LASTER, Vice Chancellor.
On September 1, 2010, Allergan, Inc. entered into a settlement with the United States Department of Justice pursuant to which Allergan pled guilty to criminal misdemeanor misbranding and paid a total of $600 million in civil and criminal fines. Various specialized plaintiffs' law firms quickly filed derivative actions in both this Court and in the United States District Court for the Central District of California (the "California Federal Court").
Litigation proceeded in both courts. The California Federal Court initially dismissed a consolidated complaint pursuant to Rule 23.1 without prejudice, then later dismissed an amended and consolidated complaint pursuant to Rule 23.1 with prejudice (the "California Judgment"). Meanwhile, I postponed briefing on the defendants' motions to dismiss to accommodate the efforts of one stockholder, U.F.C.W. Local 1776 & Participating Employers Pension Fund ("UFCW"), to obtain books and records using Section 220 of the General Corporation Law, 8 Del. C. § 220. UFCW subsequently intervened in this action, and the plaintiffs jointly filed an 84-page, 241-paragraph Verified Second Amended Derivative Complaint dated July 8, 2011 (the "Complaint").
The defendants have moved to dismiss the Complaint. First, they say that the California Judgment mandates dismissal with prejudice under the doctrine of collateral estoppel. Second, they say that even if reviewed independently, the Complaint fails to plead demand futility under Rule 23.1. Third, they say that the Complaint fails to state a claim under Rule 12(b)(6). I reject these arguments and deny the defendants' motions.
The facts for purposes of the motions to dismiss are drawn from the Complaint and the documents it incorporates by reference. The incorporated documents include publicly available information, such as a government sentencing memorandum, and non-public books and records that UFCW obtained by using Section 220, such as Allergan's internal board-approved strategic plans and warning letters from the U.S. Food and Drug Administration (the "FDA"). The Complaint contains numerous particularized factual allegations from which inferences reasonably could be drawn in favor of either the plaintiffs or the defendants. At this stage of the case, the plaintiffs receive the benefit of all reasonable inferences.
Nominal defendant Allergan is a Delaware corporation that develops and commercializes specialty pharmaceuticals, biologics, and medical devices. Allergan's stock trades on the New York Stock Exchange under the symbol "AGN." The twelve individual defendants comprised Allergan's board of directors (the "Board") at the time this action was initiated. Defendant Pyott has served as Allergan's CEO since 1998 and as Chairman of the Board since 2001. Defendants Boyer, Gallagher, Herbert, and Schaeffer have served as outside directors since before 2000. Defendants Ryan, Ray, and Jones joined the board as outside directors in 2002, 2003, and 2004, respectively. Defendants Lavigne and Ingram joined the board in 2005. Defendants Dunsire and Hudson joined the board in 2006 and 2008, respectively.
Allergan manufactures Botox, a drug widely known for its muscle-relaxing properties. The trade name derives from its active ingredient, the neurotoxin botulinum toxin type A. The government settlement and this opinion address only Botox Therapeutic; they do not address its better-known sibling, Botox Cosmetic, which has its own FDA-approved label and drug code.
The FDA first approved Botox for therapeutic use in 1989 for treating two eye muscle disorders: strabismus (crossed eyes) and blepharospasm (abnormal spasm of the eyelids). In December 2000, the FDA approved Botox for treating pain associated with cervical dystonia (involuntary neck muscle contraction). In July 2004, the FDA approved the product for treating severe primary axillary hyperhidrosis (underarm sweating). Not until 2010 would the FDA approve two additional treatments: upper-limb spasticity (approved in March 2010) and migraine headaches (approved in October 2010).
A small market existed for the limited Botox uses approved by the FDA before 2010. Treating physicians, however, were not limited to FDA-approved applications. In the United States, a physician may prescribe an approved pharmaceutical product for any use, including uses not approved by the FDA. Prescribing a pharmaceutical product for an FDA-approved use is referred to as "on-label" use; prescribing the same product for an unapproved use is referred to as "off-label" use. "`Off-label use is widespread in the medical community and often is essential to giving patients optimal medical care, both of which medical ethics, FDA, and most courts recognize.'" Buckman Co. v. Plaintiffs' Legal Comm., 531 U.S. 341, 351 n. 5, 121 S.Ct. 1012, 148 L.Ed.2d 854 (2001) (quoting James M. Beck & Elizabeth D. Azari, FDA, Off-Label Use, and Informed Consent: Debunking Myths and Misconceptions, 53 Food & Drug L.J. 71, 72 (1998)).
Because a physician legally can prescribe a product for off-label use, a manufacturer
Allergan understood the critical distinction between off-label sales and marketing. Allergan's 2004 Annual Report summarized the regulatory scheme as follows:
This derivative action arises out of Allergan's failed efforts (as demonstrated by the guilty plea and government settlement) to walk the fine line between off-label sales and off-label marketing.
Allergan strongly advocated expanded uses for Botox and supported off-label Botox sales with a phalanx of initiatives. The company sponsored Botox seminars and presentations about off-label uses, founded and financed organizations that advocated off-label uses, provided support services for physicians seeking reimbursement for off-label uses, and lobbied government healthcare programs to expand reimbursement for off-label uses. Allergen CEO Pyott was such a vocal advocate for the drug that he earned the nickname "Mr. Botox."
Most importantly, Allergan cultivated relationships with physicians, a strategy it considered critical to increasing off-label Botox use. Allergan instituted a Physician Partnership Program in which it paid selected physicians to be travelling mentors to promote Botox use among their peers, and it funded physician "preceptorships" in which Allergan personnel shadowed participating physicians. Allergan monitored physician prescription writing, identified those doctors who prescribed high levels of Botox, and recruited them for its Physician Partnership Program. Allergan also funded continuing medical education programs, seminars, and promotional dinners. In 2006 alone, the company sponsored more than 1,200 physician speaker programs.
Allergan recognized that growth in off-label Botox use largely depended on physicians receiving reimbursement from healthcare programs. To facilitate reimbursement, Allergan employed Provider Reimbursement Account Managers to counsel physicians concerning off-label Botox prescriptions. The Provider Reimbursement Account Managers audited physician billing records and reviewed the payments physicians received to assist in maximizing reimbursement for off-label use. Allergan maintained a physician-assistance hotline that doctors could call for additional off-label reimbursement advice and billing assistance. To provide a financial incentive for physicians to write more
Allergan also financed a number of organizations to support off-label Botox use. Mitchell Bren, Allergan's chief scientific officer for Botox, founded WE MOVE, the Worldwide Education and Awareness for Movement Disorders Organization. WE MOVE distributed medical literature to physicians that provided dosing guidelines for off-label uses, including a "Suggested Pediatric BOTOX® Dosing" manual. Allergan also funded the Neurotoxin Institute, an on-line organization that disseminated information about off-label Botox uses. Although funded by Allergan, the Institute described itself on its website as "a multidisciplinary organization created to serve as a comprehensive independent source of information related to the basic science and the clinical applications of neurotoxins." Compl. ¶ 78 (emphasis added; internal quotation omitted). Allergan financed another entity, the Alliance for Patient Access, whose mission was to reduce coverage barriers to reimbursement for off-label Botox uses.
The Allergan Board played an active role in planning and monitoring the growth of Botox, which was one of the company's most promising products. From at least 1997, the Board discussed and approved a series of annual strategic plans that sought to expand off-label Botox sales. A slide deck summarizing the 1997-2001 Strategic Plan listed "BOTOX — Spasticity, migraine, and pain" as one of Allergan's "Top Corporate Priorities." German Aff. Ex. D, Plan Slides, at 10 [hereinafter the Plan Slides]. At the time, those uses were not approved by the FDA. The slides further noted that Botox "represent[s] immediate growth" for Allergan and that the "[e]xpansion strategy enables Allergan to maximize ... BOTOX® now." Id. at 11. The plan noted that Botox would enable Allergan to compete in the "pain market" and "migraine headache market," which were estimated to grow to a combined $6 billion by 2007. Written Plan at 3. The plan described Botox as having "tremendous growth potential as we fund opportunities ... such as spasticity, pain, migraine, and tension headache." Id. Each remained an off-label use until at least 2010.
The Board regularly monitored Botox sales. For example, at a September 2002 Board meeting, Pyott "reviewed BOTOX® growth in average daily sales." Compl. ¶ 15. At a July 2003 Board meeting, Pyott "discussed BOTOX® sales growth over last 12 months, the then-current sales mix of BOTOX® Therapeutic (58%) v. BOTOX® Cosmetic (42%), intra-therapeutic growth rates for BOTOX®, and BOTOX® capacity utilization and scenarios." Id.
Allergan first drew government scrutiny for its Botox initiatives on August 22, 2001, when Allergan received a warning letter from the FDA. The letter noted that the FDA had "reviewed [Allergan] promotional activities and materials and has concluded that they are misleading and lacking in fair balance...." German Aff. Ex. F. The letter requested that Allergan take
Despite the FDA warnings, Allergan continued to drive Botox sales, which increased rapidly. Between 2000 and 2004, net sales of Botox grew between 25% and 42% annually, despite being approved by the FDA for only four limited uses. Compl. ¶ 53. Off-label sales skyrocketed. Between 1999 and 2006, spasticity sales grew by 332%; headache sales grew by 1,407%; and pain sales grew by 504%. Id. ¶ 12. By 2005, Botox accounted for 33% of Allergan's total net sales. Id. ¶ 170.
