Lebanon County v. Collis: Delaware Supreme Court reverses dismissal of Caremark claims

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In Lebanon County Employees’ Retirement Fund v. Collis, the Delaware Supreme Court reversed the Delaware Court of Chancery’s dismissal of Caremark claims against the directors of AmerisourceBergen Corporation that arose from the company’s distribution of opioids. The Delaware Supreme Court found that the Court of Chancery erred when it took judicial notice of another court’s factual findings at the pleading stage. The Delaware Supreme Court found that the Court of Chancery “effectively adopt[ed] the factual findings of another court in another case,” which was “a departure from the principles that animate the concept of judicial notice.” This opinion provides important guidance on the scope of judicial notice under Delaware Rules of Evidence 201 and 202 as well continued development of the Caremark doctrine.

In Lebanon County Employees’ Retirement Fund v. Collis, No. 22, 2023 (Del. Dec. 18, 2023), the Delaware Supreme Court reversed the Court of Chancery’s dismissal of shareholders’ Caremark and Massey claims against the directors of AmerisourceBergen Company (AmerisourceBergen or the Company). The plaintiffs asserted a “prong two” Caremark claim against AmerisourceBergen, alleging that the directors of the Company failed to oversee AmerisourceBergen’s compliance with laws governing the distribution of opioids. The plaintiffs also asserted a related Massey claim that the directors prioritized profits from the sale of opioids without dedicating sufficient resources to compliance efforts, like anti-diversion control systems.

In December 2022, Vice Chancellor Laster dismissed the case based on a decision in AmerisourceBergen’s favor by a West Virginia federal court in opioid-related multidistrict litigation (the West Virginia Decision). After a two-month trial on the merits, the West Virginia court found that “no culpable acts by defendants caused an oversupply of opioids . . . .” Vice Chancellor Laster concluded that the federal court’s findings were “not preclusive,” but they were “persuasive.” For Vice Chancellor Laster, the West Virignia court’s findings “knock[ed] the stuffing out of the plaintiffs’ claim[s]” and made it impossible to infer that a majority of the directors who were in office when the complaint was filed face a substantial likelihood of liability on the plaintiffs’ claims. Thus, the Court of Chancery dismissed the case for the plaintiffs’ failure to allege demand futility under Rule 23.1.

On appeal, the Delaware Supreme Court found that the Court of Chancery erred by taking judicial notice of the West Virginia Decision under Delaware Rule of Evidence (D.R.E) 202. The Supreme Court pointed out that D.R.E. 202 can be invoked for judicial notice “of case law” in other courts, such as recognizing rules or principles of law, but not for judicial notice of facts. The Court of Chancery thus improperly relied on the West Virginia Decision’s factual findings as the “sole basis” for the court’s denial of the defendant’s motion to dismiss. 

The Supreme Court further analyzed whether D.R.E. 201 could support taking “adjudicative notice” of the factual findings in the West Virginia Decision. The Supreme Court acknowledged that it “has not addressed whether a court can take adjudicative notice of the factual findings of another court.” As a result, it analyzed federal court decisions regarding Federal Rule of Evidence 201 and concluded that it would be improper to take adjudicative notice of other courts’ factual findings “when the underlying fact is reasonably disputed.” Here, the Supreme Court concluded that a defendant’s liability was “reasonably disputed” and taking adjudicative notice under D.R.E. 201 would “unfairly deprive[] the plaintiffs of the opportunity to prove the truth of their well-pleaded allegations.” Accordingly, the Supreme Court found that the Court of Chancery improperly gave the West Virginia Decision “preclusive effect.” 

The Delaware Supreme Court also took issue with the timing of Vice Chancellor Laster’s demand futility analysis. Here, the West Virginia Decision was released while briefing on the motion to dismiss in the Court of Chancery was already underway. The Supreme Court emphasized that demand futility should be considered as of the date the complaint is filed.

A rare reversal, this decision provides important guidance for both the plaintiffs and the defendants litigating Caremark claims as well as those involved in parallel litigation of any kind where similar or identical issues may be litigated simultaneously in Delaware and other forums.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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