Pikk v. Pedersen et al

Filing 78

MEMORANDUM DECISION granting 49 Motion to Dismiss ; granting 53 Motion to Dismiss for Failure to State a Claim. Signed by Judge Dee Benson on 10/1/14. (jlw)

IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH

CENTRAL DIVISION

IN RE: ZAGG INC. SHAREHOLDER
DERIVATIVE ACTION
MEMORANDUM DECISION
AND ORDER

This document relates to: All Actions
Case No.. 'd,.·.lae...\l11 <g~
Judge Dee Benson

Presently before the court is Lead Plaintiffs Albert Pikk's and Daniel L. Rosenberg's
Verified Consolidated Shareholder Derivative Complaint on behalf of ZAGG Inc. against
Individual Defendants Robert G. Pedersen II, Randall Hales, Brandon T. O'Brien, Cheryl L.
Larabee, Edward D. Eckstrom, and Shuichiro Ueyama (collectively, "Individual Defendants")
for violation of § 14(a) of the Securities Exhange Act of 1934, breaches of fiduciary duties,
unjust enrichment, waste of corporate assets, and insider trading. (Dkt. No. 43.)
On April 4, 2014, Defendant Robert G. Pedersen ("Pedersen") filed a Motion to Dismiss
pursuant to 12(b)(6) of the Federal Rules of Civil Procedure. (Dkt No. 53.) On April 7, 2014,
Nominal Defendant ZAGG Inc. and Individual Moving Defendants also filed a Motion to
Dismiss pursuant to 12(b)(6) of the Federal Rules of Civil Procedure. (Dkt. No. 49.) After
briefing by the parties, the Court heard oral argument on the motions. Having considered the
memoranda submitted by the parties, the relevant law, and the arguments ofcounsel, the court

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enters the following Memorandum Decision and Order.

BACKGROUND
In deciding whether to dismiss a shareholder derivative complaint pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure, the court presumes the truth of all well-pleaded
facts in the complaint. Tal v. Hogan, 453 F.3d 1244, 1252 (2006), cert denied, U.s. 1209 (2907).
In addition, the Court may consider "other sources courts ordinarily examine when ruling on
Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by
reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Mawr Issues
& Rights, LTD"" 551 U.S. 308, 322 (2007). With this in mind, the court considers the facts and
allegations in this case.
At the outset, the Court notes that the Moving Defendants and Pedersen have each filed
unopposed requests for judicial notice of various publicly-available documents, including ZAGG
press releases, forms filed with the SEC, transcripts of earnings conference calls, and a Google
Finance chart showing opening and closing stock prices of ZAGG common stock from October
15,2010 through August 17,2012. (Dkt. Nos. 57,60.) The Court takes judicial notice of these
documents pursuant to Federal Rule of Evidence 20 1(b)(2). 1 See id.; GFF Corp. v. Associated

Wholesale Grocers, 130 F.3d 1381, 1384 (lOth Cir. 1997). With this in mind, the Court
considers the facts and allegations in this case.
Corporate defendant ZAGG is a Nevada corporation with its principal executive offices
in Salt Lake City, Utah. (Am. Compl. ~ 2.) ZAGG designs, manufactures and distributes
protective coverings, audio accessories and power solutions for consumer electronic and handCitations to judicially noticed documents are labeled as either Pedersen's RJN Ex. ,or
Moving Defendants' RJN Ex. _.
­
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held devices. (Am. CompI. ~ 22.) Defendant Robert G. Pedersen was the co-founder of ZAGG
and its Chief Executive Officer and Chairman of the Board of Directors until August 2012. (Am.
CompI. ~ 23.) The six individual defendants, Robert G. Pedersen, Randall Hales, Brandon T.
O'Brien, Edward D. Ekstrom, Shuichiro Ueyama, and Cheryl A. Larabee, were all officers or
directors of ZAGG during the Class Period. 2 (Am. CompI. ~ 24-28.) Ueyama has been dismissed
from this action based on Plaintifrs failure to effectuate timely service. (Dkt. No. 71.)
On December 12,2011, the Company announced the appointment of Mr. Hales as
ZAGG's President and Chief Operating Officer. (Am. CompI. ~ 821 The December 12,2011,
press release stated that Mr. Hales had "become familiar with the day-to-day operations of
ZAGG," and described his new role as "overseeing operations and customer service at ZAGG."
(Id.; Ex. 1.)4

