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Lebanon County Employees' Retirement Fund v. AmerisourceBergen Corp.

Court of Chancery of Delaware

January 13, 2020

LEBANON COUNTY EMPLOYEES' RETIREMENT FUND and TEAMSTERS LOCAL 443 HEALTH SERVICES & INSURANCE PLAN, Plaintiffs,
v.
AMERISOURCEBERGEN CORPORATION, Defendant.

          Submitted: October 15, 2019

          Samuel L. Closic, Eric J. Juray, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Eric L. Zagar, Michael C. Wagner, Christopher M. Windover, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Frank R. Schirripa, Daniel B. Rehns, Hillary Nappi, HACH ROSE SCHIRRIPA & CHEVERIE LLP, New York, New York; Andrew Blumberg, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Attorneys for Plaintiffs.

          Stephen C. Norman, Jennifer C. Wasson, Tyler J. Leavengood, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Michael D. Blanchard, MORGAN, LEWIS & BOCKIUS LLP, Boston, Massachusetts; Attorneys for Defendant.

          MEMORANDUM OPINION

          LASTER, V.C.

         Defendant AmerisourceBergen Corporation is one of the world's largest wholesale distributors of opioid pain medication. Its role in America's opioid epidemic has made it the target of numerous subpoenas, government investigations, and lawsuits. Two congressional investigations have concluded that AmerisourceBergen failed to identify and address suspicious orders of opioids, contrary to the requirements of federal law. The federal Drug Enforcement Administration (the "DEA") and federal prosecutors in nine states have subpoenaed its documents. It is a defendant in multi-district litigation brought by cities, counties, Indian tribes, union pension funds, and the attorneys general of virtually every state. AmerisourceBergen and the other opioid-distributor defendants have offered to settle with the state attorneys general for $10 billion. Analysts have estimated that resolving all of the litigation would require $100 billion. AmerisourceBergen already has spent more than $1 billion in connection with the opioid-related lawsuits and investigations.

         The plaintiffs own stock in AmerisourceBergen. They are investigating whether the firm engaged in wrongdoing in connection with the distribution of opioids. As part of their investigation, the plaintiffs sought to inspect AmerisourceBergen's books and records pursuant to Section 220 of the Delaware General Corporation Law. AmerisourceBergen rejected the plaintiffs' request in its entirety, contending that the plaintiffs lacked a proper purpose, and alternatively, the scope of the requested inspection was overly broad. The plaintiffs filed this action to enforce their statutory inspection rights.

         The plaintiffs have proven that they have proper purposes to conduct an inspection, and they have established their right to inspect what this decision refers to as Formal Board Materials. The record is inadequate to determine whether the plaintiffs can inspect any other materials because AmerisourceBergen refused to provide any discovery into what types of books and records exist, how they are maintained, and who has them. The plaintiffs have leave to take a Rule 30(b)(6) deposition to explore these issues. If the plaintiffs believe that they are entitled to additional books and records after reviewing the Formal Board Materials and taking the Rule 30(b)(6) deposition, then they may make an additional application.

         I. FACTUAL BACKGROUND

         The case was tried on a paper record comprising sixty-five exhibits. The following facts were proven by a preponderance of the evidence.[1]

         A. AmerisourceBergen's Legal Obligations As An Opioid Distributor

         AmerisourceBergen is one of the world's largest distributors of pharmaceutical products, including opioids.[2] In the United States, AmerisourceBergen is one of the three largest distributors of opioids.

         As an opioid distributor, AmerisourceBergen must comply with the Comprehensive Drug Abuse Prevention and Control Act of 1970 and its implementing regulations (collectively, the "Controlled Substances Act"). To obtain and maintain a license to distribute opioids, a distributor must maintain "effective controls against diversion of [opioids] into other than legitimate medical, scientific, research, or industrial channels." 21 U.S.C. § 823(e)(1); see id. § 823(b)(1). A distributor must also "design and operate a system to disclose to the registrant suspicious orders of [opioids]." 21 C.F.R. § 1301.74(b). "Suspicious orders include orders of unusual size, orders deviating substantially from a normal pattern, and orders of unusual frequency." Id.

