Robert F. Booth Trust v. Anderson et al
Filing
35
MEMORANDUM OPINION re motions to dismiss. Signed by Judge Leonard P. Stark on 9/2/11. Associated Cases: 1:10-cv-00470-LPS, 1:10-cv-00471-LPS(ntl)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE EBAY, INC, DERIVATIVE
LITIGATION
Civ. No. 1O-470-LPS
This Document Relates to:
ALL ACTIONS
MEMORANDUM OPINION
John V. Work, LAW OFFICES OF JOHN V. WORK P.A., Wilmington, DE; Kenneth J.
Vianale, VIANALE & VIANALE LLP, Boca Raton, FL; Ronen Sarraf, Joseph Gentile,
SARRAF GENTILE LLP, New York, NY,
Attorneys for Plaintiff;
William M. Lafferty, Ryan D. Stottmann, Pauletta J. Brown, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, DE,
Attorneys for Individual Defendants and nominal Defendant eBay;
Edward D. Hassi, New York, NY; Thomas P. Brown, San Francisco, CA, O'MELVENY &
MYERS LLP,
Attorneys for nominal Defendant eBay.
September 2, 2011
Wilmington, DE
t~?fK
STARK, U.S. District Judge:
This shareholder securities lawsuit presents issues regarding federal antitrust laws and
demand futility. Pending before the Court is the individual defendants' motion to dismiss the
complaint for failure to state a claim on which relief may be granted. (D.L 11; see also C.A. No.
IO-47I-LPS D.L 8) For the reasons that follow, the Court will grant the motion.
I.
BACKGROUND I
Plaintiff Robert F. Booth Trust ("Plaintiff'), a shareholder of eBay, Inc. ("eBay"
or "the Company") at all relevant times, initiated the instant lawsuit on May 28, 2010. 2 (D.!. 1 at
4) In the complaint, Plaintiff names the individual members of eBay' s board of directors as
defendants. 3 (D.L 1 at 4-11) The complaint is styled as a derivative action on behalf of the
Company and also lists eBay as a nominal defendant. (D.L 1 at 4) The complaint alleges that by
renominating Dawn Lepore, a long-time eBay board member, to serve another term on the
Company's board of directors, in full knowledge that Lepore was serving simultaneously on the
board of directors of the New York Times Company ("NY Times"), eBay's board of directors
IOn a motion to dismiss, the Court must accept all factual allegations contained in the
complaint as true and makes all inferences in the light most favorable to the non-moving party.
See Oshiverv. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994).
20n the same day, a separate lawsuit was filed in this District against the same defendants
by a different plaintiff, Ronald Gross. See C.A. No.1 0-471-LPS. The two cases raised identical
issues, and the parties subsequently agreed to consolidate them. (C.A. No. 07-471-LPS D.L 18)
All references to the docket index in this Memorandum Opinion are to c.A. No. 07-470-LPS,
unless otherwise noted.
3The individual defendants are: Fred D. Anderson, Marc L. Andreessen, Edward W.
Barnholt, Phillipe M. Bourguignon, Scott D. Cook, John J. Donahoe, William C. Ford, Jr., Dawn
G. Lepore, David M. Moffett, Pierre M. Omidyar, Richard T. Schlossberg, and Thomas J.
Tierney. (D.L 1)
1
violated § 8 of the Clayton Act, which prohibits directors of one company from serving on the
board ofa competing company. See 5 U.S.C. § 19 (2006).
A.
The Businesses
eBay, a Delaware corporation with its headquarters in California, was founded by Pierre
Omidyar
also a named defendant - in 1995 as a place to "sell virtually everything under the
sun." (D.1. 12 at 4) Since 1995, eBay has expanded to become "the world's largest online
marketplace, where practically anyone can buy and sell practically anything." (D.L 1 at 2; id. at
6) eBay divides its business model into two primary segments: Marketplaces and Payments. 4
(D.L 12 Ex. A at 1) The Marketplaces component includes eBay's main website, ebay.com,
along with several other websites, including the Company's "online classifieds businesses." (ld.)