On December 21,2011, Mr. Pedersen sold 345,000 shares of ZAGG common stock as a
result of a margin call. (Am. Compl. ~ 5; Ex. 5.) Mr. Pedersen filed a Form 4 on December 23,
2011, disclosing his December 21, 2011, sale. The Form 4 stated that the sales were made to
meet an "immediate financial obligation." (Am. Compl. ~ 74-75; Ex. 5.)
On March 15,2012, the Company filed its FYl1 Form lO-K (Am. CompI. ~ 99.) On
April 27, 2012 the Company filed a proxy statement soliciting votes for, inter alia, re-election of
the Company's five directors, including Mr. Pedersen. The 2012 Proxy did not address whether
2 Hales was President, Chief Operating Officer and Director of ZAGG, and on August 17,
2012, he was appointed as Interim Chief Executive Officer. O'Brien was the Chief Financial
Officer ofZAGG. Ekstrom was a Director ofZAGG. Larabee was a Director ofZAGG, and on,
August 17,2012, she was appointed as Chairman of the Board of Directors.
3 Mr. Hales has also served as a ZAGG director since October 2010. (Am. Compl. ~ 24.)
4 Exhibits ("Ex._") are attached to the Declaration of Nessias. Kushner is Support of
Nominal Defendant ZAGG Inc. and Individual Moving Defendants' Motion to Dismiss the
Verified Consolidated Shareholder Derivative Complaint.

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any of Mr. Pedersen's shares were pledged as security. (Am. CompI. ~~ 8,89, 100.) On August
14,2012, and August 24,2012, Mr. Pedersen sold 515,000 and 1,250,061 shares, respectively, as
a result of margin calls. (Am. CompI. ~~ 11, 76, 117.) Mr. Pedersen filed Forms 4 disclosing
these sales and the fact that they were "to meet margin calls." (Am. CompI. ~ 76.) Mr.
Pedersen's August 28, 2012, Form 4 stated that the August 24,2012 sales "satisf[iedJ all margin
obligations." (Am. CompI. ~ 76; Ex. 6.)
After selling his stock to meet margin calls, on August 17,2012, Mr. Pedersen was
forced to resign as CEO of ZAGG and Chairman of the ZAGG Board. (Am. CompI. ~~ 11,23,
85, 110.) The Company entered into a consulting agreement with Mr. Pedersen, pursuant to
which Mr. Pedersen received $910,000. In return, Mr. Pedersen agreed to provide "services
related to current and historical finances and operations; relationships with suppliers, customers,
and vendors; product development; marketing and distibution; representation of the Registrant at
public appearances; and participation in the Registrant's meetings as an independent contractor
on projects and matters as requested by the Chairperson of the Board of Registrant." (Ex. 8 at 3.)

Also on August 17,2012, Mr. Hales was appointed interim CEO. (Am. CompI. ~ 24.)
The company held a conference call on August 28,2012, during which Mr. Hales explained that
Mr. Pedersen's departure was due to the margin call situation. (Am. CompI. ~~ 13, 86, 120.) The
Company also implemented a policy preventing officers, directors and 10% shareholders from
holding securities in margin accounts or engaging in hedging or other similar transactions using
shares@fthe Company. (Am. Compl.

mr 47, 112; Ex. 7.)

Later in 2012, multiple law suits were filed both in the form of class action lawsuits by

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shareholders and in the form of derivative lawsuits that purported to represent ZAGG in
asserting claims against its current and former board members. The class action lawsuits were
consolidated into a single class action lawsuit, Apple, et al v. ZAGG, Inc. et ai, Case No. 2: 12-cv­
00852 (the "Class Action"), which has already been dismissed by this court. The derivative
actions were consolidated into the present Derivative Action.
Plaintiffs purport to bring this derivative action on behalf of ZAGG. Plaintiffs allege that
certain ZAGG officers and directors are liable for causing the Company to issue statements that
were misleading because they omitted: (l) the CEO's margin account and (2) a supposed "secret
succession plan." The Complaint asserts a Section 14(a) claim as well.

LEGAL REQUIREMENTS
In deciding a motion to dismiss for failure to state a claim upon which relief may be
granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court presumes the truth
of all well-pleaded facts in the complaint, but need not consider conclusory allegations. Tal v.

Hogan, 453 F.3d 1244, 1252 (lOth Cir. 2006), cert. denied, 549 U.S. 1209 (2007). The Court is
not bound by a complaint's legal conclusions, deductions and opinions couched as facts. Bell

Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Further, though all reasonable inferences must
be drawn in the non-moving party's favor, a complaint will only survive a motion to dismiss if it
contains "enough facts to state a claim to relief that is plausible on its face." Id. at 570. "A claim
has facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v.Iqbal,
129 S. Ct. 1937, 1949 (2009).

