EDWARD BORON, Derivatively on Behalf of CVS HEALTH CORPORATION, Plaintiff,
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.
Plaintiff: Robert M. Duffy, Esq.
Defendant: Robert C. Corrente, Esq.
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.
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.
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.
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.
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.
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.
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.
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).
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. 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.").
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). 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).
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." 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).
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.
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
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
"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.
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).
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).
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