Court Opinion

ID: 2722731
Source: CourtListenerOpinion
Date Created: 2014-09-02 18:00:31.032915+00
Date Added: 2024-06-11T15:40:30.890782
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

WILLA ROSENBLOOM, derivatively           No. 12-55516
on behalf of Allergan, Inc.; DANIEL
HIMMEL; POMPANO BEACH POLICE                D.C. No.
& FIREFIGHTERS RETIREMENT                8:10-cv-01352-
SYSTEM; WASHINGTON LABORERS-               DOC-MLG
EMPLOYERS PENSION TRUST, AKA
Western Washington Laborers
Employers Pension Trust,                   OPINION
                Plaintiffs-Appellants,

                  v.

DAVID E. I. PYOTT; HERBERT W.
BOYER, AKA Herbert W. Boyer,
M.D.; LOUIS J. LAVIGNE, JR.; GAVIN
S. HERBERT; STEPHEN J. RYAN,
AKA Stephen J. Ryan, M.D.;
LEONARD D. SCHAEFFER; MICHAEL
R. GALLAGHER; ROBERT A. INGRAM;
TREVOR M. JONES, AKA Trevor M.
Jones, Ph.D.; DAWN E. HUDSON;
RUSSELL T. RAY; DEBORAH
DUNSIRE, AKA Deborah Dunsire,
M.D.; ALLERGAN, INC., a Delaware
corporation; HANDEL E. EVANS;
RONALD M. CRESSWELL; LOUIS T.
ROSSO; KAREN R. OSAR; ANTHONY
H. WILD,
               Defendants-Appellees.
2                    ROSENBLOOM V. PYOTT

         Appeal from the United States District Court
            for the Central District of California
          David O. Carter, District Judge, Presiding

                    Argued and Submitted
              June 2, 2014—Pasadena, California

                     Filed September 2, 2014

         Before: Stephen Reinhardt, John T. Noonan,
            and Mary H. Murguia, Circuit Judges.

                Opinion by Judge Reinhardt;
           Special Concurrence by Judge Reinhardt

                           SUMMARY*

              Securities Law / Demand Futility

    Reversing the dismissal on the pleadings of a derivative
action brought by shareholders of Allergan, Inc., producer of
Botox, a well-known cosmetic and therapeutic drug, the panel
held that the requirement of a demand on the company’s
board of directors, requesting that Allergan bring the
derivative claims in its own name, was excused.

    In their first amended complaint, the plaintiffs alleged that
Allergan’s board of directors knew about limits on promotion
of off-label uses; that the board was aware that violations of

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                  ROSENBLOOM V. PYOTT                       3

federal marketing rules could result in significant penalties;
and that Allergan nonetheless repeatedly violated federal laws
and regulations from 1997 to 2010, creating a number of
programs to promote Botox for off-label uses, such as
spasticity, pain, headaches, and migraines.

    Reviewing for an abuse of discretion, as required by
precedent, and applying Delaware law, the panel held that
demand was excused because the plaintiffs’ particularized
allegations established a reasonable doubt as to whether the
board faced a substantial likelihood of liability and as to
whether the board was protected by the business judgment
rule. The panel remanded the case for further proceedings.

   Concurring, Judge Reinhardt set forth his view that the
proper standard of review is de novo.

                        COUNSEL

Joseph D. Daley (argued), Travis E. Downs III, and David W.
Mitchell, Robbins Geller Rudman & Dowd, San Diego,
California; Aelish M. Baig, Robbins Geller Rudman &
Dowd, San Francisco, California; Brian J. Robbins and Felipe
J. Arroyo, Robbins Arroyo, San Diego, California; Kathleen
A. Herkenhoff, The Weiser Law Firm, San Diego, California;
Robert B. Weiser, Brett D. Stecker, and Jeffrey J. Ciarlanto,
The Weiser Law Firm, Berwyn, Pennsylvania, for Plaintiffs-
Appellants.

Mark A. Perry (argued) and Geoffrey C. Weien, Gibson,
Dunn, & Crutcher, Washington, D.C.; Wayne W. Smith,
Jeffrey H. Reeves, and Kristopher P. Diulio, Gibson, Dunn,
& Crutcher, Irvine, California, for Defendants-Appellees.
4                  ROSENBLOOM V. PYOTT

John C. Hueston, Daniel P. Lefler, and Lillie A. Werner, Irell
& Manella, Los Angeles, California, for Nominal Defendant-
Appellee.

                          OPINION

REINHARDT, Circuit Judge:

    Allergan, a specialty pharmaceutical manufacturer,
produces Botox, a well-known cosmetic and therapeutic drug.
In 2010, faced with allegations that it had acted illegally in
marketing and labeling Botox, Allergan settled several qui
tam suits and pled guilty in a criminal case. Allergan
ultimately paid a total of $600 million in part for civil
settlements and in part as a criminal fine. Shortly afterward,
Plaintiffs, all Allergan shareholders, filed a derivative action
alleging that Allergan’s directors are liable for violations of
various state and federal laws, as well as for breaches of their
fiduciary duties to Allergan. Plaintiffs did not, however, first
make a demand on Allergan’s board requesting that Allergan
bring the derivative claims in its own name. The district
court dismissed their action on the ground that Plaintiffs
failed to allege particularized facts showing that demand was
excused, as Federal Rule of Civil Procedure 23.1 requires. In
so doing, however, it misapplied governing Delaware law and
improperly drew inferences against Plaintiffs rather than in
their favor. We conclude that Plaintiffs’ particularized
allegations establish a reasonable doubt as to whether the
Board faces a substantial likelihood of liability and as to
whether the Board is protected by the business judgment rule.
Accordingly, we conclude that demand is excused and
reverse the district court.
                     ROSENBLOOM V. PYOTT                               5

                         BACKGROUND

                                   I

    Defendant Allergan, Inc. is a Delaware corporation
specializing in specialty pharmaceuticals and medical
devices.1 It manufactures Botox, a purified toxin sold for
cosmetic and therapeutic purposes.2 When injected, Botox
produces a local and temporary reduction of muscle or gland
activity.

   From 1989 to 2010, the FDA approved Botox for only a
few indications: crossed eyes, involuntary eyelid muscle
contractions, involuntary neck muscle contractions, and
excessive sweating.3 Although doctors may prescribe an
approved pharmaceutical for purposes other than those listed
on the FDA-approved label (“off-label use”)—and do so
regularly—federal law imposes numerous limits on drug

 1
   Defendants also include current and former Allergan directors: David
E. I. Pyott, Herbert W. Boyer, Louis J. Lavigne, Jr., Gavin S. Herbert,
Stephen J. Ryan, Leonard D. Schaeffer, Michael R. Gallagher, Robert A.
Ingram, Trevor M. Jones, Dawn E. Hudson, Russell T. Ray, Deborah
Dunsire, Handel E. Evans, Ronald M. Cresswell, Louis T. Rosso, Karen
R. Osar, and Anthony H. Wild.

    Plaintiffs include Willa Rosenbloom, Daniel Himmel, Pompano
Beach Police & Firefighters’ Retirement System, and Western
Washington Laborers-Employers Pension Trust, and each plaintiff alleges
being a shareholder of Allergan since 2003 or earlier.
 2
   The popular use of Botox for cosmetic purposes is not at issue in this
case.
  3
    Moreover, patients with two of these conditions—crossed eyes and
excessive sweating—rarely resort to Botox treatment.
6                 ROSENBLOOM V. PYOTT

manufacturers’ efforts to promote off-label uses of their
products.

    In 2007, a qui tam action was filed against Allergan,
alleging violations of the False Claims Act arising from off-
label marketing and branding of Botox. That same year, the
FBI opened an investigation into Allergan’s off-label
marketing of Botox. Three years later, after two more qui
tam actions had been filed, Allergan, the United States, and
the relators who had filed the qui tam actions entered into a
settlement. Under this deal, Allergan agreed to pay $225
million to the United States and various state governments
and to enter into a five-year corporate integrity agreement
with the Department of Health and Human Services’ Office
of Inspector General. Later in 2010, the United States filed
a criminal information against Allergan in the Northern
District of Georgia, charging distribution of a misbranded
drug/biologic in violation of the FDCA. Allergan pled guilty
and agreed to pay a $375 million fine.

    In September 2010, derivative suits against Allergan were
filed in the Central District of California and the Delaware
Court of Chancery. Ultimately, drawing on the fruits of a
third party’s demand for books and records under Delaware
law, Plaintiffs filed the First Amended Complaint, which is
at issue here. Plaintiffs allege that Allergan’s board of
directors knew about the limits on promotion of off-label
uses; that the board was aware that violations of the federal
marketing rules could result in significant penalties; and that
Allergan nonetheless repeatedly violated federal laws and
regulations from 1997 to 2010, creating a number of
programs to promote Botox for off-label uses, such as
spasticity, pain, headaches, and migraines.
                   ROSENBLOOM V. PYOTT                        7

     Meanwhile, near-identical litigation proceeded apace in
the Court of Chancery. In both courts, Allergan moved to
dismiss for failure to adequately allege demand futility. The
district court issued its opinion on the demand futility issue
first, dismissing the California case in January 2012. It then
denied a motion for reconsideration in February 2012.

