Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_19-cv-02869/USCOURTS-cand-3_19-cv-02869-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 28:1332 Diversity-Stockholders Suits

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United States District Court

Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

JEAN E. HENRY,

Plaintiff,

v.

BRIAN J. TYLER, et al.,

Defendants.

Case No. 19-cv-02869-CRB 

ORDER GRANTING MOTION TO 

DISMISS

Widespread anticompetitive conduct in the generic pharmaceuticals industry has led 

to a Department of Justice investigation, a complaint brought by forty-nine Attorneys 

General (the “AG complaint”), and a plethora of antitrust and Securities Act lawsuits 

against generic drug manufacturers. Although McKesson Corp. (“McKesson”) is, for the 

most part, a generic drug wholesaler, it has not been entirely spared. It is a defendant in 

multiple civil actions arising from the scandal, including a securities fraud action pending 

before this court.

Jean Henry’s derivative shareholder complaint (“the FAC”) builds off the 

allegations of earlier actions to accuse former and current McKesson executives and 

directors (collectively, “Defendants”) of breaching their fiduciary duties. Defendants have 

moved to dismiss Henry’s complaint for failure to state a claim or demonstrate demand 

futility. MTD (dkt. 44). Because Henry fails to sufficiently allege either demand futility 

or that McKesson participated in a price-fixing conspiracy, the motion to dismiss is 

granted.

I. BACKGROUND

McKesson is a pharmaceutical wholesaler. FAC ¶ 21 (dkt. 41). The majority of its 

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business involves buying drugs from manufacturers and reselling them to pharmacies and 

hospitals. Id. McKesson also owns a subsidiary, NorthStar Rx (“NorthStar”), that 

manufactures generic drugs. Id. ¶ 22.

In the last several years, evidence has come to light of widespread anti-competitive 

conduct in the generic drug market. Id. ¶¶ 2. Investigations by Congress, the Department 

of Justice, and multiple Attorneys General have led to a number of guilty pleas and a 

complaint alleging a wide-ranging price-fixing conspiracy. Id. ¶ 1–3, 62–73. The AG 

complaint alleges that generic drug manufacturers agreed to divide market share rather 

than compete on price. Id. ¶¶ 2–4. It does not name McKesson as a defendant. Id. ¶ 9. 

McKesson is also a defendant in various civil actions arising from the price-fixing 

conspiracy, including a securities fraud class action pending before this Court. Id. ¶ 1.

Henry is a shareholder in McKesson. Id. ¶ 183. She is bringing this action 

derivatively on behalf of McKesson, alleging that Defendants breached their fiduciary 

duties of loyalty and care to the company. Id. ¶¶ 181, 194. The FAC alleges that 

Defendants knowingly, recklessly, or negligently allowed McKesson to “become 

implicated in an illegal price-fixing and market allocation scheme.” Id. ¶ 196. McKesson 

ostensibly participated in the antitrust conspiracy both in its role as a wholesaler and 

through NorthStar. Id. ¶¶ 74–99. The FAC seizes on allegations in the AG complaint that 

generic drug manufacturers Heritage Pharmaceuticals, Inc. (“Heritage”) and Mayne 

Pharma Inc. (“Mayne”) conspired to divide the market for Doxy DR. Id. ¶¶ 81–82. 

Because Heritage and Mayne supplied Doxy DR to McKesson, and a Heritage employee 

stated that McKesson and Heritage were “strategically aligned,” the FAC suggests 

McKesson must have been in on the agreement. Id. It also reiterates allegations from the 

securities class action that NorthStar colluded to fix the price of Leflunomide. Id. ¶¶ 93–

94. The FAC also alleges circumstantial evidence of McKesson’s participation in a pricefixing conspiracy, including the movement of “top officers” between McKesson and 

generic drug manufacturers named as defendants in the AG complaint. Id. ¶¶ 85–86, 97–

99.