On September 21, 2006, the FDA sent a letter to Allergen concerning off-label marketing during a presentation by an Allergan-sponsored speaker, Dr. Jack Schim. Dr. Schim is the co-director of the Headache Center of Southern California and was a frequent participant in Allergan's sponsored-physician speaker program.
On October 24, 2006, Allergan's General Counsel Douglas S. Ingram advised the Board by email about the FDA inquiry. Ingram noted that Dr. Schim's speech "contained a large volume of information on the use of Botox for the treatment of headache," which was an off-label use at the time. German Aff. Ex. E. Ingram reminded the directors that the dinner programs were "directly funded, hosted, and controlled by Allergan" and that "the presentations are considered commercial promotion and Allergan is responsible for their content." Id. Ingram reported that
Id. (emphasis added).
Ingram advised the Board that "[i]t appears that the primary basis for this failure to comply with policy related to a perceived lack of responsibility within the sales and marketing organization." Id. According to Ingram, "[t]he sales representative and sales manager knew or should have known that [unapproved] slides were being used but apparently did not believe it was their responsibility to ensure that only [approved] slides were being used, as they were not part of the approval process for the slide decks." Id. Ingram warned that "[t]his is a potentially serious matter and in the current environment, the chance of receiving Agency action, including but not limited to a Warning Letter, on this matter is in my opinion very high." Id.
After the Schim incident, the Board continued to authorize aggressive efforts to increase Botox sales. For example, the Board approved Allergan's 2007-2011 Strategic Plan, which explicitly linked the number of sales representatives, or Neuroscience Medical Consultants ("NMCs"), to increased off-label sales. Compl. ¶ 176
During the same period, the Board received detailed reports on Botox sales. For example, management presented the Board with a 2007 Customer Survey that showed U.S. Botox sales figures for on-label and off-label uses. By 2007, annual Botox sales for therapeutic uses totaled nearly $600 million, with 70-80% generated by off-label use.
On September 1, 2010, Allergan entered into a settlement with the United States Department of Justice. The settlement followed a three-year joint investigation of Allergan's off-label marketing practices by the Federal Bureau of Investigation, the FDA's Office of Criminal Investigation, and the Department of Health and Human Services, Office of Inspector General. Under the terms of the settlement, Allergan agreed to plead guilty to criminal misdemeanor misbranding for the period from 2000 through 2005 and pay criminal fines of $375 million. Allergan also agreed to pay an additional $225 million in civil fines to resolve False Claims Act lawsuits which alleged similar off-label marketing claims. The $600 million penalty equaled 96% of the company's reported net income in 2009 and exceeded both its 2007 and 2008 net income.
As part of the settlement, Allergan entered into a five-year Corporate Integrity Agreement with the Department of Health and Human Services, Office of Inspector General. The agreement mandates that Allergan implement a strict compliance program, notify physicians of the government settlement, and post information on payments to physicians on the company's website.
The public announcement of the settlement on September 1, 2010, prompted plaintiffs' firms who specialize in stockholder representative litigation to rush to the courthouse. For reasons described below, this unfortunate behavior reflects understandable choices made by these rational economic actors given the incentives currently created by our legal system. See infra Part II.A.3.
On September 3, 2010, Louisiana Municipal Police Employees' Retirement System ("LAMPERS") filed this action. The original complaint relied solely on the Allergan press release and other publicly available information. Given the short time frame involved, counsel had minimal opportunity to investigate the claims. Nor could counsel have evaluated meaningfully whether or not a sufficient number of Allergan directors were disabled such that the Board was not the appropriate corporate actor to address the fallout from the government investigation.
Between September 9 and 24, 2010, other specialized stockholder plaintiffs' firms filed similar derivative actions in the California Federal Court. See Rosenbloom v. Pyott, No. SACV10-01352-DOC; Himmel v. Pyott, No. SACV10-01417-JVS; Pompano Beach Police & Firefighters' Ret. Sys. v. Pyott, No. SACV10-01449-DOC. On October 25, the California Federal Court consolidated the cases. See In re Allergan Inc. S'holder Deriv. Litig., Case No. SACV10-01352-DOC, 2011 WL 1429626. One stockholder plaintiffs' firm sent Allergan a litigation demand. See Dkt. 19, Ex. D.
On November 3, 2010, UFCW sent Allergan a Section 220 demand for books and records. On November 30, UFCW moved to intervene in this action. LAMPERS joined the defendants in vehemently opposing the motion to intervene. Rather than welcoming UFCW as a litigation partner and potential source of information to craft an even better complaint, LAMPERS attacked UFCW in an effort to maintain control over the case. LAMPERS' opposition maligned UFCW's efforts as "indefensible" and "serv[ing] only to unduly delay the adjudication of the rights of the original parties, while providing absolutely no benefit to Allergan, Inc." Dkt. 37, Opp'n Mem. 1-2. In doing so, LAMPERS seemed oblivious to the Delaware courts' repeated exhortations that plaintiffs use Section 220 before filing derivative actions, as UFCW was doing, or that defendants regularly prevail when moving to dismiss hastily filed derivative complaints prepared without the benefit of books and records. See infra Part II.A.3.
On January 21, 2011, I denied the motion to intervene without prejudice as prematurely filed, but postponed any hearing on the motions to dismiss "until after the 220 process is over." La. Mun. Police Empls. Ret. Sys. v. Pyott, C.A. No. 5795-VCL, at 56-57, 2011 WL 283303 (Del.Ch. Jan. 21, 2011) (TRANSCRIPT). LAMPERS and UFCW then reached an accommodation permitting both to serve as co-plaintiffs. After pressing forward with its Section 220 demand, UFCW eventually obtained documents. The Delaware plaintiffs jointly filed the Complaint on July 8. The defendants moved to dismiss on July 15.
Meanwhile, in the California Action, the California Federal Court dismissed the plaintiffs' first complaint without prejudice on April 12, 2011. The California plaintiffs asked Allergan for the Section 220 production, and Allergan shared it. The California plaintiffs subsequently filed an amended complaint that incorporated the documents Allergan provided, and the California defendants again moved to dismiss.
For reasons that are not clear to me, briefing on the motions to dismiss moved forward more quickly in California than in Delaware. On January 17, 2012, without the benefit of oral argument, the California Federal Court issued the California Judgment, a five-page order dismissing the California Action with prejudice pursuant to Rule 23.1 for failure to plead demand futility. On February 22, the California Federal Court denied a motion for reargument. The defendants then supplemented their motions to dismiss in this action to invoke collateral estoppel.
The defendants identify three bases on which they say judgment should be entered in their favor: collateral estoppel, Rule 23.1, and Rule 12(b)(6). If collateral estoppel applies, then I need not consider the others, so I start there.
Controlling Delaware Supreme Court precedent makes clear that until a Rule 23.1 motion has been denied, a derivative plaintiff whose litigation efforts are opposed by the corporation does not have authority to sue in the name of the corporation. Consequently, at the time of the first Rule 23.1 dismissal, other stockholders are not in privity with the stockholder plaintiff in the first derivative action, and a decision granting a Rule 23.1 dismissal cannot have preclusive effect. The dismissal remains persuasive authority, but it is not preclusive.
The defendants rely on LeBoyer, a California collateral estoppel decision that conflicts with controlling Delaware Supreme Court authority on the effect of a Rule 23.1 dismissal. If the collateral estoppel issue were properly presented to the California Federal Court, that court should decline to follow LeBoyer and hold instead that collateral estoppel does not bar a later derivative action by a different stockholder.
Because the California Judgment does not have preclusive effect, I analyze the defendants' motions to dismiss pursuant to Rules 23.1 and 12(b)(6). Respectfully disagreeing with the California Federal Court, I deny the Rule 23.1 motion. With all reasonable inferences drawn in favor of the plaintiffs, as required at this procedural stage, the Complaint's particularized allegations raise a reasonable doubt that a majority of the Board could properly consider a demand. Read as a whole, the particularized allegations support a reasonable inference that the Board consciously approved a business plan predicated on violating the federal statutory prohibition against off-label marketing. "[O]ne cannot act loyally as a corporate director by causing the corporation to violate the positive laws it is obliged to obey." Guttman v. Huang, 823 A.2d 492, 506 n. 34 (Del.Ch.2003). "[I]t is generally accepted that a derivative suit may be asserted by an innocent stockholder on behalf of a corporation against corporate fiduciaries who knowingly caused the corporation to commit illegal acts and, as a result, caused the corporation to suffer harm." In re Am. Int'l Gp., Inc., Consol. Deriv. Litig., 976 A.2d 872, 889 (Del.Ch.2009). The Complaint therefore pleads a non-exculpated breach of the duty of loyalty, exposes the defendants to a substantial threat of liability, and renders demand futile.
Determining that the Complaint alleges particularized facts that present a substantial threat of liability under the heightened Rule 23.1 pleading standard necessarily determines that the Complaint states a
The defendants observe that in LeBoyer, the California Federal Court applied collateral estoppel to hold that a California state court's dismissal with prejudice of one stockholder plaintiff's derivative action pursuant to Rule 23.1 barred a different stockholder plaintiff from suing derivatively. The defendants correctly point out that when applying collateral estoppel, this Court must give a judgment the same force and effect that it would be given by the rendering court.