         A distributor must report suspicious orders to the DEA. Once a distributor has reported a suspicious order, it must either (i) decline to ship the order or (ii) ship the order only after conducting due diligence and determining that the order is not likely to be diverted into illegal channels. See Masters Pharm., Inc. v. Drug Enf't Admin., 861 F.3d 206, 212-13 (D.C. Cir. 2017). The DEA can suspend or revoke the license of any distributor that fails to maintain controls or respond appropriately to suspicious orders. See 21 U.S.C. § 824.

         B. The Opioid Epidemic And Rogue Pharmacies

         The United States remains mired in an opioid epidemic that has killed hundreds of thousands of Americans and affected the lives of millions more. Starting in the late 1990s, pharmaceutical companies reassured doctors that patients would not become addicted to opioids. JX 43 at '001. Doctors responded by writing more prescriptions for opioids, often without appreciating or advising patients about the risk of addiction. See JX 24. Between 1999 and 2014, the number of opioid prescriptions quadrupled. JX 22 at '003. As many as 29% of the patients who were prescribed opioids for chronic pain misused them, and as many as 12% developed an opioid-use disorder. JX 43 at '001.

         In a vicious cycle, increasing levels of opioid abuse led to greater demand for opioids. So-called "rogue pharmacies" met the demand by filling large numbers of prescriptions. Stopping rogue pharmacies became a DEA priority.

         C. AmerisourceBergen And Rogue Pharmacies

         In 2005, DEA personnel met with the Director of Regulatory Affairs at AmerisourceBergen to make sure that the company understood the common characteristics of rogue pharmacies and its obligation to prevent the diversion of controlled substances. JX 3 at '002-03. In April 2007, the DEA suspended AmerisourceBergen's license for its distribution center in Orlando, Florida, because of its involvement with rogue pharmacies. See id. at '001. The DEA found that the Orlando center had "sold over 5.2 million dosage units of [opioids] to pharmacies" and that AmerisourceBergen "knew, or should have known" that the pharmacies "were diverting controlled substances into other than legitimate medical, scientific and industrial channels." Id. at '003. Among other things, the DEA found that the pharmacies in question (i) ordered opioids from AmerisourceBergen "in amounts that far exceeded what an average pharmacy orders," (ii) "ordered small amounts of other drug products relative to the pharmacies' [opioids] purchases," (iii) "ordered [opioids] much more frequently than [AmerisourceBergen]'s other pharmacy customers," and (iv) were publicly known to "fill[] prescriptions that were issued by physicians acting outside the usual course of professional practice . . . ." Id. at '002. The DEA concluded that AmerisourceBergen had "failed to maintain effective controls against diversion." Id. at '003.

         In June 2007, AmerisourceBergen settled with the DEA and committed to adopt and maintain "a compliance program designed to detect and prevent diversion of controlled substances." JX 5 art. II § 1(a) (the "2007 Settlement"). The program applied to all of AmerisourceBergen's facilities and required "more rapid identification and daily reporting of orders that may indicate diversion of controlled substances." JX 6 at '001. It also required "a more rigorous examination process" for new customers. Id.

         Later in 2007, AmerisourceBergen resolved similar problems at Bellco Drug Company ("Bellco"), a distributor that AmerisourceBergen acquired in March 2007. See JX 2. Between signing and closing, Bellco entered into a consent decree with the DEA "for failing to report suspicious orders of controlled substances to . . . pharmacies." JX 8; see JX 7. Bellco paid an $800, 000 fine and surrendered its DEA license. See JX 7; JX 8.

