Bricklayers Pension Fund of Western Pennsylvania v. Cynthia J. Brinkley

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BRICKLAYERS PENSION FUND OF )
WESTERN PENNSYLVANIA, )
derivatively on behalf of CENTENE )
CORPORATION, )
)
Plaintiff, )
)
v. ) C.A. No. 2022-1118-MTZ
)
CYNTHIA J. BRINKLEY, JEFFREY )
A. SCHWANEKE, JESSE N. )
HUNTER, KENNETH A. BURDICK, )
BRANDY BURKHALTER, H. JAMES )
DALLAS, FREDERICK H. )
EPPINGER, RICHARD A. )
GEPHARDT, ORLANDO AYALA, )
JESSICA L. BLUME, LORI J. )
ROBINSON, and WILLIAM )
TRUBECK, )
)
Defendants, )
)
and )
)
CENTENE CORPORATION, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: November 17, 2023
Date Decided: July 12, 2024
Mark Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware;
Nathaniel L. Orenstein, Steven L. Groopman, BERMAN TABACCO, Boston,
Massachusetts, Attorneys for Plaintiff Bricklayers Pension Fund of Western
Pennsylvania.
Raymond J. DiCamillo, Kevin M. Gallagher, Spencer V. Crawford, RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; Glenn Kurtz, Andrew
Hammond, WHITE & CASE LLP, New York, New York, Attorneys for
Defendants Cynthia J. Brinkley, Jeffrey A. Schwaneke, Jesse N. Hunter, Kenneth
A. Burdick, Brandy Burkhalter, Frederick H. Eppinger, Richard A. Gephardt,
Orlando Ayala, Jessica L. Blume, Lori J. Robinson, and William Trubeck.
Paul J. Lockwood, Lauren N. Rosenello, SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP, Wilmington, Delaware, Attorneys for Nominal Defendant Centene
Corporation.
ZURN, Vice Chancellor.
Nominal defendant Centene Corporation is a healthcare company that
administers Medicaid plans. At all relevant times, state agencies paid Centene to
administer Medicaid plans in between twenty and thirty states. Most of Centene’s
revenue is paid under a reimbursement model keyed to Centene’s costs. As alleged,
in early 2018, a public backlash started brewing against a Medicaid pricing practice
known as spread pricing. Centene, like other companies, used spread pricing in
many states. Though controversial for, among other things, its lack of transparency,
the practice was generally legal. But the backlash brought regulatory scrutiny and
attracted the attention of Ohio’s attorney general. In response, Centene began to
move away from spread pricing to a more transparent model and engaged in a public
relations and lobbying campaign. Centene’s board of directors (the “Board”) was
kept at least minimally apprised of the regulatory and public relations risks spread
pricing presented, as well as the company’s response.
But Centene had problems with its administration of Medicaid pharmaceutical
benefits that the Board was not aware of. In 2016, four Centene officers devised a
scheme to increase their incentive-based compensation by causing Centene’s
subsidiaries to inaccurately report their costs and seek reimbursement to which they
were not entitled. The scheme violated applicable law and constituted a breach of
Centene’s contracts with state Medicaid agencies.
1
As the years went on, regulators and law enforcement in Ohio, then in other
states, began to focus on Centene’s pharmacy benefit management operations. The
Board was informed of regulatory investigations in four states, and what was
originally portrayed as a public relations risk was eventually presented more clearly
as a legal risk. The Board received quarterly updates on the relevant risks, and each
time was assured management was working to address them. Separately, starting in
2019, the Board was told of shortcomings Centene had detected in one of its
compliance monitoring processes; as part of the same update, the Board was told of
specific steps being taken to address those issues.
In April 2021, the Board was told the Ohio attorney general filed a complaint
against Centene and its subsidiaries alleging the officers’ scheme violated various
laws and breached its contract with the Ohio Department of Medicaid. From there,
the Board promptly acted, with Centene retaining a law firm to conduct an
investigation and the Board retaining another firm to review that investigation. The
investigation resulted in the termination of one employee alleged to be involved in
the scheme.
The scheme began to cost Centene. First, it settled with the Ohio attorney
general for over $88 million. Then it settled litigation threatened by the Mississippi
attorney general for $55.5 million. Over the next year and a half, Centene entered
into eleven other settlements, agreeing to pay a total of $596 million. As of the filing
2
of this action, it was negotiating nine more settlements. The company announced
that it recorded a settlement reserve of $1.2 billion.
After receiving books and records, plaintiff Bricklayers Pension Fund of
Western Pennsylvania (“Plaintiff”) filed this derivative action seeking to hold
Centene’s directors and officers liable for that loss. In typical fashion, the defendants
moved to dismiss on the grounds that the decision to sue Centene’s fiduciaries on
the scheme, and for the directors’ alleged failure to exercise adequate oversight,
belongs to Centene’s Board. This decision considers whether a majority of
Centene’s current directors themselves face a substantial likelihood of liability such
that they cannot impartially consider bringing claims.
Plaintiff has fallen short of demonstrating a majority of Centene’s current
directors face a substantial likelihood of liability, either in the maintenance of the
Board’s reporting systems, or in failing to respond to the alleged notice of the
underlying wrongdoing. Plaintiff’s claims against Centene’s fiduciaries for the
underlying scheme are left for the Board; Plaintiff’s complaint is dismissed.
3
I. BACKGROUND1
The facts are drawn from the operative complaint, the documents integral to
it, and those incorporated by reference.2 Plaintiff demanded and received books and
records before filing its complaint in this action.3 The following is the partial picture
available to the Court at this stage, with all reasonable inferences drawn in Plaintiff’s
favor.
A. Centene’s Business
Nominal defendant Centene is a multinational healthcare company. In 2021,
Centene generated nearly $126 billion in revenue.4 That revenue resulted in earnings
from operations of almost $1.8 billion.5 Plaintiff alleges Centene’s “primary
business is providing health insurance and prescription drug benefit services to state
1
Citations in the form “Compl.” refer to Plaintiff’s complaint in this action, available at
docket item (“D.I.”) 1. Citations in the form “Crawford Aff.” refer to the affidavit of
Spencer V. Crawford, available at D.I. 21. Citations in the form “Szustak Aff.” refer to the
affidavit of Casimir O. Szustak, available at D.I. 29. Citations in the form “Crawford Reply
Aff.” refer to the affidavit of Spencer V. Crawford, available at D.I. 42.
2
BitGo Hldgs., Inc. v. Galaxy Digital Hldgs., Ltd., -- A.3d --, 2024 WL 2313115, at *1 n.1
(Del. May 22, 2024).
3
That production was made pursuant to an agreement providing that the documents would
be incorporated by reference into any related complaint Plaintiff filed. Crawford Aff., Ex.
1 ¶ 2(g). Those books and records are incorporated by reference. See Amalgamated Bank
v. Yahoo! Inc., 132 A.3d 752, 796–99 (Del. Ch. 2016), abrogated on other grounds by
Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019).
4
Crawford Aff., Ex. 2 at 51.
5
Id.4
Medicaid programs.”6 Medicaid is a public “health insurance program for
low-income Americans.”7 It provides both medical and pharmaceutical benefits.
Medicaid “is jointly funded by the federal and state governments and administered
by state agencies.”8 State agencies delegate the task of administering Medicaid to
private entities like Centene and its subsidiaries.
Those private entities are most commonly compensated through managed care
plans. The entities that administer Medicaid managed care plans are known as
managed care organizations (“MCOs”). State agencies pay MCOs a monthly fixed
dollar amount for each person enrolled in the state Medicaid plan.9 Those payments,
known as capitation payments, are derived from historical cost data MCOs provide
to state Medicaid agencies. That is, the capitation payments are calculated in part
based on the MCO’s actual “expenditures on behalf of plan members.”10
MCOs assist in the administration of pharmaceutical benefits, and usually
subcontract this function out to pharmacy benefit managers (“PBMs”). PBMs often
have more leverage than MCOs to negotiate favorable reimbursement rates, rebates,
6
Compl. ¶ 22.
7
Id. ¶ 46.
8
Id. ¶ 47.
9
MACPAC, Provider Payment and Delivery Systems, https://www.macpac.gov /medicaid-
101/provider-payment-and-delivery-systems (last visited July 8, 2024).
10
Compl. ¶ 51.
5
and discounts. PBMs are generally compensated through one of two models. The
first is known as pass-through pricing.11 Under a pass-through pricing model, the
MCO pays the PBM the same amount the PBM reimburses the pharmacy plus a
fixed administrative fee. The second is known as spread pricing. Under a spread
pricing model, the PBM profits from the difference between the pharmacy’s invoice
to the PBM and the MCO’s reimbursement payment. “For example, if a PBM
charges a MCO $10 for a drug but reimburses the pharmacy $7 for the same drug,
the PBM pockets $3.”12 Spread pricing generally features a lack of transparency,
making it more controversial than pass-through pricing. Despite the controversy,
spread pricing is generally legal, though some states that previously allowed it began
prohibiting it during the relevant time.
