Case: 2:19-cv-02491-SDM-EPD Doc #: 43 Filed: 06/19/20 Page: 1 of 27 PAGEID #: 1821
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE SOUTHERN DISTRICT OF OHIO
`EASTERN DIVISION
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`
`
`IN RE CARDINAL HEALTH, INC.
`DERIVATIVE LITIGATION
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`Case No. 2:19-cv-2491
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`Judge Sarah D. Morrison
`Chief Magistrate Judge Elizabeth A. Preston
`Deavers
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`ORAL ARGUMENT REQUESTED
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`MOTION TO DISMISS THE
`CONSOLIDATED VERIFIED
`SHAREHOLDER DERIVATIVE
`COMPLAINT AND MEMORANDUM OF
`LAW IN SUPPORT
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`
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`Pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1, defendants David J.
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`Anderson, Colleen F. Arnold, George S. Barrett, Carrie S. Cox, Calvin Darden, Bruce L.
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`Downey, Patricia A. Hemingway Hall, Akhil Johri, Clayton M. Jones, Michael C. Kaufmann,
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`Gregory B. Kenny, Nancy Killefer, David P. King, J. Michael Losh, and nominal defendant
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`Cardinal Health, Inc., move to dismiss the complaint for failure to state a claim upon which relief
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`can be granted. The grounds for this motion are set forth in the attached memorandum.
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`Pursuant to S.D. Ohio Local Civil Rule 7.1(b)(2), defendants hereby request oral
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`argument on the issues raised in this motion. Defendants respectfully submit that oral argument
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`may aid the Court in its decision-making process.
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`Case: 2:19-cv-02491-SDM-EPD Doc #: 43 Filed: 06/19/20 Page: 2 of 27 PAGEID #: 1822
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`/s/ Robert W. Trafford by
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`David S. Bloomfield, Jr.
`Robert W. Trafford (0024447)
`Trial Attorney
`David S. Bloomfield, Jr. (0068158)
`Kirsten R. Fraser (0093951)
`PORTER, WRIGHT, MORRIS & ARTHUR LLP
`41 South High Street, Suite 2800
`Columbus, Ohio 43215
`Phone: (614) 227-2000
`Fax: (614) 227-2100
`Email: rtrafford@porterwright.com
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` dbloomfield@porterwright.com
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` kfraser@porterwright.com
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`Attorneys for Defendants David J. Anderson,
`Colleen F. Arnold, George S. Barrett, Carrie S.
`Cox, Calvin Darden, Bruce L. Downey, Patricia A.
`Hemingway Hall, Akhil Johri, Clayton M. Jones,
`Michael C. Kaufmann, Gregory B. Kenny, Nancy
`Killefer, David P. King, J. Michael Losh, and
`Cardinal Health, Inc.
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`
`
`
`June 19, 2020
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`
`
`Of Counsel:
`WACHTELL LIPTON ROSEN & KATZ
`51 West 52nd Street
`New York, New York 10019
`Phone: (212) 403-1000
`Fax: (212) 403-2000
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`Case: 2:19-cv-02491-SDM-EPD Doc #: 43 Filed: 06/19/20 Page: 3 of 27 PAGEID #: 1823
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`TABLE OF CONTENTS
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`PRELIMINARY STATEMENT .................................................................................................... 1
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`BACKGROUND ............................................................................................................................ 2
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`A. Cardinal Health and its board of directors .................................................................... 3
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`B. Cardinal Health settles two DEA enforcement actions................................................. 3
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`C. Two courts dismiss derivative suits seeking to hold the Cardinal Health board
`liable for the company’s settlements with the DEA ..................................................... 5
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`D. A Cardinal Health subsidiary settles a suit by the United States .................................. 5
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`E. Cardinal Health settles suits by the state of West Virginia and two Ohio counties...... 6
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`F. Plaintiffs in this action file suit, seeking to hold the Cardinal Health board liable
`for the company’s settlements ...................................................................................... 6
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`ARGUMENT .................................................................................................................................. 7
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`I.
