Firemen's Retirement System of St. Louis v. Arne M. Sorenson (Marriott International, Inc.)

• Court: Court of Chancery of Delaware
• Decided: October 5, 2021
• Docket: 2019-0965-LWW
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

FIREMEN’S RETIREMENT SYSTEM ) OF ST. LOUIS, derivatively on behalf of ) Marriott International, Inc., ) ) Plaintiff, ) ) v. ) C.A. No. 2019-0965-LWW ) ARNE M. SORENSON, J.W. ) MARRIOTT, JR., KATHLEEN K. ) OBERG, DEBORAH MARRIOTT ) HARRISON, BAO GIANG VAL ) BAUDUIN, BRUCE HOFFMEISTER, ) STEPHANIE C. LINNARTZ, ERIC ) HIPPEAU, LAWRENCE W. KELLNER, ) GEORGE MUÑOZ, MARY K. BUSH, ) DEBRA L. LEE, FREDERICK A. ) HENDERSON, AYLWIN B. LEWIS, ) BRUCE W. DUNCAN, W. MITT ) ROMNEY, STEVEN S. REINEMUND, ) and SUSAN C. SCHWAB, ) ) Defendants, ) ) and ) ) MARRIOTT INTERNATIONAL, INC., a ) Delaware Corporation, ) ) Nominal Defendant. )

MEMORANDUM OPINION

Date Submitted: July 7, 2021 Date Decided: October 5, 2021 Samuel L. Closic and Eric Juray, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Brian J. Robbins, Craig W. Smith, Gregory E. Del Gaizo, and Emily R. Bishop, ROBBINS LLP, San Diego, California; Counsel for Plaintiff Firemen’s Retirement System of St. Louis Raymond J. DiCamillo and John M. O’Toole, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Jason J. Mendro and Jeffrey S. Rosenberg, GIBSON, DUNN & CRUTCHER LLP, Washington, D.C.; Adam H. Offenhartz and Laura Kathryn O’Boyle, GIBSON, DUNN & CRUTCHER LLP, New York, New York; Counsel for Defendants Arne M. Sorenson, J.W. Marriott, Jr., Kathleen K. Oberg, Deborah Marriott Harrison, Bao Giang Val Bauduin, Bruce Hoffmeister, Stephanie C. Linnartz, Eric Hippeau, Lawrence W. Kellner, George Muñoz, Mary K. Bush, Debra L. Lee, Frederick A. Henderson, Aylwin B. Lewis, Bruce W. Duncan, W. Mitt Romney, Steven S. Reinemund, and Susan C. Schwab, and Nominal Defendant Marriott International, Inc.

WILL, Vice Chancellor In the fall of 2018, Marriott International, Inc. discovered a data security

breach that had exposed the personal information of up to 500 million guests. An

investigation revealed that the cyberattack was perpetrated through the reservation

database of Starwood Hotels and Resorts—which Marriott had acquired two years

prior—and had begun in 2014. Marriott publicly announced the incident on

November 30, 2018. A series of stockholder and consumer actions followed.

The stockholder plaintiff in this action brought a derivative lawsuit against

several key executives and Marriott’s directors for breaches of fiduciary duty. The

plaintiff’s claims are based on the defendants’ conduct both before and after the

acquisition of Starwood. Regarding the pre-acquisition time period, the plaintiff

alleges that the defendants breached their fiduciary duties by failing to conduct

adequate due diligence of Starwood’s cybersecurity technology. Regarding the post-

acquisition period, the plaintiff alleges that the defendants continued to operate

Starwood’s deficient systems, failed to timely disclose the data breach, and that the

directors breached their duty of loyalty under Caremark. The defendants have

moved to dismiss the complaint for failure to plead demand futility.

