The opinion of the court was delivered by: Jed S. Rakoff, U.S.D.J.
On September 2, 2009, the United States Department of Justice announced that Pfizer, Inc. had agreed to pay $2.3 billion in fines and penalties arising from the illegal "off-label" marketing by Pfizer and one of its subsidiaries of various regulated drugs. Immediately thereafter, several derivative actions were commenced, mostly by institutional investors, seeking recovery on behalf of the company from various senior executives and present and former board members who were alleged to be responsible for the misconduct that resulted in these vary large fines and penalties. The cases were consolidated, and on November 18, 2009, the plaintiffs jointly filed a 93-page, five-count Consolidated, Amended, and Verified Shareholder Derivative Complaint (the "Complaint"). On December 16, 2009, the defendants moved to dismiss the Complaint in its entirety. Following extensive briefing and oral argument, the Court, by Order dated March 17, 2010, (a) granted the motion to dismiss Count I (which alleged that the present and former directors caused Pfizer to disseminate materially inaccurate and misleading proxy statements in violation of the federal securities laws); (b) granted the motion to dismiss Count II (which alleged that all defendants violated their fiduciary duties under Delaware law by allowing Pfizer to disseminate these statements); (c) granted the motion to dismiss Count V (which alleged that the defendants were unjustly enriched at Pfizer's expense); (d) granted the motion to dismiss all claims asserted against defendant Allen P. Waxman (on the unopposed representation that he had never been served); and (e) denied the motion in all other respects, thus leaving in place Count III (which alleged that the director defendants, in violation of their fiduciary duties under Delaware law, intentionally approved or deliberately disregarded Pfizer's alleged promotion of off-label drugs and its payment of alleged illegal kickbacks to health care professionals) and Count IV (which alleged similar breaches of duty by the executive defendants). This Opinion and Order explains the reasons for these rulings and specifies that the dismissals are with prejudice except as to Mr. Waxman.
The Complaint alleges, in pertinent part, the following: Pfizer's core business rests on the marketing of its drugs, not just to consumers, but also, importantly, to physicians and other health care professionals. Compl. ¶¶ 54-56. The Federal Food, Drug, and Cosmetics Act, 21 U.S.C. § 301 et seq., prohibits pharmaceutical companies from marketing or promoting their drugs for "off label" uses or dosages -- i.e., uses or dosages that have not specifically been approved by the Food and Drug Administration. Compl. ¶¶ 59-60. Various federal laws also prohibit paying "kickbacks" (i.e., concealed commercial bribes) to health care professionals to get them to prescribe or promote a company's drugs. Id. ¶ 61.
Pfizer was acutely aware of the need to prevent such illegal practices on the part of itself and its subsidiaries because of prior settlements with the Government attributing just such misconduct to various Pfizer subsidiaries shortly prior to their acquisition by Pfizer. For example, in 2002, Pfizer subsidiary Warner-Lambert settled charges brought by the Government under the False Claims Act alleging that Warner-Lambert, prior to its acquisition by Pfizer, had given concealed kickbacks to a managed care organization in exchange for that organization's agreement to give preferred status to Lipitor, an anti-cholesterol drug. Id. ¶ 89. Pursuant to this settlement, Pfizer paid $49 million in fines and entered into a five-year corporate integrity agreement (the "2002 CIA") to guarantee that Pfizer and Warner-Lambert would not pay illegal kickbacks in the future. Id. ¶ 90. The 2002 CIA required, among other things, that Pfizer's board would create and implement a compliance mechanism that would bring information about illegal marketing activities to the board's attention. Id. ¶¶ 90, 110-113.
Similarly, in 2004, Pfizer entered into a settlement with the Government regarding Warner-Lambert's illegal off-label marketing (prior to Warner-Lambert's acquisition by Pfizer*fn1 of Neurontin, an anticonvulsant medication with dangerous side effects. Id. ¶¶ 92-93, 100. In connection with this settlement, Warner-Lambert pleaded guilty to criminal and civil charges that it fraudulently promoted Neurontin for unapproved uses. The Government's sentencing memorandum noted that the marketing scheme, implemented "with knowledge and approval of senior management," included a variety of tactics to promote off-label use, ranging from direct solicitations by Warner-Lambert's sales representatives to sponsoring promotional meetings and "independent" medical education events to encourage off-label prescriptions. Id. ¶ 99. To settle these charges, Pfizer paid a $240 million criminal fine and an additional $190 million penalty. Id. ¶ 100. Additionally, Pfizer entered into another, more extensive CIA (the "2004 CIA") that required even more stringent steps to bring any such misconduct to the Board's attention. Id. ¶¶ 101, 114-20.
Finally, in 2007, Pfizer paid another $34.6 million in criminal fines relating to the illegal off-label marketing by Pharmacia & Upjohn Company, Inc. ("Pharmacia"), another of Pfizer's wholly-owned subsidiaries, of Genotropin, a human growth hormone with dangerous side effects that were promoted by Pharmacia (prior to its acquisition by Pfizer*fn2 ) for its alleged use as an anti-aging agent. To settle these charges, Pharmacia pleaded guilty to illegally promoting and selling Genotropin and to intentionally violating the federal anti-kickback statute. Id. ¶¶ 102-08.
