Fischman v. Reed et al

Filing 61

ORDER: The motion to dismiss filed by Sempra and SoCalGas is granted. (Dkt # 34 ). The complaint is dismissed without prejudice. Plaintiff shall file any motion for leave to file an amended complaint within thirty (30) days of the day this Order is issued. The motions to dismiss filed by the Officer Defendants and Director Defendants are denied as moot. (Dkt #s 35 , 37 ). Signed by Judge William Q. Hayes on 3/29/2017. (mdc)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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ARTHUR FISCHMAN, derivatively
on behalf of SEMPRA ENERGY and
SOUTHERN CALIFORNIA GAS
COMPANY,

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v.

CASE NO. 16cv1006-WQH-AGS
ORDER

Plaintiff,

DEBRA L. REED; JOSEPH A.
HOUSEHOLDER; STEVEN D.
DAVIS; JUSTIN C. BIRD; WILLIAM
C. RUSNACK, WILLIAM D. JONES;
WILLIAM G. OUCHI; JAMES G.
BROCKSMITH, JR.; WILLIAM P.
RUTLEDGE; LYNN SCHENK,
ALAN L. BOECKMANN; JACK T.
TAYLOR; JAMES C. YARDLEY;
KATHLEEN L. BROWN; PABLO A.
FERRERO; LUIS M. TELLEZ;
DENNIS V. ARRIOLA; JIMMIE I.
CHO; MICHAEL M. SCHNEIDER;
DOUG SCHNEIDER; SCOTT
FURGERSON; GEORGE MINTER; J.
BRET LANE; MARTHA B.
WYRSCH; JESSE J. KNIGHT, JR;
and DOES 1-25, Inclusive
Defendants,

and

SEMPRA ENERGY; and
SOUTHERN CALIFORNIA GAS
COMPANY
Nominal Defendants
HAYES, Judge:
The matters before the Court are the motion to dismiss filed by Sempra Energy
and Southern California Gas Company (collectively, the “Nominal Defendants”) (ECF
No. 34); the motion to dismiss and joinder filed by Alan. L. Boeckmann, James G.
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1 Brocksmith, Jr., Kathleen L. Brown, Pablo A. Ferrero, William D. Jones, William G.
2 Ouchi, Debra L. Reed, William C. Rusnack, William P. Rutledge, Lynn Schenk, Jack
3 T. Taylor, and James C. Yardley (collectively, the “Directors”) (ECF No. 35); and, the
4 motion to dismiss filed by Dennis V. Arriola, Justin C. Bird, Jimmie I. Cho, Steven D.
5 Davis, Scott Furgerson, Joseph A. Householder, Jesse J. Knight, Jr., J. Bret Lane,
6 George Minter, Doug Schneider, Michael M. Schneider, and Martha B. Wyrsch
7 (collectively, the “Officers”) (ECF No. 37).
8 I. Procedural Background
9

On April 25, 2016, Plaintiff Arthur Fischman, derivatively on behalf of Sempra

10 Energy (“Sempra”) and Southern California Gas Company (“SoCalGas”), initiated this
11 action by filing a shareholder derivative complaint against members of the Board of
12 Directors of both companies for their actions relating to a natural gas leak at the Aliso
13 Canyon natural gas storage facility. (ECF No. 1). The complaint alleges the following
14 three causes of action: (1) Breach of Fiduciary Duty by Sempra Individual Defendants
15 and the SoCalGas Individual Defendants1; (2) Breach of the Duty of Honest Services
16 against Reed, Householder, Davis, Bird, Director and Arriola, Cho, D. Schneider, M.
17 Schneider, Furgerson, Minter, Lane and Wyrsch; (3) Aiding and Abetting Breaches of
18 Fiduciary Duties against all Individual Defendants. Id.
19

On August 1, 2016, the Nominal Defendants Sempra and SoCalGas filed a

20 motion to dismiss with prejudice on the grounds that Plaintiff failed to adequately plead
21 facts to demonstrate demand futility pursuant to Federal Rule of Civil Procedure 23.1.
22 (ECF No. 34). Nominal Defendants also filed a request for judicial notice.2 (ECF No.
23 34-2). On September 9, 2016, Plaintiff filed a response in opposition to t. (ECF No.
24 40). On September 23, 3016, Nominal Defendants filed a reply. (ECF No. 43).
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Plaintiff defines “Individual Defendants” at multiple points in the complaint.
(ECF No. 1 at ¶¶ 1, 52, 168).
2

The Court denies Nominal Defendants’ request for judicial notice as
unnecessary to the resolution of this matter. See, e.g., Asvesta v. Petroutsas, 580 F.3d
28 1000, 1010 n.12 (9th Cir. 2009) (denying request for judicial notice where judicial
notice would be “unnecessary”).
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1

On August 1, 2016, Defendant Directors filed a motion to dismiss pursuant to

2 Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim against Defendant
3 Directors. (ECF No. 35). On September 9, 2016, Plaintiff filed a response in
4 opposition. (ECF No. 41). On September 23, 2016, Defendant Directors filed a reply.
5 (ECF No. 45).
6

On August 1, 2016, Defendant Officers filed a motion to dismiss pursuant to

7 Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim against Defendant
8 Officers.3 (ECF No. 37). Defendant Officers also filed a request for judicial notice.
9 (ECF No. 37-2). On September 9, 2016, Plaintiff filed a response in opposition. (ECF
10 No. 42). On September 23, 2016, Defendant Officers filed a reply. (ECF No. 46).
11

On February 10, 2017, the Court heard oral arguments on the three pending

12 motions to dismiss. (ECF No. 51).
13 II. Allegations of the Complaint
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Plaintiff brings this verified shareholder’s derivative suit “on behalf of nominal

15 defendants [Sempra] and [SoCalGas] against certain officers and directors of Sempra
16 and SoCalGas (collectively, the ‘Company’) for breaches of fiduciary duties and
17 violations of law from April 20, 2010 to the present.” (ECF No. 1 at ¶ 1). “SoCalGas
18 is a wholly owned subsidiary of Sempra and provides natural gas distribution and
19 storage services. Sempra is an energy-services holding company whose operating units
20 invest in, develop, and operate energy infrastructure, and provide gas and electricity to
21 their customers in North and South America.” Id. at ¶ 7. “Plaintiff Arthur Fischman
22 . . . has continuously been a stockholder of Sempra Energy since the Company’s
23 inception in 1998, and is a current Sempra stockholder.” Id. at ¶ 24.
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“This shareholder derivative action involves breaches of fiduciary duties by

