Get Your Story Straight: Inconsistency in Plaintiff’s Allegations & Theories Dooms Complaint
This past summer, in a decision that attracted little attention, Vice Chancellor David in the Delaware Court of Chancery tossed Joel B. Ritchie v. G. Leonard Baker et al., a shareholder derivative suit filed on behalf of Corcept Therapeutics, Inc. against certain directors for alleged breaches of fiduciary duty related to off-label marketing practices. The Court dismissed the complaint under Court of Chancery Rule 23.1 because Plaintiff, who had not made a pre-litigation demand, failed to plead that the Board was unable to bring its business judgment to bear on assessing such a demand and, as such, the demand was not futile.
The Ritchie opinion is predominately a classic Caremark analysis (which this post discussed earlier this year), Indeed, the Ritchie Court cited to the case discussed in that post, In re Transunion Deriv. S’holder Litig., 324 A.3d 869, (Del. Ch. 2024), and the discussion there is equally applicable here: when it comes to oversight, Delaware law does not require perfection but, instead, a legitimate good faith effort.
However, there are two interesting features of Ritchie that are worth discussing. The first is what it reveals about the strategy of choosing causes of action, drafting allegations to support them and, on the other side, combating those claims in a dispositive motion. The common thread through the Court’s analysis in Ritchie is that the allegations underpinning one claim contradicted those supporting other claims, which, in turn, created a roadblock on yet other claims. The tenor of these inconsistencies seeps through the opinion and, even if one of the individual theories may have had merit, the others swiftly undercut it.
The second element worth consideration—the effects that parallel litigations and resolutions can have on another case—is not groundbreaking but does take an interesting shape here. At the outset, the Court remarked that Plaintiff’s allegations were ill-suited to its main Caremark theory, because the Company had not faced the requisite harm, in part because, although the company had settled a related case, insurers paid the entire settlement amount. The effect of that fact on Ritchie is just another consideration for those who find themselves facing so-called “piggy back” derivative claims built upon exposure in another case.
Relatedly, those in the pharmaceutical industry should consider checking out Sidley’s yearly Securities Class Actions in the Life Sciences Annual Survey for more insight on these sorts of cases and more.
Background
Corcept is a pharmaceutical company that earns most of its revenue from a drug called Korlym that, in 2012, the FDA approved to treat endogenous Cushing’s syndrome. Broadly speaking, a physician may prescribe a drug for a non FDA-approved use (an “off-label use”), but a drug manufacturer cannot market the drug for an off-label use. As part of its role to monitor compliance, Corcept’s Audit Committee received detailed reports on Korlym. Between 2012 and 2016, Corcept’s revenues grew from $3.3 million to over $81 million. In 2017, Corcept made public statements regarding its revenue, practices, and policies regarding off-label prescribing and marketing.
In early 2019, the Southern Investigative Reporting Foundation,[1] a financial investigative reporting nonprofit, and Blue Orca Capital, an activist investment firm, published investigative reports asserting that Corcept had illegally increased profits by marketing Korlym for off-label uses. These reports spurred a flurry of litigation, including a securities class action suit in the Northern District of California (the “Securities Class Action”), which ultimately settled for $14 million. Corcept’s insurers paid the entirety of the sum.
Plaintiff filed this derivative action in the Delaware Court of Chancery on January 31, 2021, asserting one claim for a breach of fiduciary duty that it supported with three theories:
- Caremark Theory: Director Defendants failed to adequately oversee operations at the Company that resulted in a corporate trauma;
- Massey Theory: Director Defendants breached their fiduciary duties by causing the Company to violate positive law; and
- Malone Theory: the Director Defendants breached their fiduciary duties by deliberately issuing false or misleading disclosures.
Plaintiff had made no pre-suit demand.
The parties agreed to stay the case until fact discovery closed in the Securities Class Action. After the case settled in February 2023, the Court lifted the stay on March 22, 2024. On May 3, 2024, Defendants moved to dismiss the complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim and Rule 23.1 for failure to plead demand futility. After the case was reassigned in January 2025, the Court held oral argument on May 13, 2025.
The Decision
In order to determine whether Plaintiff adequately plead demand futility, a requisite showing in Delaware for any stockholder bringing a derivative claim on behalf of the company without first making a pre-litigation demand on the company, the Court had to determine whether there were “particularized facts supporting an inference that [a majority of] directors were incapable of impartially considering a demand.” Plaintiff here argued that a demand would have been futile because Director Defendants faced a substantial likelihood of liability in connection with his claims, putting the viability of Plaintiff’s claims center stage.
Vice Chancellor David did not mince words in granting the motion to dismiss, holding that Plaintiff’s theories were “largely inconsistent,” and that “[n]one of [P]laintiff’s theories support[] a viable claim for breach of fiduciary duty.” With that, Plaintiff’s demand futility argument (based upon a “substantial likelihood of liability” for the directors) failed and, with it, his suit.
