Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-55516/USCOURTS-ca9-12-55516-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 

---

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

WILLA ROSENBLOOM, derivatively

on behalf of Allergan, Inc.; DANIEL

HIMMEL; POMPANO BEACH POLICE

& FIREFIGHTERS RETIREMENT

SYSTEM; WASHINGTON LABORERSEMPLOYERS PENSION TRUST, AKA

Western Washington Laborers

Employers Pension Trust,

Plaintiffs-Appellants,

v.

DAVID E. I. PYOTT; HERBERT W.

BOYER, AKA Herbert W. Boyer,

M.D.; LOUIS J. LAVIGNE, JR.; GAVIN

S. HERBERT; STEPHEN J. RYAN,

AKA Stephen J. Ryan, M.D.;

LEONARD D. SCHAEFFER; MICHAEL

R. GALLAGHER; ROBERT A. INGRAM;

TREVOR M. JONES, AKA Trevor M.

Jones, Ph.D.; DAWN E. HUDSON;

RUSSELL T. RAY; DEBORAH

DUNSIRE, AKA Deborah Dunsire,

M.D.; ALLERGAN, INC., a Delaware

corporation; HANDEL E. EVANS;

RONALD M. CRESSWELL; LOUIS T.

ROSSO; KAREN R. OSAR; ANTHONY

H. WILD,

Defendants-Appellees.

No. 12-55516

D.C. No.

8:10-cv-01352-

DOC-MLG

OPINION

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2 ROSENBLOOM V. PYOTT

Appeal from the United States District Court

for the Central District of California

David O. Carter, District Judge, Presiding

Argued and Submitted

June 2, 2014—Pasadena, California

Filed September 2, 2014

Before: Stephen Reinhardt, John T. Noonan,

and Mary H. Murguia, Circuit Judges.

Opinion by Judge Reinhardt;

Special Concurrence by Judge Reinhardt

SUMMARY*

Securities Law / Demand Futility

Reversing the dismissal on the pleadings of a derivative

action brought by shareholders of Allergan, Inc., producer of

Botox, a well-known cosmetic and therapeutic drug, the panel

held that the requirement of a demand on the company’s

board of directors, requesting that Allergan bring the

derivative claims in its own name, was excused.

In their first amended complaint, the plaintiffs alleged that

Allergan’s board of directors knew about limits on promotion

of off-label uses; that the board was aware that violations of

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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ROSENBLOOM V. PYOTT 3

federal marketing rules could result in significant penalties;

and that Allergan nonetheless repeatedlyviolated federal laws

and regulations from 1997 to 2010, creating a number of

programs to promote Botox for off-label uses, such as

spasticity, pain, headaches, and migraines.

Reviewing for an abuse of discretion, as required by

precedent, and applying Delaware law, the panel held that

demand was excused because the plaintiffs’ particularized

allegations established a reasonable doubt as to whether the

board faced a substantial likelihood of liability and as to

whether the board was protected by the business judgment

rule. The panel remanded the case for further proceedings.

Concurring, Judge Reinhardt set forth his view that the

proper standard of review is de novo.

COUNSEL

Joseph D. Daley (argued), Travis E. Downs III, and David W.

Mitchell, Robbins Geller Rudman & Dowd, San Diego,

California; Aelish M. Baig, Robbins Geller Rudman &

Dowd, San Francisco, California; Brian J. Robbins and Felipe

J. Arroyo, Robbins Arroyo, San Diego, California; Kathleen

A. Herkenhoff, The Weiser Law Firm, San Diego, California;

Robert B. Weiser, Brett D. Stecker, and Jeffrey J. Ciarlanto,

The Weiser Law Firm, Berwyn, Pennsylvania, for PlaintiffsAppellants.

Mark A. Perry (argued) and Geoffrey C. Weien, Gibson,

Dunn, & Crutcher, Washington, D.C.; Wayne W. Smith,

Jeffrey H. Reeves, and Kristopher P. Diulio, Gibson, Dunn,

& Crutcher, Irvine, California, for Defendants-Appellees.

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4 ROSENBLOOM V. PYOTT

John C. Hueston, Daniel P. Lefler, and Lillie A. Werner, Irell

& Manella, Los Angeles, California, for Nominal DefendantAppellee.

OPINION

REINHARDT, Circuit Judge:

Allergan, a specialty pharmaceutical manufacturer,

produces Botox, awell-known cosmetic and therapeutic drug. 

In 2010, faced with allegations that it had acted illegally in

marketing and labeling Botox, Allergan settled several qui

tam suits and pled guilty in a criminal case. Allergan

ultimately paid a total of $600 million in part for civil

settlements and in part as a criminal fine. Shortly afterward,

Plaintiffs, all Allergan shareholders, filed a derivative action

alleging that Allergan’s directors are liable for violations of

various state and federal laws, as well as for breaches of their

fiduciary duties to Allergan. Plaintiffs did not, however, first

make a demand on Allergan’s board requesting that Allergan

bring the derivative claims in its own name. The district

court dismissed their action on the ground that Plaintiffs

failed to allege particularized facts showing that demand was

excused, as Federal Rule of Civil Procedure 23.1 requires. In

so doing, however, it misapplied governingDelaware law and

improperly drew inferences against Plaintiffs rather than in

their favor. We conclude that Plaintiffs’ particularized

allegations establish a reasonable doubt as to whether the

Board faces a substantial likelihood of liability and as to

whether the Board is protected by the business judgment rule. 

Accordingly, we conclude that demand is excused and

reverse the district court.

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ROSENBLOOM V. PYOTT 5

BACKGROUND

I

Defendant Allergan, Inc. is a Delaware corporation

specializing in specialty pharmaceuticals and medical

devices.1

It manufactures Botox, a purified toxin sold for

cosmetic and therapeutic purposes.2 When injected, Botox

produces a local and temporary reduction of muscle or gland

activity.

From 1989 to 2010, the FDA approved Botox for only a

few indications: crossed eyes, involuntary eyelid muscle

contractions, involuntary neck muscle contractions, and

excessive sweating.

3 Although doctors may prescribe an

approved pharmaceutical for purposes other than those listed

on the FDA-approved label (“off-label use”)—and do so

regularly—federal law imposes numerous limits on drug

1 Defendants also include current and former Allergan directors: David

E. I. Pyott, Herbert W. Boyer, Louis J. Lavigne, Jr., Gavin S. Herbert,

Stephen J. Ryan, Leonard D. Schaeffer, Michael R. Gallagher, Robert A.

Ingram, Trevor M. Jones, Dawn E. Hudson, Russell T. Ray, Deborah

Dunsire, Handel E. Evans, Ronald M. Cresswell, Louis T. Rosso, Karen

R. Osar, and Anthony H. Wild.

Plaintiffs include Willa Rosenbloom, Daniel Himmel, Pompano

Beach Police & Firefighters’ Retirement System, and Western

WashingtonLaborers-Employers PensionTrust, and each plaintiff alleges

being a shareholder of Allergan since 2003 or earlier.

 

2 The popular use of Botox for cosmetic purposes is not at issue in this

case.

3 Moreover, patients with two of these conditions—crossed eyes and

excessive sweating—rarely resort to Botox treatment.

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6 ROSENBLOOM V. PYOTT

manufacturers’ efforts to promote off-label uses of their

products.

In 2007, a qui tam action was filed against Allergan,

alleging violations of the False Claims Act arising from offlabel marketing and branding of Botox. That same year, the

FBI opened an investigation into Allergan’s off-label

marketing of Botox. Three years later, after two more qui

tam actions had been filed, Allergan, the United States, and

the relators who had filed the qui tam actions entered into a

settlement. Under this deal, Allergan agreed to pay $225

million to the United States and various state governments

and to enter into a five-year corporate integrity agreement

with the Department of Health and Human Services’ Office

of Inspector General. Later in 2010, the United States filed

a criminal information against Allergan in the Northern

District of Georgia, charging distribution of a misbranded

drug/biologic in violation of the FDCA. Allergan pled guilty

and agreed to pay a $375 million fine.

In September 2010, derivative suits against Allergan were

filed in the Central District of California and the Delaware

Court of Chancery. Ultimately, drawing on the fruits of a

third party’s demand for books and records under Delaware

law, Plaintiffs filed the First Amended Complaint, which is

at issue here. Plaintiffs allege that Allergan’s board of

directors knew about the limits on promotion of off-label

uses; that the board was aware that violations of the federal

marketing rules could result in significant penalties; and that

Allergan nonetheless repeatedly violated federal laws and

regulations from 1997 to 2010, creating a number of

programs to promote Botox for off-label uses, such as

spasticity, pain, headaches, and migraines.

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ROSENBLOOM V. PYOTT 7

Meanwhile, near-identical litigation proceeded apace in

the Court of Chancery. In both courts, Allergan moved to

dismiss for failure to adequately allege demand futility. The

district court issued its opinion on the demand futility issue

first, dismissing the California case in January 2012. It then

denied a motion for reconsideration in February 2012.

