   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE



IN RE CLOVIS ONCOLOGY, INC.              )    CONSOLIDATED
DERIVATIVE LITIGATION                    )    C.A. No. 2017-0222-JRS




                         MEMORANDUM OPINION

                         Date Submitted: July 1, 2019
                        Date Decided: October 1, 2019


Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire and Gina M. Serra, Esquire of
Rigrodsky & Long, P.A., Wilmington, Delaware; Nicholas I. Porritt, Esquire,
Adam M. Apton, Esquire and Adam C. McCall, Esquire of Levi & Korsinsky, LLP,
Washington, D.C.; Kip B. Shuman, Esquire of The Shuman Law Firm,
San Francisco, California; and Rusty E. Glenn, Esquire of The Shuman Law Firm,
Denver, Colorado, Attorneys for Plaintiffs Carl McKenry and Juzet Macalinao
on behalf of Clovis Oncology, Inc.

Gregory P. Williams, Esquire, Blake Rohrbacher, Esquire and Robert L. Burns,
Esquire of Richards Layton & Finger, P.A., Wilmington, Delaware, Attorneys for
Defendants Brian G. Atwood, M. James Barrett, James C. Blair, Keith T. Flaherty,
Ginger L. Graham, Paul H. Klingenstein, Edward J. McKinley and Thorlef
Spickschen.

William M. Lafferty, Esquire and Ryan Stottmann, Esquire of Morris, Nichols,
Arsht & Tunnell LLP, Wilmington, Delaware and Tariq Mundiya, Esquire, Todd G.
Cosenza, Esquire and Charles Dean Cording, Esquire of Willkie Farr &
Gallagher LLP, New York, New York, Attorneys for Defendants Patrick J. Mahaffy,
Erle T. Mast and Nominal Defendant Clovis Oncology, Inc.



SLIGHTS, Vice Chancellor
         Like many upstart biopharmaceutical companies, nominal defendant,

Clovis Oncology, Inc. (or the “Company”), had one drug among its drugs under

development, Rociletinib (or “Roci”), that was especially promising. Roci, a therapy

for the treatment of lung cancer, performed well during the early stages of its clinical

trial. But data from later stages of the trial revealed the drug likely would not be

approved for market by the Food and Drug Administration (“FDA”). Plaintiffs,

Clovis stockholders, allege members of the Clovis board of directors (the “Board”)

breached their fiduciary duties by failing to oversee the Roci clinical trial and then

allowing the Company to mislead the market regarding the drug’s efficacy. 1 These

breaches, it is alleged, caused Roci to sustain corporate trauma in the form of a

sudden and significant depression in market capitalization. Plaintiffs also allege that

certain members of the Board and a member of senior management engaged in

unlawful stock trades before the market was apprised of Roci’s failure.2

         Defendants have moved to dismiss each of Plaintiffs’ derivative claims under

Court of Chancery Rules 23.1 and 12(b)(6) for failure to plead demand futility with

particularity and failure to state viable claims. As explained below, Plaintiffs have

well-pled that Defendants face a substantial likelihood of liability under Caremark


1
    See In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
2
    See Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).



                                               1
and our Supreme Court’s recent explication of Caremark in Marchand v. Barnhill.3

Clovis conducted its clinical trial of Roci subject to strict protocols and associated

FDA regulations. Yet, assuming the pled facts are true, the Board ignored red flags

that Clovis was not adhering to the clinical trial protocols, thereby placing FDA

approval of the drug in jeopardy. With the trial’s skewed results in hand, the Board

then allowed the Company to deceive regulators and the market regarding the drug’s

efficacy.

         As explained in Marchand, “to satisfy their duty of loyalty, directors must

make a good faith effort to implement an oversight system and then monitor it.”4

This is especially so when a monoline company operates in a highly regulated

industry.5        Here, Plaintiffs have well-pled Roci was “intrinsically critical to the

[C]ompany’s business operation,” yet the Board ignored multiple warning signs that

management was inaccurately reporting Roci’s efficacy before seeking confirmatory

scans to corroborate Roci’s cancer-fighting potency—violating both internal clinical

trial protocols and associated FDA regulations.6 In other words, Plaintiffs have well-

pled a Caremark claim.


3
    Marchand v. Barnhill, 212 A.3d 805 (Del. 2019).
4
    Id. at 821 (emphasis supplied).
5
    Id. at 809.
6
    Id. at 822.

                                              2
         The same cannot be said for Plaintiffs’ attempt to plead Brophy and unjust

enrichment claims.7 Specifically, with respect to Brophy, Plaintiffs have failed to

plead facts that allow a reasonable inference of scienter. The allegedly unlawful

trades were so small in relation to each fiduciary’s Clovis stock holdings as to defy

any inference of the bad intent required to state a claim. And Plaintiffs’ unjust

enrichment claim, when reduced to its essence, rests on their deficient Brophy claim.

                         I. FACTUAL BACKGROUND

         I draw the facts from the allegations in the Supplemental Consolidated

Verified Shareholder Derivative Complaint (the “Complaint”), documents

incorporated by reference or integral to that pleading and judicially noticeable facts.8




7
    Brophy, 70 A.2d 5.
8
  See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (quoting
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69 (Del. 1995)) (noting that on a
motion to dismiss, the Court may consider documents that are “incorporated by reference”
or “integral” to the complaint); D.R.E. 201–02 (codifying Delaware’s judicial notice
doctrine). See also Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016),
abrogated on other grounds, 2019 WL 3683525 (Del. Aug. 7, 2019) (noting that where, as
here, the nominal defendant has produced documents in response to a demand for books
and records under 8 Del. C. § 220 on the condition that such documents be deemed
incorporated by reference in any complaint that might be filed, the court may consider the
documents in their entirety rather than rely only the portions “cherry-picked” by the
plaintiff).

                                            3
For purposes of this motion to dismiss, I accept as true the Complaint’s well-pled

factual allegations and draw all reasonable inferences in Plaintiffs’ favor.9

      A. Parties and Relevant Non-Parties

         Plaintiffs, Carl McKenry and Juzet Macalinao, are Clovis stockholders.10

They have held Clovis common stock since March 26, 2014 and January 1, 2014,

respectively.11

         Nominal Defendant, Clovis, is a biopharmaceutical firm focused on acquiring,

developing and commercializing cancer treatments.12 During the Relevant Period,13

Clovis had no drugs on the market but did have three drugs in development.

Of these, Roci was the most promising.14

         Plaintiffs bring this derivative action against all nine members of the Board

(collectively, the “Board Defendants”), each of whom was a member of the Board




9
  Marchand, 212 A.3d at 813 (“At this stage of the case, we are bound to draw all fair
inferences in the plaintiff’s favor from the well-pled facts.”).
10
     Suppl. Consol. Verified S’holder Deriv. Compl. (“Compl.”) (D.I. 37) ¶¶ 27–28.
11
     Compl. ¶¶ 27–28, 247.
12
     Compl. ¶ 29.
13
  The Complaint defines the “Relevant Period” as the start of the phase II Roci trial on
February 26, 2014, through the initiation of this litigation. Compl. ¶ 7.
14
     Compl. ¶¶ 63, 68.

                                             4
during the Relevant Period.15 Defendant, Erle Mast, is Clovis’ former Executive

Vice President and Chief Financial Officer (“CFO”).16 Defendants collectively

owned upwards of 17.4% of the Company’s stock.17

           The Board has two relevant sub-committees. The Nominating and Corporate

Governance Committee is charged with developing and overseeing the effectiveness

of Clovis’ legal, ethics and regulatory compliance matters.18 The Audit Committee

oversees typical audit functions and, importantly, reviews earnings reports with

management before release to the market.19

           Defendant, Brian G. Atwood, has served on the Board since Clovis’ inception

in 2009.20 He served as a member of the Audit Committee and the Nominating and

Corporate Governance Committee for fiscal years 2013–2015.21              Atwood had



15
     Compl. ¶¶ 1, 257.
16
     Compl. ¶ 38.
17
     Compl. ¶¶ 30, 41.
18
   Compl. ¶¶ 56–57. The Nominating and Corporate Governance Committee is also
charged with providing “general compliance oversight,” receiving “updates about the
compliance program,” and reviewing “the status and effectiveness of [Clovis’] compliance
programs with respect to non-financial regulatory requirements, including . . . Federal
health care program requirements and [FDA] requirements (and similar non-U.S.
requirements, as applicable).” Compl. ¶ 279.
19
     Compl. ¶ 58.
20
     Compl. ¶ 30.
21
     Id.

