In Clem et al. v. Skinner et al., the Delaware Court of Chancery dismissed a derivative suit against the directors of Walgreens Boots Alliance, Inc. (Walgreens) for failure to plead demand futility. The claims arise out of Walgreens’ billing practices for insulin pens. Walgreens previously dispensed a minimum of five insulin pens – the number of pens in the manufacturer’s box – even if a prescription called for fewer. In 2016, Walgreens received a civil investigative demand regarding these practices and, in 2017, Walgreens learned that a whistleblower action had been filed. Walgreens ultimately settled the action and changed its dispensing practices for insulin pens.

The plaintiffs filed suit against Walgreens’ directors in 2021, alleging a Caremark duty of oversight claim. The defendants moved to dismiss for failure to plead demand futility. After applying the three-part test for demand futility, the court found that demand was not futile and, accordingly, dismissed the plaintiffs’ claims.

The court’s analysis focused on the second prong of the demand futility test: whether the director faces a substantial likelihood of liability of any for the claims that are the subject of the litigation demand. The plaintiffs argued that the directors faced a substantial likelihood of liability under both Caremark prongs: (1) that Walgreens’ internal systems were ineffective for monitoring legal and regulatory compliance, including billing practices for insulin pens; and (2) that Walgreens disregarded “red flags” about its billing practices for insulin pens.

Rejecting Plaintiffs’ claim under prong one of Caremark, the Court noted Walgreens’ extensive oversight work as alleged in the complaint itself. Plaintiffs detailed regular discussions of legal and regulatory compliance risk at Audit Committee and Board meetings. The complaint also described compliance programs that were implemented related to healthcare regulations. The court found that Walgreens’ monitoring system was sufficient and that the plaintiffs’ insistence that Walgreens “should have fulfilled its oversight duties differently” was irrelevant. The Court note that “how directors choose to craft a monitoring system in the context of their company and industry is a discretionary matter.”

For the second Caremark prong, the Court found that the allegations “reflect[ed] a Board that was engaging with its oversight function—not one that decided to turn a blind eye to corporate wrongdoing.” The plaintiffs attempted to cite separate compliance issues, “untethered from” the insulin billing practices at-issue, as evidence of “red flags.” The court rejected those allegations, reasoning that “knowledge of illegality in one corner of a vast business does not mean that directors were on notice of a distinct problem in another.” The Court also found that Walgreens’ awareness of the government investigation into Walgreens’ sales and marketing practices for insulin products was not a “red flag” because there was no evidence that the board knew of actual violations of law. In other words, as the Court stated, the existence of a government investigation is not, in itself, a “red flag.”

At the end of the Court’s opinion, Vice Chancellor Will cautioned future plaintiffs about bringing similarly meritless claims. The court wrote that “[f]rom a doctrinal perspective,” the expansion of Caremark claims “risks weakening the core protections of the business judgment rule,” and that Caremark lawsuits should not be “reflexively filed whenever a government investigation is announced, a class action lawsuit succeeds, or a big-dollar settlement is reached.” Vice Chancellor Will noted that such lawsuits “drain[] resources from the very corporations that derivative plaintiffs purport to represent.”

Authored by Allison M. Wuertz, Jordan Teti, Sean MacDonald, and Raman Kulkarni.