In June 2012, in a detailed opinion, Vice Chancellor

Laster held in the Delaware case that the plaintiffs had shown

demand futility. See La. Mun. Police Emps.’ Ret. Sys. v.

Pyott, 46 A.3d 313, 351–59 (Del. Ch. 2012). In his lengthy

and thorough analysis of how Delaware law applies to the

issue of demand futility, Vice Chancellor Laster expressly

criticized and rejected the district court’s reasoning. Id. at

357–58. On appeal, however, the Delaware Supreme Court

reversed Vice Chancellor Laster solely on the ground that the

Delaware plaintiffs were collaterally estopped from pursuing

their claims in the Court of Chancery due to the earlier-filed

dismissal of the complaint in this case. See Pyott v. La. Mun.

Police Emps.’ Ret. Sys., 74 A.3d 612, 614 (Del. 2013).

II

Plaintiffs allege that, from 1997 to 2010, Allergan created

and expanded nearly a dozen programs designed to

aggressively promote the sale of Botox for off-label purposes. 

Plaintiffs elaborate that these programs were part of a concert

of illegal conduct and that off-label Botox sales skyrocketed

as a result. From 1996 to 2006, for example, spasticity sales

grew by 332%, pain sales by 504%, and headache sales by

1,407%. By 2007, Allergan had over $500 million in annual

Botox sales for therapeutic uses, of which 70 to 80% was

attributable to off-label indications. This was no small sum

to Allergan: Botox sales constituted 24 to 36% of total net

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8 ROSENBLOOM V. PYOTT

sales across all product lines from 2000 to 2009, and 36 to

39% of total specialty pharmaceutical sales from 2006 to

2009.

Here, we brieflysummarizePlaintiffs’ central allegations.

A. The Headache Development Program

“At the direction of the [Board] . . . Allergan aggressively

promoted Botox to treat several different types of headache

conditions in addition to chronic headache for more than a

decade, which caused Botox sales for that indication to

increase by over 1,400%.” Even though headache treatment

was an off-label use until 2010, and even though no evidence

at the time proved that Botox treated headaches (in fact, nine

out of ten clinical trials for headache had failed), starting in

2003 Allergan sought out headache specialists and promoted

Botox to them as a treatment. That same year, while aware

that headaches were not an FDA approved indication for

Botox, the Board saw a slide presentation that detailed

Allergan’s “Headache Development Program” and tracked

the prevalence of headache disorders. This fact shows the

Board’s awareness of major headache-focused marketing at

Allergan in the early 2000s—the same period in which offlabel sales of Botox for headache treatment dramatically

increased.

B. TheCervicalDystonia/Headache Initiative (CDHI)

CD is a rare disorder that affects only approximately

27,000 Americans. Pursuant to the CDHI, Allergan

“maximize[d] off-label Botox sales by encouraging doctors

to diagnose [off-label] headache and pain symptoms as

symptoms of Botox’s on-label [CD] indication.” Allergan

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ROSENBLOOM V. PYOTT 9

created this plan when clinical data did not support use of

Botox for headaches; it was, in Allergan’s words, a “backup

strategy to ensure continued expansion into the headache

market.” Then, after the FDA rejected a request from

Allergan to expand the Botox label to cover CD-related

“pain,” Allergan launched a campaign to persuade doctors

that CD is under-diagnosed and that they should diagnose

headaches and pain as mild CD to obtain reimbursement. 

This plan worked: CD quickly became a main driver for offlabel Botox sales. The Board was briefed on “Strong Botox

Sales” resulting from Allergan’s “U.S. CD/pain” market

program in a 2005 CEO Report.

C. Reimbursement Support For Off-Label Uses of

Botox

Unlike most drugs, Botox is a “buy and bill” drug,

meaning that doctors buy it from Allergan and assume the

risk of non-reimbursement on the back end. In the relevant

time period, one vial of Botox cost $400 to $500 and most

off-label uses of Botox required one to four vials. As

Allergan recognized, growth in Botox sales depended on

doctors being reimbursed.

To promote off-label use of Botox, Allergan doubled the

size of its reimbursement support team in 2003—with the

principal goal of minimizing customer barriers for Botox

bought to treat headaches, pain, and spasticity. It also

established a physician-assistance hotline for doctors to call

for help with off-label reimbursement. Plaintiffs allege that,

“[t]hrough the Botox Advantage Program, Allergan provided

customized reimbursement support services to doctors . . .

expended millions of dollars each year to operate the Botox

Reimbursement Hotline, and performed detailed audits (or

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10 ROSENBLOOM V. PYOTT

‘interventions’) of physician billing records to demonstrate

‘the value of Botox to their practice.’” On average, accounts

with such “interventions” grew six times faster than did other

accounts. Allergan provided doctors with ghost-written

materials designed to persuade third-party payers to cover

off-label uses of Botox, including treatment of headaches, and

recruited physician “advocates” to lobby Medicare and

Medicaid decision-makers to expand coverage for off-label

use. Plaintiffs allege that the Board knew about the details

and purpose of the Botox Advantage Program. They allege,

for example, that in 2004 the Board reviewed several Botox

Advantage promotional documents. The Board also received

multiple reports on reimbursement support as a crucial factor

in Botox sales.

D. Intentional Targeting of Specialists Practicing in

Off-Label Fields 

Plaintiffs allege that “Allergan promoted Botox by

targeting medical specialists who did not routinely treat

patients with any of the conditions that Botox was approved

to treat.” This strategy was crucial to growth in off-label use

of Botox. In 2004 alone, for instance, Allergan

representatives called on thousands of doctors specializing in

off-label fields, including pain and headache specialists. 

Allergan also undertook cross-promotion agreements with

other companies to allow Allergan sales representatives

access to physicians specializing in off-label fields. For

example, in 2006, “Allergan had no drug approved for the

treatment of headache at the time but agreed to double

[another] company’s sales force selling headache drugs so

that Allergan could then also sell Botox to the neurologists

who were customers of the other company.” E-mails showed

that Allergan sought to “Sell More Botox!!!” through this

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ROSENBLOOM V. PYOTT 11

program. The Board approved these agreements, several of

which expressly contemplated cross-promotion of Botox and

migraine headache treatments.

With Board approval, Allergan also acquired other

companies in order to obtain sales staffs with experience in

off-label specialties. For instance, Allergan acquired Espirit

Pharma for $370 million in 2007, allegedly to acquire sales

staff who could promote Botox for off-label uses to

urologists. When the Board held a “Strategic Planning

Session” at which this acquisition was discussed, it heard the

details of “the Strategic Plan, updated to reflect the impact of

Espirit Pharma,” and that “the successful launches of our

planned new products such as . . . new Botox indications . . .

are critical to the success of our plan.”

E. Other Allergan Programs for Promoting OffLabel Use of Botox

In addition to the programs discussed supra, Plaintiffs

allege that Allergan developed an array of expensive and

effective (and unlawful) schemes to promote off-label use of

Botox. It instructed sales representatives to promote the

message that Botox “works!” for off-label uses, even when no

clinical trials had proven the efficacy of Botox as a treatment. 

It “funded and controlled the content of hundreds of

continuing medical education (CME) seminars, injection

workshops, and promotional dinner programs at which paid

speakers identified by the company as [KeyOpinion Leaders]

advocated Botox for off-label indications.” It created

“Centers of Excellence” to create, edit, and control the

substance of CMEs that promoted Botox for off-label uses. 

It paid “honoraria” to high volume Botox injectors to speak

at CMEs, and used millions of dollars of medical grants to

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12 ROSENBLOOM V. PYOTT

reward top purchasers of Botox. It hosted “AdvisoryBoards”

at which it paid physicians $1,500 each to listen to

presentations about Botox that covered off-label topics. It

created and funded an “independent” neurotoxin educational

organization to promote off-label uses of Botox. In dealing

with off-label specialists, Allergan developed “Customer

Team Units” (CTUs) to coordinate sales initiative and offlabel marketing initiatives; these CTUs often included sales,

medical affairs, reimbursement, marketing, and management

staff. Until January 2007, the CTUs met on a quarterly basis

to exchange detailed data about doctors’ purchases of Botox

for off-label use in selected geographic areas.

III

Plaintiffs allege that the Board of Directors was involved

in and aware of this wrongdoing at Allergan. Specifically,

they allege that the Board either adopted plans premised on

illegal conduct or made a conscious decision not to take

action even when faced with “red flags” of wrongdoing.

Plaintiffs support those claims with several dozen paragraphs

of particularized allegations, emphasizing more broadly that

the Board actively oversaw the growth and sale of Botox

from 1997 to 2010, as Botox was one of its star products in

that period.