In this decision, I conclude that demand was not excused because none of the

director defendants faces a substantial likelihood of liability on a non-exculpated

claim. First, the plaintiff’s claims regarding pre-acquisition due diligence are time 1 barred. They arose more than three years before the plaintiff’s complaint was filed

and no basis for tolling applies. Second, none of the directors face a substantial

likelihood of liability under Caremark. Cybersecurity has increasingly become a

central compliance risk deserving of board level monitoring at companies across

sectors. But the allegations in the complaint do not meet the high bar required to

state a Caremark claim. The plaintiff has not shown that the directors completely

failed to undertake their oversight responsibilities, turned a blind eye to known

compliance violations, or consciously failed to remediate cybersecurity failures.

Finally, the plaintiff’s claim based on unmet notification requirements is also

unsupported by allegations of bad faith.

The Marriott board therefore retained its ability to assess whether to pursue

litigation on behalf of the company. Demand is not excused. The motion to dismiss

is granted pursuant to Court of Chancery Rule 23.1.

I. BACKGROUND

Unless otherwise noted, the following facts are drawn from the Amended

Verified Stockholder Derivative Complaint and the documents it incorporates by

2 reference.1 Any additional facts are either not subject to reasonable dispute or are

subject to judicial notice.2

A. The Starwood Acquisition

Nominal defendant Marriott International, Inc. (the “Company”) is a

Delaware corporation headquartered in Bethesda, Maryland.3 Founded in 1927,

Marriott is one of the largest hospitality companies in the world.4 Marriott operates,

1 Verified Am. Deriv. Compl. (“Am. Compl.”) (Dkt. 33). See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (“[A] plaintiff may not reference certain documents outside the complaint and at the same time prevent the court from considering those documents’ actual terms.” (quoting Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2011 WL 1167088, at *3 n.17 (Del. Ch. Mar. 29, 2011))); Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30, 2012) (“When a plaintiff expressly refers to and heavily relies upon documents in her complaint, these documents are considered to be incorporated by reference into the complaint . . . .”). The parties agreed that documents produced by Marriott pursuant to 8 Del. C. § 220 would be deemed incorporated into any complaint the plaintiff filed. See Defs.’ Opening Br. 8 n.2 (Dkt. 40); Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016). Citations in the form “Defs.’ Ex. __” refer to exhibits to the Transmittal Declaration of John M. O’Toole, Esq. in Support of Defendants’ Opening Brief in Support of their Motion to Dismiss the Verified Amended Stockholder Derivative Complaint (Dkt. 41, 66). Page numbers to these exhibits are designated by the last four digits of a Bates number, where appropriate. 2 See, e.g., In re Books–A–Million, Inc. S’holders Litig., 2016 WL 5874974, at *1 (Del. Ch. Oct. 10, 2016) (“This court may consider the Proxy Statement to establish what was disclosed to stockholders and other facts that are not subject to reasonable dispute.” (citing In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 170 (Del. 2006)); Lima Delta Co. v. Glob. Aerospace, Inc., 2017 WL 4461423, at *4 (Del. Super. Oct. 5, 2017) (explaining that dockets, pleadings, and transcripts from a foreign action are subject to judicial notice). 3 Am. Compl. ¶ 19. 4 Id. ¶ 49. 3 manages, and franchises a broad portfolio of over 6,900 hotels and lodging

facilities.5

On November 16, 2015, Marriott announced its intent to acquire Starwood

Hotels and Resorts Worldwide, Inc. (the “Acquisition”), a hotel and leisure company

whose brands included W Hotels, St. Regis, and Le Meridien.6 At that time,

Starwood had more than 1,270 properties providing approximately 360,000 rooms

in 100 countries.7 Marriott and Starwood would together create a more globally

diversified company operating or franchising more than 5,500 hotels and 1.1 million

rooms worldwide.8

In discussing the Acquisition, Marriott’s then-President and Chief Executive

Officer, Arne M. Sorenson,9 described Starwood’s guest loyalty program, Starwood

Preferred Guest, as the “central, strategic rationale for the transaction” and the “most

important piece of the [A]cquisition.”10 Starwood Preferred Guest had a devoted

5 Id. ¶¶ 19, 69. 6 Id. ¶¶ 1, 104. 7 Defs.’ Ex. 29 at 8. 8 Id. at 97. 9 On February 16, 2021, Marriott announced that Sorenson passed away on February 15, 2021. Marriott International, Inc. (Form 8-K) (Feb. 16, 2021). Sorenson had served as Marriott’s President from May 2009 and Chief Executive Officer from May 2012 until his passing. Am. Compl. ¶ 20. 10 Id. ¶ 78. 4 following of business travelers. Acquiring the program would expand Marriott’s