         D. AmerisourceBergen's Monitoring And Compliance Program

         After these events, AmerisourceBergen implemented a new compliance program that was developed in consultation with the DEA in an effort to establish an industry standard. See Dkt. 20 at 12-13; JX 6; JX 9. After AmerisourceBergen implemented the program, its Vice President of Corporate Security and Regulatory Affairs gave a presentation at a conference hosted by the DEA that addressed when companies should report suspicious orders to authorities. Dkt. 20 at 13. In August 2015, AmerisourceBergen updated its compliance program again. JX 41 at '185.

         According to AmerisourceBergen's public filings, the company's senior officers and its board of directors (the "Board") play a significant role in monitoring and enforcing compliance. For example, AmerisourceBergen's proxy statement for its annual meeting in 2011 stated, "Our Chief Compliance Officer and/or Senior Vice President, General Counsel and Secretary report to the Audit Committee throughout the year on the status of our compliance program . . . and any changes or developments." JX 16 at '021. Eight years later, AmerisourceBergen continued to make similar disclosures; its proxy statement for its annual meeting in 2019 stated: "Our Board oversees risk management and considers specific risk topics on an ongoing basis, including risks associated with the Company's distribution of opioid medications. . . . Our Board of Directors actively oversees and reviews the effectiveness of our compliance programs, including our diversion control program." JX 44 at '014-15. The charter of the Audit Committee corroborates these statements by requiring that the committee review "at least quarterly reports received from the Company's Chief Compliance Officer, counsel and other members of management regarding the Company's compliance with applicable legal requirements, including requirements of the Drug Enforcement Administration." JX 49 at '005.

         E. Government Investigations, Lawsuits, And Multidistrict Litigation

         Since 2012, AmerisourceBergen has received subpoenas relating to its anti-diversion and order-monitoring programs from the DEA and from U.S. Attorneys' Offices for the District of New Jersey, the District of Kansas, the Northern District of Ohio, the Eastern District of New York, the District of Colorado, the Northern District of West Virginia, the Western District of Michigan, the Middle District of Florida, the Southern District of Florida, and the Eastern District of California. JX 21 at '074-75; JX 46 at '014.

         In 2012, the Attorney General for the State of West Virginia sued AmerisourceBergen and other opioid distributors, alleging that they had failed to implement effective controls to identify suspicious orders and guard against the diversion of opioids. JX 21 at '075. In 2017, AmerisourceBergen paid $16 million to settle the litigation. JX 27 at '002. Also during 2017, a consortium of attorneys general from forty-one states requested documents and information from AmerisourceBergen and other opioid distributors as part of an investigation into their distribution practices. JX 29.

         In 2018, the Energy and Commerce Committee of the United States House of Representatives released a report titled "Red Flags and Warning Signs Ignored: Opioid Distribution and Enforcement Concerns in West Virginia." JX 41 (the "West Virginia Report"). The report found that AmerisourceBergen and the two other largest wholesale opioid distributors in the United States "failed to address suspicious order monitoring" in West Virginia. Id. at '008. It concluded that after the 2007 Settlement with the DEA, AmerisourceBergen initially had identified and halted suspicious orders from West Virginia. But during the years following 2013, AmerisourceBergen's reporting of suspicious orders declined significantly, eventually reaching nominal levels. In 2013, AmerisourceBergen shipped 20.2 million doses of opioids to West Virginia and reported 792 suspicious orders. Id. at '253. Two years later, in 2015, AmerisourceBergen shipped 15.85 million doses to West Virginia, yet reported only fifty-three suspicious orders. Id. In 2016, AmerisourceBergen's reporting of suspicious orders became virtually non-existent: it shipped 11.5 million doses to West Virginia, yet reported only three suspicious orders. Id. And similarly in 2017, AmerisourceBergen reported only five suspicious orders. Id. at '252-53. The West Virginia Report inferred that the trend for AmerisourceBergen's reporting of suspicious orders in West Virginia reflected a broader nationwide decline, because "in 2017, on a per-capita basis, West Virginia had the second highest number of suspicious orders reported to the DEA by AmerisourceBergen of all states." Id. at '252.

