Teamsters Local 443 Health Services & Insurance Plan v. John C. Chou

• Court: Court of Chancery of Delaware
• Decided: November 17, 2023
• Docket: CA No. 2019-0816-SG
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

TEAMSTERS LOCAL 443 HEALTH ) SERVICES & INSURANCE PLAN, ST. ) PAUL ELECTRICAL ) CONSTRUCTION PENSION PLAN, ) ST. PAUL ELECTRICAL ) CONSTRUCTION WORKERS ) SUPPLEMENTAL PENSION PLAN ) (2014 RESTATEMENT), ) RETIREMENT MEDICAL FUNDING ) PLAN FOR THE ST. PAUL ) ELECTRICAL WORKERS and SAN ) ANTONIO FIRE & POLICE PENSION ) FUND, ) ) Plaintiffs, ) ) v. ) C.A. No. 2019-0816-SG ) JOHN G. CHOU, STEVEN H. COLLIS, ) RICHARD W. GOCHNAUER, LON R. ) GREENBERG, TIM G. GUTTMAN, ) JANE E. HENNEY, M.D., KATHLEEN ) W. YLE, MICHAEL J. LONG, and ) HENRY W. MCGEE, ) ) Defendants, ) ) –and– ) ) AMERISOURCEBERGEN ) CORPORATION, ) ) Nominal Defendant. ) MEMORANDUM OPINION

Date Submitted: July 12, 2023 Date Decided: November 17, 2023

Gregory V. Varallo and Glenn R. McGillivray, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Ned Weinberger and Mark D. Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; Christine M. Mackintosh and Rebecca A. Musarra, GRANT & EISENHOFER P.A., Wilmington, Delaware; OF COUNSEL: Christopher J. Orrico, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Frank Schirripa, HACH ROSE SCHIRRIPA & CHEVERIE LLP, New York, New York; Nathaniel L. Orenstein and Steven L. Groopman, BERMAN TABACCO, Boston, Massachusetts, Attorneys for Plaintiffs.

William M. Lafferty, D. McKinley Measley, and Thomas P. Will, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: F. Joseph Warin, Jonathan M. Phillips, and Courtney M. Brown, GIBSON, DUNN & CRUTCHER LLP, Washington, D.C., Attorneys for the Special Litigation Committee of the Board of Directors for AmerisourceBergen Corporation.

GLASSCOCK, Vice Chancellor This is a derivative action, in which the Plaintiff stockholders allege that the

board of AmerisourceBergen Corporation (“ABC”, “AmerisourceBergen”, or the

“Company”) allowed a division of the Company to act as, in effect, a criminal

enterprise. That subsidiary, Medical Initiatives, Inc. d/b/a Oncology Supply

Pharmacy Service (“MII” or the “Pharmacy”), repackaged cancer drugs from single-

dose vials into syringes, for distribution to physicians. The complaint alleged that

the Pharmacy was operated in an illegal manner, including by pooling the small

amounts left in vials after charging a syringe, and using the resulting product to fill,

and sell, extra syringes, in a manner that was illegal and unsanitary. The Defendant

Directors’ and Officers’ failures to oversee operations were actionable breaches of

fiduciary duties, per the complaint, and led to fines and penalties in settlement of

DOJ investigations amounting to hundreds of millions of dollars. On a motion to

dismiss by the Defendant Directors, I found the allegations of the complaint, taken

as true and with the plaintiff-friendly inferences therefrom, sufficient to state a claim

for breach of fiduciary duty; and that the majority of ABC’s board of directors (the

“Board”) faced a substantial risk of liability for failure to properly oversee the

Pharmacy operations, justifying derivative litigation on the part of the Plaintiff

stockholders.

Such a situation, of course, is a departure from the paradigm that the assets of

a corporation, including litigation assets, are under the control of the directors.

1 Operation of a conflicted board may be restored by empowering a special committee

of independent directors. Here, the Board appointed such a committee (the “SLC”),

ultimately composed of a single independent fiduciary, to review whether the

litigation was in the best interest of ABC. I permitted a stay of litigation to facilitate

that review. The resulting report of the SLC paints a different picture from that

contained in the complaint. After a thorough review, the SLC concluded that there

had been no breach of duty on the part of the majority of the Board, that the litigation

was inimical to the corporate weal, and recommended that the matter be dismissed.

That does not end my review. Of course, this Court usually defers to the

business judgment of directors. Several scenarios exist, however, where pressures

on directors, even though technically unconflicted, have the potential to skew their

judgment, and in those situations the Court must determine that the directors’ review

and resulting exercise of judgment are reasonable.1 One such case is a

special committee’s review of derivative litigation, where the directors on the

committee are asked to evaluate the potential culpability of fellow board members.

The resulting examination by the court of a special committee’s report

1 Vice Chancellor Laster has created a scholarly review of various scenarios invoking intermediate scrutiny of fiduciaries. See In re Columbia Pipeline Grp., Merger Litig., 299 A.3d 393 (Del. Ch. 2023). 2 recommending dismissal is known colloquially as a Zapata review.2 Such a review

follows.

Plaintiffs argue that the SLC’s work cannot withstand such review, in part,

because the report of a single-member committee is inherently suspect. They point

out that the independence of such a committee, and the conduct of its investigation,

must be “above reproach.” Here, because Plaintiffs purport to find ground to

reproach the SLC’s sole member, they contend the motion to dismiss must be denied.

The Plaintiffs’ standard is essentially correct, but I reject Plaintiffs’

conclusion. I have considered the facts with which Plaintiffs reproach the SLC

member, and find them unpersuasive. I have also considered the scope of the SLC’s

examination of the allegations in the complaint, and find it adequate; and the bases

for the SLC’s conclusions, which I find reasonable, even under the “gimlet eye”3

with which a single-member committee’s conclusions should be viewed.

Accordingly, the motion to dismiss is granted. The facts developed by the SLC, and

my reasoning, follow.

A word about the factual background is in order. An interested reader will

find a walk through the Background section below less of a stroll and more like, say,

2 Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). 3 See Chesapeake Corp. v. Shore, 771 A.2d 293, 323 (Del. Ch. 2000). 3 the pilgrimage Way of St. James.4 This detailed statement is justified here, because

it informs my review of the reasonableness of the SLC’s recommendation. The

reader is forewarned.5

I. FACTUAL BACKGROUND

The facts that follow are drawn from the record submitted by the special

litigation committee (the “SLC”) and the Plaintiffs, including the special litigation

committee’s report (“SLC Report”), the 420 exhibits attached thereto, and the

transcript of the deposition taken of the sole SLC member, Dennis M. Nally.6

A. AmerisourceBergen Corporation

AmerisourceBergen is a Delaware corporation headquartered in

Conshohocken, Pennsylvania.7 The Company was formed on August 29, 2001, after

Bergen Brunswig Corporation merged with AmeriSource Health Corporation and

subsequently changed its name to AmerisourceBergen Corporation.8 Following the

merger and the subsequent yearslong integration process, ABC became the largest

4 I refer to an “interested” reader, because a casual reader, I suspect, will find her faith insufficient to sustain the effort. 5 Readers will quickly discover that the factual treatment below contains a misery of acronyms. I have attempted to define the acronyms repeatedly in text to reduce the mental effort of comprehending the facts here; in a further attempt to reduce the acro-batics required of the reader, I have appended a list of acronyms and their meaning at the end of this Memorandum Opinion, as Exhibit A. 6 See Letter from D. McKinley Measley to Vice Chancellor Glasscock, Ex. A, Dkt. No. 73 (“SLC Report”). Citations in the form of “SLC Report Ex. __” refer to exhibits to the SLC Report. 7 ABC Annual Report on Form 10-K (Nov. 19, 2020), at 1. 8 SLC Report 56–57. 4 pharmaceutical distribution or services company in the U.S. dedicated only to the

pharmaceutical supply channel.9

As of 2001, AmerisourceBergen operated its pharmaceutical distribution

business through wholesale and specialty drug distribution subsidiaries.10 Two

subsidiaries, AmerisourceBergen Drug Corporation (“ABDC”) and

AmerisourceBergen Specialty Group (“ABSG” or “Specialty Group”), primarily

drove ABC’s pharmaceutical distribution and services business.11 ABSG and its

subsidiaries served the specialty drug distribution market, including oncology

supply.12

1. AmerisourceBergen Specialty Group

Prior to the merger, ABSG was relatively decentralized, holding various

portfolio companies that primarily operated independently.13 One of ABSG’s

portfolio companies was ASD Specialty Healthcare, LLC d/b/a Oncology Supply

(“OS”), which was—and still is—an oncology distribution company based in

Dothan, Alabama.14 OS distributes chemotherapy and other cancer drugs throughout

the United States.15 Another portfolio company owned by ABSG was Medical

9 ABC Annual Report on Form 10-K (Dec. 19, 2003), at 42. 10 SLC Report 57. 11 Id. at 4–5, 57. 12 Id. at 57. 13 ABC Annual Report on Form 10-K (Dec. 28, 2001), at 13. 14 SLC Report 7, 58. Bergen Brunswig acquired OS in 1996. Bergen Brunswig Annual Report on Form 10-K (Dec. 30, 1996), at II-19. 15 SLC Report 58. 5 Initiatives, Inc. d/b/a Oncology Supply Pharmacy Service (“MII” or the

“Pharmacy”).16 MII was an Alabama-licensed pharmacy that exclusively provided

services to OS and OS customers that purchased certain medications, via MII

preparing pre-filled syringes of oncology drugs.17

The Specialty Group’s portfolio also included subsidiary group purchasing

organizations (“GPOs”), such as International Oncology Network (“ION”), that

served a variety of medical specialty practices, including oncology practices.18 ION

would negotiate with pharmaceutical manufacturers and vendors, such as OS, on

behalf of ION’s paying member practices.19 Vendors would pay ION a fee, typically

a percentage of each sale.20

Since the merger, the Company has grown the Specialty Group and revised

its organizational structure.21 As ABSG grew by expanding its services and gaining

new subsidiaries, it created the ABSG Oncology Group consisting of OS, ION, and

MII.22

16 Id. at 7, 58. Bergen Brunswig acquired MII in 1998. Bergen Brunswig Form 10-Q (Feb. 16, 1999), at 9. 17 SLC Report 58–59. 18 Id. at 22–23, 59. 19 SLC Report Ex. 20, at 3. 20 Id. 21 SLC Report 60. 22 SLC Report Ex. 21, at 11. 6 2. AmerisourceBergen Drug Corporation

ABDC operates twenty-seven distribution facilities throughout the United

States.23 After acquiring ABDC in the merger, ABC grew ABDC through a series

of acquisitions, including PharMEDium through which ABDC operated five Food

and Drug Administration (“FDA”) registered sterile compounding outsourcing

facilities to provide sterile compounded preparations to acute hospitals within the

United States.24

B. AmerisourceBergen’s Corporate Governance Structure

1. The Board of Directors’ Functions

AmerisourceBergen’s board of directors (the “Board”) has consisted of ten

members since the Company’s formation in 2001.25 From 2001 to 2006, eight of the

directors were independent and not employed by the Company; from 2007 to 2015,

all but one director were independent.26 When the Chairman of the Board is not

independent, a majority of the independent directors elect a Lead Independent

Director annually.27 In 2016, when Defendant Steven Collis, ABC’s CEO, became

23 SLC Report Ex. 22, at 6. 24 Id.; AmerisourceBergen Annual Report on Form 10-K (Dec. 10, 2004), at 50. 25 See, e.g., Schedule 14A Proxy Statement (Jan. 22, 2002), at 2. 26 Schedule 14A Proxy Statement (Jan. 18, 2008), at 1; Schedule 14A Proxy Statement (Jan. 23, 2015), at 15. 27 Schedule 14A Proxy Statement (Jan. 22, 2016), at 20. 7 the Chairman, Defendant Dr. Jane Henney was elected Lead Independent Director,

a position she holds to this day.28

The Board met formally and informally throughout each year.29 Between

2001 and 2014, the Board conducted five to seven formal meetings each year.30 The

Board also held monthly telephone calls, called “First Monday.”31 At many of the

Board meetings, each Board committee’s Chair would report to the full Board on

topics discussed at the most recent meeting of their committee.32 The Board received

regular reports on legal and compliance-related matters and, on occasion, outside

counsel would present to the Board on such matters.33

2. The Board of Directors’ Standing Committees

From 2001 to 2011, the Board maintained four standing committees: the Audit

Committee, Compensation Committee, Executive and Finance Committee, and

Governance Committee.34 In 2011, the Company split the Executive Finance

Committee into separate committees to form a Finance Committee consisting of only

non-employee directors.35

28 Id. at 18. 29 SLC Report 71. 30 See, e.g., Schedule 14A Proxy Statement (Jan. 28, 2004), at 9; Schedule 14A Proxy Statement (Jan. 18, 2008), at 11. 31 SLC Report 71. 32 See, e.g., Schedule 14A Proxy Statement (Jan. 23, 2015), at 18. 33 SLC Report 72. 34 See, e.g., Schedule 14A Proxy Statement (Jan. 23, 2002), at 4; Schedule 14A Proxy Statement (Jan. 20, 2012), at 10. 35 SLC Report 62. 8 Most relevant to this discussion is the Board’s Audit Committee, which was

charged with overseeing the Company’s financial statements and financial reporting

practices; reviewing the adequacy of the Company’s accounting practices and

financial controls; and reviewing financial disclosures in the Company’s Annual

Report on Form 10-K and quarterly Form 10-Q filed with the Securities and

Exchange Commission.36 The Audit Committee also oversees the Company’s

internal audit function, reviewing findings from completed internal audits,

managements’ response to internal audit reports, and the senior internal auditor’s

performance.37 Internal audit reports were typically discussed quarterly when

ABC’s Internal Audit Department (“Internal Audit”) leaders met.38

The Audit Committee’s responsibilities were expanded in 2004 to expressly

include oversight of the Company’s legal and regulatory compliance function.39 In

2011, the Audit Committee also assumed responsibility for overseeing and

developing an enterprise risk management program “designed to assist the Company

with monitoring and mitigating business, operational and technological risks.”40 The

Audit Committee retained oversight responsibilities for regulatory compliance,

36 See, e.g., Schedule 14A Proxy Statement (Jan. 28, 2021), at 23–24; SLC Report Ex. 25, at Ex. A, 1–2; SLC Report Ex. 26, at Ex. A, 1–2; Schedule 14A Proxy Statement (Jan. 9, 2006), at 9–10. 37 See, e.g., Schedule 14A Proxy Statement (Jan. 28, 2021), at 23–24; SLC Report Ex. 25, at Ex. A, 2–4. 38 SLC Report 64. 39 SLC Report Ex. 29, at A-8. 40 SLC Report Ex. 32, at 6; see also Schedule 14A Proxy Statement (Jan. 20, 2012), at 15. 9 compliance with the Code of Ethics and Business Conduct (the “Code of Conduct”),

and the enterprise risk management program through December 2019, at which time

the newly-formed Compliance and Risk Committee assumed those

responsibilities.41

Between 2002 and 2014, the Audit Committee held approximately ten

meetings per year.42 ABC’s compliance and legal teams made presentations to the

Audit Committee at its meetings that occurred shortly before formal Board

meetings.43 At about half of the Audit Committee meetings each year, the Chief

Compliance Officer (“CCO”), the Company’s General Counsel, the Corporate

Security and Regulatory Affairs (“CSRA”) Director, the head of Internal Audit, or

the Director of Internal Controls reported to the Committee on compliance matters,

including any allegations or incidents, management’s mitigating or corrective

actions, and Compliance Hotline Reports.44

Beyond presenting to the Audit Committee at committee meetings, the CCO

and the Vice President of Internal Audit had direct lines of communication to the

Audit Committee, including routine meetings prior to Audit Committee meetings to

discuss ongoing issues.45 The Chair of the Audit Committee would review the

41 Schedule 14A Proxy Statement (Jan. 24, 2020), at 27–28. 42 SLC Report 65. 43 Id. at 72. 44 Id. 45 Id. at 73. 10 Compliance Network Hotline and Internal Audit reports before each meeting, and

either the Chair or the Head of CSRA or the Head of Internal Audit reviewed them

in depth with the rest of the Audit Committee.46 A member of the Audit Committee

would present to the Board about the topics of discussion at the Committee Meeting

and CSRA would provide its own overview of key issues with the full Board.47

Defendant John Chou, as Chief Legal Officer, also presented relevant legal issues

first to the Audit Committee before apprising the full Board of the Company’s top

priority issues.48

C. The History of AmerisourceBergen’s Compliance Program

1. The Board Adopts a Formal Compliance Program

Following the 2001 merger, the Board created two management-level

committees and one Board-level committee to address corporate governance and

compliance.49 The pre-existing management-level Compliance Committee was

tasked with overseeing legal and regulatory compliance at the Company.50 The

Board also created the position of Chief Compliance Officer to manage the

Company’s Compliance Program and ensure compliance with applicable laws and

internal policies.51 The second management-level committee created was the Ethics

