United States: Caremark Duty Update

A new decision of the Delaware Court of Chancery provides what a leading legal commentator described as an “exemplary” explanation of the Caremark standard, and of the requirements that must be satisfied before directors can be held to have violated their duty to exercise oversight of corporate compliance programs.

The decision arose from a claim that the directors of a financial services organization breached their oversight duties by their alleged failure to appropriately monitor the company’s check cashing services (and, in particular, compliance with applicable federal money laundering laws). The Court of Chancery concluded that the plaintiffs failed to meet the Caremark “bad faith” pleading standards. Of particular interest to the health system general counsel is the opinion’s discussion of the elements of board inaction that must be present in order to demonstrate a violation of the oversight duty. According to the court, the plaintiff’s core factual allegations amounted to “yellow flags of caution” as opposed to “red flags of illegal conduct.” The general counsel may also find interesting—and relevant to health care compliance—the court’s evaluation of the board’s attentiveness to regulatory enforcement efforts in the check cashing services industry.

It has been often noted by courts that Caremark claims are among the most difficult corporate litigation claims to be instituted against board members. However, it should be noted that there are no leading state or federal decisions that conclusively apply the Caremark “bad faith” standard to nonprofit boards. Further, it is uncertain that the Department of Justice, the Office of Inspector General and other regulatory agencies would feel limited by the Caremark standard in evaluating the effectiveness of a corporation’s compliance plan (and the board’s oversight role thereof) in the context of a governmental investigation. The health system general counsel is well suited to place Caremark-related judicial decisions in the proper context for the governing board.

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