         The West Virginia Report also documented changes in how AmerisourceBergen responded to pharmacies that placed suspicious orders. In 2009, after a pharmacy submitted thirty-six suspicious orders in a single month, AmerisourceBergen terminated its relationship with the pharmacy. Id. at '253. But between 2013 and 2014, when a pharmacy submitted 109 suspicious orders over a period of five months, AmerisourceBergen continued doing business with the pharmacy. Id. at '254.

         Also in 2018, the Office of the Ranking Member for the Homeland Security and Governmental Affairs Committee in the United States Senate released a report titled "Fueling an Epidemic, Report Three: A Flood of 1.6 Billion Doses of Opioids into Missouri and the Need for Stronger DEA Enforcement." See JX 38 (the "Missouri Report"). The Missouri Report similarly concluded that AmerisourceBergen and the two other largest wholesale opioid distributors had "consistently failed to meet their reporting obligations" regarding suspicious orders. Id. at '002. And AmerisourceBergen reported suspicious orders far less frequently than its competitors, even when shipping roughly the same quantities of opioids. For example, between 2012 and 2017, AmerisourceBergen and McKesson each shipped around 650 million doses to Missouri; McKesson reported 16, 714 suspicious orders while AmerisourceBergen reported only 224. Id. at '009.

         In 2019, the New York Attorney General filed an amended complaint against AmerisourceBergen and other opioid distributors and manufacturers. JX 48 (the "NYAG Complaint"). In allegations specifically targeting AmerisourceBergen, the NYAG Complaint contended that AmerisourceBergen's policies facilitated the diversion of opioids and that AmerisourceBergen failed to stop it from happening. See id. ¶¶ 698-735. The NYAG Complaint also contended that AmerisourceBergen "has consistently stood out as compared to its major competitors [because of] its unwillingness to identify suspicious orders, even among customers that regularly exceeded their thresholds and presented multiple red flags of diversion." Id. ¶ 727.

         Among other things, the NYAG Complaint alleged that AmerisourceBergen lacked "an internal rule or policy that requires investigation of a customer based on a specific number of suspicious order reports." Id. ¶ 723. The NYAG Complaint also alleged that AmerisourceBergen set arbitrary limits on the number of suspicious orders it held for review, which resulted in other suspicious orders being shipped. Id. ¶¶ 701, 705. The NYAG Complaint similarly alleged that AmerisourceBergen only reported some of its suspicious orders to the DEA. Id. ¶¶ 705, 722, 728. The NYAG Complaint further alleged that AmerisourceBergen's procedures failed to ensure that accounts for blocked or terminated customers were deactivated, which enabled pharmacies on the "Do Not Ship List" to continue ordering and receiving opioids. Id. ¶ 726. When the control deficiency was discovered, AmerisourceBergen reinstated the affected customers without conducting any additional due diligence review. Id.

         The NYAG Complaint supported these allegations by analyzing publicly available data on AmerisourceBergen's pharmacy customers and by providing examples of rogue pharmacies that AmerisourceBergen supplied. The examples included:

• A pharmacy in Orange County, New York, that consistently ranked at or above the 99th percentile in the state for both its number of opioid orders and its total opioids ordered by weight. Between 2014 and 2016, more than 10% of its prescriptions were written by prescribers who were later indicted or convicted of opioid-related charges. Over the same period, the number of suspicious orders that AmerisourceBergen reported from the pharmacy declined. In 2018, AmerisourceBergen was still the pharmacy's primary opioid distributor. See id. at '208.
• A pharmacy in Bronx County, New York, that ranked above the 95th percentile for five years straight (2012 to 2016) based on percentage of opioids volume shipped. On average, 58% of its opioid prescriptions were paid in cash, putting it in the 99th percentile for the state. From 2013 to 2015, approximately half of its opioid prescriptions were written by prescribers who were later convicted. In 2018, this pharmacy was still a customer of AmerisourceBergen's. See id. at '210.
• A pharmacy in Queens County, New York, where, between 2013 and 2017, 77% of its prescriptions were written by prescribers who were later indicted or convicted. AmerisourceBergen did not stop shipping to that pharmacy until 2017. See id. at '209.

