Inzlicht v. Bryant et al

Filing 85

ORDER by Judge Claudia Wilken DENYING 64 McKesson Corporation's Motion to Stay; DENYING 69 McKesson Corporation's Motion to Dismiss; GRANTING IN PART AND DENYING IN PART 70 Individual Defendants' Motion to Dismiss. Amended Pleadings due by 6/11/2018. (cwlc1, COURT STAFF) (Filed on 5/14/2018)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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IN RE MCKESSON CORPORATION
DERIVATIVE LITIGATION.

Case No. 17-cv-01850-CW
ORDER DENYING MOTION TO STAY
AND DENYING IN PART AND
GRANTING IN PART MOTIONS TO
DISMISS

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________________________________/

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Plaintiffs Eli Inzlicht and Vladimir Gusinsky are

United States District Court
For the Northern District of California

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shareholders of McKesson Corporation (McKesson), a pharmaceutical

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distributor.

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of Directors and senior officers have maximized short-term profits

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over safety with respect to sales and distribution of prescription

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opioids and failed properly to implement a Controlled Substance

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Monitoring Program (CSMP), as required by a settlement with the

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United States Department of Justice (DOJ) and Drug Enforcement

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Administration (DEA) in 2008.

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$13.25 million fine.

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settlement in 2017 including a $150 million fine payment.

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They allege that certain members of McKesson’s Board

That settlement also included a

Their actions resulted in a second

Plaintiffs bring a shareholder derivative action against

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those directors and officers for breach of fiduciary duty, waste

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of corporate assets, and insider trading.

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are three motions by Defendants.

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McKesson moves to stay the case pending the outcome of

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substantially similar proceedings in the Delaware Court of

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Chancery.

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circumstances warranting a stay of this case, the Court denies the

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motion to stay.

Now before the Court

First, nominal Defendant

Because McKesson fails to show exceptional

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Defendants also bring two motions to dismiss on behalf of

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McKesson and the individual Defendants respectively.

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moves to dismiss for Plaintiffs’ failure to allege demand

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futility.

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substantial likelihood of director oversight liability based on

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conscious failure to oversee the CSMP, the Court denies McKesson’s

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motion to dismiss.

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claims against them for failure to state a claim.

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stated below, the Court denies that motion in part and grants it

United States District Court
For the Northern District of California

10

McKesson

Because Plaintiffs have sufficiently alleged a

The individual Defendants move to dismiss all
For the reasons

in part, with leave to amend.

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BACKGROUND
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I.

Factual Background
McKesson is the largest pharmaceutical distributor in the

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United States.

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principle executive offices located in San Francisco, California,

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in this district.

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New York Stock Exchange under the ticker symbol “MCK.”

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Plaintiffs Inzlicht and Gusinsky are current shareholders of

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McKesson who have continuously held McKesson stock since 2011 and

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2005, respectively.

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Compl. ¶ 3.

Id. ¶ 14.

It is a Delaware corporation with its

Its stock is publicly traded on the
Id.

Id. ¶¶ 12-13.

Defendants Andy D. Bryant, Wayne A. Budd, John Hammergren, M.

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Christine Jacobs, Marie L. Knowles, Edward A. Mueller, Donald R.

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Knauss, Susan R. Salka, N. Anthony Coles, Alton F. Irby III, David

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M. Lawrence, and Jane E. Shaw are current or former members of

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McKesson’s Board of Directors.

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Defendants Bryant, Budd, Hammergren, Jacobs, Knowles, Mueller,

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Irby, Lawrence, and Shaw have served on the Board since at least

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2008, Defendants Knauss, Salka, and Coles did not join until 2014.

See Compl. ¶¶ 15–26.

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While

1

Id.

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2001, and as Chairman of the Board since 2002.

Hammergren has served as McKesson’s President and CEO since

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Id. ¶ 17.

The present litigation focuses on the period between 2008 and

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2017.

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be briefly recounted here.

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into a settlement agreement with the DOJ through six United States

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Attorney Offices (the 2008 Settlement Agreement).

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According to a public statement made by the DOJ, the 2008

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Settlement Agreement resolved claims that McKesson

United States District Court
For the Northern District of California

10

The specific allegations are detailed below and will only
On April 30, 2008, McKesson entered

Compl. ¶ 46.

failed to report to DEA suspicious sales of controlled
substance pharmaceuticals it made to pharmacies that
filled orders from illegal “Internet pharmacies” that
sell drugs online to customers who do not have a legal
prescription. McKesson also failed to report suspicious
orders of controlled substance pharmaceuticals that it
received from other pharmacies and clinics even though
the orders were suspiciously large.

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12
13
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15

Id.

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pay $13.25 million in civil penalties as well as to develop and

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implement the CSMP, recognizing its duty to monitor sales of

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controlled substances and report suspicious orders to the DEA.

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Id. ¶ 49.

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As part of the 2008 Settlement Agreement, McKesson agreed to

After the 2008 settlement, however, McKesson continued to

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have problems relating to its sales and distribution of controlled

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substances.

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Landover, Maryland distribution center had not filed any

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suspicious order reports, and she requested customer files for

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approximately twenty suspect pharmacies.

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request prompted the Landover distribution center to file 318

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suspicious orders with the DEA, covering the previous months.

In 2011, a DEA agent noticed that McKesson’s

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3

Compl. ¶ 63.

That

Id.

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On March 12, 2013, dozens of DEA agents raided McKesson’s
Aurora, Colorado distribution center while executing an

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Administrative Inspection Warrant.

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to May 2013, the Aurora facility had reported no suspicious

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orders, despite being named in the 2008 agreements as failing to

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report suspicious sales from 2005 to 2007.

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collected by the DEA at Aurora revealed that McKesson had not

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fully implemented or adhered to the CSMP.

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2014, prosecutors in twelve districts around the United States

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United States District Court
For the Northern District of California

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were investigating McKesson distribution centers for possible

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violations of the Controlled Substances Act.

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Compl. ¶ 66.

From June 2008

Id. ¶ 67.

Id. ¶ 68.

Documents

By mid-year

Id. ¶ 65.

These events culminated in McKesson’s Board of Directors

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authorizing a second global settlement with the DEA and DOJ on

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March 19, 2015.

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made public on January 17, 2017 (the 2017 Settlement Agreement),

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resulting in McKesson paying a $150 million fine and admitting

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that it “had wholly abdicated its responsibilities under the 2008

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Agreements.”

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of controlled substances from several of McKesson’s distribution

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centers for multiple years.

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million payment as a “record,” and noted that the suspensions were

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“among the most severe sanctions ever agreed to by a [DEA]

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registered distributor.”

Compl. ¶ 73.

Id. ¶¶ 75–76.

The settlement was finalized and

The settlement also suspended sales

Id. ¶ 77.

The DOJ described the $150

Id. (alteration in original).

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From 2008 to 2017, while these events were occurring,

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directors Budd, Hammergren, Jacobs, Knowles, Irby, and Shaw (the

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Selling Defendants) routinely sold McKesson securities worth

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millions of dollars.

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$1.2 million, Hammergren over $791.3 million, Jacobs nearly $4.4

Compl. ¶¶ 16–19, 24, 26.

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Budd sold over

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million, Knowles over $2.1 million, Irby $2.1 million, and Shaw

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over $3.3 million.

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Id.

Meanwhile, during the same time period, certain of McKesson’s

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executive officers, namely CEO Hammergren, Executive Vice

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President and Group President Paul Julian, and General Counsel and

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Chief Compliance Officer Lauren Seeger, were very well

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compensated.

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compensation from McKesson since the 2008 settlement.

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263.

Hammergren has realized a total of $692 million in
Compl. ¶

Hammergren, Julian, and Seeger each received generous

United States District Court
For the Northern District of California

10

incentive compensation, including more than $253 million to

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Hammergren between 2008 and 2017, $133 million to Julian between

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2008 and 2017, and $33 million to Seeger from 2008 to 2014.

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¶¶ 229–30.

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authorized the 2017 settlement payment of $150 million, Hammergren

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and Julian received the maximum percentage of their target bonus

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awards, 210 percent in 2015 and 168 percent in 2016.

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38.

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and governance research, ranks McKesson in the bottom three

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percent of all companies in the Russell 3000 index with respect to

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“pay-for-performance” policies.

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II.

Id.

In 2015 and 2016, during the time that the Board

Id. ¶¶ 237–

Equilar, the leader in executive compensation benchmarking

Id. ¶¶ 231, 266.

Procedural History

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On April 3, 2017, Inzlicht filed this diversity action,

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asserting a derivative claim for breach of fiduciary duty on

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behalf of McKesson.

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Charles Ojeda moved to intervene in and stay this action.

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Dkt. No. 14.

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participation would end diversity jurisdiction.

