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In re Clovis Oncology, Inc. Derivative Litigation

Court of Chancery of Delaware

October 1, 2019

IN RE CLOVIS ONCOLOGY, INC. DERIVATIVE LITIGATION

          Submitted: July 1, 2019

          Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire and Gina M. Serra, Esquire of Rigrodsky & Long, P.A., Wilmington, Delaware; Nicholas I. Porritt, Esquire, Adam M. Apton, Esquire and Adam C. McCall, Esquire of Levi & Korsinsky, LLP, Washington, D.C.; Kip B. Shuman, Esquire of The Shuman Law Firm, San Francisco, California; and Rusty E. Glenn, Esquire of The Shuman Law Firm, Denver, Colorado, Attorneys for Plaintiffs Carl McKenry and Juzet Macalinao on behalf of Clovis Oncology, Inc.

          Gregory P. Williams, Esquire, Blake Rohrbacher, Esquire and Robert L. Burns, Esquire of Richards Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Defendants Brian G. Atwood, M. James Barrett, James C. Blair, Keith T. Flaherty, Ginger L. Graham, Paul H. Klingenstein, Edward J. McKinley and Thorlef Spickschen.

          William M. Lafferty, Esquire and Ryan Stottmann, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Tariq Mundiya, Esquire, Todd G. Cosenza, Esquire and Charles Dean Cording, Esquire of Willkie Farr & Gallagher LLP, New York, New York, Attorneys for Defendants Patrick J. Mahaffy, Erle T. Mast and Nominal Defendant Clovis Oncology, Inc.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor

         Like many upstart biopharmaceutical companies, nominal defendant, Clovis Oncology, Inc. (or the "Company"), had one drug among its drugs under development, Rociletinib (or "Roci"), that was especially promising. Roci, a therapy for the treatment of lung cancer, performed well during the early stages of its clinical trial. But data from later stages of the trial revealed the drug likely would not be approved for market by the Food and Drug Administration ("FDA"). Plaintiffs, Clovis stockholders, allege members of the Clovis board of directors (the "Board") breached their fiduciary duties by failing to oversee the Roci clinical trial and then allowing the Company to mislead the market regarding the drug's efficacy.[1] These breaches, it is alleged, caused Roci to sustain corporate trauma in the form of a sudden and significant depression in market capitalization. Plaintiffs also allege that certain members of the Board and a member of senior management engaged in unlawful stock trades before the market was apprised of Roci's failure.[2]

         Defendants have moved to dismiss each of Plaintiffs' derivative claims under Court of Chancery Rules 23.1 and 12(b)(6) for failure to plead demand futility with particularity and failure to state viable claims. As explained below, Plaintiffs have well-pled that Defendants face a substantial likelihood of liability under Caremark and our Supreme Court's recent explication of Caremark in Marchand v. Barnhill.[3]Clovis conducted its clinical trial of Roci subject to strict protocols and associated FDA regulations. Yet, assuming the pled facts are true, the Board ignored red flags that Clovis was not adhering to the clinical trial protocols, thereby placing FDA approval of the drug in jeopardy. With the trial's skewed results in hand, the Board then allowed the Company to deceive regulators and the market regarding the drug's efficacy.

         As explained in Marchand, "to satisfy their duty of loyalty, directors must make a good faith effort to implement an oversight system and then monitor it."[4]This is especially so when a monoline company operates in a highly regulated industry.[5] Here, Plaintiffs have well-pled Roci was "intrinsically critical to the [C]ompany's business operation," yet the Board ignored multiple warning signs that management was inaccurately reporting Roci's efficacy before seeking confirmatory scans to corroborate Roci's cancer-fighting potency-violating both internal clinical trial protocols and associated FDA regulations.[6] In other words, Plaintiffs have well-pled a Caremark claim.

         The same cannot be said for Plaintiffs' attempt to plead Brophy and unjust enrichment claims.[7] Specifically, with respect to Brophy, Plaintiffs have failed to plead facts that allow a reasonable inference of scienter. The allegedly unlawful trades were so small in relation to each fiduciary's Clovis stock holdings as to defy any inference of the bad intent required to state a claim. And Plaintiffs' unjust enrichment claim, when reduced to its essence, rests on their deficient Brophy claim.

         I. FACTUAL BACKGROUND

         I draw the facts from the allegations in the Supplemental Consolidated Verified Shareholder Derivative Complaint (the "Complaint"), documents incorporated by reference or integral to that pleading and judicially noticeable facts.[8] For purposes of this motion to dismiss, I accept as true the Complaint's well-pled factual allegations and draw all reasonable inferences in Plaintiffs' favor.[9]

         A. Parties and Relevant Non-Parties

         Plaintiffs, Carl McKenry and Juzet Macalinao, are Clovis stockholders.[10]They have held Clovis common stock since March 26, 2014 and January 1, 2014, respectively.[11]

         Nominal Defendant, Clovis, is a biopharmaceutical firm focused on acquiring, developing and commercializing cancer treatments.[12] During the Relevant Period, [13]Clovis had no drugs on the market but did have three drugs in development. Of these, Roci was the most promising.[14]