LeBoyer described collateral estoppel as having five elements:
2007 WL 4287646, at *1 (quoting In re Cantrell, 329 F.3d 1119, 1123 (9th Cir. 2003)). In substance, LeBoyer's five-part test matches shorter formulations that the California Federal Court might apply. See, e.g., Hydranautics v. FilmTec Corp., 204 F.3d 880, 885 (9th Cir.2000) ("Under both California and federal law, collateral estoppel applies only where it is established that `(1) the issue necessarily decided at the previous proceeding is identical to the one which is sought to be relitigated; (2) the first proceeding ended with a final judgment on the merits; and (3) the party against whom collateral estoppel is asserted was a party or in privity with a party at the first proceeding.'" (quoting Younan v. Caruso, 51 Cal.App.4th 401, 59 Cal.Rptr.2d 103, 106 (1996))).
For purposes of this case, I need only consider privity. I need not contemplate whether a Rule 23.1 dismissal is "on the merits" for purposes of collateral estoppel.
Whether successive stockholders are sufficiently in privity with the corporation and each other is a matter of substantive Delaware law governed by the internal affairs doctrine. See Sonus Networks, 499 F.3d at 64. "No principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations...." CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987). "Corporations are creatures of state law, and investors commit their funds to corporate directors on the understanding that, except where federal law expressly requires certain responsibilities of directors with respect to stockholders, state law will govern the internal affairs of the corporation." Cort v. Ash, 422 U.S. 66, 84, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). "The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders...." Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982); accord VantagePoint Venture P'rs 1996 v. Examen, Inc., 871 A.2d 1108, 1113
The United States Supreme Court has held that "the function of the demand doctrine in delimiting the respective powers of the individual shareholder and of the directors to control corporate litigation clearly is a matter of `substance,' not `procedure,'" and is therefore governed by the internal affairs doctrine. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96-97, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991); accord Braddock v. Zimmerman, 906 A.2d 776, 784 (Del.2006) ("The demand requirement of Rule 23.1 is a substantive right...." (internal quotation omitted)); Ainscow v. Sanitary Co. of Am., 180 A. 614, 615 (Del.Ch.1935) (Wolcott, Jos., C.) ("The question of whether a stockholder may act as a volunteer in taking up the cudgels in behalf of his corporation ... is one of his right and authority to act."). Whether a stockholder in a Delaware corporation can sue derivatively after another stockholder attempted to plead demand futility raises a question of demand futility law. In Kamen, the United States Supreme Court held that applying a universal-demand rule in federal court would disrupt the internal affairs of corporations and cautioned "against establishing competing federal — and state — law principles on the allocation of managerial prerogatives within [a] corporation." Kamen, 500 U.S. at 106, 111 S.Ct. 1711 (citing Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979)). In my view, whether a stockholder can sue derivatively after another stockholder attempted to plead demand futility is equally a matter involving the managerial prerogatives within a corporation. It is therefore a matter controlled by the internal affairs doctrine and governed by the law of the state of incorporation. See id. at 108-09, 111 S.Ct. 1711 ("[A] court that is entertaining a derivative action ... must apply the demand futility exception as it is defined by the law of the State of incorporation."); VantagePoint, 871 A.2d at 1115 (following Kamen).
As in Kamen, applying the internal affairs doctrine in this setting promotes the important objective of treating directors, officers, and stockholders uniformly across jurisdictions. See Conflict of Laws § 302, cmt. e ("Uniform treatment of directors, officers and shareholders is an important objective which can only be attained by having the rights and liabilities of those persons with respect to the corporation governed by a single law.").
CTS Corp., 481 U.S. at 90-91, 107 S.Ct. 1637. To my mind, whether a stockholder in a Delaware corporation can sue derivatively after another stockholder attempted to plead demand futility should not be governed by potentially different rules across twelve federal circuits, fifty states, and the District of Columbia, Puerto Rico, and other territories. Applying different rules in different courts would disrupt the internal affairs of corporations. See Kamen, 500 U.S. at 106, 111 S.Ct. 1711. Whether a stockholder in a Delaware corporation can sue derivatively after another stockholder attempted to plead demand futility should be governed uniformly by Delaware law.
In determining that successive stockholders were in privity for purposes giving collateral estoppel effect to a Rule 23.1 dismissal, LeBoyer relied on the legal truism that a derivative plaintiff sues in the name of the corporation. In the court's words, "the fifth element is satisfied in that in both suits the plaintiff is the corporation itself. The differing groups of shareholders who can potentially stand in the corporation's stead are in privity for the purposes of issue preclusion." 2007 WL 4287646, at *3. Other decisions giving preclusive effect to Rule 23.1 dismissals have reasoned similarly.
499 F.3d at 63-64 (citations and internal quotation omitted).
These cases miss that as a matter of Delaware law, a stockholder whose litigation efforts are opposed by the corporation does not have authority to sue on behalf of the corporation until there has
634 A.2d 927, 932 (Del. 1993) (emphases added; citation omitted). In Kaplan v. Peat, Marwick, Mitchell & Co., the Delaware Supreme Court was equally clear:
540 A.2d 726, 730 (Del.1988) (emphasis added). Delaware Court of Chancery decisions have long expressed these same principles. See, e.g., Ainscow, 180 A. at 615 ("[A] stockholder has no right to file a bill in the corporation's behalf unless he has first made demand on the corporation that it bring the suit and the demand has been answered by a refusal, or unless the circumstances are such that because of the relation of the responsible officers of the corporation to the alleged wrongs, a demand would be obviously futile ...."); accord Maldonado v. Flynn, 413 A.2d 1251, 1262 (Del.Ch.1980) ("The stockholder's individual right to bring the action does not ripen, however, until he has made a demand on the corporation which has been met with a refusal by the corporation to assert its cause of action or unless he can show a demand to be futile."), rev'd on other grounds, Zapata Corp. v. Maldonado, 430 A.2d 779, 784 (Del.1981) ("[W]here demand is properly excused, the stockholder does possess the ability to initiate the action on his corporation's behalf.").
The derivative plaintiff's lack of authority to sue on behalf of the corporation until the denial of a Rule 23.1 motion likewise flows from the two-fold nature of the derivative suit. As the Delaware Supreme Court explained in Aronson v. Lewis, the seminal demand-futility decision, "[t]he nature of the [derivative] action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it." 473 A.2d 805, 811 (Del.1984).
Cantor v. Sachs, 162 A. 73, 76 (Del.Ch. 1932) (citations omitted); accord Harff v. Kerkorian, 324 A.2d 215, 218 (Del.Ch.1974) ("The nature of the derivative suit is two-fold: first, it is the equivalent of a suit by the stockholders to compel the corporation to sue; and second, it is a suit by the corporation, asserted by the stockholders in its behalf, against those liable to it."), aff'd in part, rev'd in part on other grounds, 347 A.2d 133 (Del.1975). The granting of a Rule 23.1 motion does not address claims brought in the name of the corporation. It addresses only the first phase of the derivative action in which the stockholder sues individually.
Under these controlling Delaware precedents, until the derivative action passes the Rule 23.1 stage, the stockholder does not have authority to assert the corporation's claims and is not suing in the name of the corporation. Until a Rule 23.1 motion is denied or the board decides not to oppose the derivative action, the stockholder plaintiff is only suing to "compel the corporation to sue." Aronson, 473 A.2d at 811. Put differently, the stockholder is asking the Court for authority to sue in the name of the corporation. Indeed, where a court grants a Rule 23.1 motion, the fact that the suing stockholder lacks authority to sue in the name of the corporation
In my view, therefore, the legal truism that the underlying claim in a derivative action belongs to the corporation and ultimately will be asserted in the corporation's name if the stockholder plaintiff receives permission to sue does not support the proposition that stockholders are in privity for purposes of the preclusive effect of an order granting a Rule 23.1 motion. At that phase of the case, the competing stockholders are asserting only their individual claim to obtain equitable authority to sue. See Aronson, 473 A.2d at 811; Cantor, 162 A. at 76.
Courts giving preclusive effect to Rule 23.1 dismissals also have relied on generally accurate statements to the effect that a judgment in an action brought by or on behalf of the corporation binds all stockholders. For example, in Henik, a decision often cited as authority for giving preclusive effect to a Rule 23.1 dismissal, the court quoted a 1942 decision for the proposition that "`[a] judgment in the stockholders' derivative action is res judicata both as to the corporation and as to all of its stockholders, including stockholders who were not parties to the original action in subsequent actions based upon the same subject matter.'" 433 F.Supp.2d at 380 (quoting Ratner v. Paramount Pictures, Inc., 6 F.R.D. 618, 619 (S.D.N.Y. 1942)).
This Court has held squarely that the adjudication of one stockholder's individual claim does not have preclusive affect on a second stockholder's ability to assert the claim. Kohls v. Kenetech Corp., 791 A.2d 763 (Del.Ch.2000), aff'd, 794 A.2d 1160 (Del.2002). In Kohls, preferred stockholders filed suit to enforce their claimed entitlement to a preferential distribution on their securities. Id. at 766. Certain other non-party preferred stockholders previously had brought an individual action requesting similar relief that resulted in a post-trial judgment for the defendants. Id. at 767, 768 n. 18. The defendants argued that under the doctrines of res judicata and collateral estoppel, the prior judgment barred the later stockholders from relitigating the claim to a preferential distribution. Id. at 767. This Court rejected the defendants' preclusion arguments, id. at 770, and the Delaware Supreme Court affirmed, Kohls v. Kenetech Corp., 794 A.2d 1160 (Del.2002) (ORDER).
