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Boron v. Bracken

Superior Court of Rhode Island, Providence

April 29, 2019

EDWARD BORON, Derivatively on Behalf of CVS HEALTH CORPORATION, Plaintiff,
v.
RICHARD M. BRACKEN, LISA G. BISACCIA, EVA C. BORATTO, TROYEN A. BRENNAN, HELENA B. FOULKES, STEPHEN B. GOLD, DAVID W. DORMAN, LARRY J. MERLO, DAVID M. DENTON, HELENA B. FOULKES, J. DAVID JOYNER, JONATHAN C. ROBERTS, ANDREW SUSSMAN, PER G.H. LOFBERG, RICHARD J. SWIFT, C. DAVID BROWN II, JEAN-PIERRE MILLON, ANNE M. FINUCANE, TONY L. WHITE, WILLIAM C. WELDON, NANCY-ANN M. DEPARLE, and ALECIA A. DECOUDREAUX, Defendants, and CVS HEALTH CORPORATION, a Delaware corporation, Nominal Defendant.

          For Plaintiff: Robert M. Duffy, Esq.

          For Defendant: Robert C. Corrente, Esq.

          DECISION

          STERN, J.

         The Plaintiff Edward Boron (Plaintiff) filed this Verified Stockholder Derivative Complaint (Complaint) on behalf of CVS Health Corporation (CVS) alleging that members of CVS's Board of Directors (the Director Defendants or collectively the Board) breached their fiduciary obligations to CVS and its stockholders, wasted corporate assets, unjustly enriched themselves and committed civil conspiracy, thereby causing CVS to incur damages. The Board, as well as various CVS executive officers also named as defendants (the Officer Defendants), move this Court for an order taking judicial notice of certain exhibits and dismissing the Complaint for failure to appropriately plead demand futility.[1]

         I

         Background

         CVS, a Delaware corporation with principal executive offices located in Woonsocket, Rhode Island, is the largest "integrated pharmacy health care provider" in the United States based upon revenues and prescriptions filled. (Compl. ¶¶ 14, 34.) CVS's clients include "employers, insurance companies, unions, government employee groups, health plans, Medicare Part D plans, Managed Medicaid plans, plans offered on the public and private exchanges, other sponsors of health benefit plans and individuals throughout the United States." Id. ¶ 38.

         Customers can fill prescriptions from CVS retail locations in at least three ways: (1) by purchasing prescriptions with the assistance of a third-party payer (TPP), such as a private insurance company, Medicare, or Medicaid; (2) by paying the "retail" or "cash" price without insurance; or (3) by purchasing through an alternative prescription-benefits program. Id. ¶¶ 66, 67, 73, 83-85, 88; see also Defs.' Mem. Supp. Mot. Dismiss Pl.'s Verified Stockholder Derivative Compl. 7 (Defs.' Mem.) Most CVS customers purchase prescriptions with the help of a TPP through a negotiated cost split, also known as a "copayment" or "co-insurance." Compl. ¶ 66. The amount a TPP and a customer pay CVS, respectively, depends on a process known as "adjudication." Id. ¶¶ 69, 73.

         Based on data CVS reports during adjudication, TPPs set a customer's copayment to fill a prescription. Id. ¶ 74. As a required component of the adjudication process, CVS submits to TPPs what is known as the "usual and customary" (U&C) price for the drug being dispensed. Id. ¶ 73. The National Council for Prescription Drug Programs (NCPDP) defines the U&C price as the cash price available to the general public, exclusive of sales tax or other amounts. Id. A drug price cannot exceed the U&C price, and in some cases, the copayment may not exceed a percentage of the U&C price. Id. ¶¶ 75, 76. The TPPs pay the difference between the adjudicated amount and the copayment, or the "reimbursement" amount. Id. ¶ 69.

         In 2006, stores including Wal-Mart, Costco, and Target began offering generic drugs at significantly reduced prices; these companies were able to absorb lower margins because pharmacy sales accounted for such a small amount of total sales. Id. ¶¶ 80, 81. According to the Complaint, CVS wanted to compete with the big-box stores by retaining and attracting cash-paying customers but was unwilling to lower prices charged to TPPs. Id. ¶ 90. Thus, in November of 2008, CVS launched a custom branded generic prescription drug program, the Health Savings Pass (HSP) program, which offered discounts to cash-paying customers on generic drugs for a nominal fee. Id. ¶¶ 83-85. A majority of CVS's cash-paying customers "flocked to the HSP program." Id. ¶ 88. However, despite that most cash-paying customers were paying a discounted price, CVS continued to submit to TPPs during adjudication the price charged to the minority of customers who paid the non-HSP cash price. Id. ¶ 90.

