In re Qualcomm Inc. FCPA Stockholder Derivative Litigation
11152-VCMR
| Del. Ch. | Jun 16, 2017Background
- Plaintiffs (Qualcomm shareholders) filed a derivative complaint alleging the board ignored red flags about FCPA risks in Asia, resulting in an SEC cease-and-desist order and a $7.5 million penalty to Qualcomm.
- SEC found that from 2002–2012 Qualcomm: provided meals/gifts/entertainment to Chinese officials, hired relatives of officials, mischaracterized illegal payments in books, and lacked adequate internal controls.
- Complaint cites Audit Committee materials (2009–2010) reporting gift-log omissions in China and Korea, whistleblower allegations, PwC audit observations, and proposed corrective steps.
- Plaintiffs assert three derivative claims against directors and the former CFO: (I) breach of fiduciary duty (Caremark/oversight), (II) corporate waste, and (III) unjust enrichment.
- Defendants moved to dismiss under Court of Chancery Rule 23.1 (failure to make demand / demand futility) and Rule 12(b)(6). The Court granted dismissal for failure to plead demand futility as to all counts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether demand is excused under Rales for the Caremark oversight claim | Board knew of red flags (audit reports, whistleblower allegations, gift-log gaps) and consciously disregarded them, thus faces substantial likelihood of liability | Board received reports and implemented or planned remedial measures; plaintiffs merely second-guess timing/manner of response | Demand not excused; plaintiffs failed to plead conscious disregard/bad faith, so Caremark claim dismissed |
| Whether demand is excused for waste claim (illegal payments) | Bribes and director/officer compensation constitute waste because corporate assets were squandered while compliance failed | Complaint lacks particularized allegations tying board authorization to the illicit payments; directors did not direct wasteful transactions | Demand not excused; no particularized facts showing board caused or ratified waste, so waste claim dismissed |
| Whether demand is excused for unjust enrichment claim | Officers/directors unjustly benefited because incentive pay was tied to allegedly inflated financial results from FCPA violations | Complaint fails to allege how results were inflated or any restatement tying compensation to ill-gotten gains | Demand not excused; allegations conclusory and do not show substantial likelihood of liability, so unjust enrichment claim dismissed |
| Governing standard for demand futility | (Plaintiff relies on Rales/Stone standards to show disabling interest) | (Defendants apply Rales/Stone to argue plaintiffs must plead substantial likelihood of director liability with particularized facts) | Court applies Rales/Stone and requires particularized facts showing majority of board faces substantial likelihood of liability; plaintiffs did not meet burden |
Key Cases Cited
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (governs demand-futility inquiry for derivative claims challenging board inaction)
- Stone v. Ritter, 911 A.2d 362 (Del. 2006) (defines Caremark liability for oversight failures)
- In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del. 2006) (discusses bad faith and conscious disregard standard)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (defines corporate-waste standard)
- In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106 (Del. Ch. 2009) (on demand futility and limitations of alleging directors would have to sue themselves)