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Henry’s second theory of liability is that Defendants exposed McKesson to 

“substantial liability” in the securities fraud class action by making false and misleading 

statements about the company’s income and the underlying causes of generic drug price 

inflation. Id. ¶¶ 122–68. Many of the alleged falsehoods are explanations McKesson’s 

former Chief Executive Officer John Hammergren and former Chief Financial Officer 

James Beer offered for rising generic drug prices. See, e.g., id. ¶ 123. Henry also alleges 

that financial statements filed with the Securities and Exchange Commission were 

misleading because “McKesson’s financial results were materially impacted by 

unsustainable generic drug price hikes, including price increases driven by collusive 

activities.” Id. ¶ 156.

According to the FAC, McKesson’s Audit Committee was responsible for 

reviewing, or at least discussing, “annual audited financial statements and the disclosures 

therein,” “earnings press releases,” and “financial information and the type and 

presentation of information to be presented in earnings guidance.” Id. ¶ 175. Defendants 

Wayne Budd, Alton Irby III, M. Christine Jacobs, Donald Knauss, and Marie Knowles 

were members of the Audit Committee (collectively, “the Audit Committee defendants”). 

Id. ¶¶ 28–30, 32, 34.

McKesson’s current Board of Directors (“the Board”) is comprised of defendants N. 

Anthony Coles, Knauss, Knowles, Jacobs, Edward Mueller, Brian Tyler, and Susan Salka, 

plus non-defendants Dominic Caruso and Bradley Lerman. Id. ¶ 186. Henry alleges she 

“did not make a demand on the board of directors to take remedial action on behalf of 

McKesson,” as usually required to bring a derivative action, “because such a demand 

would have been a futile, wasteful and useless act.” Id. ¶ 185; see also Rosenbloom v. 

Pyott, 765 F.3d 1137, 1148 (9th Cir. 2014).

After Defendants moved to dismiss for failure to state a claim, Henry filed an 

amended complaint. see generally First MTD (dkt. 38); FAC. Defendants then filed the 

instant motion to dismiss, arguing that Henry has failed to adequately plead either a 

plausible claim for breach of fiduciary duty or demand futility. See generally MTD.

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II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed for 

failure to state a claim upon which relief may be granted. Dismissal may be based on 

either “the lack of a cognizable legal theory or the absence of sufficient facts alleged under 

a cognizable legal theory.” Godecke v. Kinetic Concepts, Inc., 937 F.3d 1201, 1208 (9th 

Cir. 2019). A complaint must plead “enough facts to state a claim to relief that is plausible 

on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 697 (2009) (citing Bell Atlantic Corp. v. 

Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible “when the plaintiff pleads 

factual content that allows the court to draw the reasonable inference that the defendant is 

liable for the misconduct alleged.” Id. at 678. When evaluating a motion to dismiss, the 

Court “must presume all factual allegations of the complaint to be true and draw all 

reasonable inferences in favor of the nonmoving party.” Usher v. City of Los Angeles, 

828 F.2d 556, 561 (9th Cir. 1987). “[C]ourts must consider the complaint in its entirety, as 

well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to 

dismiss, in particular, documents incorporated into the complaint by reference, and matters 

of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

551 U.S. 308, 322 (2007).

If a court does dismiss a complaint for failure to state a claim, it should “freely give 

leave [to amend] when justice so requires.” Fed. R. Civ. P. 15(a)(2). A court nevertheless 

has discretion to “deny leave to amend due to ‘undue delay, bad faith or dilatory motive on 

the part of the movant, repeated failure to cure deficiencies by amendments previously 

allowed, undue prejudice to the opposing party by virtue of allowance of the amendment,

[and] futility of amendment.’” Leadsinger, Inc. v. BMG Music Pub., 512 F.3d 522, 532 

(9th Cir. 2008) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)).

“The derivative form of action permits an individual shareholder to bring suit to 

enforce a corporate cause of action against officers, directors, and third parties.” 

Rosenbloom v. Pyott, 765 F.3d 1137, 1147 (9th Cir. 2014) (quoting Kamen v. Kemper Fin. 

Servs., Inc., 500 U.S. 90, 95 (1991)). “A shareholder seeking to vindicate the interests of a 

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corporation through a derivative suit must first demand action from the corporation’s 

directors or plead with particularity the reasons why such demand would have been futile.” 

Id. at 1148 (quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989 (9th Cir. 

