IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
DEBORAH PETTRY, derivatively on ) behalf of FEDEX CORPORATION, )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0795-JRS )
FREDERICK W. SMITH, DAVID J. ) BRONCZEK, ALAN B. GRAF, JR., ) HENRY J. MAIER, DAVID P. STEINER, ) SHIRLEY ANN JACKSON, JOHN A. ) EDWARDSON, JOSHUA A. RAMO, ) R. BRAD MARTIN, KIMBERLY A. ) JABAL, PAUL S. WALSH, SUSAN C. ) SCHWAB, MARVIN R. ELLISON, ) JOHN C. INGLIS, STEVEN R. ) LORANGER, GARY W. LOVEMAN, ) and JAMES L. BARKSDALE, )
)
Defendants, )
)
and )
)
FEDEX CORPORATION, a Delaware ) corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: April 6, 2021 Date Decided: June 28, 2021
Robert D. Goldberg, Esquire of Biggs and Battaglia, Wilmington, Delaware and Brian J. Robbins, Esquire, Stephen J. Oddo, Esquire and Emily R. Bishop, Esquire of Robbins LLP, San Diego, California, Attorneys for Plaintiff Deborah Pettry.
Lisa A. Schmidt, Esquire, Alexander M. Krischik, Esquire and Nicole M. Henry, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Defendants Frederick W. Smith, David J. Bronczek, Alan B. Graf, Jr., Henry J. Maier, David P. Steiner, Shirley Ann Jackson, John A. Edwardson, Joshua C. Ramo, R. Brad Martin, Kimberly A. Jabal, Paul S. Walsh, Susan C. Schwab, Marvin R. Ellison, John C. Inglis, Steven R. Loranger, Gary W. Loveman, James L. Barksdale and Nominal Defendant FedEx Corporation.
SLIGHTS, Vice Chancellor
FedEx Corporation is the world’s largest express transportation company.
In 2012, its carriers delivered an average of 7,538,000 packages per day. Over the
course of a six-year span, state and federal regulators estimate that, among those
packages, an infinitesimal percentage of them contained illegal cigarettes.
Specifically, regulators alleged that, from 2006 through 2012, FedEx carriers
delivered approximately 390,000 cartons of untaxed, unstamped cigarettes to New
York residents in approximately 32,000 separate deliveries. Enforcement actions
followed. In 2018, FedEx settled the actions by paying $35.3 million and agreeing
to several internal reforms.
A FedEx stockholder brought this derivative action purportedly on behalf of
FedEx against its board of directors (the “Board”) alleging that Board members
breached their duty of loyalty by consciously failing to oversee FedEx’s compliance
with state and federal laws governing the transportation and delivery of cigarettes.
She has also sued two FedEx officers, alleging they breached their duties of care and
loyalty by failing to prevent the illegal cigarette shipments. Among other damages,
the plaintiff looks to recover the $35 million payment FedEx was required to make
to settle the New York enforcement actions.
After obtaining FedEx’s response to her books and records demand under
8 Del. C. § 220, the plaintiff filed her Verified Stockholder Derivative Complaint
(“Complaint”) comprising a single count in which she alleges breach of fiduciary
2
duty against members of the Board arising from a failure of oversight, the proverbial
Caremark claim under Delaware law, 1 and breaches of the fiduciary duties of care
and loyalty against the two officers for their role in failing to prevent the illegal
shipments.
Plaintiff elected not to demand that the Board investigate and prosecute her
claims. She instead has alleged that any such demand would have been futile
because each member of the Board faces a substantial likelihood of personal
liability. Defendants disagree and have moved to dismiss the Complaint as to all
Defendants under Court of Chancery Rule 23.1 for failure to plead demand futility
or, in the alternative, Court of Chancery Rule 12(b)(6) for failure to state a viable
claim.
After carefully reviewing the Complaint and its properly incorporated
documents, and carefully considering the parties’ arguments with respect to the
Defendants’ Motion, I am satisfied the plaintiff has failed to well plead that a
majority of the Board that would have considered her demand was unfit to do so
such that demand would have been futile. More specifically, the plaintiff has failed
adequately to plead that a majority of the Board faces a substantial likelihood of
1 In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), aff’d sub nom Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006) (reviewing and restating the duties of directors to oversee corporate operations).
3
liability on her claims or that they are otherwise disabled by interest or lack of
independence. Accordingly, the Complaint must be dismissed with prejudice under
Court of Chancery Rule 23.1. Having so concluded, I need not reach Defendants’
arguments under Court of Chancery Rule 12(b)(6).
I. BACKGROUND
I have drawn the facts from well-pled allegations in the Complaint and
documents incorporated by reference or integral to that pleading. 2 For purposes of
the motion, I accept as true the Complaint’s well-pled factual allegations and draw
all reasonable inferences in Plaintiff’s favor. 3
A. Parties
Plaintiff, Deborah Pettry, has been a stockholder of FedEx Corporation
continuously since 2014.4
Nominal Defendant, FedEx Corporation, a Delaware corporation, is a holding
company that provides “transportation, e-commerce and business services
internationally through wholly-owned subsidiaries” that include Federal Express
Corporation (“FedEx Express”), FedEx Ground Pack System (“FedEx Ground”),
2 Verified Compl. (“Compl.”) (D.I. 1); Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that on a motion to dismiss, the Court may consider documents that are “incorporated by reference” or “integral” to the complaint). 3 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
4 Compl. ¶ 11.
4
FedEx Freight Corporation and FedEx Corporate Services, Inc. (all identified
subsidiaries, together, “FedEx” or the “Company”). 5 As of May 31, 2019, FedEx
employed over 285,000 full-time employees and collectively delivered in excess of
15 million packages per day.6
Defendants are current or former officers and directors of FedEx, all of whom
held those positions during the time of the alleged wrongdoing. 7 Defendant,
Frederick Smith, founded FedEx in 1971 and has served as Chairman of the Board
and CEO of the Company since 1998.8 Defendant, Henry Maier, is FedEx Ground’s
President, and has served in this role since June 2013.9 Smith and Maier, together,
are referred to hereafter as the “Officer Defendants.” 10
Defendants, John Edwardson, Joshua Ramo, David Steiner, Shirley Jackson,
Brad Martin, Kimberly Jabal and Gary Loveman, each served on the Company’s
5 Compl. ¶ 12.
6 Id.
7 Compl. ¶¶ 13–30.
8 Compl. ¶ 13.
9 Compl. ¶ 16.
10 Since the filing of the Complaint, the other two officers named in this litigation, David Bronczek and Alan Graf, have been dismissed. D.I. 19.
