Opinion
C. A. PC-2017-4398
08-04-2022
EDWARD BORON, Derivatively on Behalf of CVS HEALTH CORPORATION, Plaintiff, v. RICHARD M. BRACKEN, et al. Defendants, -and- CVS HEALTH CORPORATION, a Delaware Corporation, Nominal Defendant.
For Plaintiff: Robert M. Duffy, Esq. Stephanie F. Friedel, Esq. For Defendant: Robert Corrente, Esq. Matthew H. Parker, Esq.
For Plaintiff: Robert M. Duffy, Esq. Stephanie F. Friedel, Esq.
For Defendant: Robert Corrente, Esq. Matthew H. Parker, Esq.
DECISION
STERN, J.
Before the Court is Defendants'-the individual director defendants (Director Defendants) and CVS Health Corporation (CVS) (collectively, Defendants)-Motion to Dismiss Plaintiff Edward Boron's (Plaintiff) Amended Complaint pursuant to Rule 12(b)(6) and Rule 23.1 of the Superior Court Rules of Civil Procedure. Plaintiff filed a timely objection. Jurisdiction is pursuant to Rules 12(b)(6) and 23.1, as well as G.L. 1956 §§ 8-2-14 and 8-2-17.
I
Facts and Travel
This dispute arises out of allegations by Plaintiff that CVS was required, but failed, to report Health Savings Pass (HSP) program prices as CVS's usual and customary (U&C) prices for generic drugs included in the program. By way of background, on September 15, 2017, Plaintiff filed an original Verified Complaint, asserting claims against CVS including breach of fiduciary duty, waste of corporate assets, unjust enrichment, and conspiracy. See Pl.'s Verified Compl. 7579 (Sept. 15, 2017). Defendants, however, filed a Motion to Dismiss Plaintiff's Verified Complaint, arguing that the Complaint failed to state a claim for relief because Plaintiff failed to satisfy the verification requirements of Rule 23.1 of the Superior Court Rules of Civil Procedure and failed to plead demand futility with particularity. See Defs.' Mot. to Dismiss Pl.'s Verified Compl. 1-2 (May 21, 2018).
Following a hearing on the Motion, this Court granted Defendants' Motion to Dismiss on April 29, 2019, on the grounds that Plaintiff's Verified Complaint failed to demonstrate, through particularized factual allegations, that demand was futile. See Decision (Apr. 29, 2019) (Stern, J.) 25. More specifically, the Court noted that Plaintiff failed to properly allege that Defendants faced a substantial likelihood of liability for: (1) approving CVS's "unlawful" business plan; (2) disseminating false and misleading information; (3) authorizing CVS's stock repurchase program; and (4) approving substantial executive compensation. Id. Consequently, this Court found that Plaintiff had not demonstrated a basis for demand futility that would entitle Plaintiff to bring the instant action on CVS's behalf. Id.
Thereafter, on May 30, 2019, the Court entered an Order granting Defendants' Motion to Dismiss, dismissing Plaintiff's Verified Complaint without prejudice, and providing Plaintiff leave to file an amended complaint. See Order (May 30, 2019) (Stern, J.) 1. The Court also deferred the filing deadline to provide Plaintiff with an opportunity to inspect CVS's books and records pursuant to 8 Delaware Code § 220 (hereinafter, § 220). Id. at 2. Following Plaintiff's § 220 demand, CVS produced approximately 5,000 documents but refused to produce: (1) documents unrelated to the HSP program or U&C pricing; (2) senior management materials unconnected to a director; and (3) documents related to alleged compliance issues other than HSP. See Decision (Dec. 15, 2020) (Stern, J.) 3. Because of CVS's refusal to produce certain documents, Plaintiff filed a Motion to Compel production of these additional documents, which this Court granted on December 15, 2020. See id. at 4. CVS thereafter produced the requested additional documents to Plaintiff, resulting in approximately 9,000 documents produced in total by CVS. See Pl.'s Am. Compl. ¶ 155 (July 27, 2021).
Following Plaintiff's § 220 demand, Plaintiff filed an Amended Verified Stockholder Derivative Complaint on July 27, 2021. See id. In response, Defendants filed the present Motion to Dismiss Plaintiff's Amended Complaint for failure to state a claim upon which relief can be granted because, according to Defendants, the Amended Complaint still fails to allege with particularity facts excusing Plaintiff's failure to make a demand on the CVS Board. (Defs.' Mem. in Supp. of Mot. to Dismiss (Defs.' Mem.) 1.) More specifically, Defendants contend, among other things, that while Plaintiff's Amended Complaint is approximately twenty pages longer than the original Complaint, Plaintiff has failed to plead any particularized facts demonstrating futility in making a demand on CVS's Board of Directors, and that, if anything, Plaintiff's futility argument is now weaker in light of the fact that CVS's Board now includes a total of thirteen directors, five of whom joined the Board years after the HSP program terminated. (Defs.' Mem. 2.) Plaintiff, however, argues that the Amended Complaint contains fact-specific allegations that are "bolstered" by the information obtained through Plaintiff's § 220 inspection. (Pl.'s Mem. in Opp'n to Defs.' Mot. to Dismiss (Pl.'s Opp'n) 1.) Consequently, Plaintiff urges this Court to deny Defendants' Motion to Dismiss. Id. This Court's decision follows.