                                            5
previous experience as co-founder of a biotechnology company and as a managing

director for a healthcare-focused venture capital firm.22

           Defendant, M. James Barrett, Ph.D., has served on the Board since Clovis’

inception.23 He serves as Chairman of the Board and as Chairman of the Nominating

and Corporate Governance Committee.24 Additionally, Barrett has held positions as

a general partner in a healthcare venture capital firm and as the chairman, CEO and

founder of a medical technology company.25

           Defendant, James Blair, Ph.D., has served on the Board since Clovis’

inception.26        He is a member of the Nominating and Corporate Governance

Committee and serves as Chairman of the Compensation Committee. 27 Blair has

over thirty years of experience as a general partner in a life sciences venture capital

management company.28 Some of his other experience includes serving on the




22
     Id.
23
     Compl. ¶ 31.
24
     Id.
25
     Id.
26
     Compl. ¶ 32.
27
     Id.
28
     Id.

                                           6
boards of over 40 life science companies as well as the advisory board of the

Department of Molecular Biology at Princeton University.29

           Defendant, Keith Flaherty, M.D., has served on the Board since 2013.30 He is

a member of the Nominating and Corporate Governance Committee.31 Additionally,

Flaherty is an Associate Professor of Medicine at Harvard Medical School and has

been a principal investigator for numerous first-in-human clinical trials with novel,

targeted therapies.32

           Defendant, Ginger Graham, has served on the Board since 2013.33 She is a

member of the Compensation Committee.34 Graham has previous experience as the

president and CEO of a biopharmaceutical company and has served on the boards of

multiple healthcare firms.35




29
     Id.
30
     Compl. ¶ 33.
31
     Id.
32
     Id.
33
     Compl. ¶ 34.
34
     Id.
35
     Id.

                                             7
           Defendant, Paul Klingenstein, has served on the Board since Clovis’

inception.36 He is a member of the Audit Committee.37 Klingenstein has additional

experience as a managing partner of a healthcare venture capital firm, which he

formed in 1999.38 And he has served on the boards of multiple pharmaceutical

companies.39

           Defendant, Patrick J. Mahaffy, is one of Clovis’ co-founders and has been

Clovis’ CEO, President and a member of the Board since Clovis’ inception.40

Mahaffy previously served as the president and CEO of two biopharmaceutical

companies—one of which he also founded.41

           Defendant, Edward J. McKinley, has served on the Board since Clovis’

inception.42 He is a member of the Audit Committee.43




36
     Compl. ¶ 35.
37
     Id.
38
     Id.
39
     Id.
40
     Compl. ¶ 36.
41
     Id.
42
     Compl. ¶ 37.
43
     Id.

                                           8
           Defendant, Thorlef Spickschen, has served on the Board since Clovis’

inception.44 He is a member of the Compensation Committee.45 Before joining

Clovis, he served as the chairman of a publicly-traded biotechnology company, as

well as Eli Lilly & Co.’s managing director for Germany and Central Europe.46

           Defendant, Erle T. Mast, is a Clovis co-founder and served as Executive

Vice President and CFO from the Company’s inception in 2009 until his resignation

in March 2016.47 Mast was not a member of the Board during the Relevant Period.48

           Non-party, Dr. Andrew Allen, served as Clovis’ Chief Medical Officer

(“CMO”) during the Relevant Period.49          Non-party, AstraZeneca PLC, is a

pharmaceutical company based in the United Kingdom. AstraZeneca manufactures

Tagrisso (described below), which would have directly competed with Roci had

Roci made it to market.50




44
     Compl. ¶ 38.
45
     Id.
46
     Id.
47
     Compl. ¶ 40.
48
     Id.
49
     Compl. ¶ 13.
50
     Compl. ¶ 76.

                                           9
      B. Clovis Initiates Roci’s Clinical Trial

         At the beginning of the Relevant Period, Clovis had no products on the market

and generated no sales revenue.51 Accordingly, Clovis “reli[ed] solely on investor

capital for all [] operations.”52 The Company’s prospects rested largely on one of its

three developmental drugs, Roci, a cancer drug designed to treat a previously-

untreatable type of lung cancer.53 Because of the estimated $3 billion annual market

for drugs of its type, Clovis expected Roci to generate large profits if Clovis could

secure FDA approval for the drug and shepherd it to market.54

         As the Roci clinical trial began, the Board knew time was of the essence.

AstraZeneca’s competing drug, Tagrisso, was also in the race for FDA approval.55

Appreciating Roci’s importance to Clovis’ success, the Board was hyper-focused on

the drug’s development and clinical trial.56        Indeed, it is alleged the Board




51
     Compl. ¶¶ 63, 68.
52
     Compl. ¶ 68.
53
   Compl. ¶ 71 (“[P]rior to the Relevant Period (and the approval of competitor drug
Tagrisso), no targeted therapies were approved for the treatment of tumors with the T790M
resistance mutation.”).
54
     Compl. ¶¶ 71–72.
55
     Compl. ¶¶ 72, 76, 79, 101.
56
  Compl. ¶¶ 8, 20, 101. See, e.g., Compl. ¶ 20 (“Clovis’ internal documents confirm that
the Board was regularly apprised of the ongoing [Roci clinical trial] and spent hours at
Board meetings discussing [Roci’s] trial status and competitor drugs, particularly
                                           10
Defendants “spent hours at Board meetings discussing [Roci]” and were “regularly

apprised” of the drug’s progress.57

         To obtain FDA approval, new drugs like Roci and Tagrisso must prove their

efficacy and safety in clinical trials.58 Before commencing a clinical trial, the FDA

requires a drug’s sponsor to agree to certain standards that define how the trial will

be conducted, how the trial data will be analyzed and, most relevant here, how

success in the trial will be measured.59 These agreed-upon standards become the

“clinical trial protocol.”60 If the drug’s sponsor fails to adhere to the clinical trial

protocol, the FDA will not approve a new drug for market.61

         Clovis named its Roci clinical trial “TIGER-X.”62 TIGER-X incorporated a

standardized and well-known clinical trial protocol called “RECIST.”63 Clovis


Tagrisso.”) (citing Compl. Ex. A at 00120–00126; 00180–00181; 00371–00372; 00494–
00495; 00732–00733; 00870; 00873; 001069; 01073).
57
     Compl. ¶ 20.
58
     Compl. ¶ 77.
59
     Compl. ¶¶ 81–82.
60
   Compl. ¶ 81 (citing Friedman, et al., Fundamentals of Clinical Trials 3–8 (4th ed. 2010)
(describing clinical trial protocols as “a written agreement between the investigator
[the drug company], the participant, and the scientific community.”)).
61
     Compl. ¶¶ 81, 99.
62
     Compl. ¶¶ 65–67.
63
  Compl. ¶¶ 82, 84, 88, 89. “RECIST” stands for “Response Evaluation Criteria in Solid
Tumors.” Compl. ¶ 83.

                                            11
chose RECIST instead of a lesser-known or bespoke clinical trial protocol because

RECIST “has become the most widely used system for assessing response in cancer

clinical trials, and is the preferred and accepted system for use in new drug

applications to regulatory agencies.”64 By selecting RECIST, Clovis was able to

“give investors confidence in the Company’s reported results” by facilitating

“comparisons between [Roci] and competing therapies.”65

         One of RECIST’s important functions is to establish the “criteria defining

success” for the clinical trial.66 This success-defining metric is called the objective

response rate (or “ORR”).67        ORR measures the percentage of patients who

experience meaningful tumor shrinkage when treated with the drug.68 This metric


64
 Compl. ¶ 83 (quoting Manola et al., Assessment of Treatment Outcome, in UICC
MANUAL OF CLINICAL ONCOLOGY 40, 44 (Brian O’Sullivan et al. eds., 9th ed. 2015)).
65
     Compl. ¶ 85.
66
     Compl. ¶ 82.
67
     Compl. ¶¶ 8, 82.
68
   Compl. ¶ 8. Importantly, RECIST “unequivocally requires each instance of tumor
shrinkage (a response) to be ‘confirmed.’ This means that any initial observation . . .
[of tumor shrinkage] must have been observed in a subsequent scan before it can be
included in the calculation of ORR.” Compl. ¶¶ 82, 83, 86, 97–98. Indeed, “[m]embers of
the medical and scientific communities view response confirmation as the key metric to
guaranteeing the reliability, soundness, and reproducibility of claimed efficacy results.”
Compl. ¶ 97 (citing Eisenhaur, et al., New response evaluation criteria in solid tumors:
Revised RECIST guideline (version 1.1), 45 EUROPEAN J. CANCER, 228, 236 (2009)).
Defendants assert that, during the time Clovis was submitting data to the FDA, it was not
clear the FDA required confirmed responses because the FDA had granted Roci
“[a]ccelerated [a]pproval” for which confirmation was not required for “interim results.”
See Defs.’ Br. in Supp. of Their Mot. to Dismiss Pls.’ Consol. Verified S’holder Compl.
                                           12
is important both to the FDA in its approval process and to physicians in deciding

whether to prescribe the drug.69 Not surprisingly, then, the “[Board] was laser-

focused on [Roci’s] ORR.”70

         As Roci’s clinical trial progressed, the Board knew investors would not view

an ORR incorporating unconfirmed responses as “meaningful,” nor would the FDA

accept such results as “approvable.”71 Indeed, each of the Board Defendants

appreciated the FDA “could only make its decision . . . to approve Roci based [] on

confirmed responses.”72

      C. TIGER-X Trial’s Undisclosed Failure to Follow RECIST Standards

         Ostensibly intending to follow RECIST, the TIGER-X protocol specifically

required and set out a schedule for confirmation scans.73 And throughout the



(“DOB”) (D.I. 16) at 11–12, 14, 28. Plaintiffs respond by pointing to RECIST guidelines
stating, “confirmation [of responses] is required.” See Pls.’ Answering Br. in Opp’n to
Defs.’ Mot. to Dismiss (“PAB”) (D.I. 23) at 9. Of course, at this stage, I cannot resolve
this or any other factual dispute; I am obliged to “accord the plaintiff the benefit of all
reasonable inferences.” Marchand, 212 A.3d at 820.
69
     Compl. ¶¶ 8, 120, Ex. A at 00371.
70
   Compl. ¶ 8. See also Compl. ¶ 78 (“The single most critical metric that the [Board]
Defendants, regulators, medical professionals, and investors focused on during the phase II
trials was [Roci’s] [ORR]. Oncologists and researchers view ORR as the critical measure
of a cancer drug’s efficacy.”).
71
     Compl. ¶ 97.
72
     Compl. ¶¶ 99–100 (citing FDA guidance documents).
73
     Compl. ¶¶ 87–91, 99–100.

