Allergan Investor Claims Over Botox Penalty Thrown Out

Allergan Inc. (AGN) directors won’t have to face investor lawsuits seeking to hold them responsible for a $600 million penalty the company paid over illegal marketing of the wrinkle-smoother Botox, the Delaware Supreme Court said.

A judge erred in allowing Allergan shareholders to proceed with claims that the board failed to oversee executives who marketed Botox for ailments that hadn’t been approved by regulators, the state’s high court ruled yesterday. Allergan argued Delaware Chancery Court Judge Travis Laster was required to follow a federal judge’s lead and throw out the case.

“The undisputed interest that Delaware has in governing the internal affairs of its corporations must yield to the stronger national interest that all state and federal courts have in respecting each other’s judgments,” the appeals court said in 12-page ruling posted on its website today.

The ruling comes more than a month after Allergan officials agreed to settle an Oklahoma family’s suit alleging Botox caused a 6-year-old boy to develop botulism. The boy was given the drug to treat spasticity in his legs, which is a so-called off-label use of the drug.

Allergan, based in Irvine, California, was pleased with today’s ruling, spokeswoman Bonnie Jacobs said.

$2 Billion

Earlier this year, the U.S. Food and Drug Administration approved Botox for use in adult patients suffering from overactive bladders. It was the eighth condition for which Botox, based on a purified form of the botulinum toxin, has been approved. The company is projecting as much as $2 billion in 2013 Botox sales.

Allergan’s marketing efforts came under scrutiny in 2007, when federal prosecutors began reviewing Botox sales. They started the probe after whistle-blowers claimed the company was using illegal marketing tactics to turn the medication into a blockbuster drug.

Allergan officials agreed in September 2010 to plead guilty to a charge of misbranding Botox by promoting it for unapproved uses and to pay a total of $600 million in fines and damages.

The drugmaker agreed to pay $375 million in criminal fines and $225 million to resolve civil claims filed by the U.S. Justice Department over Botox’s marketing campaign.

Prosecutors alleged Allergan executives pushed its sales force to market the anti-wrinkle drug for headaches, pain, muscle stiffness and juvenile cerebral palsy. At the time of those sales, the FDA hadn’t approved Botox as a treatment for those ailments.

Shareholder Suits

Although doctors may prescribe drugs for uses not approved as safe and effective by government regulators, companies are forbidden to market them for off-label uses.

In the wake of the company’s guilty plea, two pension funds who invested in the drugmaker sued in Delaware seeking to hold directors accountable for the company’s marketing missteps.

The funds’ derivative suit would return any recovery from insurance covering board members to the company. In such cases, shareholders are filing suit on behalf of the company in which they’ve invested.

A separate set of Allergan shareholders sued the company’s board in federal court in California over similar claims about the illegal marketing campaign. A judge later threw that case out.

‘Same Force’

Despite the ruling from his federal-court colleague, Laster allowed the case before him to proceed after finding Allergan investors in California didn’t have the authority to sue on behalf of the company.

The Delaware Supreme Court rejected Laster’s reasoning, saying he should have considered the federal judge’s decision to throw out a similar derivative case against Allergan as precluding the Delaware suit.

Legal provisions required Laster to give the California judge’s ruling the “same force and effect it would be entitled to in the California federal or state courts,” the appeals court judges said.

The state’s highest court also rejected Laster’s finding that California investors weren’t proper derivative plaintiffs because their lawyers hurried to file a complaint after the company agreed to settle the government’s Botox marketing claims.

Laster has said in earlier rulings that so called “fast filers,” lawyers who rush to sue in the wake of a negative event in hopes of taking the litigation lead in cases, weren’t bringing substantive claims. He has said that such practices are designed to the benefit of the lawyers rather than investors or companies.

“We reject the fast-filer irrebuttable presumption of inadequacy,” the appeals court said. While some fast filers may not be adequate derivative plaintiffs, others may be, the court added.

The case is Pyott v. Louisiana Municipal Police Employees Retirement System, 380, 2012, Delaware Supreme Court (Dover).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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