1999)). “The purpose of this demand requirement in a derivative suit is to implement ‘the 

basic principle of corporate governance that the decisions of a corporation—including the 

decision to initiate litigation—should be made by the board of directors or the majority of 

shareholders.’” Id. (quoting In re Pfizer Inc. S’holder Derivative Litig., 722 F. Supp. 2d 

453, 458 (S.D.N.Y. 2010)).

If a derivative action plaintiff does not make a demand, the complaint must “state 

with particularity the reasons” for her failure to do so. Fed. R. Civ. P. 23.1(b)(3)(B). 

However, “[t]he substantive law which determines whether demand is, in fact, futile is 

provided by the state of incorporation of the entity on whose behalf the plaintiff is seeking 

relief.” Rosenbloom, 765 F.3d at 1148 (citation omitted). McKesson is a Delaware 

corporation, so Delaware law applies. FAC ¶ 20; see also id.

Delaware law requires a shareholder bringing a derivative suit to “demonstrate[ ], 

with particularity, the reasons why pre-suit demand would be futile.” Id. Futility is 

determined on a director-by-director basis. “[A] derivative complaint must plead facts 

specific to each director, demonstrating that at least half of them could not have exercised 

disinterested business judgment in responding to a demand.” Desimone v. Barrows, 924 

A.2d 908, 943 (Del. Ch. 2007). The relevant board is the one that was sitting when the 

complaint was filed. Rosenbloom, 765 F.3d at 1148. “Plaintiffs are entitled to all 

reasonable factual inferences that logically flow from the particularized facts alleged, but 

conclusory allegations are not considered as expressly pleaded facts or factual inferences.” 

Id. (quoting Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000)).

“When a shareholder challenges a decision of a board of directors, Delaware law 

provides a two-part, disjunctive test for demand futility.” Id. at 1149. A shareholder can 

demonstrate futility by creating a reasonable doubt either that “the directors are 

disinterested and independent” or “that the challenged transaction was otherwise the 

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product of a valid exercise of business judgment.” Id. (quoting Brehm, 746 A.2d at 256). 

On the other hand, when the shareholder alleges “that demand is excused on the ground 

that a board remained consciously inactive when it knew (or should have know) about 

illegal conduct,” the complaint must “allege ‘particularized facts establishing a reason to 

doubt that the board of directors could have properly exercised its independent and 

disinterested business judgment in responding to a demand.’” Id. at 1150 (quoting Wood 

v. Baum, 953 A.2d 136, 140 (Del. 2008)). “Under either approach, demand is excused 

if . . . particularized allegations create a reasonable doubt as to whether a majority of the 

board of directors faces a substantial likelihood of personal liability for breaching the duty 

of loyalty.” Id.

III. DISCUSSION

The FAC alleges two theories of liability. First, that “Defendants either knew, were 

reckless, or were grossly negligent in not knowing that McKesson was implicated in an 

illegal price-fixing and market allocation scheme.” FAC ¶ 196. Second, that Defendants 

exposed McKesson “to substantial liability” by making false and misleading statements to 

investors and in SEC filings. Id. ¶ 122.

A. Antitrust Violations

Any theory of liability premised on McKesson’s participation in a price-fixing 

conspiracy fails because the FAC fails to plausibly allege the underlying antitrust 

violations. Henry’s claims are chiefly premised on allegations recycled from previous 

complaints. See FAC ¶ 1. This Court has previously considered most of them and 

determined that they are insufficient to plausibly allege McKesson’s participation in any 

illegal anticompetitive conduct. See Order Denying Motion to Dismiss at 9–13, Evanston 

Police Pension Fund v. McKesson Corp., No. 3:18-cv-06525-CRB (N.D. Cal. Oct. 30, 

2019), ECF No. 67.

Although Henry pleads a few facts beyond those alleged in the Evanston complaint, 

they are insufficient to salvage this theory of liability. Henry alleges that “many of 

McKesson’s top officers have moved between top positions at McKesson to top positions 

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at drug manufacturing companies alleged in the AG Complaint to be central players in the 

price-fixing conspiracy.” FAC ¶ 85. Ostensibly, “[t]hese personnel exchanges facilitated 

the conspiracy by providing McKesson and the manufacturing [sic] the means to cooperate 

with one another through the personal relationships of former and current employees.” Id. 