     In June 2012, in a detailed opinion, Vice Chancellor
Laster held in the Delaware case that the plaintiffs had shown
demand futility. See La. Mun. Police Emps.’ Ret. Sys. v.
Pyott, 46 A.3d 313, 351–59 (Del. Ch. 2012). In his lengthy
and thorough analysis of how Delaware law applies to the
issue of demand futility, Vice Chancellor Laster expressly
criticized and rejected the district court’s reasoning. Id. at
357–58. On appeal, however, the Delaware Supreme Court
reversed Vice Chancellor Laster solely on the ground that the
Delaware plaintiffs were collaterally estopped from pursuing
their claims in the Court of Chancery due to the earlier-filed
dismissal of the complaint in this case. See Pyott v. La. Mun.
Police Emps.’ Ret. Sys., 74 A.3d 612, 614 (Del. 2013).

                              II

     Plaintiffs allege that, from 1997 to 2010, Allergan created
and expanded nearly a dozen programs designed to
aggressively promote the sale of Botox for off-label purposes.
Plaintiffs elaborate that these programs were part of a concert
of illegal conduct and that off-label Botox sales skyrocketed
as a result. From 1996 to 2006, for example, spasticity sales
grew by 332%, pain sales by 504%, and headache sales by
1,407%. By 2007, Allergan had over $500 million in annual
Botox sales for therapeutic uses, of which 70 to 80% was
attributable to off-label indications. This was no small sum
to Allergan: Botox sales constituted 24 to 36% of total net
8                  ROSENBLOOM V. PYOTT

sales across all product lines from 2000 to 2009, and 36 to
39% of total specialty pharmaceutical sales from 2006 to
2009.

    Here, we briefly summarize Plaintiffs’ central allegations.

    A. The Headache Development Program

     “At the direction of the [Board] . . . Allergan aggressively
promoted Botox to treat several different types of headache
conditions in addition to chronic headache for more than a
decade, which caused Botox sales for that indication to
increase by over 1,400%.” Even though headache treatment
was an off-label use until 2010, and even though no evidence
at the time proved that Botox treated headaches (in fact, nine
out of ten clinical trials for headache had failed), starting in
2003 Allergan sought out headache specialists and promoted
Botox to them as a treatment. That same year, while aware
that headaches were not an FDA approved indication for
Botox, the Board saw a slide presentation that detailed
Allergan’s “Headache Development Program” and tracked
the prevalence of headache disorders. This fact shows the
Board’s awareness of major headache-focused marketing at
Allergan in the early 2000s—the same period in which off-
label sales of Botox for headache treatment dramatically
increased.

    B. The Cervical Dystonia/Headache Initiative (CDHI)

    CD is a rare disorder that affects only approximately
27,000 Americans. Pursuant to the CDHI, Allergan
“maximize[d] off-label Botox sales by encouraging doctors
to diagnose [off-label] headache and pain symptoms as
symptoms of Botox’s on-label [CD] indication.” Allergan
                  ROSENBLOOM V. PYOTT                       9

created this plan when clinical data did not support use of
Botox for headaches; it was, in Allergan’s words, a “backup
strategy to ensure continued expansion into the headache
market.” Then, after the FDA rejected a request from
Allergan to expand the Botox label to cover CD-related
“pain,” Allergan launched a campaign to persuade doctors
that CD is under-diagnosed and that they should diagnose
headaches and pain as mild CD to obtain reimbursement.
This plan worked: CD quickly became a main driver for off-
label Botox sales. The Board was briefed on “Strong Botox
Sales” resulting from Allergan’s “U.S. CD/pain” market
program in a 2005 CEO Report.

   C. Reimbursement Support For Off-Label Uses of
      Botox

    Unlike most drugs, Botox is a “buy and bill” drug,
meaning that doctors buy it from Allergan and assume the
risk of non-reimbursement on the back end. In the relevant
time period, one vial of Botox cost $400 to $500 and most
off-label uses of Botox required one to four vials. As
Allergan recognized, growth in Botox sales depended on
doctors being reimbursed.

    To promote off-label use of Botox, Allergan doubled the
size of its reimbursement support team in 2003—with the
principal goal of minimizing customer barriers for Botox
bought to treat headaches, pain, and spasticity. It also
established a physician-assistance hotline for doctors to call
for help with off-label reimbursement. Plaintiffs allege that,
“[t]hrough the Botox Advantage Program, Allergan provided
customized reimbursement support services to doctors . . .
expended millions of dollars each year to operate the Botox
Reimbursement Hotline, and performed detailed audits (or
10                ROSENBLOOM V. PYOTT

‘interventions’) of physician billing records to demonstrate
‘the value of Botox to their practice.’” On average, accounts
with such “interventions” grew six times faster than did other
accounts. Allergan provided doctors with ghost-written
materials designed to persuade third-party payers to cover
off-label uses of Botox, including treatment of headaches, and
recruited physician “advocates” to lobby Medicare and
Medicaid decision-makers to expand coverage for off-label
use. Plaintiffs allege that the Board knew about the details
and purpose of the Botox Advantage Program. They allege,
for example, that in 2004 the Board reviewed several Botox
Advantage promotional documents. The Board also received
multiple reports on reimbursement support as a crucial factor
in Botox sales.

     D. Intentional Targeting of Specialists Practicing in
        Off-Label Fields

     Plaintiffs allege that “Allergan promoted Botox by
targeting medical specialists who did not routinely treat
patients with any of the conditions that Botox was approved
to treat.” This strategy was crucial to growth in off-label use
of Botox.        In 2004 alone, for instance, Allergan
representatives called on thousands of doctors specializing in
off-label fields, including pain and headache specialists.
Allergan also undertook cross-promotion agreements with
other companies to allow Allergan sales representatives
access to physicians specializing in off-label fields. For
example, in 2006, “Allergan had no drug approved for the
treatment of headache at the time but agreed to double
[another] company’s sales force selling headache drugs so
that Allergan could then also sell Botox to the neurologists
who were customers of the other company.” E-mails showed
that Allergan sought to “Sell More Botox!!!” through this
                   ROSENBLOOM V. PYOTT                       11

program. The Board approved these agreements, several of
which expressly contemplated cross-promotion of Botox and
migraine headache treatments.

    With Board approval, Allergan also acquired other
companies in order to obtain sales staffs with experience in
off-label specialties. For instance, Allergan acquired Espirit
Pharma for $370 million in 2007, allegedly to acquire sales
staff who could promote Botox for off-label uses to
urologists. When the Board held a “Strategic Planning
Session” at which this acquisition was discussed, it heard the
details of “the Strategic Plan, updated to reflect the impact of
Espirit Pharma,” and that “the successful launches of our
planned new products such as . . . new Botox indications . . .
are critical to the success of our plan.”

   E. Other Allergan Programs for Promoting Off-
      Label Use of Botox

    In addition to the programs discussed supra, Plaintiffs
allege that Allergan developed an array of expensive and
effective (and unlawful) schemes to promote off-label use of
Botox. It instructed sales representatives to promote the
message that Botox “works!” for off-label uses, even when no
clinical trials had proven the efficacy of Botox as a treatment.
It “funded and controlled the content of hundreds of
continuing medical education (CME) seminars, injection
workshops, and promotional dinner programs at which paid
speakers identified by the company as [Key Opinion Leaders]
advocated Botox for off-label indications.” It created
“Centers of Excellence” to create, edit, and control the
substance of CMEs that promoted Botox for off-label uses.
It paid “honoraria” to high volume Botox injectors to speak
at CMEs, and used millions of dollars of medical grants to
12                ROSENBLOOM V. PYOTT

reward top purchasers of Botox. It hosted “Advisory Boards”
at which it paid physicians $1,500 each to listen to
presentations about Botox that covered off-label topics. It
created and funded an “independent” neurotoxin educational
organization to promote off-label uses of Botox. In dealing
with off-label specialists, Allergan developed “Customer
Team Units” (CTUs) to coordinate sales initiative and off-
label marketing initiatives; these CTUs often included sales,
medical affairs, reimbursement, marketing, and management
staff. Until January 2007, the CTUs met on a quarterly basis
to exchange detailed data about doctors’ purchases of Botox
for off-label use in selected geographic areas.

                             III

    Plaintiffs allege that the Board of Directors was involved
in and aware of this wrongdoing at Allergan. Specifically,
they allege that the Board either adopted plans premised on
illegal conduct or made a conscious decision not to take
action even when faced with “red flags” of wrongdoing.
Plaintiffs support those claims with several dozen paragraphs
of particularized allegations, emphasizing more broadly that
the Board actively oversaw the growth and sale of Botox
from 1997 to 2010, as Botox was one of its star products in
that period.