Starting in 1997, Allergan’s Board discussed and

approved a number of “strategic plans” that expressly

depended on a significant and, critically, immediate increase

in off-label Botox sales. The first such plan covered 1997 to

2001 and was adopted in 1997. In a slide deck summary of

the plan, the Board described maximizing Botox sales for

spasticity, pain, and migraine, all off-label uses, as a “top

corporate priority.” The slide deck anticipated major growth

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ROSENBLOOM V. PYOTT 13

in pain, migraine, and spasticity markets, and described

Botox as Allergan’s “fastest growing business with great[est]

peak year sales of any product & highest margin.” The slide

deck noted that the Board anticipated FDA approval of Botox

for treatment of pain, migraine, and spasticity four to five

years later, in 2001 and 2002, but nonetheless stated that a

major increase in sales of Botox for these off-label uses

“represent[ed] immediate growth” that could “maximize . . .

Botox® now” as part of an “expansion strategy.”4

This anticipation of immediate and significant growth in

off-label sales of Botox was reflected in the 1997–2001

Strategic Plan itself. The Plan sought to “ensure that we can

maximize our immediate opportunities in our core

businesses,” described Botox as one of Allergan’s “five core

businesses,” and stated that Botox “has tremendous growth

potential as we fund opportunities with new indications and

uses such as spasticity, pain, migraine and tension headache.” 

The Plan emphasized in its discussion of Botox that the

combined value of the global pain and migraine headache

markets would exceed $6 billion by 2007, and that

“[i]nvestments in [Botox sales for] new indications of pain

and migraine headache represents two of the top three future

growth opportunities in our portfolio with combined peak

year sales of $1.26 billion.” Thus, even when the Board

admittedly did not anticipate FDA approval for any of these

indications for at least four years, and a full thirteen years

4 Allergan contends that the slides should be read as anticipating major

off-label sales only after FDA approval, but our review of the slides and

of the full document, and our obligation to make reasonable inferences in

Plaintiffs’ favor, lead us to conclude that the 1997–2001 Strategic Plan

anticipated immediate, major growth of off-label sales, and did so

independently of the Board’s (ill-founded) expectation that new

indications would be approved by the FDA in 2001–2002.

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14 ROSENBLOOM V. PYOTT

before the FDA actually approved of any of these indications,

the Board embraced a strategic plan expressly premised on

“immediate” and significant expansion of Botox sales for the

off-label indications of spasticity, pain, headache, and

migraines. This anticipated expansion in off-label sales, the

Board concluded, represented one of Allergan’s most

important opportunities for immediate profit.

The Board closely and continuously monitored Botox

sales for on- and off-label indications through 2010. At a

meeting in 2004, for example, “the focus for 2005 and

beyond” was on projects that included “Botox Headache” and

“Botox Urology”—both of which involved only off-label

sales and were discussed well after the Board’s original

expectation of several FDA approvals in 2001 and 2002 had

come to naught. In 2005, the Board discussed and then

authorized continued funding for nominally “independent”

organizations that supported the off-label use of Botox for

“acute and chronic pain.” In 2007, still focused on the offlabel market for Botox, the Board adopted a four-year

strategic plan in which it described “successful launches of

our planned new products such as [Botox]” as “critical to the

success of our plan.” At that meeting, the Board also

discussed “key assumptions” relating to the acquisition of

Espirit Pharma—an acquisition that, according to Plaintiffs,

was designed mainly to afford Botox sales representatives

access to specialists who practiced in off-label fields. The

Board’s discussion of the “key assumptions” of that

acquisition, we may therefore reasonably infer at this stage in

the litigation, included Allergan’s plan to use the newlyacquired sales staff to engage in aggressive off-label

marketing.

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ROSENBLOOM V. PYOTT 15

Even as the Board understood that growth of Botox sales

for off-label uses was critical to Allergan’s success, and even

as the Board made growth of such off-label sales a “top

corporate priority,” the Board was presented with information

indicating a direct link between Allergan’s Botox promotions

and rates of off-label sales. The 2007–2011 Strategic Plan,

for example, explicitly noted a connection between sales staff

and off-label sales growth: it stated that in “2006 [Allergan]

Added 45 New NMCs [sales representatives] & Spasticity

grew 25% [and in] 2007 [it] Added 19 New NMCs &

Spasticity Est[imated] 18%.” The 2006–2010 Strategic Plan

also noted a link between off-label promotion and sales: it

projected further declines in sales of Botox for pain treatment

specifically because there would be “no promotion” for that

(off-label) use. In this regard, the 2006–2010 Strategic Plan

echoed a similar conclusion from the 2005 Strategic Planning

process, which had concluded that sales for pain, headache,

and spasticity had been negatively affected by a “decrease in

calls to Pain [doctors]/Ped[iatricians].”5It is reasonable to

infer from these allegations that the Board knew that

Allergan’s sales and marketing efforts drove the substantial

increases in off-label sales of Botox from 2001–2008.

Finally, Plaintiffs argue that the Board was alerted to

unlawful conduct at Allergan by a series of FDA letters, and

by several complaints from physicians and employees. From

5 Further, a 2003 Strategy Review noted that “Adult Spasticity,

Headache, and Pain will account for 85% of incremental sales in 2003.”

And Allergan found that “[a]cross all specialties, Botox sales/MD increase

with higher call frequency” and that expanding sales calls to rehabilitation

doctors would increase sales by $14.3 million over three years.

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16 ROSENBLOOM V. PYOTT

2001 to 2010, Allergan received several letters from the FDA

concerning Botox6:

1. August 22, 2001: An FDA warning letter cautioned

that Allergan’s Botox “promotional activities and

materials” were “misleading and lacking in fair

balance within the meaning of the [FDAC].” This

letter cited five prior FDA letters raising similar

concerns, and described the “violations noted in this

letter” as “continuing examples of violative

promotion or advertising materials disseminated by

Allergan.”7

2. September 5, 2002: An FDA warning letter cautioned

Allergan about “misleading statements” in Botox

promotional materials.

3. June 23, 2003: An FDA warning letter cautioned that

several of Allergan’s “advertisements are false and/or

misleading because they falsely identify [Botox] as a

cosmetic treatment, fail to reveal material facts about

6 The Board also received an FDA warning letter in September 2005

about misleading promotions for another drug, Lumingan, a letter fromthe

French Government in 2005 concerning Botox-related aspiration and

death, and an FDA warning letter in August 2009 about misleading

promotions for another drug, ACZONE®. Plaintiffs characterize these

letters as part of a battery of FDA warnings that should have alerted the

Board to sustained misconduct in Allergan’s pharmaceutical promotional

activities.

7

 Plaintiffs do not allege that this letter was specifically directed to the

Board. They note only that it was covered by the Los Angeles Times. 

Plaintiffs appear to rely on an inference of knowledge. In any event, this

letter is, at best, of minor relevance to the ultimate issue of Board

knowledge.

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ROSENBLOOM V. PYOTT 17

the product’s use, and minimize the risk information

presented.” 

4. September 21, 2006 and “The Schim Incident”: The

FDA sent a letter to Allergan’s Director of

Advertising and Promotional Compliance, concerning

a presentation by Dr. Jack Schim on behalf of

Allergan at which Schim promoted off-label use of

Botox as a headache treatment. The letter requested

information about Allergan’s relationship with Schim

and its CME program material. An investigation in

which several board members were involved

discovered that Schim had used the relevant slides at

eight dinners over the prior twelve months. Allergan

ultimatelytook remedial measures to address Schim’s

unlawful conduct. Nonetheless, Schim remained one

of Allergan’s highest paid consultants, speakers, and

grant recipients through 2010.

In addition to these FDA warning letters—most of which

concerned only general misconduct in the branding and

promotion of Botox—the Board was also made aware of

several complaints by physicians about off-label marketing,

many of them arising from the Schim incident. In 2007 the

Board discussed an ethics complaint by an employee who

stated that she was resigning after only six weeks at Allergan

due to concerns about its off-label marketing program.

DISCUSSION 

I

As required by precedent, we review for abuse of

discretion the district court’s ruling dismissing this

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18 ROSENBLOOM V. PYOTT

shareholder derivative suit on the ground of failure to show

demand futility. See, e.g., Potter v. Hughes, 546 F.3d 1051,

1056 (9th Cir. 2008); In re Silicon Graphics Inc. Sec. Litig.,

183 F.3d 970, 983 (9th Cir. 1999). Although Plaintiffs urge

us to apply a de novo standard, the authorities that they cite,

all of which criticize the abuse of discretion standard, are not

intervening, controlling precedents that would compel us to

depart from Potter and In re Silicon Graphics. See Blue Br.

at 2–5 (citing Israni v. Bittman, 473 F. App’x 548, 550 n.1

(9th Cir. 2012), and Laborers Int’l Union of N. Am. v. Bailey,

310 F. App’x 128, 130 (9th Cir. 2009)); see Miller v.

Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en banc).8

Accordingly, we follow Potter and In re Silicon Graphics and

review the opinion below for abuse of discretion.

