Charlotte Kokocinski v. Arthur D. Collins, Jr.Charlotte Kokocinski v. Arthur D. Collins, Jr.
Case Information
*1 Before GRUENDER, BEAM, and SHEPHERD, Circuit Judges.
____________
BEAM, Circuit Judge.
Chаrlotte Kokocinski brought a shareholder derivative action on behalf of Medtronic, Inc., against current and former directors and officers of Medtronic, and against Medtronic as a nominal defendant. The district court [1] dismissed the action on the basis of a report by a special litigation committee, and we now affirm.
I. BACKGROUND
From roughly 2006 to 2008 Medtronic was the subject of a well-publicized controversy involving whistle-blower lawsuits, settlement and corporate-compliance- and-governance agreements with federal agencies, and a congressional and media investigations. These events stemmed from Medtronic's alleged improper promotion to physicians оf the "off-label" use [2] of its "Infuse" product, a surgically implanted medical device that stimulates bone growth. Infuse was also the subject of a 2008 Public Health Notification by the Food and Drug Administration (FDA). Medtronic's revenue and share price suffered as a result of this negative publicity. In 2012, without first making a demand on Medtronic, Kokocinski brought a shareholder derivative action against Medtronic directors and officers (the individual defendants) seeking declaratory and injunctive relief and damages. The complaint alleged various bad acts and false and misleading statements by which the individual defendants violated § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), breached their fiduciary duties, wasted corporate assets, and had been unjustly enriched. Later that year, in response to demand letters and derivative complaints by other stockholders presenting similar allegations, Medtronic's board of directors (the Board) formed a special litigation committee (SLC) to investigate the claims. The district court dismissed Kokocinski's complaint without prejudice in 2013 for failing to establish demand *3 futility. See Fed. R. Civ. P. 23.1(b). [3] Kokocinski then exercised her statutory right to review Medtronic's corporate records, Minn. Stat. § 302A.461, subd. 4, and in April 2014 she filed an amended complaint with bolstered allegations.
The SLC formed by Medtronic was initially composed of three members: John Matheson, a law professor and expert in corporatе and business law; former Hennepin County District Court Judge George McGunnigle; and former Governor of Utah Michael Leavitt. Of these three, only Governor Leavitt was a Board member. Governor Leavitt left the SLC in December 2012 due to the possible perception of interestedness due to his having formerly been the Secretary of Health and Human Services, which oversees the FDA, the agency tasked with approving Infuse. Professor Matheson and Judge McGunnigle proceeded to engage in an eighteen- month investigation in which they engaged an accountant, a loss-causation analyst, and an economist; retained independent legal counsel; reviewed over 2.6 million documents; and interviewed sixty individuals, including current and former directors, officers, and employees of Medtronic, Medtronic sales representatives, consulting physicians, a physician who had been solicited to use Infuse, and one unaffiliated surgeon who had used the Infuse product. In May 2014, the SLC issued a 69-page report concluding that it would not be in Medtronic's best interest to pursue litigation. It noted that setting forth detailed factual findings would not be in Medtronic's interest as Medtronic was currently involved in securities fraud and personal injury litigation involving similar allegations. Further it noted that it did not find support for the allegations and rejected the claims of the demand letters and derivative complaints.
The individual dеfendants, Medtronic, and the SLC (even though it was not a named party to the litigation and had not filed a motion to intervene) each brought a motion to dismiss Kokocinski's amended complaint on the basis of the SLC's report. *4 Applying Minnesota law, the district court determined the SLC's investigation and methodologies warranted deference to its report under the business-judgment rule (BJR), and it granted the motions. [4] After entering judgment, the district court denied Kokocinski's motion for relief from, or to amend, the judgment, and entered judgment on that motion as well. Kokocinski timely appeals from both memorandum orders and judgments, arguing that (1) the SLC was not properly formed; (2) it was not entitled to deference under the BJR; and (3) the district сourt committed reversible error in failing to permit the parties to engage in discovery.
