The opinion of the court was delivered by: Judge John J. Tharp
MEMORANDUM OPINION AND ORDER
This is a suit brought on behalf of Baxter International Inc. by a shareholder against certain officers and directors who allegedly violated duties they owed to the company. Shareholders may assert claims on a corporation's behalf only when the board of directors-which is normally responsible for decisions to bring lawsuits-has wrongfully refused the shareholders' demand that they pursue litigation, or when such a demand would be futile because the board is incapable of impartially evaluating whether to pursue the legal claims at issue. Lead Plaintiff Westmoreland County Employee Retirement System ("Westmoreland") did not ask Baxter to pursue the claims it advances in this case, asserting instead that it would have been futile to do so. Baxter and the Individual Defendants (who are directors and/or officers of Baxter) maintain that demand on the board was not excused and that the Plaintiff therefore lacks standing to go forward with this law suit. The Court agrees with the Defendants that Plaintiff has not met its burden to show that demand would be futile and, accordingly, grants the Defendants' motions to dismiss.*fn1
Westmoreland alleges that, between January 2008 and the filing of this lawsuit in October 2010, the Individual Defendants breached duties they owed to Baxter in four respects. First and foremost, Westmoreland alleges that the Individual Defendants failed to remediate long-standing problems with Baxter's Colleague Infusion Pumps, which the FDA ultimately banned from the market in 2010.*fn2 Westmoreland also maintains that that the Defendants failed to ensure the safe manufacture of the drug heparin, resulting in recalls and patient deaths. The Amended Consolidated Complaint ("Complaint") also alleges that the Defendants made various misrepresentations concerning Baxter's profits and revenues and that certain defendants engaged in insider trading. Based on these alleged breaches, the Complaint sets forth a total of seven claims for breach of fiduciary duty, waste of corporate assets, gross negligence, unjust enrichment, insider trading, and aiding and abetting a conspiracy. The facts alleged to support these claims, which for the purposes of this motion only are taken as true, are summarized as follows.
1.Failure to Remediate Problems With the Colleague Infusion Pumps
Baxter began selling Colleague Pumps, which deliver intravenous fluids such as medication or nutrients to patients, in the mid-1990s. The FDA began scrutinizing the Colleague Pumps in 1999. Between 1999 and 2005, the FDA issued a series of warning letters to Baxter detailing its consistent failure to bring the Colleague Pumps into compliance with applicable standards, but Baxter nevertheless failed to successfully address the problems with the devices. Thereafter, the FDA filed a complaint seeking the forfeiture of all Baxter-owned Colleague Pumps. In 2006, Baxter entered into a Consent Decree of Condemnation and Permanent Injunction ("Consent Decree") which required Baxter to stop selling Colleague Pumps in the U.S. market and to submit and implement a corrective action plan to bring existing Colleague Pumps being used by doctors and hospitals into compliance with federal law. The Consent Decree also gave the FDA the option of ordering a recall of all Colleague Pumps if Baxter violated the Consent Decree or federal standards.
The events leading to entry of the Consent Decree, however, are not at issue in this law suit. The claims asserted here are based on conduct beginning in 2008, relating to Baxter's "failure to comply with the Consent Decree." Cmplt. ¶ 3(b). The Complaint alleges that Baxter's efforts to comply with the Consent Decree were "minimal" and "deeply flawed," id. ¶ 94, but includes virtually no allegations as to what would have constituted a more-than-minimal effort to comply with the Consent Decree or what should have been done to correct the flaws in Baxter's remediation program. Instead, the Complaint describes the hundreds of millions of dollars of charges and costs that Baxter incurred in connection with its efforts to remediate the Colleague Pumps, the sixty-plus meetings of the board of directors (or committees thereof) to discuss the remediation program, a substantial recall of the pumps that Baxter made on its own initiative, and its development and submission to the FDA of a proposed correction schedule in 2010.*fn3
Despite Baxter's efforts, in May 2010 the FDA ordered Baxter to recall and destroy all of its Colleague Pumps because Baxter had "failed to adequately correct, within a reasonable timeframe, the deficiencies in the Colleague infusion pumps still in use." Id. ¶ 111. Baxter's stock price fell by more than 5% after the recall announcement, and Westmoreland claims the recall cost Baxter $588 million. Id. ¶ 112; Dkt. 104 at 3. In announcing the recall, the FDA acknowledged that Baxter had been working to correct the problems with the pumps since 1999, and that "Baxter has made numerous changes to the Colleague pumps but these changes have not corrected the product defect." Cmplt. ¶ 111. But the FDA determined that Baxter's proposed correction schedule, which projected a completion date in 2012, was unacceptable and ordered the recall of all of the Colleague Pumps that were still in use.