client base, increase its brand loyalty, and enhance the Company’s ability to compete

in an evolving global marketplace.11

B. Marriott’s Due Diligence and Starwood’s Data Security

Eleven months of due diligence commenced in late 2015, with ten months

passing between the signing of the Agreement and Plan of Acquisition on November

15, 2015 and closing on September 23, 2016.12 During that time, the Company, and

Sorenson in particular, publicly touted Marriott’s “extensive” diligence into

Starwood and “joint integration planning” efforts.13

In the midst of the Company’s diligence of Starwood, Marriott’s Board of

Directors ranked cybersecurity as the number one risk facing Marriott in 2016.14

The Board at that time consisted of 11 members: defendants Sorenson, J.W.

Marriott, Jr. (the Company’s Executive Chairman and Chairman of the Board),

Deborah Marriott Harrison (the Company’s Global Cultural Ambassador Emeritus),

Lawrence W. Kellner, George Muñoz, Mary K. Bush, Debra L. Lee, Frederick A.

Henderson, Steven S. Reinemund, Susan C. Schwab, and W. Mitt Romney (together,

11 Id. ¶¶ 75, 81; Defs.’ Ex. 29 at 97. 12 Am. Compl. ¶¶ 87, 109. 13 Id. ¶¶ 179-81. 14 Id. ¶ 100. 5 the “Pre-Acquisition Board”).15 Despite knowing that cybersecurity was a pervasive

risk in the hospitality industry that could affect Marriott’s ability to achieve its

goals,16 the Pre-Acquisition Board did not order any specific due diligence into

cybersecurity in connection with the planned Acquisition.17

On November 20, 2015—five days after Marriott and Starwood signed the

merger agreement—Starwood disclosed that the point-of-sale systems at 54 of its

hotels in North America had been infected by malware. 18 Several months later, an

internal Marriott report summarizing the costs of integrating the Marriott Guest

Loyalty and Starwood Preferred Guest databases noted that Starwood’s systems

lacked certain protections such as tokenization—the process of replacing sensitive

data with unique identification symbols—and point-to-point encryption across its

point-of-sale systems.19 None of this information reached the Board before the

Acquisition closed.

15 Id. ¶¶ 20-21, 23, 28-32, 35-37. 16 Id. ¶ 100. 17 Id. ¶ 5. 18 Id. ¶¶ 79, 88. 19 Id.; see Kevin Batchelor, What is Tokenization, and Why Is It So Important?, Forbes (Apr. 19, 2019). 6 C. Starwood’s Information Security Systems Post-Closing

Cybersecurity remained a “top level risk[]” for Marriott after the $13 billion 20 Acquisition of Starwood closed on September 23, 2016. Cybersecurity was

viewed by the Board as the second biggest risk facing Marriott for fiscal year 2017.21

By then, Marriott’s data systems included Starwood’s legacy systems, some of

which remained in use post-Acquisition.22

The Board and Audit Committee were routinely apprised of cybersecurity

issues after the Acquisition.23 On February 8, 2017, for example, the Audit

Committee—comprised of director defendants Henderson, Bush, Aylwin B. Lewis,

and Muñoz—was told by Marriott’s independent auditor Ernst & Young that audit

committees were “expected to have an understanding of the business implications of

cyber risks.”24 Internal Audit and Chief Audit Executive Keri Day also told the

Audit Committee that Marriott had “established a Security Operations Center

(SOC), an Incident Response (IR) plan, and related procedures” because its “incident

20 Am. Compl. ¶¶ 76, 121. 21 Id. ¶ 121. 22 Id. ¶¶ 126-27. 23 Id. ¶ 118. 24 Id. ¶ 118; Defs.’ Ex. 12 at 1238, 1240. 7 response plan [wa]s not up to date.”25 Day further reported that “[t]he Company

