In re Johnson & Johnson Derivative Litig.

900 F.Supp.2d 467

In re JOHNSON & JOHNSON DERIVATIVE LITIGATION.

Civil Action Nos. 10–2033 (FLW), 11–4993(FLW), 11–2511(FLW).

United States District Court, D. New Jersey.

Oct. 26, 2012.

Audra Elizabeth Petrolle, Donald A. Ecklund, James E. Cecchi, Carella, Byrne, Cecchi, Olstein, Brody & Agnello, P.C., Roseland, NJ, Lisa J. Rodriguez, Nicole M. Acchione, Trujillo Rodriguez & Richards, LLC, Haddonfield, NJ, James C. Shah, Shepherd, Finkelman, Miller & Shah, LLP, Collingswood, NJ, for Plaintiffs.

Edwin F. Chociey, Jr., Riker, Danzig, Scherer, Hyland & Perretti LLP, Morristown, NJ, Donald A. Robinson, Leda Dunn Wettre, Keith J. Miller, Robinson, Wettre & Miller LLC, Newark, NJ, for Defendants.

OPINION

WOLFSON, District Judge:

Presently before the Court is a motion to approve the final settlement reached between Plaintiffs-shareholders and nominal Defendant J & J Corporation (“J & J”) in several consolidated shareholder derivative actions, as well as motions to intervene and dismiss by an objector to the settlement. Through the settlement, J & J agrees to institute corporate governance changes and pay up to $10 million in attorney's fees and $450,000 in costs, subject to this Court's approval. For the following reasons, the Court will approve the settlement and appoint a special master to aid the Court in determining reasonable attorney's fees and costs. The Court denies the objector's motions to intervene and to dismiss.

I. BACKGROUNDA. Overview

This consolidated shareholder derivative action is a merger of several suits—eight separately filed demand-futility suits ¹, and two suits by plaintiffs who filed demand letters with J & J requesting, inter alia, that J & J institute litigation against members of its Board of Directors (“the Board”), but these requests were refused. I refer to these groups, respectively, as “Demand–Futility Plaintiffs” and “Demand Refused Plaintiffs.” I refer to all suits collectively as “the Derivative Suits.”

For a more complete factual background leading up to the filing of these suits, as well as the substantive allegations of the demand-futility complaint, the Court refers to its prior opinion granting, without prejudice, J & J's motion to dismiss those complaints. Suffice it to say here that the Demand–Futility Plaintiffs alleged that there were “red flags,” such as Food and Drug Administration warning letters, that should have alerted the Board about three substantive categories of alleged corporate misconduct: (a) product recalls; (b) off-label marketing of drugs; and (c) illegal kick-backs. Those plaintiffs further alleged that J & J failed to comply with current good manufacturing practices, referred to as “cGMP.” ² The Demand–Futility Plaintiffs assert violations of Section 14(a) of the Exchange Act, as well as breach of fiduciary duty claims against the Board. The Demand Refused Plaintiffs assert similar claims.

B. Procedural History

From February through November 2010, several J & J shareholders submitted demand letters to the Board, demanding that the Board investigate, institute litigation, and take other remedial action regarding, inter alia, J & J's product recalls, off-label drug marketing, illegal kickback schemes, and lack of good manufacturing practices. While these letters were in the process of being submitted, the Demand–Futility Plaintiffs filed their complaints, beginning with the first complaint filed on April 21, 2010 and ending with the final one filed on June 24, 2010.

Meanwhile, on April 22, 2010, the Board appointed a Special Committee, along with independent counsel, to consider the allegations of those shareholders who filed demand letters. The Special Committee was comprised of four independent directors who had recently joined the Board around the time the Committee was formed. Although the committee initially considered only the first-filed demand letters, on June 15, 2010, the Board expanded the committee's mandate to include review of the allegations of the demand-futility complaints, along with any subsequently-received demand letters or derivative complaints. See Report of the Special Committee at 2–3.