See Dkt. No. 1.

On May 12, 2017, non-party
See

Inzlicht opposed on the grounds that Ojeda’s

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See Dkt. No. 22.

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The Court denied Ojeda’s motion without prejudice on July 10,

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2017.

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See Dkt. No. 38.
On July 26 2017, Gusinky filed his case, identifying it as

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related to the Inzlicht action.

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cv-04248-LHK).

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stipulation to the Court on September 19, 2017 seeking

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consolidation and appointment of lead counsel.

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Ojeda objected to the stipulation.

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consolidated the Inzlicht and Gusinky actions on October 9, 2017,

United States District Court
For the Northern District of California

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See Gusinky v. Bryant, No. 4:17-

Inzlicht and Gusinky jointly submitted a

See Dkt. No. 39.

See Dkt. No. 41.

with provisional appointment of co-lead counsel.

The Court

See Dkt. No. 45.

At the initial case management conference in this case on

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October 17, 2017, Defendants’ counsel noted that a substantially

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similar action had been filed in the Delaware Court of Chancery,

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Steinberg v. Bryant, No. 2017-0736.

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agreed to a briefing schedule and hearing date on Defendants’

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anticipated motion to dismiss.

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provide Inzlicht and Gusinky his proposed complaint to see if the

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parties could agree on a consolidated complaint and on leadership.

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Plaintiffs were directed to file an amended consolidated complaint

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by December 1, 2017, and Defendants to file a motion to dismiss by

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January 5, 2018 with a hearing date of April 10, 2018.

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No. 47.

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instead filed suit in Delaware state court.

The parties nonetheless

The Court directed Ojeda to

See Dkt.

Ojeda ultimately opted not to file in this Court and

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Meanwhile, a related action was filed in the Delaware Court

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of Chancery on November 8, 2017, Police & Fire Retirement System

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of the City of Detroit v. Bryant, No. 2017-0803.

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Amalgamated Bank v. Hammergren, No. 2017-0881, followed on

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December 8, 2017.

Ojeda’s action,

These two actions along with Steinberg are all
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pending before the same Vice Chancellor, the Honorable Sam

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Glasscock III.

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also filed a motion to dismiss in the Steinberg action, which was

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heard on March 6, 2018.

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decided.

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lead counsel been appointed.

Defendants moved to consolidate those cases, and

To date, this motion has not been

The Delaware actions have not been consolidated nor has

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LEGAL STANDARD
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I.

Motion to Stay
Federal courts have a “virtually unflagging obligation . . .

10
United States District Court
For the Northern District of California

to exercise the jurisdiction given them.”

Colorado River Water

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Conservation Dist. v. United States, 424 U.S. 800, 817 (1976).
12
Only in “rare” or “exceptional” circumstances will “the presence
13
of a concurrent state proceeding” permit the district court to
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stay or dismiss a concurrent federal action “for reasons of wise
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judicial administration, giving regard to conservation of judicial
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resources and comprehensive disposition of litigation.”

R.R.

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Street & Co. Inc. v. Transport Ins. Co., 656 F.3d 966, 977–78 (9th
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Cir. 2011) (citing Colorado River, 424 U.S. at 817–18).
19
Courts apply an eight factor balancing test in deciding
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whether to stay or dismiss a case:

“(1) which court first assumed

21
jurisdiction over any property at stake; (2) the inconvenience of
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the federal forum; (3) the desire to avoid piecemeal litigation;
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(4) the order in which the forums obtained jurisdiction; (5)
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whether federal law or state law provides the rule of decision on
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the merits; (6) whether the state court proceedings can adequately
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protect the rights of the federal litigants; (7) the desire to
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avoid forum shopping; and (8) whether the state court proceedings
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7

1

will resolve all issues before the federal court.”

2

656 F.3d at 978–79.

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the exercise of jurisdiction.”

4

Mercury Constr. Corp., 460 U.S. 1, 15 (1983).

R.R. Street,

The balance is “heavily weighted in favor of
Moses H. Cone Memorial Hosp. v.

5
6

II.

Motion to Dismiss (Demand Futility)
Pursuant to Federal Rule of Procedure 23.1, a shareholder

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seeking to bring a derivative suit must first “state with
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particularity” any effort “to obtain the desired action from the
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directors” or, in the alternative, why such a demand would have
10
United States District Court
For the Northern District of California

been futile.

Fed. R. Civ. P. 23.1; see also Rosenbloom v. Pyott,

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765 F.3d 1137, 1148 (9th Cir. 2014).

“Although Rule 23.1 supplies

12
the pleading standard for assessing allegations of demand
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futility, [t]he substantive law which determines whether demand
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is, in fact, futile is provided by the state of incorporation of
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the entity on whose behalf the plaintiff is seeking relief.”
16
Rosenbloom, 765 F.3d at 1148 (internal quotation marks omitted).
17
Under the substantive law of Delaware, “the right of a stockholder
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to prosecute a derivative suit is limited to situations where the
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stockholder has demanded that the directors pursue the corporate
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claim and they have wrongfully refused to do so or where demand is
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excused because the directors are incapable of making an impartial
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decision regarding such litigation.”

Rales v. Blasband, 634 A.2d

23
927, 932 (Del. 1993).

Delaware law provides a two-part test for

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demand futility, known as the Aronson test:
25
26
27
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The first prong of the futility rubric is whether, under
the particularized facts alleged, a reasonable doubt is
created that . . . the directors are disinterested and
independent. The second prong is whether the pleading
creates a reasonable doubt that the challenged
transaction was otherwise the product of a valid
8

1
2

exercise of business judgment. These prongs are in the
disjunctive. Therefore, if either prong is satisfied,
demand is excused.

3

Brehm v. Eisner, 746 A.2d 244, 256 (Del. 2000) (citing Aronson v.

4

Lewis, 473 A.2d 805, 814, 816 (Del. 1984)).

5

“Plaintiffs are entitled to all reasonable factual inferences

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that logically flow from the particularized facts alleged, but

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conclusory allegations are not considered as expressly pleaded

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facts or factual inferences.”

9

important that the trial court consider all the particularized

Brehm, 746 A.2d at 255.

“[I]t is

United States District Court
For the Northern District of California

10

facts pled by the plaintiffs about the relationships between the

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director and the interested party in their totality and not in

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isolation from each other, and draw all reasonable inferences from

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the totality of those facts in favor of the plaintiffs.”

14

Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015).

15

III. Motion to Dismiss (Failure to State a Claim)

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Del.

Under Federal Rule of Procedure 12(b)(6), a district court

17

must dismiss a complaint if it fails to state a claim upon which

18

relief can be granted.

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dismiss, the plaintiff must allege “enough facts to state a claim

20

to relief that is plausible on its face.”

21

Twombly, 550 U.S. 544, 570 (2007).

22

when the plaintiff pleads facts that “allow[] the court to draw

23

the reasonable inference that the defendant is liable for the

24

misconduct alleged.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

25

(citation omitted).

There must be “more than a sheer possibility

26

that a defendant has acted unlawfully.”

27

require “heightened fact pleading of specifics,” a plaintiff must

To survive a Rule 12(b)(6) motion to

28
9

Bell Atl. Corp. v.

A claim is facially plausible

Id.

While courts do not

1

allege facts sufficient to “raise a right to relief above the

2

speculative level.”

Twombly, 550 U.S. at 555, 570.

3

In deciding whether the plaintiff has stated a claim upon

4

which relief can be granted, the court accepts the plaintiff’s

5

allegations as true and draws all reasonable inferences in favor

6

of the plaintiff.

7

561 (9th Cir. 1987).

8

as true “allegations that are merely conclusory, unwarranted

9

deductions of fact, or unreasonable inferences.”

United States District Court
For the Northern District of California

10

See Usher v. City of Los Angeles, 828 F.2d 556,
However, the court is not required to accept

In re Gilead

Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

11

If the court dismisses a complaint, it “should grant leave to

12

amend even if no request to amend the pleading was made, unless it

13

determines that the pleading could not possibly be cured by the

14

allegation of other facts.”

15

(9th Cir. 2000).

16

consider factors such as “the presence or absence of undue delay,

17

bad faith, dilatory motive, repeated failure to cure deficiencies

18

by previous amendments, undue prejudice to the opposing party and

19

futility of the proposed amendment.”

20

Express, 885 F.2d 531, 538 (9th Cir. 1989).

Lopez v. Smith, 203 F.3d 1122, 1127

In making this determination, the court should

See Moore v. Kayport Package

21
DISCUSSION
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23

I.

Motion to Stay
McKesson moves to stay this case pending the outcome of the

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litigation proceeding in the Delaware Court of Chancery, primarily

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for efficiency and convenience reasons.

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of showing exceptional circumstances and that the balance of the

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eight factors weighs strongly in favor of staying this case.

