Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.
A Delaware Supreme Court milestone ruling has revived a shareholder suit over pharmaceutical giant AmerisourceBergen Corp.’s role in the nation’s opioid crisis, finding the Court of Chancery should not have dismissed the derivative action by relying on a related federal court decision in Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 22, 2023, Dec. 18, 2023 (Del.).
Justice Gary Traynor, writing the December 18 unanimous en banc opinion that reversed the Chancery’s Dec. 22, 2022 ruling, said the Court of Chancery correctly concluded that the plaintiff pension funds supported charges that the Amerisource directors disloyally exposed the company to $6 billion in liability by favoring profits over people. Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022). But Justice Traynor said the vice chancellor should not have accepted as law a West Virginia District Court’s ruling about facts that were still in dispute concerning director actions. City of Huntington v. AmerisourceBergen Drug Corp., 609 F. Supp. 3d 408, 425 (S.D. W. Va. 2022).
The high court said on that basis, the vice chancellor decided that despite his finding that the board ignored numerous red flag warnings and violated an opioid distribution monitoring pact with the government, the derivative charges must fail the pre-suit demand test because the federal court ruled that the directors faced no individual liability.
The opinion will likely be studied by corporate law practitioners first because it:
- Sets parameters regarding when and how to take, weigh and apply judicial notice of the facts and law contained in rulings outside the First State.
- Updates guidelines to apply to developments in multi-faceted mega-litigation that occur after the filing of the operative complaint in a Delaware derivative suit and how they can be factored into a demand futility decision in that action, and
- Takes a fresh look at what constitutes potential liability that could prevent directors from objectively evaluating shareholder litigation over whether they have mismanaged and financially damaged their company — known as Caremark claims after the seminal decision in In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
AmerisourceBergen, one of three major wholesale distributors of opioid pain medication in the United States over the past two decades, found itself at the center of America’s opioid epidemic and in 2021, agreed to pay over $6 billion as part of a nationwide settlement to resolve multidistrict litigation brought against the three, additionally incurring hundreds of millions of dollars to settle other lawsuits and over $1 billion in defense costs.
Two dismissal motions
According to the court’s record, two pension funds sued in Chancery Court, contending that Amerisource’s directors and officers breached their fiduciary duties by making affirmative decisions and conscious non-decisions that led to the harm that the company has suffered. Plaintiffs sought to shift the responsibility for that harm from AmerisourceBergen to the human fiduciaries who allegedly caused it to occur. The plaintiffs survived the directors’ motion to dismiss on grounds that the charges were filed too late. Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022).
But that novel ruling only kept the derivative suit alive for an additional week. In a December 22 opinion, the vice chancellor agreed with the directors’ argument that under the pre-suit demand futility test, dismissal was justified because a majority of the board was not too conflicted to objectively decide whether the suit had enough merit to go forward. Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022).
The Vice Chancellor found that a federal court in West Virginia, in a related bellwether test case to decide nationwide liability for damages to opioid users, had already ruled that the directors could not be held legally liable for making decisions that directly caused the damage. He said that federal judge had considered all the evidence and testimony in the opioid damages trial and found insufficient reason to hold the directors individually liable for causing the damages.
A rare reversal
The plaintiffs’ appeal to the Supreme court argued that Vice Chancellor Laster wrongly let the federal opinion sway his decision even though it came after the operative complaint in his case had been filed and the federal court facts he relied on were still in dispute.
In a rare reversal of the Chancery Court, the justices issued the December 18 opinion four days shy of the one-year anniversary of the dismissal ruling. It essentially agreed with plaintiffs on those weight, applicability and timing issues concerning the federal court’s finding of no director liability.
Would have survived
“The Court of Chancery accepted the West Virginia Court’s findings that “‘[n]o culpable acts by defendants caused an oversupply of opioids,” finding that Amerisource had an adequate anti- diversion program in place and that there was no evidence that it distributed opioids to pill mills,” Justice Traynor wrote, finding that, “Without the findings, the plaintiffs’ claims would have survived; with them, they perished.” And he found the trial court’s “adjudicative judicial notice of the factual findings” in error.
Proper judicial notice
Moreover, he noted, judicial notice can be properly taken of only undisputed facts and the federal court wrongly concluded that no wrongdoing had occurred for which the defendants might be held liable, which “was, and is, reasonably disputed.”
As to the issue of the timing of the federal court’s liability ruling and the date of the complaint, the High Court stated: ‘the Court of Chancery’s reliance on the factual findings in the West Virginia Decision changed the date at which demand futility was considered.” The Justice concluded on behalf of the High Court that, “under the Court of Chancery’s analysis, the plaintiffs established their derivative standing as of the time the complaint was filed. The court erred by vitiating the plaintiffs’ standing in deference to the factual findings in the West Virginia decision.”