WILLA ROSENBLOOM, derivatively on behalf of Allergan, Inc.; DANIEL HIMMEL; POMPANO BEACH POLICE & FIREFIGHTERS RETIREMENT SYSTEM; WASHINGTON LABORERS-EMPLOYERS PENSION TRUST, AKA Western Washington Laborers Employers Pension Trust, Plaintiffs-Appellants,
DAVID E. I. PYOTT; HERBERT W. BOYER, AKA Herbert W. Boyer, M.D.; LOUIS J. LAVIGNE, JR.; GAVIN S. HERBERT; STEPHEN J. RYAN, AKA Stephen J. Ryan, M.D.; LEONARD D. SCHAEFFER; MICHAEL R. GALLAGHER; ROBERT A. INGRAM; TREVOR M. JONES, AKA Trevor M. Jones, Ph.D.; DAWN E. HUDSON; RUSSELL T. RAY; DEBORAH DUNSIRE, AKA Deborah Dunsire, M.D.; ALLERGAN, INC., a Delaware corporation; HANDEL E. EVANS; RONALD M. CRESSWELL; LOUIS T. ROSSO; KAREN R. OSAR; ANTHONY H. WILD, Defendants-Appellees
Argued and Submitted June 2, 2014, Pasadena, California
As Amended September 4, 2014.
[Copyrighted Material Omitted]
Appeal from the United States District Court for the Central District of California. D.C. No. 8:10-cv-01352-DOC-MLG. David O. Carter, District Judge, Presiding.
Securities Law / Demand Futility
Reversing the dismissal on the pleadings of a derivative action brought by shareholders of Allergan, Inc., producer of Botox, a well-known cosmetic and therapeutic drug, the panel held that the requirement of a demand on the company's board of directors, requesting that Allergan bring the derivative claims in its own name, was excused.
In their first amended complaint, the plaintiffs alleged that Allergan's board of directors knew about limits on promotion of off-label uses; that the board was aware that violations of federal marketing rules could result in significant penalties; and that Allergan nonetheless repeatedly violated federal laws and regulations from 1997 to 2010, creating a number of programs to promote Botox for off-label uses, such as spasticity, pain, headaches, and migraines.
Reviewing for an abuse of discretion, as required by precedent, and applying Delaware law, the panel held that demand was excused because the plaintiffs' particularized allegations established a reasonable doubt as to whether the board faced a substantial likelihood of liability and as to whether the board was protected by the business judgment rule. The panel remanded the case for further proceedings.
Concurring, Judge Reinhardt set forth his view that the proper standard of review is de novo.
Joseph D. Daley (argued), Travis E. Downs III, and David W. Mitchell, Robbins Geller Rudman & Dowd, San Diego, California; Aelish M. Baig, Robbins Geller Rudman & Dowd, San Francisco, California; Brian J. Robbins and Felipe J. Arroyo, Robbins Arroyo, San Diego, California; Kathleen A. Herkenhoff, The Weiser Law Firm, San Diego, California; Robert B. Weiser, Brett D. Stecker, and Jeffrey J. Ciarlanto, The Weiser Law Firm, Berwyn, Pennsylvania, for Plaintiffs-Appellants.
Mark A. Perry (argued) and Geoffrey C. Weien, Gibson, Dunn, & Crutcher, Washington, D.C.; Wayne W. Smith, Jeffrey H. Reeves, and Kristopher P. Diulio, Gibson, Dunn, & Crutcher, Irvine, California, for Defendants-Appellees.
John C. Hueston, Daniel P. Lefler, and Lillie A. Werner, Irell & Manella, Los Angeles, California, for Nominal Defendant-Appellee.
Before: Stephen Reinhardt, John T. Noonan, and Mary H. Murguia, Circuit Judges.
REINHARDT, Circuit Judge.
