Preview
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ONTARIO PROVINCIAL COUNCIL OF )
CARPENTERS’ PENSION TRUST FUND, )
POLICE & FIRE RETIREMENT SYSTEM OF )
THE CITY OF DETROIT, AND NORFOLK )
COUNTY RETIREMENT SYSTEM, Derivatively )
on Behalf of WALMART INC., )
)
Plaintiffs, )
)
v. ) C.A. No. 2021-0827-JTL
)
S. ROBSON WALTON, GREGORY B. PENNER, )
STEUART WALTON, TIMOTHY P. FLYNN, )
THOMAS W. HORTON, MARISSA A. MAYER, )
DOUG MCMILLON, STEVEN S. REINEMUND, )
PHYLLIS HARRIS, and JAY JORGENSEN, )
)
Defendants, )
)
and )
)
WALMART INC., )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 13, 2023
Date Decided: April 26, 2023
Gregory V. Varallo, Mae Oberste, & Daniel E. Meyer, BERNSTEIN LITOWITZ
BERGER & GROSSMANN LLP, Wilmington, Delaware; Mark Lebovitch & Edward G.
Timlin, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New
York; Leslie R. Stern, Nathaniel L. Orenstein, & Steven L. Groopman, BERMAN
TABACCO, Boston, Massachusetts; Counsel for Police & Fire Retirement System of the
City of Detroit and Norfolk County Retirement System.
Ned Weinberger & Mark Richardson, LABATON SUCHAROW LLP, Wilmington,
Delaware; David MacIsaac, LABATON SUCHAROW LLP, New York, New York;
Counsel for The Ontario Provincial Council of Carpenters’ Pension Trust Fund.
Raymond J. DiCamillo & John M. O’Toole, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Sean M. Berkowitz & Nicholas J. Siciliano, LATHAM &
WATKINS LLP, New York, New York; Andrew W. Stern & Charlotte K. Newell,
SIDLEY AUSTIN LLP, New York, New York; William M. Regan & Allison M. Wuertz,
HOGAN LOVELLS US LLP, New York, New York; Frank R. Volpe, SIDLEY AUSTIN
LLP, Washington, District of Columbia; Counsel for Defendants and Nominal Defendant.
LASTER, V.C.
Walmart Inc. operates over 5,000 pharmacies that dispense prescription opioids.
Until April 2018, Walmart also acted as a wholesale distributor of prescription opioids.
From 2006 to 2012 alone, Walmart distributed over five billion opioid pills.
Based on its involvement with prescription opioids, Walmart currently faces
thousands of lawsuits from private litigants, state attorneys general, and the U.S.
Department of Justice. In November 2022, Walmart announced that it had agreed to a $3.1
billion nationwide opioid settlement (the “Nationwide Settlement”) designed to resolve
substantially all of the opioid lawsuits pending in federal multidistrict litigation (the
“Opioid MDL”), plus potential lawsuits by state, local, and tribal governments. Walmart
has incurred millions of dollars in defense costs and suffered reputational harm.
The plaintiffs own stock in Walmart. They seek to shift responsibility for the harm
that Walmart has suffered to the fiduciaries whom they say caused it. They maintain that
the directors and officers of Walmart breached their fiduciary duties to the corporation and
its stockholders by (i) knowingly causing Walmart to fail to comply with a settlement
between the U.S. Drug Enforcement Agency (“DEA”) and Walmart (the “DEA
Settlement”); (ii) knowingly causing Walmart to fail to comply with its obligations under
the federal Controlled Substances Act and its implementing regulations (collectively, the
“Controlled Substances Act”) when acting as a dispenser of opioids through its retail
pharmacies, and (iii) knowingly causing Walmart to fail to comply with its obligations
under the Controlled Substances Act when acting as a wholesale distributor of opioids for
its retail pharmacies.
As to each of the three categories of alleged misconduct, the plaintiffs have
advanced three species of claims: a Massey Claim, a Red-Flags Claim, and an Information-
Systems Claim.1 The Massey Claim asserts that Walmart’s directors and officers knew that
Walmart was failing to comply with its legal obligations and made a conscious decision to
prioritize profits over compliance. The Red-Flags Claim asserts that a series of red flags
put Walmart’s directors and officers on notice of Walmart’s noncompliance or potential
corporate trauma, yet the directors and officers consciously ignored them. The Information-
Systems Claim asserts that Walmart’s directors and officers knew that they had an
obligation to establish a monitoring system to address a core compliance risk, yet
consciously failed to make a good faith effort to fulfill that obligation.
The defendants have moved to dismiss the plaintiffs’ claims for failing to support
an inference of demand futility. The plaintiffs argue that the demand is futile because the
complaint alleges facts supporting a reasonable inference that at least half of the directors
1
This theory has been called a “prong one” Caremark claim, but that sterile
nomenclature carries little informational content, and when not immersed in a Caremark
case, I have difficulty remembering which theory is prong one and which is prong two. In
one decision, I called the prong one theory a “Reporting-Systems Theory” or a “Reporting-
Systems Claim.” Collis, 287 A.3d at 1176. More recently, I called it an “Information-
Systems Theory” or an “Information-Systems Claim.” In re McDonald’s Corp. S’holder
Derv. Litig. (McDonald’s Officers), 289 A.3d 343, 359–60 (Del. Ch. 2023). Either works.
As between the two, the reporting-systems label is narrower and could imply only humans
reporting up the chain. Oversight systems should be broader and include technology. The
more expansive label of information-systems therefore seems preferable. Traditionalists
may stick to prong one and prong two. Lawyers communicating with me can assist my
comprehension by using the more descriptive labels.
2
in office when the lawsuit was filed face a substantial threat of liability or, in the alternative,
lack independence.
This decision denies the motion to dismiss as to claims relating to the DEA
Settlement and claims relating to Walmart’s compliance with its obligations as a dispenser
under the Controlled Substances Act. The motion is granted as to the claims relating to
Walmart’s compliance with its obligations as a distributor under the Controlled Substances
Act.
I. FACTUAL BACKGROUND
The facts are drawn from the operative complaint, the documents it incorporates by
reference, and pertinent public documents that are subject to judicial notice. 2 At this stage
2
The operative complaint incorporates by reference documents produced in federal
proceedings involving Walmart. The operative complaint also incorporates documents
filed with the U.S. Securities and Exchange Commission (the “SEC”). The court may
consider both sets of documents at this stage of the proceedings. See, e.g., In re Rural Metro
Corp. S’holders Litig., 2013 WL 6634009, at *7 (Del. Ch. Dec. 17, 2013) (“Applying
[Delaware] Rule [of Evidence] 201, Delaware courts have taken judicial notice of publicly
available documents that ‘are required by law to be filed, and are actually filed, with federal
or state officials.’” (quoting In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563,
584 (Del. Ch. 2007))); Aequitas Sols., Inc. v. Anderson, 2012 WL 2903324, at *3 n.17 (Del.
Ch. June 25, 2012) (taking judicial notice of a pleading filed in a related action); Prather
v. Doroshow, Pasquale, Krawitz & Bhaya, 2011 WL 1465520, at *1 n.2 (Del. Super. Ct.
Apr. 14, 2011) (“For purposes of the instant motion to dismiss, this Court takes judicial
notice of the federal docket of the Pennsylvania litigation and the foregoing decision of the
Court of Appeals for the Third Circuit.”); In re Career Educ. Corp. Deriv. Litig., 2007 WL
2875203, at *9 (Del. Ch. Sept. 28, 2007) (“When considering a motion to dismiss, the court
also may take judicial notice of publicly filed documents, such as documents publicly filed
in litigation pending in other jurisdictions.” (footnote omitted)).
Citations in the form “Compl. ¶ —” refer to the paragraphs of the operative
complaint. Citations in the form “Ex. [number] at —” refer to exhibits that the defendants
3
of the proceedings, the complaint’s allegations are assumed to be true, and the plaintiffs
receive the benefit of all reasonable inferences, including inferences drawn from the
documents.
Before filing suit, the plaintiffs used Section 220 of the Delaware General
Corporation Law to obtain books and records. Walmart certified that between the
documents it produced and those it listed on its privilege log, “Walmart’s production is
complete with respect to every category of documents that Walmart is required to
produce.”3 Given this certification, if the record lacks documentation relating to a particular
event, and if it is reasonable to expect that documentation would exist if the event took
place, then the plaintiffs are entitled to a reasonable inference that the event did not occur.4
filed with their opening brief in support of their motion to dismiss. See Dkt. 30. Citations
in the form “Ex. [letter] at —” refer to exhibits that the plaintiffs filed with their answering
brief. See Dkt. 40. Citations in the form “PSB Ex. [letter] at —” refer to exhibits that the
plaintiffs filed with their supplemental brief. See Dkt. 64. Page citations refer to the internal
pagination or, if there is none, then to the last three digits of the control number.
3
Final Order and Judgment at 7, See Police & Fire Ret. Sys. of the City of Det. v.
Walmart, Inc., C.A. No. 2020-0478-JTL, Dkt. 39 (Del. Ch. Oct. 29, 2020).
4
See D.R.E. 803(7) (treating as non-hearsay and permitting fact-finder to consider
the absence of a record of a regularly conducted activity, such as board or committee
meetings); see also Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1119 n.7 (Del.
1994) (“[T]he production of weak evidence when strong is, or should have been, available
can lead only to the conclusion that the strong would have been adverse.”); Smith v. Van
Gorkom, 488 A.2d 858, 878 (Del. 1985) (“It is a well established principle that the
production of weak evidence when strong is, or should have been, available can lead only
to the conclusion that the strong would have been adverse.” (citing Interstate Circuit v.
United States, 306 U.S. 208, 226 (1939) and Deberry v. State, 457 A.2d 744, 754 (Del.
1983))), overruled on other grounds by Gantler v. Stephens, 965 A.2d 695 (Del. 2009);
accord Young v. Red Clay Consol. Sch. Dist., 159 A.3d 713, 791 n.510 (Del. Ch. 2017)
4
The confidentiality agreement governing the Section 220 production included an
incorporation-by-reference condition. Relying on that condition, the defendants submitted
eighty-two exhibits with their opening brief, plus another five exhibits with their
supplemental brief. The defendants relied on the exhibits to contest the account in the
complaint.