25 Defendants in connection with knowingly causing the Company to underspend on
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On October 7, 2016, the Officer Defendants filed a Notice of Errata stating that
the Officer Defendants’ motion to dismiss mistakenly included Defendant Justin C. Bird
28 among those Defendants who are both SoCalGas Officers and Directors. Officer
Defendants state that Bird is not a SoCalGas Director. (ECF No.38 at 2).
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1 safety measures and remediation efforts at the Company’s Aliso Canyon underground
2 storage well (the “Well”), leading to a massive natural gas leak which existed for years
3 at the well but was first discovered in October 2015.” Id. at ¶ 1. By the time the leak
4 was capped on February 18, 2016, it had become “the largest methane leak in U.S.
5 history.” Id. “[T]he Company admitted in its most recent Annual Report filed with the
6 SEC on Form 10-K on February 26, 2016” that numerous governmental agencies are
7 investigating this incident, eighty-three lawsuits have been filed against SoCalGas, and
8 the Los Angeles District Attorney’s Office filed a misdemeanor criminal complaint
9 against SoCalGas. Id. at ¶ 3. “The wrongdoing associated with the leak has already
10 cost the Company more than $50 million in remediation costs. Sempra and SoCalGas
11 have also experienced significant damages to their reputation, goodwill, and standing
12 in the business community.” Id. at ¶ 4. “[T]hese actions have exposed the Company
13 to billions of dollars in potential liability for violations of state and federal law.” Id.
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“Many of the lawsuits [filed against SoCalGas] name as defendants Does . . .

15 who have been identified in part as those responsible for the oversight of Aliso
16 Canyon.” Id. at ¶ 5. “[T]he naming of these Doe defendants is meant to preserve
17 claims against some of the Individual Defendants named herein, who were responsible
18 to ensure that Sempra’s SoCalGas was operating safely.” Id. “[T]he Company is also
19 being sued by . . . the California Attorney General . . . for creating and failing to abate
20 a nuisance and violation of . . . California laws.” Id. at ¶ 12. “SoCalGas’s current
21 estimate of costs to be paid to address the leak and mitigate environmental and
22 community impacts is between $250 and $300 million” and does not include the costs
23 that will be incurred to defend against lawsuits. Id. at ¶¶ 127-128.
24

Among the named defendants are twelve current members of the Sempra Board

25 of Directors, Debra L. Reed4, William C. Rusnack, William D. Jones, William G.
26 Ouchi, James G. Brocksmith, Jr., William P. Rutledge, Lynn Schenk, Alan L.
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Debra L. Reed is Sempra’s Chairman of the Board and Chief Executive Officer.
(ECF No.1 at ¶ 27).
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1 Boeckmann, Jack T. Taylor, James. C. Yardley, Kathleen L. Brown, and Pablo A.
2 Ferrero. Id. at ¶¶ 27-41. All of the Sempra Directors joined the Sempra Board in 1998
3 or later. Id. With respect to each of these Sempra Directors, Plaintiff alleges,
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Defendant . . . either knew, was reckless, or was grossly negligent in not
knowing that the Well was unsafe and Sempra lacked an appropriate
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contingency plan in the event of a leak at the Well. Defendant . . . further
caused or allowed Sempra to fail to timely provide adequate temporary
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housing to the thousands of affected residents, despite specific orders from
the Health Department instructing Sempra to do so
7 Id. at ¶¶ 27-42. “By reason of their positions as officers and directors of Sempra and
8 SoCalGas, each of the Individual Defendants owed and owe[s] the Company and its
9 stockholders fiduciary obligations of trust, loyalty, good faith, and due care and were
10 and are required to use their utmost ability to control and manage Sempra and SoCalGas
11 in a fair, just, honest, and equitable manner.” Id. at ¶ 54.
12

The Sempra Board is directly responsible for the misconduct alleged in the

13 complaint and has “ultimate authority for all its operations.” Id. at ¶¶ 65-66. “[T]he
14 Board had direct responsibility for risk oversight.” Id. at ¶ 68. In its last two annual
15 Proxy Statements, the Company stated that “[t]he board has developed an integrated
16 risk management framework to assess prioritize, manage and monitor risks across the
17 company’s operations” and that “the board has diversified its risk oversight
18 responsibilities across its membership, housing categories of risk oversight within board
19 committees by topic.” Id. at ¶ 68. The Proxy Statement stated,
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Id.

The board reviews and monitors strategic, financial and operating plans
that are intended to provide sustainable long-term growth with what it
deems to be an acceptable level of risk. . . . The board fulfills its risk
oversight function through receipt of reports provided both directly to the
board and to appropriate board committees. Based on these reports, the
board or appropriate committees establish or amend existing risk oversight
and control mechanisms. In addition, the company has a robust internal
audit function that reports directly to the Audit Committee.
Sempra Directors Brocksmith, Rutledge, Schenk, Taylor, Yardley, Brown and

26 Ferrero “owed specific duties to Sempra to assist the Board in overseeing the
27 Company’s programs and performance related to environmental, health, safety, and
28 technology matters” as members of the Environmental, Health, Safety, and Technology
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1 Committee of the Sempra Board. Id. at ¶ 57. Sempra Directors Jones, Brocksmith,
2 Schenk, Taylor, Yardley, and Ferrero “owed additional specific duties to Sempra to
3 ensure its compliance with legal and regulatory requirements” as members of the Audit
4 Committee of the Sempra Board. Id. at ¶ 61. The Sempra Directors, including the
5 Compensation Committee of the Sempra Board consisting of Defendants Boeckmann,
6 Ouchi, Rusnack, Rutledge, and Schenk, “awarded huge bonuses to the Company’s
7 executives, notwithstanding the disastrous Aliso Canyon well leak and the huge
8 financial costs to the Company resulting from the leak.” Id. at ¶ 130.
9

Aliso Canyon, one of the Company’s four underground natural gas storage

10 facilities, “is actually a collection of approximately 116 underground wells. . .” Id. at
11 ¶¶ 76, 78. “The leaking well is referred to as Standard Sesnon-25 or ‘SS-25’. . .” Id.
12 “[T]he Well has been slowly leaking for over thirty-six years.” Id. at ¶ 13. “[F]ive
13 years ago SoCalGas requested and obtained regulatory permission to increase rates to
14 replace the many leaking valves at the Aliso Canyon storage field.” Id. “[I]nitial
15 reports about the Well failure suggested that the safety valve failed” but “subsequent
16 discovery . . . revealed that there was no safety valve at all.” Id. “SoCalGas
17 purportedly told the California Division of Oil, Gas, and Geothermal Resources
18 (‘DOGGR’) that it ‘replaced’ the safety valve in 1979. In December 2015, however,
19 SoCalGas admitted that Sempra actually removed the valve in 1979 because it was old
20 at the time, leaking, and it was difficult to find parts for and then failed to repair or
21 replace it.” Id.
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“On December 15, 2015, Roger Schewecke . . ., a SoCalGas executive who was

23 helping to coordinate a response to the leak, was asked by reporters about the safety
24 valve.” Id. at ¶ 85. “Schwecke admitted that the safety valve was not damaged; it was
25 removed in 1979.” Id. “This admission came nearly five years after SoCalGas
26 requested and obtained regulatory permission to increase rates to replace the many
27 leaking valves at the Aliso Canyon storage field. Despite the ratepayer increase and
28 annual profits of nearly $100 million, SoCalGas never installed a new safety valve. The
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1 Director Defendants were aware of this decision and approved the decision not to
2 replace the safety valve.” Id.
3

