Teamsters Local 443 Health Services & Insurance Plan, et al. v. John C. Chou, et al.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE TEAMSTERS LOCAL 443 HEALTH SERVICES & INSURANCE PLAN, ST. PAUL ELECTRICAL CONSTRUCTION PENSION PLAN, ST. PAUL ELECTRICAL CONSTRUCTION WORKERS SUPPLEMENTAL PENSION PLAN (2014 RESTATEMENT), RETIREMENT MEDICAL FUNDING PLAN FOR THE ST. PAUL ELECTRICAL WORKERS and SAN ANTONIO FIRE & POLICE PENSION FUND, Plaintiffs, v. JOHN G. CHOU, STEVEN H. COLLIS, RICHARD W. GOCHNAUER, LON R. GREENBERG, TIM G. GUTTMAN, JANE E. HENNEY, M.D., KATHLEEN W. YLE, MICHAEL J. LONG, and HENRY W. MCGEE, Defendants, –and– AMERISOURCEBERGEN CORPORATION, Nominal Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) C.A. No. 2019-0816-SG ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) MEMORANDUM OPINION Date Submitted: July 12, 2023 Date Decided: November 17, 2023 Gregory V. Varallo and Glenn R. McGillivray, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Ned Weinberger and Mark D. Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; Christine M. Mackintosh and Rebecca A. Musarra, GRANT & EISENHOFER P.A., Wilmington, Delaware; OF COUNSEL: Christopher J. Orrico, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Frank Schirripa, HACH ROSE SCHIRRIPA & CHEVERIE LLP, New York, New York; Nathaniel L. Orenstein and Steven L. Groopman, BERMAN TABACCO, Boston, Massachusetts, Attorneys for Plaintiffs. William M. Lafferty, D. McKinley Measley, and Thomas P. Will, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: F. Joseph Warin, Jonathan M. Phillips, and Courtney M. Brown, GIBSON, DUNN & CRUTCHER LLP, Washington, D.C., Attorneys for the Special Litigation Committee of the Board of Directors for AmerisourceBergen Corporation. GLASSCOCK, Vice Chancellor This is a derivative action, in which the Plaintiff stockholders allege that the board of AmerisourceBergen Corporation (“ABC”, “AmerisourceBergen”, or the “Company”) allowed a division of the Company to act as, in effect, a criminal enterprise. That subsidiary, Medical Initiatives, Inc. d/b/a Oncology Supply Pharmacy Service (“MII” or the “Pharmacy”), repackaged cancer drugs from singledose vials into syringes, for distribution to physicians. The complaint alleged that the Pharmacy was operated in an illegal manner, including by pooling the small amounts left in vials after charging a syringe, and using the resulting product to fill, and sell, extra syringes, in a manner that was illegal and unsanitary. The Defendant Directors’ and Officers’ failures to oversee operations were actionable breaches of fiduciary duties, per the complaint, and led to fines and penalties in settlement of DOJ investigations amounting to hundreds of millions of dollars. On a motion to dismiss by the Defendant Directors, I found the allegations of the complaint, taken as true and with the plaintiff-friendly inferences therefrom, sufficient to state a claim for breach of fiduciary duty; and that the majority of ABC’s board of directors (the “Board”) faced a substantial risk of liability for failure to properly oversee the Pharmacy operations, justifying derivative litigation on the part of the Plaintiff stockholders. Such a situation, of course, is a departure from the paradigm that the assets of a corporation, including litigation assets, are under the control of the directors. 1 Operation of a conflicted board may be restored by empowering a special committee of independent directors. Here, the Board appointed such a committee (the “SLC”), ultimately composed of a single independent fiduciary, to review whether the litigation was in the best interest of ABC. I permitted a stay of litigation to facilitate that review. The resulting report of the SLC paints a different picture from that contained in the complaint. After a thorough review, the SLC concluded that there had been no breach of duty on the part of the majority of the Board, that the litigation was inimical to the corporate weal, and recommended that the matter be dismissed. That does not end my review. Of course, this Court usually defers to the business judgment of directors. Several scenarios exist, however, where pressures on directors, even though technically unconflicted, have the potential to skew their judgment, and in those situations the Court must determine that the directors’ review and resulting exercise of judgment are reasonable.1 One such case is a special committee’s review of derivative litigation, where the directors on the committee are asked to evaluate the potential culpability of fellow board members. The resulting examination by the court of a special committee’s report 1 Vice Chancellor Laster has created a scholarly review of various scenarios invoking intermediate scrutiny of fiduciaries. See In re Columbia Pipeline Grp., Merger Litig., 299 A.3d 393 (Del. Ch. 2023). 2 recommending dismissal is known colloquially as a Zapata review.2 Such a review follows. Plaintiffs argue that the SLC’s work cannot withstand such review, in part, because the report of a single-member committee is inherently suspect. They point out that the independence of such a committee, and the conduct of its investigation, must be “above reproach.” Here, because Plaintiffs purport to find ground to reproach the SLC’s sole member, they contend the motion to dismiss must be denied. The Plaintiffs’ standard is essentially correct, but I reject Plaintiffs’ conclusion. I have considered the facts with which Plaintiffs reproach the SLC member, and find them unpersuasive. I have also considered the scope of the SLC’s examination of the allegations in the complaint, and find it adequate; and the bases for the SLC’s conclusions, which I find reasonable, even under the “gimlet eye”3 with which a single-member committee’s conclusions should be viewed. Accordingly, the motion to dismiss is granted. The facts developed by the SLC, and my reasoning, follow. A word about the factual background is in order. An interested reader will find a walk through the Background section below less of a stroll and more like, say, 2 3 Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). See Chesapeake Corp. v. Shore, 771 A.2d 293, 323 (Del. Ch. 2000). 3 the pilgrimage Way of St. James.4 This detailed statement is justified here, because it informs my review of the reasonableness of the SLC’s recommendation. The reader is forewarned.5 I. FACTUAL BACKGROUND The facts that follow are drawn from the record submitted by the special litigation committee (the “SLC”) and the Plaintiffs, including the special litigation committee’s report (“SLC Report”), the 420 exhibits attached thereto, and the transcript of the deposition taken of the sole SLC member, Dennis M. Nally.6 A. AmerisourceBergen Corporation AmerisourceBergen is a Delaware corporation headquartered in Conshohocken, Pennsylvania.7 The Company was formed on August 29, 2001, after Bergen Brunswig Corporation merged with AmeriSource Health Corporation and subsequently changed its name to AmerisourceBergen Corporation.8 Following the merger and the subsequent yearslong integration process, ABC became the largest I refer to an “interested” reader, because a casual reader, I suspect, will find her faith insufficient to sustain the effort. 5 Readers will quickly discover that the factual treatment below contains a misery of acronyms. I have attempted to define the acronyms repeatedly in text to reduce the mental effort of comprehending the facts here; in a further attempt to reduce the acro-batics required of the reader, I have appended a list of acronyms and their meaning at the end of this Memorandum Opinion, as Exhibit A. 6 See Letter from D. McKinley Measley to Vice Chancellor Glasscock, Ex. A, Dkt. No. 73 (“SLC Report”). Citations in the form of “SLC Report Ex. __” refer to exhibits to the SLC Report. 7 ABC Annual Report on Form 10-K (Nov. 19, 2020), at 1. 8 SLC Report 56–57. 4 4 pharmaceutical distribution or services company in the U.S. dedicated only to the pharmaceutical supply channel.9 As of 2001, AmerisourceBergen operated its pharmaceutical distribution business through wholesale and specialty drug distribution subsidiaries.10 Two subsidiaries, AmerisourceBergen Drug Corporation (“ABDC”) and AmerisourceBergen Specialty Group (“ABSG” or “Specialty Group”), primarily drove ABC’s pharmaceutical distribution and services business.11 ABSG and its subsidiaries served the specialty drug distribution market, including oncology supply.12 1. AmerisourceBergen Specialty Group Prior to the merger, ABSG was relatively decentralized, holding various portfolio companies that primarily operated independently.13 One of ABSG’s portfolio companies was ASD Specialty Healthcare, LLC d/b/a Oncology Supply (“OS”), which was—and still is—an oncology distribution company based in Dothan, Alabama.14 OS distributes chemotherapy and other cancer drugs throughout the United States.15 Another portfolio company owned by ABSG was Medical 9 ABC Annual Report on Form 10-K (Dec. 19, 2003), at 42. SLC Report 57. 11 Id. at 4–5, 57. 12 Id. at 57. 13 ABC Annual Report on Form 10-K (Dec. 28, 2001), at 13. 14 SLC Report 7, 58. Bergen Brunswig acquired OS in 1996. Bergen Brunswig Annual Report on Form 10-K (Dec. 30, 1996), at II-19. 15 SLC Report 58. 10 5 Initiatives, Inc. d/b/a Oncology Supply Pharmacy Service (“MII” or the “Pharmacy”).16 MII was an Alabama-licensed pharmacy that exclusively provided services to OS and OS customers that purchased certain medications, via MII preparing pre-filled syringes of oncology drugs.17 The Specialty Group’s portfolio also included subsidiary group purchasing organizations (“GPOs”), such as International Oncology Network (“ION”), that served a variety of medical specialty practices, including oncology practices.18 ION would negotiate with pharmaceutical manufacturers and vendors, such as OS, on behalf of ION’s paying member practices.19 Vendors would pay ION a fee, typically a percentage of each sale.20 Since the merger, the Company has grown the Specialty Group and revised its organizational structure.21 As ABSG grew by expanding its services and gaining new subsidiaries, it created the ABSG Oncology Group consisting of OS, ION, and MII.22 16 Id. at 7, 58. Bergen Brunswig acquired MII in 1998. Bergen Brunswig Form 10-Q (Feb. 16, 1999), at 9. 17 SLC Report 58–59. 18 Id. at 22–23, 59. 19 SLC Report Ex. 20, at 3. 20 Id. 21 SLC Report 60. 22 SLC Report Ex. 21, at 11. 6 2. AmerisourceBergen Drug Corporation ABDC operates twenty-seven distribution facilities throughout the United States.23 After acquiring ABDC in the merger, ABC grew ABDC through a series of acquisitions, including PharMEDium through which ABDC operated five Food and Drug Administration (“FDA”) registered sterile compounding outsourcing facilities to provide sterile compounded preparations to acute hospitals within the United States.24 B. AmerisourceBergen’s Corporate Governance Structure 1. The Board of Directors’ Functions AmerisourceBergen’s board of directors (the “Board”) has consisted of ten members since the Company’s formation in 2001.25 From 2001 to 2006, eight of the directors were independent and not employed by the Company; from 2007 to 2015, all but one director were independent.26 When the Chairman of the Board is not independent, a majority of the independent directors elect a Lead Independent Director annually.27 In 2016, when Defendant Steven Collis, ABC’s CEO, became 23 SLC Report Ex. 22, at 6. Id.; AmerisourceBergen Annual Report on Form 10-K (Dec. 10, 2004), at 50. 25 See, e.g., Schedule 14A Proxy Statement (Jan. 22, 2002), at 2. 26 Schedule 14A Proxy Statement (Jan. 18, 2008), at 1; Schedule 14A Proxy Statement (Jan. 23, 2015), at 15. 27 Schedule 14A Proxy Statement (Jan. 22, 2016), at 20. 24 7 the Chairman, Defendant Dr. Jane Henney was elected Lead Independent Director, a position she holds to this day.28 The Board met formally and informally throughout each year.29 Between 2001 and 2014, the Board conducted five to seven formal meetings each year.30 The Board also held monthly telephone calls, called “First Monday.”31 At many of the Board meetings, each Board committee’s Chair would report to the full Board on topics discussed at the most recent meeting of their committee.32 The Board received regular reports on legal and compliance-related matters and, on occasion, outside counsel would present to the Board on such matters.33 2. The Board of Directors’ Standing Committees From 2001 to 2011, the Board maintained four standing committees: the Audit Committee, Compensation Committee, Executive and Finance Committee, and Governance Committee.34 In 2011, the Company split the Executive Finance Committee into separate committees to form a Finance Committee consisting of only non-employee directors.35 28 Id. at 18. SLC Report 71. 30 See, e.g., Schedule 14A Proxy Statement (Jan. 28, 2004), at 9; Schedule 14A Proxy Statement (Jan. 18, 2008), at 11. 31 SLC Report 71. 32 See, e.g., Schedule 14A Proxy Statement (Jan. 23, 2015), at 18. 33 SLC Report 72. 34 See, e.g., Schedule 14A Proxy Statement (Jan. 23, 2002), at 4; Schedule 14A Proxy Statement (Jan. 20, 2012), at 10. 35 SLC Report 62. 29 8 Most relevant to this discussion is the Board’s Audit Committee, which was charged with overseeing the Company’s financial statements and financial reporting practices; reviewing the adequacy of the Company’s accounting practices and financial controls; and reviewing financial disclosures in the Company’s Annual Report on Form 10-K and quarterly Form 10-Q filed with the Securities and Exchange Commission.36 The Audit Committee also oversees the Company’s internal audit function, reviewing findings from completed internal audits, managements’ response to internal audit reports, and the senior internal auditor’s performance.37 Internal audit reports were typically discussed quarterly when ABC’s Internal Audit Department (“Internal Audit”) leaders met.38 The Audit Committee’s responsibilities were expanded in 2004 to expressly include oversight of the Company’s legal and regulatory compliance function.39 In 2011, the Audit Committee also assumed responsibility for overseeing and developing an enterprise risk management program “designed to assist the Company with monitoring and mitigating business, operational and technological risks.”40 The Audit Committee retained oversight responsibilities for regulatory compliance, 36 See, e.g., Schedule 14A Proxy Statement (Jan. 28, 2021), at 23–24; SLC Report Ex. 25, at Ex. A, 1–2; SLC Report Ex. 26, at Ex. A, 1–2; Schedule 14A Proxy Statement (Jan. 9, 2006), at 9–10. 37 See, e.g., Schedule 14A Proxy Statement (Jan. 28, 2021), at 23–24; SLC Report Ex. 25, at Ex. A, 2–4. 38 SLC Report 64. 39 SLC Report Ex. 29, at A-8. 40 SLC Report Ex. 32, at 6; see also Schedule 14A Proxy Statement (Jan. 20, 2012), at 15. 9 compliance with the Code of Ethics and Business Conduct (the “Code of Conduct”), and the enterprise risk management program through December 2019, at which time the newly-formed Compliance and Risk Committee assumed those responsibilities.41 Between 2002 and 2014, the Audit Committee held approximately ten meetings per year.42 ABC’s compliance and legal teams made presentations to the Audit Committee at its meetings that occurred shortly before formal Board meetings.43 At about half of the Audit Committee meetings each year, the Chief Compliance Officer (“CCO”), the Company’s General Counsel, the Corporate Security and Regulatory Affairs (“CSRA”) Director, the head of Internal Audit, or the Director of Internal Controls reported to the Committee on compliance matters, including any allegations or incidents, management’s mitigating or corrective actions, and Compliance Hotline Reports.44 Beyond presenting to the Audit Committee at committee meetings, the CCO and the Vice President of Internal Audit had direct lines of communication to the Audit Committee, including routine meetings prior to Audit Committee meetings to discuss ongoing issues.45 The Chair of the Audit Committee would review the 41 Schedule 14A Proxy Statement (Jan. 24, 2020), at 27–28. SLC Report 65. 43 Id. at 72. 44 Id. 45 Id. at 73. 42 10 Compliance Network Hotline and Internal Audit reports before each meeting, and either the Chair or the Head of CSRA or the Head of Internal Audit reviewed them in depth with the rest of the Audit Committee.46 A member of the Audit Committee would present to the Board about the topics of discussion at the Committee Meeting and CSRA would provide its own overview of key issues with the full Board.47 Defendant John Chou, as Chief Legal Officer, also presented relevant legal issues first to the Audit Committee before apprising the full Board of the Company’s top priority issues.48 C. The History of AmerisourceBergen’s Compliance Program 1. The Board Adopts a Formal Compliance Program Following the 2001 merger, the Board created two management-level committees and one Board-level committee to address corporate governance and compliance.49 The pre-existing management-level Compliance Committee was tasked with overseeing legal and regulatory compliance at the Company.50 The Board also created the position of Chief Compliance Officer to manage the Company’s Compliance Program and ensure compliance with applicable laws and internal policies.51 The second management-level committee created was the Ethics 46 Id. Id. 48 Id. at 73–74. 49 Id. at 78. 50 SLC Report Ex. 45, at 11. 51 Id. at 8. 