Corwin v. Kaplan et al

Filing 104

ORDER by Judge Claudia Wilken granting 93 MOTION to Dismiss Second Amended Complaint (scc, COURT STAFF) (Filed on 9/16/2008)

1 2 3 4 5 6 7 8 9 10 United States District Court For the Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Defendants Jozef Straus, Don Scifres, Martin A. Kaplan, Bruce D. Day, Robert E. Enos, Peter A Guglielmi, John A. MacNaughton, Wilson Sibbett, Anthony R. Muller, M. Zita Cobb, Joseph Ip, Charles J. Abbe, Frederick L. Leonberger, Michael C. Phillips, and Harry Deffebach (collectively individual Defendants) as well as nominal and JDS UNIPHASE CORPORATION, Nominal Defendant. / v. MARTIN A. KAPLAN, et al., Defendants, ROBERT CORWIN, D.D.S. derivatively on behalf of JDS UNIPHASE CORPORATION, Plaintiff, No. C 02-2020 CW ORDER GRANTING DEFENDANTS' MOTION TO DISMISS THE SECOND AMENDED COMPLAINT IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

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Defendant JDS Uniphase Corporation (JDSU) move to dismiss the second amended complaint (SAC) in this shareholder derivative action. Derivative Plaintiffs Robert Corwin and Michal Shalom The motion was heard on September 4, 2008.

oppose the motion.

Having considered all of the papers filed by the parties and argument on the motion, the Court GRANTS Defendants' motion to dismiss. BACKGROUND On April 24, 2002, the original complaint was filed in this case.1 The original complaint stated claims against six of the On August 1, 2002, the

fifteen current individual Defendants.

Court entered an order to show cause why this case should not be dismissed for lack of subject matter jurisdiction. On September 2,

2002, Plaintiff filed a First Amended Complaint (FAC) in response to the OSC.2 On November 3, 2003, the Court granted Defendants'

motion to dismiss the FAC, finding that Plaintiff failed adequately to allege demand futility, that is, that it was excused from making a demand to the board of directors that JDSU proceed with these claims before filing this suit. In addition, the Court dismissed

each of the causes of action for failure to state a claim. Specifically, the Court found that the breach of fiduciary duty Corwin was the only Plaintiff named in the original complaint and the First Amended Complaint in this case. Shalom was included in the SAC after the Court consolidated his case, Shalom v. Kaplan, C 02-2989, with this case. This amended complaint is titled "Verified First Amended Consolidated Shareholder Derivative Complaint." As noted below, Plaintiff later filed another complaint with the same title. The Court will refer to this complaint as the first amended complaint (FAC) and the later complaint as the further amended complaint. 2
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claim based on insider trading failed as a matter of law because Plaintiff failed to plead with particularity facts sufficient to support a finding of insider trading. In addition, the Court ruled

that Plaintiff's claims for breach of fiduciary duties, waste of corporate assets and indemnification were deficient because they depended upon a finding of liability in the then-pending securities fraud action against JDSU and several of the individual Defendants, In re JDS Uniphase Securities Litigation, C 02-1486 (In re JDSU), to establish causation and damages.3 At that time, Defendants

requested a stay of this case, pending the resolution of In re JDSU. The Court denied the motion to stay. On January 16, 2004, Plaintiff filed a further amended complaint.4 On March 17, 2004, Defendants moved to dismiss the

further amended complaint, again arguing that Plaintiff failed to plead facts sufficient to support a finding of demand futility or to state a claim upon which relief could be granted. On January 6,

2005, the Court stayed this case pending resolution of In re JDSU. In its order staying the case, the Court noted, The material facts in this action are the same as those in In re JDS. Because the Court has denied the defendants' motion to dismiss in that case, it would not be in the interest of justice for the Court to grant Defendants' motion to dismiss here, even though Plaintiff's current complaint is still not adequately plead.

The Court also dismissed with prejudice a cause of action for "abuse of control." As noted above, this amended complaint is also titled "Verified First Amended Consolidated Shareholder Derivative Complaint." The Court will refer to this complaint as the further amended complaint. 3
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Docket No. 59 at 2.

