McKesson agrees to $175M opioid settlement with investors

McKesson Corp. agreed to pay $175 million to settle an investor lawsuit that alleges the company repeatedly failed to properly monitor suspicious opioid shipments.

Now fighting off litigation brought by the U.S. Justice Department, state attorneys general and private plaintiffs, the nation's largest opioid distributor also consented to several measures intended to bolster corporate governance, including separating the chief executive officer and chairman roles, empowering its compliance committee and creating term limits for board members, according to court documents filed March 17.

The settlement, if approved, would be the second-largest resolution of a lawsuit arguing a failure-of-oversight claim against a company's board of directors, according to plaintiffs' attorneys at Hagens Berman Sobol Shapiro, who are requesting $43.75 million in fees.

Since 1999, more than 200,000 Americans have died as a result of prescription drug overdoses, according to the lawsuit.

Investors argued McKesson executives intentionally disregarded oversight responsibilities to maintain effective opioid distribution controls following the company's settlement with the U.S. Drug Enforcement Administration in 2008, resulting in a second settlement with the U.S. Department of Justice and other litigation now consolidated in Ohio federal court.

McKesson's board of directors only discussed issues related to the opioid crisis and the company's government-mandated controlled substances monitoring program five times between 2008 and 2013, the investor complaint alleged. Moreover, the board "ignored a number of red flags during that same period," including warnings of the DEA's increased opioid scrutiny, according to the lawsuit. In re: McKesson Corporation Derivative Litigation, 17-CV-01850 (N.D. Cal., filed April 3, 2017).

Plaintiffs' attorneys said their request for $43.75 million in fees is appropriate because the "path to a liability judgment was fraught with obstacles" because they argued a director oversight claim which is "possibly the most difficult theory in corporation law," wrote Reed R. Kathrein, who represents the shareholders. The claim requires a finding that McKesson directors "knowingly condoned illegal behavior" through "a business model allegedly reliant on a clear violation of a federal regulation," Kathrein noted.

Morrison & Foerster attorneys representing McKesson challenged plaintiffs' attorneys' profits-over-safety narrative by arguing that less than 2% of the company's revenue came from opioid sales, according to a court filing supporting the settlement that outlines a special litigation committee established by McKesson's board and led by Wilkinson Walsh & Eskovitz.

A pivotal moment in negotiations came when plaintiffs' attorneys forced former company CEO John Hammergren to waive attorney-client privilege over communications and documents relating to advice from counsel, according to Kathrein.

The shareholders complaint followed McKesson's $13.25 million settlement in 2008 with the DEA related to its failure to report suspicious orders of opioids, which mandated the company to create a program to monitor distribution of controlled substances. The Department of Justice then fined McKesson $150 million and ordered the suspension of sales from several distribution centers for similar violations in what was the beginning of massive litigation brought by hundreds of local governments and private litigants

In February, McKesson, Cardinal Health and AmerisourceBergen proposed paying more than $1 billion in legal fees for states, counties and cities suing them to bolster their offer to pay $18 billion to resolve more than 2,000 lawsuits accusing them of ignoring suspicious opioid shipments.

McKesson is spending roughly $150 million annually to defend itself in the opioid litigation consolidated in Ohio federal court, according to court filings.

U.S. District Judge Claudia Wilken will consider final approval of the settlement on April 21. The hearing might be rescheduled or occur via telephone amid Oakland federal court's closure to the public due to the coronavirus.