Where Will the Courts Draw the Lines for Caremark Claims Related to Science and Law Issues?

As law and science intersect more and more often, increasing opportunities arise for Caremark claims against corporate directors if they fail to see and monitor the intersections as relevant to their business. Therefore, I read with interest an August 3, 2016 blog post at Morris James, and the linked new Delaware Chancery opinion  exploring the extent of the “red flags” needed (or not) to pursue a Caremark claim without a prior demand. In this instance, the red flags and disregard were deemed not adequately alleged despite some concerns about conduct violating antitrust laws. It’s interesting to see where courts draw the lines, and will be fascinated to see how courts apply the law when considering suits against directors regarding science and law issues.

As a reminder of the basic standard for Caremark claims, the court explained:

“A breach of fiduciary duty claim that seeks to hold directors accountable for the consequences of a corporate trauma is known colloquially as a Caremark claim, in a tip of the hat to Chancellor Allen’s  landmark decision In re Caremark International Inc. Derivative Litigation.”

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“In Stone v. Ritter, the Delaware Supreme Court restated the bases on which directors may be found liable for a breach of their fiduciary duties under Caremark: We hold that Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations. Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.”