5
Board and Audit Committee during the relevant time period.11 Where appropriate,
they are collectively referred to as the “Audit Committee Defendants.”
Along with the Audit Committee Defendants, Defendants, Martin Ellison,
Susan Schwab, Paul Walsh, John Inglis and Smith, were all members of the Board
during the relevant time and were also members of the Board at the time this lawsuit
was filed.12 These Defendants collectively are referred to as the “Demand
Defendants” and make up the “Demand Board.”13
The final two Defendants, Steven Loranger and James Barksdale, were
members of the Board during the time of the alleged wrongdoing but were no longer
on the Board at the time this lawsuit was filed. All of the Defendants, except Henry
Maier, are collectively referred to as the “Director Defendants.” 14
B. The Regulation of Tobacco Shipments
FedEx, as a major common carrier, is subject to an array of statutes and
regulations including federal, state and local laws governing the transportation of
11 Compl. ¶¶ 17–22, 28, 36. Of the Audit Committee Defendants, only Mr. Loveman was not on the Board that would have considered a litigation demand. Compl. ¶ 73. 12 Compl. ¶¶ 13, 23–26, 73.
13 Non-party, Patricia Griffith, was the twelfth and final member of the Demand Board.
14 Compl. ¶¶ 27, 29.
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cigarettes and other tobacco products.15 Under federal law, FedEx is subject to the
Contraband Cigarette Trafficking Act (“CCTA”), which prohibits transactions
involving cigarettes not bearing appropriate state tax stamps; the Prevent All
Cigarette Trafficking Act (“PACT”), which prohibits remote cigarette purchases and
delivery of tobacco products through the United States Postal Service; the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), which makes illegal cigarette
trafficking a racketeering offense; and, finally, 49 U.S.C. § 80302, which prohibits
common carriers from transporting contraband cigarettes.16 Under relevant state law
(in this instance, New York law), FedEx is subject to New York Public Health Law
§ 1399-11 (“Section 1399-11”), which prohibits common carriers, including FedEx,
from delivering cigarettes directly to unlicensed cigarette dealers. 17
C. New York’s Cigarette Trafficking Investigations and Enforcement
In 2004, the New York Attorney General (“NYAG”) “initiated an
investigation into FedEx’s illegal shipment of cigarettes to individual New York
consumers and residences.”18 FedEx resolved that investigation two years later,
in February 2006, by entering into an Assurance of Compliance agreement (“AOC”)
15 Compl. ¶¶ 41–43.
16 Compl. ¶ 42.
17 Compl. ¶ 43.
18 Compl. ¶¶ 3, 45.
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with the NYAG. 19 Under the AOC, FedEx “agreed to cease all deliveries to
unlicensed persons in New York,” as required by Section 1399-11.20 The AOC also
mandated that FedEx “implement internal processes and controls designed to assure
that the Company would not engage in further illegal cigarette deliveries.” 21 FedEx
agreed to pay $1,000 for each violation of the AOC moving forward.22
Following the AOC, customers continued to use FedEx to ship thousands of
cartons of cigarettes, including unstamped cigarettes.23 These customers included
Cigarettes Direct to You (“CD2U”), Native Made Tobacco (“Native Tobacco”),
FOW Enterprises, Inc. (“FOW”) and Shinnecock Smoke Shop (“Shinnecock”).24
In August 2011, the City of New York (the “City”) informed FedEx that it
had violated state and federal laws by shipping and delivering cigarettes for CD2U.25
As a result of the alleged violations, the City demanded FedEx Ground pay
$6.5 million in taxes that had been avoided by the CD2U shipments.
19 Id.
20 Id.
21 Id.
22 Id.
23 Compl. ¶ 46.
24 Id.
25 Compl. ¶ 47.
8
FedEx declined.26 On March 12, 2012, the City served a subpoena on FedEx Ground
and, a year later, on March 15, 2013, FedEx paid the City $2.4 million to settle.27
This settlement spurred the City and the state of New York to serve further
subpoenas related to other potentially illegal cigarette shipments.28
On December 30, 2013, the City filed a lawsuit in federal court, with the state
of New York joining on March 30, 2014 and adding further claims, accusing FedEx
of violating the CCTA, PACT, RICO, Section 1399-11 and the AOC.29 The
complaint alleged FedEx made 20,000 deliveries of 121,000 cartons of cigarettes for
Shinnecock between 2006 and 2012, 10,500 deliveries of 260,000 cartons of
cigarettes for CD2U between 2006 and 2009, 900 deliveries of 7,850 cartons of
cigarettes for Native Tobacco between 2007 and 2012, and 600 deliveries of 3,220
cartons of cigarettes for FOW between 2006 and 2012. 30
The enforcement action did not cause FedEx to cease the illegal shipments of
cigarettes.31 This led to another lawsuit on December 11, 2017, again filed by the
26 Id.
27 Id.
28 Id.
29 Compl. ¶ 48.
30 Compl. ¶¶ 49–51.
31 Compl. ¶ 54.
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City and state of New York, alleging further illegal shipments through at least
April 2016.32 On October 5, 2018, the federal court presiding over each of the
enforcement actions against FedEx granted plaintiffs’ motion for summary
judgment, finding that FedEx knowingly shipped over 10,000 unstamped cigarettes
in violation of Section 1399-11 and the AOC. 33
“In December 2018, FedEx agreed to settle all pending enforcement actions
for $35.3 million.” 34 “As part of the settlement, the Company also agreed to
implement annual training on tobacco shipments and employ an independent
consultant to assist with identifying and halting illegal tobacco shipments in
New York.”35
D. Board Conduct Regarding Cigarette Shipments
By at least July 16, 2012, the Board was aware that the Company was violating
the AOC and that the City was investigating FedEx for its role in shipping and
delivering unstamped and untaxed cigarettes. 36 Plaintiff pegs July 16, 2012, because
that is the day the Company’s General Counsel, Christine Richards, updated the
32 Id.
33 Compl. ¶ 55.
34 Compl. ¶ 56.
35 Compl. ¶ 67.
36 Compl. ¶ 58.
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Board on the status of the then-pending enforcement actions related to the shipment
of cigarettes. 37 Roughly two weeks prior, on July 3, 2012, the Company’s outside
counsel, K&L Gates LLP, issued a report of its findings after an internal
investigation of the Company’s cigarette shipping practices in which it determined
that FedEx was not complying with the AOC (the “K&L Report”).38 Ms. Richards
allegedly relayed the conclusions of the K&L Report to the Board as part of her
July 16 presentation. 39 Following this meeting, the Board routinely received updates
on the cigarette enforcement actions.40 In fact, “between January 2014 and
December 2015, the Board was updated regarding this litigation on at least eleven
different occasions.”41 Separately, the Audit Committee likewise routinely received
updates regarding the cigarette litigation. 42
In June 2014, the Board created a committee (the “2014 Demand Committee”)
to investigate allegations contained in a demand letter sent by a concerned
stockholder requesting that the Company bring claims against FedEx directors and
37 Id.
38 Compl. ¶ 59.
39 Id.
40 Compl. ¶ 60.
41 Compl. ¶ 7.
42 Compl. ¶¶ 64–65; see also Compl. ¶ 7 (“During this time, the Audit Committee also discussed the cigarette transportation litigation on at least six separate occasions.”).