In a separate order, the Court denied

Defendants' motion to dismiss, without prejudice to refiling the motion. In orders dated August 24, September 27 and October 10, 2007, the Court granted partial summary judgment in favor of the In re JDSU defendants. The remaining claims were tried to a jury in On November 27, 2007, the jury

October and November, 2007.

returned a verdict in favor of the In re JDSU defendants on all claims. On April 22, 2008, the parties submitted in this case a stipulation allowing Plaintiffs to file the SAC. The stipulation

provides, "Upon the filing of a Second Amended Complaint, the First Amended Complaint5 shall be deemed dismissed without prejudice." Docket No. 81. On May 8, 2008, Plaintiffs filed the SAC, alleging

claims for: (1) breach of fiduciary duty, insider selling and misappropriation of information based on allegations of insider trading; (2) breach of fiduciary duty based on Defendants' actions exposing JDSU "to a significant risk of liability and damages, and loss of corporate goodwill," SAC ¶ 86; (3) indemnification; and (4) waste of corporate assets. On June 20, 2008, Defendants filed the present motion to dismiss. DISCUSSION I. Demand Futility Defendants argue that the SAC again fails to allege facts

It appears that the parties are referring to the further amended complaint, which was the operative complaint at the time of the stipulation. 4

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sufficient to support a finding that a demand that JDSU pursue the claims in this complaint would have been futile. As discussed in

the Court's earlier order, under the substantive law of Delaware,6 "the right of a stockholder to prosecute a derivative suit is limited to situations where the stockholder has demanded that the directors pursue the corporate claim and they have wrongfully refused to do so or where demand is excused because the directors are incapable of making an impartial decision regarding such litigation." Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993); see

also In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989 (9th Cir. 1999) ("A shareholder seeking to vindicate the interests of a corporation through a derivative suit must first demand action from the corporation's directors or plead with particularity the reasons why such demand would have been futile."). A demand is

futile if "the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to the demand." Id. at 934. Under federal

procedural law, the facts necessary to demonstrate that demand would be futile must be plead with particularity. 23.1; In re Silicon Graphics, 183 F.3d at 989. Defendants first argue that the SAC fails because all allegations regarding demand futility concern the board of Fed. R. Civ. P.

The substantive law of Delaware applies because JDSU is a Delaware corporation. In re Silicon Graphics, 183 F.3d 970, 990 (9th Cir. 1991). 5

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directors in place at the time this lawsuit was originally filed. Citing Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006) (en banc), Defendants argue that Plaintiffs must demonstrate demand futility with respect to the board of directors in place when the SAC was filed. In Braddock, the Delaware Supreme Court held that, under

Delaware procedural law, "a dismissal without prejudice and without explicit leave to amend operates as a final judgment." Id. at 779.

Therefore, the Delaware court held that "when a complaint is amended after a new board of directors is in place," a plaintiff must demand that the new board pursue the claims unless, "first, the original complaint was well pleaded as a derivative action; second, the original complaint satisfied the legal test for demand excusal; and third, the act or transaction complained of in the amendment is essentially the same as the act or transaction challenged in the original complaint." Id. at 786.

Because the Court dismissed the first amended complaint and found that the further amended complaint was "not adequately plead," Defendants argue that the first Braddock element is not satisfied and Plaintiffs must establish demand futility with respect to the JDSU board of directors, as it existed in 2008. Court need not decide whether Braddock applies to this case because, even accepting Plaintiffs' argument that they need to demonstrate demand futility based on the original filing of this suit, their allegations regarding demand futility in 2002 are deficient. As in their original complaint, Plaintiffs allege that The

demand is excused because Defendants, who comprise a majority of the board, as it existed in 2002, engaged in illegal insider 6

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trading, thereby benefitted from the wrongful conduct alleged in the complaint and are likely to face liability if this case moves forward. However, Plaintiffs have not plead facts sufficient to support a finding that the six members of the 2002 board named as Defendants are likely to face liability.7 Indeed, the Court

earlier dismissed Plaintiffs' cause of action based on insider trading in the FAC, finding that "the FAC does not contain facts sufficient to establish that Defendants were in the possession of material non-public information at the time that they traded in JSDU stock." Docket No. 39 at 5.

