Investor Suit Against BioScrip Board Over Drug Kickbacks Tossed

By Yin Wilczek

A BioScrip Inc. shareholder can’t sue the company’s directors over a kickback scheme involving Novartis Pharmaceuticals Corp.’s Exjade drug, Delaware’s highest court said.

The Delaware Supreme Court, in a brief Nov. 27 opinion, agreed the case should be dismissed because the shareholder failed to ask the board to sue before it filed its own complaint ( Park Emps. and Ret. Board Emps. Annuity and Benefit Fund of Chicago v. Smith , Del., No. 198, 2017, 11/27/17 ).

The Park Employees’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago sued certain BioScrip board members in May 2015, saying they covered up the scheme and participated in two “illegal stock offerings” before the company disclosed the government’s investigation in 2013.

The lawsuit was twice dismissed by the Delaware Chancery Court, on the basis that the shareholder should have brought its concerns to the board before suing. The case is unusual because the company installed a new board during the litigation.

BioScrip, a specialty pharmacy based in Denver, agreed in 2014 to pay $15 million to settle claims by state and federal prosecutors that it pushed patients to refill their prescriptions of Exjade, a drug to treat chronic iron overload, in exchange for kickbacks from Norvatis. In 2016, it reached an $11 million settlement to resolve shareholder claims that it concealed the kickback scheme.

In 2016, Novartis paid $390 million to resolve the government’s case over the kickback violations.

Demand Futility

Under Delaware law, shareholders must first ask the board to take action, or show that it was futile to ask the board because its impartiality was compromised, before they can sue on the company’s behalf.

Four days after the fund filed its complaint in 2015, BioScrip installed a new seven-member board of which only two were named defendants in the action.

The chancery court ruled in May 2016 that the fund must meet the demand futility requirement with respect to the new board. It dismissed the lawsuit, but allowed the shareholder to amend its complaint under a good-cause exception.

Subsequently, the shareholder filed an amended complaint to include allegations that the new board wasn’t independent enough to address its litigation demand. The chancery court disagreed in a ruling earlier this year.

In its appeal to the Delaware Supreme Court, the fund contended the court was wrong to conclude that the board sitting at the time the first complaint was filed wasn’t the right board against which to consider demand futility.

The parties argued their case before the state high court in mid-November.

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

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bloomberglaw.com

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