Teamsters Local 443 Health Services & Insurance Plan v. John G. Chou

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

TEAMSTERS LOCAL 443 HEALTH )
SERVICES & INSURANCE PLAN, ST. )
PAUL ELECTRICAL )
CONSTRUCTION PENSION PLAN, )
ST. PAUL ELECTRICAL )
CONSTRUCTION WORKERS )
SUPPLEMENTAL PENSION PLAN )
(2014 RESTATEMENT), )
RETIREMENT MEDICAL FUNDING )
PLAN FOR THE ST. PAUL )
ELECTRICAL WORKERS, AND SAN )
ANTONIO FIRE & POLICE PENSION )
FUND, )
)
Plaintiffs, )
)
v. ) C.A. No. 2019-0816-SG
)
JOHN G. CHOU, STEVEN H. COLLIS, )
RICHARD W. GOCHNAUER, LON R. )
GREENBERG, TIM G. GUTTMAN, )
JANE E. HENNEY, M.D., KATHLEEN )
W. HYLE, MICHAEL J. LONG, AND )
HENRY W. MCGEE, )
)
Defendants, )
)
-and- )
)
AMERISOURCEBERGEN )
CORPORATION, )
)
Nominal Defendant. )

MEMORANDUM OPINION

Date Submitted: May 27, 2020
Date Decided: August 24, 2020
Ned Weinberger and Mark D. Richardson, of LABATON SUCHAROW LLP,
Wilmington, Delaware; Christine M. Mackintosh and Rebecca Musarra, of GRANT
& EISENHOFER P.A., Wilmington, Delaware; OF COUNSEL: David MacIssac, of
LABATON SUCHAROW LLP, New York, New York; David Wales and
Christopher J. Orrico, of BERNSTEIN LITOWITZ BERGER & GROSSMANN
LLP, New York, New York; Frank Schirripa, of HACH ROSE SCHIRRIPA &
CHEVERIE LLP, New York, New York; Nathaniel L. Orenstein, of BERMAN
TABACCO, Boston, Massachusetts; Nicole Lavallee, of BERMAN TABACCO, San
Francisco, California, Attorneys for Plaintiffs.

Stephen C. Norman, Jennifer C. Wasson, and Tyler J. Leavengood, of POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Michael
D. Blanchard, Andrew M. Buttaro, and Amelia Pennington, of MORGAN, LEWIS
& BOCKIUS LLP, Boston, Massachusetts, Attorneys for Defendants and Nominal
Defendant.

GLASSCOCK, Vice Chancellor
It has become among the hoariest of Chancery clichés for an opinion to note

that a derivative claim against a company’s directors, on the grounds that they have

failed to comply with oversight duties under Caremark,1 is among the most difficult

of claims in this Court to plead successfully. As with many a cliché, there is truth

in the notion. In order to survive a motion to dismiss under Rule 23.1, a plaintiff

must raise an inference that demand on the board to undertake the action would have

been futile.2 Typically, in the Caremark context, this requires a pleading of specific

facts from which the Court may infer a substantial likelihood of liability on the part

of a majority of the board on whom demand would have been made. Such a pleading

must allege with particularity facts which imply that the directors utterly failed to

provide a corporate reporting system to permit board-level review of compliance

with law, or that the directors were provided sufficient notice of corporate non-

compliance with law such that their failure to remediate amounts to bad faith. This

is a formidable burden.

The facts of Caremark claims, on the other hand, often invoke judicial

sympathies. Frequently, the facts of the case involve corporate misconduct that has

led to material suffering among customers, or to the public at large. A judge in the

Caremark context must be careful to remember the issues before her. At issue is not

1
In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
2
Or that demand was made and wrongfully refused.

1
whether specific or society-wide victims may themselves receive a remedy for

corporate misconduct. Instead, the issue is whether the corporation, whose directors

have allegedly allowed it to commit bad acts, should itself recover damages that

ultimately inure to the benefit of the corporate owners, its stockholders. This

unusual posture raises the question of whether Caremark liability is merely a branch

of fiduciary liability designed to make the beneficiaries of that duty whole for

breach, or whether it should be seen also as a blunt but useful tool to encourage good

corporate citizenship. That question is for academic discussion, not judicial

resolution; again, a judge in equity must be mindful that it is the corporation, not that

corporation’s victims, to whom any recovery will flow.

It is of little wonder that Caremark liability is rarely imposed, as it is

fortunately rare that directors, otherwise unconflicted, should nonetheless take

actions knowingly inimical to the corporate interest, such as ignoring a known duty

to act to prevent the corporation from violating positive law. I find, however—at

least at this pleading stage where I must accept the allegations of the complaint along

with reasonable plaintiff-friendly inferences—that the Plaintiffs here have pled such

a case.

The Plaintiffs are stockholders in AmerisourceBergen Corporation (“ABC”

or, the “Company”). ABC acquired Medical Initiatives, Inc. d/b/a Oncology Supply

Pharmacy Services (“Pharmacy”) as an indirect wholly-owned subsidiary in 2001 as

2
part of a larger merger. Pharmacy, per the complaint, was run as a criminal

organization. Pharmacy was not, in fact, a state-licensed pharmacy, although it

operated in a way that made it appear as such to avoid Food and Drug Administration

(“FDA”) oversight. Pharmacy’s business was to buy single-dose sterile vials of

oncology drugs, put those drugs into syringes, and sell the syringes for injection into

a cancer patient’s body. As acquired by Pharmacy, these single-dose vials had been

intentionally overfilled by the manufacturer to account for human error in filling

syringes and to permit the medical provider to discharge a small amount before

injection to avoid air bubbles, but still have a full dose. Instead of discarding this

overfill, which was not intended for patient use, Pharmacy illegally “pooled” the

overfill and used it to fill additional syringes. This process was unsterile and led to

the contamination of the drugs so pooled.

Having thus created extra product, ABC both pocketed the extra revenue, and

undercut the competition by providing kickbacks to buyers to increase market share.

The operation used sham prescriptions to make it appear that Pharmacy was, in fact,

a pharmacy, and thus shielded from FDA oversight. When the pooled drugs were

so grossly contaminated that particulates were visible to the naked eye, Pharmacy

filtered out these “floaters” and sold the drug, nonetheless.

3
Ultimately, the criminal activities at Pharmacy and other associated ABC

subsidiaries were uncovered, and significant corporate criminal and civil penalties

ensued.

The question is whether, in allowing these conditions to obtain at Pharmacy

and its associated entities, the ABC directors failed their duty to oversee operations,

in bad faith. The Defendants have moved to dismiss under Rules 23.1 and 12 (b)(6).

According to the Defendants, the egregiousness of the allegations is undercut by the

small part of the total ABC business represented by the Pharmacy operations. It is

true that directors are not omniscient, that their eyes cannot be on every sparrow,

and that not every failure of oversight is the result of bad faith. Here, however, ABC

operated a criminal enterprise. The directors ignored such red flags as did exist, and,

in addition, permitted a woefully inadequate reporting system with respect to the

business line in which Pharmacy operated. At this pleading stage, assuming as true

the well-pled allegations and drawing reasonable inferences helpful to the Plaintiffs,

I find that the complaint states a claim for Caremark liability, and that the likelihood

of that liability is such that demand is excused. A close look at the facts supporting

that conclusion, and my reasoning, follow.

4
I. BACKGROUND3

I turn first to the scope of the record on this Motion to Dismiss. The final

order in the Plaintiffs’ underlying 8 Del. C. § 220 action to obtain ABC’s books and

records required that within five business days of the completion of production

ABC’s counsel certify that “[w]ith the exception of any documents included on the

privilege log, to the best of my knowledge after reasonable investigation, the

Company’s production is complete with respect to every category of documents that

the Company is required to produce.”4 “Given this stipulation, if [ABC] failed to

produce a document that it would reasonably be expected to possess if a particular

event had occurred, then the [P]laintiff[s] [are] entitled to a reasonable inference that

the event did not occur.”5 The final order in the Section 220 action also deems all

books and records produced pursuant to the Plaintiffs’ demand to be incorporated

by reference in any plenary complaint filed by the Plaintiffs in any subsequent

3
I draw the facts from the well-pled allegations of the Plaintiffs’ Verified Stockholder Derivative
Complaint, D.I. 1 (the “Complaint” or “Compl.”), the exhibits attached thereto, documents
incorporated by reference or integral to the pleading, and judicially noticeable facts. See In re
Clovis Oncology, Inc. Derivative Litig., 2019 WL 4850188, at *2 (Del. Ch. Oct. 1, 2019) (setting
forth Delaware’s judicial notice doctrine). ABC has produced documents to the Plaintiffs in
response to a demand for books and records by the Plaintiffs under 8 Del. C. § 220 in the case
captioned In re AmerisourceBergen Corporation Section 220 Litigation, Consol., C.A. No., 2018-
0209-SG. See Compl., ¶¶ 37–39. I follow the Plaintiffs’ convention in citing to documents
included in the Section 220 production, but not attached as exhibits to the Complaint, by using the
Bates numbers, which begin with “ABC-220 CONSOLIDATED.” Specific page numbers are
cited as ABC-220 CONSOLIDATED [Bates number of first page of document], at [last four digits
of Bates number of cited page].
4
Compl., Ex. 1, ¶ 2.
5
Hughes v. Hu, 2020 WL 1987029, at *2 (Del. Ch. Apr. 27, 2020) (citing Morrison v. Berry, 191
A.3d 268, 275 n.20 (Del. 2018)).

5
litigation relating to the Section 220 action.6 Consequently, I may consider any

documents incorporated by reference “in their entirety rather than rely only [on] the

portions ‘cherry picked’ by the [Plaintiffs].”7

A. The Parties and Relevant Entities

1. ABC and its Direct and Indirect Subsidiaries

Nominal Defendant ABC is a publicly-traded Delaware corporation with its

principal place of business in Chesterbrook, Pennsylvania.8 ABC is a

pharmaceutical sourcing and distribution company and was formed in 2001

following a merger between Bergen Brunswig Corporation (“Bergen Brunswig”)

and AmeriSource Health Corporation (“AmeriSource Health”).9 In the time period

pertinent to this Action, ABC’s pharmaceutical distribution segment consisted of

two operating segments: AmerisourceBergen Drug Corporation (which is not

pertinent here) and AmerisourceBergen Specialty Group (“Specialty”).10

Specialty, based in Frisco, Texas, is the parent entity for a group of companies

serving the specialty pharmaceuticals market, including the areas of biotechnology,

blood-plasma, and oncology.11 Specialty and its subsidiaries provide

6
Compl, Ex. 1, ¶ 3.
7
Clovis, 2019 WL 4850188, at *2 n.8 (Del. Ch. Oct. 1, 2019) (citing Amalgamated Bank v. Yahoo!
Inc., 132 A.3d 752, 797 (Del. Ch. 2016), abrogated on other grounds, 214 A.3d 933 (Del. Aug. 7,
2019)).
8
Compl., ¶ 17.
9
Id.
10
Id. ¶ 18.
11
Id. ¶ 20.

6
pharmaceutical distribution and related services directly to physicians and to

institutional healthcare providers, including hospitals.12 One of the companies

operated by Specialty is ASD Specialty Healthcare, LLC d/b/a Oncology Supply

(“Oncology”).13 Oncology is located in Dothan, Alabama and has been distributing

chemotherapy and supportive care products to independent oncology practices

throughout the United States for over thirty-five years.14

Oncology operated its subsidiary, Pharmacy.15 Pharmacy is a Florida

corporation and was acquired by ABC following the 2001 merger between Bergen

Brunswig and AmeriSource Health.16 Pharmacy operated out of Oncology’s facility

in Dothan, Alabama between 2001 and 2014.17 Pharmacy’s sole function was to

create pre-filled syringes of oncology drugs for sale and distribution to healthcare

providers—this was known as the Pre-Filled Syringe Program, which is the focus of

this Action.18 ABC closed Pharmacy’s business on January 31, 2014.19

12
Id.
13
Id. ¶ 21. Oncology is an “unincorporated subsidiary” of Specialty. Id.
14
Id.
15
Id. ¶ 22.
16
Id.
17
Id.
18
Id.
19
Id.

