Roberta Ann K.W. Wong Leung Revocable Trust U/A Dated 03/09/2018 v. Amazon.com, Inc.Roberta Ann K.W. Wong Leung Revocable Trust U/A Dated 03/09/2018 v. Amazon.com, Inc.
Before SEITZ, Chief Justice; LEGROW, and GRIFFITHS, Justices.
Upon appeal from the Court of Chancery. REVERSED.
Samuel L. Closic, Esq., Seth T. Ford, Esq., PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Brian J. Robbins, Esq., Stephen J. Oddo, Esq., Gregory E. Del Gaizo, Esq., Michael J. Nicoud, Esq., ROBBINS LLP, San Diego, California; Daniel B. Rehns, Esq., Scott Jacobsen, Esq., HACH ROSE SCHIRRIPA & CHEVERIE LLP, New York, New York, for Appellant Roberta Ann K.W. Wong Leung Revocable Trust U/A Dated 03/09/2018.
Garrett B. Moritz, Esq., Dylan T. Mockensturm, Esq., Benjamin M. Whitney, Esq., ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; William Savitt, Esq., Anitha Reddy, Esq., Adam M. Gogolak, Esq., Alexis J. Abboud, Esq., Alyssa M. Hunt, Esq., WACHTELL, LIPTON, ROSEN & KATZ, New York, New York, for Appellee Amazon.com, Inc.
GRIFFITHS, Justice:
An Amazon stockholder sent a letter to the company demanding to inspect its books and records under
I. FACTUAL AND PROCEDURAL BACKGROUND2
A. General Background
Appellant Roberta Ann K.W. Wong Leung Revocable Trust U/A Dated 03/09/2018 (the “Trust“) is a stockholder of Appellee Amazon.com, Inc. Amazon is a Delaware corporation, earning revenue primarily by selling a vast array of products and services online.3 Amazon fulfills customer orders from North America and internationally.4 In recent years, Amazon has faced regulatory scrutiny in the United States and internationally for purported anticompetitive activities. These government inquiries have led to challenges from Amazon‘s stockholders alleging possible wrongdoing and mismanagement by its fiduciaries.
B. The Demand
In October 2023, the Trust sent Amazon a letter demanding to inspect its books and records under
As a basis for inspection, the Demand included a chronology of “Amazon‘s history of monopolistic behavior.”9 The chronology contained the following events:
- In September 2019, the European Commission—the European Union‘s executive body—opened a formal antitrust investigation to assess Amazon‘s use of sensitive data from independent sellers on its marketplace to determine whether any use violated European Union competition rules.10
- In April 2020, the Wall Street Journal published an article concerning Amazon‘s use of data from independent sellers on its platform to develop competing products, which purportedly violated Amazon‘s own policies.11
- In May 2020, the U.S. House of Representatives sent a letter to Amazon‘s former CEO, Jeff Bezos, seeking to investigate whether previous statements made by Amazon personnel to the House Judiciary Committee regarding Amazon‘s business practices were misleading given the Wall Street Journal article.12 In July 2020, Bezos testified before the Subcommittee on Antitrust, Commercial and Administrative Law of the Judiciary Committee of the U.S. House of Representatives (the “Congressional Subcommittee“).13 The Congressional Subcommittee later issued a report that made policy recommendations but did not find that Amazon violated antitrust laws.14
- In November 2020, the European Commission “informed Amazon of its preliminary view that it has breached [European Union] antitrust rules by distorting competition in online retail markets,” finding that Amazon “systematically rel[ied] on non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon‘s own retail business, which directly competes with those third party sellers.”15 Around the same time, the European Commission opened a second formal antitrust investigation “into the possible preferential treatment of Amazon‘s own retail offers and those of marketplace sellers that use Amazon‘s logistics and delivery services.”16 In December 2022, Amazon made certain formal commitments to the European Commission to address the European Commission‘s concerns.17 According to Forbes, Amazon avoided a $47 billion fine with these commitments.18
- In December 2021, Italy‘s antitrust regulator, the Italian Competition Authority, issued a decision against certain Amazon subsidiaries, finding
that some of their practices infringed European Union competition rules.19 The Italian Competition Authority imposed remedial actions and a €1.13 billion fine.20 - In January 2022, the State of Washington sued Amazon after examining its practices regarding the treatment of third-party sellers on its marketplace.21 The parties shortly thereafter entered into a consent decree, whereby Amazon agreed to stop its “Sold by Amazon” program and further agreed to give the Washington Attorney General‘s Office annual updates on its compliance with antitrust laws.22 Amazon also paid $2.25 million “for recovery of [the Attorney General‘s] costs and attorneys’ fees.”23
- In September 2022, the State of California sued Amazon alleging that it violated California antitrust and unfair competition laws by contracting with its third-party sellers and wholesale suppliers to prevent competition.24 In March 2023, the California court overruled Amazon‘s demurrer to the State of California‘s complaint.25
Although these investigations and litigations serve as a basis for making the Demand upon Amazon, the gravamen of the Demand focuses on another governmental action.