The incorporation-by-reference doctrine does not enable a court to weigh evidence
on a motion to dismiss. It permits a court to review the actual documents to ensure that the
plaintiff has not misrepresented their contents and that any inference the plaintiff seeks is
a reasonable one. The doctrine limits the ability of a plaintiff to take language out of
context, because the defendants can point the court to the entire document. The doctrine
does not change the pleading standard that governs a motion to dismiss. 5 If the complaint
contains well-pled allegations that could support different interpretations, then the court
must credit the plaintiffs’ interpretation. If the record could support different inferences,
and if the plaintiff seeks a reasonable inference, then the court must grant the plaintiff the
inference.6
(quoting Kahn v. Lynch and Smith v. Van Gorkom); Chesapeake Corp. v. Shore, 771 A.2d
293, 300–01 & n.7 (Del. Ch. 2000) (same).
5
See, e.g., In re CBS Corp. S’holder Class Acton & Deriv. Litig., 2021 WL 268779,
at *18 n.257 (Del. Ch. Jan. 27, 2021 (collecting authorities).
6
See Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
5
Many of the documents in the record can support several reasonable interpretations
or inferences.7 At this stage of the case, the plaintiffs receive the benefit of their reasonable
interpretations and inferences.
Walmart laid the foundation for the plaintiffs to seek damaging inferences by
redacting documents extensively. In many cases, only a few words survive. The resulting
documents indicate that a topic was addressed, but the redactions deprive the court of
insight into the context, the substance of the discussion, and any decision that might have
been made. For a typical document, one possible inference is that the substance of the
discussion and any decision would favor the plaintiffs’ theory of the case. Another possible
inference is that the substance of the discussion and any decision would favor the
defendants’ position. At this stage, the court must draw the inference that favors the
plaintiffs.8
In some cases, Walmart made partial-sentence redactions, purportedly for non-
responsiveness. The court has acknowledged that when producing books and records, a
7
See, e.g., Ex. 6 at ’035, ’044–47; Ex. 39 at ’330, ’332, ’336; Ex. 46 at ’601; Ex. 49
at ’822, ’825; Ex. B at 8–9.
8
See In re McDonald’s Corp. S’holder Deriv. Litig. (McDonald’s Directors), —
A.3d —, 2023 WL 2293575, at *33 (Del. Ch. Mar. 1, 2023) (“When the documents from
a Section 220 production contain gaps, a plaintiff can seek inferences about what the
redacted material might say. A court can credit those inferences, and that outcome could
be worse for the defendants than if the Company had produced the documents without
redactions.”).
6
company may redact “material unrelated to the subject matter of a demand.”9 Measured
under that standard, a partial-sentence redaction is dubious, because it depends on the
premise that the author incoherently injected an unrelated topic into an otherwise
responsive sentence.10 The partial-sentence redactions played into the plaintiffs’ hands.
On many occasions, Walmart redacted or withheld documents for privilege. The
Delaware Rules of Evidence provide that “[t]he claim of a privilege, whether in the present
proceeding or upon a prior occasion, is not a proper subject of comment by judge or
counsel” and that “[n]o inference may be drawn therefrom.”11 The parties have not
addressed whether this rule applies only at trial or also at earlier stages, such as a motion
to dismiss. To be safe, this decision assumes the rule applies and therefore does not
speculate or draw inferences about the content of the privileged communication.12
In their briefs, the defendants argued that the existence of the privileged documents
and passages showed that the Board and its committees received reports on compliance
issues. That seems like a fair inference to draw, and this decision assumes that to be the
9
Okla. Firefighters Pension & Ret. Sys. v. Amazon.com, Inc., 2022 WL 1760618,
at *13 (Del. Ch. June 1, 2022).
10
See McDonald’s Officers, 289 A.3d at 355 & n.2.
11
D.R.E. 512(a).
12
See ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at *39 n.300 (Del. Ch.
July 21, 2017) (“Sprint withheld relevant materials on grounds of attorney-client privilege.
Aurelius requested an adverse inference against Sprint in post-trial briefing, but this is
improper.”), aff’d, 184 A.3d 1291 (Del. 2018).
7
case.13 What the court cannot do is draw the defense-friendly inference that the content of
the discussions favored the defendants, such as by reflecting an assessment that Walmart’s
compliance efforts were on track. Another reasonable inference is that the content of the
discussions favored the plaintiffs, such as by reflecting an assessment that Walmart’s
compliance efforts were off track. The passages and documents for which Walmart asserted
privilege could inferably cloak reports that Walmart had not devoted sufficient resources
to compliance, had failed to implement or was behind schedule in implementing key
initiatives, and would not be able to fulfill its obligations without a significant investment
of resources that would cut into profits.
Although this decision does not draw inferences from any of the passages or
documents for which Walmart has asserted privilege, it does draw inferences from an
absence of non-privileged documents containing discussions or decisions about the
business issues necessarily involved in (i) taking the steps necessary to comply with the
DEA Settlement and the Controlled Substances Act, (ii) responding to red flags of
noncompliance, and (iii) assessing the effectiveness of the compliance efforts. Legal advice
undoubtedly is an input into those discussions and decisions, but if directors and officers
13
See Conduent State Healthcare, LLC v. AIG Specialty Ins. Co., 2023 WL
2256052, at *5 (Del. Super. Ct. Feb. 14, 2023) (citing D.R.E. 512(a)) (“The parties were
strictly instructed that information contained in the logs could be used for the sole and very
limited purpose of demonstrating, for example, that a meeting took place on a certain date,
who attended the meeting, and the general topic of the meeting.”).
8
are doing their jobs, then there will be non-privileged discussions and decisions about what
are inherently and ultimately business decisions (which the business judgment rule
generally will protect). Walmart represented that its Section 220 production was complete,
so when there are no indications of non-privileged discussions, the plaintiffs are entitled to
an inference that the discussions and decisions did not occur.
A. Walmart And Its Governance
Walmart is a Delaware corporation with its principal place of business in
Bentonville, Arkansas. Walmart operates three primary business segments: Sam’s Club,
Walmart International, and Walmart U.S. As of 2022, the Walton family controls
approximately 47.51% of Walmart’s voting shares, either directly or through Walton
Enterprises, LLC and the Walton Family Holdings Trust.
Walmart has a board of directors (the “Board”) charged with overseeing the
business and affairs of the corporation. The Board’s duties include “overseeing the
Company’s policies with respect to compliance with applicable laws and regulations and
adopting policies of corporate conduct designed to assure compliance with applicable laws
and regulations and to assure maintenance of necessary accounting, financial, and other
controls.” Ex. 4 at 3. The Board meets at least four times per year. Id. at 4.
The Board has established six committees: the Executive Committee, the Audit
Committee, the Compensation and Management Development Committee, the Nominating
and Governance Committee, the Strategic Planning and Finance Committee, and the
9
Technology and eCommerce Committee. Id. at 5. The Executive Committee and the Audit
Committee are the most pertinent to this decision.
The Executive Committee “[i]mplements policy decisions of the Board” and “[a]cts
on the Board’s behalf between Board meetings.” Ex. 80 at 28. The Executive Committee
meets “as often as it determines to be necessary or appropriate.” Ex. 70 at 50. The
Executive Committee’s Chairperson “may direct appropriate members of management and
staff to prepare draft agendas and related background information for each Executive
Committee meeting.” Id. The Chairperson must approve the agenda and materials before
they are distributed to the other committee members. Id. “At the request of the Board or as
the Chairperson determines necessary, reports of meetings of the Executive Committee
shall be made to the Board at its next regularly scheduled meeting.” Id.
The Audit Committee oversees and monitors “compliance by the Company with
legal and regulatory requirements.” Ex. 5 at 1. The Audit Committee meets at least
quarterly and reports to the Board. The Audit Committee meets “no less than annually”
with Walmart’s ethics and compliance executives “regarding the implementation and
effectiveness of the Company’s ethics and compliance programs.” Id. at 8.
B. Walmart’s Legal Obligations As A Dispenser Of Prescription Opioids
Through its Health and Wellness Division, Walmart operates one of the largest
pharmacy chains in the United States, with more than 5,000 retail pharmacies located in its
Walmart and Sam’s Club stores. The Health and Wellness Division has generated at least
8% of Walmart’s annual revenues since 2011. Ex. 2 at 33. Through its retail pharmacies,
10
Walmart dispenses prescription opioids under a DEA license that requires compliance with
the Controlled Substances Act.14 In its public filings, Walmart acknowledges that its
business depends on complying with its legal obligations. See, e.g., Ex. 1 at 22.
The Controlled Substances Act establishes a closed system for controlled
substances, in which everyone from the manufacturer to the physician to the distributor to
the pharmacist must register with the DEA and fulfill statutory and regulatory obligations.
Registered manufacturers may sell controlled substances only to registered distributors.
Registered distributors may distribute controlled substances only to registered pharmacy
dispensers. And a registered dispenser may dispense controlled substances only under a
legitimate prescription written by a registered prescriber.15
As a “dispenser,”16 Walmart must establish and maintain effective controls and
procedures to guard against theft and diversion of controlled substances.17 The regulations
for dispensers include specific requirements that pharmacies must meet. A pharmacy must
14
21 C.F.R. § 1301.11(a).
15
See 21 U.S.C. § 822.
16
See 21 C.F.R. § 1300.01 (“Dispenser means an individual practitioner,
institutional practitioner, pharmacy or pharmacist who dispenses a controlled substance.”
(emphasis added)); see 21 U.S.C. § 802(10) (a dispenser is “a practitioner who so delivers
a controlled substance to an ultimate user”).
17
21 C.F.R. § 1301.71(a); see In re Nat’l Prescription Opiate Litig. (Opioid MDL
Abatement Decision), — F. Supp. 3d —, 2022 WL 3443614, at *29 n.71 (N.D. Ohio Aug.
17, 2022), appeal pending, Trumbull Cnty. v. Purdue Pharma, L.P., No. 22-3753 (6th Cir.).