II

“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.’” Kamen

v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (quoting

Ross v. Bernhard, 396 U.S. 531, 534 (1970)) (emphasis

omitted). “Devised as a suit in equity, the purpose of the

derivative action [is] to place in the hands of the individual

shareholder a means to protect the interests of the corporation

from the misfeasance and malfeasance of ‘faithless directors

8 Plaintiffs also cite a Delaware case, Brehm v. Eisner, 746 A.2d 244

(Del. 2000) (holding that the Delaware Supreme Court reviews de novo

all demand futility rulings by the Delaware Court of Chancery). Their

reliance on Brehm is misplaced for two reasons. First, Brehm is eight

years older than Potter and thus cannot qualify as intervening authority. 

Second, “the proper standard of review is a question of federal procedure

and is governed by federal law.” West v. State Farm Fire & Cas. Co.,

868 F.2d 348, 350 (9th Cir. 1989).

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ROSENBLOOM V. PYOTT 19

and managers.’” Id. (quoting Cohen v. Beneficial Loan

Corp., 337 U.S. 541, 548 (1949)).

“A shareholder seeking to vindicate the interests of a

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.” In re

Silicon Graphics, 183 F.3d at 989 (citing Fed. R. Civ. P.

23.1). “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.’”9

In re Pfizer Inc. S’holder Derivative Litig., 722 F. Supp. 2d

453, 458 (S.D.N.Y. 2010) (quoting Kamen, 500 U.S. at 101).

Although Rule 23.1 supplies the pleading standard for

assessing allegations of demand futility, “[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.” Scalisi v. Fund Asset

Mgmt., L.P., 380 F.3d 133, 138 (2d Cir. 2004). Allergan is a

Delaware corporation and Delaware law therefore applies.10

9

See also In re Veeco Instruments, Inc. Sec. Litig., 434 F. Supp. 2d 267,

273 (S.D.N.Y. 2006) (“In contrast to a motion to dismiss pursuant to Rule

12(b)(6), a Rule 23.1 motion to dismiss for failure to make a demand is

not intended to test the legal sufficiency of the plaintiffs’ substantive

claim. Rather, its purpose is to determine who is entitled, as between the

corporation and its shareholders, to assert the plaintiff’s underlying

substantive claim on the corporation’s behalf.” (internal quotation marks

omitted)).

10 As the Seventh Circuit has explained of this substance/procedure

issue:

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20 ROSENBLOOM V. PYOTT

In Delaware, a shareholder who declines to make a

demand on the board of directors may not bring a derivative

action “until [he] has demonstrated, with particularity, the

reasons why pre-suit demand would be futile.” Khanna v.

McMinn, Civ. A. 20545-NC, 2006 WL 1388744, at *11 (Del.

Ch. May 9, 2006) (internal quotation marks omitted). 

“[F]utility is gauged by the circumstances existing at the

commencement of a derivative suit” and concerns the board

of directors “sitting at the time the complaint is filed.” In re

Am. Int’l Grp., Inc. Derivative Litig., 700 F. Supp. 2d 419,

430 (S.D.N.Y. 2010) (alteration in original) (internal

quotation marks omitted), aff’d 415 F. App’x 285 (2d Cir.

2011). Demand futility “must be decided by the trial court on

a case-by-case basis and not by any rote and inelastic

criteria.” Id. (quotation marks omitted). “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.” Brehm v. Eisner, 746 A.2d 244, 255

(Del. 2000).

In this case, Plaintiffs identify two overlapping grounds

that excuse their obligation to make a demand on Allergan’s

[T]he adequacy of [the] pleadings is measured by

federal law—in particular, Rule 23.1. The function of

the demand futility doctrine, however, is a matter of

substance, not procedure. Thus, for instance, although

federal law governs the degree of detail that the

plaintiff must furnish when it gives its reasons for not

obtaining the action or not making the effort, state law

will determine whether those reasons are sufficient.

Westmoreland Cnty. Emp. Ret. Sys. v. Parkinson, 727 F.3d 719, 721–22

(7th Cir. 2013) (citations and internal quotation marks omitted).

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ROSENBLOOM V. PYOTT 21

board. First, they allege that the Board decided to pursue a

business plan premised on unlawful conduct. Second, they

allege that the Board remained consciously inactive despite

actual or constructive knowledge of wrongdoing at Allergan. 

Each of these asserted grounds for demand futility finds

stable footing in Delaware corporate law.

When a shareholder challenges a decision of a board of

directors, Delaware law provides a two-part, disjunctive test

for demand futility:

The first prong of the futility rubric is

whether, under the particularized facts

alleged, a reasonable doubt is created that . . .

the directors are disinterested and

independent. The second prong is whether the

pleading creates a reasonable doubt that the

challenged transaction was otherwise the

product of a valid exercise of business

judgment. These prongs are in the

disjunctive. Therefore, if either prong is

satisfied, demand is excused.

Id. at 256 (citing Aronson v. Lewis, 473 A.2d 805, 814, 816

(Del. 1984)). This is often called the “Aronson test.”

Under Aronson’s first prong, “[a] director’s interest may

be shown by demonstrating a potential personal benefit or

detriment to the director as a result of the decision.” In re

Goldman Sachs Grp., Inc. S’holder Litig., Civ. A. 5215, 2011

WL 4826104, at *7 (Del. Ch. Oct. 12, 2011) (alteration in

original) (internal quotation marks omitted). For that reason,

“[d]irectors who are sued have a disabling interest for pre-suit

demand purposes when the potential for liability . . . may rise

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22 ROSENBLOOM V. PYOTT

to a substantial likelihood.” Ryan v. Gifford, 918 A.2d 341,

355 (Del. Ch. 2007) (internal quotation marks omitted);

accord Rattner v. Bidzos, Civ. A. 19700, 2003 WL22284323,

at *9 (Del. Ch. Sept. 30, 2003) (“[A] ‘substantial likelihood’

of personal liability prevents a director from impartially

considering a demand.” (internal quotation marks omitted)). 

To meet that standard when presented with a motion to

dismiss under Rule 23.1, plaintiffs must make “a threshold

showing, through the allegation of particularized facts, that

their claims have some merit.”11 Rales v. Blasband, 634 A.2d

927, 934 (Del. 1993).

Under Aronson’s second prong, the question is whether

the pleading creates a reasonable doubt that the challenged

transaction was the product of a valid exercise of business

judgment. Brehm, 746 A.2d at 256. “The good faith business

decisions of informed, disinterested, and independent

directors of Delaware corporations are entitled to deference

under the business judgment standard of review.” Hamilton

Partners, L.P. v. Highland Capital Mgmt., L.P., Civ. A. 6547-

VCN, 2014 WL 1813340, at *15 (Del. Ch. May 7, 2014). 

Nonetheless, “in rare cases a transaction may be so egregious

on its face that board approval cannot meet the test of

business judgment.” Aronson, 473 A.2d at 815. These rare

cases include those in which a board decides to undertake

illegal activity. See, e.g., In re Massey Energy Co., Civ. A.

5430-VCS, 2011 WL 2176479, at *20 (Del. Ch. May 31,

2011) (“Delaware law does not charter law breakers. . . . [A]

fiduciary of a Delaware corporation cannot be loyal to a

Delaware corporation by knowingly causing it to seek profit

by violating the law.”); Metro Commc’n Corp. BVI v.

11 Here, Plaintiffs allege that a majority of Allergan’s Board faces a risk

of liability for, inter alia, breaching the duty of loyalty.

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ROSENBLOOM V. PYOTT 23

Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 131 (Del.

Ch. 2004) (“[A] fiduciary may not choose to manage an

entity in an illegal fashion, even if the fiduciary believes that

the illegal activity will result in profits . . . .”).

While Aronson applies to board decisions, the applicable

framework is less settled for claims that demand is excused

on the ground that a board remained consciously inactive

when it knew (or should have known) about illegal conduct. 

That doctrinal uncertaintyis reflected here: whereas Plaintiffs

insist that their conscious inaction claims are subject to

Aronson analysis, Allergan maintains that those claims

invoke the theory of oversight liability set forth in In re

Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971

(Del. Ch. 1996).12 Demand futility for Caremark claims is

tested under Rales v. Blasband, 634 A.2d 927 (Del. 1993), not

Aronson. Rales requires plaintiffs to 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.’” 

Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (quoting

Rales, 634 A.2d at 934).

12 A number of courts have interpreted conscious inaction claims as

Aronson-type claims of considered board action. See, e.g., Westmoreland,

727 F.3d at 725–26 (7th Cir. 2013); In re Abbott Labs. Derivative

S’holders Litig., 325 F.3d 795, 808 (7th Cir. 2003); In re Textron, Inc.,

811 F. Supp. 2d 564, 572 (D.R.I. 2011); Pfizer, 722 F. Supp. 2d at 460. 

Other courts, however, have taken the view that conscious inaction claims

sound in Caremark. See In re SAIC Inc. Derivative Litig., 948 F. Supp.

2d 366, 381 (S.D.N.Y. 2013), aff’d sub nom. Welch v. Havenstein, 553 F.