47 11 Committee, which was comprised of senior ABC managers, to receive regular reports from the Compliance Committee.52 The Compliance Committee reported quarterly to the Ethics Committee, which in turn reported directly to the Board’s Audit Committee.53 On February 27, 2003, the Board was informed by the Vice President of CSRA that the Drug Enforcement Administration (the “DEA”) was the Company’s primary federal regulator.54 The Vice President further identified the FDA, Environmental Protection Agency (“EPA”), Occupational Safety & Health Administration (“OSHA”), and the Department of Transportation (“DOT” and “FAA”) as other federal agencies that regulate the Company.55 In 2004, the Board built on ABC’s existing compliance framework to further formalize its compliance program.56 The corporate compliance program included a Code of Conduct, a Network Hotline for anonymous reporting, and compliance training.57 The Code of Conduct, in relevant part, encompassed the Company’s policy on the handling of ABC work product.58 Calls made to the Network Hotline were by compiled by the Compliance Committee alongside non-network compliance 52 Id. at 11. SLC Report Ex. 47, at 2–3. 54 See SLC Report Ex. 48. 55 Id. at 19–20. 56 SLC Report 76. 57 Id. at 76–77. 58 SLC Report Ex. 52, at 2–4. 53 12 complaints in a “Compliance Incident Report” (“CIR”) that tracked things such as the number of calls, the number of call-related inquiries that remained open, and the details of each complaint.59 Under this formalized compliance program, local compliance officers at each business unit reported to the CCO, who was a member of the Compliance Committee.60 The CCO then reported directly to the Company’s General Counsel, who was a member and Chair of the Ethics Committee.61 a. Corporate Security and Regulatory Affairs From 2001 until 2012, CSRA was solely responsible for all aspects of regulatory compliance oversight and physical security at the Company.62 CSRA focused on compliance with federal and state regulations, in addition to processing all of the Company’s DEA registration renewals, while each respective Distribution Center processed its own state and local licensing.63 Though CSRA assisted, the Company’s pharmacies were primarily responsible for their own DEA and state board of pharmacy licensing.64 After hiring a CSRA Senior Director to handle specialty group- and pharmacy-related assessments, reviews, investigations, and periodic compliance counseling for the ABSG and ABC pharmacies in 2007, CSRA 59 See, e.g., SLC Report Ex. 56. SLC Report Ex. 50, at 9. 61 SLC Report 82. According to a 2007 David Polk report, this relationship was common at the time. SLC Report Ex. 57, at 18. 62 SLC Report 85. 63 SLC Report Ex. 60, at 1. 64 Id. 60 13 had four leaders who all reported to CSRA’s Vice President, who in turn reported to the Company’s General Counsel.65 The senior directors of CSRA reviewed and audited the Distribution Centers’ licensing and regulatory processes, providing a bi-weekly update to the Company’s General Counsel.66 The audits conducted by CSRA included “Health & Safety Program Compliance Audits” and “Security and Regulatory Compliance Audits” at Distribution Centers.67 CSRA performed these audits without notice to the chosen Distribution Centers and conducted a review of the Distribution Centers’ compliance with federal, state, and local law.68 If a Distribution Center received a high risk score, CSRA would perform a follow-up audit to ensure that the Distribution Center implemented a corrective action plan.69 The results of CSRA’s audits were shared with the Company’s legal department to review for legal risk.70 CSRA was also tasked with managing the Network Hotline until the establishment of the Company’s Office of Compliance in 2012.71 While the Company contracted with an independent company to operate the Network Hotline, CSRA reviewed the resulting reports and triaged them as appropriate within the 65 SLC Report 86; see also SLC Report Ex. 61. SLC Report 90; see also SLC Report Ex. 64, at 1. 67 See, e.g., SLC Report Exs. 66–67. 68 SLC Report Ex. 68, at 2. 69 SLC Report Ex. 69, at 1. 70 SLC Report 91. 71 Id. 66 14 Company.72 Network calls were logged in the Company’s tracking system, LawTrac, and a copy of the report was sent to Employment Counsel and the Vice President of CSRA.73 The nature of the call was then evaluated by these individuals and assigned appropriate personnel for follow-up investigation, which was updated in LawTrac to ensure a response.74 The final disposition of the investigations were forwarded to the Manager of Corporate Security who distributed monthly reports and quarterly summary reports to the Vice President of CSRA and the Director of Corporate Security and Investigations.75 Not only did the Audit Committee Chair receive all Network Hotline reports, but as of 2012, the Audit Committee was also provided quarterly updates from the CSRA Director.76 b. Internal Audit Department The Company’s Internal Audit manages reviews of financial controls, financial audits, and distribution audits.77 Internal Audit was required to keep the Audit Committee “informed of emerging trends. . . in internal auditing,” develop and submit an annual audit plan to the Audit Committee, “[i]ssue periodic reports to the [A]udit [C]ommittee and management summarizing result[s] of audit activities,” and provide the Audit Committee with a “list of significant measurement goals and 72 SLC Report Ex. 70, at 1. Id. at 2. 74 Id. 75 Id. 76 SLC Report Ex. 53, at 24; see, e.g., SLC Report Ex. 71, at 4. 77 SLC Report 92. 73 15 results.”78 The Audit Committee received updates from Internal Audit at least quarterly, including executive sessions that excluded management, to provide a review of the Company’s financials and internal controls.79 Internal Audit also executed an annual risk assessment survey, which asked each Distribution Center’s management to rank their perceived top risks to the Company.80 2. Reporting to the Ethics and Audit Committees Under ABC’s Corporate Compliance Program Under the Company’s 2004 compliance program, the Ethics Committee consisted of senior leadership at the Company, including the General Counsel, Head of Human Resources, and Vice President of Internal Controls.81 At the Ethics Committee meetings, the General Counsel presented legal updates and discussed the Network Hotline Reports; the Vice President of CSRA and the CCO updated the Committee on compliance policies and investigations; and Internal Audit summarized its quarterly audit reports.82 Between 2001 and 2008, the Audit Committee held at least seventy-three meetings.83 The CFO often addressed the impact of compliance concerns on ABC’s 78 SLC Report Ex. 72, at 2. See, e.g., SLC Report Exs. 73–76. 80 See, e.g., SLC Report Ex. 35, at 2; SLC Report Ex. 77, at 9; SLC Report Ex. 78, at 6; SLC Report Ex. 79; SLC Report Ex. 80, at 8; SLC Report Ex. 81, at 4. 81 SLC Report Ex. 47, at 9. Defendant Chou became the Ethics Committee Chair on February 7, 2007. SLC Report Ex. 107, at 2. 82 See, e.g., SLC Report Ex. 106. 83 SLC Report 103–04. 79 16 business.84 In 2007, the CFO kept the Audit Committee updated on the FDA’s issuance of a “black box” warning “on Aranesp & Procrit[,]”85 two drugs that ABSG distributed.86 Defendant Tim Guttman, ABC’s former CFO, would address risk factors pertaining to the Company’s compliance with federal law during the Audit Committee’s discussions of risk factors to be listed in the Company’s Annual Report.87 The General Counsel reviewed matters related to the Company’s Code of Ethics and provided updates on ongoing legal matters, investigations, and the compliance policies.88 The CCO reported on the Company’s Corporate Compliance program, key policies and procedures, ongoing investigations at ABC subsidiaries, and implementation of new compliance measures.89 The CSRA Director began providing quarterly updates to the Audit Committee in 2012. 90 Between the Compliance, Ethics, and Audit Committees, representatives from all major compliance departments presented regularly to both management and Board-level committees.91 84 See, e.g., SLC Report Ex. 113, at 3. See SLC Report Ex. 114, at 16; see also SLC Report Ex. 115, at 5. 86 See SLC Report Ex. 16; SLC Report Ex. 304, at 5–7. 87 See, e.g., SLC Report Ex. 116, at 1–3; SLC Report Ex. 117, at 1–3; SLC Report Ex. 28, at 1–4. 88 See, e.g., SLC Report Ex. 36, at 4–5. 89 SLC Report 106. 90 See, e.g., SLC Report Ex. 119. 91 SLC Report 106. 85 17 3. The 2007 Davis Polk Report In March 2007, while auditing the billing practices of a delivery and courier service used by the Company’s Sacramento Distribution Center, the Company “identified substantial questionable billing practices and irregularities [] and [a] consequential lack of detection controls by ABDC to prevent erroneous billing errors.”92 A month later, the DEA suspended the license of a Distribution Center located in Orlando, Florida, which distributed DEA-controlled substances, for allegedly “not maintain[ing] effective controls against diversion of controlled substances” in 2006.93 In response, Defendant Chou engaged David Polk in June 2007 to conduct a ”high-level review. . . of certain aspects of the compliance, legal and regulatory functions at [ABC].”94 Davis Polk was specifically hired to (1) “[e]valuate the adequacy of the [compliance] program,” (2) “[r]ecommend improvements, if any,” and (3) “[r]eport to the Board on findings, conclusions and recommendations.”95 After conducting its review, Davis Polk presented its findings in a report (the “Davis Polk Report”) to the Audit Committee, concluding that, in light of the Board’s Caremark duties, the Company: met the “[b]asic legal requirements” for 92 SLC Report Ex. 120, at 2. SLC Report Ex. 121, at 1. 94 SLC Report Ex. 122, at 1. 95 SLC Report Ex. 57, at 2. 93 18 compliance; had “[c]omprehensive and high-quality written materials;” had a “[h]igh level of professionalism and dedication” by its compliance staff; and had a “[g]ood overall compliance track record.”96 Davis Polk also presented five “areas of improvement” for the Company’s compliance program.97 Following Davis Polk’s presentation, the CCO presented the Audit Committee with the Company’s “Preliminary Action Plan in Response to Davis Polk Assessment,” which addressed all areas of improvement.98 The Audit Committee met at least twice more to receive updates on the Company’s response to the Davis Polk Report.99 The Company’s response included developing a penalty matrix to standardize penalties for violations of the Company’s Code of Conduct;100 integrating ABSG into the corporate compliance program by adding a senior level CSRA employee to oversee ABSG compliance, tasking other corporate departments with oversight of ABSG, and creating a more “streamlined organizational structure[;]”101 and began expanding its use of its internal electronic matter management system to track hotline calls, compliance complaints, and all issues arising from the Ethics and/or Compliance Committees in one, centralized location.102 96 Id. at 34. SLC Report 109. 98 Id. 99 SLC Report Ex. 91, at 1–2; SLC Report Ex. 134, at 6. 100 SLC Report Ex. 129, at 1. 101 SLC Report Ex. 130, at 5. 102 SLC Report Ex. 91, at 1–2. 97 19 The CCO also engaged an outside ethics compliance organization through the Compliance and Ethics Leadership Council of the Corporate Executive Board (“CEB”) to conduct a “cultural diagnostic survey.”103 Of the nine categories surveyed and analyzed, ABC scored above benchmark in all but one.104 The CCO continued to engage with CEB to understand and implement industry best practices for compliance risk.105 The Board was kept apprised of the updates on ABC’s compliance program including the integration of ABSG.106 From August 2009 through May 2012, the Board received no less than eight such updates specifically concerning the Company’s response to the Davis Polk Report.107 4. AmerisourceBergen Reorganizes its Compliance Program When the then-CCO left ABC in January 2012, the Company conducted a review of its compliance program.108 The Head of CSRA, who had been at the Company since 1990 and in the health care industry since 1984, was appointed as the new CCO.109 Defendant Chou led the Company to establish a second senior compliance position, Chief Compliance Counsel (“CCC”), which was filled by the 103 SLC Report Ex. 134, at 6; see also SLC Report Ex. 144, at 1. SLC Report Ex. 144, at 16–17; see also SLC Report Ex. 134, at 6. 105 SLC Report Ex. 145. 106 SLC Report 123. 107 See SLC Report 123–27. 108 Id. at 127. 109 Id. at 127–28. 104 20 Group General Counsel who had worked in the health care industry since 1985.110 Both the CCO and CCC reported to the Audit Committee.111 Prior to 2012, the CCO’s methods of communicating with the Board were limited to either directly reporting to the General Counsel who reported to the Audit Committee or reporting to the Compliance Committee, of which the CCO was a member, that reported directly to the Ethics Committee, which then in turn reported to the Audit Committee.112 Starting in 2012, the CCO participated directly in the executive sessions of the Audit Committee after each regularly scheduled meeting.113 The CCO and CCC were instructed by the Audit Committee to “review ABC’s Compliance Program annually with the [Audit] Committee.”114 At that time, the CCO and CCC also began working under a newly created “Office of Compliance” that was charged with, among other things, notifying, investigating, and tracking all compliance-related investigations and incidents; providing quarterly reports to the Audit Committee; and continuously monitoring the changing compliance environment through various outside organizations to ensure that ABC’s compliance program was up to date and comprised of industry best practices.115 110 Id. at 128. Id. at 129. 112 Id. 113 SLC Report Ex. 160. 114 SLC Report Ex. 159. 115 SLC Report Exs. 163–64. 111 21 The Compliance Committee began implementing internal reforms in 2012.116 One such reform was to double the frequency of its meetings to twice per month.117 The agenda for these meetings was standardized to include a review of all new CIRs and all pending investigations into incident reports, in addition to approving the closures of completed incident investigations when appropriate.118 All actions taken by the Compliance Committee were required to “be documented in either a [CIR] or an assigned Compliance project, and [to] be maintained in the ABC Corporate Risk Management System.”119 The CIRs were provided to the Audit Committee at least once a quarter, prior to each Committee meeting.120 The CCC provided the Audit Committee updates on the Company’s progress updating compliance initiatives on at least four occasions between May 2012 and February 2013.121 The Audit Committee continued to meet more frequently than was required, with at least half of these meetings focusing on financial reviews and performance, meeting seventy-four times from 2012 to 2018.122 Twenty-six of the Committee’s seventy-four meetings included an update specifically about the Company’s 116 SLC Report 133. SLC Report Ex. 157, at 1. 118 Id. 119 Id. at 1–2. 120 SLC Report 133. 121 SLC Report Ex. 151, at 4; SLC Report Ex. 158, at 4–5; SLC Report Ex. 159, at 6; SLC Report Ex. 168, at 4. 122 SLC Report 134. 117 22 compliance program.123 At all meetings, the Committee reviewed the Network Hotline and incident reports in addition to receiving updates on any corrective actions taken by management.124 Once a year, the Committee received an update on the enterprise risk management system and risk assessment results and discussed any ongoing investigations and any significant legal matters.125 The Audit Committee continued to also be notified by senior management of ongoing updates to the Company’s compliance response as new regulations and compliance concerns emerged.126 D. The Legal and Regulatory Landscape Relating to Pharmacies From 2001 to 2014 (the “Relevant Period”), the regulatory landscape shifted significantly as federal regulators increased scrutiny of state-regulated pharmacies.127 This shift was of particular relevance to pharmacies like MII that pooled or compounded pharmaceuticals to dispense to health care providers for treatment of patients.128 Between 2002 and 2012, “there [was] a lack of consensus regarding whether states should have primary responsibility for regulating 123 See, e.g., SLC Report Ex. 71; SLC Report Ex. 151; SLC Report Ex. 158; SLC Report Ex. 159. See, e.g., SLC Report Ex. 71. 125 See, e.g., SLC Report Ex. 171, at 5; SLC Report Ex. 172, at 3. 126 SLC Report 136. 127 Id. at 143. 128 Id. 124 23 [compounding pharmacies] as pharmacies, or [whether the] FDA should have primary responsibility to regulate them as manufacturers.”129 The U.S. Supreme Court recognized the tradition that the regulation of the practice of pharmacy was left to the states.130 Pharmacies are not required under federal law to register with the FDA if they “maintain establishments in conformance with any applicable laws regulating the practice of pharmacy and medicine and which are regularly engaged in dispensing prescription drugs or devices.”131 1. Alabama Law MII was located in Dothan, Alabama, and subject to Alabama’s State Board of Pharmacy, which promulgates regulations, issues licenses, and inspects pharmacies to evaluate their compliance with state pharmacy law.132 Alabama law defines a pharmacy as a “place licensed by the [Alabama State Board of Pharmacy] in which prescriptions, drugs, medicines, medical devices, chemicals, and poisons are sold, offered for sale, compounded, or dispensed.”133 Prescription134 labels are required under Alabama law to include the “name and address of the pharmacy from U.S. GOV’T ACCOUNTABILITY OFF., GAO-13-702, DRUG COMPOUNDING: CLEAR AUTHORITY AND MORE RELIABLE DATA NEEDED TO STRENGTHEN FDA OVERSIGHT 9–12 (2013). 