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10

McKesson bears the burden

1

McKesson most vigorously argues that the desire to avoid

2

piecemeal litigation weighs strongly in favor of granting the

3

stay.

4

consider the same issue, thereby duplicating efforts and possibly

5

reaching different results.”

6

Am. Int’l Underwriters, (Philippines), Inc. v. Cont’l Ins. Co.,

7

843 F.2d 1253, 1258 (9th Cir. 1988)). “The mere possibility of

8

piecemeal litigation does not constitute an exceptional

9

circumstance.

“Piecemeal litigation occurs when different tribunals

Instead, the case must raise a special concern

10
United States District Court
For the Northern District of California

R.R Street, 656 F.3d at 979 (citing

about piecemeal litigation.”

11

citation omitted).

12

Id. (internal quotation marks and

McKesson argues that shareholder derivative actions present

13

special concerns about piecemeal litigation, citing Krieger v.

14

Atheros Communications, Inc., 776 F. Supp. 2d 1053 (N.D. Cal.

15

2011), and In re CytRx Corp. Stockholder Derivative Litigation,

16

No. 14-6414-GHK, 2015 WL 12745084 (C.D. Cal. Jan. 8, 2015), in

17

support of its argument.

18

a company’s board to proceed with a merger, is easily

19

distinguishable.

20

concerns were present “due to the complexity of the litigation,

21

the presence of class-action claims, and the need to proceed

22

expeditiously to address the proposed merger.”

23

1062.

24

Krieger, a case involving a decision by

In that case, the court concluded that special

776 F. Supp. 2d at

Here, none of those concerns are present.
Cases more similar to this one, involving shareholder

25

derivative actions without class action claims or pending mergers,

26

have reached conflicting results.

27

concluded that derivative lawsuits generally “present the kind of

28

exceptional circumstances which would result in special concern
11

While the court in In re CytRx

1

about piecemeal litigation” because they “waste the resources of

2

the real party in interest and create a serious risk of

3

conflicting results that could impact thousands of shareholders,”

4

2015 WL 12745084, at *5, the decision in Sabbag v. Cinnamon, No.

5

5:10-cv-02735-JF, 2010 WL 8470477 (N.D. Cal. Dec. 10, 2010), came

6

to the opposite conclusion.

7

mere potential of inconsistent judgments is not ‘exceptional.’”

8

Id. at *5.

9

The Sabbag court concluded that “the

This Court agrees with Sabbag that concurrent litigation and

United States District Court
For the Northern District of California

10

the mere potential for inconsistent judgments does not rise to the

11

level of exceptional circumstances or present any special concern

12

with respect to piecemeal litigation.

13

concurrent litigation, there may be some duplication of effort in

14

the cases.

15

however, that should both cases proceed, they will work together

16

to avoid some of the logistical pitfalls of simultaneous

17

litigation, including, for example, coordination of schedules and

18

joint discovery.

19

As is the case with any

The parties indicated at the hearing on this matter,

With respect to the order in which each forum obtained

20

jurisdiction, the present case was filed more than six months

21

prior to those in the Delaware Chancery Court.

22

has counseled, however, that “[t]his factor, as with the other

23

Colorado River factors, is to be applied in a pragmatic, flexible

24

manner with a view to the realities of the case at hand.

25

priority should not be measured exclusively by which complaint was

26

filed first, but rather in terms of how much progress has been

27

made in the two actions.”

28

it is true that the Delaware Chancery Court heard its pending

The Supreme Court

Moses H. Cone, 460 U.S. at 21.

12

Thus,

While

1

motion to dismiss approximately one month sooner than this Court

2

heard the motion here, it has yet to issue a decision as of the

3

time of writing.

4

consolidation or appoint lead counsel, which has already happened

5

in this case.

6

case, and the fact it was earlier filed, this factor weighs

7

slightly in favor of denying the stay.

8
9

It has also yet to rule on the motion for

Given the slightly advanced progress in the present

With respect to whether federal or state law provides the
rule of decision, this case requires the Court to apply Delaware

United States District Court
For the Northern District of California

10

state law in addition to California state law.

11

recognized that “the Delaware Court of Chancery unquestionably has

12

a well-recognized expertise in the field of state corporation law

13

and is a particularly suitable forum to adjudicate those

14

disputes,” Krieger, 776 F. Supp. 2d at 1062 (internal quotation

15

marks omitted), the Ninth Circuit has stated that “routine issues

16

of state law--misrepresentation, breach of fiduciary duty, and

17

breach of contract--which the district court is fully capable of

18

deciding,” do not present the “rare circumstances” necessary to

19

weigh in favor of a stay.

20

F.2d 1364, 1370 (9th Cir. 1990).

21

only slightly in favor of granting the stay.

22

While courts have

Travelers Indem. Co. v. Madonna, 914
On balance, this factor weighs

Due to the California insider trading claim that is present

23

in this case only, the factors of protection of federal litigants’

24

rights and resolution of all issues both weigh in favor of denying

25

the stay.

26

inconvenience, and jurisdiction over property are not relevant or

27

are neutral.

The remaining factors involving forum shopping,

28
13

1

Based on all of the factors, Defendants have not met their

2

burden to demonstrate the exceptional circumstances necessary to

3

justify granting a stay.

4

favor of staying this case is the rule of decision, but this Court

5

is capable of applying Delaware state law.

6

California state law claim in this case, however, weighs strongly

7

in favor of exercising jurisdiction.

8

any special concern regarding piecemeal litigation.

9

reasons, the Court denies Defendants’ motion to stay this case.

United States District Court
For the Northern District of California

10
11

II.

The only factor clearly weighing in

The presence of the

Nor does this case present
For these

Motion to Dismiss (Demand Futility)
McKesson moves to dismiss Plaintiffs’ lawsuit on the grounds

12

that Plaintiffs did not first bring a pre-suit demand to the Board

13

of Directors, and they cannot show that such a demand would have

14

been futile.

15

futile pursuant to Aronson’s first prong, that is, that there is

16

“reasonable doubt” that “the directors are disinterested and

17

independent.”

18

Plaintiffs argue that such a demand would have been

Brehm, 746 A.2d at 256.

Plaintiffs may show a reasonable doubt as to a director’s

19

disinterest “by demonstrating a potential personal benefit or

20

detriment to the director as a result of the decision.”

21

Goldman Sachs Grp., Inc. S’holder Litig., Civ. A. 5215, 2011 WL

22

4826104, at *7 (Del. Ch. Oct. 12, 2011) (internal quotation marks

23

omitted).

24

disabling interest for pre-suit demand purposes when the potential

25

for liability . . . may rise to a substantial likelihood.”

26

v. Gifford, 918 A.2d 341, 355 (Del. Ch. 2007) (internal quotation

27

marks omitted); accord Rattner v. Bidzos, Civ. A. 19700, 2003 WL

28

22284323, at *9 (Del. Ch. Sept. 30, 2003) (“[A] ‘substantial

In re

For that reason, “[d]irectors who are sued have a

14

Ryan

1

likelihood’ of personal liability prevents a director from

2

impartially considering a demand.”) (internal quotation marks

3

omitted).

4

dismiss under Rule 23.1, Plaintiffs must make “a threshold

5

showing, through the allegation of particularized facts, that

6

their claims have some merit.”

7

1993).

8
9

To meet that standard when presented with a motion to

Rales, 634 A.2d 927, 934 (Del.

Plaintiffs here argue that they have sufficiently alleged a
substantial likelihood of liability for their breach of fiduciary

United States District Court
For the Northern District of California

10

duty claim.

11

with Delaware law, McKesson’s directors are exculpated from

12

liability for a breach of the duty of care.

13

911 A.2d 362, 367 (Del. 2006).

14

bad faith or a breach of the duty of loyalty, requiring them to

15

plead “conduct that is qualitatively different from, and more

16

culpable than, the conduct giving rise to a violation of the

17

fiduciary duty of care (i.e., gross negligence).”

18

Plaintiffs may establish bad faith, for example, “where the

19

fiduciary intentionally acts with a purpose other than that of

20

advancing the best interests of the corporation, where the

21

fiduciary acts with the intent to violate applicable positive law,

22

or where the fiduciary intentionally fails to act in the face of a

23

known duty to act, demonstrating a conscious disregard for his

24

duties.”

25

A.2d 27, 67 (Del. 2006)).

26

Pursuant to an exculpation provision and consistent

See Stone v. Ritter,

Thus, Plaintiffs must establish

Id. at 369.

Id. (citing In re Walt Disney Co. Derivative Litig., 906

Plaintiffs here proceed on a director oversight theory, that

27

although the directors implemented a reporting or information

28

system, they “consciously failed to monitor or oversee its
15

1

operations thus disabling themselves from being informed of risks

2

or problems requiring their attention.”