2. The Federal Trade Commission Action
Central to the Demand is a complaint filed by the Federal Trade Commission (“FTC“) against Amazon alleging twenty violations of state and federal antitrust laws.26 In September 2023, the FTC—joined by seventeen states—filed a complaint in the Western District of Washington, alleging that Amazon had a “durable monopoly power” in the “online superstore market” and the “online marketplace services market.”27 The FTC conducted a “four-year investigation” before filing the complaint.28 During that investigation, Amazon produced millions of pages of documents
In September 2024, the district court granted in part and denied in part Amazon‘s motion to dismiss the FTC complaint, with most claims surviving the motion-to-dismiss stage.30
3. Incorporating the FTC Action into the Demand
Based on the allegations and events in the FTC action, the Trust demanded to inspect books and records related to, among other things, Amazon‘s “compliance with antitrust or competition laws, including state and federal antitrust laws in the U.S. and in the EU, including investigations into Amazon‘s compliance with such laws and lawsuits filed against [Amazon] regarding antitrust laws or anticompetitive conduct, including, but not limited to, the FTC [c]omplaint, California‘s lawsuit, and Washington‘s lawsuit.”31 The Trust also demanded to inspect documents regarding director independence.32
A few weeks after the Trust sent the Demand, Amazon responded that the Demand did not state a proper purpose and was overbroad in scope, but Amazon agreed to produce a “targeted set of materials” on the condition that the Trust enter into a confidentiality agreement.33 Amazon proposed a confidentiality agreement that included a jurisdictional restriction limiting the use of any inspection materials to litigation in a Delaware forum.34 The Trust did not agree to that restriction and, in December 2023, filed this Section 220 action.
C. A Previous Section 220 Action Involving Amazon
The Magistrate‘s final report and the Vice Chancellor‘s opinion in this case relied in part on an earlier Section 220 action against Amazon brought by a different stockholder. An overview of that case, Oklahoma Firefighters Pension and Retirement System v. Amazon.com, Inc., 2022 WL 1760618 (Del. Ch. June 1, 2022), provides context to this action.
There, a stockholder filed a Section 220 action against Amazon—after Amazon had produced board-level documents—seeking to investigate certain anticompetitive conduct in the United States, as well as potential mismanagement regarding compliance with South Carolina tax laws. Relevant here is the anticompetitive conduct analysis. The Court of Chancery denied the stockholder‘s request for books and records beyond those already produced, holding that “the evidence of potential malfeasance regarding alleged anticompetitive
The court primarily found that: (a) the Congressional Subcommittee investigation ended with no findings of antitrust violation by Amazon; (b) certain federal government investigations were “evidenced solely by news articles, which report on the existence of the investigations but lack any credible suggestion that Amazon has engaged in wrongdoing“; (c) a recently reported SEC investigation was “not evidence supporting an inference of possible misconduct” for the same reasons as the other federal government investigations; and (d) the European Commission investigation concerned breach of European Union competition laws, but the demand concerned only domestic laws.37 The court likewise found that the Italian Competition Authority‘s €1.13 billion fine did not relate to domestic anticompetition laws.38 Many of these factual and legal conclusions were later relied on by the Magistrate and Vice Chancellor in the current action to deny the Trust‘s inspection request.