`
`THE COMPLAINT FAILS TO STATE A DERIVATIVE BREACH OF
`FIDUCIARY DUTY CLAIM FOR FAILURE TO ENSURE THE COMPANY’S
`COMPLIANCE WITH CONTROLLED SUBSTANCE REGULATIONS ...................... 8
`
`A. Plaintiffs are precluded from establishing demand futility based on alleged
`director liability for the company’s settlements with the DEA .................................... 9
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`B. The complaint lacks particularized allegations establishing demand futility based
`on a substantial likelihood of director liability ........................................................... 11
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`1. The claim is time-barred to the extent it seeks to impose liability on the
`defendant directors for the company’s settlements with the DEA ....................... 11
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`2. The entire claim is unsupported by particularized allegations establishing
`demand futility based on a substantial likelihood of director liability.................. 12
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`II.
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`THE COMPLAINT FAILS TO STATE A DERIVATIVE BREACH OF
`FIDUCIARY DUTY CLAIM FOR APPROVAL OF EXCESSIVE EXECUTIVE
`COMPENSATION ........................................................................................................... 18
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`CONCLUSION ............................................................................................................................. 20
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`i
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`
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`Cases
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`TABLE OF AUTHORITIES
`
`Brosz v. Fishman,
`99 F. Supp. 3d 776 (S.D. Ohio 2015) ............................................................................... 16, 17
`
`Cal. State Teachers’ Ret. Sys. v. Alvarez,
`179 A.3d 824 (Del. 2018) ....................................................................................................... 10
`
`Davis v. DCB Fin. Corp.,
`259 F. Supp. 2d 664 (S.D. Ohio 2003) ......................................................................... 8, 13, 18
`
`Drage v. Procter & Gamble,
`119 Ohio App. 3d 19, 694 N.E.2d 479 (1997) ...................................................................... 7, 8
`
`Forsythe v. ESC Fund Mgmt. Co. (U.S.), Inc.,
`C.A. No. 1091-VCL, 2007 WL 2982247 (Del. Ch. Oct. 9, 2007) .......................................... 13
`
`Georgia-Pac. Consumer Prods. LP v. Four-U-Packaging, Inc.,
`701 F.3d 1093 (6th Cir. 2012) ................................................................................................ 10
`
`Himmel v. Barrett,
`No. 12-CV-060663, 2013 WL 4719080
`(Ohio Ct. Com. Pl. July 9, 2013) ........................................................................................ 5, 10
`
`In re Caremark Int’l, Inc. Derivative Litig.,
`698 A.2d 959 (Del. Ch. 1996)................................................................................................. 12
`
`In re Ferro Corp. Derivative Litig.,
`511 F.3d 611 (6th Cir. 2008) .................................................................................................... 7
`
`In re Goodyear Tire & Rubber Co. Derivative Litig.,
`Nos. 5:03CV2180, 5:03CV2204, 5:03CV2374, 5:03CV2468,
`5:03CV2469, 2007 WL 43557 (N.D. Ohio Jan. 5, 2007) ................................................. 18, 20
`
`In re Keithley Instruments, Inc. Derivative Litig.,
`599 F. Supp. 2d 875 (N.D. Ohio 2008) ............................................................................ passim
`
`In re Omnicare Secs. Litig.,
`769 F.3d 455 (6th Cir. 2014) .................................................................................................... 2
`
`
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`ii
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`
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`ITT Corp. Derivative Litig.,
`653 F. Supp. 2d 453 (S.D.N.Y. 2009)..................................................................................... 18
`
`Kamen v. Kemper Fin. Servs., Inc.,
`500 U.S. 90 (1991) .................................................................................................................... 8
`
`Monday v. Meyer,
`No. 1:10 CV 1838, 2011 WL 5974664 (N.D. Ohio Nov. 29, 2011) .......................... 18, 19, 20
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`Nathan v. Rowan,
`651 F.2d 1223 (6th Cir. 1981) ................................................................................................ 10
`
`Robinson Family Tr. v. Greig,
`No. 5:13 CV 1713, 2013 WL 1943330 (N.D. Ohio May 10, 2013) ....................................... 20
`
`Stanley v. Arnold,
`No. 12-cv-482, 2012 WL 5269147 (S.D. Ohio Oct. 23, 2012),
`aff’d, 531 F. App’x 695 (6th Cir. 2013) ........................................................................... passim
`
`Union Sav. Bank v. Lawyers Title Ins. Corp.,
`191 Ohio App. 3d 540, 946 N.E.2d 835 (2010) ...................................................................... 11
`
`Statutes
`
`21 U.S.C. § 801 ............................................................................................................................... 3
`
`Ohio Rev. Code § 1701.59 ..................................................................................................... passim
`
`Rules
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`Fed. R. Civ. P. 23.1 ................................................................................................................ passim