According to eBay, its classifieds websites are available in over 1,000 cities worldwide and
generate revenue primarily through advertising. (D.L 1 at 12)
eBay's principal sources of revenue may also be divided into two categories. First, eBay
generates income from transaction fees - fees charged to customers for listing items on one of the
Company's Marketplace platforms (such as ebay.com). (D.L 12 Ex. A at 1) The other major
source of eBay revenue comes from marketing services: "the sale of advertisements, revenue
sharing arrangements, classifieds fees and lead referral fees." (ld. at 2) According to eBay, the
Company generates "significant revenue from advertising" and recognizes that these revenues are
sensitive to "the effectiveness of online advertising versus offline advertising media." (D.L 12
Ex. A at 25)
4eBay's business model previously included a "Communications" component, which
consisted essentially ofSkype. In November 2009, eBay sold Skype and eBay no longer
considers Communications as part of its business. (D.L 12 Ex. A at 1)
2
NY Times is not a party to this litigation. Nevertheless, the crux of this case involves
aspects of NY Times' business and the degree to which eBay and NY Times compete with one
another. NY Times, which began circulating newspapers in 1851, publishes eighteen print
newspapers including, among others, Boston Globe, International Herald Tribune, and New York
Times. (D.L12 at 4) NY Times describes its itself as a "diversified media company that
currently includes newspapers, Internet businesses, investments in paper mills, and other
investments." (D.I. 12 Ex. Bat 1)
NY Times has developed an online presence. In addition to online versions of its
newspapers, NY Times has expanded into other online outlets, including its "About Group,"
which includes About.com and ConsumerSearch.com. (!d.; see also D.I. 1 at 16) According to
NY Times, "[a] significant portion" of its revenue is "derived from advertising sold in its
newspapers and other publications and on its Web sites." (D.I. 12 Ex. B at 2) NY Times divides
its advertising into three basic categories: national, retail, and classifieds. (Id.)
Both eBay and NY Times view competition in advertising as a major risk factor to the
continued success of their business. eBay, for example, notes in its SEC filings that the
effectiveness of "online advertising versus offline advertising media" is a risk factor for the
continued success ofthe Company's business. (D.I. 12 Ex. A at 25) eBay explains that another
risk factor is "the value [eBay' sJ web sites provide to advertisers relative to other websites." (Id.)
Likewise, NY Times considers internet advertisers as major competitors of its printed product.
According to NY Times, its "media properties and investments compete for advertising" from,
among other things, "websites." (D.I. 12 Ex. B at 7) In addition, "as a result of the secular shift
from print to digital media, all [their] newspapers increasingly face competition for audience and
3
advertising from a wide variety of digital alternatives." (ld.)
B.
The Alleeedly Interlockine Director
Dawn Lepore, a named defendant in this action, has been CEO of drugstore. com since
October 2004. Prior to that, she held various senior executive positions at Charles Schwab
Corporation. (D.!. 1 at 4) Lepore joined the eBay board of directors in 1999 and has served
continuously on the board since then. (D.!. 24 at 4) In 2008, Lepore was elected to the board of
directors of NY Times. (D.!. 12 at 5)
On March 19,2009, eBay disseminated its proxy statement in advance of the Company's
annual stockholder meeting, which was set for April 29, 2009. (D.!. 12 Ex. C at 1) Theproxy
statement re-nominated Lepore to serve on eBay's board and explicitly noted that Lepore served
on the board of directors of NY Times. (ld.) At eBay's April 29, 2009 stockholder meeting,
eBay's stockholders elected Lepore to serve another term on eBay's board.
C.
eBay's Lawsuit with craieslist
eBay is involved in separate litigation that Plaintiff submits is relevant to the instant
motion. In 2004, eBay purchased an approximately twenty-five percent security interest in
craigslist, Inc. ("craigslist"). (D.!. 1 at 3) craigslist is a closely-held company whose sole
business is an online classifieds service. By virtue of eBay's ownership interest, eBay was able
to gain a seat on the craigslist board of directors - which was initially filled by Omidyar, the
founder of eBay, and subsequently by other eBay representatives. (D.!. 24 at 3)
In 2005, eBay launched its foray into the online classifieds market by starting a website,
Kijiji, which is now known as ebayclassifieds.com. (D.I. 1 at 26) Eventually, craigslist took
steps to unseat eBay's representative from its board of directors. (D.!. 24 at 3) eBay
4
subsequently filed suit in an attempt to protect its seat on craigslist's board of directors. See
eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (DeL Ch. 2010). In that suit, the Delaware
Court of Chancery found that craigslist's board did not breach its fiduciary duties when it
implemented a staggered board to prevent eBay from having a seat on craigslist's board of
directors. See id. at 40-41. The Court noted, "[e]vidence in this case suggests that eBay liberally
passed nonpublic craigslist information around within eBay's departments .... It even appears
that eBay used some of craigslist's nonpublic information to develop Kijiji." ld. at 41 n.134.
eBayand craigslist are currently involved in pending litigation relating to whether eBay's misuse
of its seat on craigslist's board conflicted with the "policy and spirit" of applicable antitrust laws.