II.
Standard of Review
A motion to dismiss pursuant to Rule 12(b)(6) "has a narrow and specific purpose." Mokwenyei v. Rhode Island Hospital, 198 A.3d 17, 21 (R.I. 2018). "[T]he sole function of a motion to dismiss is to test the sufficiency of the complaint." Multi-State Restoration, Inc. v. DWS Properties, LLC, 61 A.3d 414, 416 (R.I. 2013) (internal quotation omitted). When considering a Rule 12(b)(6) motion to dismiss, this Court "need not look further than the complaint in conducting our review." Palazzo v. Alves, 944 A.2d 144, 149 (R.I. 2008) (citing Rhode Island Affiliate, ACLU, Inc. v. Bernasconi, 557 A.2d 1232, 1232 (R.I. 1989)).
A motion to dismiss should only be granted '"when it is clear beyond a reasonable doubt that the plaintiff would not be entitled to relief from the defendant under any set of facts that could be proven in support of the plaintiff's claim.'" Palazzo, 944 A.2d at 149-50 (quoting Ellis v. Rhode Island Public Transit Authority, 586 A.2d 1055, 1057 (R.I. 1991); see also Builders Specialty Co. v. Goulet, 639 A.2d 59, 60 (R.I. 1994)). When examining the allegations contained in a complaint, the Court "assumes them to be true, and views them in the light most favorable to the plaintiff." Palazzo, 944 A.2d at 149.
III
Analysis
As this Court has previously discussed in its earlier decision, Rule 23.1 of the Superior Court Rules of Civil Procedure requires that a shareholder plaintiff allege that he or she previously demanded the board of directors to take a corporate action or the reasons why the demand for action would have been futile. Specifically, Rule 23.1 provides that "[t]he complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors . . . and . . . the reasons for the plaintiff's failure to obtain the action or for not making the effort." Super. R. Civ. P. 23.1. A shareholder must plead demand futility with "particularity." See Mehrvar ex rel. KVH Industries Inc. v. Van Heyningen, No, N.C. /04-0375, 2005 WL 2385939, at *3 (R.I. Super. Sept. 27, 2005). Although Rhode Island courts have not had great occasion to consider demand futility analysis, Delaware law applies here because CVS is a Delaware corporation. G.L. 1956 § 7-1.2-711(h).
Delaware courts have developed two similar tests to determine whether demand is futile; the test that applies depends on whether a shareholder is challenging board action or a board's failure to act. The first test applies to the assessment of demand futility if a derivative suit challenges an affirmative board decision. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Under the Aronson test, demand is considered futile if a complaint's particularized facts create a reason to doubt that: "(1) the directors are disinterested and independent"; or "(2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Id. at 814. The second test to determine whether demand is futile applies in cases of director inaction: where it is alleged that a board's inaction excuses demand, a court should consider "whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand." Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). To balance the interests of directors and shareholders, Delaware courts have concluded "except in egregious circumstances, 'the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors.'" H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 149 (Del. Ch. 2003) (further citations omitted). Instead, only a "substantial likelihood of personal liability" will prevent a director from considering a demand with impartiality or otherwise exercising business judgment deciding whether to sue on a corporation's behalf. In re Chemed Corp., Shareholder Derivative Litigation, No. 13-1854-LPS-CJB, 2015 WL 9460118, at *9 (D. Del. Dec. 23, 2015); see also In re Intel Corp. Derivative Litigation, 621 F.Supp.2d 165, 170-71 (D. Del. 2009).