         Plaintiffs bring this derivative action against all nine members of the Board (collectively, the "Board Defendants"), each of whom was a member of the Board during the Relevant Period.[15] Defendant, Erle Mast, is Clovis' former Executive Vice President and Chief Financial Officer ("CFO").[16] Defendants collectively owned upwards of 17.4% of the Company's stock.[17]

         The Board has two relevant sub-committees. The Nominating and Corporate Governance Committee is charged with developing and overseeing the effectiveness of Clovis' legal, ethics and regulatory compliance matters.[18] The Audit Committee oversees typical audit functions and, importantly, reviews earnings reports with management before release to the market.[19]

         Defendant, Brian G. Atwood, has served on the Board since Clovis' inception in 2009.[20] He served as a member of the Audit Committee and the Nominating and Corporate Governance Committee for fiscal years 2013-2015.[21] Atwood had previous experience as co-founder of a biotechnology company and as a managing director for a healthcare-focused venture capital firm.[22]

         Defendant, M. James Barrett, Ph.D., has served on the Board since Clovis' inception.[23] He serves as Chairman of the Board and as Chairman of the Nominating and Corporate Governance Committee.[24] Additionally, Barrett has held positions as a general partner in a healthcare venture capital firm and as the chairman, CEO and founder of a medical technology company.[25]

         Defendant, James Blair, Ph.D., has served on the Board since Clovis' inception.[26] He is a member of the Nominating and Corporate Governance Committee and serves as Chairman of the Compensation Committee.[27] Blair has over thirty years of experience as a general partner in a life sciences venture capital management company.[28] Some of his other experience includes serving on the boards of over 40 life science companies as well as the advisory board of the Department of Molecular Biology at Princeton University.[29]

         Defendant, Keith Flaherty, M.D., has served on the Board since 2013.[30] He is a member of the Nominating and Corporate Governance Committee.[31] Additionally, Flaherty is an Associate Professor of Medicine at Harvard Medical School and has been a principal investigator for numerous first-in-human clinical trials with novel, targeted therapies.[32]

         Defendant, Ginger Graham, has served on the Board since 2013.[33] She is a member of the Compensation Committee.[34] Graham has previous experience as the president and CEO of a biopharmaceutical company and has served on the boards of multiple healthcare firms.[35]

         Defendant, Paul Klingenstein, has served on the Board since Clovis' inception.[36] He is a member of the Audit Committee.[37] Klingenstein has additional experience as a managing partner of a healthcare venture capital firm, which he formed in 1999.[38] And he has served on the boards of multiple pharmaceutical companies.[39]

         Defendant, Patrick J. Mahaffy, is one of Clovis' co-founders and has been Clovis' CEO, President and a member of the Board since Clovis' inception.[40]Mahaffy previously served as the president and CEO of two biopharmaceutical companies-one of which he also founded.[41]

         Defendant, Edward J. McKinley, has served on the Board since Clovis' inception.[42] He is a member of the Audit Committee.[43]

         Defendant, Thorlef Spickschen, has served on the Board since Clovis' inception.[44] He is a member of the Compensation Committee.[45] Before joining Clovis, he served as the chairman of a publicly-traded biotechnology company, as well as Eli Lilly & Co.'s managing director for Germany and Central Europe.[46]

         Defendant, Erle T. Mast, is a Clovis co-founder and served as Executive Vice President and CFO from the Company's inception in 2009 until his resignation in March 2016.[47] Mast was not a member of the Board during the Relevant Period.[48]

         Non-party, Dr. Andrew Allen, served as Clovis' Chief Medical Officer ("CMO") during the Relevant Period.[49] Non-party, AstraZeneca PLC, is a pharmaceutical company based in the United Kingdom. AstraZeneca manufactures Tagrisso (described below), which would have directly competed with Roci had Roci made it to market.[50]

         B. Clovis Initiates Roci's Clinical Trial

         At the beginning of the Relevant Period, Clovis had no products on the market and generated no sales revenue.[51] Accordingly, Clovis "reli[ed] solely on investor capital for all [] operations."[52] The Company's prospects rested largely on one of its three developmental drugs, Roci, a cancer drug designed to treat a previously-untreatable type of lung cancer.[53] Because of the estimated $3 billion annual market for drugs of its type, Clovis expected Roci to generate large profits if Clovis could secure FDA approval for the drug and shepherd it to market.[54]

         As the Roci clinical trial began, the Board knew time was of the essence. AstraZeneca's competing drug, Tagrisso, was also in the race for FDA approval.[55]Appreciating Roci's importance to Clovis' success, the Board was hyper-focused on the drug's development and clinical trial.[56] Indeed, it is alleged the Board Defendants "spent hours at Board meetings discussing [Roci]" and were "regularly apprised" of the drug's progress.[57]

