May 3, 2024
In winter 2022, families were devastated by a nationwide infant formula shortage. The shortage stemmed from a recall and the sudden shutdown of one of Abbott Laboratories’ infant formula factories after concerns developed about contaminated infant formula. Cohen Milstein is co-lead counsel in a shareholder derivative lawsuit seeking to hold Abbott’s board of directors and certain members of executive leadership responsible for breaches of fiduciary duty (and other claims) arising from that debacle.
What is a Shareholder Derivative Lawsuit?
Directors and officers of public companies owe fiduciary duties, including the duties of care, loyalty, oversight, and candor. When a director or officer breaches those duties in a way that harms the company, shareholders are empowered to bring a claim to hold that director or officer accountable and to remedy the harm. The ways a director or officer can breach their fiduciary duties include allowing the company to engage in illegal activity, failing to set up systems for the board to properly oversee the company’s business and make informed decisions on its behalf, and self-dealing.
Under the laws of most states, including Delaware, where many companies are incorporated, shareholders looking to investigate a possible claim may ask to inspect a company’s books and records as a first step. If after review of those books and records or other publicly available information the shareholder concludes that misconduct may have occurred, the shareholder has certain options. One option is for the shareholder to make a demand on the board to bring those claims on the company’s behalf against those who engaged in the misconduct. However, the “demand” requirement may be excused in certain cases if a majority of the board lacks independence or faces a substantial likelihood of liability. Under those circumstances, the shareholder can argue that making a demand would be futile and therefore that requirement should be excused by the court. The shareholder plaintiff would then “step into the shoes” of the company and pursue a claim on its behalf—essentially, protecting the company from the directors and officers who failed to protect it. Unlike a class action where the plaintiff is suing the company and hoping to recover money for injured class members, a shareholder derivative lawsuit seeks relief on behalf of the company. A successful resolution may include a financial recovery for the company and/or corporate governance reforms to reduce the likelihood that the misconduct reoccurs.
The Abbott Lawsuit
On October 16, 2023, the International Brotherhood of Teamsters Local No. 710 Pension Fund and Southeastern Pennsylvania Transportation Authority were appointed as lead plaintiffs in In re Abbott Derivative Litigation, pending in the Northern District of Illinois. Cohen Milstein represents the lead plaintiffs, along with co-counsel.
Abbott is one of the primary manufacturers of infant formula in the U.S. and is the leading provider of infant formula to low-income families through federal government programs. Abbott’s plant in Sturgis, Michigan is a key producer of formula.
Plaintiffs allege that Abbott’s leadership wholly failed to implement reasonable systems to oversee infant formula manufacturing and production—a striking oversight given the potentially severe consequences of unsafe infant formula—and ignored red flags of safety and compliance problems that arose. As a result, safety and compliance issues persisted at the Sturgis plant for years, as reported by whistleblowers and FDA inspections that found violations of regulations and resulted in Abbott receiving multiple notices of “significant objectionable conditions.” Moreover, Abbott’s own records reflected that it had detected Cronobacter, a potentially harmful bacteria, in products or the facility as early as 2019; the company had also received complaints about babies who became sick after consuming Abbott formula.
These worrisome conditions culminated in winter 2021. After a second complaint of a bacterial infection in an infant who was fed Abbott formula and later died, the FDA demanded that Abbott allow it to conduct a “for-cause” inspection. The FDA found multiple compliance failures associated with bacterial breeding and contamination risks, and detected Cronobacter at the Sturgis plant. After multiple requests from the FDA, on February 15, 2022, Abbott finally closed the Sturgis plant and two days later announced a “voluntary” infant formula recall.
The multi-month closure of the factory and the recall triggered a nationwide shortage of baby formula. Abbott ultimately entered into a Consent Order with the Department of Justice to resolve an inquiry into these concerns. Additionally, Abbott’s business suffered hundreds of millions in lost sales and profits, as well as costs to remediate the facility and upgrade compliance, risk management, and internal control systems. The business also suffered reputational harm as a result of the regulatory, criminal, and Congressional scrutiny. Abbott currently faces numerous lawsuits, including wrongful death, personal injury, and whistleblower actions, as well as consumer and investor class actions.
Plaintiffs allege that Abbott’s leadership breached their fiduciary duties by failing to implement adequate reporting mechanisms and information oversight systems to oversee the mission-critical issue of infant formula safety and compliance and failed to respond to red flags of safety issues and non-compliance. The lawsuit also alleges that certain directors caused Abbott to make false and misleading statements to the investing public about these highly material issues. As a result, plaintiffs say Abbott’s leadership failed to take action to ensure the safe production of infant formula and thereby prevent infant sicknesses and deaths linked to Abbott’s formula, as well as the harm to the business discussed above. Defendants have moved to dismiss the lawsuit, and that motion has been fully briefed. A decision will be forthcoming from the court.
Conclusion
The Abbott lawsuit reflects the important role of investors in holding corporate leaders accountable when they breach their fiduciary duties, particularly when critical health and safety issues are involved. It is also an example of the important role of courts outside Delaware in investor protection and public company oversight. While Delaware is the national center of corporate law since most publicly traded companies are currently incorporated there, Cohen Milstein considers all potential venues when evaluating a new case. As a result, we have achieved significant success in derivative litigation in state and federal courts across the country, including California, Ohio, and Illinois. We look forward to continuing to partner with our clients in these important lawsuits.