I. Demand Futility

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Demand futility must be pleaded with particularity. A fundamental policy underlying
Nevada corporate law is that "a corporation's 'board of directors has full control over the affairs
of the corporation.'" Shoen v. SAC Holding Corp., 137 P.3d 1171, 1178 (Nev. 2006) (quoting
Nev. Rev. Stat. § 78.120(1)). This includes the power to decide whether the company should
engage in litigation. Shoen, 137 P.3d at 1179. Derivative actions, in which shareholders purport
to bring suit in the name of a company, provide an unusual and narrow exception to this rule.

See Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v.
Eisner, 746 A.2d 244 (Del. 2000).5
Shareholders seeking to enforce a corporation's rights must first demand action from the
board of directors or plead with particularity the reasons why such a demand would have been
futile. Aronson, 473 A.2d at 808; see also Fed. R. Civ. P. 23.1 (demand futility must be pleaded
"with particularity"). The demand requirement is "a rule of substantive right designed to give a
corporation the opportunity to rectify an alleged wrong without litigation, and to control any
litigation which does arise." Aronson, 473 A.2d at 809.
Plaintiffs concede that they "did not make a demand on the Board to bring this action[.r
(Am. CompI. ~ 138.) It follows that before Plaintiffs can represent the interests of the Company,
they must "allege with particularity ... the reasons for [their] failure to obtain the action or for
not making the effort." Stone ex reI. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 367 & n.9

Because ZAGG is a Nevada corporation, Nevada's substantive law governs the demand
analysis required in derivative cases like this one. See Kamen v. Kemper Fin. Servs., 500 U.S.
90,108-09 (1991). However, "Nevada courts look to Delaware law for guidance on issues of
corporate law." In re Computer Sciences Corp. Deriv. Litig., No. CV 06-05288 NRP (Ex), 2007
WL 1321715, at *4 (C.D. Cal. Mar. 26, 2007). In fact, the Nevada Supreme Court has adopted
the standards articulated by the courts of .Delaware concerning the circumstances under which
demand is excused. See Shoen, 137 P.3d at 1184.
,5

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(DeL 2006) (citations omitted).
A. The Aronson and Rales Tests
If a plaintiff challenges an affirmative board decision, then under Aronson, demand is
excused only if the plaintiff pleads particularized facts creating a reasonable doubt that (l) a
majority of the directors are disinterested and independent, or (2) the transaction was the product
of a valid exercise of business judgment. Aronson, 473 A.2d at 814. If a plaintiff challenges
something other than a board action, such as a failure to act or actions by individual directors,
then the second part of the Aronson test drops out and, under Rales, the test becomes whether the
plaintiff pleads particularized facts that "create a reasonable doubt that ... the board ... could
have properly exercised its independent and disinterested business judgment in responding to a
demand." Rales v. Blasband, 634 A.2d 927, 934 (DeL 1993). Because the only claims in the
Complaint addressing affirmative decisions by the ZAGG Board are the ones challenging
compensation decisions, Aronson applies to those claims, and Rales applies to the rest.
Disinterestedness and independence are presumed at the pleading stage. See baum ex reI.

Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048·50 (Del. 2004). To
plead a disqualifying interest, a plaintiff must offer particularized facts demonstrating that a
director "will receive a personal financial benefit from a transaction that is not equally shared by
the stockholders," or that "a corporate decision will have a materially detrimental impact on a
director, but not the corporation and the stockholders." Rales, 634 A.3d at 936. To plead a lack
of independence, a plaintiff must "show that the directors are 'beholden' to [an interested
director] or so under the influence that their discretion would be sterilized." Id.
B. Pleading Facts to Show a "Substantial Likelihood of Liability

