*October 16, 2019: Update On Caremark Claims Following the Delaware Supreme Court’s Decision in Marchand v. Barnhill

In In re Clovis Oncology, Inc., C.A. No. 2017-0222-JRS, 2019 Del. Ch. LEXIS 1293 (Del. Ch. Oct. 1, 2019), the Delaware Court of Chancery applied Marchand on a motion to dismiss and determined that the complaint adequately pled a Caremark claim against a biopharmaceutical company’s board of directors. The board allegedly ignored red flags indicating the company was not adhering to FDA-required protocols in its clinical trials for the only promising drug of three drugs it then had under development, causing the FDA to withhold approval. The resulting corporate “trauma” included a 70% market capitalization loss. Like the ice cream manufacturer in Marchand, the Chancery Court characterized the company as a “monoline company operat[ing] in a highly regulated industry,” where compliance with FDA-required protocols constitute an “intrinsically critical” business operation involving a “mission critical product.” Although it acknowledged that Caremark claims remain “among the hardest to plead and prove,” it noted that Caremark liability is more likely to attach when the alleged oversight failure concerns “compliance with positive law” as opposed to the “manag[ing] of business risk.” It portrayed Marchand as further “underscor[ing] the importance of the board’s oversight function when [a] company is operating in the midst of ‘mission critical’ regulatory compliance risk.” According to the Chancery Court, Marchand “makes clear” that, in such instances, “the board’s oversight function must be more rigorously exercised.”

Clovis provides a first glimpse at the Delaware Chancery Court’s reaction to the Delaware Supreme Court’s Marchand decision. Clovis confirms that, in complying with public health and safety regulations (including those governing clinical trials), a heightened level of oversight is expected, particularly when the oversight failure may result in trauma that is significant relative to the company’s overall operations.
Continue Reading Delaware Supreme Court Allows Caremark Claim to Proceed Against Directors of Ice Cream Manufacturer Following Listeria Outbreak