         To obtain FDA approval, new drugs like Roci and Tagrisso must prove their efficacy and safety in clinical trials.[58] Before commencing a clinical trial, the FDA requires a drug's sponsor to agree to certain standards that define how the trial will be conducted, how the trial data will be analyzed and, most relevant here, how success in the trial will be measured.[59] These agreed-upon standards become the "clinical trial protocol."[60] If the drug's sponsor fails to adhere to the clinical trial protocol, the FDA will not approve a new drug for market.[61]

         Clovis named its Roci clinical trial "TIGER-X."[62] TIGER-X incorporated a standardized and well-known clinical trial protocol called "RECIST."[63] Clovis chose RECIST instead of a lesser-known or bespoke clinical trial protocol because RECIST "has become the most widely used system for assessing response in cancer clinical trials, and is the preferred and accepted system for use in new drug applications to regulatory agencies."[64] By selecting RECIST, Clovis was able to "give investors confidence in the Company's reported results" by facilitating "comparisons between [Roci] and competing therapies."[65]

         One of RECIST's important functions is to establish the "criteria defining success" for the clinical trial.[66] This success-defining metric is called the objective response rate (or "ORR").[67] ORR measures the percentage of patients who experience meaningful tumor shrinkage when treated with the drug.[68] This metric is important both to the FDA in its approval process and to physicians in deciding whether to prescribe the drug.[69] Not surprisingly, then, the "[Board] was laser-focused on [Roci's] ORR."[70]

         As Roci's clinical trial progressed, the Board knew investors would not view an ORR incorporating unconfirmed responses as "meaningful," nor would the FDA accept such results as "approvable."[71] Indeed, each of the Board Defendants appreciated the FDA "could only make its decision . . . to approve Roci based [] on confirmed responses."[72]

         C. TIGER-X Trial's Undisclosed Failure to Follow RECIST Standards

         Ostensibly intending to follow RECIST, the TIGER-X protocol specifically required and set out a schedule for confirmation scans.[73] And throughout the Relevant Period, Clovis' press releases, investor calls, Securities and Exchange Commission ("SEC") filings and statements to medical journals reinforced the belief that Clovis was reporting a confirmed ORR of about 60% "per RECIST."[74] Mindful of the race to market, Clovis' management consistently represented that Roci's ORR was at least as encouraging as Tagrisso's.[75]

         Despite these public signals, as early as June 12, 2014, the Board received reports indicating Clovis was improperly calculating Roci's ORR.[76] Specifically, these reports suggested that, while the clinical trial protocol required Clovis to calculate ORR based only on confirmed responses, Clovis was actually calculating ORR, in part, based on unconfirmed responses.[77] For example, on June 12, 2014, the Board reviewed management's presentations from a May 31, 2014 medical conference (the "ASCO conference").[78] That data indicated Roci's ORR was "58 percent" (the "ASCO ORR").[79] At the same meeting, management told the Board the ASCO ORR would improve "as patients get to their second and third scans."[80] By definition, then, the ASCO ORR was partially based on unconfirmed results (i.e., it was not RECIST compliant).[81] Notwithstanding this revelation, the Board did nothing.

         Mahaffy continued publicly to report Roci's ORR at 58% in investor calls, [82]and on August 7, 2014, Clovis issued a press release restating this inflated number.[83]Soon after, the Board viewed another report signaling that Clovis' management was calculating Roci's ORR with unconfirmed responses and that only "80% of unconfirmed [responses] convert to confirmed."[84]

         On September 9, 2014, Clovis closed a critical $287 million private placement of convertible senior notes in order to finance ongoing operations.[85] The Board relied heavily upon the market's positive reaction to Roci's publicly reported ORR to make its case for further investment in the Company.[86]

         As the Company was touting Roci's prospects, management gave a presentation to the Board explicitly comparing Roci's 63% mixed ORR to Tagrisso's confirmed 70%.[87] Another Board presentation from the same time period showed that management was reporting Roci's ORR using partially unconfirmed responses by noting that Roci's ORR was "*Unconfirmed."[88]

         As TIGER-X progressed, Clovis' public statements regarding Roci remained upbeat. Roci was Clovis' champion and it was prepared to do battle with Tagrisso. On September 9, 2014, Mahaffy told a securities analyst that Roci and Tagrisso had "similar response rate[s]," and on November 18, 2014, Clovis issued a press release stating that Roci's ORR was 67%.[89]

         The Board, however, continued to receive signals that management was not vigilantly following RECIST. On December 3, 2014, the Board reviewed a report stating, "in mid-March, we will have a response rate of less than 60% (could be less than 50%)."[90] The same report revealed the Company was waiting on "data maturity" and that at least some patients had not received a second scan at that time, indicating continued non-compliance with RECIST.[91]

         With hands on their ears to muffle the alarms, on February 27, 2015, Defendants Mahaffy, Mast, Atwood, Barrett, Blair, Flaherty, Graham, Klingenstein, McKinley and Spickschen signed Clovis' 2014 Annual Report.[92] The report reaffirmed previous, inflated ORR reports and omitted that Clovis was relying on partially unconfirmed responses.[93]