7
Oncology Group was one of Specialty’s eight business units, and at all

relevant times included Oncology, Pharmacy, and ION (a group purchasing

organization).20

2. Director and Officer Defendants

Defendant Steven H. Collis is ABC’s Chairman, President, and Chief

Executive Officer, and is Chair of ABC’s Executive Committee.21 Collis has been

a member of ABC’s Board of Directors (the “Board”) since 2011 and has served as

the Board’s Chairman since March 2016.22 Collis founded the Specialty Group at

AmeriSource Health in 1994 (which later became Specialty) and has held various

positions at ABC and its subsidiaries and predecessors.23 Collis was President of

Pharmacy from 1999 until its closure in 2014.24

Defendant Richard W. Gochnauer has been a director of ABC since

September 2008.25 Gochnauer currently serves as Chair of the Finance Committee.26

Gochnauer was a member of the Audit and Corporate Responsibility Committee (the

“Audit Committee”) from 2011 to 2012.27

20
Id. ¶ 116, n.54.
21
Id. ¶ 24.
22
Id.
23
Id.
24
Id.
25
Id. ¶ 25.
26
Id.
27
Id.

8
Defendant Lon R. Greenberg has been a director of ABC since May 2013.28

Greenberg has been a member of the Audit Committee since 2013, and is currently

its Chair.29

Defendant Jane E. Henney, M.D., has been a director of ABC since January

2002, and has been the Lead Independent Director since March 2016.30 Henney was

a member of the Audit Committee from 2004 to 2010.31

Defendant Kathleen W. Hyle has been a director of ABC since May 2010.32

Hyle was a member of the Audit Committee from 2010 to 2017 and its Chair from

2011 to 2016.33

Defendant Michael J. Long has been a director of ABC since May 2006.34

Long was a member of the Audit Committee from 2011 to 2017.35

Defendant Henry W. McGee has been a director of ABC since November

2004.36 McGee has a member of the Audit Committee since 2018, and was

previously a member of the Audit Committee from 2009 to 2015.37

28
Id. ¶ 26.
29
Id.
30
Id. ¶ 28.
31
Id.
32
Id. ¶ 29.
33
Id.
34
Id. ¶ 30.
35
Id.
36
Id. ¶ 31.
37
Id.

9
Defendant John G. Chou has been the Executive Vice President of ABC since

August 2011 and ABC’s Chief Legal and Business Officer since June 2017.38 Chou

has worked at ABC since 2002 and has previously held several other positions with

the Company.39 Chou was the General Counsel of Pharmacy from at least 2008 to

2014 and a member of the Board of Directors of Pharmacy from at least 2008 to

2018.40

Defendant Tim G. Guttman was a senior executive at ABC from 2008 to

2018.41 Guttman was a Vice President and Director of Pharmacy from 2012 to

2018.42

3. Non-Party Directors

Non-party Ornella Barra has been a director of ABC since January 2015.43

Non-party D. Mark Duncan has been a director of ABC since September

2015.44

38
Id. ¶ 32.
39
Id.
40
Id.
41
Id. ¶ 33.
42
Id.
43
Id. ¶ 34.
44
Id. ¶ 35.

10
4. Plaintiffs

Plaintiff Teamsters Local 443 Health Services & Insurance Plan

(“Teamsters”) was a stockholder of ABC during the time period relevant to the

Complaint and has been a stockholder of ABC continuously since that time. 45

Plaintiffs St. Paul Electrical Construction Pension Plan, St. Paul Electrical

Construction Workers Supplemental Pension Plan (2014 Restatement), and

Retirement Medical Funding Plan for the St. Paul Electrical Workers (together, “St.

Paul”) own and have continuously owned shares of ABC since December 2009.46

Plaintiff San Antonio Fire & Police Pension Fund (“San Antonio,” and,

together with Teamsters and St. Paul, the “Plaintiffs”) owns and has continuously

owned shares of ABC since prior to August 1, 2008.

B. The Pre-Filled Syringe Program

Pharmacy operated the Pre-Filled Syringe Program out of Oncology’s facility

in Dothan, Alabama.47 The Pre-Filled Syringe Program consisted of the creation,

packaging, and shipping of pre-filled syringes to oncology practices treating

immunocompromised patients.48 The Pre-Filled Syringe Program shipped pre-filled

syringes to oncology centers, medical practices, and physicians.49

45
Id. ¶ 14.
46
Id. ¶ 15.
47
Id. ¶ 42.
48
Id. ¶ 41.
49
Id. ¶ 44.

11
Pharmacy created the pre-filled syringes by removing FDA-approved drug

products from their original glass vials and repackaging them into single-dose plastic

syringes.50 When Pharmacy would remove the desired dosage of oncology drug

from its original glass vial a small amount of drug product would be left over—this

is known as “overfill.”51 When packaging drug products, manufacturers

intentionally include overfill to help with accurate dosage, as it accounts for human

error in filling syringes and permits the medical provider to avoid dangerous air

bubbles.52 Overfill is not intended for patient use.53 Pharmacy would extract the

overfill from FDA-compliant vials and combine the contents from multiple vials—

this is known as “pooling.”54 The pooled excess drug product was repackaged into

new syringes.55 By pooling overfill, the Pre-Filled Syringe Program was able to

create more doses than it bought from the original drug manufacturers.56

In 2006, the Board approved a capital expenditure plan to expand Oncology’s

Dothan, Alabama facility that housed the Pre-Filled Syringe Program.57 The Pre-

Filled Syringe Program sold more than 1 million pre-filled syringes annually after

50
Id.
51
Id.
52
Id. ¶ 45.
53
Id.
54
Id.
55
Id.
56
Id.
57
Id. ¶ 42.

12
the expansion and at the height of its operation generated more than $14 million in

profit for ABC each year.58

In operating the Pre-Filled Syringe Program, neither Oncology nor Pharmacy

were registered with the FDA as a drug manufacturer or repackager.59 Additionally,

neither entity obtained valid prescriptions, performed checks for harmful potential

drug interactions, or saw or counseled patients.60 Oncology and Pharmacy did not

maintain records of medication history, diagnosis, laboratory data or other pertinent

information for the patients to whom pre-filled syringes were administered.61

Neither Oncology nor Pharmacy had sufficient information to identify the patients

to whom the pre-filled syringes were ultimately administered.62 Oncology and

Pharmacy routinely provided pre-filled syringes to oncology practices without

receiving prescriptions signed by practitioners for specific patients.63

Oncology and Pharmacy frequently assigned the name of a single

individual—as the receiving “patient”—to an entire batch of pre-filled syringes and

often filled orders that had been submitted with a single person’s name but in

amounts far in excess of what could be plausibly or safely administered to one

58
Id.
59
Id. ¶ 52.
60
Id. ¶ 54.
61
Id.
62
Id. ¶ 55.
63
Id.

13
patient.64 In many cases, the individual assigned to receive a batch of pre-filled

syringes was known to be an employee at an oncology practice (such as a nurse or

office manager)—sometimes the named individual was a former patient of the

customer practice, either because the individual had passed away or was otherwise

no longer receiving treatment.65

Pharmacy prepared the pre-filled syringes in an unclean and unsterile

environment.66 The FDA-approved vials from which Pharmacy transferred the

oncology drugs into the syringes were designated for single use, yet Pharmacy’s

technicians frequently re-entered vials multiple times after the vials were

decapped.67 Pharmacy’s process for creating pre-filled syringes resulted in some

syringes containing particulate or foreign matter—Pharmacy’s employees internally

referred to such particulate or matter as “floaters.”68 Floaters were identified in pre-

filled syringes before at least 2007, and from 2007 to 2013 Pharmacy tracked the

number of pre-filled syringes that contained floaters.69 Between 2007 and 2013,

more than 32,000 pre-filled syringes were identified as containing floaters.70

64
Id. ¶ 56.
65
Id.
66
Id. ¶ 58.
67
Id.
68
Id. ¶ 59.
69
Id.
70
Id. The Plaintiffs illustrate this amount by stating that more than 100 pre-filled syringes each
week contained floaters. Id. Stated otherwise, because Pharmacy sold at least 1,000,000 pre-filled
syringes each year after the Oncology facility expansion (in 2006), and an average of
approximately 5,333 syringes per year from 2007–2013 contained floaters, an average of at least

14
Most of the pre-filled syringes containing floaters were made from vials of a

drug called Procrit®, which is used to treat chemotherapy-induced anemia, among

other conditions.71 The FDA-approved label for Procrit® stated: “drug products

should be inspected visually for particulate matter and discoloration prior to

administration. Do not use any vials exhibiting particulate matter or

discoloration.”72 Vials or syringes of Procrit® containing particulate were required

by the FDA to be destroyed.73 Pharmacy, however, did not destroy vials or syringes

containing floaters, and instead used its own process to “filter out” the visible

particulate before placing the drug in the pre-filled syringes.74

Pharmacy did not take steps to determine the cause, composition, or sterility

of floaters identified in pre-filled syringes.75 Nor did Pharmacy identify what may

have caused particulate matter to enter the pre-filled syringes or test the particulate

extracted from the pre-filled syringes to determine whether any sub-visible remnants

or contaminants remained in the syringes or posed a risk to patients.76 No assessment

was made to determine (i) whether Pharmacy’s filtration process impacted the

sterility, stability, or purity of the injectable drug content or (ii) the frequency of pre-

0.5% of the pre-filled syringes from 2007–2013 were identified as containing floaters. Id. ¶¶ 42,
59. This contaminated medicine was destined to be injected into cancer patients.
71
Id. ¶ 60.
72
Id. (italics in original).
73
Id. ¶ 61.
74
Id.
75
Id. ¶ 62.
76
Id.

15
filled syringes sold to health care providers in which particulate was present but not

visible.77

Out of more than nine million pre-filled syringes created by Pharmacy, only

eighty-two were submitted to an outside laboratory for sterility testing.78 Such

testing occurred on three occasions: once each in 2009, 2011, and 2012.79 On two

of the three occasions (2009 and 2011), several pre-filled syringes tested positive for

bacteria, but Pharmacy did not conduct follow up tests to confirm the source of the

bacteria nor did Pharmacy alert outside parties—including the healthcare providers

who purchased pre-filled syringes from the batches that tested positive for bacteria—

of the results.80

Additionally, rather than using a consistent and objective process to ensure

each pre-filled syringe contained the correct amount of injectable drug product,

when filling syringes, Pharmacy technicians “eyeballed” the volume using the

visible line on the syringe indicating the ordered dosage amount.81 Some Pharmacy

technicians drew drug product into the syringe just below the line whereas others

filled the syringe up to the line—these practices changed and/or varied among

Pharmacy technicians over the history of the Pre-Filled Syringe Program.82

77
Id.
78
Id. ¶ 63.
79
Id.
80
Id.
81
Id. ¶ 65.
82
Id.

16
Pharmacy had an “incentive program” whereby Pharmacy technicians who produced

more syringes using overfill received higher bonuses; this created a financial

incentive to use less drug product in each syringe, and thereby preserve more

overfill.83

Pharmacy technicians pooled drug product in a so-called “cleanroom.”84 On

multiple occasions the air flow hoods in the cleanroom tested positive for bacteria

in excess of acceptable levels.85 Pharmacy had the air hoods cleaned following the

positive tests, but did not conduct follow-up sampling to determine if the bacterial

contamination had been removed by the cleaning.86 Additionally, the air in the

cleanrooms tested positive for fungal contamination and/or bacterial contamination

in excess of acceptable levels on multiple occasions, but Pharmacy did not cease

operations during cleaning or conduct any immediate follow-up sampling.87

Pharmacy did not alert health care providers who received the pre-filled syringes of

the positive tests.88 Additionally, Pharmacy staff routinely entered cleanrooms

“without wearing any gowns or other protective clothing, and wore exposed jewelry,

makeup, nail polish and street clothing,” while preparing pre-filled syringes.89 Non-

83
Id. ¶ 66.
84
Id. ¶ 67.
85
Id.
86
Id.
87
Id. ¶ 68.
88
Id.
89
Id. ¶ 69 (internal quotation marks omitted).

17
sterile items were also left in the cleanrooms, including open Band-Aids, iPods and

exposed earbuds, skin lotion, aloe gel, chewing gum, lip balm, and non-sterile

mops.90

C. Criminal Guilty Plea and Civil Settlement Relating to the Pre-Filled
Syringe Program

1. The Criminal Information

On September 11, 2017, the United States Department of Justice (“DOJ”)

filed a Criminal Information against Specialty resulting from allegations related to

the Pre-Filled Syringe Program (the “Criminal Information”).91 The Criminal

Information charged Specialty with the introduction of misbranded drugs into

interstate commerce under the Food and Drug Commission Act (“FDCA”) under 21

U.S.C. §§ 331(a), 333(a)(1), 352(o), and 360, and 18 U.S.C. §§ 2, 3551 et seq.92

The Criminal Information noted that it is illegal to introduce an unapproved

new drug into interstate commerce unless an approved new drug application

(“NDA”), biologics license application (“BLA”) or similar application is in effect

for the drug.93 The Criminal Information alleged that “commercial repackaging of

FDA-approved sterile injectable drugs or biologics from their original containers

90
Id.
91
Id. ¶ 72.
92
Id.
93
Id. ¶ 46; Compl., Ex. 3 (“Criminal Information”), ¶ 10. The similar applications, as identified
in the Criminal Information, are an abbreviated new drug application or an investigational new
drug application. Criminal Information, ¶ 10.