As of 2015, at a high level, Centene’s Medicaid business was structured as
follows: Centene operated Medicaid plans in multiple states through individual
MCO subsidiaries, with a different subsidiary for each state. Each subsidiary
contracted with a state Medicaid agency to provide medical and pharmaceutical
benefits to Medicaid enrollees.13 The MCO then subcontracted certain pharmacy
benefit administration responsibilities to Envolve Pharmacy Solutions (“Envolve”),
11
Pass-through pricing is also known as transparent pricing.
12
Id. ¶ 57.
13
The parties have not addressed whether Centene administers Medicaid plans under
different models.
6
its in-house PBM.14 In many states, Envolve was compensated through a spread
pricing model. In others, it used a transparent pricing model.
B. The Cost Reporting Scheme
By 2015, Centene “was facing competitive risks due to consolidation among
major health insurers.”15 In July it announced a $6.8 billion merger with Health Net,
Inc., whose in-house PBM subcontracted its PBM functions to a third-party PBM
(the “CVS Caremark Contract”), CVS Caremark (“Caremark PBM”). Caremark
PBM was one of the nation’s largest PBMs, enabling it “to negotiate much more
favorable pharmacy reimbursement rates and other prescription drug-related
discounts than what [Centene] could achieve through [Envolve].”16 Centene
anticipated significant cost savings from the CVS Caremark Contract.
Shortly after the Health Net acquisition, four Centene officers implemented a
scheme to extract additional value out of the CVS Caremark Contract (the “Cost
Reporting Scheme”). If successful, the officers would profit from increased
merger-related incentive payments because the benefits could be categorized as
merger synergies. To implement the scheme, then-CEO Michael Neidorff worked
14
A footnote in the defendants’ opening brief suggests some of Centene’s health plans did
not use Envolve. D.I. 20 at 10 n.11. The footnote cites no support, and the Court is aware
of none in the record. I assume that Envolve was the PBM for all Centene’s health plans.
15
Compl. ¶ 80.
16
Id. ¶ 83.
7
with defendants Cynthia Brinkley, then executive vice president of global corporate
development; Jesse Hunter, then executive vice president of products; and Jeffrey
Schwaneke, then executive vice president, CFO, and treasurer.
The Cost Reporting Scheme had three prongs. In the first, Envolve enjoyed
prescription drug discounts under the CVS Caremark Contract but did not report
those discounts to state Medicaid agencies. Because state Medicaid agencies set
capitation payments based on MCOs’ actual costs, omitting those discounts allowed
Centene’s MCOs to reduce costs without affecting capitation payments. This prong
was in place from January 2017 through December 2020. Through the second,
Envolve used Caremark PBM’s pharmacy dispensing fee discounts, but reported its
own higher, undiscounted costs. This prong was in place from October 2016 through
July 2018. And in the third, Envolve falsely reported prescription drug expenditures
paid by other insurance, which allowed it to receive higher capitation payments.
This prong was in place from September 2018 through December 2020.
As alleged, all three prongs violated applicable law and Centene’s
subsidiaries’ contracts with state Medicaid agencies. The scheme worked: in 2017,
the officers each received incentive payments ranging from $890,000 to $3.915
million.17
17
Plaintiff has not alleged that these officers had any motivation for continuing the scheme
after receiving their payments in 2017.
8
C. Governance And Oversight
As of the filing of Plaintiff’s complaint, Centene was managed by a
thirteen-director board of directors. It is undisputed that seven are independent,
outside directors. During the relevant time, the Board met at least quarterly. At each
quarterly meeting, management presented an enterprise risk management report.18
Those updates identified “critical” risks and categorized them, with categories
including “Legal” and “Policy & Government Relations.”19
The Board had three committees with relevant oversight responsibilities. The
compliance committee was responsible for “oversight of all compliance activities
of [Centene] with respect to all lines of business,” including Medicaid.20 To that
end, the compliance committee was required to “assess the effectiveness of
[Centene’s] compliance program” at least once a year and “[r]eview the compliance
program structure,” “[r]emain informed about the compliance program outcomes,
including audit results and governmental enforcement activities,” and “[o]versee the
management by [Centene] of overall compliance risks” as appropriate, among other
things.21 The committee was required to “report regularly to the Board.”22 It met at
18
E.g., Crawford Aff., Ex. 49 at -3588 to -3591, -3599, -3602, -3613.
19
E.g., id. at -3602, -3613.
20
Crawford Aff., Ex. 7 § A.
21
Id. §§ C(1), 2(i)–(ii), (vii).
22
Id. § D(1).
9
least fifteen times between 2016 and 2021.23 Centene produced no minutes for any
of those meetings in connection with Plaintiff’s books and records demand. The
compliance committee reported to the Board at each of its quarterly meetings.
In furtherance of its mandate, the compliance committee oversaw an annual
internal compliance assessment of Centene’s state Medicaid plans.24 Those
assessments covered compliance with each subsidiaries’ contract with the relevant
state Medicaid agency, as well as compliance with applicable law.25 They were
conducted by a management-level corporate compliance team, who reported to the
compliance committee.26
Second, Centene’s audit committee was tasked with oversight of “the integrity
of [Centene’s] financial statements,” Centene’s “compliance with legal and
regulatory requirements,” and “the performance of [Centene’s] internal audit
function,” among other things.27 The internal audit was conducted by management,
who would report its progress to the audit committee on a quarterly basis. The
internal audit individually assessed each of Centene’s state health plans, including
23
Crawford Aff., Exs. 15, 17, 21, 31–32, 34, 39, 40, 54–57, 62–63; Crawford Reply Aff.,
Ex. 2.
24
E.g., Crawford Aff., Ex. 31, at -1179, -1185.
25
Compl. ¶ 208.
26
See, e.g., Crawford Aff., Ex. 31 at -1185.
27
Crawford Aff., Ex. 5 § A.
10
for what the relevant presentations describe as the “Top 20 Risks.”28 KPMG,
Centene’s outside auditor, conducted an external audit, the results of which were
reported to the audit committee. Both audits were conducted on an annual basis.
The audit committee met at least twenty-one times between 2016 and 2021.29
Centene produced only one set of meeting minutes for those meetings in connection
with Plaintiff’s books and records demand. The audit committee reported to the
Board at each quarterly meeting.
Finally, Centene’s government and regulatory affairs committee was tasked
with overseeing “‘all compliance activities of [Centene] with respect to all lines of
business,’ including Medicaid, and ‘all compliance functions,’ to ‘coordinate the
Board’s oversight of the performance of the Company’s compliance function.’”30 At
this stage, there is no record of the government and regulatory affairs committee
meeting at any time between 2016 and 2021 or reporting to the Board.
28
E.g., Crawford Aff., Ex. 19 at -8357.
29
Crawford Aff., Exs. 12–14, 20, 30, 33, 35–38, 46, 59, 60; Szustak Aff., Ex. 3. Compl. ¶¶
127–28, 164.
30
Compl. ¶ 77 (citation omitted) (footnote omitted).
11
D. Regulators Take On Spread Pricing; Centene Begins An
Enterprise-Wide Transition To Pass-Through Pricing; The
Board Is Apprised Of Regulatory Risk And Management’s
Response.
As of 2018, PBMs were experiencing a backlash against spread pricing. As
presented by Plaintiff, the backlash began in relevant part with a January 2018 Ohio
newspaper “publishing an investigative series on the influence of PBMs over the
cost of prescription drugs, with a particular focus on how the largest PBMs, like
[Caremark PBM], were engaging in aggressive spread pricing in connection with
Ohio’s Medicaid program at taxpayers’ expense.”31
In July, the Ohio attorney general issued a press release announcing that his
office had been investigating PBMs generally and expressing an intent to bring
litigation in the future. The Board met the same month and was informed an Ohio
legislative committee had “held hearings on PBMs,” and the committee and the Ohio
Department of Medicaid were conducting “two separate audits on PBM spend.”32
The presentation explained that Centene anticipated its health plan would be
“highlighted since [its] payment rates showed to be higher with [Caremark PBM]
31
Id. ¶ 133.
32
Crawford Aff., Ex. 24 at -5292.
12
than the other MCOs.”33 It also noted that the Ohio Department of Medicaid was
going to require PBMs to move to a pass-through pricing model by January 2019.34
In response to this pressure, Centene “anticipat[ed] the need” to move all of
its health plans to a pass-through pricing model.35 To that end, in March 2018
Centene acquired an interest in RxAdvance, “a full-service” PBM.36 The July Board
presentation explained that the company “[d]eveloped [a] schedule to transition from
[Caremark PBM] to RxAdvance during 2019/2020,” which was set to “begin in the
4th quarter of 2018 in [Mississippi].”37
In October, PBM risk began appearing as part of the Board’s quarterly
enterprise risk management update.38 The October update explained that “[c]ertain
states are placing increased scrutiny around PBM regulation, and transparency of
pharmacy rates.”39 The slide focused on the possibility that the resulting reputational
harm and regulatory changes could force Centene to alter its business model, on
additional scrutiny from “other regulatory bodies,” and on “[r]eputational risk
33
Id.
