Court Opinion

ID: 9942101
Source: CourtListenerOpinion
Date Created: 2024-02-20 15:07:40.911145+00
Date Added: 2024-06-11T13:47:40.456763
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
                               APPROVAL OF THE APPELLATE DIVISION
        This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
     internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

                                                        SUPERIOR COURT OF NEW JERSEY
                                                        APPELLATE DIVISION
                                                        DOCKET NO. A-2908-21

FEIVEL PHIL GOTTLIEB,
derivatively and on behalf of
JOHNSON & JOHNSON,

          Plaintiff-Appellant,

v.

MARY C. BECKERLE, D.
SCOTT DAVIS, IAN E.L.
DAVIS, ALEX GORSKY, MARK
B. McCLELLAN, ANNE M.
MULCAHY, WILLIAM D.
PEREZ, CHARLES PRINCE, A.
EUGENE WASHINGTON,
RONALD A. WILLIAMS,
MARY SUE COLEMAN,
JAMES G. CULLEN, LEO
F. MULLIN, MICHAEL
M.E. JOHNS, JOAQUIN
DUATO, PAUL STOFFELS,
JENNIFER L. TAUBERT,
JENNIFER A. DOUDNA,
MARILLYN A. HEWSON,
HUBERT JOLY, and MARK
A. WEINBERGER,

          Defendants-Respondents,
and

JOHNSON AND JOHNSON,

     Defendant-Respondent.
___________________________

         Argued September 27, 2023 – Decided February 20, 2024

         Before Judges Haas, Gooden Brown and Puglisi.

         On appeal from the Superior Court of New Jersey,
         Chancery Division, Middlesex County, Docket No.
         C-000186-19.

         Michael James Barry (Grant & Eisenhofer PA) argued
         the cause for appellant (The Law Office of Avram E.
         Frisch LLC and Michael James Barry, attorneys;
         Avram E. Frisch and Michael James Barry, on the
         briefs).

         Kristen R. Seeger (Sidley Austin LLP) of the Illinois
         bar, admitted pro hac vice, argued the cause for
         respondent Johnson & Johnson (Robinson Miller LLC,
         Kristen R. Seeger, Walter C. Carlson, (Sidley Austin
         LLP) of the Illinois bar, admitted pro hac vice,
         Christopher Y. Lee (Sidley Austin LLP) of the Illinois
         Bar, admitted pro hac vice, and Maseeh Moradi, (Sidley
         Austin LLP) of the Illinois Bar, admitted pro hac vice,
         attorneys; Keith J. Miller, Kristen R. Seeger, Walter C.
         Carlson, Christopher Y. Lee and Maseeh Moradi, on the
         brief).

         Riker Danzig, LLP, attorneys for respondents Mary C.
         Beckerle, D. Scott Davis, Ian E.L. Davis, Alex Gorsky,
         Mark B. Mcclellan, Anne M. Mulcahy, William D.
         Perez, Charles Prince, A. Eugene Washington, Ronald
         A. Williams, Mary Sue Coleman, James G. Cullen, Leo

                                                                    A-2908-21
                                    2
            F. Mullin, Michael M.E. Johns, Joaquin Duato, Paul
            Stoffels, Jennifer L. Taubert, Jennifer A. Doudna,
            Marillyn A. Hewson, Hubert Joly, and Mark A.
            Weinberger, join in the brief of respondent Johnson &
            Johnson.

PER CURIAM

      Plaintiff Feivel Gottlieb is the owner of three shares in the global health

care corporation, Johnson & Johnson (J&J). He filed a shareholder derivative

complaint on behalf of J&J against J&J as a nominal defendant and J&J's

officers and directors in their individual capacities (collectively, defendants),

alleging breach of the directors' fiduciary duties in connection with the

company's alleged misleading marketing of three opioid analgesics, Duragesic,

Nucynta, and Nucynta ER. Defendants moved to dismiss plaintiff's complaint,

arguing plaintiff failed to meet the statutory requirements for bringing a

shareholder derivative claim under the New Jersey Business Corporation Act

(NJBCA), N.J.S.A. 14A:1-1 to 18-11. The motion judge agreed and entered two

separate orders, both dated February 1, 2022, along with an accompanying

twenty-seven-page written opinion, dismissing plaintiff's complaint with

prejudice for failure to state a claim upon which relief can be granted, see R.

