Pfizer's D&O Insurers Fund Unusual $75 Million Derivative Settlement

In the wake of Pfizer's record-setting September 2009 $2.3 billion settlement of charges that it had engaged in off-label marketing of Bextra and other drugs, Pfizer investors filed shareholders derivative lawsuits against the company, as nominal defendant, and 19 of the company's directors and officer, alleging that the defendants breached their fiduciary duties by failing to detect and prevent the illegal marketing.

The parties have now entered a $75 million settlement of the derivative lawuits. The settlement has several interesting features, particularly with respect to the insurance, which is funding the entire settlement amount. The settlement is subject to court approval.

Background

On September 2, 2009, the Department of Justice announced that Pfizer had agreed to pay a total $2.3 billion dollars in settlment of the off-label marketing allegations.. In its press release describing the settlement, the DoJ said that the settlement - which represented a criminal fine of $1.195 billion and a civil False Claims Act settlement of $1 billion, as well as certain additional civil forfeitures - represented the largest health care fraud settlement in the DoJ's history.

Following the announcement of this settlement, investors filed a number of shareholder derivative lawsuits, which ultimately were consolidated in a single action in the Southern District of New York before Judge Jed Rakoff. Background regarding the derivative litigation can be found here. The plaintiffs' consolidated amended complaint can be found here.

The Settlement

On December 2, 2010, the plaintiffs filed a motion for preliminary approval of the derivative litigation. The motion, to which the settlement stipulation is attached, can be found here (Hat tip to the Seeking Alpha blog for the settlement documents.).

In the settlement, Pfizer and the other defendants have agreed to set up a Regulatory and Compliance Committee to report to the company's board and to take appropriate steps to prevent future drug marketing violations. Among other things the committee will review compensation policy and practices to ensure they are consistent with the compliance objectives.

One of the things that makes this settlement unusual is the way the committee's activities are to be funded. As part of the settlement, a pool of funds - to be financed entirely by insurance - will be used to pay for the committee's activities for five years.

Under the settlement stipulation, four of the company's D&O insurers "shall pay a total of $75 million into an escrow account under the control of Pfizer." After payment of fees and expenses, the remaining escrow funds "shall be subject to the exclusive control of the Regulatory Committee for funding activities of the Regulatory Committee for its initial five years." If the committee spends more than the funds available, Pfizer will make up the difference. If the committee spends less that the remaining funds, unspent amounts are to be returned to the insurers. (The four insurers involved are listed on page 9 of the settlement stipulation.)

Read the article in its entirety at the D&O Diary, a blog by Kevin LaCroix.