In Marchand v. Barnhill et al the Delaware Supreme Court overturned the Court of Chancery’s decision to dismiss a complaint asserting a Caremark cause of action for failure to state a claim.  The case involved Blue Bell Creameries USA, Inc., one of the country’s largest ice cream manufacturers.  Blue Bell suffered a listeria outbreak in early 2015, causing the company to recall all of its products, shut down production at all of its plants, and lay off over a third of its workforce. Three people died as a result of the listeria outbreak.  The Court of Chancery held that the plaintiff did not plead any facts to support “his contention that the [Blue Bell] Board ‘utterly’ failed to adopt or implement any reporting and compliance systems.

The Court noted that under Caremark, a director may be held liable if she acts in bad faith in the sense that she made no good faith effort to ensure that the company had in place any “system of controls.” Using facts discovered as a result of a books and records demand, the Court noted the complaint fairly alleged that before the listeria outbreak engulfed the company:

• no board committee that addressed food safety existed;
• no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed;
• no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed;
• during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board;
• the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture; and
• the board meetings were devoid of any suggestion that there was any regular discussion of food safety issues.

The complaint also alleged that after the listeria outbreak, the FDA discovered a number of systematic deficiencies in all of Blue Bell’s plants—such as plants being constructed “in such a manner as to [not] prevent drip and condensate from contaminating food, food-contact surfaces, and food-packing material”—that might have been rectified had any reasonable reporting system that required management to relay food safety information to the board on an ongoing basis been in place.

The Court found the complaint supported an inference that no system of board-level compliance monitoring and reporting existed at Blue Bell. When a plaintiff can plead an inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation, then that supports an inference that the board has not made the good faith effort that Caremark requires.

The defendant directors argued that by law Blue Bell had to meet FDA and state regulatory requirements for food safety, and that the company had in place certain manuals for employees regarding safety practices and commissioned audits from time to time.  The Court rejected this argument noting that while Blue Bell might have nominally complied with FDA regulations that did not imply that the board implemented a system to monitor food safety at the board level.

It is important to note that the Court did not find that any of the defendants were involved in wrongful conduct, only that the Complaint survived a motion to dismiss.