App’x 54 (2d Cir. 2014); South v. Baker, 62 A.3d 1, 6 (Del. Ch. 2012)

(“As developed in subsequent cases and endorsed by the Delaware

Supreme Court . . . directors can be held liable under [Caremark] for

knowingly causing or consciously permitting the corporation to violate

positive law . . . .”).

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Here, however, it does not matter whether Aronson or

Rales applies. Under either approach, demand is excused if

Plaintiffs’ 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. See, e.g., In re SAIC Inc. Derivative Litig.,

948 F. Supp. 2d 366, 382 (S.D.N.Y. 2013) (“[T]he difference

between Rales and Aronson may blur in cases like this one,

since the particularized allegations essential to creating

reasonable doubt as to a substantial likelihood of personal

liability for breach of fiduciary duties may also implicate the

question whether the Board can avail itself of business

judgment protections.”), aff’d sub nom. Welch v. Havenstein,

553 F. App’x 54 (2d Cir. 2014); Guttman v. Huang, 823 A.2d

492, 501 (Del. Ch. 2003) (“When . . . there are allegations

that a majority of the board that must consider a demand

acted wrongfully, the Rales test sensibly addresses concerns

similar to [Aronson]. To wit, if the directors face a

‘substantial likelihood’ of personal liability, their ability to

consider a demand impartially is compromised under Rales,

excusing demand.”). The duty of loyalty, in turn, is violated

“[w]here directors fail to act in the face of a known duty to

act, thereby demonstrating a conscious disregard for their

responsibilities [and]failing to discharge [the non-exculpable

fiduciary duty of loyalty] in good faith.” Stone ex rel.

AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del.

2006). In this case, Plaintiffs allege precisely that kind of

violation of the directors’ duties.

To summarize: Plaintiffs’ claim that the Board decided to

pursue a plan premised on illegal conduct is subject to

Aronson analysis. If Plaintiffs have made sufficient

particularized allegations in support of this claim, demand is

excused under both Aronson prongs, as the Board would face

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ROSENBLOOM V. PYOTT 25

a substantial likelihood of liability for violating the duty of

loyalty and would have lost business judgment protection for

undertaking illegal conduct. Plaintiffs’ claim that the Board

knew or should have known about illegal conduct and made

a conscious choice to turn a blind eye can be characterized

either as a Caremark-type oversight claim or as an Aronsontype allegation of considered board action. We need not

decide which characterization of Plaintiffs’ allegations is

correct because, either way, demand is excused if Plaintiffs’

particularized allegations create a reasonable doubt as to

whether a majority of the Allergan board faces a substantial

likelihood of liability for failing to act in the face of a known

duty to act.

III

Turning to the particularized factual allegations before us,

we agree with Vice Chancellor Lasker of the Delaware Court

of Chancery, who considered a near-identical complaint, that

demand is excused. See La. Mun. Police Emps.’ Ret. Sys. v.

Pyott, 46 A.3d 313, 352–53 (Del. Ch. 2012). Because

Plaintiffs’ allegations that the Board deliberately adopted a

plan premised on illegal conduct in many respects builds off

the comparatively more modest claim of conscious inaction,

we first discuss conscious inaction.

A. Conscious Inaction

Plaintiffs allege that the Board either knew or, due to a

series of red flags, should have known, about Allergan’s off-

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26 ROSENBLOOM V. PYOTT

label promotion of Botox.

13 This claim essentially turns on

whether Plaintiffs have adequately alleged scienter. See, e.g.,

Rahbari v. Oros, 732 F. Supp. 2d 367, 383 (S.D.N.Y. 2010);

Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007);

Guttman, 823 A.2d at 506. If a majority of the Board had

actual or constructive knowledge of violations of the law at

Allergan involving off-label promotions of Botox and did

nothing, it violated its duty of loyalty and faces a substantial

likelihood of liability. See Stone, 911 A.2d at 370.

Plaintiffs’ factual allegations tell a story that begins in

1997 with Board approval of the 1997–2001 Strategic Plan. 

That year, even as it anticipated that Botox approval for pain,

migraine, and spasticity would not occur for at least four or

five years, the Board adopted a four-year plan that described

maximizing sales for these off-label uses as a “top corporate

priority,” opportunity for “immediate growth,” and a means

to “maximize . . . Botox® now.” Notably, the 1997–2001

Strategic Plan contemplated a short-term increase in Botox

sales in North America from $86.1 million to $141.1 million,

a growth fueled mainly by sales for off-label uses. The Plan

noted “tremendous growth potential” for “spasticity, pain,

migraine and tension headache” sales of Botox, carefully

reviewed the market for headache and pain treatments, and,

most strikingly, described investments in Botox sales for pain

and migraine headache as “two of the top three future growth

opportunities in our portfolio.” It can be reasonably inferred

13 Although in many cases involving demand futility the parties go

director by director to determine whether demand is excused, the parties

here do not do so, mainly because Plaintiffs repeatedly allege that a

majority of the Board was involved in all (or nearly all) of the programs

and decisions at issue. When appropriate, courts may evaluate demand

futility by looking to the whole board of directors rather than by going one

by one through its ranks. See, e.g., Pfizer, 722 F. Supp. 2d at 461.

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ROSENBLOOM V. PYOTT 27

from this strategic plan that the Board was intensely

interested in off-label sales of Botox, saw off-label sales of

Botox as a critical driver of growth for Allergan over the

upcoming years, and planned on very closely monitoring offlabel Botox sales. It can also be inferred that the Board was

aware that pain, headache, spasticity, and migraine were all

off-label uses, but nonetheless wanted to achieve major

growth well before FDA approval. Over the next 13 years,

that is precisely what happened: due mainly to a continuing

series of illegal Allergan programs, off-label sales of Botox

skyrocketed.

Of course, as Allergan observes, it is entirely possible for

off-label sales to increase on their own, without any illegal

promotion by a drug manufacturer. In fact, such increases

occur all the time, spurred by developments and discussions

within the medical community. For that reason, the bare facts

of the Board’s hunger for higher off-label sales and an

ultimate increase in those sales do not suffice to show

conscious inaction on the part of the Board. See, e.g., King v.

Baldino, 648 F. Supp. 2d 609, 624 (D. Del. 2009). But

contrary to Allergan’s insistence that this case reduces solely

to that correlation, Plaintiffs offer a battery of particularized

factual allegations that strongly support an inference at this

stage of the litigation that the Board knew of and did nothing

about illegal activity.

First, Plaintiffs allege with particularity that the Board

continued to closely and regularly monitor off-label Botox

sales. In 2004, the Board focused its attention on projects

related to the off-label sale of Botox to treat headaches and

urological problems. Then, in 2005, it discussed and decided

to continue funding for organizations under Allergan control

that publicly championed the off-label use of Botox to treat

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28 ROSENBLOOM V. PYOTT

pain. In 2007, the Board emphasized that Botox is “critical

to the success of our [strategic] plan” and discussed “key

assumptions” related to the acquisition of Espirit Pharma, a

companythat was allegedlypurchased mainly to afford Botox

sales representatives access to specialists who would

prescribe Botox for off-label purposes. We can—and at this

stage, must—reasonably infer that the Board’s discussion of

these matters afforded its members a view of Allergan’s

illegal conduct.

The Board also took a particular interest in some of the

specific Allergan off-label sales programs that Plaintiffs

describe as a key part of Allergan’s wrongdoing. In 2003, for

example, the Board saw a slide show that detailed Allergan’s

creation of a “Headache Development Program” and tracked

the prevalence of headache disorders. The Board, which

already knew that nine out of ten clinical trials of Botox for

headache treatment had failed and that FDA approval was

nowhere in sight, thus learned in 2003 that Allergan was

launching a major program to treat headaches. The Board

also learned that the four-person “Core Team” involved in the

Headache Development Program included a member of

Allergan’s “Global Strategic Marketing” division. Then, in

2004, the Board reviewed several promotional documents for

the “Botox Advantage Program,” a program that provided

detailed support to physicians seeking reimbursement for offlabel uses of Botox and created a hotline for such assistance,

all in an attempt to circumvent reimbursement rules

governing off-label uses of Botox. In 2005, the Board

received a CEO report on Allergan’s CDHI program, which

was allegedly created after clinical tests for headaches failed

in order to persuade doctors to prescribe Botox for off-label

purposes (headaches) while reporting an on-label diagnosis

of cervical dystonia, even though CD is a rare disorder. 

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ROSENBLOOM V. PYOTT 29

Finally, in 2006 and 2007, the Board approved co-promotion

and acquisition agreements that were allegedly designed

mainly to facilitate illegal off-label promotion of Botox by

sales representatives familiar with specialists in off-label

fields. These allegations and the inferences that reasonably

follow from them are anything but conclusory. Accepted as

true for purposes of this appeal, they show that Allergan’s

board closely monitored off-label Botox sales and repeatedly

discussed or authorized programs even after learning that

those programs involved the same illegal conduct for which

Allergan was ultimately fined and punished.