                                            13
Relevant Period, Clovis’ press releases, investor calls, Securities and Exchange

Commission (“SEC”) filings and statements to medical journals reinforced the belief

that Clovis was reporting a confirmed ORR of about 60% “per RECIST.”74 Mindful

of the race to market, Clovis’ management consistently represented that Roci’s ORR

was at least as encouraging as Tagrisso’s.75

         Despite these public signals, as early as June 12, 2014, the Board received

reports indicating Clovis was improperly calculating Roci’s ORR.76 Specifically,

these reports suggested that, while the clinical trial protocol required Clovis to

calculate ORR based only on confirmed responses, Clovis was actually calculating

ORR, in part, based on unconfirmed responses.77 For example, on June 12, 2014,

the Board reviewed management’s presentations from a May 31, 2014 medical

conference (the “ASCO conference”).78 That data indicated Roci’s ORR was


74
   See, e.g., Compl. ¶¶ 80, 90, 91–99, 102–103, 106, 112, Ex. A at 00296 (symposium
presentation slide showing responses “per RECIST”), 00302 (same), 01004 (board slide
deck showing response “per RECIST”). See also Compl. ¶ 95 (describing a medical paper
that republished data originally disclosed by Clovis’ Chief Medical Officer) (citing Sequist,
et al., Rociletinib in EGFR-Mutated Non-Small-Cell Lung Cancer, 372 NEW ENG. J. MED.
1700, 1704 (2015)).
75
     Compl. ¶¶ 102–03, 112.
76
  Compl. ¶¶ 103–104, 224. See, e.g., Compl. ¶ 224 (“[T]he [Board] Defendants were well
aware that the ORR data was ‘immature’ and based on both unconfirmed and confirmed
responses.”) (citing Compl. Ex. A at 00162, 00246, 00371, 00495, 01021).
77
     Compl. ¶¶ 103–104, 106–08, 201.
78
     Compl. ¶ 104.

                                             14
“58 percent” (the “ASCO ORR”).79 At the same meeting, management told the

Board the ASCO ORR would improve “as patients get to their second and third

scans.”80 By definition, then, the ASCO ORR was partially based on unconfirmed

results (i.e., it was not RECIST compliant).81 Notwithstanding this revelation, the

Board did nothing.

         Mahaffy continued publicly to report Roci’s ORR at 58% in investor calls,82

and on August 7, 2014, Clovis issued a press release restating this inflated number.83

Soon after, the Board viewed another report signaling that Clovis’ management was

calculating Roci’s ORR with unconfirmed responses and that only “80% of

unconfirmed [responses] convert to confirmed.”84




79
   Compl. ¶¶ 12, 16, 103–104, Ex. A at A0060, A0074, A0108; see also the SEC’s
settlement agreement and subsequent settlement consent decree confirming that the 60%
ORR presented at the ASCO conference included unconfirmed responses while the actual
ORR, including only confirmed responses, was only 40%. Compl. ¶ 128.
80
     Compl. ¶ 104, Ex. A at 00120.
81
   See Compl. ¶ 10 (“RECIST unequivocally requires each instance of tumor shrinkage
(a response) to be ‘confirmed.’”). Plaintiffs allege that an ORR including unconfirmed
scans is, by definition, not an “ORR” because ORR can only be calculated with confirmed
scans. Compl. ¶ 105.
82
     Compl. ¶ 107.
83
     Compl. ¶¶ 107–08, 201; Clovis, Current Report (Form 8-K) (Aug. 7, 2014).
84
     Compl. ¶¶ 107–08, Ex. A at 00162.

                                            15
         On September 9, 2014, Clovis closed a critical $287 million private placement

of convertible senior notes in order to finance ongoing operations.85 The Board

relied heavily upon the market’s positive reaction to Roci’s publicly reported ORR

to make its case for further investment in the Company.86

         As the Company was touting Roci’s prospects, management gave a

presentation to the Board explicitly comparing Roci’s 63% mixed ORR to Tagrisso’s

confirmed 70%.87 Another Board presentation from the same time period showed

that management was reporting Roci’s ORR using partially unconfirmed responses

by noting that Roci’s ORR was “*Unconfirmed.”88

         As TIGER-X progressed, Clovis’ public statements regarding Roci remained

upbeat. Roci was Clovis’ champion and it was prepared to do battle with Tagrisso.

On September 9, 2014, Mahaffy told a securities analyst that Roci and Tagrisso had

“similar response rate[s],” and on November 18, 2014, Clovis issued a press release

stating that Roci’s ORR was 67%.89



85
     Compl. ¶ 110.
86
     Compl. ¶¶ 110–11.
87
   Compl. ¶¶ 12–13, 101, 112, Ex. A at 00231; see also Letter to Vice Chancellor Slights
from Brian D. Long, Esq., on behalf of Pls.’ Resp. to Questions Posed by the Ct. at the
June 19, 2019 Hr’g in this Matter (“Pls.’ Letter”) (D.I. 61) at 2–3.
88
     Compl. ¶¶ 13, 224, 259, Ex. A at 00246; Pls.’ Letter at 2–3.
89
     Compl. ¶¶ 112–13.

                                              16
           The Board, however, continued to receive signals that management was not

vigilantly following RECIST. On December 3, 2014, the Board reviewed a report

stating, “in mid-March, we will have a response rate of less than 60% (could be less

than 50%).”90        The same report revealed the Company was waiting on

“data maturity” and that at least some patients had not received a second scan at that

time, indicating continued non-compliance with RECIST.91

           With hands on their ears to muffle the alarms, on February 27, 2015,

Defendants Mahaffy, Mast, Atwood, Barrett, Blair, Flaherty, Graham, Klingenstein,

McKinley and Spickschen signed Clovis’ 2014 Annual Report.92                   The report

reaffirmed previous, inflated ORR reports and omitted that Clovis was relying on

partially unconfirmed responses.93

           On April 29, 2015, management updated the Board by presenting a series of

slides depicting that the highest ORR for any subgroup of Roci patients was 53.3%

and revealing the numbers were as low as 37.1% for other groups.94 The next day,




90
     Compl. ¶ 120, Ex. A at 00371.

 Id. (“We really want to get to at least 2 scans on every patient and to more than 2 on as
91

many as we can.”).
92
     Compl. ¶¶ 206–07.
93
     Id.
94
     Compl. ¶ 16, Ex. A at 00633, 00640, 00717, 00724, 00726. See also Pls.’ Letter at 3–4.

                                             17
Clovis management and CMO Allen published data from the TIGER-X trial in the

New England Journal of Medicine (“NEJM”).95 The NEJM article showed Roci’s

ORR at 59% as “assessed according to . . . [RECIST].”96 At about this time, in the

spring of 2015, Clovis statisticians had already informed “senior clinical personnel”

that there was “a ‘divergence between the confirmed and unconfirmed ORR’” for

Roci.97

            Approximately one month later, on June 9, 2015, Clovis officials met with the

FDA regarding Roci’s critical New Drug Application (“NDA”).98 The NDA filing

necessarily included the Company’s disclosure of TIGER-X data for final FDA

approval.99        At the meeting, management reported an ORR of 50% without

informing the FDA that this ORR included unconfirmed responses.100

Notwithstanding its report to the FDA, management continued to report a 60% ORR

in public statements.101



95
     Compl. ¶ 123.
96
     Compl. ¶¶ 124, 208.
97
     Compl. ¶ 126.
98
     Compl. ¶ 129.
99
     Id.
100
      Id.
101
      Compl. ¶¶ 128–29.

                                              18
            On June 19, 2015, Mahaffy, Mast and other members of senior management

received “close to final” data from the TIGER-X trial.102 The data showed an ORR

of 45.1% for the 500mg dose (significantly lower than the 60% ORR the Company

had been disclosing to the market).103 Mahaffy wrote to another Clovis executive

that the data “[s]eems worrying.”104 Three days later, on June 22, CMO Allen

resigned without warning.105 On July 7, Clovis’ management received the “final”

TIGER-X data showing that Roci’s ORR was only 42%.106

            On July 14, 2015, Clovis conducted a secondary offering of 4.1 million shares

and raised more than $316 million.107 The prospectus for the offering was signed by

the entire Board and disclosed a “‘60 percent ORR’ at the ‘recommended dose of

500mg.’”108 It did not disclose that the ORR included unconfirmed responses.109




102
      Compl. ¶ 130.
103
      Id.
104
      Id.
105
      Compl. ¶ 131.
106
      Compl. ¶ 137.
107
      Compl. ¶ 133.
108
      Compl. ¶¶ 134, 136.
109
      Compl. ¶ 136.