“Individual Defendants were aware of increasing well integrity problems at Aliso

4 Canyon and had proposed a [still pending] Storage Integrity Management Program
5 (SIMP) for implementation as of October 2015.” Id. at ¶ 86. “[T]he leaking well SS-25
6 was not one of those designated for the program.” Id. “The decision not to replace the
7 safety valve at Aliso Canyon and not to include SS-25 in the proposed SIMP, was a
8 conscious decision made by the Director Defendants to put profits over safety.” Id. at
9 ¶ 87.
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“Individual Defendants’ knowledge of the needed repairs to the Aliso Canyon

11 Well is demonstrated by the presentation that SoCalGas made to [the California Public
12 Utilities Commission (CPUC)] in November 2014 regarding the proposed SIMP and
13 recommended Operations and Maintenance expenses and capital improvements to
14 SoCalGas’ underground natural gas storage wells, including those at Aliso Canyon.”
15 Id. at ¶ 88. “In remarks prepared by Phillip E. Baker, Director of Gas and Distribution
16 at SoCalGas, the Company admitted the substantial capital improvements needed at the
17 Aliso Canyon underground wells.” Id. “[A]s part of its presentation in November 2014
18 regarding necessary improvements at Aliso Canyon, Sempra candidly admitted that it
19 had not spend the same resources on well safety as it had on gas transmission
20 pipelines.” Id. at ¶ 89. “In his remarks to the CPUC, Phillip Baker . . . stat[ed] ‘we
21 believe it is critical that we adopt a more proactive and in-depth approach. Historically,
22 safety and risk considerations for wells and their associated valves and piping
23 components have not been addressed in past rate cases to the same extent that
24 distribution and transmission facilities have been under the Distribution and
25 Transmission integrity management programs.’” Id. at ¶ 91. Baker noted the age,
26 length, and location of the wells and stated, “Without a robust program to inspect
27 underground storage wells to identify potential safety and/or integrity issues, problems
28 may remain undetected within the high pressure above-ground wellheads, pipe laterals
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1 . . . and below-ground facilities . . . among the 229 storage field wells.” Id. at ¶ 93.
2 “Baker told that CPUC in his written report and in his comments that major problems
3 at SoCalGas’ wells had developed, and were in fact a trend, stating: “In fact, a negative
4 well integrity trend seems to have developed since 2008.” Id. at ¶ 94. “Baker
5 concluded by noting . . . ‘Without the SIMP, SoCalGas will continue to operate in a
6 reactive mode (with the potential for even higher costs to ratepayers) to address sudden
7 failures of old equipment. In addition, SoCalGas and customers could experience major
8 failures and service interruptions from potential hazards that currently remain
9 undetected.’” Id. at ¶ 96. “Baker’s November 2014 presentation was also based in part
10 on material from [Defendant Schneider] . . . and the proposals and ultimate decisions
11 were reviewed and approved by the Board of Directors of SoCalGas and Sempra.” Id.
12 at ¶ 97. “SoCalGas and Sempra were fully aware of and had approved at all relevant
13 times a bifurcated approach to natural gas safety, pursuant to which well safety had
14 been relegated to an inferior stepchild status.” Id. at ¶ 92.
15

“When the Company discovered the massive gas leak at Sempra’s Aliso Canyon

16 natural gas storage reservoir on October 23, 2015, it did not report the leak immediately
17 as required by law. Instead Sempra and SoCalGas waited days to notify state and
18 federal agencies.” Id. at ¶ 8. “Moreover, the Individual Defendants names as
19 defendants herein consciously failed to cause the Company to take prompt and
20 sufficient corrective actions to limit the damages caused to individuals, homeowners,
21 and the Company itself from the leak. In fact, the Individual Defendants delayed more
22 than a month in implementing a contingency plan for plugging the well. As a result, the
23 well was not plugged until February 2016, and substantial damages were caused by the
24 Company’s unacceptably slow response to the leak.” Id. at ¶ 9.
25

Residents of a nearby neighborhood reported a gas leak on October 23, 2015 and

26 “SoCalGas ‘went from home to home to home, giving everybody the A-OK and [...]
27 didn’t admit to having a gas leak until [...] probably around the 28th of October.’” Id.
28 at ¶ 82. “[D]espite the fact that Sempra internally confirmed the leak on October 23,
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1 2015, the Director Defendants caused Sempra to delay by at least five days notifying
2 the authorities of the leak, in direct contravention of the law[.]” Id. at ¶ 83. “In light
3 of the health risks to local residents, on November 19, 2015, the Health Department
4 ordered Sempra to expedite leak abatement and to provide free, temporary relocation
5 to any residents affected by the gas leak. Weeks later, and more than one month after
6 SoCalGas crew states they discovered the leak . . . Sempra finally began the slow
7 process of constructing the relief well.” Id. at ¶ 84. “Commensurate with the Health
8 Department’s November 19, 2015 order, thousands of local residents have requested
9 that Sempra provide temporary relocation due to the Well leak.” Id. at ¶ 102. Sempra
10 has “failed to timely and adequately provide the housing.” Id. Sempra and SoCalGas
11 disclosed that approximately 2,5000 households had been temporarily relocated as of
12 January 2016, but at least 1,460 households’ requests for temporary relocation had not
13 yet been fulfilled. Id. at ¶ 103.
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“The Individual Defendants . . . violated and breached their fiduciary duties of

15 candor, good fath, and loyalty.” Id. at ¶ 153. “[T]he Individual Defendants . . .violated
16 their duty of good faith by creating a culture of lawlessness within Sempra and
17 SoCalGas respectively, and/or consciously failing to prevent the Company from
18 engaging in the unlawful acts complained of herein.” Id. at ¶ 153. Plaintiff alleges,
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The Director Defendants, as directors of Sempra, owed Sempra the highest
duty of loyalty. The Director Defendants either knew or were reckless in
not knowing, (i) the Well was unsafe; and (ii) Sempra lacked an
appropriate contingency plan in the event of a leak at the Well. These
defendants further caused or allowed Sempra to fail to timely provide
adequate temporary housing to the thousands of affected residents, despite
specific orders from the Health Department instructing Sempra to do so.
These actions exposed Sempra to billions of dollars in damages.
Accordingly, the Director Defendants breached their duty of loyalty to
Sempra.
Id. at ¶ 156.
“Plaintiff has not made any demand on the present [Sempra] Board to institute

26 this action because such a demand would be a futile, wasteful, and useless act.” Id. at
27 ¶ 139. “Demand is excused because the Director Defendants face a substantial
28 likelihood of liability for their misconduct.” Id. at ¶ 140. “[D]efendants Reed,
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1 Rusnack, Jones, Ouchi, Brocksmith, Rutledge, Schenk. Boeckmann, Taylor, Yardley,
2 Brown, and Ferrero breached their fiduciary duties of loyalty by failing to establish and
3 promptly implement appropriate safety plans at the Well.” Id. “Based on their own
4 statements in the Company’s SEC filings, it is clear that these defendants were well
5 aware of the tremendous environmental, public health, and financial risks posed by the
6 Well, yet failed to take meaningful action to mitigate those risks and prevent harm to
7 people and the Company.” Id. “Instead, these defendants created conditions which
8 allowed the Well to fail, and then exacerbated the effects of the disaster by causing or
9 allowing Sempra to fail to promptly notify authorities, fail to immediately begin
10 construction of a relief well, and fail to timely provide adequate temporary housing to
11 the thousands of affected residents, despite specific orders from the Health Department
12 instructing Sempra to do so.” Id.
13

“Defendants Reed, Rusnack, Jones, Ouchi, Brocksmith, Rutledge, Schenk.