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The "mere threat" of liability is insufficient to raise a reasonable doubt as to a director's
disinterestedness. Aronson, 473 A.2d at 815. Rather a plaintiff must show "such egregious
conduct ... that they face a substantial likelihood of liability." Seminaris v. Landa, 662 A.2d
1350, 1355 (Del. Ch. 1995). The standard to state a cause of action for breach of fiduciary duty
is gross negligence. See e.g., Stone, 911 A.2d at 369. "[O]rdinary negligence is insufficient[.]" In

re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 760 (Del. Ch. 2005).
In this case the burden is even higher because the corporation has adopted an
"exculpatory provision" in its articles of incorporation. 6 ZAGG's articles of incorporation
provide: "To the fullest extent permitted by the laws of the State ofNevada ... no director or
officer of the Corporation shall be liable to the Corporation or to its stockholders for damages for
breach of fiduciary duty as a director or officer." (Ex 3 at 48.) In light of this provision,
"plaintiffs cannot sustain their complaint even by pleading facts supporting an inference of gross
negligence; they must plead a non-exculpated claim." In re Lear Corp. S'holder Litig., 967 A.2d
640, 648 (Del. Ch. 2008). Plaintiffs must plead particularized facts which show "an actual intent
to do harm" or "conscious disregard for [the Individual Defendants] responsibilities." In re Walt

Disney Co. Deriv. Litig. 906 A.2d 27, 62-64 (Del. 2006). In other words, just as this court
required in the Securities Action, Plaintiffs are required to plead "particularized facts
demonstrating that the [Individual Defendants] acted with scienter." Wood, 953 A.2d at 141.

6See Nev. Rev. Stat. § 78.1 38(7)(b){"Except as otherwise provided ... or unless the
articles of incorporation ... provide for greater individual liability , a director or officer is not
individually liable to the corporation ... for any damages as a result of any act or failure to act in
his or her capacity as a director or officer unless it is proven that ... [t]he breach of those duties
involved intentional misconduct, fraud, or a knowing violation of the law.").

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II. Whether Plaintiffs Have Plead Particularized Facts Raising a Reasonable Doubt
as to Any Directors Disinterestedness
When this lawsuit was filed the Board consisted of six directors: Mr. Heiner, Mr.
Holiday, Mr. Maurer, Mr. Ekstrom, Mr. Hales, and Ms. Larabee. Thus, Plaintiffs must plead
particularized facts raising a reasonable doubt as to the disinterestedness or independence of at
least three of the six Board Members.7 However, because the allegations are inadequate as to
Ms. Larabee, an outside director who joined the ZAGG Board after the events alleged in the
"Background Allegations" and who is not alleged to have had prior business ties with Pedersen,
the court need not go any further. In any event, as demonstrated below, the Complaint fails to
mount a sufficient challenge to any of the directors.
A. No Director Faces a Substantial Likelihood of Liability for SEC Filings
Plaintiffs' main demand futility argument is that Ms. Larabee, Mr. Ekstrom, and Mr.
Hales face substantial liability because they "reviewed, approved, and signed" the Company's
March 15,2012, Form 10-K and the April 27, 2012 Proxy. (Am. Compl.,-r 154.) But "execution
of ... financial reports, without more, is insufficient to create an inference that the directors had
actual or constructive notice of any illegality." Wood, 953 A.2d at 142; see also Kaplan v. Wyatt,
499 A.2d 1184, 1189 (DeL 1985) ('"The mere fact that a director was on the Board at the time of
the acts alleged in the complaint does not make that director interested or dependent[.J").
Rather, Plaintiffs must plead particularized facts demonstrating "intentional misconduct, fraud,
or a knowing violation of the law." Nev. Rev. Stat. § 78.1 38(7)(b). Plaintiffs' conclusory and
generic allegations do not provide the requisite particularized facts showipg knowledge of both

7 Where the board consists of an even number of directors, a' plaintiff must raise a
reasonable doubt as to at least half of the directors. See e.g., Beam, 845 A.2d at 1046 & n.8.

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the status of Mr. Pedersen's pledges at the relevant times and the requirement to disclose the
alleged omission.
The court has previously analyzed allegations that ZAGG directors signed intentionally
misleading SEC filings in the Securities Action. In the Securities Action Plaintiffs asserted that
Ms. Larabee, Mr. Ekstrom, and Mr. Hales, the three directors alleged in this case to face a
"substantial likelihood of liability," were liable under Sections lO(b) and 14(a) of the Exchange
Act for signing the Company's March 15,2012 Form 10-K and its April 27, 2012 Proxy.
(Securities Action Complaint " 1, 8, 57-58. This court disagreed with Plaintiffs in the
Securities Action and for those same reasons disagrees with Plaintiffs in this case. (See
Securities Order.)
1. Plaintiffs' Scienter Allegations
(a) Knowledge of Mr. Pedersen's Margin Account
Plaintiffs assert that Ms. Larabee, Mr. Ekstrom, and Mr. Hales had knowledge of
Pedersen's margin accounts at the relevant time. However, Plaintiffs provide no particularized
facts sufficient to demonstrate that Ms. Larabee, Mr. Ekstrom, or Mr. Hales knew about, let
alone intentionally failed to disclose, Mr. Pedersen's margin account when they signed the SEC
filings in question. Instead, Plaintiffs rely on conclusory assertions. (See e.g. , 92) ("Despite
actual knowlege of Defendant Pedersen's pledges ...."), (, 94) ("Although the Board had
knowledge of Pedersen's Pledges ...."). Such conclusory assertions, without facts indicating
how and when each director gained knowledge of the status of Mr. Pedersen's margin account,
are not sufficient. Contrary to Plaintiffs' assertions, just because the Individual Defendants
knew that Mr. Pedersen had a margin call in December 2011, does not automatically mean that