18
(i.e. glass vials) into syringes, using a process that contradicted the instructions for

the approved drug” was not exempt from filing an NDA or BLA “and in any event

doing so without obtaining patient specific prescriptions for such repackaged

products required filing a new NDA or BLA.”94 The Criminal Information alleged

that Specialty “unlawfully introduced unapproved new drugs into interstate

commerce via its [Pre-Filled Syringe] Program, which engaged in the removal of

FDA-approved drug product from glass vials and the repackaging of that product

into plastic syringes.”95

The Criminal Information also noted that any entity engaged in the

“manufacture, preparation, propagation, compounding or processing” of a drug must

entities engaged in ‘repacking’ or ‘otherwise changing the container, wrapper, or

labeling of any drug package or device package in furtherance of the distribution of

the drug or device from the original place of manufacture to the person who makes

final delivery or sale to the ultimate consumer or user.’” 97 If a drug was

manufactured, prepared, propagated, compounded, or processed in an establishment

in any state not duly registered with the FDA it was deemed misbranded under the

94
Criminal Information, ¶ 13.
95
Id. ¶ 69.
96
Id. ¶ 15.
97
Id.

19
FDCA, but an entity operating as a pharmacy may have qualified for certain

exemptions, including by conformity with local laws regulating the practice of

pharmacy and medicine.98 The Criminal Information alleged that Specialty did not

avoid the FDA’s regulatory oversight and instead Specialty portrayed Pharmacy as

a state-regulated pharmacy operated in compliance with local state law. 99 Per the

Criminal Information however, Pharmacy “did not function in accordance with local

state laws, and functioned solely to repackage drug product from vials to [pre-filled

syringes] on a massive commercial scale.”100

The Criminal Information alleged that the business model for the Pre-Filled

Syringe Program was “known to and approved at the highest levels of [Specialty]

and ABC.”101 Furthermore, in addition to charging Specialty with the introduction

of misbranded drugs into interstate commerce, the Criminal Information also

included a criminal forfeiture allegation.102 The Criminal Information served as the

first disclosure to ABC’s stockholders of the alleged misconduct that occurred at

Pharmacy.103

98
Id. ¶ 16.
99
Id. ¶ 66.
100
Id.
101
Id. ¶ 25.
102
Compl., ¶ 72.
103
Id. ¶ 74.

20
2. The Criminal Guilty Plea

On September 27, 2017 Specialty pleaded guilty to violating the FDCA.104 In

the plea agreement, Specialty admitted that in operating the Pre-Filled Syringe

Program, Pharmacy’s staff “opened sterile vials, pooled the drug product from the

vials, and then transferred the drug product into smaller [pre-filled syringes].”105

Specialty also admitted that Pharmacy “often dispensed [pre-filled syringes] in

response to order forms that were not prescriptions signed by practitioners,” and

“often filled orders that had been submitted with a single patient name, and/or

assigned a single individual’s name to an order of [pre-filled syringes], in excess of

plausible and/or safe use of the drug product contained in the syringes.”106

Specialty admitted that it did not register Pharmacy with the FDA as required

by the FDCA, and that Pharmacy did not qualify for an exemption to the registration

requirement for pharmacies that maintained establishments in conformance with

applicable local laws regulating the practice of pharmacy. 107 To fully comply with

Alabama pharmacy law, Pharmacy was required to maintain the medication history,

diagnosis, laboratory data, and other pertinent information for the patients to whom

pre-filled syringes were administered.108 Finally, Specialty admitted to have

104
Id. ¶ 75; see Compl., Ex. 4 (“Plea Agreement”).
105
Plea Agreement, ¶ 6.
106
Id. ¶ 8.
107
Id. ¶¶ 9–10.
108
Id. ¶ 10.

21
“introduced, or caused the introduction of, misbranded drugs into interstate

commerce, as such drugs were manufactured, prepared, propagated, compounded,

or processed in an establishment not duly registered with the FDA . . . .”109

Pursuant to its guilty plea, Specialty paid $260 million to the DOJ, consisting

of a $208 million criminal fine and a criminal money forfeiture of $52 million ABC

had obtained from unlawful sales of pre-filled syringes in violation of the FDCA.110

3. Civil Settlement

On November 21, 2017, ABC announced via an SEC filing that Specialty had

reached an agreement in principle with the United States Attorney’s Office for the

Eastern District of New York to resolve civil claims under the False Claims Act for

$625 million.111 The filing stated:

Since fiscal 2012, [ABC and Specialty] have been responding to
subpoenas from the U.S. Attorney’s Office for the Eastern District of
New York (“USAO-EDNY”) requesting production of documents and
information relating to the pre-filled syringe program of [Pharmacy] . .
. , [Specialty’s] oncology distribution center, its group purchasing
organization for oncologists, and intercompany transfers of certain
oncology products. [Pharmacy] voluntarily ceased operations in early
2014. [ABC] has produced documents and witnesses, and has engaged
in [an] ongoing dialogue with the USAO-EDNY, since 2012.112

An accompanying press release stated:

109
Id. ¶ 11.
110
Compl., ¶ 79.
111
Id. ¶ 80.
112
Id.

22
The United States contends that ABC sought to profit from the excess
drug product or “overfill” contained within the original FDA-approved
sterile vials for these cancer supportive injectable drugs by establishing
a pre-filled syringe program through a subsidiary that it claimed was a
pharmacy. The United States alleged that the “pharmacy” was in
reality a repackaging operation that created and shipped millions of
pre-filled syringes to oncology practices for administration to cancer-
stricken patients. As part of this operation, ABC purchased original
vials from their respective manufacturers, broke their sterility, pooled
the contents, and repackaged the drugs into pre-filled syringes.113

The press release also noted that it was alleged that ABC “never submitted any

safety, stability, or sterility data to the FDA to show that its operation ensured the

safety and efficacy of the repackaged drug products,” and that it was alleged that the

pre-filled syringes were “prepared in non-sterile conditions, contaminated with

bacteria and other unknown particles, and lacked the required quality and purity.”114

The allegations specific to the False Claims Act were that by harvesting

overfill, ABC was able to bill multiple healthcare providers for the same vial of drug,

causing excess billing of federal health care programs, and that the Pre-Filled

Syringe Program made it possible for ABC to provide drugs at a discount, enabling

ABC to increase its market share.115 The discounts were in the form of general

pharmacy credits provided to customers, constituting “illegal kickbacks”—

customers would be billed for the full price of a drug and then a “general credit”

113
Compl., Ex. 6, at 1 (emphasis in original).
114
Id.
115
Compl., ¶ 82.

23
would be issued to customers’ accounts, resulting in the submission of false claims

to federal programs.116

D. ABC’s Procedures for Oversight of Regulatory Compliance

According to ABC’s Corporate Governance Principles, the Board is charged

with providing “independent risk oversight with a focus on the most significant risks

facing [ABC], including strategic, operational, and reputational risks.”117 The Board

has five standing committees: the Audit Committee, the Compensation and

Succession Planning Committee, the Finance Committee, the Governance and

Nominating Committee, and the Executive Committee.118 The Board has “delegated

specific risk oversight responsibility” to all Committees other than the Executive

Committee.119 In addition to other specific responsibilities, the Board “asses[es]

major risks facing [ABC] and review[s] options for their mitigation,” and “ensur[es]

processes are in place for maintaining the integrity of [ABC],” including “the

integrity of compliance with law and ethics.”120

Under the Audit Committee’s Charter, the Audit Committee is charged with

“assist[ing] the [Board] with oversight of [ABC’s] compliance with legal and

regulatory requirements and performance of [ABC’s] internal audit function and

116
Id.
117
Id. ¶ 85; ABC-220 CONSOLIDATED R001754, at 1754.
118
Compl., ¶ 85.
119
Id.; ABC-220 CONSOLIDATED R001754, at 1754.
120
ABC-220 CONSOLIDATED R001754, at 1754–55.

24
independent auditor.”121 The Audit Committee also “obtain[s] reports from

management and [ABC’s] senior internal auditor that [ABC] is in conformity with

applicable legal requirements and [ABC’s] Code of Ethics and Business

Conduct.”122 ABC’s Code of Ethics and Business Conduct states that ABC is

“committed to the belief that, as a principle of sound management, all business

dealings shall be conducted with the highest level of business ethics, honesty and

integrity”—all directors, officers, and employees are “expected to . . . comply with

all federal, state, and local laws, regulations and rules . . . .”123 The Audit Committee

is responsible for reporting regularly to the Board.124

During the relevant time period, the Board did not set aside a portion of Board

meetings devoted to drug safety and compliance.125 Aside from the Audit

Committee’s responsibility to assist the Board with oversight of compliance with

legal and regulatory requirements, the Audit Committee was responsible to obtain

reports from management and the senior internal auditor regarding ABC’s

compliance with legal and regulatory requirements.126 The Audit Committee was

not otherwise required to deliver written materials to the Board.127

121
Compl., ¶ 87; ABC-220 CONSOLIDATED R002236, at 2240.
122
Compl., ¶ 87; ABC-220 CONSOLIDATED R002236, at 2240.
123
Compl., ¶ 87 n.35; ABC-220 CONSOLIDATED R001803, at 1804.
124
ABC-220 CONSOLIDATED R002236, at 2241.
125
Compl., ¶ 88.
126
Id.
127
Id.

25
According to a document entitled “Corporate Compliance Program,” ABC

also established (or contemplated establishment of) an Office of Compliance to

“oversee ABC’s Compliance Program on an enterprise-wide basis.”128 A Chief

Compliance Officer and a Chief Compliance Counsel were responsible for the

Compliance Program.129 The Plaintiffs’ Verified Stockholder Derivative Complaint

(the “Complaint”) alleges that this document was a draft and was never completed,

approved, or enacted.130

Additionally, ABC’s Corporate Security and Regulatory Affairs (“Corporate

Security”) unit provides “regulatory compliance and security assistance to all

operating units through the utilization of on-site audits[,] proactive/targeted visits,

training seminars and investigations.”131 However, Corporate Security has no

Board-level reporting obligations.132

No reports regarding ABC’s compliance with applicable legal requirements

were submitted to or obtained by the Audit Committee regarding Pharmacy or the

Pre-Filled Syringe Program until after the Pre-Filled Syringe Program was shut

down.133 Additionally, neither the Board nor the Audit Committee ever received an

128
ABC-220 CONSOLIDATED R008943, at 8945.
129
Id.
130
Compl., ¶ 124 n. 58. As support, Plaintiffs point out that the document was one of several
attachments to an email and that the file was titled as a “DRAFT.” Pls.’ Answering Br. in Opp’n
to Defs.’ Mot. to Dismiss, D.I. 16 (“Pls.’ Answ. Br.”), at 19 n.19.
131
ABC-220 CONSOLIDATED R001763, at 1763.
132
Compl., ¶ 107 n. 49.
133
Id. ¶ 89.

26
update regarding compliance at Pharmacy or in connection with the Pre-Filled

Syringe Program.134

E. The Board’s Monitoring of Specialty, Oncology, Pharmacy, and the Pre-
Filled Syringe Program

1. Expansion of the Oncology Facility

On May 11, 2006, ABC’s then-CEO David R. Yost introduced a capital

expenditure request to the Board to expand the Oncology facility in Dothan,

Alabama where the Pre-Filled Syringe Program operated.135 The majority of the

expansion was dedicated to the facility whose sole business was to fill and distribute

pre-filled syringes.136 The capital expenditure request—which detailed the rationale

for undertaking the project—did not address any compliance or safety issue or any

expansion of compliance policies or procedures corresponding to the expansion of

the facility.137 The Board did not consider or discuss the regulatory and compliance

issues implicated by the expansion at that time. 138 The Board approved the capital

expenditure request to expand the Oncology facility.139

134
Id.
135
Id. ¶ 91.
136
Id.
137
Id. ¶ 92.
138
Id. ¶ 94.
139
Id. ¶ 91.

27
2. The Davis Polk Report

In 2007, Defendant Chou, acting on behalf of ABC, engaged Davis Polk &

Wardwell (“Davis Polk”) to “undertake an assessment of the adequacy of [ABC’s]

Compliance Program, to recommend improvements and to report the results of the

assessment to the Audit Committee” (the “Davis Polk Report”).140

Davis Polk notified the Audit Committee of deficiencies in ABC’s

compliance program. The areas for improvement in the Davis Polk Report included:

(1) greater accountability for compliance violations; (2) better organizational optics

around compliance function; (3) greater integration of Specialty from compliance

standpoint; (4) additional centralization of compliance and security decision-

making; and (5) better documentation and tracking of compliance and ethics

processes.141

Important implications of Davis Polk’s findings were that Specialty was not

integrated into ABC’s compliance and reporting function, and that oversight

responsibilities were being left to officers and directors of the various ABC

subsidiaries.142

140
Id. ¶ 97.
141
Id. ¶¶ 98–101; ABC-220 CONSOLIDATED R000001, at 0001–02.
142
Compl., ¶¶ 99, 102.

28
In the aftermath of the Davis Polk Report the Board and the Audit Committee

did not follow through on Davis Polk’s recommendations.143 Indeed, Pharmacy and

Oncology were kept out of ABC’s compliance programs for the entire period of the

Pre-Filled Syringe Program’s existence.144

With regard to greater integration of Specialty into ABC’s compliance

program and additional centralization of compliance authority, ABC’s Chief

Compliance Officer (“CCO”) Debra Swartz described to the Audit Committee

“efforts that [had] been implemented to increase oversight of [Specialty’s]

compliance activities by [Corporate Security].”145 But there is no report to the Audit