As mentioned above, this Court previously found that Plaintiff's original Complaint failed to plead, through particularized factual allegations, demand futility as required by Rule 23.1 of the Superior Court Rules of Civil Procedure because the Director Defendants did not face a substantial likelihood of liability for: (1) approving CVS's alleged unlawful business plan; (2) disseminating false and misleading information; (3) authorizing CVS's stock repurchase program; and (4) approving substantial executive compensation. See Decision (Apr. 29, 2019) (Stern, J.) 25. Interestingly, a review of Plaintiff's First Amended Complaint reveals that, despite conducting a § 220 inspection that resulted in approximately 9,000 documents being turned over from Director Defendants, Plaintiff's First Amended Complaint is substantially similar to Plaintiff's original Complaint, save approximately thirty newly added paragraphs. See Pl.'s Am. Compl.; see also Defs.' Mem. 1. Among these approximately thirty newly added paragraphs, two simply state that CVS's 2020 Annual Report shows the highly regulated nature of CVS's business and includes governmental regulations to which CVS is purportedly subjected. (Pl.'s Am. Compl. ¶¶ 56-57.) An additional newly added paragraph sets out the "Government Agreements and Mandates" section of CVS's 2013 Annual Report. Id. ¶ 59. Further, a newly added paragraph alleges that CVS knew the HSP pricing would give rise to compliance risks and legal liability from the beginning of the HSP program. Id. ¶ 94. However, the majority of the newly added paragraphs, approximately twenty-four in total, aver that CVS failed to design and implement protocol for reporting to the Board and failed to monitor regarding compliance with U&C pricing contractual obligations, rules, and regulations. Id. ¶¶ 83, 155-166, 211, 225-230. Additionally, these paragraphs allege that after the § 220 demand there is a lack of documents that refer to the HSP program, U&C pricing, service fees, or rebates, or refer to any director or committee to oversee the HSP program and U&C pricing. Id. ¶¶ 160-166. Many of those above-mentioned twenty-four paragraphs are repetitive and allege the same information.
In fact, Plaintiff's allegations of dissemination of false information, liability for authorizing stock repurchases and/or insider trading, and liability for compensation decisions are indeed nearly identical to the allegations contained in Plaintiff's original Verified Complaint, which this Court previously rejected. Compare Pl.'s Am. Compl. with Defs.' Ex. 13, ¶¶ 120-134, 167-183, 190205, 233-235, 238-240. Consequently, the Court will not reconsider the allegations that are identical to those previously rejected, nor will the Court consider those newly added paragraphs that relate only to the travel of this case or that otherwise have no substantive effect on this Court's decision as to whether Plaintiff has pled demand futility. To be clear, the Court will only consider the newly added paragraphs that may have some substantive bearing on Plaintiff adequately pleading demand futility; namely, Plaintiff's allegations concerning Director Defendants' liability for violating duties established by In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del Ch. 1996). The Court will address both prongs of a Caremark claim as they apply to this matter.
On April 29, 2019, this Court granted Defendants' Motion to Dismiss the Verified Complaint. See Decision (Apr. 29, 2019) (Stern, J.) 25. Plaintiff's allegations of dissemination of false information were found to have not alleged individualized shareholder reliance, so the action could not be brought on CVS's behalf. Id. at 21-22. Furthermore, the liability claim for authorizing stock repurchases and/or insider trading was rejected because Plaintiff had not demonstrated that a majority of Director Defendants face a substantial likelihood of liability for authorizing the at-issue stock purchases. Id. at 22-24. Finally, the liability claim for compensation decisions was also deemed faulty because Plaintiff had not demonstrated a basis for demand futility. Id. at 24-25. The Court need not reexamine these claims as none of the thirty newly added paragraphs in the Amended Complaint address dissemination of false information, liability for authorizing stock purchases and/or insider trading, and liability for compensation decisions. See Pl.'s Am. Compl.
A
Caremark Claim
Plaintiff has put forth a Caremark claim, which alleges that "directors failed to act when they otherwise should have done so." In re Chemed Corp., Shareholder Derivative Litigation, 2015 WL 9460118, at *12. A showing of bad faith is a "necessary condition to director oversight liability." In re Citigroup Inc. Shareholder Derivative Litigation, 964 A.2d 106, 123 (Del. Ch. 2009) (emphasis in original). Establishing bad faith pursuant to a Caremark claim generally requires establishing: (a) a showing that "the directors [completely] fail[] to implement any reporting or information system or controls"; or (b) "having implemented such a system of controls, consciously fail[] to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention." Marchand v. Barnhill, 212 A.3d 805, 821 (Del. 2019) (citing Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006)). "In short, to satisfy their duty of loyalty, directors must make a good faith effort to implement an oversight system and then monitor it." Id. Furthermore, only an "utter failure" will satisfy the requisite showing of bad faith. Lyondell Chemical Co. v. Ryan, 970 A.2d 235, 240 (Del. 2009) (citation omitted). In fact, the assertion that corporate fiduciaries have breached their obligations to stockholders by neglecting to monitor corporate activities is '"possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment."' In re Boeing Company Derivative Litigation, No. 2019-0907-MTZ, 2021 WL 4059934, at *24 (Del. Ch. Sept. 7, 2021) (quoting Caremark, 698 A.2d at 967). Given Plaintiff's Amended Complaint and the twenty-four newly added paragraphs that allege that Director Defendants failed to perform their oversight duties, this Court will address whether there are enough particularized facts to support an inference that CVS directors demonstrated a conscious disregard for their duties and whether there was an utter failure to perform their oversight obligations.
