Rosenbloom v. Pyott

Demand on the board of a corporation by their shareholders to bring a derivative claim in the corporation’s own name is excused where the shareholders can show why the demand would be futile.

Allergan is a specialty pharmaceutical manufacturer that produces Botox. There are numerous regulations on manufacturers concerning promotions of off-label uses for their products. Botox is approved by the FDA to treat only crossed eyes, involuntary eyelid muscle contractions, involuntary neck muscle contractions, and excessive sweating. Plaintiffs allege that in order to increase sales of Botox, Allergan’s board of directors initiated a “Botox Advantage Program” where they adopted plans premised on illegal conduct to promote Botox to medical specialists who did not routinely treat patients with any of the conditions that Botox was approved to treat. Plaintiffs allege the board knew about the details of the “Botox Advantage Program” and even after receiving numerous letters from physicians and employees and later the FDA, alerting them to the unlawful conduct they continued to move forward with the promotions. The district court reviewed the case to determined if the Plaintiff’s were excused from making a demand on the board to bring the suit in their own name prior to filing a suit of their own. The district court dismissed their action on the ground that Plaintiffs failed to allege particularized facts showing that demand was excused. The panel reverses noting that the district court misapplied Delaware law. The panel holds that a demand is excused here because Plaintiffs’ particularized allegations established a reasonable doubt as to whether the board faced a substantial likelihood of liability and as to whether the board was protected by the business judgment rule. Plaintiff’s specifically allege that Allergan’s board of directors knew about the limits on promotion of off-label uses and that the board was aware that violations of federal marketing rules could result in significant penalties. The board’s decision to pursue a business plan premised on unlawful conduct and then remaining consciously inactive despite actual or constructive knowledge of wrongdoing at Allergan convinces the panel that a demand on the board would have been futile. REVERSED and REMANDED.