[wa]s actively evaluating Starwood’s exposures to cybersecurity risks.”26

At a regularly scheduled meeting on February 10, 2017, the Marriott Board—

which now included former Starwood directors Bruce W. Duncan, Eric Hippeau,

and Lewis (together with the Pre-Acquisition Board members, the “Post-Acquisition

Board”)—was allegedly told for the first time about deficiencies in Starwood’s

cybersecurity controls.27 During the February 10, 2017 meeting, defendant Bruce

Hoffmeister, Marriott’s Global Chief Information Officer, gave a presentation titled

“Marriott Cybersecurity Report” to the full Post-Acquisition Board.28 Hoffmeister

discussed various steps that Marriott had taken to protect against data breaches,

including the engagement of a “specialized security company” to manage its

“Security Operations Center.”29 The “primary” step Marriott had taken to protect its

own systems was tokenization.30

Hoffmeister told the Board that a review of Starwood’s legacy data systems

“revealed that, while there was a vibrant framework, tokenization was not adopted

25 Am. Compl. ¶ 119; Defs.’ Ex. 11 at 1118. 26 Am. Compl. ¶ 118; Defs.’ Ex. 11 at 1067. 27 Am. Compl. ¶¶ 123-24. 28 Id. ¶ 122; Defs.’ Ex. 14 at 1279. 29 Defs.’ Ex. 14 at 1282. 30 Am. Compl. ¶ 126; Defs.’ Ex. 13 at 1249. 8 as a matter of course.”31 He described early findings by PricewaterhouseCoopers

(“PwC”), which Marriott had hired post-Acquisition to conduct a “Starwood

Security Program Assessment.”32 Hoffmeister’s presentation explained that, in

addition to not mandating tokenization, Starwood’s “[b]rand standards did not

mandate [payment card industry (‘PCI’)] compliance . . . or point-to-point

encryption.”33 The Payment Card Industry Data Security Standard (“PCI DSS”) is

a set of security standards required by credit card companies to ensure the security

of credit card transactions in the payment industry.34

The Board was also informed about PwC’s four “Key Recommendations” for

Marriott to “[u]pdate Starwood’s brand standards,” including mandating PCI and

setting clear cybersecurity expectations.35 Consistent with PwC’s recommendation,

Hoffmeister advised the Board on February 10, 2017 that there would be efforts to

implement tokenization across Starwood’s data systems.36

31 Am. Compl. ¶ 124. Defs.’ Ex. 13 at 1250. 32 Am. Compl. ¶ 124; Defs.’ Ex. 14 at 1287-88. 33 Am. Compl. ¶¶ 124, 126; Defs.’ Ex. 13 at 1249-50; Defs.’ Ex. 14 at 1288. 34 Am. Compl. ¶ 53. 35 Id. ¶ 125; Defs.’ Ex. 14 at 1287-88. 36 Defs.’ Ex. 13 at 1250. 9 D. Ongoing Migration of Starwood’s Systems

The full Post-Acquisition Board was next updated on cybersecurity at a

regularly scheduled meeting held on February 9, 2018.37 At that meeting, defendant

Chief Financial Officer Kathleen K. Oberg advised the Board that Marriott had

undertaken several “Key Mitigating Activities” to address the Company’s top risks

including cybersecurity.38 Those activities included adopting new technologies to

strengthen cybersecurity and “[m]igration of Starwood systems to the Marriott

established technology standards” with a September 2019 estimated completion

date.39 In addition, Marriott had “implement[ed] patching compliance tools and

reporting framework within Starwood environments.”40 On May 3, 2018, Ernst &

Young presented to the Audit Committee an assessment of “the effectiveness of the

Company’s controls over IT risks,” which included “testing the conversion of

Starwood legacy activities” to new systems.41

On August 9, 2018, Hoffmeister updated the full Board on “Noteworthy

Security Events/Incidents,” including 4 cybersecurity events which involved legacy