    Starting in 1997, Allergan’s Board discussed and
approved a number of “strategic plans” that expressly
depended on a significant and, critically, immediate increase
in off-label Botox sales. The first such plan covered 1997 to
2001 and was adopted in 1997. In a slide deck summary of
the plan, the Board described maximizing Botox sales for
spasticity, pain, and migraine, all off-label uses, as a “top
corporate priority.” The slide deck anticipated major growth
                      ROSENBLOOM V. PYOTT                             13

in pain, migraine, and spasticity markets, and described
Botox as Allergan’s “fastest growing business with great[est]
peak year sales of any product & highest margin.” The slide
deck noted that the Board anticipated FDA approval of Botox
for treatment of pain, migraine, and spasticity four to five
years later, in 2001 and 2002, but nonetheless stated that a
major increase in sales of Botox for these off-label uses
“represent[ed] immediate growth” that could “maximize . . .
Botox® now” as part of an “expansion strategy.”4

    This anticipation of immediate and significant growth in
off-label sales of Botox was reflected in the 1997–2001
Strategic Plan itself. The Plan sought to “ensure that we can
maximize our immediate opportunities in our core
businesses,” described Botox as one of Allergan’s “five core
businesses,” and stated that Botox “has tremendous growth
potential as we fund opportunities with new indications and
uses such as spasticity, pain, migraine and tension headache.”
The Plan emphasized in its discussion of Botox that the
combined value of the global pain and migraine headache
markets would exceed $6 billion by 2007, and that
“[i]nvestments in [Botox sales for] new indications of pain
and migraine headache represents two of the top three future
growth opportunities in our portfolio with combined peak
year sales of $1.26 billion.” Thus, even when the Board
admittedly did not anticipate FDA approval for any of these
indications for at least four years, and a full thirteen years

 4
    Allergan contends that the slides should be read as anticipating major
off-label sales only after FDA approval, but our review of the slides and
of the full document, and our obligation to make reasonable inferences in
Plaintiffs’ favor, lead us to conclude that the 1997–2001 Strategic Plan
anticipated immediate, major growth of off-label sales, and did so
independently of the Board’s (ill-founded) expectation that new
indications would be approved by the FDA in 2001–2002.
14                ROSENBLOOM V. PYOTT

before the FDA actually approved of any of these indications,
the Board embraced a strategic plan expressly premised on
“immediate” and significant expansion of Botox sales for the
off-label indications of spasticity, pain, headache, and
migraines. This anticipated expansion in off-label sales, the
Board concluded, represented one of Allergan’s most
important opportunities for immediate profit.

    The Board closely and continuously monitored Botox
sales for on- and off-label indications through 2010. At a
meeting in 2004, for example, “the focus for 2005 and
beyond” was on projects that included “Botox Headache” and
“Botox Urology”—both of which involved only off-label
sales and were discussed well after the Board’s original
expectation of several FDA approvals in 2001 and 2002 had
come to naught. In 2005, the Board discussed and then
authorized continued funding for nominally “independent”
organizations that supported the off-label use of Botox for
“acute and chronic pain.” In 2007, still focused on the off-
label market for Botox, the Board adopted a four-year
strategic plan in which it described “successful launches of
our planned new products such as [Botox]” as “critical to the
success of our plan.” At that meeting, the Board also
discussed “key assumptions” relating to the acquisition of
Espirit Pharma—an acquisition that, according to Plaintiffs,
was designed mainly to afford Botox sales representatives
access to specialists who practiced in off-label fields. The
Board’s discussion of the “key assumptions” of that
acquisition, we may therefore reasonably infer at this stage in
the litigation, included Allergan’s plan to use the newly-
acquired sales staff to engage in aggressive off-label
marketing.
                      ROSENBLOOM V. PYOTT                               15

    Even as the Board understood that growth of Botox sales
for off-label uses was critical to Allergan’s success, and even
as the Board made growth of such off-label sales a “top
corporate priority,” the Board was presented with information
indicating a direct link between Allergan’s Botox promotions
and rates of off-label sales. The 2007–2011 Strategic Plan,
for example, explicitly noted a connection between sales staff
and off-label sales growth: it stated that in “2006 [Allergan]
Added 45 New NMCs [sales representatives] & Spasticity
grew 25% [and in] 2007 [it] Added 19 New NMCs &
Spasticity Est[imated] 18%.” The 2006–2010 Strategic Plan
also noted a link between off-label promotion and sales: it
projected further declines in sales of Botox for pain treatment
specifically because there would be “no promotion” for that
(off-label) use. In this regard, the 2006–2010 Strategic Plan
echoed a similar conclusion from the 2005 Strategic Planning
process, which had concluded that sales for pain, headache,
and spasticity had been negatively affected by a “decrease in
calls to Pain [doctors]/Ped[iatricians].”5 It is reasonable to
infer from these allegations that the Board knew that
Allergan’s sales and marketing efforts drove the substantial
increases in off-label sales of Botox from 2001–2008.

    Finally, Plaintiffs argue that the Board was alerted to
unlawful conduct at Allergan by a series of FDA letters, and
by several complaints from physicians and employees. From

   5
      Further, a 2003 Strategy Review noted that “Adult Spasticity,
Headache, and Pain will account for 85% of incremental sales in 2003.”
And Allergan found that “[a]cross all specialties, Botox sales/MD increase
with higher call frequency” and that expanding sales calls to rehabilitation
doctors would increase sales by $14.3 million over three years.
16                     ROSENBLOOM V. PYOTT

2001 to 2010, Allergan received several letters from the FDA
concerning Botox6:

      1. August 22, 2001: An FDA warning letter cautioned
         that Allergan’s Botox “promotional activities and
         materials” were “misleading and lacking in fair
         balance within the meaning of the [FDAC].” This
         letter cited five prior FDA letters raising similar
         concerns, and described the “violations noted in this
         letter” as “continuing examples of violative
         promotion or advertising materials disseminated by
         Allergan.”7

      2. September 5, 2002: An FDA warning letter cautioned
         Allergan about “misleading statements” in Botox
         promotional materials.

      3. June 23, 2003: An FDA warning letter cautioned that
         several of Allergan’s “advertisements are false and/or
         misleading because they falsely identify [Botox] as a
         cosmetic treatment, fail to reveal material facts about

  6
     The Board also received an FDA warning letter in September 2005
about misleading promotions for another drug, Lumingan, a letter from the
French Government in 2005 concerning Botox-related aspiration and
death, and an FDA warning letter in August 2009 about misleading
promotions for another drug, ACZONE®. Plaintiffs characterize these
letters as part of a battery of FDA warnings that should have alerted the
Board to sustained misconduct in Allergan’s pharmaceutical promotional
activities.
  7
    Plaintiffs do not allege that this letter was specifically directed to the
Board. They note only that it was covered by the Los Angeles Times.
Plaintiffs appear to rely on an inference of knowledge. In any event, this
letter is, at best, of minor relevance to the ultimate issue of Board
knowledge.
                  ROSENBLOOM V. PYOTT                      17

       the product’s use, and minimize the risk information
       presented.”

   4. September 21, 2006 and “The Schim Incident”: The
      FDA sent a letter to Allergan’s Director of
      Advertising and Promotional Compliance, concerning
      a presentation by Dr. Jack Schim on behalf of
      Allergan at which Schim promoted off-label use of
      Botox as a headache treatment. The letter requested
      information about Allergan’s relationship with Schim
      and its CME program material. An investigation in
      which several board members were involved
      discovered that Schim had used the relevant slides at
      eight dinners over the prior twelve months. Allergan
      ultimately took remedial measures to address Schim’s
      unlawful conduct. Nonetheless, Schim remained one
      of Allergan’s highest paid consultants, speakers, and
      grant recipients through 2010.

    In addition to these FDA warning letters—most of which
concerned only general misconduct in the branding and
promotion of Botox—the Board was also made aware of
several complaints by physicians about off-label marketing,
many of them arising from the Schim incident. In 2007 the
Board discussed an ethics complaint by an employee who
stated that she was resigning after only six weeks at Allergan
due to concerns about its off-label marketing program.

                      DISCUSSION

                              I

    As required by precedent, we review for abuse of
discretion the district court’s ruling dismissing this
18                   ROSENBLOOM V. PYOTT

shareholder derivative suit on the ground of failure to show
demand futility. See, e.g., Potter v. Hughes, 546 F.3d 1051,
1056 (9th Cir. 2008); In re Silicon Graphics Inc. Sec. Litig.,
183 F.3d 970, 983 (9th Cir. 1999). Although Plaintiffs urge
us to apply a de novo standard, the authorities that they cite,
all of which criticize the abuse of discretion standard, are not
intervening, controlling precedents that would compel us to
depart from Potter and In re Silicon Graphics. See Blue Br.
at 2–5 (citing Israni v. Bittman, 473 F. App’x 548, 550 n.1
(9th Cir. 2012), and Laborers Int’l Union of N. Am. v. Bailey,
310 F. App’x 128, 130 (9th Cir. 2009)); see Miller v.
Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en banc).8
Accordingly, we follow Potter and In re Silicon Graphics and
review the opinion below for abuse of discretion.