                                              19
            The FDA requested additional data in support of the NDA in October 2015.110

In response, Clovis disclosed that Roci’s current confirmed ORR was between 28%

and 34%.111 At the same time, management presented a slide to the Board to

illustrate how Roci was stacking up against Tagrisso.112 The slide clearly showed

an ORR of 46% that was “(Unconf + Conf)” while Tagrisso’s ORR was

“Confirmed.”113 Management advised the Board in connection with the NDA that

“[w]e will cite the unconfirmed investigator assessed response rate of ~46%.”114 The

public continued to hear a different story, however. For instance, a November 5,

2015 press release and earnings call announced third quarter results and cited

presentations from medical conferences claiming Roci’s ORR was 60%.115

      D. The Fallout

            The conflicting reports regarding Roci’s ORR eventually prompted the FDA

to ask questions and to call for a meeting with Clovis executives on November 9,




110
      Compl. ¶ 140.
111
      Compl. ¶¶ 140–41.
112
      Compl. ¶ 143, Ex. A at 01021; Pls.’ Letter at 45.
113
      Id.
114
      Pls.’ Letter at 4–5; Compl. Ex. A at 01069.
115
      Compl. ¶¶ 144–45, 215.

                                               20
2015.116 During the meeting, the FDA emphasized it would credit only confirmed

responses on the NDA117 and insisted Clovis comply with TIGER-X’s stated

protocol (which had explicitly incorporated RECIST).118 Mahaffy updated the

Board on this most recent FDA meeting the following week.119

            The public was finally informed of Roci’s true ORR when, on November 16,

2015, Clovis issued a press release stating the correct confirmed ORR was as low

as 28–34%.120 Clovis’ stock price immediately dropped 70%, wiping out more than

$1 billion in market capitalization.121

            On April 8, 2016, the FDA voted to delay action on Clovis’ NDA until the

Company could provide concrete evidence of a risk/benefit profile meriting

approval.122 On this news, Clovis’ stock price fell another 17%.123 On May 5, 2016,




116
      Compl. ¶¶ 17, 146.
117
      Id.
118
      Compl. ¶¶ 80, 82.
119
   Compl. Ex. A at 01073 (containing minutes from a special Board meeting on
November 15, 2015).
120
      Compl. ¶¶ 222–23.
121
      Compl. ¶¶ 18, 223.
122
      Compl. ¶ 228.
123
      Compl. ¶ 227.

                                           21
Clovis withdrew its NDA for Roci and terminated enrollment in all ongoing Roci

studies.124

      E. Undisclosed Side Effects and Other TIGER-X Protocol Violations

            In addition to the Company’s refusal properly to report ORR, the Board was

advised that Roci had serious, undisclosed side effects and that the TIGER-X trial

had been compromised by other clinical trial protocol violations during the Relevant

Period.125 FDA regulations and internal Clovis policies required Clovis to abide by

certain informed consent, patient eligibility, data reliability, recordkeeping and

adverse event reporting practices.126 The Company routinely missed these marks

throughout the TIGER-X trial.127

            For example, on August 17, 2015, a research associate notified senior Clovis

management of protocol violations involving patient informed consent, patient

enrollment, adverse event reporting, data alteration and missing data.128

Management received a similar report ten days later.129 The following month, on



124
      Compl. ¶ 229.
125
      Compl. ¶¶ 1, 19, 22, 149–96.
126
      Compl. ¶¶ 149–68.
127
      Compl. ¶ 171.
128
      Id.
129
      Id.

                                             22
September 17, 2015, Clovis management identified 238 protocol deviations.130

On October 14, 2015, in a notice letter (Form 483) to the Company, the FDA

identified a failure to report two serious adverse events, approximately twelve

patient eligibility violations and various failures to maintain case history and

informed consent records.131          It was also discovered that the clinical trial

administrators had failed to monitor other medications enrollees were taking while

participating in the trial.132 The Board was notified of several of these clinical trial

protocol violations on December 10, 2015, and likely received additional

information about the problems “at regularly scheduled board meetings” where

“hours of discussion occurred . . . regarding [Roci].”133

            Protocol violations were not the only problems with the Roci clinical trial.

The Board also learned that one of the drug’s side effects, QT prolongation, was

more common than management publicly reported.134               Specifically, the Board

received a report on April 29, 2014, that a grade 3 out of 4 (indicating a severe




130
      Id.
131
      Id.
132
      Compl. ¶¶ 173, 175–176.
133
      Compl. ¶¶ 174, 259.
134
      Compl. ¶ 189.

                                             23
response) QT prolongation occurred in 6.2% of patients.135 Nevertheless, the Board

sat idle as the Company reported a “manageable side effect profile” throughout

May 2014.136 On October 7, 2014, Board materials indicated that a grade 3 QT

prolongation occurred in 2.5% of patients.137 The same results were reported in

forecasts the Board received from management in December of 2014.138

         The Company’s misleading reports regarding Roci’s side effects continued

into 2015. In February and July of 2015, Clovis disclosed that Roci’s only grade 3

adverse event “of note” was hyperglycemia.139 The prospectus for the July 2015

secondary offering made a similar disclosure.140 Although an August 6, 2015 press

release mentioned the QT prolongation side effect, it emphasized that the only

grade 3 adverse event identified in more than 5% of patients was hyperglycemia.141

Mahaffy and Mast made public statements in September and November of 2015 that

Roci did not have “typical side effects” and that the “only grade 3 or 4 adverse event


135
      Compl. ¶ 179.
136
      Compl. ¶ 103.
137
      Compl. ¶ 180.
138
      Compl. ¶ 181.
139
      Compl. ¶¶ 122, 136.
140
    Compl. ¶ 136 (“[T]he only common grade 3 [side effect] was hyperclycemia.”)
(alteration in original).
141
      Compl. ¶ 211.

                                         24
that has been identified in more than ten percent of patients is hyperglycemia.”142

By this time, however, Clovis had already reported data to the FDA indicating that

Roci had a 12% incidence of grade 3 or higher QT prolongation.143 And, by

April 2016, management had informed the Board that the FDA was going to require

a “Boxed Warning” (the strongest of the FDA warnings) because it had concluded

Roci significantly increased the risk of QT prolongation.144

      F. Defendants’ Stock Sales and Related Litigation

         As the TIGER-X tribulations unfolded, three members of the Board,

Defendants Barrett, Blair and Spickschen, along with CFO Mast, sold small

percentages of their Clovis stock holdings.145 These trades, and their timing relative

to the November 16, 2015 fall in Clovis’ stock price, are depicted in the chart

below.146




142
      Compl. ¶¶ 139, 148, 216.
143
      Compl. ¶¶ 148, 216.
144
      Compl. ¶¶ 184, 226.
145
    Compl. ¶ 31 (Barrett’s sales), ¶ 38 (Spickschen’s sales), ¶ 40 (Mast’s sales),
¶ 354 (Blair’s sales).
146
      Compl. ¶ 354.

                                         25
At first glance, the trades appear to be significant. But it is undisputed that each of

the Director Defendants retained between 96% and 99.9% of their total holdings

throughout the Relevant Period.147

      After news of the failed TIGER-X trial broke, and the value of Clovis’ stock

fell precipitously, Clovis, Mahaffy and Mast were each named as defendants in a

series of securities fraud class actions.148 One of these cases was settled for




147
   Tr. of Oral Arg. on Defs.’ Mot. to Dismiss (D.I. 63) at 35:3–5; Transmittal Aff. of
Robert L. Burns, Esq. in Supp. of Defs.’ Mot. to Dismiss Pls.’ Consol. Verified S’holder
Deriv. Compl., (“Burns Aff.”) (D.I. 19) Ex. O at 45 (showing the Board Defendants’ stock
holdings as of April 13, 2015); Clovis, Proxy Statement (Schedule 14A) (Apr. 30, 2015)
(showing the Board Defendants’ stock holdings as of April 13, 2015).
148
   Compl. ¶¶ 26, 231. See, e.g., Medina v. Clovis Oncology, Inc., et al., Civil Action
No. 1:15-cv-2546 (reported in Westlaw as 2016 WL 660133).

                                          26
$142 million in cash and Clovis stock.149 The SEC’s September 18, 2018 complaint

against Clovis, Mahaffy and Mast led to the entry of an onerous consent decree

requiring the three defendants to pay $20 million, $250 thousand and $100 thousand

in civil penalties, respectively.150 Additionally, Mast was required to disgorge

$454,154 (representing his unjust profits from selling Clovis stock).151 The FDA

also launched its own investigation of Clovis relating to the TIGER-X trial.152

      G. Procedural Posture

          On May 31, 2016 and December 15, 2016, Plaintiffs served the Company with

demands to inspect books and records under 8 Del. C. § 220 in response to which

they received approximately 3,000 pages of documents.153 Plaintiffs filed their first

complaint on March 23, 2017.154 They amended the complaint on May 18, 2017.155




149
      Compl. ¶ 239.
150
      Compl. ¶¶ 240–41, 245.
151
      Compl. ¶ 245.
152
      Compl. ¶ 232.
153
      Compl. ¶¶ 43–44.
154
      See Verified S’holder Deriv. Compl. (D.I. 1); Compl. ¶¶ 43, 250.
155
      D.I. 8.