(D.L 24 at 4; see also craigslist, Inc. v. eBay Inc., et al., No. CGC-08-475276 (CaL Super. Ct.
2009))
D.
Plaintiff's Lawsuit
Count One of Plaintiffs complaint alleges that eBay and NY Times are competitors and,
therefore, Lepore's service on both boards of directors constitutes a violation of § 8 of the
Clayton Act. (D.L 1 at 32) Count Two of Plaintiffs complaint alleges that, by distributing the
proxy statement that recommended that the shareholders vote for Lepore, which in Plaintiffs
view was a violation of federal antitrust laws, eBay's board of directors violated their fiduciary
duty ofloyalty. (ld. at 33)
On August 16, 2010, eBay filed the instant motion to dismiss for failure to state a claim
for relief, pursuant to Rules 12(b)(6) and 23.1 (b )(3) of the Federal Rules of Civil Procedure.
Briefing was completed on November 15,2010. (D.I. 12; D.I. 24; D.I. 26) The Court heard oral
argument on the motion on April 12,2011. (D.L 34, hereinafter "Tr.")
5
II.
LEGAL STANDARDS
Evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires
the Court to accept as true all material allegations ofthe complaint. See Spruill v. Gillis, 372
F.3d 218, 223 (3d Cir. 2004). "The issue is not whether a plaintiff will ultimately prevail but
whether the claimant is entitled to offer evidence to support the claims." In re Burlington Coat
Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997) (internal quotation marks omitted).
Thus, the Court may grant such a motion to dismiss only if, after "accepting all well-pleaded
allegations in the complaint as true, and viewing them in the light most favorable to plaintiff,
plaintiffis not entitled to relief." Maio v. Aetna, Inc., 221 F.3d 472,481-82 (3d Cir. 2000)
(internal quotation marks omitted).
However, "[t]o survive a motion to dismiss, a civil plaintiff must allege facts that 'raise a
right to relief above the speculative level on the assumption that the allegations in the complaint
are true (even if doubtful in fact).'" Victaulic Co. v. Tieman, 499 F.3d 227,234 (3d Cir. 2007)
(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1965 (2007)). While
heightened fact pleading is not required, "enough facts to state a claim to relief that is plausible
on its face" must be alleged. Twombly, 127 S. Ct. at 1974. At bottom, "[t]he complaint must
state enough facts to raise a reasonable expectation that discovery will reveal evidence of [each]
necessary element" of a plaintiffs claim. Wilkerson v. New Media Technology Charter School
Inc., 522 F.3d 315,321 (3d Cir. 2008) (internal quotation marks omitted). Nor is the Court
obligated to accept as true "bald assertions," Morse v. Lower Merion School Dist., 132 F.3d 902,
906 (3d Cir. 1997) (internal quotation marks omitted), "unsupported conclusions and
unwarranted inferences," Schuylkill Energy Resources, Inc. v. Pennsylvania Power & Light Co.,
6
113 F.3d 405, 417 (3d Cir. 1997), or allegations that are "self-evidently false," Nami v. Fauver,
82 F.3d 63, 69 (3d Cir. 1996).
III.
DISCUSSION
Plaintiff's lawsuit is predicated on a violation of federal antitrust laws: Plaintiff argues
that NY Times and eBay are competitors, making Lepore's service on both eBay's and NY
Times' boards of directors a violation of § 8 of the Clayton Act, which prohibits a person from
serving on the boards oftwo companies that are in competition with one another. 5 eBayasserts
that Plaintiff's complaint should be dismissed for two reasons. First, eBay argues that Plaintiff
fails to meet the standard to excuse demand in derivative lawsuits. Next, eBay disputes that
Lepore's dual service on the two boards of directors constitutes a violation of § 8 as a matter of
law. If Plaintiff fails to meet his burden on either of these issues, the Court must dismiss the
complaint. 6
A.
Demand Futility
Plaintiff purports to bring a derivative suit against the individual members of eBay' s
board of directors. See generally Brehm v. Eisner, 746 A.2d 244, 255 (DeL 2000) (explaining
5The statute provides, in relevant part, "No person shall, at the same time, serve as a
director or officer in any two corporations ... that are ... engaged ... in commerce ... [and] by
virtue of their business and location of operation, competitors, so that the elimination of
competition by agreement between them would constitute a violation of any of the antitrust laws
...." 5 U.S.C. § 19(a)(1) (2006).