Second, even as it carefully monitored Allergan’s Botox

programs and determined that growth of off-label Botox sales

was critical to achieving desired profit margins, the Board

received data directly linking Allergan’s sales programs to

fluctuations in off-label sales. In 2005, for example, it

learned that sales for pain, headache, and spasticity were

heavily affected by Allergan programs that involved phone

calls to pain specialists and pediatricians. In 2006, it

projected a decline in sales of Botox for off-label pain

treatment due to the absence of Allergan promotion for that

use. The 2007–2011 Strategic Plan, in turn, identified an

even clearer connection between Allergan programs and offlabel sales growth, stating that the addition of 45 new sales

representatives in 2006 was accompanied by a 25% increase

in spasticity sales, and that the addition of 19 representatives

in 2007 was accompanied by an estimated 18% increase in

spasticity sales.

This is exactly the kind of correlation—more Allergan

promotions for off-label use matching up preciselywith more

sales, and fewer Allergan promotions for off-label use

matching a drop in off-label sales—that qualifies as a “red

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30 ROSENBLOOM V. PYOTT

flag” of illegal promotions. See McCall v. Scott, 239 F.3d

808, 821 (6th Cir. 2001) (concluding that “it would be just as

reasonable” for experienced directors to see a suspicious

correlation as a sign of “possible improper billing activities”

as it would be for them to see it as “the norm,” and that their

indifference to that correlation supported liability). Whereas

Allergan argues that the Board could have viewed the

increase in off-label Botox sales as the natural operation of

the medical community, at this stage of the case we must

make reasonable inferences for Plaintiffs, not against

them—and it is reasonable to infer that the data repeatedly

presented to Allergan’s board linking Allergan programs to

fluctuations in off-label sales support a finding of scienter.

Third, the Board received repeated FDA warnings about

illegal promotion of Botox. To be sure, many of these

warnings concerned onlymisbranding and other violations of

the law, not the specific off-label promotions at issue here.

Only one of the warning letters, in fact, specifically addressed

off-label promotion, though it is striking that even after

learning of the Schim incident in that letter, Allergan kept

Schim as one of its highest-paid consultants and advocates. 

Nonetheless, these letters also constituted a red flag, waved

nearly every year for five straight years, that Allergan was

breaking federal law in its promotion of Botox. Given how

carefully the Board was monitoring Botox sales, its relative

inaction in the face of these repeated FDA warnings supports

a finding of liability. See In re Abbott Labs. Derivative

S’holders Litig., 325 F.3d 795, 808 (7th Cir. 2003) (excusing

demand and emphasizing that even though two FDA warning

letters contained mere “boilerplate” language, “continuing

violations of federal regulations over a period of six years

cannot be minimized”). Moreover, this is not a case where

the FDA warnings dealt with “unrelated programs” or lacked

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ROSENBLOOM V. PYOTT 31

“any other connection” to the relevant illegal conduct. See

SAIC, 948 F. Supp. 2d at 387. Rather this is a case in which

one of the FDA letters directly concerned off-label

promotions and the parade of other FDA letters addressed

issues immediately parallel to the off-label promotions at the

heart of the allegations in this lawsuit.

Closely related to the FDA warnings, an employee

resigned after filing an ethics complaint in 2007 charging

Allergan’s sales division with improper off-label promotions. 

Although Plaintiffs do not allege that this ethics issue was

specifically about Botox, there is no evidence that the Board

responded to it by investigating wrongdoing. As Vice

Chancellor Lamb has remarked, “A claim that an audit

committee or board had notice of serious misconduct and

simply failed to investigate, for example, would survive a

motion to dismiss, even if the committee or board was well

constituted and was otherwise functioning.” David B. Shaev

Profit Sharing Account v. Armstrong, Civ. A. 1449-N, 2006

WL 391931, at *5 (Del. Ch. Feb. 13, 2006).

Fourth, the illegal conduct in this case involved one of the

most important drugs at Allergan—one that was repeatedly

identified as crucial by the Board itself, which described offlabel sales of Botox as a “top corporate priority” and as “two

of the top three future growth opportunities in our portfolio.” 

In demand futility cases, courts have repeatedly emphasized

that it is especially plausible to infer board interest in and

knowledge of developments relating to a product that is

critical to a company’s success or is otherwise of special

importance to it. See, e.g., In re Biopure Corp. Derivative

Litig., 424 F. Supp. 2d 305, 307–08 (D. Mass. 2006); In re

Veeco Instruments, Inc. Sec. Litig., 434 F. Supp. 2d 267, 277

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32 ROSENBLOOM V. PYOTT

(S.D.N.Y. 2006); In re Keyspan Corp. Sec. Litig., 383 F.

Supp. 2d 358, 387–88 (E.D.N.Y. 2003).

Finally, the illegal conduct was unquestionably of

significant magnitude and duration. It persisted for over a

decade, involved several divisions at Allergan, and

constituted nearly a dozen separate programs, all related to

one of Allergan’s most important and widely known

therapeutic drugs. The combination of widespread and

enduring illegality in Allergan’s corporate activity strongly

supports an inference of Board knowledge and intentional

disregard. See SAIC, 948 F. Supp. 2d at 387; Pfizer, 722 F.

Supp. 2d at 460; Veeco, 434 F. Supp. at 278; In re Oxford

Health Plans, Inc., 192 F.R.D. 111, 117 (S.D.N.Y. 2000).

Taking all of these allegations together, we conclude that

the district court abused its discretion in determining that they

do not create a reasonable inference of conscious inaction. It

would be surprising, to say the least, if such significant,

continuing, and diverse breaches of FDA regulations in

relation to a star product at Allergan passed unnoticed by the

Board for so long, even as the Board carefully monitored offlabel sales, repeatedly discussed and authorized a number of

the allegedly illegal programs, and built strategic plans

around off-label Botox sales.

We also note that we find persuasive Delaware Vice

Chancellor Lasker’s explanation in the virtually identical

Allergan case in Delaware14:

14 Although as we have noted, Vice Chancellor Lasker’s decision was

vacated by the Delaware Supreme Court on the ground of collateral

estoppel, decisions vacated for reasons unrelated to the merits may be

considered for the persuasive of their reasoning. See In re Taffi, 68 F.3d

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ROSENBLOOM V. PYOTT 33

The plaintiffs in this case have alleged a direct

connection between the Board and a business

plan premised on illegal activity. The

Complaint pleads that from 1997 onward, the

Board discussed and approved a series of

annual strategic plans that contemplated

expanding Botox sales dramatically within

geographic areas that encompassed the United

States. The plans contemplated new markets

for Botox that involved applications that were

off-label uses in the United States. So

significant was the scope of the expansion that

it necessarily contemplated marketing and

promoting off-label uses within the United

States. The Board then closely monitored

Allergan’s dramatic success in increasing its

sales of Botox at rates far exceeding what the

market for existing on-label uses could

support or that could be generated by

physicians serendipitously learning about and

trying new off-label applications. The Board

kept Allergan’s business plan in place even

306, 310 (9th Cir. 1995) (following as persuasive authority a decision

vacated by the Supreme Court on other grounds); Orhorhaghe v. INS,

38 F.3d 488, 493 n.4 (9th Cir. 1994) (following as persuasive authority a

decision vacated by the Supreme Court as moot).

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34 ROSENBLOOM V. PYOTT

after the Schim incident and FDA inquiries

illustrated the extent of Allergan’s regulatory

exposure.

La. Mun. Police, 46 A.3d at 352–53.15

15 He also noted that other inferences are plausible, but that at this stage

in the litigation all reasonable inferences must be drawn in Plaintiffs’

favor:

Obviously this is not the only inference that can be

drawn. Alternatively, one could infer that the directors

received advice from sophisticated counsel about the

difference between legal off-label sales and illegal offlabel marketing, understood where the boundary lay,

and approved a business plan and management

initiatives in the good faith belief that Allergan was

remaining within the bounds of the law, although

perhaps close to the edge. The directors then closely

monitored Allergan’s performance with this

understanding. Unfortunately for everyone, the

directors’ good faith belief proved incorrect, and

Allergan pled guilty to criminal misdemeanor

misbranding for the period from 2000 through 2005,

paid criminal fines of $375 million, and paid another

$225 million in civil fines. If this scenario proves true,

then the directors will not have acted in bad faith and

will not be liable to Allergan for any of the harm it

suffered.

I cannot presently determine what actually happened at

Allergan. I hold only that a reasonable inference can be

drawn from the particularized allegations of the

Complaint and the documents it incorporates by

reference that the Board knowingly approved and

subsequently oversaw a business plan that required

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ROSENBLOOM V. PYOTT 35

The district court reached the contrary conclusion mainly

on the grounds that Plaintiffs failed to allege “evidence of a

decision by board members to promote off-label marketing,”

failed to connect off-label promotion programs such as the

Headache Development Program to “Botox or any prohibited

off-label marketing,” and failed to account for the fact that

the Board maintained formal compliance policies. In

analyzing Plaintiffs’ allegations, however, the district court

committed a number of errors, and thereby abused its

discretion.

