LEBANON COUNTY EMPLOYEES’ RETIREMENT FUND and TEAMSTERS LOCAL 443 HEALTH SERVICES & INSURANCE PLAN, Plaintiffs, v. STEVEN H. COLLIS, RICHARD W. GOCHNAUER, LON R. GREENBERG, JANE E. HENNEY, KATHLEEN W. HYLE, MICHAEL J. LONG, HENRY W. MCGEE, ORNELLA BARRA, D. MARK DURCAN, and CHRIS ZIMMERMAN, Defendants, and AMERISOURCEBERGEN CORPORATION, Nominal Defendant.
C.A. No. 2021-1118-JTL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
Date Decided: December 15, 2022
Date Submitted: September 23, 2022
Stephen C. Norman, Jennifer C. Wasson, Tyler J. Leavengood, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Michael S. Doluisio, Carla Graff, DECHERT LLP, Philadelphia, Pennsylvania; Matthew L. Larrabee, Hayoung Park, DECHERT LLP, New York, New York; Michael D. Blanchard, Amelia Pennington, MORGAN, LEWIS & BOCKIUS LLP, Boston, Massachusetts; Counsel for Defendants.
LASTER, V.C.
The plaintiffs own stock in AmerisourceBergen. They contend that the Company‘s directors and officers breached their fiduciary duties by making affirmative decisions and conscious non-decisions that led ineluctably to the harm that the Company has suffered. They seek to shift the responsibility for that harm from AmerisourceBergen to the human fiduciaries that caused it to occur.
The plaintiffs advance two theories of breach. For their first claim, they rely on the proposition that corporate fiduciaries cannot consciously ignore evidence indicating that the corporation is suffering or will suffer harm. Most plainly, corporate fiduciaries cannot knowingly ignore red flags evidencing legal non-compliance. The Delaware Supreme Court recognized this theory in Graham v. Allis-Chalmers Manufacturing Co., 188 A.2d 125 (Del. 1963). In his landmark decision in In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), Chancellor Allen explained that Allis-Chalmers was not the only path to liability and that corporate fiduciaries also could be held liable if they knowingly failed to adopt internal information and reporting systems that were “reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation‘s compliance with law and its business performance.” Id. at 970.
In Stone v. Ritter, 911 A.2d 362 (Del. 2006), the Delaware Supreme Court combined the holdings in Allis-Chalmers and Caremark by stating that directors could be held liable if
[i] the directors utterly failed to implement any reporting or information system or controls; or [ii] having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations.
Id. at 370. Since Stone, some decisions have labeled the first theory a “prong-one Caremark claim” and the second theory a “prong-two Caremark claim.” For those of us who have trouble keeping the two prongs straight, Chancellor McCormick has come to the rescue by referring to the second type of claim as a “Red-Flags Theory” or a “Red-Flags Claim.”1
As a distributor of opioids, AmerisourceBergen must comply with extensive regulatory frameworks imposed by federal and state law. The federal regulatory frameworks require that a distributor report any suspicious orders to the federal Drug Enforcement Agency (the “DEA“). A distributor must either not fill a suspicious order or first conduct due diligence sufficient to ensure that the order will not be diverted into improper channels.
For their Red-Flags Theory, the plaintiffs contend that the Company‘s officers and directors were confronted with a steady stream of red flags that took the form of subpoenas from various law enforcement officials, congressional investigations, lawsuits by state attorneys general, and a deluge of civil lawsuits. Meanwhile, as the opioid epidemic raged, the rates at which the Company reported suspicious orders remained incomprehensibly low. The plaintiffs contend that based on those red flags, the defendants knew that the Company was violating federal and state laws regarding opioid diversion and needed to implement stronger systems of oversight. Yet the Company‘s officers and directors consciously ignored the red flags and did not take any meaningful action until the 2021 Settlement. The complaint‘s allegations support an inference that the officers and directors declined to take action because they did not want to do anything that might imply that their earlier actions and policies were inadequate, and they also wanted to preserve their ability
For their second claim, the plaintiffs cite Chief Justice Strine‘s pointed admonition, made while serving on this court, that “Delaware law does not charter law breakers.” In re Massey Energy Co., 2011 WL 2176479, *20 (Del. Ch. May 31, 2011). “As a result, a fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the law.” Id. Chancellor McCormick has helpfully described this type of theory as a “Massey Theory” or a “Massey Claim.” See Hamrock, 2022 WL 2387653, at *17.
For their Massey Claim, the plaintiffs seek an inference that between 2010 and 2015, the Company‘s officers and directors took a series of actions which, when viewed together, support a pleading-stage inference that they knowingly prioritized profits over law compliance. The most telling evidence of intent was a decision in 2015, when management proposed and the directors approved a revised order monitoring program (the “Revised OMP“). AmerisourceBergen‘s existing order monitoring program used static criteria to flag orders of interest. The monitoring program called for AmerisourceBergen personnel to investigate the flagged orders and, if they still appeared suspicious, report them to the DEA. Under its existing program, AmerisourceBergen was already reporting suspicious orders at profoundly low rates.
Under the Revised OMP, AmerisourceBergen only would flag orders that both met the static criteria and were inconsistent with a particular customer‘s dynamic pattern of orders. The second trigger meant that if a pharmacy submitted an order that would be
With the implementation of the Revised OMP, AmerisourceBergen‘s already low rate of suspicious order reporting fell to microscopic levels. Between 2014 and 2015, the level of suspicious orders declined by 86%. Over the same period, AmerisourceBergen‘s total orders increased by 8.6%. Between 2015 and 2016, the level of suspicious orders declined by another 92%. Over the same period, AmerisourceBergen‘s total orders increased by another 6.7%.
Prosecutorial investigations, congressional inquiries, and civil lawsuits followed. Two congressional reports concluded that AmerisourceBergen failed to identify and address suspicious orders as required by federal law. Cities, counties, American Indian tribes, union pension funds, and the attorneys general of more than a dozen states sued the Company for contributing to the opioid epidemic. The plaintiffs maintain that in the face of these problems, the Company‘s officers and directors continued to pursue their illegal business strategy until the 2021 Settlement.
The defendants have moved to dismiss the plaintiffs’ claims on two grounds. They argue that the plaintiffs’ claims are untimely and that the plaintiffs’ allegations fail to support an inference of demand futility.
No Delaware court has addressed the timeliness principles that govern a Red-Flags Theory or a Massey Theory. The claims are similar in that they have a starting point when the wrongful conduct began, but the wrongful conduct then persists over the ensuing days, months, and years as the Company‘s officers and directors either continue to consciously ignore red flags (the Red-Flags Theory) or continue to employ a business plan that prioritizes profits over legal compliance (the Massey Theory).2
Both the Red-Flags Theory and the Massey Theory are equitable claims for breach of fiduciary duty. A court does not assess timeliness for those claims by applying the statute of limitations. A court applies the doctrine of laches, which considers two factors: (i) whether the plaintiff has sued within a reasonable time, and (ii) whether there has been any prejudice to the defendants from the amount of time that has passed.
When a plaintiff seeks money damages as a remedy for a breach of fiduciary duty, the court looks to the limitations period that would apply to an analogous claim at law. To
No Delaware court has addressed how to determine when a Red-Flags Claim or a Massey Claim accrues.3 Delaware decisions have applied three methods to determine when claims for breach of fiduciary duty accrue. This decision calls them the discrete act method, the continuing wrong method, and the separate accrual method.
The discrete act method applies in the vast majority of cases. When a plaintiff contends that fiduciaries have breached their duties by making a specific decision that was complete when made, that decision constitutes a discrete wrongful act that causes the claim to accrue. To apply the statute of limitations, the court starts from when the decision was made, counts forward to determine when the limitations period would end, and checks whether the plaintiff filed suit within the limitations period. Tolling doctrines can extend the time for filing suit, but once a plaintiff is on inquiry notice, tolling stops, and the plaintiff must sue within a reasonable time or the claim will be barred. For a Red-Flags Claim or a Massey Claim, the discrete act approach dramatically constrains the stockholders’ ability to sue, because an initial decision to ignore a red flag or pursue an illegal business plan often will be difficult to detect and will not have discernable consequences. But once some information about the decision reaches the public sphere, the
There are two alternatives that Delaware decisions have applied more rarely. One approach treats a series of inextricably related decisions and conscious non-decisions as a continuing wrong. Under this approach, the wrongful act is not complete, and the limitations period does not begin to run, until the continuing wrong ceases. If any portion of the wrongful act occurs within the limitations period, then the plaintiff can seek to impose liability and recover damages for the entire period covered by the continuing wrong. To apply the statute of limitations, the court determines when the wrongful conduct stopped, counts forward from that point to calculate when the limitations period ends, and checks whether the plaintiff filed suit within the limitations period. Tolling doctrines and inquiry notice are irrelevant if the plaintiff sues while the conduct is ongoing or if a portion of the conduct occurred within the limitations period, because the plaintiff can sue for the continuing wrong as a whole. Tolling doctrines and inquiry notice only come into play if the continuing wrong has ceased and the plaintiff did not file suit until after the limitations period otherwise would have run.
The other approach treats a series of related decisions and conscious non-decisions as a sequence of wrongful acts, each of which gives rise to a separate limitations period.
For the Red-Flags Claim, the separate accrual approach offers a Goldilocks regime that falls in between a too-defendant-friendly discrete act approach and a too-plaintiff-friendly continuing wrong approach. As discussed at length later in this decision, the separate accrual approach best suits the gravamen of the claim and the nature of the harm, serves the twin goals of equity and efficiency, and fulfills the policy goals associated with statutes of limitations.
The separate accrual approach could apply to a Massey Claim as well. There are many similarities between a Red-Flags Claim and a Massey Claim. Arguably, however, the decision to consciously adopt an illegal business plan carries a greater level of culpability
When applying the separate accrual approach within a laches framework, the court looks to when the plaintiff began vigilantly pursuing its claims. For purposes of a derivative action, that can be when a plaintiff begins seeking books and records. In this setting, the act of filing a lawsuit to enforce the books-and-records request is not required, and such a requirement would undercut this court‘s efforts to encourage stockholders and companies to resolve books-and-records requests without litigation.
In this case, the plaintiffs’ diligent efforts to obtain books and records could support using May 21, 2019, as a starting date for the actionable period. The plaintiffs, however, are content to use October 20, 2019, so the court uses that date. Using a three-year statute of limitations, the actionable period began on October 20, 2016.
Tolling doctrines do not warrant extending the actionable period further. AmerisourceBergen issued disclosures in 2017 and in subsequent years about the quality of its anti-diversion program. Under the doctrine of fraudulent concealment, those disclosures provide a separate basis for extending the actionable period back to September 30, 2017. The actionable period already extends back to October 20, 2016, so those disclosures are immaterial to the timeliness analysis.