The Court of Chancery in Kohls started from the foundational principle that "[a] person who is not a party to an action is not bound by the judgment in that action." 791 A.2d at 769 (quoting Restatement (Second) of Judgments § 62 cmt. c (1982) [hereinafter Judgments]). This "basic principle of law" is subject to three exceptions. Judgments § 62 cmt. a. One applies "where a non-party has a specific type of pre-existing legal relationship with a named party, such as bailor and bailee, predecessor and successor or indemnitor and indemnitee." Kohls, 791 A.2d at 769. "Being fellow stockholders is plainly not the type of legal relationship that fits [this] exception.... An individual stockholder is not, solely because of potentially aligned interests, presumed to act in the place of (and with the power to bind) the other stockholders." Id.
A second exception applies when "a person who is not a party to an action ... is involved with it in a way that falls short of becoming a party but which justly should result in his being denied opportunity to relitigate the matters previously in issue." Judgments § 62 cmt. a. "Several kinds of conduct by a non-party are recognized as having this effect. These include allowing the use of one's name as a party when the effect is to mislead an opposing litigant; assuming control of litigation being maintained by another; and agreeing to be bound by an adjudication between others." Id. (citations omitted). Concrete, case-specific actions by a stockholder plaintiff or its counsel might well trigger this exception, such as, for example, if the same counsel represented both stockholders or
This leaves the third and most pertinent exception: a properly commenced and maintained representative action. Kohls, 791 A.2d at 769. Stockholder class and derivative actions clearly qualify, but even here, the authority to represent others is not conferred automatically by filing of complaint. "A representative party must be granted ... authority, either by the represented party itself (in accordance with agency principles) or, in the class action context, by the court." Id. It is "self-evident that if a litigant never seeks to and is never compelled to act in a representative capacity, the class of people that theoretically could have been represented by that litigant is in no way precluded from asserting their own claims in a subsequent proceeding." Id. at 769-70. See Judgments § 41 (identifying categories of persons who can bind non-parties as including "[t]he representative of a class of persons similarly situated, designated as such with the approval of the court, of which the person is a member" (emphasis added)); id. § 59 cmt. c ("The stockholder's or member's derivative action is usually though not invariably in the form of a suit by some of the stockholders or members as representatives of all of them.
Whether the judgment in such a representative suit is binding upon all stockholders or members is determined by the rules stated in §§ 41 and 42.").
Despite determining that neither res judicata nor collateral estoppel applied, the Kohls Court nevertheless dismissed the second lawsuit as a matter of stare decisis: "[B]ecause the [plaintiffs] fail to distinguish their claims, either factually or legally, from those adjudicated" in the prior action, "[n]ormal respect for the principle of stare decisis" required dismissal under Rule 12(b)(6). 791 A.2d at 770. "[A]lthough plaintiffs are not literally bound by the [underlying judgment], they must still state a viable cause of action." Id. In other words, the prior judgment was not preclusive, but it still could be persuasive and compel dismissal.
When a stockholder representative pursues claims on a class basis, authority is conferred by the Court's class certification ruling. See Ct. Ch. R. 23; Schwarzschild v. Tse, 69 F.3d 293, 297 (9th Cir.1995) ("[W]hen defendants obtain summary judgment before the class has been properly certified or before notice has been sent, ... [the summary judgment] decision binds only the named plaintiffs."); 3 Alba Conte & Herbert B. Newberg, Newberg on Class Actions § 7.15, at 52 (4th ed. 2002) ("[I]f a motion to dismiss or for summary judgment is granted in favor of the defendants" prior to class certification, "the resulting order would not be binding on the class which would not suffer prejudice."). When a stockholder representative pursues claims in a derivative action, authority can be conferred in two ways. First, the board of directors or a duly empowered committee can approve the litigation expressly or by failing to oppose it. See Peat, Marwick, 540 A.2d at 730. Second, and more commonly, a court can determine that the stockholder plaintiff has authority
When the same stockholder responds to a Rule 23.1 dismissal by attempting to file a second complaint alleging demand futility, the "same party" requirement is met and a Rule 23.1 dismissal may have preclusive effect. See W. Coast Mgmt., 914 A.2d at 641-44 (holding that collateral estoppel bars "the same plaintiff" from filing a subsequent derivative suit); see also Meng v. Schwartz, 305 F.Supp.2d 49, 60 (D.D.C. 2004) (applying collateral estoppel to bar same derivative plaintiffs' efforts to relitigate previously dismissed claims); Treeby v. Aymond, 2000 WL 869502, at *8 (E.D.La. June 28, 2000) (issuing injunction against state court derivative action where same stockholder sought to relitigate demand excusal), aff'd, 251 F.3d 156 (5th Cir.2001). The same stockholder therefore cannot attempt to plead demand futility, lose, and then try again. This is also true as a matter of demand futility law. In Grimes, the Delaware Supreme Court held that if a stockholder files a complaint alleging that demand should be excused as futile and the complaint is dismissed pursuant to Rule 23.1, that same stockholder cannot try again with a different set of demand futility allegations. 673 A.2d 1207, 1218-19. That the Delaware Supreme Court rendered its decision without mentioning collateral estoppel or res judicata suggests that the high court did not envision an expansive (if any) role for preclusion doctrine in the Rule 23.1 context.
Consequently, when a different stockholder attempts to plead demand excusal, an earlier Rule 23.1 dismissal should not have preclusive effect. The earlier dismissal terminated the first phase of the prior derivative action, in which the complaining stockholder asserted an individual claim to seek equitable authority to sue on behalf of the corporation. Under Kohls, the prior ruling does not affect the individual claims of other stockholders to seek equitable authority to sue. It similarly has no effect on the second-phase issue of the corporation's cause of action. The decision does, of course, carry persuasive weight and can operate as stare decisis.
The Court of Chancery traditionally has recognized these principles. "It is common practice in this court where there are inadequate allegations of demand futility to dismiss derivative suits as to the named plaintiff, but not as to the corporation or its other stockholders." W. Coast Mgmt., 914 A.2d at 642. Effective June 1, 2001, the Court of Chancery adopted Rule
Ct. Ch. R. 15(aaa) (emphasis added). The language of Rule 15(aaa) confirms that a dismissal pursuant to Rule 23.1 is "with prejudice to the named plaintiffs only." Id.
This Court took a different approach in Career Education, a decision with which I respectfully disagree. Career Education followed the federal cases holding that a Rule 23.1 dismissal has broad preclusive effect.
2007 WL 2875203, at *10 (footnotes omitted). The Career Education decision thus assumed, as did the federal cases, that privity exists for purposes of a Rule 23.1 dismissal because "the corporation is the true party in interest in a derivative suit." Id. As discussed, controlling Delaware Supreme Court authority dictates a contrary conclusion at the Rule 23.1 stage. Notably, the plaintiffs in Career Education "concede[d] that collateral estoppel or issue preclusion applie[d] to their Rule 23.1 arguments" and contended only that they should not be precluded from raising issues not addressed in the prior action. Id. at *7. The Career Education Court therefore accepted that a Rule 23.1 dismissal would have preclusive effect, did not grapple with the authority issue, and analyzed only whether (i) the plaintiffs in the prior proceeding provided adequate representation and (ii) the two cases involved different issues.
In my view, contrary to Career Education, an earlier Rule 23.1 dismissal does not have preclusive effect on a subsequent derivative action brought by a different plaintiff because, as the earlier Rule 23.1 decision itself established, the prior plaintiff lacked authority to sue on behalf of the corporation and therefore was not in privity with the corporation or other stockholders.
As an independent basis for declining to give collateral estoppel effect to the California Judgment, I find that the California plaintiffs did not adequately represent Allergan. The decisions that give preclusive effect to a Rule 23.1 dismissal universally recognize that another stockholder still can sue if the first plaintiff provided inadequate representation.
Chancellor Strine has suggested Delaware law presume that a fast-filing stockholder with a nominal stake, who sues derivatively after the public announcement of a corporate trauma in an effort to shift the still-developing losses to the corporation's fiduciaries, but without first conducting a meaningful investigation, has not provided adequate representation. See King v. VeriFone Hldgs., Inc., 994 A.2d 354, 364 n. 34 (Del.Ch.2010) ("King I"), rev'd on other grounds, 12 A.3d 1140 (Del. 2011) ("King II").
King I, 994 A.2d at 364 n. 34; see Baca v. Insight Enters., Inc., 2010 WL 2219715, at *5 (Del.Ch. June 3, 2010) (questioning "whether a stockholder with a nominal stake who files an indemnification-based derivative action" quickly after the announcement of a corporate trauma "is adequately representing the interests of the corporation, as opposed to facilitating the pursuit of economic self-interest by an entrepreneurial law firm"). I adopt and apply the fast-filer presumption in this case.
Appreciating the need for the fast-filer presumption requires a big-picture understanding of the role derivative actions play in the corporate landscape. For publicly traded Delaware corporations, the enforcement of fiduciary obligations is largely carried out by specialized plaintiffs' firms who bring claims on a contingent basis.