                                              27
Defendants moved to dismiss the first amended complaint under Court of Chancery

Rules 23.1 and 12(b)(6) on August 1, 2017.156

          As noted, on September 18, 2018, the SEC filed a complaint against Clovis,

Mahaffy and Mast that resulted in consent decrees and civil penalties.157 After the

SEC settlements, Plaintiffs moved to amend their complaint again on November 19,

2018, to add allegations regarding the SEC enforcement actions.158 After this Court

granted leave to amend, the parties supplemented their briefing on Defendants’

motions to dismiss.159 Following oral argument and post-argument filings, the

motion to dismiss was submitted for decision on July 1, 2019.

                                  II. ANALYSIS

          The Complaint comprises three counts.160 Count I is a derivative claim for

breach of fiduciary duty against the Board Defendants.161 Specifically, Plaintiffs

allege the Board Defendants breached their fiduciary duties under Caremark by their



156
      D.I. 15–16.
157
      Compl. ¶¶ 240–43, 245.
158
      D.I. 34, 36–37.
159
      D.I. 46, 50, 54.
160
    Compl. ¶¶ 341–360. Count I has received the most attention. See, e.g., PAB (D.I. 23)
at 58, 62–63 (devoting approximately three total pages to the Brophy and unjust enrichment
claims).
161
      Compl. ¶¶ 342–44.

                                           28
“actions and inactions . . . in connection with the TIGER-X trial.”162 In this regard,

Count I alleges either that (i) the Board Defendants failed to institute an oversight

system for the TIGER-X trial or (ii) the Board Defendants consciously disregarded

a series of red flags related to the TIGER-X trial.163

         Count II asserts a derivative claim against the Board Defendants for unjust

enrichment, and Count III asserts a derivative claim for breach of fiduciary duty

against Barrett, Blair, Mast and Spickschen under Brophy, which permits a

corporation to recover from its fiduciaries for harm caused by improper stock

trades.164

         As for Count I, Plaintiffs have pled particularized facts that “create a

reasonable doubt that, as of the time the complaint [was] filed, the board of directors

could have properly exercised its independent and disinterested business judgment

in responding to a demand.”165 Specifically, Plaintiffs have well-pled that the Board




162
      Compl. ¶¶ 344–45; Caremark, 698 A.2d 959.
163
    See PAB (D.I. 23) at 31 (“Defendants Face a Substantial Likelihood of Personal
Liability for Failing to Prevent or Correct Clovis from Providing Shareholders and the FDA
with Misleading Study Data Results.”), 44 (“The [Board] Defendants Also Face a
Substantial Likelihood of Personal Liability for Failing to Implement Any System of
Internal Controls to Ensure Compliance with Study Protocol or Receive Notice of Study
Protocol Violations.”).
164
      Brophy, 70 A.2d 5; Compl. ¶¶ 349–60.
165
      Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).

                                             29
ignored red flags that the Company was violating—perhaps consciously violating—

the RECIST protocol and then misleading the market and regulators regarding

Roci’s progress through the TIGER-X trial.               Because Plaintiffs have pled

particularized facts to support a reasonable inference the Board Defendants face a

substantial likelihood of liability on Count I, Defendants’ motion to dismiss Count I

under Rule 23.1 must be denied. Having so concluded, a fortiori, I deny the Motion

to Dismiss under Rule 12(b)(6) as well.166

         Regarding Counts II and III, Plaintiffs have failed to plead particularized facts

showing that the Defendants face a substantial likelihood of personal liability as to

either count. Defendants’ motion to dismiss Counts II and III, therefore, must be

granted.

      A. The Applicable Rule 23.1 Standard

         There is no dispute that each of the Complaint’s three counts purports to state

a derivative claim.167 As Justice Moore emphasized in his seminal Aronson decision,

8 Del. C. § 141(a) codifies a bedrock of Delaware corporate law—the board of



166
   See McPhadden v. Sidhu, 964 A.2d 1262, 1270 (Del. Ch. 2008) (“[A] complaint that
survives a motion to dismiss pursuant to Rule 23.1 will also survive a 12(b)(6) motion to
dismiss[.]”); Ryan v. Gifford, 918 A.2d 341, 357 (Del. Ch. 2007) (“[W]here plaintiff alleges
particularized facts sufficient to prove demand futility under the second prong of Aronson,
that plaintiff a fortiori rebuts the business judgment rule for the purpose of surviving a
motion to dismiss pursuant to Rule 12(b)(6).”).
167
      Compl. ¶¶ 347–48, 351–52, 359–60; DOB (D.I. 16) at 1.

                                             30
directors, not stockholders, manages the business and affairs of the corporation,

including the decision to cause the corporation to sue.168 With this in mind, our law

has established procedural imperatives to ensure that shareholders do not “imping[e]

on the managerial freedom of directors.”169 To wrest control over the litigation asset

away from the board of directors, the stockholder must demonstrate that demand on

the board to pursue the claim would be futile such that the demand requirement

should be excused.170

         Plaintiffs acknowledge they did not make a pre-suit demand on the Board.171

It is settled, therefore, that their Complaint must “comply with stringent

requirements of factual particularity that differ substantially from the permissive

notice pleadings” of Chancery Rule 8 in order to demonstrate that demand upon the

Board would have been futile.172 Where, as here, a plaintiff challenges board

inaction—as opposed to a business decision of the Board—the court analyzes




168
   Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm
v. Eisner, 746 A.2d 244 (Del. 2000) (citing 8 Del. C. § 141(a)).
169
      Aronson, 473 A.2d at 811.
170
   See Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040,
1044 (Del. 2004).
171
      Compl. ¶ 250.
172
   Brehm, 746 A.2d at 254 (noting that conclusory statements or mere notice pleading are
insufficient to satisfy Rule 23.1).

                                          31
demand futility under the well-known and “well-balanced” Rales standard.173 This

standard requires plaintiffs to plead facts regarding demand futility with particularity

but balances that requirement with a mandate that the court draw all reasonable

inferences in the plaintiffs’ favor.174

         Demand futility turns on “whether the board that would be addressing the

demand can impartially consider [the demand’s] merits without being influenced by

improper considerations.”175 Such improper influence arises if a majority of the

board’s members (i) are “compromised” because they face “a ‘substantial

likelihood’ of personal liability” with respect to at least one of the alleged claims or

(ii) lack independence because they are beholden to an interested person.176




173
   Rales, 634 A.2d at 932–34; Marchand, 212 A.3d at 818 (citing Del. Cty. Empls.’ Ret.
Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. 2015) (explaining that the Rales test is “well
balanced”)).
174
   Rales, 634 A.2d at 934 (requiring “particularized factual allegations”); Marchand,
212 A.3d at 818 (requiring “reasonable inferences” to be drawn in plaintiff’s favor).
175
      Rales, 634 A.2d at 934.
176
   Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003) (quoting Rales, 634 A.2d at 936);
In re Goldman Sachs Gp., Inc. S’holder Litig., 2011 WL 4826104, at *18 (Del. Ch. Oct. 12,
2011). The parties agree the first prong in the Rales analysis applies where, as here, a
plaintiff challenges board inaction such as when a board is alleged to have consciously
disregarded its oversight responsibilities. See Wood v. Baum, 953 A.2d 136, 140
(Del. 2008); DOB (D.I. 16) at 18; PAB (D.I. 23) at 28.

                                           32
      B. Plaintiffs Have Well-Pled the Board Faces a Substantial Likelihood of
         Liability Under Caremark (Count I)
        The parties agree that Count I implicates Caremark, Stone v. Ritter and their

progeny.177    These cases require well-pled allegations of bad faith to survive

dismissal—i.e., allegations “the directors knew that they were not discharging their

fiduciary obligations,” a standard of wrongdoing “qualitatively different from, and

more culpable than . . . gross negligence.”178 Given this high bar, it is now

indubitably understood, and oft-repeated, that a Caremark claim is among the

hardest to plead and prove.179 At the pleadings stage, this means Plaintiffs must

allege particularized facts that either (i) “the directors completely fail[ed] to

implement any reporting or information system or controls, or . . . [(ii)] having

implemented such a system or controls, consciously fail[ed] to monitor or oversee

its operations thus disabling themselves from being informed of risks or problems




177
  See Marchand, 212 A.3d at 820–21 (discussing the Caremark progeny); Caremark, 698
A.2d at 970; Stone v. Ritter, 911 A.2d 362 (Del. 2006).
178
  Stone, 911 A.2d at 369–70 (citing In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del.
2006)).
179
   See Stone, 911 A.2d at 372 (“[A] claim that directors are subject to personal liability for
employee failures is possibly the most difficult theory in corporation law upon which a
plaintiff might hope to win a judgment.”) (internal quotation marks omitted); Guttman,
823 A.2d at 506 (“A Caremark claim is a difficult one to prove.”); Caremark, 698 A.2d at
967 (“The theory here advanced is possibly the most difficult theory in corporation law
upon which a plaintiff might hope to win a judgment.”).