D. The Magistrate‘s Final Report
In April 2024, the Trust presented its case for inspection during a one-day trial on a paper record before a Magistrate. A few days later, the Magistrate filed a final report, concluding that the Trust “has failed to present sufficient evidence to suggest a credible basis from which the [c]ourt can infer possible wrongdoing.”39 The Magistrate first noted the “developments” since the Amazon.com, Inc. decision, including the 2022 actions filed by the States of Washington and California; the agreement between Amazon and the European Commission concerning certain commitments Amazon made in response to the European Commission‘s investigation; and the 2023 FTC complaint. Because the Court of Chancery in Amazon.com, Inc. found that the evidence there did not support a credible basis to suspect wrongdoing, the Magistrate here relied on those findings and focused on “developments” since the Amazon.com, Inc. decision.40
The Magistrate stated that the FTC complaint “pleads allegations, not evidence,” and unlike successful Section 220 actions based on government complaints, the FTC complaint “does not extensively quote testimony or attach the documents on which it relies, so the [c]ourt cannot evaluate the underlying evidence ‘to determine if there exists an inference of wrongdoing.‘”41 The Magistrate next determined that the State of Washington action ended with a consent decree where Amazon did not admit liability and paid “a relatively small amount to defray the costs of the Washington Attorney General‘s investigation,”42 and the State of California action
Based on these findings, the Magistrate recommended that the court deny the Trust‘s inspection demand. The Magistrate concluded that when “[v]iewing the evidence in the aggregate, [the Trust] falls short of establishing a credible basis to investigate wrongdoing” because it identified “a handful[] of lawsuits, many of which merely repeat the allegations in the FTC [c]omplaint” and established only that Amazon has paid “relatively minor amounts.”46
E. The Vice Chancellor‘s Opinion
The Trust took exceptions to the Magistrate‘s final report, and, in July 2024, a Vice Chancellor heard argument.47 Before the court issued a decision, the Trust filed a letter notifying the court that the FTC complaint had largely survived Amazon‘s motion to dismiss.48
The court denied the Trust‘s inspection demand. Although the Vice Chancellor “adopted” the Magistrate‘s final report, the court concluded that it was unnecessary to decide whether the Trust satisfied its credible basis burden because “[t]here is a more fundamental problem with the Trust‘s demand: the scope of its stated purpose is facially improper.”49
To support its facially improper holding, the court quoted the Demand‘s language stating that the Trust sought to investigate whether “Amazon‘s fiduciaries have authorized or allowed [Amazon to] take unlawful advantage of [its] dominant position to engage in anticompetitive practices, leading to U.S. and international regulatory scrutiny, lawsuits, and fines.”50 According to the court, that purpose was “astoundingly broad” and “concerns any possible anticompetitive conduct by a global conglomerate at any time anywhere in the world.”51 The court concluded that “[w]hether the Trust has put forward sufficient evidence to satisfy the credible basis standard is meaningless when it failed to articulate a lucid purpose in the first place.”52
The Trust has appealed both the Vice Chancellor‘s ruling as to the scope of the Trust‘s purpose, and the Magistrate‘s credible basis ruling.
II. STANDARD OF REVIEW
“We review de novo whether a stockholder‘s stated purpose for demanding inspection under Section 220 is a ‘proper
III. ANALYSIS
“Section 220(c) provides that stockholders who seek to inspect a corporation‘s books and records must establish that ‘(1) [s]uch stockholder is a stockholder; (2) [s]uch stockholder has complied with [Section 220] respecting the form and manner of making demand for inspection of such documents; and (3) [t]he inspection such stockholder seeks is for a proper purpose.‘”55 “A proper purpose is a ‘purpose reasonably related to such person‘s interest as a stockholder.‘”56 This Court has stated that “corporate wrongdoing . . . in and of itself” is “a legitimate matter of concern that is reasonably related to [a stockholder‘s] interest[] as [a] stockholder.”57 Further, “when a stockholder investigates meritorious allegations of possible mismanagement, waste, or wrongdoing, it serves the interests of all stockholders ‘and should increase stockholder return.’ It follows that, under such circumstances, the stockholder‘s purpose is proper.”58 “Delaware [] stockholders seeking inspection under [S]ection 220 must present ‘some evidence’ to suggest a ‘credible basis’ from which a court can infer that mismanagement, waste or wrongdoing may have occurred.”59
A. The court erred in its interpretation of the scope of the Trust‘s purpose.
The Trust contends that the court erred in holding that the “scope of [the Trust‘s] stated purpose is facially improper” as it was “astoundingly broad” and “failed to articulate a lucid purpose.”60 The Trust also claims that the court incorrectly “interpreted the scope of [the Trust‘s] purpose” as concerning “any possible anticompetitive conduct by a global conglomerate at any time anywhere in the world.”61 We agree.
