Magnani v. Friedman et al

Filing 44

ORDER by Judge Yvonne Gonzalez Rogers granting 26 Motion to Stay. Case Management Statement due by 11/25/2019. Court sets a Case Management Conference for Monday, 12/2/2019 02:00 PM in Oakland, Courtroom 1, 4th Floor. (fs, COURT STAFF) (Filed on 1/23/2019)

1
2
3

UNITED STATES DISTRICT COURT

4

NORTHERN DISTRICT OF CALIFORNIA

5
IN RE RH SHAREHOLDER DERIVATIVE
LITIGATION

6

CASE NO. 18-cv-02452-YGR

7
ORDER GRANTING MOTION TO STAY

8

Re: Dkt. No. 26

9
10

United States District Court
Northern District of California

11
Plaintiffs David Magnani and Hosrof Izmirliyan bring this shareholder derivative action on

12
13

behalf of Nominal Defendant RH, Inc. (“RH”) and against current and former officers and

14

directors of RH for “issuing false and misleading proxy statements in violation of Section 14(a) of

15

the Securities Exchange Act of 1934 (the “Exchange Act”), and for breaches of fiduciary duties,

16

unjust enrichment, corporate waste, and insider selling.” (Dkt. No. 25 (“Compl.”) at 1.)

17

Now before the Court is RH’s motion to stay this action pending the resolution of the

18

related securities class action In re RH, Inc. Securities Litigation, Case No. 4:17-00554 (N.D. Cal.)

19

(the “Securities Class Action”).1 (Dkt. No. 26 (“Motion”).) Having carefully considered the

20

papers submitted, and for the reasons set forth more fully below, the Court GRANTS RH’s motion

21

to stay.

22

///

23

///

24

///

25
26
27
28

1

The Court has reviewed the papers submitted by the parties in connection with RH’s
motion to stay. The Court has determined that the motion is appropriate for decision without oral
argument, as permitted by Civil Local Rule 7-1(b) and Federal Rule of Civil Procedure 78. See
also Lake at Las Vegas Investors Group, Inc. v. Pacific Malibu Dev. Corp., 933 F.2d 724, 729 (9th
Cir. 1991).

1

I.

BACKGROUND
a. Factual Background

2
3

Plaintiffs allege as follows:

4

RH is a luxury home furnishings retailer headquartered in Corte Madera, California.

5

(Compl. ¶¶ 2, 40.) RH promotes its products and takes orders for delivery through its website,

6

catalogs known as “Source Books,” and furniture showrooms that reflect samples of some of its

7

products. (Id.) In the years prior to Spring 2015, RH had experience surging revenue growth. (Id.

8

¶ 4.)
In March 2015, RH announced plans to launch a yet-to-be-named new product line later in

10

the year. (Id. ¶¶ 44-45.) On May 12, 2015, RH filed its annual proxy statement on SEC Schedule

11
United States District Court
Northern District of California

9

14A, which described RH’s Board committees and RH’s compensation program and philosophy,

12

solicited stockholder votes in favor of re-electing certain RH directors, and solicited stockholders

13

votes in favor of a non-binding “say-on-pay” compensation proposal. (Id. ¶¶ 101-08.) On June

14

11, 2015, RH formally introduced the new product line, known as RH Modern, which was to be

15

launched in the fall of 2015. (Id. ¶ 56.) In October 2015, RH officially launched RH Modern with

16

a 540-page Source Book, a website, and significant floor space at RH showrooms in Chicago, Los

17

Angeles, New York, Denver, Tampa, and Austin. (Id. ¶¶ 71-72.)

