Caremark Compliance for the Next Twenty‐Five Years

• Published date: 01 March 2021
• Author: Robert C. Bird
• Date: 01 March 2021
• DOI: http://doi.org/10.1111/ablj.12179

American Business Law Journal

Volume 58, Issue 1, 63–119, Spring 2021

Caremark Compliance for the Next

Twenty-Five Years

Robert C. Bird*

One of the most influential cases in corporate governance is In re Caremark

International Inc. Derivative Litigation (Caremark). In 1996, Caremark

imposed a novel duty on boards of directors to make a good faith attempt to

implement and exercise oversight over obligations leading to liability. Breach of

this minimal duty has been difficult for plaintiffs to plead and prove, and the

case law is littered with dismissed Caremark lawsuits. As Caremark’s reign

reaches a quarter-century, however, its duties are primed to evolve. Two cases,

Marchand v. Barnhill and In re Clovis Oncology, Inc. Derivative Litiga-

tion, took the rare step of allowing Caremark claims to survive motions to dis-

miss. These cases signal a new understanding of Caremark obligating boards

not merely to attempt oversight, but to ensure proactively that such oversight is

effective. This subtle but significant change in board duties is one to which the

academic literature should respond. This article first reviews the Marchand and

Clovis cases and argues that these cases hold significance for the future of

Caremark claims. Second, this article studies client advisories from law firms

and other sources that evaluate the Clovis and Marchand cases. It finds that

while these advisories offer useful tactical responses, they lack strategic advice

that would benefit boards over the long term. Filling the gap, this article presents

long-term strategic advice for boards not only to meet Caremark duties but also

to thrive as exemplars of good governance and ethical leadership for the next

twenty-five years.

*Professor of Business Law and Eversource Energy Chair in Business Ethics, University of

Connecticut. My thanks for comments and support from members of the Academy of Legal

Studies in Business for various iterations of these ideas. I particularly thank David Orozco

and Stephen Park for detailed comments. All errors and omissions are my own.

©2021 The Author.

American Business Law Journal ©2021 Academy of Legal Studies in Business.

63

INTRODUCTION

On September 25, 2021, In re Caremark International Inc. Derivative Litiga-

tion (Caremark) turns twenty-five.

1

This case was the first court decision to

impose a fiduciary duty on a board of directors to oversee an organiza-

tion’s compliance and ethics program.

2

The court ruled that the

“sustained or systematic failure of the board to exercise oversight”over

activities leading to liability would “establish the lack of good faith that is

a necessary condition to liability.”

3

Caremark represented an important

shift away from prior corporate governance standards and reshaped the

compliance obligations of the board of directors.

4

Compliance immedi-

ately became more visible in the boardroom, and Caremark is now one of

the few influential decisions in corporate governance where lawyers

know the case by name.

5

The Caremark case has attracted significant scholarly attention over the

years that highlights Caremark’s continuing relevance.

6

However, in spite

1

698 A.2d 959 (Del. Ch. 1996).

2

See Paul McGreal, Caremark in the Arc of Compliance History,90TEMP.L.REV.

647, 648 (2018).

3

In re Caremark, 698 A.2d at 971.

4

See, e.g., Michael J. Borden, Of Outside Monitors and Inside Monitors: The Role of Journalists in

Caremark Litigation,15U.P

A.J.BUS. L. 921, 935 (2013).

5

McGreal, supra note 2, at 648 & n.2. McGreal rightly notes that “[t]hree other contenders

would be Ellerth,Faragher, and Kolstad, all of which address corporate vicarious liability

under the federal civil rights laws. Burlington Indus., Inc. v. Ellerth, 524 U.S. 742, 746–47

(1998); Faragher v. City of Boca Raton, 524 U.S. 775, 780 (1998); Kolstad v. Am. Dental

Ass’n, 527 U.S. 526, 545 (1999).”

6

See, e.g., Donald C. Langevoort, Caremark and Compliance: A Twenty-Year Lookback,90TEMP.