Allergan, a specialty pharmaceutical manufacturer, produces Botox, a well-known cosmetic and therapeutic drug. In 2010, faced with allegations that it had acted illegally in marketing and labeling Botox, Allergan settled several qui tam suits and pled guilty in a criminal case. Allergan ultimately paid a total of $600 million in part for civil settlements and in part as a criminal fine. Shortly afterward, Plaintiffs, all Allergan shareholders, filed a derivative action alleging that Allergan's directors are liable for violations of various state and federal laws, as well as for breaches of their fiduciary duties to Allergan. Plaintiffs did not, however, first
make a demand on Allergan's board requesting that Allergan bring the derivative claims in its own name. The district court dismissed their action on the ground that Plaintiffs failed to allege particularized facts showing that demand was excused, as Federal Rule of Civil Procedure 23.1 requires. In so doing, however, it misapplied governing Delaware law and improperly drew inferences against Plaintiffs rather than in their favor. We conclude that Plaintiffs' particularized allegations establish a reasonable doubt as to whether the Board faces a substantial likelihood of liability and as to whether the Board is protected by the business judgment rule. Accordingly, we conclude that demand is excused and reverse the district court.
Defendant Allergan, Inc. is a Delaware corporation specializing in specialty pharmaceuticals and medical devices. It manufactures Botox, a purified toxin sold for cosmetic and therapeutic purposes. When injected, Botox produces a local and temporary reduction of muscle or gland activity.
From 1989 to 2010, the FDA approved Botox for only a few indications: crossed eyes, involuntary eyelid muscle contractions, involuntary neck muscle contractions, and excessive sweating. Although doctors may prescribe an approved pharmaceutical for purposes other than those listed on the FDA-approved label (" off-label use" )--and do so regularly--federal law imposes numerous limits on drug manufacturers' efforts to promote off-label uses of their products.
In 2007, a qui tam action was filed against Allergan, alleging violations of the False Claims Act arising from off-label marketing and branding of Botox. That same year, the FBI opened an investigation into Allergan's off-label marketing of Botox. Three years later, after two more qui tam actions had been filed, Allergan, the United States, and the relators who had filed the qui tam actions entered into a settlement. Under this deal, Allergan agreed to pay $225 million to the United States and various state governments and to enter into a five-year corporate integrity agreement with the Department of Health and Human Services' Office of Inspector General. Later in 2010, the United States filed a criminal information against Allergan in the Northern District of Georgia, charging distribution of a misbranded drug/biologic in violation of the FDCA. Allergan pled guilty and agreed to pay a $375 million fine.
In September 2010, derivative suits against Allergan were filed in the Central District of California and the Delaware Court of Chancery. Ultimately, drawing on the fruits of a third party's demand for books and records under Delaware law, Plaintiffs filed the First Amended Complaint,
which is at issue here. Plaintiffs allege that Allergan's board of directors knew about the limits on promotion of off-label uses; that the board was aware that violations of the federal marketing rules could result in significant penalties; and that Allergan nonetheless repeatedly violated federal laws and regulations from 1997 to 2010, creating a number of programs to promote Botox for off-label uses, such as spasticity, pain, headaches, and migraines.
Meanwhile, near-identical litigation proceeded apace in the Court of Chancery. In both courts, Allergan moved to dismiss for failure to adequately allege demand futility. The district court issued its opinion on the demand futility issue first, dismissing the California case in January 2012. It then denied a motion for reconsideration in February 2012.
In June 2012, in a detailed opinion, Vice Chancellor Laster held in the Delaware case that the plaintiffs had shown demand futility. See La. Mun. Police Emps.' Ret. Sys. v. Pyott, 46 A.3d 313, 351-59 (Del. Ch. 2012). In his lengthy and thorough analysis of how Delaware law applies to the issue of demand futility, Vice Chancellor Laster expressly criticized and rejected the district court's reasoning. Id. at 357-58. On appeal, however, the Delaware Supreme Court reversed Vice Chancellor Laster solely on the ground that the Delaware plaintiffs were collaterally estopped from pursuing their claims in the Court of Chancery due to the earlier-filed dismissal of the complaint in this case. See Pyott v. La. Mun. Police Emps.' Ret. Sys., 74 A.3d 612, 614 (Del. 2013).
Plaintiffs allege that, from 1997 to 2010, Allergan created and expanded nearly a dozen programs designed to aggressively promote the sale of Botox for off-label purposes. Plaintiffs elaborate that these programs were part of a concert of illegal conduct and that off-label Botox sales skyrocketed as a result. From 1996 to 2006, for example, spasticity sales grew by 332%, pain sales by 504%, and headache sales by 1,407%. By 2007, Allergan had over $500 million in annual Botox sales for therapeutic uses, of which 70 to 80% was attributable to off-label indications. This was no small sum to Allergan: Botox sales constituted 24 to 36% of total net sales across all product lines from 2000 to 2009, and 36 to 39% of total specialty pharmaceutical sales from 2006 to 2009.
