                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-18-2007

In Re: Merck & Co
Precedential or Non-Precedential: Precedential

Docket No. 06-2911




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PRECEDENTIAL

           UNITED STATES COURT OF APPEALS
                FOR THE THIRD CIRCUIT

                       Case No: 06-2911

            IN RE: MERCK & CO., INC.
   SECURITIES, DERIVATIVE & ERISA LITIGATION

          CONSOLIDATED DERIVATIVE ACTION

                 Hawaii Laborers Pension Plan
                 and Halpert Enterprises, Inc.,

                              Appellants

    On Appeal from the United States District Court
             for the District of New Jersey
(MDL No. 1658 and D.C. Nos. 05-cv-01151 & 05-cv-02368)
        District Judge: Hon. Stanley R. Chesler


                     Argued April 12, 2007

         BEFORE: SMITH and COWEN, Circuit Judges
                and YOHN,* District Judge



     *
      Honorable William H. Yohn Jr., Senior United States
District Judge for the Eastern District of Pennsylvania, sitting by
designation.
                   (Filed July 18, 2007)


Travis E. Downs III
Joseph D. Daley (argued)
Lerach Coughlin Stoia Geller Rudman & Robbins
655 West Broadway, Suite 1900
San Diego, CA 92101

Peter S. Pearlman
Cohn Lifland Pearlman Herrmann & Knopf
Park 80 Plaza West-One
Saddle Brook, NJ 07663

Jeffrey P. Fink
Robbins Umeda & Fink
610 West Ash Street, Suite 1800
San Diego, CA 92101
       Counsel for Appellant

Robert D. Joffe
Evan R. Chesler
Robert H. Baron (argued)
David Greenwald
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475




                             2
William R. Stein
Roberta Koss
Hughes Hubbard & Reed
1775 I Street, N.W., Suite 600
Washington, DC 20006-2401
       Counsel for Appellee
                 _______________________

                  OPINION OF THE COURT
                  _______________________

SMITH, Circuit Judge.

         This case is part of the massive VIOXX-related litigation.
The primary–and narrow–issue on this appeal is whether the
District Court erred by refusing to allow the plaintiffs leave to
amend their complaint with additional materials they had
proffered to the court to show that amendment would not be
futile.1


     1
       The parties have also briefed the issue of whether the
District Court properly granted Merck’s motion to strike
additional materials proffered by the plaintiffs in their
opposition to the defendant’s motion to dismiss. This legal issue
is not significantly different than the after-acquired information
issue we directly confront. On this point, the plaintiffs are
correct that this issue “boils down to a single question: May
plaintiffs use after-acquired materials that defendants voluntarily
handed over to them–pursuant to a negotiated agreement–to
                                3
        This is a shareholder suit, so in the typical situation the
plaintiffs would have been required to first make demand upon
Merck’s Board of Directors. However, the plaintiffs pled
demand futility. The District Court dismissed the suit because
the plaintiffs did not meet the narrow exception where demand
may be excused. Specifically, the plaintiffs did not plead with
particularity facts establishing that demand would have been
futile at the time they commenced the lawsuit. The District
Court concluded that the plaintiffs’ allegations of demand
futility were “patently conclusory.” In re Merck & Co., Inc.,
2006 WL 1228595, MDL No. 1658 (SRC), at *13 (D.N.J. May
5, 2006). The District Court did not permit the plaintiffs to
amend their complaint with after-acquired information obtained
as a result of a discovery stipulation between the parties. Id. at
17-18.

        We conclude that the District Court erred in denying the
plaintiffs leave to amend their complaint with additional
materials on the ground that the materials were acquired as a
result of a consensual discovery agreement made by Merck and
the derivative plaintiffs. We remand the case to the District
Court to determine whether, even with these additional
materials, amendment would have been futile.


flesh out and amplify the core allegations in an existing
complaint?” To the extent that the information in the plaintiffs’
opposition to the defendant’s motion to dismiss was obtained as
a result of the discovery stipulation agreement, it must be
considered on remand.
                                4
                                I.