         On April 29, 2015, management updated the Board by presenting a series of slides depicting that the highest ORR for any subgroup of Roci patients was 53.3% and revealing the numbers were as low as 37.1% for other groups.[94] The next day, Clovis management and CMO Allen published data from the TIGER-X trial in the New England Journal of Medicine ("NEJM").[95] The NEJM article showed Roci's ORR at 59% as "assessed according to . . . [RECIST]."[96] At about this time, in the spring of 2015, Clovis statisticians had already informed "senior clinical personnel" that there was "a 'divergence between the confirmed and unconfirmed ORR'" for Roci.[97]

         Approximately one month later, on June 9, 2015, Clovis officials met with the FDA regarding Roci's critical New Drug Application ("NDA").[98] The NDA filing necessarily included the Company's disclosure of TIGER-X data for final FDA approval.[99] At the meeting, management reported an ORR of 50% without informing the FDA that this ORR included unconfirmed responses.[100]Notwithstanding its report to the FDA, management continued to report a 60% ORR in public statements.[101]

         On June 19, 2015, Mahaffy, Mast and other members of senior management received "close to final" data from the TIGER-X trial.[102] The data showed an ORR of 45.1% for the 500mg dose (significantly lower than the 60% ORR the Company had been disclosing to the market).[103] Mahaffy wrote to another Clovis executive that the data "[s]eems worrying."[104] Three days later, on June 22, CMO Allen resigned without warning.[105] On July 7, Clovis' management received the "final" TIGER-X data showing that Roci's ORR was only 42%.[106]

         On July 14, 2015, Clovis conducted a secondary offering of 4.1 million shares and raised more than $316 million.[107] The prospectus for the offering was signed by the entire Board and disclosed a "'60 percent ORR' at the 'recommended dose of 500mg.'"[108] It did not disclose that the ORR included unconfirmed responses.[109]

         The FDA requested additional data in support of the NDA in October 2015.[110]In response, Clovis disclosed that Roci's current confirmed ORR was between 28% and 34%.[111] At the same time, management presented a slide to the Board to illustrate how Roci was stacking up against Tagrisso.[112] The slide clearly showed an ORR of 46% that was "(Unconf Conf)" while Tagrisso's ORR was "Confirmed."[113] Management advised the Board in connection with the NDA that "[w]e will cite the unconfirmed investigator assessed response rate of ~46%."[114] The public continued to hear a different story, however. For instance, a November 5, 2015 press release and earnings call announced third quarter results and cited presentations from medical conferences claiming Roci's ORR was 60%.[115]

         D. The Fallout

         The conflicting reports regarding Roci's ORR eventually prompted the FDA to ask questions and to call for a meeting with Clovis executives on November 9, 2015.[116] During the meeting, the FDA emphasized it would credit only confirmed responses on the NDA[117] and insisted Clovis comply with TIGER-X's stated protocol (which had explicitly incorporated RECIST).[118] Mahaffy updated the Board on this most recent FDA meeting the following week.[119]

         The public was finally informed of Roci's true ORR when, on November 16, 2015, Clovis issued a press release stating the correct confirmed ORR was as low as 28-34%.[120] Clovis' stock price immediately dropped 70%, wiping out more than $1 billion in market capitalization.[121]

         On April 8, 2016, the FDA voted to delay action on Clovis' NDA until the Company could provide concrete evidence of a risk/benefit profile meriting approval.[122] On this news, Clovis' stock price fell another 17%.[123] On May 5, 2016, Clovis withdrew its NDA for Roci and terminated enrollment in all ongoing Roci studies.[124]

         E. Undisclosed Side Effects and Other TIGER-X Protocol Violations

         In addition to the Company's refusal properly to report ORR, the Board was advised that Roci had serious, undisclosed side effects and that the TIGER-X trial had been compromised by other clinical trial protocol violations during the Relevant Period.[125] FDA regulations and internal Clovis policies required Clovis to abide by certain informed consent, patient eligibility, data reliability, recordkeeping and adverse event reporting practices.[126] The Company routinely missed these marks throughout the TIGER-X trial.[127]

         For example, on August 17, 2015, a research associate notified senior Clovis management of protocol violations involving patient informed consent, patient enrollment, adverse event reporting, data alteration and missing data.[128]Management received a similar report ten days later.[129] The following month, on September 17, 2015, Clovis management identified 238 protocol deviations.[130]On October 14, 2015, in a notice letter (Form 483) to the Company, the FDA identified a failure to report two serious adverse events, approximately twelve patient eligibility violations and various failures to maintain case history and informed consent records.[131] It was also discovered that the clinical trial administrators had failed to monitor other medications enrollees were taking while participating in the trial.[132] The Board was notified of several of these clinical trial protocol violations on December 10, 2015, and likely received additional information about the problems "at regularly scheduled board meetings" where "hours of discussion occurred . . . regarding [Roci]."[133]