18

On December 10, 2015, RH announced third quarter 2015 financial and operating results,

19

which included net revenue at the lower end of the guidance. (Id. ¶ 74.) RH’s then-CFO Karen

20

Boone attributed the results, in part, to a late release of the RH Modern Source Book and various

21

external macroeconomic factors, including impacts of currency and oil prices. (Id.) On February

22

24, 2016, RH pre-announced fourth quarter 2015 results, which did not meet analysists’

23

expectations or the previously announced guidance. (Id. ¶ 84.) RH CEO Gary Friedman

24

attributed the results, in part, to shipping delays, vendor struggles to ramp up production, and low

25

in-stock inventory levels, in addition to some of the external macroeconomic challenges that

26

Boone had identified in December. (Id. ¶ 85.) RH’s stock subsequently dropped by

27

approximately twenty-five percent. (Id. ¶ 86.)

28

On May 13, 2016, RH filed its annual proxy statement with the SEC, which contained a
2

1

similar discussion of RH’s board committees and compensation program as contained in the prior

2

year’s proxy statement. (Id. ¶¶ 111-20.) The 2016 proxy statement again sought stockholder

3

votes to re-elect certain directors and approval of a non-binding “say-on-pay” vote. (Id. ¶¶ 111,

4

117.) On June 8, 2016, RH announced disappointing first quarter 2016 financial and operating

5

results and lowered full-year 2016 guidance, citing, among other factors, production delays and

6

the need for customer accommodations and related expenses. (Id. ¶¶ 93-95.) Thereafter, RH’s

7

stock price dropped by approximately twenty-one percent. (Id. ¶ 96.)

8
9

b. Procedural Background
Following RH’s June 8, 2016 announcement regarding its first quarter 2016 results and
lowered guidance, multiple securities class actions were filed and later consolidated as the

11
United States District Court
Northern District of California

10

Securities Class Action. The Securities Class Action plaintiffs allege that defendants RH, Gary

12

Friedman, and Karen Boone made false or misleading statements that began on March 26, 2015.

13

(Securities Class Action, Dkt. No. 45 (“SAC Compl.”).) They assert claims under Sections 10(b)

14

and 20(a) of the Exchange Act. (Id. ¶¶ 234-49.) The Court denied defendants’ motion to dismiss

15

the Securities Class Action on February 26, 2018. (Securities Class Action, Dkt. No. 68.)

16

Shortly thereafter, on April 24, 2018, plaintiff David Magnani filed the first derivative

17

action. (See Dkt. No. 1.) On June 29, 2018, a second putative derivative plaintiff, Hosrof

18

Izmirliyan, filed a substantively similar derivative complaint. (Case No. 3:18-cv-03930, Dkt. No.

19

1.) The Court subsequently consolidated the Magnani and Izmirliyan actions into the instant

20

action, In re RH Shareholder Derivative Litigation (the “Derivative Action”) and appointed lead

21

counsel on July 19, 2018. (See Dkt. No. 22.) Plaintiffs in the Derivative Action filed the

22

operative Verified Consolidated Shareholder Derivative Complaint (the “Derivative Complaint”)

23

on August 24, 2018. (See Compl.)

24

The Derivative Complaint names as defendants eight of RH’s nine directors (the “Director

25

Defendants”) and former RH CFO Karen Boone (collectively, the “Individual Defendants”).

26

(Compl. ¶¶ 26-38.) Therein, it asserts five counts: (i) an Exchange Act Section 14(a) claim against

27

the eight Director Defendants; (ii) a common law breach of fiduciary duty claim against the

28

Individual Defendants; (iii) a common law claim for unjust enrichment against the Individual
3

1

Defendants; (iv) a common law claim for waste of corporate assets against the Individual

2

Defendants; and (v) a common law claim for insider trading and misappropriation of information

3

against defendants Karen Boone and Carlos Alberini. (Id. ¶¶ 196-224.)

4

II.

LEGAL STANDARD

5

It is well-settled that “the power to stay proceedings is incidental to the power inherent in

6

every court to control the disposition of the causes on its docket with economy of time and effort

7

for itself, for counsel, and for litigants.” Landis v. North American Co., 299 U.S. 248, 254 (1936).