11
implement security measures to maintain control over its inventory of controlled
substances (the “Inventory Control Requirement”).18 The security measures must enable
the pharmacy to identify instances of loss or theft and notify the DEA.19
A pharmacist can fill only legitimate prescriptions for controlled substances. Under
the Controlled Substances Act, a prescription is legitimate if “issued for a legitimate
medical purpose by an individual practitioner acting in the usual course of his professional
practice.”20 A pharmacist has a responsibility not to knowingly fill an illegitimate
prescription.21 The prevailing professional standard requires that a pharmacist identify and
investigate any red flags, such as large, repeat orders, early refills, or prescriptions from
out-of-state prescribers.22 Pharmacists must use their professional judgment and refuse to
fill orders that they determine are suspicious, report the refusal to the DEA, and maintain
internal records regarding red-flagged prescriptions (the “Refusal-To-Fill Obligation”).23
18
21 C.F.R. § 1301.75.
19
Id. § 1301.76.
20
Id. § 1306.04(a).
21
See id. §§ 1306.04(a) & 1306.06.
22
“[D]ispensers of controlled substances are obligated to check for and conclusively
resolve red flags of possible diversion prior to dispensing those substances.” See In re Nat’l
Prescription Opiate Litig. (Opioid MDL Dismissal Ruling), 477 F. Supp. 3d 613, 629 (N.D.
Ohio 2020), clarified on denial of recons., 2020 WL 5642173 (N.D. Ohio Sept. 22, 2020).
23
See Compl. ¶¶ 9, 92–93.
12
A pharmacy-registrant like Walmart must (1) employ properly licensed
pharmacists, (2) work collaboratively with the pharmacists to dispense controlled
substances properly to avoid diversion, and (3) collect and maintain specific records and
data regarding its dispensing activities.24 The records that registrants must maintain are
extensive (the “Recordkeeping Requirement”).25 For a dispenser, the Recordkeeping
Requirement includes maintaining information on
the number of units or volume [of controlled substances that are] dispensed,
including the name and address of the person to whom it was dispensed, the
date of dispensing, the number of units or volume dispensed, and the written
or typewritten name or initials of the individual who dispensed or
administered the [controlled] substance on behalf of the dispenser.26
Many of the red flags that the DEA expects pharmacists to examine are “very difficult, if
not impossible, for a human pharmacist to identify consistently absent a system to
aggregate, analyze, and provide feedback to the pharmacist about the prescription,”
because “some prescriptions are not suspicious on their face but raise bright red flags when
compared with other prescriptions in a database.”27
A pharmacy-registrant like Walmart must provide its pharmacists with the time and
other resources necessary to carry out their obligations, including the Refusal-To-Fill
24
Opioid MDL Dismissal Ruling, 477 F. Supp. 3d at 630.
25
See 21 C.F.R. pt. 1304.
26
Id. § 1304.22(c).
27
Opioid MDL Dismissal Ruling, 477 F. Supp. 3d at 630.
13
Obligation. For example, a pharmacy-registrant may provide pharmacists with access to a
computerized recordkeeping system so that the pharmacists can investigate red flags.28 A
pharmacy is not legally required to provide access to a computerized recordkeeping
system—”[i]t remains true, however, that a pharmacy may not fill a prescription that it
knows or has reason to know is invalid and may not remain deliberately ignorant or
willfully blind of the prescription information it has (including computerized reports it
generates).”29 “Pharmacies may not do nothing with their collected data and leave their
pharmacist-employees with the sole responsibility to ensure only proper prescriptions are
filled.”30
The Controlled Substances Act does not mandate strict compliance with its
requirements. Substantial compliance is sufficient.31
28
See id. at 629–31.
29
In re Nat’l Prescription Opiate Litig., 2020 WL 5642173, at *3 (N.D. Ohio Sept.
22, 2020).
30
Id. (cleaned up).
31
In re Nat’l Prescription Opiate Litig., 2021 WL 3917174, at *3 (N.D. Ohio Sept.
1, 2021) (citing 21 C.F.R. § 1301.71(b)).
14
C. The Order To Show Cause And Walmart’s Response
On November 13, 2009, the DEA issued an order to show cause against a Walmart
pharmacy in San Diego, California (the “Order to Show Cause”). Ex. A. The Order To
Show Cause asserted that the San Diego pharmacy:
(1) improperly dispensed controlled substances to individuals based on
purported prescriptions issued by physicians who were not licensed to
practice medicine in California;
(2) dispensed controlled substances to individuals located in California based
on Internet prescriptions issued by physicians for other than a legitimate
medical purpose and/or outside the usual course of professional practice
in violation of federal and state law; and
(3) dispensed controlled substances to individuals that [the San Diego
pharmacy] knew or should have known were diverting controlled
substances.
Id. § II. Walmart disputed the factual assertions and “disagreed with DEA’s position that
the DEA registration of [the San Diego pharmacy] should be revoked.” Id.
Also in 2009, Walmart commissioned McKinsey & Company to conduct a risk
assessment for the Health and Wellness Division. Ex. 6 at ’037. Walmart has claimed the
review triggered various actions, including a host of “new compliance projects.” Id. That
is a defense-friendly inference. Documents regarding those projects were either not
produced as part of Walmart’s Section 220 production or were so heavily redacted that no
inference can be drawn about the substance of the redacted text.
In November 2010, the President of the Walmart Stores segment sent a
memorandum to the Audit Committee to provide an update on “Health & Wellness
15
Transforming Compliance and Quality Assurance.” See Ex. 39. Senior officers, including
Robson Walton, were copied. Id. at ’330.
In his memo, the President gave a mixed report on Walmart’s compliance efforts.
To the good, he stressed some positive steps:
Since our last report we have restructured our field operations management
structure to improve oversight. We have built a dedicated Professional
Affairs group headed by a vice president to oversee quality and compliance
assurance. This group includes a new staff of auditors and quality assurance
specialists. It also includes a credentialing team to assure compliance with
licensure laws. We have also established a group to train professionals in the
field including pharmacy technicians. A process for tracking key
performance indicators of thousands of pharmacy technicians will be in place
in all stores within the next 6 months.
Id. But after that leadup, the President gave a more conservative assessment of existing
efforts and the work yet to come: “Frankly, we are not satisfied with our progress
addressing many challenges that we know to exist.” Id.
The memo identified two significant challenges. The first challenge, identified in a
single sentence, was redacted. The redaction was marked “NR/ACP/AWP,” for non-
responsive, attorney-client privilege, attorney work product. Because the single sentence
redaction appears in an otherwise responsive paragraph, the redaction is dubious, and with
three possibilities provided, the basis for it is unclear. At the pleading stage, the plaintiffs
are entitled to an inference that the redacted text referenced a compliance failure that
Walmart was not addressing. The second challenge was implementing ConnexUs, a
dispensing software program that would assist pharmacists in managing their work and
16
complying with legal requirements. Referring to both challenges, the President noted that
“these are areas where we’ve still got work to do.” Id.
The memo attached an eight-page presentation on compliance. Virtually all of the
presentation was redacted as non-responsive. That claim is dubious for a presentation that
dealt with the status of compliance in the Health and Wellness Division.
D. The DEA Settlement
In February 2011, Walmart and the DEA entered into the DEA Settlement. See Ex.
A. The DEA Settlement required Walmart to implement and maintain a compliance
program for all of its pharmacies. The principal provision states:
Walmart agrees to maintain a compliance program, updated as necessary,
designed to detect and prevent diversion of controlled substances as required
by the Controlled Substances Act (“CSA”) and applicable DEA regulations.
This program shall include procedures to identify the common signs
associated with the diversion of controlled substances including but not
limited to, doctor-shopping, requests for early refills, altered or forged
prescriptions, prescriptions written by doctors not licensed to practice
medicine in the jurisdiction where the patient is located, and prescriptions
written for other than a legitimate medical purpose by an individual
practitioner acting outside the usual course of his professional practice. The
program shall also include procedures to report thefts and significant losses
of controlled substances . . . and the routine and periodic training of all
Walmart employees, including new employees, responsible for controlled
substances regarding their responsibilities under the CSA and regarding
relevant elements of the compliance program.
Id. § III.4.a.
Through this paragraph, Walmart committed to the DEA to establish and maintain
a compliance system that would result in its pharmacies being able to satisfy the Inventory
17
Control Requirement, the Recordkeeping Requirement, and the Refusal-To-Fill
Obligation.
Other sections of the DEA Settlement identified additional features that Walmart’s
compliance program needed to include, as well as problems that it had to address. For
example:
• Walmart committed to notifying the local DEA office within seven business days
of any refusal-to-fill decision by one of its pharmacists. Id. § III.4.b.
• Walmart committed to having a system that would record and maintain identifying
information from a person picking up a controlled substance prescription in a form
that would be readily retrievable. Id. § III.4.c.
• Walmart committed to instituting policies and procedures to block early refills of
controlled substances. § III.4.i.
Walmart expressly agreed that the obligations in the DEA Settlement “do not fulfill the
totality of its obligations under the CSA and its implementing regulations.” Id. § III.4.a.
The term of the DEA Settlement ran from March 11, 2011 to March 11, 2015. Id. at
§ III.13. Because the DEA Settlement spoke of maintaining a compliance program and
updating it as necessary, it is plain that the DEA was not setting March 11, 2015 as a
deadline date by which Walmart had to achieve compliance. Instead, the DEA Settlement
required that Walmart work in good faith to achieve compliance earlier, then remain in
compliance for the remainder of the term of the DEA Settlement, while updating its
systems as necessary.
