Leb. Cnty. Employees' Ret. Fund v. Collis

• Decision Date: 15 December 2022
• Docket Number: C.A. No. 2021-1118-JTL
• Citation: 287 A.3d 1160
• Parties: LEBANON COUNTY EMPLOYEES’ RETIREMENT FUND and Teamsters Local 443 Health Services & Insurance Plan, Plaintiffs, v. Steven H. COLLIS, Richard W. Gochnauer, Lon R. Greenberg, Jane E. Henney, Kathleen W. Hyle, Michael J. Long, Henry W. McGee, Ornella Barra, D. Mark Durcan, and Chris Zimmerman, Defendants, and AmerisourceBergen Corporation, Nominal Defendant.
• Court: Court of Chancery of Delaware

287 A.3d 1160

LEBANON COUNTY EMPLOYEES’ RETIREMENT FUND and Teamsters Local 443 Health Services & Insurance Plan, Plaintiffs,

v. Steven H. COLLIS, Richard W. Gochnauer, Lon R. Greenberg, Jane E. Henney, Kathleen W. Hyle, Michael J. Long, Henry W. McGee, Ornella Barra, D. Mark Durcan, and Chris Zimmerman, Defendants,andAmerisourceBergen Corporation, Nominal Defendant.

C.A. No. 2021-1118-JTL

Court of Chancery of Delaware.

Date Submitted: September 23, 2022

Date Decided: December 15, 2022

Samuel L. Closic, Eric J. Juray, Robert B. Lackey, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Lee D. Rudy, Eric L. Zagar, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Jeroen van Kwawegen, Eric J. Riedel, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Frank R. Schirripa, Daniel B. Rehns, Kurt Hunciker, Hillary Nappi, HACH ROSE SCHIRRIPA & CHEVERIE LLP, New York, New York; Gregory Mark Nespole, Daniel Tepper, LEVI & KORSINSKY, LLP, New York, New York; Brian J. Robbins, Craig W. Smith, ROBBINS LLP, San Diego, California; Counsel for Plaintiffs.

Stephen C. Norman, Jennifer C. Wasson, Tyler J. Leavengood, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Michael S. Doluisio, Carla Graff, DECHERT LLP, Philadelphia, Pennsylvania; Matthew L. Larrabee, Hayoung Park, DECHERT LLP, New York, New York; Michael D. Blanchard, Amelia Pennington, MORGAN, LEWIS & BOCKIUS LLP, Boston, Massachusetts; Counsel for Defendants.

LASTER, V.C.

Nominal defendant AmerisourceBergen Corporation ("AmerisourceBergen" or the "Company") is one of three major wholesale distributors of opioid pain medication in the United States. Over the past two decades, AmerisourceBergen has found itself at the center of America's tragic opioid epidemic. In 2021, AmerisourceBergen agreed to pay over $6 billion as part of a nationwide settlement to resolve multidistrict litigation brought against the Company and the other two major opioid distributors (the "2021 Settlement"). AmerisourceBergen has incurred hundreds of millions of dollars settling other lawsuits and over $1 billion in defense costs. Those financial figures do not attempt to quantify the reputational harm that the Company has suffered, nor the damage from lost opportunities or management distraction. Those harms obviously pale in comparison to the human cost of the opioid epidemic.

The plaintiffs own stock in AmerisourceBergen. They contend that the Company's directors and officers breached their fiduciary duties by making affirmative decisions and conscious non-decisions that led ineluctably to the harm that the Company has suffered. They seek to shift the responsibility for that harm from AmerisourceBergen to the human fiduciaries that caused it to occur.

The plaintiffs advance two theories of breach. For their first claim, they rely on the proposition that corporate fiduciaries cannot consciously ignore evidence indicating that the corporation is suffering or will suffer harm. Most plainly, corporate fiduciaries cannot knowingly ignore red flags evidencing legal non-compliance. The Delaware Supreme Court recognized this theory in Graham v. Allis-Chalmers Manufacturing Co. , 188 A.2d 125 (Del. 1963). In his landmark decision in In re Caremark International, Inc. Derivative Litigation , 698 A.2d 959 (Del. Ch. 1996), Chancellor Allen explained that Allis-Chalmers was not the only path to liability and that corporate fiduciaries also could be held liable if they knowingly failed to adopt internal information and reporting systems that were "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. at 970.

In Stone v. Ritter , 911 A.2d 362 (Del. 2006), the Delaware Supreme Court combined the holdings in Allis-Chalmers and Caremark by stating that directors could be held liable if

[i] the directors utterly failed to implement any reporting or information system or controls; or [ii] having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations.