1 CVS's Implementation of Reporting System or Controls
Plaintiff contends that Director Defendants failed either to implement any reporting system or to oversee CVS's operations, which disabled them from being informed of risks or problems. (Pl.'s Am. Compl. ¶ 227.) Plaintiff points specifically to the 9,000-plus pages of Board Materials that CVS produced in response to Plaintiff's § 220 demand and alleges that none of the documents demonstrate that Director Defendants implemented a monitoring system and oversaw CVS's regulatory compliance with respect to the HSP program, U&C pricing, service fees, or rebates. Id. ¶ 229. Plaintiff further avers that no documents indicate: (1) that the Board delegates any director or committee to oversee the operational issues relating to the HSP program, U&C pricing, service fees, or rebates; (2) that Board-level processes exist to address any issues relating to the aforementioned programs; (3) that a protocol or process exists to allow the Board to be informed of any operational issues relating to the aforementioned programs, or (4) that a schedule exists for the Board to consider on a regular basis issues relating to the aforementioned programs. Id. ¶¶ 162-165.
Plaintiff also contends that although the HSP program ended around 2016-2017, the Board just shifted the discounts from the HSP program to other new discount programs. (Pl.'s Am. Compl. ¶ 237.) Additionally, Plaintiff points to several lawsuits against CVS by third-party payors and major insurers and wants this Court to consider these lawsuits and infer that Director Defendants utterly failed to perform their oversight duties. (Pl.'s Opp'n 4.) Here, there are no particularized factual allegations, and these contentions are conclusory in nature. Therefore, this Court will not address these allegations.
Specifically, Plaintiff relies on Marchand's interpretation of the first prong of Caremark, which sets out that directors breach their duty of loyalty if they fail to implement a reasonable board-level compliance monitoring system. Marchand, 212 A.3d at 821. This prong focuses on whether the complaint pleads facts supporting a reasonable inference that the board did not undertake good faith efforts "to put a board-level system of monitoring and reporting in place." Id. Moreover, "[w]hen a plaintiff can plead an inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company's business operation, then that supports an inference that the board has not made the good faith effort that Caremark requires." Id. at 822.
Furthermore, Plaintiff is correct in pointing out that the Court must follow three settled rules. A plaintiff is only required to plead particularized facts, not evidence. See Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). Additionally, the Court must accept all well-pleaded allegations as is, must draw all reasonable inferences in plaintiff's favor, and must allow plaintiff to show demand futility based on "an inference" of misconduct. Rosenbloom v. Pyott, 765 F.3d 1137, 11521153, 1156 (9th Cir. 2014) (emphasis in original). The Court must view the complaint as a whole and must not "consider[] the factual allegations in isolation." Id. at 1155. More importantly, "Delaware courts routinely reject the conclusory allegation that because illegal behavior occurred, internal controls must have been deficient, and the board must have known so." In re Boeing Company Derivative Litigation, 2021 WL 4059934, at *24 (internal quotation omitted). Moreover, a plaintiff must plead with particularity "a sufficient connection between the corporate trauma and the board." Id. (internal quotation omitted). Finally,
In this Court's previous decision, it left for another day whether the HSP program itself was in fact illegally constituted. See Decision (Apr. 29, 2019) (Stern, J.) 11 n.6. Additionally, Director Defendants argue that there is a lack of authoritative federal guidance on reporting U&C pricing. (Defs.' Mem. 19.) In 2009, a year after the HSP program was created, the HHS Inspector General "determined that there was no federal policy on the reporting of membership program prices where, as in HSP, a fee was charged to join the discount program." Id. (citing Department Health and Human Services Office of Inspector General, A Comparison of Medicaid Federal Upper Limit Amounts to Acquisition Costs, Medicare Payment Amounts, and Retail Prices, 7 n.20 (Aug. 2009)). More specifically, the 2009 Report also states "[i]f the pharmacy charges a fee to join their discount generic program, [Centers for Medicare and Medicaid Services] CMS does not have a stated policy as to whether the prices charged under that program would meet the definition of a usual and customary charge to the public." Id. More importantly, CMS has not published any further guidance on this issue. (Defs.' Mem. 19.) Given this Court has already left whether the HSP program is illegal for another day in the previous decision and the fact there is little to no federal guidance available, the Court refuses to decide on HSP program illegality at this time.