34
Id.
35
Id. at -5282.
36
Crawford Aff., Ex. 23 at Ex. 99.1 at 1.
37
Crawford Aff., Ex. 24 at -5282.
38
Crawford Aff., Ex. 26 at -5997.
39
Id.
13
resulting from negative publicity.”40 The Board was informed that management’s
response was to use public relations and lobbying to “create good public policy.”41
The presentation also conveyed that the state plans were “engaged in affected
markets.”42 The Board was told the executives responsible for managing the risk
included Brinkley, Burkhalter, and four others.43
The Board presentation also stated that the Ohio “PBM inquiry continues with
Envolve Payment arrangement.”44 The Board was specifically told that Centene
“has pushed back aggressively to correct the record of potential ‘double dipping’
and demonstrate added value in [its] pharmacy model.”45
The Board’s February 2019 enterprise risk management update categorized
PBM risk as a critical “Regulatory Environment/Reputational” risk.46 The directors
were notified of an “[i]ncrease in [r]egulatory scrutiny” of Centene’s “[PBM] model
occurring across the country,” with “significant regulatory inquiries currently
40
Id. (emphasis omitted).
41
Id. (emphasis omitted).
42
Id.
43
Id.
44
Id. at -5935.
45
Crawford Aff., Ex. 24 at -5282. It is reasonable to infer that the reference to “double
dipping” referred to the Cost Reporting Scheme, specifically the prong that reported
expenditures paid by other insurance; this phrase assured the Board that no such “double
dipping” was occurring.
46
Crawford Aff., Ex. 25 at -4594, -4598.
14
occurring in Indiana and Georgia,” in addition to those in Ohio.47 The Board was
also told for the first time that the PBM regulatory inquiries could result in “Harmful
Legal & Regulatory Updates,” and the Board was told for the first time that Centene
was at risk of “Government Contract Non-Performance.”48 As in October, the Board
was informed that management was addressing this risk through lobbying and public
relations.49
Also in February, the corporate compliance team informed the compliance
committee that it developed a new tool “to bring additional rigor to its oversight of
47
Id. at -4594 (emphasis omitted). The presentation uses the phrase “legacy PBM model.”
Id. The phrase is not defined in the highly redacted Board presentation, nor were Board
minutes produced that give context to the phrase. I understand the defendants would have
me infer the phrase refers to the use of spread pricing, with the adjective “legacy”
conveying that the model was transitioning out of use. That is a reasonable inference. But
following the Health Net merger, Centene incorporated two additional layers of
subcontracting with two other PBMs into each Medicaid plan’s payment structure. It is
also reasonable to infer that “PBM model” refers this subcontracting of PBM functions to
multiple other PBMs, including Caremark PBM. It is also reasonable to infer that “legacy”
does not mean the model was not in use, and that a “legacy model” could indicate Centene
incorporated newer structures in some states. At this stage, I must draw all reasonable
inferences in Plaintiff’s favor: I interpret “legacy PBM model” to refer only to a PBM
model that is no longer in use or that is transitioning out of use.
48
Id. at -4598. The plaintiff-friendly inference is that these phrases refer to potential
adverse legal consequences and the potential for Centene’s subsidiaries to breach their
Medicaid contracts.
49
Id. Another slide notes that the transition to RxAdvance was anticipated to mitigate risk
relating to the use of spread pricing. Id. at -4594 (“RxAdvance’s model anticipated to
mitigate PBM risk.”). The presentation does not clarify whether the referenced “PBM risk”
concerns public concerns over the use of spread pricing, compliance with applicable law,
or something else. And the defendants have not attached Board minutes contextualizing
the comment. The plaintiff-friendly inference is that RxAdvance was offered as a solution
only to spread pricing as a controversial practice and not to anything illegal.
15
the health plan compliance programs.”50 The committee was told that the tool would
be used as part of the 2019 corporate compliance assessment.51
E. Regulatory Scrutiny Continues And The Board Is Informed
That KPMG Was Subpoenaed; The Compliance Committee
Learns Of Deficiencies In Its Health Plan Compliance
Evaluation.
Against the backdrop of regulatory scrutiny into spread pricing, the Ohio
attorney general began to focus on Centene’s PBM operations. Over the coming
months, the Board would receive only cursory updates on the issue, with assurances
that management was handling the problem. Plaintiff is adamant the Board never
received actual notice of the Cost Reporting Scheme.
On April 22, KPMG told the audit committee that the Ohio attorney general
“would be issuing a grand jury subpoena requesting the [Centene Ohio MCO] audit
working papers for 2016, 2017, and perhaps 2018.”52 The Board met the following
day.53 It received a report from the audit committee, and Plaintiff asks the Court to
infer that as part of this update the audit committee informed the Board of the KPMG
subpoena.54 The Board was also told for the first time that the “Ohio Attorney
General has signaled [an] intent to sue Medicaid PBMs,” a reference to the attorney
50
Crawford Aff., Ex. 31 at -1185.
51
Id.
52
Szustak Aff., Ex. 14 at -2963.
53
Crawford Aff., Ex. 22.
54
Id. at -4792.
16
general’s July 2018 announcement.55 The Board was again apprised of the
regulatory scrutiny of Centene’s PBM business and of management’s response of
transitioning to pass-through pricing and a public relations and public policy
response.56
The Board next met in July.57 It was told Centene’s PBM operations
continued to face regulatory scrutiny and that the company faced the risk of possible
adverse legal action.58 The Board was informed of the same management-led
solutions.59 The Board also received a “legal services” report from Centene’s
general counsel.60 Only one bullet point from that update survived Centene’s
redactions: “Responding to Ohio Attorney General’s investigation of pharmacy
pricing issues.”61
The compliance committee met in October.62 It received an update on
Centene’s health plan compliance evaluation, and was informed that “[c]ommon
findings included . . . [d]eficiencies in the quality and completeness of contract and
55
Id. at -4901.
56
Id. at -4946.
57
Crawford Aff., Ex. 27.
58
Id. at -5165, -5171.
59
Id. at -5171.
60
Id. at -5220.
61
Id.
62
Crawford Aff., Ex. 32.
17
regulatory assessments,” “[i]nsufficient and/or untimely finding/risk remediation,”
and “[i]nsufficient Compliance Committee oversight of core compliance
activities.”63 This was the first time these sorts of findings appear in the record, and
it appears they were uncovered by the new compliance tool developed in the fourth
quarter of 2018. The committee was informed that the company would “[s]hare best
practices and develop new guidance materials and resources for plans to address
common findings” and “monitor[] remediation of issues identified within the
evaluations.”64 The committee was further informed that the compliance team would
continue to revise and refine the new compliance tool for the 2020 assessment.65
In October, the Board was informed of a “[s]ignificant increase in regulatory
scrutiny” of its PBM model.66 The Board was again informed that scrutiny created
a risk of “Harmful Legal & Regulatory Updates.”67 In addition to being updated on
the transition to RxAdvance, the Board was informed of a public policy and public
relations response.68
63
Id. at -0969.
64
Id.
65
Id.
66
Crawford Aff., Ex. 28 at -3777.
67
Id. The Board also received a legal services update, but the relevant page is fully
redacted. Id. at -3860. Absent any language suggesting the legal services update concerned
the backlash to spread pricing or the Cost Reporting Scheme, the plaintiff-friendly
inference is that these matters were not discussed in the report.
68
Id. at -3727 to -3728, -3777.
18
The compliance committee met in February 2020.69 It received the final
results of the 2019 health plan compliance assessment, which reiterated the earlier
findings concerning Centene’s shortcomings.70 The presentation noted additional
remedial actions taken in response to those findings.71
The Board also met in February.72 As part of the enterprise risk management
report, it was informed of a “[s]ignificant increase in regulatory scrutiny of
[Centene’s] PBM business model occurring in several states.”73 It was told Centene
faced a risk of “Harmful Legal & Regulatory Updates” arising from this scrutiny.74
Management again described a public relations and public policy response.75 As
part of a separate report, the Board was informed that Centene was “providing
feedback to plans on state specific bills,” “develop[ing] [a] comprehensive toolkit to
assist the Health Plans,” and “completing impact analyses on the effects of
carve-out[s] and the value of pharmacy” in response to state scrutiny of “PBM price
transparency.”76
69
Crawford Aff., Ex. 34.
70
Id. at -0818.
71
Id.
72
Crawford Aff., Ex. 42.
73
Id. at -3375.
74
Id.
75
Id.
76
Id. at -3294.
19
F. In April 2020, Centene Begins Acknowledging A Separate
Legal Risk Related To Its PBM Operations.