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`Fed. R. Civ. P. 12 ................................................................................................................... passim
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`iii
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`PRELIMINARY STATEMENT
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`This is a derivative action by three stockholders of Cardinal Health, Inc., one of the
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`largest wholesale distributors of pharmaceutical products in the country, against fourteen of the
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`company’s former and current directors. The stockholder plaintiffs seek to hold the director
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`defendants personally liable for (1) costs the company incurred to settle lawsuits alleging that it
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`failed to comply with regulations governing the distribution of controlled substances, and
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`(2) compensation payments to company executives. The theory of the complaint is that the
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`director defendants breached their fiduciary duties by failing to take action to ensure that the
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`company complied with controlled substances regulations and by approving payments to
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`executives who also failed to ensure the company’s legal compliance.
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`The directors of a corporation are vested with the authority to decide whether the
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`corporation should bring a lawsuit, including a lawsuit against its own directors. Plaintiffs here
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`acknowledge that they did not make a pre-suit demand upon the Cardinal Health board to
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`authorize the company to bring the claims asserted in this action. Federal Rule of Civil
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`Procedure 23.1 therefore requires that the complaint plead “with particularity” why a pre-suit
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`demand would have been futile.
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`The complaint fails to meet that heightened pleading standard. To show that a pre-suit
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`demand would have been futile, the complaint must plead specific facts showing that a majority
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`of the board that would have considered the demand faces “a substantial likelihood of liability,”
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`and so could not impartially assess the demand in light of the best interests of the company.
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`Under Ohio law, a director may be held liable in damages only if that director acted or failed to
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`act “with deliberate intent to cause injury to the corporation” or “with reckless disregard for the
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`best interests of the corporation.” Ohio Rev. Code § 1701.59(E).
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`The complaint does not show that even one of the director defendants faces “a substantial
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`likelihood of liability” under that standard. The complaint lacks particularized factual
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`allegations showing that the director defendants were even notified of unaddressed compliance
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`problems. And the complaint nowhere alleges that they ignored reports of such problems in
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`deliberate or reckless disregard of Cardinal Health’s best interests. Nor does the complaint plead
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`specific facts showing that any of the director defendants ever approved a compensation payment
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`in deliberate or reckless disregard of Cardinal Health’s best interests. Moreover, the director
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`defendants do not face any likelihood of liability, let alone a substantial likelihood of liability,
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`for many of the settlement and compensation payments at issue because claims based on those
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`payments are now time-barred.
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`For these reasons, the complaint is subject to dismissal in its entirety under Rule 12(b)(6)
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`for failure to state a claim.
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`Furthermore, the complaint seeks to impose liability on the director defendants for
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`settlements that have already been the subject of derivative suits by Cardinal Health
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`stockholders. Those suits were dismissed based on the court’s holding in each case that the
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`complaint failed to establish demand futility as required by Rule 23.1. Those holdings preclude
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`plaintiffs here from establishing demand futility with respect to the same settlements and are yet
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`another reason the complaint should be dismissed.