In making this determination, the Court analyzed all three of Plaintiff’s theories under Caremark, Massey, and Malone.
The Caremark Theory
The Court devoted most of its analysis to Plaintiff’s argument under Caremark that the directors failed to adequately oversee Corcept’s operations, resulting in “corporate trauma.”
At the outset, Vice Chancellor David remarked that the facts alleged were ill-suited to a Caremark claim because Corcept had not suffered “enormous legal liability” or any corporate trauma. The Complaint itself alleged that the off-label marketing practices dramatically increased Corcept’s revenue, Corcept had not faced civil or criminal fines, and insurers had paid for the entirety of the settlement in the Security Class Action.
With this consideration, and the observation that it is “possibly the most difficult theory in corporation law,” Vice Chancellor David proceeded to assess the viability of the Caremark theory, under which a plaintiff must show that the directors acted in “bad faith” regarding their oversight duties under one of two prongs:
- Prong 1/Information Systems: The directors utterly failed to implement any reporting or information system or controls; or
- Prong 2/Red Flags: Having implemented such a system or controls, the directors continuously failed to monitor or oversee its operations, keeping themselves uninformed. Under this theory, plaintiffs must show that (1) the directors knew or should have known that the corporation was violating the law, (2) the directors acted in bad faith by failing to prevent or remedy those violations, and (3) such failure resulted in damage to the corporation.
It is here that the Court began to dig into the inconsistent and contradictory nature of Plaintiff’s claims. When asserting theories under both Caremark prongs, Vice Chancellor David wrote that plaintiffs “typically lose[] on the first, as ‘the plaintiff must concede the existence of a board-level monitoring system to plead under prong two that the board ignored red flags generated by that system.’” Here, Plaintiff tried to distinguish its claims and justify both theories by arguing that the Board’s oversight duties under Prong 1 were heightened because the marketing of Korlym was “essential and mission critical.” However, the Court found, the Complaint “d[id] not allege that the Board undertook ‘no efforts’ to inform itself of that ‘intrinsically critical’ issue. Again, it allege[d] the opposite—that ‘the [Director] Defendants were well-informed during the Relevant Period of all significant Korlym-related matters which took place at the Company.’”
Plaintiff fared no better under Prong 2, as the Court did not find that any of the alleged “red flags” proffered—including the marketing of Korlym to nonspecialist physicians, that a small number of prescribers wrote a disproportionally high number of Korlym prescriptions, and the hiring of a new specialty pharmacy alleged to have assisted in the conduct—supported a reasonable inference that the directors knew about or consciously disregarded evidence of illegal marketing practices.
The Massey Theory
As discussed in our earlier post on In re Transunion Deriv. S’holder Litig. referenced above, a Massey claim, which alleges that a defendant breached fiduciary duties by causing the Company to violate positive law in pursuit of greater profits, falls on the extreme end of the “Caremark continuum.” As such, a claim that cannot reach the burden of Caremark is unlikely to reach the even higher threshold of Massey. In line with this, Vice Chancellor David dealt with this theory swiftly, finding that Plaintiff’s inability to allege red flags that should have alerted the director defendants to an illegal scheme under Caremark Prong 2, preempts any attempt to show that the Director Defendants knew about and purposely caused the violations alleged.
The Maloney Theory
Finally, the Court disposed of the Maloney theory with the same line of analysis that foreclosed the Caremark Prong 2 and Massey theories. Under Maloney, Plaintiff argued that the director defendants breached their fiduciary duties by deliberately issuing false or misleading disclosures. As with the aforementioned claims, the Court found that Plaintiff had failed to allege sufficiently that the director defendants knew about the alleged marketing scheme, so the Complaint failed to plead the requisite scienter for a Maloney claim. As the Court found: “Plaintiff faces an uphill battle to plead that the Director Defendants knew Corcept’s disclosures were false, given his other allegations that the Board failed to adequately monitor the affairs of the Company.”
Conclusion
Ritchie is a good lesson in assessing where it does and does not make sense to draft a complaint or oppose a dispositive pleading with a “kitchen sink” mentality. Here, Plaintiff could not escape the theme of his contradictory assertions, and he may have had more credibility before the Court if there had been consistency among the claims, instead of arguing everything and seeing what would stick.
The other interesting facet is the effect of the insurance company covering the entirety of the Securities Class Action settlement. This is not to say that the Plaintiff’s claim would have been saved if the Company had borne more of the cost, but it was something the Court raised repeatedly throughout its analysis and provides another factor to weigh for defendants considering resolution of some, but not all, related litigation matters.
[1] Now called The Foundation for Financial Journalism.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