         Protocol violations were not the only problems with the Roci clinical trial. The Board also learned that one of the drug's side effects, QT prolongation, was more common than management publicly reported.[134] Specifically, the Board received a report on April 29, 2014, that a grade 3 out of 4 (indicating a severe response) QT prolongation occurred in 6.2% of patients.[135] Nevertheless, the Board sat idle as the Company reported a "manageable side effect profile" throughout May 2014.[136] On October 7, 2014, Board materials indicated that a grade 3 QT prolongation occurred in 2.5% of patients.[137] The same results were reported in forecasts the Board received from management in December of 2014.[138]

         The Company's misleading reports regarding Roci's side effects continued into 2015. In February and July of 2015, Clovis disclosed that Roci's only grade 3 adverse event "of note" was hyperglycemia.[139] The prospectus for the July 2015 secondary offering made a similar disclosure.[140] Although an August 6, 2015 press release mentioned the QT prolongation side effect, it emphasized that the only grade 3 adverse event identified in more than 5% of patients was hyperglycemia.[141]Mahaffy and Mast made public statements in September and November of 2015 that Roci did not have "typical side effects" and that the "only grade 3 or 4 adverse event that has been identified in more than ten percent of patients is hyperglycemia."[142]By this time, however, Clovis had already reported data to the FDA indicating that Roci had a 12% incidence of grade 3 or higher QT prolongation.[143] And, by April 2016, management had informed the Board that the FDA was going to require a "Boxed Warning" (the strongest of the FDA warnings) because it had concluded Roci significantly increased the risk of QT prolongation.[144]

         F. Defendants' Stock Sales and Related Litigation

         As the TIGER-X tribulations unfolded, three members of the Board, Defendants Barrett, Blair and Spickschen, along with CFO Mast, sold small percentages of their Clovis stock holdings.[145] These trades, and their timing relative to the November 16, 2015 fall in Clovis' stock price, are depicted in the chart below.[146]

Name

Date

Shares

Price

Proceeds

Barrett

5/15/15

2, 424

$92.22

$223, 536

Blair

3/5/15

8, 528

$77.70

$662.625

Spickschen

5/15/15

4, 309

$85.00

$366, 269

Mast

3/9/15

9, 000

$79.58

$716, 202

4/1/15

3000

$72.26

$216, 786

5/1/15

3000

$82.25

$246, 744

6/1/15

3000

$86.69

$266, 064

7/1/15

3000

$86.59

$259, 761

8/03/15

3000

$86.12

$258, 369

9/1/15

3000

$79.09

$237, 258

10/1/15

3000

$90.77

$272, 304

11/2/15

3000

$104.18

$312, 543

33, 000

$2, 786, 031

Total

48, 261

$4, 038, 461

         At first glance, the trades appear to be significant. But it is undisputed that each of the Director Defendants retained between 96% and 99.9% of their total holdings throughout the Relevant Period.[147]

         After news of the failed TIGER-X trial broke, and the value of Clovis' stock fell precipitously, Clovis, Mahaffy and Mast were each named as defendants in a series of securities fraud class actions.[148] One of these cases was settled for $142 million in cash and Clovis stock.[149] The SEC's September 18, 2018 complaint against Clovis, Mahaffy and Mast led to the entry of an onerous consent decree requiring the three defendants to pay $20 million, $250 thousand and $100 thousand in civil penalties, respectively.[150] Additionally, Mast was required to disgorge $454, 154 (representing his unjust profits from selling Clovis stock).[151] The FDA also launched its own investigation of Clovis relating to the TIGER-X trial.[152]

         G. Procedural Posture

         On May 31, 2016 and December 15, 2016, Plaintiffs served the Company with demands to inspect books and records under 8 Del. C. § 220 in response to which they received approximately 3, 000 pages of documents.[153] Plaintiffs filed their first complaint on March 23, 2017.[154] They amended the complaint on May 18, 2017.[155] Defendants moved to dismiss the first amended complaint under Court of Chancery Rules 23.1 and 12(b)(6) on August 1, 2017.[156]

         As noted, on September 18, 2018, the SEC filed a complaint against Clovis, Mahaffy and Mast that resulted in consent decrees and civil penalties.[157] After the SEC settlements, Plaintiffs moved to amend their complaint again on November 19, 2018, to add allegations regarding the SEC enforcement actions.[158] After this Court granted leave to amend, the parties supplemented their briefing on Defendants' motions to dismiss.[159] Following oral argument and post-argument filings, the motion to dismiss was submitted for decision on July 1, 2019.

