Opioid Master Disbursement Tr. II v. Covidien Unlimited Co. (In re Mallinckrodt PLC)

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In re: MALLINCKRODT PLC, et al., Debtors.

OPIOID MASTER DISBURSEMENT TRUST II, Plaintiff, v. COVIDIEN UNLIMITED COMPANY (formerly known as Covidien Ltd. and Covidien plc), COVIDIEN GROUP HOLDINGS LTD. (formerly known as Covidien Ltd.), COVIDIEN INTERNATIONAL FINANCE S.A., COVIDIEN GROUP S.A.R.L., and DOE DEFENDANTS 1-500, Defendants.

Re: Adv. D.I. 13, 33^[1]

No. 20-12522 (JTD)

Adv. Proc. No. 22-50433(JTD)

United States Bankruptcy Court, D. Delaware

January 18, 2024

Chapter 11

OPINION

JOHN T. DORSEY, U.S.B.J.

Plaintiff Opioid Master Disbursement Trust II (the "Trust") commenced this action asserting claims arising from the 2013 spinoff (the "Spinoff") of the debtors in the above-captioned chapter 11 cases (collectively "Debtors" or "Mallinckrodt") from the corporate enterprise of the defendants Covidien.^[2] The Trust seeks to avoid and recover several alleged fraudulent transfers that made up the Spinoff, including (a) approximately $867 million in cash transfers made between 2010 through 2012; (b) Covidien's retention of approximately $721 million in proceeds from Mallinckrodt's 2013 issuance of senior unsecured notes; (c) Mallinckrodt's assumption of hundreds of millions of dollars of tax liability previously held by Covidien; (d) Mallinckrodt's assumption of indemnification obligations to Covidien; and (e) the value of the enterprise (without the Debtors' pharmaceutical business) that was transferred away from the Debtors as a result of the Spinoff (collectively the "Transfers"). Additionally, the Trust asserts numerous other claims arising from the Spinoff, including breach of fiduciary duty, contribution, and equitable subordination.

Covidien moved to dismiss the claims pursuant to Federal Rule of Civil Procedure 12(b)(6), applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7012 (the "Motion to Dismiss" or "Motion").^[3] In response to the Motion to Dismiss, the Trust filed a motion to amend the complaint (the "Motion to Amend").^[4] Both motions were fully briefed and argued together at a hearing held on August 16, 2023.^[5] For the reasons set forth below, both motions are granted in part and denied in part.

FACTUAL BACKGROUND ^[6]

The facts alleged in the Amended Complaint are assumed to be true for purposes of this motion to dismiss,^[7] and are as follows:

The Parties

Mallinckrodt, originally formed in 1867 in St. Louis, Missouri, is a global enterprise that develops, manufactures, and sells pharmaceutical products, including opioids.

In 2007, Mallinckrodt's then-parent, Tyco International Ltd., separated into three companies, and its healthcare business, which included its pharmaceutical business, became a part of the Covidien enterprise.

Though consisting of many separate corporate entities, the Covidien enterprise operated as a fully-integrated company, maintaining an organizational structure that consolidated the design, manufacturing, marketing, sales, promotion, supply, reporting, compliance, administration, and cash management functions of its many companies into a single unified economic entity.^[8] The board of directors of Covidien plc managed both Covidien plc and its subsidiaries, exercising control over the day-to-day affairs of the businesses as well as their finances, business practices, policies, reporting, compensation, sales and marketing strategies.^[9]

Covidien plc filed its financial results on a consolidated basis, reporting net sales by business segment, not subsidiary, and offset its losses against its gains as a single economic entity. Segment reporting allowed Covidien plc's board and officers to determine how business segments were constructed, what business metrics were reported, and how resources were allocated across the enterprise.^[10] Covidien maintained an integrated cash management system and routinely commingled funds and assets among its various businesses through intercompany transfers.^[11]

Thus, while Mallinckrodt remained a separate corporate entity on paper, once a part of the Covidien enterprise, Mallinckrodt ceased operating as a standalone entity and was considered both internally and externally to be Covidien's pharmaceutical segment.