8

Whether to issue a stay in a case is based on the trial court’s sound discretion and basic principles

9

of equity, fairness, efficiency, and conservation of judicial resources. See Filtrol Corp. v.
Kelleher, 467 F.2d 242, 244 (9th Cir. 1972); see also Leyva v. Certified Grocers of Cal. Ltd., 593

11
United States District Court
Northern District of California

10

F.2d 857, 863 (9th Cit. 1979) (“A trial court may, with propriety, find it is efficient for its own

12

docket and the fairest course for the parties to enter a stay of an action before it, pending

13

resolution of independent proceedings which bear upon the case.”).
In contemplating a stay, a court should consider (A) the possible damage which may result

14
15

from the granting of a stay; (B) the hardship or inequity which a party may suffer as a result of

16

denial of a stay; and (C) the orderly course of justice measured in terms of the simplifying or

17

complicating of issues, proof, and questions of law which could be expected to result from a stay.

18

Lockyer v. Mirant Corp., 398 F.3d 1098, 1110 (9th Cir. 2005) (citing CMAX, Inc. v. Hall, 300

19

F.2d 265, 268 (9th Cir. 1962)).

20

III.

ANALYSIS

21

A.

Possible Damage Resulting from Grant of Stay

22

Courts may issue a stay if “it appears likely the other proceedings will be concluded within

23

a reasonable time in relation to the urgency of the claims presented to the court.” Lockyer, 398

24

F.3d at 1111 (quoting Levya, 593 F.2d at 864). The duration of a stay must reflect “the strength of

25

the justification given for it.” See Yong v. I.N.S., 208 F.3d 1116, 1119 (9th Cir. 2000). Thus, an

26

especially lengthy or “indefinite” stay “require[s] a greater showing to justify it.” Id.

27
28

Plaintiffs argue that they will suffer prejudice because a stay would pause the instant
Derivative Action indefinitely while the Securities Class Action proceeds. (Dkt. No. 29 (“Opp.”)
4

1

at 7.) However, plaintiffs need not wait long for the Securities Class Action to conclude—fact

2

discovery ends January 31, 2019, and trial will begin on November 4, 2019.2 See In re Twitter,

3

Inc. Shareholder Deriv. Litig., No. 18-62-VAC-MPT, 2018 WL 3536085, at *3 (D. Del. July 23,

4

2018) (finding an 18-month stay “is not likely to cause undue hardship”). Moreover, plaintiffs

5

seek relief in the Derivative Action for “costs incurred in investigating and defending RH and

6

certain of its officers in the pending Securities Class Action.” (Compl. ¶ 164.) Therefore, the

7

Securities Class Action must conclude before plaintiffs can obtain the relief they seek in the

8

Derivative Action. See In re STEC, Inc. Deriv. Litig., Nos. CV 10-00667-JVS (MLGx), SACV

9

10-00220-JVS (MLGx), 2012 WL 8978155, at *8 (C.D. Cal. Jan. 11, 2012) (finding that a
derivative action warrants a stay when “the securities class action had not yet been resolved” and

11
United States District Court
Northern District of California

10

plaintiffs in the derivative action seek relief contingent upon resolution thereof).

12

In addition, instituting a stay in this case does not present any real risk of loss of evidence

13

because parties in the Securities Class Action have nearly completed discovery and must preserve

14

all evidence. See id. (finding “no credible risk that evidence will be lost” given the amount of

15

discovery already completed in the underlying class action). Also, because the factual bases of

16

two actions overlap considerably, the Securities Class Action plaintiffs likely sought evidence that

17

will be useful to the plaintiffs in the Derivative Action as well. See Brenner v. Albrecht, No.

18

6514-VCP, 2012 WL 252286, at *7 (Del. Ch. Jan. 27, 2012). Therefore, granting a stay poses

19

minimal risk of damage to plaintiffs in this case because a stay will not significantly prolong any

20

requested relief and plaintiffs do not risk losing evidence.

