Court Opinion

ID: 9349639
Source: CourtListenerOpinion
Date Created: 2022-12-22 17:02:21.992061+00
Date Added: 2024-06-11T16:46:48.236045
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

LEBANON COUNTY EMPLOYEES’         )
RETIREMENT FUND and TEAMSTERS     )
LOCAL 443 HEALTH SERVICES &       )
INSURANCE PLAN,                   )
                                  )
            Plaintiffs,           )
                                  )
      v.                          )                C.A. No. 2021-1118-JTL
                                  )
STEVEN H. COLLIS, RICHARD W.      )
GOCHNAUER, LON R. GREENBERG, JANE )
E. HENNEY, KATHLEEN W. HYLE,      )
MICHAEL J. LONG, HENRY W. MCGEE,  )
ORNELLA BARRA, D. MARK DURCAN,    )
and CHRIS ZIMMERMAN,              )
                                  )
            Defendants,           )
                                  )
      and                         )
                                  )
AMERISOURCEBERGEN CORPORATION, )
                                  )
            Nominal Defendant.    )

                           MEMORANDUM OPINION

                        Date Submitted: September 23, 2022
                         Date Decided: December 22, 2022

Samuel L. Closic, Eric J. Juray, Robert B. Lackey, PRICKETT, JONES & ELLIOTT, P.A.,
Wilmington, Delaware; Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER &
GROSSMANN LLP, Wilmington, Delaware; Lee D. Rudy, Eric L. Zagar, KESSLER
TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Jeroen van Kwawegen, Eric
J. Riedel, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New
York; Frank R. Schirripa, Daniel B. Rehns, Kurt Hunciker, Hillary Nappi, HACH ROSE
SCHIRRIPA & CHEVERIE LLP, New York, New York; Gregory Mark Nespole, Daniel
Tepper, LEVI & KORSINSKY, LLP, New York, New York; Brian J. Robbins, Craig W.
Smith, ROBBINS LLP, San Diego, California; Counsel for Plaintiffs.

Stephen C. Norman, Jennifer C. Wasson, Tyler J. Leavengood, POTTER ANDERSON &
CORROON LLP, Wilmington, Delaware; Michael S. Doluisio, Carla Graff, DECHERT
LLP, Philadelphia, Pennsylvania; Matthew L. Larrabee, Hayoung Park, DECHERT LLP,
New York, New York; Michael D. Blanchard, Amelia Pennington, MORGAN, LEWIS &
BOCKIUS LLP, Boston, Massachusetts; Counsel for Defendants.

LASTER, V.C.
       Over the past two decades, an opioid epidemic has devastated America. Much of it

has been driven by prescription opioids. As one of three major wholesale distributors of

prescription opioids in the United States, nominal defendant AmerisourceBergen

Corporation (“AmerisourceBergen” or the “Company”) has faced a barrage of lawsuits

over its alleged role as a contributor to the opioid epidemic. In 2021, AmerisourceBergen

agreed to pay over $6 billion as part of a nationwide settlement to resolve multidistrict

litigation brought against the Company and the other major opioid distributors (the “2021

Settlement”). AmerisourceBergen has paid hundreds of millions to settle other lawsuits

and has incurred over $1 billion in defense costs. Those financial figures do not attempt to

quantify the reputational harm that the Company has suffered, nor the damage from lost

opportunities or management distraction. Those harms obviously pale in comparison to the

human toll of the opioid epidemic.

       The plaintiffs own stock in AmerisourceBergen. They seek to shift the responsibility

for the harms that AmerisourceBergen has suffered to the individuals who they believe

caused the Company to suffer harm. They contend that the Company’s officers and

directors breached their fiduciary duties to the Company and should be held personally

liable for the consequences of their actions.

       The plaintiffs advance two theories of breach. Their first theory relies on the settled

principle that corporate fiduciaries cannot consciously ignore evidence indicating that the

corporation is suffering or will suffer harm. Most plainly, corporate fiduciaries cannot

knowingly ignore red flags evidencing legal non-compliance. This type of theory is

sometimes called a prong-two Caremark claim. Taking a functional approach, Chancellor
McCormick has helpfully referred to this type of claim as a “Red-Flags Theory” or a “Red-

Flags Claim.” City of Detroit Police & Fire Ret. Sys. v. Hamrock, 2022 WL 2387653, at

*17 (Del. Ch. June 30, 2022).

       For their Red-Flags Theory, the plaintiffs start from the proposition that as a

distributor of opioids, AmerisourceBergen was obligated to comply with extensive

regulatory frameworks imposed by federal and state law. The federal regulatory

frameworks require that a distributor report any suspicious orders to the federal Drug

Enforcement Agency (the “DEA”). A distributor must either not fill a suspicious order or

first conduct due diligence sufficient to ensure that the order will not be diverted into

improper channels.

       The plaintiffs contend that as the Company’s legal troubles grew, its officers and

directors were confronted with a steady stream of red flags indicating that the Company

was not complying with its anti-diversion obligations. Those red flags took the form of

congressional investigations, subpoenas from prosecutors, lawsuits by state attorneys

general, and an eventual torrent of civil lawsuits. Meanwhile, as the opioid epidemic raged,

the Company continued to report suspicious orders at incomprehensibly low rates. The

plaintiffs contend that based on those red flags, the defendants knew that the Company was

violating its opioid diversion obligations and needed to implement stronger systems of

oversight. Yet the Company’s officers and directors consciously ignored the red flags and

did not take any meaningful action until the 2021 Settlement.

       For their second theory, the plaintiffs invoke the admonition that “Delaware law

does not charter law breakers.” In re Massey Energy Co., 2011 WL 2176479, *20 (Del.

                                             2
Ch. May 31, 2011). “As a result, a fiduciary of a Delaware corporation cannot be loyal to

a Delaware corporation by knowingly causing it to seek profit by violating the law.” Id.

Chancellor McCormick has helpfully described this type of theory as a “Massey Theory”

or a “Massey Claim.” Hamrock, 2022 WL 2387653, at *17.

       For their Massey Claim, the plaintiffs seek an inference that the Company’s officers

and directors took a series of acts which, when viewed together, support a pleading-stage

inference that they knowingly pursued a business plan that prioritized profits over

compliance. The plaintiffs allege that between 2010 and 2015, the Company’s officers and

directors aggressively expanded the Company’s distribution networks without devoting

comparable resources to anti-diversion control. As the decisive evidence of this strategy,

they point to the 2015 implementation of a revised order monitoring program (the “Revised

OMP”), which management and the directors knew was designed to tank the rate of

suspicious order reporting and evade the federal anti-diversion frameworks. The

Company’s officers and directors then maintained their illegal business strategy through

the 2021 Settlement.

       The defendants have moved to dismiss the plaintiffs’ claims for failing to support

an inference of demand futility. The plaintiffs argue that the demand is futile because their

claims present facts supporting a reasonable inference that at least half of the directors in

office when the lawsuit was filed face a substantial threat of liability.

       Standing alone, the avalanche of investigations and lawsuits without any apparent

response until the 2021 Settlement would support a well-pled Red-Flags Claim. Likewise,

the series of decisions that culminated in the Revised OMP, along with the decision to keep

                                              3
that framework in place until the 2021 Settlement, would support a well-pled Massey

Claim.

         The defendants maintain that the documents they produced after a hard-fought

books-and-records action, and which the complaint incorporates by reference, reveal that

the board adopted the Revised OMP on the advice of management. The documents also

show that in 2017, the board received a presentation on the Company’s anti-diversion

controls. In 2018, the Audit Committee conducted its first-ever review of the Company’s

anti-diversion controls. And in 2019, the Audit Committee conducted a similar review. The

defendants say those actions foreclose any reasonable inference of wrongdoing, whether

framed as a Red-Flags Theory or a Massey Theory.

         If that were the sum of the matter, then the pleading-stage record would support two

competing inferences. The plaintiff-friendly inference is that the defendants knew that

AmerisourceBergen was reporting astoundingly low levels of suspicious orders,

understood that was the whole purpose of the Revised OMP, and went through the motions

of providing oversight, while consciously deciding not to take any action until the 2021

Settlement so that they could use changes to the Revised OMP and their oversight policies

as part of the settlement currently. The defendant-friendly inference is that the defendants

were doing their jobs, believed that the Revised OMP complied with applicable law, and

did not take any action because they did not believe they were doing anything wrong. At

the pleading stage, the court must adopt the plaintiff-friendly inference, so the complaint

would survive the motion to dismiss.