       The District Court has stated the facts of this complicated
case concisely and accurately, so we repeat them here:

  Merck is a global pharmaceutical company incorporated
  in New Jersey, which researches, develops, manufactures
  and markets a broad range of medicines and vaccines that
  improve human and animal health. Plaintiffs are
  shareholders bringing this action on behalf of Merck
  against all individuals who were serving on Merck's Board
  of Directors as of March 11, 2004–the date the first
  shareholder derivative action relating to VIOXX was
  filed–as well as thirteen other current or former directors
  and officers of the company.

  VIOXX is a member of a class of pain medications known
  as non-steroidal anti-inflammatory drugs (“NSAIDs”).
  VIOXX is one of a new generation of “selective” NSAIDs
  called COX-2 inhibitors, which are designed to reduce
  inflammation and pain while avoiding the risk of serious
  gastrointestinal side effects associated with traditional
  NSAIDs. After receiving approval from the Food and
  Drug Administration (“FDA”), VIOXX was introduced to
  the market in May 1999. VIOXX was marketed and sold
  for over five years until September 30, 2004, when Merck
  voluntarily withdrew the medication.



                                5
Plaintiffs contend that scientists within Merck were aware
that VIOXX may cause cardiovascular problems for its
users as early as 1996. Plaintiffs allege that, from
approximately 1996 to 2004, Merck made public
statements which promoted the use of VIOXX for
treatment of arthritis, and for other pain sufferers. None of
these statements, however, mentioned any cardiovascular
risks associated with the use of VIOXX, despite
Defendants’ alleged knowledge of this problem. Plaintiffs
contend that Defendants continued to have the Company
conceal VIOXX’s health risks and repeatedly emphasized
safety despite scientific data to the contrary.

In 1999, Merck initiated an 8,000-person VIOXX
Gastrointestinal Outcomes Research (“VIGOR”) trial
designed to prove the drug’s gastrointestinal safety
benefits. The trial compared people taking a high dose of
VIOXX with those taking naproxen, and excluded those at
a high risk of heart problems. The results of the VIGOR
study came in on March 9, 2000. The results showed that
VIOXX patients suffered fewer stomach problems than the
naproxen group, but significantly more blood-clot related
problems. These results were published in the New
England Journal of Medicine in November of 2000.
Although the article discussed VIOXX’s benefits for the
stomach, it did not discuss in any detail information about
potential cardiovascular complications.



                             6
On February 8, 2001, Merck executives met with the FDA
Arthritis Advisory Committee to discuss VIOXX and the
VIGOR trial. During the meeting, approximately seven
doctors discussed cardiovascular complications associated
with VIOXX. Plaintiffs maintain that Defendants,
nonetheless, caused Merck to issue a press release on May
22, 2001 in which the Company “reconfirmed the
favorable cardiovascular safety profile of VIOXX.”

On August 22, 2001, researchers at the Cleveland Clinic
published a study in the Journal of the American Medical
Association (“JAMA”) which discussed the VIGOR study
and Celecoxib Long-term Arthritis Safety Study
(“CLASS”) studies. The article stated that “[t]he
annualized myocardial infarction rates for COX-2
inhibitors in both VIGOR and CLASS were significantly
higher than that in the placebo group.... The available data
raise a cautionary flag about the risk of cardiovascular
events with COX-2 inhibitors.” Plaintiffs allege that prior
to the publication of the article, Defendants caused Merck
to publicly claim that “VIOXX does not result in any
increase in cardiovascular events compared to placebo,”
and that it had “additional data beyond what [the
Cleveland Clinic] cite[s], and the findings are very, very
reassuring.” On September 17, 2001, the FDA sent
Defendant Gilmartin a warning letter stating that Merck’s
promotional campaign “minimizes the potentially serious
cardiovascular findings that were observed in the
[VIGOR] study, and thus, misrepresents the safety profile
                             7
for VIOXX.” In May 2004, Harvard researchers published
the results of a Merck-sponsored study which “found
VIOXX was associated with an elevated risk of heart
attacks (39% higher), compared to the use of Celebrex or
a placebo.” Plaintiff alleges that Defendants “demanded
that researchers delete or tone down their findings,” and
that prior to publication of the results, Defendants
removed the name of a Merck employee who had worked
on the study from the list of authors.