II. DISCUSSION
Our standard of review on appeal depends on the proper way in which to construe the defendants' motions made on the basis of the SLC's report. The district court determined the motions should be construed as akin to a motion seeking voluntary dismissal of a shareholder's derivative action under Rule 23.1(c), borrowing from Rule 56 procedures. Borrowing a term from other cases, we will refer to the defendants' motions collectively as a "motion to terminate" the litigation. Kokocinski *5 argues that the motion should have been converted to a Rule 56 motion for summary judgment warranting de novo review because it relied on the SLC's report, a matter outside the pleadings. [5] This is a matter of first impression for our circuit. [6]
The First Circuit, applying Delaware law, has followed the lead of Delaware
courts and classified such a motion as a "hybrid summary judgment motion for
dismissal," reviewing de novo. Sarnacki v. Golden,
We agree that because of its reliance on the SLC's report, and because it does
not go to the adequacy of the pleadings, the defendants' motion cannot be construed
as a motion under Rule 12(b)(6). On the other hand, a ruling granting the motion
would not go to the merits of Kokocinski's claims, and so it does not fit neatly into the
summary-judgment box either. Further, unlike a motion for summary judgment, an
assessment of the independence and adequacy of an SLC's investigation involves
making findings based on credibility determinations and the weighing of evidence,
and in the event the motion is denied the movant is not entitled to litigate those fact
questions afterwards. See Johnson v. Hui,
We agree with the district court and the Eleventh Circuit that the closest fit for
a motion to terminate in the Federal Rules is Rule 23.1(c). That Rule states in part
that "[a] derivative action may be settled, voluntarily dismissed, or compromised only
with the court's approval." Although Rule 23.1(c) applies only to derivative plaintiffs,
Burks v. Lasker, 441 U.S. 471, 485 n.16 (1979), a shareholder's derivative claim
actually belongs to the corporation, Ross v. Bernhard,
This characterization of the defendants' motion leads us to conclude the proper
standard of review is for an abuse of the district court's discretion. The district court's
inquiry on a motion to terminate involves determining whether the legal criteria of
Minnesota law have been met based on its familiarity with the case, its weighing of
the evidence, and its credibility determinations. As the Supreme Court has held,
abuse-of-discretion is an appropriate standard in circumstances in which the district
court must apply a fact-intensive legal standard, particularly where: (1) the district
court is better positioned than the reviewing court to decide the issue because of its
familiarity with the evidence–in such instances the normal "law-clarifying benefits"
of the circuit courts will not be advanced with more searching review; and (2) the facts
of each case are of a "multifarious, fleeting, special, [and] narrow" nature resulting in
close calls, so as not to be susceptible of "useful generalization." Cooter & Gell v.
Hartmarx Corp.,
A. The Board's Resolution Establishing an SLC
Kokocinski argues that the Board never in fact formed an SLC to which
deference could be afforded because the Board's resolution establishing the SLC did
not delegate enough authority. In forming an SLC, "[t]he key element is that the
board delegates to a committee of disinterested persons the board's power to control
the litigation. A mere advisory role of the special litigation committee fails to bestow
a sufficient legitimacy to warrant deference to the committee's decision by the court."
Janssen,
Kokocinski relies оn Janssen to argue that the Board must delegate to the SLC
the authority to pursue, i.e., to itself direct or conduct, the litigation. But the express
language in Janssen–"that the board delegates to a committee of disinterested persons
the board's power to control the litigation,"
Kokocinski also argues that the resolution does not state clearly enough that the
SLC's decision is binding. She points to the resolution in Toretta v. Lachinski, No.
A12-0779,
B. Deference to the SLC Under the Business-Judgment Rule
Kokocinski next argues that the district court erred in deferring to the SLC
under the BJR. Minnesota law provides that a corporate board of directors may form
"a special litigation committee consisting of one or more independent directors or
other independent persons to consider legal rights or remedies of the corporation and
whether those rights and remedies should be pursued." Minn. Stat. § 302A.241, subd.
1. If a shareholder brings derivative claims based on a cause of action investigated by
*11
an SLC, and the SLC determines the corporation should not pursue those claims, the
defendant may move the district court to defer to the SLC's decision and dismiss the
complaint under the BJR. The BJR is "a presumption 'developed by state and federal
courts to protect boards of directors against shareholder claims that the board made
unprofitable business decisions.'" UnitedHealth I,
The two predominant analyses of motions to terminate derivative litigation on
the basis of an SLC's recommendation were set out in Auerbach,
1. Whether the SLC Possessed a Disinterested Independence
In UnitedHealth I, the Minnesota Supreme Court stated that whether an SLC
is disinterested and independent should be assessed by considering the totality of the
circumstances.
SLC members may be composed of "independent directors or other independent persons." Minn. Stat. § 302A.241, subd. 1. Whether or not an SLC member is a director, however, she is "deemed to be [a] director[]," id. § 302A.241, subd. 7, for the purposes of Minnesota law regarding director standards of conduct, id. § 302A.251, conflicts of interest, id. § 302A.255, and indemnification, id. § 302A.521. The Board's bylaw 2.9 states in relevant part:
Directors who are not salaried officers of the corporation shall receive such fixed sum and expenses per meeting attended or such fixed annual sum or both аs shall be determined from time to time by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor.
The SLC members were paid at an hourly rate, rather than a sum per meeting or per annum. The district court apparently agreed with Kokocinski that the SLC members' status as directors under Minnesota law meant that they were directors for the purpose of bylaw 2.9. But it noted that the final sentence of that provision allows for "proper compensation" for directors serving Medtronic in "any other caрacity," and it reasoned serving on the SLC was such an "other capacity." The SLC members, both lawyers, were paid their standard hourly rate and therefore the district court concluded that their compensation was not an improper personal benefit.
