The legacy of In re: Boeing
In October 2018, a Boeing 737 MAX aircraft crashed after takeoff, killing everyone aboard. Within five months, a second Boeing 737 MAX crashed, also killing everyone aboard. In addition to the tragic loss of life, as a result of the crashes, Boeing and its investors lost billions of dollars of value. Consequently, its stockholders filed a derivative action alleging that the Boeing board was liable for oversight failures.
Plaintiffs’ complaint alleged fault based on lack of oversight and other fiduciary duties; while these types of claims can be difficult to plead, the suit survived summary judgment. In allowing the Boeing case to proceed, the court found that the board must, as an absolute minimum, “make a good faith effort – i.e., try – to put in place a reasonable board-level system of monitoring and reporting”. See Delaware Chancery Court finds Boeing Board oversight allegations satisfy Caremark
Board oversight is obligatory
There are several key learnings from Boeing regarding effective oversight protocols that life sciences and health care boards should implement, if not already in place.
First, have a board committee charged with direct responsibility to monitor key risks, such as safety operations. Ensure that the board has the requisite technical and experiential expertise to assess the reliability of this information, which may require an independent review and a higher standard than simply relying on company management.
Second, boards should monitor, discuss, and address these key risks on a regular basis. Key safety risks in this context could include adverse events monitoring in clinical trials, or assessing product quality or manufacturing issues in the production of pharmaceuticals, vaccines or other biological products, or devices.
Third, boards should have in place regular processes and protocols requiring management to apprise the board of key risks. Good recordkeeping by the board on these issues is also essential. In addition, the board has a duty to investigate red (or even yellow) flags raised by management and remedy any misconduct uncovered.
Life sciences mission critical
The life sciences sector is among the most heavily regulated industries and, accordingly, is highly scrutinized by regulators and law enforcement agencies. FDA-regulated products – and their sponsors and manufacturers – are subject to extensive premarket and postapproval obligations, including compliance with current Good Manufacturing Practice (CGMP) requirements and pharmacovigilance responsibilities. FDA requirements include maintaining a system for reports and complaints associated with product quality, manufacturing and safety. Companies operating under FDA oversight can be held strictly liable for violations of these requirements, meaning that they do not need to know that they are violating laws to be held responsible. It is important that the appropriate board committees understand the high level implications of these types of reports and the companies’ responses.
The product development process requires that drug safety and efficacy be demonstrated through preclinical studies and clinical trials. The board must have sufficient understanding to oversee the conduct of these, which must adhere to strict internal protocols and relevant FDA regulations, or risk jeopardizing approval of the product. When it comes to CGMP compliance, the board must have adequate expertise to understand the regulatory and technical issues for responding to Form FDA 483 Inspectional Observations, resolving Warning Letters, or implementing remediation activities where significant deviations have been identified.
In the context of medical devices, Quality System (QS) regulations such as Quality Management System (QMS) protocols are useful for documenting and reporting errors. Similarly, companies involved in the development and manufacture of pharmaceutical drug substances and drug products are subject to Pharmaceutical Quality System (PQS) standards applicable throughout the stages of a product lifecycle. Life sciences boards should also monitor clinical trials and postapproval studies for worrisome signals in the safety or efficacy data, as well as general compliance with Good Clinical Practices (GCP).
Across these mission critical safety operations, warning signs that may have been obvious could prevent an FDA approval, lead to FDA enforcement actions, give rise to product liability suits, or undermine claims made publicly by the company. To ensure sufficient oversight, life sciences boards should have in place a reasonable system for understanding and monitoring these types of risks, as well as an appropriate system for building a record of resultant evaluation or remediation projects.
Our teams routinely advise on these and other complex safety and operational issues for life sciences and health care companies.
Please contact the Hogan Lovells attorneys with whom you regularly work for additional information.
Authored by Blake Wilson and Lowell Zeta.