11
officers regarding the Company’s unlawful cigarette shipping practices. 43 The 2014
Demand Committee released a report in 2019 detailing its findings (the “Demand
Report”) and ultimately concluded it was not in the best interests of FedEx to bring
a lawsuit against its directors and officers.44
Citing both Board meeting minutes and the Demand Report, Plaintiff alleges
that, notwithstanding its full awareness of FedEx’s illegal conduct, “the Board failed
to take any action to address the unlawful practices, and the Company continued to
violate the law.” 45 The illegal shipment of cigarettes around the country lasted at
least until April 2016, when the company announced it was banning the shipment of
cigarettes across its platform with few exceptions.46 The Demand Report indicates
that two employees were disciplined for failure to discharge their responsibility to
ensure compliance with the AOC and applicable state and federal laws. 47 And, as
mentioned, FedEx agreed, following its December 2018 settlement with the City and
state of New York, to implement annual training regarding tobacco shipments and
43 Opening Br. in Supp. of Defs.’ Mot. to Dismiss Pl.’s Verified Compl. (“OB”) (D.I. 12), Ex. 7 (“Demand Report”) at 5. 44 Id. at 42.
45 Compl. ¶ 66; see also Compl. ¶ 76 (“[The Audit Committee Defendants] failed to implement any remedial measure or take any other action to remedy the issues or ensure the Company complied with the law and the AOC going forward.”). 46 Compl. ¶ 66.
47 Demand Report at 11.
12
to develop systems to identify potential illegal cigarette shipments moving
forward. 48
E. Procedural History
Plaintiff filed her Complaint on October 3, 2019, after obtaining books and
records from the Company under 8 Del. C. § 220. The Complaint asserts one
derivative claim on behalf of FedEx against the Director Defendants for breach of
the duty of loyalty for lack of oversight and against the Officer Defendants for their
gross negligence (at least) in disregarding the illegal activity associated with
cigarette shipments. The Complaint alleges that on July 16, 2012, the Board was
alerted to illegal cigarette shipments that occurred from 2006 to 2012.
Notwithstanding this knowledge, the Complaint alleges the Board did nothing to
remediate the shipments, that the shipments continued to occur until April 2016 and
that the Company was forced to pay roughly $35 million in settlement with
New York regulators as a result of prior illegal cigarette shipments.
On November 5, 2019, Defendants filed a joint motion to dismiss the
Complaint under Court of Chancery Rule 23.1 for failure to make a pre-suit demand
or plead demand futility, and under Court of Chancery Rule 12(b)(6) for failure to
state a claim upon which relief can be granted. Defendants argue that the action
48 Compl. ¶ 67.
13
must be dismissed because, contrary to the Complaint’s conclusory allegations, the
Board did not “do nothing” in response to being alerted about past illegal cigarette
shipments in July 2012, but rather was engaged with counsel about the enforcement
actions, deferred to the 2014 Demand Committee to investigate and react,
reprimanded employees, banned all cigarette shipments in April 2016 and instituted
certain training and compliance programs in 2018. Plaintiff responds by noting that
any action supposedly taken by the Board was taken too late and at a time where the
damage had already been done. This matter was submitted for decision on April 6,
2021.
II. ANALYSIS
By declining to make a litigation demand on the Board, Plaintiff has denied
the Board of its presumptive right to manage the Company, including its right to
manage the Company’s litigation asset. In doing so, Plaintiff was obliged to justify
her bypass of the Board by pleading with particularity the reasons why the Board
was disabled from performing its management function with respect to the
investigation and prosecution of the claims brought in the Complaint. She has failed
to do so. Instead, she has “conflate[d] concededly bad outcomes from the point of
view of the Company with bad faith on the part of the Board.” 49 Because I have
49 In re Gen. Motors Co. Deriv. Litig., 2015 WL 3958724, at *11 (Del. Ch. June 26, 2015).
14
concluded that demand is not excused under Chancery Rule 23.1, I will not reach
Defendants’ arguments under Rule 12(b)(6). 50 The analysis begins and ends with
demand futility.
A. The Demand Futility Standard
“A cardinal precept of the General Corporation Law of the state of Delaware
is that directors, rather than shareholders, manage the business and affairs of the
corporation.”51 Plaintiff’s claim against all Defendants for breach of fiduciary duty
alleges harm suffered by FedEx. Thus, the claim belongs to FedEx and the decision
whether to pursue the claim presumptively lies with the Board.52 With that said, our
law recognizes that, “[i]n certain circumstances, stockholders may pursue litigation
derivatively on behalf of the corporation as a matter of equity to redress the conduct
50 Plaintiff has not meaningfully attempted to allege that a majority of the Demand Board is conflicted, either by lack of independence or interest, with respect to the Officer Defendants or the non-Demand Board Director Defendants. For that reason, I do not address the claims against the Officer Defendants separately under Rule 12(b)(6). See Marchand v. Barnhill, 2018 WL 4657159, at *16 (Del. Ch. Sept. 27, 2018), rev’d on other grounds, 212 A.3d 805 (Del. 2019) (“The Complaint offers no reason to doubt that [the majority of the board was] independent of the Officer Defendants and would have been capable of impartially considering a demand.”). 51 Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 52 White v. Panic, 783 A.2d 543, 550 (Del. 2001) (“In most situations, the board of directors has sole authority to initiate or to refrain from initiating legal actions asserting rights held by the corporation.”).