In April, the Board met and received another enterprise risk management
report.77 It was notified of a “[c]ontinued increase in regulatory scrutiny of
[Centene’s] PBM business model occurring in several states.”78 An appendix to the
presentation categorized the PBM risk as a “Policy & Government Relations” risk,
and noted the possibility of “Harmful Legal & Regulatory Updates.”79 Another slide
in the appendix noted a related legal risk concerning PBM scrutiny, namely a
“[c]ontinued risk of governmental focus related to PBMs.”80 This was the first time
the PBM matter was presented as a separate “legal” risk, as historically the enterprise
risk management report categorized PBM risk as a policy, regulatory, or reputational
risk. The slide mentions the risk of litigation, and notes that “[s]enior management
[is] actively working to mitigate legal exposures and to take corrective action to
lessen future legal risk.”81
77
Crawford Aff., Ex. 49 at -3588.
78
Id. at -3591.
79
Id. at -3602. Though this information appeared in an appendix, it is reasonable to infer
that it was presented to the Board along with the rest of the Board slides. To the extent that
inference is unreasonable, it does not affect my conclusion because it is reasonable to infer
at the pleading stage that the slides were provided to the Board.
80
Id. at -3613.
81
Id.
20
In July the Board received a legal update on the Ohio attorney general’s
investigation and Centene’s general counsel “reviewed the history of the matter.”82
The balance of the discussion is redacted, presumably at least in part for privilege.
The compliance committee also met in July.83 It received a second quarter
update on the 2020 health plan program evaluation, with eight plans having been
evaluated to date.84 Among other things, it informed the committee that common
findings thus far included “[c]ontinued deficiencies in the quality and completeness
of Medicaid contract assessments,” which was ‘a repeat issue from 2019.”85 That
was the only issue identified as a repeat issue from the year before. The slide also
identified “[c]ommon areas of improvement” based on the review to date.86
G. The Board Is Informed Of The Potential For Legal Action In
Multiple States.
In October 2020, the Board was informed that the legal scrutiny around
Centene’s PBM model was continuing.87 A slide in an appendix to the enterprise
risk management report again presented the PBM matter as a legal risk, explaining
PBMs “continue to be a concern,” and that “[r]egulatory inquiries in OH, GA, MS
82
Crawford Reply Aff., Ex. 4 at -7314.
83
Crawford Reply Aff., Ex. 2.
84
Id. at -0919.
85
Id.
86
Id.
87
Crawford Aff., Ex. 58.
21
and NM are ongoing.”88 This was the first time the directors were informed that the
regulatory inquiries had spread to Mississippi and New Mexico. As part of this
update, the Board was informed of a “Litigation and Regulatory Risk.”89 As with
the other Board presentations, the slide notes that “[s]enior management [is] actively
working to mitigate legal exposures and to take corrective action to lessen future
legal risk.”90 It also noted that “Centene[’s] leadership and Government Affairs team
[are] communicating strategies with applicable state markets.”91
As part of the October meeting, the Board received a legal services report.92
The unredacted portion of the report flagged two risks relating to PBMs.93 First, that
the “[r]egulatory investigation continues in Ohio, where [the] Ohio Attorney General
has continued to seek additional materials around PBM activities.”94 Second, that a
“[p]laintiffs’ law firm continues investigations in Ohio, Mississippi, New Mexico,
and Georgia, and suggests they [sic] intend to conduct contractual adherence
investigations in additional states.”95 This report notified the directors for the first
88
Id. at -5625.
89
Id.
90
Id.
91
Id.
92
Id. at -5797 to -5798.
93
Id. at -5798.
94
Id.
95
Id.
22
time that, in addition to the ongoing regulatory inquiries, Centene also faced the risk
of litigation by private parties.
The compliance committee also met in October 2020.96 It received a third
quarter update on the 2020 health plan compliance evaluation, at which point
Centene evaluated fifteen health plans.97 As with the July update, the presentation
noted the common findings included “[d]eficiencies in the quality and completeness
of Medicaid contract assessments.”98 And as with other updates, it noted “[c]ommon
areas of compliance program improvement.”99
The Board met again in February 2021.100 The Board received an enterprise
risk management report that categorized the PBM matter as a legal risk, and was
informed that PBMs “continue to be a steady state concern.”101 The same slide
explained that “[s]enior management [is] actively working to mitigate legal
exposures and to take corrective action to lessen future legal risk.”102
96
Crawford Aff., Ex. 39.
97
Id. at -3224.
98
Id.
99
Id.
100
Crawford Aff., Ex. 41.
101
Id. at -6603 (emphasis omitted).
102
Id. The Board was also given a legal services report that is fully redacted other than the
title, which reads “Legal Services” and gives the general counsel’s name and title. Id.
at -6622. The plaintiff-friendly inference is that the legal services report did not discuss
the PBM matter.
23
Also in February, the compliance committee again received a health
compliance program evaluation report for the completed 2020 evaluation.103 The
update noted deficiencies common across health plans, including deficiencies in the
“[q]uality and completeness of Medicaid contract assessments,” and improvements
that were made to address those shortcomings.104
H. Centene Is Sued For The Cost Reporting Scheme; The Board
Is Notified And Responds.
On March 11, the Ohio Department of Medicaid and Ohio Attorney General
filed an action “against Centene, [its Ohio MCO subsidiary], and Envolve alleging
breach of contract, violations of Ohio healthcare law, and conspiracy to violate Ohio
healthcare law.”105 In substance, the Ohio complaint alleged that Centene, acting
through its Ohio MCO subsidiary and Envolve, secretly carried out all three prongs
of the Cost Reporting Scheme in Ohio.
The Board learned of the Ohio complaint at its April meeting.106 It was told
that the complaint was “unfounded” and that “Envolve [would] aggressively defend
the integrity of the pharmacy services provided to the State of Ohio.”107 The same
presentation explained the lawsuit affected Centene’s Ohio MCO bidding on a
103
Crawford Aff., Ex. 40 at -3296.
104
Id.
105
Compl. ¶ 211; Szustak Aff., Ex. 20.
106
Crawford Aff., Ex. 43 at -7561.
107
Id.
24
Medicaid contract, and that the contract would be “neither awarded nor denied . . .
pending the resolution of the Attorney Generals [sic] lawsuit.”108 The relevant
presentation mentioned “PBM lawsuits in other states such as Mississippi” as an
“Area[] of Continued Focus,” supporting the inference that the Board had previously
been informed that there were other legal actions filed concerning Centene’s PBM
activities.109 Plaintiff has pled particularized facts suggesting these lawsuits were
filed in, at most, three other states.
The Board also received an enterprise risk management report, which noted
the legal PBM risk “continues to escalate” due to “threatened [civil litigation] in
Mississippi, Georgia, New Mexico and potentially elsewhere.”110 The presentation
described an “[a]ction [p]lan.”111 The substance of the action plan is redacted. This
is presumably for privilege, meaning the Court cannot draw plaintiff-friendly
inferences from the redactions.112 As with previous Board presentations, the
presentation conveyed that “[s]enior management [was] actively working to mitigate
legal exposures and to take corrective action to lessen future legal risk.”113 The
108
Id. at -7538, -7576.
109
Id. at -7576.
110
Id. at -7607.
111
Id. at -7605.
112
Ontario Provincial Council of Carpenters’ Pension Tr. Fund v. Walton, 2023 WL
3093500, at *4 (Del. Ch. Apr. 26, 2023) (citing D.R.E. 512(a)).
113
Crawford Aff., Ex. 43 at -7614.
25
Board was further informed of a public relations and public policy response.114 The
Board was also informed that the attorney general’s lawsuit could affect “current
and upcoming Requests for Proposals . . . in other states.”115
The following month, the Board was informed that Skadden, Arps, Slate,
Meagher & Flom LLP (“Skadden”) had been retained to investigate legal issues
concerning Centene’s PBM operations.116 The Board separately retained the law
firm Jenner & Block, LLP (“Jenner”) to serve as its counsel in connection with the
PBM investigation.117
I. Skadden’s Investigation Continues While Centene
Negotiates Settlements With Twenty-Two States.
Centene began suffering more concrete consequences from the Cost
Reporting Scheme. In June, Centene and its subsidiaries settled the Ohio litigation
for $88.3 million.118 The settlement “required [Centene] to commit to ‘full
transparency’ concerning ‘the exact amount paid to the pharmacy for each
pharmaceutical claim.’”119 Also in June, Centene settled the threatened litigation by
114
Id. at -7610.
115
Id. at -7606.
116
Crawford Aff., Ex. 45 at -7305.
117
See Crawford Aff., Ex. 46 at -1914 (noting Jenner’s attendance at meeting).
118
Szustak Aff., Ex. 18.
119
Compl. ¶ 217 (quoting Szustak Aff., Ex. 18 ¶ 7).
26
Mississippi’s attorney general for $55.5 million. The Ohio and Mississippi
settlements required Centene to transition off RxAdvance.120
In July, the Board received an enterprise risk management report.121 The
report included far more detail than previous presentations on PBM risk and efforts
Centene was taking to address it.122 It explained that the PBM risk level decreased
“due to proactive PBM messaging and settlements.”123 The Board also received a
“Business Strategy Report,” which detailed the earlier settlements, changes the
company was making in response to those settlements, and the company’s progress
in making those changes.124 And the Board received a legal services report
concerning the settlements.125 Also in July, Hunter, who was one of the officers
alleged to have carried out the Cost Reporting Scheme, “abruptly resigned from”
Centene.126 It is reasonable to infer his resignation was related to the fallout from
the Cost Reporting Scheme.