*13 Kokocinski argues first that the SLC members are deemed to be directors under Minnesota law, and so their method of compensation violated bylaw 2.9. She reasons that because their compensation violates the bylaws, the activities they conducted for that compensation were ultra vires. We reject this argument. To begin with, it is a non sequitur to conclude from the fact that Minnesota law deems SLC members to be direсtors for three limited purposes–standards of conduct, conflicts of interest, and indemnification–that they must be deemed directors for all purposes in interpreting the Board's bylaws. Those bylaws indicate, to the contrary, that SLC members are not directors by virtue of their membership on the SLC. Bylaw 2.10 states that committee members "need not be directors," and that an SLC is to be composed of "two or more disinterested directors or other disinterested persons." Neither Professor Matheson nor Judge McGunnigle was a Board member, and so we do not even concede, as the district court appeared to, that they were directors for the purposes of 2.9. But even if we did agree with that assessment we would reach the same conclusion as the district court–that they were serving the Board in an "other capacity." Further, it is not clear that a violation of the bylaws' rules on compensation would, per se, mean the SLC was not independent. Under the multi-factor, totality-of-the-circumstances approach set forth in UnitedHealth I, this would only be one factor to consider. Kokocinski does not offer any meaningful argumentation on why this one factor would tip the balance in her favor. Finally, if the provision on compensation was violated, it is not clear why this would render the SLC's actions ultra vires, as their activities were inarguably within the ambit of authority delegated them by the Board's resolution. Kokocinski appears to conflate the act of payment–which if made in violation of the bylaws may very well be ultra vires–with the SLC's act of investigating legal rights and remedies, which is itself not implicated by bylaw 2.9.
Second, Kokocinski argues that the members were paid excessive compensation because they were paid "presumably in excess of several hundreds of thousands of dollars." Kokocinski notes that the SLC members are seasoned lawyers with presumably high rates and that they took eighteen months to investigate and complete *14 their report. Minnesota law precludes articles of incorporation from limiting the personal liability of a director "for any transaction from which the director derived an improper personal benefit." Minn. Stat. § 302A.251, subd. 4(d). Kokocinski argues that the SLC members' excessive compensation is just such an improper personal benefit, which exposes them to liability and thereby renders them interested in the results of the investigation. In our view, it is difficult to see how payment of the SLC members' standard hourly rate as attorneys could be considered improper. If anything, an hourly rate encourages thorough, time-intensive investigation. Moreover, it would be unfair to boards to encourage them to find competent, disinterested professionals to serve on an SLC, while finding that payment to those professionals of their standard rates constituted excessive compensation.
Third, Kokocinski argues that because the conflicted Board set the SLC members' compensation, and because it determines whether they are eligible for indemnification, Minn. Stat. § 302A.521, subd. 6(1), the SLC members were not disinterested and independent. We find this fact alone insufficient to overcome Medtronic's showing of independence, particularly in light of the fact that this arrangement appears to be exactly what is contemplated under Minnesota law. Kokocinski offers no evidence that either the SLC members' compensation or indemnification was contingent on their recommendation. The district court did not abuse its discretion in determining that the SLC was independent and disinterested.
2. Whether SLC's Investigative Methodologies and Procedures
Were Adequate, Appropriate, and Pursued in Good Faith
Kokocinski next argues that the SLC's report was deficient because it did not
address with sufficient particularity the allegations raised in her complaint. To show
that an investigation was adequate, appropriate, and pursued in good faith under
Minnesota law, "the proper inquiry is into the adequacy of the committee's procedures
and methodologies as a whole." Drilling, 589 N.W.2d at 509. A district court's
review of the SLC's investigation must be "robust," UnitedHealth I,
The SLC's report stated, "The SLC investigated the allegations in the demand letters and derivative complaints" and "considered the legal and factual strengths and weaknesses of all of the claims." After setting out a non-exhaustive list of twenty- seven factors it considered, the SLC concluded litigation would not be in Medtronic's best interest and that "it ha[d] not found support for and reject[ed] the core proposition of the demand letters and derivative complaints." The district court concluded on the basis of the factors quoted above that the investigation was adequate, appropriate, and pursued in gоod faith. Kokocinski argues that the SLC's report is inadequate because it does not lay out specific factual findings and documents it relied upon, because it *16 does not specifically address particular allegations in her complaint, and because it did not consider then-pending litigation in an action that had been filed shortly before the report was issued.
