A version of this story was first published by the Delaware Business Court Insider, an American Lawyer affiliate.
Last summer’s Delaware Chancery Court ruling in shareholder litigation over Botox marketing had some stinging language for the plaintiffs bar. Still, the sting was worse for Allergan Inc., which was stuck fighting claims in Delaware that it had already stomped out in parallel California litigation.
Now, thanks to Gibson, Dunn & Crutcher; Morris, Nichols, Arsht & Tunnell; and Fish & Richardson, the sting for Allergan and other Delaware defendants has been erased. On Thursday the Delaware Supreme Court reversed Vice Chancellor Travis Laster’s June 2012 decision, ruling that he was required to give the California dismissal preclusive effect.
The decision by the state’s high court en banc in Pyott v. Louisiana Municipal Police Employees’ Retirement System dismisses shareholder derivative claims against officials of Allergan, the pharmaceutical company that developed and manufactures Botox. By finding that the door to Delaware’s courts were closed by the California decision, the ruling offers a bit of relief to defendants fighting a plague of competing shareholder lawsuits.
The unanimous Supreme Court, in an opinion by Justice Carolyn Berger, held that collateral estoppel requires the dismissal of the case given the judgment in LeBoyer v. Greenspan in California federal court.
In LeBoyer, a U.S. district judge in Los Angeles ruled in January 2012 that because shareholders in that case had failed to plead demand futility, they could not bring a class action under Rule 23.1 of the Federal Rules of Civil Procedure.
Berger wrote Thursday that the Chancery Court wrongly held that the shareholders in LeBoyer and Pyott were not in privity and that the California federal case therefore had no bearing on the Delaware matter.
She also rejected the Chancery Court’s holding that the California federal court plaintiffs were not adequate representatives of the class. "Under California law, which controls on this issue, derivative stockholders are in privity with each other because they act on behalf of the defendant corporation," Berger wrote. (The California plaintiffs were represented by Robbins Geller Rudman & Dowd; Robbins Umeda; and the Weiser Law Firm. In his ruling last June, Laster had blasted the plaintiffs lawyers for seeking "to benefit themselves by rushing to gain control of a case that could be harvested for legal fees.")
Both cases stemmed from Allergan’s September 2010 settlement of claims that it illegally marketed the wrinkle-smoothing drug Botox with the U.S. Department of Justice. Under the settlement, Allergan pled guilty to a criminal misdemeanor and paid a total of $600 million in criminal and civil fines.
After the settlement, multiple shareholders filed derivative lawsuits in both Delaware, where Allergan is incorporated, and in California, where the company is based.
Berger harshly criticized Laster’s 80-page decision, in which the court ruled that until a derivative plaintiff established the right to control litigation on behalf of the corporation, the plaintiff is only acting for itself and not in privity with other stockholders.
"The Court of Chancery failed to apply. . .settled law [on full faith and credit] because it conflated collateral estoppel with demand futility," she wrote. "It began its analysis with a mistaken premise, stating that ‘whether a stockholder in a Delaware corporation can sue derivatively after another stockholder attempted to plead demand futility raises a question of demand futility law.’"
Rather, Berger wrote: "Once a court of competent jurisdiction has issued a final judgment. . .a successive case is governed by the principles of collateral estoppel, under the full faith and credit doctrine, and not by demand futility law, under the internal affairs doctrine."
The Delaware plaintiffs, whose case was thrown out the window by Thursday’s ruling, are represented by Chimicles & Tikellis and Barrack, Rodos & Bacine. Pamela Tikellis argued before the state’s high court.
The Gibson Dunn team representing individual Allergan defendants includes Wayne Smith and Mark Perry (Perry argued the appeal.) Kenneth Nachbar and Shannon German of Morris Nichols also represent the individual defendants. A Fish & Richardson team led by Cathy Reese represents nominal defendant Allergan. Amicus backing the appeal included the U.S. Chamber of Commerce (represented by Morrison & Foerster) and the Washington Legal Foundation (with DLA Piper).
Delaware Business Court Insider’s Jeff Mordock contributed to this report.
