Green v. Paz

Randy Green and Clifford Elow, derivatively and on behalf ofCigna Corporation, Plaintiffs, v. George Paz, Timothy Wentworth, Eric Slusser, James M. Havel, David Queller,Christopher A. Mcginnis, Christopher K. Knibb, Gary G. Benanav, Maura C. Breen,William J. Delaney, Elder Granger, Nicholas J. Lahowchic, Thomas P. Mac Mahon,Frank Mergenthaler, Woodrow A. Myers, Jr., Roderick A. Palmore, William L. Roper,and Seymour Sternberg, Defendants,andCIGNA CORPORATION, Nominal Defendant.

C.A. No. 20-324-LPS

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

UNSEALED ON April 6, 2021

March 31, 2021

Thomas A. Uebler, Joseph L. Christensen, and Hayley M. Lenahan, MCCOLLOM D'EMILIO SMITH UEBLER LLC, Wilmington, Delaware

Willem F. Jonckheer, Dustin L. Schubert, SCHUBERT JONCKHEER & KOLBE, San Francisco, California

Melinda Nicholson, KAHN SWICK & FOTI LLC, New Orleans, Louisiana

Roger A. Sachar, NEWMAN FERRARA, New York, New York

Attorneys for Plaintiffs Randy Green and Clifford Elow

Paul J. Lockwood, Jenness E. Parker, and Kaitlin E. Maloney, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware

Attorneys for Defendants George Paz, Timothy Wentworth, Eric Slusser, James M. Havel, David Queller, Christopher A. McGinnis, Christopher K. Knibb, Gary G. Benanav, Maura C. Breen, William J. Delaney, Elder Granger, Nicholas J. Lahowchic, Thomas P. Mac Mahon, Frank Mergenthaler, Woodrow A. Myers, Jr., Roderick A. Palmore, William L. Roper, and Seymour Sternberg

Jarrett W. Horowitz, CONNOLLY GALLAGHER LLP, Wilmington, Delaware

Timothy J. Perla, Jessica L. Lewis, and George F. Manley, WILMER CUTLER PICKERING HALE & DORR LLP, Boston, Massachusetts

Attorneys for Nominal Defendant Cigna Corporation

MEMORANDUM OPTNTON

March 31, 2021

Wilmington, Delaware

STARK, U.S. District Judge:

Pending before the Court is Cigna Corporation's ("Cigna") Motion to Dismiss (D.I. 64) Plaintiffs Randy Green ("Green") and Clifford Elow's ("Elow") (collectively "Plaintiffs") Verified First Amended Consolidated Shareholder Derivative Complaint ("FAC") pursuant to Rule 23.1. (D.I. 28)

Also pending is the motion to dismiss the FAC filed by Defendants George Paz, Timothy Wentworth, Eric Slusser, James M. Havel, David Queller, Christopher A. McGinnis, Christopher K. Knibb, Gary G. Benanav, Maura C. Breen, William J. Delaney, Elder Granger, Nicholas J. Lahowchic, Thomas P. Mac Mahon, Frank Mergenthaler, Woodrow A. Myers, Jr., Roderick A. Palmore, William L. Roper, and Seymour Sternberg (together, the "Individual Defendants"). (D.I. 68)

The Court heard oral argument on both motions on August 19, 2020. (D.I. 99) ("Tr.") For the following reasons, the Court will grant both motions to dismiss with prejudice.

I. BACKGROUND

On December 7, 2016, Plaintiff Green filed a shareholder derivative suit in the U.S. District Court for the Eastern District of Missouri against Express Scripts Holding Company ("Express Scripts"), alleging that the Individual Defendants breached their fiduciary duties with respect to the company's relationship with Anthem Inc. ("Anthem"), a health benefits company that previously had a contractual relationship with Express Scripts. (D.I. 1) All of the Individual Defendants are former Express Scripts officers and directors. (D.I. 28 ¶¶ 83-100) Four of the Individual Defendants are current Cigna officers and directors. (Id. ¶¶ 84, 92, 93, 99)

In 2009, Express Scripts entered into a 10-year contract to provide pharmacy benefits management services to Anthem (the "Anthem Contract"). (Id. ¶ 3) Section 5.6 of the AnthemContract included a "Periodic Pricing Review" provision, which allowed Anthem to hire an independent consultant to conduct a market analysis every three years. (Id. ¶ 125) When Express Scripts entered into the Anthem Contract, it amortized the contract over a 15-year period, anticipating there was a "high probability" (75% to 80% likelihood) that the contract would be renewed for at least five years beyond its expiration date. (Id. ¶¶ 33, 135-41, 180)

Anthem began negotiations on the 2015 pricing benchmark early, requesting in October 2014 some $13 billion in pricing concessions during the remaining contract term and $1.8 billion in post-termination concessions. (Id. ¶¶ 22, 148) Express Scripts, however, took the position that the Anthem Contract did not require it to provide competitive benchmark pricing. (Id. ¶ 149)