                                                                           A-2908-21
                                       3
4:6-2(e).1 Plaintiff now appeals from the February 1, 2022, orders.2 After

carefully reviewing the record and the governing legal principles, we affirm.

                                        I.

      Some background is necessary for context. The NJBCA sets forth the

procedures for derivative claims like this one. Such claims "belong[] to a

corporation" but are brought by a shareholder "on behalf of that corporation, in

an attempt to compel alleged wrongdoers to compensate the corporation for t he

injury they have caused." Johnson v. Glassman, 401 N.J. Super. 222, 227-28

(App. Div. 2008). To bring a derivative claim in the first instance, a shareholder

1
  One order dismissed the complaint against J&J and the other order dismissed
the complaint against the individual defendants.
2
   The trial court also denied plaintiff's motion for reconsideration in a May 9,
2022, order. However, because plaintiff neither identified the May 9, 2022,
order in his notice of appeal or amended notice of appeal, nor delineated a legal
challenge to the order in any point heading in his merits brief, we consider the
issue effectively waived. See 1266 Apartment Corp. v. New Horizon Deli, Inc.,
368 N.J. Super. 456, 459 (App. Div. 2004) ("[I]t is only the judgment or orders
designated in the notice of appeal which are subject to the appeal process and
review . . . ."); N.J. Dep't of Env't Prot. v. Alloway Twp., 438 N.J. Super. 501,
505 n. 2 (App. Div. 2015) ("An issue that is not briefed is deemed waived upon
appeal."); see also Pressler & Verniero, Current N.J. Court Rules, cmt. 2 on R.
2:6-2 (2024) (explaining that appellate courts "may refrain from considering
cursory arguments . . . that are not properly submitted under proper point
headings" (citing Solar Energy Indus. v. Christie, 418 N.J. Super. 499, 508 (App.
Div. 2011))).

                                                                            A-2908-21
                                        4
must be both a current owner and have owned shares of the corporation "at the

time of the act or omission complained of," "fairly and adequately represent[]

the interests of the corporation," N.J.S.A. 14A:3-6.2(1), (2), and make "a written

demand" on "the corporation to take suitable action" before filing suit, N.J.S.A.

14A:3-6.3(1).

      After receiving a written demand for action from a shareholder, a

corporation can conduct an inquiry into the allegations in the demand, and a

majority of the independent directors of the board can determine whether to

accept or reject the demand. N.J.S.A. 14A:3-6.4 to 6.5. Under the NJBCA, a

director is considered independent if the director has:

            (i) no economic interest in the challenged act or
            transaction material to him or her, other than an
            economic interest that is shared by all shareholders
            generally; and

            (ii) no material, personal or business relationships with
            the defendant directors or officers who have a material
            interest in the act or transaction challenged.

            [N.J.S.A. 14A:3-6.5(7)(a).]

      If a shareholder's demand is rejected, and the shareholder chooses to bring

a derivative lawsuit to challenge the rejection, the complaint "shall allege with

particularity facts establishing that a majority of the board of directors . . . did

not consist of independent directors at the time the determination was made."

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                                         5
N.J.S.A. 14A:3-6.5(3); see also R. 4:32-3 (setting forth prerequisites for filing a

shareholder derivative complaint, including pre-suit demand by a plaintiff for

the "desired" "action" by "managing directors or trustees").

        On the corporation's dismissal motion, "a derivative proceeding shall be

dismissed by the court" if the court finds that "a majority vote of independent

directors present at a meeting of the board of directors," N.J.S.A. 14A:3-6.5(1),

(2), has "determined in good faith, after conducting a reasonable inquiry upon

which its conclusions are based, that the maintenance of the derivative

proceeding is not in the best interests of the corporation ." N.J.S.A. 14A:3-

6.5(1)(a) (hereinafter referred to as subsection (1)). If a majority of the directors

were independent at the time the determination was made, "the plaintiff shall

have the burden of proving that the requirements of subsection (1) . . . have not

been met." N.J.S.A. 14A:3-6.5(4). If a majority of the directors were not

independent at the time the determination was made, "the corporation shall have

the burden of proving the requirements of subsection (1) . . . have been met."

Ibid.