130 Thompson v. W. States Med. Ctr., 535 U.S. 357, 361 (2002). 131 21 U.S.C. § 360(g)(1). 132 SLC Report 144. 133 Ala. Code § 34-23-1(21) (2019). 134 Prescription is statutorily defined as “[a]ny order for drug or medical supplies, written or signed or transmitted by word of mouth, telephone, telegraph, closed circuit television, or other means of communication by a legally competent practitioner.” Ala. Code § 34-23-1(25). 129 24 which the prescriptions are dispensed, the prescriber’s directions for use, the name of the drug as it is dispensed, and the strength per dosage unit.”135 A “traditional component” of pharmaceutical practice is “compounding,” the “process by which a pharmacist or doctor combines, mixes, or alters ingredients to create a medication tailored to the needs of an individual patient.”136 Compounding is statutorily defined as “[t]he preparation, mixing, assembling, packaging, and labeling of a drug or device as the result of a licensed practitioner’s prescription drug order or initiative based on the practitioner/patient/pharmacist relationship in the course of professional practice.”137 Also included in compounding is “the preparation of drugs or devices in anticipation of prescription drug orders based on routine, regularly observed prescribing patterns.”138 The regulation of compounding pharmacies in Alabama consists primarily of requirements relating to drug purity, storage conditions, qualifications and training of pharmacists and technicians, facilities, security, and record retention.139 The chief pharmacist is responsible for the pharmacy’s operations, as well as for supervision of pharmacy technicians.140 Pertinent to MII’s operations, Alabama law allows 135 Ala. Admin. Code r. 680-X-2-.13 (1982). Ala. Code § 34-23-1(5) (2019). 137 Id. § 34-23-150 (1975). 138 Id. 139 SLC Report 146. 140 Ala. Code § 34-23-70(a) (2018). 136 25 “compounded product” to be “prepared in advance in reasonable amounts in anticipation of estimated needs.”141 2. Federal Regulation of Pharmacies The Federal Food, Drug, and Cosmetic Act (“FDCA”) regulates the manufacturing, marketing, and distribution of drugs,142 including all “new drugs,” i.e., “any drug. . . the composition of which is such that such drug is not generally recognized [among experts] as safe and effective for use under the conditions prescribed.”143 Manufacturers of new drugs must register with the FDA, comply with various pre- and post-market requirements, and comply with current Good Manufacturing Practices (“cGMPs”).144 The FDCA defines the term “manufacturer” to include entities engaged in “preparation, propagation, compounding, or processing” of drugs, such as drug repackaging and relabeling.145 A “repackager” is defined as an entity that “repackag[es] or otherwise chang[es] the container, wrapper, or labeling of any drug package or device package in furtherance of the distribution of the drug or device from the original place of manufacture to the person who makes final delivery or sale to the ultimate consumer or user.”146 141 Ala. Code § 34-23-159 (1975). See, e.g., 21 U.S.C. §§ 355h, 356a, 356i. 143 21 U.S.C. § 321(p). 144 See, e.g., 21 C.F.R. §§ 210, 211 (2011). 145 21 U.S.C. § 360(a)(1). 146 Id. 142 26 The FDA has concluded that “[c]ompounded drugs” are encompassed by the FDCA’s definition of “new drugs” and, therefore, all federal regulations applicable to “new drugs” apply to “compounded drugs.”147 However, the FDA has not historically required pharmacies to apply for FDA approval of “compounded drugs;” rather, the FDA has left the regulation of compounded drugs to the states.148 a. FDA Regulation of Compounded Drugs In response to concerns that some pharmacies were “engag[ing] in manufacturing, distributing, and promoting unapproved new drugs for human use in a manner that [wa]s clearly outside the bounds of traditional pharmacy practice[,]” the FDA issued Compliance Policy Guide 7132.16 in 1992 (the “1992 CPG”).149 In the 1992 CPG, the FDA warned that it would consider “initat[ing] enforcement action when pharmacy practice extends beyond the reasonable and traditional practice of retail” after considering several factors, such as whether a pharmacy solicited business, compounded “inordinate amounts” of drugs, and used commercial scale equipment.150 Portions of the 1992 CPG were adopted into Section 503A of the Food and Drug Administration Modernization Act (“FDMA”) by Congress in 1997.151 These 147 SLC Report 148. Id. 149 Compliance Policy Guide (“CPG”) 7132.16 (“1992 CPG”) 150 Id. 151 See Food and Drug Administration Act of 1997, Pub. L. No. 105-115, § 503A, 111 Stat. 2296 (codified at 21 U.S.C. § 353a). 148 27 provisions were challenged in court and, in April 2002, the Supreme Court determined that some of these provisions were unconstitutional but did not rule on the severability of the unconstitutional provisions from others adopted in 1997.152 In response to this ruling, the FDA issued a revised CPG (the “2002 CPG”) that removed the unconstitutional provisions of the 1992 CPG.153 The 2002 CPG reaffirmed the FDA’s intent to “seriously consider enforcement action” when “the scope and nature of a pharmacy’s activities raise the kinds of concerns normally associated with a drug manufacturer[,]” and included a non-exhaustive list of factors relevant to its determination of whether “compounding pharmacies” were actually “manufacturers” of new drugs.154 b. FDA Enforcement Activity Related to Pharmacies From February 2002 to May 2012, the FDA conducted 194 “for cause” inspections of compounding pharmacies and issued thirty-one Warning Letters.155 The FDA frequently cited entities for issues such as dispensing an unreasonably large volume of drugs and/or drugs that were copies of FDA-approved, commercially available products, and compounding drugs without a patient-specific medical need.156 For example, in 2010, the FDA issued a Warning Letter to MII’s 152 Thompson, 535 U.S. at 366, 377. Compliance Policy Guide 460.200 (“2002 CPG”). 154 Id. 155 SLC Report 153. 156 Id. 153 28 competitor, Med Prep Consulting, Inc. (“Med Prep”), for shipping pre-filled syringes to health care providers without receiving prescriptions for individual patients.157 Med Prep’s Warning Letter specifically stated that Med Prep’s “practice of repackaging and distributing drugs without patient-specific prescriptions” exceeded “the regular course of a pharmacy’s business,” therefore subjecting Med Prep to cGMP regulations as a “repackager.”158 3. United States Pharmacopeia <797> In 2004, Congress moved guidelines title “Sterile Compounding” to chapter <797> of the U.S. Pharmacopeia (“USP”) standards, thereby making those guidelines enforceable by the FDA.159 Among the issues covered by USP <797> was sterility and purity of dispensed compounded sterile preparations (“CSPs”).160 Despite Congress authorizing the FDA to enforce USP <797>, individual states remained the principal regulators of pharmacy compounding activity and sterility.161 Alabama did not adopt USP <797>, but in 2009, the Alabama Board of Pharmacy 157 Warning Letter from Diana Amador Toro, Director, New Jersey District, U.S. Food & Drug Admin., to Gerald R. Tighe, Pres., Med Prep Consulting (July 9, 2010), https://web.archive.org/web/20130324195733/http://www.fda.gov/ICECI/EnforcementActions/ WarningLetters/2010/ucm222283.htm (“Med Prep Warning Letter”). 158 Id. at 1. 159 SLC Report 156. 160 Pharmaceutical Compounding—Sterile Preparation (USP <797>), United States Pharmacopeial Convention, 2008. 161 Pew Charitable Trs., National Assessment of State Oversight of Sterile Drug Compounding 1 (Feb. 2016), https://www.pewtrusts.org/~/media/assets/2016/02/national_assessment_of_state_oversight_of_s terile_drug_compounding.pdf. 29 interpreted its comparable provision on the “strength, quality, or purity” of compounded drugs as “requir[ing] sterile products to be compliant with USP <797> standards.”162 On December 31, 2010, the Alabama State Board of Pharmacy began enforcing compliance with USP <797>.163 E. MII and its Pre-Filled Syringe Program At the time it was acquired by Bergen Brunswig in 1998, MII was a Florida corporation that operated a Tampa, Florida, pharmacy providing compounding services and pre-filled syringes for physicians.164 As part of the acquisition, Bergen Brunswig engaged outside counsel to review MII’s operations.165 Potential issues associated with MII’s customer billing practices were identified by the review, but the review did not focus on nor identify FDA regulatory issues concerning MII’s pharmacy operations.166 MII’s operations were reviewed again during the 2001 merger process between Bergen Brunswig and AmeriSource,167 again raising questions related to MII’s customer billing and inventory practices while not identifying FDA regulatory risks or concerns regarding product quality or sterility.168 162 SLC Report Ex. 184. Id. 164 SLC Report 158. 165 SLC Report Ex. 186, at 3. 166 SLC Report 158–59. 167 SLC Report Ex. 189, at 1; SLC Report Ex. 187, at 1. 168 SLC Report 159. 163 30 Bergen Brunswig moved MII to a pharmacy in the OS warehouse in Dothan, Alabama, where MII focused solely on the pre-filled syringe program (“PFS Program”).169 During the Relevant Period, MII was an ABSG subsidiary and incorporated in Florida.170 After its move to Alabama, the Company registered MII with the Alabama Board of Pharmacy, but not the FDA.171 When MII’s pharmacist-in-charge, who was tasked with overseeing MII’s operations, stepped down in 2005, the Chief Pharmacist was promoted to the role.172 The Chief Pharmacist had more than twenty-five years of experience as a pharmacist.173 Generally, the Chief Pharmacist reported to OS’s Head of Operations but also reported to OS’s President for a time during the Relevant Period. 174 The Chief Pharmacist was responsible for MII’s pharmacy license in Alabama and he worked closely with OS’s Compliance Manager on licensing issues. 175 The Chief Pharmacist was responsible for with overseeing a technician supervisor, who managed the Pharmacy technicians, and the Pharmacy’s policies and procedures, including those intended to ensure that MII prepared sanitary and sterile pre-filled syringes.176 169 SLC Report Ex. 190, at 3. SLC Report 160. 171 SLC Report Ex. 14; SLC Report Ex. 15, at 1. 172 SLC Report 160. 173 Id. 174 Id. at 160–61. 175 Id. at 161. 176 SLC Report Ex. 15, at 1. 170 31 1. The Pre-Filled Syringe Program MII pre-filled syringes with oncology products for OS’s customers upon request.177 Under the terms of the PFS Program agreement between OS and its customer oncology practices, the practices were required to provide a patientspecific physician’s order to MII.178 If a customer ordered products in pre-filled syringes rather than vials, OS would transfer product vials to MII to pre-fill syringes with the drug contained in the vials.179 Over time, MII developed extensive policies and procedures requiring strict adherence to aseptic techniques and sterilization protocols.180 As of April 1, 2005, MII required all “personnel working in the sterile environment” to be tested for compliance with these policies and procedures “at least once a year.”181 When prefilling syringes, technicians were required to follow a six-step procedure to ensure the product’s integrity.182 Once the syringes were filled, MII technicians transferred the labeled syringes to a separate room of the Pharmacy where MII pharmacists performed a quality check by using a magnifying glass to check that the syringes included the appropriate product volume and did not include particulates.183 Next, 177 SLC Report 161. SLC Report Ex. 193, at 1; SLC Report Ex. 194, at 1. 179 SLC Report Ex. 15, at 2. 180 SLC Report 163–65. 181 SLC Report Ex. 199. 182 SLC Report 167. 183 Id. at 167–68. 178 32 MII staff matched the syringes with orders and labeled them with the product name, dose, batch number, and expiration date.184 The syringes were then placed in bags with printed physician order information and another label was affixed to the outside of the bags.185 MII then transferred the syringes to OS for packaging and delivery.186 OS usually delivered the pre-filled syringes to oncology practices overnight for use the next day.187 This time pressure resulted in a significant rush during the latter half of the working day at MII, as the Pharmacy prepared pre-filled syringes in response to customers’ orders.188 To alleviate this pressure, MII began preparing some pre-filled syringes before receiving particularized orders based on Alabama regulations that permitted advanced preparation “in anticipation of estimated needs.”189 2. MII’s Harvesting of Overfill MII provided the pre-filled syringe service in exchange for customers agreeing to let MII retain the product overfill remaining in the vials after the prefilled syringes were drawn.190 Overfill is the amount of product within a vial that exceeds the amount of product stated on the vial’s label; manufacturers generally 184 SLC Report Ex. 208; SLC Report Ex. 192, at 14; SLC Report Ex. 215, at 1. SLC Report Ex. 215, at 1. 186 SLC Report 168. 187 Id. 188 Id. at 168–69. 189 Ala. Code § 34-23-159 (1975). 190 SLC Report Ex. 15, at 1. 185 33 include slightly more product in each vial than the label indicates to ensure that end users can successfully draw and administer the necessary amount of product.191 Historically, healthcare practices often salvaged overfill for clinical use.192 In May 2001, Reed Smith advised Bergen Brunswig that MII’s practice of harvesting overfill was considered “standard practice at hospital[s] and other large pharmacies”; that “the dispensing of the prescribed amount from the billing units” purchased from the manufacturer was “an acceptable practice[;]” and the “[s]alvage of drug remaining in [the original] containers [wa]s also permissible.”193 Filling new prescriptions with this harvested overfill also did not “itself raise concerns.”194 MII harvested overfill to satisfy customer orders while saving numerous unopened vials, which it called “overfill inventory.”195 These unopened, overfill vials were sold monthly by MII back to OS, which then distributed the overfill vials to other affiliates of ABC or directly to customers.196 MII derived profits from its sale of overfill vials to OS.197 This incentivized MII’s technicians to harvest as much 191 Pharmaceutical Dosage Forms—Injections (USP <1151>); see also SLC Report Ex. 187; SLC Report Ex. 195. 192 Payment Policies Under the Physician Fee Schedule and Other Revisions to Part B for CY 2011, 75 Fed. Reg. 73467 (Nov. 29, 2010); cf. Vanessa Romo, Some Vials of COVID-19 Vaccine Contain Extra Doses, Expanding Supply, FDA Says, NPR (Dec. 16, 2020, 9:47 PM), https://www.npr.org/sections/coronoavirus-live-updates/2020/12/16/947386411/some-vials-ofcovid-19-vaccine-contain-extra-doses-expanding-supply. 193 SLC Report Ex. 189, at 2, 5. 194 Id. 195 SLC Report Ex. 15, at 2. 196 Id. at 3. 197 Id. at 4. 34 overfill as possible while maintaining quality standards,198 as laid out in MII’s incentive compensation program.199 In 2003, ABC’s then-General Counsel and his staff conducted a preliminary risk assessment of ABSG companies, including OS and MII.200 This assessment resulted in a memorandum describing, in relevant part, MII’s PFS Program and its use of overfill.201 While the former Assistant General Counsel noted that some of MII’s customer contracts did not explicitly authorize MII to collect and sell overfill, he did not identify concerns related to FDA regulatory issues, quality, or sterility.202 ABC’s Assistant General Counsel also engaged health care regulatory attorneys at Reed Smith to conduct a compliance review and risk assessment of ABSG companies, including OS and MII.203 Reed Smith prepared a memorandum in which it stated that the PFS Program did not appear to raise significant regulatory, anti-kickback, or double chargeback concerns.204 The Reed Smith memorandum recommended that MII disclose to physicians that it collected overfill and that OS convey the need for customers to account for their discounts when reporting to the government, to ensure compliance with safe harbors to the federal Anti-Kickback 198 SLC Report 170–71. See SLC Report Ex. 216, at 2, 4. 200 SLC Report 171. 201 SLC Report Ex. 188, at 5–6. 202 SLC Report 171–72. 203 Id. at 172. 204 SLC Report Ex. 195, at 26–27, 37. 199 35 Statute (“AKS”).205 With respect to the pre-filled syringes, Reed Smith observed that customers provided MII with lists of patients with the pharmacy staff used to mark syringes with patient-specific labels.206 When responsibility for the Specialty Group shifted to ABSG’s General Counsel, he received the Reed Smith memorandum, which he reviewed, and concluded that Reed Smith approved of MII’s business model.207 3. MII is Expanded In March 2006, OS submitted an official Capital Expenditure Request (“CER”) to ABSG management208 seeking approval to purchase vacant land adjacent to OS’s facility and to remodel the warehouse.209 According to the CER, MII was a “significant contributor” to OS’s profitability, but MII’s pharmacy space where product was drawn into syringes was inadequate to meet ABSG’s Fiscal Year 2006 target sales.210 ABSG’s executive team, ABC’s executive team, and the ABC Board approved the CER in 2006.211 In 2007, OS expanded its Dothan Distribution 205 Id. at 40. Id. at 24, 36. 