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`BACKGROUND
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`This background is drawn from the allegations in the amended consolidated complaint
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`and documents incorporated into the pleading or otherwise subject to judicial notice. See
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`Amended Consolidated Complaint, ECF No. 35, PageID # 1715; In re Omnicare Secs. Litig.,
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`769 F.3d 455, 467 (6th Cir. 2014).
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`2
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`A. Cardinal Health and its board of directors
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`Cardinal Health is an Ohio corporation headquartered in Dublin, Ohio. Am. Compl.
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`¶ 22. The company is one of the three largest distributors of pharmaceutical products in the
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`United States; it buys pharmaceutical products from manufacturers and sells them to pharmacies.
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`Id. ¶¶ 22, 44. Cardinal Health serves its pharmaceutical customers from dozens of distribution
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`centers located across the country. Id. ¶¶ 44, 109, 153. Because some of the products Cardinal
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`Health distributes are classified as controlled substances, it is required to register these centers
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`with federal and state authorities. Id. ¶¶ 45, 48, 51, 71.
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`In June 2019, when the first of the actions consolidated into this action was filed,
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`Cardinal Health had ten directors. Id. ¶¶ 24, 26-30, 32-34, 36. All but one (the chief executive
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`officer) were outside directors not employed by Cardinal Health. Id. Since then, Cardinal
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`Health has added two directors to its board, both of whom are also outside directors. Id. ¶¶ 39-
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`40.
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`B. Cardinal Health settles two DEA enforcement actions
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`The federal Controlled Substances Act, 21 U.S.C. § 801 et seq., requires distributors such
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`as Cardinal Health to employ a system to detect and report “suspicious orders” of controlled
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`substances to help prevent their diversion to illegitimate uses. Id. ¶¶ 4, 45, 49. The Drug
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`Enforcement Administration, a division of the U.S. Department of Justice, is charged with
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`enforcing the Act. Id. ¶ 50.
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`In November and December 2007, the DEA issued orders initiating administrative
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`proceedings to revoke the registration of three Cardinal Health distribution centers in Auburn,
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`Washington; Lakeland, Florida; and Swedesboro, New Jersey, based on allegations that some of
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`the centers’ customers were diverting hydrocodone to illegitimate channels. Id. ¶ 94. In January
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`2008, the DEA issued an order against the Cardinal Health distribution center in Stafford, Texas
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`based on similar allegations. Id. ¶ 101.
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`In October 2008, Cardinal Health and the DEA settled the DEA’s outstanding orders
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`against the four distribution centers, as well as the DEA’s allegations of ineffective controls at
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`three other distribution centers in Georgia, California, and Colorado. Id. ¶¶ 108-09. Cardinal
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`Health agreed to implement certain compliance measures, id. ¶ 110, and to pay $34 million “in
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`settlement of claims or potential claims for civil penalties . . . for failing to report suspicious
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`orders of controlled substances.” Ex. 1, 2008 DEA Agreement, at 5; see Am. Compl. ¶ 111. The
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`agreement expressly provided that it was not “an admission by Cardinal of liability or of the
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`veracity of any allegation made by DEA in the Orders to Show Cause, this Agreement or any
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`investigation.” Ex. 1, 2008 DEA Agreement, at 2.
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`In February 2012, the DEA issued an order initiating administrative proceedings to
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`revoke the registration of the Cardinal Health distribution center in Lakeland, Florida. Am.
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`Compl. ¶ 136. A few months later, in May 2012, Cardinal Health and the DEA entered into a
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`settlement agreement resolving the order. Id. ¶ 153. Cardinal Health agreed to implement
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`certain compliance measures. Id. ¶ 154. Cardinal Health did not then agree to pay a fine, but the
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`government reserved its right to seek civil fines based on the conduct alleged in the DEA’s order.
