In August, when Johnson & Johnson disclosed its deal to resolve criminal allegations that it falsely marketed the potent schizophrenic drug Risperdal, I said that if ever a board was ripe for a big, fat shareholder derivative suit, it was J&J’s. The Risperdal settlement was the company’s third criminal plea in a little more than a year, on top of a Justice Department and Food and Drug Administration investigation of its over-the-counter children’s drugs, state attorneys general subpoenas, whistleblower suits, and product recalls. The 111-page consolidated complaint that Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd filed against J&J’s board members last December offered more red flags than a training school for toreadors.
Judge Freda Wolfson of New Jersey federal court agreed in a Sept. 30 opinion that the allegations the plaintiffs firms had raised were “troubling and pervasive,” noting in particular that claims the board ignored systemic illegal conduct were “disconcerting to the court.” Near the end of the ruling, after analyzing all of the shareholders’ assertions, the judge cited “what appears to be serious corporate misconduct on J&J’s part.”
And then she threw out the case.
Judge Wolfson found that the shareholders’ complaint didn’t offer sufficiently specific evidence that individual board members were aware of problems at the company and nevertheless failed to do anything. “None of the various types of red flags suggest that the board acted in bad faith,” the judge wrote. “Adding all of those allegations together does not lead me to a different conclusion in this case. While plaintiffs’ allegations are disconcerting, they do not contain the [requisite] detail.”
I could retread the judge’s examination of each and every one of the assertions Bernstein Litowitz and Robbins Geller raised, explaining why the judge found their evidence insufficient. I could point out Judge Wolfson’s apparent irritation with the plaintiffs firms for failing to quote specifics from the J&J regulatory filings they cite. (“It is not the court’s obligation to wade through pages of documents to locate the language plaintiffs seek to invoke,” she wrote.) Or I could explain the debate over whether the allegations against J&J should be weighed in the aggregate or one at a time.
But I think it’s more valuable to consider the big picture. Judge Wolfson’s dismissal of the J&J case before shareholders even had a chance to conduct discovery suit proves exactly what I argued in a recent column: the law makes it virtually impossible to hold corporate board members accountable through shareholder litigation.