        On appeal, plaintiff has abandoned his challenge to the independence of

the board members who voted to reject his derivative claim. Instead, plaintiff

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                                         6
disputes whether the directors acted in good faith after conducting a reasonable

inquiry in accordance with N.J.S.A. 14A:3-6.5(5), which provides:

                  (a) If the corporation moves to dismiss the
                  derivative proceeding, it shall make a written
                  filing with the court setting forth, among other
                  things, facts to show:

                        (i) whether or not a majority of the board
                        of directors was independent at the time of
                        the determination by the independent
                        director or directors; and

                        (ii) that the independent director or
                        directors made the determination in good
                        faith and after conducting a reasonable
                        inquiry upon which the conclusions are
                        based.

                  (b) Following a motion filed pursuant to
                  paragraph (a) . . . , the court shall dismiss the
                  derivative suit unless:

                        (i) the court finds that the requirements of
                        subsection (1) . . . have not been met,
                        taking into account the burden of
                        proof . . . ; or

                        (ii) the plaintiff . . . has alleged with
                        particularity facts rebutting the facts
                        contained in the corporation's filing.

                                      II.

      Turning to the salient facts, in 1991, 2008, and 2015, the FDA approved

the marketing of three drugs introduced by J&J and its subsidiary, Janssen.

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                                       7
These drugs, Duragesic, Nucynta, and Nucynta ER, are all forms of opioids

developed by J&J. In May 2019, plaintiff served a written demand on the board,

alleging J&J's directors and officers breached their fiduciary duties to J&J and

its shareholders by failing to stop misleading marketing relating to these opioids.

J&J had previously received similar demands from other shareholders.

      In response to the first shareholder demand letter, on October 18, 2017,

by resolution, the board had retained Douglas Eakeley, Esq., of counsel to

Lowenstein Sandler LLP, as independent counsel "to investigate, review, and

analyze the facts and circumstances surrounding the allegations raised . . . as

well as any subsequently received demands or shareholder derivative lawsuits

making similar allegations or claims." The board resolution also specified that

the board had resolved to provide Eakeley with "whatever resources" were

needed "to conduct a thorough and independent [i]nvestigation" and to appoint

"a liaison" between the board and Eakeley "to help facilitate [the i]nvestigation."

Further, "any management member of the [b]oard" was "excused from its

deliberations."

      Several J&J shareholders had already filed derivative complaints in

various federal and state courts that largely mirrored the allegations in the

demand letters Eakeley was investigating. As of the date of Eakeley's retention,

                                                                             A-2908-21
                                        8
"there were an estimated [fifty] cases pending in federal courts around the

country, [thirty-six] pending state court actions, and six pending investigations

relating to the promotion and marketing" of J&J's opioid products from 1997 to

2015. On November 4, 2019, plaintiff filed his original verified derivative

complaint that is the subject of this appeal and encompassed in Eakeley's

investigation.

      During the investigation, Eakeley and his team reviewed over 5.5 million

documents, including business records, deposition transcripts from the opioid

litigation, reports of the parties' expert witnesses, and transcripts of the

proceedings.     They also "interviewed twelve current and former officers,

directors, and employees of J&J/Janssen" and submitted document demands for

records such as board meeting minutes, board meeting materials and

presentations, J&J's and Janssen's policies and procedures with respect to sales

force training, documents detailing J&J's health care compliance, documents

relating to the marketing and promotion of the opioid products, documents

tracking rates of addiction, abuse, and diversion of the opioid products, FDA

approved labels for the opioid products, and correspondence with the FDA.

      On April 13, 2020, Eakeley produced a 100-page report, which found that

"it [was] not in the best interests of [J&J] to initiate litigation based upon the

                                                                            A-2908-21
                                        9
claims in the [s]hareholder [d]emand [l]etters or to pursue the currently pending

derivative litigation."   Eakeley's report found plaintiff's demand letter and

derivative complaint, along with the other demand letters and complaints,

incorporated "the allegations advanced in a large volume of separate litigation

pending against J&J" alleging that "J&J, acting in concert with other opioid

manufacturers, caused or contributed to the nation's opioid crisis through false

and misleading promotional practices in order to enhance sales for all opioids,

generally, as well as J&J's own opioid products, specifically."