6The parties raise a peripheral issue about standing under the Clayton Act. eBay asserts
that Plaintiff's suit must be derivative because Plaintiff does not have standing to pursue a direct
Clayton Act violation. CD.!. 12 at 15 n.9) Plaintiff responds he is proceeding derivatively on
behalf of eBay, so he has standing regardless of whether he can prove any "antitrust injury."
(D.!. 24 at 14 n.7) Given the Court's ruling on demand futility, the Court need not resolve the
antitrust injury dispute.
7
derivative suits as involving "personal liability of the directors of a Delaware corporation to the
corporation"). Derivative suits require a plaintiff to satisfy the requirements of Federal Rule of
Civil Procedure 23.1.
Rule 23.1 provides that, when a shareholder pursues a derivative suit against a
corporation, the complaint must:
(3) state with particularity:
(A) any effort by the plaintiff to obtain the desired
action from the directors or comparable authority
and, if necessary, from the shareholders or
members; and
(B) the reasons for not obtaining the action or not
making the effort.
Rule 23.1 thus imposes a requirement that a shareholder plaintiff make a pre-suit demand on the
board of directors before pursuing a derivative suit on behalf of the corporation. The demand
requirement allows the corporate machinery to correct problems itself and to safeguard against
frivolous lawsuits. See Ryan v. Gifford, 918 A.2d 341, 352 (Del. Ch. 2007) (stating that demand
requirement works to curb frivolous lawsuits, which may distract management with litigation and
diminish board's authority to govern corporate affairs).
When it is clear that making a demand on the corporation's board of directors would be
futile, courts excuse the demand requirement. 7 See Aronson v. Lewis, 473 A.2d 805,815 (Del.
1984) (laying out standard for demand futility). Under Aronson and its progeny, in order to
excuse the demand requirement, Plaintiff must allege particularized facts creating a "reasonable
7Since eBay is a Delaware corporation, Delaware law governs the analysis of whether to
excuse demand. See generally Kamen v. Kemper Fin. Servs., 500 U.S. 90 (1991).
8
doubt" that: (1) the directors were disinterested and independent; or (2) the challenged
transaction was the product of a valid exercise ofbusiness judgment. Aronson, 473 A.2d at 815;
see also Brehm, 746 A.2d at 256. If either prong is satisfied, then a plaintiff has met the demand
futility burden and the demand requirement is excused. See In re Intel Corp. Derivative Litig.,
621 F. Supp. 2d 165 (D. Del. 2009) (explaining that Aronson test is disjunctive). If Plaintiff does
not satisfY the first prong of Aronson, there is a presumption that the Board's actions were the
product of a valid exercise of business judgment. See Beam v. Stewart, 845 A.2d 1040, 1049
(Del. 2004); see also In re Intel, 621 F. Supp. 2d at 170.
Here, Plaintiff does not seriously contest the first prong, the independence and
disinterestedness of the board. Plaintiff has not, for example, alleged any facts that would give
rise to a reasonable inference that a majority of the board had a financial interest in renominating
Lepore to serve on eBay's board. Likewise, Plaintiff does not argue that a majority of the board
is controlled or dominated by another (or by extraneous considerations or influences). See, e.g.,
Orman v. Cullman, 794 A.2d 5, 23-24 (Del. Ch. 2002) (discussing first prong of Aronson).
Hence, as Plaintiff conceded at oral argument, the demand futility analysis in this case does not
involve the first prong of Aronson. (Tr. at 23)
Turning to the second prong of Aronson, Plaintiff submits that the challenged transaction
is not the product of the valid business judgment of the board. Under the second prong of
Aronson, "plaintiffs must plead particularized facts sufficient to raise (1) a reason to doubt that
the action was taken honestly and in good faith or (2) a reason to doubt that the board was
adequately informed in making the decision." In re J.P. Morgan Chase & Co. S'holder Litig.,
906 A.2d 808, 824 (Del. Ch. 2005). Put differently, Plaintiff must plead facts from which one
9
could reasonably infer that the board's decision to renominate Lepore was in bad faith, could not
be attributed to any rational business purpose, or reached by a grossly negligent process. See
generally In re Walt Disney Co. Derivative Litig., 906 A.2d 27,52 (Del. 2006).
