Allergan Board Facing Lawsuit by Shareholders

Allergan Board Facing Lawsuit by Shareholders

June 14th, 2012 // 1:30 pm @

Two years after Allergan agreed to pay $600 million to settle charges that Botox was marketed for various unapproved uses, a federal judge has given a green light to a lawsuit claiming the Allergan board should be held responsible instead of relying on the corporate treasury. The off-label marketing involved promoting Botox to treat headaches, pain, spasticitiy and juvenile cerebral palsy.

In the shareholder derivative lawsuit filed in Delaware Chancery Court, two pension funds maintain that Allergan directors should be made to pay because they breached their fiduciary duties by allowing Allergan to violate federal law with off-label marketing practices. Essentially, the pension plans argue the Allergan board oversaw a calculated strategy to boost sales illegally and either willfully approved the effort or shirked their responsbilities (here is the lawsuit).

As an example, the funds cite a letter received from the FDA in 2006 concerning off-label marketing during a presentation by an Allergan-sponsored speaker, a physician who spoke on several occassions for the drugmaker. The Allergan general counsel warned the board there was a high probability the agency would take action, but the board continued to authorize aggressive efforts to increase Botox sales, the suit charges.

In his ruling, Delaware Chancery Court Judge Travis Laster decided the funds – the Louisiana Municipal Police Employees Retirement System and the UFCW Local 1776 – have amassed enough evidence to proceed. “Read as a whole, the particularized allegations support a reasonable inference that the board consciously approved a business plan predicated on violating the federal statutory prohibition against off-label marketing,” he wrote in an 82-page ruling.

“…One can reasonably infer at the pleadings stage that the board knew physicians were not harmonically converging on off-label uses in the same areas that Allergan happened to be targeting aggressively for sales growth… When, as here, the pled facts can support a reasonable inference that directors in fact approved a business plan that contemplated off-label marketing, the plaintiffs receive the benefit of the inference at the pleadings stage” (here is his ruling).

In a derivative shareholder lawsuit, claims are brought on behalf of a corporation against an insider – in this case, the Allergan board, although there is generally insurance available to cover such outcomes. Such suits are an effort to force those at the top to feel the sting of management gone awry. Shareholders unsuccessfully attempted such a suit against Johnson & Johnson directors and executives for allegedly breaching their fiduciary duty in connection with numerous product recalls and government probes (see this). The Allergan lawsuit, by the way, also named Allergan chairman and ceo David Pyott as a defendant and, since he benefited from increased sales, the suit claimed he should be forced to return part of his compensation.

For its part, Allergan had unsuccessfully countered by arguing that its board never approved any illegal marketing and, moreover, the lawsuit should have been dismissed because a California court tossed similar claims. An Allergan spokeswoman wrote us to say that the drugmaker would not comment on the ruling.

For the record, Allergan agreed to pay $375 million and plead guilty to one misdemeanor count of misbranding in connection with off-label marketing between 2000 and 2005. Another $225 million consisted of fines to cover civil claims asserted by the US Department of Justice under the False Claims Act – there were three separate whistleblower lawsuits filed by Allergan employees that prompted the government probe

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