         II. ANALYSIS

         The Complaint comprises three counts.[160] Count I is a derivative claim for breach of fiduciary duty against the Board Defendants.[161] Specifically, Plaintiffs allege the Board Defendants breached their fiduciary duties under Caremark by their "actions and inactions . . . in connection with the TIGER-X trial."[162] In this regard, Count I alleges either that (i) the Board Defendants failed to institute an oversight system for the TIGER-X trial or (ii) the Board Defendants consciously disregarded a series of red flags related to the TIGER-X trial.[163]

         Count II asserts a derivative claim against the Board Defendants for unjust enrichment, and Count III asserts a derivative claim for breach of fiduciary duty against Barrett, Blair, Mast and Spickschen under Brophy, which permits a corporation to recover from its fiduciaries for harm caused by improper stock trades.[164]

         As for Count I, Plaintiffs have pled particularized facts that "create a reasonable doubt that, as of the time the complaint [was] filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."[165] Specifically, Plaintiffs have well-pled that the Board ignored red flags that the Company was violating-perhaps consciously violating- the RECIST protocol and then misleading the market and regulators regarding Roci's progress through the TIGER-X trial. Because Plaintiffs have pled particularized facts to support a reasonable inference the Board Defendants face a substantial likelihood of liability on Count I, Defendants' motion to dismiss Count I under Rule 23.1 must be denied. Having so concluded, a fortiori, I deny the Motion to Dismiss under Rule 12(b)(6) as well.[166]

         Regarding Counts II and III, Plaintiffs have failed to plead particularized facts showing that the Defendants face a substantial likelihood of personal liability as to either count. Defendants' motion to dismiss Counts II and III, therefore, must be granted.

         A. The Applicable Rule 23.1 Standard

         There is no dispute that each of the Complaint's three counts purports to state a derivative claim.[167] As Justice Moore emphasized in his seminal Aronson decision, 8 Del. C. § 141(a) codifies a bedrock of Delaware corporate law-the board of directors, not stockholders, manages the business and affairs of the corporation, including the decision to cause the corporation to sue.[168] With this in mind, our law has established procedural imperatives to ensure that shareholders do not "imping[e] on the managerial freedom of directors."[169] To wrest control over the litigation asset away from the board of directors, the stockholder must demonstrate that demand on the board to pursue the claim would be futile such that the demand requirement should be excused.[170]

         Plaintiffs acknowledge they did not make a pre-suit demand on the Board.[171]It is settled, therefore, that their Complaint must "comply with stringent requirements of factual particularity that differ substantially from the permissive notice pleadings" of Chancery Rule 8 in order to demonstrate that demand upon the Board would have been futile.[172] Where, as here, a plaintiff challenges board inaction-as opposed to a business decision of the Board-the court analyzes demand futility under the well-known and "well-balanced" Rales standard.[173] This standard requires plaintiffs to plead facts regarding demand futility with particularity but balances that requirement with a mandate that the court draw all reasonable inferences in the plaintiffs' favor.[174]

         Demand futility turns on "whether the board that would be addressing the demand can impartially consider [the demand's] merits without being influenced by improper considerations."[175] Such improper influence arises if a majority of the board's members (i) are "compromised" because they face "a 'substantial likelihood' of personal liability" with respect to at least one of the alleged claims or (ii) lack independence because they are beholden to an interested person.[176]

         B. Plaintiffs Have Well-Pled the Board Faces a Substantial Likelihood of Liability Under Caremark (Count I)

         The parties agree that Count I implicates Caremark, Stone v. Ritter and their progeny.[177] These cases require well-pled allegations of bad faith to survive dismissal-i.e., allegations "the directors knew that they were not discharging their fiduciary obligations," a standard of wrongdoing "qualitatively different from, and more culpable than . . . gross negligence."[178] Given this high bar, it is now indubitably understood, and oft-repeated, that a Caremark claim is among the hardest to plead and prove.[179] At the pleadings stage, this means Plaintiffs must allege particularized facts that either (i) "the directors completely fail[ed] to implement any reporting or information system or controls, or . . . [(ii)] having implemented such a system or controls, consciously fail[ed] to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention."[180] Implicit in these standards is the requirement that plaintiffs plead particular facts allowing a reasonable inference the directors acted with scienter, which "requires proof that a director acted inconsistent with his fiduciary duties and, most importantly, that the director knew he was so acting."[181]

         Caremark rests on the presumption that corporate fiduciaries are afforded "great discretion to design context- and industry-specific approaches tailored to their companies' businesses and resources."[182] Indeed, "[b]usiness decision-makers must operate in the real world, with imperfect information, limited resources, and uncertain future. To impose liability on directors for making a 'wrong' business decision would cripple their ability to earn returns for investors by taking business risks."[183] But, as fiduciaries, corporate managers must be informed of, and oversee compliance with, the regulatory environments in which their businesses operate. In this regard, as relates to Caremark liability, it is appropriate to distinguish the board's oversight of the company's management of business risk that is inherent in its business plan from the board's oversight of the company's compliance with positive law-including regulatory mandates. As this Court recently noted, "[t]he legal academy has observed that Delaware courts are more inclined to find Caremark oversight liability at the board level when the company operates in the midst of obligations imposed upon it by positive law yet fails to implement compliance systems, or fails to monitor existing compliance systems, such that a violation of law, and resulting liability, occurs."[184]

         Our Supreme Court's recent decision in Marchand v. Barnhill underscores the importance of the board's oversight function when the company is operating in the midst of "mission critical" regulatory compliance risk.[185] The regulatory compliance risk at issue in Marchand was food safety and the failure to manage it at the board level allegedly allowed Blue Bell Creameries to distribute mass quantities of ice cream tainted by listeria.[186] The Court held that Blue Bell's board had not made a "good faith effort to put in place a reasonable system of monitoring and reporting" when it left compliance with food safety mandates to management's discretion rather than implementing and then overseeing a more structured compliance system.[187]

