Deborah Pettry v. Frederick W. Smith (FedEx Corporation, Nominal Defendant)
CA 2019-0795-JRS
| Del. Ch. | Jun 28, 2021Background
- FedEx carriers delivered millions of packages daily; regulators later alleged an infinitesimal fraction (≈390,000 cartons across ≈32,000 deliveries from 2006–2012) were untaxed/unstamped cigarettes, sparking New York enforcement and litigation.
- FedEx entered an Assurance of Compliance in 2006; an internal K&L Gates report (2012) and later subpoenas and lawsuits revealed continued shipments after the AOC.
- New York and City litigation culminated in a December 2018 settlement by FedEx for $35.3 million and agreed internal reforms (training, consultant, controls).
- Stockholder Deborah Pettry filed a derivative Complaint (after an 8 Del. C. § 220 books-and-records demand) asserting Caremark oversight claims against directors and duty-of-care/loyalty claims against two officers; she did not make a pre‑suit demand, alleging demand futility.
- Defendants moved to dismiss under Ct. Ch. R. 23.1 (failure to plead demand futility) and alternatively R. 12(b)(6). The Court reviewed Complaint allegations and Section 220 materials incorporated by reference.
- The Court held Pettry failed to plead particularized facts creating a reasonable doubt that a majority of the Demand Board was incapable of impartially considering a demand (no substantial likelihood of personal liability; not disabled by interest or lack of independence) and dismissed the Complaint with prejudice under Rule 23.1.
Issues
| Issue | Pettry's Argument | FedEx/Directors' Argument | Held |
|---|---|---|---|
| Whether pre‑suit demand was excused (Rales demand‑futility test for oversight claims) | Demand was futile because majority of Demand Board faced a substantial likelihood of liability for consciously ignoring red flags about illegal cigarette shipments | Board monitored litigation, received repeated updates, formed a special (2014) Demand Committee, disciplined employees, banned most cigarette shipments in April 2016, and later implemented training and controls; thus demand not futile | Demand not excused; plaintiff failed to plead particularized facts creating reasonable doubt that the Board could impartially consider a demand; dismissal under Rule 23.1 granted |
| Whether Caremark oversight liability was plausibly pled (conscious disregard/bad faith) | The Board received a clear red flag (K&L report, July 16, 2012) but took no effective action; ongoing shipments until 2016 and $35.3M settlement show failed oversight and bad faith | Board and Audit Committee received multiple updates, investigated, formed special committee, disciplined staff, and undertook remediation steps; timing and manner of responses reflect business judgment, not bad faith | Caremark claim not well pled: plaintiff did not show directors consciously disregarded duties or that controls were utterly absent; bad outcomes alone insufficient to infer scienter |
| Whether absence of detailed board minutes in 220 production permits an adverse inference | Missing minutes support inference the Board did nothing and therefore acted in bad faith | Section 220 materials and other incorporated documents (Demand Report, meeting references, remediation steps) contradict that inference; absence of specific minutes is not dispositive | No adverse inference: other documents show board engagement and reasonable explanations for limited minutes given active litigation; plaintiff’s inference rejected |
| Liability of Audit Committee members for oversight failures | Audit Committee breached its oversight role under company policy by failing to monitor compliance and remediate | Audit Committee received multiple updates and participated in monitoring and the 2014 Demand Committee process; no particularized facts show conscious disregard | Plaintiffs failed to plead particularized facts that Audit Committee members acted in bad faith; claims dismissed |
Key Cases Cited
- In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) (establishing directors’ duty to implement/monitor information and reporting systems and the high threshold for oversight liability)
- Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006) (affirming Caremark and scienter requirement for oversight liability)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (demand‑futility test for challenged business decisions)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (demand‑futility test when board inaction/oversight is challenged)
- In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006) (bad faith defined as conscious disregard or intentional dereliction of duty)
- Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) (Rule 23.1 heightened pleading requirements for derivative suits)
- Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. 2009) (distinguishing poor outcomes from bad faith conduct)
- In re Tyson Foods, Inc., 919 A.2d 563 (Del. Ch. 2007) (discussing inferences from lack of documentary evidence in Section 220 productions)
- In re Abbott Lab. Derivative Shareholders Litig., 325 F.3d 795 (7th Cir. 2003) (example where prolonged board inaction supported a Caremark claim)
- Marchand v. Barnhill, 212 A.3d 805 (Del. 2019) (Caremark claims and mission‑critical compliance obligations)