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Ninth Circuit Revives Derivative Lawsuit, Finding Delaware Chancery Case Persuasive

Friday, September 5, 2014

By Yin Wilczek

Sept. 2 — The U.S. Court of Appeals for the Ninth Circuit Sept. 2 revived a shareholder derivative lawsuit alleging that Allergan Inc.'s current and former directors were liable for state and federal violations and breached their fiduciary duties over Botox marketing practices.

Reversing the U.S. District Court for the Central District of California and remanding, the Ninth Circuit ruled that the plaintiffs were excused from making a presuit demand on Allergan's board to bring the derivative claims in the company's name.

Applying Delaware law, the court found that the plaintiffs' factual allegations and, “more important, the reasonable inferences” that must be drawn in the plaintiffs' favor adequately show that the board either did nothing despite knowing of wrongdoing or “knowingly adopted a business plan premised on illegal conduct.”

“In either case, Allergan's directors violated their duty of loyalty and would face a substantial likelihood of liability; in the latter case, they would also have forfeited the protection of the business judgment rule,” the court concluded in an opinion by Judge Stephen Reinhardt.

Reinhardt also wrote a separate special concurrence, opining that in demand futility cases “in which the standard of review is determinative of the outcome,” the proper standard of review should be de novo.

Guilty Plea

In September 2010, Allergan pleaded guilty to criminal charges for Botox misbranding and agreed to pay a total of $600 million in criminal and civil fines. Several Allergan stockholders filed derivative lawsuits, including the Louisiana Municipal Police Employees' Retirement System in Delaware and other stockholders in California federal court.

In January 2012, the U.S. District Court for the Central District of California dismissed the derivative suit for failure to adequately allege demand futility.

In a case involving almost identical issues, the Delaware Court of Chancery in June 2012 went the opposite direction, finding that the plaintiffs had shown demand futility. The state supreme court subsequently reversed the chancery court solely on the grounds that the Delaware plaintiffs were collaterally estopped from pursuing their claims in chancery court due to the earlier-filed dismissal of the complaint by the district court.

Delaware Court Persuasive

The Ninth Circuit said it agreed with the chancery court's decision that demand was excused. The plaintiffs' allegations—including that the illegal off-label promotion of Botox persisted for more than a decade and involved several Allergan divisions—suggested a “combination of widespread and enduring illegality” that “strongly supports an inference of Board knowledge and intentional disregard,” the court wrote.

The Ninth Circuit also found that the district court committed a number of errors and thus abused its discretion. Among other problems, the district court considered the plaintiffs' factual allegations in isolation rather than in combination.

In addition, the lower court “repeatedly drew inferences in the Board's favor,” crediting the company's reasonable interpretations of the factual allegations over the plaintiff's reasonable interpretations of the same allegations, the appeals court wrote. “Finally, the district court essentially insisted on a smoking gun of Board knowledge, even though precedent holds that plaintiffs can show demand futility by alleging particular facts that support an inference of conscious inaction.”

The plaintiffs were represented by Joseph D. Daley, Robbins Geller Rudman & Dowd LLP, San Diego.

Allergan's current and former directors were represented by Mark Perry, Gibson Dunn & Crutcher LLP, Washington.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

The decision is available at http://www.bloomberglaw.com/public/document/Willa_Rosenbloom_et_al_v_David_Pyott_et_al_Docket_No_1255516_9th_.

 

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