120
Crawford Aff., Ex. 48 at -6762.
121
Id. at -6711.
122
Id. at -6713 to -6719.
123
Id. at -6713.
124
Id. at -6752 to -6755, -6761 to -6765.
125
Id. at -6920.
126
Compl. ¶ 116.
27
At a September meeting, Jenner informed the audit committee that Skadden
“completed a thorough review of the PBM situation.”127 After receiving that
information, the committee “instructed Skadden to broaden its review of certain
issues.”128 The committee also supported disciplinary action in connection with the
PBM investigation: terminating Schwaneke, an officer alleged to have carried out
the scheme.129 It is reasonable to infer that Schwaneke was terminated for his
involvement in the Cost Reporting Scheme.
That same month, the Board met and Neidorff shared Skadden’s findings.130
Neidorff also informed the Board of Schwaneke’s termination.131 The directors
asked questions and discussed the forgoing.132
At an October 2021 Board meeting, Jenner reported that it conducted a review
of Skadden’s work, and concluded it was “thorough and complete in nature.”133 The
Board also received an update “regarding the PBM matter” and asked questions
concerning the same.134
127
Crawford Aff., Ex. 46 at -1914 to -1915.
128
Id. at -1915.
129
Id.130
Crawford Aff., Ex. 50.
131
Id.132
Id.133
Crawford Aff., Ex. 51 at -7682.
134
Id.28
The fallout continued. Between September 2021 and November 2022,
Centene entered eleven additional settlements concerning the Cost Reporting
Scheme, agreeing to pay out $596 million. As of the filing of Plaintiff’s complaint,
Centene was “finalizing settlements with nine other states.”135 It “recorded a legal
settlement reserve of $1.25 billion” relating to the Cost Reporting Scheme.136
J. This Litigation
Plaintiff made a demand to inspect Centene’s books and records in December
2021. Centene produced documents and certified its production was complete. 137
Plaintiff filed its complaint in this action in December 2022 naming as defendants
Centene directors Orlando Ayala, Jessica L. Blume, Kenneth A. Burdick, H. James
Dallas, Frederick H. Eppinger, Richard A. Gephardt, Lori J. Robinson, and William
Trubeck (collectively the “Director Defendants”). Plaintiff also named as
defendants in their capacity as Centene officers Brinkley, Burdick, Brandy
Burkhalter, Hunter, and Schwaneke (the “Officer Defendants,” and together with the
Director Defendants, “Defendants”).
135
Compl. ¶ 227. Plaintiff’s answering brief contends that Centene paid $936 million “thus
far.” D.I. 29 at Ans. Br. 32 [hereinafter “PAB”]. The difference between this amount and
the amount stated in the complaint appears attributable to settlements entered into after
Plaintiff filed its complaint. I do not consider these additional settlements. Anglo Am. Sec.
Fund, L.P. v. S.R. Glob. Int’l Fund, L.P., 829 A.2d 143, 155 (Del. Ch. 2003) (“Parties may
not amend the pleadings through briefing on a motion to dismiss.”).
136
Crawford Aff., Ex. 2 at 50.
137
Compl. ¶ 45.
29
Plaintiff’s complaint asserts three counts. Count I asserts duty of oversight,
or Caremark, claims against the Director Defendants. Within Count I, Plaintiff
advances two Caremark theories springing from three related oversight failures: (1)
failing to make a good faith effort to “implement and monitor compliance policies
and systems” to monitor compliance with applicable law;138 (2) ignoring red flags
indicating that Centene and its subsidiaries were not complying with applicable law.
Through Count I, Plaintiff seeks to hold the Director Defendants liable for damages
Centene suffered, “both financially and to its corporate image, reputation, and
goodwill.”139
Count II asserts the Officer Defendants “violated their corporate
responsibilities by knowingly operating and maintaining an illegal business
model.”140 Count II also asserts a claim for breach of fiduciary duty based on the
failure to “inform the Board about the illegal nature of the Cost Reporting
Scheme.”141 Through Count II, Plaintiff seeks to redress the same injuries outlined
in Count I.
Count III asserts an unjust enrichment claim against the Officer Defendants
alleging they were unjustly enriched by their receipt of “profits, benefits, and other
138
Id. ¶ 266.
139
Id. ¶ 269.
140
Id. ¶ 275.
141
Id. ¶ 278.
30
compensation from Centene, including incentive compensation based, at least in
part, on their wrongful efforts to implement the Cost Reporting Scheme.”142
Defendants moved to dismiss under Court of Chancery Rule 23.1 for failure
to plead demand was futile and under Rule 12(b)(6) for failure to state a claim.
II. ANALYSIS
Defendants seek dismissal on the grounds that Centene’s current Board can
impartially decide whether to bring claims against not only the officers who
perpetuated the Cost Reporting Scheme, but also the directors on whose watch it
occurred. Plaintiff has taken on the heavy burden of pleading with particularity that
the current Board cannot be impartial because a majority of its directors themselves
face a substantial likelihood of liability for bad faith dereliction of their duty of
oversight in not making a good faith effort to establish an information system to
oversee Medicaid compliance, and not responding to red flags. I conclude Plaintiff
has fallen short.
Under Court of Chancery Rule 23.1, a derivative complaint must “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
142
Id. ¶ 282.
31
failure to obtain the action or for not making the effort.”143 A stockholder may
pursue a derivative claim on behalf of a corporation only if either: “(a) she has first
demanded that the directors pursue the corporate claim and they have wrongfully
refused to do so; or (b) such demand is excused because the directors are deemed
incapable of making an impartial decision regarding the pursuit of the litigation.”144
Plaintiff did not make a demand and therefore the complaint “must be dismissed
unless it alleges particularized facts showing that demand would have been futile.”145
In Zuckerberg, our Supreme Court adopted a three-part demand futility test.146 It
asks the following on a director-by-director basis:
143
Ct. Ch. R. 23.1(a) (2007). Rule 23.1 was amended on September 25, 2023. In re:
Amendments to Rules 7, 10, 17–25, and 171 of the Court of Chancery Rules, Sections, III,
IV, and XVI (Del. Ch. Sept. 25, 2023) (ORDER). No substantive revisions were made to
the relevant portion of Rule 23.1. Id. at 29. Rule 23.1 was again amended on June 14,
2024, and again no substantive revisions were made to the relevant portion. In re:
Amendments to Rules 1–6, 8, 9, 11–15, 23, 23.1, 79, 79.1, 79.2 and 174 of the Court of
Chancery Rules, Section I, II, III, IV, X, and XVI at 59 (Del. Ch. May 31, 2024) (ORDER).
Nevertheless, I proceed under the Rules as they were drafted at the time this action was
filed. See Lebanon Cnty. Emps’. Ret. Fund v. Collis, 311 A.3d 773, 780 n.19 (Del. 2023).
144
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048
(Del. 2004).
145
Ryan v. Gursahaney, 2015 WL 1915911, at *5 (Del. Ch. Apr. 28, 2015), aff’d, 128 A.3d
991 (Del. 2015).
146
United Food & Com. Workers Union & Participating Food Indus. Emps. Tri-State
Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021).
32
(i) whether the director received a material personal benefit from the
alleged misconduct that is the subject of the litigation demand;
(ii) whether the director faces a substantial likelihood of liability on any
of the claims that would be the subject of the litigation demand; and
(iii) whether the director lacks independence from someone who
received a material personal benefit from the alleged misconduct that
would be the subject of the litigation demand or who would face a
substantial likelihood of liability on any of the claims that are the subject
of the litigation demand.147
“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.”148 “Demand futility is ‘conducted
on a claim-by-claim basis.’”149
Plaintiff attempts to plead demand is futile on the basis that more than half of
the demand board faces a substantial likelihood of liability due to bad faith breaches
of their duty of oversight. That duty sounds in the fiduciary duty of loyalty, and
specifically its subsidiary element of bad faith.150 Plaintiff has attempted to plead
two stripes of oversight claims, alleging the Director Defendants acted in bad faith
by failing to create systems to convey information to the Board, and by failing to
respond to information they received. The demand board is comprised of thirteen
147
Id.148
Id.149
In re Vaxart, Inc. S’holder Litig., 2021 WL 5858696, at *15 (Del. Ch. Dec. 1, 2021)
(quoting Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *4 (Del. Ch.
June 26, 2014)).
150
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369–70 (Del. 2006).
33
directors, so Plaintiff must plead seven face a substantial likelihood of liability. It
named only eight directors as defendants, and therefore concedes demand is not
futile as to five.
A. Plaintiff Failed To Plead Demand Is Futile As To Its
Information Systems Claim.