37 Am. Compl. ¶ 127; Defs.’ Ex. 16 at 1394. 38 Am. Compl. ¶ 130. 39 Id. ¶ 127; Defs.’ Ex. 15 at 1386. 40 Am. Compl. ¶ 127; Defs.’ Ex. 15 at 1386. 41 Defs.’ Ex. 17 at 1496. 10 Starwood systems.42 Those incidents included a cyberattack on a legacy Starwood

franchise network and malware found on a legacy Starwood server utilized by the

Marriott Law Department.43 Hoffmeister “confirmed there were no successful

attempts to download [or] install” the malware onto that server.44 Hoffmeister also

reported that the Company had “engaged a consultant to execute a cybersecurity

assessment.”45

E. Discovery of a Starwood Guest Reservation Database Breach

On September 7, 2018, Marriott received an alert that an unknown user had

run a query in Starwood’s guest reservation database.46 A third party contractor that

managed the guest reservation database informed Marriott’s Information

Technology department about the incident the following day.47 Ten days later, on

September 17, 2018, outside investigators engaged by Marriott uncovered malware

on Starwood’s system that had the potential to access, surveil, and gain

42 Am. Compl. ¶ 128; Defs.’ Ex. 19 at 1741; Defs.’ Ex. 20 at 1783-90. Lewis was absent from the meeting. Defs.’ Ex. 19 at 1741. 43 Am. Compl. ¶ 128; Defs.’ Ex. 20 at 1783, 1790. No guest data was lost from the franchise network attack. Id. at 1790. 44 Id. at 1783. 45 Defs.’ Ex. 19 at 1746. 46 Am. Compl. ¶¶ 8, 133. 47 Id. at ¶ 133. 11 administrative control over the system computer.48 Marriott’s Information

Technology department informed Sorenson about the ongoing investigation the

same day.49 On September 18, 2018, Sorenson notified the Board.50 The Company

notified the FBI of the intrusion on October 29, 2018 after Marriott’s investigators

found evidence of other malware in Starwood’s database, including malware that

hackers use to search a device for usernames and passwords.51

The Company’s investigation continued into November 2018, with the Board

and Audit Committee receiving regular updates from management and privileged

briefings from Marriott’s General Counsel.52 In early November 2018, Marriott

learned that the breach began as far back as July 2014.53 On November 13, 2018,

“[Marriott’s] investigators discovered evidence that two compressed encrypted files

had been deleted from a device they were examining.”54 On November 19, 2018,

48 Id. 49 Id. ¶ 136. 50 Id. 51 Id. ¶¶ 137-38. 52 E.g., id. ¶¶ 139-42; Defs.’ Ex. 21 at 1946; Ex. 22 at 2079; Ex. 23 at 2084; see also Defs.’ Exs. 25-27. 53 Am. Compl. ¶ 139. 54 Defs.’ Ex. 28 at 2743. 12 the Company discovered that those files contained customers’ personal

information.55

Eleven days later, on November 30, 2018, the Company publicly announced

the data security incident.56 Marriott’s press release explained that there had been

unauthorized access to the Starwood network since 2014 that exposed the personal

information of approximately 500 million guests.57 The exploited information

included guests’ names, passport numbers, birth dates, email and mailing addresses,

payment card details, and Starwood Preferred Guest account information.58 The

cyber attack resulted in one of the biggest data breaches in history.59

55 Am. Compl. ¶ 140; Defs.’ Ex. 28 at 2743. 56 Am. Compl. ¶¶ 140-41, 143. 57 Id. ¶ 143; see also Defs.’ Ex. 28 at 2744 (Sorenson stating that the Breach involved less than 383 million unique guests). 58 Am. Compl. ¶ 143. 59 Id. ¶ 217 (calling the incident the “second largest data breach in history”); see Aisha Al- Muslim, Dustin Volz, and Kimberly Chin, Marriott Says Starwood Data Breach Affects Up to 500 Million People, Wall St. J. (Nov. 30, 2018); Nicole Perlroth, Amie Tsang, and Adam Satariano, Marriott Hacking Exposes Data of Up to 500 Million Guests, N.Y. Times (Nov. 30, 2018) (“The assault . . . was one of the largest known thefts of personal records, second only to a 2013 breach of Yahoo that affected three billion user accounts and larger than a 2017 episode involving the credit bureau Equifax.”). 13 Marriott’s stock price dropped by more than 5.5% following the