18
E. Walmart’s Efforts To Comply With The DEA Settlement
By August 2011, Walmart had created a summary overview of its formal
compliance program for the Health and Wellness Division. See Ex. 15. The summary
described a reporting structure, concepts, and principles that tracked what a Fortune 500
company’s compliance program should have. The summary included an “Index of Health
and Wellness Procedures” that included more than 150 procedures for pharmacies to
follow. Id. at 16–19. Walmart produced a number of the policies that were in effect at that
time, which told pharmacy employees how to handle a variety of tasks.32
On paper, the effort to establish a compliance system that would satisfy the DEA
Settlement seemed off to a good start. The problem lay in the funding and staffing for the
work necessary to create the controlled substance monitoring program that would provide
the infrastructure for the words on the paper. The team responsible for doing the work
estimated that it needed $40 million to accomplish the tasks. Management only provided a
budget of $11 million. Ex. 82 at ’364. In an internal email, a team member described that
amount as “just enough to cover [existing] compliance projects” with “all development
[projects] to be evaluated on a project by project basis.” Id. at ’363. Another team member
stated that they faced a “Sophie’s Choice” that required selecting “one high need project
32
See Exs. 17, 19, 21, 22, 23, 25–29, 31–32, 37, 39. Walmart also produced some
policies that were adopted later. Ex. 18 (June 2015); Ex. 20 (Aug. 2012); Ex. 24 (Oct.
2014); Ex. 30 (Aug. 2014); Ex. 33 (Apr. 2017). These documents and other exhibits support
an inference that Walmart’s compliance program became more detailed over time.
19
over another.” Id. at ’363. Walmart did not produce a final budget for the Health and
Wellness Division as part of its Section 220 document production, entitling the plaintiffs
to an inference that a budget sufficient to fund the projects necessary to comply with the
DEA Settlement did not exist.
Two entries on Walmart’s privilege log indicate that management reported to the
Audit Committee on the Health and Wellness compliance program in November 2011. Ex.
14 at Item Nos. 34 & 41. The privilege log describes the discussions as addressing
“Walmart’s Health & Wellness Compliance Program, including compliance with DEA
regulations and agreements, controlled-substance training, and an inventory variance
reporting tool.” Ex. 14 Item No. 34 at 4. There are no non-privileged documents in the
Section 220 production reflecting any non-privileged discussion or decisions about the
business issues associated with achieving compliance with the DEA Settlement, such as
the amount of money that the team responsible for implementing the projects needed to
accomplish its work. Read together, the internal email about a lack of funding, the privilege
log entries regarding an Audit Committee meeting, and the absence of any indication of
responsive action support a pleading-stage inference, favorable to the plaintiffs, that
management told the Audit Committee about the budgeting issue and that the Audit
Committee took no action in response.
F. The 2012 Memo
In January 2012, nine months into the term of the DEA Settlement, Walmart’s Chief
Administrative Officer updated the Audit Committee and the Executive Committee about
20
compliance efforts in the Health and Wellness Division. Ex. 6 (the “2012 Memo”). The
cover memorandum acknowledged that compliance efforts had fallen behind schedule and
stated bluntly that “[s]ignificant compliance issues remain unresolved.” Id. at ’035.
Walmart’s central compliance group (“Corporate Compliance”) had taken the effort away
from the Health and Wellness Division, and the memo gives the impression of a full reboot.
To that end, the memo advises that a “Five-year Health & Wellness compliance strategy is
being developed.” Id. The strategy did not already exist, nor had it been implemented. It
was being created.
A supporting slide deck elaborated on those high-level points. Reinforcing the
impression of a full reboot, one slide stated under “The Path Forward” that a “New
compliance plan [is] being developed.” Id. at ’037. The next slide identified four phases of
planned activity that the program “will involve”: (1) “Develop Commitments,” (2) “Assess
Gaps,” (3) “Mitigate Risks,” and (4) “Maintain and Monitor.” Id. at ’038. It is reasonable
to infer at the pleading stage that none of those stages had happened yet. Along similar
lines, the slide stated that the “Proposed Health & Wellness Compliance Plan” would start
with creating a “Road map of Health & Wellness regulatory obligations” and a “Road map
of business activities that require controls.” Id. at ’039.
The slide deck observed that the project needed “[s]easoned leadership that strikes
the proper balance between business and compliance considerations.” Id. at ’040. At the
pleading stage, the plaintiffs are entitled to an inference that the memo’s reference to a
21
“proper balance between business and compliance considerations,” meant limiting
compliance efforts when they threatened profitability.
An appendix to the slide deck identified a list of items that Walmart had completed
during fiscal years 2011 and 2012. See id. at ’044–’045. Walmart starts its fiscal year on
February 1 of the prior year, so fiscal year 2011 ran from February 1, 2010 to January 31,
2011, and fiscal year 2012 ran from February 1, 2011 to January 31, 2012. Significant
portions of the appendix are redacted. The reasonable inference is that the Health and
Wellness Division had accomplished some things, but their effort had fallen far short, so
Corporate Compliance took over and restarted the project. The list of completed activities
conspicuously omits significant items identified in the DEA Settlement, such as testing for
doctor shopping, flagging requests for early refills, or checking for altered or forged
prescriptions.
Read together, the 2012 Memo and accompanying materials support a pleading-
stage inference that the Health and Wellness Division had created a summary of what a
nice compliance program would look like, then never did the work to implement one. It
was now 2012, and Corporate Compliance was proposing to develop a five-year plan to
implement a new compliance program. That implementation would not be accomplished
until 2017, two years after the DEA Settlement expired in March 2015. To state the
obvious, Walmart would not comply with the DEA Settlement.
The 2012 Memo and accompanying materials were presented to the Audit
Committee and the Executive Committee, so those committees knew. Minutes from an
22
Audit Committee meeting in February 2012 reflect that the Audit Committee received a
report—from the Chief Administrative Officer who authored the 2012 Memo—on the state
of Walmart’s Health and Wellness compliance efforts, the transition to Corporate
Compliance, and the proposed five-year plan that Walmart was developing. Ex. 7. Minutes
from an Audit Committee meeting in March 2012 reflect that the Audit Committee
received another report on the state of Walmart’s “Health and Wellness Compliance
landscape.” Ex. 8 at 6.
The Board met six times during fiscal year 2013. The pleading-stage record does
not include any meeting minutes for any Board meeting. The plaintiff-friendly inference is
that the Board was not monitoring compliance with the DEA Settlement or the Controlled
Substances Act and was relying on the Audit Committee to fulfill its monitoring duties.
G. Maximizing Sales Through Opioid Prescriptions
During the same period that Walmart failed to invest in and build out a system of
compliance, Walmart used the filling of opioid prescriptions to enhance its bottom line.
One initiative was to incentivize pharmacists to fill more prescriptions. Walmart
implemented Pharmacy Facility Incentive Plans that paid bonuses to pharmacists based on
the number of prescriptions filled, the amount of profit generated, and customer relations
metrics. Walmart advocated within the National Association of Chain Drug Stores DEA
Compliance Working Group for permission to include controlled substances within the
pharmacist incentive programs, insisting that “[i]ncentive programs should be entirely
agnostic as to the type of prescriptions (controlled substances or non-controlled drugs)
23
filled.” Compl. ¶ 120. Walmart opposed a proposal to treat “[e]xcessive volume and rate
of growth of dispensing controlled substances” as a red flag. Id. ¶ 120 n.50. Consistent with
those positions, Walmart’s Pharmacy Facility Incentive Plan for 2012 did not distinguish
between prescriptions for controlled substances and other prescriptions. As pharmacists
filled more prescriptions, their incentive payments increased.
Walmart also introduced a Management Incentive Plan that provided for bonuses to
eligible employees once the number of prescriptions filled in a year exceeded 190,000. The
plan did not contain any metrics for patient safety or red flag detection. Id. ¶ 120.
Through these incentive plans, Walmart provided pharmacists with financial
inducements to fill more prescriptions and to disregard their Refusal-To-Fill Obligation.
Walmart also imposed direct pressure on pharmacists by setting a goal of filling a
prescription in less than twenty minutes, and that target was later reduced to fifteen
minutes. That short period did not enable a pharmacist to perform the due diligence and fill
out the forms necessary to investigate a prescription and, if warranted, refuse to fill it. Id.
¶ 119.
Walmart also took steps to bring more users of prescription opioids to its
pharmacies. Walmart collaborated with McKesson on trial offers, savings cards, and e-
coupons for opioids such as OxyContin, Butrans, Hysingla, Ultram, Magnacet, and
Nucynta. For the Magnacet loyalty program, Walmart and CVS handled 49% of all claims.
For Nucynta, Walmart was in the top four pharmacies by the number of claims. Walmart
24
also partnered with Purdue Pharma on direct mail campaigns to sell Butrans, using
Walmart’s prescription data to target patients who had used opioids. Id. ¶¶ 115–116.
Walmart’s opioid marketing campaigns not only generated sales for its pharmacies,
but also helped cross-sell other products. By bringing customers into its stores to fill opioid
prescriptions, Walmart had the opportunity to sell them other products. Id. ¶ 119.
The complaint’s allegations support a pleading-stage inference that Walmart sought
to increase the number of opioid prescriptions that it filled as a means of increasing profits.
Walmart did not exhibit comparable initiative on the compliance front. The plaintiff-
friendly inference is that Walmart had a business plan of prioritizing profits over
compliance.
H. The Whistleblower
In August 2012, a whistleblower notified the Chairman of the Board and Walmart’s
Global Ethics Office about concerns regarding controlled substance prescriptions. The
whistleblower was a full-time floater pharmacist who filed a qui tam complaint in 2013
that outlined his concerns. He asserted that the following events took place during the six
weeks between July 14 and August 30, 2012:
• He observed Walmart pharmacists filling prescriptions that bore red flags, failing to
comply with the Recordkeeping Requirement, and failing to comply with the
Refusal-To-Fill Obligation.
• He received significant pushback from the Health and Wellness Division about his
complaints and was terminated.
25
The complaint was not unsealed until 2018.33
The plaintiff-friendly inference is that the whistleblower put the Chairman of the
Board and Walmart’s Global Ethics Office on notice about the consequences that were
flowing from a business strategy that prioritized filling opioid prescriptions over building
the compliance infrastructure and investing in the resources necessary to comply with the
DEA Settlement and the Controlled Substances Act. That red flag reached the highest
levels of Walmart management, including the member of the Board entrusted with primary
responsibility for Walmart’s governance.