A “mere statement of a purpose to investigate possible general mismanagement, without more,”62 is insufficient to establish entitlement to inspection. But the “more” that Section 220 requires is not a narrower or more “lucid” purpose. Instead, a stockholder must present some evidence to establish a credible basis of mismanagement or wrongdoing warranting further investigation.63
The court concluded that it was unnecessary to reach the credible basis analysis because the scope of the purpose
The court also erred in construing the stated purpose as “concern[ing] any possible anticompetitive conduct by a global conglomerate at any time anywhere in the world.”66 In its Demand, the Trust expressed belief that Amazon‘s fiduciaries “have authorized or allowed” Amazon to “take unlawful advantage of [its] dominant [marketplace] position to engage in anticompetitive practices, leading to U.S. and international regulatory scrutiny, lawsuits, and fines.”67 The Demand explained that “[i]n particular, [the Trust] is concerned that Amazon utilized a set of interlocking anticompetitive and unfair strategies to illegally maintain its monopoly power that benefits the products it makes and sells internally versus third-party sellers that utilize [Amazon]‘s marketplace.”68 The Demand then detailed Amazon‘s “history of monopolistic behavior” before moving to the FTC complaint. Most of the Demand focused on detailing the FTC complaint.69
The court‘s interpretation of the Trust‘s purpose is not consistent with the Demand
The court erred in its interpretation of the scope of the Trust‘s purpose. Under the circumstances, the court was required to continue its analysis by engaging with the evidence presented by the Trust. We next discuss whether the Trust presented some evidence from which a court can infer possible wrongdoing by Amazon.
B. The Trust satisfied its credible basis burden.
The Trust also appeals the Magistrate‘s finding that the Trust did not establish a credible basis. The Trust contends that the evidence it presented to the Court of Chancery was sufficient to establish a credible basis. Although we afford considerable deference to the Court of Chancery‘s determination as to whether a credible basis exists,73 we find that—contrary to the Magistrate‘s determination—the Trust satisfied its burden of proving a credible basis, especially considering the developments in the FTC action since the Magistrate issued the final report.
The credible basis “standard does not require stockholders to show actual waste or mismanagement.”74 Instead, stockholders “need only show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation—a showing that ‘may ultimately fall well short of demonstrating that anything wrong occurred.‘”75 “The credible basis ‘threshold may be satisfied by a credible showing, through documents, logic, testimony
The Magistrate explained that, where the evidence presented “primarily concerns certain government investigations and litigation,” “Delaware courts have routinely looked to some additional evidence beyond ongoing inquiries or litigation to find that a plaintiff has met its burden.”78 For that proposition, the Magistrate relied on Amazon.com, Inc., where, as discussed previously, the Court of Chancery denied a stockholder‘s Section 220 demand because the anticompetitive conduct noted in that demand “lack[ed] the sort of ‘plus factor’ found” in other, similar cases.79 To the extent that one may read the “additional evidence” or “plus factor” language as creating a burden higher than the established credible-basis-from-some-evidence burden, that is not so. The burden remains the same, including in cases primarily concerning ongoing government investigations and litigation. Delaware caselaw shows that meeting this burden often requires more than a mere untested allegation of wrongdoing but does not require that the underlying litigation result in a full victory on the merits against the company.
In In re Facebook, Inc. Section 220 Litigation, 2019 WL 2320842 (Del. Ch. May 30, 2019), stockholders sought to investigate possible wrongdoing regarding whether board members and senior management “knowingly implemented policies that placed user data at risk of misappropriation and failed to monitor Facebook‘s compliance with [an FTC] [c]onsent [d]ecree, and, more generally, its efforts to protect its users’ private information.”81 The stockholders presented the following evidence: a parliamentary report concluding that the Cambridge Analytica scandal was facilitated by Facebook‘s policies; an FTC consent decree mandating Facebook to monitor its compliance with specific data privacy procedures; information “released to the public sphere” indicating that Facebook sought to monetize its users’ data even after entering into the consent decree; a newspaper article reporting that the board knew Facebook was allowing unauthorized access to user data; evidence that the FTC opened an investigation into whether Facebook violated the consent decree; a “£500,000” fine by European authorities for permitting third parties to access user data
In Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corp., 2020 WL 132752 (Del. Ch. Jan. 13, 2020), aff‘d, 243 A.3d 417 (Del. 2020), a stockholder sought books and records to investigate alleged mismanagement by the board and management in connection with AmerisourceBergen‘s “distribution of prescription opioid medications.”85 The Court of Chancery determined that the stockholder established a credible basis to infer that AmerisourceBergen had been violating positive law and that those violations resulted in a corporate trauma.86 The stockholder referenced the following evidence: an action by the West Virginia Attorney General that AmerisourceBergen paid $16 million to settle; a pending action by the New York Attorney General; a multidistrict litigation in which AmerisourceBergen was a defendant; reports by the States of West Virginia and Missouri finding that AmerisourceBergen failed to address suspicious opioid orders; and an offer by AmerisourceBergen to settle its part of the multidistrict litigation for $10 billion, which was rejected.87 The court permitted inspection, concluding that “[w]hen a corporation has suffered a significant trauma, and when a stockholder can establish a credible basis to suspect a possible violation of positive law, the stockholder has stated a proper purpose[.]”88
In Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020), a stockholder sought to investigate possible wrongdoing “in connection with [Gilead]‘s development, marketing, and sale of HIV drugs”90 based on “four categories of possible wrongdoing“: anticompetitive activity, mass torts, patent infringement, and kick-back schemes.91 The Court of Chancery determined that the stockholder established a credible basis for each category. Regarding the alleged anticompetitive activity, the stockholder sought to investigate activity “resulting in a multi-billion dollar lawsuit accusing Gilead of violating federal and state antitrust laws by colluding with its competitors to unlawfully extend patent protection and drive up the price of HIV drugs[.]”92 As evidence supporting its credible basis for anticompetitive activity, the stockholder relied on a thirteen-count class action complaint filed against Gilead in federal court alleging that Gilead and other drug companies violated federal and state antitrust laws by engaging in anticompetitive conduct in the HIV-drug market.93 The lawsuit sought
As these cases reveal, the credible basis standard remains a highly fact-intensive analysis that by its nature resists a brightline rule. But where a stockholder presents evidence of ongoing investigations and lawsuits, and those investigations and lawsuits have advanced beyond untested allegations, then the evidence can be sufficient to meet the credible basis standard, especially when liability or fines could result in a corporate trauma.
Here, the Magistrate found that the Demand identified “a handful” of lawsuits, “many of which merely repeat the allegations of the FTC [c]omplaint.”96 The Magistrate also found that the investigations noted in the Demand ended without findings of violations of the law, and that the fines paid by Amazon were “relatively minor[.]”97 Thus, the Magistrate concluded that the Trust did not satisfy its evidentiary burden. We disagree.
The FTC complaint—filed after a four-year investigation—advanced twenty counts alleging that Amazon violated state and federal antitrust laws.98 Most of those claims survived Amazon‘s motion to dismiss.99 In Gilead, the Court of Chancery found that the stockholder presented sufficient evidence to establish a credible basis to suspect wrongdoing where that evidence arose from a class action complaint alleging violations of state and federal antitrust laws that survived in part a motion to dismiss.100 And, unlike Gilead, the FTC action is a government lawsuit. Government lawsuits can be especially probative: “[o]ngoing investigations and lawsuits can provide the necessary evidentiary basis to suspect wrongdoing or mismanagement warranting further investigation. This type of evidence is stronger when governmental agencies or arms of law enforcement have
The Trust presented additional evidence from which the court could infer possible wrongdoing, including the lawsuit filed by the State of California, which is ongoing after that court denied Amazon‘s demurrer.102 That case concerns Amazon‘s alleged violations of California antitrust law for contracting with its third-party sellers and wholesale suppliers to prevent competition.103 Additionally, although the lawsuit filed by the State of Washington ended with a negligible monetary payment and no admission of liability, Amazon entered into a consent decree agreeing to stop its “Sold by Amazon” program and further agreeing to give the Washington Attorney General‘s Office annual updates on compliance with antitrust laws.104 And Amazon paid a €1.13 billion fine to the Italian Competition Authority due to “certain of [Amazon‘s] marketplace and logistics practices in Italy infring[ing] EU competition rules.”105
Each of those investigations, viewed in isolation, might not meet the Trust‘s burden. But taken together, the FTC action, the State of California action, the State of Washington consent decree, and the Italian Competition Authority fine are sufficient to establish a credible basis from which a court can infer that Amazon has engaged in possible wrongdoing through its purported anticompetitive activities.106 Delaware courts have a “duty to closely examine any Section 220 demand to ‘prevent possible abuse of the shareholder‘s right of inspection.‘”107 We have done so and find no abuse here.
IV. CONCLUSION
The court erred in its interpretation of the scope of the Trust‘s purpose and was required to engage with the evidence presented by the Trust. And the Trust established a credible basis to infer possible wrongdoing. We reverse the judgment of the Court of Chancery and remand for