      In particular, Eakeley found the complaints asserted that "J&J and others

falsely and misleadingly downplayed the serious risk of addiction that all

opioids present" by: (1) "concealing the link between long-term use of opioids

and addiction;" (2) "masking the signs of addiction through promoting the

concept of 'pseudoaddiction' (i.e., advocating that the signs of addiction should

be treated with more opioids);" (3) "misrepresenting that opioid dependence and

withdrawal are easily managed;" and (4) "misrepresenting, denying, or omitting

the risks inherent in higher opioid dosages."

      The report concluded:

            [T]here was no breach of the fiduciary duties of care,
            loyalty, or good faith by the [b]oard of [d]irectors or
            senior management of the [c]ompany.             Senior
            management was diligent in creating and upgrading the

                                                                           A-2908-21
                                      10
     [c]ompany's [h]ealth [c]are [c]ompliance organization
     and systems, as well as its information and reporting
     systems, and in reporting regularly to the [b]oard with
     respect to the adequacy and appropriateness of such
     organizations and systems. The [b]oard and its
     committees were similarly diligent in monitoring the
     [c]ompany's compliance organization and its
     information and reporting systems, and in responding
     to reports of potential noncompliance requiring
     correction.

           Moreover, and despite the proliferation of the
     [o]pioid [l]itigation . . . our investigation uncovered no
     "red flags" or other warning signs of misconduct by
     Janssen . . . that should have put either the [b]oard or
     senior management on notice of wrongdoing or the
     need for corrective action during the time period at
     issue. With regard to its opioid products, J&J received
     a single [w]arning [l]etter during the [twenty-four]
     years that Janssen marketed, promoted and sold
     Duragesic and Nucynta. That letter was received in
     2004 . . . and related to even earlier promotional
     conduct; therefore, even if it were a basis for a claim,
     pursuing it at this late date would be problematic, if it
     is even possible. And Janssen promptly responded to
     the [w]arning [l]etter by ceasing and remedying the
     challenged conduct in a fashion acceptable to the FDA.

           . . . [T]he [a]udit [c]ommittee received reports
     confirming that the [h]ealth [c]are [c]ompliance
     organization was appropriately policing the
     J&J/Janssen compliance system . . . . [a]nd . . . . the
     [c]ompany's regular reporting mechanisms did not
     indicate that Duragesic or Nucynta were subject to
     material abuse or misuse warranting corrective action.

The report advised:

                                                                  A-2908-21
                                11
                    The [b]oard now must decide what action to take
             with respect to the [s]hareholder [d]emand [l]etters and
             [d]erivative [c]omplaints. In essence, the [b]oard has
             three options: (1) initiate litigation against certain
             individuals as demanded in the letters and/or continue
             with the litigation by taking over from the shareholder
             plaintiffs; (2) stand aside and let the shareholders
             pursue their derivative claims on behalf of the
             [c]ompany; or (3) reject the shareholder demands and
             seek dismissal of the pending [d]erivative [c]omplaints.
             As the preceding sections of this [r]eport make clear,
             we believe that it is not in the best interests of the
             [c]ompany to initiate litigation based upon the claims
             in the [s]hareholder [d]emand [l]etters or to pursue the
             currently pending derivative litigation. We therefore
             recommend that the [b]oard should reject the
             [s]hareholder [d]emand [l]etters and take whatever
             steps are necessary or appropriate to secure dismissal
             of the [d]erivative [c]omplaints.

      On April 23, 2020, Eakeley presented his report and findings at a meeting

of the board of directors. The report had been distributed to each director on

April 13, 2020, ten days in advance of the meeting. After discussing the report

and asking questions of Eakeley, the board members adopted resolutions to

"refuse[] as contrary to the best interests of the [c]ompany" the shareholder

demands, including plaintiff's; to "decline[] to have the [c]ompany pursue the

litigation contemplated in the shareholder demands"; and to "direct[] that the

[c]ompany take such steps as are necessary or appropriate to secure dismissal of

the derivative litigation."

                                                                          A-2908-21
                                       12
      After receiving Eakeley's report, plaintiff filed an amended complaint on

May 29, 2020. In the amended complaint, plaintiff alleged the directors violated

their fiduciary duties by:     (1) "declining to stop and prevent J&Js illegal

marketing and promotion of off-label uses of J&J's opioid drugs despite

numerous red flags indicating widespread illegality"; (2) "[f]ailing to act to stop

and prevent J&J's illegal kickbacks to healthcare professionals                  and

organizations for prescribing, recommending or using J&J opioid drugs" in

violation of law; and (3) "[a]pproving and/or consciously disregarding J&J's

business plan of marketing its drugs through the widespread illegal promotion

of off-label uses and dosages and through illegal kickbacks . . . to maximize

J&J's short-term profit at the expense of shareholder's long-term interests and

J&J's reputation and goodwill."

