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In re Boston Scientific Corp. Shareholders Litigation

June 13, 2007

IN RE BOSTON SCIENTIFIC CORPORATION SHAREHOLDERS LITIGATION


The opinion of the court was delivered by: Alvin K. Hellerstein, U.S.D.J.

MEMORANDUM AND ORDER GRANTING DEFENDANTS' MOTION TO DISMISS DERIVATIVE SUIT

The issue on which I write is whether, in an action brought derivatively by stockholders, the decision of the directors of Boston Scientific Corporation, made upon the recommendation of an independent committee of the directors, to refrain from suing the managing officers and directors of the company is dispositive, and whether that recommendation of the independent committee of directors can be subjected to discovery proceedings. I conclude that the business judgment of the directors cannot be challenged by a derivative suit or subjected to discovery, and I order the Complaint dismissed.

Plaintiffs' Second Verified Consolidated Amended Complaint ("The Complaint") survived dismissal by being treated as a demand upon the directors of defendant Boston Scientific Corporation ("BSC") to sue defendants Peter M. Nicholas, co-founder, former Chief Executive Officer and current Chairman of BSC, and Lawrence C. Best, Senior Vice President and Chief Financial Officer of BSC. After full investigation by an independent committee appointed by the Board of Directors ("The Board"), and their forty-four page report recommending against a lawsuit, the Board, on February 20, 2007, unanimously resolved to reject Plaintiffs' demand. Defendants then moved for an order dismissing the Complaint. For the reasons set forth below, I hold, applying Delaware law, that the Board's refusal of Plaintiffs' demand is entitled to respect as a proper exercise of the Board's business judgment, and is not reviewable on the merits by a court. I hold also, for the reasons set forth below, that Plaintiffs are not entitled to discovery under Rules 26 and 34, Fed. R. Civ. P., in opposing Defendants' motion.

Background

This derivative lawsuit had its genesis in a hard-fought lawsuit between BSC and an Israeli company, Medinol, Ltd. Medinol had developed a coronary stent, and BSC had entered into a long-term arrangement with it. The lawsuit involved charges of corporate misdeeds by BSC and some of its principal officers, among them Nicholas and Best, to capture the stent for BSC. The case was settled for a significant amount of money during a bench trial before me.

Plaintiffs commenced this derivative action on January 10, 2002, alleging that Defendants Peter Nicholas ("Nicholas") and Lawrence Best ("Best"), among others, breached their fiduciary obligations to BSC by causing BSC to breach its coronary stent supply contract with Medinol. By random assignment, the case came to me, and neither side objected to me, because of my role in the Medinol case, as the presiding judge in this case.

Plaintiffs' complaint alleged that BSC's conduct vis-à-vis Medinol was likely to cause significant financial and reputational harm to BSC. Yet, the action between Medinol BSC had not yet been resolved, so the parties agreed to stay this action pending completion of the Medinol action. For an account of the Medinol lawsuit, see Medinol v. Boston Scientific Corp., 346 F.Supp.2d 575 (S.D.N.Y. 2004). The Medinol litigation was resolved by settlement, and dismissed with prejudice in October 2005.

Plaintiffs in this case filed the current amended complaint on May 1, 2006. By their Complaint, Plaintiffs again alleged that defendants Nicholas and Best breached their fiduciary obligations to BSC by causing BSC to breach its agreement with Medinol. Plaintiffs alleged that Nicholas and Best engaged in an elaborate scheme to deceive Medinol in order to free itself of its contractual obligations, in part by reverse-engineering Medinol's products through the creation of a secret shell corporation and facility in Ireland. Complaint ¶ ¶ 20, 50. As part of its scheme, which it titled, "Bringing a Better Deal," BSC also made false submissions to the U.S. Food and Drug Administration ("FDA"). Complaint ¶¶28-31. By their suit, and in addition to other relief, Plaintiffs seek, derivatively and on behalf of BSC, contribution from defendants Nicholas and Best for the $750 million that BSC paid to Medinol to settle its lawsuit, and the $74 million that BSC paid to the federal government to settle charges arising out of BSC's allegedly false submissions to the FDA.