First, it considered the factual allegations in isolation

from each other rather than in combination, even though in

cases like this one an inference of Board involvement or

knowledge may depend on a combination of factual

allegations. See, e.g., McCall, 239 F.3d at 823; SAIC, 948 F.

Supp. 2d at 387–88; Veeco, 434 F. Supp. 2d at 276. Second,

it repeatedly drew inferences in the Board’s favor, crediting

Allergan’s reasonable interpretations of the factual

allegations over Plaintiffs’ reasonable interpretations of those

same allegations.16See, e.g., Westmoreland Cnty. Emp. Ret.

illegal off-label marketing and support initiatives for

Botox. At this stage of the case, I must credit this

inference . . . .

La. Mun. Police, 46 A.3d at 356.

16 For example, the district court refused to view the repeated FDA

warnings as at all relevant, even though they involved Botox promotion. 

It saw no connection between the Headache Development Program, the

Board, and off-label sales, despite the allegations discussed supra. It

dismissed the CDHI allegations as irrelevant on the ground that cervical

dystonia was an approved use, disregarding all of Plaintiffs’ other

allegations. And it suggested that it viewed the Complaint as alleging

only that the Board must have known of illegal conduct because sales for

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36 ROSENBLOOM V. PYOTT

Sys. v. Parkinson, 727 F.3d 719, 729 (7th Cir. 2013) (“[T]he

district court’s focus on other hypothetical explanations for

the defendants’ conduct improperly ignores the rule that ‘any

inferences reasonably drawn from the factual allegations of

the complaint must be viewed in the light most favorable to

the plaintiffs.’” (quoting Abbott Labs., 325 F.3d at 803));

Brehm, 746 A.2d at 255. Finally, the district court essentially

insisted on a smoking gun of Board knowledge, even though

off-label uses increased, when in fact the First Amended Complaint

contains many, particularized allegations that bear on the question of what

the Board knew.

In these and other ways, the district court abused its discretion. As

Vice Chancellor Lasker noted while explaining his disagreement with the

district court:

The California Federal Court . . . concluded that a

Board-sanctioned “Headache Development” program

for Botox “had absolutely nothing to do with

marketing; rather, it was a clinical presentation

regarding Botox’s potential efficacy in treating

migraines.” The California Federal Court likewise

dismissed the sufficiency of the allegation that the

Board oversaw a “Cervical Dystonia/Headache

Expansion Initiative” by noting that cervical dystonia

was an approved FDA use at the time.

In my view, both descriptions adopt one possible and

defendant-friendly interpretation of the underlying

documents and related allegations. At the pleadings

stage, I believe the plaintiffs are entitled to the

reasonable inference that the Board oversaw companywide efforts to promote off-label use of Botox for

treating migraine headaches, which was not an FDAapproved use at the time.

La. Mun. Police, 46 A.3d at 357–58 (citations omitted).

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ROSENBLOOM V. PYOTT 37

precedent holds that plaintiffs can show demand futility by

alleging particular facts that support an inference of

conscious inaction.17See Brehm, 746 A.2d at 255.

Ultimately, this case is in important respects like Abbott

Labs., Pfizer, and Westmoreland—all cases in which

particularized allegations made plausible an inference that the

directors at issue had remained consciously inactive in the

 

17 Again, we find persuasive Vice Chancellor Lasker’s careful analysis

of how the district court erred in applying Delaware law:

[A] plaintiff does not have to point to actual

confessions of illegality by defendant directors to

survive a Rule 23.1 motion in a Caremark case. 

Particularly at the pleadings stage, a court can draw the

inference of wrongful conduct when supported by

particularized allegations of fact. Given that off-label

marketing is illegal, it would be astounding if the

1997–2001 Strategic Plan or any other board

presentation actually used that term. If in-house

counsel hoped to keep their jobs, those words only

could make it into a board presentation in the context of

a statement against the practice. But sadly,

sophisticated corporate actors at times engage in illegal

behavior and attempt to hide their misconduct with the

appearance of legal compliance. Having reviewed the

summary slides and the underlying strategic plans, I

believe there are sufficient references in the documents

to support a reasonable inference that Allergan

expected to drive increased sales by promoting off-label

use. When, as here, the pled facts can support a

reasonable inference that directors in fact approved a

business plan that contemplated off-label marketing, the

plaintiffs receive the benefit of the inference at the

pleadings stage.

La. Mun. Police, 46 A.3d at 357–58 (citations omitted).

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face of wrongdoing at their companies. See Westmoreland,

727 F.3d at 727 (finding demand to be excused where the

complaint alleged “not only that [the company’s] directors

consciously flouted . . . FDA regulations, but also that the

directors knowingly steered [the company] on a course that

was all but certain to prompt the FDA to take enforcement

action under [a consent decree]”); Abbott, 325 F.3d at 809

(“We find that six years of noncompliance, inspections, 483s,

Warning Letters, and notice in the press, all of which then

resulted in the largest civil fine ever imposed by the FDA and

the destruction and suspension of products which accounted

for approximately $250 million in corporate assets, indicate

that the directors’ decision to not act was not made in good

faith and was contrary to the best interests of the company.”);

Pfizer, 722 F. Supp. 2d at 460 (excusing demand where “a

fair reading of the particularized allegations of the Complaint

is that the defendants, at a minimum, knew of a high

probability that Pfizer was continuing to purposely promote

off-label marketing and deliberately decided to let it continue

by blinding themselves to that knowledge”). To be sure,

there are noteworthy differences between those cases and this

one. For example, in several of those cases the companies

had already been sanctioned by the FDA, whereas here the

Board had merely received a number of warning letters

relating to Allergan’s marketing of Botox. What all of these

cases have in common with this one, however, is that, given

the combination of non-conclusory facts alleged, Delaware

law required a reasonable inference of scienter—and thus

conscious inaction—on the part of the board, at least for

purposes of a motion on the pleadings.

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ROSENBLOOM V. PYOTT 39

B. Adoption of a Plan Premised on Illegal Conduct

Having concluded that we must reverse with respect to

Plaintiffs’ conscious inaction argument, we only briefly

address Plaintiffs’ alternative argument that demand is

excused on the ground that Allergan’s board of directors

knowingly adopted a business plan premised on illegal offlabel promotions of Botox.

Much like their conscious inaction argument, Plaintiffs’

argument on this point begins with the 1997–2001 Strategic

Plan and proceeds through the other allegations recited supra. 

Here, though, Plaintiffs make the comparatively bolder claim

that Allergan’s conduct is reasonably interpreted as the

predictable unfolding of a Board-sanctioned effort to

massively boost off-label Botox sales while pushing (too)

hard on regulatory limits. Thus, in Plaintiffs’ view, it can

reasonably be inferred that the “red flags” of illegal conduct

that actually or constructively alerted the Board to

wrongdoing were not signs that the marketing team had gone

off the rails. Rather, they were welcome indicators that a

massive, Board-approved push for off-label sales of Botox

was going according to plan.

We conclude that, at the pleading stage of this case, this

is a reasonable inference from the particular facts

alleged—and that the district court abused its discretion in

concluding that it is not.

Allergan and the district court make much of the fact that

Plaintiffs do not allege that the Board formalized or recorded

any decision to break the law. They also emphasize that

Allergan did, as one would expect of a major pharmaceutical

company, maintain some formal policies prohibiting off-label

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40 ROSENBLOOM V. PYOTT

promotion of drugs. On their view, these facts render

implausible the inference that Plaintiffs have asked us to draw

from the particularized facts alleged.

These arguments, however, overstate what the law

requires of plaintiffs arguing that demand is excused. See La.

Mun. Police, 46 A.3d at 357 (“[A] plaintiff does not have to

point to actual confessions of illegality by defendant directors

to survive a Rule 23.1 motion . . . . Particularly at the

pleadings stage, a court can draw the inference of wrongful

conduct when supported by particularized allegations of

fact.”). For example, an inference that the Board decided to

break the law can be drawn even without a Board-approved

document stating, ‘we’re all going to go promote Botox offlabel now and do so in a way that violate the FDA’s

regulations.’ So long as Plaintiffs’ particularized allegations

give rise to a reasonable doubt that a majority of the directors

adopted a plan premised on illegal off-label marketing of

Botox, and therefore face a substantial likelihood of liability

for breaching their duty of loyalty, demand is excused.