3

(citing In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959

4

(Del. Ch. 1996)).

5

pointing to “red flags” and a subsequent failure to act in the

6

face of such information.

7

Ch. 2012) (“A board that fails to act in the face of such

8

information makes a conscious decision, and the decision not to

9

act is just as much of a decision as a decision to act.”).

United States District Court
For the Northern District of California

10

A.

11

Stone, 911 A.2d at 367

Plaintiffs may show conscious disregard by

See South v. Baker, 62 A.3d 1, 15 (Del.

Plaintiffs Have Alleged Sufficient “Red Flags” to
Establish a Plausible Caremark Claim

Here, Plaintiffs allege a long timeline of facts that they
12
argue show that McKesson’s directors and officers should have
13
responded to various red flags but failed to do so.

Plaintiffs

14
and Defendants present dramatically different interpretations of
15
the events and their legal implications.

For purposes of this

16
motion, the Court accepts as true the allegations in the complaint
17
and draws all reasonable inferences from the totality of the facts
18
in favor of Plaintiffs.

Del. Cty. Emps. Ret. Fund, 124 A.3d at

19
1019.
20
McKesson was first advised by the DOJ no later than September
21
1, 2005 of “serious problems concerning the Company’s compliance
22
with controlled substances laws and regulations,” and its
23
Lakeland, Florida Distribution Center received an Order to Show
24
Cause relating to controlled substances from the DEA on August 4,
25
2006.

Compl. ¶¶ 41, 43.

The DEA also sent McKesson three letters

26
on September 27, 2006, February 7, 2007, and December 27, 2007
27
concerning certain requirements under the Comprehensive Drug Abuse
28
16

1

Prevention and Control Act, 21 U.S.C. § 842(a)(5)k, and

2

corresponding regulations.

3

Id. ¶ 42.

McKesson’s alleged failure to monitor and limit its

4

distribution of controlled substances led to the 2008 Settlement

5

Agreement with the DOJ, signed by Hammergren on April 30, 2008.

6

Compl. ¶ 46.

7

pay a $13.25 million civil penalty and to develop the CSMP, and

8

resulted in temporary suspension of McKesson’s license to

9

distribute controlled substances at certain distribution centers.

The 2008 Settlement Agreement required McKesson to

United States District Court
For the Northern District of California

10

Id. ¶¶ 49–50.

11

decision, such that the members of McKesson’s board of directors

12

at the time in 2008 (a majority of whom constitute the board at

13

the time of the 2017 Settlement) knew that McKesson had serious

14

problems concerning the Company’s compliance with controlled

15

substances laws and regulations for many years and spread across

16

many of the Company’s facilities.”

17

The entry into the settlement was a “board-level

Id. ¶ 51.

Plaintiffs argue, and the Court agrees, that the 2008

18

Settlement Agreement represents the first occurrence that put

19

Defendants on notice that there were serious issues with respect

20

to their compliance with controlled substances laws.

21

affirmative agreement not only to pay fines but also to implement

22

the CSMP are sufficient events to establish Defendants’ knowledge

23

that McKesson had a problem and obligating them to ensure that the

24

problem was properly addressed and rectified.

25
26

The

Following the 2008 settlement, however, minutes from meetings
of the Board of Directors and the Audit Committee show that these

27
28
17

1

issues were seldom addressed.1

2

settlement, on May 2, 2008, the Audit Committee held a meeting

3

during which there appears to have been no discussion of the

4

settlement or the CSMP.

5

until the DEA raid in March 2013, nearly a five year period, these

6

issues were only discussed in meetings three times, on October 22,

7

2008, July 27, 2010, and January 29, 2013.

8
9

Immediately following the

See Compl. ¶¶ 57; 174.

From this time

These matters were first discussed at an Audit Committee
meeting on October 22, 2008, attended by at least four individual

United States District Court
For the Northern District of California

10

Defendants.2

11

showed that the internal audit of the CSMP was categorized as

12

“Needs Improvement.”

13

71-4).3

See Compl. ¶ 175.

At this meeting, a presentation

Id.; see also Weiner Decl. Ex. 4 (Dkt. No.

The presentation identified key issues, including

14
1

15
16
17

Plaintiffs allege and Defendants do not deny that
Plaintiffs made a demand pursuant to Delaware General Corporation
Law Section 220 for relevant documents, providing “the opportunity
to provide exculpatory documents,” but the production included
minutes of only fourteen Board meetings between 2008 and 2016.
See Opp’n at 18; Compl. ¶ 198.

18
19
20
21
22
23
24
25
26
27
28

2

Those individual Defendants were Knowles, Bryant, Budd, and

Shaw.
3

Defendants request judicial notice of several documents,
including certain of McKesson’s SEC filings, the 2008 Settlement
Agreement, the 2017 Settlement Agreement, internal audit reports,
and meeting minutes and presentations from various Board and Audit
Committee meetings. See Dkt. No. 72. The Court agrees with
Defendants that several of these documents, namely the settlement
agreements and meeting minutes and presentations, have been
incorporated by reference in the complaint, because Plaintiffs
quote from them and describe them in their allegations, and thus
are properly subject to judicial notice. See United States v.
Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). The Court only takes
judicial notice of these documents, however, insofar as they
evidence that certain topics of discussion were addressed at these
meetings, and not for the truth of the facts discussed. See id.
(“Courts may only take judicial notice of adjudicative facts that
18

1

assignment of customer thresholds to flag large shipments of

2

controlled substances, incomplete new customer due diligence,

3

incomplete documentation supporting changed thresholds for

4

existing customers, and enhancement of Standard Operating

5

Procedures.

6

however, that “[a]ll of the items noted have already been

7

addressed by management.”

8
9

Compl. ¶ 176; Weiner Decl. Ex. 4.

It also stated,

Compl. ¶ 176; Weiner Decl. Ex. 4.

Meeting minutes reflect that these issues were not addressed
again until July 27, 2010.

This gap alone suggests some level of

United States District Court
For the Northern District of California

10

disregard.

11

Agreement and the gravity of the situation, but they also knew

12

that, as of October 2008, there were serious issues with the CSMP

13

that warranted follow up.

14

Not only were Defendants aware of the 2008 Settlement

At the July 27, 2010 meeting, attended by the same four

15

individual Defendants, a presentation described an audit summary

16

of the CSMP and found that “the Distribution Centers selected for

17

testing consistently lacked documented evidence to demonstrate

18

controls are operating effectively,” and that “adequate controls

19

[were] not in place to ensure the required Pedigree is included

20

when invoicing wholesale licensed customers.”

21

(emphasis omitted).

Compl. ¶ 178

The presentation noted that the issues were

22
23
24
25
26
27
28

are ‘not subject to reasonable dispute.’” (citing Fed. R. Evid.
201(b))). The remaining documents are not necessary to resolve
these motions, and the Court declines to take judicial notice of
them at this time. See Adriana Int’l Corp. v. Thoeren, 913 F.2d
1406, 1410 n.2 (9th Cir. 1990) (declining to take judicial notice
of another action “not relevant” to the case); Neylon v. Cty. of
Inyo, No. 1:16-cv-0712, 2016 WL 6834097, at *4 (E.D. Cal. Nov. 21,
2016) (“[I]f an exhibit is irrelevant or unnecessary to deciding
the matters at issue, a request for judicial notice may be
denied.”).
19

1

communicated to the “appropriate level of management” and “action

2

plans” were created.

Id.

3

Defendants argue that both this and the October 2008

4

presentation indicated to directors that, while there were some

5

issues identified, they were all being addressed and under

6

control, and thus did not raise any red flags.

7

plausibly allege, however, that the presentations made clear that

8

there were ongoing and consistent problems with the CSMP that

9

certainly warranted follow up, because they implicated a major

Plaintiffs’

United States District Court
For the Northern District of California

10

legal obligation and a national problem with respect to opioids.

11

Unfortunately, no follow up took place.

12

In July of 2011, a DEA agent noticed that McKesson’s

13

Landover, Maryland distribution center had no suspicious-order

14

reports, and requested customer files for twenty suspect

15

pharmacies.

16

the problem, and the Landover distribution center filed 318

17

suspicious orders with the DEA covering previous months.

18

Defendants were already on notice of problems involving the CSMP,

19

and this incident was certainly a red flag indicating that it was

20

failing and required oversight.

21

reflect that this was ever discussed.

22

inquire at all into the program following this incident supports

23

Plaintiffs’ theory of conscious disregard for the CSMP’s

24

functioning.

25

See Compl. ¶ 63.

This forced McKesson to acknowledge

Id.

Yet meeting minutes do not
Defendants’ failure to

These issues were not discussed until a year and a half

26

later, on January 29, 2013, at another Audit Committee meeting.