I. Reports To Senior Officers, The Audit Committee, And The Board
The next event for which Walmart provided responsive documents in the Section
220 production took place on November 8, 2012, when the “Global Compliance and Ethics
Committee” met. That was a committee of compliance executives and employees, so this
decision calls it the Employee Compliance Committee.
Walmart produced a copy of the meeting minutes, which comprise seven pages. All
of the substantive portions of the minutes were redacted for non-responsiveness and
33
The defendants argue that the plaintiffs waived any arguments based on the
whistleblower by not spelling them out in their answering brief. The complaint was 135
pages long and contained 316 numbered paragraphs. The plaintiffs could not reproduce
every factual assertion in their brief, nor did they have to. Like the defendants, the plaintiffs
made legal argumen
Preview
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE ONTARIO PROVINCIAL COUNCIL OF ) CARPENTERS’ PENSION TRUST FUND, ) POLICE & FIRE RETIREMENT SYSTEM OF ) THE CITY OF DETROIT, AND NORFOLK ) COUNTY RETIREMENT SYSTEM, Derivatively ) on Behalf of WALMART INC., ) ) Plaintiffs, ) ) v. ) C.A. No. 2021-0827-JTL ) S. ROBSON WALTON, GREGORY B. PENNER, ) STEUART WALTON, TIMOTHY P. FLYNN, ) THOMAS W. HORTON, MARISSA A. MAYER, ) DOUG MCMILLON, STEVEN S. REINEMUND, ) PHYLLIS HARRIS, and JAY JORGENSEN, ) ) Defendants, ) ) and ) ) WALMART INC., ) ) Nominal Defendant. ) MEMORANDUM OPINION Date Submitted: January 13, 2023 Date Decided: April 26, 2023 Gregory V. Varallo, Mae Oberste, & Daniel E. Meyer, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Mark Lebovitch & Edward G. Timlin, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Leslie R. Stern, Nathaniel L. Orenstein, & Steven L. Groopman, BERMAN TABACCO, Boston, Massachusetts; Counsel for Police & Fire Retirement System of the City of Detroit and Norfolk County Retirement System. Ned Weinberger & Mark Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; David MacIsaac, LABATON SUCHAROW LLP, New York, New York; Counsel for The Ontario Provincial Council of Carpenters’ Pension Trust Fund. Raymond J. DiCamillo & John M. O’Toole, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Sean M. Berkowitz & Nicholas J. Siciliano, LATHAM & WATKINS LLP, New York, New York; Andrew W. Stern & Charlotte K. Newell, SIDLEY AUSTIN LLP, New York, New York; William M. Regan & Allison M. Wuertz, HOGAN LOVELLS US LLP, New York, New York; Frank R. Volpe, SIDLEY AUSTIN LLP, Washington, District of Columbia; Counsel for Defendants and Nominal Defendant. LASTER, V.C. Walmart Inc. operates over 5,000 pharmacies that dispense prescription opioids. Until April 2018, Walmart also acted as a wholesale distributor of prescription opioids. From 2006 to 2012 alone, Walmart distributed over five billion opioid pills. Based on its involvement with prescription opioids, Walmart currently faces thousands of lawsuits from private litigants, state attorneys general, and the U.S. Department of Justice. In November 2022, Walmart announced that it had agreed to a $3.1 billion nationwide opioid settlement (the “Nationwide Settlement”) designed to resolve substantially all of the opioid lawsuits pending in federal multidistrict litigation (the “Opioid MDL”), plus potential lawsuits by state, local, and tribal governments. Walmart has incurred millions of dollars in defense costs and suffered reputational harm. The plaintiffs own stock in Walmart. They seek to shift responsibility for the harm that Walmart has suffered to the fiduciaries whom they say caused it. They maintain that the directors and officers of Walmart breached their fiduciary duties to the corporation and its stockholders by (i) knowingly causing Walmart to fail to comply with a settlement between the U.S. Drug Enforcement Agency (“DEA”) and Walmart (the “DEA Settlement”); (ii) knowingly causing Walmart to fail to comply with its obligations under the federal Controlled Substances Act and its implementing regulations (collectively, the “Controlled Substances Act”) when acting as a dispenser of opioids through its retail pharmacies, and (iii) knowingly causing Walmart to fail to comply with its obligations under the Controlled Substances Act when acting as a wholesale distributor of opioids for its retail pharmacies. As to each of the three categories of alleged misconduct, the plaintiffs have advanced three species of claims: a Massey Claim, a Red-Flags Claim, and an Information- Systems Claim.1 The Massey Claim asserts that Walmart’s directors and officers knew that Walmart was failing to comply with its legal obligations and made a conscious decision to prioritize profits over compliance. The Red-Flags Claim asserts that a series of red flags put Walmart’s directors and officers on notice of Walmart’s noncompliance or potential corporate trauma, yet the directors and officers consciously ignored them. The Information- Systems Claim asserts that Walmart’s directors and officers knew that they had an obligation to establish a monitoring system to address a core compliance risk, yet consciously failed to make a good faith effort to fulfill that obligation. The defendants have moved to dismiss the plaintiffs’ claims for failing to support an inference of demand futility. The plaintiffs argue that the demand is futile because the complaint alleges facts supporting a reasonable inference that at least half of the directors 1 This theory has been called a “prong one” Caremark claim, but that sterile nomenclature carries little informational content, and when not immersed in a Caremark case, I have difficulty remembering which theory is prong one and which is prong two. In one decision, I called the prong one theory a “Reporting-Systems Theory” or a “Reporting- Systems Claim.” Collis, 287 A.3d at 1176. More recently, I called it an “Information- Systems Theory” or an “Information-Systems Claim.” In re McDonald’s Corp. S’holder Derv. Litig. (McDonald’s Officers), 289 A.3d 343, 359–60 (Del. Ch. 2023). Either works. As between the two, the reporting-systems label is narrower and could imply only humans reporting up the chain. Oversight systems should be broader and include technology. The more expansive label of information-systems therefore seems preferable. Traditionalists may stick to prong one and prong two. Lawyers communicating with me can assist my comprehension by using the more descriptive labels. 2 in office when the lawsuit was filed face a substantial threat of liability or, in the alternative, lack independence. This decision denies the motion to dismiss as to claims relating to the DEA Settlement and claims relating to Walmart’s compliance with its obligations as a dispenser under the Controlled Substances Act. The motion is granted as to the claims relating to Walmart’s compliance with its obligations as a distributor under the Controlled Substances Act. I. FACTUAL BACKGROUND The facts are drawn from the operative complaint, the documents it incorporates by reference, and pertinent public documents that are subject to judicial notice. 2 At this stage 2 The operative complaint incorporates by reference documents produced in federal proceedings involving Walmart. The operative complaint also incorporates documents filed with the U.S. Securities and Exchange Commission (the “SEC”). The court may consider both sets of documents at this stage of the proceedings. See, e.g., In re Rural Metro Corp. S’holders Litig., 2013 WL 6634009, at *7 (Del. Ch. Dec. 17, 2013) (“Applying [Delaware] Rule [of Evidence] 201, Delaware courts have taken judicial notice of publicly available documents that ‘are required by law to be filed, and are actually filed, with federal or state officials.’” (quoting In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 584 (Del. Ch. 2007))); Aequitas Sols., Inc. v. Anderson, 2012 WL 2903324, at *3 n.17 (Del. Ch. June 25, 2012) (taking judicial notice of a pleading filed in a related action); Prather v. Doroshow, Pasquale, Krawitz & Bhaya, 2011 WL 1465520, at *1 n.2 (Del. Super. Ct. Apr. 14, 2011) (“For purposes of the instant motion to dismiss, this Court takes judicial notice of the federal docket of the Pennsylvania litigation and the foregoing decision of the Court of Appeals for the Third Circuit.”); In re Career Educ. Corp. Deriv. Litig., 2007 WL 2875203, at *9 (Del. Ch. Sept. 28, 2007) (“When considering a motion to dismiss, the court also may take judicial notice of publicly filed documents, such as documents publicly filed in litigation pending in other jurisdictions.” (footnote omitted)). Citations in the form “Compl. ¶ —” refer to the paragraphs of the operative complaint. Citations in the form “Ex. [number] at —” refer to exhibits that the defendants 3 of the proceedings, the complaint’s allegations are assumed to be true, and the plaintiffs receive the benefit of all reasonable inferences, including inferences drawn from the documents. Before filing suit, the plaintiffs used Section 220 of the Delaware General Corporation Law to obtain books and records. Walmart certified that between the documents it produced and those it listed on its privilege log, “Walmart’s production is complete with respect to every category of documents that Walmart is required to produce.”3 Given this certification, if the record lacks documentation relating to a particular event, and if it is reasonable to expect that documentation would exist if the event took place, then the plaintiffs are entitled to a reasonable inference that the event did not occur.4 filed with their opening brief in support of their motion to dismiss. See Dkt. 30. Citations in the form “Ex. [letter] at —” refer to exhibits that the plaintiffs filed with their answering brief. See Dkt. 40. Citations in the form “PSB Ex. [letter] at —” refer to exhibits that the plaintiffs filed with their supplemental brief. See Dkt. 64. Page citations refer to the internal pagination or, if there is none, then to the last three digits of the control number. 3 Final Order and Judgment at 7, See Police & Fire Ret. Sys. of the City of Det. v. Walmart, Inc., C.A. No. 2020-0478-JTL, Dkt. 39 (Del. Ch. Oct. 29, 2020). 4 See D.R.E. 803(7) (treating as non-hearsay and permitting fact-finder to consider the absence of a record of a regularly conducted activity, such as board or committee meetings); see also Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1119 n.7 (Del. 1994) (“[T]he production of weak evidence when strong is, or should have been, available can lead only to the conclusion that the strong would have been adverse.”); Smith v. Van Gorkom, 488 A.2d 858, 878 (Del. 1985) (“It is a well established principle that the production of weak evidence when strong is, or should have been, available can lead only to the conclusion that the strong would have been adverse.” (citing Interstate Circuit v. United States, 306 U.S. 208, 226 (1939) and Deberry v. State, 457 A.2d 744, 754 (Del. 1983))), overruled on other grounds by Gantler v. Stephens, 965 A.2d 695 (Del. 2009); accord Young v. Red Clay Consol. Sch. Dist., 159 A.3d 713, 791 n.510 (Del. Ch. 2017) 4 The confidentiality agreement governing the Section 220 production included an incorporation-by-reference condition. Relying on that condition, the defendants submitted eighty-two exhibits with their opening brief, plus another five exhibits with their supplemental brief. The defendants relied on the exhibits to contest the account in the complaint. The incorporation-by-reference doctrine does not enable a court to weigh evidence on a motion to dismiss. It permits a court to review the actual documents to ensure that the plaintiff has not misrepresented their contents and that any inference the plaintiff seeks is a reasonable one. The doctrine limits the ability of a plaintiff to take language out of context, because the defendants can point the court to the entire document. The doctrine does not change the pleading standard that governs a motion to dismiss. 