Just Right: Delaware Court of Chancery Adopts ‘Goldilocks’ Approach to Accrual of Red-Flag Caremark Claims

Key Takeaways:

• In a case of first impression, the Delaware Court of Chancery issued a decision that could give investors more time to sue corporate directors and officers for Caremark breach of fiduciary duty claims.
• Under the “separate accrual” method, each decision (or conscious non-decision) of directors and officers gives rise to a separate limitations period. As a result, a singular course of conduct can include some acts that are timely but others that are time-barred.
• Application of the separate accrual method primarily impacts the damages available to plaintiffs. It does not necessarily preclude reference to or introduction of evidence as to non-actionable conduct if such conduct is relevant to timely claims.

Whether a plaintiff unreasonably delayed suing a corporate fiduciary for lack of oversight may depend on multiple limitations periods rather than just one. That is the recent determination of Delaware Vice Chancellor Laster in Lebanon County Employees’ Retirement Fund v. Collis, 287 A.3d 1160 (Del. Ch. 2022). In Collis, the court held that claims based on a director’s or officer’s conscious disregard of so-called “red flags” in a corporate compliance program can accrue at multiple points, rather than as either a single isolated event or as a continuous course of conduct. As the first to ever address the issue in Delaware, the court was explicitly mindful of adopting a balanced approach to timeliness that did not punish shareholders from failing to detect the instant a corporate fiduciary begins disregarding their oversight duties, while also providing defendants with some repose from having to defend against stale claims.

Background

The Collis case concerns claims brought against directors and officers of AmerisourceBergen Corporation for the role it played in America’s opioid epidemic. AmerisourceBergen is one of three major wholesale distributors of opioid pain medication in the United States. In the lawsuit, plaintiffs allege that AmerisourceBergen failed time and again to implement a meaningful program to flag and combat suspicious orders of opioids. Among other things, plaintiffs accuse AmerisourceBergen’s directors and officers of (1) repeatedly ignoring “red flags” indicating that the company was ineffectively monitoring suspicious opioid orders, and (2) implementing a policy that prioritized company profits over legal compliance.

A claim for breach of fiduciary duty against directors or officers based on a failure of oversight or intervention despite various “red flags” showing improper conduct is commonly referred to as a “Caremark claim,” after the influential case In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). A related theory of fiduciary liability that overlaps significantly with a Caremark claim is sometimes independently recognized as a “Massey claim,” after In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011). A Massey claim differs from a Caremark claim in that it concerns an intentional decision to prioritize profits over legal compliance. Both theories of relief are types of breach of fiduciary duty claims.

The Decision

Defendants in Collis moved to dismiss the claims against them on multiple grounds, including that the claims were untimely. Because breach of fiduciary duty claims are equitable claims, the question of timeliness was analyzed by the Delaware Court of Chancery under a laches theory. This meant defendants had to show plaintiffs unreasonably delayed in bringing suit. In determining whether plaintiffs unreasonably delayed bringing their claims in Collis, the court examined whether the lawsuit would have been timely under Delaware’s analogous three-year statute of limitations for breach of fiduciary duty claims. This required the court to first determine when plaintiffs’ claims accrued.

Remarkably, Collis marked the first time a Delaware court had ever been tasked with determining the time of accrual of either “red flag” Caremark claims or Massey claims. This left the court to consider application of three different methods Delaware courts have previously used to determine the accrual date of different types of breach of fiduciary duty claims: (i) the “discrete act” method, (ii) the “continuing wrong” method and (iii) the “separate accrual” method.

Discrete act method. The discrete act method is the most common method for determining accrual of claims. Under this method, a claim accrues when an actionable decision is first made and the limitations period runs from that point. The court rejected application of the discrete act method for red-flag Caremark claims or Massey claims on the basis that it would “dramatically constrain[] the stockholder’s ability to sue.” Unlike most causes of action, Caremark and Massey claims are characterized by a defendant’s inaction, which is both difficult to observe and has no immediate consequences for the company. The court also determined a discrete act approach to Caremark and Massey claims went against “Delaware’s system of corporate accountability,” by effectively allowing directors and officers to continue ignoring red flags with impunity after the initial limitations period had run.

Continuing wrong method. While it rejected the discrete act method as “too-defendant-friendly,” the court likewise rejected application of the continuing wrong method as “too-plaintiff-friendly.” Under the continuing wrong approach, the applicable limitations period does not begin to run until a defendant ceases performing the alleged wrongful act. In the case of Caremark and Massey claims, the court was concerned that the continuing wrong method could allow a prospective plaintiff to challenge oversight failures going back several years, potentially involving stale evidence and faded memories.

Separate accrual method. The court considered the third method—separate accrual—as providing a “Goldilocks solution” for red-flag Caremark claims. The separate accrual method treats a series of related decisions (or conscious non-decisions) as a sequence of wrongful acts, each of which gives rise to a separate limitations period. Under a separate accrual approach, a plaintiff can seek damages only for that portion of the wrongful conduct where the statute of limitations has not yet run. According to the court, this approach “strikes an appropriate balance by respecting the important interests served by limitations periods while preserving a litigation vehicle that can provide accountability and generate compensation for injuries.”

Having settled on a method for determining the beginning date for its laches analysis, the court still needed to determine the end date—i.e., the date on which the plaintiffs began to pursue their claims. Because the Collis case was a derivative action in which plaintiffs first pursued books and records from AmerisourceBergen, the court used the date on which plaintiffs served and began to diligently pursue their books and records request as the end date. The court explicitly held that it was not necessary for plaintiffs to file suit or even to file their books and records request in order for pursuit of their claims to be considered timely.

Applying these principles, the court determined defendants’ motion to dismiss on timeliness grounds should be denied because at least some actionable conduct occurred within the analogous limitations period. The court employed a similar analysis to deny dismissal of the Massey claims under the separate accrual method. However, in doing so, the court left open the possibility of using the continuing wrong accrual method for Massey claims since a defendant should arguably face greater culpability for affirmative decisions to disregard compliance rules.

Takeaways

Vice Chancellor Laster’s decision in Collis provides important new guidance on timeliness of claims related to directors’ and officers’ failure to exercise their oversight duties, providing a new method for plaintiff investors to argue that the statute of limitations has not expired. The court in Collis, however, was careful to clarify that even if conduct was untimely (and thus non-actionable) under a red-flag Caremark claim, it could still be relevant evidence for more recent, actionable conduct. Accordingly, the ruling in Collis primarily impacts damages available under a Caremark or Massey cause of action. It does not compel a court to look at each “separate accrual” of such claims as isolated incidents, potentially opening discovery to a much longer history of alleged wrongdoing.