                                   II

    “The derivative form of action permits an individual
shareholder to bring ‘suit to enforce a corporate cause of
action against officers, directors, and third parties.’” Kamen
v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (quoting
Ross v. Bernhard, 396 U.S. 531, 534 (1970)) (emphasis
omitted). “Devised as a suit in equity, the purpose of the
derivative action [is] to place in the hands of the individual
shareholder a means to protect the interests of the corporation
from the misfeasance and malfeasance of ‘faithless directors

  8
    Plaintiffs also cite a Delaware case, Brehm v. Eisner, 746 A.2d 244
(Del. 2000) (holding that the Delaware Supreme Court reviews de novo
all demand futility rulings by the Delaware Court of Chancery). Their
reliance on Brehm is misplaced for two reasons. First, Brehm is eight
years older than Potter and thus cannot qualify as intervening authority.
Second, “the proper standard of review is a question of federal procedure
and is governed by federal law.” West v. State Farm Fire & Cas. Co.,
868 F.2d 348, 350 (9th Cir. 1989).
                      ROSENBLOOM V. PYOTT                              19

and managers.’” Id. (quoting Cohen v. Beneficial Loan
Corp., 337 U.S. 541, 548 (1949)).

    “A shareholder seeking to vindicate the interests of a
corporation through a derivative suit must first demand action
from the corporation’s directors or plead with particularity
the reasons why such demand would have been futile.” In re
Silicon Graphics, 183 F.3d at 989 (citing Fed. R. Civ. P.
23.1). “The purpose of this demand requirement in a
derivative suit is to implement ‘the basic principle of
corporate governance that the decisions of a corporation—
including the decision to initiate litigation—should be made
by the board of directors or the majority of shareholders.’”9
In re Pfizer Inc. S’holder Derivative Litig., 722 F. Supp. 2d
453, 458 (S.D.N.Y. 2010) (quoting Kamen, 500 U.S. at 101).

    Although Rule 23.1 supplies the pleading standard for
assessing allegations of demand futility, “[t]he substantive
law which determines whether demand is, in fact, futile is
provided by the state of incorporation of the entity on whose
behalf the plaintiff is seeking relief.” Scalisi v. Fund Asset
Mgmt., L.P., 380 F.3d 133, 138 (2d Cir. 2004). Allergan is a
Delaware corporation and Delaware law therefore applies.10

 9
   See also In re Veeco Instruments, Inc. Sec. Litig., 434 F. Supp. 2d 267,
273 (S.D.N.Y. 2006) (“In contrast to a motion to dismiss pursuant to Rule
12(b)(6), a Rule 23.1 motion to dismiss for failure to make a demand is
not intended to test the legal sufficiency of the plaintiffs’ substantive
claim. Rather, its purpose is to determine who is entitled, as between the
corporation and its shareholders, to assert the plaintiff’s underlying
substantive claim on the corporation’s behalf.” (internal quotation marks
omitted)).
   10
      As the Seventh Circuit has explained of this substance/procedure
issue:
20                   ROSENBLOOM V. PYOTT

    In Delaware, a shareholder who declines to make a
demand on the board of directors may not bring a derivative
action “until [he] has demonstrated, with particularity, the
reasons why pre-suit demand would be futile.” Khanna v.
McMinn, Civ. A. 20545-NC, 2006 WL 1388744, at *11 (Del.
Ch. May 9, 2006) (internal quotation marks omitted).
“[F]utility is gauged by the circumstances existing at the
commencement of a derivative suit” and concerns the board
of directors “sitting at the time the complaint is filed.” In re
Am. Int’l Grp., Inc. Derivative Litig., 700 F. Supp. 2d 419,
430 (S.D.N.Y. 2010) (alteration in original) (internal
quotation marks omitted), aff’d 415 F. App’x 285 (2d Cir.
2011). Demand futility “must be decided by the trial court on
a case-by-case basis and not by any rote and inelastic
criteria.” Id. (quotation marks omitted). “Plaintiffs are
entitled to all reasonable factual inferences that logically flow
from the particularized facts alleged, but conclusory
allegations are not considered as expressly pleaded facts or
factual inferences.” Brehm v. Eisner, 746 A.2d 244, 255
(Del. 2000).

    In this case, Plaintiffs identify two overlapping grounds
that excuse their obligation to make a demand on Allergan’s

        [T]he adequacy of [the] pleadings is measured by
        federal law—in particular, Rule 23.1. The function of
        the demand futility doctrine, however, is a matter of
        substance, not procedure. Thus, for instance, although
        federal law governs the degree of detail that the
        plaintiff must furnish when it gives its reasons for not
        obtaining the action or not making the effort, state law
        will determine whether those reasons are sufficient.

Westmoreland Cnty. Emp. Ret. Sys. v. Parkinson, 727 F.3d 719, 721–22
(7th Cir. 2013) (citations and internal quotation marks omitted).
                   ROSENBLOOM V. PYOTT                       21

board. First, they allege that the Board decided to pursue a
business plan premised on unlawful conduct. Second, they
allege that the Board remained consciously inactive despite
actual or constructive knowledge of wrongdoing at Allergan.
Each of these asserted grounds for demand futility finds
stable footing in Delaware corporate law.

    When a shareholder challenges a decision of a board of
directors, Delaware law provides a two-part, disjunctive test
for demand futility:

       The first prong of the futility rubric is
       whether, under the particularized facts
       alleged, a reasonable doubt is created that . . .
       the directors are disinterested and
       independent. The second prong is whether the
       pleading creates a reasonable doubt that the
       challenged transaction was otherwise the
       product of a valid exercise of business
       judgment.       These prongs are in the
       disjunctive. Therefore, if either prong is
       satisfied, demand is excused.

Id. at 256 (citing Aronson v. Lewis, 473 A.2d 805, 814, 816
(Del. 1984)). This is often called the “Aronson test.”

    Under Aronson’s first prong, “[a] director’s interest may
be shown by demonstrating a potential personal benefit or
detriment to the director as a result of the decision.” In re
Goldman Sachs Grp., Inc. S’holder Litig., Civ. A. 5215, 2011
WL 4826104, at *7 (Del. Ch. Oct. 12, 2011) (alteration in
original) (internal quotation marks omitted). For that reason,
“[d]irectors who are sued have a disabling interest for pre-suit
demand purposes when the potential for liability . . . may rise
22                    ROSENBLOOM V. PYOTT

to a substantial likelihood.” Ryan v. Gifford, 918 A.2d 341,
355 (Del. Ch. 2007) (internal quotation marks omitted);
accord Rattner v. Bidzos, Civ. A. 19700, 2003 WL 22284323,
at *9 (Del. Ch. Sept. 30, 2003) (“[A] ‘substantial likelihood’
of personal liability prevents a director from impartially
considering a demand.” (internal quotation marks omitted)).
To meet that standard when presented with a motion to
dismiss under Rule 23.1, plaintiffs must make “a threshold
showing, through the allegation of particularized facts, that
their claims have some merit.”11 Rales v. Blasband, 634 A.2d
927, 934 (Del. 1993).

    Under Aronson’s second prong, the question is whether
the pleading creates a reasonable doubt that the challenged
transaction was the product of a valid exercise of business
judgment. Brehm, 746 A.2d at 256. “The good faith business
decisions of informed, disinterested, and independent
directors of Delaware corporations are entitled to deference
under the business judgment standard of review.” Hamilton
Partners, L.P. v. Highland Capital Mgmt., L.P., Civ. A. 6547-
VCN, 2014 WL 1813340, at *15 (Del. Ch. May 7, 2014).
Nonetheless, “in rare cases a transaction may be so egregious
on its face that board approval cannot meet the test of
business judgment.” Aronson, 473 A.2d at 815. These rare
cases include those in which a board decides to undertake
illegal activity. See, e.g., In re Massey Energy Co., Civ. A.
5430-VCS, 2011 WL 2176479, at *20 (Del. Ch. May 31,
2011) (“Delaware law does not charter law breakers. . . . [A]
fiduciary of a Delaware corporation cannot be loyal to a
Delaware corporation by knowingly causing it to seek profit
by violating the law.”); Metro Commc’n Corp. BVI v.

 11
    Here, Plaintiffs allege that a majority of Allergan’s Board faces a risk
of liability for, inter alia, breaching the duty of loyalty.
                     ROSENBLOOM V. PYOTT                             23

Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 131 (Del.
Ch. 2004) (“[A] fiduciary may not choose to manage an
entity in an illegal fashion, even if the fiduciary believes that
the illegal activity will result in profits . . . .”).

    While Aronson applies to board decisions, the applicable
framework is less settled for claims that demand is excused
on the ground that a board remained consciously inactive
when it knew (or should have known) about illegal conduct.
That doctrinal uncertainty is reflected here: whereas Plaintiffs
insist that their conscious inaction claims are subject to
Aronson analysis, Allergan maintains that those claims
invoke the theory of oversight liability set forth in In re
Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971
(Del. Ch. 1996).12 Demand futility for Caremark claims is
tested under Rales v. Blasband, 634 A.2d 927 (Del. 1993), not
Aronson. Rales requires plaintiffs to allege “particularized
facts establishing a reason to doubt that ‘the board of
directors could have properly exercised its independent and
disinterested business judgment in responding to a demand.’”
Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (quoting
Rales, 634 A.2d at 934).