14 Boeckmann, Taylor, Yardley, Brown, and Ferrero knew that the safety valve at SS-25
15 had been removed in the past and approved SoCalGas’s repeated decision to not replace
16 the valve.” Id at ¶ 141. “The Director Defendants knew the valve was missing and yet
17 approved operating plans for Aliso Canyon which did not call for replacement of the
18 valve.” Id. “Such conduct constituted bad faith and a breach of the directors’ duty of
19 loyalty.” Id.
20

The Directors were aware of increasing well integrity problems at Aliso Canyon

21 and had proposed a SIMP in November 2015 but had not designated Well SS-25 for
22 inclusion in the program. Id. at ¶ 142. Director Defendants had “actual knowledge as
23 demonstrated by Phillip Baker’s presentations that SoCalGas employed a wholly
24 deficient and inadequate approach to natural gas well safety.” Id. at ¶ 143. “Director
25 Defendants were thus fully aware of an had approved at all relevant times a bifurcated
26 approach to natural gas safety, pursuant to which well safety had been intentionally
27 relegated to an inferior stepchild status . . .” Id. at ¶ 144. “The Director Defendants’
28 reckless approach to natural gas well safety, and their intentional decision to not adopt
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1 and implement a modern, effective, and comprehensive risk assessment program for the
2 Company’s gas wells, despite knowledge of increasing integrity problems at the wells
3 constitutes bad faith and disloyal conduct - conduct which cannot be indemnified and
4 thus which subjects the Director Defendants to a substantial likelihood of liability.” Id.
5 at ¶ 145.
6

The Director Defendants on the Environmental, Health, Safety and Technology

7 Committee and Audit Committee face liability for failing to perform their specific
8 duties associated with membership on the respective committees. Id. at ¶¶ 147-48.
9 III. Contentions of the Parties
10

Nominal Defendants Sempra and SoCalGas contend that Plaintiff fails to satisfy

11 the heightened pleading requirements of Federal Rule of Civil Procedure 23.1.5 (ECF
12 No. 34-1). Nominal Defendants contend that Plaintiff failed to demand action from the
13 Board of Directors or state with particularity why demand would be futile. Id. at 14-17.
14

Nominal Defendants contend that Plaintiff alleges a failed oversight claim rather than

15 challenging a specific Board action. Id. Nominal Defendants contend that Plaintiff
16 fails to plead particularized facts to establish a reasonable doubt that a majority of
17 directors were not independent or disinterested at the time the complaint was filed. Id.
18 at 18. Nominal Defendants contend that Plaintiff fails to plead particularized facts
19 showing that any “director’s conduct was so egregious that he faces a ‘substantial
20 likelihood’ of personal monetary liability.” Id. at 19. Nominal Defendants contend that
21 Plaintiff does not allege facts to show that the Outside Directors failed to implement any
22 reporting or information systems or failed to oversee Sempra’s operations and does not
23 allege facts to show that a majority of Directors knew and ignored wrongdoing. Id. at
24 20-23. Nominal Defendants contend that Plaintiff’s claim also fail to raise a reasonable
25 doubt that the Board’s actions were the product of a valid exercise of business
26 judgment. Id. at 28. Nominal Defendants contend that exculpatory provisions limiting
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The Officer Defendants and Director Defendants join in the Nominal
28 Defendants’ motion to dismiss. (ECF No. 37 at 2; ECF No. 35 at 2).
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1 the liability of directors in the Articles of Incorporation shield the Outside Directors
2 from personal liability. Id. at 26-27.
3

Plaintiff contends that demand is properly excused and that he challenges a Board

4 decision. (ECF No. 40 at 22). Plaintiff contends that he brings a claim based on bad
5 faith and disloyal conduct rather than a failed oversight claim. Id. at 28. Plaintiff
6 contends that the complaint challenges two Board actions: “(1) approving annual
7 operating plans for the gas storage wells, including those at Aliso Canyon, that
8 significantly underfunded gas storage well safety despite actual knowledge of an
9 increasing trend of well integrity failures; and (2) taking actions that repeatedly
10 relegated strong well safety to an inferior ‘stepchild status.’” Id. at 17-18. Plaintiff
11 contends that “the Director Defendants had knowledge of the lack of a safety valve in
12 well SS-25, as well as the antiquated dilapidated conditions at the Aliso Canyon facility,
13 yet consciously decided not to replace the valve or take any steps to prevent or remedy
14 the situation.” Id. at 18. Plaintiff contends that the Directors had actual knowledge of
15 and, under the core-product doctrine, are presumed to have knowledge of well-safety
16 issues. Id. at 24, 27. Plaintiff contends that the Directors are not disinterested because
17 they face a substantial likelihood of personal liability for breaching their fiduciary duty
18 of loyalty and good faith by “knowingly approv[ing] inadequate operating plans and
19 fail[ing] to remedy the safety deficiencies.” Id. at 23. Plaintiff contends that the
20 Director Defendants’ adoption and approval of plans that “repeatedly fail[ed] to comply
21 with regulations governing well safety” constitutes illegal conduct that cannot be
22 considered a valid exercise of business judgment. Id. at 19. Plaintiff contends that the
23 exculpatory provision in Sempra’s Articles of Incorporation does not absolve the
24 Director Defendants of personal liability under California law. Id. at 30. Plaintiff
25 requests leave to amend if the Court dismisses the complaint. Id. at 32.
26 IV. Federal Rule of Civil Procedure 23.1
27

“The normal rule is that a corporation is run by its management and the

28 corporation itself has the right to make claims.” Quinn v. Anvil Corp., 620 F.3d 1005,
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1 1012 (9th Cir. 2010). “A derivative action is an extraordinary process where courts
2 permit ‘a shareholder to step into the corporation’s shoes and to seek in its right the
3 restitution he could not demand in his own.’” Id. (quoting Lewis v. Chiles, 719 F.2d
4 1044, 1047 (9th Cir. 1983)). “Strict compliance with Rule 23.1 and the applicable
5 substantive law is necessary before a derivative suit can wrest control of an issue from
6 the board of directors.” Potter v. Hughes, 546 F.3d 1051, 1058 (9th Cir. 2008).
7