In 2015, Anthem notified Express Scripts of certain operational issues and asserted breaches of the Anthem Contract. (Id. ¶ 142) Express Scripts attempted to resolve these issues (id. ¶¶ 157, 159, 165, 182, 185, 212) and throughout the year also continued negotiating with Anthem (id. ¶¶ 167, 196, 207, 211, 230). In March 2015, Anthem purported to invoke its right to conduct a Periodic Pricing Review. (Id. ¶¶ 22, 174) On April 1, 2015, Anthem provided Express Scripts with a formal notice of breach related to the pricing negotiations, triggering a cure period under Section 6.2 of the contract. (Id. ¶ 175) At a May 6, 2015 meeting, the Express Scripts Board reviewed management's plan "to improve the Company's relationship with Anthem." (Id. ¶ 182)

For the remainder of 2015 and the first quarter of 2016, Anthem and Express Scripts had discussions and exchanged proposals regarding the Periodic Pricing Review. (See, e.g., id. ¶¶ 196, 207, 211, 219, 230-31, 235, 238) A March 3, 2015 handout to Express Scripts' Compensation Committee stated that the Anthem Contract was one of the company's "mostsignificant risks" (id. ¶ 161 Ex. H at 1128); the Express Scripts Board received identical information the next day (id. ¶ 163 Ex. I).

Express Scripts continued to utilize a 15-year amortization period on the Anthem Contract in its Form 10-K for 2015 and all Form 10-Qs for 2016. (Id. ¶¶ 33, 135, 180) Then, on April 1, 2015, following more refusals to engage in competitive benchmark pricing, Anthem sent a second notice of breach, arising out of a failure to negotiate. (Id. ¶ 175) Anthem publicly reiterated its hope to reach an agreement on the pricing negotiations. (See D.I. 70 Ex. 10 at 8)

On behalf of Express Scripts, George Paz confirmed that Express Scripts was "excited to continue productive discussions with Anthem regarding [the] relationship" and was "fully committed to reaching a mutually beneficial agreement and continuing our successful working relationship." (D.I. 28 ¶¶ 225-26; see also D.I. 70 Ex. 8 at 3) Throughout 2015, the Express Scripts Board and its committees continued to meet and discuss the Company's relationship with Anthem. (See, e.g., D.I. 28 ¶¶ 161, 163-66, 181-86, 192-93, 198, 209, 216-17)

Anthem then publicly disclosed that it was seeking $3 billion in concessions from Express Scripts. It was also still seeking a resolution: "[A]ll I can tell you at this stage is that dialog will continue, and we're hopeful that still in 2016, we will reach a resolution to this matter that we are engaged in with [Express Scripts]." (D.I. 70 Ex. 11 at 9)

On February 16, 2016, Express Scripts released its fourth quarter 2015 results and 2015 annual report. (D.I. 28 ¶ 239) In them, Express Scripts identified challenges associated with predicting the outcome of the negotiations, stating: "At this time we are unable to provide a timetable or an estimate as to the potential outcome of these events, any of which could result in a material adverse effect on our business and results of operations." (D.I. 70 Ex. 6 at 21) On an earnings call the next day, George Paz stated: "[O]bviously we would love to have an extensionas part of this agreement. And I think it's up to us to negotiate with them and find out what's tolerable and works for them and what's good for us and our shareholders." (Id. Ex. 9 at 11)

The parties negotiated but did not reach an agreement. (D.I. 28 Ex. F ¶ 9) On April 24, 2017, Express Scripts announced that Anthem would not renew the Anthem Contract. (Id. ¶ 255)

II. PROCEDURAL HISTORY

On March 21, 2016, Anthem filed suit against Express Scripts, alleging breach of contract for failing to renegotiate pricing in good faith and failing to remedy various operational shortfalls. (Id. ¶ 249) Anthem sought $13 billion in pricing concessions for the remainder of the contract's term, $1.8 billion in post-termination adjustments, $150 million in damages, and immediate contract termination. (Id. ¶ 41) At that point, Express Scripts acknowledged internally that the 15-year amortization was no longer appropriate. (Id. ¶¶ 232, 249, 252, 254)

Shortly thereafter, Plaintiff Clifford Elow sent a Section 220 demand to Express Scripts, which was refused. (Id. ¶ 113 n.15) Elow then filed a Section 220 suit in the Delaware Court of Chancery seeking to enforce the inspection demand, where he prevailed. (Id.) Express Scripts subsequently provided the pertinent materials.

On May 5, 2016, stockholders of Express Scripts filed a putative class action suit in the Southern District of New York, alleging violations of federal securities laws (the "Securities Action") and advancing the same theory of securities fraud that Plaintiffs assert here. (D.I. 70 Exs. 3, 4) The district court dismissed that putative class action suit with prejudice, which the Court of Appeals for the Second Circuit affirmed on appeal. (Id. Ex. 2)

On September 26, 2016, stockholders of Express Scripts filed a derivative action in the Southern District of New York (the "SDNY Derivative Action") arising out of the same facts asthis double derivative suit and the Securities Action. The SDNY Derivative Action, which asserted similar claims as this action, was dismissed pursuant to Rule 23.1 for failing to allege demand futility. (Id. Ex. 5)

On December 7, 2016, Plaintiff Randy Green filed a derivative action in the Eastern District of Missouri. (D.I. 1) Green alleged that the directors and officers of Express Scripts breached their fiduciary duties during the Anthem Contract negotiations by: (1) failing to disclose material information and/or making material misstatements; (2)...