207 SLC Report 175–76. 208 SLC Report Ex. 230, at 1. 209 SLC Report Exs. 224–28. 210 SLC Report Ex. 222, at 7. 211 Id. at 1; SLC Report Ex. 221, at 8–9. 206 36 Center,212 increasing the size of the Distribution Center by 70,000 square feet and expanding MII’s pharmacy from 1,000 square feet to 3,000 square feet.213 4. MII’s Alabama License and Board of Pharmacy Inspections Although the CSRA Senior Director was primarily responsible for general pharmacy oversight, an OS Compliance Manager in Dothan handled the particulars of MII’s state licenses.214 The OS Compliance Manager understood MII to be a mail-order pharmacy because it shipped syringes to physicians, who owned and administered the medications.215 During the Relevant Period, MII had an active license as a parenteral216 and mail-order pharmacy in Alabama.217 The Alabama Board of Pharmacy inspected MII in 2007, 2009, 2010, 2011, and 2013, with MII passing each of these inspections without any adverse observations about the safety or sterility of products dispensed by the Pharmacy.218 All inspections prior to 2010 were announced, in-person reviews of MII’s storage conditions, facilities, security, record-keeping, and written policies and procedures.219 After Alabama began enforcing USP <797> in 2010, its inspectors 212 SLC Report 176. SLC Report Ex. 221, at 8; SLC Report Ex. 222, at 7. 214 SLC Report 181. 215 Id. 216 “Parenteral” here is used to mean a pharmacy preparing drugs to be administered by injection. 217 See, e.g., SLC Report Ex. 233. 218 SLC Report Exs. 234–38. 219 SLC Report Ex. 239. 213 37 focused on sterility, dose containers, personnel cleansing and garbing, and quality testing and documentation, among other things.220 5. Sterility Testing at MII During the Relevant Period, MII tested its pre-filled syringes, as well as its pharmacists, technicians, and workspaces, for sterility and safety.221 An external testing service conducted a majority of MII’s sterility tests every six to twelve months.222 MII tested the sterility of its syringes at least once per year from 2009 through 2013.223 Some years, MII tested its syringes internally while other years MII shipped syringes to an external laboratory for shelf-life testing.224 For example, in September 2012, MII conducted internal tests of syringes drawn by its technicians.225 The following month, MII shipped syringes to BioScreen Testing Services for additional testing.226 The September and October 2012 testing results of these syringes did not find any sterility problems.227 While MII passed the vast majority of its sterility tests, it did have occasional failures.228 These failures were generally addressed internally with MII taking 220 SLC Report Ex. 240; see also SLC Report Ex. 241. SLC Report 183. 222 Id. 223 Id. at 184. 224 E.g., SLC Report Ex. 246, at 2; SLC Report Ex. 200, at 8, 11; SLC Report Ex. 247, at 1; SLC Report Ex. 248, at 1. 225 SLC Report Ex. 200, at 11. 226 Id.; SLC Report Ex. 247, at 1; SLC Report Ex. 250, at 1. 227 SLC Report Ex. 247, at 1; SLC Report Ex. 248, at 1. 228 See, e.g., SLC Report Ex. 249, at 5, 23; SLC Report Ex. 245, at 5–6. 221 38 corrective measures and retesting when deemed necessary.229 Through its inspections, the Board of Pharmacy reviewed each of MII’s sterility test results, including the occasional failures, to ensure that MII documented its testing and to certify that MII’s results comported with International Organization for Standardization standards.230 Despite the occasional sterility test failures considered by the inspectors, MII passed each Alabama Board of Pharmacy inspection without any issues.231 6. CSRA Audits and Reviews of OS and MII Prior to 2007, the audits of OS by the Company’s Corporate Security and Regulatory Affairs group (“CSRA”) focused on OS Distribution Center’s operations.232 These audits were conducted by the Compliance Manager at OS in accordance with a 400-page checklist, which, other than licensing, did not focus on the Pharmacy.233 The Company’s audit of MII included evaluating the licensing status of MII under applicable state board of pharmacy requirements.234 229 SLC Report Ex. 250, at 1–2; SLC Report Ex. 251, at 17. See SLC Report Ex. 239, at 1; SLC Report Ex. 241, at 6–7. 231 SLC Report Exs. 234–38. 232 SLC Report 188. 233 Id. at 188–89. 234 See, e.g., SLC Report Ex. 256, at 5–6; SLC Report Ex. 257. 230 39 a. CSRA’s Pharmacy-Related Experience and Expertise In July 2007, a new Senior Director joined CSRA and provided additional regulatory oversight of MII.235 From his experience as a pharmacist and Compliance Officer of another ABC entity,236 the Senior Director was familiar with pharmacy regulations, including the distinctions between state-regulated pharmacies and FDAregulated manufacturers or repackagers.237 The OS Compliance Manager reported to the CSRA Senior Director who then in turn reported to the CSRA Vice President.238 The Senior Director frequently consulted with the OS Compliance Manager on issues relating to MII and also served as a resource to MII’s Chief Pharmacist.239 The CSRA Senior Director conducted regular in-person reviews of MII roughly once a quarter, including during the annual CSRA audit of the OS Distribution Center,240 with his attention on regulatory compliance issues.241 When all of his visits were considered together, the Senior Director spent approximately one month of every year at the Dothan facility.242 The Senior Director did not follow 235 SLC Report 189. Id. 237 Id. 238 Id. at 190. 239 Id. 240 Id. at 191. 241 Id. 242 Id. 236 40 a formal checklist nor file a separate formal written report when reviewing MII;243 instead he would follow a prescription through the Pharmacy’s processes by asking the Pharmacy to walk through the process of receiving a prescription or order, entering the associated data into the computer system, generating the label of the pre-filled syringes, filling the prescription, conducting a prescription check, and then packaging the syringes before they were dispensed to customers.244 b. CSRA’s 2008 Review of MII In January 2008, the CSRA Senior Director expressed concerns that “some customers request not to have patient names on the syringes which is a concern due to the fact that the FDA could potentially say that the [P]harmacy is wholesaling and not dispensing which would require us to meet extra requirements similar to a manufacturer/repackager.”245 The Senior Director also questioned a pending nonresident sterile compounding license in California and documentation for the Pharmacy’s policy on expiration dates.246 The Senior Director reiterated his concerns during a formal CSRA audit of the OS Distribution Center in September 2008.247 He instructed the OS Compliance Id. MII was the only pharmacy under CSRA’s purview, so the Company saw no urgent need to develop a formal checklist that could be used at other locations. Id. 244 Id. at 192. 245 SLC Report Ex. 259. 246 Id. 247 SLC Report Ex. 257. 243 41 Manager to ensure that MII’s license in California was properly maintained248 and took steps to gather documentation to justify the Pharmacy’s expiration-date practices.249 The Senior Director further instructed MII personnel to secure patientspecific orders because he was concerned by the lack of patient-specific names on each dispensed order.250 In his November 2008 CSRA Compliance Audit Report, the Senior Director only recommended MII’s California license as a “Risk Value,” but that had been resolved by the time the Report was issued.251 The Senior Director was not alarmed that MII’s practices were non-compliant with FDA regulations because the FDA was permitting the Alabama Board of Pharmacy to enforce the relevant requirements.252 He further believed that the FDA would, if it had concerns, issue a Warning Letter before taking any additional action, which would allow the Company to address the concerns before the FDA would pursue more severe enforcement activity.253 c. Alabama’s Implementation of USP <797> On March 30, 2009, the Alabama Board of Pharmacy sent a letter to all pharmacies “known to prepare sterile compounds” in Alabama, including MII,254 248 SLC Report 193. SLC Report Ex. 260, at 1–2. 250 SLC Report 193. 251 SLC Report Ex. 257, at 4. 252 SLC Report 195. 253 Id. 254 SLC Report Ex. 184. 249 42 explaining that Board of Pharmacy would begin enforcing USP <797> on December 31, 2010.255 MII’s Chief Pharmacist received another letter from the Alabama Board of Pharmacy in May 2009, announcing that “[t]he first action taken by the [Alabama] Board [of Pharmacy] [would be] to assist pharmacies in evaluating their degree of compliance with USP <797>.”256 The Alabama Board of Pharmacy asked MII to complete a Risk Level Assessment Form to define its compounding category as lowrisk, medium-risk, or high-risk.257 This form contained questions about the sterility of the pharmacy, such as whether the pharmacy practiced routine disinfection and air quality testing.258 The Alabama Board of Pharmacy also requested that MII to complete a Compliance Self-Assessment and, as necessary, a Compliance Action Plan.259 MII reported that it was compliant with a range of USP <797> requirements, including the activities of compounding personnel, personnel training, aseptic technique, personnel cleansing and garbing, quality checks, and maintaining the sterility, purity, and stability of products.260 On the Risk Level Assessment Form, MII reported that it was a “medium-risk level” pharmacy because it “pool[ed]” products, a process that USP <797> defines as combining “multiple individual or 255 Id. SLC Report Ex. 262. 257 Id. 258 SLC Report Ex. 263. 259 SLC Report Ex. 262. 260 SLC Report Exs. 263–64. 256 43 small doses of sterile products. . . to prepare a [Compounded Sterile Preparation].”261 MII further noted that it expected to be compliant with USP <797> by October 2009, fifteen months before the USP standard’s effective date.262 After completing its self-assessment, the Compliance Manager worked with operations personnel within OS to execute MII’s action plan by, among other things, updating new Standard Operating Procedures and upgrading air pressure and air exchange systems.263 d. CSRA’s 2009, 2010, 2011, and 2012 Reviews of MII CSRA’s Senior Director conducted further reviews of MII in 2009 and 2011.264 The Chief Pharmacist periodically informed the Senior Director that MII customers265 often complained about MII’s requirement that they submit patientspecific orders for pre-filled syringes.266 During these reviews of MII, the Senior Director saw patient names placed on the bags containing the pre-filled syringes.267 In January 2012, following a complaint from a customer regarding MII “put[ting] a random name on a medication, call[ing] it a prescription and sell[ing] it to us. . . without the name being on any of the packaging or anywhere else,”268 the 261 SLC Report Ex. 263, at 2. SLC Report Ex. 265, at 9. 263 SLC Report 198. 264 SLC Report Exs. 267–68.. The Senior Director did not conduct the 2010 review; rather, other CSRA personnel conducted these reviews and did not identify issues related to patient names. See SLC Report Exs. 269–70. 265 That is, the physician-purchasers of the pre-filled syringes. 266 SLC Report 199. 267 Id. 268 See SLC Report Ex. 271, at 2; SLC Report Ex. 272, at 1. 262 44 Chief Pharmacist and the OS President escalated the complaint to CSRA and ABSG’s General Counsel.269 In February 2012, the Senior Director conducted an in-person review of MII’s operations as requested by ABSG’s General Counsel.270 The Senior Director provided an update to ABSG’s General Counsel, noting that only fifty-nine of 869 of the prescriptions in his sample had been “completed with a ‘proper [patient] name.’”271 Due to the significance of the Senior Director’s findings, CSRA added this review to the agenda for the upcoming February 23, 2012, Ethics Committee Meeting.272 At the meeting, CSRA’s Vice President “discussed the MII investigation” and stated that “[t]here is a concern that the [P]harmacy is not providing the patient name” because “[i]t appears that 90% of the [P]harmacy records were incomplete.”273 Following this meeting, the Senior Director continued to investigate the MII issues alongside ABSG’s Corporate Counsel.274 Based on their research, ABSG’s Corporate Counsel and the Senior Director concluded that the conduct observed at MII did not violate Alabama law, which was relatively lax on patient-specific labeling.275 269 SLC Report 200. Id. 271 SLC Report Ex. 273, at 1. 272 SLC Report Ex. 274. 273 SLC Report Ex. 276, at 2. 274 SLC Report 203. 275 Id. at 204. 270 45 On March 15, 2012, ABC’s Compliance Committee met and discussed what should be included on the list of CIRs to be presented to the Company’s Audit Committee.276 The Compliance Committee decided against adding the MII syringe dispensing procedure review to the CIR because “it appear[ed] that the practice may be in compliance with State regulations. If this should change, the MII matter will be added to the CIR Report.”277 Two months later, ABSG’s Corporate Counsel sent a memorandum to MII’s Chief Pharmacist stating that “a recently conducted audit directed by ABC’s legal department of randomly inspected orders dispensed by [MII] revealed that prescriptions filled under these orders were indeed consistent” with Alabama law, which did not require a prescription label to contain a patient’s name.278 It continued on to caution that “[r]ecent guidance from the [FDA] suggests additional prescription label requirements may be necessary” because “processing and repacking (including repackaging) of approved drugs may be viewed by the FDA as exceeding the traditional practice of pharmacy and, as such, requiring licensure with the FDA as a repackager.”279 Therefore, the memorandum directed that MII add “[t]he name of the patient” to each “prescription label” at the Pharmacy.280 276 Id. at 205. SLC Report Ex. 282, at 1. 278 SLC Report Ex. 284, at 1. 279 Id. at 1–2. 280 Id. at 2. 277 46 e. ABSG Monitored FDA’s Warning Letter to Med Prep In July 2013, Morgan Lewis notified ABC and ABSG legal counsel of a federal complaint against an ABC competitor, Med Prep, related to sterility issues and its practice of repackaging drugs without a patient-specific prescription described in the Med Prep Warning Letter, as discussed supra in Section I.D.2.b.281 While Morgan Lewis advised ABC personnel that the sterility concerns related to Med Prep’s practices were not present at MII, Morgan Lewis suggested that Med Prep’s requirement to adhere to cGMP regulations as a repackager was relevant to MII and recommended that ABC and ABSG monitor developments in the Med Prep case.282 f. MII’s Closure MII closed its operations on January 31, 2014, primarily because of its declining profitability in the face of increasing potential reputational harm caused by continuing the PFS Program during the federal government’s investigation, discussed infra at Section I.F.6.283 The exit of MII’s largest customer, Florida Cancer Specialists & Research Institute, from the PFS Program—which significantly reduced MII’s profitability and demonstrated the reputational harm 281 SLC Report Ex. 290, at 1; Med Prep Warning Letter, at 1. Id. 283 SLC Report 211. 282 47 caused by the government’s investigation—was the primary trigger for the decision to close MII.284 F. Michael Mullen and the DOJ Investigation Michael Mullen served as CFO of ABSG from May 2003 until September 2008, President of Distribution Services at ABSG from September 2008 until September 2009, and COO of ABSG from September 2009 until April 2010.285 After his termination in April 2010, he raised concerns about violations of the AntiKickback Statute (“AKS”) and price reporting compliance issues, similar to those at issue in an earlier qui tam complaint brought against the Company and others, described below.286 1. United States ex rel. Westmoreland v. Amgen et al. On June 5, 2006, a qui tam lawsuit was filed against Amgen, Inc., as well as AmerisourceBergen Corporation, and its subsidiaries, INN, Oncology Supply (“OS”), and AmerisourceBergen Specialty Group.287 The relator alleged that defendants Amgen, INN, and OS violated the federal AKS by inappropriately encouraging providers to submit claims for payment by Medicare for the value of the excess product, or “overfill,” that was contained in the vials of their drug 284 Id. at 212–13. Id. at 213. 286 Id. 287 See United States ex rel. Westmoreland v. Amgen et al., Compl., No. 06-10972-WGY, ECF No. 1 (D. Mass. 2006). 