Committee detailing these efforts, and the Audit Committee never asked Swartz

what such efforts were or whether they had been implemented.146 Neither the Audit

Committee nor the Board received a single report from Corporate Security

concerning Specialty.147

Additionally, Swartz told the Audit Committee at the meeting where the Davis

Polk Report was presented that she “had presented a preliminary response to the

Davis Polk assessment and recommendations at the November 7, 2008 meeting and

that she would now present a more fulsome [sic] response and action plan” to the

143
Id. ¶ 104.
144
Id. ¶ 105.
145
Id. ¶ 107; ABC-220 CONSOLIDATED R000001, at 0002.
146
Compl., ¶ 107.
147
Id.

29
Audit Committee.148 However, neither the “preliminary response” nor the “more

fulsome response and action plan” were ever documented by Swartz or the Board.149

Swartz also proposed that she would serve as Secretary of ABC’s Ethics Committee

so that the Audit Committee would have transparency into ABC’s compliance

activities.150 The Audit Committee never received an update from the Ethics

Committee nor does it appear that the Ethics Committee reported to the Board.151

Swartz had also informed the Audit Committee in response to the Davis Polk

Report that an “electronic matter management system” would “enable [ABC] to

track matters from opening to signoff.”152 However, the Audit Committee never

heard or received a report from the system following Swartz’s comments.153 Swartz

“presented a proposed penalty matrix . . . intended to provide for greater consistency

of disciplinary action,” and informed the Audit Committee that the matrix would be

implemented around November 2008.154 No documentation of the matrix or other

reforms were presented to the Audit Committee or the Board.155

148
Id. ¶ 108; ABC-220 CONSOLIDATED R000001, at 0001. The November 2008 date is
presumably an error, because the Audit Committee meeting was held in February 2008.
149
Compl., ¶ 108.
150
Id. ¶ 109.
151
Id.
152
Id. ¶ 111; ABC-220 CONSOLIDATED R000001, at 0001.
153
Compl., ¶ 111.
154
Id. ¶ 112; ABC-220 CONSOLIDATED R000001, at 0002.
155
Compl., ¶ 112.

30
The Audit Committee never received any reports specifically concerning

compliance at Pharmacy or in connection with the Pre-Filled Syringe Program.156

The Board did not receive any updates or progress reports on ABC’s reporting

controls following the Davis Polk Report or any time thereafter. 157 Additionally,

ABC had no committee specifically designated to oversee compliance with FDA

rules and regulations.158

3. Mullen’s Concerns and Qui Tam Action

Michael Mullen was an executive at Specialty beginning in 2003 and was

appointed to ABC’s Corporate Ethics Committee.159 In September 2009, Mullen

was promoted to COO of Specialty where he was responsible for Specialty’s eight

business units including the Oncology Group (which included Oncology and

Pharmacy).160

By January 2010, Mullen had identified significant issues across all of

Specialty’s business units, including serious issues with Specialty’s oncology

business model that created regulatory exposure.161 Mullen prepared six strategic

initiatives to address Specialty’s issues, which he summarized in a PowerPoint

156
Id. ¶ 110.
157
Id.
158
Id. ¶ 113.
159
Id. ¶ 114. Mullen was Specialty’s CFO from May 2003 to September 2008 and in September
2008 was appointed President, Distribution Services at Specialty. Id.
160
Id. ¶¶ 115–16.
161
Id. ¶ 117.

31
presentation.162 Mullen provided the presentation to Defendant Collis (and possibly

ABC’s then-CEO Yost), and presented the initiatives at a senior management retreat

held in January 2010.163 In the months after the retreat, Mullen repeated his concerns

about Specialty’s oncology business model to Collis and Yost, and in one such

conversation Yost noted there were aspects of the Oncology Group’s business—

which operated under Specialty’s umbrella—that he “would not want to see on the

front page of the Wall Street Journal.”164

Mullen met with Yost on March 23, 2010 regarding the Oncology Group, and

was adamant that serious issues needed to be addressed.165 Mullen’s concerns

encompassed a number of areas including business, competitiveness, and regulatory

exposure.166 Mullen provided Yost with another PowerPoint presentation detailing

his concerns with the Oncology Group—Yost did not inform the Board of this

information or provide the PowerPoint to the Board.167

After months of raising concerns about Specialty’s oncology business and

lobbying for ABC to address the compliance issues at Specialty, Mullen was

terminated on April 8, 2010, in a meeting with Yost, June Berry (then ABC’s head

162
Id. ¶ 118.
163
Id.
164
Id.
165
Id. ¶ 119.
166
Id.
167
Id.

32
of Human Resources), and Defendant Chou.168 Management never told the Board

about Mullen’s compliance concerns or firing.169 Likewise, Mullen’s concerns were

not documented, and the Board’s Compensation Committee was not informed of

(nor did it discuss) Mullen’s departure even though it was required to “[a]pprove or

recommend employment agreements and severance agreements for the CEO and

other executive officers.”170 Shortly after Mullen was terminated he contacted

Defendant Chou and later met with ABC’s in-house counsel, Rob Stone, in May

2010.171 At that meeting, Mullen provided Stone “extremely detailed written

documentation” regarding “a long-standing, and very profitable Specialty oncology

business group practice involving overfill and numerous oncology drugs.”172

Several email exchanges from July 2010 indicate that Chou and others made

inquiries into the Pre-Filled Syringe Program after Mullen’s termination, but none

of them were relayed to the Board.173 On July 23, 2010 Rob Stone forwarded an

email chain regarding overfill provisions in a proposed draft rule to the Medicare

Physician Fee Schedule to Chou, CCO Swartz, and others—the forwarded chain

includes a comment from a Senior Vice President at ABC that states: “Based on my

understanding of how we managed PFS at OS, I ‘think’ we are fine . . . but I wanted

168
Id. ¶ 122.
169
Id. ¶ 123.
170
Id. ¶ 124.
171
Id. ¶ 125.
172
Id.
173
Id. ¶ 128.

33
to alert you all to this provision as it may be wise to have an external/expert legal

review update an opinion on this issue.”174 An earlier email in the same chain from

an employee of an ABC subsidiary states: “[Center for Medicare and Medicaid

Services] recognizes that, in some cases, manufacturers intentionally include overfill

(an amount over what’s indicated on the FDA approved table) to ensure the patient

will get the full dose. In the context of [Average Sales Price] calculation and drug

payment, CMS proposes to clarify its regulations to clearly state that the unused

overfill amount should not be harvested and billed incrementally. That is, the

intentional overfill is ‘free’ product.”175 An email dated July 26, 2010, from Vinu

Pillai, Specialty’s Corporate Counsel, copied to Chou, attaches a “spreadsheet which

lists all of Oncology Supply’s contracted manufacturer products” and refers to a

DVD regarding the “OS syringe pre-fill program.”176

In 2010, ABC engaged the law firm Ober Kaler to conduct a compliance and

regulatory review of the Oncology Group—the review was announced to the Audit

Committee as a routine review.177 After the Audit Committee discussed Ober

Kaler’s finding and recommendations, the Audit Committee “instructed

174
Id.
175
Id.
176
Id. ¶ 129.
177
Id. ¶ 131.

34
management to undertake appropriate consideration and follow up of the

recommendations.”178

ABC made some changes after the Ober Kaler presentation, such as

commencing viable air sampling in Pharmacy’s cleanroom and anterooms and

conducting glove fingertip testing on Pharmacy technicians.179 However, many of

the unsanitary and unsterile conditions at the Oncology facility continued after the

Ober Kaler review and ABC failed to follow up on those issues.180 This included no

follow up testing when bacteria was found in the flow hoods, and when bacterial and

fungal infections were identified in the cleanroom and anterooms, and lack of follow

up when gloved fingertip testing came back positive for bacterial contamination.181

In February 2011, Chou reported to the Audit Committee that ABC “was

proceeding to implement all of the recommendations that were presented” by Ober

Kaler.182 But the Audit Committee did not follow up on whether management

actually carried out Ober Kaler’s recommendations, and no policies or procedures

were implemented, revised, or updated in response to Ober Kaler’s compliance and

regulatory review.183 The review by Ober Kaler and its findings and

recommendations were not presented to ABC’s full Board, and neither the Board

178
Id.
179
Id. ¶ 133.
180
Id. ¶ 134.
181
Id.
182
Id. ¶ 136.
183
Id.

35
nor the Audit Committee received subsequent reports on the sanitary, hygiene and/or

sterile conditions in the Pre-Filled Syringe Program.184

Meanwhile, on October 21, 2010, Mullen filed a qui tam complaint under seal

in federal district court in New York.185 Mullen alleged that the Pre-Filled Syringe

Program was an “overfill laundering scheme” involving “illegal kickbacks and price

concessions” to physician customers and undermined accurate pricing by

government healthcare programs, and that Pharmacy employed additional discounts,

price concessions, and/or “general pharmacy credit” issued to the accounts of

medical providers in furtherance of the program.186 Counsel for ABC’s management

learned of the qui tam complaint in November 2010 when it was inadvertently made

public, and counsel engaged outside law firm Morgan Lewis & Bockius LLP

(“Morgan Lewis”) without notifying the Board.187 Chou circulated an email on

November 17, 2010 to CCO Swartz and an attorney from Morgan Lewis with the

subject “New Qui Tam – Privileged and Confidential – Writeup for EY,” which was

not sent to any Board members.188

ABC publicly disclosed Mullen’s qui tam complaint in its Form 10-K filed

with the Securities and Exchange Commission (“SEC”) on November 23, 2010:

184
Id.
185
Id. ¶ 137.
186
Id.
187
Id. ¶ 138.
188
Id.

36
The Company has learned that there are both prior and subsequent
filings in another federal district, including a complaint filed by a
former employee of the Company, that are under seal and that involve
allegations similar to those in the Federal District Court Action against
the same and/or additional subsidiaries or businesses of the Company
that are defendants in the Federal District Court Action, including the
Company’s group purchasing organization for oncologists and the
Company’s oncology distribution business.189

The “Federal District Court Action” was a “qui tam matter . . . pending in the United

States District Court for the District of Massachusetts . . . naming Amgen Inc., as

well as two business units of [Specialty] . . . as defendants.”190 This matter is referred

to herein as the Westmoreland case.

ABC’s Board—including then-CEO Yost and current Board members

Gochnauer, Henney, Hyle, Long, and McGee—all signed the 10-K.191 ABC’s 2011

Form 10-K contained a similar disclosure regarding the Mullen qui tam, and was

likewise signed by the Board.192 No remedial action was taken against any employee

for the misconduct identified in Mullen’s qui tam complaint.193

189
Id. ¶ 139.
190
Defs.’ Opening Br. in Support of Their Mot. to Dismiss, D.I. 10 (“Defs.’ Opening Br.”), Ex.
17, at 14. I take judicial notice of ABC’s 2010 10-K.
191
Compl., ¶ 140.
192
Id. ¶ 141. The 2011 10-K was signed by Board members Collis, Gochnauer, Henney, Hyle,
Long, and McGee. Id.
193
Id. ¶ 142.

37
4. Search Warrant; USAO Subpoena; Article on Pre-Filled Syringe
Program

In 2012, FDA agents executed a search warrant on the Oncology facility in

Dothan, Alabama where the Pre-Filled Syringe Program operated.194 The incident

was reported in the press, and an article on the search warrant quoted ABC’s

corporate spokesperson.195 ABC’s Form 10-K filed in November 2012 disclosed

that Specialty had received a subpoena from the United States Attorney’s Office.196

The 2012 10-K was signed by current Board members Collis, Gochnauer, Henney,

Hyle, Long, and McGee.197 Neither the search warrant nor the subpoena were

mentioned in the Audit Committee’s or the Board’s meeting minutes or materials.198

On November 15, 2012, ABC’s Board held a meeting attended by current

Board members Collis, Henney, Hyle, Long, and McGee—the Board minutes state:

“Mr. Collis reported on a possible article being prepared by a reporter on pre-filled

syringes and the Company’s response to the article. There was discussion of a

possible article on the subject of pre-filled syringes and developments in this

area.”199 The Board appears to have discussed the article, but apparently did not then

194
Id. ¶ 143.
195
Id.
196
Id. ¶ 144.
197
Id.
198
Id. ¶¶ 143–44.
199
Id. ¶ 145.

38
discuss then underlying issues, i.e. compliance issues with the Pre-Filled Syringe

Program.200

F. Closure of the Oncology Facility

In January 2014, ABC and Specialty ended the Pre-Filled Syringe Program

by closing the Oncology facility in Dothan, Alabama.201 The Audit Committee’s

first mention of ending the Pre-Filled Syringe Program was on April 23, 2014, where

the Audit Committee was informed that “the [Specialty] operating income included

the loss of income from a[] [Specialty] pharmacy closure in Dothan, Alabama.”202

The Audit Committee next discussed the Oncology facility closure at a meeting on

July 23, 2014.203 No discussion occurred regarding why the Oncology facility was

closing.204

G. Procedural History

The Plaintiffs filed the Complaint on October 11, 2019. The Complaint pleads

two counts of breach of fiduciary duty (Counts I and II).205 Count I is asserted

against Defendants Collis, Gochnauer, Greenberg, Henney, Hyle, Long, and McGee

(the “Director Defendants”).206 Count I alleges that the Director Defendants

200
Id. ¶ 146.
201
Id. ¶ 147.
202
Id.
203
Id.
204
Id.
205
Id. ¶¶ 207–21.
206
Id. ¶¶ 207–14.

39
consciously failed to implement and monitor compliance policies and systems and

failed to exercise their oversight responsibilities.207 The seven Director Defendants

are all current directors of ABC.208

Count II is asserted against Defendants Collis, Chou, and Guttman (the

“Officer Defendants”).209 Collis is ABC’s Chairman, President, and CEO; Chou is

the EVP of ABC and ABC’s Chief Legal & Business Officer; Guttman was a senior

executive at ABC from 2002 to 2018.210 Count II alleges that the Officer Defendants

consciously breached their fiduciary duties and violated corporate responsibilities

by knowingly operating and maintaining an illegal business model, and failed to

inform the Board about the Pre-Filled Syringe Program’s regulatory compliance.211

Count III alleges unjust enrichment against Collis.212

The Defendants moved to dismiss this Action on December 20, 2019. I heard

Oral Argument on May 27, 2020, and considered the matter submitted for decision

on that date.