15
of a torpid or unfaithful management . . . where those in control of the company
refuse to assert (or are unfit to consider) a claim belonging to it.” 53
“Because stockholder derivative suits by [their] very nature . . . impinge on
the managerial freedom of directors, our law requires that a stockholder satisfy the
threshold demand requirements of Court of Chancery Rule 23.1 before he is
permitted to assume control of a claim belonging to the corporation.” 54 Rule 23.1,
similar to Rule 9(b) in the context of fraud, requires pleadings to “comply with
stringent requirements of factual particularity that differ substantially from the
permissive notice pleadings governed solely by Chancery Rule 8(a).” 55 To meet the
Rule 23.1 requirements, the stockholder must plead with particularity either that she
made a demand on the company’s board of directors to pursue particular claims or
why any such demand would be futile, thereby excusing the need to make a demand
altogether. 56 Where, as here, the stockholder plaintiff chooses the latter path, she
53 In re CBS Corp. S’holder Class Action & Deriv. Litig., 2021 WL 268779, at *27 (Del. Ch. Jan. 27, 2021), as corrected (Feb. 4, 2021) (quoting Cumming v. Edens, 2018 WL 992877, at *11 (Del. Ch. Feb. 20, 2018) (internal quotations omitted)). 54 Horman v. Abney, 2017 WL 242571, at *6 (Del. Ch. Jan. 19, 2017) (cleaned up).
55 Brehm, 746 A.2d at 254.
56 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044 (Del. 2004); Wood v. Baum, 953 A.2d 136, 140 (Del. 2008).
16
“must plead particularized facts creating a reasonable doubt concerning the Board’s
ability to consider the demand.” 57
While the continued utility of a binary approach to demand futility
legitimately has been called into question, for now, Delaware still applies one of two
tests when deciding whether demand upon the board would be futile. 58 The first,
established in Aronson v. Lewis, “applies to claims involving a contested transaction
i.e., where it is alleged that the directors made a conscious business decision in
breach of their fiduciary duties.”59 The second, established in Rales v. Blasband,60
applies where a majority of the current members of the board “had not participated
in the challenged decision,”61 or “where the subject of a derivative suit is not a
business decision . . . [such as when the board is alleged to have violated its]
57 In re CBS, 2021 WL 268779, at *28.
58 See United Food & Commerc. Workers Union v. Zuckerberg, 2020 WL 6266162, at *9 (Del. Ch. Oct. 26, 2020) (observing that “the Aronson test has proved to be comparatively narrow and inflexible in its application, and its formulation has not fared well in the face of subsequent judicial developments”). 59 473 A.2d at 814; see also Wood, 953 A.2d at 140 (explaining the two demand futility tests). Under Aronson, the plaintiff must plead particularized facts that create a reasonable doubt that (i) the directors are disinterested and independent or (ii) the challenged transaction was otherwise the product of a valid exercise of business judgment. Wood, 953 A.2d at 140. 60 634 A.2d 927 (Del. 1993).
61 Zuckerberg, 2020 WL 6266162, at *16.
17
oversight duties.”62 “The central question of a Rales inquiry, no matter the context,
is the same: ‘whether the board can exercise its business judgment on the corporate
behalf in considering demand.’” 63 In refining that question, Rales instructs that a
director cannot objectively exercise her business judgment in considering a demand
if she is either (1) “interested,” meaning, among other things, that she faces a
“substantial likelihood of liability” for her role in the alleged corporate wrongdoing;
or (2) not independent of another interested fiduciary. 64
“On a motion to dismiss pursuant to Rule 23.1, the Court considers the same
documents, similarly accepts well-pled allegations as true, and makes reasonable
inferences in favor of the plaintiff—all as it does in considering a motion to dismiss
under Rule 12(b)(6).”65 Given the heightened pleading requirements of Rule 23.1,
however, “conclusory allegations of fact or law not supported by allegations of
62 Wood, 953 A.2d at 140; see also Horman, 2017 WL 242571, at *6 (holding that Rales applies “when a plaintiff challenges board inaction such as when a board is alleged to have consciously disregarded its oversight duties”). 63 McElrath ex rel. Uber Techs. v. Kalanick, 2019 WL 1430210, at *8 (Del. Ch. Apr. 1, 2019), aff’d sub nom. McElrath v. Kalanick, 224 A.3d 982 (Del. 2020) (quoting Inter- Mktg. Gp. USA, Inc. v. Armstrong, 2019 WL 417849, at *4 (Del. Ch. Jan. 31, 2019)). 64 Rales, 634 A.2d at 934, 936 (noting that, at bottom, the court must “determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand”); In re CBS, 2021 WL 268779, at *28 (same). 65 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 976 (Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004) (citing White, 783 A.2d at 549).
18
specific fact may not be taken as true.”66 In this case, because the Complaint cites
documents Plaintiff obtained through her Section 220 demand, I may consider those
documents under the incorporation-by-reference doctrine to determine whether the
Complaint has accurately referenced their contents in support of its claims and in
pleading demand futility.67
While the Complaint makes a half-hearted attempt to question the
independence of one director, Smith, the gravamen of the Complaint’s demand
futility allegations is that a majority of the Demand Board is interested under Rales
because their “inaction” when confronted with the Company’s illegal cigarette
shipments was “of a nature that would expose [them] to ‘a substantial likelihood’ of
personal liability.” 68
B. The Caremark Standard
As Chancellor Allen first observed in Caremark, and has since been
emphasized by this court many times, perhaps to redundance, 69 the claim that
66 Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988) (cleaned up).
67 Reiter on Behalf of Cap. One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *5–6 (Del. Ch. Oct. 18, 2016); Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016). 68 Horman, 2017 WL 242571, at *6 (“Particularized facts create a reasonable doubt of the board’s independence and disinterestedness when the demand would reveal board inaction of a nature that would expose the board to ‘a substantial likelihood’ of personal liability.”). 69 See Teamsters Loc. 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *1 (Del. Ch. Aug. 24, 2020) (“It has become among the hoariest of Chancery clichés for an
19
corporate fiduciaries have breached their duties to stockholders by failing to monitor
corporate affairs is “possibly the most difficult theory in corporation law upon which
a plaintiff might hope to win a judgment.” 70 A decade after Caremark, our Supreme
Court affirmed the doctrine Chancellor Allen announced there and clarified that our
law will hold directors personally liable only where, in failing to oversee the
operations of the company, “the directors knew that they were not discharging their
fiduciary obligations.” 71 At the pleadings stage, a plaintiff must allege particularized
facts that satisfy one of the necessary conditions for director oversight liability
articulated in Caremark: either that (1) “the directors utterly failed to implement any
reporting or information system or controls”; or (2) “having implemented such a
system or controls, [the directors] consciously failed to monitor or oversee its
operations thus disabling themselves from being informed of risks or problems
requiring their attention.”72
opinion to note that a derivative claim against a company’s directors, on the grounds that they have failed to comply with oversight duties under Caremark, is among the most difficult of claims in this Court to plead successfully.”). 70 Caremark, 698 A.2d at 967; Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *7 (Del. Ch. Nov. 30, 2007) (same); Desimone v. Barrows, 924 A.2d 908, 939 (Del. Ch. 2007) (same); Guttman v. Huang, 823 A.2d 492, 506 n.33 (Del. Ch. 2003) (same). 71 Stone, 911 A.2d at 370.