I begin with Plaintiff’s information systems claim against the Director
Defendants. To satisfy its duty of oversight, “the board must make a good faith
effort—i.e., try—to put in place a reasonable board-level system of monitoring and
reporting.”151 Thus, an information systems analysis focuses on whether the plaintiff
pled facts from which the court can infer the director defendants “made no effort to
put in place a board-level compliance system”152 or utterly failed “to assure a
reasonable information and reporting system exists.”153 “[O]ur case law gives
deference to boards and has dismissed Caremark cases even when illegal or harmful
company activities escaped detection,” so long as “the plaintiffs have been unable
to plead that the board failed to make the required good faith effort to put a
151
Id. at 821; see also id. (“[T]o satisfy their duty of loyalty, directors must make a good
faith effort to implement an oversight system and then monitor it.”).
152
Id.; see also Stone, 911 A.2d at 370 (“We hold that Caremark articulates the necessary
conditions predicate for director oversight liability: (a) the directors utterly failed to
implement any reporting or information system or controls . . . . .”).
153
Stone, 911 A.2d at 372 (internal quotation marks omitted) (quoting In re Caremark Int’l
Inc. Deriv. Litig., 698 A.2d 959, 971 (Del. Ch. 1996)).
34
reasonable compliance and reporting system in place.”154 And “Delaware courts
routinely reject the conclusory allegation that because illegal behavior occurred,
internal controls must have been deficient, and the board must have known so.”155
The Court must remain “conscious of the need to prevent hindsight from dictating
the result of a Caremark action; a bad outcome, without more, does not equate to
bad faith.”156
Still, having the “trappings of oversight”157 will not necessarily foreclose an
information systems claim where those systems are “woefully inadequate” or do not
put “meaningful controls in place.”158 To that end, our courts have concluded a
Caremark claim may be pled by alleging “the company had an audit committee that
met only sporadically and devoted patently inadequate time to its work, or that the
audit committee had clear notice of serious accounting irregularities and simply
chose to ignore them or, even worse, to encourage their continuation.”159
Defendants moved to dismiss on the basis that Centene had a rigorous system
for monitoring Medicaid compliance and reporting deficiencies to the Board.
154
Marchand v. Barnhill, 212 A.3d 805, 821 (Del. 2019).
155
Desimone v. Barrows, 924 A.2d 908, 940 (Del. Ch. 2007).
156
Rich ex rel. Fuqi Int’l, Inc. v. Yu Kwai Chong, 66 A.3d 963, 980 (Del. Ch. 2013).
157
Hughes v. Xiaoming Hu, 2020 WL 1987029, at *16 (Del. Ch. Apr. 27, 2020).
158
Rich, 66 A.3d at 982–82 (emphasis omitted).
159
Hughes, 2020 WL 1987029, at *14 (internal quotation marks omitted) (quoting Guttman
v. Huang, 823 A.2d 492, 507 (Del. Ch. 2003)).
35
Plaintiff has not pled, or even argued, that Centene lacked an adequate oversight
framework on paper. Instead, Plaintiff relies on a line of cases concluding the
existence of such systems does not foreclose an information systems claim where
the board knows they are inadequate.160 My analysis focuses on whether a majority
of the demand board had such knowledge.161
Plaintiff attempts to plead board-level awareness with allegations sweeping
from February 2017 to February 2021. But to plead that a majority of the demand
board faces a substantial likelihood of liability for this claim, Plaintiff must plead
Dallas, Robinson, and Trubeck knew of the relevant deficiencies.162 Though
Robinson joined the Board in late 2019, Dallas and Trubeck joined the Board in
January 2020. Plaintiff does not allege, even in conclusory fashion, that these
directors were brought up to date on earlier alleged oversight shortcomings.
Therefore, the analysis hinges on information the Board received after January 2020.
160
Id. at *14–16; Rich, 66 A.3d at 982–83; see also Constr. Indus. Laborers Pension Fund
v. Bingle, 2022 WL 4102492, at *12 (Del. Ch. Sept. 6, 2022) (“This inference I find
unwarranted. To be sure, nominal acts of delegation, such as delegating oversight
responsibility to a Board subcommittee that failed to meet, or that failed to investigate
serious misconduct after being put on notice, are not preclusive of an oversight claim.”),
aff’d, 297 A.3d 1083 (Del. 2023).
161
See Marchand, 212 A.3d at 824 (reasoning Caremark requires “that a board make a
good faith effort to put in place a reasonable system of monitoring and reporting about the
corporation’s central compliance risks” (emphasis added)).
162
If Plaintiff pleads Burdick faces a substantial likelihood of liability, the math leaves
Plaintiff having to plead two of these three do as well. Dallas and Trubeck were identically
situated, having joined the Board at the same time and served on neither the audit
committee nor the compliance committee.
36
Within that narrowed timeframe, Plaintiff points to information received at
four compliance committee meetings and focuses exclusively on information the
committee received as part of the annual health plan compliance program
evaluation.163 Centene’s corporate compliance team provided the compliance
committee with quarterly updates on the company’s health plan compliance program
evaluation.164 That assessment encompassed compliance with each health plan’s
Medicaid contract as well as legal and regulatory compliance.165 Plaintiff relies on
findings common across all of Centene’s health plans reported in October 2019
(which it alleges was shared with the full Board in 2020166), February, July, and
October 2020, and February 2021, including “[d]eficiencies in the quality and
completeness of contract and regulatory assessments.”167 At each meeting, the
163
PAB 37.
164
E.g., Crawford Aff., Ex. 34 at -0818.
165
See, e.g., Crawford Aff., Ex. 54 at -1465 (“Assessments ensure there are processes,
policies and procedures in place to address contract requirements.”); Crawford Aff., Ex. 55
at -1751 (displaying chart relating to health plan compliance assessment titled “Contract
and Law/Reg Compliance Status as of July 6, 2017”).
166
Compl. ¶ 176.
167
Crawford Aff., Ex. 32 at -0969; Crawford Aff., Ex. 34 at -0818; Crawford Reply Aff.,
Ex. 2 at -0919; Crawford Aff., Ex. 39 at -3243; Crawford Aff., Ex. 40 at -3296. Plaintiff
identifies others. PAB 37–38 (identifying reports of “(i) ‘deficiencies in the quality and
completeness of Medicaid contract assessments (a repeat issue from 2019)’; (ii)
‘Insufficient compliance committee oversight of core compliance activities’; (iii)
‘Compliance performing non-compliance functions’; (iv) ‘Failure to document governance
body actions and activities . . . within meeting minutes’; (v) ‘Insufficient and/or untimely
finding/risk remediation, including inadequate root cause analysis, insufficient
37
compliance committee was expressly informed of specific measures management
was taking or had taken to address each of the shortcomings identified for the
compliance committee.168
From there, Plaintiff infers the compliance committee shared these
deficiencies with the full Board. This is based on the fact the committee reported to
the Board at its February 2020, October 2020, and February 2021 meetings.169 This
is a significant inference. But if I were to make it, it would be unreasonable to infer
the committee did not also inform the Board of the actions taken to address those
deficiencies. And so even accepting Plaintiff’s requested inference, the Board
oversaw improvements to Centene’s Medicaid compliance systems for as long as it
was aware of the deficiencies at the heart of Plaintiff’s claim. This falls far short of
a showing that the directors “turned a blind eye” to problems with its reporting
systems or knew that Centene effectively had no controls in place.170 Plaintiff failed
preventative remediation plans, failing to provide ongoing remediation status updates, and
failing to ensure contract assessments reflect current compliant/non-compliant status;’ and
(vi) ‘Inadequate documentation/investigation of root cause of findings, and remediation
plans.’” (alteration in original) (citations omitted)).
168
Crawford Aff., Ex. 32 at -0969; Crawford Aff., Ex. 34 at -0818; Crawford Aff., Ex. 39
at -3243; Crawford Reply Aff., Ex. 2 at -0919; Crawford Aff., Ex. 40 at -3296.
169
Crawford Aff., Ex. 42 at -3226; Crawford Aff, Ex. 58 at -5453; Crawford Aff., Ex. 41
-6411.
170
Hughes, 2020 WL 1987029, at *14; Rich, 66 A.3d at 982–83 (concluding the company
“had no meaningful controls in place”). Notably, the record demonstrates that these
deficiencies were uncovered only after Centene improved its health plan compliance
assessment.
38
to establish that a majority of the demand Board knew Centene lacked reasonable
compliance systems and failed to make a good faith effort to implement a reasonable
system.
Plaintiff’s fallback argument swings for the fences: it asks the Court to infer
bad faith from the mere absence of any Board or committee discussion of Medicaid
compliance, given the extent to which Centene’s revenue depended on its Medicaid
business.171 In Marchand v. Barnhill, the Delaware Supreme Court identified
specific circumstances compelling the “inference that a board has undertaken no
efforts to make sure it is informed of a compliance issue intrinsically critical to the
company’s business operation,” which in turn “support[ed] an inference that the
board has not made the good faith effort that Caremark requires.”172 The Supreme
Court considered six facts supporting such a conclusion, only one of which was an
absence of regular board-level discussions on the relevant topic:
171
The complaint alleges 67% of Centene’s revenue derived from its Medicaid business.