                                              4
       But there is a final factor that fatally undermines the complaint. In 2022, the United

States District Court for the Southern District of West Virginia (the “West Virginia Court”)

issued a post-trial decision in which the City of Huntington and the Cabell County

Commission asserted that AmerisourceBergen and the other major opioid distributors had

failed to comply with their anti-diversion obligations, thereby fueling the opioid epidemic

in those localities. After a two-month trial, during which seventy witnesses testified either

live or by deposition, the court rejected the plaintiffs’ theory and found that the defendants

had not violated their anti-diversion obligations. The court expressly found that

AmerisourceBergen had complied with its anti-diversion obligations.

       Although the federal court’s findings are not preclusive, they are persuasive. Both

the Red-Flags Theory and the Massey Theory depend on an inference that the officers and

directors knowingly failed to cause the Company to comply with its anti-diversion

obligations, either because they consciously ignored red flags that put them on notice of

violations or because they intentionally adopted a business plan that prioritized profits over

compliance. In light of the West Virginia Court’s thorough analysis, it is not possible to

infer that the Company failed to comply with its anti-diversion obligations, nor is it possible

to infer that a majority of the directors who were in office when the complaint was filed

face a substantial likelihood of liability on the plaintiffs’ claims. Demand is therefore not

futile, and the plaintiffs lack standing to assert their claims on the Company’s behalf.

                           I.      FACTUAL BACKGROUND

       The facts are drawn from the complaint and the documents that the complaint

incorporated by reference. Before filing this lawsuit, the plaintiffs spent two years litigating

                                               5
a books-and-records action in which AmerisourceBergen raised a host of defenses,

including arguments that sought to defend preemptively against the merits of an eventual

derivative action. The plaintiffs prevailed at the trial level and on appeal. See Lebanon

Cnty. Empls.’ Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752 (Del. Ch. Jan. 13,

2020), aff’d, 243 A.3d 417 (Del. 2020). After that hard-fought and resource-intensive

victory, the plaintiffs obtained books and records under the terms of a confidentiality order,

which provided that if the plaintiffs relied on the documents in a future action, then all of

the documents “will be deemed incorporated by reference in any complaint subject to the

conditions set forth in Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016),

subject to Delaware law.” C.A. No. 2019-0527-JTL, Dkt. 64 ¶ 9 (Del. Ch. May 8, 2020).

       Relying on the incorporation-by-reference condition, the defendants submitted

sixty-one exhibits in support of their opening brief, plus another seven exhibits in support

of their reply brief. The defendants ask the court to consider the sixty-eight exhibits when

evaluating the allegations of the complaint.1

       The incorporation-by-reference doctrine does not enable a court to weigh evidence

on a motion to dismiss. It permits a court to review the actual documents to ensure that the

plaintiff has not misrepresented their contents and that any inference the plaintiff seeks to

       1
         Citations in the form “Ex. — at —” refer to exhibits that the defendants submitted.
Page citations refer to the internal pagination or, if there is none, then to the last three digits
of the control number. Citations in the form “Compl. ¶ ___” refer to the paragraphs of the
complaint.

                                                6
have drawn is a reasonable one.2 The doctrine limits the ability of a plaintiff to take

language out of context, because the defendants can point the court to the entire document.

But the doctrine does not change the pleading standard that governs a motion to dismiss.

If there are factual conflicts in the documents or the circumstances support competing

interpretations, and if the plaintiff had made a well-pled factual allegation, then the court

must credit the allegation. See Savor, Inc. v. FMR Corp., 812 A.2d 894, 896 (Del. 2002).

The plaintiff also remains entitled to “all reasonable inferences.” Id. at 897. Consequently,

if a document supports more than one possible inference, and if the inference that the

plaintiff seeks is reasonable, then the plaintiff receives the inference. Id.

       At this stage of the proceeding, the well-pled allegations of the complaint are

deemed to be true. The plaintiff is entitled to all reasonable inferences that the well-pled

allegations support. To the extent that factual allegations or documents incorporated by

reference support competing inferences, the plaintiffs are entitled at this stage to the

inference that favors their claims.

       The factual background for this decision emphasizes the facts pertinent to the

demand futility analysis. The factual background therefore de-emphasizes or omits certain

facts that figured into the court’s analysis of the defendants’ timeliness defense.

       2
        See In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169–70 (Del. 2006);
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 70 (Del. 1995); In re Gardner
Denver, Inc., 2014 WL 715705, at *2 & n.17 (Del. Ch. Feb. 21, 2014).

                                               7
A.     AmerisourceBergen’s Legal Obligations As An Opioid Distributor

       In the United States, AmerisourceBergen is one of the “Big Three” wholesale

distributors of pharmaceutical products, along with Cardinal Health, Inc. and McKesson

Corporation.3 AmerisourceBergen and McKesson each control approximately one-third of

the market, and Cardinal Health controls another fifth.

       As an opioid distributor, AmerisourceBergen serves as a middleman between the

companies who manufacture opioids and the pharmacies that fill prescriptions. When

acting as a distributor, AmerisourceBergen must comply with the Comprehensive Drug

Abuse Prevention and Control Act of 1970 and its implementing regulations (collectively,

the “Controlled Substances Act”). To obtain and maintain a license to distribute opioids, a

company must maintain “effective controls against diversion of [opioids] into other than

legitimate medical, scientific, research, and industrial channels.” 21 U.S.C. § 823(b)(1). A

distributor must also “design and operate a system to disclose to the registrant suspicious

orders of [opioids].” 21 C.F.R. § 1301.74(b). “Suspicious orders include orders of unusual

       3
         The Company has conducted its pharmaceutical distribution business through two
subsidiaries: AmerisourceBergen Drug Corporation (the “Drug Company”) and
AmerisourceBergen Specialty Group, LLC (the “Specialty Group”). The Drug Company
distributed healthcare products and supplies, including opioids, and provided pharmacy
management and other consulting services to institutional healthcare providers such as
hospitals and retail pharmacies. The Specialty Group served the specialty pharmaceuticals
market, focusing on products involving biotechnology, blood plasma, and oncology. The
Specialty Group also provided pharmaceutical distribution and related services to
physicians and institutional healthcare providers. While important for many reasons, the
distinctions between AmerisourceBergen and its subsidiaries are not relevant to this
decision, which refers only to AmerisourceBergen.

                                             8
size, orders deviating substantially from a normal pattern, and orders of unusual

frequency.” Id.

       A distributor must report suspicious orders to the DEA. Once a distributor has

reported a suspicious order, it must either (i) decline to ship the order or (ii) ship the order

only after conducting due diligence and determining that the order is not likely to be

diverted into illegal channels. See Masters Pharm., Inc. v. Drug Enf’t Admin., 861 F.3d

206, 212–13 (D.C. Cir. 2017). The DEA can suspend or revoke the license of any

distributor that fails to maintain controls or respond appropriately to suspicious orders.

See 21 U.S.C. § 824.

       The DEA may determine that substantial compliance with the order-diversion

requirements is sufficient. 21 C.F.R. § 1301.71(b). “A registrant’s regulatory obligations

. . . do not require strict compliance. Only substantial compliance is required.” In re Nat’l

Prescription Opiate Litig., 2021 WL 3917174, at *3 (N.D. Ohio Sept. 1, 2021).

B.     The Ongoing Opioid Crisis

       The United States remains mired in an opioid epidemic that has spanned more than

two decades, killed hundreds of thousands of Americans, and affected the lives of millions

more. In the late 1990s, the pharmaceutical industry made a massive push to increase the

use of prescription opioids to treat pain management. Manufacturers made new

formulations of extended-release opioids, which they marketed as non-addictive and

superior to existing pain management options. Doctors responded by writing more

prescriptions for opioids, often without appreciating or advising patients about the risk of

addiction.

