The opinion of the court was delivered by: Moran, Senior District Judge.
MEMORANDUM OPINION AND ORDER
Abbott Laboratories (Abbott) entered into a consent decree with
the Food and Drug Administration (FDA) on November 2, 1999. The
decree required Abbott to pay a $100 million penalty, withdraw
125 types of medical diagnostic test kits from the United States
market, destroy certain inventory, and make various corrective
changes in its manufacturing procedures. That spawned a number of
derivative actions, now consolidated in this litigation. Abbott
and its directors have moved to dismiss the complaint for failure
to properly plead futility of a demand under Rule 23.1 of the
Federal Rules of Civil Procedure. Those motions are granted, but
with leave to amend within 21 days.
The parties agree that Illinois substantive law controls. They
consider the requirements of Rule 23.1 and Illinois law to be
similar and to be instructed by Delaware law, and they go
directly to the Delaware cases. And so shall we. The verbal
formulation of what is necessary to excuse a demand is
well-defined in those cases, but its application is much more
Plaintiffs here, for the most part, attack what the directors
failed to do — their failure to require management to bring
Abbott into compliance with federal requirements. "Thus, a court
must determine whether or not the particularized factual
allegations of a derivative stockholder complaint create a
reasonable doubt that, as of time the complaint is filed, the
board of directors could have properly exercised its independent
and disinterested business judgment in responding to a demand."
Rales v. Blasband, 634 A.2d 927, 934 (1993). A mere threat of
personal liability is insufficient to create a reasonable doubt
of the board's ability to act independently; the potential for
liability must rise to a substantial likelihood. Id. at 936.
When the Certificate of Incorporation exempts the directors from
liability for acts or omissions other than violations of their
duty of loyalty or acts not in good faith or involving
intentional misconduct or knowing violation of law, the complaint
must plead non-exempt conduct with sufficient particularity to
permit the court reasonably to determine from the face of the
complaint whether there is a substantial likelihood of liability.
In re Baxter International Inc. Shareholders Litigation,
654 A.2d 1268, 1270 (1995). The pleader must set forth particularized
factual statements that are essential to the claim. Brehm v.
Eisner, 746 A.2d 244, 254 (2000).
It is no answer to say that a demand is necessarily futile
because the directors would have to sue themselves. Id., at 257
n. 34. Indeed, it appears to be recognized by all concerned that
it is highly unlikely that a demand here would lead to a decision
to initiate litigation, because the necessary allegations would
seriously compromise the defense of the various securities cases
filed in the wake of the consent decree. The issue is not,
however, what the directors would do, so long as the decision was
arguably an appropriate business
judgment, but whether they can act without being influenced by
So what do the plaintiffs allege? They do not allege any
personal financial interest in causing violations or concealing
the facts, or in any other respect other than the customary
benefits arising from service as directors, and that is not
enough. Grobow v. Perot, 539 A.2d 180, 188 (1988). None of the
outside directors, who comprise almost the entire board, is
alleged to have sold any of his or her shares prior to the date
of the consent decree. There are no specific facts alleged that
indicate that their positions as directors would have been
threatened if they had taken earlier action.
The allegations are generally couched in terms of "knew or
should have known" or similar variations. The "should have known"
claims cannot excuse demand because the directors are indemnified
for any liability that may arise from their negligence. What then
are the plaintiffs charging that might fall outside the scope of
the indemnification? The complaint is 30 pages long, with 82
paragraphs. It has four counts. The second count claims waste of
corporate assets because of the payment of the $100 million and
the destruction of inventory. That claim does invoke the
two-prong approach of Aronson v. Lewis, 473 A.2d 805 (1984),
because it attacks board action rather than its failure to act.
But, given their allegations that Abbott was seriously deficient
in meeting federal requirements, plaintiffs cannot and do not
charge that the settlement was so improvident that it was devoid
of a legitimate corporate purpose. See Starrels v. First
National Bank of Chicago, 870 F.2d 1168, 1171 (7th Cir. 1989).