27

See Compl. ¶ 181.

28

respect to the CSMP, that its controls were “effective,” but “the

The presentation at the meeting stated, with

20

1

application of policies and procedures across business units and

2

customer segments could be improved.”

3

3 (Dkt. No. 71-3).

4

DEA raided McKesson’s Aurora, Colorado distribution center.

5

Compl. ¶ 66.

6

the DEA at the facility revealed that McKesson had not fully

7

implemented or adhered to the CSMP.

8

that Defendants must have willfully blinded themselves to these

9

serious violations in order to remain ignorant of them.

Id. ¶ 182; Weiner Decl. Ex.

Not two months later, on March 12, 2013, the

According to published reports, documents seized by

Id. ¶ 68.

It can be inferred

United States District Court
For the Northern District of California

10

At an Audit Committee meeting4 on October 22, 2013, a

11

presentation titled “U.S. Pharmaceutical Controlled Substances

12

Review” discussed the prescription drug abuse epidemic in the

13

United States generally, as well as McKesson’s own failure to

14

comply with the 2008 Settlement Agreement and the March 2013

15

investigation.

16

needing improvement, including governance structure, specialists,

17

and more senior-level decision makers.

18

however, Defendants failed to follow up and see that these serious

19

problems were addressed.

20

Compl. ¶¶ 183–85.

It identified specific areas

Id. ¶ 186.

Again,

On May 28, 2014, a presentation given during a meeting to the

21

full board stated that McKesson had “[c]ontinually enhanced &

22

audited” the CSMP, including “[m]ore advanced analytics & internal

23

drug diversion expertise.”

24

But by mid-year of 2014, at least twelve U.S. Attorney Offices

25

were investigating McKesson distribution centers.

Weiner Decl. Ex. 10 (Dkt. No. 71-10).

Compl. ¶ 191.

26
27
28

4

Defendants Bryant, Budd, and Irby were present.

¶ 183.
21

See Compl.

1

That these issues were not discussed at Audit Committee meetings

2

on July 29, 2014 or October 21, 2014 provide further support for

3

Plaintiffs’ oversight theory.

4

On January 27, 2015, the Audit Committee5 was told during a
presentation “that there were no issues related to suspicious

6

order reporting under the CSMP and that the internal audit of U.S.

7

Pharmaceutical’s Distribution Center Operations was completed and

8

satisfactory.”

9

CSMP known to the board, as well as the multiple ongoing federal

10
United States District Court
For the Northern District of California

5

investigations and the litigation risk, no Defendant should have

11

taken this presentation at face value without inquiring further.

12

Indeed, at an Audit Committee meeting on April 28, 2015, a

13

presentation stated that enhancements to the CSMP were necessary.

14

Id. ¶ 193.

15

Compl. ¶ 192.

Given the number of issues with the

On March 19, 2015, the Board initially authorized a second

16

global settlement with the DEA and DOJ of $150 million.

17

73.

18

2017, and included an admission that McKesson had “wholly

19

abdicated” its responsibilities under the 2008 Settlement

20

Agreement.

21

penalty as a “record,” and imposing “among the most severe

22

sanctions ever,” including suspension of sales of controlled

23

substances from several distribution centers for multiple years.

24

Id. ¶ 77.

Compl. ¶

The 2017 Settlement Agreement was finalized on January 17,

Id. ¶ 76.

The DOJ described the $150 million civil

25
26
27
28

5

Defendants Knowles, Budd, Irby, Knauss, and Salka were
present. See Compl. ¶ 192.
22

1

Defendants claim that they were simply ignorant of what was

2

happening with the company because they were constantly reassured

3

that if any problems existed, they were being addressed.

4

stage, however, Plaintiffs have plausibly alleged sufficient

5

factual allegations constituting multiple “red flags” that

6

Defendants ignored.

7

first red flag--the 2008 Settlement Agreement--and it was upon

8

them from that point on to ensure that McKesson improved its

9

practices and complied with its legal obligations.

At this

Defendants indisputably had knowledge of the

The

United States District Court
For the Northern District of California

10

infrequency with which they discussed this serious issue, despite

11

the regular signals that the CSMP was failing and required more

12

attention, evidences conscious disregard and abdication of

13

responsibility.

14

B.

15

The case law supports the plausibility of liability in this

The Relevant Case Law Supports Liability Here

16

instance, and several cases are illustrative here.

17

Abbott Laboratories Derivative Shareholders Litigation, for

18

example, the Seventh Circuit considered a case in which the

19

plaintiffs alleged that the defendant directors had ignored red

20

flags raised by the FDA, which had inspected the company thirteen

21

times over a six-year period, and sent four formal certified

22

warning letters to the defendants.

23

2003).

24

dismissal and concluded that the facts “support[ed] a reasonable

25

assumption that there was a sustained and systemic failure of the

26

board to exercise oversight . . . .”

In In re

325 F.3d 795, 799 (7th Cir.

The Seventh Circuit reversed the district court’s

Id. at 809.

27

In another case, In re Pfizer Inc. Shareholder Derivative

28

Litigation, Pfizer had entered into at least three settlements
23

1

with the FDA and paid fines relating to illegal sales.

2

Supp. 2d 453, 455–57 (S.D.N.Y. 2010).

3

“was acutely aware of the need to prevent such illegal practices

4

on the part of itself and its subsidiaries because of prior

5

settlements with the Government attributing just such misconduct

6

to various Pfizer subsidiaries shortly prior to their acquisition

7

by Pfizer.”

8

allegations showed the defendants knew of a high probability of

9

illegal practices but “deliberately decided to let it continue by

Id. at 455.

722 F.

The court found that Pfizer

It concluded that the plaintiffs’

United States District Court
For the Northern District of California

10

blinding themselves to that knowledge,” and that “a majority of

11

the directors face[d] a substantial threat of personal liability

12

arising from their alleged breach of their non-exculpated

13

fiduciary duties.”

14

Id. at 460.

Similarly to both Abbott and Pfizer, in this case, Defendants

15

were repeatedly made aware of ongoing problems with the CSMP that

16

required oversight, which Defendants allegedly failed to exercise.

17

While Defendants seek to differentiate Abbott on the grounds that

18

the FDA sent its letters directly to the chairman of the board,

19

Plaintiffs here have alleged that the entire board approved the

20

2008 Settlement Agreement and therefore were on notice of the need

21

for McKesson properly to implement the CSMP, as well as that

22

several individual Defendants were present at each of the Audit

23

Committee meetings.

24

Pfizer contained an obligation that misconduct be reported

25

directly to the board differentiate it from the present case.

26

Here, Plaintiffs have plausibly alleged several incidents

27

representing red flags that required action on behalf of the

28

board, but that it repeatedly failed to intervene.

Nor does the fact that the settlement in

24

1

Defendants liken this case to Horman v. Abney, in which the

2

Delaware Court of Chancery rejected a claim that an Assurance of

3

Discontinuous Agreement (AOD) resulting from a prior government

4

investigation served as a red flag in that case because the

5

plaintiffs acknowledged that the company complied with the AOD for

6

more than five years following it.

7

at *11 (Del. Ch. Jan. 19, 2017).

8

that “[t]here might well be a reasonably conceivable scenario

9

where the AOD itself could have taken the form of a red flag.

No. 12290-VCS, 2017 WL 242571,

The court recognized, however,

For

United States District Court
For the Northern District of California

10

instance, if UPS had entered the AOD in 2005 and then continued a

11

pattern of non-compliant shipments immediately thereafter and

12

through 2014, one might reasonably infer that the Board had

13

consciously disregarded UPS’s commitments under the AOD and its

14

own oversight responsibilities.”

15

precisely that “reasonably conceivable scenario” where the

16

underlying agreement--namely, the 2008 Settlement Agreement--takes

17

the form of a red flag, and Plaintiffs here do indeed allege that

18

Defendants continued a pattern of noncompliance immediately

19

thereafter and through the relevant period.

20

Id.

The present case alleges

Defendants also contend that In re General Motors Co.

21

Derivative Litigation should control the result here.

22

VCG, 2015 WL 3958724 (Del. Ch. June 26, 2015).

23

shareholders brought suit against GM after it issued over forty-

24

five recalls starting in February 2013, resulting in approximately

25

thirteen million vehicles recalled, approximately $1.5 billion

26

charges against earnings in 2014, two Congressional

27

investigations, and a criminal investigation by the DOJ.

28

plaintiffs sought to hold the board of directors liable because
25

No. 9627-

In that case,

Id.

The

1

the board did not know about the defect and lacked a better

2

mechanism to receive information about safety risks, even though

3

certain engineers and other employees in the company knew of the

4

defect for a number of years.