46 Id. 47 Id. 48 Id. at 73–74. 49 Id. at 78. 50 SLC Report Ex. 45, at 11. 51 Id. at 8. 11 Committee, which was comprised of senior ABC managers, to receive regular

reports from the Compliance Committee.52 The Compliance Committee reported

quarterly to the Ethics Committee, which in turn reported directly to the Board’s

Audit Committee.53

On February 27, 2003, the Board was informed by the Vice President of

CSRA that the Drug Enforcement Administration (the “DEA”) was the Company’s

primary federal regulator.54 The Vice President further identified the FDA,

Environmental Protection Agency (“EPA”), Occupational Safety & Health

Administration (“OSHA”), and the Department of Transportation (“DOT” and

“FAA”) as other federal agencies that regulate the Company.55

In 2004, the Board built on ABC’s existing compliance framework to further

formalize its compliance program.56 The corporate compliance program included a

Code of Conduct, a Network Hotline for anonymous reporting, and compliance

training.57 The Code of Conduct, in relevant part, encompassed the Company’s

policy on the handling of ABC work product.58 Calls made to the Network Hotline

were by compiled by the Compliance Committee alongside non-network compliance

52 Id. at 11. 53 SLC Report Ex. 47, at 2–3. 54 See SLC Report Ex. 48. 55 Id. at 19–20. 56 SLC Report 76. 57 Id. at 76–77. 58 SLC Report Ex. 52, at 2–4. 12 complaints in a “Compliance Incident Report” (“CIR”) that tracked things such as

the number of calls, the number of call-related inquiries that remained open, and the

details of each complaint.59 Under this formalized compliance program, local

compliance officers at each business unit reported to the CCO, who was a member

of the Compliance Committee.60 The CCO then reported directly to the Company’s

General Counsel, who was a member and Chair of the Ethics Committee.61

a. Corporate Security and Regulatory Affairs

From 2001 until 2012, CSRA was solely responsible for all aspects of

regulatory compliance oversight and physical security at the Company.62 CSRA

focused on compliance with federal and state regulations, in addition to processing

all of the Company’s DEA registration renewals, while each respective Distribution

Center processed its own state and local licensing.63 Though CSRA assisted, the

Company’s pharmacies were primarily responsible for their own DEA and state

board of pharmacy licensing.64 After hiring a CSRA Senior Director to handle

specialty group- and pharmacy-related assessments, reviews, investigations, and

periodic compliance counseling for the ABSG and ABC pharmacies in 2007, CSRA

59 See, e.g., SLC Report Ex. 56. 60 SLC Report Ex. 50, at 9. 61 SLC Report 82. According to a 2007 David Polk report, this relationship was common at the time. SLC Report Ex. 57, at 18. 62 SLC Report 85. 63 SLC Report Ex. 60, at 1. 64 Id. 13 had four leaders who all reported to CSRA’s Vice President, who in turn reported to

the Company’s General Counsel.65

The senior directors of CSRA reviewed and audited the Distribution Centers’

licensing and regulatory processes, providing a bi-weekly update to the Company’s

General Counsel.66 The audits conducted by CSRA included “Health & Safety

Program Compliance Audits” and “Security and Regulatory Compliance Audits” at

Distribution Centers.67 CSRA performed these audits without notice to the chosen

Distribution Centers and conducted a review of the Distribution Centers’ compliance

with federal, state, and local law.68 If a Distribution Center received a high risk

score, CSRA would perform a follow-up audit to ensure that the Distribution Center

implemented a corrective action plan.69 The results of CSRA’s audits were shared

with the Company’s legal department to review for legal risk.70

CSRA was also tasked with managing the Network Hotline until the

establishment of the Company’s Office of Compliance in 2012.71 While the

Company contracted with an independent company to operate the Network Hotline,

CSRA reviewed the resulting reports and triaged them as appropriate within the

65 SLC Report 86; see also SLC Report Ex. 61. 66 SLC Report 90; see also SLC Report Ex. 64, at 1. 67 See, e.g., SLC Report Exs. 66–67. 68 SLC Report Ex. 68, at 2. 69 SLC Report Ex. 69, at 1. 70 SLC Report 91. 71 Id. 14 Company.72 Network calls were logged in the Company’s tracking system,

LawTrac, and a copy of the report was sent to Employment Counsel and the Vice

President of CSRA.73 The nature of the call was then evaluated by these individuals

and assigned appropriate personnel for follow-up investigation, which was updated

in LawTrac to ensure a response.74 The final disposition of the investigations were

forwarded to the Manager of Corporate Security who distributed monthly reports

and quarterly summary reports to the Vice President of CSRA and the Director of

Corporate Security and Investigations.75 Not only did the Audit Committee Chair

receive all Network Hotline reports, but as of 2012, the Audit Committee was also

provided quarterly updates from the CSRA Director.76

b. Internal Audit Department

The Company’s Internal Audit manages reviews of financial controls,

financial audits, and distribution audits.77 Internal Audit was required to keep the

Audit Committee “informed of emerging trends. . . in internal auditing,” develop

and submit an annual audit plan to the Audit Committee, “[i]ssue periodic reports to

the [A]udit [C]ommittee and management summarizing result[s] of audit activities,”

and provide the Audit Committee with a “list of significant measurement goals and

72 SLC Report Ex. 70, at 1. 73 Id. at 2. 74 Id. 75 Id. 76 SLC Report Ex. 53, at 24; see, e.g., SLC Report Ex. 71, at 4. 77 SLC Report 92. 15 results.”78 The Audit Committee received updates from Internal Audit at least

quarterly, including executive sessions that excluded management, to provide a

review of the Company’s financials and internal controls.79 Internal Audit also

executed an annual risk assessment survey, which asked each Distribution Center’s

management to rank their perceived top risks to the Company.80

2. Reporting to the Ethics and Audit Committees Under ABC’s Corporate Compliance Program

Under the Company’s 2004 compliance program, the Ethics Committee

consisted of senior leadership at the Company, including the General Counsel, Head

of Human Resources, and Vice President of Internal Controls.81 At the Ethics

Committee meetings, the General Counsel presented legal updates and discussed the

Network Hotline Reports; the Vice President of CSRA and the CCO updated the

Committee on compliance policies and investigations; and Internal Audit

summarized its quarterly audit reports.82

Between 2001 and 2008, the Audit Committee held at least seventy-three

meetings.83 The CFO often addressed the impact of compliance concerns on ABC’s

78 SLC Report Ex. 72, at 2. 79 See, e.g., SLC Report Exs. 73–76. 80 See, e.g., SLC Report Ex. 35, at 2; SLC Report Ex. 77, at 9; SLC Report Ex. 78, at 6; SLC Report Ex. 79; SLC Report Ex. 80, at 8; SLC Report Ex. 81, at 4. 81 SLC Report Ex. 47, at 9. Defendant Chou became the Ethics Committee Chair on February 7, 2007. SLC Report Ex. 107, at 2. 82 See, e.g., SLC Report Ex. 106. 83 SLC Report 103–04. 16 business.84 In 2007, the CFO kept the Audit Committee updated on the FDA’s

issuance of a “black box” warning “on Aranesp & Procrit[,]”85 two drugs that ABSG

distributed.86 Defendant Tim Guttman, ABC’s former CFO, would address risk

factors pertaining to the Company’s compliance with federal law during the Audit

Committee’s discussions of risk factors to be listed in the Company’s Annual

Report.87

The General Counsel reviewed matters related to the Company’s Code of

Ethics and provided updates on ongoing legal matters, investigations, and the

compliance policies.88 The CCO reported on the Company’s Corporate Compliance

program, key policies and procedures, ongoing investigations at ABC subsidiaries,

and implementation of new compliance measures.89 The CSRA Director began

providing quarterly updates to the Audit Committee in 2012. 90 Between the

Compliance, Ethics, and Audit Committees, representatives from all major

compliance departments presented regularly to both management and Board-level

committees.91

84 See, e.g., SLC Report Ex. 113, at 3. 85 See SLC Report Ex. 114, at 16; see also SLC Report Ex. 115, at 5. 86 See SLC Report Ex. 16; SLC Report Ex. 304, at 5–7. 87 See, e.g., SLC Report Ex. 116, at 1–3; SLC Report Ex. 117, at 1–3; SLC Report Ex. 28, at 1–4. 88 See, e.g., SLC Report Ex. 36, at 4–5. 89 SLC Report 106. 90 See, e.g., SLC Report Ex. 119. 91 SLC Report 106. 17 3. The 2007 Davis Polk Report

In March 2007, while auditing the billing practices of a delivery and courier

service used by the Company’s Sacramento Distribution Center, the Company

“identified substantial questionable billing practices and irregularities [] and [a]

consequential lack of detection controls by ABDC to prevent erroneous billing

errors.”92 A month later, the DEA suspended the license of a Distribution Center

located in Orlando, Florida, which distributed DEA-controlled substances, for

allegedly “not maintain[ing] effective controls against diversion of controlled

substances” in 2006.93 In response, Defendant Chou engaged David Polk in June

2007 to conduct a ”high-level review. . . of certain aspects of the compliance, legal

and regulatory functions at [ABC].”94 Davis Polk was specifically hired to (1)

“[e]valuate the adequacy of the [compliance] program,” (2) “[r]ecommend

improvements, if any,” and (3) “[r]eport to the Board on findings, conclusions and

recommendations.”95

After conducting its review, Davis Polk presented its findings in a report (the

“Davis Polk Report”) to the Audit Committee, concluding that, in light of the

Board’s Caremark duties, the Company: met the “[b]asic legal requirements” for

92 SLC Report Ex. 120, at 2. 93 SLC Report Ex. 121, at 1. 94 SLC Report Ex. 122, at 1. 95 SLC Report Ex. 57, at 2. 18 compliance; had “[c]omprehensive and high-quality written materials;” had a

“[h]igh level of professionalism and dedication” by its compliance staff; and had a

“[g]ood overall compliance track record.”96 Davis Polk also presented five “areas

of improvement” for the Company’s compliance program.97 Following Davis Polk’s

presentation, the CCO presented the Audit Committee with the Company’s

“Preliminary Action Plan in Response to Davis Polk Assessment,” which addressed

all areas of improvement.98 The Audit Committee met at least twice more to receive

updates on the Company’s response to the Davis Polk Report.99

The Company’s response included developing a penalty matrix to standardize

penalties for violations of the Company’s Code of Conduct;100 integrating ABSG

into the corporate compliance program by adding a senior level CSRA employee to

oversee ABSG compliance, tasking other corporate departments with oversight of

ABSG, and creating a more “streamlined organizational structure[;]”101 and began

expanding its use of its internal electronic matter management system to track

hotline calls, compliance complaints, and all issues arising from the Ethics and/or

Compliance Committees in one, centralized location.102

96 Id. at 34. 97 SLC Report 109. 98 Id. 99 SLC Report Ex. 91, at 1–2; SLC Report Ex. 134, at 6. 100 SLC Report Ex. 129, at 1. 101 SLC Report Ex. 130, at 5. 102 SLC Report Ex. 91, at 1–2. 19 The CCO also engaged an outside ethics compliance organization through the

Compliance and Ethics Leadership Council of the Corporate Executive Board

(“CEB”) to conduct a “cultural diagnostic survey.”103 Of the nine categories

surveyed and analyzed, ABC scored above benchmark in all but one.104 The CCO

continued to engage with CEB to understand and implement industry best practices

for compliance risk.105 The Board was kept apprised of the updates on ABC’s

compliance program including the integration of ABSG.106 From August 2009

through May 2012, the Board received no less than eight such updates specifically

concerning the Company’s response to the Davis Polk Report.107

4. AmerisourceBergen Reorganizes its Compliance Program

When the then-CCO left ABC in January 2012, the Company conducted a

review of its compliance program.108 The Head of CSRA, who had been at the

Company since 1990 and in the health care industry since 1984, was appointed as

the new CCO.109 Defendant Chou led the Company to establish a second senior

compliance position, Chief Compliance Counsel (“CCC”), which was filled by the

103 SLC Report Ex. 134, at 6; see also SLC Report Ex. 144, at 1. 104 SLC Report Ex. 144, at 16–17; see also SLC Report Ex. 134, at 6. 105 SLC Report Ex. 145. 106 SLC Report 123. 107 See SLC Report 123–27. 108 Id. at 127. 109 Id. at 127–28. 20 Group General Counsel who had worked in the health care industry since 1985.110

Both the CCO and CCC reported to the Audit Committee.111

Prior to 2012, the CCO’s methods of communicating with the Board were

limited to either directly reporting to the General Counsel who reported to the Audit

Committee or reporting to the Compliance Committee, of which the CCO was a

member, that reported directly to the Ethics Committee, which then in turn reported

to the Audit Committee.112 Starting in 2012, the CCO participated directly in the

executive sessions of the Audit Committee after each regularly scheduled

meeting.113 The CCO and CCC were instructed by the Audit Committee to “review

ABC’s Compliance Program annually with the [Audit] Committee.”114 At that time,

the CCO and CCC also began working under a newly created “Office of

Compliance” that was charged with, among other things, notifying, investigating,

and tracking all compliance-related investigations and incidents; providing quarterly

reports to the Audit Committee; and continuously monitoring the changing

compliance environment through various outside organizations to ensure that ABC’s

compliance program was up to date and comprised of industry best practices.115

110 Id. at 128. 111 Id. at 129. 112 Id. 113 SLC Report Ex. 160. 114 SLC Report Ex. 159. 115 SLC Report Exs. 163–64. 21 The Compliance Committee began implementing internal reforms in 2012.116

One such reform was to double the frequency of its meetings to twice per month.117

The agenda for these meetings was standardized to include a review of all new CIRs

and all pending investigations into incident reports, in addition to approving the

closures of completed incident investigations when appropriate.118 All actions taken

by the Compliance Committee were required to “be documented in either a [CIR] or

an assigned Compliance project, and [to] be maintained in the ABC Corporate Risk

Management System.”119 The CIRs were provided to the Audit Committee at least

once a quarter, prior to each Committee meeting.120 The CCC provided the Audit

Committee updates on the Company’s progress updating compliance initiatives on

at least four occasions between May 2012 and February 2013.121

The Audit Committee continued to meet more frequently than was required,

with at least half of these meetings focusing on financial reviews and performance,

meeting seventy-four times from 2012 to 2018.122 Twenty-six of the Committee’s

seventy-four meetings included an update specifically about the Company’s

116 SLC Report 133. 117 SLC Report Ex. 157, at 1. 118 Id. 119 Id. at 1–2. 120 SLC Report 133. 121 SLC Report Ex. 151, at 4; SLC Report Ex. 158, at 4–5; SLC Report Ex. 159, at 6; SLC Report Ex. 168, at 4. 122 SLC Report 134. 22 compliance program.123 At all meetings, the Committee reviewed the Network