II. ANALYSIS

The Defendants have moved to dismiss the Complaint pursuant to Chancery

Court Rule 23.1 for failure to make a demand on the Board and failure to plead

207
Id. ¶¶ 210–11.
208
Id. ¶¶ 34–35, 164.
209
Id. ¶¶ 215–21.
210
Id. ¶¶ 24, 32–33.
211
Id. ¶ 220.
212
Id. ¶¶ 222–23.

40
demand futility.213 The Defendants have also moved to dismiss under Chancery

Court Rule 12(b)(6) for failure to state a claim upon which relief may be granted.214

A. Rule 23.1

A “cardinal precept” of Delaware corporate law is that the board of directors,

not stockholders, manage the business and affairs of the corporation.215 Thus,

ordinarily, in the aftermath of a corporate trauma it falls to the board of directors to

determine the corporation’s course of action, including whether to pursue litigation

against the individuals involved.216 But in a derivative suit, a stockholder seeks to

sue on behalf of the corporation when the board fails to deploy a litigation asset.217

Because a derivative action necessarily “impinges on the managerial freedom of

directors,” Rule 23.1 requires that, where a stockholder has not demanded the

directors pursue the claim, the complaint must “allege with particularity the reasons

for not making the effort to make a litigation demand.”218 In other words, “[t]o wrest

control over the litigation asset away from the board of directors, the stockholder

213
Ch. Ct. R. 23.1.
214
Ch. Ct. R. 12(b)(6).
215
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. §141(a)). Aronson, along
with six other cases, were overturned by Brehm v. Eisner, 746 A.2d 244 (Del. 2000) “to the extent
they reviewed a Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard
or otherwise suggested deferential appellate review.” Hughes v. Hu, 2020 WL 1987029, at *9 n.1
(Del. Ch. Apr. 27, 2020). Aronson, and the other overturned cases, otherwise remain good law,
and this decision does not rely on Aronson for the standard of appellate review, and omits the
subsequent case history. See id.
216
Hughes, 2020 WL 1987029, at *9.
217
Aronson, 473 A.2d at 811.
218
Hughes, 2020 WL 1987029, at *10 (quoting Ch. Ct. R. 23.1).

41
must demonstrate that demand on the board to pursue the claim would be futile such

that the demand requirement should be excused.”219

The Plaintiffs have pled derivative claims and concede they have not made a

litigation demand on the Board, but plead that demand would have been futile.220

Because the Plaintiffs have not made a litigation demand, the Plaintiffs can only

surmount Rule 23.1’s demand requirement if “demand is excused because the

directors are incapable of making an impartial decision regarding whether to institute

[this] litigation.”221 In pleading demand futility, the Complaint “must comply with

stringent requirements of factual particularity that differ substantially from the

permissive notice pleadings governed solely by Chancery Rule 8(a).”222 The

Complaint must set forth “particularized factual statements that are essential to the

claim.”223 However, on a Rule 23.1 motion all well-pleaded factual allegations are

accepted as true, and “[o]nce a plaintiff has made particularized allegations, the

plaintiff is entitled to all ‘reasonable inferences [that] logically flow from

particularized facts alleged.’”224

219
In re Clovis Oncology, Inc. Derivative Litig., 2019 WL 4850188, at *11 (Del. Ch. Oct. 1, 2019)
(citing Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044 (Del.
2004)).
220
Compl., ¶ 163.
221
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 367 (Del. 2006).
222
Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000).
223
Id.
224
In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *34 (Del. Ch.
Jan. 25, 2016) (quoting Beam, 845 A.2d at 1048).

42
The Plaintiffs have pled that the Board that would consider a demand is

composed of the seven Director Defendants and two non-parties: Ornella Barra and

D. Mark Durcan (the Director Defendants, together with Barra and Durcan, the

“Demand Board”).225

Because the Plaintiffs challenge board inaction, and not a specific board

decision, demand futility is analyzed under the test articulated in Rales v.

Blasband.226 To show that demand is futile in such an instance, a plaintiff must

allege “particularized facts that ‘create a reasonable doubt that, as of the time the

complaint is filed, the board of directors could have properly exercised its

independent and disinterested business judgment in responding to a demand.’”227 A

director cannot exercise her independent and disinterested business judgment where

a director is “either interested in the alleged wrongdoing or not independent of

someone who is.”228

A plaintiff can raise a reasonable doubt regarding a board’s interestedness “by

alleging particularized facts that reveal board inaction of a nature that would expose

225
Compl., ¶¶ 34–35, 164.
226
634 A.2d 927 (Del. 1993); In re Clovis Oncology, Inc. Derivative Litig., 2019 WL 4850188, at
*11 (Del. Ch. Oct. 1, 2019); In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 120
(Del. Ch. 2009).
227
Citigroup, 964 A.2d at 120 (quoting Rales, 634 A.2d at 933–34).
228
Hughes v. Hu, 2020 WL 1987029, at *12 (Del. Ch. Apr. 27, 2020).

43
at least half of the directors to a substantial likelihood of personal liability.”229 To

plead a substantial risk of liability, a plaintiff need not “demonstrate a reasonable

probability of success on the claim,” instead, a plaintiff “need only ‘make a threshold

showing, through the allegation of particularized facts, that their claims have some

merit.’”230

Alternatively, the Plaintiffs could plead demand futility by raising a

reasonable doubt that a majority of the Demand Board is independent.231 “[A] lack

of independence turns on ‘whether the plaintiffs have pled facts from which the

director’s ability to act impartially on a matter important to the interested party can

be doubted because that director may feel either subject to the interested party’s

dominion or beholden to that interested party.” 232 All pled facts pertinent to a

director’s relationship to the interested party must “be considered in full context in

making the, admittedly imprecise, pleading stage determination of independence.”233

“If the board of directors lacks a majority comprising independent and

disinterested directors, then demand is futile.”234

229
Oklahoma Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *14 (Del. Ch. Dec.
18, 2017) (quoting Horman v. Abney, 2017 WL 242571, at *6 (Del. Ch. Jan. 19, 2017)) (internal
quotation marks omitted).
230
Hughes, 2020 WL 1987029, at *12 (quoting Rales, 634 A.2d at 934).
231
Rales, 634 A.2d at 936.
232
Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016) (quoting Delaware Cty. Employees Ret. Fund
v. Sanchez, 124 A.3d 1017, 1023 n.25 (Del. 2015)).
233
Sandys, 152 A.3d at 128 (quoting Sanchez, 124 A.3d at 1022).
234
In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *34 (Del. Ch.
Jan. 25, 2016).

44
Count I is styled as claiming breach of duty under the theory articulated by

Chancellor Allen in In re Caremark Int’l Inc. Derivative Litigation.235 The Plaintiffs

also plead claims against three ABC officers (one of whom is also a director). The

claims against the Officer Defendants are breach of fiduciary duty (Count II) and an

unjust enrichment claim against Collis (Count III). 236

Below, I analyze whether demand was excused as to Counts I, II, and III. I

find that a majority of the Demand Board faces a substantial likelihood of liability

as to Count I, and therefore the Demand Board cannot bring its independent and

disinterested business judgment to bear in considering a demand. Consequently,

demand is excused as to Count I. Because Count I is necessarily bound up with the

claims against the Officer Defendants, demand is excused as to Counts II and III as

well.

235
698 A.2d 959 (Del. Ch. 1996); see e.g. Compl., ¶ 210 (“The Director Defendants consciously
breached their fiduciary duties and violated their corporate responsibilities by failing to implement
and monitor compliance policies and systems to ensure the safety of the Company’s [Pre-Filled
Syringe] Program.”).
236
Count II is not a Caremark claim but a conventional claim for breach of fiduciary duty. Compl.,
¶¶ 216, 218–19 (“[T]he Officer Defendants owed and owe [ABC] and its stockholders the highest
duties of good faith, due care, and loyalty . . . . The Officer Defendants consciously breached their
fiduciary duties and violated their corporate responsibilities by knowingly operating and
maintaining an illegal business model . . . . [T]he Officer Defendants also consciously breached
their fiduciary duties and violated their corporate responsibilities by failing to inform the Board
about the [Pre-Filled Syringe] Program’s regulatory compliance.”).

45
B. Demand is Excused as to Count I

Count I alleges that the Director Defendants “consciously breached their

fiduciary duties by failing to exercise their oversight responsibilities.”237 Under

Caremark and its progeny, “a director must make a good faith effort to oversee the

company’s operations.”238 “A Caremark claim contends that the directors set in

motion or ‘allowed a situation to develop and continue which exposed the

corporation to enormous legal liability and that in doing so they violated a duty to

be active monitors of corporate performance.’”239 Such a claim “‘is rooted in

concepts of bad faith; indeed, a showing of bad faith is a necessary condition to

director oversight liability.’”240 Because a Caremark claim must plead bad faith, “a

plaintiff must allege facts that allow a reasonable inference that the directors acted

with scienter which, in turn, requires not only proof that a director acted

inconsistently with his fiduciary duties, but also most importantly, that the director

knew he was so acting.”241 A Caremark claim is “possibly the most difficult theory

in corporation law upon which a plaintiff might hope to win a judgment.”242

237
Id. ¶ 211.
238
Marchand v. Barnhill, 212 A.3d 805, 820 (Del. 2019) (citing Caremark, 698 A.2d at 970).
239
South v. Baker, 62 A.3d 1, 14 (Del. Ch. 2012) (quoting Caremark, 698 A.2d at 967).
240
City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017) (quoting In re
Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 123 (Del. Ch. 2009)).
241
Oklahoma Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *14 (Del. Ch. Dec.
18, 2017) (quoting Horman v. Abney, 2017 WL 242571, at *7 (Del. Ch. Jan. 19, 2017)); In re
Clovis Oncology, Inc. Derivative Litig., 2019 WL 4850188, at *12 (Del. Ch. Oct. 1, 2019)).
242
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 372 (Del. 2006).

46
Caremark claims can take two forms. A so-called “prong one” claim arises

where “the directors utterly failed to implement any reporting or information system

or controls.”243 Under “prong one,” “a director may be held liable if she acts in bad

faith in the sense that she made no good faith effort to ensure that the company had

in place any system of controls.”244 A “prong two” claim, on the other hand, arises

where “having implemented such a system or controls, [the directors] consciously

failed to monitor or oversee its operations thus disabling themselves from being

informed of risks or problems requiring their attention.”245 To state a “prong two”

Caremark claim, the Plaintiffs must “plead [particularized facts] that the board knew

of evidence of corporate misconduct—the proverbial ‘red flag’—yet acted in bad

faith by consciously disregarding its duty to address that misconduct.” 246 “[A]

plaintiff asserting a Caremark oversight claim must plead with particularity ‘a

sufficient connection between the corporate trauma and the board.’”247

The Plaintiffs allege that the Director Defendants face a substantial likelihood

of liability under both prongs of Caremark.248

243
Id. at 370.
244
Hughes v. Hu, 2020 WL 1987029, at *14 (Del. Ch. Apr. 27, 2020) (quoting Marchand v.
Barnhill, 212 A.3d 805, 822 (Del. 2019)).
245
Stone, 911 A.2d at 370 (Del. 2006).
246
Horman, 2017 WL 242571, at *10 (quoting Reiter on Behalf of Capital One Fin. Corp. v.
Fairbank, 2016 WL 6081823, at *8 (Del. Ch. Oct. 18, 2016)).
247
Reiter, 2016 WL 6081823, at *8 (quoting Louisiana Mun. Police Empls.’ Ret. Sys. v. Pyott, 46
A.3d 313, 340 (Del. Ch. 2012), rev’d on other grounds, 74 A.3d 612 (Del. 2013)).
248
Compl., ¶¶ 179 (“By utterly failing to ensure that there was a system in place that would bring
to the Board’s attention flagrant violations of federal law . . . the Defendants scorned their fiduciary

47
Seven members of the Demand Board (the Director Defendants) are alleged

to have served as ABC directors during the unlawful operation of the Pre-Filled

Syringe Program. Five of the Director Defendants have served on the Board since

at least May 2010.249 Additionally, five of the Director Defendants served on the

Audit Committee during the period most pertinent to this Action.250 The Defendants

do not argue that a majority of the Demand Board are insulated from a substantial

likelihood of liability because they were not directors during the relevant time

period. If the five Director Defendants who have served on the Board since May

2010 (at a minimum) face a substantial likelihood of liability, the Board cannot

properly exercise its independent and disinterested business judgment in responding

to a demand.