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`Ex. 2, 2012 DEA Agreement, at 6. In December 2016, Cardinal Health settled the government’s
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`reserved claims for civil fines. Am. Compl. ¶¶ 176-77; Ex. 3, 2016 DEA Agreement, at 1, 3.
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`Cardinal Health admitted that “[b]etween January 1, 2009 and May 14, 2012, Cardinal Lakeland
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`failed to inform DEA that certain orders for controlled substances it received from some
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`customers were suspicious, as required by 21 C.F.R. § 1301.74(b)” and agreed to pay the United
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`States $34 million. Ex. 3, 2016 DEA Agreement, at 3, 5; Am. Compl. ¶ 176.
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`C. Two courts dismiss derivative suits seeking to hold the Cardinal Health board
`liable for the company’s settlements with the DEA
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`In June 2012, two Cardinal Health stockholders brought derivative actions on the
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`company’s behalf—one in Ohio state court and one in this Court—without first making demands
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`upon the Cardinal Health board that the company bring the actions itself. See Ex. 4, Complaint,
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`Himmel v. Barrett, No. 12-CVA-060663 (Ohio Ct. Com. Pl. June 11, 2012); Ex. 5, Complaint,
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`Stanley v. Arnold, No. 12-CV-00482 (S.D. Ohio June 22, 2012). Both complaints claimed that
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`current and former directors of Cardinal Health breached their fiduciary duties by failing to
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`ensure that the company complied with the federal Controlled Substances Act and sought to hold
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`the director defendants liable in damages for the company’s 2008 and 2012 settlements with the
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`DEA. See Ex. 4, Himmel Complaint ¶¶ 1, 4-9, 85; Ex. 5, Stanley Complaint ¶¶ 1, 8-9.
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`Both complaints were dismissed. In each action, the court concluded that the plaintiff
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`had failed to allege “with particularity,” as required by Rule 23.1 of both the Ohio and Federal
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`Rules of Civil Procedure, that a pre-suit demand would have been futile. Himmel v. Barrett, No.
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`12-CVA-060663, 2013 WL 4719080, at *4-5 (Ohio Ct. Com. Pl. July 9, 2013); Stanley v.
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`Arnold, No. 12-CV-00482, 2012 WL 5269147, at *3, *7 (S.D. Ohio Oct. 23, 2012), aff’d, 531 F.
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`App’x 695 (6th Cir. 2013).
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`D. A Cardinal Health subsidiary settles a suit by the United States
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`In December 2016, Kinray, LLC, a New York-based subsidiary of Cardinal Health,
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`agreed to pay $10 million to settle a suit by the United States alleging that it had failed to report
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`suspicious orders by New York area pharmacies “[b]etween January 1, 2011 and May 14, 2012.”
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`Am. Compl. ¶ 177; see Ex. 6, Consent Order ¶ 2, United States v. Kinray, No. 16 Civ. 9767
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`(S.D.N.Y. Dec. 22, 2016); Ex. 7, Complaint ¶ 13, United States v. Kinray, No. 16 Civ. 9767
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`(S.D.N.Y. Dec. 19, 2016).
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`E. Cardinal Health settles suits by the state of West Virginia and two Ohio counties
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`On June 26, 2012, the state of West Virginia sued Cardinal Health, alleging that Cardinal
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`Health had violated state law by distributing controlled substances to “rogue drugstores” that
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`were filling prescriptions written by “unethical physicians” for “illegitimate medical purposes.”
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`Am. Compl. ¶ 159; Ex. 8, Complaint ¶ 13, West Virginia v. Cardinal Health, No. 12-C-140 (W.
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`Va. Ct. June 26, 2012). In 2017, Cardinal Health agreed to pay $20 million to settle the suit.
