This article was prepared by Frank Reynolds, who has been following Delaware corporate law and writing about it in various publications for more than 35 years.
The Delaware Chancery Court has declined to dismiss shareholder derivative charges that Walmart Corp. officers and directors chose to let the company violate criminal law by putting opioid drug profits ahead of their duty to comply with a Drug Enforcement Agency settlement.
Ontario Provincial Council of Carpenters’ Pension Trust Fund, et al. v Walton et.al. No. 2021-0827-JTL opinion issued (Del. Ch. April 26, 2023).
In his April 26 opinion of 128-pages denying part of a defense motion to dismiss for failure to plead pre-suit demand, Vice Chancellor Travis Laster ruled that the business judgment rule does not shield Walmart fiduciaries from liability for decisions that “consciously condoned illegality” by pushing its pharmacies to increase opioid sales after agreeing with regulators to reign them in. However, he found that the majority of the directors did not face liability that would prevent them from objectively reviewing other breach-of-duty charges related to Walmart’s role as an opioid distributor.
Corporate and insurance law specialists will likely be interested in the distinction the vice chancellor made in finding that only charges involving possible criminal liability for the board’s alleged disregard of a DEA mandate and its duty as an opioid dispenser could survive the pre-suit demand test. The court said a fiduciary cannot “make a business judgment to cause or allow the corporation to break the law” because former Chancellor Leo Strine’s Massey Energy decision found that, “Delaware law does not charter law breakers.” In re Massey Energy Co., 2011 WL 2176479, *20 (Del. Ch. May 31, 2011).
Background
Walmart, as the distributor for a national network of more than 5,000 company pharmacies, was accused in myriad later-consolidated lawsuits of over-prescribing and diverting massive amounts of drugs in a major contribution to a plague of opioid dependence. After a bellwether suit in a multi-district litigation determined that Walmart caused $3.1 billion of a massive total national opioid damages’ judgment, three pension fund shareholders filed a derivative suit that charged Walmart fiduciaries brought about that liability by knowingly causing Walmart to fail to comply with:
(i) its obligations under the federal Controlled Substances Act and its implementing regulations,
(ii) its obligations under the Controlled Substances Act when acting as a distributor of opioids, and
(iii) its obligations under a settlement with the U.S. Drug Enforcement Agency.
The charges survived a motion to dismiss them as untimely. In an April 12 ruling the court found that Walmart Corp. shareholders did not wait too long to charge that their officers and directors violated their fiduciary duties and a settlement with federal drug regulators by letting Walmart misuse its opioid dispenser role for 5,000 company pharmacies in Ontario Provincial Council of Carpenters’ Pension Trust Fund, et al. v Walton et.al. No. 2021-0827-JTL opinion issued (Del. Ch. April 12, 2023).
But two weeks later on a motion to dismiss for failure to make or excuse pre-suit demand, the court allowed only the DEA-settlement charges and the alleged violations of the Controlled Substances Act as dispenser to proceed.
Analysis of the demand ruling
The vice chancellor found significance in the absence of non-privileged communications in the record as to both compliance with the DEA settlement and the regulators’ allegations regarding Walmart’s compliance with the Controlled Substance Act as a dispenser. He reasoned that if the board was dutifully working on those issues the record would include more than privileged communications with the directors’ attorneys (which were by nature, unavailable.)
He noted a lack of non-privileged communications about:
- taking the steps necessary to comply with the DEA Settlement and the Controlled Substances Act,
- responding to red flags of noncompliance, and
- assessing the effectiveness of the compliance efforts. Although legal advice undoubtedly is an input into those discussions and decisions.
The court said “As a dispenser, Walmart must establish and maintain effective controls and procedures to guard against theft and diversion of controlled substances. The regulations for dispensers include specific requirements that pharmacies must meet.” It found enough support for a pleading stage inference that Walmart’s board did not authorize the resources that its pharmacies needed to implement promised reforms of opioid prescribing procedures. Instead, there was talk of support for incentives to boost prescription volume, he said.
Regarding the DEA settlement –which ran from March 2011 to March 2015—the court noted that despite Walmart’s agreement to fund reform, a report to the board ‘”conspicuously omits significant items identified in the DEA Settlement,” such as `doctor shopping, flagging requests for early refills, or checking for altered or forged prescriptions.
The vice chancellor said the pleading-stage record points to a motive for the conscious decision not to devote more resources to compliance: Walmart was driving opioid prescription traffic to its pharmacies both to generate pharmacy sales and get customers into Walmart’s stores so that they would buy other products, he said. “Walmart was simultaneously incentivizing and pressuring its pharmacists to fill more prescriptions and do it faster. Devoting more resources to achieving compliance with the DEA Settlement would have cost money and undercut those initiatives,” he concluded.
The court ruled that was enough at the pleading stage to deny the motion to dismiss–especially since those charges could result in criminal liability. It declined to stay the suit until that was determined in a related case.