Federal Rule of Civil Procedure 23.1 establishes the pleading requirements

8 “when one or more shareholders or members of a corporation or an unincorporated
9 association bring a derivative action to enforce a right that the corporation or
10 association may properly assert but has failed to enforce.” Fed. R. Civ. P. 23.1(a). Rule
11 23.1 states that a complaint in a shareholder’s derivative action must “state with
12 particularity: (A) any effort by the plaintiff to obtain the desired action from the
13 directors or comparable authority and, if necessary, from the shareholders or members;
14 and (B) the reasons for not obtaining the action or not making the effort.” Fed. R. Civ.
15 P. 23.1(b)(3). “A shareholder seeking to vindicate the interests of a corporation through
16 a derivative suit must first demand action from the corporation’s directors or plead with
17 particularity the reasons why such demand would have been futile.” In re Silicon
18 Valley Graphics Inc. Securities Litigation, 183 F.3d 970, 989 (9th Cir. 1999). “Futility
19 is gauged by the circumstances existing at the commencement of a derivative suit and
20 concerns the board of directors sitting at the time the complaint is filed.” Rosenbloom
21 v. Pyott, 765 F.3d 1137, 1148 (9th Cir. 2014).
22

To establish the circumstances under which demand would be futile, courts turn

23 to the law of the state of incorporation. Id. SoCalGas and Sempra were incorporated
24 in California and the parties agree that the California law is applicable in this case.
25 (ECF No. 40 at 17; ECF No 34-1 at 16; ECF No. 1 at 12). While the Court applies
26 California law, “California law is identical to Delaware law on the demand
27 requirement.” Potter, 546 F.3d at 1057. California courts find certain Delaware cases
28 to be instructive on the issue of demand futility in shareholder derivative suits. See
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1 Bader v. Anderson, 101 Cal. Rptr. 3d 821, 833 n.5 (Cal. Ct. App. 2009); Oakland
2 Raiders v. Nat'l Football League, 113 Cal. Rptr. 2d 255, 266 n.5 (Cal. Ct. App. 2001)
3 (“The parties agree that we may properly rely on corporate law developed in the State
4 of Delaware given that it is identical to California corporate law for all practical
5 purposes”).
6

Courts rely on two relevant tests to evaluate whether demand would be futile.

7 See Bader, 101 Cal. Rptr. 3d at 833-34. The Aronson test, enunciated in Aronson v.
8 Lewis, 473 A.2d 805 (Del. 1984), is applicable when a plaintiff challenges a decision
9 or action by the board of directors. See Bader, 101 Cal. Rptr. 3d at 834. (“[T]he
10 Aronson two-prong standard is well-suited to actions challenging conscious decisions
11 by boards to act or refrain from acting . . .”). Under Aronson, demand is excused when
12 “under the particularized facts alleged, a reasonable doubt is created that: (1) the
13 directors are disinterested and independent [or] (2) the challenged transaction was
14 otherwise the product of a valid exercise of business judgment.” Aronson, 472 A.2d at
15 814.
16

Courts apply the Rales test “where the board that would be considering the

17 demand did not make a business decision which is being challenged in the derivative
18 suit.” Rales v. Blasband, 634 A.2d 927, 933-34 (Del. 1993). “The absence of board
19 action . . . makes it impossible to perform the essential inquiry contemplated by
20 Aronson – whether the directors have acted in conformity with the business judgment
21 rule in approving the challenged transaction.” Id. at 933. Under Rales, the second
22 prong of Aronson is inapplicable and the plaintiff must plead “particularized factual
23 allegations . . . creat[ing] a reasonable doubt that, as of the time the complaint is filed,
24 the board of directors could have properly exercised its independent and disinterested
25 business judgment in responding to a demand.” Id. at 935.
26

“At the pleading stage, Board independence and compliance with the business

27 judgment rule are presumed.” In re Silicon, 183 F.3d at 990. “The derivative plaintiff
28 seeking demand excusal based on a director’s lack of independence must allege specific
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1 facts that cast doubt as to whether the director’s decision is based on the corporate
2 merits of the subject before the board rather than extraneous considerations or
3 influences.” Bader, 101 Cal. Rptr. 3d at 834 (quotations omitted). A director is
4 “interested” where “the facts alleged demonstrate a potential personal benefit or
5 detriment to the director as a result of the decision.” Id. “[T]he mere threat of personal
6 liability for approving a questioned transaction, standing alone is insufficient to
7 challenge either the independence or disinterestedness of directors.” In re Silicon, 183
8 F.3d at 990 (quoting Aronson, 473 A.2d at 814). “Demand will be excused only if the
9 plaintiff’s allegations show the defendant’s actions were so egregious that a substantial
10 likelihood of director liability exists.” Id. (quotations omitted).
11

To excuse demand under the second prong of Aronson, Plaintiffs must plead

12 “particular facts sufficient to raise (1) a reason to doubt that the action was taken
13 honestly and in good faith or (2) a reason to doubt that the board was adequately
14 informed in making the decision.” In re J.P. Morgan Chase & Co. S'holder Litig., 906
15 A.2d 808, 824 (Del. Ch. 2005).
16 V. Discussion
17

A. Applicable Test

18

Plaintiff must state with particularity the reasons why demand upon the Sempra

19 Board would have been futile pursuant to Rule 23.1. To determine whether Plaintiff has
20 sufficiently alleged demand futility, the Court first considers whether to apply the
21 analysis of Rales or Aronson in this case. Nominal Defendants contend that the Court
22 should apply Rales because Plaintiff does not challenge a specific Board action, but
23 rather challenges Board inaction. Nominal Defendants contend that Plaintiff alleges a
24 failed oversight theory which is properly considered under Rales. Plaintiff contends
25 that Aronson is applicable because the Board had knowledge of illegality or substantial
26 wrongdoing and made a conscious decision not to act.
27

Plaintiff alleges that demand is futile because the Sempra Directors face a

28 substantial likelihood of liability for knowingly engaging in the following acts of bad
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1 faith and breaches of the duty of loyalty: (1) failing to establish and promptly
2 implement appropriate safety plans at the Well despite “knowledge of the tremendous
3 environmental, public health, and financial risks posed by the Well”; (2) approving
4 operating plans for Aliso Canyon which did not call for replacement of the safety valve
5 despite knowledge that the valve was missing; (3) following a “reckless approach to
6 natural gas well safety and . . . intentional[ly] deci[ding] to not adopt and implement a
7 modern, effective and comprehensive risk assessment program for the Company’s
8 natural gas wells, despite knowledge of increasing integrity problems at the wells”; (4)
9 failing “to immediately notify authorities of the leak as required by law” and “timely
10 provide adequate temporary housing for thousands of affected residents.” (ECF No. 1
11 at ¶¶ 140-149). Initially, the Court must determine whether these allegations challenge
12 a Board decision or challenge Board inaction.6
13