  12
     A number of courts have interpreted conscious inaction claims as
Aronson-type claims of considered board action. See, e.g., Westmoreland,
727 F.3d at 725–26 (7th Cir. 2013); In re Abbott Labs. Derivative
S’holders Litig., 325 F.3d 795, 808 (7th Cir. 2003); In re Textron, Inc.,
811 F. Supp. 2d 564, 572 (D.R.I. 2011); Pfizer, 722 F. Supp. 2d at 460.
Other courts, however, have taken the view that conscious inaction claims
sound in Caremark. See In re SAIC Inc. Derivative Litig., 948 F. Supp.
2d 366, 381 (S.D.N.Y. 2013), aff’d sub nom. Welch v. Havenstein, 553 F.
App’x 54 (2d Cir. 2014); South v. Baker, 62 A.3d 1, 6 (Del. Ch. 2012)
(“As developed in subsequent cases and endorsed by the Delaware
Supreme Court . . . directors can be held liable under [Caremark] for
knowingly causing or consciously permitting the corporation to violate
positive law . . . .”).
24                 ROSENBLOOM V. PYOTT

    Here, however, it does not matter whether Aronson or
Rales applies. Under either approach, demand is excused if
Plaintiffs’ particularized allegations create a reasonable doubt
as to whether a majority of the board of directors faces a
substantial likelihood of personal liability for breaching the
duty of loyalty. See, e.g., In re SAIC Inc. Derivative Litig.,
948 F. Supp. 2d 366, 382 (S.D.N.Y. 2013) (“[T]he difference
between Rales and Aronson may blur in cases like this one,
since the particularized allegations essential to creating
reasonable doubt as to a substantial likelihood of personal
liability for breach of fiduciary duties may also implicate the
question whether the Board can avail itself of business
judgment protections.”), aff’d sub nom. Welch v. Havenstein,
553 F. App’x 54 (2d Cir. 2014); Guttman v. Huang, 823 A.2d
492, 501 (Del. Ch. 2003) (“When . . . there are allegations
that a majority of the board that must consider a demand
acted wrongfully, the Rales test sensibly addresses concerns
similar to [Aronson]. To wit, if the directors face a
‘substantial likelihood’ of personal liability, their ability to
consider a demand impartially is compromised under Rales,
excusing demand.”). The duty of loyalty, in turn, is violated
“[w]here directors fail to act in the face of a known duty to
act, thereby demonstrating a conscious disregard for their
responsibilities [and] failing to discharge [the non-exculpable
fiduciary duty of loyalty] in good faith.” Stone ex rel.
AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del.
2006). In this case, Plaintiffs allege precisely that kind of
violation of the directors’ duties.

    To summarize: Plaintiffs’ claim that the Board decided to
pursue a plan premised on illegal conduct is subject to
Aronson analysis. If Plaintiffs have made sufficient
particularized allegations in support of this claim, demand is
excused under both Aronson prongs, as the Board would face
                   ROSENBLOOM V. PYOTT                        25

a substantial likelihood of liability for violating the duty of
loyalty and would have lost business judgment protection for
undertaking illegal conduct. Plaintiffs’ claim that the Board
knew or should have known about illegal conduct and made
a conscious choice to turn a blind eye can be characterized
either as a Caremark-type oversight claim or as an Aronson-
type allegation of considered board action. We need not
decide which characterization of Plaintiffs’ allegations is
correct because, either way, demand is excused if Plaintiffs’
particularized allegations create a reasonable doubt as to
whether a majority of the Allergan board faces a substantial
likelihood of liability for failing to act in the face of a known
duty to act.

                              III

    Turning to the particularized factual allegations before us,
we agree with Vice Chancellor Lasker of the Delaware Court
of Chancery, who considered a near-identical complaint, that
demand is excused. See La. Mun. Police Emps.’ Ret. Sys. v.
Pyott, 46 A.3d 313, 352–53 (Del. Ch. 2012). Because
Plaintiffs’ allegations that the Board deliberately adopted a
plan premised on illegal conduct in many respects builds off
the comparatively more modest claim of conscious inaction,
we first discuss conscious inaction.

    A. Conscious Inaction

    Plaintiffs allege that the Board either knew or, due to a
series of red flags, should have known, about Allergan’s off-
26                    ROSENBLOOM V. PYOTT

label promotion of Botox.13 This claim essentially turns on
whether Plaintiffs have adequately alleged scienter. See, e.g.,
Rahbari v. Oros, 732 F. Supp. 2d 367, 383 (S.D.N.Y. 2010);
Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007);
Guttman, 823 A.2d at 506. If a majority of the Board had
actual or constructive knowledge of violations of the law at
Allergan involving off-label promotions of Botox and did
nothing, it violated its duty of loyalty and faces a substantial
likelihood of liability. See Stone, 911 A.2d at 370.

    Plaintiffs’ factual allegations tell a story that begins in
1997 with Board approval of the 1997–2001 Strategic Plan.
That year, even as it anticipated that Botox approval for pain,
migraine, and spasticity would not occur for at least four or
five years, the Board adopted a four-year plan that described
maximizing sales for these off-label uses as a “top corporate
priority,” opportunity for “immediate growth,” and a means
to “maximize . . . Botox® now.” Notably, the 1997–2001
Strategic Plan contemplated a short-term increase in Botox
sales in North America from $86.1 million to $141.1 million,
a growth fueled mainly by sales for off-label uses. The Plan
noted “tremendous growth potential” for “spasticity, pain,
migraine and tension headache” sales of Botox, carefully
reviewed the market for headache and pain treatments, and,
most strikingly, described investments in Botox sales for pain
and migraine headache as “two of the top three future growth
opportunities in our portfolio.” It can be reasonably inferred

  13
       Although in many cases involving demand futility the parties go
director by director to determine whether demand is excused, the parties
here do not do so, mainly because Plaintiffs repeatedly allege that a
majority of the Board was involved in all (or nearly all) of the programs
and decisions at issue. When appropriate, courts may evaluate demand
futility by looking to the whole board of directors rather than by going one
by one through its ranks. See, e.g., Pfizer, 722 F. Supp. 2d at 461.
                   ROSENBLOOM V. PYOTT                        27

from this strategic plan that the Board was intensely
interested in off-label sales of Botox, saw off-label sales of
Botox as a critical driver of growth for Allergan over the
upcoming years, and planned on very closely monitoring off-
label Botox sales. It can also be inferred that the Board was
aware that pain, headache, spasticity, and migraine were all
off-label uses, but nonetheless wanted to achieve major
growth well before FDA approval. Over the next 13 years,
that is precisely what happened: due mainly to a continuing
series of illegal Allergan programs, off-label sales of Botox
skyrocketed.

    Of course, as Allergan observes, it is entirely possible for
off-label sales to increase on their own, without any illegal
promotion by a drug manufacturer. In fact, such increases
occur all the time, spurred by developments and discussions
within the medical community. For that reason, the bare facts
of the Board’s hunger for higher off-label sales and an
ultimate increase in those sales do not suffice to show
conscious inaction on the part of the Board. See, e.g., King v.
Baldino, 648 F. Supp. 2d 609, 624 (D. Del. 2009). But
contrary to Allergan’s insistence that this case reduces solely
to that correlation, Plaintiffs offer a battery of particularized
factual allegations that strongly support an inference at this
stage of the litigation that the Board knew of and did nothing
about illegal activity.

    First, Plaintiffs allege with particularity that the Board
continued to closely and regularly monitor off-label Botox
sales. In 2004, the Board focused its attention on projects
related to the off-label sale of Botox to treat headaches and
urological problems. Then, in 2005, it discussed and decided
to continue funding for organizations under Allergan control
that publicly championed the off-label use of Botox to treat
28                ROSENBLOOM V. PYOTT

pain. In 2007, the Board emphasized that Botox is “critical
to the success of our [strategic] plan” and discussed “key
assumptions” related to the acquisition of Espirit Pharma, a
company that was allegedly purchased mainly to afford Botox
sales representatives access to specialists who would
prescribe Botox for off-label purposes. We can—and at this
stage, must—reasonably infer that the Board’s discussion of
these matters afforded its members a view of Allergan’s
illegal conduct.

    The Board also took a particular interest in some of the
specific Allergan off-label sales programs that Plaintiffs
describe as a key part of Allergan’s wrongdoing. In 2003, for
example, the Board saw a slide show that detailed Allergan’s
creation of a “Headache Development Program” and tracked
the prevalence of headache disorders. The Board, which
already knew that nine out of ten clinical trials of Botox for
headache treatment had failed and that FDA approval was
nowhere in sight, thus learned in 2003 that Allergan was
launching a major program to treat headaches. The Board
also learned that the four-person “Core Team” involved in the
Headache Development Program included a member of
Allergan’s “Global Strategic Marketing” division. Then, in
2004, the Board reviewed several promotional documents for
the “Botox Advantage Program,” a program that provided
detailed support to physicians seeking reimbursement for off-
label uses of Botox and created a hotline for such assistance,
all in an attempt to circumvent reimbursement rules
governing off-label uses of Botox. In 2005, the Board
received a CEO report on Allergan’s CDHI program, which
was allegedly created after clinical tests for headaches failed
in order to persuade doctors to prescribe Botox for off-label
purposes (headaches) while reporting an on-label diagnosis
of cervical dystonia, even though CD is a rare disorder.
                   ROSENBLOOM V. PYOTT                       29

Finally, in 2006 and 2007, the Board approved co-promotion
and acquisition agreements that were allegedly designed
mainly to facilitate illegal off-label promotion of Botox by
sales representatives familiar with specialists in off-label
fields. These allegations and the inferences that reasonably
follow from them are anything but conclusory. Accepted as
true for purposes of this appeal, they show that Allergan’s
board closely monitored off-label Botox sales and repeatedly
discussed or authorized programs even after learning that
those programs involved the same illegal conduct for which
Allergan was ultimately fined and punished.