On August 25, 2004, Dr. David Graham, an FDA
researcher, presented the results of an FDA study at a
medical conference. The results showed that higher doses
of VIOXX “may have led to more than 27,000 heart
attacks and sudden cardiac deaths” and triple the risk of
heart attacks and death. Plaintiffs contend that the
following day, Defendants caused Merck to state publicly
that they “strongly disagree[d] with Graham’s conclusion,
and that ‘Merck stands behind the efficacy, overall safety
and cardiovascular safety of VIOXX.’”

Plaintiffs further allege that Defendants threatened and
intimidated numerous academics who publicly questioned
or discussed the safety of VIOXX. Plaintiffs maintain that
certain Merck directors held the power to withdraw
important funding from academic research and also
cancelled the presentations of doctors who questioned the
safety of VIOXX.


                            8
See In re Merck & Co., Inc., 2006 WL 1228595, at **1-3
(internal citations omitted).

        Because of the harm allegedly caused by VIOXX, Merck
now faces thousands of lawsuits. These lawsuits come in a
variety of forms, including product liability and shareholder
derivative actions. On February 23, 2005, the Judicial Panel on
Multidistrict Litigation transferred all VIOXX-related
derivative, securities and ERISA actions to the District of New
Jersey for pre-trial consideration and/or coordination.
Consolidation occurred on May 6, 2005. The plaintiffs in this
case filed their complaint on June 20, 2005, arguing that demand
on Merck’s Board of Directors would be futile. On June 27,
2005, the Magistrate Judge approved a discovery stipulation
agreement between the parties that stated, in relevant part, that
“all discovery in the Consolidated Derivative Action, except for
requests for production of documents focused on the Merck
Board of Directors’ actions concerning VIOXX prior to Merck’s
voluntary withdrawal of VIOXX on September 30, 2004, shall
be stayed pending the Court’s ruling on the motion to dismiss
the Consolidated Derivative Complaint, unless the Court enters
an order permitting such discovery to proceed.”

        In late August 2005, Merck filed a motion to dismiss on
the grounds that the plaintiffs had failed to make a pre-suit
demand upon the March 2004 Board and had failed to
adequately plead demand futility. In November 2005, the
plaintiffs filed a redacted version of their memorandum in
opposition to the defendants’ motion to dismiss. The plaintiffs
                               9
also filed an unredacted version of their opposition under seal,
which contained arguments and factual assertions that relied on
after-acquired information the plaintiffs obtained during the
course of discovery. On December 22, 2005, Merck filed a
motion to strike the extraneous documents in the plaintiffs’
opposition memorandum. At an April 5, 2006 hearing, the
District Court granted Merck’s motion to strike because it
concluded that much of the information in the plaintiffs’
unredacted brief was not contained in the complaint and did not
constitute the type of material that can be considered on a
motion to dismiss pursuant to Rule 12(b)(6). The general rule
in demand futility cases is that discovery may not be used to
supplement demand futility allegations.

       On May 5, 2006, the District Court granted Merck’s
motion to dismiss the plaintiffs’ complaint with prejudice, and
also denied the plaintiffs’ leave to amend their complaint to
supplement their demand futility allegations based on
information acquired through discovery.2


   2
     We do not have a proposed amended complaint from the
plaintiffs. This Court has refused to permit leave to amend
when the party failed to provide the proposed amended
complaint, because “the court had nothing upon which to
exercise its discretion.” Lake v. Arnold, 232 F.3d 360, 374 (3d
Cir. 2000). However, our situation is different here, because the
District Court acknowledged that such a complaint would
“incorporate information obtained in discovery, stricken from
use in the instant Motion to Dismiss, to supplement and
                               10
                               II.

        The District Court exercised diversity jurisdiction over
this case pursuant to 28 U.S.C. § 1332(a)(1). Our jurisdiction is
pursuant to 28 U.S.C. § 1291, because the District Court’s
dismissal with prejudice constituted a final order.

