La. Mun. Police Employees' Ret. Sys. v. Pyott

• Decision Date: 11 June 2012
• Docket Number: C.A. No. 5795–VCL.
• Citation: 46 A.3d 313
• Court: Court of Chancery of Delaware
• Parties: LOUISIANA MUNICIPAL POLICE EMPLOYEES' RETIREMENT SYSTEM and U.F.C.W. Local 1776 & Participating Employers Pension Fund, Plaintiffs, v. David PYOTT, Herbert W. Boyer, Louis J. Lavigne, Gavin S. Herbert, Stephen J. Ryan, Leonard D. Schaeffer, Michael R. Gallagher, Robert Alexander Ingram, Trevor M. Jones, Dawn E. Hudson, Russell T. Ray, and Deborah Dunsire, Defendants, and Allergan, Inc., Nominal Defendant.

46 A.3d 313

LOUISIANA MUNICIPAL POLICE EMPLOYEES' RETIREMENT SYSTEM and U.F.C.W. Local 1776 & Participating Employers Pension Fund, Plaintiffs,
v.
David PYOTT, Herbert W. Boyer, Louis J. Lavigne, Gavin S. Herbert, Stephen J. Ryan, Leonard D. Schaeffer, Michael R. Gallagher, Robert Alexander Ingram, Trevor M. Jones, Dawn E. Hudson, Russell T. Ray, and Deborah Dunsire, Defendants,
and
Allergan, Inc., Nominal Defendant.

C.A. No. 5795–VCL.

Court of Chancery of Delaware.

Submitted March 29, 2012.
Decided June 11, 2012.

[46 A.3d 316]

Pamela S. Tikellis, Robert J. Kriner, Jr., Scott M. Tucker, Chimicles & Tikellis LLP, Wilmington, Delaware; Scott R. Shepherd, Shepherd, Finkelman, Miller & Shah, LLP, Media, Pennsylvania; Lesley E. Weaver, Shepherd, Finkelman, Miller & Shah, LLP, San Francisco, California; Jeffrey W. Golan, Lisa M. Lamb, Barrack, Rodos & Bacine, Philadelphia, Pennsylvania, Attorneys for Plaintiffs.

Kenneth J. Nachbar, Shannon E. German, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Wayne W. Smith, Jeffrey H. Reeves, Kristopher P. Diulio, Gibson, Dunn & Crutcher LLP, Irvine, California, Attorneys for Defendants.

Cathy L. Reese, Jose P. Sierra, Joseph B. Warden, Fish & Richardson P.C., Wilmington, Delaware, Attorneys for Nominal Defendant Allergan, Inc.

OPINION
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.

[46 A.3d 317]

I. FACTUAL BACKGROUND

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.

A. Allergan And The Growth Of Botox

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

[46 A.3d 318]

legally can sell a product notwithstanding its potential off-label use. It is illegal, however, for a manufacturer to market a drug for off-label use. Under the Food, Drug, and Cosmetics Act, 21 U.S.C. §§ 301 et seq., the Public Health Service Act, 42 U.S.C. §§ 262 et seq., and their implementing regulations, drug manufacturers cannot market or promote drugs for uses that the FDA has not approved. See, e.g.,21 U.S.C. § 331(a), (d); 42 U.S.C. § 262(a)(1), (b); 21 C.F.R. § 601.12.

Allergan understood the critical distinction between off-label sales and marketing. Allergan's 2004 Annual Report summarized the regulatory scheme as follows:

Physicians may prescribe pharmaceutical and biologic products for uses that are not described in a product's labeling or differ from those tested by us and approved by the FDA. While such “off-label” uses are common and the FDA does not regulate a physician's choice of treatment, the FDA does restrict a manufacturer's communications on the subject of off-label use. Companies cannot actively promote FDA-approved pharmaceutical or biologic products for off-label uses.... If ... our promotional activities fail to comply with the FDA's regulations or guidelines, we may be subject to warnings from, or enforcement action by, the FDA or another enforcement agency.

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.

B. Allergan Provides Extensive Support For Off–Label Sales.

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...