                                               9
       A vicious cycle developed in which increasing levels of opioid abuse generated

greater demand for opioids. Between 1999 and 2014, the sale of prescription opioids in the

United States nearly quadrupled. The medications proved far more addictive and dangerous

than the pharmaceutical industry led the nation to believe, and the expanded use of the

medications resulted in widespread misuse. As many as 29% of the patients who were

prescribed opioids for chronic pain misused them, and as many as 12% developed an

opioid-use disorder.

       The increased abuse of opioids had tragic consequences. The Centers for Disease

Control and Prevention reported that there had been nearly 218,000 overdose deaths related

to prescription opioids between 1999 and 2017. Between 2000 and 2015, the rate of opioid

overdose deaths in the United States more than tripled. The number of opioid-related deaths

reached 69,710 in 2020, and opioid overdoses comprised the vast majority of drug

overdoses in the country.

       To help fight the epidemic, the DEA increased its scrutiny of distributors.

AmerisourceBergen and its competitors supplied drugs to pharmacies using “just-in-time”

delivery. That meant that most pharmacies received drug deliveries every day—sometimes

multiple times a day. Because deliveries were so frequent, the distributors knew exactly

how many opioid pills they were delivering to each pharmacy. The distributors thus were

uniquely positioned to assess whether pharmacies were facilitating the diversion of

prescription opioids.

                                            10
C.     The Independent Pharmacy Strategy

       After some run-ins with the DEA over poor anti-diversion controls in 2007,

AmerisourceBergen worked with the DEA to establish an industry-standard order

monitoring program (the “2007 OMP”). As part of that process, AmerisourceBergen

engaged Davis Polk & Wardwell LLP to assess the Company’s compliance program. Ex. 45

at ’664. In August 2010, the Audit Committee reviewed Davis Polk’s report, which concluded

that the Company’s compliance program “was functioning effectively,” although the firm

“made [a] few process improvement suggestions that were implemented, including better

tracking of compliance issues.” Id.

       The complaint depicts 2010 as the high-water mark for AmerisourceBergen’s anti-

diversion compliance. The plaintiffs allege that in early 2010, management received the

go-ahead from the board to maximize the value that the Company could extract from the

independent pharmacy market (the “Independent Pharmacy Strategy”). Independent

pharmacies offered a significant source of profits because they had less market power than

chain pharmacies and therefore could not bargain as effectively for lower prices. Their

smaller size also meant that they had fewer resources to devote to monitoring suspicious

orders and could more easily become pill mills.

       During 2011, management continued to pursue the Independent Pharmacy Strategy.

Management focused on improving the efficiency of the Company’s sales force and

expanding the number of independent pharmacies that the Company served. The strategy

worked, with sales to independent pharmacies increasing year-over-year by 11.7%.

                                           11
       Management and the directors did not devote similar resources to improving the

Company’s anti-diversion efforts. Instead, management emphasized cost control, expense

reductions, and efficiency gains.

       At the time, Chris Zimmerman was in charge of diversion control. On April 22,

2011, he sent an email to the five senior members of the diversion control team that

contained a set of lyrics for a song titled “Pillbillies,” a parody of the theme song for The

Beverly Hillbillies. The parody described opioid addicts visiting Florida pain clinics to buy

“Hillbilly Heroin.” Another email that circulated among the senior compliance staff

included the lyrics for the song “OxyContinVille,” a parody of Jimmy Buffet’s

“Margaritaville,” which described addicts driving from Kentucky to Florida “Lookin’ for

pill mills.” On May 6, 2011, Zimmerman emailed the diversion control leadership team

about recently enacted Florida legislation that was designed to crack down on pill mills.

He offered the following prediction: “Watch out Georgia and Alabama, there will be a

mass exodus of Pillbillies heading north.” Compl. ¶ 110.

       In March 2012, Zimmerman was promoted to the positions of Chief Compliance

Officer and Senior Vice President in charge of Corporate Securities and Regulatory Affairs

(“Regulatory Affairs”), a position he held until October 2018. During that period,

Zimmerman and his division were responsible for overseeing the Company’s order

monitoring program and anti-diversion efforts. Zimmerman personally was responsible for

bringing issues to the attention of the Audit Committee.

       Zimmerman’s communications with his team support a pleading-stage inference

that he was not a suitable individual to hold these critical positions. But the complaint does

                                             12
not support an inference that the directors knew about Zimmerman’s callous and

inappropriate communications with his team.

       In early 2012, management reported to the board that the DEA had suspended

Cardinal Health’s controlled substances license for a distribution facility in Lakeland,

Florida based on its dealings with four independent pharmacies. In the face of the DEA’s

enforcement actions, management doubled down on the Independent Pharmacy Strategy

and sought to further increase AmerisourceBergen’s market share by offering “a ‘light

touch’ franchise model” and “friendly landings” for pharmacies looking to transfer

ownership. Id. ¶ 119. The model amounted to the easy onboarding for new independent

pharmacies and minimal compliance-related diligence by AmerisourceBergen.

       Two months after reporting on the DEA’s enforcement action against Cardinal

Health, management reported that the Company had received subpoenas from the DEA

and the United States Attorney’s Office for the District of New Jersey that sought

documents concerning the Company’s order monitoring program. In June 2012, the

Attorney General of West Virginia named AmerisourceBergen as a defendant in a lawsuit

that alleged violations of state law related to the distribution of opioids. By August 2012,

the Company considered regulatory compliance to be the number two risk factor facing the

drug distribution business for the 2013 fiscal year. Ex. 47 at ’464.

       In November 2012, the Audit Committee received a report on the Company’s

regulatory compliance efforts, including its anti-diversion controls. The report informed

the committee members that AmerisourceBergen’s levels of suspicious order reporting

were extremely low:

                                             13
                          AmerisourceBergen Averaged 215,000,000
                                Line Orders from 2009-2012
                                     Suspicious Orders Reported

                   2009                  0.000864% [1,858]

                   2010                  0.001085% [2,322]

                   2011                  0.001870% [4,020]

                   2012                  0.002564% [5,512]

       The committee also learned that the Company was expending far fewer resources

on compliance than peer companies. Its staff of fourteen internal audit personnel was less

than one-third the average of forty-six internal audit staff at other Fortune 500 companies.

AmerisourceBergen’s internal audit expenditure of $1.85 million compared similarly to the

$7.1 million average at other Fortune 500 companies.

D.     The Walgreens Alliance

       During 2013, management sought to increase the Company’s sales further through

an alliance with Walgreens. AmerisourceBergen estimated that the alliance would increase

its orders for controlled substances by 213%. By increasing order flow, the alliance would

increase the risk of order diversion. Not only that, but Walgreens was already having

problems with the DEA. In June 2013, Walgreens agreed to pay an $80 million fine to the

DEA for allowing opioids to be diverted for misuse.

       Anticipating the significant expansion in its distribution business, management

reported to the board that the diversion control group in Regulatory Affairs would increase

from just five employees to seven, and the investigations group would increase from only

four employees to six. Management thus planned to increase order-diversion resources at
                                            14
a lower rate than sales and in the context of an alliance with a company that had recent

problems with diversion control.

       As 2013 wore on, it became clear that the regulatory and enforcement environment

was intensifying. The DEA and the United States Attorney’s Office for the District of New

Jersey continued their investigations into the Company, and the United States Attorneys

for the District of Kansas and the Northern District of Ohio served subpoenas of their own.

During its meeting in October 2014, the Audit Committee learned that the United States

Attorney’s Office for the District of New Jersey had subpoenaed the Company’s outside

auditor as part of its grand jury investigation. Board minutes throughout 2014 contain

references to reports on the Company’s order monitoring program.

E.     The Revised OMP

       In 2015, against a backdrop of increasing legal scrutiny and already low levels of

suspicious order reporting, management and the board implemented the Revised OMP. The

plaintiffs contend that the Revised OMP was plainly intended to reduce the number of

suspicious orders that the Company would report to the DEA. The plaintiffs assert that,

when viewed in conjunction with the Company’s efforts to expand its opioid distribution

business through measures like the Independent Pharmacy Strategy and the Walgreens

alliance, and in the context of intensifying regulatory risk, the adoption of the Revised

OMP evidences a knowing breach of fiduciary duty, in which the directors prioritized

profits over compliance.

