912 F.3d 523
9th Cir.2018Background
- Plaintiff Eugene Towers, a Disney shareholder, brought a derivative suit alleging Disney directors and officers participated in a long-running anticompetitive "no-poach" conspiracy among animation and VFX firms that suppressed technician compensation.
- Allegations rested on internal emails (e.g., between Edwin Catmull and Richard Cook), DOJ investigations and consent judgments against Pixar and other companies, and Board meeting minutes around Disney’s acquisition of Pixar.
- Plaintiff admitted he did not make a pre-suit demand on Disney’s Board; he instead alleged demand futility in an amended complaint under Fed. R. Civ. P. 23.1 and Delaware law.
- The district court dismissed for failure to plead demand futility with particularity, finding allegations at most showed that some officers knew of misconduct but did not show a majority of directors knew or acted in bad faith.
- The Ninth Circuit affirmed, holding the amended complaint lacked particularized facts tying Board members to knowledge of or participation in the alleged conspiracy.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether pre-suit demand on Disney’s Board was excused (demand futility under Rule 23.1/Delaware law) | Towers: a majority of directors knew of or were involved in the conspiracy based on officer emails, Board continuity since 2006, and acquisition meeting discussions | Defendants: allegations are conclusory/proximity-based; officer knowledge and meeting topics do not show directors knew or acted in bad faith | Demand not excused: plaintiff failed to plead particularized facts showing a majority of directors knew of or participated in the conspiracy |
| Whether officer misconduct imputes Board knowledge for demand futility | Towers: officer emails and conduct imply Board was aware or deliberately inactive | Defendants: Delaware law forbids wholesale imputation absent particularized allegations of reporting/communication to directors | Court: cannot impute officer knowledge to directors without facts showing information was transmitted to or known by directors |
| Whether Board meeting minutes and acquisition discussions suffice to plead director knowledge | Towers: discussions of talent and Jobs’ involvement permit inference directors knew of the scheme | Defendants: such discussions are ordinary merger oversight and lawful talent-retention strategy | Court: minutes support lawful business inferences; do not permit inference of illegal conspiracy knowledge |
| Whether allegations show bad faith sufficient to overcome Delaware exculpation of directors | Towers: conscious inaction or active connivance can be inferred | Defendants: no particularized facts showing directors knowingly violated duties or consciously disregarded duties | Court: allegations insufficient to plead bad faith for a majority of directors; dismissal affirmed |
Key Cases Cited
- Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (corporate demand principle; derivative suit framework)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (demand futility principles and business judgment rule context)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (when demand excusal applies under Delaware law)
- Rosenbloom v. Pyott, 765 F.3d 1137 (9th Cir. 2014) (demand futility pleading must be particularized; conscious inaction theory)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (permissible factual inferences in demand-futility pleadings)
- Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007) (no wholesale imputation of one director’s knowledge to others)
- In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009) (bad faith standard where charter exculpates directors)
- Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264 (Del. 2014) (proving director knowledge by showing officer-to-director reporting relationship)
- Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006) (board oversight and failure-to-monitor claims limitations)
Conclusion
The Ninth Circuit affirmed dismissal because Towers failed to plead particularized facts to excuse pre-suit demand under Rule 23.1 and Delaware law; proximity, officer emails, and merger discussions did not demonstrate that a majority of directors knew of or acted in bad faith regarding the alleged conspiracy.