    Second, even as it carefully monitored Allergan’s Botox
programs and determined that growth of off-label Botox sales
was critical to achieving desired profit margins, the Board
received data directly linking Allergan’s sales programs to
fluctuations in off-label sales. In 2005, for example, it
learned that sales for pain, headache, and spasticity were
heavily affected by Allergan programs that involved phone
calls to pain specialists and pediatricians. In 2006, it
projected a decline in sales of Botox for off-label pain
treatment due to the absence of Allergan promotion for that
use. The 2007–2011 Strategic Plan, in turn, identified an
even clearer connection between Allergan programs and off-
label sales growth, stating that the addition of 45 new sales
representatives in 2006 was accompanied by a 25% increase
in spasticity sales, and that the addition of 19 representatives
in 2007 was accompanied by an estimated 18% increase in
spasticity sales.

    This is exactly the kind of correlation—more Allergan
promotions for off-label use matching up precisely with more
sales, and fewer Allergan promotions for off-label use
matching a drop in off-label sales—that qualifies as a “red
30                 ROSENBLOOM V. PYOTT

flag” of illegal promotions. See McCall v. Scott, 239 F.3d
808, 821 (6th Cir. 2001) (concluding that “it would be just as
reasonable” for experienced directors to see a suspicious
correlation as a sign of “possible improper billing activities”
as it would be for them to see it as “the norm,” and that their
indifference to that correlation supported liability). Whereas
Allergan argues that the Board could have viewed the
increase in off-label Botox sales as the natural operation of
the medical community, at this stage of the case we must
make reasonable inferences for Plaintiffs, not against
them—and it is reasonable to infer that the data repeatedly
presented to Allergan’s board linking Allergan programs to
fluctuations in off-label sales support a finding of scienter.

     Third, the Board received repeated FDA warnings about
illegal promotion of Botox. To be sure, many of these
warnings concerned only misbranding and other violations of
the law, not the specific off-label promotions at issue here.
Only one of the warning letters, in fact, specifically addressed
off-label promotion, though it is striking that even after
learning of the Schim incident in that letter, Allergan kept
Schim as one of its highest-paid consultants and advocates.
Nonetheless, these letters also constituted a red flag, waved
nearly every year for five straight years, that Allergan was
breaking federal law in its promotion of Botox. Given how
carefully the Board was monitoring Botox sales, its relative
inaction in the face of these repeated FDA warnings supports
a finding of liability. See In re Abbott Labs. Derivative
S’holders Litig., 325 F.3d 795, 808 (7th Cir. 2003) (excusing
demand and emphasizing that even though two FDA warning
letters contained mere “boilerplate” language, “continuing
violations of federal regulations over a period of six years
cannot be minimized”). Moreover, this is not a case where
the FDA warnings dealt with “unrelated programs” or lacked
                   ROSENBLOOM V. PYOTT                        31

“any other connection” to the relevant illegal conduct. See
SAIC, 948 F. Supp. 2d at 387. Rather this is a case in which
one of the FDA letters directly concerned off-label
promotions and the parade of other FDA letters addressed
issues immediately parallel to the off-label promotions at the
heart of the allegations in this lawsuit.

    Closely related to the FDA warnings, an employee
resigned after filing an ethics complaint in 2007 charging
Allergan’s sales division with improper off-label promotions.
Although Plaintiffs do not allege that this ethics issue was
specifically about Botox, there is no evidence that the Board
responded to it by investigating wrongdoing. As Vice
Chancellor Lamb has remarked, “A claim that an audit
committee or board had notice of serious misconduct and
simply failed to investigate, for example, would survive a
motion to dismiss, even if the committee or board was well
constituted and was otherwise functioning.” David B. Shaev
Profit Sharing Account v. Armstrong, Civ. A. 1449-N, 2006
WL 391931, at *5 (Del. Ch. Feb. 13, 2006).

     Fourth, the illegal conduct in this case involved one of the
most important drugs at Allergan—one that was repeatedly
identified as crucial by the Board itself, which described off-
label sales of Botox as a “top corporate priority” and as “two
of the top three future growth opportunities in our portfolio.”
In demand futility cases, courts have repeatedly emphasized
that it is especially plausible to infer board interest in and
knowledge of developments relating to a product that is
critical to a company’s success or is otherwise of special
importance to it. See, e.g., In re Biopure Corp. Derivative
Litig., 424 F. Supp. 2d 305, 307–08 (D. Mass. 2006); In re
Veeco Instruments, Inc. Sec. Litig., 434 F. Supp. 2d 267, 277
32                    ROSENBLOOM V. PYOTT

(S.D.N.Y. 2006); In re Keyspan Corp. Sec. Litig., 383 F.
Supp. 2d 358, 387–88 (E.D.N.Y. 2003).

    Finally, the illegal conduct was unquestionably of
significant magnitude and duration. It persisted for over a
decade, involved several divisions at Allergan, and
constituted nearly a dozen separate programs, all related to
one of Allergan’s most important and widely known
therapeutic drugs. The combination of widespread and
enduring illegality in Allergan’s corporate activity strongly
supports an inference of Board knowledge and intentional
disregard. See SAIC, 948 F. Supp. 2d at 387; Pfizer, 722 F.
Supp. 2d at 460; Veeco, 434 F. Supp. at 278; In re Oxford
Health Plans, Inc., 192 F.R.D. 111, 117 (S.D.N.Y. 2000).

    Taking all of these allegations together, we conclude that
the district court abused its discretion in determining that they
do not create a reasonable inference of conscious inaction. It
would be surprising, to say the least, if such significant,
continuing, and diverse breaches of FDA regulations in
relation to a star product at Allergan passed unnoticed by the
Board for so long, even as the Board carefully monitored off-
label sales, repeatedly discussed and authorized a number of
the allegedly illegal programs, and built strategic plans
around off-label Botox sales.

    We also note that we find persuasive Delaware Vice
Chancellor Lasker’s explanation in the virtually identical
Allergan case in Delaware14:

  14
    Although as we have noted, Vice Chancellor Lasker’s decision was
vacated by the Delaware Supreme Court on the ground of collateral
estoppel, decisions vacated for reasons unrelated to the merits may be
considered for the persuasive of their reasoning. See In re Taffi, 68 F.3d
                     ROSENBLOOM V. PYOTT                              33

         The plaintiffs in this case have alleged a direct
         connection between the Board and a business
         plan premised on illegal activity. The
         Complaint pleads that from 1997 onward, the
         Board discussed and approved a series of
         annual strategic plans that contemplated
         expanding Botox sales dramatically within
         geographic areas that encompassed the United
         States. The plans contemplated new markets
         for Botox that involved applications that were
         off-label uses in the United States. So
         significant was the scope of the expansion that
         it necessarily contemplated marketing and
         promoting off-label uses within the United
         States. The Board then closely monitored
         Allergan’s dramatic success in increasing its
         sales of Botox at rates far exceeding what the
         market for existing on-label uses could
         support or that could be generated by
         physicians serendipitously learning about and
         trying new off-label applications. The Board
         kept Allergan’s business plan in place even

306, 310 (9th Cir. 1995) (following as persuasive authority a decision
vacated by the Supreme Court on other grounds); Orhorhaghe v. INS,
38 F.3d 488, 493 n.4 (9th Cir. 1994) (following as persuasive authority a
decision vacated by the Supreme Court as moot).
34                     ROSENBLOOM V. PYOTT

         after the Schim incident and FDA inquiries
         illustrated the extent of Allergan’s regulatory
         exposure.

La. Mun. Police, 46 A.3d at 352–53.15

 15
    He also noted that other inferences are plausible, but that at this stage
in the litigation all reasonable inferences must be drawn in Plaintiffs’
favor:

         Obviously this is not the only inference that can be
         drawn. Alternatively, one could infer that the directors
         received advice from sophisticated counsel about the
         difference between legal off-label sales and illegal off-
         label marketing, understood where the boundary lay,
         and approved a business plan and management
         initiatives in the good faith belief that Allergan was
         remaining within the bounds of the law, although
         perhaps close to the edge. The directors then closely
         monitored Allergan’s performance with this
         understanding.      Unfortunately for everyone, the
         directors’ good faith belief proved incorrect, and
         Allergan pled guilty to criminal misdemeanor
         misbranding for the period from 2000 through 2005,
         paid criminal fines of $375 million, and paid another
         $225 million in civil fines. If this scenario proves true,
         then the directors will not have acted in bad faith and
         will not be liable to Allergan for any of the harm it
         suffered.

         I cannot presently determine what actually happened at
         Allergan. I hold only that a reasonable inference can be
         drawn from the particularized allegations of the
         Complaint and the documents it incorporates by
         reference that the Board knowingly approved and
         subsequently oversaw a business plan that required
                     ROSENBLOOM V. PYOTT                             35

    The district court reached the contrary conclusion mainly
on the grounds that Plaintiffs failed to allege “evidence of a
decision by board members to promote off-label marketing,”
failed to connect off-label promotion programs such as the
Headache Development Program to “Botox or any prohibited
off-label marketing,” and failed to account for the fact that
the Board maintained formal compliance policies. In
analyzing Plaintiffs’ allegations, however, the district court
committed a number of errors, and thereby abused its
discretion.