I find below that a majority of the Demand Board faces a substantial

likelihood of liability for Count I because the Plaintiffs have adequately pled that a

majority of the Demand Board consciously ignored red flags rising to the level of

bad faith.

duties. In doing so, the Director Defendants—including seven members of the Demand Board—
face a substantial risk of liability.”), 186 (“This repeated failure of the Board and its committees
to supervise ABC’s officers and employees to prevent illegal activity and to respond to red flags
exposes the directors to a substantial risk of liability for their fiduciary breaches.”).
249
Id. ¶ 169. The tenures of the Director Defendants is as follows: Henney (since January 2002);
McGee (since November 2004); Long (since May 2006); Gochnauer (since September 2008); Hyle
(since May 2010); Collis (since 2011); and Greenberg (since May 2013). Id.
250
Id. ¶ 148. These Audit Committee members and their tenures are as follows: Gochnauer (2011–
12), Henney (2004–10), Hyle (2010–17; Chair 2011–16), Long (2011–17), and McGee (2009–15;
2018–present). Id.

48
1. Caremark’s Second Prong and Drug Health and Safety as a Mission
Critical Compliance Risk

Again, to state a “prong two” Caremark claim requires a pleading of

particularized facts that the board knew of red flags but consciously disregarded

them in bad faith. That is, to survive the Motion to Dismiss under Rule 23.1, the

Complaint must plead particularized facts that the Defendant Directors knew of red

flags, but acted in bad faith by consciously disregarding their duty to address the

misconduct alerted to by such red flags.251 “In this context, bad faith means ‘the

directors were conscious of the fact that they were not doing their jobs, and that they

ignored red flags indicating misconduct in defiance of their duties.’”252 “The court

must remain mindful that ‘red flags are only useful when they are either waived in

one’s face or displayed so that they are visible to the careful observer.’”253 The

“careful observer” in this regard is “one whose gaze is fixed on the company’s

mission critical regulatory issues.”254

The concept of mission critical compliance risk emanates from our Supreme

Court’s decision in Marchand v. Barnhill.255 In Marchand, the company, Blue Bell

251
Horman, 2017 WL 242571, at *10.
252
Id. (quoting David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931, at *5 (Del.
Ch. Feb. 13, 2006), aff’d, 911 A.2d 802 (Del. 2006)).
253
In re Clovis Oncology, Inc. Derivative Litig., 2019 WL 4850188, at *13 (Del. Ch. Oct. 1, 2019)
(quoting Wood v. Baum, 953 A.2d 136, 143 (Del. 2008)).
254
Id. (citing Marchand v. Barnhill, 212 A.3d 805 (Del. 2019)).
255
212 A.3d 805 (Del. 2019).

49
Creameries, distributed ice cream containing the deadly bacteria listeria.256 The

Supreme Court found that Blue Bell’s board had failed to put in place a reasonable

system of monitoring and reporting on food safety, which for a “monoline company

that makes a single product . . . ice cream” was an “essential and mission critical”

compliance risk.257 In In re Clovis Oncology, Inc. Derivative Litigation,258 this Court

found that a complaint alleging with particularity that a biopharmaceutical firm

(Clovis) whose board consciously ignored red flags that “revealed a mission critical

failure to comply” with a market-standard protocol and associated FDA regulations

stated a claim under Caremark’s second prong.259 Like Blue Bell Creameries,

Clovis was a “monoline company operat[ing] in a highly regulated industry.”260

Clovis’s board’s conscious disregard imperiled FDA approval of a promising drug

that was “intrinsically critical to [Clovis’s] business operation.”261

Though ABC is a relatively more complex corporation than either Blue Bell

Creameries or Clovis, that does not mean the concept of mission critical compliance

risk is inapplicable here. ABC is a “manufacturer, distributor, and packager of

pharmaceutical drugs.”262 ABC operates in a highly regulated industry.263 The

256
Id. at 807.
257
Id. at 809, 824.
258
2019 WL 4850188 (Del. Ch. Oct. 1, 2019).
259
Id. at *15.
260
Id. at *1.
261
Id.
262
Compl., ¶ 40.
263
Id. ¶ 86.

50
Plaintiffs have pled that “compliance with FDA regulations is [ABC’s] primary

regulatory concern and is absolutely critical to its business.”264 Laws and regulations

governing the health and safety of drugs are thus the “most central . . . safety and

legal compliance issue facing the company.”265 And “when a company operates in

an environment where externally imposed regulations govern its ‘mission critical’

operations, the board’s oversight function must be more rigorously exercised.”266

Thus, when regulations governing drug health and safety are at issue, ABC’s Board

must actively exercise its oversight duties in order to properly discharge its duties in

good faith. The allegations here are a prime example: flouting laws meant to ensure

the safety and purity of drugs destined for patients suffering from cancer is directly

inimical to the central purpose of ABC’s business. I now examine the purported red

flags in light of this standard.

2. The Plaintiffs Have Pled Facts From Which I Can Reasonably Infer
that the Board Consciously Ignored Red Flags267

The Plaintiffs allege that the Board and its committees failed to “supervise

ABC’s officers and employees to prevent illegal activity and to respond to red

264
Id. ¶ 40.
265
Marchand v. Barnhill, 212 A.3d 805, 824 (Del. 2019).
266
Clovis, 2019 WL 4850188, at *13 (quoting id.).
267
As noted, supra, the documents included in ABC’s Section 220 production are deemed
incorporated into the Complaint regardless of whether they are cited by the Plaintiffs. But “Section
220 documents, hand selected by the company, cannot be offered to rewrite an otherwise well-
pled complaint.” Id. at *14 n.216. “The only effect” of the condition that Section 220 documents
are deemed incorporated into the Complaint “will be to ensure that the plaintiff cannot seize on a
document, take it out of context, and insist on an unreasonable inference that the court could not

51
flags.”268 The Complaint pleads four separate instances of red flags (some multi-

part) that the Plaintiffs allege were ignored by ABC’s Board: (1) the 2006 capital

expenditure request to expand the Oncology facility, (2) the 2008 Davis Polk Report,

(3) Mullen’s allegations and qui tam suit, and (4) the 2012 DOJ subpoena and FDA

search warrant. Per the Plaintiffs, these red flags signaled to the Board that ABC

was engaged in illegal conduct in operating the Pre-Filled Syringe Program.

a. 2006 Capital Expenditure Request

The Plaintiffs contend that the Board’s consideration of the 2006 capital

expenditure request demonstrated conscious disregard of a red flag because the

capital expenditure request “did not address any compliance or safety issues or any

expansion of compliance policies or procedures to correspond to the expansion of

draw if it considered related documents.” Id. (quoting Amalgamated Bank v. Yahoo! Inc., 132
A.3d 752, 798 (Del. Ch. 2016), abrogated on other grounds, 214 A.3d 933 (Del. Aug. 7, 2019)).
In line with this standard, I determine, with reference to the Complaint, whether I can reasonably
draw the inferences the Plaintiffs ask me to draw—the Section 220 documents are used only to
test whether those inferences which are reasonable from the face of the Complaint are rendered
unreasonable by reference to a document incorporated by reference. Where the Plaintiffs have
adequately pled a fact, a Section 220 document suggesting the facts are otherwise is insufficient at
the pleading stage to refuse to draw the reasonable inference in the Plaintiffs’ favor. Yahoo!, 132
A.3d at 798 (“If there are factual conflicts in the documents or the circumstances support
competing interpretations, and if the plaintiff makes a well-pleaded factual allegation, then the
allegation will be credited. The plaintiff also will be entitled to ‘all reasonable inferences.’ This
means that if a document or the circumstances support more than one possible inference, and if
the inference that the plaintiff seeks is reasonable, then the plaintiff receives the inference.”
(internal citations omitted)); accord id. At the pleading stage, “Defendants cannot ask the court to
accept their Section 220 documents as definitive fact and thereby turn pleading stage inferences
on their head. That is not, and should not be, the state of our law.” Clovis, 2019 WL 4850188, at
*14 n.216.
268
Compl., ¶ 186.

52
the facility,” the Board “was neither asked to approve the expenditure of any funds

for the expanded [Oncology] facility’s compliance needs nor did it discuss the need

for compliance at the facility,” and “there was no indication there was any regulatory

or other compliance system even in place (much less being followed) at the Dothan,

Alabama facility.”269 But this is not a particularized pleading of facts demonstrating

conscious disregard of a red flag, because nowhere does the Complaint plead what

the red flag was. The Complaint instead appears to plead that it is obvious that a

compliance discussion should have occurred in connection with the capital

expenditure request, and the fact that such a discussion did not occur was itself

sufficient to alert the Board that the Oncology facility was not operating in

accordance with health and safety rules regarding drug manufacture and distribution.

Although drug health and safety is a mission critical compliance risk for ABC, there

is simply no particularized pleading of a red flag in connection with the expansion.270

The allegation is that the Board did not ask enough questions. That, to my mind,

tends to indicate that in bringing an expanded Oncology facility on line, the Board

failed in its duty to implement a compliance system, a fact important to a “prong

one” Caremark analysis. It does not, however, indicate that the Board ignored a

269
Id. ¶ 92.
270
See In re Citigroup Inc. S’holders Litig., 2003 WL 21384599, at *2 (Del. Ch. June 5, 2003)
(“‘Red flags’ are only useful when they are either waived in one’s face or displayed so that they
are visible to the careful observer.”).

53
“red flag” pertinent to “prong two.” Without a pleading of something that the Board

ignored, even though the allegation concerns a mission critical compliance risk, it is

not reasonably conceivable that the 2006 capital expenditure request constituted a

red flag.

b. The Davis Polk Report

Next are the Plaintiffs’ allegations regarding the Davis Polk Report. The

Plaintiffs have pled that the Davis Polk Report indicated that Specialty and its

subsidiaries—including Pharmacy and Oncology—were operating outside of ABC’s

compliance controls and that “there were no reporting structures in place to inform

the Board of compliance-related violations or complaints pertaining to [Specialty’s]

businesses, including the [Pre-Filled Syringe] Program.”271 The Complaint also

alleges that the Davis Polk Report indicated that ABC had no centralized compliance

and reporting structure, that there was inadequate documentation and tracking of

compliance and ethics processes, and that there was inadequate accountability for

compliance violations at ABC.272

The Plaintiffs allege that the Audit Committee and the Board ignored Davis

Polk’s recommendations and “failed to take any steps to ensure that [ABC’s]

inadequate compliance and reporting program was remedied.”273 Indeed, per the

271
Compl., ¶ 98.
272
Id. ¶¶ 99–101.
273
Id. ¶ 104.

54
Complaint, Pharmacy and Oncology were kept out of ABC’s compliance programs

for the entire period of the Pre-Filled Syringe Program’s existence, and “ABC

excluded the entire [Pre-Filled Syringe] Program from its standard regulatory audit

and pedigree compliance programs.”274 Supporting this allegation, the Plaintiffs

have pled that the Audit Committee never received any reports specifically

concerning compliance at Pharmacy or in connection with the Pre-Filled Syringe

Program.275

Again, the lack of a reporting system for the recently-acquired Specialty

business suggests a “prong one” failure of Caremark oversight. But, pertinent to

“prong two,” it is reasonably conceivable that the Davis Polk Report, at a minimum,

served as a red flag that Specialty’s mission critical compliance mechanisms—which

included both Pharmacy and Oncology—had substantial gaps. I need not decide

whether the Davis Polk Report alone could serve as a red flag sufficient to make it

reasonably conceivable that the Director Defendants face a substantial likelihood of

liability. Instead, as the Plaintiffs urge, the Davis Polk Report serves as a backdrop

against which the other pled red flags must be viewed. That is, the Audit Committee

(at a minimum) was on notice in 2008 that it was likely that significant compliance

274
Id. ¶ 105.
275
Id. ¶ 110.

55
gaps existed at the Pre-Filled Syringe Program, creating a void in which illegal

activity could occur undetected.