Hotline and incident reports in addition to receiving updates on any corrective

actions taken by management.124 Once a year, the Committee received an update on

the enterprise risk management system and risk assessment results and discussed any

ongoing investigations and any significant legal matters.125 The Audit Committee

continued to also be notified by senior management of ongoing updates to the

Company’s compliance response as new regulations and compliance concerns

emerged.126

D. The Legal and Regulatory Landscape Relating to Pharmacies

From 2001 to 2014 (the “Relevant Period”), the regulatory landscape shifted

significantly as federal regulators increased scrutiny of state-regulated

pharmacies.127 This shift was of particular relevance to pharmacies like MII that

pooled or compounded pharmaceuticals to dispense to health care providers for

treatment of patients.128 Between 2002 and 2012, “there [was] a lack of consensus

regarding whether states should have primary responsibility for regulating

123 See, e.g., SLC Report Ex. 71; SLC Report Ex. 151; SLC Report Ex. 158; SLC Report Ex. 159. 124 See, e.g., SLC Report Ex. 71. 125 See, e.g., SLC Report Ex. 171, at 5; SLC Report Ex. 172, at 3. 126 SLC Report 136. 127 Id. at 143. 128 Id. 23 [compounding pharmacies] as pharmacies, or [whether the] FDA should have

primary responsibility to regulate them as manufacturers.”129

The U.S. Supreme Court recognized the tradition that the regulation of the

practice of pharmacy was left to the states.130 Pharmacies are not required under

federal law to register with the FDA if they “maintain establishments in conformance

with any applicable laws regulating the practice of pharmacy and medicine and

which are regularly engaged in dispensing prescription drugs or devices.”131

1. Alabama Law

MII was located in Dothan, Alabama, and subject to Alabama’s State Board

of Pharmacy, which promulgates regulations, issues licenses, and inspects

pharmacies to evaluate their compliance with state pharmacy law.132 Alabama law

defines a pharmacy as a “place licensed by the [Alabama State Board of Pharmacy]

in which prescriptions, drugs, medicines, medical devices, chemicals, and poisons

are sold, offered for sale, compounded, or dispensed.”133 Prescription134 labels are

required under Alabama law to include the “name and address of the pharmacy from

129 U.S. GOV’T ACCOUNTABILITY OFF., GAO-13-702, DRUG COMPOUNDING: CLEAR AUTHORITY AND MORE RELIABLE DATA NEEDED TO STRENGTHEN FDA OVERSIGHT 9–12 (2013). 130 Thompson v. W. States Med. Ctr., 535 U.S. 357, 361 (2002). 131 21 U.S.C. § 360(g)(1). 132 SLC Report 144. 133 Ala. Code § 34-23-1(21) (2019). 134 Prescription is statutorily defined as “[a]ny order for drug or medical supplies, written or signed or transmitted by word of mouth, telephone, telegraph, closed circuit television, or other means of communication by a legally competent practitioner.” Ala. Code § 34-23-1(25). 24 which the prescriptions are dispensed, the prescriber’s directions for use, the name

of the drug as it is dispensed, and the strength per dosage unit.”135

A “traditional component” of pharmaceutical practice is “compounding,” the

“process by which a pharmacist or doctor combines, mixes, or alters ingredients to

create a medication tailored to the needs of an individual patient.”136 Compounding

is statutorily defined as “[t]he preparation, mixing, assembling, packaging, and

labeling of a drug or device as the result of a licensed practitioner’s prescription drug

order or initiative based on the practitioner/patient/pharmacist relationship in the

course of professional practice.”137 Also included in compounding is “the

preparation of drugs or devices in anticipation of prescription drug orders based on

routine, regularly observed prescribing patterns.”138

The regulation of compounding pharmacies in Alabama consists primarily of

requirements relating to drug purity, storage conditions, qualifications and training

of pharmacists and technicians, facilities, security, and record retention.139 The chief

pharmacist is responsible for the pharmacy’s operations, as well as for supervision

of pharmacy technicians.140 Pertinent to MII’s operations, Alabama law allows

135 Ala. Admin. Code r. 680-X-2-.13 (1982). 136 Ala. Code § 34-23-1(5) (2019). 137 Id. § 34-23-150 (1975). 138 Id. 139 SLC Report 146. 140 Ala. Code § 34-23-70(a) (2018). 25 “compounded product” to be “prepared in advance in reasonable amounts in

anticipation of estimated needs.”141

2. Federal Regulation of Pharmacies

The Federal Food, Drug, and Cosmetic Act (“FDCA”) regulates the

manufacturing, marketing, and distribution of drugs,142 including all “new drugs,”

i.e., “any drug. . . the composition of which is such that such drug is not generally

recognized [among experts] as safe and effective for use under the conditions

prescribed.”143 Manufacturers of new drugs must register with the FDA, comply

with various pre- and post-market requirements, and comply with current Good

Manufacturing Practices (“cGMPs”).144 The FDCA defines the term “manufacturer”

to include entities engaged in “preparation, propagation, compounding, or

processing” of drugs, such as drug repackaging and relabeling.145 A “repackager” is

defined as an entity that “repackag[es] or otherwise chang[es] the container,

wrapper, or labeling of any drug package or device package in furtherance of the

distribution of the drug or device from the original place of manufacture to the

person who makes final delivery or sale to the ultimate consumer or user.”146

141 Ala. Code § 34-23-159 (1975). 142 See, e.g., 21 U.S.C. §§ 355h, 356a, 356i. 143 21 U.S.C. § 321(p). 144 See, e.g., 21 C.F.R. §§ 210, 211 (2011). 145 21 U.S.C. § 360(a)(1). 146 Id. 26 The FDA has concluded that “[c]ompounded drugs” are encompassed by the

FDCA’s definition of “new drugs” and, therefore, all federal regulations applicable

to “new drugs” apply to “compounded drugs.”147 However, the FDA has not

historically required pharmacies to apply for FDA approval of “compounded drugs;”

rather, the FDA has left the regulation of compounded drugs to the states.148

a. FDA Regulation of Compounded Drugs

In response to concerns that some pharmacies were “engag[ing] in

manufacturing, distributing, and promoting unapproved new drugs for human use in

a manner that [wa]s clearly outside the bounds of traditional pharmacy practice[,]”

the FDA issued Compliance Policy Guide 7132.16 in 1992 (the “1992 CPG”).149 In

the 1992 CPG, the FDA warned that it would consider “initat[ing] enforcement

action when pharmacy practice extends beyond the reasonable and traditional

practice of retail” after considering several factors, such as whether a pharmacy

solicited business, compounded “inordinate amounts” of drugs, and used

commercial scale equipment.150

Portions of the 1992 CPG were adopted into Section 503A of the Food and

Drug Administration Modernization Act (“FDMA”) by Congress in 1997.151 These

147 SLC Report 148. 148 Id. 149 Compliance Policy Guide (“CPG”) 7132.16 (“1992 CPG”) 150 Id. 151 See Food and Drug Administration Act of 1997, Pub. L. No. 105-115, § 503A, 111 Stat. 2296 (codified at 21 U.S.C. § 353a). 27 provisions were challenged in court and, in April 2002, the Supreme Court

determined that some of these provisions were unconstitutional but did not rule on

the severability of the unconstitutional provisions from others adopted in 1997.152

In response to this ruling, the FDA issued a revised CPG (the “2002 CPG”) that

removed the unconstitutional provisions of the 1992 CPG.153 The 2002 CPG

reaffirmed the FDA’s intent to “seriously consider enforcement action” when “the

scope and nature of a pharmacy’s activities raise the kinds of concerns normally

associated with a drug manufacturer[,]” and included a non-exhaustive list of factors

relevant to its determination of whether “compounding pharmacies” were actually

“manufacturers” of new drugs.154

b. FDA Enforcement Activity Related to Pharmacies

From February 2002 to May 2012, the FDA conducted 194 “for cause”

inspections of compounding pharmacies and issued thirty-one Warning Letters.155

The FDA frequently cited entities for issues such as dispensing an unreasonably

large volume of drugs and/or drugs that were copies of FDA-approved,

commercially available products, and compounding drugs without a patient-specific

medical need.156 For example, in 2010, the FDA issued a Warning Letter to MII’s

152 Thompson, 535 U.S. at 366, 377. 153 Compliance Policy Guide 460.200 (“2002 CPG”). 154 Id. 155 SLC Report 153. 156 Id. 28 competitor, Med Prep Consulting, Inc. (“Med Prep”), for shipping pre-filled syringes

to health care providers without receiving prescriptions for individual patients.157

Med Prep’s Warning Letter specifically stated that Med Prep’s “practice of

repackaging and distributing drugs without patient-specific prescriptions” exceeded

“the regular course of a pharmacy’s business,” therefore subjecting Med Prep to

cGMP regulations as a “repackager.”158

3. United States Pharmacopeia <797>

In 2004, Congress moved guidelines title “Sterile Compounding” to chapter

<797> of the U.S. Pharmacopeia (“USP”) standards, thereby making those

guidelines enforceable by the FDA.159 Among the issues covered by USP <797>

was sterility and purity of dispensed compounded sterile preparations (“CSPs”).160

Despite Congress authorizing the FDA to enforce USP <797>, individual states

remained the principal regulators of pharmacy compounding activity and sterility.161

Alabama did not adopt USP <797>, but in 2009, the Alabama Board of Pharmacy

157 Warning Letter from Diana Amador Toro, Director, New Jersey District, U.S. Food & Drug Admin., to Gerald R. Tighe, Pres., Med Prep Consulting (July 9, 2010), https://web.archive.org/web/20130324195733/http://www.fda.gov/ICECI/EnforcementActions/ WarningLetters/2010/ucm222283.htm (“Med Prep Warning Letter”). 158 Id. at 1. 159 SLC Report 156. 160 Pharmaceutical Compounding—Sterile Preparation (USP <797>), United States Pharmacopeial Convention, 2008. 161 Pew Charitable Trs., National Assessment of State Oversight of Sterile Drug Compounding 1 (Feb. 2016), https://www.pewtrusts.org/~/media/assets/2016/02/national_assessment_of_state_oversight_of_s terile_drug_compounding.pdf. 29 interpreted its comparable provision on the “strength, quality, or purity” of

compounded drugs as “requir[ing] sterile products to be compliant with USP <797>

standards.”162 On December 31, 2010, the Alabama State Board of Pharmacy began

enforcing compliance with USP <797>.163

E. MII and its Pre-Filled Syringe Program

At the time it was acquired by Bergen Brunswig in 1998, MII was a Florida

corporation that operated a Tampa, Florida, pharmacy providing compounding

services and pre-filled syringes for physicians.164 As part of the acquisition, Bergen

Brunswig engaged outside counsel to review MII’s operations.165 Potential issues

associated with MII’s customer billing practices were identified by the review, but

the review did not focus on nor identify FDA regulatory issues concerning MII’s

pharmacy operations.166 MII’s operations were reviewed again during the 2001

merger process between Bergen Brunswig and AmeriSource,167 again raising

questions related to MII’s customer billing and inventory practices while not

identifying FDA regulatory risks or concerns regarding product quality or sterility.168

162 SLC Report Ex. 184. 163 Id. 164 SLC Report 158. 165 SLC Report Ex. 186, at 3. 166 SLC Report 158–59. 167 SLC Report Ex. 189, at 1; SLC Report Ex. 187, at 1. 168 SLC Report 159. 30 Bergen Brunswig moved MII to a pharmacy in the OS warehouse in Dothan,

Alabama, where MII focused solely on the pre-filled syringe program (“PFS

Program”).169 During the Relevant Period, MII was an ABSG subsidiary and

incorporated in Florida.170 After its move to Alabama, the Company registered MII

with the Alabama Board of Pharmacy, but not the FDA.171

When MII’s pharmacist-in-charge, who was tasked with overseeing MII’s

operations, stepped down in 2005, the Chief Pharmacist was promoted to the role.172

The Chief Pharmacist had more than twenty-five years of experience as a

pharmacist.173 Generally, the Chief Pharmacist reported to OS’s Head of Operations

but also reported to OS’s President for a time during the Relevant Period. 174 The

Chief Pharmacist was responsible for MII’s pharmacy license in Alabama and he

worked closely with OS’s Compliance Manager on licensing issues. 175 The Chief

Pharmacist was responsible for with overseeing a technician supervisor, who

managed the Pharmacy technicians, and the Pharmacy’s policies and procedures,

including those intended to ensure that MII prepared sanitary and sterile pre-filled

syringes.176

169 SLC Report Ex. 190, at 3. 170 SLC Report 160. 171 SLC Report Ex. 14; SLC Report Ex. 15, at 1. 172 SLC Report 160. 173 Id. 174 Id. at 160–61. 175 Id. at 161. 176 SLC Report Ex. 15, at 1. 31 1. The Pre-Filled Syringe Program

MII pre-filled syringes with oncology products for OS’s customers upon

request.177 Under the terms of the PFS Program agreement between OS and its

customer oncology practices, the practices were required to provide a patient-

specific physician’s order to MII.178 If a customer ordered products in pre-filled

syringes rather than vials, OS would transfer product vials to MII to pre-fill syringes

with the drug contained in the vials.179

Over time, MII developed extensive policies and procedures requiring strict

adherence to aseptic techniques and sterilization protocols.180 As of April 1, 2005,

MII required all “personnel working in the sterile environment” to be tested for

compliance with these policies and procedures “at least once a year.”181 When pre-

filling syringes, technicians were required to follow a six-step procedure to ensure

the product’s integrity.182 Once the syringes were filled, MII technicians transferred

the labeled syringes to a separate room of the Pharmacy where MII pharmacists

performed a quality check by using a magnifying glass to check that the syringes

included the appropriate product volume and did not include particulates.183 Next,

177 SLC Report 161. 178 SLC Report Ex. 193, at 1; SLC Report Ex. 194, at 1. 179 SLC Report Ex. 15, at 2. 180 SLC Report 163–65. 181 SLC Report Ex. 199. 182 SLC Report 167. 183 Id. at 167–68. 32 MII staff matched the syringes with orders and labeled them with the product name,

dose, batch number, and expiration date.184 The syringes were then placed in bags

with printed physician order information and another label was affixed to the outside

of the bags.185 MII then transferred the syringes to OS for packaging and delivery.186

OS usually delivered the pre-filled syringes to oncology practices overnight

for use the next day.187 This time pressure resulted in a significant rush during the

latter half of the working day at MII, as the Pharmacy prepared pre-filled syringes

in response to customers’ orders.188 To alleviate this pressure, MII began preparing

some pre-filled syringes before receiving particularized orders based on Alabama

regulations that permitted advanced preparation “in anticipation of estimated

needs.”189

2. MII’s Harvesting of Overfill

MII provided the pre-filled syringe service in exchange for customers

agreeing to let MII retain the product overfill remaining in the vials after the pre-

filled syringes were drawn.190 Overfill is the amount of product within a vial that

exceeds the amount of product stated on the vial’s label; manufacturers generally

184 SLC Report Ex. 208; SLC Report Ex. 192, at 14; SLC Report Ex. 215, at 1. 185 SLC Report Ex. 215, at 1. 186 SLC Report 168. 187 Id. 188 Id. at 168–69. 189 Ala. Code § 34-23-159 (1975). 190 SLC Report Ex. 15, at 1. 33 include slightly more product in each vial than the label indicates to ensure that end

users can successfully draw and administer the necessary amount of product.191

Historically, healthcare practices often salvaged overfill for clinical use.192 In May

2001, Reed Smith advised Bergen Brunswig that MII’s practice of harvesting

overfill was considered “standard practice at hospital[s] and other large pharmacies”;

that “the dispensing of the prescribed amount from the billing units” purchased from

the manufacturer was “an acceptable practice[;]” and the “[s]alvage of drug

remaining in [the original] containers [wa]s also permissible.”193 Filling new

prescriptions with this harvested overfill also did not “itself raise concerns.”194

MII harvested overfill to satisfy customer orders while saving numerous

unopened vials, which it called “overfill inventory.”195 These unopened, overfill

vials were sold monthly by MII back to OS, which then distributed the overfill vials

to other affiliates of ABC or directly to customers.196 MII derived profits from its

sale of overfill vials to OS.197 This incentivized MII’s technicians to harvest as much

191 Pharmaceutical Dosage Forms—Injections (USP <1151>); see also SLC Report Ex. 187; SLC Report Ex. 195. 192 Payment Policies Under the Physician Fee Schedule and Other Revisions to Part B for CY 2011, 75 Fed. Reg. 73467 (Nov. 29, 2010); cf. Vanessa Romo, Some Vials of COVID-19 Vaccine Contain Extra Doses, Expanding Supply, FDA Says, NPR (Dec. 16, 2020, 9:47 PM), https://www.npr.org/sections/coronoavirus-live-updates/2020/12/16/947386411/some-vials-of- covid-19-vaccine-contain-extra-doses-expanding-supply. 193 SLC Report Ex. 189, at 2, 5. 194 Id. 195 SLC Report Ex. 15, at 2. 196 Id. at 3. 197 Id. at 4. 34 overfill as possible while maintaining quality standards,198 as laid out in MII’s

incentive compensation program.199

In 2003, ABC’s then-General Counsel and his staff conducted a preliminary

risk assessment of ABSG companies, including OS and MII.200 This assessment

resulted in a memorandum describing, in relevant part, MII’s PFS Program and its

use of overfill.201 While the former Assistant General Counsel noted that some of

MII’s customer contracts did not explicitly authorize MII to collect and sell overfill,

he did not identify concerns related to FDA regulatory issues, quality, or sterility.202

ABC’s Assistant General Counsel also engaged health care regulatory

attorneys at Reed Smith to conduct a compliance review and risk assessment of

ABSG companies, including OS and MII.203 Reed Smith prepared a memorandum

in which it stated that the PFS Program did not appear to raise significant regulatory,

anti-kickback, or double chargeback concerns.204 The Reed Smith memorandum

recommended that MII disclose to physicians that it collected overfill and that OS

convey the need for customers to account for their discounts when reporting to the

government, to ensure compliance with safe harbors to the federal Anti-Kickback

198 SLC Report 170–71. 199 See SLC Report Ex. 216, at 2, 4. 200 SLC Report 171. 201 SLC Report Ex. 188, at 5–6. 202 SLC Report 171–72. 203 Id. at 172. 204 SLC Report Ex. 195, at 26–27, 37. 35 Statute (“AKS”).205 With respect to the pre-filled syringes, Reed Smith observed

that customers provided MII with lists of patients with the pharmacy staff used to

mark syringes with patient-specific labels.206 When responsibility for the Specialty

