# Henry v. Tyler

> District Court, N.D. California · January 21, 2020

URL: https://www.frixlaw.com/law-library/cases/10062801

## Case

- **Court:** District Court, N.D. California
- **Decided:** January 21, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

1
2
3
4
5 IN THE UNITED STATES DISTRICT COURT
6 FOR THE NORTHERN DISTRICT OF CALIFORNIA
7
8 JEAN E. HENRY, Case No. 19-cv-02869-CRB

9 Plaintiff,
ORDER GRANTING MOTION TO
10 v. DISMISS

11 BRIAN J. TYLER, et al.,
12 Defendants.

13 Widespread anticompetitive conduct in the generic pharmaceuticals industry has led
14 to a Department of Justice investigation, a complaint brought by forty-nine Attorneys
15 General (the “AG complaint”), and a plethora of antitrust and Securities Act lawsuits
16 against generic drug manufacturers. Although McKesson Corp. (“McKesson”) is, for the
17 most part, a generic drug wholesaler, it has not been entirely spared. It is a defendant in
18 multiple civil actions arising from the scandal, including a securities fraud action pending
19 before this court.
20 Jean Henry’s derivative shareholder complaint (“the FAC”) builds off the
21 allegations of earlier actions to accuse former and current McKesson executives and
22 directors (collectively, “Defendants”) of breaching their fiduciary duties. Defendants have
23 moved to dismiss Henry’s complaint for failure to state a claim or demonstrate demand
24 futility. MTD (dkt. 44). Because Henry fails to sufficiently allege either demand futility
25 or that McKesson participated in a price-fixing conspiracy, the motion to dismiss is
26 granted.
27 I. BACKGROUND
1 business involves buying drugs from manufacturers and reselling them to pharmacies and
2 hospitals. Id. McKesson also owns a subsidiary, NorthStar Rx (“NorthStar”), that
3 manufactures generic drugs. Id. ¶ 22.
4 In the last several years, evidence has come to light of widespread anti-competitive
5 conduct in the generic drug market. Id. ¶¶ 2. Investigations by Congress, the Department
6 of Justice, and multiple Attorneys General have led to a number of guilty pleas and a
7 complaint alleging a wide-ranging price-fixing conspiracy. Id. ¶ 1–3, 62–73. The AG
8 complaint alleges that generic drug manufacturers agreed to divide market share rather
9 than compete on price. Id. ¶¶ 2–4. It does not name McKesson as a defendant. Id. ¶ 9.
10 McKesson is also a defendant in various civil actions arising from the price-fixing
11 conspiracy, including a securities fraud class action pending before this Court. Id. ¶ 1.
12 Henry is a shareholder in McKesson. Id. ¶ 183. She is bringing this action
13 derivatively on behalf of McKesson, alleging that Defendants breached their fiduciary
14 duties of loyalty and care to the company. Id. ¶¶ 181, 194. The FAC alleges that
15 Defendants knowingly, recklessly, or negligently allowed McKesson to “become
16 implicated in an illegal price-fixing and market allocation scheme.” Id. ¶ 196. McKesson
17 ostensibly participated in the antitrust conspiracy both in its role as a wholesaler and
18 through NorthStar. Id. ¶¶ 74–99. The FAC seizes on allegations in the AG complaint that
19 generic drug manufacturers Heritage Pharmaceuticals, Inc. (“Heritage”) and Mayne
20 Pharma Inc. (“Mayne”) conspired to divide the market for Doxy DR. Id. ¶¶ 81–82.
21 Because Heritage and Mayne supplied Doxy DR to McKesson, and a Heritage employee
22 stated that McKesson and Heritage were “strategically aligned,” the FAC suggests
23 McKesson must have been in on the agreement. Id. It also reiterates allegations from the
24 securities class action that NorthStar colluded to fix the price of Leflunomide. Id. ¶¶ 93–
25 94. The FAC also alleges circumstantial evidence of McKesson’s participation in a price-
26 fixing conspiracy, including the movement of “top officers” between McKesson and
27 generic drug manufacturers named as defendants in the AG complaint. Id. ¶¶ 85–86, 97–
1 Henry’s second theory of liability is that Defendants exposed McKesson to
2 “substantial liability” in the securities fraud class action by making false and misleading
3 statements about the company’s income and the underlying causes of generic drug price
4 inflation. Id. ¶¶ 122–68. Many of the alleged falsehoods are explanations McKesson’s
5 former Chief Executive Officer John Hammergren and former Chief Financial Officer
6 James Beer offered for rising generic drug prices. See, e.g., id. ¶ 123. Henry also alleges
7 that financial statements filed with the Securities and Exchange Commission were
8 misleading because “McKesson’s financial results were materially impacted by
9 unsustainable generic drug price hikes, including price increases driven by collusive
10 activities.” Id. ¶ 156.
11 According to the FAC, McKesson’s Audit Committee was responsible for
12 reviewing, or at least discussing, “annual audited financial statements and the disclosures