         AmerisourceBergen is also a defendant in multidistrict litigation pending in the United States District Court for the Northern District of Ohio (the "Multidistrict Litigation"). That action centralizes 1, 548 different lawsuits brought by state attorneys general, cities, counties, Native American tribes, union benefit funds, and other plaintiffs. See JX 45.

         One of the centralized lawsuits illustrates the types of cases that are proceeding through the Multidistrict Litigation. In a detailed complaint containing some 1, 165 paragraphs, the State of Ohio and the County of Cuyahoga County alleged that AmerisourceBergen and other distributors failed to report or halt suspicious orders of opioids. See JX 37 (the "Ohio Complaint") ¶¶ 9, 14. The Ohio Complaint further alleged that AmerisourceBergen and other manufacturers collaborated to increase DEA-imposed limits on the volume of opioids that could be manufactured and distributed. Id. ¶ 517. It also alleged that opioid distributors collaborated to increase opioid sales by working through organizations such as the Pain Care Forum and the Healthcare Distribution Alliance. Id. ¶¶ 500-14.

         The claims in the Multidistrict Litigation survived a motion to dismiss (except for certain public nuisance claims). See JX 42. The claims also survived a defense motion for summary judgment. See JX 54 at '016. In response to the defendants' motion for summary judgment, the plaintiffs presented evidence indicating that despite having a compliance program in place nominally, "AmerisourceBergen continued the practice of shipping some orders it identified as suspicious, with little or no documentation as to whether a due diligence investigation was conducted." JX 52 at '105. They also presented evidence indicating that "other due diligence policies put in place . . . suffered from numerous and critical deficiencies" that "rendered AmerisourceBergen's due diligence program ineffective and toothless." Id. As an example, the plaintiffs described a project that AmerisourceBergen had implemented in 2016 to ensure that it had the necessary documentation to establish that all of its customers were authorized to purchase controlled substances. The project identified a significant number of customer files that lacked the necessary documentation. One year later, AmerisourceBergen had collected the necessary documentation for only about 10% of the files. Id. at '106.

         The Multidistrict Litigation is heading toward a series of bellwether trials. JX 47. In August 2019, AmerisourceBergen and two other opioid distributors offered to pay $10 billion to settle the claims asserted by state attorneys general. JX 55. The regulators countered at $45 billion. See id. Analysts have estimated that a global settlement could cost as much as $100 billion. Id.

         Meanwhile, AmerisourceBergen continues to incur costs. Since September 2017, AmerisourceBergen has spent more than $1 billion on litigation and opioid-related costs, including settlements and legal fees relating to opioid lawsuits and investigations. See AmerisourceBergen Corp., Annual Report (Form 10-K) 73 (Sept. 30, 2019).

         F. The Section 220 Demand

         On May 21, 2019, the plaintiffs served a demand for books and records on AmerisourceBergen. See JX 50 (the "Demand"). The Demand stated that the plaintiffs sought to "investigate whether the Company's Directors and Officers have committed mismanagement or breached their fiduciary duties" in connection with the distribution of opioids. See id. at '013. The Demand described the opioid crisis and AmerisourceBergen's anti-diversion and compliance practices. See id. at '002-10. The Demand asked for "Board Materials" relating to ten categories of information. Id. at '011-12. The specific requests appear and are addressed in the Legal Analysis. See infra Part II.B.

         On June 7, 2019, AmerisourceBergen rejected the Demand in its entirety, contending that the Demand did not "state a proper purpose or a credible basis to suspect wrongdoing" and that the scope of the inspection was "overly broad." See JX 51 at '006. To date, AmerisourceBergen has not produced any documents in response to the Demand.