21
22
23
24
25
26
27
28

2

Plaintiffs reliance upon In re Galena Biopharma, Inc. Deriv. Litig. and Smith v. Sperling
does not persuade. In both Galena and Smith, the plaintiffs in the respective derivative actions
would have had to wait several years before the relative underlying securities class actions would
conclude. See In re Galena Biopharma, Inc. Deriv. Litig., 83 F. Supp. 3d 1033 (D. Or. 2015);
Smith v. Sperling, No. CV-11-0722-PHX-JAT, 2012 WL 79237 (D. Ariz. Jan. 11, 2012). Here,
the Securities Class Action is set for trial later this year.
Moreover, in the event that unforeseen circumstances result in delay of the Securities Class
Action, the Court may use its discretion to lift the stay and allow the instant Derivative Action to
proceed. See In re First Solar Deriv. Litig., No. CV-12-00769-PHX-DGC, 2016 WL 687138 (D.
Ariz. Feb. 19, 2016) (lifting a stay after an interlocutory appeal would cause plaintiffs in the
derivative action to wait more than five years to proceed).
5

1

B.

Hardship or Inequity Resulting from Denial of Stay

2

In general, a derivative suit must be in the company’s best interest in order to proceed.

3

Breault v. Folino, No. SACV010826GLTANX, 2002 WL 31974381, at *2 (C.D. Cal. Mar. 15,

4

2002) (citing Zapata Corp. v. Maldonado, 430 A.2d 779, 784 (Del.1981).) For this reason, courts

5

frequently stay shareholder derivative suits in favor of securities class actions “when the cases

6

arise from the same factual allegations and the evidence in the former could jeopardize the

7

company’s defense in the latter.” In re STEC, 2012 WL 8978155, at *4; see also In re Ormat

8

Techs. Inc., No. 3:10-cv-00177-ECR-RAM, 2011 WL 3841089, at *4 (D. Nev. Aug. 29, 2011)

9

(“The concerns of hardship and equity to the moving party are especially relevant in shareholder

10

United States District Court
Northern District of California

11

derivative cases when a securities class action suit is proceeding on the same issues.”).
RH argues that proceeding with the Derivative Action risks prejudicing its defense in the

12

Securities Class Action and that simultaneously litigating both cases would force RH to implement

13

conflicting litigation strategies. (Motion at 6-7.) Plaintiffs in the Derivative Action, purportedly

14

on behalf of RH, will seek to prove that RH’s directors knowingly or recklessly caused the

15

Company to issue false statements to its investors. (Id. at 6.) If plaintiffs ultimately succeed in the

16

Derivative Action, then the officers’ liability could be imputed to RH therefore undermining RH’s

17

defense in the Securities Class Action. (Id. at 6-7.) Myriad courts have found this argument

18

sufficient reason to support a stay in a derivative action. In re First Solar Deriv. Litig., No. CV-

19

12-00769-PHX-DGC, 2012 WL 6570914, at *2 (D. Ariz. Dec. 17, 2012).3 Moreover, RH may

20

suffer if the Derivative Action continues because it would necessarily divert RH’s financial and

21

management resources away from its defense in Securities Class Action. (Motion at 7-8.) See In

22

re STEC, 2012 WL 8978155, at *4; Breault, 2002 WL 31974381, at *2.

