Friday, December 29, 2023

AmerisourceBergen, and Who Decides?

Delaware’s Caremark cases continue to be catnip for me.

The latest is the Delaware Supreme Court’s Lebanon County Employees’ Retirement Fund v. Collis, reversing VC Laster’s decision from last year.

Plaintiffs alleged that AmerisourceBergen’s board of directors violated opioid drug laws by failing to monitor suspicious prescriptions, to the point where they altered their internal reporting systems so that fewer prescriptions would be flagged.  Ultimately, this conduct caused severe damage to the company, through a $6 billion global settlement, as well as other settlements and litigation costs.

VC Laster explored the allegations in detail, ultimately determining that, standing alone, the complaint stated a claim against the AmerisourceBergen board for a violation of Caremark duties. 

But!  Plot twist.  Because in mid 2022, after the plaintiffs’ complaint was filed, a federal West Virginia court cleared AmerisourceBergen of misconduct.  The case was filed by a city and county in West Virginia – areas that were ground zero for the opioid crisis – and among thousands of similar cases consolidated for pretrial proceedings in a larger multidistrict litigation.  After a bench trial, the judge found that the plaintiffs had failed to prove that AmerisourceBergen did not maintain an effective control system.  According to Laster, that decision was enough to undermine the plaintiffs’ claims that AmerisourceBergen’s directors had caused the company to break the law.  As he held:

In light of the West Virginia Court’s thorough analysis, it is not possible to infer that the Company failed to comply with its anti-diversion obligations, nor is it possible to infer that a majority of the directors who were in office when the complaint was filed face a substantial likelihood of liability on the plaintiffs’ claims.

Case dismissed.

On appeal, the Delaware Supreme Court held that Laster had improperly deferred to the factfinding of another court as to contested matters, namely, whether the AmerisourceBergen Board had complied with the Controlled Substances Act.  As the Court put it:

the question whether the defendants in the West Virginia litigation engaged in wrongful conduct and failed to comply with the CSA was, it seems clear to us, a question of fact… This Court has not addressed whether a court can take adjudicative notice of the factual findings of another court. The weight of authority in the federal courts applying Federal Rule of Evidence 201, which is nearly identical to D.R.E. 201, indicates that a court may not do so when the underlying fact is reasonably disputed.

So, Laster was reversed, and the complaint sustained.

I’ve posted a lot about how common Caremark claims are becoming, and how they’re becoming more successful.  I think this trend is likely to create a lot of headaches for the Delaware courts and among those headaches – as this case demonstrates – is how Delaware’s decisions are going to interact with the findings of other courts.  After all, Caremark is predicated on the existence of illegal conduct.  Other regulators are the ones who are primarily responsible for determining whether any illegal conduct occurred in the first place; Delaware’s role is secondary to those primary findings of legality/illegality.

In other words, it would be kind of odd if a Delaware court held that a board violated its fiduciary duties by causing the company to break the law, if the company’s primary regulator determined that the company had not broken the law.

Laster’s original decision, then, has the air of trying to work out how Delaware courts will operate in tandem with these other legal systems in the context of Caremark.  Laster treated the West Virginia decision as a legal declaration under Delaware Rule of Evidence 202, which thereby absolved AmerisourceBergen – and thus its board – of any wrongdoing. 

The Delaware Supreme Court, however, rejected that attempt.  In its view, the West Virginia decision was not, for evidentiary purposes, a legal declaration of the propriety of the board’s conduct, but a factual determination of what had historically occurred – contested facts that Delaware is free to revisit (“To be sure, the findings of the West Virginia Court are recorded in the ‘case law . . . of the United States[,]’ but they do not establish or recognize a rule or principle of law of the kind that is subject to judicial notice under D.R.E. 202”).  And though the Delaware Supreme Court’s decision, taken in isolation, certainly makes sense, I wonder if it will create more problems for Delaware going forward, if Caremark claims appear to be proceeding even where underlying regulatory actions fail.  Or, as I put it previously, “Delaware really can’t be in the business of functioning as a backup regulator for the entire United States.”

Ann Lipton | Permalink


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