In December 2014, a stockholder represented by an entrepreneurial law firm served a books-and-records request on the Company and obtained internal documents. In December 2015, the law firm sent a litigation demand asking the defendants to sue themselves on claims that anticipate the far-better-developed claims that have been asserted in the complaint. Even acknowledging that the demands were sent by a frequent and fast filing firm that was prospecting for a lawsuit, the letters show that stockholders had enough information to be on inquiry notice by December 2015. The plaintiffs needed to start pursuing their claims within a reasonable time after 2015. They did not seek books and records until 2019 and did not sue until 2022.
Because of inquiry notice, the plaintiffs cannot rely on equitable tolling to extend the actionable period to a date earlier than October 20, 2016. They can still sue for conduct and consequences that took place after October 20, 2016, because under the separate accrual approach, the defendants’ ongoing refusal to respond to red flags and their persistent pursuit of an illegal business plan continued after October 20, 2016, giving rise to newly accruing wrongs.
Having reached these holdings, it becomes relatively easy to conclude that wrongful conduct occurred within the actionable period. The defendants’ conduct continued until
It bears emphasizing that a starting date of October 20, 2016 for the actionable period does not mean that evidence from earlier periods is irrelevant. To determine whether the Company‘s business plan during the actionable period wrongfully prioritized profit over law compliance, the court must determine what business plan the officers and directors were pursuing. Answering that question requires an understanding of the state of affairs leading up to the actionable period. Likewise, to evaluate whether officers and directors acted in bad faith by ignoring red flags during the actionable period, the court must understand what they knew and understood when they made those decisions, which can take into account matters pre-dating the actionable period. For both claims, however, liability must turn on what the officers and directors did during the actionable period, and damages are limited to harms that the Company suffered during the actionable period.
The defendants’ motion to dismiss the complaint as untimely is therefore denied.
I. FACTUAL BACKGROUND
The facts are drawn from the complaint and the documents that the complaint incorporated by reference. Before filing this lawsuit, the plaintiffs spent two years litigating a books-and-records action in which AmerisourceBergen raised a host of defenses, including arguments that sought to defend preemptively against the merits of an eventual derivative action. The plaintiffs prevailed at the trial level and on appeal. See Lebanon Cnty. Empls.’ Ret. Fund v. AmerisourceBergen Corp. (220 Decision), 2020 WL 132752 (Del. Ch. Jan. 13, 2020), aff‘d, 243 A.3d 417 (Del. 2020). After that hard-fought and resource-intensive victory, the plaintiffs obtained books and records under the terms of a confidentiality order which provided that if the plaintiffs relied on the documents in a future action, then all of the documents “will be deemed incorporated by reference in any complaint subject to the conditions set forth in Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016), subject to Delaware law.” C.A. No. 2019-0527-JTL, Dkt. 64 ¶ 9 (Del. Ch. May 8, 2020).
Relying on the incorporation-by-reference condition, the defendants submitted sixty-one exhibits in support of their opening brief, plus another seven exhibits in support of their reply brief. The defendants ask the court to consider the sixty-eight exhibits when evaluating the complaint‘s allegations.4
The incorporation-by-reference doctrine does not enable a court to weigh evidence on a motion to dismiss. It permits a court to review the actual documents to ensure that the plaintiff has not misrepresented their contents and that any inference the plaintiff seeks to have drawn is a reasonable one.5 The doctrine limits the ability of a plaintiff to take language out of context, because the defendants can point the court to the entire document.
At this stage of the proceeding, the well-pled allegations of the complaint are deemed to be true. The plaintiffs are entitled to all reasonable inferences that the well-pled allegations support. To the extent that factual allegations or documents incorporated by reference support competing inferences, the plaintiffs are entitled at this stage to the inference that favors their claims.
The factual background for this decision emphasizes matters pertinent to the timeliness analysis. It de-emphasizes matters pertinent to the defendants’ alternative contention that demand is not futile because the plaintiffs’ claims do not pose a substantial threat of liability to at least half of the directors in office when the lawsuit was filed.
A. AmerisourceBergen And Its Legal Obligations As An Opioid Distributor
Nominal defendant AmerisourceBergen is one of the largest distributors of pharmaceutical products in the world.6 It is a Delaware corporation, headquartered in
In the United States, AmerisourceBergen is one of the “Big Three” wholesale distributors of pharmaceutical products. The other two are Cardinal Health, Inc. and McKesson Corporation. AmerisourceBergen and McKesson each control approximately one-third of the domestic pharmaceutical distribution market. Cardinal Health controls another fifth.
As an opioid distributor, AmerisourceBergen acts as a middleman between the companies who manufacture opioids and the pharmacies that fill prescriptions for opioids. In its role as a distributor, AmerisourceBergen must comply with the Comprehensive Drug Abuse Prevention and Control Act of 1970 and its implementing regulations. To obtain and maintain a license to distribute opioids, a Company must maintain “effective controls against diversion of [opioids] into other than legitimate medical, scientific, research, and industrial channels.”
distributes healthcare products and supplies, including opioids, and provides pharmacy management and other consulting services to institutional healthcare providers such as hospitals and retail pharmacies. The Specialty Group serves the specialty pharmaceuticals market, focusing on products involving biotechnology, blood plasma, and oncology. The Specialty Group also provides pharmaceutical distribution and related services to physicians and institutional healthcare providers. While important for many reasons, the distinctions between AmerisourceBergen and its subsidiaries are not relevant to this decision, which refers only to AmerisourceBergen.
A distributor must report suspicious orders to the DEA. Once a distributor has reported a suspicious order, it must either (i) decline to ship the order or (ii) ship the order only after conducting due diligence and determining that the order is not likely to be diverted into illegal channels. See Masters Pharm., Inc. v. Drug Enf‘t Admin., 861 F.3d 206, 212–13 (D.C. Cir. 2017). The DEA can suspend or revoke the license of any distributor that fails to maintain controls or respond appropriately to suspicious orders.
B. The Ongoing Opioid Crisis
The United States remains mired in an opioid crisis that has spanned more than two decades, killed hundreds of thousands of Americans, and affected the lives of millions more. In the late 1990s, the pharmaceutical industry pushed to increase the use of prescription opioids to treat pain management. Manufacturers created new formulations of extended-release opioids, which they marketed as non-addictive and superior to existing methods of pain management. Doctors responded by writing more prescriptions for opioids, often without appreciating or advising patients about the risk of addiction. See 220 Decision, 2020 WL 132752, at *2.
Between 1999 and 2014, the sale of prescription opioids in the United States practically quadrupled. The medications proved far more addictive and dangerous than the pharmaceutical industry had led the nation to believe, and the expanded use of the medications led to widespread misuse. As many as 29% of the patients who were
The increased levels of opioid abuse had tragic consequences. The Centers for Disease Control and Prevention reported that there were nearly 218,000 overdose deaths related to prescription opioids between 1999 and 2017. Between 2000 and 2015, the rate of opioid overdose deaths in the United States more than tripled. The number of opioid-related deaths reached 69,710 in 2020, and opioid overdoses comprised the vast majority of drug overdoses in the country.
To help fight the epidemic, the DEA increased its scrutiny of distributors like AmerisourceBergen in an attempt to have them fulfill their legal obligations to identify suspicious orders and prevent diversion. The Big Three supply drugs to pharmacies using “just-in-time” delivery. That means that most pharmacies receive drug deliveries every day and sometimes multiple times a day. Because deliveries are so frequent, distributors know exactly how many individual opioid pills they are delivering to each pharmacy. Distributors like AmerisourceBergen are thus uniquely positioned to assess whether a pharmacy is facilitating the diversion of prescription opioids.
C. AmerisourceBergen‘s Initial Run-Ins With The DEA
In April 2007, the DEA suspended AmerisourceBergen‘s license for a distribution center in Orlando, Florida, because of involvement with suspicious orders of opioids. The DEA found that the Orlando center had sold over 5.2 million dosage units of opioids to pharmacies that AmerisourceBergen knew, or should have known, were diverting the opioids into improper channels. The DEA found that the pharmacies in question (i) ordered
In June 2007, AmerisourceBergen settled with the DEA (the “2007 Settlement“). As part of the settlement, AmerisourceBergen committed to implement a more sophisticated order monitoring program designed to detect and prevent diversion of controlled substances (the “2007 OMP“). In August, in reliance on the implementation of the 2007 OMP, the DEA reinstated the license for the Orlando center.
That same year, AmerisourceBergen acquired Bellco Drug Company (“Bellco“), another drug distributor. In June 2007, between signing and closing, Bellco entered into a consent decree with the DEA for failing to report suspicious orders of controlled substances. Bellco paid an $800,000 fine and surrendered its DEA license.
After these events, AmerisourceBergen developed and implemented the 2007 OMP. When doing so, the Company consulted with the DEA to establish what at the time constituted the industry-standard compliance program.
AmerisourceBergen described the 2007 Settlement and the Bellco settlement in its annual reports on Form 10-K for the years 2007, 2008, 2009, 2010, and 2011.
During 2010, management embarked on a plan to extract maximum value from the independent pharmacy market (the “Independent Pharmacy Strategy“). Independent pharmacies offered a potentially significant source of revenue because they had significantly less market power than chain pharmacies and could not bargain as effectively for lower prices. Their smaller size also meant that they had fewer resources to devote to monitoring suspicious orders and could more easily become pill mills.
In 2011, management continued to pursue the Independent Pharmacy Strategy. Management hired McKinsey & Co. to help make the AmerisourceBergen sales force more effective and focused on expanding its independent pharmacy business in New York. Sales to independent pharmacies increased by 11.7% between July 2010 and March 2011.
During this same period, AmerisourceBergen‘s commitment to diversion control began to ebb. At the time, Chris Zimmerman held the position of Vice President of Corporate Securities and Regulatory Affairs (“Regulatory Affairs“), where he was in charge of diversion control. On April 22, 2011, he sent an email to the five senior members of the diversion control team that contained a set of lyrics for a song titled “Pillbillies,” a parody of The Beverly Hillbillies theme song. The parody described opioid addicts visiting Florida “Pain Clinics” to buy “Hillbilly Heroin.” Another email that circulated among the senior compliance staff included the lyrics for the song “OxyContinVille,” a parody of Jimmy Buffet‘s “Margaritaville.” It described addicts driving from Kentucky to Florida “[l]ookin’ for pill mills.” On May 6, 2011, Zimmerman emailed the leadership team for diversion control about recently enacted Florida legislation that was designed to crack
In March 2012, Zimmerman was promoted to the positions of Chief Compliance Officer and Senior Vice President in charge of Corporate Securities and Regulatory Affairs, a position he held until October 2018. During that period, Zimmerman and his division were responsible for overseeing the order monitoring program and anti-diversion efforts, and Zimmerman personally was responsible for bringing issues to the attention of the Audit Committee. Zimmerman‘s communications with his team support an inference that he was not a suitable individual to hold these important positions, and his callous and scornful disregard for the victims of the opioid crisis supports an inference that AmerisourceBergen lacked a culture of compliance.