      The complaint also alleged the corporate officers breached their fiduciary

duties "by causing J&J to employ a deliberate and systematic business plan of

artificially increasing sales by engaging in unlawful sales and promotion

practices . . . ." Plaintiff further alleged that these practices "unjustly enriched"

the individual defendants "as a result of the compensation and director

renumeration they received while breaching fiduciary duties owed to J&J."

                                                                              A-2908-21
                                        13
      Defendants moved to dismiss plaintiff's complaint, arguing plaintiff failed

to meet the burden of proof required under the NJBCA. Plaintiff opposed the

motions, arguing, among other things, that Eakeley was not independent based

on his and his law firm's "irreconcilable conflicts of interest" stemming from

representing J&J for over thirty years. Following oral argument, the judge

entered separate orders on February 1, 2022, with accompanying written

decisions dated January 30, 2022, granting defendants' motions and dismissing

plaintiff's complaint with prejudice.

      Specifically, the judge found plaintiff "failed to satisfy his burden of

proving that the board's inquiry was unreasonable or in bad faith." According

to the judge,

            the record demonstrates that the [b]oard acted with
            good faith in investigating the merits of the claims and
            rejecting [p]laintiff's demand. In response to the
            demands which preceded [p]laintiff's, the [b]oard
            retained . . . Eakeley to conduct an independent
            investigation and generate a report on the facts and
            circumstances regarding the shareholders' allegations
            to the [b]oard. . . . Eakeley's investigation lasted over
            two years. . . . Eakeley focused his investigation on the
            allegations of false and misleading promotion by
            Janssen and its opioid prescription medications. The
            investigation consisted of reviewing more than 5.5
            million pages of documents ranging from [b]oard
            materials to marketing documents relating to J&J's
            opioid products, to relevant policies, procedures, and
            compliance documents, to communications with

                                                                           A-2908-21
                                        14
            regulators, and other materials. . . . Eakeley's team also
            reviewed pleadings, motions, briefs, deposition and
            trial transcripts and exhibits, expert reports, and other
            materials from the [o]pioid [l]itigation. . . . Eakeley
            also interviewed key individuals, including current and
            former J&J directors, officers, and employees.
            Following the investigation, . . . Eakeley wrote a 100-
            page [r]eport detailing the scope and procedures of the
            investigations, as well as the legal analysis and
            recommendations.

                  The [c]ourt finds and believes that the procedures
            taken by . . . Eakeley . . . demonstrate that the [b]oard
            made a reasonable inquiry into . . . [p]laintiff's
            demands.

      In rejecting plaintiff's challenge to Eakeley's independence, the judge

applied the governing principles and determined plaintiff's arguments "f[e]ll far

short" of the requisite standard because "J&J was not a significant client of

Lowenstein Sandler or . . . Eakeley when . . . Eakeley undertook his

investigation." The judge explained:

            Eakeley's last work involving J&J was in 2013,
            when . . . Eakeley served a limited role as local counsel
            in two cases for a J&J subsidiary. Between January
            2016 and November 2020, excluding revenues received
            in connection with [plaintiff's] derivative litigation,
            J&J made up only 0.08[ percent] of Lowenstein
            Sandler's overall [revenue], and between 2012 and 2015
            only 0.41[ percent] or less. Lowenstein Sandler is not
            within the top 175 outside law firms that J&J has paid
            since 2004. Plaintiff's claim that . . . Eakeley was "lead
            counsel" for J&J in several federal district court cases
            is also unavailing. Plaintiff makes this claim on the

                                                                           A-2908-21
                                       15
            basis that . . . Eakeley is listed as "lead counsel" on the
            docket for a number of these cases. The district court
            lists . . . Eakeley as "lead counsel" because he was the
            lead local counsel for these cases, not the overall lead
            counsel. In fact, these cases generated income for
            Lowenstein         Sandler       representing     between
            0.03[ percent] and 0.41[ percent] of its yearly revenue.
            Further, . . . Eakeley is of counsel at Lowenstein
            Sandler, meaning he is an independent contractor of the
            firm and does not receive a salary or benefits and does
            not share in the firm's profits. . . . Eakeley's primary
            employment is as a law professor at Rutgers Law
            School.