285 48 Aranesp, but not included in calculating Aranesp’s average sales price (“ASP”).288 In relevant part, the relator also alleged that the defendants improperly gave special incentives to Aranesp purchasers who contracted with INN and encouraged physicians to prescribe medically unnecessary drugs and bill Medicare for overfill amounts that were not administered.289 The Westmoreland relator also alleged that Amgen created INN ostensibly to be an independent entity that would focus on nephrology practices and physicians, but that actually acted as a “de facto marketing arm for Amgen” that pushed Amgen products to businesses.290 Amgen allegedly funneled business to INN and OS, which then targeted customers based on lists provided by Amgen and used an administrative fee as a way to pass through discounts to customers.291 The Westmoreland complaint did not contain allegations of violations of the FDCA or of product quality or safety deficiencies.292 By January 2009, the Company became aware of the Westmoreland complaint. Defendant Chou informed the Board of its existence at the Board’s “Monday call” on February 2, 2009, and to the Audit Committee on February 4, 2009.293 288 Id. ¶¶ 41–48. Id. ¶¶ 55–70. 290 Id.¶¶ 71–72. 291 Westmoreland Fourth Am. Compl. ¶ 303. 292 SLC Report 216. 293 Id. at 216–17. 289 49 2. Mullen Raises Concerns Internally a. Mullen’s Time as COO/President of ABSG Mullen was named COO/President of ABSG in September 2009 after David Yost, former CEO and Chairman of the Board, announced his plan to retire.294 By way of a succession plan, the Board decided to move Defendant Collis from his role as President of ABSG to ABDC to give Defendant Collis more experience with other parts of ABC’s business so that he could one day take over as ABC’s CEO.295 Mullen was chosen to take over leadership of ABSG as President and COO.296 In his position as COO of ABSG, OS came under Mullen’s purview,297 so Mullen undertook an effort to drill down into the OS business and learn how OS went to market.298 However, Mullen learned about OS’s pricing structure, which caused him to have questions because he observed that profitability at OS was highly variable across products and customers.299 He believed that ION was too close to OS, its distributor, which allowed the entities to coordinate which manufacturers were or were not providing favorable pricing.300 After attending ION meetings with manufacturers and physicians,301 Mullen assumed that if these meetings were 294 Id. at 218. Id. at 218–19. 296 Id. at 219. 297 Id. 298 Id. 299 Id. 300 Id. at 220. 301 Id. 295 50 occurring openly and as a matter of course, they must be “above board.”302 Similarly, Mullen assumed that the PFS Program was a compliant business practice.303 After completing his review of the ABSG business units in January 2010, Mullen delivered a “strategic initiatives” presentation at an ABSG Team Lead Retreat304 that included the results of a survey of the ABSG business unit general managers, broad strategy discussions, and efforts to optimize services provided by external vendors.305 However, the presentation did not contain any specific regulatory or compliance-related concerns regarding ABSG’s oncology business.306 Throughout his time at ABSG, Mullen never raised any of the allegations contained in his qui tam action or this action with either ABSG’s Corporate Counsel or ABSG’s Group General Counsel, whose offices abutted that of Mullen, before his departure from the Company.307 b. Mullen Raised Concerns Post-Termination On April 8, 2010, Mullen was terminated from his role as COO/President of ABSG due to his underperformance in the COO position.308 As part of his separation 302 Id. Id. 304 Id. 305 See SLC Report Ex. 293. 306 Id. at 4. 307 SLC Report 223–24. 308 SLC Report Ex. 297. 303 51 package, Mullen was required to inform ABC of any concerns not otherwise known to ABC management.309 Because Mullen had previously been considered to be the corporate representative in Westmoreland, he had reviewed the court records and allegations contained within the complaint in preparation.310 He came to believe that the Westmoreland allegations potentially applied to ION, OS, and the PFS Program.311 Mullen contacted Defendant Chou stating he had concerns he wished to share with the Company.312 In May 2010, ABSG’s Group General Counsel met with Mullen,313 at which point Mullen summarized his two categories of concerns: (1) that average sales price (“ASP”) was not reported correctly in connection with how MII handled overfill, and (2) that there was insufficient separation of OS and ION.314 Mullen did not raise any concerns about FDA regulatory compliance, pharmacy licensing, safety, sterility, or any other matter that ultimately became the basis for the resolutions of the DOJ’s criminal and civil investigations that resulted in the corporate trauma at issue here, discussed infra at Section I.F.9.315 After the meeting, Mullen sent the Group General Counsel an email outlining the process through which MII’s business 309 SLC Report Ex. 300. SLC Report 228. 311 Id. 312 SLC Report Ex. 302. 313 SLC Report 229. 314 Id. 315 Id. 310 52 model purportedly allowed manufacturers to transfer free product in the form of overfill to wholesalers that then distributed the free product to physicians.316 The Board was informed by Defendant Chou of Mullen’s concerns in the context of explaining the Ober Kaler review and introducing the presentation of Ober Kaler’s report (the “Ober Kaler Report”).317 3. Ober Kaler Report In June 2010, the Company engaged Ober Kaler to review the business practices of the Company’s Oncology Group as a whole318 and Defendant Chou shared the documents provided by Mullen for Ober Kaler’s analysis. 319 Ober Kaler was charged not only with conducting a target review of ION’s GPO compliance320 but also to assess “overall compliance with federal anti-kickback/fraud and abuse laws and the federal false claims act” at both ION and OS.321 As neither the Westmoreland complaint nor Mullen raised concerns about FDCA compliance or 316 SLC Report Ex. 204, at 2–4. SLC Report 232. 318 SLC Report Ex. 308. 319 SLC Report Ex. 306. 320 Group purchasing organizations (“GPOs”) are regulated entities. See SLC Report Ex. 390. As a GPO, ION would negotiate with pharmaceutical manufacturers and vendors, such as OS, on behalf of ION’s paying member physician practices. See Section I.A.1. Similar to the allegation in the Westmoreland complaint that INN was a “de facto marketing arm for Amgen” that pushed Amgen products to businesses, Mullen alleged that there was insufficient separation between ION and its vendor, OS, such that it violated regulations pertaining to GPOs. See Section I.F.1; Section I.F.2.b. As part of this scheme, the Westmoreland relator alleged that Amgen funneled business to INN and INN would use an administrative fee to pass through discounts to customers, thereby violating the Anti-Kickback Statute. See Section I.F.1. 321 SLC Report Ex. 20, at 2. 317 53 sterility, Ober Kaler’s mandate did not include a review of those concerns.322 Also excluded from Ober Kaler’s mandate was a review of the legality of the PFS Program because it was not at issue in the Westmoreland case or with Mullen.323 As part of its review, Ober Kaler interviewed the Chief Pharmacist at the Dothan facility regarding his role in the PFS Program.324 The Chief Pharmacist explained how the syringes were filled, how the Pharmacy made money, and how the service is marketed.325 However, Ober Kaler did not ask about, and the Chief Pharmacist did not discuss, FDCA regulations or sanitation issues.326 Ober Kaler discussed an early version of its draft presentation with Defendant Chou, the ABC CCO, the ABSG General Counsel, the ABSG Corporate Counsel, the ABSG CEO, an attorney at Morgan Lewis, and an attorney at Buchanan Ingersoll.327 On the call, Ober Kaler asked about the PFS Program in the context of AKS and GPO328 concerns, specifically asking about a discount under the program and what the physician took possession of after placing an order.329 After an attorney from Ober Kaler requested to “have an adequate explanation of the program when or if the government comes and asks about it[,]” Defendant Chou suggested that 322 SLC Report 234. Id. 324 SLC Report Ex. 313. 325 Id. at 1–2, 4. 326 Id. 327 SLC Report Ex. 314, at 20. 328 See n.320, supra. 329 SLC Report Ex. 307, at 4–5. 323 54 Ober Kaler “talk to [ABSG General Counsel and [ABSG Corporate Counsel] because they had a similar reaction to the program but felt better after examining the facts more clearly.”330 ABSG’s General Counsel believed that the PFS Program was “previously blessed” by external counsel before he joined the Company, and ABSG’s Corporate Counsel believed that the Pharmacy was not subject to FDA regulations or cGMPs at the time of the meeting.331 In light of this understanding and the fact that neither the Westmoreland case and nor the Mullen allegations raised concerns about the PFS Program’s FDA compliance or sterility, Ober Kaler’s review did not include follow-up on the PFS Program.332 On August 11, 2010, Ober Kaler presented its findings to the Audit Committee.333 Ober Kaler’s presentation specifically referenced the PFS Program in its general description of the “[r]ole of Oncology Supply,” but Ober Kaler did not reference sterility or FDCA concerns.334 Beyond describing three aspects of the PFS Program, the final presentation did not otherwise refer to MII or the PFS Program.335 At the end of the presentation, the Audit Committee “instructed management to undertake appropriate consideration and follow-up of the recommendations.”336 330 Id SLC Report 237. 332 Id. at 237–38. 333 SLC Report Ex. 81, at 1–2. 334 SLC Report Ex. 20, at 4, 9–12. 335 Id. at 4. 336 SLC Report Ex. 81, at 1–2. 331 55 On October 19, 2010, Ober Kaler sent a final memorandum to Defendant Chou containing action items for the Company to consider, including four broad categories: (1) the definition of the roles of ION and OS; (2) discounting practices at OS; (3) ION services to pharmaceutical manufacturers; and (4) GPO safe harbor compliance.337 The Company began implementing new policies in response to Ober Kaler’s report even before the suggested action items were finalized by Ober Kaler.338 The Audit Committee received at least two updates from Defendant Chou on the Company’s progress in addressing Ober Kaler’s recommendations.339 By November 21, 2010, the Company implemented nearly all of Ober Kaler’s recommended action items.340 4. Mullen’s October 2010 Qui Tam Complaint On October 21, 2010, Mullen filed a qui tam complaint under the Federal Claims Act (the “FCA”) against ABC, ABSG, ION, OS, and MII in the U.S. District for the Eastern District of New York.341 This complaint largely mirrored the allegations that Mullen raised in his May 2010 meeting with ABSG’s General Counsel, including that the free services provided by ION and OS constituted kickbacks in violation of the AKS and FCA.342 He also alleged that ION, OS, and 337 SLC Report Ex. 317, at 1–3. SLC Report 241. 339 Id. at 242. 340 SLC Report Ex. 323, at 9–13. 341 SLC Report Ex. 4. 342 Id. ¶ 7. 338 56 MII engaged in an illegal overfill laundering scheme designed to pass kickbacks to medical providers and allow drug manufacturers to overreport the drugs’ ASPs.343 The October 2010 qui tam complaint did not contain any allegations relating to sanitation, repackaging, or FDCA violations.344 While qui tam complaints are kept under seal,345 on October 27, 2010, Mullen’s qui tam complaint was inadvertently unsealed.346 An attorney with Buchanan Ingersoll transmitted the unsealed complaint to the ABC’s CCO who notified Defendant Chou, attorneys from Morgan Lewis, and the broader ABC executive team and ABSG’s President and Group General Counsel.347 Defendant Chou notified the Board of the suit348 and the Board discussed “the status of a qui tam matter involving Amgen Inc. and two business units of [ABSG], ABSG, and the Company” at its November 12, 2010, meeting.349 5. Mullen’s January 2011 Amended Qui Tam Complaint In January 2011, Mullen filed a First Amended FCA Qui Tam Complaint (the “FAC”)350 that added new allegations related to violations of the FDCA and 343 Id. ¶ 8. See generally SLC Report Ex. 4. 345 31 U.S.C. § 3730(b)(2). 346 See SLC Report Ex. 324. 347 Id. 348 SLC Report Ex. 325, at 4. 349 SLC Report Ex. 326. 350 SLC Report Ex. 5. 344 57 Alabama state pharmacy regulations.351 Specifically, the FAC alleged that MII was operating as an unlicensed manufacturer and repackager of drugs and thus was operating without proper FDA oversight.352 MII allegedly violated “any number” of FDA protocols designed to protect against contamination, product mix-ups, misidentification, mislabeling, deficient inventory control, etc.353 For the first time, Mullen alleged that MII operated as a drug repackager or manufacturer under the FDCA because it “compounded” pre-filled syringes, used large-scale vacuum and centrifuge equipment to extract drugs from manufacturer’s vials in a facility designed solely for that purpose, and sold the pre-filled syringes to other companies as opposed to individual patients.354 The FAC was filed under seal and stayed under seal.355 The Company was not informed of the allegations contained within the FAC until January 29, 2016, when federal prosecutors shared three complaints with the Company as part of efforts to facilitate a settlement.356 351 SLC Report 247. FAC ¶ 8. 353 Id. ¶ 9. 354 Id. ¶ 201. 355 SLC Report 249. 356 SLC Report Ex. 328. 352 58 6. The Department of Justice’s Investigation Around the time Mullen filed his qui tam lawsuit, the Department of Justice (“DOJ”) initiated parallel criminal and civil investigations into ABC.357 a. July 2012 Search of MII On July 11, 2012, an FDA search warrant was executed at OS’s Dothan facility with a focus on MII’s pharmacy.358 At the time the search warrant was executed, federal agents also served a subpoena on ABSG as part of an investigation into potential federal fraud, false claims, and other offenses.359 While executing the search warrant and subpoena, federal agents seized product—pre-filled syringes, partially filled syringes, and empty vials—and interviewed some employees.360 b. ABC Officers’ Response to the Search The Company engaged Morgan Lewis on the day of the search to help the Company respond to the search warrant and subpoena.361 After interviewing the employees who were interviewed by federal agents during the search,362 Morgan Lewis learned, and shared with Defendant Chou, that the federal agents asked about topics like the employees’ job duties; how MII fit into the corporate structure; how 357 SLC Report 249. Matt Elofson, FDA Agents Search Oncology Supply Business, DOTHAN EAGLE (July 11, 2012), https://dothaneagle.com/news/fda-agents-search-oncology-supply-business/article_a9cb93fc0e3d-5701-9958-35f8544b1f82.html; SLC Report Ex. 239, at 2. 359 SLC Report Ex. 331, at 1. 360 SLC Report Ex. 332. 361 See SLC Report Exs. 334–35. 362 SLC Report Ex. 340. 358 59 overfill was captured, “stored,” and “tracked”; whether MII profited off of overfill; the sterility and stability of the pre-filled syringes, including testing performed at MII and employee training; the packaging and labeling of pre-filled syringes with patient and lot information and how patient information was protected; the rebate program for pre-filled syringes; patient records; and whether MII used a “centrifuge” in the pre-filled syringe process.363 To better understand what prompted the search, Defendant Chou and Company counsel collected and considered earlier legal reviews and work product related to the Pharmacy, including the 2003 Reed Smith memorandum discussing MII’s PFS Program; the May 2012 Pharmacy Directive regarding patient-specific labeling at MII; and the then-current version of the PFS Program agreement.364 ABC in-house counsel also received Mullen’s May 2010 allegations, Ober Kaler’s 2010 review of ION and OS, and a summary of ABC’s action items in response to Ober Kaler’s review.365 c. The Board’s Response to the Search The Board was informed of the search of MII and the subpoena on July 12, 2012, a day after the search occurred.366 At the August 9, 2012, Board meeting, 363 SLC Report Ex. 341. SLC Report Ex. 343, at -498130. 365 SLC Report Exs. 344–47. 366 SLC Report 257. 364 60 Defendant Chou updated the Board on “significant legal matters affecting the company” and on “certain matters that would be disclosed in the Company’s. . . Form 10-Q for the quarterly period ended June 30, 2012.”367 The Board members discussed the search, the basis for the government’s action, and whether there were any concerns about MII’s operations, including any concerns about product adulteration, sterility, or patient safety.368 At that time, the Company was only aware of Mullen’s original October 2012 qui tam complaint, which did not contain any FDCA-related allegations.369 The Board was also unaware of any prior history of patient safety or sterility issues at MII; ABC management confirmed to the Board that such problems had not occurred in the past.370 While the Board and management considered closing the Pharmacy after the July 2012 search, MII remained open in light of the lack of clear indicia that it was operating in violation of regulations.371 In August 2012, the Board, in consultation with Morgan Lewis, decided to disclose the subpoena in the Company’s upcoming Form 10-Q372 and in the Company’s Annual form on Form 10-K for the fiscal year ending September 30, 2012.373 367 SLC Report Ex. 353, at 5. SLC Report 259. 369 Id. 370 Id. at 260. 371 Id. at 260–61. 372 Id. at 261; see also SLC Report Ex. 355. 373 ABC Annual Report on Form 10-K (2012), at 57. 