Group shifted to ABSG’s General Counsel, he received the Reed Smith

memorandum, which he reviewed, and concluded that Reed Smith approved of

MII’s business model.207

3. MII is Expanded

In March 2006, OS submitted an official Capital Expenditure Request

(“CER”) to ABSG management208 seeking approval to purchase vacant land

adjacent to OS’s facility and to remodel the warehouse.209 According to the CER,

MII was a “significant contributor” to OS’s profitability, but MII’s pharmacy space

where product was drawn into syringes was inadequate to meet ABSG’s Fiscal Year

2006 target sales.210 ABSG’s executive team, ABC’s executive team, and the ABC

Board approved the CER in 2006.211 In 2007, OS expanded its Dothan Distribution

205 Id. at 40. 206 Id. at 24, 36. 207 SLC Report 175–76. 208 SLC Report Ex. 230, at 1. 209 SLC Report Exs. 224–28. 210 SLC Report Ex. 222, at 7. 211 Id. at 1; SLC Report Ex. 221, at 8–9. 36 Center,212 increasing the size of the Distribution Center by 70,000 square feet and

expanding MII’s pharmacy from 1,000 square feet to 3,000 square feet.213

4. MII’s Alabama License and Board of Pharmacy Inspections

Although the CSRA Senior Director was primarily responsible for general

pharmacy oversight, an OS Compliance Manager in Dothan handled the particulars

of MII’s state licenses.214 The OS Compliance Manager understood MII to be a

mail-order pharmacy because it shipped syringes to physicians, who owned and

administered the medications.215 During the Relevant Period, MII had an active

license as a parenteral216 and mail-order pharmacy in Alabama.217

The Alabama Board of Pharmacy inspected MII in 2007, 2009, 2010, 2011,

and 2013, with MII passing each of these inspections without any adverse

observations about the safety or sterility of products dispensed by the Pharmacy.218

All inspections prior to 2010 were announced, in-person reviews of MII’s storage

conditions, facilities, security, record-keeping, and written policies and

procedures.219 After Alabama began enforcing USP <797> in 2010, its inspectors

212 SLC Report 176. 213 SLC Report Ex. 221, at 8; SLC Report Ex. 222, at 7. 214 SLC Report 181. 215 Id. 216 “Parenteral” here is used to mean a pharmacy preparing drugs to be administered by injection. 217 See, e.g., SLC Report Ex. 233. 218 SLC Report Exs. 234–38. 219 SLC Report Ex. 239. 37 focused on sterility, dose containers, personnel cleansing and garbing, and quality

testing and documentation, among other things.220

5. Sterility Testing at MII

During the Relevant Period, MII tested its pre-filled syringes, as well as its

pharmacists, technicians, and workspaces, for sterility and safety.221 An external

testing service conducted a majority of MII’s sterility tests every six to twelve

months.222 MII tested the sterility of its syringes at least once per year from 2009

through 2013.223 Some years, MII tested its syringes internally while other years

MII shipped syringes to an external laboratory for shelf-life testing.224 For example,

in September 2012, MII conducted internal tests of syringes drawn by its

technicians.225 The following month, MII shipped syringes to BioScreen Testing

Services for additional testing.226 The September and October 2012 testing results

of these syringes did not find any sterility problems.227

While MII passed the vast majority of its sterility tests, it did have occasional

failures.228 These failures were generally addressed internally with MII taking

220 SLC Report Ex. 240; see also SLC Report Ex. 241. 221 SLC Report 183. 222 Id. 223 Id. at 184. 224 E.g., SLC Report Ex. 246, at 2; SLC Report Ex. 200, at 8, 11; SLC Report Ex. 247, at 1; SLC Report Ex. 248, at 1. 225 SLC Report Ex. 200, at 11. 226 Id.; SLC Report Ex. 247, at 1; SLC Report Ex. 250, at 1. 227 SLC Report Ex. 247, at 1; SLC Report Ex. 248, at 1. 228 See, e.g., SLC Report Ex. 249, at 5, 23; SLC Report Ex. 245, at 5–6. 38 corrective measures and retesting when deemed necessary.229 Through its

inspections, the Board of Pharmacy reviewed each of MII’s sterility test results,

including the occasional failures, to ensure that MII documented its testing and to

certify that MII’s results comported with International Organization for

Standardization standards.230 Despite the occasional sterility test failures considered

by the inspectors, MII passed each Alabama Board of Pharmacy inspection without

any issues.231

6. CSRA Audits and Reviews of OS and MII

Prior to 2007, the audits of OS by the Company’s Corporate Security and

Regulatory Affairs group (“CSRA”) focused on OS Distribution Center’s

operations.232 These audits were conducted by the Compliance Manager at OS in

accordance with a 400-page checklist, which, other than licensing, did not focus on

the Pharmacy.233 The Company’s audit of MII included evaluating the licensing

status of MII under applicable state board of pharmacy requirements.234

229 SLC Report Ex. 250, at 1–2; SLC Report Ex. 251, at 17. 230 See SLC Report Ex. 239, at 1; SLC Report Ex. 241, at 6–7. 231 SLC Report Exs. 234–38. 232 SLC Report 188. 233 Id. at 188–89. 234 See, e.g., SLC Report Ex. 256, at 5–6; SLC Report Ex. 257. 39 a. CSRA’s Pharmacy-Related Experience and Expertise

In July 2007, a new Senior Director joined CSRA and provided additional

regulatory oversight of MII.235 From his experience as a pharmacist and Compliance

Officer of another ABC entity,236 the Senior Director was familiar with pharmacy

regulations, including the distinctions between state-regulated pharmacies and FDA-

regulated manufacturers or repackagers.237 The OS Compliance Manager reported

to the CSRA Senior Director who then in turn reported to the CSRA Vice

President.238 The Senior Director frequently consulted with the OS Compliance

Manager on issues relating to MII and also served as a resource to MII’s Chief

Pharmacist.239

The CSRA Senior Director conducted regular in-person reviews of MII

roughly once a quarter, including during the annual CSRA audit of the OS

Distribution Center,240 with his attention on regulatory compliance issues.241 When

all of his visits were considered together, the Senior Director spent approximately

one month of every year at the Dothan facility.242 The Senior Director did not follow

235 SLC Report 189. 236 Id. 237 Id. 238 Id. at 190. 239 Id. 240 Id. at 191. 241 Id. 242 Id. 40 a formal checklist nor file a separate formal written report when reviewing MII;243

instead he would follow a prescription through the Pharmacy’s processes by asking

the Pharmacy to walk through the process of receiving a prescription or order,

entering the associated data into the computer system, generating the label of the

pre-filled syringes, filling the prescription, conducting a prescription check, and then

packaging the syringes before they were dispensed to customers.244

b. CSRA’s 2008 Review of MII

In January 2008, the CSRA Senior Director expressed concerns that “some

customers request not to have patient names on the syringes which is a concern due

to the fact that the FDA could potentially say that the [P]harmacy is wholesaling and

not dispensing which would require us to meet extra requirements similar to a

manufacturer/repackager.”245 The Senior Director also questioned a pending non-

resident sterile compounding license in California and documentation for the

Pharmacy’s policy on expiration dates.246

The Senior Director reiterated his concerns during a formal CSRA audit of

the OS Distribution Center in September 2008.247 He instructed the OS Compliance

243 Id. MII was the only pharmacy under CSRA’s purview, so the Company saw no urgent need to develop a formal checklist that could be used at other locations. Id. 244 Id. at 192. 245 SLC Report Ex. 259. 246 Id. 247 SLC Report Ex. 257. 41 Manager to ensure that MII’s license in California was properly maintained248 and

took steps to gather documentation to justify the Pharmacy’s expiration-date

practices.249 The Senior Director further instructed MII personnel to secure patient-

specific orders because he was concerned by the lack of patient-specific names on

each dispensed order.250

In his November 2008 CSRA Compliance Audit Report, the Senior Director

only recommended MII’s California license as a “Risk Value,” but that had been

resolved by the time the Report was issued.251 The Senior Director was not alarmed

that MII’s practices were non-compliant with FDA regulations because the FDA was

permitting the Alabama Board of Pharmacy to enforce the relevant requirements.252

He further believed that the FDA would, if it had concerns, issue a Warning Letter

before taking any additional action, which would allow the Company to address the

concerns before the FDA would pursue more severe enforcement activity.253

c. Alabama’s Implementation of USP <797>

On March 30, 2009, the Alabama Board of Pharmacy sent a letter to all

pharmacies “known to prepare sterile compounds” in Alabama, including MII,254

248 SLC Report 193. 249 SLC Report Ex. 260, at 1–2. 250 SLC Report 193. 251 SLC Report Ex. 257, at 4. 252 SLC Report 195. 253 Id. 254 SLC Report Ex. 184. 42 explaining that Board of Pharmacy would begin enforcing USP <797> on December

31, 2010.255 MII’s Chief Pharmacist received another letter from the Alabama Board

of Pharmacy in May 2009, announcing that “[t]he first action taken by the [Alabama]

Board [of Pharmacy] [would be] to assist pharmacies in evaluating their degree of

compliance with USP <797>.”256 The Alabama Board of Pharmacy asked MII to

complete a Risk Level Assessment Form to define its compounding category as low-

risk, medium-risk, or high-risk.257 This form contained questions about the sterility

of the pharmacy, such as whether the pharmacy practiced routine disinfection and

air quality testing.258 The Alabama Board of Pharmacy also requested that MII to

complete a Compliance Self-Assessment and, as necessary, a Compliance Action

Plan.259

MII reported that it was compliant with a range of USP <797> requirements,

including the activities of compounding personnel, personnel training, aseptic

technique, personnel cleansing and garbing, quality checks, and maintaining the

sterility, purity, and stability of products.260 On the Risk Level Assessment Form,

MII reported that it was a “medium-risk level” pharmacy because it “pool[ed]”

products, a process that USP <797> defines as combining “multiple individual or

255 Id. 256 SLC Report Ex. 262. 257 Id. 258 SLC Report Ex. 263. 259 SLC Report Ex. 262. 260 SLC Report Exs. 263–64. 43 small doses of sterile products. . . to prepare a [Compounded Sterile Preparation].”261

MII further noted that it expected to be compliant with USP <797> by October 2009,

fifteen months before the USP standard’s effective date.262 After completing its

self-assessment, the Compliance Manager worked with operations personnel within

OS to execute MII’s action plan by, among other things, updating new Standard

Operating Procedures and upgrading air pressure and air exchange systems.263

d. CSRA’s 2009, 2010, 2011, and 2012 Reviews of MII

CSRA’s Senior Director conducted further reviews of MII in 2009 and

2011.264 The Chief Pharmacist periodically informed the Senior Director that MII

customers265 often complained about MII’s requirement that they submit patient-

specific orders for pre-filled syringes.266 During these reviews of MII, the Senior

Director saw patient names placed on the bags containing the pre-filled syringes.267

In January 2012, following a complaint from a customer regarding MII

“put[ting] a random name on a medication, call[ing] it a prescription and sell[ing] it

to us. . . without the name being on any of the packaging or anywhere else,”268 the

261 SLC Report Ex. 263, at 2. 262 SLC Report Ex. 265, at 9. 263 SLC Report 198. 264 SLC Report Exs. 267–68.. The Senior Director did not conduct the 2010 review; rather, other CSRA personnel conducted these reviews and did not identify issues related to patient names. See SLC Report Exs. 269–70. 265 That is, the physician-purchasers of the pre-filled syringes. 266 SLC Report 199. 267 Id. 268 See SLC Report Ex. 271, at 2; SLC Report Ex. 272, at 1. 44 Chief Pharmacist and the OS President escalated the complaint to CSRA and

ABSG’s General Counsel.269 In February 2012, the Senior Director conducted an

in-person review of MII’s operations as requested by ABSG’s General Counsel.270

The Senior Director provided an update to ABSG’s General Counsel, noting that

only fifty-nine of 869 of the prescriptions in his sample had been “completed with a

‘proper [patient] name.’”271

Due to the significance of the Senior Director’s findings, CSRA added this

review to the agenda for the upcoming February 23, 2012, Ethics Committee

Meeting.272 At the meeting, CSRA’s Vice President “discussed the MII

investigation” and stated that “[t]here is a concern that the [P]harmacy is not

providing the patient name” because “[i]t appears that 90% of the [P]harmacy

records were incomplete.”273 Following this meeting, the Senior Director continued

to investigate the MII issues alongside ABSG’s Corporate Counsel.274 Based on

their research, ABSG’s Corporate Counsel and the Senior Director concluded that

the conduct observed at MII did not violate Alabama law, which was relatively lax

on patient-specific labeling.275

269 SLC Report 200. 270 Id. 271 SLC Report Ex. 273, at 1. 272 SLC Report Ex. 274. 273 SLC Report Ex. 276, at 2. 274 SLC Report 203. 275 Id. at 204. 45 On March 15, 2012, ABC’s Compliance Committee met and discussed what

should be included on the list of CIRs to be presented to the Company’s Audit

Committee.276 The Compliance Committee decided against adding the MII syringe

dispensing procedure review to the CIR because “it appear[ed] that the practice may

be in compliance with State regulations. If this should change, the MII matter will

be added to the CIR Report.”277

Two months later, ABSG’s Corporate Counsel sent a memorandum to MII’s

Chief Pharmacist stating that “a recently conducted audit directed by ABC’s legal

department of randomly inspected orders dispensed by [MII] revealed that

prescriptions filled under these orders were indeed consistent” with Alabama law,

which did not require a prescription label to contain a patient’s name.278 It continued

on to caution that “[r]ecent guidance from the [FDA] suggests additional

prescription label requirements may be necessary” because “processing and

repacking (including repackaging) of approved drugs may be viewed by the FDA as

exceeding the traditional practice of pharmacy and, as such, requiring licensure with

the FDA as a repackager.”279 Therefore, the memorandum directed that MII add

“[t]he name of the patient” to each “prescription label” at the Pharmacy.280

276 Id. at 205. 277 SLC Report Ex. 282, at 1. 278 SLC Report Ex. 284, at 1. 279 Id. at 1–2. 280 Id. at 2. 46 e. ABSG Monitored FDA’s Warning Letter to Med Prep

In July 2013, Morgan Lewis notified ABC and ABSG legal counsel of a

federal complaint against an ABC competitor, Med Prep, related to sterility issues

and its practice of repackaging drugs without a patient-specific prescription

described in the Med Prep Warning Letter, as discussed supra in Section I.D.2.b.281

While Morgan Lewis advised ABC personnel that the sterility concerns related to

Med Prep’s practices were not present at MII, Morgan Lewis suggested that Med

Prep’s requirement to adhere to cGMP regulations as a repackager was relevant to

MII and recommended that ABC and ABSG monitor developments in the Med Prep

case.282

f. MII’s Closure

MII closed its operations on January 31, 2014, primarily because of its

declining profitability in the face of increasing potential reputational harm caused

by continuing the PFS Program during the federal government’s investigation,

discussed infra at Section I.F.6.283 The exit of MII’s largest customer, Florida

Cancer Specialists & Research Institute, from the PFS Program—which

significantly reduced MII’s profitability and demonstrated the reputational harm

281 SLC Report Ex. 290, at 1; Med Prep Warning Letter, at 1. 282 Id. 283 SLC Report 211. 47 caused by the government’s investigation—was the primary trigger for the decision

to close MII.284

F. Michael Mullen and the DOJ Investigation

Michael Mullen served as CFO of ABSG from May 2003 until September

2008, President of Distribution Services at ABSG from September 2008 until

September 2009, and COO of ABSG from September 2009 until April 2010.285

After his termination in April 2010, he raised concerns about violations of the Anti-

Kickback Statute (“AKS”) and price reporting compliance issues, similar to those at

issue in an earlier qui tam complaint brought against the Company and others,

described below.286

1. United States ex rel. Westmoreland v. Amgen et al.

On June 5, 2006, a qui tam lawsuit was filed against Amgen, Inc., as well as

AmerisourceBergen Corporation, and its subsidiaries, INN, Oncology Supply

(“OS”), and AmerisourceBergen Specialty Group.287 The relator alleged that

defendants Amgen, INN, and OS violated the federal AKS by inappropriately

encouraging providers to submit claims for payment by Medicare for the value of

the excess product, or “overfill,” that was contained in the vials of their drug

284 Id. at 212–13. 285 Id. at 213. 286 Id. 287 See United States ex rel. Westmoreland v. Amgen et al., Compl., No. 06-10972-WGY, ECF No. 1 (D. Mass. 2006). 48 Aranesp, but not included in calculating Aranesp’s average sales price (“ASP”).288