For purposes of this motion, I assume that allegation is well pled.
172
212 A.3d 805, 822 (Del. 2019).
39
• no board committee that addressed food safety existed;
• no regular process or protocols that required management to keep
the board apprised of food safety compliance practices, risks, or
reports existed;
• no schedule for the board to consider on a regular basis, such as
quarterly or biannually, any key food safety risks existed;
• during a key period leading up to the deaths of three customers,
management received reports that contained what could be
considered red, or at least yellow, flags, and the board minutes
of the relevant period revealed no evidence that these were
disclosed to the board;
• the board was given certain favorable information about food
safety by management, but was not given important reports that
presented a much different picture; and
• the board meetings are devoid of any suggestion that there was
any regular discussion of food safety issues.173
In In re Boeing Company Derivative Litigation, all those same circumstances were
present and compelled the same inference of bad faith.174
Even assuming it is reasonable to infer neither the Board nor its committees
discussed Medicaid compliance from January 2020 through April 2021, this alone
is not enough for the Court to conclude a board of directors acted in bad faith—
Plaintiff has not painted the extreme picture present in Marchand and Boeing. On
the contrary, Centene had three committees responsible for overseeing Medicaid
173
Id.174
2021 WL 4059934, at *26 (Del. Ch. Sept. 7, 2021).
40
compliance; the record shows two did real work and reported to the full Board.
Management was required to report quarterly to the compliance committee on the
company’s annual health plan compliance assessment, which encompassed
compliance with each health plan’s Medicaid contract as well as legal and regulatory
compliance.175 Management conducted an annual internal audit and reported to the
Board on a quarterly basis. The internal audit likewise covered Medicaid
compliance.176 The full Board regularly received enterprise risk management
reports, which identified key risks, and many of those presentations specifically
discussed risks pertaining to the company’s PBM operations.177 And Plaintiff did
not adequately plead any red flags management was aware of that did not reach the
Board.178
Plaintiff has not pled facts supporting an inference that the Director
Defendants failed to make a good faith effort to establish a reasonable reporting
175
See supra note 165.
176
Compl. ¶ 208.
177
E.g., Crawford Aff., Ex. 49 at -3613.
178
Plaintiff points out that the Ohio attorney general’s announcement did not reach the
Board until much later. Dallas, Trubeck, and Robinson were not on the Board when it was
informed of it. Therefore, this fact could not serve as a red flag.
41
system. Plaintiff failed to plead a majority of the demand board faces a substantial
likelihood of liability on this basis.179
B. Plaintiff Failed To Plead Demand Is Futile As To Its Red
Flags Claim.
I now turn to Plaintiff’s argument that a majority of the demand board faces a
substantial likelihood of liability for ignoring reports of legal risks in connection
with Centene’s PBM operations. Directors are liable for an oversight failure where
they implemented a reporting system or controls, but “consciously failed to monitor
or oversee its operations thus disabling themselves from being informed of risks or
problems requiring their attention.”180 This claim can be pled by “alleging that the
board’s information system generated red flags indicating wrongdoing to which the
directors failed to respond.”181 “Typically . . . the red flag analogy depicts events or
reports that serve as warning signs to the Board of corporate wrongdoing after a
system of reporting and compliance is in place.”182
179
Plaintiff also contends that Centene’s fraud, waste, and abuse policy applied only
externally and not internally and that Centene’s internal audit did not encompass Envolve
during the relevant period. Even if Plaintiff is correct as to both points, it would not disturb
my conclusion that it failed to plead the Director Defendants acted in bad faith.
180
Stone, 911 A.2d at 370.
181
In re McDonald’s Corp. S’holder Deriv. Litig., 291 A.3d 652, 676 (Del. Ch. 2023).
182
Horman v. Abney, 2017 WL 242571, at *11 (Del. Ch. Jan. 19, 2017).
42
Generally, “‘red flags’ are a proxy for pleading knowledge.”183 Whether an
event or report is a red flag depends on context.184 Where the plaintiff’s claim centers
on violations of law, an event must have sufficient nexus with the underlying
wrongdoing to serve as a red flag.185 At the pleading stage, that nexus exists where
183
See In re Gen. Motors Co. Deriv. Litig., 2015 WL 3958724, at *16 (Del. Ch.
June 26, 2015), aff’d sub nom. In re Gen. Motors Co. Deriv. Litig., 133 A.3d 971 (Del.
2016).
184
See, e.g., Rojas ex rel. J.C. Penney Co., Inc. v. Ellison, 2019 WL 3408812, at *13 (Del.
Ch. July 29, 2019) (explaining the “sheer amount” of a settlement payment “and the posture
of the case when it settled are far from sufficient in the context of the overall circumstances
to support the inference of scienter necessary to demonstrate that [the company’s] directors
acted in bad faith”).
185
See Clem v. Skinner, 2024 WL 668523, at *9 (Del. Ch. Feb. 19, 2024) (rejecting the
argument that certain events served as red flags because they did not “concern[],” “relate
to,” or were “‘sufficiently similar’ to the wrongdoing challenged by the plaintiffs” (quoting
Melbourne Mun. Firefighters’ Pension Tr. Fund ex rel. Qualcomm, Inc. v. Jacobs, 2016
WL 4076369, at *8 (Del. Ch. Aug. 1, 2016), aff’d, 158 A.3d 449 (Del. 2017)); City of
Detroit Police & Fire Ret. Sys. ex rel. NiSource, Inc. v. Hamrock, 2022 WL 2387653, at
*26 (Del. Ch. June 30, 2022) (concluding an alleged red flag evincing “a failure to follow
internal documentation” did not put the directors on notice of a potential corporate trauma
concerning a failure to “maintain proper documentation”); Melbourne Mun. Firefighters’
Pension Tr. Fund ex rel. Qualcomm, Inc. v. Jacobs, 2016 WL 4076369, at *8 (Del. Ch.
Aug. 1, 2016) (“The subsequent complained-of ‘corporate trauma,’ however, must be
sufficiently similar to the misconduct implied by the ‘red flags’ such that the board’s bad
faith, ‘conscious inaction’ proximately caused that trauma.” (footnote omitted) (quoting
South v. Baker, 62 A.3d 1, 15 (Del. Ch. 2012)), aff’d, 158 A.3d 449 (Del. 2017); In re Dow
Chem. Co. Deriv. Litig., 2010 WL 66769, at *13 (Del. Ch. Jan. 11, 2010) (“Plaintiffs argue
that because bribery may have occurred in the past ([the company] paid a fine to the SEC
in January 2007), by different members of management, in a different country (India), and
for a different transaction (pesticide registrations), the board should have suspected similar
conduct by different members of management, in a different country, in an unrelated
transaction. This argument is simply too attenuated to support a Caremark claim.”
(footnote omitted)); see also In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 129
(Del. Ch. 2009) (rejecting the argument that “prior, unrelated wrongdoing would make
directors ‘sensitive to similar circumstances’” (citation omitted)).
43
the Court can reasonably infer that the alleged red flag put the board on notice or
should have put the board on notice of the wrongdoing alleged in the plaintiff’s
complaint.186 The receipt of a subpoena or notice a lawsuit has been filed is not per
se evidence that the company is engaged in ongoing wrongdoing.187 Rather, whether
subpoenas or regulatory investigations serve as red flags absent a finding of
wrongdoing “depends on the circumstances.”188 The same is true of civil litigation,
which may serve as a red flag if there are other facts suggesting the board was
already on notice of wrongdoing.189
Plaintiff tacitly acknowledges that this Court has rejected the idea that reports
of increasing regulatory scrutiny, state investigations, and threatened litigation,
without more, constitute red flags.190 Plaintiff contends such reports served as red
flags here because they were presented in the context of notice that Centene’s
compliance assessment and monitoring functions were not functioning. Plaintiff
argues those reports, coupled with reports of inadequate compliance measures, gave
186
See Clem, 2024 WL 668523, at *10.
187
Id. (“The receipt of a lone subpoena or launch of a regulatory investigation does not
necessarily show that directors knew the company was breaking the law. It might not even
indicate that the company was breaking the law in the first place.” (footnote omitted)).
188
Rojas, 2019 WL 3408812, at *11.
189
Cf. id. at *13 (“The Spann action was a purely civil matter of the type that commercial
parties routinely settle after motion practice. It was not brought against the backdrop of a
prior settlement where clear, repeated violations of a law had been found.”).
190
PAB at 51–52 (citing Fisher ex rel. LendingClub Corp. v. Sanborn, 2021 WL 1197577(Del. Ch. Mar. 30, 2021); Reiter v. Fairbank, 2016 WL 6081823 (Del. Ch. Oct. 18, 2016)).
44
the Board notice that Centene was headed for a corporate trauma, and that the Board
willfully ignored that information and consciously decided not to act.