Bird v. Lida, Inc., 681 A.2d 399, 402-03 (Del.Ch.1996) (footnote omitted). Due to rational passivity, "it is likely that in a public corporation there will be less shareholder monitoring expenditures than would be optimum from the point of the shareholders as a collectivity." Id. at 403. Incentivized by contingent fees, specialized plaintiffs' firms can "pursue monitoring activities that are wealth increasing for the collectivity (the corporation or the body of its shareholders)." Id.
Because specialized plaintiffs' firms ultimately receive compensation from awards of attorneys' fees, their interests can diverge from the class or entity they represent.
A plaintiffs' firm only can obtain a fee if it first obtains a result. A firm cannot obtain a result if a competitor gains control of the case. Many jurisdictions are perceived to follow a "first-filed" rule that gives control within that jurisdiction to the first stockholder plaintiff and associated law firm to file a representative action.
The conflict arises because fast-filing imposes real costs on corporations and their stockholders. When fast-filed complaints follow the announcement of a transaction or other event that likely will require expedited litigation, they at least perform the beneficial function of identifying the firms who wish to compete for leadership status. In a quickly evolving deal setting, fast-filing enables a leadership structure to be put in place so that expedited litigation can begin in earnest. But in contexts that do not warrant expedition, any administrative benefit disappears. When plaintiffs sue derivatively to recover damages from directors and senior officers for harm suffered by the corporation, the hastily filed complaints have little chance of surviving a Rule 23.1 motion, yet the defendant fiduciaries must respond, and the corporation must underwrite the costs of defense, either directly through indemnification and advancement or indirectly through insurance.
When a corporation suffers harm, the board of directors is the institutional actor legally empowered under Delaware law to determine what, if any, remedial action the corporation should take, including pursuing litigation against the individuals involved. See 8 Del. C. § 141(a). "A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation." Aronson, 473 A.2d at 811. "Directors of Delaware corporations derive their managerial decision making power, which encompasses decisions whether to initiate, or refrain from entering, litigation, from 8 Del. C. § 141(a)." Zapata, 430 A.2d at 782 (footnote omitted). Section
Absent sufficient reason to doubt the directors' ability to make disinterested and independent decisions about litigation, the board is not only empowered but optimally positioned to make decisions on behalf of the corporation and, if appropriate, pursue litigation. The board can deploy the corporation's resources to investigate the wrongdoing and seek a remedy. The directors have full access to the corporation's internal information, including privileged communications. The board can seek cooperation from management and employees and utilize the company's internal expertise. In contrast to the Court, which typically only can award some form of damages, the board can bargain with alleged wrongdoers and craft remedies that may better serve the entity. Perhaps most significantly, the board can take into consideration and balance the interests of multiple constituencies when determining what outcome best serves the interests of stockholders. See, e.g., 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations § 13.15, at 13-75 (3d ed.1998) (listing factors that special litigation committee should consider, including [t]he magnitude and merits of the claims; [t]he size and likelihood of a recovery of damages or other relief; [t]he possible detriment to the company from the assertion of any claims, as well as the indirect costs, such as the effect upon other potential litigation to which the company is a party, and relationships with customers or suppliers; and [t]he remedial steps already taken and that, in the future, could be taken by the corporation to prevent a reoccurrence of the challenged actions"). Consequently, both as a matter of legal authority and optimal resource allocation, the "board of directors, unless legally disabled, should be presented with the opportunity to manage litigation that seeks to redress harm inflicted upon the corporation." Saito v. McCall, 2004 WL 3029876, *10 (Del.Ch. Dec. 20, 2004), overruled on other grounds, Lambrecht v. O'Neal, 3 A.3d 277 (Del. 2010).
In a derivative suit, a stockholder seeks to displace the board's authority. Aronson, 473 A.2d at 811; see also Desimone v. Barrows, 924 A.2d 908, 914 (Del. Ch.2007) (noting that issue for Rule 23.1 motion is "whether the ... board should be divested of its authority to address [the underlying] misconduct"). To do so, the complaint must allege with particularity that the board was presented with a demand and refused it wrongfully or that the board could not properly consider a demand, thereby excusing the effort to make demand as futile. Framed in the language of controlling Delaware Supreme Court precedent, demand is futile when "the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."
A stockholder cannot displace the board's authority simply by describing the calamity and alleging that it occurred on the directors' watch. "`[M]ost of the decisions that a corporation, acting through its human agents, makes are, of course, not the subject of director attention.'" Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 364, 372 (Del.2006) (quoting Caremark, 698 A.2d at 968). "[O]rdinary business decisions that are made by officers and employees deeper in the interior of the organization can ... vitally affect the welfare of the corporation and its ability to achieve its various strategic and financial goals." Caremark, 698 A.2d at 968. "[D]irectors' good faith exercise of oversight responsibility may not invariably prevent employees from violating criminal laws, or from causing the corporation to incur significant financial liability, or both...." Stone, 911 A.2d at 373. Without a connection to the board, a corporate calamity will not lead to director liability. Without a substantial threat of director liability, a court has no reason to doubt the board's ability to evaluate a demand.
To plead a sufficient connection between the corporate trauma and the board, the plaintiff's first and most direct option is to allege with particularity actual board involvement in a decision that violated positive law. In Caremark, Chancellor Allen framed the test as whether the directors "knew or ... should have known" about illegality. Caremark, 698 A.2d at 971. In Stone, the Delaware Supreme
If the plaintiff cannot point to a decision, then the next alternative is to plead that the board consciously failed to act after learning about evidence of illegality — the proverbial "red flag." A plaintiff might plead, for example, that the directors
Shaev, 2006 WL 391931, at *5 (footnote omitted). A board that fails to act in the face of such information makes a conscious decision, and the decision not to act is just as much of a decision as a decision to act. See Krieger v. Wesco Fin. Corp., 30 A.3d 54, 58 (Del.Ch.2011); Hubbard v. Hollywood Park Realty Enters., Inc., 1991 WL 3151, at *10 (Del.Ch. Jan. 14, 1991). The decision to act and the conscious decision not to act are thus equally subject to review under traditional fiduciary duty principles and equally able to create the requisite connection to the board. See Spiegel, 571 A.2d at 773-74 ("[A] conscious decision by a board of directors to refrain from acting may be a valid exercise of business judgment...."); Aronson, 473 A.2d at 813 (equating "a conscious decision to refrain from acting" with a decision to act).
If there is no evidence of direct board action or conscious inaction, then the plaintiff might seek to plead "that a board of directors is dominated or controlled by key members of management, who the rest of the board unknowingly allowed to engage in self-dealing transactions." Shaev, 2006 WL 391931, at *5 n. 11. Typically, however, the plaintiff must fall back to the final means of connecting the directors to illegality: the board's obligation to adopt internal information and reporting systems that are "reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation's compliance with law and its business performance."
Id. "Concretely, this latter allegation might take the form of facts that show the company entirely lacked an audit committee or other important supervisory structures, or that a formally constituted audit committee failed to meet." Shaev, 2006 WL 391931, at *5 (footnote omitted); see Guttman, 823 A.2d at 507 ("[T]he kind of fact pleading that is critical to a Caremark claim [is] ... contentions that the company lacked an audit committee, that 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."). As with the business judgment rule, this demanding standard benefits stockholders as a whole, because "it makes board service by qualified persons more likely, while continuing to act as stimulus to good faith performance of duty by such directors." Caremark, 698 A.2d at 971.
The standard for Caremark liability thus parallels the standard for imposing damages when a corporation has an exculpatory provision adopted pursuant to 8 Del. C. § 102(b)(7). See Desimone, 924 A.2d at 935. "Such a provision can exculpate directors from monetary liability for a breach of the duty of care, but not for conduct that is not in good faith or a breach of the duty of loyalty." Stone, 911 A.2d at 367.
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del.2006) (quoting In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 755-56 (Del.Ch.2005), aff'd, 906 A.2d 27 (Del.2006)). A Caremark claim based on the failure to establish a monitoring system seeks to invoke the third of these examples. See Stone, 911 A.2d at 369 ("The third of [the Disney] examples describes, and is fully consistent with, the lack of good faith conduct that the Caremark court held was a `necessary condition' for director oversight liability ...." (quoting Caremark, 698 A.2d at 971)). See generally Stephen M. Bainbridge et al., The Convergence of Good Faith and Oversight, 55 UCLA L.Rev. 559 (2008) (discussing the re-interpretation of Caremark as a good faith case and the potential liability risks to directors that result).
Because a plaintiff must plead a connection to the board, only the extremely rare complaint will be able to establish the necessary linkage without referring to internal corporate documents. To obtain the necessary documents, the Delaware
If dispersed stockholders could act collectively following a corporate trauma, they would want the corporation to pursue claims vigorously against its fiduciaries only if there was a risk-adjusted prospect of a net-positive recovery. They would not file suit hastily, thereby imposing needlessly on themselves both the cost of their offensive litigation and the burdens of defense. The hypothetical stockholder collective would recognize there was no need to rush. The statute of limitations on a breach of fiduciary duty claim is three years. In re Tyson Foods, Inc., 919 A.2d 563, 584 (Del.Ch.2007). If the underlying corporate trauma resulted from a government investigation, securities class action, or some other slowly unfurling event, there would likely be further developments that would yield additional information that could materially affect whether to sue.