         As Marchand makes clear, when a company operates in an environment where externally imposed regulations govern its "mission critical" operations, the board's oversight function must be more rigorously exercised.[188] Key to the Supreme Court's analysis was the fact that food safety was the "most central safety and legal compliance issue facing the company."[189] To be sure, even in this context, Caremark does not demand omniscience. But it does demand a "good faith effort to implement an oversight system and then monitor it."[190] This entails a sensitivity to "compliance issue[s] intrinsically critical to the company[]."[191]

         1. Caremark's First Prong

         The so-called first prong of Caremark requires Plaintiffs to well-plead that the Board "completely fail[ed] to implement any reporting or information system or controls[.]"[192] But Plaintiffs acknowledge the Board's Nominating and Corporate Governance Committee was "specifically charged" with "provid[ing] general compliance oversight . . . with respect to . . . Federal health care program requirements and FDA requirements."[193] And they further acknowledge "[t]he Board . . . reviewed detailed information regarding [Roci's] TIGER-X trial at each Board meeting."[194] Given these acknowledged facts, it is difficult to conceive how Plaintiffs would prove the Board had no "reporting or information system or controls[.]"[195]

         2. Caremark's Second Prong

         Caremark's second prong is implicated when it is alleged the company implemented an oversight system but the board failed to "monitor it."[196] To state a claim under this prong, Plaintiffs must well-plead that a "red flag" of non-compliance waived before the Board Defendants but they chose to ignore it.[197] In this regard, the court must remain mindful that "red flags are only useful when they are either waived in one's face or displayed so that they are visible to the careful observer."[198] But, as Marchand makes clear, the careful observer is one whose gaze is fixed on the company's mission critical regulatory issues.[199] For Clovis, this was Roci's TIGER-X trial and the clinical trial protocols and related FDA regulations governing that study.

         Plaintiffs have alleged particularized facts supporting reasonable inferences that: (i) the Board knew the TIGER-X protocol incorporated RECIST;[200](ii) RECIST requires reporting only confirmed responses;[201] (iii) industry practice and FDA guidance require that the study managers report only confirmed responses;[202] (iv) management was publicly reporting unconfirmed responses to keep up with Tagrisso's response rate;[203] and (v) the Board knew management was incorrectly reporting responses but did nothing to address this fundamental departure from the RECIST protocol.[204] When Clovis' serial non-compliance with RECIST was finally revealed to the regulators, Roci was doomed.[205] And when the drug's failure was revealed to the market, Clovis' stock price tumbled.[206]

         ORR was the crucible in which Roci's safety and efficacy were to be tested.[207]Roci was Clovis' mission critical product.[208] And the Board knew, upon completion of the TIGER-X trial, the FDA would consider only confirmed responses when determining whether to approve Roci's NDA per the agency's own regulations.[209]As pled, these regulations, and the reporting requirements of the RECIST protocol, were not nuanced.[210] The Board was comprised of experts and the RECIST criteria are well-known in the pharmaceutical industry.[211] Moreover, given the degree to which Clovis relied upon ORR when raising capital, it is reasonable to infer the Board would have understood the concept and would have appreciated the distinction between confirmed and unconfirmed responses.[212] The inference of Board knowledge is further enhanced by the fact the Board knew that even after FDA approval, physicians (i.e., future prescribers) would evaluate Roci based on its ORR.[213]

         Defendants argue the FDA blessed Clovis' plan to report unconfirmed responses for "interim" results because Roci was on an accelerated approval track.[214]Additionally, Defendants claim FDA guidance was not as clear as the Complaint depicts.[215] But, again, that is not what the Complaint alleges.[216] Whether Plaintiffs' allegations hold up during discovery, at summary judgment or at trial remains to be seen.

         Drawing all reasonable inferences in Plaintiffs' favor, I am satisfied they have well-pled that the Board consciously ignored red flags that revealed a mission critical failure to comply with the RECIST protocol and associated FDA regulations. Additionally, at this stage, Plaintiffs' allegation that this failure of oversight caused monetary and reputational harm to the Company is sufficient to provide a causal nexus between the breach of fiduciary duty and the corporate trauma.[217] Therefore, Defendants' motion to dismiss Count I (Plaintiffs' Caremark claim) under Rules 23.1 and 12(b)(6) must be denied.