       In March 2015, Zimmerman gave a presentation to the Audit Committee about the

Revised OMP. He was assisted by David May, the Director of Diversion Control and

                                            15
Federal Investigations. May had joined AmerisourceBergen in 2014 after working for the

DEA for thirty years.

       The Company was still using the 2007 OMP, which flagged orders using static

thresholds. The Revised OMP added a second test that compared an individual order’s size

against “[d]ynamic thresholds refreshed annually based upon actual consumption data over

the most recent 12-month period.” Compl. ¶ 166. It thus added an additional trigger that

would fail only if a current order was inconsistent with the customer’s recent pattern of

orders. Ultimately, both tests needed to fail for an order to be flagged for investigation.

       As depicted in a Venn diagram presented to the Audit Committee, the double-trigger

would inevitably result in only a small fraction of AmerisourceBergen’s orders being

flagged for investigation:

                                             16
Ex. 39 at 9.

       The Audit Committee reported on this presentation to the full board the next day.

After the board meeting, the Revised OMP went into effect.

       Between 2014 and 2015, the level of suspicious orders that AmerisourceBergen

reported to the DEA declined by 86%, dropping from 14,003 to 1,892. Over the same

period, AmerisourceBergen’s total orders increased by 8.6%, from 20,777,594 to

22,560,562.

       Between 2015 and 2016, the level of suspicious orders that AmerisourceBergen

reported to the DEA declined by another 92%, dropping from 1,892 to 139. Over the same

                                          17
period, AmerisourceBergen’s total orders increased by 6.7%, from 22,560,562 to

24,067,791.

      The following table shows the impact of the Revised OMP.

                   Percentage of Orders Flagged and Reported to the DEA
                                  2013            2014        2015          2016

        Orders Placed           13,580,197    20,777,594    22,560,562    24,067,791

        Orders of Interest          60,499         78,707      83,407        48,888

        Orders Reported             24,103         14,003        1,892             139

        Percent of All Orders
                                   0.445%         0.379%       0.370%        0.203%
        Flagged (derived)

        Percent of All Orders
                                   0.177%         0.067%       0.008%       0.0006%
        Reported (derived)

      The Revised OMP was not the only problem with the order monitoring system. In

August 2015, AmerisourceBergen engaged FTI Consulting, Inc. to conduct a review of

how AmerisourceBergen went about investigating orders of interest. FTI identified a series

of deficiencies, including a lack of resources, a lack of formal training, inconsistent

policies, and communication breakdowns. The report identified the Company’s regulatory

obligations related to diversion control as one of the “Gaps & Risks” that needed to

be addressed.

F.    2017: More Red Flags

      In January 2017, the Audit Committee was informed that AmerisourceBergen had

entered into a $16 million settlement with the State of West Virginia to resolve claims

                                             18
regarding opioid distribution. The Audit Committee was advised that other West Virginia

County Commissions and cities had filed similar complaints. In March 2017, the full board

received an update on the lawsuits that various West Virginia cities and communities had

filed against AmerisourceBergen.

       In May 2017, the Audit Committee received a further report which listed Legal

Contingencies as an “Area of Emphasis.” See Ex. 5, at ’510–14. During the meeting, the

Audit Committee received a presentation from management on the Revised OMP. See Ex.

3 at ’960; Ex. 4 at ’023. Lead director Jane E. Henney asked management to provide “an

in-depth review of the Company’s compliance program” at the board’s meeting in August.

Compl. ¶ 197.

       Also in May 2017, the Energy and Commerce Committee of the United States

House of Representatives (the “House Committee”) opened a bipartisan investigation into

large opioid shipments to small-town pharmacies in West Virginia. Two months later,

United States Senator Claire McCaskill of Missouri, then the Ranking Member of the

Senate Committee on Homeland Security and Governmental Affairs, requested documents

and information related to AmerisourceBergen’s anti-diversion efforts.

       During the board’s meeting in August 2017, Zimmerman and May provided a

presentation that the directors had asked for about the Company’s anti-diversion efforts.

The directors also received sixteen pages of written materials. The presentation described

the Revised OMP and its “Data Driven Risk Adjusted Framework.” Id. ¶ 213. Zimmerman

and May explained that the program established “individual customer order and peer group

parameters relying on widely accepted methodology for identifying statistical outliers.” Id.

                                            19
The presentation noted that orders exceeding the program parameters became “orders of

interest” that were “reviewed and adjudicated by trained personnel,” with the Company

canceling and reporting any orders that were determined to be suspicious. Id. The

presentation added that management was creating a new opioid task force that would focus

on developing “proactive initiatives to address issues surrounding controlled substances.”

Id. ¶ 210.

       The presentation identified a total of eighteen individuals assigned to diversion

control, including a Senior Director of Diversion Control and Federal Investigations, a

Director of Diversion Control, a DEA Consultant, three Regulatory Affairs Investigators,

three Diversion Control Program Specialists, a Diversion Control Analyst, and many

others. The presentation also described a Diversion Control Advisory Committee,

comprising nine senior employees who met quarterly to provide “oversight, guidance and

recommendations for improvement to the Diversion Control Program.” Ex. 41 at 12.

       During the meeting, a compliance employee provided an overview of the seven

elements of an effective compliance program. Zimmerman explained how the Company’s

compliance program satisfied each element. Management also reported that the healthcare

regulatory practice group at Reed Smith LLP had reached the same conclusion while also

recommending improvements to make the program even more robust.

       The plaintiffs point out that whatever the content of the presentation, the reality was

that the Revised OMP was flagging an infinitesimal level of suspicious orders. The

plaintiffs contend that directors operating in good faith, against a backdrop of the opioid

crisis and in the context of heightened levels of regulatory scrutiny, could not have accepted

                                             20
these figures as the legitimate outcomes of a functioning system. The plaintiffs maintain

that the board should have questioned the microscopic levels of suspicious order reporting

and sought to improve the system.

       Instead, the board focused on how to change the public perception of the opioid

crisis and AmerisourceBergen’s role in it. The discussion explored how public relations

efforts could improve the balance of media coverage and how lobbyists could reach

key audiences.

       AmerisourceBergen’s order reporting statistics for 2017 as a whole resembled its

numbers for 2015 and 2016. AmerisourceBergen received 24,319,706 opioid orders. The

Company flagged 87,224 for examination, representing a rate of 0.359%. The Company

determined that only 176 orders were actually suspicious, reflecting a rate of 0.0007% of

total orders and 0.2% of flagged orders.

       During 2017, a consortium of attorneys general from forty-one states requested

documents and information from AmerisourceBergen and other opioid distributors as part

of an investigation into their distribution practices. In December 2017, the Judicial Panel

on Multidistrict Litigation consolidated what was then nearly two hundred pending opioid-

related cases into a multidistrict litigation in the United States District Court of the

Northern District of Ohio (the “Opioid MDL”).

G.     2018: More Red Flags

       In January 2018, after AmerisourceBergen failed to respond to a November 2017

records request, the State of Delaware filed a complaint alleging that AmerisourceBergen

“routinely and continuously violated [Delaware] laws and regulations,” including

                                            21
regulations requiring distributors to reject suspicious orders, conduct due diligence of

customers, and maintain inventory security and control systems to prevent diversion.

Compl. ¶ 250. In February, the Cherokee Nation filed a complaint against

AmerisourceBergen for having fueled the opioid crisis in Oklahoma. By this point,

AmerisourceBergen faced 840 cases in state and federal courts, as well as the investigations

being conducted by the Department of Justice and by the United States Attorneys’ Offices

for New Jersey, New York, Colorado, and West Virginia.

       During a meeting in April 2018, the Audit Committee reviewed an audit of the

Revised OMP, which the minutes described as something that the Audit Committee was

doing “for the first time.” Id. ¶ 221. Management staunchly defended the Revised OMP.

When testifying before the House Committee on May 8, 2018, the Company’s CEO denied

that AmerisourceBergen had contributed to the nation’s opioid epidemic while maintaining

that the Company’s order management program was fully compliant with the law.

