Delaware Business Litigation Report

Chancery Dismisses Caremark Action Based on Insufficient Allegations of Bad Faith

Clem v. Skinner, et al., C.A. 2021-0240-LWW (Del. Ch. Feb. 19, 2024)
This Caremark decision involved the retail pharmacy company, Walgreens, and concerned billing practices for a particular insulin pen product that gave rise to unnecessary refill reminders and overbilling, which led to a government investigation and a whistleblower lawsuit. A stockholder plaintiff brought this related derivative action against Walgreens' directors and officers. The Court of Chancery easily disposed of the claims under Rule 23.1 for failure to allege demand futility. According to the Court, the plaintiff's allegations demonstrated that Walgreens' board fulfilled its oversight duty by enacting a board-level monitoring system and by responding to red flags. Indeed, soon after learning of the whistleblower action, the company considered and remedied the problem through software changes. And the plaintiff's contention that the board's actions “came too late and did too little” was “incompatible with bad faith—a necessary component of any Caremark claim.” Notably, the Court expressed some concern about the uptick of Caremark suits, cautioning that “more harm than good comes about if Caremark claims are reflexively filed” whenever an alleged defect is discovered or investigated.

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