5 If the complaint contains well-pled allegations that could support different interpretations, then the court must credit the plaintiffs’ interpretation. If the record could support different inferences, and if the plaintiff seeks a reasonable inference, then the court must grant the plaintiff the inference.6 (quoting Kahn v. Lynch and Smith v. Van Gorkom); Chesapeake Corp. v. Shore, 771 A.2d 293, 300–01 & n.7 (Del. Ch. 2000) (same). 5 See, e.g., In re CBS Corp. S’holder Class Acton & Deriv. Litig., 2021 WL 268779, at *18 n.257 (Del. Ch. Jan. 27, 2021 (collecting authorities). 6 See Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002). 5 Many of the documents in the record can support several reasonable interpretations or inferences.7 At this stage of the case, the plaintiffs receive the benefit of their reasonable interpretations and inferences. Walmart laid the foundation for the plaintiffs to seek damaging inferences by redacting documents extensively. In many cases, only a few words survive. The resulting documents indicate that a topic was addressed, but the redactions deprive the court of insight into the context, the substance of the discussion, and any decision that might have been made. For a typical document, one possible inference is that the substance of the discussion and any decision would favor the plaintiffs’ theory of the case. Another possible inference is that the substance of the discussion and any decision would favor the defendants’ position. At this stage, the court must draw the inference that favors the plaintiffs.8 In some cases, Walmart made partial-sentence redactions, purportedly for non- responsiveness. The court has acknowledged that when producing books and records, a 7 See, e.g., Ex. 6 at ’035, ’044–47; Ex. 39 at ’330, ’332, ’336; Ex. 46 at ’601; Ex. 49 at ’822, ’825; Ex. B at 8–9. 8 See In re McDonald’s Corp. S’holder Deriv. Litig. (McDonald’s Directors), — A.3d —, 2023 WL 2293575, at *33 (Del. Ch. Mar. 1, 2023) (“When the documents from a Section 220 production contain gaps, a plaintiff can seek inferences about what the redacted material might say. A court can credit those inferences, and that outcome could be worse for the defendants than if the Company had produced the documents without redactions.”). 6 company may redact “material unrelated to the subject matter of a demand.”9 Measured under that standard, a partial-sentence redaction is dubious, because it depends on the premise that the author incoherently injected an unrelated topic into an otherwise responsive sentence.10 The partial-sentence redactions played into the plaintiffs’ hands. On many occasions, Walmart redacted or withheld documents for privilege. The Delaware Rules of Evidence provide that “[t]he claim of a privilege, whether in the present proceeding or upon a prior occasion, is not a proper subject of comment by judge or counsel” and that “[n]o inference may be drawn therefrom.”11 The parties have not addressed whether this rule applies only at trial or also at earlier stages, such as a motion to dismiss. To be safe, this decision assumes the rule applies and therefore does not speculate or draw inferences about the content of the privileged communication.12 In their briefs, the defendants argued that the existence of the privileged documents and passages showed that the Board and its committees received reports on compliance issues. That seems like a fair inference to draw, and this decision assumes that to be the 9 Okla. Firefighters Pension & Ret. Sys. v. Amazon.com, Inc., 2022 WL 1760618, at *13 (Del. Ch. June 1, 2022). 10 See McDonald’s Officers, 289 A.3d at 355 & n.2. 11 D.R.E. 512(a). 12 See ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at *39 n.300 (Del. Ch. July 21, 2017) (“Sprint withheld relevant materials on grounds of attorney-client privilege. Aurelius requested an adverse inference against Sprint in post-trial briefing, but this is improper.”), aff’d, 184 A.3d 1291 (Del. 2018). 7 case.13 What the court cannot do is draw the defense-friendly inference that the content of the discussions favored the defendants, such as by reflecting an assessment that Walmart’s compliance efforts were on track. Another reasonable inference is that the content of the discussions favored the plaintiffs, such as by reflecting an assessment that Walmart’s compliance efforts were off track. The passages and documents for which Walmart asserted privilege could inferably cloak reports that Walmart had not devoted sufficient resources to compliance, had failed to implement or was behind schedule in implementing key initiatives, and would not be able to fulfill its obligations without a significant investment of resources that would cut into profits. Although this decision does not draw inferences from any of the passages or documents for which Walmart has asserted privilege, it does draw inferences from an absence of non-privileged documents containing discussions or decisions about the business issues necessarily involved in (i) taking the steps necessary to comply with the DEA Settlement and the Controlled Substances Act, (ii) responding to red flags of noncompliance, and (iii) assessing the effectiveness of the compliance efforts. Legal advice undoubtedly is an input into those discussions and decisions, but if directors and officers 13 See Conduent State Healthcare, LLC v. AIG Specialty Ins. Co., 2023 WL 2256052, at *5 (Del. Super. Ct. Feb. 14, 2023) (citing D.R.E. 512(a)) (“The parties were strictly instructed that information contained in the logs could be used for the sole and very limited purpose of demonstrating, for example, that a meeting took place on a certain date, who attended the meeting, and the general topic of the meeting.”). 8 are doing their jobs, then there will be non-privileged discussions and decisions about what are inherently and ultimately business decisions (which the business judgment rule generally will protect). Walmart represented that its Section 220 production was complete, so when there are no indications of non-privileged discussions, the plaintiffs are entitled to an inference that the discussions and decisions did not occur. A. Walmart And Its Governance Walmart is a Delaware corporation with its principal place of business in Bentonville, Arkansas. Walmart operates three primary business segments: Sam’s Club, Walmart International, and Walmart U.S. As of 2022, the Walton family controls approximately 47.51% of Walmart’s voting shares, either directly or through Walton Enterprises, LLC and the Walton Family Holdings Trust. Walmart has a board of directors (the “Board”) charged with overseeing the business and affairs of the corporation. The Board’s duties include “overseeing the Company’s policies with respect to compliance with applicable laws and regulations and adopting policies of corporate conduct designed to assure compliance with applicable laws and regulations and to assure maintenance of necessary accounting, financial, and other controls.” Ex. 4 at 3. The Board meets at least four times per year. Id. at 4. The Board has established six committees: the Executive Committee, the Audit Committee, the Compensation and Management Development Committee, the Nominating and Governance Committee, the Strategic Planning and Finance Committee, and the 9 Technology and eCommerce Committee. Id. at 5. The Executive Committee and the Audit Committee are the most pertinent to this decision. The Executive Committee “[i]mplements policy decisions of the Board” and “[a]cts on the Board’s behalf between Board meetings.” Ex. 80 at 28. The Executive Committee meets “as often as it determines to be necessary or appropriate.” Ex. 70 at 50. The Executive Committee’s Chairperson “may direct appropriate members of management and staff to prepare draft agendas and related background information for each Executive Committee meeting.” Id. The Chairperson must approve the agenda and materials before they are distributed to the other committee members. Id. “At the request of the Board or as the Chairperson determines necessary, reports of meetings of the Executive Committee shall be made to the Board at its next regularly scheduled meeting.” Id. The Audit Committee oversees and monitors “compliance by the Company with legal and regulatory requirements.” Ex. 5 at 1. The Audit Committee meets at least quarterly and reports to the Board. The Audit Committee meets “no less than annually” with Walmart’s ethics and compliance executives “regarding the implementation and effectiveness of the Company’s ethics and compliance programs.” Id. at 8. B. Walmart’s Legal Obligations As A Dispenser Of Prescription Opioids Through its Health and Wellness Division, Walmart operates one of the largest pharmacy chains in the United States, with more than 5,000 retail pharmacies located in its Walmart and Sam’s Club stores. The Health and Wellness Division has generated at least 8% of Walmart’s annual revenues since 2011. Ex. 2 at 33. Through its retail pharmacies, 10 Walmart dispenses prescription opioids under a DEA license that requires compliance with the Controlled Substances Act.14 In its public filings, Walmart acknowledges that its business depends on complying with its legal obligations. See, e.g., Ex. 1 at 22. The Controlled Substances Act establishes a closed system for controlled substances, in which everyone from the manufacturer to the physician to the distributor to the pharmacist must register with the DEA and fulfill statutory and regulatory obligations. Registered manufacturers may sell controlled substances only to registered distributors. Registered distributors may distribute controlled substances only to registered pharmacy dispensers. And a registered dispenser may dispense controlled substances only under a legitimate prescription written by a registered prescriber.15 As a “dispenser,”16 Walmart must establish and maintain effective controls and procedures to guard against theft and diversion of controlled substances.17 The regulations for dispensers include specific requirements that pharmacies must meet. A pharmacy must 14 21 C.F.R. § 1301.11(a). 15 See 21 U.S.C. § 822. 16 See 21 C.F.R. § 1300.01 (“Dispenser means an individual practitioner, institutional practitioner, pharmacy or pharmacist who dispenses a controlled substance.” (emphasis added)); see 21 U.S.C. § 802(10) (a dispenser is “a practitioner who so delivers a controlled substance to an ultimate user”). 17 21 C.F.R. § 1301.71(a); see In re Nat’l Prescription Opiate Litig. (Opioid MDL Abatement Decision), — F. Supp. 3d —, 2022 WL 3443614, at *29 n.71 (N.D. Ohio Aug. 17, 2022), appeal pending, Trumbull Cnty. v. Purdue Pharma, L.P., No. 22-3753 (6th Cir.). 11 implement security measures to maintain control over its inventory of controlled substances (the “Inventory Control Requirement”).18 The security measures must enable the pharmacy to identify instances of loss or theft and notify the DEA.19 A pharmacist can fill only legitimate prescriptions for controlled substances. Under the Controlled Substances Act, a prescription is legitimate if “issued for a legitimate medical purpose by an individual practitioner acting in the usual course of his professional practice.”20 A pharmacist has a responsibility not to knowingly fill an illegitimate prescription.21 The prevailing professional standard requires that a pharmacist identify and investigate any red flags, such as large, repeat orders, early refills, or prescriptions from out-of-state prescribers.22 Pharmacists must use their professional judgment and refuse to fill orders that they determine are suspicious, report the refusal to the DEA, and maintain internal records regarding red-flagged prescriptions (the “Refusal-To-Fill Obligation”).23 18 21 C.F.R. § 1301.75. 