        We review both a district court’s refusal to grant the
plaintiffs’ leave to amend their complaint and a district court’s
ruling on demand futility under Federal Rule of Civil Procedure
23.1 for abuse of discretion. Kanter v. Barella,--- F.3d ----, No.
05-5398, 2007 WL 1519894 (3d Cir. May 25, 2007); Hill v. City
of Scranton, 411 F.3d 118, 125 (3d Cir. 2005). To the extent
that the District Court made conclusions of law, our review is de
novo. See Blasband v. Rales, 971 F.2d 1034, 1040 (3d Cir.
1992).

       In this case, we are confronted with the decision by the
District Court that held, as a matter of law, that after-acquired
information obtained through the stipulated discovery agreement
could not be used to supplement the plaintiffs’ demand futility
allegations. We review this conclusion of law de novo. Both
parties agree that we should apply New Jersey law to this case,
as “federal courts hearing shareholders’ derivative actions
involving state law claims apply the federal procedural



particularize” the initial complaint. In re Merck & Co., Inc.,
2006 WL 1228595, at *17.
                               11
requirement of particularlized pleading, but apply state
substantive law to determine whether the facts demonstrate
demand would have been futile and can be excused.” Kanter,
2007 WL 1519894, at *2.

                               III.

       A.      Demand

        Shareholder derivative suits typically require plaintiffs to
make pre-suit demand on the board of directors that the board
bring suit on behalf of the corporation. Blasband, 971 F.2d at
1048. The reason for this requirement is that “[t]he decision to
bring a lawsuit or to refrain from litigating a claim on behalf of
the corporation is a decision concerning the management of the
corporation and consequently is the responsibility of the
directors.” Id. (citations omitted). There are narrow exceptions
when shareholders will be excused from making demand. The
New Jersey Supreme Court has adopted Delaware’s demand
futility standard. In re PSE & G S’holder Litig., 801 A.2d 295,
310 (N.J. 2002); Kanter, 2007 WL 1519894, at *4 (“Because the
New Jersey Supreme Court in PSE&G sought guidance from
Delaware’s decisional law, we will do the same here.”). As the
New Jersey Supreme Court stated, “for shareholder plaintiffs in
New Jersey to withstand a motion to dismiss for failure to make
a demand, they must plead with particularity facts creating a
reasonable doubt that: (1) the directors are disinterested and
independent, or (2) the challenged transaction was otherwise the
product of a valid exercise of business judgment.” In re PSE &
                                12
G, 801 A.2d at 310. If, as in this case, the board of directors is
being accused of a failure to act, then the second prong
technically does not apply and demand futility must be shown
through the first prong.3 Id. at 309-10. The first prong
nonetheless requires us to look to the business judgment rule, as
“the entire question of demand futility is inextricably bound to
issues of business judgment.” Aronson v. Lewis, 473 A.2d 805,
812 (Del. 1984); id. at 813 (stating that “a conscious decision to
refrain from acting may nonetheless be a valid exercise of
business judgment and enjoy the protections of the rule”). In
this regard, “when the complaint asserts inaction by the board,
as here, courts will not excuse demand ‘in the absence of
allegations demonstrating why the board is incapable of
considering a demand’.” Kanter, 2007 WL 1519894, at *3
(quoting In re Prudential Ins. Co. Derivative Litig., 659 A.2d
961, 975 (N.J. Super. 1995); Rales v. Blasband, 634 A.2d 927,
934 (Del. 1993)). “[W]here inaction is the heart of the
allegation, the plaintiff bears the burden of demonstrating a
reasonable doubt as to the validity of the business judgment
presumption.” Kanter, 2007 WL 1519894, at *6.