72 Id.
20
The Caremark standard “draws heavily upon the concept of director failure to
act in good faith.” 73 As our Supreme Court explained in In re Walt Disney Co.
Derivative Litigation, the “intentional dereliction of duty” or “conscious disregard
for one’s responsibilities,” which “is more culpable than simple inattention or failure
to be informed of all facts material to the decision,” reflects that directors have acted
in bad faith and cannot, by default, avail themselves of defenses grounded in a
presumption of good faith.74 In order to plead a derivative claim under Caremark,
therefore, a plaintiff must plead particularized facts that allow a reasonable inference
the directors acted with scienter which, in turn, “requires [not only] proof that a
director acted inconsistent[ly] with his fiduciary duties,” but also “most importantly,
that the director knew he was so acting.” 75
“Delaware courts routinely reject the conclusory allegation that because
illegal behavior occurred, internal controls must have been deficient, and the board
must have known so.” 76 Rather, the plaintiff must plead with particularity
73 Id. at 369.
74 906 A.2d 27, 66 (Del. 2006).
75 In re Massey Energy Co., 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011).
76 Desimone, 924 A.2d at 940.
21
“a sufficient connection between the corporate trauma and the board.” 77 To draw
that connection, the plaintiff must well plead facts that allow an inference that the
directors’ behavior falls within either prong one (no oversight system or controls)
or two (failure to oversee once controls are in place) of Caremark. 78
Plaintiff concedes that the only claim raised in her Complaint is that a majority
of the Demand Defendants violated their Caremark duties under prong two.79
In other words, there is no allegation that the Board utterly failed to implement any
reporting or information systems of controls. “To state a ‘prong two’ Caremark
claim, Plaintiff must ‘plead [particularized facts] that the board knew of evidence of
corporate misconduct—the proverbial ‘red flag’—yet acted in bad faith by
consciously disregarding its duty to address that misconduct.’” 80
77 La. Mun. Police Emps.’ Ret. Sys. v. Pyott, 46 A.3d 313, 340 (Del. Ch. 2012), rev’d on other grounds, 74 A.3d 612 (Del. 2013). 78 Stone, 911 A.2d at 370.
79 Answering Br. in Opp’n to Defs.’ Mot. to Dismiss Pl.’s Verified Compl. (“AB”) (D.I. 16) at 16–34. 80 Chou, 2020 WL 5028065, at *17 (quoting Reiter, 2016 WL 6081823, at *8) (alterations in original).
22
C. The Complaint Fails to Well Plead the Demand Directors Consciously Disregarded Red Flags
Plaintiff’s focus on “red flags” the Board is alleged to have consciously
ignored begins with the delivery of the K&L Report to the Board on July 16, 2012.81
To understand the significance of this focus, it is useful to note that the litigation
filed on December 30, 2013 by the City, and supplemented on March 30, 2014 by
the state of New York, concerned alleged illegal cigarette shipments from 2006 to
2012, a time period prior to the K&L Report. 82 Those shipments, therefore, are not
part of the corporate trauma that forms the basis of Plaintiff’s claim.83 The illegal
shipments at issue are those that followed the K&L Report and resulted in
81 Compl. ¶ 6 (“[R]epeated warnings that FedEx’s cigarette deliveries were unlawful . . . began in 2012 when an internal investigation revealed that FedEx was not complying with the AOC.”); Compl. ¶¶ 58–59 (“[B]y July 2012, [the Board was] aware of FedEx’s noncompliance with the AOC.”). I note that neither the Complaint nor Plaintiff’s brief alleges that the AOC itself was a red flag that put the Board on notice of continued illegal cigarette shipments. AB at 17–19 (discussing a handful of potential red flags without any mention of the AOC). 82 Compl. ¶¶ 48–51.
83 The K&L Report was commissioned by the Board after the City served FedEx with a subpoena related to CD2U cigarette shipments in March 2012. Compl. ¶¶ 57–59. Of course, the Board’s initiation of an internal investigation in response to a subpoena can hardly be characterized as its conscious disregard of a red flag. It is not surprising, therefore, that Plaintiff would have the Court focus on post-K&L Report events, as the report itself is powerful evidence that the Board responded to red flags when they saw them.
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litigation— shipments from 2012 through April 2016—all of which were the subject
of the NYAG’s December 11, 2017 enforcement action. 84
According to Plaintiff, in response to the K&L Report, the Board “failed to
take any action to address the unlawful practices, and the Company continued to
violate the law.” 85 That conclusory allegation ignores other facts acknowledged in
the Complaint.
First, the Complaint’s well-pled allegations make clear that both the entire
Board and the Audit Committee were kept apprised of the ongoing enforcement
actions from inception through settlement. The Complaint notes that between
January 2014 and December 2015, the Board was updated on eleven separate
occasions, while the Audit Committee was apprised of the status of the litigation at
least six different times. 86 The Board’s level of engagement during this time period
does not support an inference of bad faith indifference and distinguishes this case
from one of Plaintiff’s favorite cases, Teamsters v. Chou.87 There, in finding that
the plaintiff well pled the board of a pharmaceutical company had failed to monitor
the company’s compliance with federal regulations, the court emphasized the
84 Compl. ¶ 54.
85 Compl. ¶ 66 (emphasis added).
86 Compl. ¶¶ 7, 59–66.
87 Chou, 2020 WL 5028065.
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complaint’s allegations that the board had commissioned an investigation by outside
counsel but the board’s “Audit Committee never received any reports specifically
concerning compliance.” 88 Here, as indicated, the Complaint pleads the opposite.
Second, the Board formed the 2014 Demand Committee to consider
a stockholder demand related to the alleged illegal cigarette shipments and prior
settlements with the City and state of New York. 89 The Demand Report,
incorporated by reference at paragraphs 6, 47, 58 and 59 of the Complaint, released
in 2019, found that the Company should not bring claims against the Director
Defendants for violation of their duty of oversight related to illegal cigarette
shipments because there was no evidence of bad faith.90 The existence of the
88 Id. at *20.
89 Demand Report at 5.
90 Id. at 42. I note that the Demand Report, among other Section 220 documents, is incorporated by reference into the Complaint to the extent it directly disputes Plaintiff’s conclusory assertion that the Board did nothing when it became aware illegal cigarette shipments continued following the AOC. See, e.g., Compl. ¶ 66 (“Nonetheless, the Board failed to take any action to address the unlawful practices, and the Company continued to violate the law.”); see also Phoenix Mgmt. Tr. v. Win S. Credit Union, 2019 WL 1575272, at *5 (Del. Ch. Mar. 25, 2019) (“When incorporation-by-reference is appropriate, a complaint may, despite allegations to the contrary, be dismissed where the unambiguous language of documents upon which the claims are based contradict the complaint’s allegations.” (internal quotations omitted)). In her brief, Plaintiff argues that the Section 220 documents reflect the Board’s complete lack of discussion or action regarding the illegal cigarette shipments. AB at 36 (discussing the lack of board minutes reflecting Board discussions as evidence that no remediation efforts occurred). To the extent the Demand Report, a document made available to Plaintiff under Section 220 and referenced in the Complaint, directly contradicts that allegation, it is incorporated here for that purpose.