For purposes of demand futility, the analysis must focus on the period after
Dallas and Trubeck joined the Board. After that period, the reports of Centene’s
compliance issues were limited to the annual health plan compliance reports to the
compliance committee, which Plaintiff alleges were passed on to the Board.
Against that backdrop, Plaintiff identifies several red flags, which can be
grouped into three categories: (1) the subpoena served on KMPG in connection with
the Ohio attorney general’s investigation; (2) updates that Centene was continuing
to face regulatory and legal scrutiny or was continuing to face an increase in
regulatory scrutiny and legal scrutiny; and (3) updates from Centene’s general
counsel concerning regulatory investigations in Ohio and elsewhere.191 I address
each category of information in turn, then consider them in the context of the
compliance committee’s reports.
The audit committee learned of the KPMG subpoena on April 22, 2019.
Plaintiff infers the committee informed the Board of the subpoena when it gave its
Board update the following day.192 Dallas, Robinson, and Trubeck did not serve on
191
Plaintiff also points out that at the audit committee’s February 2020 meeting, it was
informed that Centene “renewed the CVS Contract without consulting the Board.” PAB
48. I understand Plaintiff is not presenting this fact as a red flag.
192
Crawford Aff., Ex. 43 at -7317.
45
the Board when any of those updates were given, and Plaintiff does not allege they
were later provided with this information. Even assuming the audit committee
passed its information along to the full Board, that information was limited to what
the committee knew, which was that the Ohio attorney general “would be issuing a
grand jury subpoena requesting the [Ohio MCO subsidiary’s] audit working papers
for 2016, 2017, and perhaps 2018.”193 This falls far short of putting the directors on
notice of the Cost Reporting Scheme’s existence or demonstrating that they should
have been aware.194 Indeed, nothing in the record suggests that the directors knew
of the subpoena’s contents or the conduct the Ohio attorney general was
investigating.195 The subpoena, the contents of which were unknown, could not have
put the demand board on notice of any impending corporate trauma.
193
Szustak Aff., Ex. 14 at -2963.
194
Clem, 2024 WL 668523, at *10; Fisher ex rel. LendingClub Corp. v. Sanborn, 2021
WL 1197577, at *12 (Del. Ch. Mar. 30, 2021) (“The issuance of a subpoena or the launch
of a regulatory investigation does not ‘necessarily demonstrate that a corporation’s
directors knew or should have known that the corporation was violating the law.’” (quoting
Rojas, 2019 WL 3408812, at *11)).
195
See Fisher, 2021 WL 1197577, at *20 (reasoning the plaintiff failed to plead the director
defendants had actual knowledge of the subject matter of an FTC investigation where the
complaint contained no allegations that the directors reviewed a subpoena issued in
connection with the investigation and where no board-level presentations described the
subpoena’s contents).
46
Next, beginning in 2018, the Board was aware of regulatory scrutiny into its
PBM operations, sparked, at least in part, by a public backlash to spread pricing.196
Management told the Board Centene was responding by moving all health plans to
a pass-through pricing model by 2020 through the transition to RxAdvance.197 By
February 2019, the Board was told regulatory inquiries were ongoing in three states,
and that Centene faced the risk of adverse legal consequences as a result of those
investigations, including findings that its MCO subsidiaries were not complying
with their state Medicaid contracts.198 Those three states were out of the thirty in
which Centene operated managed care Medicaid plans that year. 199 Plaintiff does
not allege the Board was aware of the exact subject of those inquiries; there are no
allegations supporting the inference that the directors had reason to suspect
wrongdoing. In April, the Board was informed that the Ohio attorney general
signaled an intent to sue PBMs.200 The Board received no additional negative
information on the issue through the end of 2019, save a legal update that was limited
196
Crawford Aff., Ex. 26 at -5935. Plaintiff acknowledges that these updates did not
specifically reference illegal or fraudulent conduct. PAB 54 (“That reports of steadily
increasing regulatory scrutiny failed to reference specific illegal or fraudulent conduct . . .
.”).
197
Crawford Aff., Ex. 24 at -5282.
198
Crawford Aff., Ex. 25 at -4594, -4598.
199
Centene Corporation, Form 10-K (Annual Report), at 5 (Feb. 18, 2020).
200
Crawford Aff., Ex. 22 at -4901.
47
to the events in Ohio.201 And again, Dallas, Robinson, and Trubeck did not serve on
the Board when any of those updates were given, and Plaintiff does not allege they
were later provided with an update on any of the forgoing.
In February 2020, the Board was informed the scrutiny continued, though the
Board was not told it had expanded to any additional states.202 Then in April, the
enterprise risk management update categorized PBM risk as a legal risk for the first
time.203 It is reasonable to infer this reframing was significant and represented a
perceived greater risk of adverse legal action. But the update still did not put the
Board on notice of the Cost Reporting Scheme. Even if it put the Board on notice
of a risk of corporate trauma, the Board was simultaneously informed that “[s]enior
management [was] actively working to mitigate legal exposures and to take
corrective action to lessen future legal risk.”204
In July, the Board received an update from Centene’s general counsel, but that
update was limited to Ohio.205 Later in the year a presentation specified four states
in which regulatory inquiries remained ongoing, and a legal services update noted
201
Crawford Aff., Ex. 27 at -5220.
202
Crawford Aff., Ex. 42 at -3375.
203
Crawford Aff., Ex. 49 at -3613.
204
Id.205
Crawford Reply Aff., Ex. 4 at -7314.
48
that a plaintiff’s law firm was investigating in four states.206 But the Board was again
assured management was working to address the issue.207 The Board again received
similar information in February 2021, with the same assurance that steps were being
taken.208
And so, through April 2020, PBM risk was presented as a regulatory and
reputational risk with the possibility for adverse legal action. Those updates were
devoid of details and at best put the Board on notice of regulatory scrutiny into
Centene’s PBM operations in a handful of states. When the matter was framed as a
regulatory risk, the directors were informed that management was addressing it
through lobbying and public relations.209 When the risk was framed as a legal one
beginning in April 2020, the directors were told that management was actively
working to mitigate that risk and decrease Centene’s exposure.210 The Board was
not put on notice that Centene was heading for corporate trauma—and certainly not
from the Cost Reporting Scheme or any other particular wrongdoing.
Finally, as to the general counsel’s updates, there is no indication that they put
the Board on notice of anything other than the Ohio attorney general’s investigation
206
Crawford Aff., Ex. 58 at -5625, -5798.
207
Id. at -5625.
208
Crawford Aff., Ex. 41 at -6603.
209
E.g., Crawford Aff., Ex. 26 at -5997.
210
E.g., Crawford Aff., Ex. 58 at -5625.
49
and potential litigation in up to three other states. And Plaintiff failed to plead
particularized facts demonstrating the general counsel described the Cost Reporting
Scheme or any other wrongdoing of which Centene was being accused, as there is
nothing in the record suggesting Centene was aware of that information before the
Ohio attorney general filed its complaint. Regardless, the states identified in the
general counsel’s reports represent only a fraction of the states in which Centene
operated managed care plans. This is hardly the sort of widespread legal action that
puts directors on notice of impending corporate trauma.211
Consistent with this granular review of the information given to the Board,
Plaintiff makes no argument that the demand board was on notice or should have
been on notice of the Cost Reporting Scheme specifically. Plaintiff’s argument is
more abstract: the aforementioned information, set in the context of the knowledge
that Centene’s compliance systems needed improvement, should have put the Board
on notice that Centene was headed for a corporate trauma, and that from there, the
Board willfully ignored that evidence and decided to do nothing.
211
See, e.g., Lebanon Cnty. Emps.’ Ret. Fund v. Collis, 2022 WL 17841215, at *16 (Del.
Ch. Dec. 22, 2022) (“In this case, the complaint identifies over seventy examples of
subpoenas, settlements, civil litigation, congressional reports, and analyses of regulatory
risks that put the directors on notice of problems at the Company. The directors did not
just see red flags; they were wrapped in them.”), rev’d on other grounds, 311 A.3d 773(Del. 2023).
50
I will assume that that adding knowledge of a known faulty compliance
system to knowledge of investigations, a subpoena, and regulatory scrutiny would
put the Board on notice that Centene was heading for major corporate trauma. But
Plaintiff has not supported the essential conclusion that the Board ignored that
information in bad faith. “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.”212 Plaintiff has not shown the
Board failed to respond in bad faith. Rather, the Board accepted management’s
statements that both the compliance issues and the regulatory risks were being
handled. The Board did not make a conscious decision to violate the law. Plaintiff
has not rebutted the presumption that the Board acted in good faith.
* * *
Plaintiff failed to plead that a majority of the demand board faces a substantial
likelihood of liability for its Caremark claims. Count I is dismissed. The demand
board is therefore capable of considering whether to bring Counts II and III against
the Officer Defendants. Those counts are likewise dismissed.
212
Walton, 2023 WL 3093500, at *33.
51
III. CONCLUSION
Defendants’ motion to dismiss is GRANTED as to Counts I, II, and III.
52