The financial headlines can make it seem like every corporate scandal is also a breach of the fiduciary duty of oversight (also known as a Caremark claim). These types of suits, which shareholders bring against company directors and officers, are particularly risky because they can lead to personal financial liability.
Consider the high-profile, tragic catastrophe of Boeing and its $238 million settlement in derivative suit litigation for inadequate safety oversight leading to more than 300 deaths.
Or the case involving McKesson Corporation—a pharmaceutical giant found to be fueling the nation’s opioid crisis, which settled for $175 million.
These types of cases grab headlines that make a company’s leadership very uncomfortable—sometimes rightly so.
However, not all corporate scandals are breaches of the fiduciary duty of oversight, as the recent dismissal of a fiduciary duty suit against Walgreens in early 2024 demonstrates.
In February 2024, a Delaware court issued an opinion on the derivative suit against Walgreens Boots Alliance, Clem et al. v. Skinner et al. The case involved Walgreens’ billing practices for insulin pens.
Specifically, Walgreens’ retail pharmacy software was programmed to dispense a minimum of five insulin pens in a single manufacturer’s box, even if the doctor prescribed fewer pens.
This led to unnecessary refill reminders and overbilling of third-party payers, including government health care programs.
People noticed, which led to a civil investigative demand from the DOJ, a subsequent government investigation and a settlement with the DOJ in which Walgreens paid out $209.2 million.
The shareholder plaintiffs in the Walgreens derivative case invoked both prongs of the Caremark test, arguing that the directors both failed to implement an adequate reporting system and, having implemented it, failed to monitor it effectively.
However, the court’s analysis revealed a different story: The Walgreens board was regularly updated and took action, including modifying the software to correct billing practices.
The facts showed that the board both implemented appropriate oversight mechanisms and responded to compliance issues as they arose.
As such, the court granted Walgreens’ motion to dismiss—a win for good corporate governance.
Walgreens Case Analysis
Although there has been a rash of Caremark claims in recent years, directors (and officers) can find some relief in the Walgreens outcome.
In its opinion, the court emphasizes that not everything bad that happens in business is an oversight claim:
Fueled by hindsight bias, [many Caremark suits] . . . seek to hold directors personally liable for imperfect efforts, operational struggles, business decisions . . . The present lawsuit is an unexceptional member of this broader group.
In its analysis, the court highlighted that “a Caremark prong one claim requires a plaintiff to plead the absence of any good faith effort ‘to try’ putting a board-level monitoring system in place.” (Emphasis on “try.”)
Moreover, the court was clear that Caremark claims like the one against Walgreens do more harm than good when indiscriminately filed in response to government investigations, successful class action lawsuits or substantial settlements.
The court stated, “From a doctrinal perspective, this expansion risks weakening the ‘core protections of the business judgment rule.’ From a practical standpoint, it drains resources from the very corporations that derivative plaintiffs purport to represent.”
In other words, there’s a balance to be had between holding directors accountable while preserving their ability to make judgment calls without fear of unwarranted litigation.
Helpfully, Walgreens is not the only time a court has dismissed a derivative suit, notwithstanding[1] a corporate debacle. Another good example is SolarWinds winning its motion to dismiss a Caremark claim despite having had a disastrous cyber breach with disastrous outcomes.
This latest case involving Walgreens—and other past cases—demonstrates that the fiduciary duty of oversight doesn’t mean you have to get everything right, only that you try. [2]
Lessons From The Walgreens Case
Some directors and officers see corporate governance as a nuisance. However, it is part of the job. Good corporate governance can also help a board of directors win a motion to dismiss when shareholders bring a Caremark claim as the Walgreens case demonstrates.
Note, too, that the Walgreens board had to have had board meeting minutes that were detailed enough for the court to find that the board had set up an appropriate oversight process and also responded to red flags appropriately.
This is why every director should take seriously the exercise of reviewing board minutes before approving them.
A board’s best efforts, however, does not mean that all fiduciary duty suit litigation will be avoided.
Even though the Walgreens board won its motion to dismiss, it still had to pay defense costs. This is something a D&O insurance program can cover.
And not every board will get the motion to dismiss that Walgreens did. The worse the scandal, the harder it may be to get that motion to dismiss.
Indeed, as bad as the Walgreens scandal was, it wasn’t a scandal on the level of being a major contributor to the opioid crisis or aircraft failures.
Notably, settlements of fiduciary duty suits brought derivatively cannot be paid by a Delaware-incorporated company.
This is when having an excellent D&O insurance program is critical to protecting directors and officers from personal financial liability. If there isn’t any insurance (or not enough), directors would have to pay for the settlement out of their own pockets.