The Court considered each of the red flags (which included the Company’s receipt of subpoenas and information requests from the attorneys general of forty-one states and numerous United States Attorneys’ offices; internal audit reports that raised questions about the Company’s compliance structure; congressional investigations and conclusions that found the Company failed to meet its reporting obligations; and the Company’s involvement in [and settlement of] several lawsuits regarding its compliance practices) and concluded that they would ordinarily be sufficient to overcome a motion to dismiss. Id. at *40–49. In fact, the Court held that the allegations demonstrated that the Defendants “did not just see red flags; they were wrapped in them.” Id. at *48.
That holding, however, did not end the Court’s analysis. The Court then looked to the United States District Court for the Southern District of West Virginia’s decision in City of Huntington v. AmerisourceBergen Corp. (2022 U.S. Dist. LEXIS 117322 [S.D. WV, 2022]), which held that the Company’s Anti-Diversion Policies were appropriate. Based on that holding, the Court found that the Defendants did not face a substantial likelihood of liability because it was impossible to infer that the Company failed to comply with its anti-diversion obligations. Id. at *50–51.
Plaintiffs’ second argument was that the Defendants caused the Company to put profitability over its compliance obligations by: (i) revising its oversight policy to make it harder for a sale to be deemed suspicious, and providing less oversight to sales to smaller and more profitable pharmacies; and (ii) entering into agreements with a large pharmacy chain that was under investigation by the DEA. The Court again concluded that the allegations in the complaint were sufficient to overcome the motion, however; because the West Virginia Court determined that the Company’s Anti-Diversion Policies were adequate, and therefore did not violate the law, the Court could not infer that the Defendants faced a substantial threat of liability for their conduct. Id. at *56.
While Vice Chancellor Laster’s decision provides helpful recitations of law, perhaps the most important theme is one that has been echoed by the Delaware Chancery Court for years—that equity is not a plug-and-play concept, and the Court may be required to consider the larger picture.