"In order to plead a derivative claim under Caremark, therefore, a plaintiff must plead particularized facts that allow a reasonable inference the directors acted with scienter which in turn 'requires [not only] proof that a director acted inconsistent[ly] with his fiduciary duties,' but also 'most importantly, that the director knew he was so acting.'" Id. at 25 (quoting In re Massey Energy Co., No. 5430-VCS, 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011)).
Here, Plaintiff contends that "each Individual Defendant acted with knowledge of the primary wrongdoing, substantially assisted in the accomplishment of that wrongdoing, and was aware of his or her overall contribution to and furtherance of the wrongdoing." (Pl.'s Am. Compl. ¶ 216.) Plaintiff alleges that Director Defendants acted with scienter and relies on that theory to support the Caremark claim. Id. Additionally, Plaintiff alleges that the existence of an Audit Committee, SEC filings, and adherence to federal and state regulations does not constitute CVS's implementation of reporting systems or controlling regulatory compliance with respect to the HSP program, U&C pricing, service fees, or rebates. (Pl.'s Opp'n 16-17.) This Court will consider whether Director Defendants acted with scienter and were cognizant of the day-to-day goings on within the corporation, as well as whether the existence of an Auditing Committee constitutes an implementation of a monitoring and reporting system that helped CVS oversee regulatory compliance with respect to the HSP program, U&C pricing, service fees, or rebates.
(a) Outside Directors
Importantly, as Director Defendants point out, demonstrating that individual directors acted disloyally or in bad faith requires that Plaintiff carry a heavy burden to plead "particularized facts that demonstrate that . . . directors acted with scienter." In re Goldman Sachs Group, Inc. Shareholder Litigation, No. 5215-VCG, 2011 WL 4826104, at *12 (Del. Ch. Oct. 12, 2011) (emphasis added). Director Defendants rely on the fact that twelve of the thirteen directors are considered outside directors. (Defs.' Mem. 7.) It is well-settled that outside directors are entitled to a presumption of independence and disinterestedness when considering a demand on the board. Mehrvar ex rel. KVH Industries, 2005 WL 2385939 at *4 (citing Grobow v. Perot, 526 A.2d 914, 924 (Del. Ch. 1987)). Furthermore, outside directors are not presumed sufficiently familiar with the daily decisions made within the corporation that "a reasonable inference could be made that they knew the true state of affairs." Ji ex rel. KVH Industries v. Van Heyningen, No. 05-273 ML, 2006 WL 2521440, at *9 (D.R.I. Aug. 29, 2006). Here, there are no particularized facts pleaded that demonstrate that the twelve outside directors knew anything about whether the prices being reported by CVS violated contractual requirements or not. Without particularized facts suggesting Director Defendants had scienter, the Court must presume Director Defendants were independent and disinterested, and therefore, had no knowledge of the inner workings of the corporation's dayto-day decisions.
At the time of the original Verified Complaint, there were twelve individuals on the Board, and the Amended Complaint states there are thirteen Board members, but only eight of the current Board members are defendants. Compare Pl.'s Am. Compl. with Defs.' Ex. 13, ¶ 223. The eight current Board member defendants are as follows: Dorman, Brown, Millon, Finucane, Deparle, DeCoudreaux, White, and Weldon. Compare Pl.'s Am. Compl. with Defs.' Ex. 13, ¶ 223. Before the change in Board membership, Plaintiff needed to demonstrate that demand would be futile as to half of the Board, but now they only need to demonstrate that demand is futile as to seven directors. Compare Pl.'s Am. Compl. with Defs.' Ex. 13, ¶ 224. As noted by Defendants, the five non-Defendant-Directors became members of the Board after the events alleged in the Amended Complaint. (Defs.' Mem. 13.)
(b) Audit Committee
Next, Plaintiff asserts that their § 220 demand, as in Marchand, revealed that none of the documents indicate any board-level process to address any issues, a protocol or process to allow the Board to be informed of any operational issues, or a schedule for the Board to consider on a regular basis any concerns relating to the HSP program, U&C pricing, service fees, or rebates. (Pl.'s Am. Compl. ¶¶ 162-165.) In Marchand, the Delaware Supreme Court held that the complaint sufficiently alleged particularized facts supporting a reasonable inference that the board failed to implement any system to monitor food safety and compliance. Marchand, 212 A.3d at 807. Plaintiff theorizes that the absence of documents that show a Board-level monitoring system supports an inference that such a system did not exist, and therefore a reasonable inference can be made that the Board failed to exercise its oversight duties under Caremark. (Pl.'s Am. Compl. ¶ 159.) Defendants counter that CVS's Board has an Audit Committee that reviews '"the Company's policies and practices with respect to risk assessment and risk management, including discussing with management the Company's major financial risk exposures and the steps that have been taken to monitor and control such exposures."' (Defs.' Mem. 15) (quoting Pl.'s Am. Compl. ¶ 208). In fact, CVS's Audit Committee met nine times per year from 2013 to 2016. Id. (quoting Pl.'s Am. Compl. ¶ 235). Defendants also point to the fact that CVS's Annual Reports and SEC filings demonstrate that the Board was cognizant of, and responded to, regulatory issues relating to the HSP program, U&C pricing, service fees, or rebates. Id. at 16 (quoting Pl.'s Am. Compl. ¶ 135).