                                             33
requiring their attention.”180 Implicit in these standards is the requirement that

plaintiffs plead particular facts allowing a reasonable inference the directors acted

with scienter, which “requires proof that a director acted inconsistent with his

fiduciary duties and, most importantly, that the director knew he was so acting.”181

         Caremark rests on the presumption that corporate fiduciaries are afforded

“great discretion to design context- and industry-specific approaches tailored to their

companies’ businesses and resources.”182 Indeed, “[b]usiness decision-makers must

operate in the real world, with imperfect information, limited resources, and

uncertain future. To impose liability on directors for making a ‘wrong’ business

decision would cripple their ability to earn returns for investors by taking business

risks.”183 But, as fiduciaries, corporate managers must be informed of, and oversee

compliance with, the regulatory environments in which their businesses operate.

In this regard, as relates to Caremark liability, it is appropriate to distinguish the

board’s oversight of the company’s management of business risk that is inherent in

its business plan from the board’s oversight of the company’s compliance with


180
      Marchand, 212 A.3d at 821 (quoting Stone, 911 A.2d at 370–72).
181
     In re Massey Energy Co., 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011)
(citing Stone, 911 A.2d at 370) (emphasis in original).
182
      Marchand, 212 A.3d at 821.
183
   In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 126 (Del. Ch. 2009) (emphasis
supplied).

                                            34
positive law—including regulatory mandates.              As this Court recently noted,

“[t]he legal academy has observed that Delaware courts are more inclined to find

Caremark oversight liability at the board level when the company operates in the

midst of obligations imposed upon it by positive law yet fails to implement

compliance systems, or fails to monitor existing compliance systems, such that a

violation of law, and resulting liability, occurs.”184

          Our Supreme Court’s recent decision in Marchand v. Barnhill underscores the

importance of the board’s oversight function when the company is operating in the

midst of “mission critical” regulatory compliance risk.185 The regulatory compliance

risk at issue in Marchand was food safety and the failure to manage it at the board

level allegedly allowed Blue Bell Creameries to distribute mass quantities of ice

cream tainted by listeria.186 The Court held that Blue Bell’s board had not made a

“good faith effort to put in place a reasonable system of monitoring and reporting”




184
   In re Facebook, Inc. Sec. 220 Litig., 2019 WL 2320842, at *14 (Del. Ch. May 31, 2019).
The court explained: “In other words, it is more difficult to plead and prove Caremark
liability based on a failure to monitor and prevent harm flowing from risks that confront
the business in the ordinary course of its operations. Failure to monitor compliance with
positive law, including regulatory mandates, is more likely to give rise to oversight
liability.” Id. (collecting authorities).
185
      Marchand, 212 A.3d at 824 (applying Caremark, 698 A.2d 959).
186
      Id. at 809.

                                           35
when it left compliance with food safety mandates to management’s discretion rather

than implementing and then overseeing a more structured compliance system.187

            As Marchand makes clear, when a company operates in an environment

where externally imposed regulations govern its “mission critical” operations, the

board’s oversight function must be more rigorously exercised.188               Key to the

Supreme Court’s analysis was the fact that food safety was the “most central safety

and legal compliance issue facing the company.”189 To be sure, even in this context,

Caremark does not demand omniscience. But it does demand a “good faith effort

to implement an oversight system and then monitor it.”190 This entails a sensitivity

to “compliance issue[s] intrinsically critical to the company[].” 191

            1. Caremark’s First Prong

            The so-called first prong of Caremark requires Plaintiffs to well-plead that the

Board “completely fail[ed] to implement any reporting or information system or




187
      Id. at 823–24.
188
    Id. at 824 (“food safety was essential and mission critical” and the “most central
consumer safety and legal compliance issue facing the company”). See also id. at 822
(observing that food safety “has to be one of the most central issues at the company” and
“a compliance issue intrinsically critical to the company’s [monoline] business operation”).
189
      Id.
190
      Id. at 821.
191
      Id. at 822.

                                               36
controls[.]”192 But Plaintiffs acknowledge the Board’s Nominating and Corporate

Governance Committee was “specifically charged” with “provid[ing] general

compliance oversight . . . with respect to . . . Federal health care program

requirements and FDA requirements.”193                And they further acknowledge

“[t]he Board . . . reviewed detailed information regarding [Roci’s] TIGER-X trial at

each Board meeting.”194 Given these acknowledged facts, it is difficult to conceive

how Plaintiffs would prove the Board had no “reporting or information system or

controls[.]”195

            2. Caremark’s Second Prong

            Caremark’s second prong is implicated when it is alleged the company

implemented an oversight system but the board failed to “monitor it.”196 To state a

claim under this prong, Plaintiffs must well-plead that a “red flag” of non-

compliance waived before the Board Defendants but they chose to ignore it.197


192
      Id. at 821.
193
      Compl. ¶ 279.
194
    Compl. ¶ 16. Plaintiffs also allege Clovis maintained extensive policies addressing the
alleged deviations from the clinical study protocol. See Compl. ¶¶ 150 (protocol
on recordkeeping), 146 (informed consent protocol), 154, 158 (regarding FDA
regulations), 67 (regarding reporting adverse events).
195
      Marchand, 212 A.3d at 821.
196
      Id.
197
      See South v. Baker, 62 A.3d 1, 16–17 (Del. Ch. 2012).

                                             37
In this regard, the court must remain mindful that “red flags are only useful when

they are either waived in one’s face or displayed so that they are visible to the careful

observer.”198 But, as Marchand makes clear, the careful observer is one whose gaze

is fixed on the company’s mission critical regulatory issues.199 For Clovis, this was

Roci’s TIGER-X trial and the clinical trial protocols and related FDA regulations

governing that study.

         Plaintiffs have alleged particularized facts supporting reasonable inferences

that: (i) the Board knew the TIGER-X protocol incorporated RECIST;200

(ii) RECIST requires reporting only confirmed responses;201 (iii) industry practice

and FDA guidance require that the study managers report only confirmed

responses;202 (iv) management was publicly reporting unconfirmed responses to


  Wood, 953 A.2d at 143 (internal citations omitted); In re Citigroup Inc. S’holders Litig.,
198

2003 WL 21384599, at *2 (Del. Ch. June 5, 2003) (internal quotes omitted).
199
      Marchand, 212 A.3d 805.
200
    Compl. ¶¶ 82, 84, 88, 89. Indeed, the Company elected to adopt RECIST even though
it could have incorporated other clinical trial protocols. Compl. ¶¶ 80, 83.
201
   Compl. ¶ 86. As noted, Defendants vigorously dispute whether RECIST requires only
confirmed responses to be included in ORR. See, e.g., DOB (D.I. 16) at 14, 28. While
Defendants may ultimately prove that their interpretation of RECIST is correct, they cannot
rewrite Plaintiffs’ Complaint on a motion to dismiss. See Compl. ¶ 86, Ex. B (D.I. 37) at 1
(RECIST guidelines stating that “[c]onfirmation of response is required for trials . . .”)
(emphasis in original). See also Vanderbilt Income & Growth Assocs., L.L.C. v.
Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996) (emphasizing the trial court
cannot ignore well-pled allegations in a complaint on a motion to dismiss).
202
      Compl. ¶ 99–100 (citing FDA guidance documents).

                                            38
keep up with Tagrisso’s response rate;203 and (v) the Board knew management was

incorrectly reporting responses but did nothing to address this fundamental departure

from the RECIST protocol.204 When Clovis’ serial non-compliance with RECIST

was finally revealed to the regulators, Roci was doomed.205 And when the drug’s

failure was revealed to the market, Clovis’ stock price tumbled.206

         ORR was the crucible in which Roci’s safety and efficacy were to be tested.207

Roci was Clovis’ mission critical product.208 And the Board knew, upon completion

of the TIGER-X trial, the FDA would consider only confirmed responses when

determining whether to approve Roci’s NDA per the agency’s own regulations.209

As pled, these regulations, and the reporting requirements of the RECIST protocol,

were not nuanced.210 The Board was comprised of experts and the RECIST criteria



203
      See, e.g., Compl. ¶¶ 16, 104, 120, 134, 136, 143, 206–07, 259.
204
      Compl. ¶¶ 104, 107–08, 120, 259; Compl. Ex. A at 00120, 00162, 00246, 00371.
205
      Compl. ¶¶ 223, 228.
206
      Compl. ¶¶ 18, 222–23.
207
   Compl. ¶ 8 (“ORR was the “primary endpoint”—the key measure of success—in the
TIGER-X trial.”).
208
      Compl. ¶¶ 8, 20, 101; see also Compl. ¶ 63 (Clovis had no drugs on the market).
209
      Compl. ¶ 99.
210
    See Compl. ¶ 10 (“RECIST unequivocally requires each instance of tumor shrinkage
(a response) to be ‘confirmed.’”). Defendants attack Plaintiffs’ assertions that (i) the Board
understood RECIST and (ii) ORR was more than a mere “nuts and bolts” requirement.
See Defs.’ Reply Br. in Supp. of Their Mot. to Dismiss Pls.’ Consol. Verified S’holder
                                              39
are well-known in the pharmaceutical industry.211 Moreover, given the degree to

which Clovis relied upon ORR when raising capital, it is reasonable to infer the

Board would have understood the concept and would have appreciated the

distinction between confirmed and unconfirmed responses.212 The inference of

Board knowledge is further enhanced by the fact the Board knew that even after

FDA approval, physicians (i.e., future prescribers) would evaluate Roci based on its