Here, we briefly summarize Plaintiffs' central allegations.
A. The Headache Development Program
" At the direction of the [Board] . . . Allergan aggressively promoted Botox to treat several different types of headache conditions in addition to chronic headache for more than a decade, which caused Botox sales for that indication to increase by over 1,400%." Even though headache treatment was an off-label use until 2010, and even though no evidence at the time proved that Botox treated headaches (in fact, nine out of ten clinical trials for headache had failed), starting in 2003 Allergan sought out headache specialists and promoted Botox to them as a treatment. That same year, while aware that headaches were not an FDA approved indication for Botox, the Board saw a slide presentation that detailed Allergan's " Headache Development Program" and tracked the prevalence of headache disorders. This fact shows the Board's awareness of major headache-focused marketing at Allergan in the early 2000s--the same period in which off-label sales of Botox for headache treatment dramatically increased.
B. The Cervical Dystonia/Headache Initiative (CDHI)
CD is a rare disorder that affects only approximately 27,000 Americans. Pursuant to the CDHI, Allergan " maximize[d] off-label Botox sales by encouraging doctors to diagnose [off-label] headache and pain symptoms as symptoms of Botox's on-label [CD] indication." Allergan created this plan when clinical data did not support use of Botox for headaches; it was, in Allergan's words, a " backup strategy to ensure continued expansion into the headache market." Then, after the FDA rejected a request from Allergan to expand the Botox label to cover CD-related " pain," Allergan launched a campaign to persuade doctors that CD is under-diagnosed and that they should diagnose headaches and pain as mild CD to obtain reimbursement. This plan worked: CD quickly became a main driver for off-label Botox sales. The Board was briefed on " Strong Botox Sales" resulting from Allergan's " U.S. CD/pain" market program in a 2005 CEO Report.
C. Reimbursement Support For Off-Label Uses of Botox
Unlike most drugs, Botox is a " buy and bill" drug, meaning that doctors buy it from Allergan and assume the risk of non-reimbursement on the back end. In the relevant time period, one vial of Botox cost $400 to $500 and most off-label uses of Botox required one to four vials. As Allergan recognized, growth in Botox sales depended on doctors being reimbursed.
To promote off-label use of Botox, Allergan doubled the size of its reimbursement support team in 2003--with the principal goal of minimizing customer barriers for Botox bought to treat headaches, pain, and spasticity. It also established a physician-assistance hotline for doctors to call for help with off-label reimbursement. Plaintiffs allege that, " [t]hrough the Botox Advantage Program, Allergan provided customized reimbursement support services to doctors . . . expended millions of dollars each year to operate the Botox Reimbursement Hotline, and performed detailed audits (or 'interventions') of physician billing records to demonstrate 'the value of Botox to their practice.'" On average, accounts with such " interventions" grew six times faster than did other accounts. Allergan provided doctors with ghost-written materials designed to persuade third-party payers to cover off-label uses of Botox, including treatment of headaches, and recruited physician " advocates" to lobby Medicare and Medicaid decision-makers to expand coverage for off-label use. Plaintiffs allege that the Board knew about the details and purpose of the Botox Advantage Program. They allege, for example, that in 2004 the Board reviewed several Botox Advantage promotional documents. The Board also received multiple reports on reimbursement support as a crucial factor in Botox sales.
D. Intentional Targeting of Specialists Practicing in Off-Label Fields
Plaintiffs allege that " Allergan promoted Botox by targeting medical specialists who did not routinely treat patients with any of the conditions that Botox was approved to treat." This strategy was crucial to growth in off-label use of Botox. In 2004 alone, for instance, Allergan representatives called on thousands of doctors specializing in off-label fields, including pain and headache specialists. Allergan also undertook cross-promotion agreements with other companies to allow Allergan sales representatives access to physicians specializing in off-label fields. For example, in 2006, " Allergan had no drug approved for the treatment of headache at
the time but agreed to double [another] company's sales force selling headache drugs so that Allergan could then also sell Botox to the neurologists who were customers of the other company." E-mails showed that Allergan sought to " Sell More Botox!!!" through this program. The Board approved these agreements, several of which expressly ...