In Marchand, "Blue Bell Creameries USA, Inc., one of the country's largest ice cream manufacturers, suffered a listeria outbreak in early 2015, causing the company to recall all of its products, shut down production at all of its plants, and lay off over a third of its workforce." Marchand v. Barnhill, 212 A.3d 805, 807 (Del. 2019).
A complaint that notes "the existence of board-level systems of monitoring and oversight such as a relevant committee, a regular protocol requiring board-level reports about the relevant risks, or the board's use of third-party monitors, auditors, or consultants" usually does not satisfy the first prong of Caremark. Marchand, 212 A.3d at 823; see also In re GoPro, Inc., No. 2018-0784-JRS, 2020 WL 2036602, at *12 n.152 (Del. Ch. Apr. 28, 2020) (finding no plausible argument under Caremark's first prong where the Board maintained an active Audit Committee and GoPro had a supply chain monitoring system that was regularly reviewed by the Audit Committee and the Board). Conversely, a plaintiff can state a Caremark claim by avowing that "the company had an audit committee that met only sporadically and devoted patently inadequate time to its work, or that the audit committee had clear notice of serious accounting irregularities and simply chose to ignore them or, even worse, to encourage their continuation." Guttman v. Jen-Hsun Huang, 823 A.2d 492, 507 (Del. Ch. 2003). However, plaintiffs cannot plead that directors faced a substantial likelihood of liability by asserting that the board should have instituted a better reporting system. In re General Motors Co. Derivative Litigation, No. 9627-VCG, 2015 WL 3958724, at *11 (Del. Ch. June 26, 2015) (finding the board regularly reviewed the company's risk management structure, identified the top risks facing the company's business, and received presentations on product safety and quality, while the plaintiff argued the board had failed to institute a reporting system that alerted them specifically to serious injuries and deaths resulting from safety defects).
General Motors involves ignition switches engineered and used by General Motors that malfunctioned when used by consumers. In re General Motors Co. Derivative Litigation, No. 9627-VCG, 2015 WL 3958724, at *3 (Del. Ch. June 26, 2015). This led to personal injury and death of General Motors' customers. Id. at *4. The plaintiffs, General Motors' stockholders, alleged that the directors breached a duty of loyalty by failing to oversee the operations of General Motors, but the plaintiffs failed to raise a reasonable doubt as to whether General Motors' directors acted in good faith. Id.
Here, the existence of the Audit Committee and the fact that the Audit Committee met nine times a year from 2013 to 2016 with the purpose of reviewing company policies and practices regarding risk assessment, risk management, major financial risk exposures, and the steps that have been taken to monitor such exposures does not amount to enough to satisfy the first prong of Caremark. The Audit Committee did not meet sporadically or for an inadequate time and so no inference can be made that this committee was perfunctory. Furthermore, this Court is not persuaded by Plaintiff's argument that the absence of documents showing a Board-level monitoring system supports an inference that such a system did not exist, and therefore, a reasonable inference can be made that the Board failed to exercise its oversight duties. First, there were 9,000-plus documents that Defendant Directors produced that referred to HSP, U&C pricing, service fees, or rebates. Although there may not have been a committee with the sole, express purpose of overseeing HSP, U&C pricing, service fees, or rebates, there are enough documents produced, in addition to the existence of the Audit Committee and SEC filings, that demonstrate there was some oversight. Second, there does not need to be a specific committee that meets for the sole purpose of overseeing a specific product. Like in General Motors, where the court held the board did not need to institute a reporting system specifically alerting them to serious injuries and deaths resulting from safety defects as long as there was a general monitoring of the top risks facing the company, it is enough for Director Defendants to have utilized a reporting system and some level of monitoring. Here, the Board did not need to establish a monitoring system specific to HSP, U&C pricing, service fees, or rebates. Plaintiff cannot look back and argue that the reporting and monitoring system could have been better when, in fact, the systems that were in place were adequate. See In re General Motors Co. Derivative Litigation, 2015 WL 3958724, at *11.
Although Marchand provides direction for how to apply a Caremark analysis, this Court does not find the facts pleaded in the Amended Complaint to be sufficiently particularized for an inference to be made that there was absolutely no system of monitoring and reporting in place. Therefore, there are no particularized factual allegations establishing the futility of making a demand on CVS's Board of Directors.
