Johnson & Johnson's deal to resolve the Justice Department's criminal investigation of the company's off-label marketing of the schizophrenia drug Risperdal is the company's third criminal plea in a little more than a year. In April 2010 J&J agreed to pay $81 million to resolve accusations of off-label marketing of the epilepsy drug Topamax. A year later the company ponied up $21.4 million in a deferred prosecution agreement that resolved allegations of illegal overseas bribery. Then there's the DOJ and Food and Drug Administration consent decree Johnson & Johnson signed in March 2011 to address problems in its production of over-the-counter medicines, including children's Tylenol and Motrin.
If you're thinking this all sounds like grist for a big, fat shareholder derivative suit against the J&J board, you're right, but you're also about a year too late.
In fact, there are two different derivative actions underway against J&J's board, which presents an interesting experiment in how to prosecute a derivative claim. Last December, four firms including Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd filed a 111-page consolidated complaint accusing members of the J&J board of failing to heed dozens of red flags waving in their faces from 2004 on. "Inexplicably, instead of remedying these drug and medical-device manufacturing and marketing violations, the misconduct continued unabated and in many ways it proliferated," the complaint asserted. "Put simply, the J&J board only takes action to curtail illicit practices at the company when facing imminent civil or criminal penalties." The Bernstein/Robbins group alleged that it would have been futile for shareholders to ask the board to sue anyone on their behalf because the board wasn't fulfilling its duties.
Another group of plaintiffs lawyers, however, took a different tack. Led by Abraham, Fruchter & Twerskey, they served what's known as a demand letter on the J&J board, asking the board to sue various J&J alleged corporate villains for the benefit of shareholders. In response, Johnson & Johnson formed a special committee of independent directors to evaluate the prospect of such litigation. Last month the board released the special committee's report. You probably won't be too surprised to hear that the committee concluded no litigation is warranted. You also won't be shocked to know that the shareholders who sued instead of serving a demand letter claimed that the committee's report proved the board's conflict of interest.
Late last month, New Jersey federal court judge Freda Wolfson heard oral arguments on J&J's motion to dismiss the Bernstein/Robbins group's complaint. The July 28 argument, according to this transcript, went straight to the heart of shareholders' allegations that the J&J board failed to correct the company's course despite voluminous evidence of wrongdoing. Walter Carlson of Sidley Austin, who argued for the board, said plaintiffs lawyers had lumped together allegations spanning many years and many divisions of a far-flung company.
"They threw a lot of crap up in the air and they claimed that certain things are red flags," Carlson said. "[J&J] is a huge company. It sells its products around the globe. It has 115,000 employees. It sells countless products and it has 250 subsidiaries. The board of J&J cannot get into the marketing plan of every product, even products as successful as Risperdal [and] Topamax.The board doesn't get into the level of detail that you are hypothesizing."
But Mark Lebovitch of Bernstein Litowitz, arguing for the shareholders, said it's the board's job to pay attention to evidence of wrongdoing. "In weighing this motion and weighing the allegations, the fact that so many different sources are telling the board, 'We believe your practices are illegal,' it should become harder for the board to say they are way off," Lebovitch said. "At a certain point there [are] enough credible, third-party voices saying, 'You are violating the law; stop it,' that the board has its duty to intervene and say, 'What's going on here?'"
Judge Wolfson hasn't yet ruled on the motion to dismiss. She did find that the shareholder group that served a demand letter on J&J cannot intervene in the Bernstein/Robbins case-which, remember, asserts that it would have been futile to demand that the board take action-but must file its own derivative suit. So if the judge denies J&J's dismissal motion, the board could be facing two well-developed shareholder suits.
And the new Risperdal admissions can only help, said Lebovitch of Bernstein Litowitz. "This is an unprecedented third guilty plea for Johnson & Johnson companies," he told me. "That speaks for itself. If that doesn't show the failure of this board, I don't know what does."
J&J counsel Walter Carlson declined to comment. Erik Haas of Patterson, Belknap, Webb & Tyler, who represents individual defendants, didn't respond to my e-mail and phone messages.
(Reporting by Alison Frankel)