This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.
A recent milestone Chancery Court opinion found shareholders were not too late in charging that opioid maker AmerisourceBergen Corp.’s directors and officers disloyally prioritized profits over regulatory compliance and ignored red-flag warnings that the drug was being wrongly marketed. Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022).
Vice Chancellor J. Travis Laster’s 94-page opinion ruled that under a “separate accrual” method of determining when the Company should have been put on notice of their potential liability for allegedly mismarketing a purportedly dangerously addictive drug, the various charges were timely filed.
But that novel ruling – which addressed the first part of the defendant directors’ two-prong dismissal move — only kept the derivative suit alive for an additional week. In a separate 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).
Director liability already decided
He 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. The vice chancellor 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.
Therefore, he ruled in the December 22 opinion, that it was unlikely that the directors’ decision on the merits of the suit would be swayed by the possibility that they might face liability and a conflict of interest that would disqualify them under the pre-suit rule for lack of objectivity. That opinion will be summarized in a forthcoming article.
However, the December 15 opinion should be of interest to corporate law specialists for its extensive analysis of how timeliness should be determined for two charges – a “Red flag claim” and a “Massey claim” — where the starting points of the alleged wrongs are often difficult to determine:
- “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.”
- 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. In re Massey Energy Co., 2011 WL 2176479, *20 (Del. Ch. May 31, 2011) The most telling evidence of intent was a decision in 2015, when management proposed and the directors approved a revised order monitoring program. AmerisourceBergen’s existing order monitoring program used static criteria to flag orders of interest.
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 and has incurred hundreds of millions of dollars settling other lawsuits and over $1 billion in defense costs.
According to the court’s record, two pension funds sued, contending 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. Plaintiffs seek to shift the responsibility for that harm from AmerisourceBergen to the human fiduciaries that allegedly caused it to occur.
The dismissal motion
Defendants moved to dismiss on grounds that both the Red Flags and Massey claims were filed late. Vice Chancellor Laster said, “No Delaware court has addressed how to determine when a Red-Flags Claim or a Massey Claim accrues. Delaware decisions have applied three methods to determine when claims for breach of fiduciary duty accrue, the discrete act method, the continuing wrong method, and the separate accrual method.
The discrete act method applies in the vast majority of cases. When a plaintiff contends that fiduciaries have breached their duties by making a specific decision that was complete when made, that decision constitutes a discrete wrongful act that causes the claim to accrue.
For a Red-Flags Claim or a Massey Claim, the discrete act approach dramatically constrains the stockholders’ ability to sue, because an initial decision to ignore a red flag or pursue an illegal business plan often will be difficult to detect and will not have discernable consequences, the vice chancellor said.
The separate accrual method
Vice Chancellor Laster said the separate accrual approach treats a series of related decisions and conscious non-decisions as a sequence of wrongful acts, each of which gives rise to a separate limitations period. Under this approach, the plaintiff can seek to impose liability and recover damages for any portion of the wrongful conduct where the statute of limitations has not yet run, but not for wrongful conduct that occurred earlier. “To apply the statute of limitations, the court determines when the plaintiff filed suit, looks back from that point over the length of the limitations period, and checks whether actionable conduct took place within that period,” he said.
“When applying the separate accrual approach within a laches framework, the court looks to when the plaintiff began vigilantly pursuing its claims. For purposes of a derivative action, that can be when a plaintiff begins seeking books and records,” Vice Chancellor Laster wrote.
“In this case, the plaintiffs’ diligent efforts to obtain books and records could support using May 21, 2019, as a starting date for the actionable period,” the court decided. “The plaintiffs, however, are content to use October 20, 2019, so the court uses that date. Using a three-year statute of limitations, the actionable period began on October 20, 2016.” Using that timetable, the claims were not filed late, the court ruled.