The Complaint’s allegations concerning the Davis Polk Report cite to minutes

from an Audit Committee meeting on February 27, 2008, where the Davis Polk

Report was summarized to the Audit Committee.276 The report itself is not among

the Section 220 documents presented in briefing this Motion to Dismiss, and I

presume it was not produced.

The Defendants refer to the same Audit Committee minutes in an attempt to

refute the inferences the Plaintiffs ask me to draw regarding the Davis Polk Report.

The Defendants cite that the minutes refer to efforts that had been implemented to

increase oversight of Specialty compliance activities in response to the Davis Polk

Report.277 But the Plaintiffs have adequately pled that the Audit Committee never

received any reports specifically concerning compliance at Pharmacy or in

connection with the Pre-Filled Syringe Program. The citation by the Defendants that

some efforts had been implemented is insufficient to render the inference

unreasonable because it is unclear whether the efforts to increase oversight over

Specialty’s compliance activities targeted the mission critical compliance risk that

undergirds the Complaint.

276
E.g. id. ¶¶ 97 n.42, 99 n.45, 101 n.47, 108 n.50, 111 n.51.
ABC-220 CONSOLIDATED R000001, at 0002 (“Ms. Swartz described efforts that have been
277

implemented to increase oversight of [Specialty] compliance activities by [Corporate Security].”).

56
Moreover, the Defendants argue that “Plaintiffs here simply seek to second-

guess the . . . manner of the board’s response to the red flags, which fails to state a

Caremark claim.”278 The Defendants contend that the Audit Committee minutes

“reflect that steps were taken to improve the systems and controls related to” drug

health and safety regulations, and therefore, cannot represent a red flag consciously

disregarded by ABC’s Board.279 But, as noted, the Defendants have not pointed to

any part of the Section 220 production that refers to actions taken with regard to the

shortcomings at Pharmacy concerning mission critical drug health and safety

regulations. Moreover, the Davis Polk Report is the basis for the Plaintiffs’

allegations that the Board was on notice of gaps in Specialty’s compliance, making

the later red flags all the more consequential. Consequently, I find that it is

reasonably conceivable that the Davis Polk Report represents a red flag regarding

Specialty’s compliance failures and a potential void permitting illegal activity, and

the Plaintiffs have adequately pled that the Board did not respond to the potential

gaps regarding drug health and safety risks.

278
Oklahoma Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *17 (Del. Ch. Dec.
18, 2017) (quoting In re Qualcomm Inc. FCPA S’holder Derivative Litig., 2017 WL 2608723, at
*4 (Del. Ch. June 16, 2017)).
279
Id.

57
c. Mullen’s Allegations and Qui Tam Action

The next alleged red flag is the allegations and qui tam suit by Specialty’s

former Chief Operating Officer Michael Mullen. The Complaint alleges that Mullen

raised concerns regarding Specialty’s oncology business model that created

regulatory exposure, that after raising concerns for months Mullen was fired, and

that Mullen’s concerns were never documented nor were the concerns or Mullen’s

firing conveyed to the Board. The Plaintiffs also allege that Mullen continued his

effort to convey his compliance concerns about Specialty and the Pre-Filled Syringe

Program after his firing, including emailing Specialty’s in-house counsel regarding

“a long-standing, and very profitable [Specialty] oncology business group practice

involving overfill and numerous oncology drugs.”280 While the Plaintiffs plead

mutually exclusive occurrences, that is, the Board was not informed of Mullen’s

allegations (supporting a “prong one” Caremark claim) and that the Board

consciously ignored Mullen’s allegations (supporting a “prong two” Caremark

claim),281 the Board did sign ABC’s 2010 and 2011 Form 10-Ks that disclosed

Mullen’s qui tam suit.282 I may consequently draw the inference that the Defendant

280
Compl., ¶ 125. Mullen’s report has been withheld as privileged. Defs.’ Opening Br., Ex. 14.
281
Compare Compl., ¶ 183 (“[T]he Board had no reporting system and as such was not informed
of [Mullen’s] firing or the allegations he raised.”) with Compl., ¶ 184 n.83 (“There is no doubt
Defendants knew about the Mullen report.”).
282
Id. ¶¶ 139–41.

58
Directors then serving on the Board283 were aware of Mullen’s allegations.284 For

context, the Board disclosed Mullen’s suit in November 2010, and the Pre-Filled

Syringe Program continued operation until January 2014.

Mullen’s inadvertently publicly disclosed qui tam complaint addressed

mission critical drug health and safety risks, specifically citing the problematic use

of overfill:

[Pharmacy] purchased vials of injectable drugs from drug
manufacturers, used sophisticated centrifuge and vacuum technology to
extract all of the product from these vials (including the free overfill
amounts) and filled syringes with this free product. By doing this, the
Defendants were able to create free doses of the drug in the form of pre-
filled syringes. These pre-filled syringes were then sold to medical
providers through [Oncology] at a steeper discount than was offered on
the vials.285

Mullen also pleaded the following regard his meeting with Yost:

On March 23, 2010, Mr. Mullen had a face-to-face meeting with CEO
Yost, during which Mr. Mullen provided an extensive “download” on
the oncology business group and the status of ION.286 During that
meeting, Mr. Mullen was very direct and adamant with Mr. Yost as to
the serious issues that needed to be addressed and the changes that
needed to be made; he expressed grave concerns in a number of areas
including business, competitiveness, and regulatory exposure and told

283
This includes Henney, McGee, Long, Gochnauer, and Hyle—a majority of the Demand
Board—who have served on the Board since at least May 2010.
284
See Rich ex rel. Fuqi Int’l, Inc. v. Yu Kwai Chong, 66 A.3d 963, 984 (Del. Ch. 2013) (“Facially,
these disclosures are enough to allow me to reasonably infer scienter on the part of the
Defendants.”). I note that Fuqi was a Caremark analysis under the “more lenient” 12(b)(6)
standard.
285
Defs.’ Opening Br., Ex. 11, ¶ 8. I take judicial notice of this complaint, which was filed in the
United States District Court for the Eastern District of New York on October 21, 2010.
286
ION was a group purchasing organization and was part of the Oncology Group.

59
Mr. Yost words to the effect that the situation was “worse” than Mr.
Mullen had “thought.”287

Based on the Board’s disclosure of the Mullen qui tam complaint and the allegations

of the complaint relating to the Pre-Filled Syringe Program, it is a reasonable

inference at this pleading stage that ABC’s entire Board knew of Mullen’s

allegations that Pharmacy was operating the Pre-Filled Syringe Program illegally.288

The Complaint pleads that the Board never asked for any investigations, reports, or

updates concerning Mullen’s allegations.289

The Defendants retort that the Board responded to the substance of Mullen’s

allegations, and that they did not consciously disregard such allegations, because the

Board was addressing similar claims in the Westmoreland case, which was, as noted,

another qui tam action involving Specialty. Mullen’s own qui tam complaint alleges

that the Westmoreland case concerned Specialty’s nephrology (not oncology)

287
Defs.’ Opening Br., Ex. 11, ¶ 120.
288
The Defendants argue that because Mullen’s original complaint alleged that the Pre-Filled
Syringe Program operated illegally based on Anti-Kickback Statute and False Claims Act theories,
and not for failure to register Pharmacy with the FDA, Mullen’s complaint cannot constitute a red
flag for the failure to register and the attendant drug health and safety violations. However,
separation of allegations at Pharmacy into baskets of illegality strikes me as artificial. Mullen’s
complaint was sufficient to alert the Board that Mullen’s allegations concerned, at least in part,
mission critical compliance failures. That is, the factual predicate underlying Mullen’s qui tam
complaint was that Pharmacy was harvesting and selling overfill. While it is illegal to bill for
overfill (because it not intended for patient use), it is also illegal to sell overfill for patient use
because the harvesting process imperils the safety and purity of the medicine. Because the drug
health and safety regulations implicated by overfill harvesting are mission critical, the Board’s
“oversight function must be more rigorously exercised.” In re Clovis Oncology, Inc. Derivative
Litig., 2019 WL 4850188, at *13 (Del. Ch. Oct. 1, 2019) (citing Marchand v. Barnhill, 212 A.3d
805, 822, 824 (Del. 2019)).
289
Compl., ¶ 184.

60
business, that the allegations in Westmoreland were similarly applicable to the

Oncology Group, and that the nature of the wrongdoing applied to a number of

different oncology drugs.290

The Defendants contend that the Section 220 documents refute the

contentions of Board inaction with respect to the allegations in Mullen’s qui tam

action. The Section 220 documents put forward by the Defendants, however, at most

give rise to multiple inferences, and at this pleading stage that means the Plaintiffs

receive the inference.291 The otherwise nearly-entirely redacted292 Audit Committee

and Board minutes cited by the Defendants purportedly showing that the Board

monitored and received updates pertinent to the Mullen allegations state as follows:

 “In Note 8, Legal Matters and Contingencies, the discussion of the
Company’s litigation matters and contingencies, including the updated
disclosure concerning the status of the qui tam matter and related
filings”293

290
Defs.’ Opening Br., Ex. 11, ¶ 118 (“Moreover, Mr. Mullen recognized that the allegations made
in the Westmoreland Case with respect to ABC’s nephrology GPO and wholesale practice . . .
were also applicable to ABC’s oncology GPO and wholesale practice . . . .”).
291
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 798 (Del. Ch. 2016), abrogated on other
grounds, 214 A.3d 933 (Del. Aug. 7, 2019).
292
By this, I mean, other than the language quoted, they are redacted in their entirety other than
the information necessary to know what body was meeting, who the attendees were, and when and
where the meeting occurred.
293
ABC-220 CONSOLIDATED R000005, at 0007.
294
ABC-220 CONSOLIDATED R000020, at 0022.

61
 “Ms. Hyle stated that the Committee had received an update on
compliance activities and calls to the Company’s hotline since the last
meeting of the Committee. She said that the Committee had also
received an updated on the status of certain qui tam litigation relating
to the Company, [REDACTED] and a qui tam matter relating to the
Company’s oncology supply business”295

 “Mr. Chou then presented the legal update, reporting on significant
legal matters affect the Company, including the qui tam lawsuit”296

 “Mr. Chou presented the legal update, reporting on significant legal
matters affecting the company. [REDACTED]. Mr. Chou discussed
certain other matters, including the status of a pending qui tam action
in New York involving a former employee of the Company”297

 “Mr. Chou presented the legal update, reporting on significant legal
matters affecting the Company. [REDACTED]. Mr. Chou discussed
certain other matters, including the status of a pending qui tam action
in New York involving a former employee of the Company. There was
a discussion of these matters”298
The Defendants also put forth a single slide (presumably part of a larger

presentation) with the heading “Legal and CSRA FY 14 Accomplishments”—the

only other unredacted text reads: “Defend [REDACTED] and Oncology Supply299

qui tam investigations vigorously, with minimal disruption for business

associates.”300

295
ABC-220 CONSOLIDATED R000306, at 0310.
296
ABC-220 CONSOLIDATED R000231, at 0236.
297
ABC-220 CONSOLIDATED R000334, at 0346.
298
ABC-220 CONSOLIDATED R000372, at 0381.
299
Oncology’s full name is ASD Specialty Healthcare, LLC d/b/a Oncology Supply. Compl., ¶
21.
300
ABC-220 CONSOLIDATED R001043, at 1043.

62
The Section 220 materials cited by the Defendants do not demonstrate that in

invoking the Mullen allegations and qui tam suit as a red flag, the Plaintiffs have

“seize[d] on a document, take[n] it out of context, and insist[ed] on an unreasonable

inference that the court could not draw if it considered related documents.”301 Many

of the minutes referenced do not even obviously refer to the Mullen suit—as noted,

both the Westmoreland case and Mullen’s action were qui tam actions—and even

those that inferably do refer to Mullen’s qui tam action do not demonstrate any

remedial action taken by the Board in response. The closest the Defendants get in

this regard is the single slide, but that slide is titled FY14 [inferably fiscal year 2014]

Accomplishments. Notably, Mullen’s original complaint was filed in October 2010,

and the Pre-Filled Syringe Program was ended in January 2014. Consequently, a

reference to a fiscal year 2014 “accomplishment” of defending Mullen’s qui tam

does not refute the inference that the Board knew of Mullen’s allegations and

consciously ignored Mullen’s allegations of wrongdoing in connection with the Pre-

Filled Syringe Program.

The Defendants next argue that that Board specifically reviewed the legality

the Pharmacy’s business in the aftermath of Mullen’s termination. Per the

Complaint, in 2010 Ober Kaler was brought in to conduct a compliance and

301
In re Clovis Oncology, Inc. Derivative Litig., 2019 WL 4850188, at *14 n.216 (Del. Ch. Oct.
1, 2019) (quoting Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 798 (Del. Ch. 2016),
abrogated on other grounds, 214 A.3d 933 (Del. Aug. 7, 2019)).