5

that the plaintiffs failed to show an utter failure to implement a

6

proper reporting system because they did not allege that the board

7

had knowledge that the system was inadequate, or consciously

8

remained uninformed, nor were there sufficient red flags to impute

9

knowledge to them.

United States District Court
For the Northern District of California

10

Id. at *2.

The court concluded

Id. at *14.

That case is easily distinguishable from the present case,

11

where Plaintiffs have alleged not one but two major incidents

12

involving federal regulators, the first of which put Defendants on

13

notice, as well as sufficient red flags in between the two

14

incidents.

15

board should have known about certain safety risks, but here,

16

Plaintiffs allege that Defendants did in fact know of McKesson’s

17

major legal risks.

18

The plaintiffs in General Motors alleged that the

Plaintiffs here have provided sufficient factual allegations

19

to support that Defendants were repeatedly faced with red flags

20

but consciously decided not to act, resulting in a knowing failure

21

to exercise oversight of the CSMP as was their duty.

22

allegations are sufficient to plead a substantial likelihood of

23

liability for Defendants’ breach of their fiduciary duty, such

24

that Plaintiffs have established that bringing a demand to the

25

Board would have been futile.

26

nominal Defendant McKesson’s motion to dismiss the complaint.

These

For these reasons, the Court denies

27
28
26

1
2
3
4
5
6
7
8
9

United States District Court
For the Northern District of California

10
11
12
13
14

III. Motion to Dismiss (Failure to State a Claim)
Defendants move to dismiss each count for failure to state a
claim.

to plead a Caremark claim against the nine directors6 who served
on McKesson’s Board at the time that the 2008 Settlement Agreement
was executed, the Court denies dismissal for the reasons discussed
above.

17
18
19
20
21
22
23
24
25
26
27
28

Each of these directors was aware of and approved the 2008

Settlement Agreement, and therefore knew of McKesson’s misconduct
and legal obligations to implement and oversee the CSMP.
Defendants also move to dismiss the Caremark claim against
Defendants Coles, Knauss, and Salka, and the claims for waste and
insider trading under both Delaware and California law.

Finally,

they move to strike Plaintiffs’ demand for a jury trial.
A.

15
16

With respect to Defendants’ argument that Plaintiffs fail

Plaintiffs Fail to Allege Sufficient Facts Supporting a
Caremark Claim Against Defendants Coles, Knauss, and
Salka

Defendants separately move to dismiss the Caremark claim
alleged against Defendants Coles, Knauss, and Salka on the grounds
that they did not join the Board until 2014, and therefore the
bulk of Plaintiffs’ allegations are irrelevant to them.7
Plaintiffs argue that these Defendants are not shielded from
liability because at the time that they joined the Board, they
were made aware of McKesson’s “heightened risk for violations” and
the 2008 Settlement Agreement, and failed to ensure McKesson’s
compliance up until the 2017 settlement.

Opp’n at 10–11; Compl. ¶

6

Namely, directors Bryant, Budd, Hammergren, Jacobs,
Knowles, Mueller, Irby, Lawrence, and Shaw.
7

Coles joined the Board in April 2014, and Knauss and Salka
joined in October 2014. See Compl. ¶¶ 21–23.
27

1

130.

2

early as March 19, 2015, less than one year after Coles joined the

3

Board, and only five months after Knauss and Salka joined.

4

Plaintiffs do not allege any red flag events during this short

5

period.

6

The 2017 settlement, however, was approved by the Board as

The Court concludes that there were too few intervening

7

events between these directors joining the board and the

8

authorization of the settlement in March 2015 to establish

9

conscious disregard and a failure to act.

See In re Intel Corp.

United States District Court
For the Northern District of California

10

Derivative Litig., 61 F. Supp. 2d 165, 175 (D. Del. 2009) (since

11

an arbitration award “was made roughly 16 years ago and before

12

nine of the twelve current Directors joined the Board, it is

13

difficult to see how this is a ‘red flag’ that the Directors[]

14

allegedly disregarded at their peril”).

15

to allege that these three Defendants exhibited an utter failure

16

to oversee the CSMP in the short time between their joining the

17

Board and the March 2015 authorization of the 2017 settlement, the

18

Court dismisses, with leave to amend, the breach of fiduciary duty

19

claims alleged against Coles, Knauss, and Salka.

20
21
22
23
24
25
26
27
28

B.

Because Plaintiffs fail

Plaintiffs Sufficiently Allege their Claim for Waste of
Corporate Assets

Defendants also move to dismiss the claim for waste of
corporate assets alleged against all Defendants.

“To recover on a

claim of corporate waste, the plaintiffs must shoulder the burden
of proving that the exchange was so one sided that no business
person of ordinary, sound judgment could conclude that the
corporation has received adequate consideration.”
A.2d at 74 (internal quotation marks omitted).
28

Disney, 906

“A claim of waste

1

will arise only in the rare, unconscionable case where directors

2

irrationally squander or give away corporate assets.

3

standard for waste is a corollary of the proposition that where

4

business judgment presumptions are applicable, the board’s

5

decision will be upheld unless it cannot be attributed to any

6

rational business purpose.”

7

citations omitted).

8
9

This onerous

Id. (internal quotation marks and

“[T]he discretion of directors in setting executive
compensation is not unlimited,” however, and “there is an outer

United States District Court
For the Northern District of California

10

limit to the board's discretion to set executive compensation, at

11

which point a decision of the directors on executive compensation

12

is so disproportionately large as to be unconscionable and

13

constitute waste.”

14

Litig., 962 A.2d 106, 138 (Del. Ch. 2009) (citing Brehm, 746 A.2d

15

at 262 n.56)).

16

defendants’ motion to dismiss where the plaintiffs alleged that a

17

departing director would receive $68 million in compensation,

18

along with an office, an administrative assistant, and a car and

19

driver for five years or until commencement of full time

20

employment in exchange for non-compete, non-disparagement, and

21

non-solicitation agreements, and a release of claims.

22

court agreed that the plaintiffs’ allegations constituted waste

23

and met the “so one sided” standard because the CEO was “allegedly

24

responsible, in part, for billions of dollars of losses at

25

Citigroup.”

In re Citigroup Inc. S’holder Derivative

In Citigroup, for example, the court denied the

Id.

26
27
28
29

Id.

The

1

Here, Plaintiffs allege that the Compensation Committee8

2

unjustifiably compensated Hammergren, Julian, and Seeger, despite

3

McKesson’s mounting costs and civil penalties and resounding

4

shareholder disapproval.

5

Hammergren, Plaintiffs allege that he was compensated a total of

6

$692 million since the 2008 settlement, id. ¶ 231, and under the

7

company’s new incentive plan in 2015, has received additional

8

compensation including a $1.1 million increase to his annual bonus

9

in 2017, despite McKesson receiving “the most severe sanctions

See Compl. ¶¶ 244–49.

With respect to

United States District Court
For the Northern District of California

10

ever” levied on a DEA registered distributor, id. ¶ 237.

11

and 2016, the Compensation Committee awarded Hammergren 210

12

percent and 168 percent of his target awards, respectively, the

13

maximum percentage of his target award allowable as bonus pay in

14

both years.

15

$700 million in stock since 2008.

16

Id. ¶ 237.

In 2015

Finally, he was permitted to sell over
Id. ¶ 224.

The Compensation Committee also granted Julian more than $133

17

million in incentive compensation between 2008 and 2014.

18

230.

19

of his target awards in 2015 and 2016, respectively.

20

In 2017, the Committee awarded him 135 percent of his target

21

award, resulting in a $1,937,813 bonus.

22

the maximum amount allowed each year, despite McKesson’s

23

continuing violations of the 2008 Settlement Agreement and the

24

events leading to the 2017 Settlement Agreement.

25

Counsel and Chief compliance Officer, received more than $33

Compl. ¶

Like Hammergren, Julian received 210 percent and 168 percent

Id.

Id. ¶ 238.

Julian was awarded

Seeger, General

26
8

27
28

Defendants Bryant, Jacobs, Mueller, Shaw, Lawrence, Irby,
and Coles served on the Compensation Committee for varied tenures
between 2009 and 2016. See Compl. ¶ 29.
30

1

million in incentive compensation between 2008 and 2014, despite

2

McKesson’s continuing failure to comply with its legal obligations

3

and litigation risk.

4

go unnoticed by the market:

5

three percent of all companies in the Russell 3000 index with

6

respect to its “pay-for-performance” policies.

7

Id. ¶ 230.

Such lavish compensation did not

McKesson was rated in the bottom

Id. ¶ 266.

Even after the misconduct over the same period came to light,

8

and the Board approved the 2017 settlement in March of 2015, the

9

Compensation Committee refused to exercise McKesson’s Compensation

United States District Court
For the Northern District of California

10

Recoupment Policy.