       As we have stated, derivative plaintiffs are required to

   3
    The counsel for the plaintiffs agreed in the motion to strike
hearing that the focus is on the first prong:
       Court: “In short, I am not dealing with [the] second prong
of the demand futility test. Correct?
       Derivative Plaintiffs’ Counsel: “In this case all the action
is going to be in the first prong.” JA215-16.
                                13
establish that demand would have been futile at the time they
commenced litigation. FED. R. CIV. P. 23.1; N.J. CT. R. 4:32-3.
A corollary of this rule is that discovery generally may not be
used to supplement allegations of demand futility. Beam v.
Stewart, 845 A.2d 1040, 1056 (Del. 2004) (“In general,
derivative plaintiffs are not entitled to discovery in order to
demonstrate demand futility.”); In re PSE & G, 801 A.2d at 312
(stating that “when a court decides a defendant’s motion to
dismiss a shareholder’s suit for failure to make a demand as
required under Rule 4:32-5, the court’s review is generally
limited to the pleadings”); Rales, 634 A.2d at 934 n.10
(“[D]erivative plaintiffs . . . are not entitled to discovery to assist
their compliance with Rule 23.1.”). This rule serves the
underlying purpose of the demand requirement. As the District
Court stated, “[t]he demand requirement would be rendered
meaningless if a plaintiff who cannot establish demand futility
when he files suit is nonetheless permitted to amend his
pleading using materials later obtained during discovery to
justify his failure to make a pre-suit demand.” In re Merck &
Co., Inc., 2006 WL 1228595, at *18. If derivative plaintiffs are
allowed to obtain discovery after making conclusory allegations
in their complaints to strengthen those very complaints, then
shareholder plaintiffs will have incentive to make baseless
allegations and then engage in discovery fishing expeditions.
Further, except in narrow circumstances, directors and officers
should not be burdened with engaging in discovery from
shareholders who might have no legitimate basis to sue. The
demand requirement would be effectively circumvented if we
were to adopt a contrary rule.
                                 14
       The District Court began its leave-to-amend discussion
by laying out the parameters of Federal Rule of Civil Procedure
15(a), which states in relevant part that “a party may amend its
pleadings only by leave of court or written consent of the
adverse party; and leave shall be freely given when justice so
requires.” The District Court then cited Foman v. Davis, 371
U.S. 178, 182 (1962), for the proposition that “[i]n the absence
of undue delay, bad faith or dilatory motive on the part of the
movant, leave to amend should be freely given.” In re Merck &
Co., Inc., 2006 WL 1228595, at *17; see also Lorenz v. CSX
Corp., 1 F.3d 1406, 1413-14 (3d Cir. 1993).

        Futility is also a sufficient ground to deny leave to
amend. Kanter, 2007 WL 1519894, at *7. “‘Futility’ means
that the complaint, as amended, would fail to state a claim upon
which relief could be granted.” In re Burlington Coat Factory
Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997). The District
Court concluded that amendment would have been futile
because it held that the plaintiffs could not rely on after-acquired
information to bolster their conclusory allegations of demand
futility.
        The plaintiffs argue that the District Court improperly
adopted a bright-line rule whereby after-acquired information
can never be used in demand futility complaints. The plaintiffs
rely primarily on our Court’s decision in Blasband as well as the
Sixth Circuit’s in McCall v. Scott, 239 F.3d 808 (6th Cir. 2001).
Merck contends that the plaintiffs’ position contradicts the well-
settled rule that discovery may not be used to supplement
demand futility allegations.
                                15
        In Blasband, a plaintiff filed a derivative action alleging
that demand was excused. 971 F.2d at 1039. The two issues
were whether Blasband had standing to bring the action and
whether he established demand futility. The District Court
dismissed the complaint, concluding that Blasband did not have
standing and did not adequately plead that demand would have
been futile. This Court vacated the District Court’s decision and
remanded, concluding that “[w]e agree with the district court
that Blasband has not adequately established that he is excused
from making a proper demand. However, we also believe . . .
that Blasband does have standing to maintain this derivative
action, and we therefore hold that Blasband should be given the
opportunity to move to amend the complaint to allege additional
facts establishing that a proper demand would have been futile.”
Id. Although the opinion did not address whether Blasband
could use discovery, the Court did not place any limitations on
the type of information that Blasband could include in his
amended complaint. Merck argues that Blasband is inapposite
because it does not specifically address the use of discovery to
amend demand futility allegations.

        In McCall, the Sixth Circuit reversed a district court
decision to not consider an affidavit that the plaintiffs included
in their amended shareholder derivative complaint. The McCall
Court stated that “facts in existence before the derivative claims
were filed but not discovered until later, may be considered in
determining demand futility.” 239 F.3d at 823. Merck attempts
to distinguish McCall by noting that the discovered information
was dated after the first derivative complaint was filed but
                                16
before the filing of the operative complaint that contained the
demand futility allegations scrutinized by the court, and that the
material arose out of discovery from separate (but related)
litigation.

