Delaware Court Of Chancery Rules That Shareholder Derivative Lawsuits Are Not Collaterally Estopped By Previously Dismissed Suits Involving Similar Claims

In a significant opinion with wide-ranging implications for both the plaintiffs and defense bar, Vice Chancellor J. Travis Laster of the Delaware Chancery Court ruled that dismissal of a shareholder derivative suit for failure to make a demand on the board of directors, as required by Del. Ch. Ct. R. 23.1,1 does not preclude different shareholders from subsequently asserting similar claims. See La. Mun. Police Emps.' Ret. Sys. v. Pyott, C.A. No. 5795-VCL, 2012 WL 2087205, at *8-18 (Del. Ch. June 11, 2012). In so ruling, Vice Chancellor Laster harshly criticized the current "first-to-file mentality" of the shareholder plaintiffs bar. See id. at *18-29. At the same time, the decision upends established preclusion doctrine for shareholder derivative claims and provides the plaintiffs bar the ability to investigate and file, in a new forum, derivative claims even when another court has already rejected those claims as insufficient.

Background

Allergan, Inc. ("Allergan") manufactures the muscle relaxant Botox. In a settlement with the United States Department of Justice on September 1, 2010, Allergan pleaded guilty to claims of misbranding and off-label marketing of Botox from 2000-2005. Allergan agreed to pay $600 million in criminal and civil fines, exceeding its net income in each of the previous two years and constituting 96% of its net income in 2010.

Within days of the settlement, Louisiana Municipal Police Employees' Retirement System ("LAMPERS") commenced an action in Delaware, relying solely on public information and Allergan's press release announcing the settlement, and later amended the complaint with additional public information. Within three weeks, three similar derivative suits were filed in the United States District Court for the Central District of California and were eventually consolidated (the "California Litigation"). Allergan moved to dismiss all complaints.

In November of 2010, the U.F.C.W. Local 1776 & Participating Employment Pension Fund ("UFCW") made a books and records demand on Allergan under 8 Del. C. § 220 and moved to intervene in LAMPERS v. Pyott. Vice Chancellor Laster denied intervention without prejudice but stayed any decision on the motion to dismiss until completion of UFCW's review of Allergen's books and records. Subsequently, LAMPERS and UFCW reached an agreement permitting both to serve as co-plaintiffs and filed an amended complaint, on July 8, 2011, based on information discovered through the books...