Ontario Provincial Council of Carpenters’ Pension Trust Fund, et al., v. S. Robson Walton, et al., C.A. No. 2021-0827-JTL (Del. Ch. Apr. 26, 2023) (Laster, V.C.)
In a lawsuit claiming certain Directors and Officers of Walmart (“Defendants”) breached their oversight duties related to the company’s practices concerning prescription opioids, the Court of Chancery mostly denied Defendants’ Motion to Dismiss under Rule 23.1. For the claims surviving dismissal, the Court determined demand was futile because the complaint alleged facts supporting a reasonable inference that half of the Directors either acted in bad faith and so could face a substantial likelihood of liability, or were conflicted given their family ties to a member of the Walton family against whom the claims could be asserted.
Plaintiffs claimed that Defendants acted in bad faith by: (i) knowingly causing Walmart to fail to comply with the terms of a settlement agreement it entered into in 2011 with the Drug Enforcement Agency (the “DEA Settlement”); (ii) knowingly causing Walmart to fail to comply with its obligations as an opioid dispenser under the Controlled Substances Act (the “Pharmacy Obligations”), and (iii) knowingly causing Walmart to fail to comply with its obligations as an opioid distributer under the Controlled Substances Act (the “Distributor Obligations”). Plaintiffs alleged Defendants intentionally prioritized profits over compliance (referred to as the “Massey claim”), consciously ignored a steady stream of red flags that Walmart was failing to comply with its obligations under the Controlled Substances Act (referred to as a “Red-Flags Claim”), and failed to establish information systems sufficient to monitor Walmart’s compliance (referred to as an “Information-Systems Claim”). However, because of the similarities between the core allegations of the claims and the burden of analyzing each claim for each separate Defendant, the Court analyzed Plaintiffs’ claims by assessing the category of underlying misconduct and asking whether the facts support an inference that the Directors acted in bad faith.
The DEA Settlement
Walmart entered into a settlement with the DEA in 2011 requiring it to establish and maintain a compliance system for all of its pharmacies concerning inventory controls, recordkeeping, and providing pharmacists sufficient tools to use their judgment to refuse to fill, and record and report, suspicious prescriptions. The Court’s review of evidence, which consisted mainly of heavily redacted board meeting minutes and board reports, supported an inference that the Directors and Officers were aware the company was not complying with the DEA Settlement. For example, nine months into the DEA Settlement, Walmart’s Audit and Executive Committees received a memorandum introducing them to the compliance program and updating them on compliance efforts (“2012 Memo”). The 2012 Memo informed the Directors that compliance efforts were behind schedule and significant compliance problems remained unresolved. While the 2012 Memo created a “nice-sounding” compliance program, the Court found that Defendants never did the work to implement it and left the program underfunded and understaffed. Additionally, a former Walmart pharmacist filed a qui tam whistleblower complaint alleging several compliance violations.
Through the 2012 Memo, the whistleblower complaint, and reports in board meetings, the Court concluded Plaintiffs were entitled to an inference that the Directors knew about the company’s noncompliance and did not try to bring Walmart into full compliance. Instead, they made a conscious decision to not devote more resources to compliance, which would decrease the ability to fill prescriptions, and instead incentivized pharmacists to fill more prescriptions and to increase prescription sales.
The Court emphasized the impact of Walmart’s heavily redacted 220 production on its analysis. The “compulsive redacting of documents” allowed the Court to infer that the Director’s main response to learning of Walmart’s compliance failures was to talk with lawyers and receive legal advice. But because Walmart did not produce evidence of non-privileged business discussions and decisions and certified its production of books and records were complete, the Court had to infer that no business decisions were made. If the documents were less redacted, the Court hypothesized, they would perhaps reveal that Walmart, in particular its outside Directors, properly relied on legal advice that Walmart was in substantial compliance with the DEA Settlement.
As a result, the Court found sufficient reason to think at least half of the Directors acted in bad faith such that they faced a substantial likelihood of liability. Additionally, two Directors’ relationships (son-in-law and grandson) to Robson Walton were enough to raise a doubt as to their independence in considering a DEA Settlement litigation demand. Thus, the Court held that demand was futile on the Directors regarding the DEA Settlement.
Walmart operates over 5,000 pharmacies that dispense prescription opioids. These operations are made possible through a DEA license that requires Walmart to comply with the Controlled Substances Act.
On top of the red flags described regarding the DEA Settlement, Walmart was hit with an “avalanche” of lawsuits from plaintiffs and federal and state law enforcement agencies related to its prescription opioid business. These suits resulted in millions in defense costs, reputational harm, and a nationwide $3.1 billion settlement (“Nationwide Settlement”) in November 2022. In the Nationwide Settlement, Walmart agreed to implement expansive procedures and controls.
The Court inferred support for the claim that the Directors consciously chose not to bring Walmart’s Pharmacy business into compliance with the Controlled Substances Act until the Nationwide Settlement. The Court reasoned that procedures similar to what Walmart agreed to implement as part of that Nationwide Settlement had not been in place earlier. If they had, then implementing such procedures could not have been part of consideration for the settlement. The Directors were alleged to know of noncompliance from internal reporting, DOJ investigations, and lawsuits—including jury findings to that effect—and remained noncompliant. The amount and consistency of the lawsuits, in particular, put the Directors on notice that Walmart was and remained non-compliant with the Controlled Substances Act. Here too, Walmart’s heavily redacted 220 production supported an inference that the Directors merely spoke to lawyers in response to the red flags. Thus, the Court held that demand was futile on directors regarding the Pharmacy Issues.
As it was with the Directors, demand was futile against Officers regarding the DEA Settlement and Pharmacy Issues. Just as the Directors could not consider whether to assert such claims against themselves, they could not consider whether to assert such claims against the Officers because proceeding against the Officers would implicate themselves.
Walmart also acted as a distributor of prescription opioids (supplying other pharmacies with opioids) until 2018. This role placed obligations on Walmart over and above those required as a distributor, including designing and implementing a system to identify and report suspicious orders to the DEA.
The Court found that the complaint did not plead facts sufficient to infer that the Directors did not know about any failure to comply with its Distributor Obligations. Moreover, management commenced winding down the business when it learned of compliance issues. Thus, the Court held that demand was not futile on Defendants regarding the Distributor Issues and dismissed those claims.