Under a conscious inaction theory, a shareholder-plaintiff alleges particularized

14 factual allegations leading to a plausible “inference that the directors had remained
15 consciously inactive in the face of wrongdoing at their companies.” Rosenbloom, 765
16 F.3d 1137 at 1156. While Rales is the applicable test for a derivative suit that does not
17 challenge a decision of the board, courts may apply Aronson where a plaintiff
18 challenges a board’s failure to act and the allegations are sufficient to infer that the
19 board knew of the problems and decided no action was required. See Bader, 101 Cal.
20 Rptr. 3d at 834. In this case, Plaintiff alleges that the Sempra Board failed to take
21 certain actions, such as implementing different safety measures at Well SS-25, replacing
22 the safety valve, reporting the leak earlier, and responding to the leak in a different way.
23

Aronson is inapplicable to this case unless particularized allegations support a

24 reasonable inference that the Board made a conscious decision not to take these actions.
25

Plaintiff first contends that the Sempra Board was aware that the safety valve had

26 been removed in 1979 and repeatedly made the decision to not replace it. Plaintiff
27
6

Plaintiff relies on these allegations in support of demand futility. (ECF No. 1
28 at ¶¶ 140-149).
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1 alleges that, “On December 15, 2015, Rodger Schwecke (“Schwecke”), a SoCalGas
2 executive who was helping to coordinate the response to the leak, was asked by
3 reporters about the safety valve . . . [and] admitted that the safety valve was not
4 damaged; it was actually removed in 1979.” (ECF No. 1 at ¶ 85). The allegation that
5 a SoCalGas executive stated that the safety valve had been removed in 1979 in the
6 months after the leak does not support a reasonable inference that the Sempra Board had
7 knowledge that the safety valve had been removed and repeatedly decided not to replace
8 it, particularly in light of the fact that the Complaint alleges that none of the current
9 Sempra Directors served on the Board prior to 1998. Id. at ¶¶ 27-41. Plaintiff’s
10 allegation that the Sempra Directors knew that the safety valve at Well SS-25 had been
11 removed and approved SoCalGas’s repeated decision not the replace the valve is
12 unsupported by particularized factual allegations as required under Rule 23.1.
13

Plaintiff alleges that the presentation to the CPUC by Phillip Baker establishes

14 that the Sempra Board knew of substantial risks regarding the Aliso Canyon wells. Id.
15 at ¶ 88.

Plaintiff alleges that the Company “admitted the substantial capital

16 improvements needed at Aliso Canyon underground wells” and “admitted that it had
17 not spend the same resources on well safety as it had on gas transmission pipelines” in
18 the Baker presentation. Id. at ¶¶ 88-89. Baker allegedly stated that, “without a robust
19 program to inspect underground storage wells to identify potential safety and/or
20 integrity issues, problems may remain undetected” and that “a negative well integrity
21 trend seems to have developed since 2008.” Id. at ¶ 94. However, the alleged Baker
22 presentation to the CPUC was not specific to Well SS-25, one of approximately 116
23 wells at Aliso Canyon, and fails to show Board knowledge of substantial safety risks
24 associated with Well SS-25. The Court concludes that the allegations regarding the
25 Baker presentation do not permit a reasonable inference that the Sempra Board knew
26 of inadequate safety measures at Well SS-25 and deliberately pursued plans that de27 emphasized well safety. Rather, the allegations related to the Baker presentation permit
28 a reasonable inference that Sempra Board was pursuing its oversight duties by seeking
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1 general well safety improvements through the proposed SIMP. Without particularized
2 facts demonstrating that the Board had knowledge of safety concerns specific to Well
3 SS-25, the Court cannot infer that alleged failure to designate Well SS-25 for the
4 pending SIMP or adopt other well safety measures in relation to Well SS-25 were
5 conscious decisions not to act.
6

Plaintiff further alleges the Board deliberately delayed reporting the leak and

7 knowingly responded inadequately to the leak.

Plaintiff alleges that SoCalGas

8 discovered the leak on October 23, 2015 “during one of its twice-daily well
9 observations” and reported the leak to the general public on October 26, 2015. Id. at
10 ¶¶ 1 n.1, 83. However, Plaintiff’s conclusory allegation that “the Director Defendants
11 caused Sempra to delay by at least five days notifying the authorities of the leak” is
12 unsupported by particularized facts supporting a reasonable inference that the Sempra
13 directors had knowledge of the leak and deliberately delayed reporting during this time
14 period. Id. at ¶ 83. Similarly, Plaintiff alleges that Sempra’s response to the leak has
15 been “woefully inadequate[] and painfully slow[].” Id. at ¶ 17. Plaintiff alleges that the
16 Sempra Directors “caused or allowed Sempra to fail to timely provide adequate housing
17 to the thousands of affected residents, despite specific orders from the Health
18 Department instructing Sempra to do so” and alleges that the inadequate response
19 contributes to the substantial likelihood of liability. Id. at ¶¶ 27-51. However, Plaintiff
20 fails to allege particularized facts to support the allegation that any Sempra Director
21 “caused or allowed” this alleged inadequate response. The allegations of the complaint
22 are insufficient to establish that the Board consciously failed to respond adequately to
23 the leak or deliberately violated an order from the Health Department.
24

Because Plaintiff fails to allege particularized facts leading to a reasonable

25 inference that the Sempra Board had knowledge of wrongdoing and inadequate safety
26 measures related to Well SS-25, the Court cannot reasonably infer that the Board made
27
28
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1 a conscious decision not to take a certain action.7 Accordingly, the Court determines
2 that the analysis in Rales properly applies under these alleged facts because the
3 complaint does not challenge a decision by the Sempra Board.
4

B. Demand Futility Under Rales

5

To adequately allege demand futility under Rales, a complaint must contain

6 “particularized factual allegations . . . creat[ing] a reasonable doubt that, as of the time
7 the complaint is filed, the board of directors could have properly exercised its
8 independent and disinterested business judgment in responding to a demand.” Rales,
9 634 A.2d at 935.

