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In re Insys Therapeutics Inc. Derivative Litigation

Court of Chancery of Delaware

November 30, 2017

In re Insys Therapeutics Inc. Derivative Litigation

          Submitted: September 19, 2017

          Joel Friedlander, Esquire Christopher Foulds, Esquire Christopher P. Quinn, Esquire Friedlander & Gorris, P.A.

          Rudolf Koch, Esquire Sarah A. Clark, Esquire Matthew W. Murphy, Esquire Richards, Layton, & Finger, PA


         Dear Counsel:

         This letter opinion addresses Defendants' Motion to Stay. For the reasons stated herein, Defendants' Motion to Stay is granted.

         I. BACKGROUND

         Nominal Defendant Insys Therapeutics, Inc. ("Insys") produces SUBSYS, "an instant-release sublingual fentanyl spray."[1] The Federal Food and Drug Administration approved SUBSYS in January 2012 "[f]or the management of breakthrough pain in cancer patients 18 years of age or older who are already receiving and who are tolerant to around-the-clock opioid therapy for their underlying persistent cancer pain."[2]

         On December 12, 2013, Insys received "a subpoena from the Department of Health and Human Services Office of Inspector General ("HHS") in connection with the government's investigation of the sales and marketing of SUBSYS."[3] On February 2, 2016, Insys stockholders filed a federal securities class action lawsuit against Defendants Insys, John N. Kapoor, and Michael L. Babich, and non-party in the instant case Darryl Baker, alleging that Insys "made misrepresentations concerning its business practices and compliance with law."[4]

         Following the HHS subpoena and federal class action lawsuit, state authorities in Arizona, Massachusetts, Illinois, and New Jersey launched investigations of Insys.[5] Additionally, medical professionals associated with Insys have faced criminal investigations, indictments, and convictions.[6] "U.S. Attorney's Offices of Michigan, Rhode Island, Florida, Connecticut, New Hampshire and Alabama are investigating physicians with ties to Insys."[7] On November 8, 2016, Plaintiffs filed this suit.

         On December 6, 2016, six senior Insys executives, including Babich, were indicted in federal court on charges of racketeering conspiracy, mail fraud conspiracy, wire fraud conspiracy, and conspiracy to violate the federal anti-kickback statute.[8] A trial is scheduled for October 2018.[9] Plaintiffs filed an amended complaint on January 26, 2017 to include information about the indictments. On April 28, 2017, Plaintiffs filed their Consolidated Verified Derivative Complaint (the "Complaint").

         On November 6, 2017, Plaintiffs alerted the Court to the fact that Kapoor had also been arrested.[10] On October 26, 2017, the United States Attorney's Office of the District of Massachusetts announced that Kapoor had been arrested and charged in a superseding indictment that includes additional allegations against the former Insys executives initially charged in December 2016. [11]

          Plaintiffs have brought derivative breach of fiduciary duty claims against Insys's board of directors (the "Individual Defendants"), against Kapoor and Babich as former Insys officers, and against Kapoor as the controlling stockholder of Insys.[12] Plaintiffs allege that the Individual Defendants, Babich, and Kapoor "knowingly over[saw] the implementation of an illegal sales and marketing program, and thereby caus[ed] Insys to violate positive law;"[13] "consciously and repeatedly fail[ed] to actively monitor or oversee the compliance program;"[14] and "consciously disregard[ed] their duty to investigate red flags and to remedy any misconduct uncovered."[15] Plaintiffs further allege that Kapoor violated his fiduciary duties as controlling stockholder "by causing Insys to implement and execute an illegal sales and marketing plan."[16]

         Defendants move to dismiss this action or, in the alternative, to stay this action pending the resolution of the federal securities action and criminal investigation. The Court heard oral argument on the Motion to Dismiss or Stay on September 19, 2017.

         II. ANALYSIS

         "The Court's right to grant a stay is within the exclusive discretion of the Court. The discretion to issue a stay is 'inherent in every court and flows from its control over the disposition of cases on its docket.'"[17] When deciding a motion to stay, this Court "recognizes the inherently discretionary nature of a decision on a stay motion and the importance of striking a sensible balance of the relevant competing interests."[18]

         A. The Motion to Stay is Granted Because Simultaneous Prosecution of This Derivative Action and the Federal Securities Action Would Be Unduly Complicated, Inefficient, and Unnecessary

         Among the relevant competing interests this Court must balance are "'practical considerations' [that] make it unduly complicated, inefficient, and unnecessary for [the action before it] to proceed ahead or apace of a related litigation pending elsewhere."[19] Defendants raise two main practical considerations, which they argue outweigh any prejudice to Plaintiffs.

         First, Defendants argue that Insys will be prejudiced in the securities action and government investigation by a simultaneous derivative action that significantly overlaps with both.[20] Defendants rely on Brenner v. Albrecht, in which this Court found that the derivative action risked prejudicing the Company's defense in a simultaneous securities class action. [21] The Brenner Court explained:

Like any co-defendant [the company] could pursue a litigation strategy of either cross-claiming that its directors and officers are the primary wrongdoers who should indemnify it, as is asserted in this derivative action, or collaborating with its directors and officers and denying that any wrongdoing occurred as [the company] is doing in the [s]ecurities [c]lass [a]ction. Either litigation strategy would appear to be reasonable, but it is not practical for two actors . . . to pursue divergent strategies in two simultaneous actions on behalf of the same entity.
. . . Prosecution of [the] derivative action would involve taking actions designed to refute the merits of the [c]ompany's defense of the [s]ecurities [c]lass [a]ction, and vice versa. The [i]ndividual [d]efendants are likely witnesses in both cases, but [plaintiff] must attempt to undermine their credibility while the [c]ompany presumably will attempt to rely on their veracity. The potential for such conflicts . . . creates a significant risk that prosecution of [plaintiff's] case will prejudice [the company]. For example, party admissions and adverse judicial rulings in this action might estop the [c]ompany from advancing contrary assertions on its own behalf in the [s]ecurities [c]lass [a]ction. . . . In contrast, staying this action for the immediate future would minimize these risks of prejudice to [the company's] defense of the [s]ecurities [c]lass [a]ction.[22]

         These concerns apply in the present case. Allowing this derivative suit to go forward simultaneously with the federal securities action likely would prejudice Insys by requiring both parties acting on behalf of Insys to adopt conflicting strategies in their respective lawsuits. This constitutes a significant risk to Insys-a risk to which the Court is particularly sensitive because a derivative suit is meant to further the best interests of the company.[23]

         Second, Defendants argue that the damages sought by Plaintiffs "result primarily from the pending securities action and government investigations"[24] and, therefore, will not be discernible until the action and investigation conclude. Plaintiffs disagree that the derivative action is primarily an indemnification action for other ongoing actions.[25] Plaintiffs point out that Insys previously settled one class action and several governmental investigations, incurring "many millions of dollars in damages as a result."[26] The same was true in Brenner. There, this Court noted that "at least some portion of [the plaintiff's] derivative claims is ripe for adjudication now. Nevertheless, if [the plaintiff] ultimately succeeds on the merits, the full extent of damages will not be known until the Securities Class Action is resolved."[27] This reasoning applies here as well. While some claims against Insys currently are ripe, the full extent of damages due to Insys cannot be known until the ...

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