announcement.60 In the weeks that followed, the stock price dropped $15.45 per

share (more than 12%) from its high on November 29, 2018.61

F. Federal Lawsuits and Regulatory Investigations

Numerous lawsuits and regulatory investigations followed Marriott’s

November 30, 2018 announcement. Attorneys general of all 50 states and the

District of Columbia, the Securities and Exchange Commission, the Federal Trade

Commission, and certain committees of the U.S. Senate and House of

Representatives, among others, opened investigations into the data breach.62

Marriott also faced class action lawsuits for violations of federal securities laws,

violations of state and federal consumer protection laws, and violations of state

disclosure laws. Those lawsuits, along with a lawsuit by a financial institution

accusing Marriott of failing to perform adequate due diligence during the

acquisition, were consolidated for multi-district litigation (the “Federal Action”) in

the United States District Court for the District of Maryland.63

60 Am. Compl. ¶ 151. 61 Id. 62 Id. ¶¶ 14, 152-54. 63 In re Marriott Int’l Inc., Customer Data Sec. Breach Litig., 2021 WL 2401641, at *1-3 (D. Md. June 11, 2021). 14 With respect to the consumer class action, the District of Maryland denied, in

part, Marriott’s motion to dismiss certain “bellwether” claims that the parties had

selected to test the sufficiency of the pleadings. In doing so, the court held that the

consumer plaintiffs plausibly stated claims that Marriott had violated the Maryland

Personal Information Privacy Act’s requirement to provide “timely notice to

customers affected by [a] breach” by “fail[ing] to disclose the data breach for more

than two months.”64 The court similarly denied Marriott’s motion under Michigan’s

Identity Theft Protection Act, which also required timely notice to consumers.65

As for the federal securities law claims, the District of Maryland held that the

statements challenged by the plaintiffs—including statements about due diligence

and integration, risk factors, and protection of customer data—were not materially

false or misleading and dismissed those claims with prejudice.66 Delaware state law

claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment

were also dismissed without prejudice.67

In re Marriott Int’l Inc. Customer Data Sec. Breach Litig., 440 F. Supp. 3d 447, 488 (D. 64

Md. 2020). 65 Id. at 490. 66 Marriott, 2021 WL 2401641, at *6-7. 67 Id. at *19. 15 G. This Derivative Litigation

The plaintiff filed this derivative action on December 3, 2019 after obtaining

roughly 3,000 pages of documents from the Company pursuant to 8 Del. C. § 220.68

The plaintiff’s books and records request was limited to Board-level “cybersecurity”

documents since May 23, 2014.69 On March 16, 2020, the plaintiff filed an amended

complaint, the operative complaint in this action (the “Complaint”).70

The Complaint asserts a single claim for breach of fiduciary duty against 13

of the 14 directors who served on the Board when the Complaint was filed (i.e., the

Post-Acquisition Board), several officers, and one former director (Romney).71 The

claim is based on allegations that the individual defendants breached their fiduciary

duties by (1) failing to “undertake cybersecurity and technology due diligence”

during the Acquisition; (2) failing to implement adequate internal controls after the

Acquisition; and (3) concealing the data security incident until November 30, 2018.72

