Esa v. NortonLifeLock Incorporated

• Court: District Court, N.D. California
• Decided: August 30, 2021
• Docket: 3:20-cv-05410
• Status: Unknown

Opinion

1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 ELLIEMARIA TORONTO ESA, 10 Case No. 20-cv-05410-RS Plaintiff, 11 v. ORDER SEVERING CLAIMS AND 12 GRANTING MOTION TO DISMISS NORTONLIFELOCK INCORPORATED, WITH LEAVE TO AMEND 13 et al.,

14 Defendants.

15 16 I. INTRODUCTION 17 According to defendants, this is one of six or more “cookie cutter” derivative complaints 18 recently filed by plaintiff’s counsel against various companies, all involving those companies’ 19 efforts (or lack thereof) to have boards, management, and/or workforces that appropriately reflect 20 racial and gender diversity. In this case, plaintiff’s focus is on an alleged historical lack of black 21 board members at nominal defendant NortonLifeLock, Inc. Without questioning that there may be 22 systemic under-representation in corporate boardrooms, or plaintiff’s good faith in looking for 23 legal recourse, the flaws in this putative class action complaint require dismissal, as explained 24 below. State law claims subject to a forum selection clause will be severed and dismissed without 25 prejudice.

26 27 1 II. BACKGROUND 2 In 2019 the California-based company known as Symantec spun off its consumer computer 3 and identity protection assets, which were then set up as defendant NortonLifeLock in Arizona.1 4 Plaintiff’s basic liability theory is that NortonLifeLock’s proxy statements filed in connection with 5 the 2018, 2019, and 2020 annual shareholders’ meetings were materially misleading. Plaintiff 6 contends defendants represented that the company is committed to diversity and that the Board of 7 Directors actively seeks diversity among its members, but that is false. Plaintiff refers to the 8 following from proxy statements: 9 Diversity. In addition to a diverse portfolio of professional background, 10 experiences, knowledge and skills, the composition of the Board should reflect the benefits of diversity as to gender, race, and ethnic background. [2018 Proxy.] 11 Diversity. In addition to a diverse portfolio of professional background, 12 experiences, knowledge and skills, the composition of the Board should reflect the benefits of diversity as to gender, race, ethnic cultural and geographic backgrounds 13 that reflect the composition of our global investors, customers, employees and partners. [2019 and 2020 Proxies.] 14 In addition, we do not have a formal written policy with regard to the consideration 15 of diversity in identifying candidates; however, as discussed above, diversity is one of the numerous criteria the Nominating and Governance Committee reviews 16 before recommending a candidate. [2018, 2019, and 2020 Proxies.] 17 18 Plaintiff asserts that contrary to the statements and implications in the proxies, the Board 19 has never in good faith actively sought minority candidates and, in fact, impeded nomination of 20 qualified Black directors through its maintenance of “proxy access” provisions and refusal to 21 adopt term limits for directors. The “proxy access” provisions about which plaintiff complains 22 only permit nominations to the Board by shareholders or groups of shareholders who have at 23 owned at least 3% of the company’s outstanding shares—about $371 million worth—continuously 24

25 1 The move to Arizona is relevant only to a personal jurisdiction argument defendants present as to state law claims arising from a proxy statement filed after that move. Because this order severs 26 and dismisses the state law claims based on a forum selection clause, the personal jurisdiction 27 issue is moot. 1 for at least 3 years. Plaintiff contends the effect of these provisions is to limit severely the number 2 and diversity of new candidates. Defendants insist the provisions are completely typical for large 3 public corporations, have neither a discriminatory intent nor effect, and are necessary to make the 4 election process manageable. 5 Plaintiff also contends the proxies were also materially misleading because they asked 6 shareholders to vote in favor of executive compensation “say on pay” proposals, but failed to 7 disclose that none of NortonLifeLock’s executive compensation decisions actually take into 8 consideration whether the executives have been successful in achieving the company’s stated 9 diversity and inclusion goals. Rather, plaintiff alleges, issues relating to diversity do not carry 10 significant weight in setting executive compensation and over 90% of executive compensation is 11 based on the company’s financial performance. 12 Without making pre-suit demand on the Board, plaintiff filed this action purporting to 13 assert claims on NortonLifeLock’s behalf against the individual defendants for violation of 14 Section 14(a) of the Securities Exchange Act of 1934, as well as common law claims for breach 15 of fiduciary duty, aiding and abetting, abuse of control, and unjust enrichment. Plaintiff alleges 16 that as a result of defendants’ purported failure “to create any diversity at the very top of the 17 Company,” Complaint ¶ 1, its “reputation, goodwill, and market capitalization have been 18 harmed.” Id.¶ 165. Plaintiff also alleges the company “has expended, and will continue to expend, 19 significant sums of money” for (1) “costs incurred from having to hire new employees” to replace 20 unspecified personnel who purportedly “have quit in protest over Defendants’ misconduct,” (2) 21 “costs incurred from defending and paying settlements in discrimination lawsuits . . . .” Id. ¶ 167. 22 Plaintiff names twelve current and former directors individually, only one of whom is also a 23 NortonLifeLock employee.2 24