368 61 7. November 2012 Potential Negative News Article In October 2012, Katherine Eban,374 a journalist for Fortune magazine, contacted a Vice President for Corporate & Investor Relations at ABC about an article she was writing regarding the July 2012 search of OS.375 After working with CSRA leadership, in-house counsel, and Defendant Chou, who consulted outside counsel to develop talking points, the Vice President spoke with Ms. Eban by phone on October 22, 2012.376 During the call, Ms. Eban focused on the government’s investigation, the Pharmacy’s parenteral license, whether the syringe labels included the lot number, the harvesting of overfill, and whether the Pharmacy was engaged in the manufacturing process.377 Ms. Eban did not raise any concerns about safety or sterility; however, Ms. Eban did inquire into how MII used overfill to offer pre-filled syringes at a discount.378 Ultimately, Ms. Eban did not publish the article on October 24, 2012, but she continued to ask the Vice President follow-up questions into early November.379 The Vice President followed public relations firm Starkman & Associates’ recommendation to contact Ms. Eban’s editor 374 Ms. Eban had previously written a book entitled Dangerous Doses that criticized ABC and other drug companies for allegedly distributing counterfeit or adulterated drugs, which caused the Company to become apprehensive of how Ms. Eban would portray the Company. SLC Report 263–64. 375 SLC Report Ex. 356, at 4–5; SLC Report Ex. 357, at 1. 376 SLC Report Ex. 356, at 2–3. 377 SLC Report Ex. 357, at 2. 378 SLC Report Ex. 252, at 2. 379 SLC Report Ex. 360, at 2. 62 regarding the falsity of Ms. Eban’s allegations that the Pharmacy did not have a parenteral license, explaining to the editor that the Pharmacy had recently passed an inspection by the Alabama Board of Pharmacy.380 The Board was apprised of the potential Fortune article at its November 15, 2012, meeting.381 The Board did not express concern that Ms. Eban was exposing wrongdoing at the Company, or that there were compliance issues at MII, because the Board was confident in the legality of MII’s business model and its classification as a traditional pharmacy as of November 2012.382 On November 16, 2012, Ms. Eban’s editor at Fortune e-mailed the Vice President to inform her that Fortune had decided against running the article.383 8. Evolution of the DOJ Investigation a. DOJ Interactions: 2012–2013 Following the July 2012 subpoena, the DOJ issued an additional three subpoenas in 2013 alone, all of which were generally focused on financial issues related to MII, overfill, and the PFS Program, although one requested information regarding sterility testing and communications about the quality of the pre-filled 380 SLC Report Ex. 363, at 1–2. SLC Report 267. 382 Id. at 267–68. 383 SLC Report Ex. 366, at 1–2. 381 63 syringes.384 Both in-house counsel and Morgan Lewis viewed Mullen’s qui tam complaint as the likely impetus for the requests in these subpoenas.385 Throughout 2013, Morgan Lewis reviewed these subpoenas and advised ABC on the subpoenas and the status of the MII investigation.386 At a May 2013 presentation to ABC’s Legal Department, Morgan Lewis described the regulatory landscape for pharmacies, addressed when a pharmacy would be subject to FDA regulation, and explained why MII was exempt from federal regulation as a stateregulated pharmacy.387 By the end of 2013, the DOJ’s subpoenas and interviews did not provide the Company with a clear understanding of DOJ’s investigative theories, although they appeared to derive from Mullen’s qui tam allegations about AKS and pricing issues.388 Although ABC employees and Morgan Lewis considered potential FDCA theories, they concluded that the Company had a strong defense that MII was not subject to FDA regulation.389 b. DOJ Interactions: 2014–2016 While MII closed in January 2014, ABC continued to receive subpoenas related to its operations. From 2014 through March 2016, the DOJ issued twelve more subpoenas seeking documents and information about MII and the PFS 384 See SLC Report Ex. 369; SLC Report Ex. 371. SLC Report 272–74. 386 Id. 387 SLC Report Ex. 376, at 6–17, 53–54. 388 SLC Report 274. 389 See, e.g., SLC Report Ex. 376. 385 64 Program, including MII’s closure, “bubbles, floating (‘floaters’) or other particulate matter” in pre-filled syringes, and the volume of drug product contained in the syringes.390 These requests also focused on the Company’s compliance program and audits of MII.391 On October 27, 2014, Morgan Lewis presented to the DOJ on behalf of MII and argued that MII did not violate the FDCA, FCA, AKS, or the Prescription Drug Marketing Act.392 Following this presentation, the DOJ issued a subpoena about “filter syringes” used at MII and appeared to be focusing on MII’s practice of removing particulate from syringes of Procrit.393 The 2014 DOJ subpoenas suggested a possible interest in senior executives’ and the Board’s role in MII oversight as evidenced by the DOJ requesting documents and information about how sales of overfill or pre-filled syringes factored into compensation and performance evaluations of Company personnel, including directors and officers;394 the Board’s involvement in the decision to construct the Pharmacy;395 and presentations to the Board about MII during the process of AmeriSource Health’s merger with Bergen Brunswig.396 390 SLC Report Exs. 378–87. SLC Report 275. 392 SLC Report Ex. 389. 393 SLC Report Ex. 392; see also SLC Report Ex. 384. 394 SLC Report Ex. 385. 395 SLC Report Ex. 386. 396 SLC Report Ex. 387. 391 65 c. The DOJ Presentation In October 2015, attorneys from ABC, Morgan Lewis, and the DOJ Civil and Criminal Divisions met to discuss DOJ’s theories of liability in the MII investigation.397 During this meeting, federal attorneys, both civil and criminal, presented a 280-slide PowerPoint deck to the attendees over the course of approximately four and half hours.398 From a liability standpoint, DOJ’s presentation focused on alleged FDCA violations, many of which hinged on the argument that MII was a repackager or manufacturer, therefore not falling within FDA’s exception for “bona fide pharmacies.”399 The FDCA violations were alleged as misdemeanors.400 The DOJ also presented two civil FCA theories: (1) MII caused physicians to submit false claims for payment by providing adulterated and unapproved new drugs that were not reasonable or medically necessary, and (2) the use of overfill resulted in double billing and improper reimbursement.401 The Audit Committee received an update about the DOJ investigation and were informed of this meeting between ABC’s counsel and the United States Attorney’s Office.402 397 SLC Report Ex. 393, at 2. Id. at 1. 399 Id. at 4, 14. 400 See id. at 27. 401 See id. at 26–27. 402 SLC Report Ex. 394, at 3. 398 66 d. The Company’s Response Following the October 2015 presentation, the Company asked Morgan Lewis to conduct a further investigation into, and to prepare a rebuttal of, the DOJ’s theories.403 On February 29, 2016, Morgan Lewis presented its investigative findings to civil and criminal DOJ attorneys.404 While Morgan Lewis acknowledged that some of MII’s conduct was problematic, Morgan Lewis emphasized that certain aspects of the case presented serious litigation risk for DOJ.405 Morgan Lewis also contended that the federal regulatory landscape with respect to compounding was ambiguous at the time, and thus it was unclear when a state-regulated pharmacy would be deemed a drug manufacturer subject to FDA’s registration and cGMP requirements.406 The Board was updated again on the MII investigation at its March 3, 2016, meeting.407 9. DOJ Resolutions Following the February 29, 2016, presentation by Morgan Lewis, ABC and the DOJ began negotiating resolutions of both the criminal and civil allegations. 408 403 SLC Report 284. Id. at 285. 405 SLC Report Ex. 400, at 2–3; SLC Report Ex. 401, at 2–3. 406 SLC Report Ex. 400, at 109; SLC Report Ex. 401, at 125–26. 407 SLC Report Ex. 402, at 14. 408 SLC Report 288. 404 67 The Board received seven updates on the investigation at Board meetings, including three from Morgan Lewis.409 As the investigation progressed and the DOJ’s legal theories and financial demands became apparent, ABC’s management, in close consultation with the Board, determined that resolving the criminal case based on a single, strict liability misdemeanor count under the FDCA was in the Company’s best interests, notwithstanding the Company’s legal defenses.410 In September 2017, ABSG pleaded guilty to a misdemeanor FDCA violation stemming from ABSG’s failure to register MII with FDA and agreed to pay a $260 million monetary penalty and to comply with the terms of a Compliance Agreement.411 The plea agreement was a compromised resolution in which ABSG admitted to a limited statement of facts but not to the factual allegations in DOJ’s Information.412 During the resolution negotiations, the parties “agree[d] that defendant ABSG may challenge, contest and refute the factual allegations in the Information in any subsequent proceeding.”413 No current or former employees were charged as defendants by the DOJ.414 ABSG 409 SLC Report Ex. 402, at 5; SLC Report Ex. 403, at 5; SLC Report Ex. 404, at 13–14; SLC Report Ex. 405, at 4; SLC Report Ex. 406, at 15; SLC Report Ex. 407, at 7; SLC Report Ex. 43, at 2–3. 410 SLC Report 250. 411 Plea Agreement, United States v. AmerisourceBergen Specialty Group, LLC, No. 17-507 (NG) (E.D.N.Y. Sept. 27, 2017). 412 SLC Report 289. 413 Plea Agreement, United States v. AmerisourceBergen Specialty Group, LLC, No. 17-507 (NG), ¶ 2 (E.D.N.Y. Sept. 27, 2017). 414 SLC Report 292. 68 did not take any disciplinary action against individuals involved in the conduct that led to the guilty plea, because MII had already been closed and many of its employees had been let go.415 After several additional months of unsuccessful negotiations related to the civil matter, the DOJ showed the Company a draft complaint in July 2017.416 Due to the gap between the parties’ settlement offers, and the Company and outside counsel’s views that DOJ’s case relied on novel theories to which the Company had strong defenses, ABC prepared to litigate the case.417 However, after being informed that the potential civil penalties and trebled damages could exceed $6.6 billion, the Board agreed with Morgan Lewis’s recommendation to continue resolution negotiations with DOJ.418 The DOJ eventually accepted the Company’s offer to settle the matter for $625 million on November 16, 2017,419 and the settlement agreement and related CIA were fully executed on September 28, 2018.420 As part of the resolution, the Company admitted only to facts expressly included in the Statement of Facts contained in the civil settlement agreement.421 415 SLC Report Ex. 409; Tr. of Plea and Sentencing Hr’g, United States v. AmerisourceBergen Specialty Group, LLC, No. 17-507 (NG) (E.D.N.Y. Sept. 27, 2017)). 416 SLC Report Ex. 43, at 3. 417 See id.; SLC Report Ex. 412. 418 SLC Report Ex. 43, at 2–3. 419 SLC Report Ex. 413. 420 Settlement Agreement (Sept. 28, 2018); SLC Report Ex. 179. 421 Settlement Agreement (Sept. 28, 2018), at Recitals ¶ K. 69 10. Compensation Considerations Relating to Defendants Chou and Collis after the MII Resolution On multiple occasions, the Board considered whether to reduce executive compensation or bonus amounts for Defendants Chou and Collis as a result of the DOJ Resolutions.422 The Chief HR Officer contacted Pearl Meyer & Partners LLC, an executive compensation consulting firm, to receive advice on how to handle the situation.423 The firm was unaware of any instances of Compensation Committees reducing compensation or bonus amounts, in situations comparable to ABC’s current posture, absent “executive misconduct or gross negligence.”424 They had only seen “voluntary bonus give backs in situations involving poor company performance that was not already reflected in annual bonus payouts.”425 The Compensation Committee met on November 14, 2018, and, following an executive session, decided against reducing Defendants Chou’s and Collis’s salaries as a result of the DOJ Resolutions after concluding that the conduct of Defendants Collis and Chou did not rise to the standard to find individual culpability for intentional fraud.426 422 SLC Report 296. SLC Report Ex. 414. 424 Id. 425 Id. 426 SLC Report 300; SLC Report Exs. 417–18. 423 70 G. Litigation Ensues On October 11, 2019, Plaintiffs filed the complaint pleading two counts of breach of fiduciary duty and one count of unjust enrichment.427 On August 24, 2020, I denied the Defendants’ motions to dismiss under Rule 23.1 for failure to make demand or show that demand would have been futile and, in the alternative, under Rule 12(b)(6) for failure to state a claim.428 I concluded that Plaintiffs sufficiently pled that “a majority of the Demand Board faces a substantial likelihood of liability for Count I because the Plaintiffs have adequately pleaded that a majority of the Demand Board consciously ignored red flags rising to the level of bad faith.”429 H. The Company Forms the SLC On September 24, 2020, the Company authorized a two-person special litigation committee to investigate and evaluate the allegations and issues raised in this action, in addition to determining whether prosecuting this action was in the best interests of the Company or if the action should be dismissed or settled.430 Initially, the two SLC members were D. Mark Durcan and Dennis M. Nally.431 Durcan was removed from the SLC on December 11, 2020, because Durcan had previously Verified S’holder Deriv. Compl. for Breach of Fiduciary Duties, Dkt. 1 (“Verified Compl.”). See Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065 (Del. Ch. Aug. 24, 2020) (“Teamsters I”). 429 Id. at *17. 430 SLC Report Ex. 6, at 5. 431 SLC Report 36. 427 428 71 served on the Company’s Audit Committee that had received an earlier stockholder demand referenced in Mullen’s qui tam complaint.432 1. Dennis M. Nally Nally is the former chairman of PricewaterhouseCoopers (“PwC”) International Ltd. and currently serves on the boards of Morgan Stanley, The HOW Institute for Society, and the Royal Poinciana Golf Club.433 Prior to joining the Company’s board, Nally knew only one other director, nonparty Richard Gozon, the former chairman of the Board.434 Nally’s relationship with Gozon was attenuated; limited to being members of the same golf club.435 I. The SLC Investigation and its Report On November 10, 2020, I granted the SLC’s motion to stay the proceedings pending its investigation.436 The SLC moved to extend the stay on May 7, 2021, and I granted the stay from May 10, 2021, to May 28, 2021.437 The SLC conducted a seven-month-long investigation. During this time, the SLC collected more than 12 million documents, of which the SLC reviewed 432 Id. at 39–40. See id. at 41–42; see also SLC’s Opening Br. in Supp. of Its Mot. to Dismiss 6, Dkt. No. 98 (“SLC OB”). 434 SLC OB 7. 435 Reply Br. in Supp. of Mot. to Dismiss by the SLC of the Board of Directors for Nominal Def. ABC 29–30, Dkt. No. 109 (“SLC RB”). 436 Signed Order Granting Mot. to Stay by the SLC of the Board of Directors of Nominal Def. AmerisourceBergen Corp., Dkt. No. 58. 437 Order Granting Mot. to Extend Stay by the SLC of the Board of Directors of Nominal Def. AmerisourceBergen Corp., Dkt. No. 62. 433 72 approximately 220,0000.438 The SLC also conducted 77 interviews of 67 witnesses.439 The Report itself was 365 pages in length, containing over 1500 footnotes, with 420 exhibits attached. Ultimately, the SLC concluded that pursuing this action any further is not in the best interests of the Company in light of “all relevant factors—including the factual findings and applicable legal standards, potential costs to the Company, public relations, and distraction to the Board, management, and other ABC employees[.]”440 With respect to Count I of the complaint, the SLC concluded that the Director Defendants did not fail to implement and monitor reporting or information systems, or otherwise exercise their oversight duties, but rather had “implemented a system of reporting that was more than adequate to meet the Caremark standards.”441 Specifically, the SLC found that the Company had an Audit Committee with clear reporting lines and the Company repeatedly updated the compliance program as the Company’s business grew, providing sufficient evidence that the directors did not “utterly fail[]” to fulfill their duty to implement and monitor a compliance system.442 The Audit Committee considered and determined which compliance and regulatory matters needed the full Board’s attention and the Audit Committee Chairman 438 SLC Report 47–53. Id. at 53–54. 440 SLC OB 39. 441 SLC Report 319. 442 Id. at 320. 439 73 reported to the Board accordingly.443 The SLC also found that ABSG was not intentionally nor actually segregated from the rest of ABC’s compliance program.444 Furthermore, the SLC concluded that MII’s operations were not “mission critical” for the Company under Marchand and therefore did not present a strong basis for pursuing Caremark claims against the Defendant Directors.445 Thus, “the SLC concluded that the Audit Committee and Board’s efforts amounted to more than a mere ‘attempt’ to oversee MII’s compliance with applicable laws[.]”446 The SLC also determined that five of the six “red flags” alleged in the complaint did not amount to red flags for the purposes of the second prong of Caremark.447 The SLC found that the Board responded to each of the six events, specifically (1) the 2007 Davis Polk Report; (2) Mullen’s qui tam allegations; (3) the Ober Kaler Report; (4) the 2012 FDA search warrant and subpoena; (5) the 2012 Fortune magazine article; and (6) the 2006 Capital Expenditure Report.448 The SLC also considered whether unpled events might also qualify as red flags, such as patient-specific labeling concerns, and concluded that none did.449 Even if the Court were to consider the cumulative effects of these multiple events, the SLC concluded 443 Id. at 325–26. Id. at 326. 