ORR.213




Deriv. Compl. (D.I. 27) at 16 (there are “no well-pled allegations even suggesting the
[Board] Defendants understood (or should have understood) that ORR results were
reported (allegedly) incorrectly based on the highly technical detail on which Plaintiffs
focus.”). Plaintiffs have alleged sufficient facts to support an inference that the Board
Defendants did understand (or should have understood) that Clovis was reporting ORR
results incorrectly. For example, Board slides explicitly warn that ORR numbers are
“[u]nconfirmed.” Compl. Ex. A at 00162, 00246. Tagrisso was compared with Roci by
highlighting their respective ORRs with the caveat that Roci’s ORR was
“(Unconf + Conf)” while Tagrisso’s was “Confirmed.” Compl. Ex. A at 01021.
Additionally, Plaintiffs point to scholarly publications indicating that “confirmation
[of responses] is the ‘industry standard.’” Compl. ¶ 97. Since Roci was such an important
product for the Company, it is reasonable to infer that the Board presentations regarding
ORR, at the least, should have prompted questions—if not objections—from the Board.
Furthermore, the Complaint alleges circumstances where any reliance on Clovis’
management regarding ORR reporting would be unreasonable in light of the Board
presentations and the competitive pressure Roci faced from Tagrisso—rendering a reliance
defense under 8 Del. C. § 141(e) inappropriate, at least at this stage.
211
   Compl. ¶¶ 30–38; see also Compl. ¶ 83 (quoting Manola et al., Assessment of Treatment
Outcome, in UICC MANUAL OF CLINICAL ONCOLOGY 40, 44 (Brian O’Sullivan et al. eds.,
9th ed. 2015).
212
      Compl. ¶¶ 110–11.
213
      Compl. ¶¶ 8, 120, Ex. A at 00371.

                                           40
         Defendants argue the FDA blessed Clovis’ plan to report unconfirmed

responses for “interim” results because Roci was on an accelerated approval track.214

Additionally, Defendants claim FDA guidance was not as clear as the Complaint

depicts.215 But, again, that is not what the Complaint alleges.216 Whether Plaintiffs’


214
   See, e.g., DOB (D.I. 16) at 14. Defendants cite to Compl. Ex. A (D.I. 37) at 00001069.
This document is an October 7, 2015 Board report stating “a few highlights” “in terms of
the FDA review so far.” One of those highlights was that “[w]e will cite the unconfirmed
investigator assessed response rate of [] 46%.” Id. Defendants claim this means that the
FDA did not have an “issue” with reporting unconfirmed results. DOB (D.I. 16) at 30.
This report might be interpreted as suggesting either that (i) the FDA implicitly condoned
reporting unconfirmed responses or (ii) the FDA did not notice or was not specifically told
that Clovis reneged on a promise to use only confirmed responses. Which interpretation
will carry the day remains to be seen. At this point, I cannot ignore that the Complaint
contradicts the assertion that the FDA knew about and blessed reliance on unconfirmed
results. Compl. ¶ 129 (“Documents publicly released by the FDA on April 8, 2016
demonstrate that at that June 9, 2015 meeting, the [Board] Defendants privately reported
an ORR of 50% (without informing the FDA that the ORR was unconfirmed)[.]”). On this
point, my conclusion at this stage is similar to Judge Moore’s in the related federal
securities litigation, Medina v. Clovis Oncology, Inc., 215 F.Supp. 3d 1094, 1112 (D. Colo.
2017) (stating, after an extensive review of RECIST requirements, that he “agrees with
plaintiffs’ interpretation of RECIST” “at this stage” that RECIST “requires that responses
be confirmed.”). Like Judge Moore, I note that my conclusion is a reflection of the
applicable standard of review, fully acknowledging that “Defendants [might] present
evidence at summary judgment indicating that their interpretation of RECIST was
reasonable and that the FDA would accept [] unconfirmed responses.” Id. at 1117.
215
      DOB (D.I. 16) at 14.
216
    Compl. ¶ 86 (“RECIST unequivocally requires each instance of tumor shrinkage
(a response) to be ‘confirmed.’”). See also Sanchez, 124 A.3d at 1020 (“all reasonable
inferences from the pled facts must . . . be drawn in favor of the plaintiff in determining
whether the plaintiff has met its burden under Aronson.”). I acknowledge the parties’
agreement that the Company’s Section 220 documents would be deemed incorporated in
the Complaint whether cited there or not. This is a now-standard form of agreement and it
serves the laudable purpose of eliminating the need for parties and the court to address
whether referring to Section 220 documents has converted a motion to dismiss into a
motion for summary judgment. See Yahoo!, 132 A.3d at 797 (confirming parties can agree
that Section 220 documents are deemed incorporated by reference in the complaint without
                                            41
allegations hold up during discovery, at summary judgment or at trial remains to be

seen.

        Drawing all reasonable inferences in Plaintiffs’ favor, I am satisfied they have

well-pled that the Board consciously ignored red flags that revealed a mission critical

failure to comply with the RECIST protocol and associated FDA regulations.

Additionally, at this stage, Plaintiffs’ allegation that this failure of oversight caused

monetary and reputational harm to the Company is sufficient to provide a causal

nexus between the breach of fiduciary duty and the corporate trauma.217 Therefore,


altering the Rule 12(b)(6) standard of review). But incorporating documents that might
not square with a complaint’s otherwise well-pled allegations is a far cry from providing
the court with an undisputed factual predicate upon which judgment as a matter of law may
rest. In other words, Section 220 documents, hand selected by the company, cannot be
offered to rewrite an otherwise well-pled complaint. This view of the so-called Yahoo!
agreement is entirely consistent with the “incorporation by reference doctrine,” whereby
the court may “review the actual document to ensure that the plaintiff has not
misrepresented its contents and that any inference the plaintiff seeks to have drawn is a
reasonable one.” Id. The doctrine “limits the ability of the plaintiff to take language out
of context because the defendants can point the court to the entire document.” Id. “In the
end, the only effect of the Incorporation Condition (within the parties’ agreement) will be
to ensure that the plaintiff cannot seize on a document, take it out of context, and insist on
an unreasonable inference that the court could not draw if it considered related documents.”
Id. at 798. Mindful of this purpose, our courts must regulate how far down the road of
incorporation by reference a defendant may go when plaintiff has well-pled something as
fact (e.g., that the Board understood ORR), even if another document might suggest the
facts are otherwise. Section 220 documents may or may not comprise the entirety of the
evidence on a particular point. Until that is tested, Defendants cannot ask the court to
accept their Section 220 documents as definitive fact and thereby turn pleading stage
inferences on their head. That is not, and should not be, the state of our law.
217
   Compl. ¶ 21. With this said, Plaintiffs’ causation case will be challenging. It appears
Roci was not what Clovis hoped it would be. If that proves true, then Plaintiffs may have
difficulty connecting the oversight failure(s) to the corporate trauma. It might well be that
Roci simply did not work and nothing the Board did or did not do would change that.
                                             42
Defendants’ motion to dismiss Count I (Plaintiffs’ Caremark claim) under

Rules 23.1 and 12(b)(6) must be denied.

      C. Plaintiffs Fail to State a Brophy Claim (Count III)
         Generally, “corporate officers and directors may purchase and sell the

corporation’s stock at will, without any liability to the corporation.”218 Indeed,

Delaware law recognizes that it is good when fiduciaries align their interests with

the company through stock ownership, a dynamic facilitated by the fact that many

directors and officers are compensated in stock.219 With the desirability of aligned

incentives in mind, our law sets the bar for stating a claim for breach of fiduciary

duty based on insider trading very high.220

         “[A]n insider’s trade may be deemed a breach of the fiduciary duty of loyalty,

when: (1) ‘the corporate fiduciary possessed material, nonpublic information’; and



For now, questions of causation are fact intensive and, as such, cannot be addressed at the
pleading stage. In re Massey Energy Co. Deriv. & Class Action Litig., 160 A.3d 484, 506
(Del. Ch. 2017).
218
      Tuckman v. Aerosonic Corp., 1982 WL 17810, at *11 (Del. Ch. May 20, 1982).
219
    See In re Oracle Corp., 867 A.2d 904, 930 (Del. Ch. 2004), aff’d, 872 A.2d 960
(Del. 2005) (“[T]he use of equity as a compensation tool is a legitimate choice under our
law and Delaware statutory law permits and its common law creates incentives for
stockholders to serve as directors and officers.”).
220
   See Guttman, 823 A.2d at 502 (“[I]t is unwise to formulate a common law rule that
makes a director ‘interested’ [for demand futility purposes] whenever a derivative plaintiff
cursorily alleges that he made sales of company stock in the market at a time when he
possessed material, non-public information.”).

