In Lebanon County Employees’ Retirement Fund v. Collis, C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022), the Delaware Court of Chancery denied a motion to dismiss as untimely a derivative action against a pharmaceutical distributor’s officers and directors. Noting that the timeliness principles governing Caremark red-flags claims and Massey claims alleging that a fiduciary acted disloyally by causing a company to seek profit by violating the law was an issue of first impression, the court decided on a “separate accrual approach” that views “a series of related decisions and conscious nondecisions as a sequence of wrongful acts” each giving rise “to a separate limitations period.” Therefore, the court concluded that the plaintiffs could assert claims for conduct that occurred within the three-year period prior to their books and records request.
AmerisourceBergen is one of the largest wholesale distributors of opioids in the United States. The company has faced a number of investigations, enforcement actions, and litigation related to its business strategies, placing it “at the center of America’s tragic opioid epidemic.” More specifically, AmerisourceBergen is alleged to have sold increasingly larger quantities of opioids to questionable purchasers despite incurring a significant increase in legal risk. In 2021, the company agreed to pay over US$6 billion as part of a nationwide resolution of multidistrict litigation.
The plaintiffs’ derivative claim sought to shift the responsibility for the harm of that settlement agreement from the company to its officers and directors under two theories: (1) a Caremark “red flag” theory, in which directors can be held liable if they consciously fail to monitor or oversee a reporting system or controls, and (2) a Massey theory, based on allegations that the company’s officers and directors took actions that knowingly prioritized profits over law compliance. Although the alleged conduct began in 2010, the plaintiffs did not seek books and records until 2019 and did not file their derivative claim until 2021. AmerisourceBergen argued that the derivative claim was outside the three year statute of limitations and therefore untimely.
The court acknowledged that “[n]o Delaware court has addressed how to determine when a Red-Flags Claim or a Massey Claim accrues.” The court therefore considered whether to apply the discrete act method, the continuing wrong method, or the separate accrual approach. The court found both the discrete act method—when a specific decision constitutes a discrete wrongful act that causes the claim to accrue—as well as the continuing wrong method—when a series of inextricably related decisions and conscious non-decisions are treated as a continuing wrong—were inappropriate. Ultimately, the court settled on the “separate accrual approach” as a “Goldilocks regime that falls in between a too-defendant-friendly discrete act approach and a too-plaintiff-friendly continuing wrong approach.”
Under the separate accrual approach, the court looks to when a plaintiff begins to “vigilantly pursu[e] its claims” rather than when the suit is filed. For a derivative action, that can be when a plaintiff begins to seek books and records. Therefore, the plaintiffs’ claims regarding a “litany of events” in the three years prior to their books and records request were timely.
A short time later, in Lebanon County Employees’ Retirement Fund v. Collis, C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022), the plaintiffs’ claims were dismissed for failure to plead demand futility. Nevertheless, the court’s decision provides useful guidance on the timeliness of derivative claims brought on Caremark red-flags or Massey theories of liability.
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