445 Id. at 327. 446 Id. at 329. 447 Id. at 329–30. 448 Id. at 330–47. 449 Id. at 330, 348–49. 444 74 it would not change its conclusion that the Board responded to and actively monitored each issue.450 With respect to Count II of the complaint, the SLC concluded that the Officer Defendants did not knowingly operate an illegal business model or fail to inform the Board about problems with the PFS Program’s regulatory compliance.451 Specifically, the SLC concluded that the CSRA Senior Director’s review of MII in 2012 did not put the Officer Defendants on notice of “noncompliance because they were informed that state law, rather than the FDCA, applied to the Pharmacy, and because they understood that any issues had been corrected and were not recurring[,]”452 nor were the Officer Defendants grossly negligent in their management of MII; rather, “the Officers believed in good faith that MII was operating legally as a pharmacy and dispensing safe, sterile products.”453 As to Defendant Chou, the Company’s General Counsel, the SLC concluded that he did not breach his fiduciary duties with respect to how he handled the Ober Kaler Report, CSRA’s 2012 review of MII, and the Company’s handling of the DOJ investigation.454 450 Id. at 349–50. Id. at 350–51. 452 Id. at 351. 453 Id. at 352–53. 454 Id. at 355–58. 451 75 Finally, with respect to Count III, the SLC concluded that there is no basis for an unjust enrichment claim against Defendant Collis because he did not breach his fiduciary duties as alleged in Counts I and II of this action.455 Because the breach of fiduciary duty and unjust enrichment counts rely on the same alleged acts or omissions, the SLC’s conclusion that there were no breaches of fiduciary duty forecloses the unjust enrichment count.456 The SLC filed its Report and moved to dismiss this derivative action on September 22, 2021.457 The parties finished briefing the SLC’s motion to dismiss on March 6, 2023,458 and I heard oral arguments on July 12, 2023.459 II. ANALYSIS I found in Teamsters I, based on the allegations of the complaint and the plaintiff-friendly inferences therefrom appropriate at the motion-to-dismiss analysis, that a majority of the ABC directors could not bring their business judgment to bear because there existed a substantial risk that they may be liable for breaches of fiduciary duty.460 Thus, the traditional deference to the board’s control of corporate litigation assets was unwarranted, and the matter could proceed derivatively. ABC 455 Id. at 359. Id. at 360. 457 See SLC Report. 458 See SLC RB. 459 See Judicial Action Form re Mot. Dismiss before Vice Chancellor Sam Glasscock dated 7.12.23, Dkt. No. 115. 460 Teamsters I, 2020 WL 5028065, at *26. 456 76 has attempted to reassert directorial control over the suit by creating a special litigation committee consisting of an unconflicted director. That SLC has investigated the claims in Plaintiffs’ complaint and recommended dismissal of the action. That recommendation is entitled to some credit but not to the full deference of the application of the business judgment rule. There is a tension in review by any special litigation committee, which this Court recognizes is faced with the rather daunting task of evaluating publicly the behavior of fellow board members. That tension is not a conflict sufficient to sterilize the business judgment of the SLC, but it is sufficient to cause the Court, in evaluating a determination that a derivative action should be dismissed, to review the Committee’s work and the bases for its conclusion, for reasonableness. The pressure on a sole-member SLC is especially evident, and causes a need for close review by the Court. When a special litigation committee concludes that it is in the best interest of the corporation to dismiss a derivative action, the Court reviews the motion to dismiss under “a procedural standard akin to a summary judgment inquiry[.]”461 Under this standard, “the SLC bears the burden of demonstrating that there are no 461 In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 928 (Del. Ch. 2003). 77 genuine issues of material fact as to its independence, the reasonableness and good faith of its investigation, and that there are reasonable bases for its conclusions.”462 A special litigation committee’s motion to dismiss a derivative action is reviewed under the two-pronged analysis—the first prong mandatory, the second discretionary—set forth in Zapata Corporation v. Maldonado.463 The first prong of Zapata requires that the Court “inquire into the independence and good faith of the committee and the bases supporting its conclusions.”464 Regardless of what the Court finds during its inquiry in the first prong, the Court may, in its discretion, move to the second prong, under which the Court must “determine, applying its own independent business judgment, whether the motion should be granted.”465 A. Zapata’s First Prong “The first prong of the Zapata standard analyzes the independence and good faith of the committee members, the quality of its investigation and the reasonableness of its conclusions.”466 The burden lies with the SLC to prove “independence, good faith and a reasonable investigation.”467 462 London v. Tyrrell, 2010 WL 877528, at *12 (Del. Ch. Mar. 11, 2010). 430 A.2d 779 (Del. 1981). 464 Id. at 788. 465 Id. at 789; accord. Diep ex rel. El Pollo Loco Hldgs., Inc. v. Trimaran Pollo P’rs, L.L.C., 280 A.3d 133, 158 (Del. 2022) (reiterating that the Court may apply its own business judgment to determine whether the action should be dismissed). 466 Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 836 (Del. 2011). 467 Zapata, 430 A.2d at 788. 463 78 1. Nally Conducted a Good Faith Investigation In reviewing whether the SLC conducted a reasonable investigation, the Court considers whether there are “material issue[s] of fact” and whether “the SLC acted in good faith and had a reasonable basis for its conclusion.”468 The Court considers the reasonableness of the scope of the investigation to ensure that the SLC thoroughly investigated all causes of action and theories of recovery contain in a plaintiff’s complaint, rather than merely “accept[ing] defendants’ version of disputed facts without consulting independent sources to verify defendants’ assertions.”469 The purpose of the Court’s inquiry is narrow at this “prong one” stage of the proceedings. The Court’s inquiry is not meant to allow plaintiff to litigate the facts and merits of the derivative cause of action, “[r]ather, it is the conduct and activity of the Special Litigation Committee in making its evaluation of the factual allegations and contentions contained the plaintiff’s complaint which provide the measure for the Committee’s independence, good faith and investigatory thoroughness.”470 Thus, it is the SLC and its investigation that are examined under the first prong of Zapata, and not this Court’s independent conclusions about “the merits of the plaintiff’s [case].”471 468 Kahn, 23 A.3d at 842. London, 2010 WL 877528, at *17. 470 Kaplan v. Wyatt, 484 A.2d 501, 519 (Del. Ch. 1984). 471 Id. 469 79 Plaintiffs put forth five ways that they allege the SLC failed to conduct a reasonable investigation. First, Plaintiffs allege that the SLC deemed the Company’s FCA-violating “kickback scheme” to be beyond the scope of the SLC’s investigation. Second, Plaintiffs claim that the SLC did not consider materials from the DOJ’s investigation of the Company. Third, Plaintiffs assert that the SLC’s investigation of the Officer Defendants was inadequate. Fourth, Plaintiffs contend that the SLC’s conclusion that the Director Defendants satisfied their Caremark duties lacks a reasonable basis. Finally, Plaintiffs argue that the SLC’s conclusion that the Company did not violate the law lacks a reasonable basis. Plaintiffs’ attacks on the SLC’s investigation can be grouped into two categories: (a) reasonableness of the scope of the SLC’s investigation and (b) reasonableness of the bases for the SLC’s conclusions. a. The Scope of the Investigation was Reasonable “To conduct a good faith investigation of reasonable scope, the SLC must investigate all theories of recovery asserted in the plaintiffs’ complaint.”472 If the SLC totally fails “to explore the less serious allegations in the plaintiffs’ complaint[,]” doubt may be cast on the reasonableness of the SLC’s investigation if exploring those allegations “would have helped the SLC gain a full understanding 472 London, 2010 WL 877528, at *17. 80 of the more serious allegations in plaintiffs’ complaint.”473 “The court will not fault the SLC for failing to evaluate claims that were not asserted in the Complaint.”474 Plaintiffs first contend that the SLC “intentionally chose not to investigate Defendants’ potential liability in connection with the Company’s FCA [False Claims Act] violations.”475 Specifically, Plaintiffs point to SLC allegedly declaring that the FCA violations, which involved kickbacks and double-billing, were outside the scope of its investigation when it declared that “AKS [Anti-Kickback Statute] and price reporting compliance issues. . . are not at issue in this Action.” 476 As evidence of the SLC’s failure to investigate the FCA violations, Plaintiffs point to the SLC’s (1) dismissal of Mullen’s initial qui tam complaint as “irrelevant” because “the assertions he raised were limited to AKS and price reporting compliance issues[,]”477 (2) deeming the Ober Kaler Report “inconsequential” because it “focused on. . . AKS and price-reporting allegations[,]”478 as well as the SLC’s “nonsensical[] dismiss[al]” of consideration of the DOJ’s investigation that resulted in the Company admitting to liability for violating the FCA.479 473 Id. Diep ex rel. El Pollo Loco Hldgs., Inc. v. Sather, 2021 WL 3236322, at *20 (Del. Ch. July 30, 2021), aff’d sub nom. Diep ex rel. El Pollo Loco Hldgs., Inc. v. Trimaran Pollo P’rs, L.L.C., 280 A.3d 133 (Del. 2022). 475 Lead Pls.’ Answering Br. Opp’n SLC’s Mot. to Dismiss 29, Dkt. No. 104 (“Pls. AB”). 476 SLC OB 27–28. 477 Pls. AB 31 (quoting SLC OB 27–28). 478 Id. (quoting SLC OB 56). 479 Pls. AB 33. 474 81 The complaint contains three causes of action, all of which are focused on the alleged breaches of fiduciary duties with respect to drug safety and sterility in the Pre-Filled Syringe Program and FDCA compliance.480 That is, the complaint is largely silent with respect to violations of the AKS, and to the same extent the SLC would have been justified in not addressing such violations.481 While the complaint lacks any claims asserting illegal kickbacks or double-billing, however, the SLC nevertheless investigated Defendants’ knowledge of those issues. The SLC Report is replete with discussion and analysis of the kickback and double-billing allegations underlying Mullen’s qui tam complaint, the Ober Kaler Report, and the DOJ’s investigation.482 Given the scope of the complaint and the actual scope of the investigation, I find that the SLC has met its burden here. Regarding Mullen’s qui tam complaint, the SLC Report lays out Plaintiffs’ allegations that Mullen raised the AKS and double-billing issues in his qui tam complaint and explains the steps the SLC took to investigate these issues.483 The SLC Report also details its investigation into the Ober Kaler Report that resulted from Mullen’s qui tam complaint, including Ober Kaler’s mandate that included, in relevant part, assessing the Company’s “‘overall compliance with federal anti480 See Verified Compl. ¶¶ 207–23. To be clear, a sufficiently glaring omission by the SLC to thoroughly investigate issues as they arise in the ordinary course of the SLC’s investigation of the claims contained in a derivative action complaint would cause the Court to invoke Zapata’s second prong. 482 See SLC Report 30–32, 48 n.173, 51–52, 53 n.181, 213–33, 243–62, 269–96, 338–40. 483 Id. 30–32, 48 n.173, 51–52, 53 n.181. 481 82 kickback/fraud and abuse laws and the federal false claims act[;]’” the process Ober Kaler used to conduct its investigation; the findings contained within the Ober Kaler Report; and the Company’s response to the Ober Kaler Report.484 The SLC was not “dismissive” of the DOJ’s FCA Investigation; rather, the SLC dedicated over 40 pages of its report to exploration of the facts and sources relating to the DOJ’s fiveyear investigation.485 Next, Plaintiffs contend that the SLC improperly failed to take into consideration the materials underlying the Company’s criminal and civil settlements with the DOJ.486 They point to documents containing allegations relating to Defendant Collis’s role in creating the PFS Program and his knowledge that the program caused double-billing in violation of federal law.487 It is Plaintiffs’ position that the SLC further failed to review the DOJ’s proffer memoranda and the implications those memoranda have on this action.488 However, I find that not only did the SLC consider both the DOJ’s draft civil complaint and the presentation the DOJ gave to ABC about its theories of liability,489 the SLC investigated the allegations underlying it, for example, by interviewing two Morgan Lewis attorneys who attended the presentation and reviewing the 484 Id. at 233–43, 338–40. Id. at 249–62, 269–96. 486 Pls. AB 37. 487 Id. at 38. 488 Id. 38–39. 489 SLC Report 249–62, 269–96. 485 83 contemporaneous memorandum that documented the meeting.490 In the SLC Report, the SLC concluded that the DOJ’s investigation focused on FDCA violations.491 The SLC Report stated that the SLC reviewed the proffer memoranda but declined to rely on those documents after concluding that the information contained within the proffer memoranda was duplicative of information the SLC had already obtained from its witness interviews.492 Plaintiffs’ last contention with respect to the reasonableness of the scope of the SLC’s investigation pertains to Plaintiffs’ allegation that the SLC failed to adequately investigate the Officer Defendants. In support of this contention, Plaintiffs point out that the SLC’s conclusions are contradicted by the DOJ’s allegations against the Officer Defendants, including that they “understood and sanctioned” the PFS Program and the kickback scheme; Defendant Collis’s “demonstrated intimate knowledge” of how the scheme worked; and Defendant Collis’s personal intervention to satisfy manufacturer concerns while keeping illegal double-billing in place.493 With respect to the SLC’s investigation of the Officer Defendants, Plaintiffs rely on a mistaken assertion that the SLC failed to consider the allegations contained 490 Id. at 280–83 & nn.1197–1206. Id. at 281–82. 492 SLC RB 16–17; see SLC Report 249–62, 269–96. The sole proffer memorandum that the SLC did cite to in its Report was that of a witness the SLC was unable to interview. SLC RB 17; see also SLC Report 54 n.182. 493 Pls. AB 42. 491 84 within the DOJ’s draft civil complaint. As explained supra, the SLC considered the DOJ’s allegations but found that these were unproven allegations used by the DOJ to negotiate a settlement with ABC.494 To investigate these allegations, the SLC Report explains that the SLC reviewed relevant documents and interviewed thirdparty witnesses about the regulatory landscape during the Relevant Period and about the legal reviews of MII that were conducted, such as those conducted by Reed Smith and Davis Polk.495 These documents also support the SLC’s conclusion that Defendant Collis, at most, had an understanding of MII’s business model and that all Officer Defendants believed in good faith that MII was operating as a stateregulated pharmacy, not subject to FDA regulations.496 The burden is on the SLC to show that its scope and thoroughness of review were adequate to its task of evaluating the legal action. This, I conclude, it has done. Despite Plaintiffs’ best efforts to attack the reasonableness of the scope of the SLC’s investigation, I find there is no genuine question as to whether the SLC investigation was reasonable in scope and conducted in good faith. b. There are Reasonable Bases for the SLC’s Conclusions Plaintiffs first allege that the SLC’s conclusion that the Director Defendants satisfied their Caremark duties lacks a reasonable basis. To support this argument, SLC’s RB 18–19. SLC Report 141–80. 496 See id. at 353–54. 494 495 85 Plaintiffs attack the SLC’s portrayal of ABC’s compliance program as it pertained to MII by asserting that, during his deposition, Nally could not explain the evidence that supported this conclusion.497 Although Plaintiffs rely on the Davis Polk Report to argue that the Company’s compliance system was not uniform throughout the Company,498 the SLC Report explains that despite Davis Polk recommending areas needing improvement, the Davis Polk Report ultimately concluded that the Company’s compliance program met the “[b]asic legal requirements” under Caremark.499 Moreover, the Company responded to the Davis Polk Report, by implementing the recommendations contained therein.500 Plaintiffs’ reliance on Nally’s lack of recall about specific facts investigated by the SLC is not significant, in light of the fact that SLC’s conclusion that MII was included in ABC’s compliance program is well-documented and supported by facts.501 Plaintiffs also posit that the SLC relied exclusively on self-serving statements in concluding that the Director Defendants did not breach their Caremark duties in their response to Mullen’s qui tam complaint.502 With respect to Mullen’s qui tam complaint, the SLC found that the Board responded by providing Mullen’s concerns to outside counsel at Ober Kaler who then investigated the concerns to develop 497 See Pls. AB 48–50. Id. at 47. 