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`Am. Compl. ¶ 178; Ex. 9, West Virginia Agreement, ¶ 4.1. In the settlement agreement,
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`Cardinal Health “expressly denie[d]” the allegations of the suit and any liability in the settlement
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`agreement. Ex. 9, West Virginia Agreement at 4, 9. And the agreement recognized that
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`Cardinal Health “has never been found to be in violation of any state or federal laws, regulations,
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`or guidelines concerning the distribution of controlled substances into West Virginia, and the
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`WVBOP [West Virginia Board of Pharmacy] has never instituted any administrative actions
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`and/or complaints against Cardinal Health.” Id. at 3.
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`In October 2019, Cardinal Health agreed to settle opioid-related claims by two Ohio
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`counties, Summit and Cuyahoga, for $66 million. Am. Compl. ¶ 233.
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`F. Plaintiffs in this action file suit, seeking to hold the Cardinal Health board liable
`for the company’s settlements
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`This action consolidates three stockholder derivative actions filed in June 2019 and
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`January 2020. Order Consolidating Actions, ECF No. 31, PageID # 1567. Plaintiffs filed an
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`amended consolidated complaint in March 2020. Amended Consolidated Complaint, ECF
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`No. 35, PageID # 1715. Like the earlier derivative suits brought in 2012, this action claims that
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`current and former directors of Cardinal Health breached their fiduciary duties by failing to
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`ensure that the company complied with regulations governing the distribution of controlled
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`substances. Am. Compl. ¶¶ 81, 91, 249-56. And like the earlier derivative suits, this action
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`seeks to hold the director defendants liable for the company’s settlements with the DEA. Id.
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`¶ 232. This action also seeks to hold the director defendants liable for the company’s settlement
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`with the United States regarding Kinray, and the company’s settlements with West Virginia and
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`with Summit and Cuyahoga Counties. Id. ¶ 233.
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`This action asserts a second claim for breach of fiduciary duty on the theory that the
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`director defendants wasted corporate assets by approving the payment of “unwarranted and
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`excessive compensation” to company executives from 2008 to 2017, despite those executives’
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`“failure to . . . maintai[n] an effective anti-diversion program.” Id. ¶ 236; see id. ¶¶ 258-59.
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`ARGUMENT
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`Under Ohio law, the “directors of a corporation are charged with the responsibility of
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`making decisions on behalf of the corporation and are the proper parties to bring a suit on behalf
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`of the corporation or, in their business judgment, to forego a lawsuit.” In re Ferro Corp.
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`Derivative Litig., 511 F.3d 611, 617-18 (6th Cir. 2008) (quoting Drage v. Procter & Gamble,
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`119 Ohio App. 3d 19, 694 N.E.2d 479, 482 (1997)). A shareholder of an Ohio corporation
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`therefore may not pursue a derivative lawsuit without first showing either that the board
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`wrongfully refused a demand to bring the lawsuit or that such a demand would have been futile.
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`Id. at 618.
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`The shareholder plaintiffs here acknowledge that they did not make a pre-suit demand
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`upon the Cardinal Health board. Am. Compl. ¶ 241. Federal Rule of Civil Procedure 23.1
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`therefore requires that their complaint “state with particularity” why a pre-suit demand would
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`have been futile and so is excused. Fed. R. Civ. P. 23.1(b)(3). Notice pleading is not good
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`enough. See In re Ferro, 511 F.3d at 621-22 (“the particularity requirement” of Rule 23.1
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`“differs substantially from the principles of notice pleading”).
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`Whether the failure to make a demand is excused is determined under the substantive law
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`of the state of incorporation—here, Ohio. Id. at 617 (citing Kamen v. Kemper Fin. Servs., Inc.,
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`500 U.S. 90, 108-09 (1991)). Ohio law “presumes ‘that directors can make an unbiased,
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`independent business judgment about whether it would be in the corporation’s best interests to
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`sue some or all of the other directors.’” Id. at 618 (quoting Drage, 694 N.E.2d at 483). So to
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`plead futility with particularity, “plaintiff[s] must point to facts which show that the presumed
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`ability of the directors . . . does not exist in this case.” Davis v. DCB Fin. Corp., 259 F. Supp. 2d
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`664, 670 (S.D. Ohio 2003). Because the complaint here does not establish demand futility as
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`required by Rule 23.1, it is subject to dismissal for failure to state a claim under Rule 12(b)(6).
