Willa Rosenbloom v. David Pyott
2014 U.S. App. LEXIS 17078
9th Cir.2014Background
- Allergan manufactures Botox and faced FDA and enforcement actions for off-label marketing; settlement and criminal fine totaled $375m and civil penalties of $225m.
- Derivative actions were filed by Allergan shareholders seeking to hold the board liable for alleged violations and fiduciary breaches; plaintiffs did not demand board action before filing.
- The district court dismissed for lack of demand futility under Rule 23.1, but the district court applied Delaware law incorrectly and drew inferences against plaintiffs.
- Delaware law applies to a Delaware corporation; two theories alleged to excuse demand: conscious inaction in the face of wrongdoing and a board-adopted plan premised on illegal conduct.
- The Delaware Court of Chancery proceedings in Pyott informed the court’s approach; the Ninth Circuit reverses, finding demand excused based on the specific, detailed allegations.
- The opinion addresses whether the board’s actions or inactions created a reasonable doubt that a majority faced substantial liability for loyalty violations, justifying excusal of demand and remand for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether demand was excused under Aronson and Rales frameworks. | Plaintiffs allege the Board’s plan depended on illegal off-label marketing. | Allergan argues no Board decision to break the law; compliance policies exist. | Yes; demand excused under either framework. |
| Whether conscious inaction establishes demand futility. | Board knew or should have known of illegal promotions and did nothing. | Board monitored programs; no explicit knowledge shown. | Yes; conscious inaction supports futility. |
| Whether adoption of a plan premised on illegal conduct supports demand futility. | Board approved a strategy predicated on off-label promotion. | No memorialized plan to break the law; compliance controls exist. | Yes; plausible inference of a plan premised on illegal conduct. |
Key Cases Cited
- Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991) (derivative suits; governance decisions by board)
- In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir.1999) (abuse of discretion standard for demand futility)
- Pfizer Inc. S’holder Derivative Litig., 722 F. Supp. 2d 453 (S.D.N.Y.2010) (Caremark/arising duty to monitor; demand futility)
- Abbott Labs. Derivative S’holders Litig., 325 F.3d 795 (7th Cir.2003) (Caremark/Conscious inaction; demand futility standard)
- Westmoreland Cnty. Emps. Ret. Sys. v. Parkinson, 727 F.3d 719 (7th Cir.2013) (de facto standard for demand futility in some circuits)
- La. Mun. Police Emps.’ Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012) (Delaware law on demand futility; court’s approach on conscious inaction)
- Veeco Instruments, Inc. Sec. Litig., 434 F. Supp. 2d 267 (S.D.N.Y.2006) (caremark/arising fiduciary duty concerns)