       Two months later, in July 2018, Senator McCaskill published a report titled Fueling

an Epidemic, Report Three: A Flood of 1.6 Billion Doses of Opioids into Missouri and the

Need for Stronger DEA Enforcement. The report concluded that AmerisourceBergen,

McKesson, and Cardinal Health consistently failed to meet their reporting obligations

regarding suspicious orders. The report observed that AmerisourceBergen was the most

egregious of the three, and that the Company reported suspicious orders far less frequently

than its competitors. Between 2012 and 2017, AmerisourceBergen shipped approximately

650 million dosage units to Missouri customers and reported only 224 orders as suspicious.

McKesson reported seventy-five times more suspicious orders on similar order volumes.

                                            22
Cardinal Health reported twenty-three times as many suspicious orders on half the

order volume.

       In December 2018, the House Committee released a report titled Red Flags and

Warning Signs Ignored: Opioid Distribution and Enforcement Concerns in West Virginia.

The report found that AmerisourceBergen, McKesson, and Cardinal Health failed to

address suspicious order monitoring in West Virginia. It concluded that beginning in 2013,

AmerisourceBergen’s reporting of suspicious orders declined significantly from a high of

792 orders in 2013 to a low of only three orders in 2016. The report inferred that the trend

for West Virginia reflected a broader nationwide decline, because on a per-capita basis,

West Virginia had the second-highest number of suspicious orders for all states. Stated

differently, in all but one other state, AmerisourceBergen was reporting fewer suspicious

orders on a per-capita basis.

       Like the Senate report, the House report concluded that AmerisourceBergen’s

reporting failures were worse than its competitors. Between 2007 and 2017, McKesson

reported more than 10,000 suspicious orders to the DEA for West Virginia customers.

AmerisourceBergen only reported 2,000 suspicious orders during the same period.

       The House report provided examples of how the Independent Pharmacy Strategy

and its program of “light touch” regulatory oversight operated in practice. For example, in

2011, AmerisourceBergen approved Westside Pharmacy as a new customer despite the fact

that two of the six prescribing “Pain Doctors” were located substantial distances away from

the pharmacy. AmerisourceBergen did not conduct any investigation into why Westside

Pharmacy was filling prescriptions for one doctor whose office was a four-hour round-trip

                                            23
drive away or for a second doctor whose office was an eleven-and-a-half-hour round-trip

drive away. AmerisourceBergen discontinued supplying Westside Pharmacy with opioids

in 2012, then approved a new customer application for Westside Pharmacy in January

2016, without any reference to the pharmacy’s prior history with the Company.

AmerisourceBergen also did not consult public news reports that contained red flags about

the top prescribing physicians.

       In another example, the House report described how AmerisourceBergen responded

inconsistently when pharmacies placed suspicious orders. AmerisourceBergen claimed

that repeated suspicious orders for a single customer would be considered a problem, yet

the Company continued to supply Beckley Pharmacy for nearly a year after reporting 109

suspicious orders filled by that pharmacy in five months from 2013 to 2014.

       AmerisourceBergen’s order reporting statistics for 2018 resembled its numbers for

2015, 2016, and 2017. AmerisourceBergen received 26,520,195 opioid orders. The

Company flagged 75,431 for examination, representing a rate of 0.284%. The Company

determined that only 489 orders were actually suspicious, reflecting a rate of 0.0018% of

total orders and 0.6% of flagged orders.

H.     2019: Still More Red Flags

       In February 2019, the board received a report detailing over 1,600 federal cases that

were pending in the Opioid MDL, numerous cases pending in state courts, an investigation

being undertaken by a coalition of state attorneys general, and subpoenas from numerous

United States Attorneys’ offices. The Attorney General for the State of Florida filed suit in

November 2018, and the Attorney General for the State of Georgia filed suit in January

                                             24
2019. The directors also were informed that the United States Attorney’s Office for the

District of New Jersey had notified management that it was opening a

criminal investigation.

       In March 2019, the Attorney General for the State of Washington filed suit. The

Attorney General for the State of New York filed its own action that same month.

       In May 2019, the board received another legal update. By this point, the number of

federal cases consolidated in the Opioid MDL had climbed to 1,800, and there were over

270 cases in state court. The Company also faced thirteen investigations and lawsuits from

state attorneys general. The directors reviewed the status of discovery, the prospects for

bellwether trials, and the status of settlement discussions.

       In August 2019, the Audit Committee received a presentation on “diversion control

and an Order Monitoring Program update.” Id. ¶ 226. The accompanying eighteen-page

presentation explained that the Company had a “[c]omprehensive program to prevent

diversion” that had continued to “evolve and expand,” including by “prohibiting sales of

schedule II controlled substances to secondary customers” and using “[e]nhance[d] data

analytics to monitor and predict trends.” Id. ¶ 227.

       On October 21, 2019, on the eve of trial for one of the bellwether cases in the Opioid

MDL, AmerisourceBergen, McKesson, and Cardinal Health settled the case for a payment

of $215 million.

       AmerisourceBergen’s order reporting statistics for 2019 resembled its numbers for

2015, 2016, 2017, and 2018, albeit with slight increases in the numbers of orders flagged

and reported. AmerisourceBergen received 27,030,389 opioid orders. The Company

                                             25
flagged 66,009 for examination, representing a rate of 0.244%. The Company determined

that only 1,091 orders were actually suspicious, reflecting a rate of 0.004% of total orders

and 1.65% of flagged orders.

I.     2021: The Settlements

       In the summer of 2021, AmerisourceBergen, McKesson, and Cardinal Health

offered a global settlement worth $21 billion to resolve all claims by the states and localities

in the Opioid MDL. On July 20, 2021, AmerisourceBergen, Cardinal Health, McKesson,

and Johnson & Johnson agreed to settle a case brought by the Attorney General of New

York for $1.18 billion. They simultaneously entered into the 2021 Settlement with various

other states and localities. The total settlement consideration was $26 billion.

AmerisourceBergen agreed to pay approximately $6.4 billion over eighteen years.

       As part of the 2021 Settlement, AmerisourceBergen agreed to permanent injunctive

relief that remedied deficiencies in the Revised OMP and required direct board oversight

of the program. Among other things, AmerisourceBergen committed to improving its

monitoring of customer red flags, conducting more thorough due diligence, and using

model-based thresholds that would actually identify and stop suspicious orders. In addition,

AmerisourceBergen agreed to establish the position of Chief Diversion Control Officer and

form a management-level committee that would report regularly to the board on anti-

diversion efforts. AmerisourceBergen also agreed to create a board-level Compliance

Committee to directly oversee the new order management program.

       In return for this package of relief, AmerisourceBergen and the individual

defendants received expansive releases of claims. The plaintiffs view the corporate

                                              26
governance measures as steps that the directors could and should have taken years before,

but which they saved to use as settlement currency.

       As of January 2021, anticipated opioid settlements had caused the Company to

suffer an operating loss of $5.135 billion (approximately $16.65 per share). Despite the

massive harm to AmerisourceBergen, the directors approved a raise of $14.3 million for

the Company’s CEO, reflecting an increase of 26%.

J.     The West Virginia Decision

       On July 4, 2022, the West Virginia Court issued its post-trial decision in litigation

that the City of Huntington and the Cabell County Commission filed against the Big Three

distributors. City of Huntington v. AmerisourceBergen Drug Corp. (West Virginia

Decision), — F. Supp. 3d —, 2022 WL 2399876 (S.D.W. Va. July 4, 2022). The cases had

been part of the Opioid MDL, then were remanded back to the West Virginia Court as the

bellwether cases for the lawsuits against distributors. Id. at *1. The trial ran from May 3,

2021, through July 12, 2021, during which seventy witnesses testified either live or by

deposition. Id. at *1–2.

       Huntington and Cabell asserted that the defendants’ practices of wholesale

distribution of opioids in Huntington and Cabell created a public nuisance. As their

principal defense, the defendants argued that their activities complied with law and

therefore could not constitute a nuisance.

       The evidence showed that West Virginia had been ground zero for the national

opioid epidemic and was the hardest-hit state in the country. The evidence showed that

Huntington and Cabell were among the West Virginia communities most affected by the

                                             27
opioid epidemic. Id. at *8. The question was whether any of the defendants contributed to

the epidemic by failing to comply with their anti-diversion obligations and thus creating a

public nuisance.