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Demand Report alone refutes any reasonable inference that the Board sat idly by
while red flags whipped in the breeze before its members.91
Third, Plaintiff acknowledges that several Company personnel were
reprimanded for their handling of the CD2U account and issues related to the AOC
following the issuance of the K&L Report. 92 While Plaintiff argues there is no
indication the Board knew about the reprimands, the fact that reprimands occurred
91 In re Lear Corp. S’holder Litig., 967 A.2d 640, 655 (Del. Ch. 2008) (“Where, as here, the board employed a special committee that met frequently, hired reputable advisors, and met frequently itself, a Caremark-based liability theory is untenable.”). Plaintiff argues that the 2014 Demand Committee’s decision to wait until the conclusion of the New York litigation to issue the Demand Report creates a reasonable inference that the 2014 Demand Committee was not active and consciously disregarded its duties. AB at 27. That argument, however, calls on the Court improperly to “second-guess the timing and manner of the board’s response to [] red flags” and rests on a factual predicate that “fails to state a Caremark claim.” In re Qualcomm Inc. FCPA S’holder Deriv. Litig., 2017 WL 2608723, at *4 (Del. Ch. June 16, 2017). The 2014 Demand Committee, in its business judgment, concluded “in lieu of creating a parallel factual record . . . it would instead continue to monitor the formal record as developed in the New York Litigation as a part of its ongoing investigation of the claims set forth in the Demand, but defer a final recommendation to the Board until such time as that proceeding had concluded.” Demand Report at 7. Plaintiff’s quibbles with that approach amount to nothing more than a disagreement about the merits of a deliberate decision, and the resultant timing of responsive measures, and fall well short of supporting an inference of bad faith. See In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 135 n.96 (Del. Ch. 2009) (“[J]udges are in no position to second guess well-informed business decisions made in good faith, and the allegations in the Complaint are not sufficient to suggest that the directors knowingly or in bad faith disregarded their duty to monitor.”). 92 Reply Br. in Supp. of Defs.’ Mot. to Dismiss Pl.’s Verified Compl. (“RB”) (D.I. 26) at 16; Demand Report at 11 (“As a result of the K&L Gates report, sales manager Grant Kuhn and account executive Renee Thomas were disciplined by the Company for their handling of the CD2U account. In addition, staff director Andy Lynn was reprimanded for failing to ensure compliance with the communications and reporting requirements of the AOC.”).
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is contrary to the “do nothing” environment within a company that often fosters
board-level Caremark liability.93
Finally, and perhaps most importantly, the Complaint acknowledges that:
(1) by at least April 2016, FedEx banned nearly all tobacco shipments;94 and (2) in
2019, following the December 2018 settlement with the City and state of New York,
FedEx introduced numerous training programs and implemented measures to
increase the detection of illegal cigarette shipments. 95 Plaintiff does not deny that
these actions were taken to remedy the problems at issue in the New York litigation,
but rather argues, again, that the remediation measures came too late.96 For example,
she argues the 2016 policy change banning cigarette shipments “was not made until
more than three years after the Board and Audit Committee were on notice of the
93 See Marchand v. Barnhill, 212 A.3d 805, 809 (Del. 2019) (holding that board’s failure to monitor compliance with FDA regulations was the product of a company-wide environment of non-responsiveness); In re Clovis Oncology, Inc. Deriv. Litig., 2019 WL 4850188, at *1 (Del. Ch. Oct. 1, 2019) (emphasizing the complacent environment that pervaded the entire company). 94 Compl. ¶ 66 (“[T]he Company continued shipping contraband cigarettes until at least April 2016 . . . .”); Demand Report at 14 (“Effective January 1, 2016, FedEx banned the shipment of any tobacco, with four customer exceptions: Kroger, Meijer, Dollar General, and Spartan Nash (which carries cigarettes exclusively for Dollar General).”). 95 Compl. ¶¶ 56, 67.
96 AB at 28–29.
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compliance issues and several years after the Company began violating the AOC.”97
That allegation does not support a reasonable inference of bad faith.
At the outset, I note that the April 2016 policy change was made prior to any
litigation filed by the NYAG concerning the time period in dispute (i.e., the period
following the July 16, 2012 Board meeting where the Board became aware that
illegal cigarette shipments continued after the AOC).98 It is hard to understand this
policy change as anything but a direct response to the illegal cigarette shipments of