Plaintiff must allege particularized facts sufficient to create a

10 reasonable doubt as to six of the twelve directors at the time the complaint was filed.8
11 See Louisiana Mun. Police Employees’ Ret. Sys. v. Wynn, 829 F.3d 1048, 1058 (9th Cir.
12 2016).
13

Plaintiff alleges that the Sempra Directors are not disinterested because they face

14 a substantial likelihood of liability arising from breaches of fiduciary duties. Director
15 disinterest can be challenged on the grounds that a director faces a substantial likelihood
16 of liability; however, “the mere threat of personal liability for approving a questioned
17 transaction, standing alone is insufficient to challenge either the independence or
18 disinterestedness of directors.” In re Silicon, 183 F.3d at 990 (quoting Aronson, 473
19 A.2d at 814). Plaintiff alleges that the Sempra Directors breached their fiduciary duty
20
21
22
23
24
25
26
27

7

Plaintiff contends that “the core-product doctrine forms an additional basis for
inferring [Board] knowledge and conscious misconduct” because “storage and
distribution of gas are SoCalGas’ core – in fact sole – product.” (ECF No. 40 at 27).
“In demand futility cases, courts have repeatedly emphasized that it is especially
plausible to infer board interest in and knowledge of developments relating to a product
that is critical to a company's success or is otherwise of special importance to it.”
Rosenbloom, 765 F.3d at 1154. The complaint alleges that there are approximately 116
wells at Aliso Canyon and that Aliso Canyon is one of the Company’s four
underground natural gas facilities. (ECF No. 1 at ¶ 75,78). The Court concludes that
it cannot infer that the Sempra Board had knowledge of safety issues at Well SS-25
based on the core product doctrine.
8

Plaintiff alleges that Sempra Board at the time the complaint was filed consisted
of Defendants Reed, Rusnack, Jones, Ouchi, Brocksmith, Rutledge, Schenk,
28 Boeckmann, Taylor, Yardley, Brown, and Ferrero. (ECF No. 1 at ¶ 139).
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1 in relation to the Well SS-25 because they knew or should have known that Well SS-25
2 was unsafe and that Sempra lacked an appropriate contingency plan in the event of a
3 leak and then failed to take appropriate actions following the leak. (ECF No. 1 at ¶ 156).
4

Plaintiff’s allegations that the Sempra Board failed to take appropriate action are

5 properly construed as a claim that the Board failed to exercise proper oversight of Well
6 SS-25. Plaintiff must establish a substantial likelihood of liability on this failed
7 oversight claim in order to create a reasonable doubt as to director disinterest and satisfy
8 Rales. See Rosenbloom, 765 F.3d 1137, 1150 (9th Cir. 2014) (holding that demand
9 futility for Caremark failed oversight claims is tested under Rales). Directors are liable
10 for failed oversight in two circumstances articulated in In re Caremark Intern., Inc.
11 Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) (“Caremark”). In Caremark, a
12 Delaware court considered a motion to approve a proposed settlement of a consolidated
13 derivative action dealing with a claim that the “directors allowed a situation to develop
14 and continue which exposed the corporation to enormous legal liability and that in
15 doing so they violated a duty to be active monitors of corporate performance.” 698
16 A.2d at 967.
17
18
19
20
21
22

Caremark articulates the necessary conditions predicate for director
oversight liability: (a) the directors utterly failed to implement any
reporting or information system or controls; or (b) having implemented
such a system or controls, consciously failed to monitor or oversee its
operations thus disabling themselves from being informed of risks or
problems requiring their attention. In either case, imposition of liability
requires a showing that the directors knew that they were not discharging
their fiduciary obligations. Where directors fail to act in the face of a
known duty to act, thereby demonstrating conscious disregard for their
responsibilities, they breach their duty of loyalty by failing to discharge
that fiduciary obligation in good faith.

23 Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006). “A
24 ‘stockholder cannot displace the board’s authority [over the corporation’s claims]
25 simply by describing the calamity and alleging that it occurred on the directors’ watch.”
26 South v. Baker, 62 A.3d 1, 14 (Del. Ch. 2012). “Without a connection to the board,
27 corporate trauma will not lead to director liability. Without a substantial threat of
28 director liability, a court has no reason to doubt the board’s ability to address the
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1 corporate trauma and evaluate a related demand.” Id. Stating an oversight claim is
2 “possibly the most difficult theory in corporate law upon which a plaintiff might hope
3 to win a judgment.” Caremark, 698 A.2d at 967.
4

Plaintiff does not contend that the Sempra Directors “utterly failed to implement

5 any reporting or information system or controls.” Stone, 911 A.2d at 379. Plaintiff
6 must therefore allege particularized facts showing a substantial likelihood of liability
7 arising from the Directors’ “fail[ure] to act in the face of a known duty to act” and
8 “conscious disregard” of their fiduciary obligations. Id. at 370. Plaintiff’s complaint
9 contains allegations indicating that the Sempra Board was monitoring and overseeing
10 its obligations pursuant to their fiduciary duties. Plaintiff alleges that in recent Proxy
11 Statements, the Company stated that, “the board has developed an integrated risk
12 management framework to assess prioritize manage and monitor risks across the
13 company’s operations” and that “[t]he board fulfills its risk oversight function through
14 receipt of reports provided both directly to the board and to appropriate board
15 committees. Based on these reports, the board or appropriate committees establish or
16 amend existing risk oversight and control mechanisms.” (ECF No. 1 at ¶ 68). Plaintiff
17 alleges that the proposed SIMP sought to “mitigate safety-related risks relating to the
18 Company’s underground natural gas storage wells.” Id. at ¶ 98. Plaintiff has not
19 alleged particularized facts demonstrating that the Sempra Board “consciously failed
20 to monitor or oversee its operations, thus disabling them from being informed of risks
21 or problems requiring their attention.” Stone, 911 A.2d at 370. Additionally, as
22 discussed previously, Plaintiff has not sufficiently alleged that the Sempra Board had
23 knowledge of and ignored misconduct or safety risks associated to Well SS-25.
24 Plaintiff provides conclusory statements that the Board was aware of misconduct, but
25 does not provide particularized facts sufficient to support an inference the Board was
26 or should have been aware of risks or misconduct related to Well SS-25.
27

Plaintiff has not adequately alleged that the Sempra Board failed to act in the face

28 of a known duty to act and his allegations cannot support an inference of a substantial
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1 likelihood of liability on this Caremark failed oversight claim. Plaintiff has therefore
2 not pled sufficient factual material to create a reasonable doubt as to the Sempra
3 Directors’ disinterest and independence and has not adequately pleaded demand futility
4 under Rales.
5

C. Demand Futility Under Aronson

6

Courts in the Ninth Circuit have recognized some “doctrinal uncertainty” as to

7 the applicable framework for claims that “a board remained consciously inactive when
8 it knew (or should have known) about illegal conduct.” Rosenbloom, 765 F.3d at 1150.
9 In Rosenbloom, the Ninth Circuit Court of Appeals considered a shareholder’s
10 derivative claim in which the plaintiffs “insist[ed] that their conscious inaction claims
11 [were] subject to Aronson analysis” while the corporation maintained “that those claims
12 invoke[d] the theory of oversight liability set forth in [Caremark].” 765 F.3d at 1150.
13 However, the Court of Appeals in Rosenbloom held that the distinction between Rales
14 and Aronson blurs in cases alleging demand futility based on the directors’ substantial
15 likelihood of liability because a substantial likelihood of liability can create a reasonable
16 doubt as to director disinterest as well as protection under the business judgment rule.
17 See id. at 1150-51 (“We need not decide which characterization of Plaintiff’s
18 allegations is correct because, either way, demand is excused if Plaintiffs’ particularized
19 allegations create a reasonable doubt as to whether a majority of the . . . Board faces a
20 substantial likelihood of liability for failing to act in the face of a known duty to act.”).
21
22