         On July 8, 2019, the plaintiffs filed this action. The parties negotiated a schedule and conducted limited discovery. A trial on a paper record took place on October 15, 2019.

         II. LEGAL ANALYSIS

         Section 220(b) of the Delaware General Corporation Law grants "[a]ny stockholder" the right "to inspect for any proper purpose . . . [t]he corporation's stock ledger, a list of its stockholders, and its other books and records . . . ." 8 Del. C. § 220(b). "Section 220 is now recognized as 'an important part of the corporate governance landscape.'" Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 120 (Del. 2006) (quoting Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 571 (Del. 1997)).

         To obtain books and records under Section 220(b), the plaintiff must establish by a preponderance of the evidence (i) its status as a stockholder, (ii) compliance with the statutory requirements for making a demand, and (iii) a proper purpose for conducting the inspection. Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 144 (Del. 2012). After meeting these requirements, the plaintiff must demonstrate by a preponderance of the evidence that "each category of books and records is essential to accomplishment of the stockholder's articulated purpose for the inspection." Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996). The only disputed issues in this case are whether the plaintiffs have a proper purpose and the scope of the inspection.

         A. The Plaintiffs' Purposes

         "The paramount factor in determining whether a stockholder is entitled to inspection of corporate books and records is the propriety of the stockholder's purpose in seeking such inspection." CM & M Gp., Inc. v. Carroll, 453 A.2d 788, 792 (Del. 1982). In the language of the statute, "[a] proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder." 8 Del. C. § 220(b).

         "There is no shortage of proper purposes under Delaware law . . . ." Melzer v. CNET Networks, Inc., 934 A.2d 912, 917 (Del. Ch. 2007). Prior cases have recognized that a stockholder can state a proper purpose by seeking

• to investigate allegedly improper transactions or mismanagement;
• to clarify an unexplained discrepancy in the corporation's financial statements regarding assets;
• to investigate the possibility of an improper transfer of assets out of the corporation;
• to ascertain the value of his stock;
• to aid litigation he has instituted and to contact other stockholders regarding litigation and invite their association with him in the case;
• "[t]o inform fellow shareholders of one's view concerning the wisdom or fairness, from the point of view of the shareholders, of a proposed recapitalization and to encourage fellow shareholders to seek appraisal";
• "to discuss corporate finances and management's inadequacies, and then, depending on the responses, determine stockholder sentiment for either a change in management or a sale pursuant to a tender offer";
• to inquire into the independence, good faith, and due care of a special committee formed to consider a demand to institute derivative litigation;
• to communicate with other stockholders regarding a tender offer;
• to communicate with other stockholders in order to effectuate changes in management policies;
• to investigate the stockholder's possible entitlement to oversubscription privileges in connection with a rights offering;
• to determine an individual's suitability to serve as a director;
• to obtain names and addresses of stockholders for a contemplated proxy solicitation; or
• to obtain particularized facts needed to adequately allege demand futility after the corporation has admitted engaging in backdating stock options.

City of Westland Police & Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281, 289 n.30 (Del. 2010) (emphasis omitted, formatting altered to add bullets, and internal footnotes omitted) (quoting Edward P. Welch et al., Folk on the Delaware General Corporation Law, Fundamentals § 220.6.3, at GCL-VII-202 to -206 (2009 ed.)).

         The Demand identifies the following purposes for inspection:

(i) to investigate possible breaches of fiduciary duty, mismanagement, and other violations of law by members of the Company's Board of Directors and management, including the Company's senior officers . . . in connection with [AmerisourceBergen]'s distribution of prescription opioid medications;
(ii) to consider any remedies to be sought in respect of the aforementioned conduct;
(iii) to evaluate the independence and disinterestedness of the members of the Board; and
(iv) to use information obtained through inspection of the Company's books and records to evaluate possible litigation or other corrective measures with ...

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