In relevant part, the relator also alleged that the defendants improperly gave special

incentives to Aranesp purchasers who contracted with INN and encouraged

physicians to prescribe medically unnecessary drugs and bill Medicare for overfill

amounts that were not administered.289

The Westmoreland relator also alleged that Amgen created INN ostensibly to

be an independent entity that would focus on nephrology practices and physicians,

but that actually acted as a “de facto marketing arm for Amgen” that pushed Amgen

products to businesses.290 Amgen allegedly funneled business to INN and OS, which

then targeted customers based on lists provided by Amgen and used an

administrative fee as a way to pass through discounts to customers.291 The

Westmoreland complaint did not contain allegations of violations of the FDCA or of

product quality or safety deficiencies.292

By January 2009, the Company became aware of the Westmoreland

complaint. Defendant Chou informed the Board of its existence at the Board’s

“Monday call” on February 2, 2009, and to the Audit Committee on February 4,

2009.293

288 Id. ¶¶ 41–48. 289 Id. ¶¶ 55–70. 290 Id.¶¶ 71–72. 291 Westmoreland Fourth Am. Compl. ¶ 303. 292 SLC Report 216. 293 Id. at 216–17. 49 2. Mullen Raises Concerns Internally

a. Mullen’s Time as COO/President of ABSG

Mullen was named COO/President of ABSG in September 2009 after David

Yost, former CEO and Chairman of the Board, announced his plan to retire.294 By

way of a succession plan, the Board decided to move Defendant Collis from his role

as President of ABSG to ABDC to give Defendant Collis more experience with other

parts of ABC’s business so that he could one day take over as ABC’s CEO.295

Mullen was chosen to take over leadership of ABSG as President and COO.296

In his position as COO of ABSG, OS came under Mullen’s purview,297 so

Mullen undertook an effort to drill down into the OS business and learn how OS

went to market.298 However, Mullen learned about OS’s pricing structure, which

caused him to have questions because he observed that profitability at OS was highly

variable across products and customers.299 He believed that ION was too close to

OS, its distributor, which allowed the entities to coordinate which manufacturers

were or were not providing favorable pricing.300 After attending ION meetings with

manufacturers and physicians,301 Mullen assumed that if these meetings were

294 Id. at 218. 295 Id. at 218–19. 296 Id. at 219. 297 Id. 298 Id. 299 Id. 300 Id. at 220. 301 Id. 50 occurring openly and as a matter of course, they must be “above board.”302

Similarly, Mullen assumed that the PFS Program was a compliant business

practice.303

After completing his review of the ABSG business units in January 2010,

Mullen delivered a “strategic initiatives” presentation at an ABSG Team Lead

Retreat304 that included the results of a survey of the ABSG business unit general

managers, broad strategy discussions, and efforts to optimize services provided by

external vendors.305 However, the presentation did not contain any specific

regulatory or compliance-related concerns regarding ABSG’s oncology business.306

Throughout his time at ABSG, Mullen never raised any of the allegations

contained in his qui tam action or this action with either ABSG’s Corporate Counsel

or ABSG’s Group General Counsel, whose offices abutted that of Mullen, before his

departure from the Company.307

b. Mullen Raised Concerns Post-Termination

On April 8, 2010, Mullen was terminated from his role as COO/President of

ABSG due to his underperformance in the COO position.308 As part of his separation

302 Id. 303 Id. 304 Id. 305 See SLC Report Ex. 293. 306 Id. at 4. 307 SLC Report 223–24. 308 SLC Report Ex. 297. 51 package, Mullen was required to inform ABC of any concerns not otherwise known

to ABC management.309 Because Mullen had previously been considered to be the

corporate representative in Westmoreland, he had reviewed the court records and

allegations contained within the complaint in preparation.310 He came to believe that

the Westmoreland allegations potentially applied to ION, OS, and the PFS

Program.311 Mullen contacted Defendant Chou stating he had concerns he wished

to share with the Company.312

In May 2010, ABSG’s Group General Counsel met with Mullen,313 at which

point Mullen summarized his two categories of concerns: (1) that average sales price

(“ASP”) was not reported correctly in connection with how MII handled overfill,

and (2) that there was insufficient separation of OS and ION.314 Mullen did not raise

any concerns about FDA regulatory compliance, pharmacy licensing, safety,

sterility, or any other matter that ultimately became the basis for the resolutions of

the DOJ’s criminal and civil investigations that resulted in the corporate trauma at

issue here, discussed infra at Section I.F.9.315 After the meeting, Mullen sent the

Group General Counsel an email outlining the process through which MII’s business

309 SLC Report Ex. 300. 310 SLC Report 228. 311 Id. 312 SLC Report Ex. 302. 313 SLC Report 229. 314 Id. 315 Id. 52 model purportedly allowed manufacturers to transfer free product in the form of

overfill to wholesalers that then distributed the free product to physicians.316 The

Board was informed by Defendant Chou of Mullen’s concerns in the context of

explaining the Ober Kaler review and introducing the presentation of Ober Kaler’s

report (the “Ober Kaler Report”).317

3. Ober Kaler Report

In June 2010, the Company engaged Ober Kaler to review the business

practices of the Company’s Oncology Group as a whole318 and Defendant Chou

shared the documents provided by Mullen for Ober Kaler’s analysis. 319 Ober Kaler

was charged not only with conducting a target review of ION’s GPO compliance320

but also to assess “overall compliance with federal anti-kickback/fraud and abuse

laws and the federal false claims act” at both ION and OS.321 As neither the

Westmoreland complaint nor Mullen raised concerns about FDCA compliance or

316 SLC Report Ex. 204, at 2–4. 317 SLC Report 232. 318 SLC Report Ex. 308. 319 SLC Report Ex. 306. 320 Group purchasing organizations (“GPOs”) are regulated entities. See SLC Report Ex. 390. As a GPO, ION would negotiate with pharmaceutical manufacturers and vendors, such as OS, on behalf of ION’s paying member physician practices. See Section I.A.1. Similar to the allegation in the Westmoreland complaint that INN was a “de facto marketing arm for Amgen” that pushed Amgen products to businesses, Mullen alleged that there was insufficient separation between ION and its vendor, OS, such that it violated regulations pertaining to GPOs. See Section I.F.1; Section I.F.2.b. As part of this scheme, the Westmoreland relator alleged that Amgen funneled business to INN and INN would use an administrative fee to pass through discounts to customers, thereby violating the Anti-Kickback Statute. See Section I.F.1. 321 SLC Report Ex. 20, at 2. 53 sterility, Ober Kaler’s mandate did not include a review of those concerns.322 Also

excluded from Ober Kaler’s mandate was a review of the legality of the PFS

Program because it was not at issue in the Westmoreland case or with Mullen.323

As part of its review, Ober Kaler interviewed the Chief Pharmacist at the

Dothan facility regarding his role in the PFS Program.324 The Chief Pharmacist

explained how the syringes were filled, how the Pharmacy made money, and how

the service is marketed.325 However, Ober Kaler did not ask about, and the Chief

Pharmacist did not discuss, FDCA regulations or sanitation issues.326

Ober Kaler discussed an early version of its draft presentation with Defendant

Chou, the ABC CCO, the ABSG General Counsel, the ABSG Corporate Counsel,

the ABSG CEO, an attorney at Morgan Lewis, and an attorney at Buchanan

Ingersoll.327 On the call, Ober Kaler asked about the PFS Program in the context of

AKS and GPO328 concerns, specifically asking about a discount under the program

and what the physician took possession of after placing an order.329 After an attorney

from Ober Kaler requested to “have an adequate explanation of the program when

or if the government comes and asks about it[,]” Defendant Chou suggested that

322 SLC Report 234. 323 Id. 324 SLC Report Ex. 313. 325 Id. at 1–2, 4. 326 Id. 327 SLC Report Ex. 314, at 20. 328 See n.320, supra. 329 SLC Report Ex. 307, at 4–5. 54 Ober Kaler “talk to [ABSG General Counsel and [ABSG Corporate Counsel]

because they had a similar reaction to the program but felt better after examining the

facts more clearly.”330 ABSG’s General Counsel believed that the PFS Program was

“previously blessed” by external counsel before he joined the Company, and

ABSG’s Corporate Counsel believed that the Pharmacy was not subject to FDA

regulations or cGMPs at the time of the meeting.331 In light of this understanding

and the fact that neither the Westmoreland case and nor the Mullen allegations raised

concerns about the PFS Program’s FDA compliance or sterility, Ober Kaler’s review

did not include follow-up on the PFS Program.332

On August 11, 2010, Ober Kaler presented its findings to the Audit

Committee.333 Ober Kaler’s presentation specifically referenced the PFS Program

in its general description of the “[r]ole of Oncology Supply,” but Ober Kaler did not

reference sterility or FDCA concerns.334 Beyond describing three aspects of the PFS

Program, the final presentation did not otherwise refer to MII or the PFS Program.335

At the end of the presentation, the Audit Committee “instructed management to

undertake appropriate consideration and follow-up of the recommendations.”336

330 Id 331 SLC Report 237. 332 Id. at 237–38. 333 SLC Report Ex. 81, at 1–2. 334 SLC Report Ex. 20, at 4, 9–12. 335 Id. at 4. 336 SLC Report Ex. 81, at 1–2. 55 On October 19, 2010, Ober Kaler sent a final memorandum to Defendant

Chou containing action items for the Company to consider, including four broad

categories: (1) the definition of the roles of ION and OS; (2) discounting practices

at OS; (3) ION services to pharmaceutical manufacturers; and (4) GPO safe harbor

compliance.337 The Company began implementing new policies in response to Ober

Kaler’s report even before the suggested action items were finalized by Ober

Kaler.338 The Audit Committee received at least two updates from Defendant Chou

on the Company’s progress in addressing Ober Kaler’s recommendations.339 By

November 21, 2010, the Company implemented nearly all of Ober Kaler’s

recommended action items.340

4. Mullen’s October 2010 Qui Tam Complaint

On October 21, 2010, Mullen filed a qui tam complaint under the Federal

Claims Act (the “FCA”) against ABC, ABSG, ION, OS, and MII in the U.S. District

for the Eastern District of New York.341 This complaint largely mirrored the

allegations that Mullen raised in his May 2010 meeting with ABSG’s General

Counsel, including that the free services provided by ION and OS constituted

kickbacks in violation of the AKS and FCA.342 He also alleged that ION, OS, and

337 SLC Report Ex. 317, at 1–3. 338 SLC Report 241. 339 Id. at 242. 340 SLC Report Ex. 323, at 9–13. 341 SLC Report Ex. 4. 342 Id. ¶ 7. 56 MII engaged in an illegal overfill laundering scheme designed to pass kickbacks to

medical providers and allow drug manufacturers to overreport the drugs’ ASPs.343

The October 2010 qui tam complaint did not contain any allegations relating to

sanitation, repackaging, or FDCA violations.344

While qui tam complaints are kept under seal,345 on October 27, 2010,

Mullen’s qui tam complaint was inadvertently unsealed.346 An attorney with

Buchanan Ingersoll transmitted the unsealed complaint to the ABC’s CCO who

notified Defendant Chou, attorneys from Morgan Lewis, and the broader ABC

executive team and ABSG’s President and Group General Counsel.347 Defendant

Chou notified the Board of the suit348 and the Board discussed “the status of a qui

tam matter involving Amgen Inc. and two business units of [ABSG], ABSG, and the

Company” at its November 12, 2010, meeting.349

5. Mullen’s January 2011 Amended Qui Tam Complaint

In January 2011, Mullen filed a First Amended FCA Qui Tam Complaint (the

“FAC”)350 that added new allegations related to violations of the FDCA and

343 Id. ¶ 8. 344 See generally SLC Report Ex. 4. 345 31 U.S.C. § 3730(b)(2). 346 See SLC Report Ex. 324. 347 Id. 348 SLC Report Ex. 325, at 4. 349 SLC Report Ex. 326. 350 SLC Report Ex. 5. 57 Alabama state pharmacy regulations.351 Specifically, the FAC alleged that MII was

operating as an unlicensed manufacturer and repackager of drugs and thus was

operating without proper FDA oversight.352 MII allegedly violated “any number” of

FDA protocols designed to protect against contamination, product mix-ups,

misidentification, mislabeling, deficient inventory control, etc.353 For the first time,

Mullen alleged that MII operated as a drug repackager or manufacturer under the

FDCA because it “compounded” pre-filled syringes, used large-scale vacuum and

centrifuge equipment to extract drugs from manufacturer’s vials in a facility

designed solely for that purpose, and sold the pre-filled syringes to other companies

as opposed to individual patients.354

The FAC was filed under seal and stayed under seal.355 The Company was

not informed of the allegations contained within the FAC until January 29, 2016,

when federal prosecutors shared three complaints with the Company as part of

efforts to facilitate a settlement.356

351 SLC Report 247. 352 FAC ¶ 8. 353 Id. ¶ 9. 354 Id. ¶ 201. 355 SLC Report 249. 356 SLC Report Ex. 328. 58 6. The Department of Justice’s Investigation

Around the time Mullen filed his qui tam lawsuit, the Department of Justice

(“DOJ”) initiated parallel criminal and civil investigations into ABC.357

a. July 2012 Search of MII

On July 11, 2012, an FDA search warrant was executed at OS’s Dothan

facility with a focus on MII’s pharmacy.358 At the time the search warrant was

executed, federal agents also served a subpoena on ABSG as part of an investigation

into potential federal fraud, false claims, and other offenses.359 While executing the

search warrant and subpoena, federal agents seized product—pre-filled syringes,

partially filled syringes, and empty vials—and interviewed some employees.360

b. ABC Officers’ Response to the Search

The Company engaged Morgan Lewis on the day of the search to help the

Company respond to the search warrant and subpoena.361 After interviewing the

employees who were interviewed by federal agents during the search,362 Morgan

Lewis learned, and shared with Defendant Chou, that the federal agents asked about

topics like the employees’ job duties; how MII fit into the corporate structure; how

357 SLC Report 249. 358 Matt Elofson, FDA Agents Search Oncology Supply Business, DOTHAN EAGLE (July 11, 2012), https://dothaneagle.com/news/fda-agents-search-oncology-supply-business/article_a9cb93fc- 0e3d-5701-9958-35f8544b1f82.html; SLC Report Ex. 239, at 2. 359 SLC Report Ex. 331, at 1. 360 SLC Report Ex. 332. 361 See SLC Report Exs. 334–35. 362 SLC Report Ex. 340. 59 overfill was captured, “stored,” and “tracked”; whether MII profited off of overfill;

the sterility and stability of the pre-filled syringes, including testing performed at

MII and employee training; the packaging and labeling of pre-filled syringes with

patient and lot information and how patient information was protected; the rebate

program for pre-filled syringes; patient records; and whether MII used a “centrifuge”

in the pre-filled syringe process.363

To better understand what prompted the search, Defendant Chou and

Company counsel collected and considered earlier legal reviews and work product

related to the Pharmacy, including the 2003 Reed Smith memorandum discussing

MII’s PFS Program; the May 2012 Pharmacy Directive regarding patient-specific

labeling at MII; and the then-current version of the PFS Program agreement.364 ABC

in-house counsel also received Mullen’s May 2010 allegations, Ober Kaler’s 2010

review of ION and OS, and a summary of ABC’s action items in response to Ober

Kaler’s review.365

c. The Board’s Response to the Search

The Board was informed of the search of MII and the subpoena on July 12,

2012, a day after the search occurred.366 At the August 9, 2012, Board meeting,

363 SLC Report Ex. 341. 364 SLC Report Ex. 343, at -498130. 365 SLC Report Exs. 344–47. 366 SLC Report 257. 60 Defendant Chou updated the Board on “significant legal matters affecting the

company” and on “certain matters that would be disclosed in the Company’s. . .

