AmeriSource Decision a Difficult Pill to Swallow for Securities Plaintiffs

The opioid crisis has garnered nationwide attention for decades and has resulted in thousands of lawsuits, subjecting pharmaceutical distributors to billions of dollars in damages.  AmerisourceBergen (“Amerisource”) — one of the “big three” largest pharmaceutical distributors in the U.S. — has frequently been accused of failing to adequately monitor and report suspicious orders of prescription opioids and was required to pay $6.6 billion as a settlement payment in 2021 for related claims as a result. In response, Amerisource’s shareholders brought a derivative suit to impose personal liability on Amerisource’s directors and officers for damages resulting from their actions. The shareholders’ derivative suit included claims that the directors/officers: (1) routinely ignored “red flags” such as investigations and low suspicious-order reporting (often referred to as a Caremark claim); and (2) failed to adequately monitor and oversee anti-diversion policies and prioritized profits over legal compliance (commonly known as a Massey claim) by both (a) revising its anti-diversion policy to become more lenient and provide less oversight of sales to smaller and more profitable pharmacies; and (b) engaging in business with a large pharmacy chain under investigation by the DEA.

On December 22, 2022, Vice Chancellor Travis Laster of the Delaware Chancery Court (the “Court”) issued a decision (the “Decision”) dismissing the action, finding that the shareholders failed to satisfy the challenging requirements by which to show “demand futility” in accordance with the Court of Chancery Rule 23.1. [1] Demand futility allows shareholders to file a derivative suit without first making a demand to act on the company’s board of directors only after the shareholders adequately allege facts sufficient to create a reasonable doubt that the board of directors could have properly exercised its objective judgment in responding to a demand. In other words, the shareholders must show that the board would be unable to reasonably respond based on its own risk of liability or that the board lacked an independence from the individuals or entities accused of the wrongdoing. Under Delaware law in a shareholder derivative action, the shareholder must — if no pre-suit demand is made — properly allege that “the directors are incapable of making an impartial decision regarding whether to institute such litigation.” [2] In determining whether plaintiffs have met their burden in a demand futility analysis, Delaware courts consider whether the director: (1) received a personal benefit from the alleged wrongdoings that would be the subject of the litigation demand; (2) faces a substantial likelihood of liability on the same; and (3) lacks independence from those who received a personal benefit or faces a substantial likelihood of liability.

While the Court noted that the allegations contained within the complaint were sufficient to survive a typical motion to dismiss, they did not rise to the standard required in establishing demand futility and the shareholders’ standing to pursue the derivative claims. This Decision was based largely on the fact that the shareholders failed to set forth enough evidence to show that the Defendants faced a substantial threat of liability on either of the shareholders’ claims where parallel federal litigation essentially absolved the board of individual liability. [3] The Vice Chancellor noted that both the shareholders’ Caremark and Massey claims required showing that the directors acted knowingly and intentionally, and such an inference would be impossible in light of the Huntington decision, which found that — as a matter of fact and after trial — Amerisource’s business plan did not violate any law.

The Vice Chancellor’s reasoning and resulting Decision hinged on the court’s findings in Huntington in which the court’s ruling — that the directors could not be liable for the damages caused to opioid users — came after the court had the benefit of considering all of the evidence and testimony related to the opioid damages. Based on the Huntington decision, the Vice Chancellor found that it was unlikely that the directors would have been unable to act objectively in responding to a demand where a federal judge had already found that they could not be held individually liable. While the Vice Chancellor noted that the parallel litigation was not preclusive, it was persuasive, and acted as strong support that the shareholders could not meet their burden in establishing demand futility, highlighting the Court’s available discretion in taking judicial notice of separate litigation and basing its Decision on the same.

The December 22, 2022, Decision accordingly not only serves as reminder of the heightened pleading standard of Delaware Rule 23.1, but of the impact decisions in parallel litigation may have on the Court’s demand futility analysis.  Plaintiffs in shareholder actions nationwide should pay close attention to this decision for both the pleading requirements for demand futility and information that courts may consider outside of the pleadings in evaluating the demand futility allegations.

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[1] Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022).

[2] Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 367 (Del. 2006).

[3] See City of Huntington v. AmerisourceBergen Drug Corp., 2022 WL 2399876 (S.D. W. Va. July 4, 2022).