The Delaware Court of Chancery dismissed three claims in Ritchie v. Baker (6/25). Broadly speaking, the plaintiff failed to adequately plead demand futility under Court of Chancery Rule 23.1 because the complaint did not establish that a majority of the demand board faced a substantial likelihood of liability on non-exculpated claims.
The plaintiff sought to sue derivatively on behalf of Corcept Therapeutics, Inc. Corcept is a pharmaceutical company that derives most of its revenue from a single drug, Korlym, which treats endogenous Cushing’s syndrome. In early 2019, investigative reports claimed Corcept had increased profits by marketing Korlym for off-label uses in violation of federal law. Litigation followed.
The three claims alleged by plaintiff were as follows:
- Caremark Theory: The defendants breached their fiduciary duties by failing to adequately oversee operations at Corcept that resulted in a corporate trauma.
- Massey Theory: The defendants breached their fiduciary duties by causing Corcept to violate positive law.
- Malone Theory: The defendants breached their fiduciary duties by deliberately issuing false or misleading disclosures.
The Court also noted that Caremark liability was an “ill fit” for the facts alleged because the company had not suffered “enormous legal liability” or any corporate trauma but rather had experienced dramatic revenue growth during the relevant period. In addition, the Court reasoned that the complaint contradicted itself by alleging both that the board failed to implement adequate oversight systems and that the board was “well-informed” of “all significant Korlym-related matters.” The Court found that the board had implemented reporting systems through regular board and audit committee meetings where Korlym marketing and sales were discussed.
Likewise, there was no basis for a “red flag” claim under Caremark. The Court found that none of the alleged red flags (marketing to non-specialist physicians, prescriber “whales,” and changing specialty pharmacies) would have alerted the board to illegal activity. The Court noted that the complaint failed to allege facts supporting a reasonable inference that the board knew about or consciously disregarded evidence of illegal marketing practices.
On the Massey claim, the Court determined that the complaint failed to allege that directors purposely caused the company to violate the law, which is an even higher burden than alleging conscious disregard under Caremark. The Court stated the Complaint falls short of alleging red flags that should have alerted the director defendants to an illegal scheme, let alone that the director defendants knew about and purposely caused the violations.
With respect to the Malone claim, the Court concluded that without adequately alleging the directors knew of an off-label marketing scheme, the complaint failed to establish the scienter necessary for a disclosure violation claim.