Form 10-Q for the quarterly period ended June 30, 2012.”367 The Board members

discussed the search, the basis for the government’s action, and whether there were

any concerns about MII’s operations, including any concerns about product

adulteration, sterility, or patient safety.368 At that time, the Company was only aware

of Mullen’s original October 2012 qui tam complaint, which did not contain any

FDCA-related allegations.369 The Board was also unaware of any prior history of

patient safety or sterility issues at MII; ABC management confirmed to the Board

that such problems had not occurred in the past.370

While the Board and management considered closing the Pharmacy after the

July 2012 search, MII remained open in light of the lack of clear indicia that it was

operating in violation of regulations.371 In August 2012, the Board, in consultation

with Morgan Lewis, decided to disclose the subpoena in the Company’s upcoming

Form 10-Q372 and in the Company’s Annual form on Form 10-K for the fiscal year

ending September 30, 2012.373

367 SLC Report Ex. 353, at 5. 368 SLC Report 259. 369 Id. 370 Id. at 260. 371 Id. at 260–61. 372 Id. at 261; see also SLC Report Ex. 355. 373 ABC Annual Report on Form 10-K (2012), at 57. 61 7. November 2012 Potential Negative News Article

In October 2012, Katherine Eban,374 a journalist for Fortune magazine,

contacted a Vice President for Corporate & Investor Relations at ABC about an

article she was writing regarding the July 2012 search of OS.375

After working with CSRA leadership, in-house counsel, and Defendant Chou,

who consulted outside counsel to develop talking points, the Vice President spoke

with Ms. Eban by phone on October 22, 2012.376 During the call, Ms. Eban focused

on the government’s investigation, the Pharmacy’s parenteral license, whether the

syringe labels included the lot number, the harvesting of overfill, and whether the

Pharmacy was engaged in the manufacturing process.377 Ms. Eban did not raise any

concerns about safety or sterility; however, Ms. Eban did inquire into how MII used

overfill to offer pre-filled syringes at a discount.378 Ultimately, Ms. Eban did not

publish the article on October 24, 2012, but she continued to ask the Vice President

follow-up questions into early November.379 The Vice President followed public

relations firm Starkman & Associates’ recommendation to contact Ms. Eban’s editor

374 Ms. Eban had previously written a book entitled Dangerous Doses that criticized ABC and other drug companies for allegedly distributing counterfeit or adulterated drugs, which caused the Company to become apprehensive of how Ms. Eban would portray the Company. SLC Report 263–64. 375 SLC Report Ex. 356, at 4–5; SLC Report Ex. 357, at 1. 376 SLC Report Ex. 356, at 2–3. 377 SLC Report Ex. 357, at 2. 378 SLC Report Ex. 252, at 2. 379 SLC Report Ex. 360, at 2. 62 regarding the falsity of Ms. Eban’s allegations that the Pharmacy did not have a

parenteral license, explaining to the editor that the Pharmacy had recently passed an

inspection by the Alabama Board of Pharmacy.380

The Board was apprised of the potential Fortune article at its November 15,

2012, meeting.381 The Board did not express concern that Ms. Eban was exposing

wrongdoing at the Company, or that there were compliance issues at MII, because

the Board was confident in the legality of MII’s business model and its classification

as a traditional pharmacy as of November 2012.382 On November 16, 2012, Ms.

Eban’s editor at Fortune e-mailed the Vice President to inform her that Fortune had

decided against running the article.383

8. Evolution of the DOJ Investigation

a. DOJ Interactions: 2012–2013

Following the July 2012 subpoena, the DOJ issued an additional three

subpoenas in 2013 alone, all of which were generally focused on financial issues

related to MII, overfill, and the PFS Program, although one requested information

regarding sterility testing and communications about the quality of the pre-filled

380 SLC Report Ex. 363, at 1–2. 381 SLC Report 267. 382 Id. at 267–68. 383 SLC Report Ex. 366, at 1–2. 63 syringes.384 Both in-house counsel and Morgan Lewis viewed Mullen’s qui tam

complaint as the likely impetus for the requests in these subpoenas.385

Throughout 2013, Morgan Lewis reviewed these subpoenas and advised ABC

on the subpoenas and the status of the MII investigation.386 At a May 2013

presentation to ABC’s Legal Department, Morgan Lewis described the regulatory

landscape for pharmacies, addressed when a pharmacy would be subject to FDA

regulation, and explained why MII was exempt from federal regulation as a state-

regulated pharmacy.387 By the end of 2013, the DOJ’s subpoenas and interviews did

not provide the Company with a clear understanding of DOJ’s investigative theories,

although they appeared to derive from Mullen’s qui tam allegations about AKS and

pricing issues.388 Although ABC employees and Morgan Lewis considered potential

FDCA theories, they concluded that the Company had a strong defense that MII was

not subject to FDA regulation.389

b. DOJ Interactions: 2014–2016

While MII closed in January 2014, ABC continued to receive subpoenas

related to its operations. From 2014 through March 2016, the DOJ issued twelve

more subpoenas seeking documents and information about MII and the PFS

384 See SLC Report Ex. 369; SLC Report Ex. 371. 385 SLC Report 272–74. 386 Id. 387 SLC Report Ex. 376, at 6–17, 53–54. 388 SLC Report 274. 389 See, e.g., SLC Report Ex. 376. 64 Program, including MII’s closure, “bubbles, floating (‘floaters’) or other particulate

matter” in pre-filled syringes, and the volume of drug product contained in the

syringes.390 These requests also focused on the Company’s compliance program and

audits of MII.391 On October 27, 2014, Morgan Lewis presented to the DOJ on

behalf of MII and argued that MII did not violate the FDCA, FCA, AKS, or the

Prescription Drug Marketing Act.392 Following this presentation, the DOJ issued a

subpoena about “filter syringes” used at MII and appeared to be focusing on MII’s

practice of removing particulate from syringes of Procrit.393

The 2014 DOJ subpoenas suggested a possible interest in senior executives’

and the Board’s role in MII oversight as evidenced by the DOJ requesting documents

and information about how sales of overfill or pre-filled syringes factored into

compensation and performance evaluations of Company personnel, including

directors and officers;394 the Board’s involvement in the decision to construct the

Pharmacy;395 and presentations to the Board about MII during the process of

AmeriSource Health’s merger with Bergen Brunswig.396

390 SLC Report Exs. 378–87. 391 SLC Report 275. 392 SLC Report Ex. 389. 393 SLC Report Ex. 392; see also SLC Report Ex. 384. 394 SLC Report Ex. 385. 395 SLC Report Ex. 386. 396 SLC Report Ex. 387. 65 c. The DOJ Presentation

In October 2015, attorneys from ABC, Morgan Lewis, and the DOJ Civil and

Criminal Divisions met to discuss DOJ’s theories of liability in the MII

investigation.397 During this meeting, federal attorneys, both civil and criminal,

presented a 280-slide PowerPoint deck to the attendees over the course of

approximately four and half hours.398 From a liability standpoint, DOJ’s

presentation focused on alleged FDCA violations, many of which hinged on the

argument that MII was a repackager or manufacturer, therefore not falling within

FDA’s exception for “bona fide pharmacies.”399 The FDCA violations were alleged

as misdemeanors.400 The DOJ also presented two civil FCA theories: (1) MII caused

physicians to submit false claims for payment by providing adulterated and

unapproved new drugs that were not reasonable or medically necessary, and (2) the

use of overfill resulted in double billing and improper reimbursement.401 The Audit

Committee received an update about the DOJ investigation and were informed of

this meeting between ABC’s counsel and the United States Attorney’s Office.402

397 SLC Report Ex. 393, at 2. 398 Id. at 1. 399 Id. at 4, 14. 400 See id. at 27. 401 See id. at 26–27. 402 SLC Report Ex. 394, at 3. 66 d. The Company’s Response

Following the October 2015 presentation, the Company asked Morgan Lewis

to conduct a further investigation into, and to prepare a rebuttal of, the DOJ’s

theories.403 On February 29, 2016, Morgan Lewis presented its investigative

findings to civil and criminal DOJ attorneys.404 While Morgan Lewis acknowledged

that some of MII’s conduct was problematic, Morgan Lewis emphasized that certain

aspects of the case presented serious litigation risk for DOJ.405 Morgan Lewis also

contended that the federal regulatory landscape with respect to compounding was

ambiguous at the time, and thus it was unclear when a state-regulated pharmacy

would be deemed a drug manufacturer subject to FDA’s registration and cGMP

requirements.406 The Board was updated again on the MII investigation at its March

3, 2016, meeting.407

9. DOJ Resolutions

Following the February 29, 2016, presentation by Morgan Lewis, ABC and

the DOJ began negotiating resolutions of both the criminal and civil allegations. 408

403 SLC Report 284. 404 Id. at 285. 405 SLC Report Ex. 400, at 2–3; SLC Report Ex. 401, at 2–3. 406 SLC Report Ex. 400, at 109; SLC Report Ex. 401, at 125–26. 407 SLC Report Ex. 402, at 14. 408 SLC Report 288. 67 The Board received seven updates on the investigation at Board meetings, including

three from Morgan Lewis.409

As the investigation progressed and the DOJ’s legal theories and financial

demands became apparent, ABC’s management, in close consultation with the

Board, determined that resolving the criminal case based on a single, strict liability

misdemeanor count under the FDCA was in the Company’s best interests,

notwithstanding the Company’s legal defenses.410 In September 2017, ABSG

pleaded guilty to a misdemeanor FDCA violation stemming from ABSG’s failure to

register MII with FDA and agreed to pay a $260 million monetary penalty and to

comply with the terms of a Compliance Agreement.411 The plea agreement was a

compromised resolution in which ABSG admitted to a limited statement of facts but

not to the factual allegations in DOJ’s Information.412 During the resolution

negotiations, the parties “agree[d] that defendant ABSG may challenge, contest and

refute the factual allegations in the Information in any subsequent proceeding.”413

No current or former employees were charged as defendants by the DOJ.414 ABSG

409 SLC Report Ex. 402, at 5; SLC Report Ex. 403, at 5; SLC Report Ex. 404, at 13–14; SLC Report Ex. 405, at 4; SLC Report Ex. 406, at 15; SLC Report Ex. 407, at 7; SLC Report Ex. 43, at 2–3. 410 SLC Report 250. 411 Plea Agreement, United States v. AmerisourceBergen Specialty Group, LLC, No. 17-507 (NG) (E.D.N.Y. Sept. 27, 2017). 412 SLC Report 289. 413 Plea Agreement, United States v. AmerisourceBergen Specialty Group, LLC, No. 17-507 (NG), ¶ 2 (E.D.N.Y. Sept. 27, 2017). 414 SLC Report 292. 68 did not take any disciplinary action against individuals involved in the conduct that

led to the guilty plea, because MII had already been closed and many of its

employees had been let go.415

After several additional months of unsuccessful negotiations related to the

civil matter, the DOJ showed the Company a draft complaint in July 2017.416 Due

to the gap between the parties’ settlement offers, and the Company and outside

counsel’s views that DOJ’s case relied on novel theories to which the Company had

strong defenses, ABC prepared to litigate the case.417 However, after being informed

that the potential civil penalties and trebled damages could exceed $6.6 billion, the

Board agreed with Morgan Lewis’s recommendation to continue resolution

negotiations with DOJ.418 The DOJ eventually accepted the Company’s offer to

settle the matter for $625 million on November 16, 2017,419 and the settlement

agreement and related CIA were fully executed on September 28, 2018.420 As part

of the resolution, the Company admitted only to facts expressly included in the

Statement of Facts contained in the civil settlement agreement.421

415 SLC Report Ex. 409; Tr. of Plea and Sentencing Hr’g, United States v. AmerisourceBergen Specialty Group, LLC, No. 17-507 (NG) (E.D.N.Y. Sept. 27, 2017)). 416 SLC Report Ex. 43, at 3. 417 See id.; SLC Report Ex. 412. 418 SLC Report Ex. 43, at 2–3. 419 SLC Report Ex. 413. 420 Settlement Agreement (Sept. 28, 2018); SLC Report Ex. 179. 421 Settlement Agreement (Sept. 28, 2018), at Recitals ¶ K. 69 10. Compensation Considerations Relating to Defendants Chou and Collis after the MII Resolution

On multiple occasions, the Board considered whether to reduce executive

compensation or bonus amounts for Defendants Chou and Collis as a result of the

DOJ Resolutions.422 The Chief HR Officer contacted Pearl Meyer & Partners LLC,

an executive compensation consulting firm, to receive advice on how to handle the

situation.423 The firm was unaware of any instances of Compensation Committees

reducing compensation or bonus amounts, in situations comparable to ABC’s

current posture, absent “executive misconduct or gross negligence.”424 They had

only seen “voluntary bonus give backs in situations involving poor company

performance that was not already reflected in annual bonus payouts.”425 The

Compensation Committee met on November 14, 2018, and, following an executive

session, decided against reducing Defendants Chou’s and Collis’s salaries as a result

of the DOJ Resolutions after concluding that the conduct of Defendants Collis and

Chou did not rise to the standard to find individual culpability for intentional

fraud.426

422 SLC Report 296. 423 SLC Report Ex. 414. 424 Id. 425 Id. 426 SLC Report 300; SLC Report Exs. 417–18. 70 G. Litigation Ensues

On October 11, 2019, Plaintiffs filed the complaint pleading two counts of

breach of fiduciary duty and one count of unjust enrichment.427 On August 24, 2020,

I denied the Defendants’ motions to dismiss under Rule 23.1 for failure to make

demand or show that demand would have been futile and, in the alternative, under

Rule 12(b)(6) for failure to state a claim.428 I concluded that Plaintiffs sufficiently

pled that “a majority of the Demand Board faces a substantial likelihood of liability

for Count I because the Plaintiffs have adequately pleaded that a majority of the

Demand Board consciously ignored red flags rising to the level of bad faith.”429

H. The Company Forms the SLC

On September 24, 2020, the Company authorized a two-person special

litigation committee to investigate and evaluate the allegations and issues raised in

this action, in addition to determining whether prosecuting this action was in the best

interests of the Company or if the action should be dismissed or settled.430 Initially,

the two SLC members were D. Mark Durcan and Dennis M. Nally.431 Durcan was

removed from the SLC on December 11, 2020, because Durcan had previously

427 Verified S’holder Deriv. Compl. for Breach of Fiduciary Duties, Dkt. 1 (“Verified Compl.”). 428 See Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065 (Del. Ch. Aug. 24, 2020) (“Teamsters I”). 429 Id. at *17. 430 SLC Report Ex. 6, at 5. 431 SLC Report 36. 71 served on the Company’s Audit Committee that had received an earlier stockholder

demand referenced in Mullen’s qui tam complaint.432

1. Dennis M. Nally

Nally is the former chairman of PricewaterhouseCoopers (“PwC”)

International Ltd. and currently serves on the boards of Morgan Stanley, The HOW

Institute for Society, and the Royal Poinciana Golf Club.433 Prior to joining the

Company’s board, Nally knew only one other director, nonparty Richard Gozon, the

former chairman of the Board.434 Nally’s relationship with Gozon was attenuated;

limited to being members of the same golf club.435

I. The SLC Investigation and its Report

On November 10, 2020, I granted the SLC’s motion to stay the proceedings

pending its investigation.436 The SLC moved to extend the stay on May 7, 2021, and

I granted the stay from May 10, 2021, to May 28, 2021.437

The SLC conducted a seven-month-long investigation. During this time, the

SLC collected more than 12 million documents, of which the SLC reviewed

432 Id. at 39–40. 433 See id. at 41–42; see also SLC’s Opening Br. in Supp. of Its Mot. to Dismiss 6, Dkt. No. 98 (“SLC OB”). 434 SLC OB 7. 435 Reply Br. in Supp. of Mot. to Dismiss by the SLC of the Board of Directors for Nominal Def. ABC 29–30, Dkt. No. 109 (“SLC RB”). 436 Signed Order Granting Mot. to Stay by the SLC of the Board of Directors of Nominal Def. AmerisourceBergen Corp., Dkt. No. 58. 437 Order Granting Mot. to Extend Stay by the SLC of the Board of Directors of Nominal Def. AmerisourceBergen Corp., Dkt. No. 62. 72 approximately 220,0000.438 The SLC also conducted 77 interviews of 67

witnesses.439 The Report itself was 365 pages in length, containing over 1500

footnotes, with 420 exhibits attached. Ultimately, the SLC concluded that pursuing

this action any further is not in the best interests of the Company in light of “all

relevant factors—including the factual findings and applicable legal standards,

potential costs to the Company, public relations, and distraction to the Board,

management, and other ABC employees[.]”440

With respect to Count I of the complaint, the SLC concluded that the Director

Defendants did not fail to implement and monitor reporting or information systems,

or otherwise exercise their oversight duties, but rather had “implemented a system

of reporting that was more than adequate to meet the Caremark standards.”441

Specifically, the SLC found that the Company had an Audit Committee with clear

reporting lines and the Company repeatedly updated the compliance program as the

Company’s business grew, providing sufficient evidence that the directors did not