13 therein,” “earnings press releases,” and “financial information and the type and
14 presentation of information to be presented in earnings guidance.” Id. ¶ 175. Defendants
15 Wayne Budd, Alton Irby III, M. Christine Jacobs, Donald Knauss, and Marie Knowles
16 were members of the Audit Committee (collectively, “the Audit Committee defendants”).
17 Id. ¶¶ 28–30, 32, 34.
18 McKesson’s current Board of Directors (“the Board”) is comprised of defendants N.
19 Anthony Coles, Knauss, Knowles, Jacobs, Edward Mueller, Brian Tyler, and Susan Salka,
20 plus non-defendants Dominic Caruso and Bradley Lerman. Id. ¶ 186. Henry alleges she
21 “did not make a demand on the board of directors to take remedial action on behalf of
22 McKesson,” as usually required to bring a derivative action, “because such a demand
23 would have been a futile, wasteful and useless act.” Id. ¶ 185; see also Rosenbloom v.
24 Pyott, 765 F.3d 1137, 1148 (9th Cir. 2014).
25 After Defendants moved to dismiss for failure to state a claim, Henry filed an
26 amended complaint. see generally First MTD (dkt. 38); FAC. Defendants then filed the
27 instant motion to dismiss, arguing that Henry has failed to adequately plead either a
II. LEGAL STANDARD
1
Under Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed for
2
failure to state a claim upon which relief may be granted. Dismissal may be based on
3
either “the lack of a cognizable legal theory or the absence of sufficient facts alleged under
4
a cognizable legal theory.” Godecke v. Kinetic Concepts, Inc., 937 F.3d 1201, 1208 (9th
5
Cir. 2019). A complaint must plead “enough facts to state a claim to relief that is plausible
6
on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 697 (2009) (citing Bell Atlantic Corp. v.
7
Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible “when the plaintiff pleads
8
factual content that allows the court to draw the reasonable inference that the defendant is
9
liable for the misconduct alleged.” Id. at 678. When evaluating a motion to dismiss, the
10
Court “must presume all factual allegations of the complaint to be true and draw all
11
reasonable inferences in favor of the nonmoving party.” Usher v. City of Los Angeles,
12
828 F.2d 556, 561 (9th Cir. 1987). “[C]ourts must consider the complaint in its entirety, as
13
well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to
14
dismiss, in particular, documents incorporated into the complaint by reference, and matters
15
of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
16
551 U.S. 308, 322 (2007).
17
If a court does dismiss a complaint for failure to state a claim, it should “freely give
18
leave [to amend] when justice so requires.” Fed. R. Civ. P. 15(a)(2). A court nevertheless
19
has discretion to “deny leave to amend due to ‘undue delay, bad faith or dilatory motive on
20
the part of the movant, repeated failure to cure deficiencies by amendments previously
21
allowed, undue prejudice to the opposing party by virtue of allowance of the amendment,
22
[and] futility of amendment.’” Leadsinger, Inc. v. BMG Music Pub., 512 F.3d 522, 532
23
(9th Cir. 2008) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)).
24
“The derivative form of action permits an individual shareholder to bring suit to
25
enforce a corporate cause of action against officers, directors, and third parties.”
26
Rosenbloom v. Pyott, 765 F.3d 1137, 1147 (9th Cir. 2014) (quoting Kamen v. Kemper Fin.
27
Servs., Inc., 500 U.S. 90, 95 (1991)). “A shareholder seeking to vindicate the interests of a
1 corporation through a derivative suit must first demand action from the corporation’s
2 directors or plead with particularity the reasons why such demand would have been futile.”
3 Id. at 1148 (quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989 (9th Cir.
4 1999)). “The purpose of this demand requirement in a derivative suit is to implement ‘the
5 basic principle of corporate governance that the decisions of a corporation—including the
6 decision to initiate litigation—should be made by the board of directors or the majority of
7 shareholders.’” Id. (quoting In re Pfizer Inc. S’holder Derivative Litig., 722 F. Supp. 2d
8 453, 458 (S.D.N.Y. 2010)).
9 If a derivative action plaintiff does not make a demand, the complaint must “state
10 with particularity the reasons” for her failure to do so. Fed. R. Civ. P. 23.1(b)(3)(B).
11 However, “[t]he substantive law which determines whether demand is, in fact, futile is
12 provided by the state of incorporation of the entity on whose behalf the plaintiff is seeking
13 relief.” Rosenbloom, 765 F.3d at 1148 (citation omitted). McKesson is a Delaware
14 corporation, so Delaware law applies. FAC ¶ 20; see also id.
15 Delaware law requires a shareholder bringing a derivative suit to “demonstrate[ ],
16 with particularity, the reasons why pre-suit demand would be futile.” Id. Futility is