which the Board was aware that occurred between 2006 and 2012. To the extent the
focus is on the manner and timing of the Board’s response, that focus misses the
mark for a Caremark claim.99 Moreover, the Board’s rationale for waiting until
April 2016 to acknowledge past wrongdoing by banning nearly all cigarette
shipments makes sense; the Company was embroiled in, and actively defending,
litigation involving allegations of illegal cigarette shipments throughout 2013–
97 Id. at 28.
98 Compl. ¶ 54.
99 See Qualcomm Inc., 2017 WL 2608723, at *4.
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2016. 100 While one might disagree with the approach, a reasonable factfinder could
not conceivably find that it was the product of bad faith.101
Plaintiff makes much of the fact that the Company’s substantial Section 220
production did not reveal a single Board minute between July 16, 2012 and
February 18, 2015 evidencing a Board discussion regarding compliance with the
AOC or whether the issues identified in the K&L Report were being remediated.102
This absence of contemporaneous evidence, Plaintiff says, entitles her to the
100 Compl ¶¶ 47–56. This court has acknowledged that it is appropriate for boards to take into account the implications of board-level decisions on the company’s defenses in ongoing litigation. See, e.g., Brenner v. Albrecht, 2012 WL 252286, at *1 (Del. Ch. Jan. 27, 2012) (granting a motion to stay where the litigation would prejudice the defense of a separate securities class action). 101 See Qualcomm, 2017 WL 2608723, at *4; Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009) (emphasizing “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties”); Okla. Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *24 (Del. Ch. Dec. 18, 2017) (“[T]here are no allegations suggesting that any of [the Company’s] officers or directors viewed themselves (or [the Company]) as above the law . . . the picture that emerges is of a massive, poorly integrated company that made efforts to comply with [the law] . . . . Those efforts failed in many instances, but that is not enough . . . [b]ad results alone do not imply bad faith.”). As in Corbat, it is appropriate to note (again) the magnitude of FedEx’s operations: FedEx Express and FedEx Ground together delivered an average of 7,538,000 packages per day in fiscal 2012. See OB, Ex. 12 at 49, 52 (FedEx, Annual Report (Form 10-K) (July 16, 2012)); In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 170 (Del. 2006) (taking judicial noting of facts within a form 10-Q that were not reasonably in dispute). The number of illegal cigarette shipments dwarfs in comparison to the total number of shipments companywide. To be sure, the illegal cigarette shipments were problematic, needed to be addressed and were addressed. But Plaintiff’s Caremark claim supposes that this was the only challenge confronting this Board. That also is not reasonably conceivable. 102 AB at 21 n.15.
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inference that the Director Defendants never even discussed, much less attempted to
oversee, the remediation of illegal cigarette shipments and, thus, consciously
allowed the illegality to continue. In this regard, Plaintiff cites Hughes v. Xiaoming
Hu, where this court noted, “if the Company failed to produce a document that it
would reasonably be expected to possess if a particular event had occurred, then the
plaintiff is entitled to a reasonable inference that the event did not occur.” 103 Plaintiff
correctly quotes Hughes but her citation to the decision is misplaced.
First, as already mentioned, there are other documents confirming Board
responses, and acknowledgements of these responses in the Complaint.104 Those
responses include the Board (and its Audit Committee) monitoring the enforcement
proceedings in New York, the Company reprimanding employees, the Board
enlisting the 2014 Demand Committee to investigate Board-level misconduct and
make recommendations on whether to pursue claims and the Board ultimately
directing that the Company ban most cigarette shipments and reform processes for
103 2020 WL 1987029, at *2 (Del. Ch. Apr. 27, 2020) (citing Morrison v. Berry, 191 A.3d 268, 275 n.20 (Del. 2018)); see also In re Tyson Foods, Inc., 919 A.2d 563, 577 (Del. Ch. 2007) (finding the lack of exculpatory evidence in a 220 production regarding board action as creating an inference that the board took no action). 104 Demand Report; Compl. ¶¶ 56, 59–66. Contra Chou, 2020 WL 5028065, at *20 (noting that not a single Section 220 document reflected board action to oversee compliance with FDA regulations).
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detecting illegal shipments.105 Plaintiff argues that, at a minimum, certain corrective
measures, including reprimanding employees and the April 2016 decision to stop
shipping cigarettes, evidences management rather than Board action. 106 Even if
Plaintiff is correct, our law does not demand board action in all instances; if action
is taken by the Company to remediate the alleged harm, that is a reflection of a lack
of bad faith on the part of the Board.107
Second, according to the Complaint, the Board minutes actually do reflect
Board-level discussions in their references to the updates the Board received
regarding “the cigarette transportation litigation pending in New York.”108 The
reasonable inference to draw, then, is not that the Board discussed nothing and did
nothing, but rather that the Board was engaged on this issue, allowing the New York
litigation to play out prior to making any determinations regarding the remediation
105 Demand Report at 14; Compl. ¶¶ 56, 59–66. I note these facts, some of which are directly stated in the Complaint, distinguish this case from In re Tyson Foods, Inc., where “the complaint contain[ed] detailed allegations that would lead [the court] to infer that some transactions were not, in fact, reviewed.” Tyson, 919 A.2d at 578. 106 AB at 28 (arguing the Board was not aware of FedEx management’s decision to reprimand employees or stop shipping cigarettes). 107 Corbat, 2017 WL 6452240, at *20 (noting that certain management actions, including instituting “a global, end-to-end assessment of Citi’s management effectiveness” and development of “Project Andes” represented clear and sufficient responses to red flags to avoid a finding that Citi’s board acted in bad faith); Horman, 2017 WL 242571, at *13 (finding a lack of bad faith where the board was informed of a multitude of management remediation efforts). 108 Compl. ¶¶ 60–63.
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of the underlying alleged illegal conduct.109 Plaintiff’s conclusory allegations to the
contrary are but another flawed attempt to second-guess the Board’s decision
making.110
The cases cited by Plaintiff to resist dismissal exemplify far more egregious
conduct than Plaintiff has alleged here. In In re Massey Energy Co., the complaint
well pled that the management of Massey, as directed by its board, “fostered a
business strategy expressly designed to put coal production and higher profits over
compliance with the law” and took “an openly aggressive attitude with”
regulators.111 Massey’s CEO publicly flouted “that the idea that governmental safety
regulators knew more about mine safety than he did was silly.”112 The Massey board
also knew of and fostered “a corporate culture premised on the view that the
company’s management knew better than the law about what was necessary to run
safe mines.”113 Rather than respond to the clear red flags that Massey’s management
109 Here again, the lack of detailed Board minutes reflecting specific discussions or remediation steps in the midst of the Company’s defense of the New York enforcement actions is not surprising given the Board’s appreciation that the Company was defending, not admitting, the claims and that subpoenas for Company documents were inbound on a regular basis. Compl ¶¶ 47–56. 110 Qualcomm, 2017 WL 2608723, at *4.
111 Massey, 2011 WL 2176479, at *19.
112 Id.
113 Id.
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was belittling environmental regulations, “the Board allowed itself to continue to be
dominated by [the CEO]” and did “nothing of actual substance to change the
direction of the company’s real policy.” 114 Here, the 2016 decision to prohibit
cigarette shipping altogether and the various remedial measures taken as a result of
the 2019 settlement illustrates the Board’s “attitude and commitment to” ensuring
compliance with federal and state cigarette shipment laws.115 Unlike Massey, there
was no rogue CEO and no indifferent board fostering an environment of law
breaking.
Plaintiff’s reliance upon Westmoreland City Employee Retirement System v.
Parkinson is likewise inapt.116 There, the Seventh Circuit, applying Delaware law,
determined that directors consciously disregarded their responsibility to ensure
compliance with a consent decree where the board took active steps to minimize
remediation “despite repeated warnings from the FDA . . . that were directly
communicated to [the CEO] and passed along to the board of directors.”117 Here,
114 Id.
115 Id. at *20 (“Instead of becoming a corporation with a new attitude and commitment to safety that won recognition for that change from its regulators, Massey continued to think it knew better than those charged with enforcing the law, and in fact, often argued with the law itself.”). 116 727 F.3d 719 (7th Cir. 2013).