       To evaluate the sufficiency of AmerisourceBergen’s anti-diversion program, the

West Virginia Court reviewed the program’s development from its origins in 1996. Id. at

*13–16. The court discussed the events of 2007 which resulted in the 2007 OMP. Id. at

*14–16. The court also discussed events in 2014 and 2015 that led to the Revised OMP.

Id. at *16. The West Virginia Court found that “[b]y 2008, each defendant had in place an

SOM [Suspicious Order Monitoring] program that blocked all suspicious orders they

identified.” Id. at *61.

       The West Virginia Court next reviewed the plaintiffs’ evidence, finding that

“Plaintiffs did not prove that defendants failed to maintain effective controls against

diversion and design and operate sufficient SOM systems to do so. Relatedly, plaintiffs did

not prove that defendants’ due diligence with respect to suspicious orders was inadequate.”

Id. at *25.

       The West Virginia Court analyzed the expert testimony on which the plaintiffs

relied and found that evidence “unpersuasive.” Id. The plaintiffs’ expert reviewed data on

AmerisourceBergen’s shipments into Huntington and Cabell between 2002 and 2018. The

expert offered six different analyses of the data, each of which was designed to demonstrate

that AmerisourceBergen identified only a fraction of the suspicious orders that should have

been flagged. Id. at *26–29. The West Virginia Court rejected each of the methods, finding

                                            28
that they “were not convincing ways to achieve accurate results of the number of orders

that should have been flagged or blocked.” Id. at *26.

       The West Virginia Court found that the plaintiffs had failed to prove that the Big

Three had acted unreasonably in supplying opioids in Huntington and Cabell. The court

reviewed the evidence regarding the causes of the opioid crisis and found most persuasive

the role of changing standards of care and the decisions that doctors made to prescribe

opioids to help patients with pain. The court found that the defendants were not responsible

for an oversupply of opioids. Instead, “[d]octors in Cabell/Huntington determined the

volume of prescription opioids that pharmacies in the community ordered from defendants

and then dispensed pursuant to those prescriptions.” Id. at *49.

       The West Virginia Court found no evidence that any of the defendants distributed

through pill mills. Id. at *53. The court found “no evidence that Defendants ever distributed

controlled substances to any entity that it knew was dispensing for any purpose other than

to fill legitimate prescriptions written by doctors.” Id. And the court found that the levels

of prescription and distribution in Cabell County “matched almost perfectly,” with an

average of 141.2 opioid pills prescribed per person and an average of 142.19 opioid pills

distributed per person. Id. at *49.

       Based on these findings, the West Virginia Court ruled that “[n]o culpable acts by

defendants caused an oversupply of opioids in Cabell/Huntington.” Id. *61. The court

explained that under the Controlled Substances Act, the distributors were charged with

preventing opioids from being sent to rogue pharmacies. The distributors were not expected

to address over-prescribing. Id. at *64. And the distributors were not responsible for

                                             29
policing any diversion that occurred downstream from their pharmacy customers. Id. at

*65. The court found “no admissible evidence in this case that defendants caused diversion

that resulted in an opioid epidemic.” Id.

                                 II.   LEGAL ANALYSIS

       The defendants have moved to dismiss the complaint under Court of Chancery Rule

23.1 for failure to plead demand futility. On a cold read, the relevant language in Rule 23.1

hardly suggests that it would play such an outsized role in corporate jurisprudence. In its

entirety, Rule 23.1(a) states:

       In a derivative action brought by one or more shareholders or members to
       enforce a right of a corporation or of an unincorporated association, the
       corporation or association having failed to enforce a right which may
       properly be asserted by it, the complaint shall allege that the plaintiff was a
       shareholder or member at the time of the transaction of which the plaintiff
       complains or that the plaintiff’s share or membership thereafter devolved on
       the plaintiff by operation of law. The complaint shall also allege with
       particularity the efforts, if any, made by the plaintiff to obtain the action the
       plaintiff desires from the directors or comparable authority and the reasons
       for the plaintiff’s failure to obtain the action or for not making the effort.

The innocuous language of the second sentence supports the edifice of Rule 23.1

motion practice.

       Rule 23.1’s second sentence is the “procedural embodiment” of substantive

principles of Delaware law. Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). When a

corporation suffers harm, the board of directors is the institutional actor legally empowered

under Delaware law to determine what, if any, remedial action the corporation should take,

including pursuing litigation against the individuals involved. See 8 Del. C. § 141(a). “A

cardinal precept of the General Corporation Law of the State of Delaware is that directors,

                                              30
rather than shareholders, manage the business and affairs of the corporation.” Aronson v.

Lewis, 473 A.2d 805, 811 (Del. 1984).4 “Directors of Delaware corporations derive their

managerial decision making power, which encompasses decisions whether to initiate, or

refrain from entering, litigation, from 8 Del. C. § 141(a).” Zapata Corp. v. Maldonado, 430

A.2d 779, 782 (Del. 1981) (footnote omitted). Section 141(a) vests statutory authority in

the board of directors to determine what action the corporation will take with its litigation

assets, just as with other corporate assets. See id.

       In a derivative suit, a stockholder seeks to displace the board’s authority over a

litigation asset and assert the corporation’s claim. Aronson, 473 A.2d at 811. Unless the

       4
         In Brehm v. Eisner, 746 A.2d 244, 253–54 (Del. 2000), the Delaware Supreme
Court overruled seven precedents, including Aronson to the extent that they reviewed a
Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or
otherwise suggested deferential appellate review. Id. at 253 n.13 (overruling in part on this
issue Scattered Corp. v. Chi. Stock Exch., 701 A.2d 70, 72–73 (Del. 1997); Grimes v.
Donald, 673 A.2d 1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d
950, 952 (Del. 1992); Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Grobow v. Perot,
539 A.2d 180, 186 (Del. 1988); Pogostin v. Rice, 480 A.2d 619, 624–25 (Del. 1984); and
Aronson, 473 A.2d at 814. The Brehm Court held that going forward, appellate review of
a Rule 23.1 determination would be de novo and plenary. Brehm, 746 A.2d at 254. The
seven partially overruled precedents otherwise remain good law. This decision does not
rely on any of them for the standard of appellate review. Having described Brehm’s
relationship to these cases, this decision omits their cumbersome subsequent history.

        More recently, the Delaware Supreme Court overruled Aronson and Rales, to the
extent that they set out alternative tests for demand futility. United Food & Com. Workers
Union & Participating Food Indus. Empls. Tri-State Pension Fund v. Zuckerberg, 262
A.3d 1034, 1059 (Del. 2021). The high court adopted a single, unified test for demand
futility. Although the Zuckerberg test displaced the prior tests, cases properly applying
Aronson and Rales remain good law. Id. This decision therefore does not identify any
precedents, including Aronson and Rales, as having been overruled by Zuckerberg.

                                              31
board of directors permits the stockholder to proceed, a stockholder only can pursue a cause

of action belonging to the corporation if (i) the stockholder demanded that the directors

pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused

because the directors are incapable of making an impartial decision regarding the litigation.

Zuckerberg, 262 A.3d 1047; Ainscow v. Sanitary Co. of Am., 180 A. 614, 615 (Del. Ch.

1935) (Wolcott, C.) (citing Sohland v. Baker, 141 A. 277 (Del. 1927)).

          Rule 23.1 imposes a pleading requirement so that demand principles can be applied

at the outset of a case to determine whether the plaintiff has standing to sue. See

Zuckerberg, 262 A.3d 1047. To satisfy the pleading requirements of Rule 23.1, the plaintiff

“must comply with stringent requirements of factual particularity that differ substantially

from . . . permissive notice pleadings . . . .” Brehm, 746 A.2d at 254. Under the heightened

pleading requirements of Rule 23.1, “conclusionary [sic] allegations of fact or law not

supported by allegations of specific fact may not be taken as true.” Grobow, 539 A.2d

at 187.

          The requirement of factual particularity does not entitle a court to discredit or weigh

the persuasiveness of well-pled allegations. “The well-pleaded factual allegations of the

derivative complaint are accepted as true on such a motion.” Rales, 634 A.2d at 931.