Rather than filing hastily, the hypothetical stockholder collective would proceed deliberately. It would hire well-qualified counsel. Through counsel, it would conduct an investigation and seek books and records using Section 220. After obtaining books and records, counsel would evaluate whether it made sense to sue. The books and records might show that the board had an appropriate monitoring system in place, but that the system did not alert the board. Or the books and records might show that despite their good faith efforts, the directors were misinformed or misled. Under these or other circumstances, the hypothetical stockholder collective logically might decide not to sue, preferring to leave their elected fiduciaries to the task of remedying the harm suffered by the corporation and dispensing with expensive litigation that likely would founder on Rule 23.1. If the stockholders had concerns, they might make a litigation demand, provide the board with the results of their
By contrast, if the books and records showed director misconduct, then the stockholders could decide to pursue a claim. Their counsel at that point would be well positioned to plead demand futility and survive a motion to dismiss. Importantly for all concerned, the costly process of briefing and arguing motions to dismiss would take place once, based on the stockholders' post-inspection complaint.
Under a first-to-file system, plaintiffs' lawyers cannot act as stockholders collectively would want because by proceeding deliberately, a law firm risks losing control of the case to competitors who file immediately. For fast-filing lawyers, the resulting action has the dynamics of a lottery ticket. In most cases, the fast-filing plaintiff will not have pled a derivative claim that can overcome Rule 23.1. But in the rare case, fate may bless the fast-filer with something implicating the board, or a court might be offended by the magnitude of the corporate trauma and allow the derivative action to proceed. If the action survives a motion to dismiss, then its settlement value increases exponentially. See Kenneth B. Davis, Jr., The Forgotten Derivative Suit, 61 Vand. L.Rev. 387, 429-30 (2008) ("At least four of the eight [Caremark] cases where plaintiffs survived a motion to dismiss ultimately settled, all with significant attorneys' fees or monetary awards.... [T]he substantial corporate losses incurred in these cases increase the settlement value of a successful demand-excused claim.").
A fast-filer can readily build a portfolio of cases in the hope that one will hit. Filing a derivative claim is relatively cheap. Search costs are minimal because corporations publicly announce material adverse events. Public disclosures, news stories, and analyst reports provide the background information for the claim. See id. at 417 (finding empirical evidence "consistent with the critique that derivative suits simply piggyback on what the government (or perhaps even the media) already has uncovered and investigated"); John C. Coffee, Jr., Rescuing the Private Attorney General: Why the Model of the Lawyer as Bounty Hunter Is Not Working, 42 Md. L.Rev. 215, 221 n.15 (1983) (observing phenomenon of "piggybacking" by private plaintiffs' attorneys on efforts by government investigators to unearth wide range of classes of misconduct). Indeed, derivative plaintiffs often piggyback on the efforts of other specialized plaintiffs' firms by filing indemnification-based claims that crib from other complaints. See, e.g., Guttman, 823 A.2d at 504 (noting admission by plaintiffs' counsel that the complaints in federal securities class actions provided "the primary source of information" for the derivative complaint). As with a federal securities law claim, the lawyer's most difficult task typically will be finding a suitable plaintiff.
The fast-filer presumption suggested by Chancellor Strine comports with other steps this Court has taken to shape the legal incentives of specialized plaintiffs' firms. In addition to criticizing fast-filed, non-substantive complaints, this Court has made clear that when stockholder plaintiffs sue in a representative capacity, first-to-file does not control which plaintiff has the substantive right to proceed.
820 A.2d at 1159 (footnote omitted). In lieu of first-to-file, this Court balances the factors pertinent to a forum non conveniens analysis to determine where it makes sense for the representative action to proceed. See, e.g., Rosen v. Wind River Sys., Inc., 2009 WL 1856460, at *6 (Del.Ch. June 26, 2009); In re Topps Co. S'holders Litig., 924 A.2d 951, 956-64 (Del.Ch.2007); Ryan v. Gifford, 918 A.2d 341, 350-51 (Del.Ch.2007).
This Court also adopted Rule 15(aaa), quoted above, to limit a plaintiff's ability to re-plead. Ct. Ch. R. 15(aaa). Under this rule, a plaintiff who files a derivative action cannot freely amend after engaging in briefing on the motion to dismiss. See Braddock, 906 A.2d at 783 (explaining purpose and operation of Rule 15(aaa)). By imposing consequences for litigating to a pleadings-stage decision, Rule 15(aaa) encourages plaintiffs to do their homework and prepare a well-crafted complaint.
The Delaware Supreme Court has rejected two other attempts by this Court to address the first-to-file problem, but in each case expressed support for the effort. In King I, Chancellor Strine held that by filing a derivative action, a stockholder plaintiff represented consistent with Rule 11 that the plaintiff and his counsel had sufficient information to plead demand futility and did not require additional information. See 994 A.2d at 356; see also Ct. Ch. R. 11. The Chancellor ruled that the stockholder plaintiff therefore could not plead a proper purpose in a later-filed Section 220 action to obtain books and records relating to the issue of demand futility. Id. at 361. In reaching this holding, the Chancellor discussed the incentives created by the first-to-file rule and sought to thwart efforts by fast-filing plaintiffs' lawyers to eat their cake (by filing quickly) while still having it (by obtaining books and records through Section 220). Id. at 357-59. The Delaware Supreme Court rejected this interpretation of the proper purpose requirement in cases where the derivative action had been dismissed without prejudice.
Similarly in White I, Vice Chancellor Lamb suggested that a plaintiff's failure to obtain books and records could be taken into account when evaluating whether a complaint's allegations were sufficiently particularized to satisfy Rule 23.1. See 793 A.2d at 364 (stating that because the plaintiff failed to use Section 220, "I will not give a broad reading to the facts alleged in the complaint, nor will I infer from them the existence of other facts that would have been proved or disproved by a further presuit investigation"). On appeal, the Delaware Supreme Court rejected this approach as inconsistent with Rule 23.1, but observed that "[t]he Court of Chancery was certainly justified in chastising the plaintiff for his lackluster pre-suit efforts." White II, 783 A.2d at 549. Chancellor Chandler tried again in Beam v. Stewart, where he suggested that Delaware Supreme Court decisions interpreting Rule 23.1 were "wholly consistent with [White I's approach of] not giving `a broad reading to the facts alleged in the complaint.'" Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 982 n. 66 (Del.Ch.2003) ("Beam I"), aff'd on other grounds, 845 A.2d 1040 (Del.2004) ("Beam II"). He further suggested that "one might argue that following [White I's] interpretive suggestion would be a reasonable method to further the Supreme Court's desire to encourage the use of § 220." Id. On appeal, the Delaware Supreme Court affirmed the dismissal of the complaint but reiterated that "[a] plaintiff's use of, or failure to use, a books and records inspection does not change the standard to be applied to review of the complaint." Beam II, 845 A.2d at 1057 n. 52. The Supreme Court nevertheless "agree[d] with the Chancellor's point about cost and drain on resources in weak cases where the plaintiff does not seek books and records." Id.
In Rales, the Delaware Supreme Court made clear that "[n]othing requires the Court of Chancery, or any other court having appropriate jurisdiction, to countenance [fast-filing] by penalizing diligent counsel who has employed [investigative] methods, including section 220, in a deliberate and thorough manner in preparing a complaint that meets the demand excused test of Aronson." 634 A.2d at 934 n. 10; see also King II, 12 A.3d at 1151 (suggesting denial of lead plaintiff status as remedy for fast-filed derivative action). In my view, a court in a plenary derivative action such as this one has discretion to address a rush to the courthouse by determining that the plaintiff in the original derivative action did not provide adequate representation for the corporation and declining on that basis to give preclusive effect to a Rule 23.1 dismissal of the fast-filer's complaint. In this case, to give preclusive effect to the California Judgment would favor the lawyers who filed hastily, penalize
The origins of this case exemplify the race-to-the-courthouse problem. Less than 48 hours after Allergan announced its settlement, LAMPERS filed the first derivative complaint, without using Section 220, without conducting any serious investigation, and without any meaningful allegations that could defeat a demand-futility motion. Within weeks, three comparably scant complaints had been filed in the California Federal Court. These prematurely filed complaints were filed hastily for one reason only: to enable the specialized law firms to gain control of a case that could generate legal fees.
Fast-filing might have benefited the specialized law firms, but it did not benefit Allergan. The complaints forced Allergan to fund the teams of the lawyers hired by the individual defendants to respond in each jurisdiction, address coordination issues, and brief parallel motions to dismiss. The fast-filed complaints also forced two separate court systems to expend judicial resources on the litigation. Ironically, when one stockholder — UFCW — attempted to proceed properly by using Section 220, the defendants and the fast-filing Delaware plaintiff joined forces to oppose its effort to develop the facts needed to plead a complaint with a meaningful chance of success.
By leaping to litigate without first conducting a meaningful investigation, the California plaintiffs' firms failed to fulfill the fiduciary duties they voluntarily assumed as derivative action plaintiffs. Rather than seeking to benefit Allergan, they sought to benefit themselves by rushing to gain control of a case that could be harvested for legal fees. In doing so, the fast-filing plaintiffs failed to provide adequate representation.