Also in March 2012, the board learned that the DEA had suspended Cardinal Health‘s license to distribute controlled substances from a distribution facility in Lakeland, Florida. The basis for the suspension was Cardinal Health‘s dealings with four independent retail pharmacies.
In the face of the DEA‘s enforcement actions, management and the board doubled down on the Independent Pharmacy Strategy. Management and the board discussed ways to expand the independent pharmacy business by offering a “[s]uite of offerings to reduce churn and increase profitability,” including “a ‘light touch’ franchise model” and “‘friendly landings’ for [AmerisourceBergen] independent pharmacists looking to transfer ownership.” Compl. ¶ 119. The light touch franchise model meant easy onboarding for new
Two months later, in May 2012, management reported to the Audit Committee that the Company had received subpoenas from the DEA and the United States Attorney‘s Office for the District of New Jersey that sought documents concerning the Company‘s anti-diversion programs. In June 2012, the Attorney General of West Virginia named AmerisourceBergen as a defendant in a lawsuit that alleged violations of state law related to the distribution of opioids.
In November 2012, the Audit Committee received a report on the Company‘s regulatory compliance efforts, including anti-diversion controls. The report informed the committee members that AmerisourceBergen‘s levels of suspicious order reporting were extremely low:
| AmerisourceBergen Averaged 215,000,000 Line Orders from 2009-2012 | |
|---|---|
| Suspicious Orders Reported | |
| 2009 | 0.000864% [1,858] |
| 2010 | 0.001085% [2,322] |
| 2011 | 0.001870% [4,020] |
| 2012 | 0.002564% [5,512] |
Id. ¶ 129. The committee also learned that the Company was expending far fewer resources on compliance than peer companies. Its staff of fourteen internal audit personnel was less than one-third the average of forty-six internal audit staff at other Fortune 500 companies.
The Company‘s quarterly report on Form 10-Q for the quarter ending December 31, 2012, disclosed the subpoena from the United States Attorney‘s Office for the District of New Jersey and the lawsuit filed by the Attorney General of West Virginia. Similar disclosures appeared in the Company‘s Form 10-Q for the period ending March 30, 2013.
E. The Walgreens Alliance
During 2013, management sought to increase the Company‘s sales through an alliance with Walgreens. By taking on a distribution relationship with Walgreens, AmerisourceBergen added more than 8,000 retail pharmacies to its portfolio. AmerisourceBergen estimated that the alliance would increase its orders for controlled substances by 213%.
By increasing order flow, the alliance increased AmerisourceBergen‘s risk of suspicious orders. Not only that, but Walgreens was already having problems with the DEA. In June 2013, Walgreens agreed to pay an $80 million fine to the DEA for negligently allowing opioids to be diverted for misuse.
With the Company expecting to double its orders, management advised the board that the Diversion Control Group in Regulatory Affairs would increase from just five employees to seven. The Investigations Group would increase from only four employees to six. The resources associated with diversion thus would not keep pace with anticipated growth. In real-world terms, the per-order level of resources was reduced.
As 2013 wore on, the regulatory and enforcement environment intensified. In September 2013, management advised the board that there was an “increasing focus in [sic] [controlled substances] sales and [order monitoring programs] in US.” Id. ¶ 148. In November 2013, the board received an update on subpoenas issued by the DEA and multiple United States Attorneys’ Offices.
The Company‘s Form 10-K for the fiscal year ending September 30, 2013, disclosed the complaint filed by the Attorney General of West Virginia, the subpoenas issued by the United States Attorney for the District of New Jersey, and additional subpoenas issued by the United States Attorneys for the Districts of Kansas and the Northern District of Ohio. The Company‘s Form 10-Q for the period ending December 31, 2013, contained similar disclosures.
Throughout 2014, the directors received reports on the ongoing investigations into the Company. During its meeting in October 2014, the Audit Committee learned that the United States Attorneys’ Office for the District of New Jersey had subpoenaed the Company‘s outside auditor as part of a pending grand jury investigation involving the Company.
During 2014, the Company‘s public filings continued to contain disclosures regarding the investigations being conducted by the United States Attorneys’ Offices and the lawsuit filed by the Attorney General of West Virginia.
In 2015, against a backdrop of increasing legal scrutiny and already low levels of suspicious order reporting, management and the board implemented the Revised OMP. The plaintiffs contend that the Revised OMP was plainly intended to reduce the number of suspicious orders that the Company would report to the DEA. The plaintiffs assert that, when viewed in conjunction with the Company‘s efforts to expand its opioid distribution business through measures like the Independent Pharmacy Strategy and the Walgreens alliance, and in the context of intensifying regulatory scrutiny, the adoption of the Revised OMP evidences a knowing breach of fiduciary duty in which the directors prioritized profits over compliance.
In March 2015, Zimmerman and David May, the Director of Diversion Control and Federal Investigations, gave a presentation to the Audit Committee about the Revised OMP. The Company was still using the 2007 OMP, which flagged orders using static thresholds. The Revised OMP added a second test that compared an individual order‘s size against “[d]ynamic thresholds refreshed annually based upon actual consumption data over the most recent 12-month period.” Id. ¶ 166. It thus added an additional trigger that would fail only if a current order was inconsistent with the customer‘s recent pattern of orders. Ultimately, both tests needed to fail for an order to be marked as suspicious.
As depicted in a Venn diagram presented to the Audit Committee, the double-trigger Revised OMP would inevitably result in only a portion of orders flagged for investigation:
Between 2014 and 2015, the level of suspicious orders that AmerisourceBergen reported to the DEA declined by 86%, dropping from 14,003 to 1,892. Over the same period, AmerisourceBergen‘s total orders increased by 8.6%, from 20,777,594 to 22,560,562.
Between 2015 and 2016, the level of suspicious orders that AmerisourceBergen reported to the DEA declined by another 92%, dropping from 1,892 to 139. Over the same
The following table shows the impact of the Revised OMP.
| Percentage of Orders Flagged and Reported to the DEA | ||||
|---|---|---|---|---|
| 2013 | 2014 | 2015 | 2016 | |
| Orders Placed | 13,580,197 | 20,777,594 | 22,560,562 | 24,067,791 |
| Orders of Interest | 60,499 | 78,707 | 83,407 | 48,888 |
| Orders Reported | 24,103 | 14,003 | 1,892 | 139 |
| Percent of All Orders Flagged (derived) | 0.445% | 0.379% | 0.370% | 0.203% |
| Percent of All Orders Reported (derived) | 0.177% | 0.067% | 0.008% | 0.0006% |
The Revised OMP was not the only problem with the Company‘s order monitoring system. In August 2015, AmerisourceBergen engaged FTI Consulting, Inc. to conduct a review of how AmerisourceBergen went about investigating orders of interest. FTI identified a series of deficiencies, including a lack of resources, lack of formal training, inconsistent policies, and communication breakdowns. The report identified the Company‘s regulatory obligations related to diversion control as one of the “Gaps & Risks” that needed to be addressed.
H. The Stockholder Litigation Demand
On December 1, 2015, the law firm of Scott + Scott LLP sent a litigation demand to the board on behalf of a stockholder named James Hays that asked the directors to bring
The Audit Committee retained Fried, Frank, Harris, Shriver & Jacobson LLP (“Fried Frank“) to evaluate the demand and make a recommendation regarding whether the Company should pursue litigation against its directors. On August 4, 2016, Fried Frank presented its report and recommendations to the board. Fried Frank recommended against pursuing any claims, and the board adopted that recommendation. See Ex. 56.
Except for reviewing the litigation demand, the board did not take any steps in 2016 to evaluate the Revised OMP. Government investigators subsequently asserted that AmerisourceBergen‘s systems could be manipulated easily to avoid flagging orders as suspicious and that AmerisourceBergen was not conducting adequate diligence into customer orders.
As noted, AmerisourceBergen reported only 139 orders in 2016. Despite shipping millions of opioid pills into West Virginia in 2016, AmerisourceBergen reported only three suspicious orders for all of the pharmacies in West Virginia.
I. 2017: More Red Flags
In 2017, AmerisourceBergen‘s officers and directors were confronted with a steady stream of red flags. In January 2017, the Audit Committee was informed that AmerisourceBergen had entered into a $16 million settlement with the State of West Virginia to resolve claims regarding opioid distribution. The Audit Committee was advised that other West Virginia County Commissions and cities had filed similar complaints.
AmerisourceBergen‘s order reporting statistics for 2017 resembled its numbers for 2015 and 2016. AmerisourceBergen received 24,319,706 opioid orders. The Company flagged 87,224 for examination, representing a rate of 0.359%. The Company determined that only 176 orders were actually suspicious, reflecting a rate of 0.0007% of total orders and 0.2% of flagged orders.
During 2017, a consortium of attorneys general from forty-one states requested documents and information from AmerisourceBergen and other opioid distributors as part of an investigation into their distribution practices. See 220 Decision, 2020 WL 132752, at *3.
In its annual report on Form 10-K for the fiscal year ending September 30, 2017, AmerisourceBergen represented to stockholders that its diversion controls were sound. The annual report stated:
[W]e are deeply committed to diversion control efforts, have sophisticated systems in place to identify orders placed warranting further review to determine if they are suspicious (including through the use of data analytics), and engage in significant due diligence and ongoing monitoring of customers.
Compl. ¶ 295.
In January 2018, after AmerisourceBergen failed to respond to a records request, the State of Delaware filed a complaint alleging that AmerisourceBergen “routinely and continuously violated [Delaware] laws and regulations” concerning the distribution of opioids. Id. ¶ 250. In February, the Cherokee Nation filed a complaint against AmerisourceBergen for having fueled the opioid crisis in Oklahoma. By this point, AmerisourceBergen faced 840 cases in state and federal courts, as well as investigations by the Department of Justice and by United States Attorneys’ Offices in New Jersey, New York, Colorado, and West Virginia.
Management staunchly defended the Company‘s practices. When testifying in May 2018, before the House Committee, the Company‘s Chairman, President, and CEO, Steven Collis, denied that AmerisourceBergen had contributed to the nation‘s opioid epidemic and maintained that the Company‘s order management program was fully compliant with law.
Two months later, in July 2018, Senator McCaskill published a report titled Fueling an Epidemic, Report Three: A Flood of 1.6 Billion Doses of Opioids into Missouri and the Need for Stronger DEA Enforcement. The Senate report concluded that AmerisourceBergen, McKesson, and Cardinal Health consistently failed to meet their reporting obligations regarding suspicious orders. The report observed that AmerisourceBergen was the most egregious of the three and reported suspicious orders far less frequently than its competitors. Between 2012 and 2017, AmerisourceBergen shipped approximately 650 million dosage units to Missouri customers and reported only 224 orders as suspicious. McKesson reported seventy-five times more suspicious orders on
In August 2018, Zimmerman gave a deposition in which he testified that although he met with the Audit Committee quarterly, he did not regularly provide updates on diversion controls. He also admitted that his department did not perform periodic, unexpected audits of the Company‘s independent pharmacy customers, even the easily identifiable and relatively small groups of pharmacies that consistently ordered the highest volumes of opioids.