11

to recover annual or long-term incentive compensation provided to

12

certain employees in the event that they engage in conduct

13

detrimental to the company.

14

by the 2017 settlement, the Compensation Committee never exercised

15

its power to recoup any of these awards.

16

Compl. ¶ 226.

Id.

That policy allows the company

Despite the record fines imposed

Viewed against the background of the 2008 and 2017

17

settlements, Plaintiffs’ allegations are sufficient to state a

18

claim for waste of corporate assets.

19

Hammergren, Julian, and Seeger, in the same years as McKesson’s

20

continuing and major legal violations, are so disproportionately

21

large that they may plausibly reach the level of

22

unconscionability, particularly when viewed in hindsight in

23

conjunction with the Compensation Recoupment Policy and in

24

comparison to other companies in the Russell 3000 index.

25

these reasons, the Court denies Defendants’ motion to dismiss the

26

claim for waste.

27
28
31

The awards granted to

For

1
2
3
4
5
6
7
8
9

United States District Court
For the Northern District of California

10

C.

Plaintiffs Fail to Allege with Particularity Sufficient
Facts to Establish a Claim for Insider Trading Under
Both Delaware and California Law

Defendants first move to dismiss Plaintiffs’ insider trading
claims under California law on the grounds that, because McKesson
is a Delaware corporation, it is not subject to the California
Corporations Code.

Even if it is, however, Defendants also move

to dismiss for failure to state a claim under both California and
Delaware law.
1.

Plaintiffs May Bring Their Insider Trading Claim
Under California Law

Defendants argue that under the internal affairs doctrine,

11

McKesson is not subject to the California Corporations Code, but

12

may only be subject to claims brought under Delaware law because

13

it is a Delaware corporation.

14
15
16
17
18
19

The internal affairs doctrine is a conflict of laws
principle which recognizes that only one State should
have the authority to regulate a corporation's internal
affairs--matters peculiar to the relationships among or
between the corporation and its current officers,
directors, and shareholders––because otherwise a
corporation could be faced with conflicting demands.
States normally look to the State of a business’
incorporation for the law that provides the relevant
corporate governance general standard of care.
Friese v. Super. Ct., 134 Cal. App. 4th 693, 706 (2005) (internal

20
quotation marks and citation omitted).

This doctrine is codified

21
in California Corporations Code Section 2116, which states that
22
“[t]he directors of a foreign corporation transacting intrastate
23
business are liable to the corporation . . . according to any
24
applicable laws of the state or place of incorporation or
25
organization, whether committed or done in this state or
26
elsewhere.”

Cal. Corp. Code § 2116.

27
28
32

1

Plaintiffs cite Friese for the proposition that Section 2116

2

bars neither their Section 25402 nor their Section 25502.5 claim.

3

In that decision, a California appellate court reviewed the

4

history and purpose of California’s insider trading prohibitions

5

as well as existing precedent, and reasoned that the prohibitions

6

exhibited the California legislature’s “historic and well-

7

established intent to regulate both intrastate conduct and . . .

8

subject securities transactions which take place in this state to

9

California’s securities laws even if those securities are issued

United States District Court
For the Northern District of California

10

by foreign corporations.”

11

thus concluded that because these laws served both “the public and

12

regulatory interests,” they were not subject to the internal

13

affairs doctrine.

14

Friese, 134 Cal. App. 4th at 709.

It

Id. at 710.

Defendants for their part cite the decision in In re Wells

15

Fargo & Co. Shareholder Derivative Litigation, 282 F. Supp. 3d

16

1074 (N.D. Cal. 2017).

17

district analyzed the same issue and considered Friese, noting

18

that it was “a close issue.”

19

rejected Friese and stated that “California law codifying the

20

internal affairs doctrine is relatively clear.”

21

concluded that, pursuant to the internal affairs doctrine, the

22

defendants were not subject to suit under California law and

23

dismissed an insider trading claim brought under Section 25402.

24

Id. at 1112.

25

In that decision, another judge in this

Id. at 1111.

The court nonetheless

Id.

It thus

While this Court agrees that it is “a close issue,” In re

26

Wells Fargo, 282 F. Supp. 3d at 1111, the decisions of

27

California’s state courts are more persuasive authority on

28

California law.

Nor does any part of the decision in Friese
33

1

suggest that it is inapplicable to derivative actions, as

2

Defendants suggest.

3

Derivative Litig., 574 F. Supp. 2d 1046, 1070 (N.D. Cal. 2008)

4

(stating in a derivative action that “plaintiff may bring a

5

California insider trading claim against individuals who traded on

6

insider information in California even if the corporation is

7

incorporated in Delaware”); In re Verisign, Inc., Derivative

8

Litig., 531 F. Supp. 2d 1173, 1221 (N.D. Cal. 2007) (concluding,

9

in a derivative action, pursuant to Friese “that the claims

See also In re Maxim Integrated Prods, Inc.,

United States District Court
For the Northern District of California

10

brought under §§ 25402 and 25403 are not barred by application of

11

California's internal affairs doctrine”).

12

decision in Friese and denies Defendants’ motion to dismiss the

13

insider trading claims under California law pursuant to the

14

internal affairs doctrine.

15
16

2.

This Court follows the

Plaintiffs Fail to State a Claim for Insider
Trading

In order to state a claim for insider trading under Delaware
17
law, Plaintiffs must show that “1) the corporate fiduciary
18
possessed material, nonpublic company information; and 2) the
19
corporate fiduciary used that information improperly by making
20
trades because she was motivated, in whole or in part, by the
21
substance of that information.”

In re Oracle Corp., 867 A.2d 904,

22
934 (Del. Ch. 2004).

Delaware requires that “the selling

23
defendants acted with scienter.”

Guttman v. Huang, 823 A.2d 492,

24
505 (Del. Ch. 2003).
25
California Corporations Code Section 25402 makes it unlawful
26
for an officer or director of a company with direct or indirect
27
access to material information not generally available to the
28
34

1

public to purchase or sell any security of the company in

2

California when he or she knows the material information would

3

significantly affect the market price of that security.

4

Corp. Code § 25402.9

5

See Cal.

Because insider trading is a fraudulent practice, Plaintiffs

6

must satisfy Rule 9(b), which requires that they allege with

7

particularity the facts giving rise to their claims.

8

P. 9(b).

9

have material, nonpublic information.

Fed. R. Civ.

Both Delaware and California law require that the trader
In Delaware, the trader

United States District Court
For the Northern District of California

10

must be motivated by the substance of that information, Oracle,

11

867 A.2d at 934, whereas in California the trader must simply make

12

a purchase or sale with the knowledge that the information would

13

significantly affect the market price of the security, Cal. Corp.

14

Code § 25402.

15

Plaintiffs’ complaint includes tables of each Selling

16

Defendant’s trading summaries in the years 2008 to 2017.

17

Compl. ¶¶ 16–19, 24, 26; see also Compl. App’x A.

18

Plaintiffs provide detailed allegations regarding Defendants’

19

sales transactions, they fail to link with sufficient

20

particularity each transaction to material, nonpublic information

21

either motivating each sale or with the potential to affect the

22

market price significantly.

23

that “the Selling Defendants had access to highly material

See

While

Instead, Plaintiffs allege generally

24
25
26
27
28

9

California Corporations Code Section 25502.5 provides, “Any
person other than the issuer who violates Section 25402 shall be
liable to the issuer of the security purchased or sold in
violation of Section 25402” for treble damages. Cal. Corp. Code §
25502.5. Thus, Plaintiffs’ Section 25502.5 claim rises and falls
with their Section 25402 claim.
35

1

information regarding the Company, including the information set

2

forth herein regarding the true adverse facts of McKesson’s

3

failure to adhere to the terms of the 2008 Settlement Agreement

4

and contribution to the opioid crisis.”

5

Compl. ¶ 332.

These allegations are lacking because much of the adverse

6

information that Plaintiffs discuss was made public, but

7

Plaintiffs appear to include all sales from the years 2008 to 2017

8

without regard to when the alleged material adverse information

9

became public.

For example, in 2008, McKesson’s February 1, 2008

United States District Court
For the Northern District of California

10

Form 10-Q reported that McKesson “was seeking to resolve claims

11

with the DEA and certain U.S. Attorneys General that between 2005

12

and 2007 certain of McKesson’s distribution centers fulfilled

13

orders of controlled substances that were not adequately reported

14

to the DEA,” and noted that the company was implementing

15

comprehensive procedures and processes to satisfy these concerns.

16

Compl. ¶ 56.

17

Settlement Agreement and McKesson issued a press release as well.

18

Id. ¶¶ 57–58.

On May 2, 2008, the DEA publicly announced the 2008

19

Even assuming that the February 1 filing did not make public

20

the full scope of the violations or the settlement terms, the May

21

2 announcement certainly did.

