McKesson Corp. Derivative Litigation

CASE BACKGROUND

In 2017, Hagens Berman filed this class action investor-rights derivative action brought on behalf of nominal Defendant McKesson Corporation based on the McKesson board’s failure to monitor and oversee the company’s operations. The case stated that McKesson’s board failed to make sure that McKesson was not breaking the law and was abiding by the terms of a settlement agreement entered into with various agencies of the United States government.

McKesson, which distributes more than one-third of all controlled substances in North America, is at the epicenter of the nation’s opioid crisis. In 2008, the Drug Enforcement Administration (DEA) found that McKesson had failed to maintain effective controls for controlled substances. McKesson was required to establish and implement a compliance program – the Controlled Substances Monitoring Program or CSMP – to ensure that the company maintained effective internal controls over the distribution of controlled substances and that the company reported suspicious orders to DEA field offices.

McKesson continued to break the law by filling suspicious orders for controlled substances. Its board had done nothing to ensure that the CSMP was actually functioning as intended to prevent the diversion of controlled substances. At one point, the DEA found that McKesson had sustained and systemic compliance failures at almost 50 percent of its distribution facilities.

Finally, pursuant to a 2017 agreement with the DEA, the DOJ, and various United States Attorneys’ offices, McKesson was forced to admit that it had breached the terms of the 2008 Settlements and that it had failed to identify and report to the DEA orders that “should have been detected by McKesson as suspicious.” The DEA imposed a record $150 million fine and prohibited McKesson from shipping controlled substances from four of its distribution centers for periods ranging from two to three years. The DOJ characterized these draconian penalties as among “the most severe sanctions ever agreed to by a [DEA] registered distributor.”

PROCEDURAL HISTORY

On Apr. 3, 2017, Plaintiffs commenced this derivative action to hold defendants liable for their breaches of fiduciary duty in causing and knowingly allowing McKesson to repeatedly and continuously violate federal law designed to prevent the illegal distribution of opioids. Defendants’ failure to oversee McKesson’s operations has caused substantial harm to the company. Defendants’ breaches of duty have caused McKesson to become the subject of multiple government investigations (by both federal and state authorities, as well as Congressional committees) and the defendant in a number of large scale civil actions (including the Opioid MDL and numerous actions by state, city, and other government entities).

On Oct. 17, 2017, this court held a status conference. During this conference, defendants agreed to a briefing schedule and a hearing date on their anticipated motion to dismiss. Under this schedule, plaintiffs were given until Dec. 1, 2017 to file an amended complaint, defendants were given until Jan. 5, 2018 to file a motion to dismiss, plaintiffs were given until Feb. 9, 2018 to file an opposition, and defendants were given until Mar. 2, 2018 to file a reply. The court set a hearing for the motion on Apr. 10, 2018.

On Dec. 1, 2017, plaintiffs filed their amended complaint. On Dec. 15, 2017, McKesson filed a motion to stay their Jan. 5, 2018 response deadline, requesting a briefing schedule for their proposed motion to stay this action in favor of the Delaware action. Finding a lack of good cause, the court denied McKesson’s request for a stay on Dec. 19, 2017. The parties fully briefed both motions to dismiss and motions to stay, and the court held a hearing on the motions on Apr. 24, 2018.

On May 14, 2018, this court denied the motion for a stay, and granted in part and denied in part the motion to dismiss. Defendants then moved for partial reconsideration of the ruling on the motion to dismiss, and after briefing, the court denied that motion.

On July 25, 2018, McKesson’s board formed a Special Litigation Committee “to investigate claims in the derivative litigation, make decisions on McKesson regarding the litigation, and determine whether it is in McKesson’s best interests for plaintiffs to pursue their claims in this litigation.”