Subsequent events did not transform the fast-filing plaintiffs into adequate representatives. True, the defendants voluntarily provided the California plaintiffs with the Section 220 materials, after UFCW invested the time and resources to obtain them, and the California plaintiffs used the materials to file an amended complaint. But in my view, the fast-filing plaintiffs already had shown where their true loyalties lay. Asking for and receiving the benefit of another lawyer's work did not rehabilitate them. It rather evidenced their continuing desire to control the case. In this regard, I disagree that the policy goal of encouraging plaintiffs to use Section 220 will not be undercut by a rule that affords priority to fast filers if the corporation gives them the same books and records that a diligent stockholder fought to obtain. But see Career Educ., 2007 WL 2875203, *10 n. 58 (asserting that policy of encouraging stockholders to use of Section 220 would not be undercut by allowing fast-filing plaintiffs to copy complaint prepared by stockholder who used Section 220 and then giving preclusive effect to dismissal in fast-filed action). Under the rule enunciated in King I, the issue would not arise because stockholders like the California plaintiffs would not be able to file fast, suffer dismissal, and then ask for books and records to try again.
Assuming LeBoyer accurately states the law of collateral estoppel as I am bound to apply it (a point with which I disagree), the doctrine does not require dismissal in the current case because the plaintiffs in the California Action provided inadequate representation for Allergan. Rather than representing the best interests of the corporation, the California plaintiffs sought to maximize the potential returns of the specialized
Having determined that collateral estoppel does not require judgment for the defendants, I must consider independently whether Rule 23.1 requires dismissal. Although not binding, the California Judgment is potentially persuasive.
Rule 23.1 requires that a derivative plaintiff "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." Ct. Ch. R. 23.1. For a board to consider a demand properly, a majority of the directors must be able to exercise their independent and disinterested business judgment about whether to pursue litigation. Aronson, 473 A.2d at 815. The Delaware plaintiffs contend that demand should be excused as futile because each of the directors would face a substantial risk of liability if the litigation were pursued.
The requirement of factual particularity does not entitle a court to discredit or weigh the persuasiveness of well-pled allegations. "The well-pleaded factual allegations of the derivative complaint are accepted as true on such a motion." Rales, 634 A.2d at 931. "Plaintiffs are entitled to all reasonable factual inferences that logically flow from the particularized facts alleged...." Brehm, 746 A.2d at 255. Put differently, once a plaintiff pleads particularized allegations, then the plaintiff is entitled to all "reasonable inferences [that] logically flow from particularized facts alleged by the plaintiff." Beam II, 845 A.2d at 1048. Rule 23.1 requires that a plaintiff allege specific facts, but "he need not plead evidence." Id. at 816; accord Brehm, 746 A.2d at 254 ("[T]he pleader is not required to plead evidence...."). A plaintiff also need not "plead particularized facts sufficient to sustain a `judicial finding' either of director interest or lack of director independence" or other disabling factor. Grobow, 539 A.2d at 183. The Delaware Supreme Court in Grobow interpreted the Court of Chancery as having adopted a "judicial finding" standard and explicitly rejected it as "an excessive criterion" for pleading under the "reasonable doubt test." Id.
Similarly, to show that a director faces a "substantial risk of liability," the plaintiff does not have to demonstrate a reasonable probability of success on the claim. In Rales, the Delaware Supreme Court rejected such a requirement as "unduly onerous." 634 A.2d at 935. "The purpose of [Rule 23.1's] heightened standard is to ensure only derivative actions supported by a reasonable factual basis proceed." Dow Chem., 2010 WL 66769, at *6. Plaintiffs need only "make a threshold showing, through the allegation of particularized facts, that their claims have some merit." Rales, 634 A.2d at 934.
In this case, the plaintiffs do not seek to impose liability on the Allergan directors for making a "wrong" business decision or taking imprudent business risks. Cf. Citigroup, 964 A.2d at 126 (dismissing Caremark claim premised on taking excessive risk); In re Goldman Sachs Gp., Inc. S'holder Litig., 2011 WL 4826104, *13-16 (Del.Ch. Oct. 12, 2011) (rejecting fiduciary duty claims based on alleged misalignment of interests created by compensation scheme). That type of "judicial second guessing is what the business judgment rule was designed to prevent." Citigroup, 964 A.2d at 126. "The business outcome of an investment project that is unaffected by director self-interest or bad faith, cannot itself be an occasion for director
Corporate misconduct involving fraud or illegality presents a different situation. Even under a pure Caremark monitoring theory,
Citigroup, 964 A.2d at 131. "[I]mposing Caremark-type duties on directors to monitor business risk is fundamentally different from imposing on directors a duty to monitor fraud and illegal activity." Goldman Sachs, 2011 WL 4826104, at *22 (internal quotation omitted).
"Delaware law does not charter law breakers." Massey Energy, 2011 WL 2176479, at *20. "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.'" Id. (citing 8 Del. C. §§ 101 & 102). "Under Delaware law, a fiduciary may not choose to manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will result in profits for the entity." Metro Commc'n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 163-64 (Del.Ch.2004).
Desimone, 924 A.2d at 934-35 (footnote omitted). "As a result, a fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profits by violating the law." Massey Energy, 2011 WL 2176479, at *20.
The plaintiffs in this case have alleged a direct connection between the Board and a business plan premised on illegal activity. The Complaint pleads that from 1997 onward, the Board discussed and approved a series of annual strategic plans that contemplated expanding Botox sales dramatically within geographic areas that encompassed the United States. The plans contemplated new markets for Botox that involved applications that were off-label uses in the United States. So significant was the scope of the expansion that it necessarily contemplated marketing and promoting off-label uses within the United States. The Board then closely monitored Allergan's dramatic success in increasing its sales of Botox at rates far exceeding what the market for existing on-label uses could support or that could be generated by physicians serendipitously learning about and trying new off-label applications. The Board kept Allergan's business plan in
Critically, the Complaint does not merely allege that this misconduct took place. Unlike the parade of hastily filed Caremark complaints that Delaware courts have dismissed, and like those rare Caremark complaints that prior decisions have found adequate, the Complaint supports these allegations with references to internal Allergan books and records that UFCW obtained using Section 220. For example, the Complaint references a slide presentation to the Board that summarized the Strategic Plan for 1997-2001. The presentation projected ramping up Botox sales in North America from $86.1 million to $141.1 million. Plan Slides at 5. A slide entitled "Top Corporate Priorities" identified "Maximize New Products" as the second of three bullet points. Id. at 10. The fourth bullet point under the "Maximize New Products" heading read "BOTOX — Spasticity, migraine, and pain." Id. At the time, none were approved uses in the United States, which one can readily infer at the pleadings stage constituted a non-trivial part of the North American Botox-purchasing market.
Other slides in the deck provide further support for the inference that the Board-approved plan contemplated affirmative marketing and support for off-label uses. A slide described the "Charter" for the Botox "Business Portfolio Strateg[y]" in North America as "[i]nvest to grow new indications & develop follow-on toxins." Id. at 5. It listed "[s]pasticity," "[b]ack pain," and "[h]ead ache." Id. None were FDA-approved uses in the United States. Another slide entitled "Transitioning to a Future with Sustainable Growth" stated:
Id. at 11. One can reasonably infer from these slides that the plan contemplated pursuing as "Top Corporate Priorities" new Botox uses not yet approved by the FDA as a source of "immediate growth" for Allergan and a means for "Allergan to maximize ... BOTOX®
The text of Allergan's actual, written strategic plan expanded on the points identified in the slides. It identified "Maximize New Products" as the number 1 item on Allergan's list of six "Top Corporate Priorities." Written Plan at 14. The fourth bullet point under this number 1 item read: "Botox — Maximize sales for spasticity and new indications such as migraine." Id. Neither was an FDA-approved use. The section of the plan entitled "Corporate Portfolio Strategy" identified the "Role/Charter" for "Botox/Neuromuscular" as follows: "Invest to develop follow-on toxins with improved performance characteristics that protect and expand our toxin franchise. Sales expected to grow from $94 million in 1997 to $215 million in 2001." Id. at 22. The "Strategic Rationale" for this step was that
Id. One can reasonably infer that "all regions" included the United States, where "pain" and "migraine headaches" were off-label applications. See also id. at 3 (identifying Botox as one of "five core Allergan businesses" and describing the treatment as having "tremendous growth potential as we fund opportunities with new indications and uses such as spasticity, pain, migraine and tension headache").
Allergan's plan projected that the company would enter the "Migraine Headache" market in 2001 and achieve estimated peak-year, risk-adjusted sales of $596 million. Id. at 5. "Migraine headache" was an off-label use. The plan also projected that Allergan would enter the back pain market in 2002 and achieve estimated peak-year, risk-adjusted sales of $666 million. Id. "Back pain" was an off-label use.
The plan further anticipated that Allergan's sales growth would be driven in part by "continued growth from Botox" and that Allergan's improvement in gross profit margin would be "driven by changes in the sales mix as sales growth comes from higher priced and higher margin products such as Alphagan, Botox, and Zorac." Id. at 8. The plan further noted that
Id. at 9. The plan warned that Allergan was largely dependent on these products, and that "[t]he majority of Allergan's growth over the next five years is expected to come from Alphagan, Array IOL, Zorac and Botox." Id. at 10.