17 determined on a director-by-director basis. “[A] derivative complaint must plead facts
18 specific to each director, demonstrating that at least half of them could not have exercised
19 disinterested business judgment in responding to a demand.” Desimone v. Barrows, 924
20 A.2d 908, 943 (Del. Ch. 2007). The relevant board is the one that was sitting when the
21 complaint was filed. Rosenbloom, 765 F.3d at 1148. “Plaintiffs are entitled to all
22 reasonable factual inferences that logically flow from the particularized facts alleged, but
23 conclusory allegations are not considered as expressly pleaded facts or factual inferences.”
24 Id. (quoting Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000)).
25 “When a shareholder challenges a decision of a board of directors, Delaware law
26 provides a two-part, disjunctive test for demand futility.” Id. at 1149. A shareholder can
27 demonstrate futility by creating a reasonable doubt either that “the directors are
1 product of a valid exercise of business judgment.” Id. (quoting Brehm, 746 A.2d at 256).
2 On the other hand, when the shareholder alleges “that demand is excused on the ground
3 that a board remained consciously inactive when it knew (or should have know) about
4 illegal conduct,” the complaint must “allege ‘particularized facts establishing a reason to
5 doubt that the board of directors could have properly exercised its independent and
6 disinterested business judgment in responding to a demand.’” Id. at 1150 (quoting Wood
7 v. Baum, 953 A.2d 136, 140 (Del. 2008)). “Under either approach, demand is excused
8 if . . . particularized allegations create a reasonable doubt as to whether a majority of the
9 board of directors faces a substantial likelihood of personal liability for breaching the duty
10 of loyalty.” Id.
11 III. DISCUSSION
12 The FAC alleges two theories of liability. First, that “Defendants either knew, were
13 reckless, or were grossly negligent in not knowing that McKesson was implicated in an
14 illegal price-fixing and market allocation scheme.” FAC ¶ 196. Second, that Defendants
15 exposed McKesson “to substantial liability” by making false and misleading statements to
16 investors and in SEC filings. Id. ¶ 122.
17 A. Antitrust Violations
18 Any theory of liability premised on McKesson’s participation in a price-fixing
19 conspiracy fails because the FAC fails to plausibly allege the underlying antitrust
20 violations. Henry’s claims are chiefly premised on allegations recycled from previous
21 complaints. See FAC ¶ 1. This Court has previously considered most of them and
22 determined that they are insufficient to plausibly allege McKesson’s participation in any
23 illegal anticompetitive conduct. See Order Denying Motion to Dismiss at 9–13, Evanston
24 Police Pension Fund v. McKesson Corp., No. 3:18-cv-06525-CRB (N.D. Cal. Oct. 30,
25 2019), ECF No. 67.
26 Although Henry pleads a few facts beyond those alleged in the Evanston complaint,
27 they are insufficient to salvage this theory of liability. Henry alleges that “many of
1 at drug manufacturing companies alleged in the AG Complaint to be central players in the
2 price-fixing conspiracy.” FAC ¶ 85. Ostensibly, “[t]hese personnel exchanges facilitated
3 the conspiracy by providing McKesson and the manufacturing [sic] the means to cooperate
4 with one another through the personal relationships of former and current employees.” Id.
5 But this movement has an obvious innocuous explanation: top executives looking for a
6 new job are likely to find one in the field they have experience in. A more plausible
7 interpretation of these allegations is that sometimes executives at McKesson and its
8 suppliers have sought new employment and found it at other generic drug companies,
9 without going on to facilitate any illegal conspiracy. See In re Musical Instruments &
10 Equip. Antitrust Litig., 798 F.3d 1186, 1194 (9th Cir. 2015) (“Allegations of facts that
11 could just as easily suggest rational, legal business behavior by the defendants as they
12 could suggest an illegal conspiracy are insufficient to plead a § 1 violation.” (internal
13 quotation marks and citations omitted)).
14 Henry’s briefing also refers to an alleged conspiracy to raise the price of
15 Levothyroxine. Opp’n at 14–15. But the FAC makes no reference to Levothyroxine, see
16 generally FAC, and, even if it did, the allegations Henry describes do not plausibly allege
17 McKesson’s participation in an antitrust conspiracy. Like the FAC’s allegations, they
18 suggest only that generic drug manufacturers who supplied McKesson conspired to fix
19 prices, not that McKesson participated in those agreements.1 See Opp’n at 14–15.
20 Because the FAC’s failure to adequately allege that McKesson was involved in an
21 illegal conspiracy is fatal to this theory of liability, the Court need not address the parties’
22 other arguments on this issue.
23
24

