In re Caremark International, Inc. Derivative Litigation

Caremark International, Inc. was indicted and pleaded guilty to violating a federal statute which made it a felony to pay kickbacks to persons for referring Medicare and Medicaid patients to it. The company was forced to pay approximately $250 million in criminal fines and civil reimbursement. The suit is a derivative action against the board, asserting negligence and a failure to monitor company activity.

"In order to show that . . . directors breached their duty of care by failing adequately to control . . . employees, plaintiffs would have to show either (1) that the directors knew or (2) should have known that violations of law were occurring and, in either event, (3) that the directors took no steps in a good faith effort to prevent or remedy that situation, and (4) that such failure proximately resulted in the losses complained. . . ." The court held that because the misfeasance was not an activity with which a board would normally concern itself, that the board was not liable.

Fiduciary Duties & Shareholder Litigation | The Business Judgment Rule and Duty of Care