In December 2018, the House Committee released a report titled Red Flags and Warning Signs Ignored: Opioid Distribution and Enforcement Concerns in West Virginia. The report found that AmerisourceBergen, McKesson, and Cardinal Health failed to address suspicious order monitoring in West Virginia. It concluded that after the 2007 Settlement with the DEA, AmerisourceBergen initially identified and halted suspicious orders from West Virginia, but that beginning in 2013, AmerisourceBergen‘s reporting of suspicious orders declined significantly from a high of 792 orders in 2013 to a low of only three orders in 2016. The report inferred that the trend for AmerisourceBergen‘s reporting of suspicious orders in West Virginia reflected a broader nationwide decline, because on a per-capita basis, West Virginia had the second-highest number of suspicious orders reported to the DEA by AmerisourceBergen of all states. Stated differently, in other states AmerisourceBergen was reporting fewer suspicious orders on a per-capita basis. See Majority Staff of H. Comm. on Energy & Com., Red Flags and Warning Signs Ignored:
The House Committee report concluded that AmerisourceBergen was worse than its competitors when it came to reporting suspicious orders to the DEA. Between 2007 and 2017, McKesson reported more than 10,000 suspicious orders for West Virginia customers. AmerisourceBergen only reported 2,000 suspicious orders during the same period. Id. at 16.
The House Committee report provided examples of how the Independent Pharmacy Strategy and the “light touch” approach operated in practice. For example, in 2011, AmerisourceBergen approved Westside Pharmacy as a new customer even though two of the six prescribing “Pain Doctors” were located substantial distances away from the pharmacy. AmerisourceBergen did not conduct any investigation into why those doctors were using Westside Pharmacy to fill their prescriptions. AmerisourceBergen stopped supplying Westside Pharmacy with opioids in 2012, then approved a new customer application for Westside Pharmacy in January 2016, without considering the pharmacy‘s prior history with the Company. AmerisourceBergen also did not consult public news reports that contained red flags about the prescribing physicians. Id. at 19-20.
AmerisourceBergen‘s order reporting statistics for 2018 resembled its numbers for 2015, 2016, and 2017. AmerisourceBergen received 26,520,195 opioid orders. The Company flagged 75,431 for examination, representing a rate of 0.284%. The Company determined that only 489 orders were actually suspicious, reflecting a rate of 0.0018% of total orders and 0.6% of flagged orders.
K. 2019: Still More Red Flags
In February 2019, the board received a report detailing over 1,600 federal cases that had been consolidated in a multidistrict litigation before the Northern District of Ohio (the “Opioid MDL“), numerous cases pending in state courts, an investigation being undertaken by a coalition of state attorneys general, and subpoenas from numerous United States Attorneys’ offices. The Attorney General for the State of Florida had filed suit in November 2018, and the Attorney General for the State of Georgia had filed suit in January 2019. The directors also were informed that the United States Attorney‘s Office in the District of New Jersey was opening a criminal investigation into the Company.
The Company‘s report on Form 10-Q for the quarter ending January 30, 2019, included disclosures regarding the litigation facing the Company. It noted that AmerisourceBergen was engaged in settlement discussions with the United States Attorney for the District of New Jersey and stated:
[T]he Company continued to receive additional subpoenas from the USAO-NJ that expanded the scope of the previous subpoenas, asking about the Company‘s programs from 2013 through the present. Due to this increase in scope, any previous monetary offers made by the Company are suspended and any settlement discussions are now preliminary and incomplete. The Company has concluded, and we concur, that a loss in this matter is reasonably possible in accordance with ASC 450-20, Contingencies- Loss Contingences; however, the Company is unable to reasonably estimate a range of possible loss.
Compl. ¶ 256 (formatting omitted).
In May 2019, the plaintiffs served a demand for books and records on AmerisourceBergen. The plaintiffs explained that they sought to investigate whether the Company‘s directors and officers had committed mismanagement or breached their fiduciary duties in connection with the distribution of opioids, and they described AmerisourceBergen‘s role in the opioid crisis and the avalanche of legal issues facing the Company. Astoundingly, AmerisourceBergen rejected the demand in its entirety, contending that the demand did not state a proper purpose or provide a credible basis to suspect wrongdoing. Over the next two years, the plaintiffs pursued their books-and-records action, prevailing first before this court and then on appeal. See AmerisourceBergen Corp. v. Lebanon Cnty. Empls.’ Ret. Fund, 243 A.3d 417, 422 (Del. 2020) (affirming 220 Decision).
On October 21, 2019, on the eve of trial for one of the bellwether cases in the Opioid MDL, AmerisourceBergen, McKesson, and Cardinal Health settled for a payment of $215 million.
During 2019, more plaintiffs brought claims against the Company. Cabell County and the City of Huntington in West Virginia filed a joint complaint against AmerisourceBergen and other major opioid distributors. The State of Tennessee and the State of Michigan also filed lawsuits.
AmerisourceBergen‘s order reporting statistics for 2019 resembled its numbers for 2015, 2016, 2017, and 2018, albeit with slight increases in the numbers of orders flagged
In its annual report on Form 10-K for the fiscal year ending September 30, 2019, AmerisourceBergen repeated its disclosure regarding the quality of its diversion control program.
L. 2021: The Settlements
In 2020, AmerisourceBergen continued to face an onslaught of additional opioid litigation. AmerisourceBergen‘s annual report on Form 10-K for the fiscal year ending September 30, 2020, again reassured stockholders about the quality of its diversion control program.
In the summer of 2021, AmerisourceBergen, McKesson, and Cardinal Health faced two significant trials, one in West Virginia and one in New York. Before the New York trial concluded, the defendants offered a global settlement worth $21 billion to resolve all claims by the states and localities.
On July 20, 2021, AmerisourceBergen, Cardinal Health, McKesson, and Johnson & Johnson agreed to settle the New York action for $1.18 billion. They simultaneously reached an agreement with various other states and localities on a global settlement involving a payment of $26 billion (the “2021 Settlement“). AmerisourceBergen agreed to pay approximately $6.4 billion over eighteen years.
In return for this package of relief, AmerisourceBergen and the individual defendants received expansive releases from liability. The plaintiffs view the corporate governance measures as steps that the defendants could and should have taken years before, but which they saved to use as settlement currency. Id. at 35 n.118.
As of January 2021, anticipated opioid settlements had caused the Company to suffer an operating loss of $5.135 billion (approximately $16.65 per share). Despite the massive harm to AmerisourceBergen, the directors approved a raise of $14.3 million for Collis as CEO, reflecting an increase of 26%. Id. at 35-36.
II. LEGAL ANALYSIS
The defendants have moved to dismiss the complaint under
For a court to grant a
Jan. 21, 1993) (“[W]here, as here, plaintiff‘s pleading shows on its face that if the applicable statute were applied, the claim asserted would be time-barred, then it is plaintiff‘s burden to plead facts which could support a conclusion that, in the circumstances, the running of the statute was tolled.“). The authorities do not support the assertion that once a plaintiff has pled facts that could support the application of a tolling doctrine, the plaintiff does not receive the benefit of pleading-stage inferences that would support the tolling doctrine‘s application. Nor does the Pettinaro decision explain why the
The real difference seems to be between Delaware‘s fact-based version of notice pleading under
A. The Framework For Analyzing Timeliness
There are two conceptual frameworks for analyzing timeliness: the statute of limitations and the doctrine of laches. See Whittington v. Dragon Gp., L.L.C., 991 A.2d 1, 7 (Del. 2009) (“Both the doctrine of laches and statutes of limitations function as time bars to lawsuits.“). Depending on the nature of the claim and the relief requested, a court of equity may apply either doctrine.
When a plaintiff has advanced a legal claim and seeks a form of relief that is available from a court at law, such as monetary damages, then the court will apply the statute of limitations in the same manner as a law court. Perkins v. Cartmell, 1845 WL 493 at *5 (Del. June 1845). Otherwise, a plaintiff could “be placed in a potentially better position to seek to avoid a statute of limitations than if she had filed in a Delaware court of law by invoking the more flexible doctrine of laches.” Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 976 (Del. Ch. 2016). For a legal claim seeking legal relief, a plaintiff should not be able to end run the statute of limitations by finding a basis for jurisdiction in chancery. BioVeris Corp. v. Meso Scale Diagnostics, LLC, 2017 WL 5035530, at *5 (Del. Ch. Nov. 2, 2017), aff‘d, 2019 WL 244619 (Del. Jan. 17, 2019) (TABLE).
If a plaintiff has presented a court of equity with an equitable claim or if the plaintiff has sought equitable relief, then the court will apply the doctrine of laches. 2 Donald J.
In this case, the plaintiffs have asserted claims for breach of fiduciary duty, which is an equitable tort.8 The claim sounds in equity, so the doctrine of laches applies.
If a plaintiff has presented a court of equity with an equitable claim and only seeks money damages, then a modified form of laches applies. U.S. Cellular Inv. Co. of Allentown v. Bell Atl. Mobile Sys., Inc., 677 A.2d 497, 502 (Del. 1996). In this setting, “[w]here a plaintiff seeks a legal remedy in a court of equity and a statute of limitations exists for an analogous action at law, the statutory period may create a presumptive time period for application of laches to bar a claim.” Id.
B. Unreasonable Delay
The first element of the laches analysis is whether a plaintiff has delayed unreasonably in bringing the claim. Because the plaintiffs seek money damages, the court
A threshold issue challenge is to identify a statutory period for a comparable claim. Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004). For claims for breach of fiduciary duty that step is easy, because this court regularly looks to
Having identified a statutory period, the court must determine when the claim accrued, because the limitations period is calculated from that point of claim accrual. Wal-Mart, 860 A.2d at 319. After that, the court must determine whether any tolling doctrines could extend the statute of limitations. Id. The result is the analogous time period that forms the laches baseline.
1. The Time Of Accrual
“In addressing when an action is time-barred, a necessary first step in the analysis is determining the time when the action accrued.” U.S. Cellular, 677 A.2d at 503; accord Scharf v. Edgcomb Corp., 864 A.2d 909, 920 (Del. 2004) (“[I]t is imperative to identify a date certain when any statute of limitations begins to run.“). “[A]ny period of limitation is utterly meaningless without specification of the event that starts it running. As a practical
“The statute of limitations begins to run at the time that the cause of action accrues . . . .” Largo Legacy Gp., LLC v. Charles, 2021 WL 2692426, at *9 (Del. Ch. June 30, 2021) (quoting Tyson Foods, 919 A.2d at 584). Different jurisdictions use different rules to determine when a cause of action accrues.
