November 4, 2024
On August 7, 2024, the Honorable Sunil R. Harjani of the United States District Court for the Northern District of Illinois denied Abbott’s motion to dismiss, permitting Lead Plaintiffs’ key derivative claims to go forward: a claim for breach of fiduciary duty for failure to oversee the manufacturing and sale of infant formula and a claim for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 related to false and misleading statements on those same topics and involving the company’s repurchase of stock at prices inflated by the misleading statements.
Lead Plaintiffs in the case are the International Brotherhood of Teamsters Local No. 710 Pension Fund and Southeastern Pennsylvania Transportation Authority.
Background
Abbott, an Illinois corporation, is one of the primary manufacturers of infant formula products in the U.S., previously producing 40% of all infant formula products consumed in the U.S. It is also the nation’s leading provider of infant formula to low-income families through the U.S. government’s Special Supplemental Nutrition Program for Women, Infants, and Children (“WIC”) program. On February 15, 2022, Abbott closed its Sturgis, Michigan infant formula manufacturing facility due to the FDA’s concerns about contaminated baby formula. Two days later, on February 17, 2022, Abbott announced a “voluntary” recall of infant formula products manufactured at the Sturgis plant. The consequences were devastating. A nationwide shortage of baby formula ensued as the facility remained shut down for several months.
Abbott’s business suffered hundreds of millions in lost sales and profits and costs to remediate the facility and upgrade food safety compliance, risk management systems, and internal controls. The company’s business and reputation were badly tarnished as it came under regulatory, criminal, and Congressional scrutiny. The company is now exposed to numerous lawsuits, including wrongful death, personal injury, and whistleblower actions, as well as consumer and investor class actions.
In addition to their oversight failures, Plaintiffs allege that certain members of Abbott’s leadership violated Section 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”). Specifically, the complaint alleged that they authorized the company to engage in billions of dollars in stock repurchases while Abbott’s stock was artificially inflated due to false and misleading statements regarding Abbott’s production and manufacture of infant formula products in the US., with certain Defendants benefiting personally from insider stock sales before the truth started to leak out.
Motion to Dismiss Ruling
Recognizing the strength of the complaint, the Court upheld the core claims against Defendants’ motion to dismiss, including the federal violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5, which will allow the case to move forward in federal court. These are the claims that Defendants issued false and misleading statements to shareholders about the company that Defendants knew or recklessly disregarded were false, and which harmed the company by engaging in stock repurchases at inflated prices. The Court also found that the breach of fiduciary duty claim (sometimes referred to as a Caremark claim) for Abbott’s directors was sufficiently plead on the first prong, that the Director Defendants repeatedly failed to implement, monitor, or oversee compliance and safety of manufacturing at the Sturgis plant. Finally, the Court rejected Defendants’ contention that dismissing the suit was in the best interest of the company.
The Court did dismiss certain ancillary claims that do not affect the case’s overall scope or significance.
Defendants have asked the Court to reconsider certain aspects of its ruling; Plaintiffs have opposed that request.
Key Takeaways for Shareholders
Overcoming a motion to dismiss is a key milestone in any lawsuit and particularly so for a shareholder derivative lawsuit given the high burden that plaintiffs must meet. The past few years have seen an increasing focus in state and federal courts on corporate board and executives’ oversight responsibilities, particularly when health and safety is at risk. Long-term shareholders have important rights to protect their investment through investigating and, if warranted, pursuing litigation to ensure that corporate leaders fulfill their fiduciary duties. We look forward to continuing to litigate the Abbott derivative matter to protect Plaintiffs’ long-term investment and hold wrongdoers to account.