22

made after May 2, 2008, before any new red flags were raised,

23

would be subject to an insider trading claim.

24

directors made any sales prior to May 2, 2008.

Thus, it is not clear why sales

Only two of the six

25

The next major event occurred in July 2011, when a DEA agent

26

noticed anomalies with McKesson’s Landover, Maryland distribution

27

center.

28

respect to the many sales made in between May 2, 2008 and July

Plaintiffs do not allege any theory, however, with

36

1

2011, which include eleven of Hammergren’s sales, six of Irby’s,

2

five of Jacobs’, four of Knowles’, and all but one of Shaw’s.

3

Compl. App’x A.

4

knowledge of the July 2011 incident, Plaintiffs fail to allege how

5

this single event motivated any Defendant’s sales.

6

See

And assuming that the Selling Defendants had

With respect to the March 12, 2013 raid and ensuing

7

investigations, McKesson “disclosed in its January 30, 2014 10-Q

8

that the U.S. Attorney for the Northern District of West Virginia

9

was investigating potential claims under the Comprehensive Drug

United States District Court
For the Northern District of California

10

Abuse Prevention and Control Act in connection with the Company’s

11

Landover distribution center.”

12

marks omitted).

13

2015 that it had reached an agreement in principle with the DEA,

14

the DOJ, and various U.S. Attorney offices, and that the

15

investigations and potential for settlement were previously

16

disclosed in a February 5, 2015 Form 10-Q.

17

30 announcement caused McKesson’s share price to decline over

18

forty percent.

19

Compl. ¶ 70 (internal quotation

McKesson also publicly announced on April 30,

Id. ¶ 118.

The April

Id. ¶ 119.

Giving Plaintiffs the benefit of the doubt at this stage, and

20

assuming that the April 30, 2015 disclosure made public

21

information that was not disclosed by the public filings,

22

Plaintiffs may bring claims with respect to sales between March

23

12, 2013 and April 30, 2015.

24

list, this includes only two sales by Budd, ten sales by

25

Hammergren, three sales by Irby, one sale by Jacobs, two sales by

26

Knowles, and no sales by Shaw.

27

allege, however, that this event motivated these sales.

Out of the myriad sales Plaintiffs

Plaintiffs nonetheless fail to

28
37

Nor do

1

Plaintiffs allege any theory as to why the many sales made after

2

April 30, 2015 should be subject to insider trading claims.

3

Plaintiffs argue that they are not required to identify

4

“defendant-by-defendant, transaction-by-transaction, the specific

5

material non-public information allegedly possessed by that

6

particular defendant at the time of any particular transaction.”

7

In re RasterOps Corp. Sec. Litig., No. C 92-20115 RMW EAI, 1993 WL

8

476651, at *5 (N.D. Cal. Sept. 10, 1993).

9

both California and Delaware law, however, have held plaintiffs to

More recent cases under

United States District Court
For the Northern District of California

10

a higher pleading standard.

11

Supp. 2d at 1221 (dismissing California insider trading claims

12

where “plaintiffs d[id] not explain which ‘true adverse facts’

13

each of the selling defendants knew, when each knew those facts,

14

how they acquired the knowledge, or which sales were made when

15

defendants were in possession of which inside information”);

16

Guttman, 823 A.2d at 505 (concluding that plaintiffs failed to

17

allege particularized facts supporting “that each sale by each

18

individual defendant was entered into and completed on the basis

19

of, and because of, adverse material non-public information”).

20

Given that the majority of the transactions at issue fall

21

into time periods during which there does not appear to be any

22

non-public material adverse information, Plaintiffs’ generalized

23

allegations fail to state with particularity a plausible theory

24

supporting their insider trading claim.

25

that do fall within the relevant time periods addressed above must

26

be pled with more particularity with respect to the Selling

27

Defendants’ knowledge and motivation.

28

Court grants the Selling Defendants’ motion to dismiss the insider

See, e.g., In re Verisign, 531 F.

38

Even those transactions

For these reasons, the

1

trading claims under both California and Delaware law, with leave

2

to amend.

3
4

D.

Defendants’ Motion to Strike Plaintiffs’ Jury Demand Is
Denied Without Prejudice

Plaintiffs request a trial by jury, to which Defendants argue
5
they are not entitled because their claims are brought in equity.
6
The Seventh Amendment guarantees a party’s right to a jury trial
7
“[i]n Suits at common law,” U.S. Const., amend VII, but this right
8
does not extend to actions involving only equitable claims.
9
“[T]he right to jury trial attaches to those issues in derivative
10
United States District Court
For the Northern District of California

actions as to which the corporation, if it had been suing in its
11
own right, would have been entitled to a jury.”

Ross v. Bernhard,

12
396 U.S. 531, 532–33 (1970).

This question requires the Court to

13
“examine both the nature of the action and of the remedy sought.”
14
Tull v. United States, 481 U.S. 412, 417 (1987).
15
Plaintiffs concede that their breach of fiduciary duty claim
16
is traditionally equitable in nature, but contend that their waste
17
and insider trading claims are based in law rather than equity and
18
therefore subject to a jury trial.

See Opp’n at 20.

Both parties

19
cite cases that they claim support their arguments as to the
20
nature of the waste and insider trading claims.
21
The parties’ cases concerning the waste claim fail to provide
22
any clarity on the issue.

While Defendants cite In re Shaw &

23
Elting LLC for the proposition that “[a] claim for breach of
24
fiduciary duty, like a claim for waste, sounds in equity,” Nos.
25
9661-CB, 9686-CB, 9700-CB, 10449-CB, 2015 WL 4874733, at *36 (Del.
26
Ch. Aug. 13, 2015), Plaintiffs point to Navellier v. Sletten, in
27
which a case involving only breach of fiduciary duty and waste
28
39

1

claims went to a jury (although it appears that the jury trial

2

question was not explicitly raised), 262 F.3d 923, 931 (9th Cir.

3

2001).

4

With respect to the insider trading claims, Defendants argue
that such claims rely on “principles of restitution and equity.”

6

Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 837 (Del.

7

2011).

8

the question of whether insider trading claims are subject to jury

9

trials, and instead point to Morales v. Executive Telecard, Ltd.,

10
United States District Court
For the Northern District of California

5

No. 95 CIV 10202, 1998 WL 1031493, at *3 (S.D.N.Y. Oct. 30, 1998),

11

which held that a claim for damages based on a short-swing trading

12

violation of Section 16(b) of the Securities Exchange Act was

13

subject to a jury trial.

14

did not consider the type of insider trading claims alleged here.

15

Neither side cites nor addresses Securities and Exchange

16

Commission v. Lipson, in which the Seventh Circuit stated,

17

“Trading on insider knowledge by a major shareholder who is also

18

the corporation’s chief executive officer is a breach of fiduciary

19

obligation, and so the disgorgement of the insider’s ill-gotten

20

gain (or averted loss, which is the economic equivalent or profit)

21

is indeed equitable in character,” 278 F.3d 656, 663 (7th Cir.

22

2002).

23

Plaintiffs respond that that case did not actually address

That case, however, is inapposite, as it

Plaintiffs also argue that the remedies they seek are legal,

24

such as “money damages, including restitution and disgorgement,”

25

as well as “a request for treble damages for violations of

26

California Corporations Code § 25502.5.”

27

argue that restitution and disgorgement are equitable, not legal,

28

remedies, and that Plaintiffs cannot “salvage” their jury demand
40

Opp’n at 20.

Defendants

1

by citing Section 25502.5 because that cause of action is barred

2

by the internal affairs doctrine.

3

above, however, the Court declines to bar Plaintiffs’ insider

4

trading claims on that ground.

5

Rep. at 13.

As discussed

Defendants do not appear to contest that Plaintiffs’ Section

6

25502.5 claim sounds in law rather than equity.

7

Plaintiffs amend their California insider trading claims so as to

8

survive dismissal, those claims at least may be tried to a jury.

9

Moreover, given the lack of clarity surrounding the other insider

Thus, should

United States District Court
For the Northern District of California

10

trading and waste claims, as well as the early stage of the

11

current proceedings, the Court denies Defendants’ motion to strike

12

the jury demand at this time without prejudice.

13
14

CONCLUSION
For the reasons stated above, the Court denies nominal

15

Defendant McKesson’s motions to stay and dismiss this action.

16

Court denies in part Defendants’ motion to dismiss for failure to

17

state a claim and grants it in part, with leave to amend.

18

Plaintiffs may file an amended complaint within twenty-eight days

19

of the date of this Order.

20

IT IS SO ORDERED.

21
22
23

Dated: May 14, 2018
CLAUDIA WILKEN
United States District Judge

24
25
26
27
28
41

The