Some states accrue a cause of action when damages have been suffered or are ascertainable. Other states accrue a cause of action at the time of loss. Delaware, by contrast, declined to adopt these or other alternatives. Instead, Delaware is an occurrence rule jurisdiction, meaning a cause of action accrues at the time of the wrongful act, even if the plaintiff is ignorant of the cause of action.
ISN Software Corp. v. Richards, Layton & Finger, P.A., 226 A.3d 727, 732 (Del. 2020) (cleaned up).
“The ‘wrongful act’ is a general concept that varies depending on the nature of the claim at issue.” Certainteed Corp. v. Celotex Corp., 2005 WL 217032, *7 (Del. Ch. Jan. 24, 2005). “In Delaware, for contract claims, the wrongful act occurs at the time a contract is breached.” ISN Software Corp., 226 A.3d at 732 (cleaned up). Thus, “the cause of action accrues at the time of breach.” Certainteed, 2005 WL 217032, at *7, quoted in ISN Software Corp., 226 A.3d at 732 n.22. “For tort claims . . . the wrongful act occurs at the time of injury.” Id. at 732 (cleaned up). But the concept of injury for purposes of accrual does not require that a plaintiff have suffered quantifiable damages, even if pleading
As noted previously, a claim for a breach of fiduciary duty is an equitable tort. Under the standard formulation, “[t]he claim has only two formal elements: (i) the existence of a fiduciary duty that the defendant owes to the plaintiff and (ii) a breach of that duty.” Metro Storage Int‘l LLC v. Harron, 275 A.3d 810, 840-41 (Del. Ch. 2022); accord Estate of Eller v. Bartron, 31 A.3d 895, 897 (Del. 2011) (“To establish liability for the breach of a fiduciary duty, a plaintiff must demonstrate that the defendant owed her a fiduciary duty and that the defendant breached it.“). When a fiduciary makes a decision that the plaintiff alleges is wrongful, the decision is the wrongful act.9 Like other types of claims, “[a] claim
Applying this test is straightforward when a fiduciary makes an affirmative decision, such as when a board approves a contract or grants an option. The wrongful act takes place when the decision is made, and any cause of action for breach of fiduciary duty accrues at that point. As Chancellor Allen explained in a case where a plaintiff challenged a decision by an interested board majority to cause the corporation to enter into a contract with its controlling stockholder,
[a]ny such wrong occurred at the time that enforceable legal rights against Seaboard were created. Suit could have been brought immediately thereafter to rescind the contract and for nominal damages which are traditionally available in contract actions. Complete and adequate relief, if justified, could be shaped immediately or at any point thereafter.
Determining a time of accrual is more difficult when the wrongful act is not a singular decision but rather an ongoing series of continual decisions and non-decisions that extend over time. Courts have adopted different approaches depending on different settings. See, e.g., Eric C. Surette, Annotation, Accrual of Claims for Continuing Trespass or Continuing Nuisance for Purposes of Statutory Limitations, 14 A.L.R.7th art. 8 (2016 & Supp); 4 Am. Jur. Trials 441 § 6 (1966).
One approach is to apply the same methodology used for discrete acts and look to the point at which the ongoing series begins. A seminal law review article on limitations periods explains that under this approach, “the period limiting actions to recover for all harm may commence upon the occurrence of the first invasion of the plaintiff‘s rights.”
Chancellor Allen‘s decision in Seaboard can be interpreted as applying this approach. The interested contract concerned “a ten year time charter of seven vessels” which required the company to pay substantial management fees and other sums over the ten-year period. 625 A.2d at 270. The corporation and its controller entered into the contract in 1986, but the plaintiff did not sue until 1990. Chancellor Allen rejected the plaintiff‘s contention that the approval of the contract created an ongoing wrong that lasted for all ten years of the contracting period. He reasoned that “the only liability matter to be litigated involves defendants’ 1986 actions in authorizing the creation of these contract rights and liabilities.” Id. at 1036. The cause of action accrued at the time of that distinct act. The next ten years involved the implementation of the contract and the possible manifestation of damages, but not an ongoing wrongful act or a series of wrongful acts.
A second approach aggregates into a single unit “a series of related and assertedly wrongful acts, decisions, or failures to act (each of which may or may not be sufficient on its own to form the basis for a separate claim) occurring both within and outside of the limitations period prior to suit.” Graham, supra, at 280. Under the aggregation approach, the limitations period does not commence until the defendant ceases his wrongful conduct, because as long as the harm is ongoing, the cause of action is not yet complete. Developments, supra, at 1205.
Designating a cause of action as a continuing wrong has significant implications for liability and damages, because it means that a court can impose liability, and a plaintiff can recover damages for the entire period during which the continuing wrong took place, including for periods that plainly preceded the applicable limitations period. Graham, supra, at 280-81. By contrast, under the discrete act approach, if the course of conduct began outside the limitations period, then the plaintiff cannot recover at all, even if the discrete act resulted in damage that manifests itself within the limitations period. See 54 C.J.S. Limitations of Actions § 279, Westlaw (database updated Nov. 2022).
A plaintiff alleging a [continuous] hostile work environment can recover for all injurious manifestations of that environment, regardless of when they occurred, whether they would be actionable if sued upon individually, and when the plaintiff discovered the essential facts supporting his or her claim, provided that the same hostile environment persisted up into the limitations period prior to the filing of an administrative charge.
Graham, supra, at 281.
This court applied the continuing wrong doctrine to a claim for breach of fiduciary duty in Frederick Hsu Living Trust v. ODN Holding Corp., 2017 WL 1437308 (Del. Ch. Apr. 14, 2017). The complaint supported a reasonable inference that between 2011 and 2015, a private equity firm and its conflicted representatives on the board of one of its portfolio companies caused the portfolio company to sell off its assets to create a pool of cash that the company would be forced to use to redeem the preferred stock held by the private equity firm. The defendants sought to treat each sale of an asset as a separate transaction to which a separate limitations period would apply, resulting in the complaint
A third approach takes ongoing conduct and “dissects [the] misbehavior, instead of aggregating it.” Graham, supra, at 281. It thus “regards the perpetuation of, or (in some cases) failure to redress prior misconduct as wrongful and actionable in its own right, giving rise to a series of separate and fresh claims accruing within the limitations period on a day-by-day, act-by-act, or similarly parsed basis.” Id. Under this approach, “each
Writing while as a member of this court, then-Vice Chancellor Strine applied a version of the separate accrual doctrine in Teachers’ Retirement System of Louisiana v. Aidinoff, 900 A.2d 654 (Del. Ch. 2006). Stockholder plaintiffs sued derivatively on behalf of American International Group, Inc. (AIG) to invalidate and recover damages based on various managing general agent agreements between AIG and entities controlled by its CEO. The defendants argued that the agreements had been put in place thirty years earlier
Applying the separate accrual theory has important implications for liability and damages. The plaintiff can prove liability and recover for acts that occurred during the limitations period, even if other aspects of the ongoing conduct occurred outside of the limitations period. See ODN Hldg., 2017 WL 1437308, at *43; Seaboard, 625 A.2d at 1035-36; Graham, supra, at 282.
Claims of copyright infringement provide the paradigmatic example of this approach. Acts of infringement that are substantially similar can span an extended period, but copyright law imposes a three-year statute of limitations. See
Ongoing breaches of fiduciary duty under the Employment Retirement Income Security Act (ERISA) are also governed by the separate accrual approach.13 In an illustrative decision, the United States District Court for the Southern District of New York considered a claim alleging that the fiduciaries of an employee benefit plan breached their fiduciary duties by failing to divest from improper investments in individual life insurance policies. Buccino v. Cont‘l Assur. Co., 578 F. Supp. 1518, 1521 (S.D.N.Y. 1983). The court rejected the defendants’ argument that the claim was time barred because the initial decision occurred outside the limitations period. Id. at 1520-21. The court reasoned:
The flaw in defendants’ argument is that as Fund fiduciaries they were under a continuing obligation to advise the Fund to divest itself of unlawful or imprudent investments. Their failure to do so gave rise to a new cause of action each time the Fund was injured by its continued possession of individual policies, that is, each time it made a premium payment.
Id. at 1521. Consistent with the separate accrual rule, the court limited the trustees’ liability to the harm suffered within the limitations period.14
When deciding on the accrual method for a particular claim, commentators recommend considering the gravamen of the claim and the nature of the harm, the accrual method‘s ability to maximize the equities and efficiencies of litigation, and the extent to which the method appropriately balances the policy considerations associated with statutes of limitations.15 On one side of the ledger are considerations associated with finality,
a. The Red-Flags Theory
One possibility would be to use the discrete act approach for the Red-Flags Theory. That approach makes the most sense when (i) the gravamen of the action involves a finite quantum of conduct that causes all of the harm which may result, such that the continuation or repetition of the act will not increase the plaintiff‘s damages, and (ii) the initial impact of the act provides the potential plaintiff with both knowledge of the conduct and an incentive to sue. See Developments, supra, at 1205. When a claim has those features, the discrete act approach gives a plaintiff an incentive to proceed promptly by filing a single suit that can address all of the harm resulting from the discrete act. By contrast, either a continuing wrong or a separate accrual approach makes more sense when it is difficult to identify a clear starting point for a claim, and the harm develops gradually over time. Id. at 1207.
ignored “red flags” indicating misconduct in defiance of their duties. A claim that an audit committee or board had notice of serious misconduct and simply failed to investigate, for example, would survive a motion to dismiss, even if the committee or board was well constituted and was otherwise functioning.
David B. Shaev Profit Sharing Acct. v. Armstrong, 2006 WL 391931, at *5 (Del. Ch. Feb. 13, 2006) (footnote omitted).
A Red-Flags Theory thus has two aspects. One involves the initial decision to consciously ignore a particular red flag. The other involves the ongoing series of explicit or implicit decisions to continue consciously ignoring the red flag. Fiduciaries who have committed a knowing failure to act on day one will engage in the same knowing failure on day two and on each day thereafter until they eventually respond to the red flag. A Red-Flags Theory is thus not solely a discrete act; it has an ongoing dimension.
Another feature of a Red-Flags Theory is that there is rarely a single and definitive red flag. Grounds for alarm typically add up over time. Admittedly there sometimes will be a clear and dramatic event, such as an airplane crash, that shines like a beacon and puts directors on notice. See In re Boeing Co. Deriv. Litig., 2021 WL 4059934, at *34 (Del. Ch. Sept. 7, 2021). (“The Lion Air Crash was a red flag about [a new software system] that the Board should have heeded but instead ignored.“). More commonly, the situation evolves.18
The same is true for the harm. Yes, there will be rare cases in which the failure to ignore a clear red flag like an airplane crash leads to immediate harm, such as a second airplane crash and a business shutdown. See Boeing, 2021 WL 4059934, at *17. More commonly, the initial decision to ignore a red flag may have no immediate effect, and meaningful injury may not result until years later. In this case, the harm that AmerisourceBergen suffered escalated over a decade, with AmerisourceBergen bearing litigation costs, suffering reputational damage, and paying out individual settlements along the way before ultimately agreeing to massive settlements in 2021.