            . . . Simply put, [p]laintiff's allegations that Lowenstein
            Sandler and . . . Eakeley were dependent on J&J
            contradict the facts and do not allow [p]laintiff to meet
            his burden of proving an unreasonable or bad faith
            inquiry.

      In this ensuing appeal, plaintiff raises the following points for our

consideration:

            POINT I

            EAKELEY LACKED INDEPENDENCE AND THE
            BOARD LACKED ANY REASONABLE BASIS TO
            RELY ON HIM TO CONDUCT AN OBJECTIVE
            INVESTIGATION IN[]TO ALLEGATIONS OF
            ILLEGAL OPIOIDS MARKETING.

            POINT II

            THE BOARD'S INQUIRY WAS UNREASONABLE
            AND THE COURT'S ANALYSIS WAS INCORRECT
            BECAUSE THEY BOTH ADDRESSED ONLY
            POTENTIAL OVERSIGHT CLAIMS.

                                                                          A-2908-21
                                       16
            POINT III

            THE BOARD'S INQUIRY WAS UNREASONABLE
            BECAUSE THE BOARD FAILED TO PARTICIPATE
            AT ALL IN EAKELEY'S INVESTIGATION.

                                       III.

      We review "de novo the trial court's determination of [a] motion to dismiss

under Rule 4:6-2(e)" and we owe "no deference to the trial court's legal

conclusions." Dimitrakopoulos v. Borrus, Goldin, Foley, Vignuolo, Hyman &

Stahl, P.C., 237 N.J. 91, 108 (2019). On a motion to dismiss, a plaintiff need

not prove the case, but need only "make allegations which, if proven, would

constitute a valid cause of action." Kieffer v. High Point Ins. Co., 422 N.J.

Super. 38, 43 (App. Div. 2011) (quoting Leon v. Rite Aid Corp., 340 N.J. Super.

462, 472 (App. Div. 2001)). Only where "even a generous reading of the

allegations does not reveal a legal basis for recovery" should the motion be

granted. Ibid. (quoting Edwards v. Prudential Prop. & Cas. Co., 357 N.J. Super.

196, 202 (App. Div. 2003)).

      When evaluating whether a corporation's board of directors acted in good

faith and with reasonable care in investigating the merits of a shareholder's

derivative claim, "the court's inquiry is not into the substantive decision of the

board, but rather . . . into the procedures employed by the board in making its

                                                                            A-2908-21
                                       17
determination."   In re PSE & G S'holder Litig., 173 N.J. 258, 291 (2002)

(internal quotation marks omitted).

            In that regard, there is "no prescribed procedure that a
            board must follow." Nonetheless, the process should
            be such that a reviewing court can look to it and
            conclude confidently that it reflects a corporation's
            earnest attempt to investigate a shareholder's
            complaint. Stated differently, the inquiry is whether the
            "investigation has been so restricted in scope, so
            shallow in execution, or otherwise so pro forma or half
            hearted as to constitute a pretext or a sham[.]"

            [Id. at 291-92 (alteration in original) (citations omitted)
            (first quoting Levine v. Smith, 591 A.2d 194, 214 (Del.
            1991), overruled on other grounds, Brehm v. Eisner,
            746 A.2d 244 (Del. 2000); and then quoting Stoner v.
            Walsh, 772 F. Supp. 790, 806 (S.D.N.Y. 1991)).]

      "One of a board's prerogatives in this context is 'to entrust its investigation

to a law firm[.]'" Id. at 292 (alteration in original) (quoting Stepak v. Addison,

20 F.3d 398, 405 (11th Cir. 1994)); see also 2 Principles of Corp. Governance §

7.09(a)(2) (1994) (instructing that shareholder demands should be considered

by board of directors with assistance of counsel "of its choice"). Where the

board retains counsel of its choice to conduct such an investigation, "the critical

question is whether [the board] demonstrated bad faith or acted unreasonably in

relying on that firm's investigation." PSE & G, 173 N.J. at 292-93.