“utterly fail[]” to fulfill their duty to implement and monitor a compliance system.442

The Audit Committee considered and determined which compliance and regulatory

matters needed the full Board’s attention and the Audit Committee Chairman

438 SLC Report 47–53. 439 Id. at 53–54. 440 SLC OB 39. 441 SLC Report 319. 442 Id. at 320. 73 reported to the Board accordingly.443 The SLC also found that ABSG was not

intentionally nor actually segregated from the rest of ABC’s compliance program.444

Furthermore, the SLC concluded that MII’s operations were not “mission critical”

for the Company under Marchand and therefore did not present a strong basis for

pursuing Caremark claims against the Defendant Directors.445 Thus, “the SLC

concluded that the Audit Committee and Board’s efforts amounted to more than a

mere ‘attempt’ to oversee MII’s compliance with applicable laws[.]”446

The SLC also determined that five of the six “red flags” alleged in the

complaint did not amount to red flags for the purposes of the second prong of

Caremark.447 The SLC found that the Board responded to each of the six events,

specifically (1) the 2007 Davis Polk Report; (2) Mullen’s qui tam allegations; (3)

the Ober Kaler Report; (4) the 2012 FDA search warrant and subpoena; (5) the 2012

Fortune magazine article; and (6) the 2006 Capital Expenditure Report.448 The SLC

also considered whether unpled events might also qualify as red flags, such as

patient-specific labeling concerns, and concluded that none did.449 Even if the Court

were to consider the cumulative effects of these multiple events, the SLC concluded

443 Id. at 325–26. 444 Id. at 326. 445 Id. at 327. 446 Id. at 329. 447 Id. at 329–30. 448 Id. at 330–47. 449 Id. at 330, 348–49. 74 it would not change its conclusion that the Board responded to and actively

monitored each issue.450

With respect to Count II of the complaint, the SLC concluded that the Officer

Defendants did not knowingly operate an illegal business model or fail to inform the

Board about problems with the PFS Program’s regulatory compliance.451

Specifically, the SLC concluded that the CSRA Senior Director’s review of MII in

2012 did not put the Officer Defendants on notice of “noncompliance because they

were informed that state law, rather than the FDCA, applied to the Pharmacy, and

because they understood that any issues had been corrected and were not

recurring[,]”452 nor were the Officer Defendants grossly negligent in their

management of MII; rather, “the Officers believed in good faith that MII was

operating legally as a pharmacy and dispensing safe, sterile products.”453 As to

Defendant Chou, the Company’s General Counsel, the SLC concluded that he did

not breach his fiduciary duties with respect to how he handled the Ober Kaler Report,

CSRA’s 2012 review of MII, and the Company’s handling of the DOJ

investigation.454

450 Id. at 349–50. 451 Id. at 350–51. 452 Id. at 351. 453 Id. at 352–53. 454 Id. at 355–58. 75 Finally, with respect to Count III, the SLC concluded that there is no basis for

an unjust enrichment claim against Defendant Collis because he did not breach his

fiduciary duties as alleged in Counts I and II of this action.455 Because the breach of

fiduciary duty and unjust enrichment counts rely on the same alleged acts or

omissions, the SLC’s conclusion that there were no breaches of fiduciary duty

forecloses the unjust enrichment count.456

The SLC filed its Report and moved to dismiss this derivative action on

September 22, 2021.457 The parties finished briefing the SLC’s motion to dismiss

on March 6, 2023,458 and I heard oral arguments on July 12, 2023.459

II. ANALYSIS

I found in Teamsters I, based on the allegations of the complaint and the

plaintiff-friendly inferences therefrom appropriate at the motion-to-dismiss analysis,

that a majority of the ABC directors could not bring their business judgment to bear

because there existed a substantial risk that they may be liable for breaches of

fiduciary duty.460 Thus, the traditional deference to the board’s control of corporate

litigation assets was unwarranted, and the matter could proceed derivatively. ABC

455 Id. at 359. 456 Id. at 360. 457 See SLC Report. 458 See SLC RB. 459 See Judicial Action Form re Mot. Dismiss before Vice Chancellor Sam Glasscock dated 7.12.23, Dkt. No. 115. 460 Teamsters I, 2020 WL 5028065, at *26. 76 has attempted to reassert directorial control over the suit by creating a special

litigation committee consisting of an unconflicted director. That SLC has

investigated the claims in Plaintiffs’ complaint and recommended dismissal of the

action.

That recommendation is entitled to some credit but not to the full deference

of the application of the business judgment rule. There is a tension in review by any

special litigation committee, which this Court recognizes is faced with the rather

daunting task of evaluating publicly the behavior of fellow board members. That

tension is not a conflict sufficient to sterilize the business judgment of the SLC, but

it is sufficient to cause the Court, in evaluating a determination that a derivative

action should be dismissed, to review the Committee’s work and the bases for its

conclusion, for reasonableness. The pressure on a sole-member SLC is especially

evident, and causes a need for close review by the Court.

When a special litigation committee concludes that it is in the best interest of

the corporation to dismiss a derivative action, the Court reviews the motion to

dismiss under “a procedural standard akin to a summary judgment inquiry[.]”461

Under this standard, “the SLC bears the burden of demonstrating that there are no

461 In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 928 (Del. Ch. 2003). 77 genuine issues of material fact as to its independence, the reasonableness and good

faith of its investigation, and that there are reasonable bases for its conclusions.”462

A special litigation committee’s motion to dismiss a derivative action is

reviewed under the two-pronged analysis—the first prong mandatory, the second

discretionary—set forth in Zapata Corporation v. Maldonado.463 The first prong of

Zapata requires that the Court “inquire into the independence and good faith of the

committee and the bases supporting its conclusions.”464 Regardless of what the

Court finds during its inquiry in the first prong, the Court may, in its discretion, move

to the second prong, under which the Court must “determine, applying its own

independent business judgment, whether the motion should be granted.”465

A. Zapata’s First Prong

“The first prong of the Zapata standard analyzes the independence and good

faith of the committee members, the quality of its investigation and the

reasonableness of its conclusions.”466 The burden lies with the SLC to prove

“independence, good faith and a reasonable investigation.”467

462 London v. Tyrrell, 2010 WL 877528, at *12 (Del. Ch. Mar. 11, 2010). 463 430 A.2d 779 (Del. 1981). 464 Id. at 788. 465 Id. at 789; accord. Diep ex rel. El Pollo Loco Hldgs., Inc. v. Trimaran Pollo P’rs, L.L.C., 280 A.3d 133, 158 (Del. 2022) (reiterating that the Court may apply its own business judgment to determine whether the action should be dismissed). 466 Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 836 (Del. 2011). 467 Zapata, 430 A.2d at 788. 78 1. Nally Conducted a Good Faith Investigation

In reviewing whether the SLC conducted a reasonable investigation, the Court

considers whether there are “material issue[s] of fact” and whether “the SLC acted

in good faith and had a reasonable basis for its conclusion.”468 The Court considers

the reasonableness of the scope of the investigation to ensure that the SLC

thoroughly investigated all causes of action and theories of recovery contain in a

plaintiff’s complaint, rather than merely “accept[ing] defendants’ version of

disputed facts without consulting independent sources to verify defendants’

assertions.”469 The purpose of the Court’s inquiry is narrow at this “prong one” stage

of the proceedings. The Court’s inquiry is not meant to allow plaintiff to litigate the

facts and merits of the derivative cause of action, “[r]ather, it is the conduct and

activity of the Special Litigation Committee in making its evaluation of the factual

allegations and contentions contained the plaintiff’s complaint which provide the

measure for the Committee’s independence, good faith and investigatory

thoroughness.”470 Thus, it is the SLC and its investigation that are examined under

the first prong of Zapata, and not this Court’s independent conclusions about “the

merits of the plaintiff’s [case].”471

468 Kahn, 23 A.3d at 842. 469 London, 2010 WL 877528, at *17. 470 Kaplan v. Wyatt, 484 A.2d 501, 519 (Del. Ch. 1984). 471 Id. 79 Plaintiffs put forth five ways that they allege the SLC failed to conduct a

reasonable investigation. First, Plaintiffs allege that the SLC deemed the Company’s

FCA-violating “kickback scheme” to be beyond the scope of the SLC’s

investigation. Second, Plaintiffs claim that the SLC did not consider materials from

the DOJ’s investigation of the Company. Third, Plaintiffs assert that the SLC’s

investigation of the Officer Defendants was inadequate. Fourth, Plaintiffs contend

that the SLC’s conclusion that the Director Defendants satisfied their Caremark

duties lacks a reasonable basis. Finally, Plaintiffs argue that the SLC’s conclusion

that the Company did not violate the law lacks a reasonable basis. Plaintiffs’ attacks

on the SLC’s investigation can be grouped into two categories: (a) reasonableness

of the scope of the SLC’s investigation and (b) reasonableness of the bases for the

SLC’s conclusions.

a. The Scope of the Investigation was Reasonable

“To conduct a good faith investigation of reasonable scope, the SLC must

investigate all theories of recovery asserted in the plaintiffs’ complaint.”472 If the

SLC totally fails “to explore the less serious allegations in the plaintiffs’

complaint[,]” doubt may be cast on the reasonableness of the SLC’s investigation if

exploring those allegations “would have helped the SLC gain a full understanding

472 London, 2010 WL 877528, at *17. 80 of the more serious allegations in plaintiffs’ complaint.”473 “The court will not fault

the SLC for failing to evaluate claims that were not asserted in the Complaint.”474

Plaintiffs first contend that the SLC “intentionally chose not to investigate

Defendants’ potential liability in connection with the Company’s FCA [False

Claims Act] violations.”475 Specifically, Plaintiffs point to SLC allegedly declaring

that the FCA violations, which involved kickbacks and double-billing, were outside

the scope of its investigation when it declared that “AKS [Anti-Kickback Statute]

and price reporting compliance issues. . . are not at issue in this Action.” 476 As

evidence of the SLC’s failure to investigate the FCA violations, Plaintiffs point to

the SLC’s (1) dismissal of Mullen’s initial qui tam complaint as “irrelevant” because

“the assertions he raised were limited to AKS and price reporting compliance

issues[,]”477 (2) deeming the Ober Kaler Report “inconsequential” because it

“focused on. . . AKS and price-reporting allegations[,]”478 as well as the SLC’s

“nonsensical[] dismiss[al]” of consideration of the DOJ’s investigation that resulted

in the Company admitting to liability for violating the FCA.479

473 Id. 474 Diep ex rel. El Pollo Loco Hldgs., Inc. v. Sather, 2021 WL 3236322, at *20 (Del. Ch. July 30, 2021), aff’d sub nom. Diep ex rel. El Pollo Loco Hldgs., Inc. v. Trimaran Pollo P’rs, L.L.C., 280 A.3d 133 (Del. 2022). 475 Lead Pls.’ Answering Br. Opp’n SLC’s Mot. to Dismiss 29, Dkt. No. 104 (“Pls. AB”). 476 SLC OB 27–28. 477 Pls. AB 31 (quoting SLC OB 27–28). 478 Id. (quoting SLC OB 56). 479 Pls. AB 33. 81 The complaint contains three causes of action, all of which are focused on the

alleged breaches of fiduciary duties with respect to drug safety and sterility in the

Pre-Filled Syringe Program and FDCA compliance.480 That is, the complaint is

largely silent with respect to violations of the AKS, and to the same extent the SLC

would have been justified in not addressing such violations.481 While the complaint

lacks any claims asserting illegal kickbacks or double-billing, however, the SLC

nevertheless investigated Defendants’ knowledge of those issues. The SLC Report

is replete with discussion and analysis of the kickback and double-billing allegations

underlying Mullen’s qui tam complaint, the Ober Kaler Report, and the DOJ’s

investigation.482 Given the scope of the complaint and the actual scope of the

investigation, I find that the SLC has met its burden here.

Regarding Mullen’s qui tam complaint, the SLC Report lays out Plaintiffs’

allegations that Mullen raised the AKS and double-billing issues in his qui tam

complaint and explains the steps the SLC took to investigate these issues.483 The

SLC Report also details its investigation into the Ober Kaler Report that resulted

from Mullen’s qui tam complaint, including Ober Kaler’s mandate that included, in

relevant part, assessing the Company’s “‘overall compliance with federal anti-

480 See Verified Compl. ¶¶ 207–23. 481 To be clear, a sufficiently glaring omission by the SLC to thoroughly investigate issues as they arise in the ordinary course of the SLC’s investigation of the claims contained in a derivative action complaint would cause the Court to invoke Zapata’s second prong. 482 See SLC Report 30–32, 48 n.173, 51–52, 53 n.181, 213–33, 243–62, 269–96, 338–40. 483 Id. 30–32, 48 n.173, 51–52, 53 n.181. 82 kickback/fraud and abuse laws and the federal false claims act[;]’” the process Ober

Kaler used to conduct its investigation; the findings contained within the Ober Kaler

Report; and the Company’s response to the Ober Kaler Report.484 The SLC was not

“dismissive” of the DOJ’s FCA Investigation; rather, the SLC dedicated over 40

pages of its report to exploration of the facts and sources relating to the DOJ’s five-

year investigation.485

Next, Plaintiffs contend that the SLC improperly failed to take into

consideration the materials underlying the Company’s criminal and civil settlements

with the DOJ.486 They point to documents containing allegations relating to

Defendant Collis’s role in creating the PFS Program and his knowledge that the

program caused double-billing in violation of federal law.487 It is Plaintiffs’ position

that the SLC further failed to review the DOJ’s proffer memoranda and the

implications those memoranda have on this action.488

However, I find that not only did the SLC consider both the DOJ’s draft civil

complaint and the presentation the DOJ gave to ABC about its theories of liability,489

the SLC investigated the allegations underlying it, for example, by interviewing two

Morgan Lewis attorneys who attended the presentation and reviewing the

484 Id. at 233–43, 338–40. 485 Id. at 249–62, 269–96. 486 Pls. AB 37. 487 Id. at 38. 488 Id. 38–39. 489 SLC Report 249–62, 269–96. 83 contemporaneous memorandum that documented the meeting.490 In the SLC Report,

the SLC concluded that the DOJ’s investigation focused on FDCA violations.491 The

SLC Report stated that the SLC reviewed the proffer memoranda but declined to

rely on those documents after concluding that the information contained within the

proffer memoranda was duplicative of information the SLC had already obtained

from its witness interviews.492

Plaintiffs’ last contention with respect to the reasonableness of the scope of

the SLC’s investigation pertains to Plaintiffs’ allegation that the SLC failed to

adequately investigate the Officer Defendants. In support of this contention,

Plaintiffs point out that the SLC’s conclusions are contradicted by the DOJ’s

allegations against the Officer Defendants, including that they “understood and

sanctioned” the PFS Program and the kickback scheme; Defendant Collis’s

“demonstrated intimate knowledge” of how the scheme worked; and Defendant

Collis’s personal intervention to satisfy manufacturer concerns while keeping illegal

double-billing in place.493

With respect to the SLC’s investigation of the Officer Defendants, Plaintiffs

rely on a mistaken assertion that the SLC failed to consider the allegations contained

490 Id. at 280–83 & nn.1197–1206. 491 Id. at 281–82. 492 SLC RB 16–17; see SLC Report 249–62, 269–96. The sole proffer memorandum that the SLC did cite to in its Report was that of a witness the SLC was unable to interview. SLC RB 17; see also SLC Report 54 n.182. 493 Pls. AB 42. 84 within the DOJ’s draft civil complaint. As explained supra, the SLC considered the

DOJ’s allegations but found that these were unproven allegations used by the DOJ

to negotiate a settlement with ABC.494 To investigate these allegations, the SLC

Report explains that the SLC reviewed relevant documents and interviewed third-

party witnesses about the regulatory landscape during the Relevant Period and about

the legal reviews of MII that were conducted, such as those conducted by Reed Smith

and Davis Polk.495 These documents also support the SLC’s conclusion that

Defendant Collis, at most, had an understanding of MII’s business model and that

all Officer Defendants believed in good faith that MII was operating as a state-

regulated pharmacy, not subject to FDA regulations.496

The burden is on the SLC to show that its scope and thoroughness of review

were adequate to its task of evaluating the legal action. This, I conclude, it has done.