Those features make a discrete act approach ill-suited to a Red-Flags Theory. Using a discrete act approach would treat a Red-Flags Theory as if the fiduciaries made a singular decision, ignoring its ongoing dimension. The approach also would treat a Red-Flags Theory as if the singular act of ignoring the first red flag was both easily identifiable to a
A discrete act approach also fares poorly when evaluated from the standpoint of the equities and efficiencies of litigation and the policy considerations associated with limitations periods. To be sure, a discrete act approach is more likely to deliver the benefits of repose to defendants, because it is more likely to result in claims being time-barred. But the discrete act approach achieves these benefits at the cost of providing a fair opportunity for plaintiffs to present their claims.
Ordinarily, a discrete act approach might be expected to encourage the prompt enforcement of claims while conserving judicial and litigant resources by barring stale claims, but those benefits are unlikely for a Red-Flags Theory. The chronic problem in stockholder derivative litigation involves entrepreneurial plaintiffs’ counsel seeking to sue too quickly because of the competitive dynamics involved in gaining control of a case. See La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313, 336 (Del. Ch. 2012) (describing competitive dynamics that lead to fast filing), rev‘d on other grounds, 74 A.3d 612 (Del. 2013). The Delaware courts have consistently dismissed cases where stockholders sued quickly without taking the time to conduct a meaningful investigation. Id. at 343-44. “Put simply, fast-filing generates dismissals.” Id. at 344.
Under a discrete act regime, more plaintiffs are likely to file suit prematurely rather than risk having the limitations period run. That understandable response will generate cases about conceptual harms that may never ripen into meaningful disputes. As a
And there is another problem. The decisions addressing premature complaints are likely to result in dismissals, which under current law have preclusive effect on the ability of any other stockholder to pursue the same or similar claims. See Cal. State Tchrs.’ Ret. Sys. v. Alvarez, 179 A.3d 824, 843-44 (Del. 2018) (holding that Rule 23.1 dismissal had preclusive effect under standard that required a final judgment on the merits); Pyott v. La. Mun. Police Empls.’ Ret. Sys., 74 A.3d 612, 617 (Del. 2013). That outcome undercuts the accountability system of Delaware law. Meanwhile, because the premature lawsuits are unlikely ever to reach the merits, the potential benefits from resolving cases while evidence is fresh never arise. Instead, premature lawsuits are likely to increase the number of pleading-stage false negatives, resulting in preclusive dismissals in situations where a complaint filed later and after greater diligence could demonstrate the need for post-pleading-stage investigation.
Requiring a plaintiff to file suit within the limited period of time tied to an initial wrongful act makes sense for purposes of a discrete act. When the wrongdoing is ongoing, cutting off the accountability mechanism allows the wrongdoing to continue. Delaware should not be in the business of facilitating ongoing wrongdoing, suggesting that the discrete act approach should not be the law for a Red-Flags Claim.
That conclusion leads to the next possibility, which would be to apply the continuing wrong approach and treat a Red-Flags Theory as viable until the fiduciary takes action to
From the standpoint of the gravamen of the claim, the continuing wrong approach presents the mirror image of the discrete act approach. The continuing wrong approach affords full significance to the ongoing nature of the decision to ignore red flags, but de-emphasizes the reality that the ongoing act started at some point. It thus fits no better than the discrete act approach.
The continuing wrong approach does better than the discrete act approach in accommodating the origins and nature of the harm. Using a continuing wrong approach acknowledges that it is difficult for an outsider to determine when the first red flag is ignored. It also acknowledges that the harm from ignoring red flags is likely to grow over time.
In terms of the equities and efficiencies of litigation and the policy considerations associated with limitations periods, the continuing wrong approach generates a range of benefits and detriments. Most notably, the approach does not deliver the benefits of repose to defendants until the ongoing conduct stops. It thus opens the door to the potential litigation of stale claims and a greater risk of erroneous results as memories fade and evidence is lost. Counterbalancing those effects are the benefits of avoiding an additional incentive for the filing of premature lawsuits. On the margin, using the approach could lead to additional litigation over events long past, with concomitant burdens on the parties and the courts.
In terms of the gravamen of the claim, the separate accrual approach recognizes that a Red-Flags Theory has two dimensions. The wrong began at some point, but also persists until the fiduciaries correct it. The ability of a board to take action to end a red flag scenario makes the situation analogous to Aidinoff, where the board had the option each year to terminate the offending contracts. The separate accrual approach acknowledges both aspects of the claim.
The separate accrual approach also accommodates the difficulty in identifying the accrual of a claim from outside the organization and the nature of the harm. The separate accrual approach does not require a plaintiff to sue quickly and potentially prematurely. Once a corporate trauma has occurred, a plaintiff can sue on the corporation‘s behalf for the harm that the corporation suffered during the actionable period leading up to the lawsuit. When a corporation has suffered a trauma, the actionable period should encompass the bulk of the harm. Unlike the discrete act approach, there is no risk that an early point of accrual will make the wrongdoing non-actionable in its entirety. And unlike with the continuing wrong approach, there is no risk that the damages figure can extend back across time to the earliest possible act.
In terms of equities, efficiencies, and policy considerations, the separate accrual approach strikes an appropriate balance by respecting the important interests served by limitations periods while preserving a litigation vehicle that can provide accountability and generate compensation for injuries. The separate accrual method provides a measure of
This decision therefore concludes that to determine the time at which the Red-Flags Claim accrued, the proper method is the separate accrual approach.
b. The Massey Theory
Similar considerations apply to the Massey Theory. The principal difference is that in a Red-Flags Claim, the fiduciary makes a conscious decision to ignore red flags. In a Massey Claim, the fiduciary makes a conscious decision to prioritize profit over legal compliance.
The analysis of the gravamen of the claim and the nature of the harm proceeds along similar lines. Like a Red-Flags Theory, a Massey Theory combines an initial wrongful act with the ongoing continuation of that act. The initial wrongful act underlying a Massey Claim is more prominent and serious, because the plaintiff must allege that the defendants made a specific decision to pursue profit over legal compliance. But the wrongful act does
A Massey Theory also resembles a Red-Flags Theory in that it may be difficult to identify a specific point at which the wrongful decision was made. Corporate fraud and illegality can involve deliberateness from the outset, but it often manifests as a classic slippery-slope problem, where what eventually manifests as wrongdoing “starts small and innocently and then builds.” Donald. C. Langevoort, Selling Hope, Selling Risk: Corporations, Wall Street, and the Dilemmas of Investor Protection, 36 (2016). What results is
a process that begins with some period of time during which there is no perception of wrongfulness that needs rationalization, which only later turns into awareness that something is amiss. Precisely because of the now-deep commitment, the cognitive pressure to justify deception at this point is stronger than it would be at the outset, and self-serving inference goes to work . . . . The third stage comes late in the process: the realization that one‘s rationalizations were just that.
Id. at 37.
This case presents that possibility. The plaintiffs argue that management and the board adopted a business plan that prioritized profits over compliance based on decisions they made over a five-year period, starting with the Independent Pharmacy Strategy, continuing with the Walgreens alliance, and culminating in the adoption of the Revised OMP, with disregard for regulatory compliance and order-diversion monitoring along the way. The plaintiffs allege, as they must, that the wrongful business strategy started with the Independent Pharmacy Strategy, and they view the Revised OMP as definitive evidence
As with a Red-Flags Theory, the evolving nature of the Massey Theory makes it difficult to identify from the outside when the claim accrues for filing purposes. And as with a Red-Flags Theory, the damages that a Massey Claim generates are likely to increase over time. Indeed, with a Massey Claim, the business plan initially may generate positive results, precisely because the plan prioritizes profit over legal compliance. Only as the problems associated with legal noncompliance accumulate will the negative consequences become apparent, eventually bursting forth as a corporate trauma.
From the standpoint of the gravamen of the claim and the nature of the harm, the Red-Flags Theory and the Massey Theory operate similarly. Just as those considerations support rejecting the discrete act approach for a Red-Flags Theory, they counsel similarly against using the discrete act approach for a Massey Theory.
The analysis of the equities and efficiencies of litigation and the policies associated with limitations periods is also similar. Even more so than with a Red-Flags Theory, a discrete act approach would be likely to fixate on the initial decision to adopt an illegal business plan and risk insulating the ongoing pursuit of that plan from a challenge. Such
The real question for the Massey Theory is whether there is an additional degree of culpability associated with the affirmative adoption of a business plan that prioritizes profit over legal compliance such that the continuing wrong approach should apply rather than the separate accrual approach. Notwithstanding Delaware authorities equating action and conscious inaction,19 humans intuitively distinguish between the two and associate greater culpability with an affirmative act rather than a conscious decision not to act.20
Assume that a board and management team made a conscious decision to violate the
Whether to apply the continuing wrong approach rather than the separate accrual approach is thus a fundamentally difficult policy question that would take lots of pages to explore and resolve. In terms of practical outcomes for litigation, the real difference is in the magnitude of damages. Nominally, there are differences for both liability and damages, because the continuing wrong approach permits a plaintiff to prove liability and recover damages for the entire period that the illegal business plan was in place, while the separate accrual approach limits liability and damages to the actionable period. But the factual inquiry for the separate accrual approach often will need to examine earlier periods to determine what the directors and officers knew and either continued doing or permitted to persist during the actionable period. Because of the nature of the factual inquiry, the choice between the two accrual rules principally affects damages.
At a minimum, the separate accrual approach applies to the Massey Claim. As discussed below, that conclusion is sufficient to render the claim timely. This decision therefore need not confront the additional question of whether the continuing wrong approach should apply to this subspecies of claim. At the pleading stage, it is sufficient to measure the time at which the Massey Claim accrued using the separate accrual approach.
2. When The Plaintiff Began To Pursue The Claim
Having decided to apply the separate accrual methodology, I must now determine the period of time during which the ongoing conduct is actionable. In this case, the plaintiffs filed this plenary action on December 30, 2021, so the actionable period would start on December 30, 2018. But for a derivative action in which the plaintiff has sought books and records, the court can calculate the actionable period using an earlier date tied to the plaintiff‘s diligent pursuit of its informational rights. Because the laches analysis is flexible and does not turn on statutory standing under
These principles enable a court to take into account a plaintiff‘s diligent use of
Justice Jacobs subsequently applied these principles while serving as a Vice Chancellor. He rejected a timeliness defense by noting that the plaintiffs had pursued a
[i]t would be perverse if the rule were otherwise. On at least two occasions the Supreme Court has expressly encouraged potential derivative plaintiffs to utilize the ‘tools at hand’ to obtain information bearing on the subject of their claims, in order to avoid an unseemly race to the courthouse to file ‘a plethora of superficial complaints that could not be sustained.’ To accept the defendants’ time-bar argument would penalize, not encourage, the use of those important tools.”
