In re Cardinal Health, Inc. Derivative Litig.

• Decision Date: 08 February 2021
• Docket Number: Case No. 2:19-cv-2491
• Citation: 518 F.Supp.3d 1046
• Court: U.S. District Court — Southern District of Ohio
• Parties: IN RE CARDINAL HEALTH, INC. DERIVATIVE LITIGATION

518 F.Supp.3d 1046

IN RE CARDINAL HEALTH, INC. DERIVATIVE LITIGATION

Case No. 2:19-cv-2491

United States District Court, S.D. Ohio, Eastern Division.

Filed February 8, 2021

OPINION AND ORDER

SARAH D. MORRISON, UNITED STATES DISTRICT JUDGE

This matter is before the Court for consideration of Defendants’ Motion to Dismiss the Consolidated Verified Shareholder Derivative Complaint. (Mot. to Dismiss, ECF No. 43.) Plaintiffs filed their Memorandum in Opposition (Memo. in Opp'n, ECF No. 47) to which Defendants have replied (Reply, ECF No. 48). The Court heard oral argument on the Motion on January 21, 2021. For the reasons set forth below, the Motion is GRANTED IN PART and DENIED IN PART .

I. BACKGROUND

At its heart, this case is about negative externalities. "Negative externalities" is a term of art used by economists to describe the phenomenon of a firm's operations creating societal costs that are not captured by the market price of the firm's products.¹ Air pollution is a classic example. Negative externalities are generally recognized as a market failure, because the price of a product should account for the true cost of its production. When the societal costs reach a certain magnitude, the firm is often forced—by regulation, taxation, litigation, or a combination thereof—to ‘internalize’ the costs. The thrust of the claims now before the Court is that the directors and officers of this firm, Nominal Defendant Cardinal Health, Inc., failed (or refused) to mitigate the societal costs of Cardinal Health's business in the face of increasing evidence that the company would be forced to bear them.

All well-pled factual allegations in the Consolidated Verified Shareholder Derivative Complaint (Consol. Compl., ECF No. 35) are considered as true for purposes of the Motion to Dismiss. See Gavitt v. Born , 835 F.3d 623, 639–40 (6th Cir. 2016). The following summary draws from the allegations in that Consolidated Complaint, the documents integral to and incorporated therein, and certain other documents which are subject to judicial notice.

A. Parties

1. Nominal Defendant Cardinal Health, Inc.

Cardinal Health is a publicly traded Ohio corporation headquartered in Dublin, Ohio. (Consol. Compl., ¶ 22.) The sixteenth largest company in the United States, Cardinal Health's recent annual revenues topped $135 billion. (Id. , ¶ 41.) Cardinal Health generally operates two business lines, Medical and Pharmaceutical, which are separately managed and reported. (Id. , ¶ 42.) The Medical segment manufactures, sources, and distributes medical, surgical, and laboratory products. (Id. ) The Pharmaceutical segment distributes pharmaceutical and over-the-counter healthcare products. (Id. ) On average, the Pharmaceutical segment accounted for 90.0% of all Cardinal Health revenue for the ten-year period ending in 2018. (Id. , ¶ 43.)

Cardinal Health is one of the three largest distributors of pharmaceutical products in the country. (Id. , ¶¶ 3, 22, 66.) A distributor purchases pharmaceutical products from the manufacturers and sells them to pharmacies, where they are then dispensed to patients. (Id. , ¶ 44.) The distributor's position in the pharmaceutical supply chain makes it uniquely capable to identify and stunt diversion of prescription drugs for illegal use. (Id. , ¶ 69.) It is no surprise, then, that the law imposes certain obligations on distributors in this respect.

At the federal level, the Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. § 801, et seq. and its implementing regulations (also known as the "Controlled Substances Act" or "CSA") affirmatively requires distributors of controlled substances² to, inter alia :

• Maintain effective controls against diversion of particular controlled substances into other than legitimate medical, scientific, and industrial channels;

• Design and operate a system to identify suspicious orders of controlled substances;

• Inform the Drug Enforcement Administration ("DEA") of suspicious orders when discovered; and

• Conduct meaningful diligence to avoid filling suspicious orders that might be improperly diverted.

21 U.S.C. §§ 823(b), 832(a) ; 21 C.F.R. § 1301.74(b). (See also Consol. Compl., ¶¶ 4, 49.) Suspicious orders are defined to include "orders of unusual size, orders deviating substantially from a normal pattern, and orders of unusual frequency." 21 C.F.R. § 1301.74(b). (See also Consol. Compl., ¶ 49.)

The DEA is charged with enforcing the CSA. See generally , 21 C.F.R. Ch. II. Among other enforcement tools, the DEA may deny, revoke, or suspend a distributor's registration if it determines the distributor is operating in violation of the CSA, or if its actions are inconsistent with the public interest. See 21 U.S.C. §§ 823(b), 824. (See also Consol. Compl., ¶ 50.)

2. Plaintiffs

Plaintiffs Melissa Cohen, Stanley M. Malone, and Michael Splaine own shares in Cardinal Health. Ms. Cohen purchased her shares in September 2001 (Consol. Compl., ¶ 19); Mr. Malone purchased his shares in January 2004 (Id. , ¶ 20); and Mr. Splaine purchased his shares in August 2015 (Id. , ¶ 21). Each has maintained ownership since that date. (Id. , ¶¶ 19–21.)