Plaintiff advances essentially three arguments that demand is excused under the second
prong of Aronson. Plaintiff first contends that Lepore's nomination to the board was "per se
illegal" and could not have been the product of a valid business judgment. (D.1. 24 at 7) Second,
Plaintiff argues that the decision to renominate Lepore was ultra vires and, therefore, completely
outside the purview of the business judgment rule. (Id. at 8-9) Third, Plaintiff asserts that the
board's actions were taken knowingly and in bad faith; that is, Plaintiff argues that the board
violated § 8 "intentionally to give eBay the competitive benefit of an improper interlocking
directorship."g (Id. at 12)
eBay responds that the complaint fails to allege that if Plaintiff had made a demand, the
board would not have been able to impartially consider whether Lepore's service on the two
boards was appropriate. (D.1. 12 at 11) eBay also argues that the complaint says nothing about
what the board mayor may not have considered in reaching its decision to renominate Lepore.
(Id. at 10) In eBay's view, Plaintiff here needs to allege facts that raise a reasonable inference
8Plaintiffseeks to excuse demand based, in part, on statements made in the Company's
brief supporting its motion to dismiss. (D.1. 24 at 12) In its brief, eBay states: "Plaintiff does not
and cannot allege facts to sustain his antitrust claim." (D.1. 12 at 1) From the use of the word
"cannot," Plaintiff contends that "the board has apparently already determined that there is no
Section 8 violation claim to be brought." (D.L 24 at 13) Thus, according to Plaintiff, the board
is not open-minded to the possibility of a Section 8 violation and, therefore, is not independent
and cannot be trusted to address any potential Clayton Act violations. The Court disagrees with
Plaintiff's position. Arguments made in a brief are not evidence. Plaintiff's reliance on Klein v.
Broadhead, 2004 U.S. Dist. LEXIS 919, at *42, *74 (S.D. Fla. Jan 20, 2004) - in which a
defendant corporation had made statements in its public filings about the merits of its defenses in
a litigation - does not persuade the Court to the contrary.
10
that the directors knew (or believed) that nominating Lepore to the board constituted a violation
of § 8. (Id. at 11-13) eBay contends that the combined allegations that the board knew of § 8 of
the Clayton Act and renominated Lepore to serve on the board, knowing that she served
simultaneously on the board of NY Times, does not support an inference that the board intended
or knew that it was violating federal antitrust laws. (Id. at 13-15) eBay points out that, "aside
from Plaintiff, no one appears to believe that simultaneous service on the boards of eBay and NY
Times poses a problem under Section 8 of the Clayton Act."9 (Id. at 14) Moreover, eBay
submits that acts ultimately found to be unlawful may nevertheless be protected by the business
judgment rule - and by extension, the second prong ofAronson - so long as such acts were taken
in good faith and on an informed basis. (D.L 26 at 3)
As a general matter, the second step of the Aronson analysis is directed to "extreme
cases," in which the board's decision is so "curious" that it could constitute "gross negligence."
See Edward P. Welch & Andrew J. Turezyn, Folk on the Delaware General Corporation Law
§ 327.4.2.5 (2007 ed.) (explaining test under second Aronson prong as "necessarily high" and
"stringent"). Additionally, when conducting a demand futility analysis under the second prong of
Aronson, the question, by its nature, involves an "inquiry into the substantive nature of the
challenged transaction and the board's approval thereof." Melzer v. CNET Networks, Inc., 934
A.2d 912, 919 (Del. Ch. 2007). Aronson and its progeny make clear that "the entire review is
factual in nature" and that "[r]easonable doubt must be decided by the trial court on a
case-by-case basis employing an objective analysis." Aronson, 473 A.2d at 815; see also
9For example, eBay points out that regulators, despite clearly being aware of Ms.
Lepore's dual service on both boards, have not taken any enforcement action. (D.1. 12 at 14 n.6)
11
Grobow v. Perot, 539 A.2d 180, 186 (DeL 1988), overruled on other grounds by Brehm, 746
A.2d 244.
With these well-settled principles as guideposts, the Court now turns to each of Plaintiff s
arguments that demand is excused in this case.
1.