The second count can be read as attacking the board's prior
inaction, which resulted in the consent decree, but that is not a
claim of corporate waste. Rather, it is another way of stating
the breach of fiduciary duty claim in the first count and is
duplicative of it. Plaintiffs call the same conduct or lack of
conduct "ultra vires acts" in the third count, but, again, we
think they are dressing up the same claim in different
terminology. In the fourth count, plaintiffs contend that
increased compensation for the two inside director-officers was
self-dealing, but it did not benefit the outside directors and
executive compensation is a business judgment left to the board
except in the most exceptional circumstances. Brehm v. Eisner,
supra. The allegation that the outside directors approved a
modest increase in compensation for themselves is also hardly the
stuff of derivative litigation.
Plaintiffs' claim gets down to the charge that the directors
were in knowing breach of their fiduciary duty by failing to
correct and by failing to disclose the deficiencies that led to
the consent decree. And there they use a variety of pejorative
words and phrases: "sanctioning violations of federal laws and
regulations," "caused," "knowing and culpable violation of their
duties," "aware of . . . a risk of serious damage," "ratified
and/or endorsed the ongoing violations of law," "an absence of
good faith," "participated," "approved the wrongful acts
complained of," "concealed" and "misused." But when we analyze
the particularized factual allegations contained in the portion
of the complaint labeled "Substantive Allegations," the scope of
the claims is uncertain.
Plaintiffs allege that Abbott began receiving reports of
violations after FDA inspections from 1993 on. The FDA sent
Abbott warning letters on October 20, 1993, March 28, 1994, and
March 17, 1999. It met at least ten times with Abbott
representatives during that period. Abbott operated under an
FDA-monitored compliance plan from July 19, 1995, until February
26, 1998, under which Abbott committed to make specific
corrections and to submit reports of its progress. There is no
allegation that the directors were even aware of the 1993 and
1994 warning letters, although apparently copies were sent to the
chairman of the board, or that they
had any reason to believe that appropriate corrective action was
not being taken. Rather, they allege that the directors
(presumably those defendant directors who were members of the
board in those years) had access to information because of their
position. They allege in par. 33 that the directors reviewed the
March 17, 1999, warning letter, but in par. 57 they allege that
the directors knew about warning letters because of their
publication in a Warning Letter Bulletin and their public
dissemination. They allege that the March 17, 1999, warning
letter was publicly disclosed in two publications in June 1999.
Plaintiffs also allege that the FDA conducted extensive
inspections May-July 1999, and detailed 45 deviations, and Abbott
submitted written responses that the FDA deemed insufficient.
Abbott issued a press release on September 28, 1999, announcing
that the FDA was alleging noncompliance with its regulations,
that Abbott believed it was in substantial compliance, that the
FDA disagreed, that the parties were discussing a consent decree
and that if those discussions were unsuccessful the government
would seek injunctive relief.
We are left, then, to speculate as to whether plaintiffs' claim
that the directors knew of the representations in the March 17,
1999, warning letter at that time, or shortly thereafter; whether
they knew that corrective action was not being taken; whether
they knew of the results of the later inspection; whether they
knew that corrective action was not being taken; and when they
knew that the FDA wanted Abbott to enter into a consent decree.
Conceivably they were parties to a decision not to comply with
federal requirements until the FDA threatened to file suit, or
were advised that deficiencies were not being corrected and did
nothing, but particularized factual allegations of what board
members knew and when they knew it are lacking.
We think In re Baxter International, Inc. Shareholders
Litigation, supra, is instructive here. Plaintiffs there alleged
that the defendants "knew" about sales representative misconduct
that led to the suspension of the company from receiving
government contracts. Noting that directors are entitled to rely
upon the honesty and integrity of their subordinates until
something occurs to alert suspicion, the court required that
plaintiffs there plead with particularity that the directors
ignored obvious danger signals. Here, also, the plaintiffs must
allege more than they have if demand is to be excused. The
complaint is dismissed, with leave to amend within 21 days.
The motions to consolidate discovery and to stay all discovery
are denied as moot.
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