     First, it considered the factual allegations in isolation
from each other rather than in combination, even though in
cases like this one an inference of Board involvement or
knowledge may depend on a combination of factual
allegations. See, e.g., McCall, 239 F.3d at 823; SAIC, 948 F.
Supp. 2d at 387–88; Veeco, 434 F. Supp. 2d at 276. Second,
it repeatedly drew inferences in the Board’s favor, crediting
Allergan’s reasonable interpretations of the factual
allegations over Plaintiffs’ reasonable interpretations of those
same allegations.16 See, e.g., Westmoreland Cnty. Emp. Ret.

         illegal off-label marketing and support initiatives for
         Botox. At this stage of the case, I must credit this
         inference . . . .

La. Mun. Police, 46 A.3d at 356.
  16
     For example, the district court refused to view the repeated FDA
warnings as at all relevant, even though they involved Botox promotion.
It saw no connection between the Headache Development Program, the
Board, and off-label sales, despite the allegations discussed supra. It
dismissed the CDHI allegations as irrelevant on the ground that cervical
dystonia was an approved use, disregarding all of Plaintiffs’ other
allegations. And it suggested that it viewed the Complaint as alleging
only that the Board must have known of illegal conduct because sales for
36                    ROSENBLOOM V. PYOTT

Sys. v. Parkinson, 727 F.3d 719, 729 (7th Cir. 2013) (“[T]he
district court’s focus on other hypothetical explanations for
the defendants’ conduct improperly ignores the rule that ‘any
inferences reasonably drawn from the factual allegations of
the complaint must be viewed in the light most favorable to
the plaintiffs.’” (quoting Abbott Labs., 325 F.3d at 803));
Brehm, 746 A.2d at 255. Finally, the district court essentially
insisted on a smoking gun of Board knowledge, even though

off-label uses increased, when in fact the First Amended Complaint
contains many, particularized allegations that bear on the question of what
the Board knew.

     In these and other ways, the district court abused its discretion. As
Vice Chancellor Lasker noted while explaining his disagreement with the
district court:

         The California Federal Court . . . concluded that a
         Board-sanctioned “Headache Development” program
         for Botox “had absolutely nothing to do with
         marketing; rather, it was a clinical presentation
         regarding Botox’s potential efficacy in treating
         migraines.” The California Federal Court likewise
         dismissed the sufficiency of the allegation that the
         Board oversaw a “Cervical Dystonia/Headache
         Expansion Initiative” by noting that cervical dystonia
         was an approved FDA use at the time.

         In my view, both descriptions adopt one possible and
         defendant-friendly interpretation of the underlying
         documents and related allegations. At the pleadings
         stage, I believe the plaintiffs are entitled to the
         reasonable inference that the Board oversaw company-
         wide efforts to promote off-label use of Botox for
         treating migraine headaches, which was not an FDA-
         approved use at the time.

La. Mun. Police, 46 A.3d at 357–58 (citations omitted).
                     ROSENBLOOM V. PYOTT                            37

precedent holds that plaintiffs can show demand futility by
alleging particular facts that support an inference of
conscious inaction.17 See Brehm, 746 A.2d at 255.

    Ultimately, this case is in important respects like Abbott
Labs., Pfizer, and Westmoreland—all cases in which
particularized allegations made plausible an inference that the
directors at issue had remained consciously inactive in the

 17
    Again, we find persuasive Vice Chancellor Lasker’s careful analysis
of how the district court erred in applying Delaware law:

        [A] plaintiff does not have to point to actual
        confessions of illegality by defendant directors to
        survive a Rule 23.1 motion in a Caremark case.
        Particularly at the pleadings stage, a court can draw the
        inference of wrongful conduct when supported by
        particularized allegations of fact. Given that off-label
        marketing is illegal, it would be astounding if the
        1997–2001 Strategic Plan or any other board
        presentation actually used that term. If in-house
        counsel hoped to keep their jobs, those words only
        could make it into a board presentation in the context of
        a statement against the practice.             But sadly,
        sophisticated corporate actors at times engage in illegal
        behavior and attempt to hide their misconduct with the
        appearance of legal compliance. Having reviewed the
        summary slides and the underlying strategic plans, I
        believe there are sufficient references in the documents
        to support a reasonable inference that Allergan
        expected to drive increased sales by promoting off-label
        use. When, as here, the pled facts can support a
        reasonable inference that directors in fact approved a
        business plan that contemplated off-label marketing, the
        plaintiffs receive the benefit of the inference at the
        pleadings stage.

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

face of wrongdoing at their companies. See Westmoreland,
727 F.3d at 727 (finding demand to be excused where the
complaint alleged “not only that [the company’s] directors
consciously flouted . . . FDA regulations, but also that the
directors knowingly steered [the company] on a course that
was all but certain to prompt the FDA to take enforcement
action under [a consent decree]”); Abbott, 325 F.3d at 809
(“We find that six years of noncompliance, inspections, 483s,
Warning Letters, and notice in the press, all of which then
resulted in the largest civil fine ever imposed by the FDA and
the destruction and suspension of products which accounted
for approximately $250 million in corporate assets, indicate
that the directors’ decision to not act was not made in good
faith and was contrary to the best interests of the company.”);
Pfizer, 722 F. Supp. 2d at 460 (excusing demand where “a
fair reading of the particularized allegations of the Complaint
is that the defendants, at a minimum, knew of a high
probability that Pfizer was continuing to purposely promote
off-label marketing and deliberately decided to let it continue
by blinding themselves to that knowledge”). To be sure,
there are noteworthy differences between those cases and this
one. For example, in several of those cases the companies
had already been sanctioned by the FDA, whereas here the
Board had merely received a number of warning letters
relating to Allergan’s marketing of Botox. What all of these
cases have in common with this one, however, is that, given
the combination of non-conclusory facts alleged, Delaware
law required a reasonable inference of scienter—and thus
conscious inaction—on the part of the board, at least for
purposes of a motion on the pleadings.
                  ROSENBLOOM V. PYOTT                      39

   B. Adoption of a Plan Premised on Illegal Conduct

    Having concluded that we must reverse with respect to
Plaintiffs’ conscious inaction argument, we only briefly
address Plaintiffs’ alternative argument that demand is
excused on the ground that Allergan’s board of directors
knowingly adopted a business plan premised on illegal off-
label promotions of Botox.

    Much like their conscious inaction argument, Plaintiffs’
argument on this point begins with the 1997–2001 Strategic
Plan and proceeds through the other allegations recited supra.
Here, though, Plaintiffs make the comparatively bolder claim
that Allergan’s conduct is reasonably interpreted as the
predictable unfolding of a Board-sanctioned effort to
massively boost off-label Botox sales while pushing (too)
hard on regulatory limits. Thus, in Plaintiffs’ view, it can
reasonably be inferred that the “red flags” of illegal conduct
that actually or constructively alerted the Board to
wrongdoing were not signs that the marketing team had gone
off the rails. Rather, they were welcome indicators that a
massive, Board-approved push for off-label sales of Botox
was going according to plan.

    We conclude that, at the pleading stage of this case, this
is a reasonable inference from the particular facts
alleged—and that the district court abused its discretion in
concluding that it is not.

    Allergan and the district court make much of the fact that
Plaintiffs do not allege that the Board formalized or recorded
any decision to break the law. They also emphasize that
Allergan did, as one would expect of a major pharmaceutical
company, maintain some formal policies prohibiting off-label
40                 ROSENBLOOM V. PYOTT

promotion of drugs. On their view, these facts render
implausible the inference that Plaintiffs have asked us to draw
from the particularized facts alleged.

    These arguments, however, overstate what the law
requires of plaintiffs arguing that demand is excused. See La.
Mun. Police, 46 A.3d at 357 (“[A] plaintiff does not have to
point to actual confessions of illegality by defendant directors
to survive a Rule 23.1 motion . . . . Particularly at the
pleadings stage, a court can draw the inference of wrongful
conduct when supported by particularized allegations of
fact.”). For example, an inference that the Board decided to
break the law can be drawn even without a Board-approved
document stating, ‘we’re all going to go promote Botox off-
label now and do so in a way that violate the FDA’s
regulations.’ So long as Plaintiffs’ particularized allegations
give rise to a reasonable doubt that a majority of the directors
adopted a plan premised on illegal off-label marketing of
Botox, and therefore face a substantial likelihood of liability
for breaching their duty of loyalty, demand is excused.

