Delaware Chancery Court Allows Derivative Suit Vs. Botox Directors

By | June 12, 2012

Directors of Allergan Inc. must face a lawsuit over $600 million in fines the company paid for misbranding its Botox treatment to smooth out wrinkles, a Delaware judge ruled, in a decision that could affect securities litigation in that state.

The opinion by Chancery Court Judge Travis Laster could make it easier for shareholders to bring lawsuits on behalf of companies in Delaware, a state traditionally seen as friendly for corporate defendants.

Allergan declined to comment.

The lawsuit stems from a $600 million settlement Allergan reached with the U.S. Department of Justice in 2010, which followed a three-year investigation by several government agencies of the marketing of Botox for unapproved uses.

Following the settlement, the Louisiana Municipal Police Employees’ Retirement System and U.F.C.W. Local 1776 pension funds brought derivative lawsuits in Delaware’s Court of Chancery and several similar lawsuits were filed in California federal court.

Derivative lawsuits allow shareholders essentially to step into the shoes of the company and sue directors for harm. Any recovery from individual directors or their insurers would go to the company, rather than to shareholders.

The California lawsuit was dismissed earlier this year and the directors argued that this meant the Delaware case should also be dismissed.

But Laster found that just because the California federal case was weak does not mean it should preclude the Delaware state case from going forward.

Laster dedicated much of his 84-page opinion to what he called the problem of “fast-filing” – the rush to the courthouse by lawyers with inadequate lawsuits to try to seize control of litigation before other lawyers file better lawsuits.

“Put simply, fast-filing generates dismissals,” wrote Laster, who joined the Delaware court, one of the nation’s busiest for shareholder litigation, in 2009.

Saying he would focus on the strength of lawsuits, he rejected an earlier Delaware Chancery Court decision that he said could preclude new lawsuits where the original plaintiff “lacked authority to sue on behalf of the corporation.”

Laster has been an outspoken critic of plaintiffs’ attorneys whom he believes have done a poor job litigating potentially strong cases and even replaced plaintiffs’ attorneys in a case involving Revlon Inc.

“It’s very significant,” said Larry Hamermesh, a professor at Widener University School of Law in Wilmington, Delaware, said of the opinion.

“The ruling in the case is, as I see it, an effort to discourage both plaintiffs and defendants from using ‘fast filing’ in a way that squelches more effective derivative litigation.”

The case is Louisiana Municipal Police Employees’ Retirement System et al v David Pyott et al, Delaware Court of Chancery, No. 5794

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