Illelal Conduct
Plaintiff first argues that renominating and endorsing Lepore to serve on the board is a
violation of § 8 of the Clayton Act. As such, eBay's conduct was "per se illegal" and not entitled
to the presumption of the business judgment rule. Thus, according to Plaintiff, the very act of
appointing or nominating Lepore, which in Plaintiffs view is an obvious violation of § 8, takes
the board's conduct outside of the ambit of the business judgment rule. Plaintiff insists that he
does not need to show that the board intended to violate § 8. (Tr. at 24)
Plaintiff relies primarily on two cases in support of the view that an illegal act by
definition excuses demand. See SCM Corp. v. FTC, 565 F.2d 807,811 (2d Cir. 1977); TRW, Inc.
v. FTC, 647 F.2d 942, 949 (9th Cir. 1981). Both cases, however, stand for the proposition that a
corporation itself, as opposed to the individual directors, violates § 8 by nominating an
interlocking director to its board. See TRW, 647 F.2d at 949 ("In SCM Corp. v. FTC, ... , the
Second Circuit rejected arguments identical to those presented by TRW and held that section 8
properly applies to corporations."). Neither case, in fact, discusses demand futility whatsoever.
Even an allegation that a board approved an illegal transaction is not sufficient, standing
alone, to overcome the presumptions of the business judgment rule: "One can reasonably
conceive of numerous situations in which directors might act on an informed basis, in good faith
and in the honest belief that an action taken is in the best interests of the company and yet
12
approve a transaction that, in the end, proves to be unlawful." Landy v. D 'Alessandro, 316 F.
Supp. 2d 49, 64 (D. Mass. 2004). The Delaware Chancery Court has also explained that "[t]here
can be no personal liability of a director for losses arising from illegal transactions if a director
were financially disinterested, acted in good faith, and relied on advice of counsel reasonably
selected in authorizing a transaction.,,10 Gagliardi v. Trifoods Int'l, Inc., 683 A.2d 1049, 1051
(Del. Ch. 1996).
Plaintiffs argument, at bottom, is that eBay's board's decision to nominate Lepore was
illegal because it violated § 8 ofthe Clayton Act. To say that a company violated § 8, however,
is an altogether different matter than to say that a company knowingly and intentionally violated
§ 8. Here, Plaintiff has come forward with no facts that could support a reasonable inference that
eBay's board of directors renominated Lepore knowing that her service on both boards would
constitute a violation of § 8. In other words, "the Complaint does not allege with particularity
that the Board, when it approved the [transactions], knew that its actions were illegal." Litt v.
Wycoff, 2003 Del. Ch. LEXIS 23 (Del. Ch. Mar. 28,2003).
The Supreme Court of Delaware has explained that if a complaint based on a violation of
federal law does not give rise to a reasonable inference that "directors knowingly participated in
illegal conduct," the complaint fails to satisfy the demand requirement of Rule 23.1. Wood v.
Baum, 953 A.2d 136, 142 (Del. 2008); see also generally In re Dow Chem. Co. Derivative Litig.,
2010 Del. Ch. LEXIS 2, at *37 (Del. Ch. Jan. 11,2010) ("[S]ubstantive second-guessing of the
merits of a business decision ... is precisely the kind of inquiry that the business judgment
IOThe complaint does not allege whether the board had the benefit of an opinion of
counsel when it decided to re-nominate Lepore.
13
prohibits."). Accordingly, Plaintiff's argument that demand is excused because eBay's conduct
allegedly violated § 8 of the Clayton Act is unavailing. II
2.
Ultra Vires Conduct
Plaintiff next argues that the eBay board's conduct in renominating Lepore was ultra
vires and, therefore, pre-suit demand is excused as a matter of law. (D.r. 24 at 8) Ultra vires acts
are acts that are beyond the authority ofthe board. See, e.g., 8 Del. C. § 124; Black's Law
Dictionary 1522 (6 th ed. 1990); see also California Pub. Employees' Ret. Sys. v. Coulter, 2002
WL 31888343, at * 11 (Del. Ch. Dec. 18, 2002) ("Any action ofthe board that falls outside the
rather broad scope of its authority is not entitled to the protection of the business judgment rule..
. .").
Plaintiff's argument that the eBay board's actions are ultra vires, however, misses the
mark. Delaware law defines ultra vires acts narrowly: "ultra vires acts fall under a much more
narrow definition which includes acts specifically prohibited by the corporation's charter, for
which no implicit authority may be rationally surmised, or those acts contrary to basic principles
of fiduciary law." Solomon v. Armstrong, 747 A.2d 1098, 1114 (Del. Ch. 1999). Cases
discussing ultra vires acts have generally involved acts that are alleged to be contrary to a
corporation's charter. See Lynch v. Coinmaster USA, Inc., 614 F. Supp. 2d 494,501 (D. Del.
2009).
Plaintiff seems to confuse ultra vires conduct with actions that are illegal. For example,
Plaintiff relies on Coulter, 2002 WL 31888343, at *11, but Coulter actually supports eBay's
IIPlaintiffhas not asserted that the directors were motivated by a subjective intent to harm
the corporation.
