Cross-posted at’s “On the Docket”

Two weeks ago, Pfizer Inc. was hit with a stockholder derivative lawsuit in a Delaware court, arising out of its September 2009 settlement of federal allegations that it improperly promoted several of its drugs. The filing was hardly surprising.  Other shareholder derivative suits motivated by the federal settlement have been filed against Pfizer, and several have been consolidated in a New York federal court.  Many of the largest pharmaceutical companies have been pressured into settling charges that they violated one or more of the bewilderingly vague federal drug promotion rules, and enterprising plaintiffs’ lawyers routinely view such settlements as an opportunity to profit from the companies’ misfortune.

But if lawyers stopped to take a closer look at their legal theory, they would realize that such stockholder derivative suits stand little chance of success – unless success is measured as the ability to extort settlement payments from litigation-averse corporations. Stockholder derivative suits are intended to allow a corporation to recover funds from unfaithful directors, not to punish directors for the wrongdoing of corporate employees.