Technicorp, 2000 WL 713750, at *9 n.26 (quoting Rales v. Blasband, 634 A.2d 927, 932–35, n.10 (1993)). Even in 2000, the estimate of only two exhortations missed low, and in the two decades since then, the calls for stockholders to use
The applicable three-year statute of limitations was tolled, however, during the pendency of the plaintiff‘s
Section 220 action. The final opinion in the 220 action was entered on May 16, 2006, and the plaintiff filed her complaint on September 6, 2006, less than 120 days later. Given the time between the entry of the opinion and the actual production of the demanded books and records, and affording the plaintiff time to evaluate any potential claims in light of what was produced, the short window between the closing of the 220 action and the filing of the original complaint in this action is reasonable, and the statute is likewise tolled during that period. The plaintiff‘s claims are therefore time-barred as to any transactions occurring more than three years prior to the date the 220 action was instituted, i.e., prior to August 31, 2001.
Id. at *5 (cleaned up).
The doctrine of laches is flexible and requires case-specific analysis. For laches, a rule that turned on the filing of a
A stockholder therefore should receive credit for serving a demand and obtaining books and records without the need for an enforcement action. But that does not mean that simply sending a demand will yield a benefit in every case. The stockholder plaintiff must
In this case, the plaintiffs served their books-and-records demand on May 21, 2019. On June 7, 2019, AmerisourceBergen refused the demand, claiming incomprehensibly that the stockholders lacked a credible basis to suspect corporate wrongdoing and therefore did not have a proper purpose for obtaining any books and records. After failed efforts to negotiate, the plaintiffs filed their books-and-records action on July 8, 2019. Lebanon Cnty. Empls. Ret. Fund vs. AmerisourceBergen Corp., C.A. No. 2019-0527, Dkt. 1 (Del. Ch. July 8, 2019). That litigation turned into a
The plaintiffs’ diligent efforts could support using May 21, 2019, as a starting date for calculating the actionable period, which would cause the actionable period to reach back to May 21, 2016. But the plaintiffs do not seek that outcome. They are content to use October 20, 2019, as the starting date. Using that date, the actionable period begins on October 20, 2016, and ends on December 30, 2022.
The next step in the analysis is to consider tolling doctrines. Delaware has many doctrines that can toll a statute of limitations. Some, such as infancy and incapacity, rarely play a role in corporate and commercial disputes. Others, such as inherently unknowable injuries, fraudulent concealment, and equitable tolling, make frequent appearances.
Tolling doctrines operate in a straightforward manner when a court is applying the discrete act approach and the plaintiff has sued outside the presumptive limitations period. The court simply asks whether there are grounds to permit the plaintiff to sue over the discrete act notwithstanding the expiration of the limitations period.
Tolling doctrines have limited effect when a court is applying a continuing wrong approach. Under that doctrine, the cause of action does not accrue until the conduct ceases. As long as a part of the continuing wrong takes place within the limitations period, then the plaintiff can prove liability and damages for the entire time that the continuing wrong was ongoing, regardless of whether the limitations period would have run if calculated from when the continuing wrong began. If the conduct remains ongoing at the time suit is filed, then tolling doctrines have no role to play. The fact that the conduct remains ongoing renders the entire continuing wrong actionable. See, e.g., Bodner v. Banque Paribas, 114 F. Supp. 2d 117, 134–35 (E.D.N.Y. 2000). See generally Graham, supra, at 272.
Tolling doctrines still can have some effect under a continuing wrong regime. Envision a scenario in which the continuing wrong persisted for some time then stopped. For the continuing wrong doctrine to apply, at least part of the ongoing wrongful conduct must have occurred within the limitations period, so with the cessation of the act, the
Under a separate accrual system, tolling doctrines have two roles to play. As with the continuing wrong approach, once the ongoing action has stopped, then the statute of limitations begins to run. If the plaintiff does not file suit until after the limitations period has run as measured from the cessation of the wrongful activity, then a plaintiff can invoke tolling doctrines to demonstrate that the suit is timely. But tolling doctrines also play a second role, similar to the role they have in a discrete act system. The separate accrual system only treats the portion of the ongoing conduct that takes place within the limitations period as actionable. As with the discrete act system, a challenge to the portion of the ongoing conduct that precedes the actionable period is untimely. As with the discrete act system, a plaintiff can use tolling doctrines to demonstrate that a suit over earlier acts is timely. As a practical matter, the plaintiff can use tolling doctrines to extend the actionable period so that it reaches further back in time.
Under Delaware law, inquiry notice universally limits tolling doctrines. A plaintiff cannot invoke tolling doctrines to push the timeliness period beyond the point when the plaintiff “was objectively aware, or should have been aware, of facts giving rise to the wrong.” Tyson Foods, 919 A.2d at 585. “Even where a defendant uses every fraudulent device at its disposal to mislead a victim or obfuscate the truth, no sanctuary from the statute will be offered to the dilatory plaintiff who was not or should not have been fooled.” Id. Once the plaintiff is aware of the injury, or should have discovered it in the exercise of
Under a discrete act system, inquiry notice terminates tolling and requires that a plaintiff pursue the action within a reasonable time. Under a continuing wrong system where the wrongful conduct remains ongoing, inquiry notice does not matter, because the continuing nature of the conduct means that the claim has not yet accrued for purposes of the running of the statute. Under a continuing wrong system where the wrongful conduct has stopped and a plaintiff has invoked a tolling doctrine to save an otherwise untimely lawsuit, inquiry notice operates the same way as in a discrete act system and may prevent the plaintiff from relying on the tolling doctrine to make the claim timely.
Under a separate accrual system, inquiry notice has two effects. If the ongoing conduct has stopped and a plaintiff has invoked a tolling doctrine to save an otherwise untimely lawsuit, inquiry notice operates the same way as in a discrete act system and may prevent the plaintiff from relying on a tolling doctrine to make the claim timely. If the plaintiff has sought to use a tolling doctrine to extend the actionable period and to show that a suit over earlier acts is timely, then inquiry notice may cut off the ability of the plaintiff to extend the actionable period. But the claim is not foreclosed entirely, because the plaintiff can still pursue claims that fall within the non-extended actionable period.
For example, assume that at Time Zero, the defendants implement an illegal business plan that prioritizes profit over compliance, giving rise to a Massey Claim. The defendants continue to pursue the business plan for ten years, at which point they adopt a
If the plaintiff spent a year diligently pursuing books and records before filing suit, then the actionable period extends to Year 6.
If the plaintiff successfully alleges that the defendants fraudulently concealed the wrongful business strategy at all times, then the actionable period extends back to Time Zero.
In this case, the plaintiffs invoke fraudulent concealment and equitable tolling. Neither provides a basis for expanding the actionable period.23
The doctrine of fraudulent concealment tolls the statute of limitations and extends the time for suit under the doctrine of laches “when a defendant has fraudulently concealed from a plaintiff the facts necessary to put him on notice of the truth.” Tyson Foods, 919 A.2d at 585. Tolling ends when the plaintiff is placed on inquiry notice, in the sense that the plaintiff knew or should have known about the wrongful act.24
“Fraudulent concealment requires that something affirmative be done by a defendant, some ‘actual artifice’ which prevents a plaintiff from gaining knowledge of the facts, or some misrepresentation which is intended to put the plaintiff off the trail of inquiry.” Ewing, 520 A.2d at 667. Ignorance alone does not toll the statute. Id.; Halpern, 313 A.2d at 143. “The affirmative act requirement distinguishes fraudulent concealment from the doctrine of inherently unknowable injuries.”25
“The rationale for this doctrine is to disallow a defendant from taking advantage of his own wrong in preventing a plaintiff from a timely suit in the courts.” Allen v. Layton, 235 A.2d 261, 265 (Del. Super. Ct. 1967), aff‘d, 246 A.2d 794 (Del. 1968).
[I]f one by fraud conceals the fact of a right of action, it is not ingrafting an exception on the statute to say that he is not protected thereby, but it is simply saying that he never was within the statute. since its protection was never designed for such as he. By fraud he has put himself outside of its pale. Whether this be taken as an exception, or only a limitation of the statute, it rests upon sound reason and just policy.
Lieberman v. First Nat‘l Bank of Wilm., 45 A. 901, 903 (Del. 1900).
When a plaintiff relies on fraudulent concealment, the plaintiff must plead the circumstances supporting the doctrine with particularity sufficient to advise the defendant of the basis for the claim. Ct. Ch. R. 9(b); Halpern, 313 A.2d at 143. Simply alleging that a defendant engaged in fraudulent concealment is insufficient. As with an affirmative claim for fraud, once the plaintiff pleads facts with the requisite particularity, the plaintiff is
To assert fraudulent concealment as a tolling doctrine, a plaintiff requires facts supporting an inference of scienter such that the defendant “had actual knowledge of the wrong done and acted affirmatively in concealing the facts.”26 Delaware decisions have not clearly stated whether a plaintiff must plead reliance and causation to invoke tolling by fraudulent concealment. One Delaware case asserts that “a plaintiff must allege an affirmative act of ‘actual artifice’ by the defendant that either prevented the plaintiff from gaining knowledge of material facts or led the plaintiff away from the truth.” Tyson Foods, 919 A.2d at 585. By using the verbs “prevented” and “led . . . away,” the decision implies the need for reliance by the plaintiff and causation by the defendant, and one decision has cited Tyson Foods with a parenthetical that describes the case as requiring that a plaintiff plead reliance to support tolling. See Akrout v. Jarkoy, 2018 WL 3361401, at *10 n.80 (Del. Ch. July 10, 2018). Other statements of what a plaintiff must show to plead fraudulent concealment do not require causation or reliance. See, e.g., Lecates v. Hertrich Pontiac
The plaintiffs offer little to support fraudulent concealment. They argue that “[m]ultiple lawsuits describe [AmerisourceBergen‘s] attempts to hide its Board sanctioned practice of prioritizing profits over safety.” Dkt. 28 at 70 (citing Compl. ¶ 119). Paragraph 119 describes a board meeting in March 2012 at which the board approved management‘s plan to expand AmerisourceBergen‘s market share by targeting independent pharmacies. The paragraph does not contain any references about AmerisourceBergen hiding information. There are other paragraphs in the complaint that make generalized references to lawsuits containing descriptions of AmerisourceBergen‘s attempts to hide its wrongdoing, but that is insufficient to support an inference of fraudulent concealment. Perhaps those other complaints contain specific allegations about concealment. The court does not have the other complaints, and the plaintiffs’ complaint does not contain the requisite specific allegations.