    Applied here, that standard requires reversal. As Vice
Chancellor Lasker persuasively explained in his opinion in
the Delaware case:

       It is not unreasonable to infer that the
       Allergan Board, led by a hard-charging CEO
       who earned the nickname “Mr. Botox,” could
       have believed that Allergan knew better than
       the FDA which Botox applications were safe,
       particularly off-label uses already approved
       (or at least permitted) in other countries. It is
       not unreasonable to infer that the Board and
       CEO saw the distinction between off-label
                   ROSENBLOOM V. PYOTT                        41

        selling and off-label marketing as a source of
        legal risk to be managed, rather than a
        boundary to be avoided. Based on this
        premise, the CEO and his management team
        devised, and the Board approved, a business
        plan that relied on off-label-use-promoting
        activities, confident that the risk of regulatory
        detection was low, that most regulatory
        problems could be solved, and that dealing
        with regulatory risk was a cost of doing
        business. As profits increased and the
        regulatory risk seemed well managed, the
        extent of off-label use-promoting activities
        grew. The appearance of formal compliance
        cloaked the reality of non-compliance, and
        directors who understood the difference
        between legal off-label sales and illegal off-
        label marketing continued to approve and
        oversee business plans that depended on
        illegal activity. See Massey Energy, 2011 WL
2176479, at *19 (crediting inference that
        outside directors went “through the motions”
        rather than making “good faith efforts to
        ensure that [the company] cleaned up its act”).

La. Mun. Police, 46 A.3d at 355–56.

    Vice Chancellor Lasker’s analysis complements the
analysis of conscious inaction set forth supra. As alleged by
Plaintiffs, this is a board that adopted a strategic plan in 1997
expressly predicated on massive, immediate growth in off-
label sales of Botox for indications that even the Board did
not believe would be approved by the FDA until 2001–2002;
that continued to depend on increased off-label sales over the
42                 ROSENBLOOM V. PYOTT

next decade; that carefully monitored Botox in meetings and
reports, and that took an especially keen interest in off-label
uses; that heard numerous presentations on some of
Allergan’s illegal off-label promotions; that approved cross-
promotion deals and acquisitions intended mainly to facilitate
off-label promotion; that received a stream of FDA warning
letters about improper Botox marketing, one of which
expressly involved off-label promotions; that heard from at
least one employee whistleblower about unethical off-label
marketing; and that heard information at several points
expressly linking Allergan’s expansive off-label marketing
programs to fluctuations in the number of off-label sales of
Botox.

     When these allegations are examined together, certainly
it is plausible to conclude that they reveal a board committed
to very aggressive off-label promotion of Botox—one of its
most important products, highest corporate priorities, and
most promising sources of revenue. And certainly it is
plausible to conclude that such a board might publicly pay lip
service to regulations while more quietly urging its officers
to push marketing efforts to the regulatory breaking point in
an effort to dramatically improve profits in a tough economic
climate.

    Ultimately, even reviewed for abuse of discretion, the
district court’s single-page analysis of why this inference is
not plausible must be reversed. By declining to draw
inferences to which Plaintiffs are entitled, reading Plaintiffs’
allegations separately rather than in combination, and
incorrectly describing Delaware law as requiring proof of an
explicit and memorialized decision to break the law, the
district court exceeded its discretion.
                      ROSENBLOOM V. PYOTT                               43

                           CONCLUSION

    We do not know what really happened at Allergan from
1997 to 2010. This case comes before us at the pleading
stage—and thus before any discovery—and presents factual
uncertainties that are “an unavoidable consequence of
Delaware’s demand futility rule.” Westmoreland, 727 F.3d
at 729. We therefore hold only that Plaintiffs have satisfied
their obligation to show that demand on Allergan’s board of
directors is excused. Plaintiffs’ particularized factual
allegations, and, more important, the reasonable inferences
that we must draw in Plaintiffs’ favor in deciding a Rule 23.1
motion, suffice to show that the Board either did nothing
despite actual or constructive knowledge of wrongdoing at
Allergan, or knowingly adopted a business plan premised on
illegal conduct. In either case, Allergan’s directors violated
their duty of loyalty and would face a substantial likelihood
of liability; in the latter case, they would also have forfeited
the protection of the business judgment rule. Accordingly,
we reverse and remand for further proceedings.18

       REVERSED AND REMANDED.

  18
    Plaintiffs’ appeal from the district court’s denial of their motion for
reconsideration is dismissed as moot. On appeal, the Directors
Defendants urge that we also address the arguments in their motion to
dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), even though
the district court did not reach those arguments. Following our usual
practice, we decline to reach those issues in the first instance. See United
States v. Johnson Controls, Inc., 457 F.3d 1009, 1022 (9th Cir. 2006)
(“We have noted that while we may affirm the district court’s judgment
on a different ground, we need not do so, and we usually do not.”
(emphasis and internal quotation marks omitted)). To the extent they have
not been waived in the district court, those issues may be raised again on
remand.
44                 ROSENBLOOM V. PYOTT

REINHARDT, Circuit Judge, specially concurring:

   Because it is not necessary to decide the question of the
applicable standard of review in our opinion, I write
separately to set forth my view that the proper standard is de
novo.

    The arguments that Plaintiffs advance against the rule of
Potter v. Hughes, 546 F.3d 1051 (9th Cir. 2008), and In re
Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir.
1999), are compelling. The issue is an important and
controversial one, as evidenced by the fact that the Supreme
Court granted certiorari to resolve a circuit split on this exact
point of law just one year ago (although that case settled
before oral argument). See UBS Fin. Servs. Inc. of Puerto
Rico v. Union de Empleados de Muelles de Puerto Rico
PRSSA Welfare Plan, 134 S. Ct. 40 (2013).

    The problem with Potter and In re Silicon Graphics is
simply stated: Courts of Appeals ordinarily review the
sufficiency of a complaint’s allegations de novo, and there is
no reason why that general rule is not fully applicable to
motions to dismiss on the pleadings under Federal Rule of
Civil Procedure 23.1. Recognizing the problems with abuse
of discretion review of motions to dismiss for failure
adequately to allege demand futility, several state courts have
recently switched to de novo review. See, e.g., Fink v. Codey
(In re PSE & G S’holder Litig.), 801 A.2d 295, 313 (2002);
Harhen v. Brown, 730 N.E.2d 859, 866 (2000); Brehm v.
Eisner, 746 A.2d 244, 253 (Del. 2000). In the federal system,
several circuits have expressed strong concerns about an
abuse of discretion standard, see Pirelli Armstrong Tire Corp.
Retiree Med. Benefits Trust ex rel. Fed. Nat. Mortgage Ass’n
v. Raines, 534 F.3d 779, 783 n.2 (D.C. Cir. 2008); Scalisi v.
                   ROSENBLOOM V. PYOTT                       45

Fund Asset Mgmt., L.P., 380 F.3d 133, 137 n.6 (2d Cir.
2004), the First and Seventh Circuits have recently adopted
de novo review, see Union de Empleados de Muelles de
Puerto Rico PRSSA Welfare Plan v. UBS Fin. Servs. Inc. of
Puerto Rico, 704 F.3d 155, 162 (1st Cir. 2013);
Westmoreland Cnty. Employee Ret. Sys. v. Parkinson,
727 F.3d 719, 724–25 (7th Cir. 2013), and the Sixth and
Eighth Circuits have recently reaffirmed their adherence to de
novo review, see Lukas v. McPeak, 730 F.3d 635, 637 (6th
Cir. 2013); Gomes v. Am. Century Cos., Inc., 710 F.3d 811,
815 (8th Cir. 2013). Motivated by similar concerns, two
panels of this Court have expressed discomfort with abuse of
discretion review in unpublished dispositions. See Israni v.
Bittman, 473 F. App’x 548, 550 n.1 (9th Cir. 2012); Laborers
Int’l Union of N. Am. v. Bailey, 310 F. App’x 128, 130 (9th
Cir. 2009).

     These judges have offered powerful arguments in favor of
de novo review. As a panel of this Court observed in 2000,
we choose “between the de novo and abuse of discretion
standards by balancing the peculiar need of a full appellate
review, against the argument that the district court’s . . .
determination requires the exercise of discretion and therefore
is due the correlative level of deference on review.” Harman
v. Apfel, 211 F.3d 1172, 1176 (9th Cir. 2000). That inquiry,
in turn, looks to factors such as “the language and structure of
the governing statute,” Pierce v. Underwood, 487 U.S. 552,
559 (1988); “[t]he non-amenability of the problem to rules,
because of the diffuseness of circumstances, novelty,
vagueness, or similar reasons that argue for allowing
experience to develop,” id. at 562; whether a decision
“ordinarily has . . . substantial consequences” requiring “it to
be reviewed more intensively,” id. at 563; and whether, “as
a matter of the sound administration of justice, one judicial
46                 ROSENBLOOM V. PYOTT

actor is better positioned than another to decide the issue in
question,” Miller v. Fenton, 474 U.S. 104, 114 (1985).

    Here, all relevant factors cut in favor of de novo review.
Nothing in Rule 23.1 indicates a preference for district court
decision-making; doctrines of demand futility are reasonably
uniform and amenable to general rules that cover a wide
range of circumstances; the decision to dismiss a shareholder
derivative suit under Rule 23.1 results in the serious
consequence of terminating the litigation, and is of particular
importance in the Rule 23.1 context due to the high costs
associated with filing shareholder derivative suits; and district
courts do not have an institutional advantage over appellate
courts in determining the legal sufficiency of pleadings.

    In view of the above, I strongly urge that when we are
presented with a demand futility case in which the standard
of review is determinative of the outcome, reconsideration of
the applicable standard of review would be in order.