25
1 Henry also alleges some new facts to support her allegation that Defendants must have been
aware of the purported underlying misconduct. For example, the FAC alleges that various
26
defendants made suspicious stock sales “when the share price was artificially inflated due to the
underlying misconduct.” FAC ¶¶ 116–20. But whether the FAC adequately alleges that
27
Defendants knew about the underlying antitrust violations is a moot point, because it fails to
B. False Statements
1
This Court has previously denied a motion to dismiss a securities fraud action based
2
on the same alleged false statements underlying Henry’s second theory of liability. See
3
generally Order Denying Motion to Dismiss, Evanston, No. 3:18-cv-06525-CRB.
4
Nonetheless, this theory of liability fails because the FAC does not adequately plead
5
demand futility.
6
As an initial matter, the parties dispute the correct test for demand futility in this
7
case. Defendants assert that Henry alleges a failure of oversight, whereas Henry insists she
8
is challenging a decision of the Board. Compare MTD at 22–23, with Opp’n at 7–8. This
9
dispute is entirely beside the point. Henry alleges only one theory of futility: that the
10
Board is not independent and disinterested because it “is far too directly and specifically
11
involved in the misconduct alleged . . . to be able to reasonably or in good faith evaluate a
12
demand to investigate their own misconduct.” FAC ¶ 192. Because Henry relies on the
13
Board’s potential liability to demonstrate demand utility, she must plead “particularized
14
allegations [to] create a reasonable doubt [that] a majority of the board of directors faces a
15
substantial likelihood of personal liability for breaching the duty of loyalty,” regardless of
16
which test applies. See Rosenbloom, 765 F.3d at 1150.
17
Henry has not met this standard, because the FAC “fails to provide specific facts
18
showing that [a majority of] the Board approved the . . . allegedly fraudulent statements.”
19
Silicon Graphics, 183 F.3d at 990, overruled on other grounds by South Ferry LP v.
20
Killinger, 542 F.3d 776, 784 (9th Cir. 2008). Without “particularized facts demonstrating
21
how each [Board member] was involved in, prepared, or even knew about the alleged
22
misstatements and omissions,” In re Facebook, Inc. S’holder Derivative Privacy Litig., 367
23
F. Supp. 3d 1108, 1127 (N.D. Cal. 2019), the FAC cannot create “a reasonable doubt
24
that . . . the directors are disinterested and independent” as to this claim, Silicon Graphics,
25
183 F.3d at 990.
26
It is true that the FAC alleges that the Audit Committee Defendants were
27
responsible for reviewing, or at least discussing, “annual audited financial statements and
1 || the disclosures therein,” “earnings press releases,” and “financial information and the type
2 || and presentation of information to be presented in earnings guidance.” FAC § 175. But
3 || even assuming these allegations are a sufficiently specific showing that the Audit
4 || Committee Defendants “approved the . . . allegedly fraudulent statements,” Silicon
5 || Graphics, 183 F.3d at 990, that would not demonstrate demand futility because the Audit
6 || Committee Defendants did not comprise a majority of the Board when the Complaint was
7 || filed,? see Rosenbloom, 765 F.3d at 1150; FAC 4 37, 186.
8 Henry argues that at least some of the “misrepresentations were made by
9 || Defendants themselves.” Opp’n at 19 (original emphasis omitted). But this refers to
10 || Hammergren and Beer, who are not (current) Board members, so it is irrelevant to demand
11 || futility.
12 Finally, Henry argues that “any suit brought against the former directors would
13 || necessarily implicate the current directors.” Opp’n at 21 n.9. This ignores Delaware law
14 |} requiring that “a derivative complaint must plead facts specific to each director.”
3 15 || Desimone, 924 A.2d at 943.
a 16 Henry’s failure to plead demand futility is fatal, so her claims based on the alleged
2 17 || false statements are not viable. It is therefore not necessary to reach the parties’ other
18 arguments on this issue. If Henry believes the deficiencies identified in this order can be
19 || remedied by amendment, she may file an amended complaint within thirty days of the
20 || filing of this order.’
21 || IV. CONCLUSION
22 For the foregoing reasons, the motion to dismiss is granted.
23 IT ISSO ORDERED.
24 Dated: January 21, 2020 EL»
CHARLES R. BREYER
25 United States District Judge
26 a
27 2 This is true regardless of whether the relevant board is the one sitting when the original
complaint was filed, or when the FAC was filed. See MTD at 3 n.2.
28 anaes request for judicial notice of eleven documents is denied as moot. See RJN at 1-2

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10062801. Public record. Not legal advice.