John Barker (jbarker@bonarinstitute.com) is a Senior Associate at the Bonar Institute in Ottawa, Canada; and Wheeling, IL.
Life sciences companies wanting to market new drugs, biological products, and medical devices across state lines must conduct clinical trials to obtain approval from the U.S. Food and Drug Administration (FDA) to do so.[1] These companies’ compliance professionals and board members face unique and evolving compliance challenges. This article provides practical tips for board members and compliance professionals for optimizing clinical trial oversight. It first reviews the fundamental duty established in the Delaware case of In re Caremark to monitor a corporation’s legal and regulatory compliance and business performance.[2] Second, it discusses the lack of guidance for life science companies in Caremark. Third, it provides practical suggestions for life sciences companies’ boards and compliance professionals for fulfilling Caremark oversight duties based on analysis of two cases, Marchand v. Barnhill[3] and In re Clovis Oncology,[4] as well as a review of advice from legal scholars and compliance professionals. It offers suggestions for identifying compliance risks associated with clinical trials. Finally, the article notes challenges that arise from the differing perceptions of Caremark duties between compliance professionals and board members, as well as the effect of other incentives to fulfill monitoring duties.
The article does not provide tax, accounting, or legal advice but instead aspires to contribute to fulfilling the compliance profession’s duties “to the general public, to employers and clients, and to the legacy of the profession,” as noted in the preamble to the Code of Ethics for Health Care Compliance Professionals.[5]
The fundamental Caremark duty to monitor
Compliance professionals who are Certified in Healthcare Research Compliance (CHRC)[6] are familiar with board members’ duty to monitor, which the Delaware Court of Chancery established in dicta in the In re Caremark case.[7] This oversight duty requires directors to “attempt in good faith” to be “reasonably informed” about the corporation to “reach informed judgments concerning both the corporation’s compliance with law and its business performance.” Directors should assure themselves that “reasonably designed” systems exist that provide timely and accurate information and reports to enable senior management and the board to make “informed judgments” about the corporation’s business performance and legal compliance. The Caremark court noted the incentives under the Federal Sentencing Guidelines for corporations to establish compliance programs to obtain reduced penalties for compliance failures.[8] In the case of Stone v. Ritter, the Delaware Supreme Court noted that Caremark liability for failure to monitor occurs only if shareholder-plaintiffs prove that directors acted in bad faith.[9] Directors’ personal liability for failure to monitor under Caremark occurs in either of two circumstances: (1) “utter failure” to implement an information and reporting system (Type 1 Caremark Claim) or (2) conscious failure to monitor despite having implemented a monitoring system (Type 2 Caremark Claim).[10]
Compliance professionals can enhance their engagement with boards by understanding how boards typically experience Type 1 or Type 2 Caremark claims. Disputes usually arise in the context of shareholder derivative litigation. In derivative litigation, shareholder-owners bring an action on behalf of the corporation against present and former directors, officers, or controlling shareholders.[11] In the Caremark context, these lawsuits allege that harm resulted to the corporation as a result of directors not fulfilling their duty to monitor under the duty of loyalty. The burden of proof is high because Caremark claims can result in directors being personally liable for their breach of the duty of loyalty. Delaware fiduciary law prohibits companies from eliminating a director’s personal liability for a breach of the duty of loyalty.[12] The typical Caremark claim cases proceed as follows: (1) shareholder plaintiffs present facts to the court that purport to show a board’s bad-faith breach of the duty of loyalty, (2) the court reviews the facts under the Caremark standards to determine the probability of a successful Caremark claim, and (3) the court dismisses the shareholder’s case for failure to state a claim because the alleged misconduct does not rise to the level of bad faith.[13] Most Caremark claim cases are dismissed.