The FAC alleged, The Individual Defendants, through their positions as chairs of the Audit Committee and Compensation Committee, directors, and/or senior officers of the Company and their receipt of reports, attendance at meetings, and access to all of the Company's books, records and other proprietary information, had responsibility for and, therefore, were in possession of, material non-public information concerning the Company and its inventory, orders for product operations, finances and business prospects. This material non-public information included, but was not limited to, the Company's sales and growth prospects and the effect that the sharp downturn in the telecommunications industry had on those growth prospects. FAC ¶ 12. The SAC contains various additional allegations about the material non-public information Plaintiffs contend Defendants possessed when they traded in JDSU stock. However, the SAC also

alleges that such information was the subject of emails and The six Defendants who were board members in 2002 are Kaplan, Straus, Enos, Guglielmi, Day and Scifres. 7
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meetings which were not received or attended by any of the six board-member Defendants other than Straus. Plaintiffs' new

allegations about how the remaining Defendants could have received such information are similar to the allegations in the FAC and are similarly deficient. Plaintiffs allege,

At the time of their insider stock sales, the Director Defendants all seasoned senior executives in the telecommunications and data transmission industries, with access to the Company's computer systems and at least quarterly JDSU internal reports indicating a slowdown in demand for JDSU's products from its customers, knew that the Company's business prospects were changing and that when this information became public, the market price of JDSU's shares would likely decline sharply. SAC ¶ 81. Moreover, as Defendants point out, of the six board-member Defendants, only two were members of JDSU's management and the remaining four were outside directors. Plaintiffs do not allege

that these four outside directors were involved in the day-to-day operations of JDSU or that they received specific information about the company's demand projections. The Court finds that Plaintiffs have again failed to plead with particularity facts sufficient to establish demand futility. Therefore, the Court dismisses Plaintiffs' complaint with prejudice. II. Failure to State a Claim Defendants also renew their argument that Plaintiffs' complaint fails to state a claim pursuant to the requirements of Delaware law. See First Nat'l City Bank v. Banco Para El Comercio

Exterior De Cuba, 462 U.S. 611, 621 (1983) ("As a general matter, 8

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the law of the state of incorporation normally determines issues relating to the internal affairs of a corporation."). Although

Defendants contend that all of Plaintiffs' causes of action fail to state a claim, their argument regarding causation and damages relates only to Plaintiffs' second, third and fourth causes of action for breach of fiduciary duty, indemnification and waste of corporate assets. These causes of action are based on allegations

of insider trading and the communication of misleading information about the strength of the market for JDSU's products. As

Plaintiffs point out, liability for insider trading does not require damage to the corporation under Delaware law. See Thomas

v. Roblin Indus., Inc., 520 F.2d 1393, 1397 (3rd Cir. 1975) (liability exists for insider trading claims "for any gains without regard to whether the corporation suffered damages as a result of the corporation."). Therefore, Defendants' arguments do not relate

to Plaintiffs' first cause of action. In their motion to dismiss the FAC, Defendants argued that the damages claimed for what are now Plaintiffs' second, third and fourth causes of action were speculative because they were based only on the potential for damages if JDSU were found liable in In re JDSU. The Court found that these causes of action were

"deficient, and must be dismissed" because the "the only wrongful conduct alleged in the FAC is that Defendants engaged in illegal insider trading and issued misleading statements regarding JDSU's financial health" and the "FAC does not allege that these wrongful acts caused the damages to JDSU that Plaintiff now asserts, nor is it apparent how these wrongful acts could have caused such 9

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damages."

Id. at 6.

Defendants argue that the damages claimed in

the SAC mirror the speculative damages claimed in the FAC. Moreover, Defendants point out, Plaintiffs can no longer speculate that such damages will be proved because judgment was entered in JDSU's favor in In re JDSU. Plaintiffs allege that, as a result of

Defendants' conduct, "JDSU has been exposed to a significant risk of liability and damages, and loss of corporate goodwill." 86. SAC ¶

Similarly, Plaintiffs broadly allege that Defendants' insider

trading was "to their great benefit, and to the detriment of the nominal defendant," and Defendants' conduct "caused JDSU to waste valuable assets." Id. at ¶¶ 89, 92. Plaintiffs have not cured the

deficiency identified in the FAC by alleging how Defendants' conduct caused the purported damages. Further, it is not clear Therefore,

what damages Plaintiffs believe JDSU has suffered.

Plaintiffs' second, third and fourth causes of action are dismissed with prejudice for this reason as well.8 CONCLUSION For the foregoing reasons, the Court GRANTS Defendants' motion to dismiss (Docket No. 93). Plaintiffs' SAC is dismissed with The Clerk shall

prejudice and judgment shall enter accordingly. close the file. IT IS SO ORDERED. Dated: 9/16/08

CLAUDIA WILKEN United States District Judge

Because the Court dismisses Plaintiffs' claims based on their failure to allege demand futility and their failure to state a claim, it need not reach Defendants' argument that Plaintiffs' claims are barred by collateral estoppel. 10

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