Id. at 370. Since Stone , some decisions have labeled the first theory a "prong-one Caremark claim" and the second theory a "prong-two Caremark claim." For those of us who have trouble keeping the two prongs straight, Chancellor McCormick has come to the rescue by referring to the second type of claim as a "Red-Flags Theory" or a "Red-Flags Claim."¹

As a distributor of opioids, AmerisourceBergen must comply with extensive regulatory frameworks imposed by federal and state law. The federal regulatory frameworks require that a distributor report any suspicious orders to the federal Drug Enforcement Agency (the "DEA"). A distributor must either not fill a suspicious order or first conduct due diligence sufficient to ensure that the order will not be diverted into improper channels.

For their Red-Flags Theory, the plaintiffs contend that the Company's officers and directors were confronted with a steady stream of red flags that took the form of subpoenas from various law enforcement officials, congressional investigations, lawsuits by state attorneys general, and a deluge of civil lawsuits. Meanwhile, as the opioid epidemic raged, the rates at which the Company reported suspicious orders remained incomprehensibly low. The plaintiffs contend that based on those red flags, the defendants knew that the Company was violating federal and state laws regarding opioid diversion and needed to implement stronger systems of oversight. Yet the Company's officers and directors consciously ignored the red flags and did not take any meaningful action until the 2021 Settlement. The complaint's allegations support an inference that the officers and directors declined to take action because they did not want to do anything that might imply that their earlier actions and policies were inadequate, and they also wanted to preserve their ability to use possible fixes to the Company's order monitoring systems and oversight policies as settlement currency.

For their second claim, the plaintiffs cite Chief Justice Strine's pointed admonition, made while serving on this court, that "Delaware law does not charter law breakers." In re Massey Energy Co. , 2011 WL 2176479, *20 (Del. Ch. May 31, 2011). "As a result, a fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the law." Id. Chancellor McCormick has helpfully described this type of theory as a " Massey Theory" or a " Massey Claim." See Hamrock , 2022 WL 2387653, at *17.

For their Massey Claim, the plaintiffs seek an inference that between 2010 and 2015, the Company's officers and directors took a series of actions which, when viewed together, support a pleading-stage inference that they knowingly prioritized profits over law compliance. The most telling evidence of intent was a decision in 2015, when management proposed and the directors approved a revised order monitoring program (the "Revised OMP"). AmerisourceBergen's existing order monitoring program used static criteria to flag orders of interest. The monitoring program called for AmerisourceBergen personnel to investigate the flagged orders and, if they still appeared suspicious, report them to the DEA. Under its existing program, AmerisourceBergen was already reporting suspicious orders at profoundly low rates.

Under the Revised OMP, AmerisourceBergen only would flag orders that both met the static criteria and were inconsistent with a particular customer's dynamic pattern of orders. The second trigger meant that if a pharmacy submitted an order that would be flagged for investigation under the static criteria, but the order was consistent with the pharmacy's recent pattern of orders, then the new system would not flag the order for review. Management's presentation to the board included a Venn diagram which showed that the new system only would identify for investigation a sliver of the orders flagged under the old system.

With the implementation of the Revised OMP, AmerisourceBergen's already low rate of suspicious order reporting fell to microscopic levels. Between 2014 and 2015, the level of suspicious orders declined by 86%. Over the same period, AmerisourceBergen's total orders increased by 8.6%. Between 2015 and 2016, the level of suspicious orders declined by another 92%. Over the same period, AmerisourceBergen's total orders increased by another 6.7%.

Prosecutorial investigations, congressional inquiries, and civil lawsuits followed. Two congressional reports concluded that AmerisourceBergen failed to identify and address suspicious orders as required by federal law. Cities, counties, American Indian tribes, union pension funds, and the attorneys general of more than a dozen states sued the Company for contributing to the opioid epidemic. The plaintiffs maintain that in the face of these problems, the Company's officers and directors continued to pursue their illegal business strategy until the 2021 Settlement.

The defendants have moved to dismiss the plaintiffs’ claims on two grounds. They argue that the plaintiffs’ claims are untimely and that the plaintiffs’ allegations fail to support an inference of demand futility.

This decision addresses the timeliness defense. When analyzing such a claim, the court assumes that the claim is valid. The crux of the defendants’ argument is that even if the claim has merit, the plaintiffs have waited too long to bring it.

No Delaware court has addressed the...