The Opioid Landscape in the Early 2000s

Due to concerns about addiction, opioid pain relievers had traditionally been reserved for patients with the most serious conditions, such as cancer. But beginning in the 1990s, pharmaceutical manufacturers began to engage in marketing and promotional campaigns designed to persuade prescribers and patients that opioids were in fact safe, effective, non-addictive, and appropriate for individuals experiencing virtually any type of chronic pain.^[12] As a result, healthcare providers began to prescribe opioids in mass quantities.

Throughout the early 2000s, Mallinckrodt's opioid business was substantial, both in terms of production and market share.^[13] Mallinckrodt's leading branded opioid was an extended-release form of hydromorphone hydrochloride that was sold under the brand name Exalgo ("Exalgo"). Mallinckrodt also manufactured and sold generic versions of oxycodone, hydrocodone, and other opioid products.^[14] Though reports of increased opioid abuse and diversion of opioid products began to surface by the year 2000, it was not until the second half of the decade that opioids became a potentially significant source of liability for those who manufactured and sold them.

The first major pharmaceutical company to face opioid-related liability was Mallinckrodt competitor Purdue Pharma ("Purdue"). In 2007, Purdue entered into a settlement resolving government investigations into the company's aggressive and deceptive marketing of its opioid products, most notably OxyContin, for $19.5 million.^[15] Also in 2007, Purdue's affiliate Purdue Frederick Company pled guilty to one felony count of misbranding OxyContin, with the intent to defraud or mislead, and three of its corporate officers also pled guilty to misdemeanor charges of misbranding.^[16] In resolving the matters against it, Purdue Frederick Company admitted that from 1995 to 2001 it "marketed and promoted OxyContin as less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications," despite knowing these claims were untrue. As part of the plea agreement, Purdue Frederick agreed to pay over $600 million in fines and various other payments to settle related civil claims which was, at the time, one of the largest monetary sanctions imposed in the history of the pharmaceutical industry.^[17]

Mallinckrodt's Opioid Business

Despite the fact that scrutiny on companies in the opioid business was increasing, by September 2008, Mallinckrodt's profits from opioid sales had skyrocketed, leading one vice president of sales to refer to the growing oxycodone business as a "new economy."^[18] Between 2006 and 2014, Mallinckrodt was the largest manufacturer marketer, and producer of opioid products in the United States, with a 23% market share.^[19]

Mallinckrodt employed a sales force of approximately 200 representatives who were collectively responsible for about $400 million in sales from the business's branded opioid products. This vast network of sales representatives was incentivized to aggressively sell opioids using false and misleading claims about the benefits of opioids to prescribers while downplaying the risk of abuse and addiction. Representatives were evaluated, and their compensation determined, primarily by the number of opioid prescriptions that they sold.^[20]

The company also recruited and compensated top prescribers, referred to as "Key Opinion Leaders" to help promote its opioid products by speaking at or attending events designed to promote opioid products, delivering scripted talks about Mallinckrodt's opioids, and drafting misleading studies, among other things. Physicians selected for these programs attended trainings that Mallinckrodt hosted and delivered presentations to medical community peers at expensive restaurants and resorts.^[21]

By 2009, more manufacturers and distributors of opioid products came under fire by the Drug Enforcement Administration (the "DEA"). The company learned that "the sale of controlled substances to dispensers by distributors has come under great debate and concern from the DEA. Many wholesale drug distributors have already had significant fines and had to add to their existing protocols." Similarly, a Mallinckrodt director of security admitted, "we are very aware of the multi-million-dollar fines levied against Cardinal Health and McKesson for not being diligent with regard to sales."^[22] On January 7, 2009, Mallinckrodt received the first of what would eventually become many subpoenas from government investigators; this one from the U.S. Attorney's Office in the Northern District of California regarding the sales and monitoring of certain drugs, including Magnacet, one of Mallinckrodt's opioid products.^[23]

In subsequent months, following the widespread misuse of Purdue's opioid product, OxyContin, there was significant pressure on opioid manufacturers to ensure that their opioid products were "abuse-deterrent." Mallinckrodt's leading product, Exalgo, was coming up short. A June 2009 internal presentation stated that while "originally [] Exalgo was believed to be less abusable, through due diligence this profile was not validated. . . Hydromorphone [the active ingredient in Exalgo] is one of the most widely abused narcotics and one of the most potent . . . . There is not sufficient clinical or scientific evidence available to suggest that Exalgo should be treated differently than Palladone."^[24] That same month, an internal analysis of the risks of Exalgo stated that

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