As the Complaint alleges, Allergan pursued the Board's strategic plan by deploying an array of programs to support off-label Botox use. These efforts included sponsoring physicians to speak about and promote off-label use, assisting physicians in seeking reimbursement for off-label use, and providing pricing support to promote off-label use. The strategic plan specifically cited "U.S.-Reimbursement assistance" as one of the reasons "Why Customers Buy From Us Now." Id. at 59.
The Complaint pleads that the Board regularly monitored Botox sales and cites specific occasions where the Board was made aware of growth in average daily sales and the revenue mix across different usage categories. The Complaint specifically pleads that between 2000 and 2004, Botox achieved annual sales growth of 25% to 42%, despite being approved by the FDA for only four uses where demand was limited. Off-label sales skyrocketed with spasticity sales growing by 332%, headache sales by 1,407%, and pain sales by 504%. Although it is not the only possible inference, one can reasonably infer at the pleadings stage that the Board knew physicians were not harmonically converging on off-label uses in the same areas that Allergan happened to be targeting aggressively for sales growth.
The Complaint specifically pleads that in October 2006, the Board learned that the FDA was inquiring about off-label marketing
The Complaint pleads that after the Schim incident, the Board approved the 2007-2011 Strategic Plan which explicitly linked the number of sales representatives to increased off-label sales. During the same period, the Board continued to receive detailed reports on Botox sales and the revenue mix, including reports showing that 70% to 80% of Botox sales were generated from off-label use. These particularized allegations support a reasonable inference that the Board knew Allergan personnel were engaging in or turning a blind-eye towards illegal off-label marketing and promotion and that the Board nevertheless decided to continue Allergan's existing business practices in pursuit of greater sales.
Ten of the twelve defendant directors have served on the Board since 2005 and earlier. One can reasonably infer that these directors approved multiple iterations of Allergan's strategic plan, monitored Botox's explosive sales growth, learned of the Schim incident in October 2006, then approved the 2007 Strategic Plan, fully conscious of the role of off-label marketing in Allergan's success. The inference is more tenuous for Dunsire and Hudson, who joined the Board in 2006 and 2008, respectively. Because the Complaint implicates more than half of the Board, I need not make any determination one way or the other as to those two directors.
It is not unreasonable to infer that the Allergan Board, led by a hard-charging CEO who earned the nickname "Mr. Botox," could have believed that Allergan knew better than the FDA which Botox applications were safe, particularly off-label uses already approved (or at least permitted) in other countries. It is not unreasonable to infer that the Board and CEO saw the distinction between off-label selling and off-label marketing as a source of legal risk to be managed, rather than a boundary to be avoided.
Obviously this is not the only inference that can be drawn. Alternatively, one could infer that the directors received advice from sophisticated counsel about the difference between legal off-label sales and illegal off-label marketing, understood where the boundary lay, and approved a business plan and management initiatives in the good faith belief that Allergan was remaining within the bounds of the law, although perhaps close to the edge. The directors then closely monitored Allergan's performance with this understanding. Unfortunately for everyone, the directors' good faith belief proved incorrect, and Allergan pled guilty to criminal misdemeanor misbranding for the period from 2000 through 2005, paid criminal fines of $375 million, and paid another $225 million in civil fines. If this scenario proves true, then the directors will not have acted in bad faith and will not be liable to Allergan for any of the harm it suffered. See id. at *22.
I cannot presently determine what actually happened at Allergan. I hold only that a reasonable inference can be drawn from the particularized allegations of the Complaint and the documents it incorporates by reference that the Board knowingly approved and subsequently oversaw a business plan that required illegal off-label marketing and support initiatives for Botox. At this stage of the case, I must credit this inference, even if I believe it more likely that the directors acted in good faith. The complaint need not "plead particularized facts sufficient to sustain `a judicial finding' either of director interest or lack of director independence" or other disabling factor. Grobow, 539 A.2d at 183. Nor must it demonstrate a reasonable probability of success. Rales, 634 A.2d at 934-35. The complaint needs only to make a "threshold showing, through the allegation of particularized facts, that their
In reaching this conclusion, I part company with the California Federal Court and find unpersuasive the analysis in the California Judgment. The California Federal Court correctly described Delaware law in stating that that the California complaint only could survive a Rule 23.1 motion to dismiss if the particularized allegations presented the directors with a substantial threat of liability. The California Federal Court nevertheless determined that the California complaint failed to meet this test.
The California Federal Court held that the California complaint fell short because "[t]here is still no evidence of a decision by board members to promote the use of off-label marketing, nor are there any facts suggesting that the Directors would be incapable of making an impartial decision concerning litigation. The 1997-2001 Strategic Plan makes no mention of off-label marketing." California Judgment at 4. The California Federal Court stated that the "Top Corporate Priorities" slide listed bullet points, "the first of which does not even mention Botox." Id. As the California Federal Court recognized in denying the plaintiffs' motion for reargument, the fourth bullet point identified Botox as one of four products the sales of which Allergan sought to maximize. In re Allergan Inc. S'holder Deriv. Action, Case No. SACV 10-1352, at 3 (C.D.Cal. Feb. 22, 2012). As discussed above, the underlying written plan identified "Maximize New Products" as the number 1 item on Allergan's list of six "Top Corporate Priorities." German Aff. Ex. D at 14. The fourth bullet point under this number 1 item reads: "Botox — Maximize sales for spasticity and new indications such as migraine." Id. Neither was an FDA-approved use.
In my view, a plaintiff does not have to point to actual confessions of illegality by defendant directors to survive a Rule 23.1 motion in a Caremark case. Particularly at the pleadings stage, a court can draw the inference of wrongful conduct when supported by particularized allegations of fact.
The California Federal Court similarly concluded that a Board-sanctioned "Headache Development" program for Botox "had absolutely nothing to do with marketing; rather, it was a clinical presentation regarding Botox's potential efficacy in treating migraines." California Judgment at 4. The California Federal Court likewise dismissed the sufficiency of the allegation that the Board oversaw a "Cervical Dystonia/Headache Expansion Initiative" by noting that cervical dystonia was an approved FDA use at the time. Id.
In my view, both descriptions adopt one possible and defendant-friendly interpretation of the underlying documents and related allegations. At the pleadings stage, I believe the plaintiffs are entitled to the reasonable inference that the Board oversaw company-wide efforts to promote off-label use of Botox for treating migraine headaches, which was not an FDA-approved use at the time.
The California Federal Court also held that the Board's knowledge of the Schim incident did not demonstrate wrongdoing by the Board. According to the California Judgment, "[n]ot only was the presentation approved prior to the presentation without the offending slides, but the Directors took appropriate remedial action after learning of the presentation." Id. (citing defendants' motion). Whether the directors took "appropriate remedial action" is unclear and strikes me as a factual issue that reasonably could be disputed at this stage of the case. Regardless, as I understand the plaintiffs' theory, the argument is not that the Schim incident itself established wrongdoing. The point rather is that the Schim incident should have further illuminated the serious legal risks posed by Allergan's various programs for supporting off-label use, including its sponsored-speaker program, and the existence of a culture of non-compliance at the company. Despite being confronted with this red-flag, the directors subsequently approved iterations of the business plan that further ramped up Allergan's support for off-label use. It may be that the directors in fact acted in good faith after the Schim incident and when taking these steps, but at the pleadings stage I do not believe that I can adopt a defendant-friendly interpretation of the plaintiffs' allegations.
As should be abundantly clear, this is a pleadings-stage decision. To prevail ultimately, the plaintiffs actually will have to prove their claims. At later stages of the case, the plaintiffs will not be entitled to pleadings-stage presumptions, and the defendants will have strong arguments against liability. See Massey Energy, 2011 WL 2176479, at *20-21. For present purposes, however, the plaintiffs need only plead particularized allegations that support a reasonable inference that their claims have "some merit." Rales, 634 A.2d at 934. Because the plaintiffs have met this standard, the Rule 23.1 motion is denied.
"The standard for pleading demand futility under Rule 23.1 is more stringent than the standard under Rule 12(b)(6)...." Citigroup, 964 A.2d at 139. A complaint that pleads a substantial threat of liability for purposes of Rule 23.1 "will also survive a 12(b)(6) motion to dismiss." McPadden v. Sidhu, 964 A.2d 1262, 1270 (Del.Ch.2008). Accordingly, the Rule 12(b)(6) motion is denied.
As Chancellor Allen famously observed, a Caremark theory "is possibly the most
Under my understanding of controlling Delaware Supreme Court precedent, collateral estoppel does not mandate dismissal. Separately and independently, by filing hastily and failing to conduct a meaningful investigation, the California plaintiffs acted self-interestedly and contrary to Allergan's best interests. They did not provide adequate representation, rendering collateral estoppel inapplicable.
On the merits of the Rule 23.1 motion, the California Judgment is not persuasive because it adopts one possible defendant-friendly inference from the pled facts. Even under Rule 23.1, the plaintiffs receive the benefit of reasonable inferences that can be drawn from adequately pled facts. Here, the particularized allegations support a reasonable inference that the Board knowingly approved a business plan that contemplated illegal off-label marketing in the United States. The particularized allegations of the Complaint, which are supported by internal documents obtained through Section 220, present a substantial threat of liability for all but two members of the Board.
Demand is therefore excused as futile. For the same reasons, the Complaint states a claim under Rule 12(b)(6). The motions to dismiss are denied. IT IS SO ORDERED.