25 2 Without opposition, defendants seek judicial notice of the company’s bylaws, and the proxy statements referred to above. The parties vigorously dispute whether defendants’ attempts to 26 obtain judicial notice of a number of other materials directly or indirectly referred to in the 27 complaint represents the practice condemned in Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988 (9th Cir. 2018), or falls within what is permissible under that authority. As defendants 1 III. DISCUSSION 2 A. Forum selection 3 NortonLifeLock’s bylaws contain a forum selection clause purporting to require all 4 derivative actions, with two exceptions, to be brought in Chancery Court in Delaware.3 There is no 5 argument that NortonLifeLock’s forum selection clause is not generally enforceable, or that it 6 would not ordinarily apply to derivative actions against the Board. The sole dispute is whether the 7 forum selection clause can be applied to the federal Exchange Act claim, over which the Delaware 8 Chancery Court unarguably lacks jurisdiction. Defendants contend the forum selection provision 9 has only two exceptions, and if neither applies, then it does not matter if the Chancery Court can 10 adjudicate the Exchange Act claim per se—rather, the rule generally applicable to forum selection 11 clauses is that they are enforceable unless the designated forum effectively leaves plaintiff with no 12 meaningful remedies at all. See Yei A. Sun v. Advanced China Healthcare, Inc., 901 F.3d 1081, 13 1092 (9th Cir. 2018) (“a clause remains enforceable even when the contractually selected forum 14 may afford the plaintiffs less effective remedies than they could receive in the forum where they 15 filed suit . . . . [T]he fact that certain types of remedies are unavailable in the foreign forum does 16 not change the calculus if there exists a basically fair court system in that forum that would allow 17 the plaintiff to seek some relief.”) Defendants then argue that because Delaware state law in fact 18 provides remedies roughly equivalent to the Exchange Act for similar wrongdoing, the forum 19 20 ultimately recognize, however, none of their arguments stand or fall on material outside the four 21 corners of the complaint, and additional judicial notice beyond the bylaws is superfluous. Accordingly judicial notice is granted as to bylaws and proxy statements and otherwise denied. 22 3 The clause states, in part, “[A]ny derivative action brought by or on behalf of the Corporation, 23 and any direct action brought by a stockholder against the Corporation or any of its directors or 24 officers, alleging a violation of the Delaware General Corporation Law, the Certificate of Incorporation or these Bylaws or breach of fiduciary duties or other violation of Delaware 25 decisional law relating to the internal affairs of the Corporation, shall be brought in the Court of Chancery in the State of Delaware, which shall be the sole and exclusive forum for such 26 proceedings. . . . Any person or entity purchasing or otherwise acquiring any interest in shares of 27 capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section 9.7.” Bylaws, Art. IX, Section 9.7 (emphases added). 1 selection clause may be enforced even though plaintiff will thereby be precluded from pursuing 2 her Exchange Act claim under that precise legal label and theory. 3 As to the two express exceptions in the forum selection provision, defendants insist neither 4 applies. The first one—“exception (a)”—is for “actions in which the Court of Chancery in the 5 State of Delaware concludes that an indispensable party is not subject to the jurisdiction of the 6 Delaware courts.” Even plaintiff does not attempt to argue that applies here, as the Delaware Court 7 has made no such conclusion. Exception (b) is for “actions in which a federal court has assumed 8 exclusive jurisdiction of a proceeding.” Defendants vigorously insist meaning must be given to the 9 phrases “has assumed” and “of a proceeding.” The fact that this court has addressed its jurisdiction 10 in this case, however, is not equivalent to a conclusion that it has assumed “exclusive 11 jurisdiction.” 12 The approach taken in In re Facebook, Inc. S’holder Derivative Privacy Litig., 367 F. 13 Supp. 3d 1108 (N.D. Cal. 2019) is appropriate here. The Facebook court found it had discretion to 14 sever the federal claim, and dismiss the remaining state claims in favor of the Delaware forum. Id. 15 at 1120. See also Ocegueda v. Zuckerberg, 2021 WL 1056611, at *8 (N.D. Cal. Mar. 19, 2021) 16 (taking same approach). Accordingly, the state law claims are dismissed without prejudice to their 17 reassertion in the Delaware Court of Chancery. 