We conclude that the SLC's investigation easily met the requirements of Minnesota's BJR. The investigation was extensive in both its length and scope. The SLC reviewed over 2.6 million documents and interviewed sixty individuals over an eighteen month period. It relied on the advice of independent experts and counsel. Kokocinski presents no evidence that Medtronic or the individual defendants were involved in the investigation, and she has not raised any complaint about the quality of the information received. Kokocinski primarily relies upon Janssen , but that case involved an SLC with a single member who neglected to interview the plaintiff or the plaintiff's attorneys and who "gave no indication that he had undertaken the careful consideration of all the germane benefits and detriments to" the corporation. 662 N.W.2d at 889. Here, by contrast, the SLC laid out twenty-seven factors it considered, touching on myriad aspects of Medtronic's business, including its economic health, officer and director responsibility, the evidencе, the nature of the legal claims, credibility of the witnesses, policies of federal law, findings of previous investigations, Medtronic's relationship with its customers, employee morale, and the effect on Medtronic's future business relationships. In addition, the SLC's report stated that it considered "the existence of and possible effects on parallel litigation in state and federal courts." As to Kokocinski's arguments, we agree with the district court that, in effect, Kokocinski seeks review of the substance and rationality of the SLC's decision. This is something we are precluded from reviewing under Minnesota law. We find no abuse of discretion in the district court's determination that the SLC's investigation was adequate, appropriate, and pursued in good faith.
C. Discovery
Finally, Kokocinski argues that it was reversible error for the district court to
decline to order discovery before deciding on the motion to terminate. "We review
the district court's discovery decisions for an abuse of discretion." Schoffstall v.
Henderson,
Kokocinski argues that further discovery would have allowed access to
documents relating to: compensation of the SLC's members; formation of the SLC
and selection of its members; adoption of the SLC's recommendations; and retention
and compensation of experts consulted by the SLC. Kokocinski primarily relies on
Parkoff v. General Telephone & Electronics Corp.,
The defendants met their burden with affidavits including the SLC's report,
demand letters and complaints from shareholders, the Board's resolution, and
Medtronic's marketing policies. Kokocinski filed an affidavit in opposition that
included the Board's bylaws and a letter from counsel for the SLC refusing a request
for specific information on how the SLC members were compensated, but
acknowledging that they were paid their standard hourly rates. Presented with this
and other evidence, the district court exercised its sound discretion in concluding that
discovery was not necessary. Although Kokocinski has identified areas she would
like to have investigated further, she points to no indication in the existing evidence
that further discovery may be fruitful. "To speculate that something might be caught
on a fishing expedition provides no basis to postpone decision" on a motion to
terminate. Auerbach,
III. CONCLUSION
For the foregoing reasons, we affirm the district court. [9]
______________________________
Notes
[1] The Honorable John R. Tunheim, Chief Judge, United States District Court for the District of Minnesota.
[2] An off-label use is one that has not been approved by the Food and Drug Administration.
[3] Rule 23.1 imposes certain prerequisites, pleading requirements, and procedures specific to derivative shareholder suits.
[4] At all times relevant to this dispute Medtronic was incorporated in Minnesota.
Therefore, Minnesota law governs aрplication of the BJR to the SLC's
recommendations respecting derivative state law claims. Burks v. Lasker, 441 U.S.
471, 478 (1979). When a derivative suit raises a federal question, the law of the state
of incorporation "govern[s] the authority of independent directors to discontinue
derivative suits to the extent such [state] law is consistent with the policies of" the
asserted federal right. Id. at 486. In Abbey v. Control Data Corp.,
[5] Kokocinski also argues that the SLC lacks standing in this appeal because it
is not a party to the litigation and did not move to intervene. The issues in this case
are properly before us on the basis of Medtronic's and the individual defendants'
motions and so we do not think it is necessary to address this issue. Under Minnesota
law, the burden of proving the elements of the BJR have been met lies with the
proponent
of the SLC's decision,
In re
UnitedHealth Grp. Inc. S'holder Derivative
Litig.,
[6] In Abbey,
[7] Obviously this inquiry entails findings of fact, which we typically review for
clear error. But "[w]hen an appellate court reviews a district court's factual findings,
the abuse-of-discretion and clearly erroneous standards are indistinguishable: A court
of appeals would be justified in concluding that a district court had abused its
discretion in making a factual finding only if the finding were clearly erroneous."
Cooter,
[8] Kokocinski also raises the fact that Judge McGunnigle owned 450 shares of Medtronic stock. However, as the district court noted, this actually aligns him with Medtronic's interest in the litigation. Furthermore, McGunnigle disclosed his ownership and directed his financial advisor to refrain from buying or selling Medtronic stock during the investigation. The district court correctly concluded under these circumstances that this stock ownership did not render him interested.
[9] We rely on the foregoing reasons as well to affirm the district court's denial of
Kokocinski's motion for relief from, or to amend, the judgment. We decline
Kokocinski's request to have these issues certified to the Minnesota Supreme Court,
as we do not believe the requisite conditions for certification as set forth in Hatfield
ex rel.
Hatfield v. Bishop Clarkson Memorial Hospital,