117 Id. at 726.
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the Complaint fails to plead any active efforts on the part of any member of the
Board or management to avoid remediation.
Similarly, in In re Abbott Laboratories Derivative Shareholders Litigation,
the Seventh Circuit, again applying Delaware law, held that the plaintiff had well
pled a Caremark claim where it was alleged the board “took no steps in an effort to
prevent or remedy the situation . . . for such an inordinate amount of time result[ing]
in substantial corporate losses, establishing a lack of good faith.”118 No such
allegations are sustainable here; the Complaint acknowledges the Board actively
investigated and monitored the allegations of wrongdoing and then responded (either
at the Board level or through management) promptly after the litigation threat to the
Company subsided. Whether that approach, in hindsight, was right or wrong is not
the point; the point is that the approach was not conceivably a product of bad faith.119
Indeed, the Board’s conduct here tracks the conduct of the United Parcel
Service board of directors in Horman v. Abney, where the court dismissed a nearly
identical Caremark claim for failing to plead demand futility under Rales.120 There,
the plaintiff alleged that the UPS board had consciously disregarded red flags related
118 325 F.3d 795, 809 (7th Cir. 2003).
119 See Qualcomm, 2017 WL 2608723, at *4; Lyondell, 970 A.2d at 243; Corbat, 2017 WL 6452240, at *21. 120 2017 WL 242571.
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to its own bouts with New York in the context of illegal cigarette shipping.121
Notwithstanding the plaintiff’s allegations that the UPS board did nothing in
response to three audit committee presentations regarding the illegal shipments, the
incorporated documents established that, on the board’s watch, UPS increased
employee training, improved reporting, added a data analytics program to identify
offenders and established processes for investigating possible illegal shipments.122
Given that the plaintiff acknowledged the board was aware of these remediation
efforts, the court determined that the plaintiff failed to allege particularized facts that
allowed an inference the board acted in bad faith by doing nothing in response to red
flags.123 Similarly here, the Board was informed of FedEx’s noncompliance with
the AOC at a July 16, 2012 Board meeting, and then, within a reasonable amount of
time, the Company, with Board knowledge if not Board direction, began taking steps
to monitor and then address the risks associated with the noncompliance.124
121 Id. at *10–14.
122 Id. at *13.
123 Id.
124 Compl. ¶¶ 58–62. I note that Plaintiff makes a separate argument as to why the Audit Committee Defendants failed in their duty of oversight as members of that committee. AB at 34–37. Specifically, Plaintiff argues that the Audit Committee Defendants violated FedEx policies that expressly tasked the Audit Committee with reviewing and discussing with management and the Board risk exposures and how to address such exposures. Compl. ¶ 36; AB at 34. For the reasons already stated, Plaintiff has failed to plead that any member of the Board, including Audit Committee members, consciously disregarded red
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*****
To summarize, in response to an undisputed red flag received by the FedEx
Board in July 2012 in the form of the K&L Report, the Board swiftly, and then
regularly thereafter, received updates from FedEx’s general counsel about ongoing
litigation, first with respect to illegal cigarette shipments that occurred between 2006
and 2012, and then with respect to allegations that illegal shipments continued after
2012. When the Board was faced with a litigation demand from a shareholder in
2014 related to this precise issue, it promptly delegated its authority to investigate
and respond to the 2014 Demand Committee rather than sit on its hands and do
nothing. Meanwhile, FedEx management reprimanded employees who, in 2011,
permitted certain illegal shipments. The Company eventually chose to institute a
cigarette shipment ban altogether in April 2016.
In December 2017, the NYAG sued FedEx again for further illegal cigarette
shipments from 2012 to 2016. That is the time period Plaintiff asserts the corporate
trauma occurred. Yet, as already demonstrated, this was also the time period that
the Board and management, to the extent possible, given the specter of ongoing
litigation, began their remediation efforts. Doing anything more, as argued by
Defendants, could have easily put at risk FedEx’s defense in the ongoing
flags in bad faith. The attempt to support an inference of bad faith by referring to general policies of the Audit Committee fails for lack of specificity.
36
enforcement actions. Eventually, the Board chose to settle the enforcement actions
in December 2018, agreeing to significant training and compliance controls. When
viewing the Board and management’s actions in their totality, from July 2012, when
the Board was informed of the ongoing legal problems, until December 2018, when
it implemented strong controls to prevent further cigarette shipments, it is not
reasonably conceivable that the Board acted in bad faith in consciously disregarding
its duty to oversee the affairs of the Company. 125
125 In apparent reaction to Marchand and Clovis, both involving alleged failures to monitor “mission critical operations” of the company, the parties focus at length on the extent to which the illegal cigarette shipments implicate mission critical operations of FedEx. See Marchand, 212 A.3d at 824; Clovis, 2019 WL 4850188, at *13. To reiterate, the illegal cigarette shipments at issue here, and the resulting fines, constitute an infinitesimal fraction of the overall business FedEx does on a yearly basis. Compare Compl. ¶¶ 49–51 (noting 32,000 illegal cigarette shipments over the span of six years), with OB, Ex. 12 (noting in FedEx’s 2012 form 10-K that it delivered an average of 7,538,000 packages per day in 2012); see also Compl. ¶ 56 (indicating the payment of $35.3 million to settle with New York); RB, Ex. 13 at 52 (noting in FedEx’s 2018 form 10-K annual revenues of $65.5 billion for 2018). That the alleged corporate trauma did not arise from mission critical operations, however, means only that the Court will not draw an inference of bad faith from the breadth and severity of the alleged illegal conduct alone; Plaintiff must plead additional facts that allow an inference the Board acted in bad faith. Horman, 2017 WL 242571, at *14–15 (explaining that the magnitude and duration of the illegal conduct can create an inference of bad faith with respect to the board’s exercise of its duty of oversight). In other words, the flaw in Plaintiff’s Complaint is not its failure to plead that the illegal cigarette shipments occurred in the midst of the Company’s mission critical operations, but rather its failure to plead other facts from which an inference of scienter may reasonably be drawn.
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III. CONCLUSION
Plaintiff has failed to plead particularized facts that make it reasonably
conceivable a majority of the Demand Defendants face a substantial likelihood of
liability for ignoring red flags in a manner demonstrating a conscious failure to
monitor or oversee corporate operations. Consequently, Plaintiff has failed to plead
particularized facts that demonstrate demand on the Board would have been futile.
The motion to dismiss the Complaint with prejudice, therefore, must be GRANTED.
IT IS SO ORDERED.