         C. Plaintiffs Fail to State a Brophy Claim (Count III)

         Generally, "corporate officers and directors may purchase and sell the corporation's stock at will, without any liability to the corporation."[218] Indeed, Delaware law recognizes that it is good when fiduciaries align their interests with the company through stock ownership, a dynamic facilitated by the fact that many directors and officers are compensated in stock.[219] With the desirability of aligned incentives in mind, our law sets the bar for stating a claim for breach of fiduciary duty based on insider trading very high.[220]

         "[A]n insider's trade may be deemed a breach of the fiduciary duty of loyalty, when: (1) 'the corporate fiduciary possessed material, nonpublic information'; and (2) 'the corporate fiduciary used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information.'"[221] In other words, Plaintiffs must plead facts that support an inference that Barrett, Blair, Mast and Spickschen acted with scienter.[222]

         At the pleading stage, by necessity, a Brophy claim usually rests on circumstantial facts and a successful claim typically includes allegations of unusually large, suspiciously timed trades that allow a reasonable inference of scienter.[223] While the fact a fiduciary sells stock near the time he learns of material, nonpublic information might be evidence of the seller's motive, temporal proximity alone generally is insufficient to support an inference of scienter that will survive a motion to dismiss.[224] The other important piece of circumstantial evidence that, along with timing, might support an inference of scienter is the size of the trade relative to the defendant's overall stock holdings.[225] If a defendant sells only a small portion of her holdings and retains a "huge stake in the company[, ]" then it is difficult reasonably to infer she was "fleeing disaster or seeking to make an unfair buck[.]"[226]

         Plaintiffs allege three of the Director Defendants each traded one time, six months or more before Clovis disclosed the lower ORR results, with each trade representing a very small fraction of the trader's overall stake in the Company.[227]Specifically, each of the directors named in Count III retained between 96% and 99.9% of their total holdings as of April 13, 2015 (i.e., after the alleged improper trades).[228] In other words, in large measure, notwithstanding their alleged knowledge of the corporate trauma soon to come, each of these Defendants rode over the falls with the rest of Clovis' stockholders when the corporate storm hit the Company.

         Regarding Mast, Plaintiffs allege he traded nine times in a consistent pattern (selling about 3, 000 shares on the first of every month), which is inconsistent with an inference that he sold because insider knowledge allowed him to anticipate a decline.[229] While Mast sold a larger percentage of his overall holdings when compared with the other Defendants named in Count III, he still retained approximately 90% of his holdings throughout the Relevant Period.[230]

         Noticeably absent from the Complaint are any well-pled facts that the trades at issue represented a deviation from the sellers' past trading practices.[231] To the contrary, the alleged selling patterns are inconsistent with a rational inference that these Defendants were motivated to sell based on their knowledge of Roci's true ORR.

         After carefully reviewing the Complaint, I am satisfied it is not reasonably conceivable that these four defendants-who sold only a sliver of their holdings and suffered approximately the same decrease in net worth as other Clovis stockholders-made their trades with the requisite scienter required to sustain a Brophy claim. Therefore, Defendants' motion to dismiss under Rule 12(b)(6), and by extension Rule 23.1, is granted.

         D. Plaintiffs Fail to State an Unjust Enrichment Claim (Count II)

         In Count II, Plaintiffs attempt to state a derivative claim for unjust enrichment in addition to their Caremark and Brophy claims.[232] As "representatives of Clovis," they seek "restitution from the Board Defendants" and an order requiring Defendants to disgorge "all profits, benefits and other compensation obtained . . . from their wrongful conduct and fiduciary breaches."[233]

         Unjust enrichment is the "unjust retention of a benefit to the loss of another, or the retention of money or other property of another against the fundamental principles of justice or equity and good conscience."[234] "The elements of unjust enrichment are: (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a remedy provided by law."[235]

         Even with Section 220 documents in hand, Plaintiffs have not attempted to connect the Board Defendants' enrichment to alleged wrongdoing beyond their Brophy claim.[236] In search of an enrichment, Plaintiffs can point only to the Board Defendants' regular compensation and the profits obtained by some of the Board Defendants who sold stock. Because I have determined Plaintiffs have failed to state a viable Brophy claim, the only potential "enrichment" that remains is the Board Defendants' regular compensation.

         Not surprisingly, Plaintiffs fail to connect the Board Defendants' "benefits and other compensation" with the alleged wrongdoing (i.e., oversight failures).[237] In apparent recognition of this pleading gap, Plaintiffs cite Caspian Select Credit Master Fund Ltd. v. Gohl for the general proposition that an unjust enrichment claim that is duplicative of a breach of fiduciary duty claim can survive a motion to dismiss if the fiduciary duty claim survives.[238] But that general proposition is not helpful here. In Caspian, a controlling shareholder allegedly engaged in self-dealing by being on both sides of a stock issuance.[239] There was a clear enrichment tied to an alleged breach of the fiduciary duty of loyalty.[240] Where, as here, the underlying breach arises from a Caremark violation, it is difficult to discern how that breach would give rise to an enrichment, and Plaintiffs have not well-pled that connection here.

         Defendants' motion to dismiss Count II is granted under Rule 12(b)(6) for failure to state a viable claim and, by extension, under Rule 23.1 for failure to plead particular facts that would allow an inference that a majority of the Board faces a substantial likelihood of liability for unjust enrichment.

         III. CONCLUSION

         Based on the foregoing, Defendants' motion to dismiss Plaintiffs' Complaint is DENIED as to Count I ...


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