19 Id. § 1301.76. 20 Id. § 1306.04(a). 21 See id. §§ 1306.04(a) & 1306.06. 22 “[D]ispensers of controlled substances are obligated to check for and conclusively resolve red flags of possible diversion prior to dispensing those substances.” See In re Nat’l Prescription Opiate Litig. (Opioid MDL Dismissal Ruling), 477 F. Supp. 3d 613, 629 (N.D. Ohio 2020), clarified on denial of recons., 2020 WL 5642173 (N.D. Ohio Sept. 22, 2020). 23 See Compl. ¶¶ 9, 92–93. 12 A pharmacy-registrant like Walmart must (1) employ properly licensed pharmacists, (2) work collaboratively with the pharmacists to dispense controlled substances properly to avoid diversion, and (3) collect and maintain specific records and data regarding its dispensing activities.24 The records that registrants must maintain are extensive (the “Recordkeeping Requirement”).25 For a dispenser, the Recordkeeping Requirement includes maintaining information on the number of units or volume [of controlled substances that are] dispensed, including the name and address of the person to whom it was dispensed, the date of dispensing, the number of units or volume dispensed, and the written or typewritten name or initials of the individual who dispensed or administered the [controlled] substance on behalf of the dispenser.26 Many of the red flags that the DEA expects pharmacists to examine are “very difficult, if not impossible, for a human pharmacist to identify consistently absent a system to aggregate, analyze, and provide feedback to the pharmacist about the prescription,” because “some prescriptions are not suspicious on their face but raise bright red flags when compared with other prescriptions in a database.”27 A pharmacy-registrant like Walmart must provide its pharmacists with the time and other resources necessary to carry out their obligations, including the Refusal-To-Fill 24 Opioid MDL Dismissal Ruling, 477 F. Supp. 3d at 630. 25 See 21 C.F.R. pt. 1304. 26 Id. § 1304.22(c). 27 Opioid MDL Dismissal Ruling, 477 F. Supp. 3d at 630. 13 Obligation. For example, a pharmacy-registrant may provide pharmacists with access to a computerized recordkeeping system so that the pharmacists can investigate red flags.28 A pharmacy is not legally required to provide access to a computerized recordkeeping system—”[i]t remains true, however, that a pharmacy may not fill a prescription that it knows or has reason to know is invalid and may not remain deliberately ignorant or willfully blind of the prescription information it has (including computerized reports it generates).”29 “Pharmacies may not do nothing with their collected data and leave their pharmacist-employees with the sole responsibility to ensure only proper prescriptions are filled.”30 The Controlled Substances Act does not mandate strict compliance with its requirements. Substantial compliance is sufficient.31 28 See id. at 629–31. 29 In re Nat’l Prescription Opiate Litig., 2020 WL 5642173, at *3 (N.D. Ohio Sept. 22, 2020). 30 Id. (cleaned up). 31 In re Nat’l Prescription Opiate Litig., 2021 WL 3917174, at *3 (N.D. Ohio Sept. 1, 2021) (citing 21 C.F.R. § 1301.71(b)). 14 C. The Order To Show Cause And Walmart’s Response On November 13, 2009, the DEA issued an order to show cause against a Walmart pharmacy in San Diego, California (the “Order to Show Cause”). Ex. A. The Order To Show Cause asserted that the San Diego pharmacy: (1) improperly dispensed controlled substances to individuals based on purported prescriptions issued by physicians who were not licensed to practice medicine in California; (2) dispensed controlled substances to individuals located in California based on Internet prescriptions issued by physicians for other than a legitimate medical purpose and/or outside the usual course of professional practice in violation of federal and state law; and (3) dispensed controlled substances to individuals that [the San Diego pharmacy] knew or should have known were diverting controlled substances. Id. § II. Walmart disputed the factual assertions and “disagreed with DEA’s position that the DEA registration of [the San Diego pharmacy] should be revoked.” Id. Also in 2009, Walmart commissioned McKinsey & Company to conduct a risk assessment for the Health and Wellness Division. Ex. 6 at ’037. Walmart has claimed the review triggered various actions, including a host of “new compliance projects.” Id. That is a defense-friendly inference. Documents regarding those projects were either not produced as part of Walmart’s Section 220 production or were so heavily redacted that no inference can be drawn about the substance of the redacted text. In November 2010, the President of the Walmart Stores segment sent a memorandum to the Audit Committee to provide an update on “Health & Wellness 15 Transforming Compliance and Quality Assurance.” See Ex. 39. Senior officers, including Robson Walton, were copied. Id. at ’330. In his memo, the President gave a mixed report on Walmart’s compliance efforts. To the good, he stressed some positive steps: Since our last report we have restructured our field operations management structure to improve oversight. We have built a dedicated Professional Affairs group headed by a vice president to oversee quality and compliance assurance. This group includes a new staff of auditors and quality assurance specialists. It also includes a credentialing team to assure compliance with licensure laws. We have also established a group to train professionals in the field including pharmacy technicians. A process for tracking key performance indicators of thousands of pharmacy technicians will be in place in all stores within the next 6 months. Id. But after that leadup, the President gave a more conservative assessment of existing efforts and the work yet to come: “Frankly, we are not satisfied with our progress addressing many challenges that we know to exist.” Id. The memo identified two significant challenges. The first challenge, identified in a single sentence, was redacted. The redaction was marked “NR/ACP/AWP,” for non- responsive, attorney-client privilege, attorney work product. Because the single sentence redaction appears in an otherwise responsive paragraph, the redaction is dubious, and with three possibilities provided, the basis for it is unclear. At the pleading stage, the plaintiffs are entitled to an inference that the redacted text referenced a compliance failure that Walmart was not addressing. The second challenge was implementing ConnexUs, a dispensing software program that would assist pharmacists in managing their work and 16 complying with legal requirements. Referring to both challenges, the President noted that “these are areas where we’ve still got work to do.” Id. The memo attached an eight-page presentation on compliance. Virtually all of the presentation was redacted as non-responsive. That claim is dubious for a presentation that dealt with the status of compliance in the Health and Wellness Division. D. The DEA Settlement In February 2011, Walmart and the DEA entered into the DEA Settlement. See Ex. A. The DEA Settlement required Walmart to implement and maintain a compliance program for all of its pharmacies. The principal provision states: Walmart agrees to maintain a compliance program, updated as necessary, designed to detect and prevent diversion of controlled substances as required by the Controlled Substances Act (“CSA”) and applicable DEA regulations. This program shall include procedures to identify the common signs associated with the diversion of controlled substances including but not limited to, doctor-shopping, requests for early refills, altered or forged prescriptions, prescriptions written by doctors not licensed to practice medicine in the jurisdiction where the patient is located, and prescriptions written for other than a legitimate medical purpose by an individual practitioner acting outside the usual course of his professional practice. The program shall also include procedures to report thefts and significant losses of controlled substances . . . and the routine and periodic training of all Walmart employees, including new employees, responsible for controlled substances regarding their responsibilities under the CSA and regarding relevant elements of the compliance program. Id. § III.4.a. Through this paragraph, Walmart committed to the DEA to establish and maintain a compliance system that would result in its pharmacies being able to satisfy the Inventory 17 Control Requirement, the Recordkeeping Requirement, and the Refusal-To-Fill Obligation. Other sections of the DEA Settlement identified additional features that Walmart’s compliance program needed to include, as well as problems that it had to address. For example: • Walmart committed to notifying the local DEA office within seven business days of any refusal-to-fill decision by one of its pharmacists. Id. § III.4.b. • Walmart committed to having a system that would record and maintain identifying information from a person picking up a controlled substance prescription in a form that would be readily retrievable. Id. § III.4.c. • Walmart committed to instituting policies and procedures to block early refills of controlled substances. § III.4.i. Walmart expressly agreed that the obligations in the DEA Settlement “do not fulfill the totality of its obligations under the CSA and its implementing regulations.” Id. § III.4.a. The term of the DEA Settlement ran from March 11, 2011 to March 11, 2015. Id. at § III.13. Because the DEA Settlement spoke of maintaining a compliance program and updating it as necessary, it is plain that the DEA was not setting March 11, 2015 as a deadline date by which Walmart had to achieve compliance. Instead, the DEA Settlement required that Walmart work in good faith to achieve compliance earlier, then remain in compliance for the remainder of the term of the DEA Settlement, while updating its systems as necessary. 