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Laster issues cross-country bench slap

by David Marcus | Published June 20, 2012 at 6:00 AM

J. Travis Laster asserted Delaware's pre-eminence in corporate law once again in a June 11 decision where he declined to dismiss a derivative suit brought by shareholders of Allergan Inc., the maker of Botox. The Delaware vice chancellor refused to be bound by a California federal court's dismissal of a similar suit, a ruling that he treated almost contemptuously, and took issue with two Court of Chancery opinions under which Laster would have been bound to defer to the California decision. Laster also expounded at length upon how -- and where -- plaintiffs should conduct derivative suits.

The case is the latest in a string of decisions where Laster and Delaware Chancellor Leo E. Strine Jr. have forcefully argued for the primacy of Delaware courts in handling matters that involve the state's corporate law even when those matters may be brought in other venues.

The case stems from Allergan's aggressive marketing of Botox for uses not approved by the Food and Drug Administration. In the U.S., physicians may prescribe an FDA-approved drug for any use, but companies may market their products only for approved or "on-label" uses and not for "off-label" applications, where a medication is promoted for other than its intended indication, that regulators have not blessed. Two years ago, Allergan pled guilty to "criminal misdemeanor misbranding" and paid $600 million in civil and criminal fines to settle a case in which the Department of Justice claimed that the company had actively promoted off-label uses of Botox.

After the settlement, different Allergan shareholders brought derivative suits in Chancery and California federal court in which the plaintiffs claimed that Allergan's directors violated their fiduciary duties to the company by encouraging off-label sales that they knew were illegal. On Jan. 17, 2012, U.S. District Court Judge David Carter dismissed the case before him with prejudice. Early in his 82-page opinion, Laster telegraphs his suspicion of Carter with a single sentence: "For reasons that are not clear to me, briefing on the motions to dismiss moved forward more quickly in California than in Delaware."

Laster is also skeptical of the California plaintiffs. Allergan argued to Laster that the Delaware plaintiffs should be stopped from pursuing their case by the California decision. Laster rejected that argument on formal grounds. A shareholder who brings a derivative suit does not do so on the company's behalf until a judge excuses the plaintiff from asking the company's board to bring the suit. Until then, Laster held, the shareholder is suing only on his own behalf, and therefore a dismissal of his case does not preclude other shareholders from bringing their own suits. Laster noted that his view of the matter ran counter to the one that Vice Chancellor Donald Parsons Jr. expressed in opinions dismissing a 2007 derivative action brought by shareholders of Career Education Corp. and a 2009 suit brought by shareholders of Jos. A. Bank Clothiers Inc.

Edward Rock, a professor at the University of Pennsylvania Law School, called the decision "a very clever interpretation of doctrine to keep derivative litigation in Delaware where it belongs."

Marcel Kahan, a professor at New York University School of Law, offered an alternative view: "Had the situation been the reverse -- Delaware judges rejecting a suit and the California judges saying we are not bound by the dismissal -- I am not sure whether Laster would have been happy."

"As a purely doctrinal matter, even though the case departs from decisions by other courts, I think that Laster is right," said Kahan. "In a class action where a class is never certified, the outcome is not binding on other 'class' members, since there is no class. So in a derivative action that was never properly initiated as a derivative action, the outcome is not binding."

But Kahan added that there were policy arguments pointing in the other direction, since Laster's ruling encourages the litigation of the same issues in different courts.

Laster acknowledged that in situations where shareholders of the same company bring different derivative suits, a dismissal of one suit "does, of course, carry persuasive weight and can operate as stare decisis." As a result, he wrote later in his opinion, "I suspect that in many cases the second court will follow the earlier ruling." But that won't happen if the second court is suspicious of the either the plaintiff or the judge in the first case.

In a 2010 case, Laster wrote, Chancellor Leo E. Strine Jr. "suggested Delaware law presume that a fast-filing stockholder with a nominal stake, who sues derivatively after the public announcement of a corporate trauma in an effort to shift the still-developing losses to the corporation's fiduciaries, but without first conducting a meaningful investigation, has not provided adequate representation." Laster found that the plaintiffs who brought the California action fit this description even though they had access to the Allergan documents that the Delaware plaintiffs obtained in a request they made for company books and records under Section 220 of the Delaware General Corporation Law.

That in turn suggests that Laster's real problem was with the ruling by Carter, a 68-year-old California federal judge who's been on the bench since 1998. At the end of Laster's opinion, he writes that Carter imposed too high a standard for the derivative suit to survive a motion to dismiss. "The California judgment is not persuasive because it adopts one possible defendant friendly inference from the pled facts," instead of giving the plaintiffs "the benefit of reasonable inferences that can be drawn from adequately pled facts."

Laster spent a good chunk of his opinion describing "the idealized derivative action." The perfect plaintiff proceeds carefully and files a 220 action; in contrast, Laster wrote, "fast-filing generates dismissals." In other words, jurisdictions that reward fast-filing plaintiffs' lawyers by giving them lead-plaintiff status -- jurisdictions such as federal courts in California -- encourage sloppy, wasteful litigation, and Delaware courts should grant that due weight.

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