But this movement has an obvious innocuous explanation: top executives looking for a 

new job are likely to find one in the field they have experience in. A more plausible 

interpretation of these allegations is that sometimes executives at McKesson and its 

suppliers have sought new employment and found it at other generic drug companies, 

without going on to facilitate any illegal conspiracy. See In re Musical Instruments & 

Equip. Antitrust Litig., 798 F.3d 1186, 1194 (9th Cir. 2015) (“Allegations of facts that 

could just as easily suggest rational, legal business behavior by the defendants as they 

could suggest an illegal conspiracy are insufficient to plead a § 1 violation.” (internal 

quotation marks and citations omitted)).

Henry’s briefing also refers to an alleged conspiracy to raise the price of 

Levothyroxine. Opp’n at 14–15. But the FAC makes no reference to Levothyroxine, see 

generally FAC, and, even if it did, the allegations Henry describes do not plausibly allege 

McKesson’s participation in an antitrust conspiracy. Like the FAC’s allegations, they 

suggest only that generic drug manufacturers who supplied McKesson conspired to fix 

prices, not that McKesson participated in those agreements.1 See Opp’n at 14–15.

Because the FAC’s failure to adequately allege that McKesson was involved in an 

illegal conspiracy is fatal to this theory of liability, the Court need not address the parties’ 

other arguments on this issue.

 

1

 Henry also alleges some new facts to support her allegation that Defendants must have been 

aware of the purported underlying misconduct. For example, the FAC alleges that various 

defendants made suspicious stock sales “when the share price was artificially inflated due to the 

underlying misconduct.” FAC ¶¶ 116–20. But whether the FAC adequately alleges that 

Defendants knew about the underlying antitrust violations is a moot point, because it fails to 

sufficiently plead that those violations even occurred. Any additional evidence plead to support 

this point is irrelevant.

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B. False Statements

This Court has previously denied a motion to dismiss a securities fraud action based 

on the same alleged false statements underlying Henry’s second theory of liability. See 

generally Order Denying Motion to Dismiss, Evanston, No. 3:18-cv-06525-CRB. 

Nonetheless, this theory of liability fails because the FAC does not adequately plead 

demand futility.

As an initial matter, the parties dispute the correct test for demand futility in this 

case. Defendants assert that Henry alleges a failure of oversight, whereas Henry insists she 

is challenging a decision of the Board. Compare MTD at 22–23, with Opp’n at 7–8. This 

dispute is entirely beside the point. Henry alleges only one theory of futility: that the 

Board is not independent and disinterested because it “is far too directly and specifically 

involved in the misconduct alleged . . . to be able to reasonably or in good faith evaluate a 

demand to investigate their own misconduct.” FAC ¶ 192. Because Henry relies on the 

Board’s potential liability to demonstrate demand utility, she must plead “particularized 

allegations [to] create a reasonable doubt [that] a majority of the board of directors faces a 

substantial likelihood of personal liability for breaching the duty of loyalty,” regardless of 

which test applies. See Rosenbloom, 765 F.3d at 1150.

Henry has not met this standard, because the FAC “fails to provide specific facts 

showing that [a majority of] the Board approved the . . . allegedly fraudulent statements.” 

Silicon Graphics, 183 F.3d at 990, overruled on other grounds by South Ferry LP v. 

Killinger, 542 F.3d 776, 784 (9th Cir. 2008). Without “particularized facts demonstrating 

how each [Board member] was involved in, prepared, or even knew about the alleged 

misstatements and omissions,” In re Facebook, Inc. S’holder Derivative Privacy Litig., 367 

F. Supp. 3d 1108, 1127 (N.D. Cal. 2019), the FAC cannot create “a reasonable doubt 

that . . . the directors are disinterested and independent” as to this claim, Silicon Graphics, 

183 F.3d at 990.

It is true that the FAC alleges that the Audit Committee Defendants were 

responsible for reviewing, or at least discussing, “annual audited financial statements and 

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