18 E. Walmart’s Efforts To Comply With The DEA Settlement By August 2011, Walmart had created a summary overview of its formal compliance program for the Health and Wellness Division. See Ex. 15. The summary described a reporting structure, concepts, and principles that tracked what a Fortune 500 company’s compliance program should have. The summary included an “Index of Health and Wellness Procedures” that included more than 150 procedures for pharmacies to follow. Id. at 16–19. Walmart produced a number of the policies that were in effect at that time, which told pharmacy employees how to handle a variety of tasks.32 On paper, the effort to establish a compliance system that would satisfy the DEA Settlement seemed off to a good start. The problem lay in the funding and staffing for the work necessary to create the controlled substance monitoring program that would provide the infrastructure for the words on the paper. The team responsible for doing the work estimated that it needed $40 million to accomplish the tasks. Management only provided a budget of $11 million. Ex. 82 at ’364. In an internal email, a team member described that amount as “just enough to cover [existing] compliance projects” with “all development [projects] to be evaluated on a project by project basis.” Id. at ’363. Another team member stated that they faced a “Sophie’s Choice” that required selecting “one high need project 32 See Exs. 17, 19, 21, 22, 23, 25–29, 31–32, 37, 39. Walmart also produced some policies that were adopted later. Ex. 18 (June 2015); Ex. 20 (Aug. 2012); Ex. 24 (Oct. 2014); Ex. 30 (Aug. 2014); Ex. 33 (Apr. 2017). These documents and other exhibits support an inference that Walmart’s compliance program became more detailed over time. 19 over another.” Id. at ’363. Walmart did not produce a final budget for the Health and Wellness Division as part of its Section 220 document production, entitling the plaintiffs to an inference that a budget sufficient to fund the projects necessary to comply with the DEA Settlement did not exist. Two entries on Walmart’s privilege log indicate that management reported to the Audit Committee on the Health and Wellness compliance program in November 2011. Ex. 14 at Item Nos. 34 & 41. The privilege log describes the discussions as addressing “Walmart’s Health & Wellness Compliance Program, including compliance with DEA regulations and agreements, controlled-substance training, and an inventory variance reporting tool.” Ex. 14 Item No. 34 at 4. There are no non-privileged documents in the Section 220 production reflecting any non-privileged discussion or decisions about the business issues associated with achieving compliance with the DEA Settlement, such as the amount of money that the team responsible for implementing the projects needed to accomplish its work. Read together, the internal email about a lack of funding, the privilege log entries regarding an Audit Committee meeting, and the absence of any indication of responsive action support a pleading-stage inference, favorable to the plaintiffs, that management told the Audit Committee about the budgeting issue and that the Audit Committee took no action in response. F. The 2012 Memo In January 2012, nine months into the term of the DEA Settlement, Walmart’s Chief Administrative Officer updated the Audit Committee and the Executive Committee about 20 compliance efforts in the Health and Wellness Division. Ex. 6 (the “2012 Memo”). The cover memorandum acknowledged that compliance efforts had fallen behind schedule and stated bluntly that “[s]ignificant compliance issues remain unresolved.” Id. at ’035. Walmart’s central compliance group (“Corporate Compliance”) had taken the effort away from the Health and Wellness Division, and the memo gives the impression of a full reboot. To that end, the memo advises that a “Five-year Health & Wellness compliance strategy is being developed.” Id. The strategy did not already exist, nor had it been implemented. It was being created. A supporting slide deck elaborated on those high-level points. Reinforcing the impression of a full reboot, one slide stated under “The Path Forward” that a “New compliance plan [is] being developed.” Id. at ’037. The next slide identified four phases of planned activity that the program “will involve”: (1) “Develop Commitments,” (2) “Assess Gaps,” (3) “Mitigate Risks,” and (4) “Maintain and Monitor.” Id. at ’038. It is reasonable to infer at the pleading stage that none of those stages had happened yet. Along similar lines, the slide stated that the “Proposed Health & Wellness Compliance Plan” would start with creating a “Road map of Health & Wellness regulatory obligations” and a “Road map of business activities that require controls.” Id. at ’039. The slide deck observed that the project needed “[s]easoned leadership that strikes the proper balance between business and compliance considerations.” Id. at ’040. At the pleading stage, the plaintiffs are entitled to an inference that the memo’s reference to a 21 “proper balance between business and compliance considerations,” meant limiting compliance efforts when they threatened profitability. An appendix to the slide deck identified a list of items that Walmart had completed during fiscal years 2011 and 2012. See id. at ’044–’045. Walmart starts its fiscal year on February 1 of the prior year, so fiscal year 2011 ran from February 1, 2010 to January 31, 2011, and fiscal year 2012 ran from February 1, 2011 to January 31, 2012. Significant portions of the appendix are redacted. The reasonable inference is that the Health and Wellness Division had accomplished some things, but their effort had fallen far short, so Corporate Compliance took over and restarted the project. The list of completed activities conspicuously omits significant items identified in the DEA Settlement, such as testing for doctor shopping, flagging requests for early refills, or checking for altered or forged prescriptions. Read together, the 2012 Memo and accompanying materials support a pleading- stage inference that the Health and Wellness Division had created a summary of what a nice compliance program would look like, then never did the work to implement one. It was now 2012, and Corporate Compliance was proposing to develop a five-year plan to implement a new compliance program. That implementation would not be accomplished until 2017, two years after the DEA Settlement expired in March 2015. To state the obvious, Walmart would not comply with the DEA Settlement. The 2012 Memo and accompanying materials were presented to the Audit Committee and the Executive Committee, so those committees knew. Minutes from an 22 Audit Committee meeting in February 2012 reflect that the Audit Committee received a report—from the Chief Administrative Officer who authored the 2012 Memo—on the state of Walmart’s Health and Wellness compliance efforts, the transition to Corporate Compliance, and the proposed five-year plan that Walmart was developing. Ex. 7. Minutes from an Audit Committee meeting in March 2012 reflect that the Audit Committee received another report on the state of Walmart’s “Health and Wellness Compliance landscape.” Ex. 8 at 6. The Board met six times during fiscal year 2013. The pleading-stage record does not include any meeting minutes for any Board meeting. The plaintiff-friendly inference is that the Board was not monitoring compliance with the DEA Settlement or the Controlled Substances Act and was relying on the Audit Committee to fulfill its monitoring duties. G. Maximizing Sales Through Opioid Prescriptions During the same period that Walmart failed to invest in and build out a system of compliance, Walmart used the filling of opioid prescriptions to enhance its bottom line. One initiative was to incentivize pharmacists to fill more prescriptions. Walmart implemented Pharmacy Facility Incentive Plans that paid bonuses to pharmacists based on the number of prescriptions filled, the amount of profit generated, and customer relations metrics. Walmart advocated within the National Association of Chain Drug Stores DEA Compliance Working Group for permission to include controlled substances within the pharmacist incentive programs, insisting that “[i]ncentive programs should be entirely agnostic as to the type of prescriptions (controlled substances or non-controlled drugs) 23 filled.” Compl. ¶ 120. Walmart opposed a proposal to treat “[e]xcessive volume and rate of growth of dispensing controlled substances” as a red flag. Id. ¶ 120 n.50. Consistent with those positions, Walmart’s Pharmacy Facility Incentive Plan for 2012 did not distinguish between prescriptions for controlled substances and other prescriptions. As pharmacists filled more prescriptions, their incentive payments increased. Walmart also introduced a Management Incentive Plan that provided for bonuses to eligible employees once the number of prescriptions filled in a year exceeded 190,000. The plan did not contain any metrics for patient safety or red flag detection. Id. ¶ 120. Through these incentive plans, Walmart provided pharmacists with financial inducements to fill more prescriptions and to disregard their Refusal-To-Fill Obligation. Walmart also imposed direct pressure on pharmacists by setting a goal of filling a prescription in less than twenty minutes, and that target was later reduced to fifteen minutes. That short period did not enable a pharmacist to perform the due diligence and fill out the forms necessary to investigate a prescription and, if warranted, refuse to fill it. Id. ¶ 119. Walmart also took steps to bring more users of prescription opioids to its pharmacies. Walmart collaborated with McKesson on trial offers, savings cards, and e- coupons for opioids such as OxyContin, Butrans, Hysingla, Ultram, Magnacet, and Nucynta. For the Magnacet loyalty program, Walmart and CVS handled 49% of all claims. For Nucynta, Walmart was in the top four pharmacies by the number of claims. Walmart 24 also partnered with Purdue Pharma on direct mail campaigns to sell Butrans, using Walmart’s prescription data to target patients who had used opioids. Id. ¶¶ 115–116. Walmart’s opioid marketing campaigns not only generated sales for its pharmacies, but also helped cross-sell other products. By bringing customers into its stores to fill opioid prescriptions, Walmart had the opportunity to sell them other products. Id. ¶ 119. The complaint’s allegations support a pleading-stage inference that Walmart sought to increase the number of opioid prescriptions that it filled as a means of increasing profits. Walmart did not exhibit comparable initiative on the compliance front. The plaintiff- friendly inference is that Walmart had a business plan of prioritizing profits over compliance. H. The Whistleblower In August 2012, a whistleblower notified the Chairman of the Board and Walmart’s Global Ethics Office about concerns regarding controlled substance prescriptions. The whistleblower was a full-time floater pharmacist who filed a qui tam complaint in 2013 that outlined his concerns. He asserted that the following events took place during the six weeks between July 14 and August 30, 2012: • He observed Walmart pharmacists filling prescriptions that bore red flags, failing to comply with the Recordkeeping Requirement, and failing to comply with the Refusal-To-Fill Obligation. • He received significant pushback from the Health and Wellness Division about his complaints and was terminated. 25 The complaint was not unsealed until 2018.33 The plaintiff-friendly inference is that the whistleblower put the Chairman of the Board and Walmart’s Global Ethics Office on notice about the consequences that were flowing from a business strategy that prioritized filling opioid prescriptions over building the compliance infrastructure and investing in the resources necessary to comply with the DEA Settlement and the Controlled Substances Act. That red flag reached the highest levels of Walmart management, including the member of the Board entrusted with primary responsibility for Walmart’s governance. I. Reports To Senior Officers, The Audit Committee, And The Board The next event for which Walmart provided responsive documents in the Section 220 production took place on November 8, 2012, when the “Global Compliance and Ethics Committee” met. That was a committee of compliance executives and employees, so this decision calls it the Employee Compliance Committee. Walmart produced a copy of the meeting minutes, which comprise seven pages. All of the substantive portions of the minutes were redacted for non-responsiveness and 33 The defendants argue that the plaintiffs waived any arguments based on the whistleblower by not spelling them out in their answering brief. The complaint was 135 pages long and contained 316 numbered paragraphs. The plaintiffs could not reproduce every factual assertion in their brief, nor did they have to. Like the defendants, the plaintiffs made legal argumen