499 SLC Report 108–11, 331–32. 500 Id. at 113–22, 333–35. 501 Id. at 86–88, 90, 189–92, 324. 502 Pls. AB 52–53. 498 86 recommendations to reduce regulatory risks and reported these findings to the Board.503 Plaintiffs go on to criticize the Company’s compliance program as it applied to MII because the reviews CSRA conducted of MII were, according to Plaintiffs, not “formal” enough and failed to raise all issues to the Board level.504 The SLC Report concludes that while CSRA found MII’s failure to use patient-specific labels an issue of concern, CSRA and the Company’s in-house counsel determined that this practice was compliant with state law and therefore did not raise the issue to the Board.505 Once the allegations in Mullen’s qui tam complaint were made known to the Board, the Board discussed them with Defendant Chou and were informed that Morgan Lewis had been retained to defend the Company against the claims and represent the Company in any investigative action.506 This is a Caremark action; the Defendant Directors’ action would be evaluated, if this case were to go forward, not for compliance with best practices or in light of what greater rigor the Board could have brought to the process; the Defendant Directors would instead be liable only for failures of oversight so grossly apparent that they amount to bad faith. I find the SLC’s conclusions in this regard have a reasonable basis. 503 SLC Report 232–43, 337–38. Pls. AB 50–51. 505 SLC Report 192–95, 200–10, 348. 506 Id. at 245–47, 338. 504 87 Plaintiffs next assert that the SLC’s conclusion that the Company did not knowingly violate the law also lacks a reasonable basis.507 This conclusion allegedly “flies in the face of ABSG’s September 27, 2017 federal criminal plea” and “contradicts the admissions in ABC’s September 28, 2018 FCA Settlement Agreement with the DOJ[.]”508 SLC concluded that none of the Officer Directors knowingly operated and maintained an illegal business model.509 This conclusion does not contradict the Company’s federal guilty plea: that plea involved a strict liability offense and therefore did not implicate the Officer Defendants’ knowledge of the violations admitted to.510 Additionally, Plaintiffs point again to Nally’s deposition during which Nally incorrectly stated that states are responsible for enforcing the FCA with respect to Medicare billing.511 Plaintiffs’ reliance on Nally’s limited understanding of Medicare billing and the FCA as indicative of the unreasonableness of the SLC’s conclusions is unfounded—Nally is not an attorney, nor has he claimed to be an expert on these specific matters.512 He is entitled to reasonably rely on the SLC counsel in drawing the conclusions laid out in the SLC Report. 507 Pls. AB 53. Id. at 54–55. 509 SLC Report 350–51. 510 Id. at 289–92. 511 Pls. AB at 55. 512 SLC RB at 27. 508 88 I find that Plaintiffs have failed to discredit the legal bases for the conclusions reached by the SLC in its report. Again, however, the burden is on the SLC, and I find that the SLC, via its report, has demonstrated that its conclusions have a reasonable basis. 2. Nally is Independent “To establish independence the court must be persuaded that the SLC can base its decision on the merits of the issue rather than being governed by extraneous consideration or influences.”513 In determining whether extraneous considerations or influences existed, the Court considers “the members’ personal interest in the disputed transaction, and scrutinizes the members’ relationship with the interested directors.”514 Where, as here, the SLC has a single member, it is more closely scrutinized and the SLC has the burden of proving that its member was able to bring her business judgment to bear without any suspicion of extraneous influence.515 I find Nally facially independent, and scrutinize him in light of Plaintiffs’ allegations of more cryptic extrinsic conflicts. a. Nally’s Relationship with Gozon Nally did not join the ABC Board until months after I denied the Company’s motion to dismiss this action. He is, therefore, free of the suggestions of liability 513 Sutherland v. Sutherland, 958 A.2d 235, 239 (Del. Ch. 2008) (quotations omitted). Id. (quotations omitted). 515 Lewis v. Fuqua, 502 A.2d 962, 967 (Del. Ch. 1985). 514 89 that caused me to allow this matter to proceed derivatively.516 I will focus my analysis of Nally’s independence on whether his relationships “with [D]efendants are of such a nature that they might have caused [Nally] to consider factors other than the best interests of the corporation in making [his] decision to move for dismissal.”517 Here, Nally did not have a relationship with any of the named Defendants prior to joining the Board. The only relationship that Plaintiffs point to is between Nally and a nonparty Board member, Gozon, who served as ABC’s Chairman from 2006 to 2016.518 Nally asserts that this relationship is limited to seeing Gozon on occasion at a golf club where they are both members and serve on the board.519 This is not disabling or suspicious. Plaintiffs, however, contend that this relationship is closer, and is sufficient to undermine Nally’s independence. Plaintiffs point to Nally’s admission that the golf club is an important outlet for him and his wife, both socially and through his ability to serve in leadership at the golf club.520 Further, Plaintiffs attack the SLC’s alleged failure to disclose that Gozon was on the golf club’s nominating committee that is charged with nominating directors to the golf club’s board.521 Plaintiffs speculate 516 See Teamsters I, 2020 WL 5028065, at *3–4, 25. London, 2010 WL 877528, at *13. 518 Pls. AB 60–61. 519 SLC OB 44 (citing Tr. of Deposition of Dennis Nally (“Nally Tr.”) at 34:22–36:16, Ex. A to Transmittal Aff. of Thomas P. Will, Dkt. No. 99). 520 Pls. AB 61 (citing Nally Tr. at 35:10–36:16). 521 Id. at 61. 517 90 that Gozon nominated Nally for his initial term of the golf club’s board (and renominated him during the pendency of this litigation).522 Moreover, Plaintiffs allege that dismissing this derivative lawsuit would inherently benefit Gozon, despite his non-Defendant status, because this litigation implicates actions taken during Gozon’s tenure as the former chairman of the ABC Board during the Relevant Period and would, therefore, expose Gozon to potential litigation or, at the very least, reputational harm and personal embarrassment.523 However, Gozon is not a named defendant in the instant action and therefore is not an “interested director[]” for purposes of Zapata’s first prong.524 Even if I were to assume that Gozon’s previous role as chairman of the ABC Board during the Relevant Period was sufficient to make Gozon an interested director such that his relationship with Nally needs to be more closely examined, Nally and Gozon’s service on the board of the golf club is, in and of itself, insufficient to compromise Nally’s independence.525 While Plaintiffs contend that Gozon was likely instrumental in Nally being nominated for his seat on the golf club’s board, the evidence shows that Gozon was not a member of the nominating committee until 522 Id. at 61–62. Id. at 63–64. 524 Sutherland, 958 A.2d at 239. 525 See, e.g., In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 357 (Del. Ch. 1998), rev’d on other grounds sub. nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 523 91 after Nally’s appointment in 2018.526 I find this relationship too attenuated to disable reliance on Nally’s exercise of judgment in the best interest of ABC. b. Nally’s Ability to be Impartial in Light of His Historical Involvement with Lawsuits Next, Plaintiffs argue that Nally is incapable of considering the merits of this action because (1) Nally was involved in (but not a party to) a separate class action lawsuit that alleged that his former employer PwC violated the FCA (the “Arkansas Class Action”) and (2) through the course of his employment with PwC, Nally acquired an allegedly “long history of adversarial litigation against (and multimillion settlements secured by) the law firms representing Plaintiffs.”527 Plaintiffs do not cite to any case law to support their contentions that either of these allegations would have an impact on Nally’s independence.528 Nor do Plaintiffs allege how Nally’s experience with his former employer’s entirely separate, now-concluded suit, alleging different facts, makes him personally interested in the instant action. Their theory instead seems to be that Nally should be suspected to have sympathy for the Devil, having been accused of being associated with devils, himself. First, Plaintiffs allege that Nally’s involvement in the Arkansas Class Action gave Nally personal experience with pertinent issues such as allegations of 526 See Aff. of Thomas P. Will Supp. SLC RB, Ex. I, Dkt. No. 109. Pls. AB 57–60, 64–66 (emphasis in original). 528 See id. 527 92 fraudulent overbilling, a whistleblower qui tam complaint, and a DOJ investigation and civil action alleging FCA violations.529 These personal experiences allegedly explain why Nally, in Plaintiffs’ opinion, failed to meaningfully investigate similar issues in the instant lawsuit.530 Contrary to these allegations, Nally’s involvement in the Arkansas Class Action was limited to the court determining, over PwC’s objection, that Nally had relevant knowledge and should be deposed.531 Nally was not a named defendant in the Arkansas Class Action, nor was he implicated in the alleged misconduct.532 Given Nally’s limited role and that I have already determined that Nally conducted a thorough and good faith investigation of the issues which Plaintiffs allege are “striking[ly] similar[]”,533 I find that Nally’s involvement in the Arkansas Class Action does not raise a genuine issue with respect to Nally’s independence. Next, Plaintiffs assert that Nally’s long history of adversarial litigation involving Plaintiffs’ counsel’s law firms makes it “reasonable to infer that Nally may harbor bias against Plaintiffs’ counsel or class actions in general.”534 Specifically, Plaintiffs’ law firms brought multiple class action suits against PwC during Nally’s tenure as the chairman of PwC’s U.S. affiliate and PwC International, resulting in 529 Id. at 57–60. Id. 531 SLC RB 28. 532 Id. 533 Pls. AB 58. 534 Id. at 65. 530 93 PwC paying out millions to settle those suits.535 There are no allegations that Nally was personally involved in those suits, nor are there allegations that Nally was even aware of the attorneys or the law firms representing the plaintiffs in those suits.536 Plaintiffs’ argument, as I understand it, is that even if Nally were otherwise able to conduct an independent investigation in the best interests of ABC, once he learned that his nemeses, these class action attorneys, represented Plaintiffs, he was willing to skew the investigation to vindicate some personal animosity. This is, I suppose, a theory, but not one which deserves serious consideration on these facts. In sum, neither Nally’s relationship with Gozon, nor Nally’s limited involvement in the Arkansas Class Action, nor Nally’s history with Plaintiffs’ law firms are enough to establish a genuine dispute of material fact as to Nally’s independence. Therefore, I find that the SLC has met its burden in establishing Nally’s independence. B. Zapata’s Second Prong The second prong of Zapata can be described as a “fiduciary out” for the Court, giving it a method to review and, if warranted, set aside conclusions not disabled under a prong one analysis, but which nonetheless cause the Court to harbor doubts as to whether dismissal is in the corporate interest. Under this prong, “the 535 536 Id. SLC RB 32. 94 trial court’s task. . . is to determine whether the SLC’s recommended result falls within a range of reasonableness that a disinterested and independent decision maker for the corporation, not acting under any compulsion and with the benefit of the information then available, could reasonably accept.”537 The purpose of Zapata prong two is “to thwart instances where corporate actions meet the criteria of step one, but the result does not appear to satisfy its spirit, or where corporation actions would simply prematurely terminate a stockholder grievance deserving of further consideration in the corporation’s interest.”538 I have already concluded that the SLC conducted an independent, good faith, and reasonable investigation that resulted in conclusions not “‘irrational’ or ‘egregious’ or some other extreme[]” invoking Zapata’s second prong.539 Where, as here, however, the stockholder-Plaintiffs have not only pointed to substantial corporate trauma but have withstood the rigors of a motion to dismiss under Rule 23.1, I think it is incumbent upon the Court, in review of a special litigation committee’s motion to dismiss, to go beyond a review of independence and reasonableness of the scope of the investigation and the bases for its conclusion. The Court should, implicitly in its prong one analysis or explicitly via prong two, apply its own judgment of the reasonableness of the special litigation committee’s In re Primedia, Inc. S’holder Litig., 67 A.3d 455, 468 (Del. Ch. 2013). Zapata, 430 A.2d at 789. 539 Kindt v. Lund, 2003 WL 21453879, at *3 (Del. Ch. May 30, 2003). 537 538 95 conclusions as well. Because such an analysis is implicit in the review of the SLC and its motion, supra, I need not formally address prong two—I do not find that a dismissal here tends to implicate a result problematic to the corporate weal. For the sake of completeness, however, I will briefly address my findings were I to invoke the second prong. I largely limit myself here to the Caremark claims against the Director Defendants, since that was the sole ground found in Teamsters I to justify the stockholder-Plaintiffs proceeding derivativity.540 First, I must address the underlying corporate trauma that the Plaintiffs are trying to vindicate via this action. I acknowledge that the Company has paid hundreds of millions of dollars to settle the DOJ’s civil and criminal investigations. Plaintiffs assert as well that this action may be the only opportunity for the Company’s stockholders to have a meaningful role in addressing the Company’s compliance and oversight deficiencies through governance reforms.541 Nonetheless, for this litigation to come to a conclusion in favor of ABC, the Court would have to conclude that the Defendant Directors’ oversight was so inexplicably lax that it amounted to bad faith, a knowing abdication of duty. The evidence before me, including the facts found by the SLC, does not support such a conclusion, nor does it indicate that material facts in this regard are in dispute. Given the facts of record, 540 541 Teamsters I, 2020 WL 5028065, at *26. Pls. AB 68–69. 96 it is unlikely that Plaintiffs could prove either prong of a Caremark claim. Finding such, with the benefit of the information that the SLC acquired through its investigation, I would conclude under Zapata’s second prong that the litigation is unlikely to benefit ABC, and that the SLC’s recommendation to dismiss this action was reasonable. III. CONCLUSION The SLC has met its burden in demonstrating that it conducted an independent, good faith, and reasonable investigation of the allegations contained in Plaintiffs’ complaint. Its conclusion to seek dismissal of this action rests on a reasonable basis. The SLC’s motion to dismiss is therefore GRANTED. The parties should provide an appropriate form of order. 97 Exhibit A Term ABC/AmerisourceBergen/the Company ABDC ABSG/Specialty Group AKS ASP Board CCC CCO CER cGMPs CIA CIR CSPs CSRA DEA DOJ DOT/FAA EPA FAC FCA FDA FDCA FDMA GPO Internal Audit ION MII/the Pharmacy OS Definition AmerisourceBergen Corp. AmerisourceBergen Drug Corp. AmerisourceBergen Specialty Group Anti-Kickback Statute average sales price AmerisourceBergen’s Board of Directors Chief Compliance Counsel Chief Compliance Officer Capital Expenditure Report Current Good Manufacturing Practices Corporate Integrity Agreement Compliance Incident Report Compounded Sterile Preparations Corporate Security and Regulatory Affairs Drug Enforcement Administration Department of Justice Department of Transportation Environmental Protection Agency Mullen’s First Amended Qui Tam Complaint Federal Claims Act Food and Drug Administration Food, Drug, and Cosmetic Act Food and Drug Administration Modernization Act Group Purchasing Organization ABC’s Internal Audit Department International Oncology Network Medical Initiatives, Inc. d/b/a Oncology Supply Pharmacy Service ASD Specialty Healthcare, LLC d/b/a Oncology Supply OSHA PFS Program SLC USP Occupational Safety & Health Administration Pre-Filled Syringe Program Special Litigation Committee U.S. Pharmacopeia
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