         Because insured customers were still obliged to pay a cost split, their copayments sometimes exceeded the amount paid by cash-paying customers filling prescriptions through the HSP program without insurance. Id. The Plaintiff contends that CVS violated the law by failing to report the HSP price as the U&C price, which would have effectively reduced insured customers' copayments. Id. ¶¶ 96-99. "Numerous former employees/whistleblowers and governments" associated with the HSP program have instituted actions against CVS. Id. ¶ 105. CVS ultimately discontinued the HSP program in or about April 2017. Id. ¶ 141.

         On September 15, 2017, the Plaintiff filed the Complaint. On April 13, 2018, this Court rendered a decision denying the Defendants' motion to stay this case pending the outcome of the various civil actions filed against CVS, reasoning that the Defendants had "put the cart before the horse" by not first filing an answer or a motion to dismiss. On May 21, 2018, the Defendants filed the present motion. After hearing oral argument and reviewing the papers, this Court renders the following Decision.

         II

         Standard of Review

         "'[A] motion to dismiss is to test the sufficiency of the complaint.'" Palazzo v. Alves, 944 A.2d 144, 149 (R.I. 2008) (quoting R.I. Affiliate, ACLU, Inc. v. Bernasconi, 557 A.2d 1232 (R.I. 1989)). A court must assume the truth of a complaint's allegations and "examine the facts in the light most favorable to the nonmoving party." A.F. Lusi Constr., Inc. v. R.I. Convention Ctr. Auth., 934 A.2d 791, 795 (R.I. 2007) (citations omitted). This Court may only grant a motion to dismiss upon being convinced that a plaintiff would not be entitled to relief "under any conceivable set of facts." Estate of Sherman v. Almeida, 747 A.2d 470, 473 (R.I. 2000).

         III

         Analysis

         In derivative shareholder actions, a plaintiff's pleading obligation is significantly higher than mere notice pleading. See Mehrvar ex rel. KVH Indus., Inc. v. Van Heyningen, No. N.C. / 04-0375, 2005 WL 2385939, at *3 (R.I. Super. Sept. 27, 2005). Rule 23.1 of the Superior Court Rules of Civil Procedure (Rule 23.1) requires that a shareholder plaintiff allege that he or she previously demanded the board of directors to take a desired corporate action or the reasons why making such a demand would have been futile.[2] See id., at **1-2 (citing Hendrick v. Hendrick, 755 A.2d 784, 794 (R.I. 2000)). A shareholder must plead demand or demand futility with "particularity." See id., at *3 (citation omitted) ("Mere notice pleading is insufficient to meet the plaintiff's burden of showing demand excusal in a derivative case."); see also Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) ("Rule 23.1 is not satisfied by conclusory statements or mere notice pleading.").

         Rule 23.1's heightened pleading standard reflects the equitable principle known as the "demand" requirement, which "is a corollary to the general proposition of corporate law that directors, rather than shareholders, manage the business affairs of a corporation." See Mehrvar ex rel. KVH Indus., Inc., 2005 WL 2385939, at *3 (citing Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984)), overruled on other grounds in Brehm, 746 A.2d at 254). A derivate action "by its very nature . . . impinges on the managerial freedom of directors." Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 366 (Del. 2006).[3] The demand requirement "preserve[s] the primacy of board decisionmaking regarding legal claims belonging to the corporation." In re Am. Int'l Grp. Inc., 965 A.2d 763, 808 (Del. Ch. 2009). Similarly, the obligation to allege futility in the absence of demand serves the policy purpose of encouraging intra-corporate dispute resolution. See Rattner v. Bidzos, No. Civ.A. 19700, 2003 WL 22284323, at *7 (Del. Ch. 2003).

         Rhode Island courts have not had great occasion to consider demand futility analysis; however, as the parties have correctly identified, Delaware law applies because CVS is a Delaware corporation. See G.L. 1956 § 7-1.2-711(h) ("In any derivative proceeding in the right of a foreign corporation" a court must apply "the laws of the jurisdiction of incorporation of the foreign corporation."); see also Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 108-09 (1991). Fundamentally, "the entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability."[4] Aronson, 473 A.2d at 812. A plaintiff must hurdle the threshold presumptions of the business judgment rule before initiating a derivative suit; otherwise, black-letter corporate law tasks directors with deciding whether to sue on a corporation's behalf. Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993).