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they knew he still had more ZAGG shares in a margin account more than four months later when
.the Proxy was filed.
As this court wrote in dismissing the Securities action;
There are no allegations of any memoranda, e.mails, or other written documentation to
suggest that the Moving Defendants knew about the stock pledging prior to each margin
call. There are no allegations as to any statements made by any Moving Defendant that
could suggest that such Defendant knew about the stock pledging. The allegations are
simply insufficient to suggest that the Moving Defendants knew about the stock
pledging prior to each margin call.
Securities Order at 11. Like the Securities Action, the Complaint alleges no contemporaneous
documentation or other evidence to indicate knowledge at the relevant time.
In addition to showing that the Individual Defendants knew the status of Mr. Pedersen's
margin account, Plaintiffs also must plead particularized facts showing they knew its omission
from the 2012 Proxy would mislead investors. See e.g., Wood, 953 A.2d at 142 ("[T]he
Complaint alleges many violations of federal securities and tax laws but does not plead with
particularity ... defendants knew that such conduct was illega1."). In this regard, the Complaint
fails. There are virtually no such allegations in the Complaint.
(b) The "Secret Succession Plan"
Plaintiffs also allege liability for omission of a "secret succession plan." (See e.g.,

~~

6·7,

152.) However, the Complaint fails to allege the existence, much less the knowledge, of such a
plan. See e.g., Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988) (assertions "not supported by
allegations of specific fact may not be taken as true"), overruled in part on other grounds by

Brehm, 746 A.2d at 244.
This court has already determined that Plaintiffs' theory rests on a tripod with three bad
legs. Plaintiffs argue: (1) Mr. Hales was hired on December 12,2011, to run the "day·to·day
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operations of ZAGG" (~ 82), (2) Mr. Hales became interim CEO when Mr. Pedersen resigned (~
111), and (3) Mr. Hales stated on August 28,2012, that "Pedersen's departure 'was entirely
related to the margin call situation. "'(~ 86.) But there could not have been a "secret succession
plan" to replace Mr. Pedersen created by Mr. Pedersen's margin call if Mr. Hales was hired nine
days before Mr. Pedersen's December 21,2011 margin call. (Compare ~ 82) (Mr. Hales hired on
December 12, 2011) with ~ 5 (Mr. Pedersen's first forced sale occurred on December 21, 2011.)
The Complaint portrays Mr. Hales' running the "day-to-day operations" of ZAGG as some sort
of August 2012 surprise (~ 120), but not only were these responsibilities disclosed in both the
December 12,2011 press release

(~

82; Ex. 1) and the February 27, 2012 earnings call

(~~

6,84;

Ex. 2 at 2), they are precisely the responsibilities one would expect for a Chief Operating
Officer. And the mere fact that Mr. Hales succeeded Mr. Pedersen does not mean there was a
pre-existing plan that he would do so.
To show a "substantial likelihood of liability," Plaintiffs must plead particularized facts
demonstrating that the directors acted with "an actual intent to do harm" or "conscious disregard
for [their] responsibilities," Le., scienter, in signing the SEC filings at issue. Walt Disney, 906
A.2d at 62-64. Plaintiffs have failed to do so.

CONCLUSION
Plaintiffs cannot show the lack of independence of Mr. Hales, Mr. Ekstrom, and
especially Ms. Larabee. Plaintiffs have not plead facts showing that it is plausible that the
Individual Defendants: (1) knew Pedersen still had margin pledges after December 2011, or (2)
knew about (or that there even was) a secret succession plan. The pleading standard has not
been satisfied. For the same reasons, the Court also fmds an insufficient pleading as to the

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substantive claims l which are very similar to the Securities Order in the earlier case.
Accordingly, both motions to dismiss are GRANTED.
Dated this 1st day of October, 2014.

Dee Benson
United States District Judge

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