63
regulatory review in response to Mullen’s allegations.302 But the Plaintiffs allege

that the Audit Committee never followed up to determine if Ober Kaler’s

recommendations were implemented, and that no policies or procedures were

created or changed as a result of the review.303 Moreover, even after the Ober Kaler

review, “there were no reports to the Board or the Audit Committee regarding FDA

compliance or the unsanitary and unhygienic conditions at the [Pre-Filled Syringe]

facility.”304

The Plaintiffs ask for the inference that Ober Kaler informed the Audit

Committee of the “serious unsanitary and unhygienic conditions” in the Pre-Filled

Syringe Program.305 The extent of the information about the Ober Kaler review in

the Section 220 production is that Ober Kaler was engaged to conduct a “compliance

and regulatory review of [ABC’s] ION and Oncology Supply businesses,” 306 and

that ABC was “proceeding to implement all of the recommendations that were

presented as part of the [review].”307 It is unclear what Ober Kaler’s

recommendations were because the report was withheld as privileged. 308 But the

Plaintiffs do not need the inference that Ober Kaler informed the Audit Committee

302
Compl., ¶ 184 n. 84.
303
Id.
304
Id.
305
Id. ¶ 135.
306
ABC-220 CONSOLIDATED R000238, at 0238.
307
ABC-220 CONSOLIDATED R000244, at 0248.
308
See Defs.’ Opening Br., at 51 n.25; Defs.’ Opening Br., Ex. 14.

64
of concerns with the Pre-Filled Syringe Program because it is already reasonable to

infer the Board’s (as a whole) knowledge from their signed disclosure of Mullen’s

allegations.309 Furthermore, based on the Complaint and incorporated Section 220

documents, that Ober Kaler conducted a review is insufficient to rebut the otherwise

well-pled allegation that the Board consciously ignored Mullen’s allegations

because it is unknown what Ober Kaler recommended. Consequently, without

knowing what these recommendations were, it is not possible at this time to draw an

inference regarding the extent of the measures implemented, nor is it sufficient to

render unreasonable the Plaintiffs’ proffered inference: that the Board consciously

ignored concerns about the Pre-Filled Syringe Program.310

The Plaintiffs have adequately pled that the Board knew of Mullen’s

allegations regarding the Pre-Filled Syringe Program and that the Board ignored

such concerns in bad faith by failing take action regarding the operation of the Pre-

Filled Syringe Program in response. These well-pled allegations are sufficient to

309
As noted, the Complaint alleges that Ober Kaler presented only to the Audit Committee. The
Complaint specifically pleads: “The review by Ober Kaler and its findings and recommendations
were not presented to ABC’s full Board, and the Audit Committee never followed up to confirm
that the recommendations from this ‘routine’ review were actually implemented.” Compl., ¶ 136.
310
The Complaint concedes that ABC “made some changes after the Ober Kaler presentation, but
failed to follow up and ensure that the unsterile and unhygienic conditions in the [Pre-Filled
Syringe] Program were discontinued.” Id. ¶ 132. Given that drug health and safety was a mission
critical compliance risk, and given the other allegations in the Complaint, this concession is
insufficient to render unreasonable the inference that the Board consciously ignored the substance
of Mullen’s allegations in bad faith, especially because it is unknown what Ober Kaler
recommended.

65
reasonably infer that the Board consciously ignored red flags regarding the Pre-

Filled Syringe Program and its attendant mission critical compliance risks.

d. The 2012 DOJ Subpoena and FDA Search Warrant

The final red flag alleged by the Plaintiffs is the FDA search warrant executed

at Pharmacy’s operations in 2012 and a subpoena received from federal prosecutors

that ABC “believe[d] could be related to a qui tam action that remains under seal,”

inferably Mullen’s qui tam action.311

The Plaintiffs allege that the search warrant was reported in the press, though

there is no mention of it in any Board or Audit Committee minutes or materials,

giving rise to a reasonable inference that it was never discussed by these bodies. As

to the subpoena, it was disclosed in ABC’s 2012 10-K, signed by ABC’s Board,

making it a reasonable inference that the Board had knowledge of the subpoena.

It is not reasonable to infer that the Board consciously ignored a red flag with

regard to the search warrant, because there is no well-pled allegation that the Board

had knowledge of the search warrant or the raid, and hence the scienter required to

adequately plead bad faith is absent.312 As to the subpoena, I can draw a reasonable

inference of the Board’s knowledge because the Board disclosed the subpoena in

ABC’s 10-K.

311
Id. ¶ 185.
312
The Complaint does not allege that the then-forthcoming article mentioned at the November
15, 2012 ABC Board meeting concerned the search warrant.

66
ABC’s same 2012 10-K noted that ABC was “in the process of responding to

the subpoena and is cooperating fully with the USAO.”313 But the Plaintiff is entitled

to the inference that the Board never discussed the subpoena due to its absence from

the Board’s minutes.314 The Defendants rely on the statement in the 10-K that ABC

was “responding” to the subpoena to negate an inference that the Board failed to take

action regarding the mission critical compliance shortcomings that the subpoena

implicated. To my mind, that does not follow. It is reasonably conceivable that

ABC could respond to the subpoena, in the way of handing over the information

requested, without taking any action with regard to the reason why the United States

Attorney’s Office was asking for information, that is, the illegality of the Pre-Filled

Syringe Program.

Given the Plaintiff-friendly standard at this pleading stage, I find that the

absence of any discussion of the subpoena by the Board is sufficient to make

reasonable the inference the Plaintiffs ask me to draw, that is, even after receiving

the subpoena the Board did nothing to correct the underlying mission critical

compliance shortcomings at Pharmacy. Whether this will bear out upon discovery

is a matter that awaits a record.

313
Defs.’ Opening Br., Ex. 15, at 57. I take judicial notice of ABC’s 2012 10-K.
314
Hughes v. Hu, 2020 WL 1987029, at *2 (Del. Ch. Apr. 27, 2020 (“Given [the stipulation that
any remaining materials requested by Plaintiff either do not exist or had been withheld on privilege
grounds], if the Company failed to produce a document that it would reasonably be expected to
possess if a particular event had occurred, then the plaintiff is entitled to a reasonable inference
that the event did not occur.” (citing Morrison v. Berry, 191 A.3d 268, 275 n.20 (Del. 2018))).

67
3. Demand is Excused as to Count I Because the Complaint Contains
Adequately Pled Allegations that the Board Consciously Ignored Red
Flags

To repeat, demand on the Board is excused if the Plaintiffs can “alleg[e]

particularized facts that reveal board inaction of a nature that would expose at least

half of the directors to a substantial likelihood of personal liability.”315 Seven

members of the Demand Board (the Director Defendants) are alleged to have served

as ABC directors during the unlawful operation of the Pre-Filled Syringe Program,

and five of the Director Defendants—a majority of ABC’s Board—have served on

the Board since at least May 2010. Therefore, a majority of ABC’s current Board

were on the Board when it disclosed the existence of Mullen’s qui tam action—the

principal red flag alleged—in November 2010.316 Moreover, a majority of the

Demand Board served on the Audit Committee around the time of the wrongdoing

alleged.

The Plaintiffs have demonstrated that a majority of ABC’s Board faces a

substantial likelihood of liability by pleading particularized facts from which it is

reasonably conceivable that a majority of the Board “knew of evidence of corporate

315
Oklahoma Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *14 (Del. Ch. Dec.
18, 2017) (quoting Horman v. Abney, 2017 WL 242571, at *6 (Del. Ch. Jan. 19, 2017)) (internal
quotation marks omitted).
316
While it is true that a majority of the Demand Board was not on the Board at the time of the
Davis Polk Report, even absent the Davis Polk Report the Complaint would survive a Motion to
Dismiss based on the alleged knowing failure to respond to the Mullen qui tam action.
Consequently, there is no need for a further inquiry regarding director independence.

68
misconduct—the proverbial ‘red flag’—yet acted in bad faith by consciously

disregarding its duty to address that misconduct.”317 That is, the Plaintiffs have

adequately pled that the Board was aware of the Pre-Filled Syringe Program’s

contravention of mission critical drug health and safety regulations, and that the

Board failed to act in response. The Board’s knowledge of these failures can be

reasonably inferred from, at minimum, the serious allegations of Mullen—

Specialty’s COO—regarding mission critical compliance failures regarding

Specialty’s oncology business. The Defendants have placed forth Section 220

evidence that shows that some Board-level (and Audit Committee-level) review was

taken in regard to failures at Pharmacy, but have put forth nothing to show tangible

action taken to remedy the underlying drug health and safety issues. Calling

attention to the hiring of law firms to review alleged illegality, without more, is

insufficient to refute well-pled allegations that the Board failed to address mission

critical compliance risks. The Defendants have put forth nothing from the Section

220 production showing a tangible reaction to—as opposed to a review of—the

mission critical compliance failures at Pharmacy.

Because a majority of the Demand Board faces a substantial likelihood of

liability for Count I of the Complaint, demand is excused as to Count I and the

317
Horman, 2017 WL 242571, at *10 (quoting Reiter on Behalf of Capital One Fin. Corp. v.
Fairbank, 2016 WL 6081823, at *8 (Del. Ch. Oct. 18, 2016)).

69
Defendants’ Motion to Dismiss under Rule 23.1 is denied. The Defendants have

also moved to dismiss Count I under Rule 12(b)(6). “Because the standard under

Rule 12(b)(6) is less stringent than that under Rule 23.1, a complaint that survives a

motion to dismiss pursuant to Rule 23.1 will also survive a 12(b)(6) motion to

dismiss, assuming that it otherwise contains sufficient facts to state a cognizable

claim.”318 Consequently, because the Complaint otherwise contains sufficient

factual allegations to state a cognizable claim, the Defendants’ Motion to Dismiss

under Rule 12(b)(6) is likewise denied.

4. Caremark “Prong One” Allegations

Because the Complaint survives under a “prong two” theory, I need not decide

whether the Director Defendants face a substantial likelihood of liability under

“prong one” of Caremark. I note, however, that the Davis Polk Report indicates that

several years after acquiring Specialty, ABC had a woefully inadequate compliance

system. While the implication of a “prong one” claim is unnecessary to survive the

Defendant’s Motion, it nonetheless speaks to a lax approach (at best) to compliance

at ABC.

318
McPadden v. Sidhu, 964 A.2d 1262, 1270 (Del. Ch. 2008) (footnotes omitted).

70
C. The Motion to Dismiss Counts II and III is Denied

As noted, supra, the Complaint also brings claims against officers of ABC:

Defendants Collis (in his officer capacity), Chou, and Guttman (the Officer

Defendants).

Count II alleges breach of fiduciary duty against the Officer Defendants.

Specifically, the Complaint alleges that “[t]he Officer Defendants consciously

breached their fiduciary duties and violated their corporate responsibilities by

knowingly operating and maintaining an illegal business model” and that the Officer

Defendants failed to inform the Board about the Pre-Filled Syringe Program’s

regulatory compliance.319

Count III alleges unjust enrichment against Collis. Collis was allegedly

unjustly enriched because he “derived profits, benefits, and other compensation from

ABC and were [sic] otherwise unjustly enriched during the time in which the

wrongful practices occurred.”320

Neither party disputes that the factual allegations underlying Counts II and III

are congruous with those underlying Count I. An investigation of the alleged officer

breaches of duty would necessarily implicate the same set of facts as Count I.

Namely, the activities alleged as breaches of the Officer Defendants’ fiduciary

319
Compl., ¶¶ 218–19.
320
Id. ¶ 223.

71
obligations is the same conduct that the Director Defendants allegedly failed to

adequately oversee.

Because the Plaintiffs did not make a demand with regard to the Counts II and

III, like with Count I they must show why demand would be futile. Of the Officer

Defendants, only Collis is a member of the Demand Board. Rales applies because

Counts II and III do not challenge an action of the Board, but instead actions of the

Officer Defendants.321

“To evaluate a demand to assert the claim[s] posited in Count[s] II [and III],

the Demand Board would have to investigate and then assert litigation based on the

breaches of the duty of oversight that are the subject of Count I.”322 As noted, at a

minimum a majority of the Demand Board—Henney, McGee, Long, Gochnauer,

and Hyle, who have all been Board members since at least May 2010—face a

substantial likelihood of liability with regard to Count I and hence cannot impartially

consider a demand for the Caremark claim. In other words, the Director Defendants

could not bring their business judgment to bear on a demand to prosecute Counts II

and III, because such litigation would implicate their own wrongdoing adequately

pled in Count I. Thus, because Counts II and III “would implicate the same conduct”

321
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 977 (Del. Ch.
2003), aff’d, 845 A.2d 1040 (Del. 2004).
322
Hughes v. Hu, 2020 WL 1987029, at *18 (Del. Ch. Apr. 27, 2020).

72
as Count I, demand is futile as to Counts II and III.323 And for the same reasons

noted, supra, because demand is futile with regard to Counts II and III, the Motion

to Dismiss under Rule 12(b)(6) is likewise denied.

III. CONCLUSION

The Defendants Motion to Dismiss is DENIED. The parties should submit a

form of order consistent with this Memorandum Opinion.

323
Id.

Teamsters Local 443 Health Services & Insurance Plan v. John G. Chou

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