         The Delaware courts have developed two similar tests to determine whether demand is futile; the test that applies depends on whether a shareholder is challenging board action or a board's failure to act. The first test, enunciated in Aronson, applies to the assessment of demand futility if a derivative suit challenges an affirmative board decision. 473 A.2d at 812; see also Rales, 634 A.2d at 933 ("The essential predicate for the Aronson test is the fact that a decision of the board of directors is being challenged in the derivative suit.") (Emphasis in original.) Under the Aronson test, demand is futile if a complaint's particularized facts create a reason to doubt that "(1) the directors are disinterested and independent" or "(2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Aronson, 473 A.2d at 814. The second variation of futility analysis, announced by the Rales court, applies in cases of director inaction: where it is alleged that a board's inaction excuses demand, a court should consider "whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the 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, 634 A.2d at 934.

         For purposes of either Aronson or Rales, demand is excused if suing would have a "materially detrimental impact on a director, but not on the corporation and the stockholders." Rattner, 2003 WL 22284323, at *8 (citation omitted); In re SAIC Inc. Derivative Litig., 948 F.Supp.2d 366, 382 (S.D.N.Y. 2013) (citing Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003) ("[T]he difference between Rales and Aronson may blur in cases . . . [where] the particularized allegations essential to creating reasonable doubt as to a substantial likelihood of personal liability for breach of fiduciary duties may also implicate the question whether the Board can avail itself of business judgment protections.")). Where directors are exposed to liability, they may be materially and detrimentally affected by deciding to sue. Thus, demand is excused if a plaintiff sufficiently pleads a claim for breach of fiduciary duty against a majority of the board. Guttman, 823 A.2d at 500.

         However, because it is often the case that a derivative suit essentially asks the directors to sue themselves, courts have grappled with maintaining the integrity of the demand requirement:

"The conundrum for the law in this area is well understood. If the legal rule was that demand was excused whenever, by mere notice pleading, the plaintiffs could state a breach of fiduciary duty claim against a majority of the board, the demand requirement of the law would be weakened and the settlement value of so-called 'strike suits' would greatly increase, to the perceived detriment of the best interests of stockholders as investors. But, if the demand excusal test is too stringent, then stockholders may suffer as a class because the deterrence effects of meritorious derivative suits on faithless conduct may be too weak." Id.

         To balance the interests of the shareholders and directors, Delaware courts have held "except in egregious circumstances, 'the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors.'" H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 149 (Del. Ch. 2003). Rather, only a "substantial likelihood of personal liability" will prevent a director from considering a demand with impartiality or otherwise exercising business judgment in determining whether to sue on a corporation's behalf. In re Chemed Corp., S'holder Derivative Litig., Civ. Action No. 13-1854-LPS-CJB, 2015 WL 9460118, at *9 (D. Del. Dec. 23, 2015); see also In re Intel Corp. Derivative Litig., 621 F.Supp.2d 165, 170-71 (D. Del. 2009).

         If shareholders want to extend more protection to directors, the shareholders can include an "exculpatory" provision in the corporation's charter. Faced with such a provision, a shareholder cannot establish that directors bear a substantial likelihood of personal liability without pleading a non-exculpated claim. See Wood v. Baum, 953 A.2d 136, 141 (Del. 2008). However, Delaware law precludes shareholders from exculpating directors for particularly egregious acts evidencing scienter including "any breach of the director's duty of loyalty to the corporation or its stockholders" or "acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law." 8 Del. C. 1953 § 102(b)(7)(i), (ii). Exculpatory provisions are designed to enable directors to make potentially "value-maximizing" business decisions without the fear of personal liability. In re Cornerstone Therapeutics Inc., Stockholder Litig., 115 A.3d 1173, 1185 (Del. 2015).

         The inquiry before this Court is whether a majority of the Board faces a substantial likelihood of liability based on the Complaint's particularized allegations. Such an analysis "is conducted on a claim-by-claim basis." Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 58 n.71 (Del. Ch. 2015) (citation omitted). Here, because the Board is even-numbered, the Plaintiff needs to show that half the Board (six Director Defendants) cannot disinterestedly consider a demand. See In re in fo USA, Inc. S'holders Litig., 953 A.2d 963, 990 (Del. Ch. 2007). The parties agree that Director Defendant Larry J. Merlo, as CVS's Chief Executive Officer, inside director and a member of the Board, lacks independence. (Defs.' Mem. 27 n.14.) Thus, to demonstrate demand futility, the Plaintiff needs to establish that at least five of the other Director Defendants lack independence. The Plaintiff argues demand is futile because the Director Defendants face a substantial likelihood of liability for (1) approving CVS's "unlawful" business plan; (2) disseminating false and misleading information; (3) authorizing CVS's stock-repurchase program; and (4) approving substantial executive compensation packages. (Pl.'s Mem. Opp'n Defs.' Mot. Dismiss Pl.'s Verified Stockholder Derivative Compl. 11, 21, 22, 23 (Pl.'s Mem.)). This Court will address these theories in turn.

         A

         Likelihood ...


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