14
position here. Coulter analyzed the board's allegedly ultra vires action by looking to the
company's charter to determine if the transaction was outside of the powers granted to the board.
A provision in the company's charter required shareholder approval before the board could raise
the minimum exercise price for option contracts granted to its officers. The plaintiff in Coulter
alleged that the board had, in fact, raised the minimum exercise price without first seeking
shareholder approval. In other words, the board of directors had allegedly taken an action that
the company's charter explicitly precluded.
Here, by contrast, eBay's board of directors' actions are only allegedly against the law.
No specific provision of eBay's charter prohibits the particular conduct the board took. Plaintiff
observes that eBay's charter generally forbids eBay's board of directors from authorizing illegal
acts. (D.I. 24 at 7) But accepting Plaintiff's proposition would stretch the ultra vires doctrine
beyond the narrow confines in which it has been contained under Delaware law.
Clearly, nominating a person to serve on a company's board of directors is not, itself,
ultra vires. One of the major functions of a board of directors is to nominate qualified
individuals to help steer the corporation's business, and eBay's bylaws explicitly authorize the
board to nominate candidates. (D.1. 26 at 3) Accordingly, Plaintiff's argument that demand is
excused because the board's actions are ultra vires is unavailing.
3.
Bad Faith
Finally, Plaintiff is left with the argument that the board acted in bad faith; that is, that the
transaction was so far beyond the bounds ofbusiness judgment that it could serve no conceivable
rational business purpose, or that the process that led to the determination was deficient. See
Brehm, 746 A.2d at 264 n.66; see also Emerald Partners v. Berlin, 787 A.2d 85, 91 (DeL 2001).
15
Bad faith nonnally means that a transaction is undertaken for some purpose "other than a
genuine attempt to advance corporate welfare" or is "known to constitute a violation of
applicable positive law." Litt v. Wycoff, 2003 Del. Ch. LEXIS 23 (Del. Ch. Mar. 28, 2003)
(emphasis added); see also In re Walt Disney Co., 906 A.2d at 67 (Del. 2006). The three most
"salient" examples ofbad faith involve a fiduciary who "intentionally acts with a purpose other
than that of advancing the best interests of the corporation," "acts with the intent to violate
applicable positive law," or "intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties." In re Walt Disney Co., 906 A.2d at 67.
Under Delaware law, the presumption of good faith is difficult to rebut. See Gagliardi,
683 A.2d at 1049. To establish bad faith, "a transaction [must be] authorized for some purpose
other than a genuine attempt to advance corporate welfare or is known to constitute a violation
of applicable positive law." Id. at 1051 n.2.
Plaintiff asserts that eBay's board did act in bad faith and knowingly violated federal law.
(D.I. 24 at 9-10) Plaintiff relies on three allegations. First, Plaintiff alleges that the board knew
that NY Times competes with eBay. In support, Plaintiff points to the following statement in
eBay's 2009 public filings: "In many markets in which they operate, including in the U.S., our
classified platfonns compete against more established online and offline classifieds platfonns."
(D.I. 12 Ex. A at 39) As Plaintiff argued at the hearing, '''Online and offline.' That's the New
York Times." (Tr. at 29) Thus, according to Plaintiff, eBay understands that NY Times is a
competitor. Plaintiff next points to the craigslist lawsuit as evidence that the board was clearly
aware of the Clayton Act and the statutory prohibition against having interlocking directors.