L. REV. 727, 727 (2018) (“In nearly all narratives of how compliance has grown as a legal

subject and field of practice in the last two decades, the Delaware Chancery Court’s decision

in In re Caremark International Inc. Derivative Litigation plays a featured role.”); Ezra

Wasserman Mitchell, Caremark’s Hidden Promise,51L

OY. L.A. L. REV. 239, 241 n.3 (2018)

(citing a number of scholarly works); DENNIS J. BLOCK &MICHAEL A. EPSTEIN,THE CORPORATE

COUNSELLOR’SDESKBOOK § 803[B][1][d] (1999 & 2017-3 Supp.) (“A key area of board over-

sight that has received significant attention in the past few years concerns the corporation’s

compliance with law… . Therefore, directors must oversee the company’s efforts in this

regard.”) (citing In re Caremark, 698 A.2d 959); H. Lowell Brown, The Corporate Director’s

Compliance Oversight Responsibility in the Post Caremark Era,26D

EL.J.CORP. L. 1, 144 (2001)

(remarking how the Caremark case “sharpened the attention of corporate directors on their

compliance oversight responsibilities”).

64 Vol. 58 / American Business Law Journal

of this attention, plaintiffs rarely succeed in pleading or proving their

Caremark claims.

7

The result has been a veritable graveyard of Caremark

lawsuits from plaintiffs trying to surmount “possibly the most difficult

theory in corporation law upon which a plaintiff might hope to win a

judgment.”

8

That dynamic might begin to change. The Caremark case is aging.

When Caremark was decided, the internet was stuck in its “Jurassic”

period,

9

the extensive compliance demands tied to the behemoth health

care law known as HIPAA had just been enacted,

10

and the influential

United States Sentencing Guidelines specifically targeted to organizations

were less than five years old.

11

Other major compliance-related develop-

ments had yet to transpire, including the financial crisis of 2007–09 and

the Dodd-Frank Act of 2010.

12

The legal, ethical, social, and technologi-

cal environments in which Caremark was decided were substantially dif-

ferent than today.

The time is overdue to adapt Caremark’s twentieth-century mandates

to twenty-first century standards of ethics, governance, and compliance.

The time is also overdue to reconsider Caremark as not merely a source

7

See, e.g., Mercer Bullard, Caremark’s Irrelevance,10BERKELEY BUS. L.J. 15, 17 (2013).

(“Chancellor Allen established a heightened standard of care in Caremark while suggesting

that it would very rarely, if ever, result in personal liability.”).

8

In re Caremark, 698 A.2d at 967.

9

See Farhad Manjoo, Jurassic Web,SLATE (Feb. 24, 2009, 5:33 PM), https://slate.com/

technology/2009/02/the-unrecognizable-internet-of-1996.html.

10

HIPAA is an acronym that stands for the Health Insurance Portability and Accountability

Act. HIPAA was signed into law by President Clinton on August 21, 1996. Health Insurance

Portability and Accountability Act of 1996, Pub. L. No. 104-191, 110 Stat. 1936 (codified at

42 U.S.C. §§ 1320d-1–9 (2018)).

11

See U.S. SENTENCING GUIDELINES MANUAL ch. 8 (U.S. SENTENCING COMM’N2018), https://

www.ussc.gov/guidelines/2018-guidelines-manual/annotated-2018-chapter-8#NaN (last vis-

ited Oct. 28, 2020) [hereinafter U.S. SENTENCING GUIDELINES]. Summarized briefly, “[t]he

sentencing guidelines enact the methodology by which to fine corporations that are found

guilty of criminal conduct with the express purpose of facilitating future criminal prosecu-

tion of corporations. The guidelines also provide a means by which to mitigate those fines,

and that provision may restructure how organizations do business.”Robert S. Patterson Sr.,

Organizational Sentencing Guidelines,29T

ENN. B.J. 28, 28 (1993).

12

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,

124 Stat. 1376 (2010) (codified as amended in scattered sections of the U.S. Code); see also

Geoffrey P. Miller, The Compliance Function: An Overview 3 (N.Y.U. Law & Econ. Working

Paper No. 14-36, 2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2527621.

2021 / Caremark Compliance for the Next Twenty-Five Years 65