Plaintiff contends that his complaint alleges a conscious inaction theory similar

23 to In re Abbott Laboratories Derivative Shareholders Litigation, 325 F.3d 795, 799 (7th
24 Cir. 2003), and Rosenbloom v. Pyott, in which the courts determined that plaintiffs
25 adequately alleged demand futility. In these cases, particularized allegations that the
26 directors received a series of “red flags” of illegal conduct “made plausible an inference
27 that the directors at issue had remained consciously inactive in the face of wrongdoing
28 at their companies.” Rosenbloom, 765 F.3d at 1156. In doing so, the boards violated
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1 their duty of loyalty and faced a substantial likelihood of liability. See id. at 1151.
2 However, this case is distinguishable because Plaintiff’s allegations do not permit a
3 reasonable inference that the Board consciously disregarded red flags of substantial
4 wrongdoing or illegal activity comparable to the cases cited by Nominal Defendants.
5

In Rosenbloom v. Pyott, the Ninth Circuit Court of Appeals determined that a

6 plaintiff had adequately alleged demand futility in a conscious inaction case where the
7 complaint alleged that the board of Allergan, a pharmaceutical manufacturer of Botox,
8 “knew, or due to a series of red flags, should have known about Allergan’s off-label
9 promotion of Botox” in violation of federal law. Rosenbloom, 765 F.3d at 1151.
10 Among the “red flags” of illegal activity, the board received repeated FDA warnings
11 about illegal promotion of Botox. The Court of Appeals determined, “[T]hese letters
12 also constituted a red flag, waved nearly every year for five straight years, that Allergan
13 was breaking federal law in its promotion of Botox.” Id. The Court held that the
14 repeated FDA warnings, along with the significant magnitude and duration of the illegal
15 conduct, the fact that the illegal conduct involved one of the most important drugs at
16 Allergan, data presented to the board about the fluctuations of off-label sales, and
17 particularized allegations that the board closely monitored off-label sales, created a
18 reasonable inference of conscious inaction. Id. at 1151-56; see also In re Abbott, 325
19 F.3d at 809 (“We find that six years of noncompliance, inspections . . . , [FDA]
20 Warning Letters, and notice in the press, all of which them resulted in the largest civil
21 fine ever imposed by the FDA and the destruction and suspension of products which
22 accounted for approximately $250 million in corporate assets, indicate that the directors
23 decision not to act was not made in good faith and was contrary to the best interests of
24 the company.” ).
25

In this case, Plaintiff cannot satisfy Rule 23.1 under a conscious inaction theory

26 because Plaintiff does not allege particularized facts sufficient to support a reasonable
27 inference that the Sempra Directors were aware of wrongdoing related to Well SS-25.
28 In Abbott and Rosenbloom, the plaintiffs alleged that the boards received and ignored
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1 multiple letters from the FDA specifically informing the boards of illegal conduct. In
2 this case, the complaint contains conclusory statements that the Directors “were well
3 aware of the tremendous environmental, public health, and financial risks posed by the
4 Well” but failed to take action to mitigate those risks and in fact “created conditions
5 which allowed the Well to fail.” Id. at ¶ 54. However, Plaintiff fails to allege
6 particularized facts permitting a reasonable inference that the Directors were conscious
7 of, and deliberately chose to ignore, wrongdoing associated with Well SS-25.
8 Plaintiff’s allegations regarding Schwecke’s statements about the safety valve, the
9 Baker presentation, and the delayed reporting of the leak do not permit a reasonable
10 inference that the Sempra Board was aware of any illegal conduct or substantial
11 wrongdoing in relation to Well SS-25. Plaintiff fails to allege demand futility under
12 Aronson and Rales because his allegations fail to establish that the board had the
13 requisite knowledge under either test.
14

Plaintiff’s allegations of demand futility regarding the Sempra Directors are also

15 distinguishable from the conscious inaction cases cited by Plaintiff, because the
16 complaint does not allege particularized facts that support a reasonable inference of
17 illegal conduct or significant wrongdoing. In Abbott and Rosenbloom, the boards were
18 alleged to have received red flags that contained notice of conduct that was specifically
19 illegal. In this case, Plaintiff does not allege facts sufficient to support a reasonable
20 inference that the Sempra Board should have been aware of illegal or any liability21 creating conduct in relation to Well SS-25. Plaintiff alleges that Baker’s presentation
22 to the CPUC sought general improvements to overall well safety, but Plaintiff does not
23 alleged that the Baker presentation disclosed any conduct that was illegal. Similarly,
24 Plaintiff has not alleged facts sufficient to infer that, even if the Sempra Board was
25 aware of it, the removed safety valve would constitute illegal conduct or wrongdoing.
26 The allegations of the complaint do not allow a reasonable inference that the Sempra
27 Directors knew or should have known of illegal activity or wrongdoing and then
28 consciously failed to act. Plaintiff has not alleged sufficient facts to demonstrate that
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1 a majority of the Sempra Board faces a substantial likelihood of liability from breaching
2 their duty of loyalty.
3 VI. Conclusion
4

Plaintiff has not alleged facts sufficient to infer a substantial likelihood of

5 liability and satisfy the demand futility requirement under either Rales or Aronson. See
6 Rosenbloom, 765 F.3d at1150 (“Under either approach, demand is excused if Plaintiffs’
7 particularized allegations create a reasonable doubt as to whether a majority of the
8 board of directors faces a substantial likelihood of personal liability for breaching the
9 duty of loyalty.”). Accordingly, Plaintiff has not established that he is entitled to bring
10 this shareholder’s derivative action on behalf of Sempra and SoCalGas.9
11

IT IS HEREBY ORDERED that the motion to dismiss filed by Sempra and

12 SoCalGas is GRANTED. (ECF No. 34). The complaint is dismissed without prejudice.
13 Plaintiff shall file any motion for leave to file an amended complaint within thirty (30)
14 days of the day this Order is issued.
15

IT IS FURTHER ORDERED that the motions to dismiss filed by the Officer

16 Defendants and Director Defendants are denied as moot. (ECF Nos. 35, 37).
17 DATED: March 29, 2017
18
19

WILLIAM Q. HAYES
United States District Judge

20
21
22
23
24
25
9
Nominal Defendants contend that Plaintiff may not have standing to sue
26 derivatively on behalf of SoCalGas, a double derivative action, because he does not
own any stock in SoCalGas. (ECF No. 16-17 n.4). Plaintiff’s demand futility
27 allegations are specific to the Sempra Board and fail to satisfy Rule 23.1. Plaintiff does
not provide any basis for the Court to conclude that Plaintiff may sue derivatively on
28 behalf of SoCalGas independent of its connection to Sempra.

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