Thank You For Submiting Feedback!
Caremark rests on the presumption that corporate fiduciaries are afforded great discretion to design context- and industry-specific approaches tailored to their companies' businesses and resources. Indeed, business decision-makers must operate in the real world, with imperfect information, limited resources, and uncertain future. To impose liability on directors for making a "wrong" business decision would cripple their ability to earn returns for investors by taking business risks. But, as fiduciaries, corporate managers must be informed of, and oversee compliance with, the regulatory environments in which their businesses operate. In this regard, as relates to Caremark liability, it is appropriate to distinguish the board's oversight of the company's management of business risk that is inherent in its business plan from the board's oversight of the company's compliance with positive law—including regulatory mandates. The legal academy has observed that Delaware courts are more inclined to find Caremark oversight liability at the board level when the company operates in the midst of obligations imposed upon it by positive law yet fails to implement compliance systems, or fails to monitor existing compliance systems, such that a violation of law, and resulting liability, occurs.
Defendant, Clovis Oncology, Inc., had one drug among its drugs under development, Rociletinib (or "Roci"), that was especially promising. Roci, a therapy for the treatment of lung cancer, performed well during the early stages of its clinical trial. However, data from later stages of the trial revealed the drug likely would not be approved for market by the Food and Drug Administration ("FDA"). Plaintiffs, Clovis stockholders, filed a complaint, alleging that members of the Clovis board of directors (the "Board") breached their fiduciary duties by failing to oversee the Roci clinical trial and then allowing the Company to mislead the market regarding the drug's efficacy. Th Plaintiffs alleged that the breaches caused the drug to sustain corporate trauma in the form of a sudden and significant depression in market capitalization. Plaintiffs further alleged a Brophy claim, averring that certain members of the Board and a member of senior management engaged in unlawful stock trades before the market was apprised of Roci's failure. Defendants have moved to dismiss each of the Plaintiff’s claims for failure to state viable claims.
Did the plaintiffs’ complaint fail to state a claim, thereby warranting the grant of defendant’s motion to dismiss?
Yes, but only with respect to their Brophy claim.
The Court granted defendant’s motion to dismiss in part and denied it in part, holding that the plaintiffs had not stated a claim under Brophy, as the allegedly unlawful stock trades were so small in relation to each fiduciary's stock holdings as to defy any inference of the bad intent required to state a claim. However, the Court held that the plaintiffs had well-pleaded a Caremark claim for purposes of Del. Ch. Ct. R. 23.1 and 12(b)(6) when they alleged that a drug was intrinsically critical to the company's business operation, yet the board of directors ignored multiple warning signs that management was inaccurately reporting the drug's efficacy before seeking confirmatory scans to corroborate its cancer-fighting potency, violating both internal clinical trial protocols and associated federal regulations.