“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, 746 A.2d at 255. Rule 23.1 requires that a

plaintiff allege specific facts, but “he need not plead evidence.” Aronson, 473 A.2d at 816;

accord Brehm, 746 A.2d at 254 (“[T]he pleader is not required to plead evidence.”).

                                                32
       The plaintiffs in this case chose not to make a pre-suit demand. The operative

question is therefore whether “demand is excused because the directors are incapable of

making an impartial decision regarding whether to institute such litigation.” Stone v. Ritter,

911 A.2d 362, 367 (Del. 2006).

       When conducting a demand futility analysis, Delaware courts ask, on a director-by-

director basis:

              (i) whether the director received a material personal benefit
              from the alleged misconduct that is the subject of the litigation
              demand;

              (ii) whether the director faces a substantial likelihood of
              liability on any of the claims that would be the subject of the
              litigation demand; and

              (iii) whether the director lacks independence from someone
              who received a material personal benefit from the alleged
              misconduct that would be the subject of the litigation demand
              or who would face a substantial likelihood of liability on any
              of the claims that are the subject of the litigation demand.

Zuckerberg, 262 A.3d at 1059. “If the answer to any of the questions is ‘yes’ for at least

half of the members of the demand board, then demand is excused as futile.” Id.

       The plaintiffs rely only on the second basis for establishing director interestedness.

They contend that nine out of the ten directors in office when the plaintiffs filed their

lawsuit have served on the board since 2015 or earlier, with some directors serving since

as early as 2010. The plaintiffs claim that those directors face a substantial risk of liability

on the claims that the plaintiffs have asserted, because they ignored the red flags giving

rise to the Red-Flags Claim and made the business decisions giving rise to the Massey

                                              33
Claim. When a plaintiff advances that type of argument, the demand analysis effectively

folds into an analysis of the strength of the underlying claims.

A.     The Red-Flags Claim

       The plaintiffs’ first theory is their Red-Flags Claim. That theory derives from the

Delaware Supreme Court’s decision in Graham v. Allis-Chalmers Manufacturing Co., 188

A.2d 125 (Del. 1963), “which had long been held out as embracing the protective ‘red

flags’ rule” that premised director liability on a failure to take action despite being aware

of red flags indicating wrongdoing. Martin Lipton & Theodore N. Mirvis, Chancellor Allen

and the Director, 22 Del. J. Corp. L. 927, 939 (1997). Under the rule in Allis-Chalmers,

directors had no duty to act “absent cause for suspicion.” 188 A.2d at 130. Most

significantly, the Allis-Chalmers court stated that directors had no duty “to install and

operate a corporate system of espionage to ferret out wrongdoing which they have no

reason to suspect exists.” Id. Under Allis-Chalmers, therefore, directors arguably had no

duty to set up a reasonable oversight system to facilitate board-level oversight. They only

needed to act when information came to their attention. Id.

       In the landmark Caremark decision, Chancellor Allen artfully explained why the

colorful language in Allis-Chalmers about a system of corporate espionage “could not be

generalized into a rule that, absent grounds for suspected law violation, directors had no

duty to assure that an information gathering and reporting system exists to provide senior

management and the board with material internal operating information, including as

regards legal compliance.” Lipton & Mirvis, supra, at 939. Caremark’s contribution was

                                             34
to explain that a board’s fiduciary duties encompass the need to make a good-faith effort

to ensure that

                 information and reporting systems exist in the organization that
                 are reasonably designed to provide to senior management and
                 to the board itself timely, accurate information sufficient to
                 allow management and the board, each within its scope, to
                 reach informed judgments concerning both the corporation’s
                 compliance with law and its business performance.

In re Caremark Int’l Inc. Deriv. Litig, 698 A.2d 959, 970 (Del. Ch. 1996).

       Caremark’s second major contribution was to explain when directors could be held

liable for failing to implement a reporting system to facilitate board oversight. In the words

of the original decision,

                 only a sustained or systematic failure of the board to exercise
                 oversight—such as an utter failure to attempt to assure a
                 reasonable information and reporting system exists—will
                 establish the lack of good faith that is a necessary condition to
                 liability. Such a test of liability—lack of good faith as
                 evidenced by sustained or systematic failure of a director to
                 exercise reasonable oversight—is quite high. But, a demanding
                 test of liability in the oversight context is probably beneficial
                 to corporate shareholders as a class, as it is in the board
                 decision context, since it makes board service by qualified
                 persons more likely, while continuing to act as a stimulus to
                 good faith performance of duty by such directors.

Id. at 971 (emphasis omitted).

       In Stone, the Delaware Supreme Court adopted the reasoning of Caremark and

identified two types of Caremark claims. The high court wrote that the plaintiff must allege

particularized facts supporting a reasonable inference that either “(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

                                                35
operations thus disabling themselves from being informed of risks or problems requiring

their attention.” Stone, 911 A.2d at 370. This framing has led to the claims being called

prong-one and prong-two Caremark claims. Technically, only a prong-one claim traces its

lineage to Caremark. A prong-two claim traces its lineage to Allis-Chalmers.

       In this case, the plaintiffs have not advanced a prong-one Caremark theory. They

have advanced a Red-Flags Theory in which they assert that the defendants ignored red

flags by failing to take action to fix the Revised OMP and improve AmerisourceBergen’s

system of board oversight until they could use those changes as part of the currency for the

2021 Settlement.

       Relying on this court’s decision in Reiter v. Fairbank, 2016 WL 6081823 (Del. Ch.

Oct. 18, 2016), the defendants argue that subpoenas and investigations do not rise to the

level of red flags. In Reiter, the plaintiff alleged that the board of a large bank ignored red

flags showing that the bank’s check-cashing business was failing to comply with anti-

money laundering (“AML”) regulations. The complaint alleged that the board knew about

six grand jury subpoenas that had been served on the company, had received reports stating

that the company’s AML risk was high, and had been told that the company’s AML

compliance program had been rated as inadequate. Id. at *13. The court dismissed the

complaint, holding that the plaintiff had not alleged “red flags of illegal conduct” but

merely “yellow flags of caution” which suggested “escalating AML compliance risk that

was occurring in tandem with heightened regulatory scrutiny.” Id. The Reiter decision also

found that the documentary record at the pleading stage showed that the directors engaged

in sufficient oversight of management’s efforts to negate any inference that they

                                              36
consciously failed to respond to red flags, even if it was debatable whether they engaged

in sufficient oversight. Id. at *1, *14.

       Whether allegations about investigations, subpoenas, and lawsuits rise to the level

of red flags “depends on the circumstances.” Fisher v. Sanborn, 2021 WL 1197577, at *12

(Del. Ch. Mar. 30, 2021). “A settlement of litigation or a warning from a regulatory

authority—irrespective of any admission or finding of liability—may demonstrate that a

corporation’s directors knew or should have known that the corporation was violating the

law.” Rojas v. Ellison, 2019 WL 3408812, at *11 (Del. Ch. July 29, 2019). In this case, the

complaint identifies over seventy examples of subpoenas, settlements, civil litigation,

congressional reports, and analyses of regulatory risks that put the directors on notice of

problems at the Company. The directors did not just see red flags; they were wrapped

in them.

       The defendants also argue that the complaint does not support an inference that the

directors consciously disregarded their obligation to address the red flags. The defendants

advance arguments about actions that they took between 2007 and 2012. But for the

plaintiffs’ claim, the critical period started in 2015, after the Revised OMP went into effect.

During that period, the defendants can point to only three instances of board involvement.

The full board requested and received an in-depth review of the Company’s compliance

systems in 2017. The Audit Committee conducted its first-ever review of the Revised OMP

in 2018, then conducted another review in 2019. The defendants say that the court cannot

infer a conscious decision to ignore red flags when the directors received those reports.

                                              37
       Three instances are better than none, but they would not be enough to warrant

dismissal when evaluated against the panoply of allegations in the complaint. That is

particularly so when the content of the reports detailed the paltry number of suspicious

orders that the Company was identifying, yet the defendants did nothing in response. The

allegations of the complaint support a reasonable inference that the defendants knew that

some level of corrective action was required, but they did not want to do anything that

might imply that the Company’s existing systems were inadequate. Instead, they wanted

to save those measures to use as settlement currency when they could obtain a global

release. Until they could achieve a settlement, they went through the motions. See Massey

Energy, 2011 WL 2176479, at *19 (drawing inference that outside directors went “through

the motions” rather than making “good faith efforts to ensure that [the company] cleaned

up its act”).