23
24

For these reasons, RH has sufficiently demonstrated a “clear case of hardship or inequity in
being required to go forward” with the Derivative Action because plaintiffs’ strategy likely would

25
26
27
28

3

Brenner, 2012 WL 252286, at **4-5; Cucci v. Edwards, No. SACV 07-532 PSG
(MLGx), 2007 WL 3396234 (C.D. Cal. Oct. 31, 2007); In re STEC, 2012 WL 8978155, at *4-5; In
re Ormat, 2011 WL 3841089, at *4; Breault, 2002 WL 31974381, at *2; Rosenblum v. Sharer,
No. CV 07-6140 PSG (PLAx), 2008 WL 9396534, at *3 (C.D. Cal. July 28, 2008); In re Twitter,
2018 WL 3536085, at *3, In re Insys Therapeutics Deric. Litig., No. 12696-VCMR, 2017 WL
5953515, at *2-3 (Del. Ch. Nov. 30, 2017).
6

1

undercut RH’s defense in the Securities Class Action and divert valuable litigation resources away

2

from RH’s defense of that litigation. See Lockyer, 398 F.3d at 1112.

3

C.

Effect of a Stay on the Orderly Course of Justice

4

In determining whether a stay promotes the orderly course of justice, courts may consider

5

the degree of overlap in factual allegations between parallel cases in order to avoid unnecessary

6

duplicative litigation. Levya, 593 F.2d at 863; see also Cucci v. Edwards, No. SACV 07-532 PSG

7

(MLGx), 2007 WL 3396234, at *2 (C.D. Cal. Oct. 31, 2007) (finding that a stay “would promote

8

judicial economy” in light of “common issues in the Securities Class Action and Shareholder

9

Derivative Action”).
Plaintiffs argue that a stay would not preserve judicial resources because the Derivative

10

United States District Court
Northern District of California

11

Action presents distinct Section 14(a) and insider trading claims that the Securities Class Action

12

will not resolve. (Opp. at 5-7.) As a preliminary matter, identical claims are not a prerequisite for

13

granting a stay of a derivative shareholder action pending resolution of a related shareholder class

14

action. See In re STEC, 2012 WL 8978155, at *6; In re Ormat, 2011 WL 3841089, at *5.

15

Moreover, plaintiffs’ claims that RH made “false and misleading statements regarding the launch

16

of RH’s new product line, RH Modern,” provide the factual bases for both the Derivative Action

17

and the Securities Class Action. (See Compl. ¶¶ 1, 196-224; SAC Compl. ¶¶ 1, 234-49.)

18

Accordingly, resolution of these claims will further adjudication of both actions and issuing a stay

19

in this case will simplify “issues, proof, and questions of law” in the Derivative Action and will

20

therefore help preserve judicial resources and promote the orderly course of justice. Lockyer, 398

21

F.3d at 1110.
Because (A) the plaintiffs will not experience any significant harm due to the relatively

22
23

short stay contemplated here, (B) RH will likely suffer prejudice of engaging in contradictory

24

litigation strategies if the Court does not grant a stay, and (C) in light of the shared factual bases of

25

the Derivative Action and the Securities Class Action, a stay will preserve judicial resources, the

26

Court finds that granting the stay ensures the fairest and most efficient course for all parties.

27

//

28

//
7

1
2
3
4

IV.

CONCLUSION
For the reasons stated above, the Court GRANTS RH’s motion to stay the instant action

pending the resolution of the related Securities Class Action. Accordingly, the case is STAYED.
The Court SETS a Case Management Conference (“CMC”) for Monday, December 2,

5

2019 at 2:00 p.m. in Courtroom 1 of the Federal Courthouse at 1301 Clay Street, Oakland,

6

California. In addition to filing a timely CMC statement, the parties shall include a detailed

7

discovery plan and shall meet and confer with respect to the disclosure of relevant discovery from

8

the Securities Class Action to expedite discovery in this matter. Should a settlement in the

9

Securities Class Action be reached, counsel shall contact the Court’s courtroom deputy to advance

10

the CMC date.

United States District Court
Northern District of California

11

This Order terminates Docket Number 26.

12

IT IS SO ORDERED.

13
14

Dated: January 23, 2019
YVONNE GONZALEZ ROGERS
UNITED STATES DISTRICT COURT JUDGE

15
16
17
18
19
20
21
22
23
24
25
26
27
28
8