18 19 B. Demand futility 20 It is a “basic principle of corporate governance” that a corporation’s decisions—“including 21 the decision to initiate litigation—should be made by the board of directors.” In re Facebook, Inc. 22 S’holder Data Privacy Litig., 367 F. Supp. 3d 1108, 1123 (N.D. Cal. 2019). Because derivative 23 actions “effectively wrest[] control from the board of directors,” FRCP 23.1 dictates that “a 24 shareholder seeking to vindicate the interests of a corporation through a derivative suit must first 25 demand action from the corporation’s directors or plead with particularity the reasons why such 26 demand would have been futile.” Id.; Bhonagiri v. Pandey, 2020 WL 5893404, at *2 (N.D. Cal. 27 Oct. 5, 2020). These pleading requirements are “stringent,” Quinn v. Anvil Corp., 620 F.3d 1005, 1 1012 (9th Cir. 2010), 2 Although Rule 23.1 controls “the adequacy of a plaintiff’s pleadings, the substantive law 3 which determines whether demand is futile is provided by the state of incorporation of the entity 4 on whose behalf the plaintiff is seeking relief”—here, Delaware. City of Birmingham Relief & Ret. 5 Sys. v. Hastings, 2019 WL 3815722, at *4 (N.D. Cal. Feb. 13, 2019). Delaware law is “clear 6 that the bar is high, the standards are stringent, and the situations where demand will be excused 7 are rare.” Canty v. Day, 13 F. Supp. 3d 333, 345 (S.D.N.Y. 2014) (internal citation omitted). 8 Corporate directors “are entitled to a presumption that they were faithful to their fiduciary duties,’ 9 and ‘the burden is upon the plaintiff . . . to overcome that presumption.’” In re Impax Labs., Inc. 10 S’holder Deriv. Litig., 2015 WL 5168777, at *4 (N.D. Cal. Sept. 3, 2015) (quoting Beam v. 11 Stewart, 845 A.2d 1040, 1048-49 (Del. 2004)). 12 Although the complaint asserts there were only eight board members at the time of filing, 13 such that plaintiff would have to show disqualification of four, the parties now agree there were 14 nine board members and plaintiff must show that at least five of them could not have properly 15 responded to a demand. What the parties refer to as “the Demand Board” consists of Vincent 16 Pilette (CEO) (director since 2019), Frank E. Dangeard (director since 2007), Sue Barsamian 17 (director since 2019), Nora Denzel (director since 2019), Peter A. Feld (director since 2018), 18 Kenneth Y. Hao (director since 2016), David W. Humphrey (director since 2016), V. Paul Unruh 19 (director since 2005), and Eric K. Brandt (director since 2020). While the board may not have 20 included any black members until after the complaint was filed, it apparently has included women 21 and other racial minorities. 22 The familiar test is Rales—a plaintiff must “allege particularized facts that ‘create a 23 reasonable doubt that . . . the board of directors could have properly exercised its independent and 24 disinterested business judgment in responding to a demand.’” In re Citigroup Inc. S’holder Deriv. 25 Litig., 964 A.2d 106, 120 (Del. Ch. 2009) (quoting Rales v. Blasband, 634 A.2d 927, 934 (Del. 26 1993)). Plaintiff also argues her claim can proceed under the demand futility standard articulated 27 in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), insofar as she alleges the Board ignored unlawful 1 and discriminatory practices. Aronson, however, applies where a plaintiff challenges a specific 2 board decision, and allows the shareholder to show either that the demand board is interested and 3 not independent, or that a challenged decision was not an exercise of reasonable business 4 judgment. Id at 814. Here, plaintiff does not point to a specific decision or decisions to which an 5 Aronson analysis is well-suited. Even if that were not so, her invocation of Aronson adds nothing 6 of substance, because it merely allows plaintiff to show demand futility either under the Rales 7 standard or by showing that a challenged board action was not a valid exercise of business 8 judgment. Plaintiff does not argue the second option here, instead only asserting interestedness 9 and a lack of independence.4 10 The issue then, is whether plaintiff has pleaded sufficient facts to show at least five of the 11 Demand Board directors are not disinterested because they face a substantial likelihood of 12 liability, which would include establishing their knowledge of illegal conduct. Defendants fault 13 plaintiff for making no effort at such a showing on a director-by-director basis. While cases often 14 conduct the inquiry one director at a time, it is not clear that is always required. In theory, at least, 15 a plaintiff might be able to rely on sufficiently detailed factual allegations that apply to every 16 member of the board, without expressly repeating those allegations for each member. That said, 17 plainly there must be a showing that the relevant facts apply to each of the board members (up to 18 the requisite number for a majority)—therefore, the “director-by-director” analysis ensures both 19 that is satisfied, and that no director is counted as interested merely because he or she is a member 20 of the board. 21 Here, defendants’ emphasis on plaintiff’s failure to address disqualification “director-by- 22