On June 30, 2006, Defendants filed a motion to dismiss pursuant to Rules 12(b)(6) and 23.1 of the Federal Rules of Civil Procedure, arguing that (1) pre-suit demand cannot be excused as futile under applicable Delaware law; (2) Plaintiffs failed to plead demand futility with the particularity required by Rule 23.1; and (3) the Complaint anyway failed to state a cause of action on behalf of BSC, since a breach of a contract with a third party, without more, does not constitute a breach of fiduciary obligation(s) to the corporation. Rather than dismiss the Complaint, I treated the Complaint as a demand upon the directors of defendant Boston Scientific Corporation to investigate its right to sue defendants Nicholas and Best in the best interests of BSC, and I denied Defendants' motion without prejudice to be renewed after the Board reviewed Plaintiffs' demand. See also Gueli Decl. Ex. B at 3, 10-21.

On October 31, 2006, BSC established a litigation committee ("the Committee") of three non-management, independent, directors to review Plaintiffs' demand, and the claims asserted in the Complaint, and to recommend appropriate action to the entire Board of Directors. On the Committee were the following three independent directors from the Board of BSC: Joel Fleishman, Raymond Groves and former United States Senator Warren Rudman, who served as the Committee Chair. The Committee retained a law firm, Janis, Schuelke & Wechsler ("Janis Schuelke") to assist in the investigation and to report its findings to the Committee. Janis Schuelke had previously worked with BSC's Board of Directors in connection with a Department of Justice investigation and had also attended interviews of BSC witnesses, and their testimony in the Medinol trial proceedings.

On November 29, 2006, Janis Schuelke informed Plaintiffs' counsel that they would be "advising the Board and the Special Committee on whether the corporation should adopt and prosecute the lawsuit, resolve the grievances internally without resort to litigation or reject the demand." Gueli Decl. Ex. E. Janis Schuelke also requested that Plaintiffs provide them, at Plaintiffs' "earliest convenience," with any "additional information not contained in the complaint" that Plaintiffs believed relevant to the investigation. Gueli Decl. Ex. E.

In anticipation of a Board of Directors meeting scheduled for February 20, 2007, Janis Schuelke presented to the Committee a forty-four page report ("the Report") on February 5, 2007, and met with the Committee on February 9, 2007 to review the same. By letter of February 12, 2007 (more than ten weeks after Defendants' invitation and one week after the presentation of Janis Schuelke's Report), Plaintiffs responded to Janis Schuelke's request for additional information. Plaintiffs described numerous other legal and regulatory "problems" BSC has faced in the past decade, and expressed the opinion that "BSC has historically lacked the requisite internal mechanisms necessary to insure it will comply with regulatory and partnership duties and obligations," and that "something in BSC's corporate culture . . . engenders the kind of conduct . . . which Medinol experienced." Gueli Decl. Ex. F. Plaintiffs recommended alterations and augmentations to BSC's recently-formed "Compliance and Quality Committee," and requested that the Committee investigate: (1) what, if any, mechanisms were in place at BSC at the time of the Medinol contract to ensure that BSC was in compliance with its terms; (2) what investigations were undertaken, and by whom, respecting the establishment of BSC's secret, independent, reverse-engineered line of stents; (3) when the Board first learned of the possibility of litigation between Medinol and BSC; and (4) what discussions the Board undertook regarding the 1998 discovery of pinhole ruptures in BSC's coronary stent balloons and the related FDA investigations thereof.

On February 20, 2007, BSC's board of directors*fn1 met to discuss Plaintiffs' Complaint, the letter of February 12, 2007, and the Committee Report of February 5, 2007, and unanimously resolved, reflected by a Certificate dated February 26, 2007, to reject Plaintiffs' demand. The resolution recited the report's findings that, inter alia, "no evidence [was found to suggest] that Mr. Nicholas or Mr. Best acted other than in what they believed at the time was the best interests of the Corporation, or that they were motivated in any way by conflicting personal interests," and that "neither Nicholas nor Best violated any fiduciary duty to the Corporation, and any lawsuit based on the claims and allegations in the Complaint would not be warranted by the facts or by existing law." The resolution noted the Report's finding that "[y]ears of intensive investigation and discovery . . . have not produced sufficient evidence to establish that . . .

Nicholas or . . . Best violated their fiduciary duties of good faith, due care or loyalty to the Corporation, and there is no reason to believe that further discovery could produce any additional, significant, and relevant ...


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