        We need not wade into the Blasband/McCall debate to
resolve this issue. We agree with the District Court and Merck
that, as a general rule, a plaintiff in a shareholder derivative suit
may not use discovery to amend demand futility allegations.
Whether the discovered material existed before or after the filing
of the operative complaint does not alter our analysis. However,
this case presents a rare exception to this rule because both
parties voluntarily entered into a stipulated discovery agreement
that did not preclude the plaintiffs from using this after-acquired
information in an amended complaint. Thus, the standard
argument–that allowing discovery in demand futility scenarios
undermines the authority of the corporation to decide whether
to bring suit against itself and gives incentive to shareholders to
engage in fishing expeditions–has no applicability when the
plaintiffs and the corporation voluntarily agree to permit limited
discovery.

       B.      The Stipulated Discovery Agreement

        As the plaintiffs note, Merck voluntarily negotiated and
agreed to the scope of a document production with plaintiffs.
The agreement did not result from a District Court ruling. This
agreement did not restrict the manner in which plaintiffs could
utilize the documents.
                                17
       Paragraph 5 of the June 27, 2005 discovery stipulation is
particularly relevant to our discussion:

       Without limiting the scope of ¶1 above, all
       discovery in the Consolidated Derivative Action,
       except for requests for production of
       documents focused on the Merck Board of
       Directors’ actions concerning VIOXX prior to
       Merck’s voluntary withdrawal of VIOXX on
       September 30, 2004, shall be stayed pending the
       Court’s ruling on the motion to dismiss the
       Consolidated Derivative Complaint, unless the
       Court enters an order permitting such discovery to
       proceed.




The general rule that discovery may not be used to supplement
demand futility allegations has no applicability in a case where
the parties voluntarily agree to permit discovery to go forward
on the one area that has particular import for the motion to
dismiss. We recognize that the discovery stipulation was
entered into shortly after the initial complaint was filed. This
stipulation, though, contains no limitation on how this after-
acquired information may be used. When this fact is coupled
with the general policy of liberal amendment of pleading
standards, we must conclude that the District Court should have
considered this after-acquired information in its discussion of
whether the plaintiffs may amend their complaint. The District
                              18
Court erred as a matter of law in refusing to consider the
discovery that resulted from the consensual stipulation. We will
therefore remand this case so that the District Court may
examine whether the after-acquired information discovered as
a result of the stipulation affects its conclusion that amendment
would have been futile.4




          C.   Whether Demand Would be Futile

        We decline to examine whether demand would have been
futile in light of the information acquired through the June 27,
2005 discovery stipulation agreement. We recognize the
superior position of the District Court in addressing this issue.5


     4
      We reject the argument that allowing consideration of
information obtained pursuant to a discovery stipulation will
discourage negotiated settlements of discovery disputes. The
parties can simply provide in the discovery stipulation a
provision that information obtained pursuant to the stipulation
may not be used to supplement demand futility allegations in the
complaint.
      5
        We also do not address the applicability of Merck’s
exculpatory charter provision to this case, but we do note that
courts routinely examine exculpatory agreements in demand
futility motions to dismiss. See, e.g., Guttman v. Huang, 823
A.2d 492, 501 (Del. Ch. 2003).
                               19
In the interests of judicial economy, however, we write to
emphasize that the applicability of the business judgment rule in
board inaction cases focuses on whether the Board could not be
considered disinterested (the Aronson first prong) because of the
potential liability its members face. As the District Court
properly noted, this standard is quite high, so that in order for
demand to be excused as futile the board members must face “a
substantial likelihood” of liability. See Rales, 634 A.2d at 936
(quoting Aronson, 473 A.2d at 815). The leading case on
“substantial likelihood” from the Supreme Court of Delaware
has stated that a board’s actions must be “egregious” to meet
this standard. See Aronson, 473 A.2d at 815. Further, the
business judgment rule provides directors with a “powerful
presumption[],” Rales, 634 A.2d at 933, “that in making a
business decision the directors of a corporation acted on an
informed basis, in good faith and in the honest belief that the
action taken was in the best interests of the company.” Aronson,
473 A.2d at 812. This standard has been oft repeated, and in
some cases strengthened, in Delaware and New Jersey. See,
e.g., Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1246 (Del.
1999) (“The presumptive validity of a business judgment is
rebutted in those rare cases where the decision under attack is so
far beyond the bounds of reasonable judgment that it seems
essentially inexplicable on any ground other than bad faith.”
(quotation omitted)).

