Westmoreland County Employee Retirement System v. Parkinson
2013 U.S. App. LEXIS 17124
7th Cir.2013Background
- Westmoreland filed a shareholder derivative suit against Baxter's thirteen directors and officer defendants for allegedly breaching fiduciary duties in Baxter's remediation of the Colleague Infusion Pump under the 2006 FDA Consent Decree.
- The district court dismissed for failure to plead demand futility under Rule 23.1(b)(3) and Delaware law; this court reverses.
- The 2006 Consent Decree required Baxter to bring pumps into compliance with the FD&C Act and related regulations, and to implement a comprehensive remediation plan without a specified deadline.
- FDA warnings continued from 2008 into 2010; Baxter proposed a long timeline and a new Sigma Pump, while the FDA ordered recalls and reimbursements in 2010, costing Baxter hundreds of millions.
- Board and committee activity showed substantial pre-2008 remediation efforts, but the pace and quality of later actions, despite FDA guidance, became a central focus for alleged bad faith.
- Westmoreland argues the directors consciously disregarded duties in late 2008 by halting remedial efforts in the face of FDA directives, creating a reasonable doubt about the validity of the directors' business judgments.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether pleadings excuse pre-suit demand under Aronson. | Westmoreland argues demand futility because directors acted in bad faith. | Baxter contends pleadings do not show disinterestedness or invalid business judgment. | Yes; pleadings create reasonable doubt, excusing demand. |
| Whether the alleged conscious disregard constitutes bad faith to excuse demand. | Westmoreland asserts conscious disregard in late 2008–2010 violated duty of loyalty. | Baxter argues allegations do not show bad faith beyond poor business decisions. | Yes; allegations support potential bad faith and excusal of demand. |
| Is Abbott Laboratories Derivative case applicable to Baxter here? | Abbott Labs supports finding bad faith where FDA noncompliance persisted despite knowledge. | Abbott Labs is distinguishable on timing and plan details but shows a matching concerns. | Abbott Labs is applicable; supports finding of potential bad faith. |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (establishes the disjunctive demand futility test)
- Abbott Laboratories Derivative Shareholders Litig., 325 F.3d 795 (7th Cir. 2003) (pleadings can raise reasonable doubt of business judgment, excusing demand)
- Stone v. Ritter, 911 A.2d 362 (Del. 2006) (conscious disregard constitutes breach of loyalty; no shield from failure to act)
- In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. 1996) (emphasizes directors' duty to act in good faith in overseeing compliance)
- Kamen v. Kemper Financial Services, Inc., 500 U.S. 90 (U.S. Supreme Court 1991) (federal law governs pleading standards; substance of demand futility determined by state law)
- La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012) (illustrates application of demand futility standards in Chancery context)
- Abbott Laboratories, 325 F.3d 795 (7th Cir. 2003) (discusses difficulty of pleading demand futility and business judgment concerns)