640 F. App'x 212
3rd Cir.2016Background
- DuPont (via its Pioneer acquisition) developed OGAT herbicide-resistant seeds to compete with Monsanto’s Roundup Ready; DuPont invested ~$4 billion before OGAT problems emerged.
- Longstanding dispute history: 1997 and 1999 lawsuits between Monsanto and Pioneer/DuPont over stacking genetic traits; parties negotiated a 2002 license limiting stacking.
- Monsanto sued DuPont in 2009 for allegedly stacking Roundup Ready in soybeans; a jury found willful infringement and awarded $1 billion, later settled by a licensing agreement requiring DuPont to pay $1.75 billion over ten years and granting Monsanto rights in certain DuPont tech.
- In 2013, shareholder Robert Zomolosky filed a derivative complaint alleging the DuPont Board breached oversight duties (Caremark-style claim) by acquiescing in or failing to detect ongoing patent infringement; the District Court dismissed for failure to plead demand futility under Rales.
- Zomolosky appealed, arguing the complaint pleaded sufficient particularized facts (red flags, committee reports, sanctions, communications) to excuse pre-suit demand; the Third Circuit affirmed dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rales or Aronson governs demand futility when complaint alleges board inaction/oversight failure | Zomolosky: Aronson applies because the Board made a conscious decision not to act (citing Vertin) | Board: Rales applies because the claim challenges oversight/inaction, not a discrete business decision | Rales governs: oversight/inaction claims are evaluated under Rales |
| Whether complaint pleaded particularized facts creating reasonable doubt that a majority of directors could impartially evaluate a demand (i.e., conscious disregard of duty / red flags) | Zomolosky: multiple red flags (prior lawsuits, 2002 license, large OGAT investment, negotiations with Monsanto, SEC filing, Monsanto letter, sanctions, committee duties, executive pay) infer board knowledge of infringement | Board: Allegations are generalized, temporally and substantively disconnected, lack particularized communications to directors, and do not show the Board knew of willful infringement | Held: Plaintiff failed to plead particularized facts to show directors faced a substantial likelihood of liability; dismissal affirmed |
| Whether communications and litigation events (SEC filing, Monsanto letter, sanctions) impute knowledge to the Board | Zomolosky: such items would have reached directors or their committees and raised red flags | Board: filings/letters were directed to management or adversarial and do not demonstrate board awareness of infringement; sanctions concerned discovery/strategy, not knowledge of infringement | Held: Those items insufficiently alleged to impute knowledge to directors; reasonable inferences do not supply the needed particularity |
| Whether post-litigation executive compensation (Kullman raise) supports inference of board acquiescence | Zomolosky: raise suggests board rewarded wrongdoing | Board: raise occurred after litigation resolved and does not relate to pre-suit knowledge or oversight | Held: Compensation decision unrelated to pleaded oversight failures; not probative of demand futility |
Key Cases Cited
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (test for demand futility in oversight/inaction derivative claims)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (demand futility test for challenges to a conscious business decision)
- In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) (foundation for director oversight duty and ‘‘red flags’’ standard)
- Wood v. Baum, 953 A.2d 136 (Del. 2008) (distinguishing when Aronson vs. Rales applies)
- Quadrant Structured Products Co. v. Vertin, 102 A.3d 155 (Del. Ch. 2014) (board’s conscious decision not to act can be treated as a business decision)
- Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014) (permitting inference that officers pass litigation-related information to directors)
- Kanter v. Barella, 489 F.3d 170 (3d Cir. 2007) (standard of review and particularity requirements for derivative demand futility)