`
`I.
`
`THE COMPLAINT FAILS TO STATE A DERIVATIVE BREACH OF
`FIDUCIARY DUTY CLAIM FOR FAILURE TO ENSURE THE COMPANY’S
`COMPLIANCE WITH CONTROLLED SUBSTANCE REGULATIONS
`
`The complaint’s first claim for breach of fiduciary duty is based on the theory that the
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`director defendants—fourteen current and former directors of Cardinal Health—breached their
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`fiduciary duties by “failing to ensure that [the company] complied with . . . applicable law”
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`concerning the distribution of controlled substances. Am. Compl. ¶ 249; see also id. ¶ 252
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`(alleging that the director defendants “declin[ed] to stop and prevent [the company] from failing
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`to maintain effective controls”). “Where a complaint challenges board inaction, such as in this
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`case, an alleged shortfall in monitoring management’s efforts at compliance with . . . regulations,
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`absent presuit demand, the case can proceed only if the particularized allegations in the
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`complaint present a substantial likelihood of liability for a majority of the board, and not simply
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`the mere threat of personal liability.” Stanley v. Arnold, No. 12-cv-482, 2012 WL 5269147, at
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`*5 (S.D. Ohio Oct. 23, 2012), aff’d, 531 F. App’x 695 (6th Cir. 2013); see also In re Keithley
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`Instruments, Inc., 599 F. Supp. 2d 875, 890 (N.D. Ohio 2008) (“Reasonable doubt as to the
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`disinterestedness of a director” who would have assessed a pre-suit demand “is created when the
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`particularized allegations in the complaint present a substantial likelihood of liability on the part
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`of a director.”). And under Ohio law, a director may be held personally liable only if his or her
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`“action or failure to act involved an act or omission undertaken with deliberate intent to cause
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`injury to the corporation or undertaken with reckless disregard for the best interests of the
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`corporation.” Ohio Rev. Code § 1701.59(E). To demonstrate demand futility, the complaint
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`here therefore must contain particularized factual allegations showing that at least half of the ten
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`directors on the Cardinal Health board in June 2019—who could have considered a pre-suit
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`demand—are “substantially likely” to be held personally liable for a breach of fiduciary duty
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`under § 1701.59(E).1 See Stanley, 2012 WL 5269147, at *5.
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`The complaint does not satisfy that requirement for two reasons. First, decisions in prior
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`stockholder actions preclude the plaintiffs here from establishing demand futility with respect to
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`the same claims of director liability. Second, in any event, the complaint lacks particularized
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`allegations establishing demand futility based on a substantial likelihood of liability for a
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`majority of the board.
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`A. Plaintiffs are precluded from establishing demand futility based on alleged
`director liability for the company’s settlements with the DEA
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`The complaint’s first claim for breach of fiduciary duty seeks to hold the director
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`defendants liable for the company’s settlements of various actions related to its distribution of
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`controlled substances, including its settlement of two DEA enforcement actions. Am. Compl.
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`¶ 233. The complaint asserts that a pre-suit demand on that claim would have been futile
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`because the claim presents “a substantial likelihood of liability” for the directors who would have
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`1 The ten directors on the board in June 2019 were Colleen Arnold, Carrie Cox, Calvin Darden,
`Bruce Downey, Patricia Hemingway Hall, Akhil Johri, Michael Kaufmann, Gregory Kenny,
`Nancy Killefer, and J. Michael Losh. Am. Compl. ¶ 240.
