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In New AmerisourceBergen Decision, Chancery Applies 'Separate Accrual' Laches Analysis for 'Caremark' Red-Flags Claims

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December 28, 2022
By: K. Tyler O'Connell
Delaware Business Court Insider

In the latest Delaware corporate decision concerning AmerisourceBergen’s role in the nation’s opioid epidemic, the Delaware Court of Chancery largely rejected arguments that laches barred fiduciary duty claims against AmerisourceBergen’s directors and officers for acting in bad faith by disregarding red flags in safety reporting and monitoring systems and knowingly operating the business in a manner to violate positive law. See Lebanon County Employees’ Retirement Fund v. Collis, 2022 WL 17687848 (Del. Ch. Dec. 15, 2022). Addressing an issue of first impression, Vice Chancellor J. Travis Laster applied a “separate accrual” analysis, which regards “a series of related decisions and conscious nondecisions as a sequence of wrongful acts, each of which gives rise to a separate limitations period.”

The Court of Chancery’s Decision

AmerisourceBergen is one of the nation’s largest opioid distributors, a middleman between manufacturers and pharmacies. It has faced many federal, state, and local government investigations, enforcement actions, and other lawsuits arising from its alleged business strategy of selling greater quantities of opioids to suspicious purchasers despite increasing legal risk. Previously the stockholder-plaintiffs sought books and records under 8 Del. C. Section 220 to investigate potential wrongdoing by the company’s directors and stockholders, and ultimately prevailed before the Delaware Supreme Court. See Lebanon County Employees’ Retirement Fund v. Collis. 2020 WL 132752 (Del. Ch. Jan. 13, 2020), aff’d, 243 A.3d 417 (Del. 2020).

With the benefit of those documents, the stockholder-plaintiffs then filed derivative claims in December 2021. They alleged that over a period of years, directors and officers sought to increase sales to suspicious purchasers in disregard of heightened legal risks, making many large sales to illicit “pill mills.” Among other things, the stockholder-plaintiffs alleged the company systemically failed to report suspicious orders to the Drug Enforcement Administration as required by law.

Then in 2015, against a background of already low reporting and increased regulatory scrutiny, the directors and officers adopted a revised order monitoring program (the Revised OMP). They allegedly knew the Revised OMP would further reduce suspicious order reporting, which in fact occurred. The company began to face more and more serious investigations and litigation, resulting in harm to its business. Despite this, the directors and officers allegedly knowingly continued this course of conduct leading up a 2021 global settlement with states and localities, which included a mandatory permanent injunction requiring improvements to monitoring and reporting systems. The stockholder-plaintiffs alleged the directors and officers deliberately did not take steps to address serious problems in the years prior so that they might offer process improvements as nonmonetary bargaining chips in settlement negotiations.

The defendants moved to dismiss the plaintiffs’ claims as untimely. The court observed that the plaintiff asserted so-called “Red-Flags Claims” under Caremark and its progeny for consciously failing to address known problems under existing reporting systems. The plaintiff also brought what the court termed a “Massey Claim” for intentionally attempting to maximize profits by violating positive law. The court reasoned that “no Delaware court has addressed how to determine when a Red-Flags Claim or a Massey Claim accrues.”

The court surveyed Delaware and non-Delaware authorities concerning accrual tests. It explained that, in fiduciary duty litigation, a “discrete act” accrual test applies in “the vast majority” of cases. Under that method, “when a plaintiff contends that fiduciaries have breached their duties by making a specific decision that was complete when made, that decision constitutes a discrete wrongful act that causes the claim to accrue.” The court also noted that Delaware fiduciary duty cases also occasionally have applied the “continuing wrong” theory of accrual, under which “the wrongful act is not complete, and the limitations period does not begin to run, until the continuing wrong ceases[;]” and “if any portion of the wrongful act occurs within the limitations period, then the plaintiff can seek to impose liability and recover damages for the entire period covered by the continuing wrong.”

Rather than applying either of these competing approaches, the court instead applied what it called “a Goldilocks regime that falls in between a too-defendant-friendly discrete act approach and a too-plaintiff-friendly continuing wrong approach.” Under that “separate accrual” approach, each challenged decision and conscious failure to act initiates a new limitations period. Thus, “the plaintiff can prove liability and recover for acts that occurred during the limitations period, even if other aspects of the ongoing conduct occurred outside of the limitations period.” The court reasoned this is appropriate due to the nature of a Red-Flags Claim, under which the red flags at-issue—and the defendants’ alleged scienter when faced with them—tend to evolve over time. The separate accrual method also “strikes an appropriate balance by respecting the important interests served by limitations periods while preserving a litigation vehicle that can provide accountability and generate compensation for injuries.” With respect to a Massey Claim, in the case of a business strategy premised upon violating positive law, culpability and the magnitude of the harm similarly evolve over time. The court reasoned that “in an egregious setting” involving long-standing unlawful practices, the policies underlying a Massey Claim could require applying the more plaintiff-friendly “continuing wrong” accrual standard. The court reasoned that it need not decide that specific issue in the circumstances of this case, however.

As applied here, the court reasoned that under Delaware precedents, in “a derivative action in which the plaintiff has sought books and records, the court can calculate the actionable period using an earlier date tied to the plaintiff’s diligent pursuit of its informational rights”—i.e., “when the plaintiff began pursuing books and records” in earnest, versus the later date when it filed derivative claims. The court reasoned this does not turn on when a Section 220 action is filed. Rather, the question is when the stockholder requested information and pursued the books and records demand process “with deliberate speed.” Here, the court reasoned that, while the plaintiffs could be entitled to a look-back period from May 2019, when they made their books and records demand, the plaintiffs argued for October 2019, which was during the books and records action. The court thus concluded that the plaintiffs had timely claims for the “litany of events” alleged in the three years prior to October 2019 constituting red flags, as well as the alleged deliberate decision at the heart of the Massey Claim to continue the Revised OMP program.

Accordingly, the court held the plaintiffs’ claims were timely filed. The court’s decision did not address the defendants’ arguments for dismissal under Rule 23.1 and 12(b)(6), which remain pending.

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