       The allegations of the complaint fairly support two competing inferences. One

reasonable inference is that the directors received reports on the Revised OMP and the

Company’s anti-diversion control systems, determined that the Company’s existing

systems were adequate, and made a legitimate business judgment to do nothing. Another

reasonable inference is that the directors knew that the Company’s existing systems were

inadequate and consciously decided not to take any action in response to the red flags. This

case is at the pleading stage. At this stage of the case, the plaintiffs get the benefit of the

inference they seek.

       If that were the state of the pleading-stage record, the Red-Flags Claim would

survive. But there is another factor that tips the outcome in favor of the defendants. In the

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West Virginia Decision, the West Virginia Court found on the merits after a lengthy trial

that AmerisourceBergen had an adequate anti-diversion program in place. West Virginia

Decision, 2022 WL 2399876, at *61. The West Virginia Court found no evidence that

AmerisourceBergen distributed opioids to pill mills. Id. at *53. Based on its findings, the

West Virginia Court ruled that “[n]o culpable act by defendants caused an oversupply of

opioids in Cabell/Huntington.” Id. at *61.

       The findings in the West Virginia Decision are not preclusive, but they are

persuasive. The Red-Flags Theory depends on an inference that the officers and directors

knowingly caused the Company to fail to comply with its anti-diversion obligations. The

West Virginia Court found that AmerisourceBergen did not fail to comply with its anti-

diversion obligations. That finding knocks the stuffing out of the plaintiffs’ claim.

       The plaintiffs argue that the West Virginia Decision did not specifically address the

Revised OMP, but that is incorrect. The West Virginia Decision did address the Revised

OMP as part of the changes that the Company made in 2014 and 2015. See 2022 WL

2399876, at *16. The court’s discussion did not continue after that point, but that is

consistent with the plaintiffs’ allegation that the defendants did not make any further

changes in their order monitoring program until the 2021 Settlement. The West Virginia

Court’s analysis included the Revised OMP, and the West Virginia Court expressly found

AmerisourceBergen’s anti-diversion controls were legally compliant. Id. at *61.

       A variant of this objection would be that the West Virginia Decision did not address

the full period leading up to the 2021 Settlement. To reiterate, the West Virginia Decision

addressed the Revised OMP, and that was the system in place until the 2021 Settlement.

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The   West     Virginia   Court    also   analyzed     an     expert   opinion   that   covered

AmerisourceBergen’s sales in Huntington and Cabell County from 2002 through 2018. Id.

at *26. That period included the three years after the adoption of the Revised OMP. The

plaintiffs have not provided any reason to think that anything changed after that point.

       Another possible objection would be that the West Virginia Decision only addressed

order diversion in Huntington and Cabell County, not elsewhere. But the West Virginia

Court found that the opioid problem in West Virginia was the worst in the nation and that

Huntington and Cabell County were among the worst localities in West Virginia. If there

was anywhere that AmerisourceBergen could have been held liable for not complying with

its order-diversion obligations, that was the place.

       In light of the West Virginia Decision, it is not possible to infer that the Company

failed to comply with its anti-diversion obligations. It is therefore not possible to infer that

at least half of the directors who were in office when the complaint was filed face a

substantial likelihood of liability for ignoring red flags.

B.     The Massey Claim

       The plaintiffs’ second theory is their Massey Claim. They contend that between

2010 and 2015, management and the directors made a series of conscious decisions which

they knew would result in the Company failing to comply with its anti-diversion

obligations, thereby evidencing the defendants’ pursuit of a business plan that prioritized

profit over legal compliance. They claim that after 2015, management and the directors

adhered to the same business strategy and did not stray from it until the 2021 Settlement.

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As with the Red-Flags Claim, the Massey Claim does not present at least half of the

directors with a substantial threat of liability.

       A Massey Claim derives from the fundamental proposition that

               Delaware law does not charter law breakers. Delaware law
               allows corporations to pursue diverse means to make a profit,
               subject to a critical statutory floor, which is the requirement
               that Delaware corporations only pursue “lawful business” by
               “lawful acts.” As a result, a fiduciary of a Delaware corporation
               cannot be loyal to a Delaware corporation by knowingly
               causing it to seek profit by violating the law.

Massey, 2011 WL 2176479, at *20 (footnoted omitted); accord Metro Commc’n Corp. BVI

v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 131 (Del. Ch. 2004) (“Under

Delaware law, 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 for the entity.”).

“Delaware corporate law has long been clear on this rather obvious notion; namely, that it

is utterly inconsistent with one’s duty of fidelity to the corporation to consciously cause

the corporation to act unlawfully. The knowing use of illegal means to pursue profit for the

corporation is director misconduct.” Desimone v. Barrows, 924 A.2d 908, 934 (Del. Ch.

2007) (cleaned up).

       Although sometimes lumped in with Caremark, a Massey Claim is technically not

a Caremark claim. Cf. Hamrock, 2022 WL 2387653, at *17 n.144 (questioning whether a

Massey Claim is a Caremark claim). Both a prong-one Caremark claim and a prong-two

Allis-Chalmers claim rest on the defendants’ failure to take action. A Massey Claim turns

on affirmative acts.

                                               41
       The plaintiffs contend that starting around 2010, management and the directors

made a series of decisions which, when taken together, support an inference that the

defendants were prioritizing profits over compliance. The process started with the

Independent Pharmacy Strategy and its light-touch, easy-onboarding model. It continued

with the Walgreens alliance, which management projected would more than double the

volume of the Company’s controlled-substances orders, but was not accompanied by a

similar increase in order-diversion resources. The clearest manifestation of the strategy was

the adoption of the Revised OMP, which used a double-trigger test to reduce the number

of orders of interest that the Company flagged for investigation. The Company already was

flagging low levels of orders, and with the adoption of the Revised OMP, the Company’s

rates of suspicious order reporting fell to microscopic levels.

       As with the Red-Flags Claim, if this were the state of the record, then the court

would permit the claim to proceed past the pleading stage. When viewed as a whole, the

allegations support a reasonable inference that the managers and directors acted with the

intent necessary for a Massey Claim. The allegations about the Independent Pharmacy

Strategy are relatively weak and would not be sufficient standing alone. The allegations

regarding the Walgreens alliance and the failure to increase oversight personnel are

stronger, but those allegations would not be enough either, whether independently or in

conjunction with the Independent Pharmacy Strategy. What gets the plaintiffs the inference

they need is the Revised OMP and its seemingly apparent purpose of driving down the

already low number of suspicious orders that AmerisourceBergen was reporting.

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       As with the Red-Flags Claim, the defendants seek to defeat the Massey Theory by

arguing that the board received a report about the Company’s order monitoring system in

2017, and the Audit Committee reviewed the Revised OMP in 2018 and 2019. Yet the

directors took no action, despite the Company’s minuscule levels of suspicious order

reporting. For the directors to receive those reports and take no action while the Company

was facing a barrage of litigation and investigations supports a pleading-stage inference

that the Company’s fiduciaries had embarked on a strategy of prioritizing profits over

compliance and were sticking to it. That is not the only possible inference, but it is one to

which the plaintiffs would be entitled.

       But as with the Red-Flags Claim, the West Virginia Decision is the plaintiffs’

undoing. A Massey Claim depends on a business plan that violates the law. The West

Virginia Court held that the Company’s business plan did not violate the law. Given the

West Virginia Decision, it is not possible to infer that management and the board

consciously embarked on a business plan that violated the law. It is therefore not possible

to infer that the Massey Claim poses a substantial threat of liability to the defendants.

                                  III.    CONCLUSION

       The allegations of the complaint fail to support a basis for demand excusal. The

plaintiffs therefore lack standing to litigate their claims on behalf of the Company. The

action is dismissed. Under Rule 15(aaa), the dismissal is with prejudice solely as to

the plaintiffs.

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