3. Individual Defendants

Plaintiffs bring this action, for the benefit of Cardinal Health, against the following current and former members of Cardinal Health's Board of Directors and executive management team: David J. Anderson, Colleen F. Arnold, George S. Barrett, Carrie S. Cox, Calvin Darden, Bruce L. Downey, Patricia A. Hemingway Hall, Akhil Johri, Clayton M. Jones, Michael C. Kaufmann, Gregory B. Kenny, Nancy Killefer, David P. King, and J. Michael Losh. (See generally, id. )

Mr. Anderson served on the Board from 2014 until September 5, 2018. (Id. , ¶ 23.) Mr. Anderson was a member of the Audit Committee from 2014 through 2018. (Id. )

Ms. Arnold has served on the Board since 2007. (Id. , ¶ 24.) Ms. Arnold was a member of: the Nominating and Governance Committee from 2010 through 2018; the Audit Committee from 2009 through 2010; and the Compensation Committee in 2008. (Id. ) Ms. Arnold rejoined the Audit Committee in 2018. (Id. )

Mr. Barrett served as CEO and Chairman from 2009 through 2017. (Id. , ¶ 25.) At the end of 2017, Mr. Barrett stepped down as CEO, but continued to serve as Executive Chairman until November 2018. (Id. )

Ms. Cox has served on the Board since 2009. (Id. , ¶ 26.) Ms. Cox was a member of the Audit Committee from 2010 through 2013. (Id. ) She has also been a member of the Compensation Committee since 2014, and the Ad Hoc Committee since 2018. (Id. )

Mr. Darden has served on the Board since 2005. (Id. , ¶ 27.) Mr. Darden has been a member of the Compensation Committee since 2005, and the Ad Hoc Committee since 2018. (Id. )

Mr. Downey has served on the Board since 2009. (Id. , ¶ 28.) Mr. Downey was a member of the Audit Committee from 2009 through September 2019. (Id. ) He has been a member of the Nominating and Governance Committee and the Ad Hoc Committee since 2018. (Id. )

Ms. Hemingway Hall has served on the Board since 2013. (Id. , ¶ 29.) Ms. Hemingway Hall was a member of the Audit Committee from November 2013 through 2018. (Id. ) She has also been a member of the Nominating and Governance Committee since 2015 and the Compensation Committee since November 2018. (Id. )

Mr. Johri has served on the Board since February 2018. (Id. , ¶ 30.) Mr. Johri has been a member of the Audit Committee since that time. (Id. )

Mr. Jones served on the Board from 2012 through 2018. (Id. , ¶ 31.) Mr. Jones was a member of the Compensation Committee from 2013 through 2014, and the Audit Committee from 2014 through 2018. (Id. )

Mr. Kaufmann has served on the Board since he became CEO of Cardinal Health on January 1, 2018. (Id. , ¶ 32.) Mr. Kaufmann was CEO of the Pharmaceutical segment from April 2008 to November 2014, and CFO of the company from November 2014 through 2017. (Id. )

Mr. Kenny has served on the Board since 2007. (Id. , ¶ 33.) Mr. Kenny succeeded Mr. Barrett as Executive Chairman. (Id. ) He was a member of the Audit Committee from August to November 2007, and the Compensation Committee from 2008 through 2014. (Id. ) Mr. Kenny has been a member of the Nominating and Governance Committee since 2009 and the Ad Hoc Committee since 2018. (Id. )

Ms. Killefer has served on the Board since 2015. (Id. , ¶ 34.) Ms. Killefer has been a member of the Compensation Committee since that time. (Id. )

Mr. King served on the Board from 2011 through 2018. (Id. , ¶ 35.) Mr. King was a member of the Audit Committee from November 2011 through 2013, and the Compensation Committee from November 2013 through 2018. (Id. )

Finally, Mr. Losh served on the Board from 1996 to 2009, and rejoined in December 2018. (Id. , ¶ 36.) Mr. Losh was a member of the Audit Committee in 2008, and has served again in that capacity since 2018. (Id. )

B. Factual Background

Plaintiffs have availed themselves of the Ohio law permitting them to examine Cardinal Health's books and records of account, together with the minutes of the proceedings of its Board and committees of the Board (the "Books and Records"). (Consol. Compl., preamble. See also Ohio Rev. Code § 1701.37.)

1. Board Governance

Cardinal Health's Board is organized and operates in accordance with internal governing documents, including the Corporate Governance Guidelines and various committee charters. (Consol. Compl., ¶ 82.) The Corporate Governance Guidelines provide, in part:

The Board, operating directly and through its committees, fulfills the following primary functions:

1. Oversee management in the conduct of Cardinal Health's business;

2. Oversee management's efforts to establish and maintain for the Company high standards of legal and ethical conduct in all of its businesses, including conformity with all applicable laws and regulations; ...

3. Oversee management's efforts to protect the assets of Cardinal Health through the maintenance of appropriate accounting, financial reporting and financial and other controls;

4. Oversee the

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