CURRENT MONTH (December 2023)
Delaware Supreme Court Reverses Dismissal in Opioid Case Based on Misapplication of Other Court’s Factual Findings
By Sean M. Brennecke, Lewis Brisbois
For more than a decade courts and government agencies have been wrangling with the fallout of the opioid crisis, which has gripped this country since the beginning of the twenty-first century.
This time last year the Delaware Court of Chancery dismissed a derivative complaint brought by shareholders of one of the largest wholesale pharmaceutical distributors—AmerisourceBergen Corp. (the “Company”). The Court of Chancery held that the complaint satisfied the high burden of alleging that the Company’s board of directors breached their fiduciary duties of oversight/loyalty. However, because the United States District Court for the Southern District of West Virginia (the “West Virginia Court”), in a case arising from the same underlying issues, held that the defendants had not engaged in culpable acts, plaintiffs could not satisfy the demand futility requirement of Court of Chancery Rule 23.1 and therefore could not assert derivative claims. Plaintiffs appealed.
On December 18, 2023, the Delaware Supreme Court reversed the Chancery Court’s decision. Lebanon County Employees’ Retirement Fund v. Collis, 2023 Del. LEXIS 422 (Del. Dec. 18, 2023). In resolving an issue of first impression, the Supreme Court held that “the Court of Chancery’s use of D.R.E. 202, which provides for judicial notice of law, to effectively adopt the factual findings of another court in another case reflects a category error and a departure from the principles that animate the concept of judicial notice.” According to the Delaware Supreme Court, whether the defendants engaged in wrongful conduct was a question of fact (rather than law as the Court of Chancery stated), and D.R.E. 201 only permits a court to take judicial notice of “fact[s] that [are] not subject to reasonable dispute because [they] (1) [are] generally known within the trial court’s territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” By adopting another court’s factual findings in the face of well-pleaded facts to the contrary, the Court of Chancery “unfairly deprived the plaintiffs of the opportunity to prove the truth of their well-pleaded allegations.” Furthermore, by adopting the West Virginia Court’s factual findings, which were made months after plaintiffs filed their complaint, the Chancery Court “changed the date at which demand futility was considered from the date on which the complaint was filed to a date six months later, well after the defendants filed their motion to dismiss.”
As Chancery Court practitioners are aware, Delaware courts are not always “writing on a clean slate,” as many significant related issues may be litigated at different stages in different forums. Thus, in addition to allowing shareholders to pursue their claims, the Delaware Supreme Court’s decision provides important guidance regarding the interaction of decisions from sister courts dealing with the same parties and similar issues.
New York Appellate Court Resolves Split as to Whether the PSLRA Automatic Stay of Discovery Applies in State Court
In Camelot Event Driven Fund v. Morgan Stanley & Co. LLC, the New York Appellate Division, First Department affirmed the judgment of the New York State Supreme Court, finding that discovery stays pending motions to dismiss under the Private Securities Litigation Reform Act (“PSLRA”) shall apply in state court cases. The underlying case was a class action on behalf of Plaintiffs who alleged that Defendants violated the Securities Act of 1933, after Plaintiffs purchased Common Stock and Preferred Stock from Underwriter Defendants. Congress enacted the PSLRA in 1995 to address abusive and frivolous securities suits, in part by postponing discovery. The PSLRA provides that in cases brought under the Securities Act of 1933, “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss.” Defendants argued that the discovery stay in their case should apply while their motions to dismiss were pending appeal, asserting that the First Department was an extension of the New York State Supreme Court. Justice Andrew Borrok of the New York State Supreme Court disagreed with that argument, holding that a stay of discovery only applies while a motion to dismiss is awaiting disposition. Here, Defendants’ motions to dismiss had been decided, and therefore the stay no longer applied. The First Department agreed and concluded that the discovery stay also applied to state actions. Although this issue was resolved in New York, there continues to be a split in California trial courts as to whether the automatic stay applies.