Despite Plaintiffs’ best efforts to attack the reasonableness of the scope of the SLC’s

investigation, I find there is no genuine question as to whether the SLC investigation

was reasonable in scope and conducted in good faith.

b. There are Reasonable Bases for the SLC’s Conclusions

Plaintiffs first allege that the SLC’s conclusion that the Director Defendants

satisfied their Caremark duties lacks a reasonable basis. To support this argument,

494 SLC’s RB 18–19. 495 SLC Report 141–80. 496 See id. at 353–54. 85 Plaintiffs attack the SLC’s portrayal of ABC’s compliance program as it pertained

to MII by asserting that, during his deposition, Nally could not explain the evidence

that supported this conclusion.497 Although Plaintiffs rely on the Davis Polk Report

to argue that the Company’s compliance system was not uniform throughout the

Company,498 the SLC Report explains that despite Davis Polk recommending areas

needing improvement, the Davis Polk Report ultimately concluded that the

Company’s compliance program met the “[b]asic legal requirements” under

Caremark.499 Moreover, the Company responded to the Davis Polk Report, by

implementing the recommendations contained therein.500 Plaintiffs’ reliance on

Nally’s lack of recall about specific facts investigated by the SLC is not significant,

in light of the fact that SLC’s conclusion that MII was included in ABC’s compliance

program is well-documented and supported by facts.501

Plaintiffs also posit that the SLC relied exclusively on self-serving statements

in concluding that the Director Defendants did not breach their Caremark duties in

their response to Mullen’s qui tam complaint.502 With respect to Mullen’s qui tam

complaint, the SLC found that the Board responded by providing Mullen’s concerns

to outside counsel at Ober Kaler who then investigated the concerns to develop

497 See Pls. AB 48–50. 498 Id. at 47. 499 SLC Report 108–11, 331–32. 500 Id. at 113–22, 333–35. 501 Id. at 86–88, 90, 189–92, 324. 502 Pls. AB 52–53. 86 recommendations to reduce regulatory risks and reported these findings to the

Board.503

Plaintiffs go on to criticize the Company’s compliance program as it applied

to MII because the reviews CSRA conducted of MII were, according to Plaintiffs,

not “formal” enough and failed to raise all issues to the Board level.504 The SLC

Report concludes that while CSRA found MII’s failure to use patient-specific labels

an issue of concern, CSRA and the Company’s in-house counsel determined that this

practice was compliant with state law and therefore did not raise the issue to the

Board.505 Once the allegations in Mullen’s qui tam complaint were made known to

the Board, the Board discussed them with Defendant Chou and were informed that

Morgan Lewis had been retained to defend the Company against the claims and

represent the Company in any investigative action.506 This is a Caremark action; the

Defendant Directors’ action would be evaluated, if this case were to go forward, not

for compliance with best practices or in light of what greater rigor the Board could

have brought to the process; the Defendant Directors would instead be liable only

for failures of oversight so grossly apparent that they amount to bad faith. I find the

SLC’s conclusions in this regard have a reasonable basis.

503 SLC Report 232–43, 337–38. 504 Pls. AB 50–51. 505 SLC Report 192–95, 200–10, 348. 506 Id. at 245–47, 338. 87 Plaintiffs next assert that the SLC’s conclusion that the Company did not

knowingly violate the law also lacks a reasonable basis.507 This conclusion allegedly

“flies in the face of ABSG’s September 27, 2017 federal criminal plea” and

“contradicts the admissions in ABC’s September 28, 2018 FCA Settlement

Agreement with the DOJ[.]”508 SLC concluded that none of the Officer Directors

knowingly operated and maintained an illegal business model.509 This conclusion

does not contradict the Company’s federal guilty plea: that plea involved a strict

liability offense and therefore did not implicate the Officer Defendants’ knowledge

of the violations admitted to.510 Additionally, Plaintiffs point again to Nally’s

deposition during which Nally incorrectly stated that states are responsible for

enforcing the FCA with respect to Medicare billing.511 Plaintiffs’ reliance on Nally’s

limited understanding of Medicare billing and the FCA as indicative of the

unreasonableness of the SLC’s conclusions is unfounded—Nally is not an attorney,

nor has he claimed to be an expert on these specific matters.512 He is entitled to

reasonably rely on the SLC counsel in drawing the conclusions laid out in the SLC

Report.

507 Pls. AB 53. 508 Id. at 54–55. 509 SLC Report 350–51. 510 Id. at 289–92. 511 Pls. AB at 55. 512 SLC RB at 27. 88 I find that Plaintiffs have failed to discredit the legal bases for the conclusions

reached by the SLC in its report. Again, however, the burden is on the SLC, and I

find that the SLC, via its report, has demonstrated that its conclusions have a

reasonable basis.

2. Nally is Independent

“To establish independence the court must be persuaded that the SLC can base

its decision on the merits of the issue rather than being governed by extraneous

consideration or influences.”513 In determining whether extraneous considerations

or influences existed, the Court considers “the members’ personal interest in the

disputed transaction, and scrutinizes the members’ relationship with the interested

directors.”514 Where, as here, the SLC has a single member, it is more closely

scrutinized and the SLC has the burden of proving that its member was able to bring

her business judgment to bear without any suspicion of extraneous influence.515 I

find Nally facially independent, and scrutinize him in light of Plaintiffs’ allegations

of more cryptic extrinsic conflicts.

a. Nally’s Relationship with Gozon

Nally did not join the ABC Board until months after I denied the Company’s

motion to dismiss this action. He is, therefore, free of the suggestions of liability

513 Sutherland v. Sutherland, 958 A.2d 235, 239 (Del. Ch. 2008) (quotations omitted). 514 Id. (quotations omitted). 515 Lewis v. Fuqua, 502 A.2d 962, 967 (Del. Ch. 1985). 89 that caused me to allow this matter to proceed derivatively.516 I will focus my

analysis of Nally’s independence on whether his relationships “with [D]efendants

are of such a nature that they might have caused [Nally] to consider factors other

than the best interests of the corporation in making [his] decision to move for

dismissal.”517 Here, Nally did not have a relationship with any of the named

Defendants prior to joining the Board. The only relationship that Plaintiffs point to

is between Nally and a nonparty Board member, Gozon, who served as ABC’s

Chairman from 2006 to 2016.518 Nally asserts that this relationship is limited to

seeing Gozon on occasion at a golf club where they are both members and serve on

the board.519 This is not disabling or suspicious.

Plaintiffs, however, contend that this relationship is closer, and is sufficient to

undermine Nally’s independence. Plaintiffs point to Nally’s admission that the golf

club is an important outlet for him and his wife, both socially and through his ability

to serve in leadership at the golf club.520 Further, Plaintiffs attack the SLC’s alleged

failure to disclose that Gozon was on the golf club’s nominating committee that is

charged with nominating directors to the golf club’s board.521 Plaintiffs speculate

516 See Teamsters I, 2020 WL 5028065, at *3–4, 25. 517 London, 2010 WL 877528, at *13. 518 Pls. AB 60–61. 519 SLC OB 44 (citing Tr. of Deposition of Dennis Nally (“Nally Tr.”) at 34:22–36:16, Ex. A to Transmittal Aff. of Thomas P. Will, Dkt. No. 99). 520 Pls. AB 61 (citing Nally Tr. at 35:10–36:16). 521 Id. at 61. 90 that Gozon nominated Nally for his initial term of the golf club’s board (and

renominated him during the pendency of this litigation).522

Moreover, Plaintiffs allege that dismissing this derivative lawsuit would

inherently benefit Gozon, despite his non-Defendant status, because this litigation

implicates actions taken during Gozon’s tenure as the former chairman of the ABC

Board during the Relevant Period and would, therefore, expose Gozon to potential

litigation or, at the very least, reputational harm and personal embarrassment.523

However, Gozon is not a named defendant in the instant action and therefore is not

an “interested director[]” for purposes of Zapata’s first prong.524 Even if I were to

assume that Gozon’s previous role as chairman of the ABC Board during the

Relevant Period was sufficient to make Gozon an interested director such that his

relationship with Nally needs to be more closely examined, Nally and Gozon’s

service on the board of the golf club is, in and of itself, insufficient to compromise

Nally’s independence.525 While Plaintiffs contend that Gozon was likely

instrumental in Nally being nominated for his seat on the golf club’s board, the

evidence shows that Gozon was not a member of the nominating committee until

522 Id. at 61–62. 523 Id. at 63–64. 524 Sutherland, 958 A.2d at 239. 525 See, e.g., In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 357 (Del. Ch. 1998), rev’d on other grounds sub. nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 91 after Nally’s appointment in 2018.526 I find this relationship too attenuated to disable

reliance on Nally’s exercise of judgment in the best interest of ABC.

b. Nally’s Ability to be Impartial in Light of His Historical Involvement with Lawsuits

Next, Plaintiffs argue that Nally is incapable of considering the merits of this

action because (1) Nally was involved in (but not a party to) a separate class action

lawsuit that alleged that his former employer PwC violated the FCA (the “Arkansas

Class Action”) and (2) through the course of his employment with PwC, Nally

acquired an allegedly “long history of adversarial litigation against (and multi-

million settlements secured by) the law firms representing Plaintiffs.”527 Plaintiffs

do not cite to any case law to support their contentions that either of these allegations

would have an impact on Nally’s independence.528 Nor do Plaintiffs allege how

Nally’s experience with his former employer’s entirely separate, now-concluded

suit, alleging different facts, makes him personally interested in the instant action.

Their theory instead seems to be that Nally should be suspected to have sympathy

for the Devil, having been accused of being associated with devils, himself.

First, Plaintiffs allege that Nally’s involvement in the Arkansas Class Action

gave Nally personal experience with pertinent issues such as allegations of

526 See Aff. of Thomas P. Will Supp. SLC RB, Ex. I, Dkt. No. 109. 527 Pls. AB 57–60, 64–66 (emphasis in original). 528 See id. 92 fraudulent overbilling, a whistleblower qui tam complaint, and a DOJ investigation

and civil action alleging FCA violations.529 These personal experiences allegedly

explain why Nally, in Plaintiffs’ opinion, failed to meaningfully investigate similar

issues in the instant lawsuit.530 Contrary to these allegations, Nally’s involvement

in the Arkansas Class Action was limited to the court determining, over PwC’s

objection, that Nally had relevant knowledge and should be deposed.531 Nally was

not a named defendant in the Arkansas Class Action, nor was he implicated in the

alleged misconduct.532 Given Nally’s limited role and that I have already determined

that Nally conducted a thorough and good faith investigation of the issues which

Plaintiffs allege are “striking[ly] similar[]”,533 I find that Nally’s involvement in the

Arkansas Class Action does not raise a genuine issue with respect to Nally’s

independence.

Next, Plaintiffs assert that Nally’s long history of adversarial litigation

involving Plaintiffs’ counsel’s law firms makes it “reasonable to infer that Nally may

harbor bias against Plaintiffs’ counsel or class actions in general.”534 Specifically,

Plaintiffs’ law firms brought multiple class action suits against PwC during Nally’s

tenure as the chairman of PwC’s U.S. affiliate and PwC International, resulting in

529 Id. at 57–60. 530 Id. 531 SLC RB 28. 532 Id. 533 Pls. AB 58. 534 Id. at 65. 93 PwC paying out millions to settle those suits.535 There are no allegations that Nally

was personally involved in those suits, nor are there allegations that Nally was even

aware of the attorneys or the law firms representing the plaintiffs in those suits.536

Plaintiffs’ argument, as I understand it, is that even if Nally were otherwise able to

conduct an independent investigation in the best interests of ABC, once he learned

that his nemeses, these class action attorneys, represented Plaintiffs, he was willing

to skew the investigation to vindicate some personal animosity. This is, I suppose,

a theory, but not one which deserves serious consideration on these facts.

In sum, neither Nally’s relationship with Gozon, nor Nally’s limited

involvement in the Arkansas Class Action, nor Nally’s history with Plaintiffs’ law

firms are enough to establish a genuine dispute of material fact as to Nally’s

independence. Therefore, I find that the SLC has met its burden in establishing

Nally’s independence.

B. Zapata’s Second Prong

The second prong of Zapata can be described as a “fiduciary out” for the

Court, giving it a method to review and, if warranted, set aside conclusions not

disabled under a prong one analysis, but which nonetheless cause the Court to harbor

doubts as to whether dismissal is in the corporate interest. Under this prong, “the

535 Id. 536 SLC RB 32. 94 trial court’s task. . . is to determine whether the SLC’s recommended result falls

within a range of reasonableness that a disinterested and independent decision maker

for the corporation, not acting under any compulsion and with the benefit of the

information then available, could reasonably accept.”537 The purpose of Zapata

prong two is “to thwart instances where corporate actions meet the criteria of step

one, but the result does not appear to satisfy its spirit, or where corporation actions

would simply prematurely terminate a stockholder grievance deserving of further

consideration in the corporation’s interest.”538

I have already concluded that the SLC conducted an independent, good faith,

and reasonable investigation that resulted in conclusions not “‘irrational’ or

‘egregious’ or some other extreme[]” invoking Zapata’s second prong.539 Where,

as here, however, the stockholder-Plaintiffs have not only pointed to substantial

corporate trauma but have withstood the rigors of a motion to dismiss under Rule

23.1, I think it is incumbent upon the Court, in review of a special litigation

committee’s motion to dismiss, to go beyond a review of independence and

reasonableness of the scope of the investigation and the bases for its conclusion. The

Court should, implicitly in its prong one analysis or explicitly via prong two, apply

its own judgment of the reasonableness of the special litigation committee’s

537 In re Primedia, Inc. S’holder Litig., 67 A.3d 455, 468 (Del. Ch. 2013). 538 Zapata, 430 A.2d at 789. 539 Kindt v. Lund, 2003 WL 21453879, at *3 (Del. Ch. May 30, 2003). 95 conclusions as well. Because such an analysis is implicit in the review of the SLC

and its motion, supra, I need not formally address prong two—I do not find that a

dismissal here tends to implicate a result problematic to the corporate weal. For the

sake of completeness, however, I will briefly address my findings were I to invoke

the second prong. I largely limit myself here to the Caremark claims against the

Director Defendants, since that was the sole ground found in Teamsters I to justify

the stockholder-Plaintiffs proceeding derivativity.540

First, I must address the underlying corporate trauma that the Plaintiffs are

trying to vindicate via this action. I acknowledge that the Company has paid

hundreds of millions of dollars to settle the DOJ’s civil and criminal investigations.

Plaintiffs assert as well that this action may be the only opportunity for the

Company’s stockholders to have a meaningful role in addressing the Company’s

compliance and oversight deficiencies through governance reforms.541 Nonetheless,

for this litigation to come to a conclusion in favor of ABC, the Court would have to

conclude that the Defendant Directors’ oversight was so inexplicably lax that it

amounted to bad faith, a knowing abdication of duty. The evidence before me,

including the facts found by the SLC, does not support such a conclusion, nor does

it indicate that material facts in this regard are in dispute. Given the facts of record,

540 Teamsters I, 2020 WL 5028065, at *26. 541 Pls. AB 68–69. 96 it is unlikely that Plaintiffs could prove either prong of a Caremark claim. Finding

such, with the benefit of the information that the SLC acquired through its

investigation, I would conclude under Zapata’s second prong that the litigation is

unlikely to benefit ABC, and that the SLC’s recommendation to dismiss this action

was reasonable.

III. CONCLUSION

The SLC has met its burden in demonstrating that it conducted an

independent, good faith, and reasonable investigation of the allegations contained in

Plaintiffs’ complaint. Its conclusion to seek dismissal of this action rests on a

reasonable basis. The SLC’s motion to dismiss is therefore GRANTED. The parties

should provide an appropriate form of order.

97 Exhibit A

Term Definition ABC/AmerisourceBergen/the AmerisourceBergen Corp. Company ABDC AmerisourceBergen Drug Corp. ABSG/Specialty Group AmerisourceBergen Specialty Group AKS Anti-Kickback Statute ASP average sales price Board AmerisourceBergen’s Board of Directors CCC Chief Compliance Counsel CCO Chief Compliance Officer CER Capital Expenditure Report cGMPs Current Good Manufacturing Practices CIA Corporate Integrity Agreement CIR Compliance Incident Report CSPs Compounded Sterile Preparations CSRA Corporate Security and Regulatory Affairs DEA Drug Enforcement Administration DOJ Department of Justice DOT/FAA Department of Transportation EPA Environmental Protection Agency FAC Mullen’s First Amended Qui Tam Complaint FCA Federal Claims Act FDA Food and Drug Administration FDCA Food, Drug, and Cosmetic Act FDMA Food and Drug Administration Modernization Act GPO Group Purchasing Organization Internal Audit ABC’s Internal Audit Department ION International Oncology Network MII/the Pharmacy Medical Initiatives, Inc. d/b/a Oncology Supply Pharmacy Service OS ASD Specialty Healthcare, LLC d/b/a Oncology Supply OSHA Occupational Safety & Health Administration PFS Program Pre-Filled Syringe Program SLC Special Litigation Committee USP U.S. Pharmacopeia