The plaintiffs add that “[AmerisourceBergen] falsely assured the public that it was undertaking efforts to comply with its legal obligations and prevented discovery of
alleged AmerisourceBergen made affirmative efforts to conceal its conduct and avoid detection, including by falsely assuring the public, through trade associations or otherwise, that AmerisourceBergen was undertaking efforts to comply with its legal obligations as well as by preventing discovery of statistical data and other information showing the extent of AmerisourceBergen‘s unlawful activities and its impact on the Cherokee Nation.
Compl. ¶ 252. That may be so, but that summary of what the Cherokee Nation alleged is no substitute for the plaintiffs alleging facts supporting an inference that AmerisourceBergen engaged in specific acts designed to fraudulently conceal its actions from them, nor have they explained when the fraudulent acts took place so that the court could consider whether to apply a tolling doctrine. The complaint alleges that the United States District Court for the Eastern District of Oklahoma denied the defendants’ motion to dismiss, but the plaintiffs do not reference any ruling on fraudulent concealment or tolling (which the decision does not appear to contain). See Cherokee Nation v. McKesson Corp., 529 F. Supp. 3d 1225 (E.D. Okla. 2021).
Paragraph 255 also references a complaint that the Attorney General of the State of Georgia filed against AmerisourceBergen and other major opioid distributors and manufacturers in January 2019. The plaintiffs describe the Georgia complaint as alleging that “AmerisourceBergen, among others, made fraudulent misrepresentations, suppressions, and concealments of material facts in order to fraudulently conceal the
The plaintiffs fare better with their allegations about disclosures that appeared in AmerisourceBergen‘s annual reports on Form 10-K starting with the fiscal year ending September 30, 2017. There, AmerisourceBergen represented to stockholders that its anti-diversion controls were sound, stating:
[W]e are deeply committed to diversion control efforts, have sophisticated systems in place to identify orders placed warranting further review to determine if they are suspicious (including through the use of data analytics), and engage in significant due diligence and ongoing monitoring of customers.
Id. ¶ 295. Similar disclosures appear in the Form 10-Ks for subsequent years.
The plaintiffs have alleged particularized facts which support an inference that the disclosure in the Form 10-K for September 30, 2017, was false, which makes that disclosure an actual artifice that would be sufficient to invoke fraudulent concealment for the purpose of extending the actionable period to that date. But that has no effect on the actionable period for purposes of this litigation, because the plaintiffs’ diligent use of
b. Equitable Tolling
“[T]he doctrine of equitable tolling stops the statute from running while a plaintiff has reasonably relied upon the competence and good faith of a fiduciary.” Tyson Foods,
In Seaboard, Chancellor Allen engaged in a lengthy and scholarly discussion of the tolling principle under which a stockholder is entitled to rely on the good faith of directors such that a claim for breach of fiduciary duty would not arise until the stockholder had actual knowledge of the wrong or was placed on inquiry notice. Chancellor Allen explained that “[g]iven the fiduciary duties that the law imposes upon the relationship among those serving as corporate directors, stockholders are entitled to rely on the good faith of the directors when they act with respect to the corporation‘s property or processes.” 625 A.2d at 275. He stressed that “[s]ince trust and good faith are the essence of this relationship, it would be corrosive and contradictory for the law to punish reasonable reliance on that good faith by applying the statute of limitations woodenly or automatically to alleged self-interested violations of trust.” Id. He concluded that reasonable reliance upon the competence and good faith of others who have assumed legal responsibilities towards a plaintiff was sufficient to toll the running of an applicable statute of limitations. Id.
The Seaboard case involved a self-dealing contract between a corporation and its controlling stockholder, and in his discussion of the precedents and their application to the
When this court next applied Seaboard, the court converted the specific application to a general rule. See Litman v. Prudential-Bache Props., Inc., 1994 WL 30529, at *3 (Del. Ch. Jan. 14, 1994), aff‘d, 642 A.2d 837 (Del. 1994) (TABLE). Based on the repeated references to self-dealing in Seaboard, the Litman court reasoned that the fiduciary tolling principle—which the court described as equitable tolling—only applied to cases involving
The limitation of equitable tolling to one subspecies of loyalty violation—self-dealing—does not make sense to me. Loyalty and its subsidiary element of good faith constitute the core fiduciary principle. If fiduciaries act disloyally or in bad faith, but without engaging in self-dealing, it seems to me that equitable tolling should apply.28
The application of equitable tolling in Weiss supports the broader formulation. There, the court considered a challenge to grants of spring-loaded and bullet-dodged
More to the point, while serving as a Vice Chancellor, Chief Justice Strine rejected an argument that equitable tolling “only applies to cases of pure self-dealing.” Am. Int‘l. Gp., 965 A.2d at 812. The plaintiff in that case alleged that an officer had taken steps to fraudulently inflate a corporation‘s balance sheet. Chief Justice Strine reasoned that “[t]o allow fiduciaries who engaged in illegal conduct to wield a limitations defense against stockholders who relied in good faith on those fiduciaries when their disclosures provided no fair inquiry notice of claims would be inequitable.” Id. Under the reasoning of that case, equitable tolling extends to breaches of the duty of loyalty that rest on illegality.
A Massey Claim involves a breach of the duty of loyalty that rests on illegality. Equitable tolling is therefore available for a Massey Claim, even without allegations of pure self-dealing. A Red-Flags Theory requires conscious wrongdoing that amounts to bad faith. Equitable tolling is available for that species of claim as well.
For the Massey Claim, equitable tolling theoretically could enable the plaintiffs to extend the actionable period back to 2010, when they contend that AmerisourceBergen
The defendants point to facts that the plaintiffs have alleged in their complaint about AmerisourceBergen‘s initial difficulties with the DEA and anti-diversion programs in 2007, including the settlement with the DEA over AmerisourceBergen‘s Orlando distribution center and the consent judgment between the DEA and AmerisourceBergen‘s Bellco subsidiary. The plaintiffs have pled those facts to support an inference that the directors knew about the need for anti-diversion controls and the risks inherent in not having a strong anti-diversion program. The plaintiffs are not citing those facts as actionable conduct. To the contrary, the plaintiffs acknowledge that after these events, AmerisourceBergen developed what at the time constituted the industry-standard anti-diversion program.
Between 2010 and 2015, however, problems began to emerge at the Company. The quarterly report on Form 10-Q for the quarter ending December 31, 2012, disclosed that the Company had received a subpoena from the United States Attorney‘s Office for the District of New Jersey and that the Company had been sued by the Attorney General of West Virginia. The Form 10-K for the fiscal year ending September 30, 2013, disclosed a series of legal matters, including a complaint filed by the Attorney General of West Virginia, the subpoenas issued by the United States Attorney for the District of New Jersey,
A reasonable stockholder seeing those disclosures would be concerned about what was happening at the Company. Evidencing that reality, a law firm that is both a fast and frequent flier of derivative actions sent a books-and-records demand to the Company in December 2014 to investigate potential wrongdoing. After obtaining an agreed-upon production of documents, the law firm sent a litigation demand in December 2015, which asked the directors to bring claims against themselves and the management team for breaches of fiduciary duty in connection with their failure to oversee the Company‘s diversion control and order monitoring systems. Ex. 55. As support for an inference of wrongdoing, the demand cited:
- The DEA‘s 2007 suspension of the Company‘s license for the Orlando distribution center.
- The Company‘s public disclosures about receiving subpoenas from various U.S. Attorneys’ Offices.
- A complaint filed by the Attorney General of West Virginia, as well as complaints filed by the Attorneys General of Boone County, West Virginia, and Fulton County, Georgia.
Id. at 3-4. The demand also cited the Company‘s low rate of suspicious order reporting for 2012, which was obtained from documents produced in the books-and-records investigation. Id. at 4.
Under the separate accrual system, inquiry notice does not have that effect. It prevents the plaintiff from relying on tolling doctrines to extend the actionable period, but it does not prevent a plaintiff from suing for the portion of the ongoing wrongful acts and the resulting damages that occurred during the actionable period. Nor does it prevent the actionable period from including additional time on the basis of when the plaintiffs began pursuing their claims by seeking books and records. Here, the plaintiffs can sue for wrongs dating back to October 20, 2016, and can recover damages that the Company suffered during that period.
C. The Issue Of Prejudice
The second dimension of the laches analysis is prejudice to the defendants. “Laches is fundamentally concerned with the prevention of inequity in permitting a claim to be enforced. Inequity for this purpose arises where there occurs some change in the condition or relation of the parties or the property involved in the pending lawsuit.” Wolfe & Pittenger, supra, § 15.07[c][4] at 15-18. The time period that a court determines is
The defendants have not pointed to any prejudice that could render the plaintiffs’ suit untimely. They made a straightforward statute of limitations argument, which this decision has rejected. There are no indications that evidence has been lost. There is no reason to think that the defendants have suffered any other disadvantage in their ability to litigate the case.
If anything, now is the appropriate time to litigate the case. With the 2021 Settlement concluded, the bulk of the harm to the Company has been quantified, and the time has come to consider whether grounds exist to shift responsibility for the harm that the Company has suffered to the individuals who made decisions on its behalf.
D. Other Equitable Considerations
When conducting a laches analysis, a court may take into account “unusual conditions or extraordinary circumstances.”29 This decision has conducted an extensive
E. The Plaintiffs’ Claims Are Timely.
In their final argument, the defendants contend that the plaintiffs’ claims are untimely because no actionable conduct took place within the limitations period. Based on the laches analysis that this decision has conducted, the plaintiffs’ claims are timely.
The factual background describes a litany of events that took place after October 20, 2016, which constitute red flags for purposes of the Red-Flags Theory. The factual background likewise explains that the defendants did not take action to address the Revised
This decision does not address the defendants’ contention that demand is futile because the plaintiffs’ theories do not pose a substantial threat of liability to at least half of the directors in office when suit was filed. This decision assumes for purposes of the timeliness analysis that the plaintiffs have viable claims and only considers whether the plaintiffs pursued them too late. Because the conduct that the plaintiffs challenged continued and intensified during the actionable period, the plaintiffs’ claims are timely.
III. CONCLUSION
The defendants’ motion to dismiss the plaintiffs’ claims as untimely is denied.
92
Notes
625 A.2d at 1035-36 (internal citation omitted).[w]here a continuing wrong acts as an answer to the defense of limitations it is typically the case that plaintiff can prove her claim by reference only to actions within the limitations period. Thus, for example, if plaintiff is complaining about a nuisance (a noise for example) emitted by a neighborhood plant for, say five years, plaintiff can prove her claim by proving the elements of the claim which occur daily or weekly or whenever, within the limitations period. It is irrelevant for limitations purposes that these daily or weekly invasions have been going on for years.