to key metrics, promotion criteria, compensation programs, and
corporate cultures that emphasize profits over compliance.81 Some scholars have argued
81
See, e.g., John Armour et al., Taking Compliance Seriously, 37 Yale J. on Reg. 1,
20–31 (2020) (modeling how stock-based pay gives managers incentives to underinvest in
compliance); Donald C. Langevoort, Caremark and Compliance: A Twenty-Year
Lookback, 90 Temp. L. Rev. 727, 739–40 (2018) (discussing why “[i]t is a difficult
managerial task to simultaneously drive profits and growth while preserving a strong sense
of compliance” given that “the former is directly rewarded via raises and promotions and
116
that to address this problem, the Delaware courts should make clear that oversight is not
exclusively about agency costs; instead, “the aspect of good faith that is focused on legal
compliance also, or perhaps primarily, serves a public purpose and legitimizing role for
corporate law.”82
Under that model, the key measure of an information system would be the extent to
which it brings actionable and timely information about illegality or criminality to the
attention of the board so that the directors can investigate and terminate misconduct and
provide information to enforcement officials.83 Delaware courts would not merely sign off
on the existence of an information system, but would look to whether the information
system reflected a good faith effort to achieve that goal. Having such a focus would provide
a unifying orientation for an Information-Systems Claim, just as the fiduciary goal of
maximizing the long-term value of the corporation for the ultimate benefit of its
stockholders provides a polestar when evaluating fiduciary decision-making.
the latter more through exhortations and soft praise”). See generally Donald C. Langevoort,
Selling Hope, Selling Risk 35–45 (2016) (discussing the causes of corporate fraud).
82
Elizabeth Pollman, Corporate Oversight and Disobedience, 72 Vand. L. Rev.
2013, 2027 n.73 (2019).
83
E.g., Principles of the Law, Compliance and Enforcement for Organizations
§ 5.18 (Am. L. Inst. 2021); Jennifer Arlen, Evolution of Director Oversight Duties and
Liability under Caremark: Using Enhanced Information-Acquisition Duties in the Public
Interest (Feb 2023); Jennifer Arlen, The Story of Allis-Chalmers, Caremark, and Stone at
326–27, 344, in Corporate Stories (2009).
117
While the policy rationale for that step makes sense, how to implement it is unclear,
because it would involve the court evaluating at least one dimension of the effectiveness
of a compliance program, rather than deferring to the directors’ business judgment. True,
the analysis of an Information-Systems Claim would be more targeted, because compliance
system components like policies and procedures, employee training, whistleblower
hotlines, and the like would have reduced significance for the fiduciary claim. They would
remain important to the overall health of the organization and for purposes of the
Organizational Sentencing Guidelines, but the focus of the Information-Systems Claim
would narrow to whether the system was designed to bring information about illegality and
criminality to the board’s attention. That inquiry could risk becoming a check-the-box
exercise, because if the board required management to provide regular reports and followed
through on receiving them, then that dimension of the oversight obligation would be
satisfied. But the proponents of the model view that as a feature, because once the
information reaches the board, the oversight rubric shifts to a Red-Flags Claim or a Massey
Claim with an attendant impetus for the directors to take remedial action. Driving adverse
information to the board-level thus becomes the mechanism for improved compliance. This
decision provides no opportunity to explore those issues.
The plaintiffs lack a comprehensible theory of how the Walmart directors acted in
bad faith regarding the Distributor Issues. It is therefore not necessary to conduct a director-
by-director analysis. Demand is not futile as to the Distributor Issues and the claims relating
to those issues are dismissed.
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E. The Officer Defendants’ Motion To Dismiss
The plaintiffs have sued Jorgensen and Harris, who served as compliance officers
during the actionable period. Both have moved to dismiss under Rules 23.1 and 12(b)(6).
For purposes of the Distributor Issues, Rule 23.1 is dispositive. Just as demand is not futile
for the directors, it is not futile for the officers. For purposes of the DEA Settlement Issues
and the Pharmacy Issues, the converse is true. Just as the Demand Board cannot consider
whether to assert claims based on those issues against the director defendants, they likewise
cannot consider whether to assert claims based on those issues against the officer
defendants, because if Walmart were to proceed against the officer defendants, then the
claims could implicate the directors themselves.
The Rule 12(b)(6) motion does not provide an independent basis for dismissal. The
officers argued that they did not owe oversight duties, but this court has resolved that issue
against them. See McDonald’s Officers, 289 A.3d at 378–79. The officer defendants were
Walmart’s principal compliance officers while the DEA Settlement was in effect and later
when Walmart was confronting the Pharmacy Issues. It is reasonably conceivable that they
failed to take the steps necessary to cause Walmart to comply with the DEA Settlement
and with the Controlled Substances Act and that they did not make a sufficient effort to
report to the Board regarding Walmart’s shortcomings. The complaint states facts
supporting claims against the Officer Defendants for both the DEA Settlement Issues and
the Pharmacy Issues.
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F. Next Steps
The defendants have asked for a stay of this case if the court does not dismiss it
entirely. The defendants want the case stayed pending the outcome of the DOJ Action.
This court has “inherent power to manage its own docket, including the power to
stay litigation on the basis of comity, efficiency, or simple common sense.”84 The request
for a stay is not based on a prior-filed action under McWane and its progeny. The argument
is rather that we should find out how the DOJ Action ends before this action proceeds. If
the DOJ Action results in further harm to Walmart, then this action could be a vehicle for
remedying it. And if the DOJ Action results in factual findings, those findings may be
persuasive and assist in simplifying the case. See Collis Demand Decision, 2022 WL
17841215, at *3 (treating federal court’s findings on related issues as persuasive).
A stay is not warranted. The DOJ Action is itself stayed pending the outcome of two
appeals to the Supreme Court of the United States. The plaintiffs can pursue their liability
theories independently of the DOJ Action. The outcome of the DOJ Action may affect the
quantum of damages, but it will not affect the parties’ ability to litigate the question of
liability.
84
Paolino v. Mace Sec. Int’l, Inc., 985 A.2d 392, 397 (Del. Ch. 2009); see Salzman
v. Canaan Cap. P’rs, 1996 WL 422341, at *5 (Del. Ch. July 23, 1996) (“To enable courts
to manage their dockets, courts possess the inherent power to stay proceedings.”); Phillips
Petroleum Co. v. ARCO Alaska, Inc., 1983 WL 20283, at *4 (Del. Ch. Aug. 3, 1983)
(granting stay in favor of pending arbitration based on “common sense”).
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To further facilitate the orderly progression of this case, the court will bifurcate the
issues of liability for breach of fiduciary duty from the issues of causally related damages.
The federal district court took the same approach in the Opioid MDL by holding a separate
trial on liability before fashioning remedies. Bifurcation will promote efficiency because
if there is no breach, then there will not be any need to reach the question of causally related
damages. This approach will also provide time for the DOJ Action to resume and proceed
to trial so that any harm that Walmart suffers as a result of the DOJ Action can be taken
into account during the remedial phase. If a stay of the case is warranted to allow the DOJ
Action to reach completion, then the case can be stayed after the issue of liability has been
determined.
III. CONCLUSION
The defendants’ motion to dismiss under Rule 23.1 is denied as to the DEA
Settlement Issues and the Pharmacy Issues. The motion is granted as to the Distributor
Issues. The officer defendants’ motion to dismiss is granted as to the Distributor Issues and
denied as to the DEA Settlement Issues and the Pharmacy Issues. The case will not be
stayed. Proceedings will be bifurcated, with the parties initially litigating the issue of
liability.
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