2 CVS Board's Response to Alleged Red Flags
The second prong of a Caremark claim requires a showing that if a board of directors has implemented any reporting or information system or controls, then the board "consciously fail[ed] to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention." Marchand, 212 A.3d at 821 (quoting Stone, 911 A.2d at 370). Furthermore, the directors must have known they were not executing their fiduciary duties or that they had shown a conscious disregard for their obligations. In re Intel Corp. Derivative Litigation, 621 F.Supp.2d at 173. Generally, where a claim of "directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation . . . only a sustained or systematic failure of the board to exercise oversight . . . will establish the lack of good faith that is a necessary condition to liability." In re Caremark, 698 A.2d at 971. Additionally, "[p]laintiffs must well-plead that a 'red flag' of non-compliance waived [sic] before the Board Defendants but they chose to ignore it." See In re Clovis Oncology, Inc. Derivative Litigation, No. 2017-0222-JRS, 2019 WL 4850188, at *13 (Del. Ch. Oct. 1, 2019) (citing South v. Baker, 62 A.3d 1, 16-17 (Del. Ch. 2012)). Importantly, "red flags are only useful when they are either waived [sic] in one's face or displayed so that they are visible to the careful observer." Id. (citing Wood v. Baum, 953 A.2d 136, 143 (Del. 2008)). Plaintiff alleges that the 2014 subpoena is a red flag that Defendant Directors should have heeded but instead knowingly allowed it to continue. (Pl.'s Am. Compl. ¶ 137.) Moreover, Plaintiff also argues that the HSP program, U&C pricing, service fees, and rebates are so crucial to CVS's earnings and business that they should be deemed "[M]ission [C]ritical." (Pl.'s Opp'n 13.) This Court will consider the alleged "red flag" that is the 2014 subpoena to determine whether it supports an inference of bad faith or scienter and the theory that CVS's aforementioned programs are "Mission Critical" in turn.
This Court has already ruled on the "red flags" Plaintiff alleged in the original Verified Complaint. See Decision (Apr. 29, 2019) (Stern, J.). Previously, this Court held that "CVS's unrelated non-compliance and the Director Defendants' stated intention to comply with the law do not constitute red flags supporting an inference of bad faith." Id. at 13. Additionally, this Court ruled that subpoenas received in 2012 from the Office of the Inspector General (OIG) and the Office of the Texas Attorney General, requesting information about the HSP program, were discussed by Director Defendants as investigations into "possible" wrongdoings but were not admissions of misconduct and did not suggest Director Defendants acted in bad faith. Id. at 14-15. This Court also held that the various class actions do not create an inference that Director Defendants acted in bad faith. Id. at 17. These civil actions include the consolidated action of two cases: Corcoran (California) and Podgorny (Illinois). Id. at 15. Because this Court has already ruled on these purported "red flags," and the Amended Complaint pleads no new facts related to these previously decided "red flags," the Court will only address the 2014 subpoena "red flag" that was pleaded in the Amended Complaint.
(a) 2014 Subpoena
Plaintiff alleges that Defendant Directors turned a blind eye to another subpoena CVS received in March 2014 from the Rhode Island Attorney General in connection with "service fees and rebates received from pharmaceutical manufacturers in connection with certain drugs utilized under . . . the Medicare Program." (Pl.'s Am. Compl. ¶ 150(1)(j).) Specifically, the Amended Complaint alleges that Defendant Directors violated the law "by causing the Company to receive service fees and rebates from pharmaceutical manufacturers in connection with certain drugs utilized under Medicare Part D, as well as the reporting of those fees and rebates to Part D plan sponsors[.]" Id. ¶ 213. However, as Director Defendants point out, the 2014 subpoena was limited to three drugs that were used for the treatment of multiple sclerosis and that were not reported to the government as a discount under Medicare Part D regulations. (Defs.' Mem. 11.) Even assuming, arguendo, that the 2014 subpoena had been related to the reporting of fees and rebates, it would not on its own create an inference of director wrongdoing. The receipt of subpoenas, alone, is an insufficient basis for inferring directors were aware of corporate misconduct. In re Chemed Corp., Shareholder Derivative Litigation, 2015 WL 9460118, *18 (citing Johnson &Johnson Derivative Litigation, 865 F.Supp.2d 545, 566 (D.N.J. 2011)). Here, the existence of subpoenas, coupled with the lack of particularized facts, is not enough for this Court to make an inference that Director Defendants acted with scienter.