(D.L 24 at 9) Moreover, Plaintiff argues that eBay's behavior with respect to craigslist
16
demonstrates that eBay has a pattern of placing its board members on other companies' boards to
gain competitive advantages. Finally, Plaintiff points to eBay's nomination of Richard
Schlossberg as further evidence of eBay' s bad faith. Schlossberg, the former CEO of the Los
Angeles Times, was nominated to eBay's board because of his experience "as a Chief Executive
Officer in the newspaper/publishing industry, which is particularly relevant to eBay's classifieds
business." (D.L 1 at 29)
The Court concludes that these allegations are inadequate to excuse demand due to bad
faith. The first of Plaintiffs charges
that the board knew eBay and NY Times were
competitors sufficient to raise antitrust concerns - is a purely conclusory accusation that lacks a
factual predicate. eBay's 2009 lO-K does state that eBay's classifieds business must compete
with more established online and offline classifieds platforms. But nowhere does the 2009 10-K
state that NY Times is a competitor - nor, in fact, does the 10-K state that any newspaper is a
competitor. Instead, eBay lists several other companies, including, among others, Wal-Mart,
Target, Sears, Macy's, Amazon.com, Buy.com, AOL.com, and Yahoo! ShoppingY
Plaintiffs reliance on the other two allegations is likewise unavailing. Plaintiff urges this
Court to substitute factual averments found in the craigslist lawsuit for factual allegations that
might have been brought in the context of this lawsuit. But there is no allegation in the instant
lawsuit that the board or Lepore sought to get secret information from NY Times to aid in eBay's
12Plaintiff cites to paragraphs 35 and 59 in its complaint for the proposition that eBay
publicly acknowledged that NY Times was a competitor. (Tr. at 28; see also D.L 1 at ~ 35; id. at
~ 59) Neither of these paragraphs, however, contains an explicit statement that eBay and NY
Times are competitors. Instead, what these paragraphs recite is the same 2009 10-K that the
Court discussed above. The complaint does not contain any reference to an explicit statement in
which eBay acknowledges that it competes with NY Times.
17
own classifieds and advertising business. More fundamentally, knowledge of the Clayton Act
prohibitions and violation of it is not sufficient to establish an intentional violation. eBay's
public statements that Schlossberg has experience in the publishing industry that is relevant to
eBay's classifieds business is not an admission that eBay competes with newspapers generally or
NY Times in particular.
At bottom, the alleged § 8 violation presents a close, debatable proposition. Hence,
Plaintiff has failed to satisfy its "heavy burden" under the second prong of Aronson. See White v.
Panic, 783 A.2d 543, 551 (Del. 2001). Plaintiff cites Robert F. Booth Trust v. Crowley in
support of their position. See 2010 U.S. Dist. LEXIS 18355 (N.D. Ill. Feb. 26, 2010). That case
does bear similarities, both factual and legal, to the instant action.13 In Crowley, the plaintiffs
argued that the Sears board of directors breached its fiduciary duties by nominating a director to
serve on its board who already served on the board of one of its competitors. Id. at *5-6. The
plaintiffs there alleged: (1) that the director defendants knew that § 8 prohibited interlocking
directors; and (2) that the director defendants knew that the two directors served simultaneously
on competing companies' boards of directors. Id. at *9-11. The court in Crowley explicitly
asserted that the non-party companies were "competitors" of the defendant company. Id. at * 10
11. The court in Crowley also specifically noted that the defendant company "publicly
acknowledges" that two of the directors "were members of the boards of Sears' competitors." !d.
Here, that fundamental element
that eBay publicly acknowledges that the NY Times is a
competitor - is missing. Plaintiff has pointed to no facts suggesting that eBay's board of
13Indeed, the two cases share more than factual and legal allegations. They also share the
same plaintiffs: the Robert F. Booth Trust and Ronald Gross. See Crowley, 2010 U.S. Dist.
LEXIS 18355, at *1.
18
directors considers NY Times a competitor to eBay to a degree sufficient to trigger antitrust
concerns.
Without any factual basis to support the inference that eBay's board of directors knew
that eBay and NY Times were competitors that would trigger a violation § 8 of the Clayton Act,
the board's actions are protected by the presumptions of the business judgment rule and, thereby,
the requirement to make demand. Plaintiff has failed to demonstrate that his objections to
Lepore's dual service would not have been impartially handled by the Company's board of
directors. Accordingly, the Plaintiff has failed to meet the standard for demand futility, and the
Court must dismiss his lawsuit. 14
B.
Section 8 of the Clayton Act
It is undisputed that Plaintiff is proceeding derivatively on behalf of eBay in connection
with both his breach of fiduciary duty claim and his § 8 Clayton Act claim. (See, e.g., OJ. 24 at
14 n.7; Tr. at 20) Because Plaintiff has failed to establish that demand is excused under
Delaware law, the Court need not determine whether Plaintiff has alleged facts sufficient to state
a Clayton Act violation.
IV.
CONCLUSION
For the foregoing reasons, the Court will grant eBay's motion to dismiss. An appropriate
Order follows.
14Plaintiffhas requested leave to amend the complaint. (D.!. 24 at 20; see also Tr. at 32)
Plaintiffs rationale is that he could point to "some things in their papers which I think reveal the
board's state of mind." (Tr. at 32) But adding information from Defendants' briefs in this action
would not change the Court's analysis. Thus, an additional amendment would be futile.
Accordingly, the Court denies Plaintiffs request for leave to amend the complaint.
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