23 4 Defendants’ moving papers also argued plaintiff cannot succeed on a so-called Caremark claim, 24 which requires showing that “(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system of controls, consciously 25 failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006); In re 26 Caremark Int’l., Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996)). In opposition, 27 however, plaintiff disavows any attempt to rely on such a theory. 1 director” addresses the second point—plaintiff’s attempt to tar the entire Demand Board as 2 disqualified rests on unduly conclusory assertions that, as Board members, they all necessarily had 3 knowledge of, and are responsible for, the discrepancies between the assertions in the proxies and 4 the alleged true state of affairs. See In re Paypal Holdings, Inc. S’holder Deriv. Litig., 2018 WL 5 466527, at *5 (N.D. Cal. Jan. 18, 2018) (“[C]onclusory allegations are not considered.”). 6 Also of particular import here is an exculpatory provision in NortonLifeLock’s bylaws. 7 The bylaws provide that any officer or director “shall be . . . held harmless by the Corporation to 8 the fullest extent permitted by the Delaware General Corporation Law, against all expenses, 9 liability and loss” arising out of his or her service to NortonLifelock. If “directors are contractually 10 or otherwise exculpated from liability for certain conduct, then a serious threat of liability may 11 only be found to exist if [the Plaintiff] pleads a non-exculpated claim against the directors based 12 on particularized facts,” In re Facebook, 367 F. Supp. 3d at 1124. “Negligent or even reckless 13 conduct is insufficient,” In re Paypal, 2018 WL 466527, at *3. Under these standards, plaintiff has 14 not adequately alleged demand futility, and the Section 14(a) claim must be dismissed.5 See also 15 Ocegueda, 2021 WL 1056611, at *7 (reaching same conclusion on indistinguishable facts). 16 17 C. Rule 12 (b)(6) 18 An argument could be advanced that if demand has not been made or excused, plaintiff 19 lacks standing to bring the claim, such that a court should not pass on the merits of the pleading. In 20 this instance, however, consideration of defendants’ challenge to the complaint under Rule 21 12(b)(6) is appropriate as an alternative basis for dismissal. 22 A complaint must contain “a short and plain statement of the claim showing that the 23

