In what is one of the largest ever shareholder derivative settlements, the parties to the Cardinal Health opioid-related shareholder derivative litigation have agreed to settle the suit for $124 million. The Cardinal Health settlement, which is subject to court approval, is the latest massive settlement of opioid-related derivative litigation. It also represents another example of a massive settlement of a breach of the duty of oversight claim. The settlement is to be funded entirely by Cardinal Health’s D&O insurers. A copy of the plaintiffs’ May 25, 2022 unopposed motion for preliminary approval of the settlement can be found here.

Background

Cardinal Health is one of the largest pharmaceutical products distributors in the United States. In an escalating series of actions beginning in 2007, Cardinal Health was the target of extensive Drug Enforcement Administration (DEA) investigative and enforcement activity. In 2008, in the first of a series of consent agreements with the DEA, the company committed to a series of measure to address Controlled Substances Act (CSA) violations. In 2012, the company entered a second agreement with the DEA requiring the company to take remedial measures concerning opioid distribution.

A further series of lawsuits and investigations followed the company’s entry into the 2012 order, including a high-profile lawsuit by the West Virginia Attorney General. In 2018, the company entered a settlement with several states’ attorneys general, in which the company admitted to controlled substances violations in certain of its facilities. In addition, a U.S. Senate Committee examined Cardinal Health’s CSA compliance activities. In 2018, the company’s CEO stepped down.

In June 2019, multiple plaintiff shareholders launched separate shareholder derivative lawsuits against certain current and former directors of Cardinal Health’s board of directors. The lawsuits ultimately were consolidated. The consolidated complaint alleges that the defendants acted with reckless disregard for the best interests of the company by allowing the company to distribute prescription opioids without fully adhering to the laws governing the distribution of controlled substances, including the CSA. The plaintiffs also alleged that the defendants ignored red flags of non-compliance with the CAS and other laws, ultimately causing the Company significant financial exposure and harm from investigations and litigation involving federal, state, and local governments. The defendants moved to dismiss the plaintiffs’ consolidated complaint.

As discussed here, on February 8, 2021, Southern District of Ohio Judge Sarah D. Morrison denied the defendants’ motion to dismiss the plaintiffs’ breach of fiduciary duty claims but granted the defendants’ motion to dismiss the plaintiffs’ claims for waste of corporate assets. In denying the defendants’ motion to dismiss, Judge Morrison concluded that the plaintiffs had sufficiently alleged demand futility, saying that the plaintiffs’ allegations were sufficient to establish that a majority of the Cardinal Health board members “acted with reckless disregard for the corporation’s best interests by failing to take action on CSA compliance.” Judge Morrison also said that as a result of the company’s CSA enforcement activity, the board was on notice that “CSA noncompliance could pose an existential threat” to the company, yet despite a series of “red flags” over the course of several years, “the Board remained passive.”

Following Judge Morrison’s denial of the defendants’ motion to dismiss, the case went forward. In December 2021, the parties undertook mediation. The mediation ultimately resulted in settlement.

The Settlement

As reflected in the plaintiffs’ motion for preliminary approval, the parties to the derivative litigation reached an agreement to settle the action for a payment of $124 million, subject to court approval. According to the plaintiffs’ motion, the $124 million settlement amount is “to be paid by Cardinal by Defendants’ insurers.” The plaintiffs’ motion also states that Cardinal has agreed to pay plaintiffs’ counsel an aggregate fee and expense award of 25% of the settlement amount, subject to court approval. The parties also agreed that, subject to court approval, each of the named plaintiffs can receive a service award not to exceed $2,500, to be paid out of the fee and expense award.

Discussion

The Cardinal Health opioid-related derivative lawsuit settlement is one of the largest shareholder derivative lawsuit settlements ever. Depending on how (or whether) some of the nominally largest settlements are counted, the Cardinal Health settlement arguably ranks as the 12^th largest ever. Given the question whether certain of the largest settlements should “count,” the Cardinal Health settlement could even rank as the 10^th largest ever. (My updated running list of the largest derivative settlements can be found here.)

Interestingly, among the larger derivative settlements ahead of the Cardinal Health settlement on the list is the 2020 settlement in the McKesson opioid-related derivative litigation. As discussed here, the McKesson opioid-related derivative litigation settled for $175 million. As was the case in the Cardinal Health settlement, the McKesson settlement was also entirely funded by D&O insurance. The opioid related litigation costs are clearly taking a heavy toll on the D&O insurance industry.

In their unopposed motion for preliminary approval, the plaintiffs state that the $124 settlement represents “one of the largest cash recoveries in a derivative settlement ever on behalf of an Ohio corporation,” a statement that assuredly is true. However, it is probably worth noting in this context that, as discussed here, earlier this year the parties to the FirstEnergy political bribery related derivative litigation agreed to settle that case for $180 million; FirstEnergy is an Ohio-based corporation – although to be sure the settlement approval process has become procedurally complicated (as discussed here).

As I have noted in connection with prior shareholder derivative suit settlements involving a large cash component, there was a time not too long ago when it was rare for derivative settlements to involve significant cash payments. The many recent derivative suit settlements involving large cash payments shows the extent to which things have changed; derivative litigation now represents a very substantial severity risk for D&O insurers, one of many developments that has contributed to D&O insurers’ growing loss costs in recent years.

It is important to keep in mind that the claims being settled here essentially allege “breach of the duty of oversight.” If the case were pending in Delaware courts under Delaware law, we would call the plaintiffs’ claims “Caremark claims.” The fact that the plaintiffs alleged (and sustained and settled) breach of the duty of oversight under the laws of a jurisdiction other than Delaware is significant in and of itself. But the fact that these claims resulted in massive settlement should not be overlooked; the fact is that there is a growing track-record of massive settlements of breach of the duty of oversight claims. Just to cite one recent example, the Boeing Max 737 Air Disaster claims (which were based on an alleged breach of the duty of oversight) recently settled for $237.5 million, as discussed here.

These massive settlements of breach of the duty of oversight claims  will reinforce the view that potential allegations of breach of the duty of oversight represents an increasing risk for corporate boards. These developments clearly represent significant concerns for corporate boards and for their insurers.