                                            43
(2) ‘the corporate fiduciary used that information improperly by making trades

because she was motivated, in whole or in part, by the substance of that

information.’”221 In other words, Plaintiffs must plead facts that support an inference

that Barrett, Blair, Mast and Spickschen acted with scienter.222

         At the pleading stage, by necessity, a Brophy claim usually rests on

circumstantial facts and a successful claim typically includes allegations of

unusually large, suspiciously timed trades that allow a reasonable inference of

scienter.223 While the fact a fiduciary sells stock near the time he learns of material,

nonpublic information might be evidence of the seller’s motive, temporal proximity

alone generally is insufficient to support an inference of scienter that will survive a

motion to dismiss.224 The other important piece of circumstantial evidence that,

along with timing, might support an inference of scienter is the size of the trade


221
    Tilden v. Cunningham, 2018 WL 5307706, at *19 (Del. Ch. Oct. 26, 2018)
(quoting In re Oracle, 867 A.2d at 934).
222
      Guttman, 823 A.2d at 505; Brophy, 70 A.2d 5.
223
   See, e.g., In re Fitbit, Inc. S’holder Deriv. Litig., 2018 WL 6587159, at *1 (Del. Ch.
Dec. 14, 2018) (finding that plaintiffs adequately alleged that insiders sold substantial
amounts of their holdings in an initial public offering and a secondary offering after voting
to waive lock-up agreements intended to prevent insiders from selling more shares after
the initial public offering).
224
    See Guttman, 823 A.2d at 502; Rattner v. Bidzos, 2003 WL 22284323, at *10, *12
(Del. Ch. Sept. 30, 2003) (noting that a complaint seeking an inference based on the
“timing and size of [] sales” should plead facts to “assist in determining whether the pattern
of executed trades was the product of an orchestrated scheme to defraud the market . . . or
good faith adherence to Company policy or consistent with prior individual practices.”).

                                             44
relative to the defendant’s overall stock holdings.225 If a defendant sells only a small

portion of her holdings and retains a “huge stake in the company[,]” then it is

difficult reasonably to infer she was “fleeing disaster or seeking to make an unfair

buck[.]”226

            Plaintiffs allege three of the Director Defendants each traded one time,

six months or more before Clovis disclosed the lower ORR results, with each trade

representing a very small fraction of the trader’s overall stake in the Company.227

Specifically, each of the directors named in Count III retained between 96% and

99.9% of their total holdings as of April 13, 2015 (i.e., after the alleged improper

trades).228       In other words, in large measure, notwithstanding their alleged

knowledge of the corporate trauma soon to come, each of these Defendants rode




225
   See, e.g., In re Oracle, 867 A.2d at 954 (analyzing the size of stock sales relative to
defendants’ overall holdings, and concluding that, even though the dollar values generated
from sales were large (nearly $1 billion), the fact that the sales were between 7% and 2%
of defendants’ overall holdings was inconsistent with a “rational inference of scienter.”).
226
      Id.
227
   Compl. ¶¶ 222–23 (stock price decline was on 11/16/15), 354 (stock trades were on
5/15/15 (Barrett), 3/5/15 (Blair), 5/15/15 (Spickschen)); Burns Aff. (D.I. 19) Ex. O at 45
(showing shares owned as of April 13, 2015).
228
   Compl. ¶ 354; Clovis, Proxy Statement (Schedule 14A) (Apr. 30, 2015) (showing that,
as of April 13, 2015, Barrett owned more than 2,300,000 shares, Blair owned more than
2,200,000 shares and Spickschen owned more than 116,000 shares. These Defendants sold
approximately 2,424; 8,528; and 4,309 shares, respectively yielding a percent of total
holdings sold of approximately .1%; .5%; and 4% respectively). Compl. ¶ 354.

                                            45
over the falls with the rest of Clovis’ stockholders when the corporate storm hit the

Company.

       Regarding Mast, Plaintiffs allege he traded nine times in a consistent pattern

(selling about 3,000 shares on the first of every month), which is inconsistent with

an inference that he sold because insider knowledge allowed him to anticipate a

decline.229 While Mast sold a larger percentage of his overall holdings when

compared with the other Defendants named in Count III, he still retained

approximately 90% of his holdings throughout the Relevant Period.230

       Noticeably absent from the Complaint are any well-pled facts that the trades

at issue represented a deviation from the sellers’ past trading practices.231 To the

contrary, the alleged selling patterns are inconsistent with a rational inference that



229
   Compl. ¶¶ 222–23 (stock decline was on 11/16/15), 354 (between 3/9/15 and 11/2/15,
Mast’s trades occurred early in the month and, with one exception, were for 1,000 shares
each.). The nature of the stock trades in this case make it distinguishable from other cases
involving numerous insiders unloading significant portions of their stock. See, e.g.,
Silverberg ex rel. Dendreon Corp. v. Gold, 2013 WL 6859282, at *15 (Del. Ch. Dec. 31,
2013) (denying a motion to dismiss where directors sold between 77% and 58% of their
holdings within a day of FDA approval milestone and these sales were the first time that
the directors had sold any of their shares despite owning them for more than a decade).
230
    Burns Aff. (D.I. 19) Ex. O at 45; Clovis, Proxy Statement (Schedule 14A) (Apr. 30,
2015) (showing that, as of April 13, 2015, Mast owned more than 330,000 shares).
Mast sold 33,000 shares from March until November of 2015—yielding a percentage of
total holdings sold of approximately 10%). Compl. ¶ 354.
231
   See Rattner, 2003 WL 22284323, at *12; Guttman, 823 A.2d at 503–04 (declining to
draw an inference of scienter from the unusual timing of trades where the complaint did
not plead facts related to sellers’ past trading practices).

                                            46
these Defendants were motivated to sell based on their knowledge of Roci’s true

ORR.

         After carefully reviewing the Complaint, I am satisfied it is not reasonably

conceivable that these four defendants—who sold only a sliver of their holdings and

suffered approximately the same decrease in net worth as other Clovis

stockholders—made their trades with the requisite scienter required to sustain a

Brophy claim. Therefore, Defendants’ motion to dismiss under Rule 12(b)(6), and

by extension Rule 23.1, is granted.

      D. Plaintiffs Fail to State an Unjust Enrichment Claim (Count II)
         In Count II, Plaintiffs attempt to state a derivative claim for unjust enrichment

in addition to their Caremark and Brophy claims.232 As “representatives of Clovis,”

they seek “restitution from the Board Defendants” and an order requiring Defendants

to disgorge “all profits, benefits and other compensation obtained . . . from their

wrongful conduct and fiduciary breaches.”233

         Unjust enrichment is the “unjust retention of a benefit to the loss of another,

or the retention of money or other property of another against the fundamental




232
      Compl. ¶¶ 349–52.
233
      Compl. ¶ 351.

                                             47
principles of justice or equity and good conscience.”234 “The elements of unjust

enrichment are: (1) an enrichment, (2) an impoverishment, (3) a relation between the

enrichment and impoverishment, (4) the absence of justification, and (5) the absence

of a remedy provided by law.”235

            Even with Section 220 documents in hand, Plaintiffs have not attempted to

connect the Board Defendants’ enrichment to alleged wrongdoing beyond their

Brophy claim.236 In search of an enrichment, Plaintiffs can point only to the Board

Defendants’ regular compensation and the profits obtained by some of the Board

Defendants who sold stock. Because I have determined Plaintiffs have failed to state

a viable Brophy claim, the only potential “enrichment” that remains is the Board

Defendants’ regular compensation.

            Not surprisingly, Plaintiffs fail to connect the Board Defendants’ “benefits

and other compensation” with the alleged wrongdoing (i.e., oversight failures).237



234
   Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (citing Fleer Corp. v. Topps
Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988)).
235
      Id.
236
   Of course, Brophy is a species of unjust enrichment that does not require a showing of
actual harm to the corporation, but instead focuses “on the public policy of preventing
unjust enrichment based on the misuse of confidential corporate information.” Kahn v.
Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 840 (Del. 2011) (citing Brophy,
70 A.2d 5). Therefore, I have analyzed Plaintiffs’ allegations of enrichment associated
with the alleged improper stock trades under Brophy’s rubric with respect to Count III.
237
      Compl. ¶ 351.

                                             48
In apparent recognition of this pleading gap, Plaintiffs cite Caspian Select Credit

Master Fund Ltd. v. Gohl for the general proposition that an unjust enrichment claim

that is duplicative of a breach of fiduciary duty claim can survive a motion to dismiss

if the fiduciary duty claim survives.238 But that general proposition is not helpful

here. In Caspian, a controlling shareholder allegedly engaged in self-dealing by

being on both sides of a stock issuance.239 There was a clear enrichment tied to an

alleged breach of the fiduciary duty of loyalty. 240 Where, as here, the underlying

breach arises from a Caremark violation, it is difficult to discern how that breach

would give rise to an enrichment, and Plaintiffs have not well-pled that connection

here.

            Defendants’ motion to dismiss Count II is granted under Rule 12(b)(6) for

failure to state a viable claim and, by extension, under Rule 23.1 for failure to plead

particular facts that would allow an inference that a majority of the Board faces a

substantial likelihood of liability for unjust enrichment.




238
  PAB (D.I. 23) at 62 (citing Caspian Select Credit Master Fund Ltd. v. Gohl, 2015
WL 5718592, at *16 (Del. Ch. Sept. 28, 2015)).
239
      Id.
240
      Id.

                                            49
                           III. CONCLUSION

     Based on the foregoing, Defendants’ motion to dismiss Plaintiffs’ Complaint

is DENIED as to Count I but GRANTED as to Counts II and III.

     IT IS SO ORDERED.




                                      50
