970 F. Supp. 2d 1022
N.D. Cal.2013Background
- Plaintiff, City of Orlando Police Pension Fund, filed a shareholder derivative suit on behalf of Google against nine directors, alleging board failure to prevent unlawful advertising by Canadian online pharmacies that imported prescription drugs into the U.S., culminating in a DOJ non-prosecution agreement (NPA) and a $500 million forfeiture by Google.
- Plaintiff alleges directors breached fiduciary duties of care (failure of oversight, reporting systems, compliance) and that senior executives (Page, Brin, Schmidt) breached loyalty by consciously permitting the ads.
- Plaintiff made a pre-suit demand; the board formed a two-member committee (Greene and Mather) that produced a confidential 149-page report and the board unanimously refused the demand via a six-page demand refusal letter (DRL) summarizing the report.
- Plaintiff challenges the sufficiency and good-faith of the investigation and refusal, alleging the DRL is conclusory, the full report remains confidential, and the committee omitted interviewing key witnesses (notably the DOJ lead investigator, Peter Neronha).
- Defendants moved to dismiss for failure to state a claim and under Fed. R. Civ. P. 23.1 for lack of standing/timeliness as to pre-ownership conduct; the court considered whether plaintiff adequately pleaded wrongful refusal under Delaware law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing under Rule 23.1/timing of challenged conduct | Plaintiff can challenge each separate failure to act that occurred during its ownership (post-May 2, 2005) including 2008 warnings | Plaintiff lacks standing to challenge pre-ownership conduct (2003) | Held for Plaintiff: may challenge failures occurring during ownership (2008 letters alleged); cannot contest 2003 conduct but may reference it for context |
| Effect of making a demand on board independence | Demand does not conclusively preclude showing the board later acted without independence/good faith | Making a demand concedes board disinterest and independence | Held: Demand concedes independence ex ante, but plaintiff may plead particularized facts creating reasonable doubt that the board acted independently, reasonably, and in good faith in refusing the demand (Scattered standard) |
| Adequacy of the investigation (confidential report and cursory DRL) | DRL is conclusory and withholding the full committee report combined with that summary raises reasonable doubt about the investigation’s thoroughness | Committee investigated, interviewed 17 people, produced a 149-page report; counsel reviewed report; DRL summarizes findings | Held for Plaintiff: Confidentiality plus conclusory DRL insufficient here — plaintiff raised reasonable doubt that the investigation was conducted reasonably and in good faith |
| Failure to interview key witnesses (DOJ investigator) | Committee should have interviewed the DOJ lead investigator (Neronha) or equivalent; his investigation was central and might have changed the outcome | Committee need not interview every suggested witness; plaintiff must show interviews would yield unique, material evidence | Held for Plaintiff: Failure to interview the DOJ lead investigator or equivalent was a material omission that supports reasonable doubt about the adequacy of the investigation |
Key Cases Cited
- Scattered Corp. v. Chicago Stock Exchange, 701 A.2d 70 (Del. 1997) (a demand concedes board independence ex ante but plaintiff may plead facts showing the board acted without independence, good faith, or reasonable investigation)
- Grimes v. Donald, 673 A.2d 1207 (Del. 1996) (limits on the conclusive effect of a demand; preserves challenge to independence/ex post conduct)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading requires factual content plausibly showing entitlement to relief)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (complaint must state a plausible claim and not rest on mere conclusory allegations)
- In re Zoran Corp. Derivative Litigation, 511 F. Supp. 2d 986 (N.D. Cal. 2007) (discusses use of pre-demand conduct for context when plaintiff lacks standing to attack pre-ownership acts)