On July 19, 2010, while the Special Committee was considering the aforesaid allegations, three of the shareholders who filed demand letters (Leslie Katz, Jeffrey Tarson and Joan Tarson) moved to intervene in the demand-futility actions in which counsel had moved for leave to consolidate. The demand-futility complaints were ultimately consolidated, by Order of this Court, on August 17, 2010. In that same order, the Court appointed as co-counsel the following firms: Carella, Byrne, Cecchi, Olstein, Brody & Agnello, P.C., Morris and Morris Counselors at Law LLC, Robbins Geller Rudman & Dowd LLP, and Bernstein Litowitz Berger & Grossmann LLP. Counsel stipulated to this arrangement, arguing that appointing them to a co-counsel organizational structure would ensure that their efforts were not duplicated and would streamline representation of all Demand–Futility Plaintiffs. After the Court consolidated the demand-futility actions, the motion to intervene was administratively terminated pending the Special Committee's decision. The Demand–Futility Plaintiffs then filed a consolidated amended complaint on December 17, 2010. A few months later, on February 21, 2011, J & J filed a motion to dismiss that complaint.

While the J & J motion to dismiss the demand-futility consolidated amended complaint was still pending, the Special Committee issued its report, on June 27, 2011. The Committee recommended that the Board not pursue litigation on behalf of J & J against any J & J Board member or executive. The Board subsequently adopted the Special Committee's recommendation on July 11, 2011.

In addition, the Board adopted a series of internal controls designed to ensure that quality control and other issues that underlay the allegations of wrongful conduct in the Derivative Suits were reported upstream to the directors. Specifically, the Board accepted the Special Committee's recommendation that the Regulatory and Compliance Committee be expanded in the following manner:

[The Committee should be] authorized to retain outside expert consultants, to assist the Committee in its work as the need arises. Among other things, the Regulatory and Compliance Committee, in consultation with management and an expert consultant, should develop metrics and a report card that would provide insight into and perspective on J & J's Compliance systems and organizations. The new Committee should have an initial term of five years, commensurate with the McNeil Consent Decree. Members of the Special Committee will make themselves available to consult and confer with the members of the Regulatory and Compliance Committee, to provide the latter with the former's insights gained as a consequence of its investigation.

Report of the Special Committee at 121.

Once the Special Committee's report was filed, the Court granted the parties the opportunity to submit supplemental briefing on J & J's motion to dismiss. Thereafter, on July 28, 2011, the Court heard oral argument on the motion and reserved its ruling for a formal opinion. Also at the hearing, the Court addressed the previously-administrative terminated motion to intervene by the Demand Refused Plaintiffs ³, and denied that motion. Rather than consolidating those plaintiffs into the demand-futility action, the Court consolidated the suit brought by Leslie Katz, Jeffrey Tarson and Joan Tarson with one brought by another shareholder whose demand was refused—M.J. Copeland. These actions, together, comprise the Demand–Refused Plaintiffs. The Court appointed Abraham, Fruchter & Twersky, LLP as lead counsel, and Kantrowitz, Goldhamer & Graifman, P.C., as liaison counsel, for this group of plaintiffs.

After thoroughly considering the parties' arguments and extensive briefing, on September 29, 2011, 865 F.Supp.2d 545 (D.N.J.2011), the Court issued a formal opinion granting J & J's motion to dismiss without prejudice. The central question posed by the motion was whether the plaintiffs satisfied the Federal Rule of Civil Procedure 23.1 heightened pleading standard applicable solely to demand-futility actions. In granting J & J's motion, the Court ruled that, while the complaint alleged the numerous “red flags” that the demand-futility plaintiffs believed should have alerted Board members to J & J's alleged malfeasance, the plaintiffs did not sufficiently allege that the specific Board members actually had knowledge of those red flags.

The plaintiffs engaged in settlement negotiations with J & J following oral argument on the motion to dismiss but before the opinion was issued. Throughout the negotiations, the parties reviewed documents from their respective, multiple, experts and J & J provided informal discovery. In the parties' initial negotiations, around August 31, 2011, Demand Futility Plaintiffs provided a settlement proposal to the Board that included both corporate governance reforms and a monetary payment to J & J. Joint Decl., ¶ 53. Demand Refused Plaintiffs also participated in the settlement negotiations. Id. at ¶ 56. However, once the Court granted J & J's motion to dismiss on September 29, 2011, the Board was not willing to entertain a monetary component to the settlement and the negotiations from that point forward focused primarily on injunctive relief. See id. at ¶ 53–54, 60–61.

After seven months of negotiations, the parties entered into a proposed settlement agreement on July 11, 2012. Generally, Plaintiffs characterize these reforms as providing for adoption of management levelsystems and procedures designed to ensure early detection and remediation of all product-related issues. Pl. Open. Br. at 2. The key features of the agreement are: (1) the adoption of a Quality and Compliance (“Q & C”) Core Objective; (2) the creation and adoption of a Regulatory, Compliance & Government Affairs Committee (“RCGC”); and ...