24 5 Plaintiff argues one defendant, CEO Vincent Pilette, is not “independent” because he is highly compensated by the company. More typically, a lack of “independence” in the context of demand 25 futility refers to directors who are unduly influenced by other directors, and there is no basis to make such a claim about Pilette. It is also superfluous to plaintiff’s contention that the entire 26 Board is disqualified, and does not assist her when that claim fails, since one disqualified member 27 would not be enough. 1 pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). While “detailed factual allegations are not 2 required,” a complaint must include sufficient facts to “state a claim to relief that is plausible on its 3 face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 4 544, 570 (2007)). A claim is facially plausible “when the pleaded factual content allows the court 5 to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. 6 Claims grounded in fraud are also subject to Rule 9(b), which provides that “[i]n 7 allegations of fraud or mistake, a party must state with particularity the circumstances constituting 8 fraud or mistake.” Fed. R. Civ. P. 9(b). To satisfy that rule, a plaintiff must allege the “who, what, 9 where, when, and how” of the charged misconduct. Cooper v. Pickett,137 F.3d 616, 627 (9th 10 Cir.1997). 11 A motion to dismiss a complaint under Rule 12(b)(6) of the Federal Rules of Civil 12 Procedure tests the legal sufficiency of the claims alleged in the complaint. See Parks Sch. of Bus. 13 v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995). Dismissal under Rule 12(b)(6) may be based 14 either on the “lack of a cognizable legal theory” or on “the absence of sufficient facts alleged 15 under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th 16 Cir.1988). When evaluating such a motion, the court must accept all material allegations in the 17 complaint as true, even if doubtful, and construe them in the light most favorable to the non- 18 moving party. Twombly, 550 U.S. at 570. “[C]onclusory allegations of law and unwarranted 19 inferences,” however, “are insufficient to defeat a motion to dismiss for failure to state a claim.” 20 Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir.1996); see also Iqbal, 556 U.S. at 21 678 (citing Twombly, 550 U.S. at 555 (“threadbare recitals of the elements of the cause of action, 22 supported by mere conclusory statements,” are not taken as true)). 23 Here, plaintiff seeks to impose liability under Section 14(a) of the Exchange Act. To state a 24 claim under that section and the related SEC Rule 14a-9, the plaintiff must allege that the proxy 25 statements contained either (1) a false or misleading declaration of material fact, or (2) an 26 omission of material fact that makes any portion of the statement misleading. 15 U.S.C. § 78j(b); 27 17 C.F.R. § 240.14a-9; Desaigoudar v. Meyercord, 223 F.3d 1020, 1022 (9th Cir. 2000). The 1 plaintiff must specify each statement alleged to be misleading and the reason or reasons why the 2 statement is misleading. 15 U.S.C. § 78u-4(b)(1); Desaigoudar, 223 F.3d at 1023. “[A] Section 3 14(a), Rule 14a-9 plaintiff must demonstrate that the misstatement or omission was made with the 4 requisite level of culpability and that it was an essential link in the accomplishment of the 5 proposed transaction.” Id. 6 The complaint here simply does not plausibly plead an actionable false statement. Courts 7 routinely find similar statements to be non-actionable puffery or aspirational (and hence 8 immaterial). See, e.g., Retail Wholesale & Dep’t Store Union Loc. 338 Ret. Fund v. Hewlett- 9 Packard Co., 845 F.3d 1268, 1276 (9th Cir. 2017) (statements “to commit to certain ‘shared 10 values . . . not capable of objective verification’ ”); Lopez v. Ctpartners Exec. Search, Inc., 173 F. 11 Supp. 3d 12, 19, 26–29 (S.D.N.Y. 2016) (company’s statements about commitment to a “diverse 12 workforce” and “an inclusive and positive working environment” were “immaterial puffery”); 13 Nathanson v. Polycom, Inc., 87 F. Supp. 3d 966, 976–77 (N.D. Cal. 2015) (commitment to ethical 14 practices “‘inherently aspirational and hence immaterial’ ”); Retail Wholesale & Dep’t Store 15 Union Loc. 338 Ret. Fund v. Hewlett–Packard Co., 52 F. Supp. 3d 961, 965, 970 n.2 (N.D. Cal. 16 2014) (“commitment to highest standards of governance [is] quintessential, non-actionable 17 puffery”), aff’d, 845 F.3d 1268 (9th Cir. 2017); Ocegueda, 2021 WL 1056611, at *9. 18 19 IV. CONCLUSION 20 Plaintiff’s claim under Section 14(a) is dismissed for failure to allege demand futility 21 and/or for failure to state a claim. Any amended complaint shall be filed within 30 days of the date 22 of this order. Plaintiff’s common law claims are dismissed without prejudice to refiling in 23 Delaware, pursuant to the forum selection clause. 24 25 26 27 1 IT IS SO ORDERED. 2 3 Dated: August 30, 2021 4 RICHARD SEEBORG 5 Chief United States District Judge 6 7 8 9 10 11 12

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