                                                                               A-2908-21
                                        18
      Our courts look to Delaware law for guidance in assessing director

liability in shareholder derivative suits alleging wrongdoing on the part of the

board of directors. Cain v. Merck & Co., 415 N.J. Super. 319, 332 (App. Div.

2010) (citing Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383, 398

(1999)). Such disputes typically fall into two categories: (1) liability on the

board resulting from a decision that results in a loss to the corporation "because

that decision was ill[-]advised or 'negligent'"; or (2) liability for a loss that

resulted from "an unconsidered failure of the board to act in circumstances in

which due attention would, arguably, have prevented the loss." In re Caremark

Int'l, Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996) (emphasis

omitted).

      In the former class of cases, also known as direct liability cases, "director

action is analyzed under the business judgment rule, which prevents judicial

second guessing of the decision if the directors employed a rational process and

considered all material information reasonably available—a standard measured

by concepts of gross negligence." In re Citigroup Inc. S'holder Derivative Litig.,

964 A.2d 106, 122 (Del. Ch. 2009); see also Seidman v. Clifton Sav. Bank,

S.L.A., 205 N.J. 150, 177 (2011) (explaining that the presumption of validity

applicable under the business judgment rule can only "be rebutted . . . if the

                                                                             A-2908-21
                                       19
challenged corporate actions are so far from the norm of responsible corporate

behavior as to be unconscionable or constitute a fraud, impermissible self-

dealing or corporate waste").

      In the latter group—oversight cases, also known as Caremark claims—a

plaintiff is required to show:

            (a) the directors utterly failed to implement any
            reporting or information system or controls; or (b)
            having implemented such a system or controls,
            consciously failed to monitor or oversee its operations
            thus disabling themselves from being informed of risks
            or problems requiring their attention. In either case,
            imposition of liability requires a showing that the
            directors knew that they were not discharging their
            fiduciary obligations. Where directors fail to act in the
            face of a known duty to act, thereby demonstrating a
            conscious disregard for their responsibilities, they
            breach their duty of loyalty by failing to discharge that
            fiduciary obligation in good faith.

            [In re Citigroup, 964 A.2d at 123 (emphasis omitted)
            (quoting Stone v. Ritter, 911 A.2d 362, 370 (Del.
            2006)).]

"[I]ndeed, a showing of bad faith is a necessary condition to director oversight

liability." Ibid. (emphasis omitted). Still, "directors' good faith exercise of

oversight responsibility may not invariably prevent employees from violating

criminal laws, or from causing the corporation to incur significant financial

liability, or both." Stone, 911 A.2d at 373.

                                                                          A-2908-21
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      Applying these principles, we affirm substantially for the reasons

expressed in the judge's well-reasoned January 30, 2022, written decisions. We

are satisfied plaintiff failed to demonstrate the board did not conduct a good

faith or reasonable inquiry into his allegations in accordance with the NJBCA.

On the contrary, we conclude with confidence that the investigation "reflects a

corporation's earnest attempt to investigate a shareholder's complaint." PSE &

G, 173 N.J. at 292.

      Like the judge, we reject plaintiff's argument that the board's lack of good

faith and due care is evident in its selection of Eakeley to investigate the

allegations because Eakeley lacked independence given Eakeley's and

Lowenstein's "[thirty]-year history of defending J&J and its corporate interests."

In the absence of a disabling conflict of interest, there is no requirement that the

attorney retained to investigate a litigation demand have no prior relationship

with the company or the targets of the investigation. See PSE & G, 173 N.J. at

292-93 (noting that "a disabling conflict" would taint the investigation and

pointing out that although the investigating firm "needlessly risked creating a

conflict by briefly assuming a dual role as the Board's investigator and litigation

counsel," the Board did not demonstrate bad faith or act unreasonably "in relying

on th[e] firm's investigation"); Stepak, 20 F.3d at 400 (reversing dismissal of

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                                        21
shareholder derivative suit where "the Board's investigation and consideration

of the [shareholder's] demand was dominated by a law firm that had represented

the alleged wrongdoers in criminal proceedings involving the very subject

matter of the demand").