       In light of the business judgment presumption as well as
the standard for demand futility in board inaction cases, the
District Court on remand must inquire into whether the after-
                               20
acquired information, as well as the information contained in the
initial complaint, supports the position that the Board recklessly
ignored a well-established link between VIOXX and increased
cardiovascular risk to establish that the Board acted egregiously
or in bad faith. Because the plaintiffs do not challenge the
District Court’s conclusion that the original complaint’s
allegations were “patently conclusory,” the question before the
District Court will be whether the additions permitted by virtue
of this opinion will transform the complaint from patently
conclusory to a complaint that establishes to a sufficient degree
of particularity that the March 2004 Directors approved,
participated in, or caused Merck to make strategic decisions
regarding the marketing of VIOXX.6

       We also write to state that the District Court properly
distinguished In re Tower Air, Inc., 416 F.3d 229 (3d Cir. 2005)
from facts alleged in the plaintiffs’ unamended complaint in this
case. In Tower Air, we reversed the dismissal of a breach of
fiduciary duty claim where the company’s officers

        did nothing when they were told by the corporate
        Director of Safety of quality assurance problems
        with aircraft maintenance and of failures to record
        maintenance and repair work. Whether the


    6
     The original complaint’s allegations, however, might be
viewed in a different light because the after-acquired
information will presumably amplify those allegations.
                                21
       officers’ behavior is construed as an egregious
       decision or as unconsidered inaction, that
       allegation is troubling. Under no circumstances
       should aircraft maintenance problems be ignored.
       Lives are on the line . . . . We can imagine few
       things more egregious. The officers’ alleged
       passivity in the face of negative maintenance
       reports seems so far beyond the bounds of
       reasonable business judgment that its only
       explanation is bad faith.




Id. at 239. The plaintiffs analogize the facts of Tower Air to the
present matter, asserting that the Board, by knowing the
cardiovascular risks of VIOXX, put “lives on the line” in an
egregious manner. This analogy is legally and factually
inapposite.

       With respect to the legal distinctions, Tower Air did not
deal with demand futility and applied a notice pleading standard
under Federal Rule of Civil Procedure 8 instead of the
heightened factual pleading standard under Federal Rule of Civil
Procedure 23.1.

       This Court in Tower Air suggested that a director or
officer acts egregiously and in bad faith when the director or
officer’s passivity/inaction/nonfeasance in the face of a known
and obvious risk results in a potentially life threatening
                               22
situation. Here, the situation is factually different. As explained
by the District Court

       First, the safety concerns in Tower Air were
       brought to the attention of the officers controlling
       the company’s management and operations.
       Ignoring safety risks can be more easily
       characterized as “egregious” where the
       information lies in the hand of those officers
       involved in actually running the corporation on a
       day to day basis, as opposed to a group of
       predominantly outside directors with little
       involvement in the operations of the corporation.
       Second, there is a significant difference between
       the safety warnings given to the officers in Tower
       Air, and those allegedly before Merck’s Board.
       The safety information provided to the officers in
       Tower Air revealed documented problems with
       aircraft maintenance and repair work. These
       reports were unquestionably negative and
       illustrated serious risks to public safety.

In re Merck & Co., Inc., 2006 WL 1228595, at *13 n.5
(emphasis added). Of course, we express no opinion about
whether the newly acquired facts that are included in the
amended complaint will alter this analysis. The District Court
will, on remand, examine whether the plaintiffs’ allegations
show that the Board knew that VIOXX caused cardiovascular
harm and then chose to do nothing about it. The allegations
                                23
must not simply demonstrate an aloof or negligent Board, but
nonfeasance that rose to the level of egregiousness or bad faith.

                              IV.

       We will therefore reverse and remand the judgment of the
District Court for consideration of whether the information
acquired as a result of the stipulated discovery agreement still
renders the amended complaint futile.




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