Applied here, that standard requires reversal. As Vice

Chancellor Lasker persuasively explained in his opinion in

the Delaware case:

It is not unreasonable to infer that the

Allergan Board, led by a hard-charging CEO

who earned the nickname “Mr. Botox,” could

have believed that Allergan knew better than

the FDA which Botox applications were safe,

particularly off-label uses already approved

(or at least permitted) in other countries. It is

not unreasonable to infer that the Board and

CEO saw the distinction between off-label

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ROSENBLOOM V. PYOTT 41

selling and off-label marketing as a source of

legal risk to be managed, rather than a

boundary to be avoided. Based on this

premise, the CEO and his management team

devised, and the Board approved, a business

plan that relied on off-label-use-promoting

activities, confident that the risk of regulatory

detection was low, that most regulatory

problems could be solved, and that dealing

with regulatory risk was a cost of doing

business. As profits increased and the

regulatory risk seemed well managed, the

extent of off-label use-promoting activities

grew. The appearance of formal compliance

cloaked the reality of non-compliance, and

directors who understood the difference

between legal off-label sales and illegal offlabel marketing continued to approve and

oversee business plans that depended on

illegal activity. See Massey Energy, 2011 WL

2176479, at *19 (crediting inference that

outside directors went “through the motions”

rather than making “good faith efforts to

ensure that [the company] cleaned up its act”).

La. Mun. Police, 46 A.3d at 355–56.

Vice Chancellor Lasker’s analysis complements the

analysis of conscious inaction set forth supra. As alleged by

Plaintiffs, this is a board that adopted a strategic plan in 1997

expressly predicated on massive, immediate growth in offlabel sales of Botox for indications that even the Board did

not believe would be approved by the FDA until 2001–2002;

that continued to depend on increased off-label sales over the

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42 ROSENBLOOM V. PYOTT

next decade; that carefully monitored Botox in meetings and

reports, and that took an especially keen interest in off-label

uses; that heard numerous presentations on some of

Allergan’s illegal off-label promotions; that approved crosspromotion deals and acquisitions intended mainly to facilitate

off-label promotion; that received a stream of FDA warning

letters about improper Botox marketing, one of which

expressly involved off-label promotions; that heard from at

least one employee whistleblower about unethical off-label

marketing; and that heard information at several points

expressly linking Allergan’s expansive off-label marketing

programs to fluctuations in the number of off-label sales of

Botox.

When these allegations are examined together, certainly

it is plausible to conclude that they reveal a board committed

to very aggressive off-label promotion of Botox—one of its

most important products, highest corporate priorities, and

most promising sources of revenue. And certainly it is

plausible to conclude that such a board might publicly pay lip

service to regulations while more quietly urging its officers

to push marketing efforts to the regulatory breaking point in

an effort to dramatically improve profits in a tough economic

climate.

Ultimately, even reviewed for abuse of discretion, the

district court’s single-page analysis of why this inference is

not plausible must be reversed. By declining to draw

inferences to which Plaintiffs are entitled, reading Plaintiffs’

allegations separately rather than in combination, and

incorrectly describing Delaware law as requiring proof of an

explicit and memorialized decision to break the law, the

district court exceeded its discretion.

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ROSENBLOOM V. PYOTT 43

CONCLUSION

We do not know what really happened at Allergan from

1997 to 2010. This case comes before us at the pleading

stage—and thus before any discovery—and presents factual

uncertainties that are “an unavoidable consequence of

Delaware’s demand futility rule.” Westmoreland, 727 F.3d

at 729. We therefore hold only that Plaintiffs have satisfied

their obligation to show that demand on Allergan’s board of

directors is excused. Plaintiffs’ particularized factual

allegations, and, more important, the reasonable inferences

that we must draw in Plaintiffs’ favor in deciding a Rule 23.1

motion, suffice to show that the Board either did nothing

despite actual or constructive knowledge of wrongdoing at

Allergan, 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. Accordingly,

we reverse and remand for further proceedings.18

REVERSED AND REMANDED.

18 Plaintiffs’ appeal from the district court’s denial of their motion for

reconsideration is dismissed as moot. On appeal, the Directors

Defendants urge that we also address the arguments in their motion to

dismiss pursuant to Federal Rule ofCivil Procedure 12(b)(6), even though

the district court did not reach those arguments. Following our usual

practice, we decline to reach those issues in the first instance. See United

States v. Johnson Controls, Inc., 457 F.3d 1009, 1022 (9th Cir. 2006)

(“We have noted that while we may affirm the district court’s judgment

on a different ground, we need not do so, and we usually do not.”

(emphasis and internal quotation marks omitted)). To the extent they have

not been waived in the district court, those issues may be raised again on

remand.

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44 ROSENBLOOM V. PYOTT

REINHARDT, Circuit Judge, specially concurring:

Because it is not necessary to decide the question of the

applicable standard of review in our opinion, I write

separately to set forth my view that the proper standard is de

novo.

The arguments that Plaintiffs advance against the rule of

Potter v. Hughes, 546 F.3d 1051 (9th Cir. 2008), and In re

Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir.

1999), are compelling. The issue is an important and

controversial one, as evidenced by the fact that the Supreme

Court granted certiorari to resolve a circuit split on this exact

point of law just one year ago (although that case settled

before oral argument). See UBS Fin. Servs. Inc. of Puerto

Rico v. Union de Empleados de Muelles de Puerto Rico

PRSSA Welfare Plan, 134 S. Ct. 40 (2013).

The problem with Potter and In re Silicon Graphics is

simply stated: Courts of Appeals ordinarily review the

sufficiency of a complaint’s allegations de novo, and there is

no reason why that general rule is not fully applicable to

motions to dismiss on the pleadings under Federal Rule of

Civil Procedure 23.1. Recognizing the problems with abuse

of discretion review of motions to dismiss for failure

adequately to allege demand futility, several state courts have

recently switched to de novo review. See, e.g., Fink v. Codey

(In re PSE & G S’holder Litig.), 801 A.2d 295, 313 (2002);

Harhen v. Brown, 730 N.E.2d 859, 866 (2000); Brehm v.

Eisner, 746 A.2d 244, 253 (Del. 2000). In the federal system,

several circuits have expressed strong concerns about an

abuse of discretion standard, see Pirelli Armstrong Tire Corp.

Retiree Med. Benefits Trust ex rel. Fed. Nat. Mortgage Ass’n

v. Raines, 534 F.3d 779, 783 n.2 (D.C. Cir. 2008); Scalisi v.

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ROSENBLOOM V. PYOTT 45

Fund Asset Mgmt., L.P., 380 F.3d 133, 137 n.6 (2d Cir.

2004), the First and Seventh Circuits have recently adopted

de novo review, see Union de Empleados de Muelles de

Puerto Rico PRSSA Welfare Plan v. UBS Fin. Servs. Inc. of

Puerto Rico, 704 F.3d 155, 162 (1st Cir. 2013);

Westmoreland Cnty. Employee Ret. Sys. v. Parkinson,

727 F.3d 719, 724–25 (7th Cir. 2013), and the Sixth and

Eighth Circuits have recentlyreaffirmed their adherence to de

novo review, see Lukas v. McPeak, 730 F.3d 635, 637 (6th

Cir. 2013); Gomes v. Am. Century Cos., Inc., 710 F.3d 811,

815 (8th Cir. 2013). Motivated by similar concerns, two

panels of this Court have expressed discomfort with abuse of

discretion review in unpublished dispositions. See Israni v.

Bittman, 473 F. App’x 548, 550 n.1 (9th Cir. 2012); Laborers

Int’l Union of N. Am. v. Bailey, 310 F. App’x 128, 130 (9th

Cir. 2009).

These judges have offered powerful arguments in favor of

de novo review. As a panel of this Court observed in 2000,

we choose “between the de novo and abuse of discretion

standards by balancing the peculiar need of a full appellate

review, against the argument that the district court’s . . .

determination requires the exercise of discretion and therefore

is due the correlative level of deference on review.” Harman

v. Apfel, 211 F.3d 1172, 1176 (9th Cir. 2000). That inquiry,

in turn, looks to factors such as “the language and structure of

the governing statute,” Pierce v. Underwood, 487 U.S. 552,

559 (1988); “[t]he non-amenability of the problem to rules,

because of the diffuseness of circumstances, novelty,

vagueness, or similar reasons that argue for allowing

experience to develop,” id. at 562; whether a decision

“ordinarily has . . . substantial consequences” requiring “it to

be reviewed more intensively,” id. at 563; and whether, “as

a matter of the sound administration of justice, one judicial

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46 ROSENBLOOM V. PYOTT

actor is better positioned than another to decide the issue in

question,” Miller v. Fenton, 474 U.S. 104, 114 (1985).

Here, all relevant factors cut in favor of de novo review. 

Nothing in Rule 23.1 indicates a preference for district court

decision-making; doctrines of demand futility are reasonably

uniform and amenable to general rules that cover a wide

range of circumstances; the decision to dismiss a shareholder

derivative suit under Rule 23.1 results in the serious

consequence of terminating the litigation, and is of particular

importance in the Rule 23.1 context due to the high costs

associated with filing shareholder derivative suits; and district

courts do not have an institutional advantage over appellate

courts in determining the legal sufficiency of pleadings.

In view of the above, I strongly urge that when we are

presented with a demand futility case in which the standard

of review is determinative of the outcome, reconsideration of

the applicable standard of review would be in order.

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