In In re Cardinal Health, Inc. Derivative Litigation, Kessler Topaz clients defeated a motion to dismiss a shareholder derivative action filed against the directors and officers of Cardinal Health, Inc. (“Cardinal Health” or the “Company”). The action seeks to hold these individuals responsible for allowing Cardinal Health to repeatedly violate the laws regulating the distribution of prescription opioids. This pleading stage win against one of the nation’s largest prescription opioid distributors represents another significant victory by public shareholders focused on increasing corporate accountability for the nation’s opioid crisis. As alleged in the action, oversight failures at the highest level at Cardinal Health directly contributed to the opioid epidemic that continues to kill thousands of Americans every year.
In her ruling, the Hon. Sarah D. Morrison of the United States District Court for the Southern District of Ohio fully endorsed the call of the action. As Judge Morrison explained, “The thrust of the claims now before the Court is that the directors and officers of [Cardinal Health] failed (or refused) to mitigate the societal costs of Cardinal Health’s business in the face of increasing evidence that the company would be forced to bear them.” Finding that the complaint stated a claim against each of the fourteen former and current fiduciaries of the Company, the court ultimately concluded that a majority of Cardinal Health’s current directors face a substantial risk of liability in the action.
The action began in July 2019, when Cardinal Health shareholders represented by Kessler Topaz served a demand upon Cardinal Health’s board to access the Company’s records related to its opioid distribution practices. After reviewing thousands of pages of confidential, board-level documents, plaintiffs commenced their derivative action on December 13, 2019. The decision to pursue the Company’s confidential documents before filing suit proved critical to the court’s analysis.
Under Ohio law, when challenging directors’ failure to oversee legal compliance, a shareholder can only proceed with the lawsuit if a majority of the directors face a substantial risk of liability. Only then does the law presume that the board cannot be trusted with the decision to pursue the claims. As applicable to Cardinal Health, plaintiffs’ action would only proceed if their complaint demonstrated that a majority of the board acted with “reckless disregard” for the “best interests” of Cardinal Health.
In reaching its decision to allow the action to proceed, the court relied heavily on the board-level documents summarized in the complaint regarding the board’s reaction to mounting scrutiny by the Company’s principal regulators. Because of plaintiffs’ pre-suit investigation, the complaint described “no fewer than 53 specific instances in which the Board or one of its relevant committees met to discuss, or was otherwise notified of important information related to, compliance risks or issues in Cardinal Health’s distribution of prescription opioids.” Even after the Company paid significant sums of money to settle multiple claims from regulators, the board continued to sit on their hands and essentially ignored the unlawful conduct. Crediting plaintiffs’ assertion that the board was more concerned with public relations than legal compliance, the court highlighted relatively recent board minutes that include “extensive discussion of a public relations strategy for ‘reorienting’ the narrative” without any discussion of the “track-record or effectiveness” of Cardinal Health’s internal controls.
The court’s opinion demonstrates that a public company’s board of directors has a duty to react to repeated warning signs of unlawful activity. It is not enough for a board to implement internal reporting controls. Fiduciaries must act when those controls indicate that the corporation is acting unlawfully.
The opinion further reinforces the power public shareholders have to hold their fiduciaries accountable for the harms their decisions cause a corporation. At bottom, the opinion recognizes that short-term profits should not come at the expense of society or the long-term best interests of a company. Rather, fully complying with the law should be a top priority of every corporation and fiduciary.