      Indeed, "[e]ven though [the investigating attorney] might have previously

represented [the company] and previously recommended rejection of

shareholder demands, that does not establish sufficient bias or lack of

independence to make [his or her] selection unreasonable." Levine v. Liveris,

216 F. Supp. 3d 794, 810 (E.D. Mich. 2016). Further, where, as here, the

plaintiff alleges no ties between the attorney and the individual directors and no

involvement by the attorney with any of the challenged conduct, and "has

offered only general, conclusory allegations regarding the process by which [the

investigating attorney] was selected[,]" then the plaintiff "has not rebutted the

presumption that [the investigating attorney] was retained in good faith and after

a reasonable investigation." Ibid. Moreover, as the judge pointed out, plaintiff

overstated the nature and extent of Eakeley's and Lowenstein's prior history

representing J&J.

      We also reject plaintiff's contention that the board unreasonably selected

Eakeley given "Eakeley's obvious and abject failure[] in the Risperdal

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                                       22
investigation." By way of background, in 2010 and 2011, Eakeley was retained

by a Special Committee of the J&J board to investigate shareholder demands

and derivative complaints alleging, among other things, that J&J's subsidiary

Janssen had engaged in off-label promotion of the antipsychotic drug Risperdal.

After a year-long investigation, that included interviewing Alex Gorsky, the

then Vice Chairman of the J&J Executive Committee, Eakeley issued a report

presenting his findings and recommendations.

      Although the report concluded "that Janssen did not intentionally promote

Risperdal for off-label usage," and recommended rejecting the shareholder

demands, the report discussed, among other things, the then-pending

Department of Justice investigation into Janssen's "alleged off-label promotion

of Risperdal" and explicitly recognized that "a sizeable settlement" was

possible.   Subsequently, as predicted in the report, the related shareholder

derivative litigation settled.     Although the stipulation of settlement

acknowledged Eakeley's investigation, none of the objections to the settlement

ever challenged the independence of the investigation.      Moreover, a prior

recommendation to reject shareholder demands does not disqualify an attorney.

See Levine, 216 F. Supp. 3d at 810.

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                                      23
      Likewise, we reject plaintiff's assertion that the board's reliance on the

report was unreasonable because Eakeley did not investigate claims of "direct

violations" in the illegal marketing campaign by J&J directors and officers,

"only potential claims involving directors' oversight duties."          However,

plaintiff's conclusory allegations neither identified any specific J&J board

member or officer nor pled with particularity any claim of direct wrongdoing by

a director or officer in the marketing of opioid products.3 Nevertheless, Eakeley,

in fact, investigated allegations of direct wrongdoing in relation to the improper

marketing of opioids at J&J.

      Equally unavailing is plaintiff's contention that the board abdicated its

responsibility to investigate plaintiff's allegations       by abandoning its

responsibility to oversee and direct the investigation. The board was entitled to

3
   On appeal, plaintiff argues that "the [d]emand detailed direct wrongdoing by
Gorsky and the [b]oard's direct participation by promoting Gorsky and thereby
approving his actions." According to the demand and the complaint, Gorsky
"was in charge of Janssen during its illegal Risperdal marketing campaign" and
"the [b]oard ratified his misconduct" by appointing him CEO on February 21,
2012, exposing the company to liability. Defendants counter that "eight of the
twelve [d]irectors" who voted "to reject [p]laintiff's [d]emand in 2020 were not
even on the [b]oard" when Gorsky was appointed CEO in 2012. Regardless,
these are still oversight claims. See, e.g., South v. Baker, 62 A.3d 1, 14 (Del.
Ch. Ct. 2012) ("A Caremark claim contends that the directors set in motion or
'allowed a situation to develop and continue which exposed the corporation to
enormous legal liability and that in doing so they violated a duty to be active
monitors of corporate performance.'" (quoting Caremark, 698 A.2d at 967)).
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                                       24
retain independent counsel of its choice to conduct the investigation, and

nothing about Eakeley's process, or his legal or factual analysis, was so deficient

that the board's reliance on his comprehensive investigation and exhaustive

report was unreasonable.     See PSE & G, 173 N.J. at 294 ("Based on the

procedures employed and the seriousness by which the [investigating law firm]

approached its task, we are satisfied that defendants have satisfied their burden

of demonstrating that they acted in good faith and with due care in evaluating

the litigation."); Lowinger v. Oberhelman, 924 F.3d 360, 369 (7th Cir. 2019)

("[N]othing about [the investigating attorney's] process, or its legal or factual

analysis, was so egregiously deficient that the Board was grossly negligent to

rely on it.").

       Affirmed.

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