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`considered the demand. Id. ¶ 241. But this Court and an Ohio state court have already dismissed
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`derivative actions seeking to hold current and former Cardinal Health directors liable for the
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`company’s settlements with the DEA. Both courts held that a pre-suit demand would not have
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`been futile because the defendant directors did not face a substantial likelihood of liability for a
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`breach of fiduciary duty that caused the company to enter into those settlements. See Himmel,
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`2013 WL 4719080, at *5; Stanley, 2012 WL 5269147, at *7. Under the doctrine of issue
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`preclusion, those holdings preclude plaintiffs here from establishing otherwise.
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`The issue preclusion doctrine bars the relitigation of an issue when the issue was actually
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`litigated and decided in a prior action and the party asserted to be estopped was in privity with a
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`party to the prior action. Georgia-Pac. Consumer Prods. LP v. Four-U-Packaging, Inc., 701
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`F.3d 1093, 1098 (6th Cir. 2012). Those elements are met here. The issue of whether demand is
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`excused for a claim seeking to hold Cardinal Health directors liable for the company’s
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`settlements with the DEA was actually litigated and decided in the prior Himmel and Stanley
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`actions. And it is settled that “in shareholder derivative actions arising under Fed. R. Civ. P.
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`23.1, parties and privies include the corporation and all nonparty shareholders.” Nathan v.
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`Rowan, 651 F.2d 1223, 1226 (6th Cir. 1981); see also Cal. State Teachers’ Ret. Sys. v. Alvarez,
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`179 A.3d 824, 848-49 (Del. 2018) (citing Nathan and explaining that multiple federal circuit
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`courts have found that “privity exist[s] because . . . derivative plaintiffs s[eek] to represent the
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`same legal right—that of the corporation”). Plaintiffs are thus bound by the Himmel and Stanley
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`decisions and barred from relitigating a derivative claim asserting director liability for the
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`company’s settlements with the DEA.
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`B. The complaint lacks particularized allegations establishing demand futility
`based on a substantial likelihood of director liability
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`In any event, the complaint fails to establish demand futility with respect to its first
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`breach of fiduciary duty claim because it lacks particularized allegations showing that a majority
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`of the Cardinal Health board that would have considered a pre-suit demand faces “a substantial
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`likelihood of liability” for that claim. See Stanley, 2012 WL 5269147, at *5.
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`1. The claim is time-barred to the extent it seeks to impose liability on the
`defendant directors for the company’s settlements with the DEA
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`To begin with, the director defendants do not face a substantial likelihood of liability for
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`any breach allegedly resulting in the company’s settlements with the DEA because a claim
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`seeking to impose liability for those settlements is time-barred. “If, as a matter of law, based on
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`the running of the applicable statute of limitations or repose, the individual face[s] no possibility
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`of liability because any claims against the individual were time-barred, then surely the individual
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`cannot be said to face a ‘substantial likelihood’ of liability.” In re Keithley, 599 F. Supp. 2d at
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`901; see id. at 901-07 (dismissing derivative complaint for failure to establish demand futility
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`because claims were time-barred and thus did not present a substantial likelihood of liability that
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`compromised the board’s ability to properly consider a pre-suit demand).
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`A breach of fiduciary duty claim is subject to the four-year statute of limitations in Ohio
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`Rev. Code § 2305.09, id. at 907, and “accrues when the act or omission constituting the breach
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`actually occurs,” Union Sav. Bank v. Lawyers Title Ins. Corp., 191 Ohio App. 3d 540,
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`946 N.E.2d 835, 843 (2010). Plaintiffs therefore cannot assert a claim based on any alleged act
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`or omission by a director defendant before June 14, 2015—four years before the earliest action in
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`this consolidated action was filed. A claim based on the company’s 2008 settlement with the
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`DEA is time-barred because any act or omission that supposedly caused the company to enter
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`into that settlement necessarily pre-dated that settlement. A claim based on the company’s 2012
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`Case: 2:19-cv-02491-SDM-EPD D