As Defendants note, the 2014 subpoena never resulted in any findings suggesting CVS engaged in any corporate misconduct. (Defs.' Mem. 12.) Director Defendants point to the fact that the United States refused to intervene in the action, and ultimately, the complaints related to the subpoena were dismissed because "many of Relator's core contentions, including the manner in which these fees are collected, reported, or distributed, and their resulting impact on the bidding and reconciliation process, are unsupported or incorrect, and unlikely to result in a recovery." Id. (quoting United States' Mot. Dismiss, United States ex rel. Borzilleri v. Bayer, at 4, 16, ECF No. 166 (Exhibit 5)).
(b) Mission Critical
Additionally, Plaintiff asserts that the HSP program, U&C pricing, service fees, and rebates are so important to CVS earnings and business that they should be deemed "[M]ission [C]ritical." (Pl.'s Opp'n 13.) Plaintiff argues that the "[s]ales of prescription pharmaceutical drugs are critical to the profitability of CVS's Pharmacy Services Segment. For example, Pharmacy revenues represented more than two-thirds of Retail Pharmacy revenues in each of 2013, 2012 and 2011." (Pl.'s Am. Compl. ¶ 41.) Importantly, the exact language "[M]ission [C]ritical" never appears in the Amended Complaint. Contrarily, Defendant Directors argue that the Amended Complaint does not state particularized facts supporting this "Mission Critical" theory. (Defs.' Reply 8.) Plaintiff's Amended Complaint does not refer to the HSP program's contribution to CVS revenue and only refers to U&C pricing without explaining how it affected financial results from 2014. See Pl.'s Am. Compl. ¶ 119.
A reasonably designed monitoring and reporting system, at a minimum, addresses "Mission Critical" risks. Marchand, 212 A.3d at 823. Furthermore, a board "has a rigorous oversight obligation where safety is mission critical," given that the consequences of the "Board's utter failure to try to satisfy this 'bottom-line requirement' can cause 'material suffering' . . . 'among customers, or to the public at large[.]'" In re Boeing Company Derivative Litigation, 2021 WL 4059934, at *33 (quoting Teamsters Local 443 Health Services &Insurance Plan v. Chou, No. 2019-0816-SG, 2020 WL 5028065, at *1 (Del. Ch. Aug. 24, 2020)). In Marchand, Blue Bell Creameries distributed ice cream containing listeria; three people died because of the outbreak. See Marchand, 212 A.3d at 807; see also In re Boeing Company Derivative Litigation, 2021 WL 4059934, at *1 (malfunctioning airplanes crashed and killed everyone on board, leading the court to deem the safety of Boeing's airplane operation as "Mission Critical"). Moreover, "merely fulfilling regulatory requirements imposed by governmental authorities was not necessarily enough." City of Detroit Police and Fire Retirement System on Behalf of NiSource, Inc. v. Hamrock, No. 2021-0370-KSJM, 2022 WL 2387653, at *13 (Del. Ch. June 30, 2022). When a company operates in an environment where external regulations govern its "[M]ission [C]ritical" operations, the board's rigorous oversight obligation must be met. Id. at *14.
Even though this Court finds there were no red flags that were waved in front of Director Defendants alerting them to a concern they consciously chose to ignore, assuming arguendo that there were in fact such red flags, this Court would still find a "Mission Critical" argument unavailing. First, the HSP program, U&C pricing, service fees, or rebates constitute only a small percentage of pharmaceutical sales for CVS. The facts here are different from the facts in Marchand. In Marchand, Blue Bell's business centered exclusively around one product and ensuring the safety of ice cream consumption. Marchand, 212 A.3d at 809. The matter at hand is also not in line with Boeing. In Boeing, the product and safety concerns center exclusively around the operation of airplanes. Boeing, 2021 WL 4059934, at *1. Second, these cases dealt with the critical importance of safety. Blue Bell's listeria outbreak led to death and serious illness, while Boeing's airplane malfunctions led to significant casualties. Id. at *25-26. This Court does not equate CVS's HSP program, U&C pricing, service fees, or rebates with those calamities. Given the fact that Plaintiff has not pleaded particularized facts pointing to Director Defendants' oversight goals being "Mission Critical," and more importantly does not use the words "Mission Critical" in the Amended Complaint, this Court finds that the question whether CVS's oversight of the HSP program, U&C pricing, service fees, or rebates are "Mission Critical" to be irrelevant. Given that the HSP program, U&C pricing, service fees, or rebates do not make up the majority of CVS's revenue and have nothing to do with safety, this Court does not find that these programs are "Mission Critical."
IV
Conclusion
Based on the foregoing, Defendants' Motion to Dismiss Plaintiff's Amended Verified Stockholder Derivative Complaint is granted in light of Plaintiff's failure to demonstrate, through particularized factual allegations, demand futility as required by Rule 23.1 of the Superior Court Rules of Civil Procedure. Counsel shall prepare and submit the appropriate order for entry consistent with this Decision.