In what is one of the largest settlements in a breach of the duty of oversight lawsuit, the parties to the Walmart Opioid-Related Shareholder Derivative lawsuit have agreed to settle the case for $123 million. The settlement is also one of the largest-ever derivative lawsuit settlements. As discussed below, the Walmart settlement is the latest in a series of jumbo settlements in opioid-related breach of the duty of oversight claims. The settlement is subject to court approval. A copy of the parties’ October 13, 2024, Stipulation of Settlement can be found here.

Background

Walmart runs one of the largest pharmacy chains in the U.S., with over 5,000 retail pharmacies in the company’s stores. Its pharmacies are subject to compliance with the Controlled Substances Act. In November 2009, the company’s pharmacies were the subject of a DEA investigation regarding its CSA compliance. In November 2011, the company entered a settlement agreement with the DEA requiring the company to institute certain changes and put controls in place to ensure CSA compliance. As was the subject of the later Delaware derivative lawsuit, it was alleged that the board was not monitoring the company’s compliance with the DEA settlement or of the CSA and that the company and its board emphasized profits over compliance. Among other things, the plaintiffs subsequently alleged that the board was aware of red flags regarding the non-compliance.

Numerous opioid related proceedings followed. In 2016 and 2017 the company was the subject of a “barrage” of lawsuits. In 2017, it was named as a defendant in the Opioid multidistrict litigation. In March 2021, a jury in the MDL litigation found that the plaintiffs had proven that Walmart engaged in illegal conduct involving controlled substances. The court later entered a $650.6 million damages aware against Walmart and other pharmacy defendants. In November 2022, Walmart entered a $3.1 billion nationwide settlements of various claims by state, local, and tribal governments.

In November 2021, plaintiff shareholders filed the first of several shareholder derivative complaints against certain directors and officers of Walmart. The plaintiffs filed an amended complaint in February 2022. The amended complaint, a copy of which can be found here, consists of two counts, the first against the director defendants and the second against the officer defendants. Both counts allege that the defendants breached their fiduciary duties by consciously failing to ensure that Walmart complied with the CSA and the DEA settlement, and also allege that the defendants failed to make a good faith effort to “implement and monitor internal reporting policies and systems.”

In the court’s April 2023 order substantially denying the defendants’ motion to dismiss the amended complaint (here), the court specifically noted that the plaintiffs’ claims in essence alleged that the defendants had breached their duty of oversight. The court specifically noted that the plaintiffs alleged three kinds of breach of the duty of oversight: a so-called Massey claim, that the individual defendants knew Walmart was failing to comply with its legal obligations and made a conscious decision to prioritize profits over compliance; a red-flag claim, that a series of red flags put Walmart’s directors and officers on notice of Walmart’s noncompliance or potential corporate trauma, yet the directors and officers consciously ignored them; and an information systems claim, alleging that the directors and officers knew that they had an obligation to establish a monitoring system to address a core compliance risk, yet consciously failed to make a good faith effort to fulfill that obligation.

The Settlement

After the court substantially denied the motion to dismiss, the board handed the derivative claims to a single-member special litigation committee. The parties subsequently entered mediation efforts. In September, the mediator made a settlement recommendation that both sides accepted. In the parties’ stipulation of settlement, the defendants reiterated their position that they deny all of the plaintiffs’ allegations.

Readers of this blog will be interested to note what the parties’ stipulation says with respect to the source of funds. The stipulation defines the settlement amount as $123 million cash to be paid “by the Insurers to Walmart as part of the consideration for the Settlement contemplated by this Stipulation.” The stipulation further defines the term “Insurers” to mean the defendants’ directors and officers insurance carriers.

Discussion

In my recent round-up of the top current stories in the world of D&O liability, I noted that one of the top trends to watch is the proliferation of lawsuit alleging that directors and officers had violated their duty of oversight. These kinds of claims are notoriously difficult to maintain, and recently Delaware’s court has demonstrated impatience with the increasing numbers of these kinds of claims. Nevertheless, some of these claims have over recent years survived motions to dismiss and some have resulted of these cases have resulted in substantial settlements.

The most substantial settlement of a duty of oversight claim is the $237.5 million settlement in the Boeing air crash derivative lawsuit settlement. Notably, that case, as also appears to be true of this recent settlement in the Walmart case, the Boeing case was settled entirely by the payment of D&O insurance.

The Walmart case settlement is not only one of the largest breach of the duty of oversight claims settlements, it is also one of the largest-ever shareholder derivative lawsuit settlements, as well. According to the list that I have maintained on this site ranking the largest derivative settlements, the Walmart settlement is the 15^th largest shareholder derivative lawsuit settlement, and also the largest so far this year.

It is worth noting that this lawsuit and its settlement relates to the opioid epidemic in this country. As I have noted in numerous posts on this site (most recently here), the opioid epidemic has been the source of extensive corporate and securities litigation. There have in fact been very substantial settlements arising out of this litigation, including even very large shareholder derivative settlements.

Indeed, the next largest settlement on my list of largest derivative suit settlements is the $124 million settlement in the Cardinal Health Opioid-Related Derivative Lawsuit (discussed here). Notably, and as discussed in detail here, the Cardinal Health lawsuit was also based on an alleged breach of the duty of oversight, under Ohio law.

In addition to the Cardinal Health and the Walmart lawsuits, McKesson also settled a breach of they duty of oversight opioid related derivative lawsuit. As discussed here, McKesson settled the lawsuit for $175 million. The McKesson settlement is the ninth largest ever derivative lawsuit settlement.

It is clear that in the field of opioid related derivative litigation, breach of the duty of oversight claims have been successful from the plaintiffs’ perspective and have resulted in a series of settlements that are among the largest ever derivative lawsuit settlements. It seems as if within the larger discussion of breach of the duty of oversight cases, the opioid cases represent their own special category, characterized by successful survival of motions to dismiss and substantial settlements.