In the face of all these prior violations by its subsequently-acquired subsidiaries, and despite its promises to take significant steps to monitor and prevent any further violations, Pfizer itself engaged in the same misconduct. Using sophisticated "prescription data mining" and "influence mapping" analyses, Pfizer targeted specific physicians for visits by Pfizer sales representatives to promote off-label uses of Pfizer drugs. Id. ¶ 77. Sales representatives were given financial incentives and assigned quotas to encourage such off-label promotion, and these representatives were urged to make false claims regarding the safety and efficacy of off-label uses of Pfizer drugs. Id. ¶¶ 77, 81. Pfizer also developed a "Scientific Ambassador Program" that used medical liaisons to promote off-label uses. Id. ¶ 79. Further, Pfizer commissioned articles published in medical journals that promoted certain off-label uses for "blockbuster" drugs based on skewed and inaccurate data, and then instructed its sales representatives and medical liaisons to use these studies to market the drugs to physicians. Id. ¶¶ 82-83. Doctors who were identified as marketing targets would be invited to "consultant meetings" in luxury hotels, where they were encouraged to make off-label prescriptions. Id. ¶ 84. Pfizer also designated certain doctors as "opinion leaders" and paid them to promote off-label prescriptions at purportedly independent continuing medical education meetings. Id. ¶ Pfizer kept careful track of how well their illegal activities were succeeding. For example, according to the Government, Pfizer's own records showed that such activities generated an estimated $664 million in off-label prescriptions for the Pfizer drug Bextra (discussed below). Id. ¶ 86. And, as alleged (among other places) in recently unsealed qui tam complaints filed by Pfizer employees, Pfizer's board and senior management, rather than attempting to stop this off-label promotional activity, retaliated against employees who reported internally that Pfizer's marketing practices were illegal. Id. ¶ 87.
It was thus activity by Pfizer itself, as well as by its subsidiary Pharmacia, that gave rise to the 2009 settlement. Id. ¶¶ 79-87, 121-53. Among other things, Pfizer and Pharmacia engaged in the illegal marketing of Bextra, a painkiller known as a "COX-2 inhibitor." Id. ¶ 121. Beginning in October 2001, Pfizer entered into an alliance with Pharmacia to market Bextra jointly with Celebrex, a similar drug. Pharmacia applied for FDA approval of Bextra with respect to certain specific uses, but the FDA denied that application in several respects because of concerns about serious adverse health consequences. Id. ¶¶ 123-24. Nonetheless, Pfizer and Pharmacia immediately created plans to market Bextra for unapproved uses by, among other things, promoting the drug with false and misleading safety indications, distributing samples to doctors who had no FDA-approved use for the drug, creating sham doctor requests for information about unapproved uses, and funding purportedly independent continuing educational programs to promote the drug for off-label purposes. Id. ¶ 128. This marketing continued after Pfizer's acquisition of Pharmacia was completed in 2003 and after the 2002 and 2004 CIAs went into effect. Id. ¶¶ 130-31.
The 2009 settlement, however, covered not only the marketing of Bextra, but also a variety of other illegal marking activities undertaken by Pfizer between January 1, 2001 and October 31, 2008 with respect to thirteen different drugs, including seven of Pfizer's nine so-called "blockbuster" drugs, which generated over $1 billion of revenue per year. Id. ¶¶ 140-42. In the settlement agreement, Pfizer not only admitted that the illegal promotion of Bextra continued beyond 2003, when Pfizer's acquisition of Pharmacia was completed, id. ¶ 142, but also that the illegal marketing of Zyvox, an antibacterial agent, continued past the time when the 2004 CIA went into effect and even after the FDA issued a warning letter with respect to Pfizer's misbranding of that drug in 2005, id. ¶ 144.
The $2.3 billion amount of the 2009 settlement consisted of a criminal fine of $1.195 billion (the largest criminal fine ever imposed in the United States); criminal forfeitures of $105 million; and a $1 billion civil settlement -- "the largest civil fraud settlement in history against a pharmaceutical company" -- with respect to violations of the False Claims Act and the federal anti-kickback statute. Id. ¶¶ 138-40. Additionally, the settlement required Pfizer to enter into yet another CIA (the "2009 CIA") with still further compliance requirements. Id. ¶¶ 146-49.
In short, the Complaint, seemingly corroborated in material respects by the Government's own charges that led to the 2009 settlement, alleges a rather blatant pattern of misconduct by Pfizer, undertaken with the knowledge, approval, or, at the very least, conscious disregard, of Pfizer's board and senior management.
Based on these allegations, as noted, plaintiffs assert five derivative causes of action against the various defendants, specifically, claims alleging that the defendants published false and misleading proxy statements and financial statements in violation of federal and state law (Counts I and II); claims alleging that the defendants breached their fiduciary duties to Pfizer by causing or consciously disregarding the illegal marketing activity (Counts III and IV); and a claim for unjust enrichment (Count V). Defendants, in turn, have moved to dismiss the Complaint, both on grounds relating to all claims and on grounds relating to specific claims.
The Court turns first to the argument made by all defendants -- including nominal defendant Pfizer -- that the Complaint must be dismissed, in its entirety, pursuant to Rule 23.1 of the Federal Rules of Civil Procedure, because plaintiffs have failed to plead with particularity facts that would warrant excusing plaintiffs' failure to issue a demand upon Pfizer's board of directors. Plaintiffs concede that they issued no such demand on the board, but assert that such a demand is excused, both because the directors' misconduct here alleged could not have been a valid exercise of business judgment and also because a majority of the current board is charged with the alleged misconduct and therefore would be conflicted from assessing the demand. Id. ¶¶ 170-95.
It is, of course, axiomatic under both state and federal law that a shareholder bringing a derivative action on behalf of the company in which he owns stock is required to either first demand that the corporation's board of directors pursue the action or else show why such demand would be futile. The purpose of this demand requirement in a derivative suit is to implement "the basic principle of corporate governance that the decisions of a corporation --including the decision to initiate litigation -- should be made by the board of directors or the majority of shareholders." Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 101 (1991) (internal quotation marks omitted). Federal Rule of Civil Procedure 23.1 requires, as a procedural matter, that plaintiffs plead with particularity the reasons why ...