Heparin is a prescription drug used as a blood thinner to reduce the chance of blood clots forming in patients. The active pharmaceutical ingredient ("API") in heparin is an enzyme extracted from pig intestines. In 2008, Baxter supplied approximately half of the heparin sold in the United States. Baxter obtained component ingredients for heparin from a supplier, Scientific Protein Laboratories LLP ("SPL"), which had a manufacturing plant in Changzhou, China. Westmoreland alleges upon information and belief that the Changzhou facility "obtained the API for the heparin from entirely unregulated and often unclean multiple, small, family-owned workshops that failed to process the crude heparin effectively, which resulted in a dangerous product that contained animal cartilage and contaminated the API." Cmplt. ¶ 69.
Westmoreland alleges that Baxter never made a single inspection or visit to the Changzhou manufacturing plant, and never took any effective action to verify the purity of the API. Id. ¶ 72. The Complaint asserts that, despite the fact that no Baxter employees had ever visited the Changzhou manufacturing plant, Baxter represented and warranted that it "places significant emphasis on providing quality products," that it "works closely with its suppliers" in an effort to manage risk associated with raw materials, that "great care is taken in assuring the safety of these raw materials," that it "regularly reviews its quality systems," and that it "performs assessments of its suppliers and raw materials." Id. ¶ 70. Westmoreland alleges that these statements were false and that the Individual Defendants knew them to be false. Id. ¶ 71. The Court takes judicial notice, however, of the fact that Baxter received FDA approval to use API from the Changzhou plant in its heparin products. Dkt. 98-2 at 3.*fn4
In 2007, Baxter became aware of severe allergic reactions, including death, experienced by patients using its heparin. Cmplt. ¶ 74. In early 2008, Baxter and the FDA announced recalls of heparin, and the FDA announced that the drug had been contaminated.*fn5 Id. ¶¶ 75-77. Westmoreland alleges that Baxter's stock price fell by approximately 15% when the public became aware of the full extent of the heparin contamination and its implications for Baxter. Id. ¶ 80.
Westmoreland also alleges that the Individual Defendants
misrepresented or failed to disclose several pieces of material
information to shareholders. For example, it claims that the
Individual Defendants did not disclose that Baxter benefitted from a
supply constraint allowing it to charge high prices for plasma-based
products because one of its competitors was experiencing manufacturing
disruptions and seeking a merger with another competitor.*fn6
Id. ¶ 84. Rather than disclosing that this was only a short
term advantage, the Individual Defendants stated that Baxter's gross
margin was sustainable and could be expanded even further, indicating
that plasma product prices would remain high. Id. ¶¶ 96, 99, 103, 105.
The FTC eventually disapproved the competitors' merger,
which caused Baxter's competitor to return to full production,
adversely affecting Baxter's ability to maintain high prices. Id. ¶¶
The Individual Defendants also failed, it is alleged, to account for the impact of healthcare reform legislation in their initial financial guidance for 2010, forcing Baxter to revise its revenue estimates downward after healthcare legislation was enacted. The healthcare bill was signed into law on March 23, 2010, and on April 22, 2010, Baxter issued a press release reducing its expected annual revenue growth from 5-7% to 1-3%, and reducing its earnings estimates. Id. ¶ 108. The press release specifically stated that the "revised financial guidance primarily reflects the impact of the recent healthcare reform legislation in the U.S. and [Baxter's] outlook for continued plasma market pressures." Id. Baxter's stock price declined over 13% on the day the press release was issued. Id. ¶ 109.
Finally, Westmoreland also accuses several of the Individual Defendants (Defendants Boomer, Martin, Shapazian, Stallkamp, Riedel, McGillivray, and White, hereinafter the "Trading Defendants") of selling Baxter stock at times when they knew- because of material non-public information that they gained in the course of their board meetings and/or employment-that the stock was artificially inflated. Westmoreland alleges the number of shares that each Trading Defendant sold, the dates of the sales, and the amount of proceeds received. But it does not allege what percentage of their shareholdings each Trading Defendant sold, provides no information about their trading history or basis to discern whether the trades described were aberrational, and fails to associate the trades with any particular facts in a manner that would make the timing of the sales were suspicious.
The Defendants move to dismiss the Complaint in its entirety pursuant to Federal Rule of Civil Procedure 23.1 and Delaware Chancery Rule 23.1. The Delaware rule is essentially identical to the federal rule and, in any event, federal procedural rules govern in diversity suits. Starrels v. First Nat. Bank of Chicago, 870 F.2d 1168, 1170 (7th Cir. 1989) (applying federal procedural requirements to substantive claim under Delaware Rule ...