68 Defs.’ Opening Br. 16. 69 Am. Compl. ¶ 107; see Pl.’s Answering Br. 23 n.10 (Dkt. 51). The production did not include officer-level documents. Id.; Mot. to Dismiss Hr’g Tr. 55 (noting that the plaintiff did not press to receive a beneath-the-board Section 220 production). 70 Dkt. 33. 71 Am. Compl. ¶¶ 20-37. The four officer defendants are Oberg, Hoffmeister, Bao Giang Val Bauduin (Marriott’s Controller and Chief Accounting Officer), and Stephanie C. Linnartz (Marriott’s Chief Commercial Officer and Executive Vice President). Am. Compl. ¶¶ 22, 24-26. 72 Id. ¶¶ 20-37, 246-47. The Complaint also advances other theories for breach of fiduciary duty such as “violating the Company’s Guidelines” and suggests that certain defendants 16 On April 30, 2020, the defendants moved to dismiss the Complaint.73 After

the reassignment of this matter from then-Chancellor Bouchard, I heard re-argument

on the motion to dismiss on July 7, 2021.74

II. ANALYSIS

The defendants have moved to dismiss the Complaint under Court of

Chancery Rule 23.1 for failure to make a demand on the Board. For the reasons

explained below, I conclude that demand was not excused. The Complaint is

therefore dismissed in its entirety.

A. The Legal Standard for Demand Excusal

“The decision whether to initiate or pursue a lawsuit on behalf of the

corporation is generally within the power and responsibility of the board of

directors.”75 A stockholder plaintiff can pursue claims belonging to the corporation

if (1) the corporation’s directors wrongfully refused a demand to authorize the

could not impartially consider a demand because of the Securities Class Action. See Am. Compl. ¶ 238. But these issues were not briefed or pressed at argument. Issues not briefed are waived. See, e.g., Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999). The plaintiff also withdrew its assertions of breach of fiduciary duty based on disclosure violations after overlapping claims were dismissed in the Federal Action. See Mot. to Dismiss Hr’g Reargument Tr. at 67 (hereinafter “Reargument Hr’g Tr.”) (Dkt. 87); Marriott, 2021 WL 2407518, at *45. 73 Dkt. 39. 74 Dkt. 87. In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 120 (Del. Ch. 2009) (citing 8 75

Del. C. § 141(a)). 17 corporation to bring the suit or (2) a demand would have been futile because the

directors were incapable of impartially considering the demand.76 Because the

plaintiff did not make a demand on Marriott’s Board, the Complaint must plead

particularized factual allegations establishing that demand was excused.77

The parties initially debated whether the Aronson or Rales standard for

assessing demand excusal should apply.78 The defendants argued that the Rales

standard applied because the plaintiff’s claims are predicated upon the Board’s

alleged failure to act and not a challenge to an affirmative decision.79 The plaintiff

agreed that Rales applied other than to the claim challenging the Board’s decision to

complete the Acquisition without conducting cybersecurity due diligence, which it

argued should be analyzed under Aronson.80

That question became moot after the Delaware Supreme Court’s decision in

United Foods & Commercial Workers Union v. Zuckerberg.81 There, the Court held

that it is “no longer necessary to determine whether the Aronson test or the Rales

76 See Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). 77 Ct. Ch. R. 23.1; see, e.g., Guttman v. Huang, 823 A.2d 492, 499 (Del. Ch. 2003). 78 See Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984) overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000); Rales 634 A.2d at 932-935. 79 Defs.’ Reply Br. 5 (Dkt. 65). 80 Pl.’s Answering Br. 20-22. 81 2021 WL 4344361 (Del. 2021). 18 test governs a complaint’s demand-futility allegations.”82 Instead, the Court adopted

a three-part “universal test” for assessing demand futility that is “consistent with and

enhances” Aronson, Rales, and their progeny, which “remain good law.”83 Going

forward:

Delaware courts should ask the following three questions on a director- by-director basis when evaluating allegations of demand futility:

(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;

(ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and

(iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.84

Demand is excused as futile if “the answer to any of the questions is ‘yes’ for at least

half of the members of the demand board.”85 The “analysis is conducted on a claim-

by-claim basis.”86

82 Id. at *17. 83 Id. 84 Id. 85 Id. 86 Beam v. Stewart, 833 A.2d 961, 977 (Del. Ch. 2003). 19 While engaging in this analysis, I confine myself to the well-pleaded

allegations of the Complaint, the documents incorporated into the Complaint by

reference, and facts subject to judicial notice.87 All reasonable inferences from the

allegations in the Complaint are drawn in favor of the plaintiff.88 “Rule 23.1 is not

satisfied by conclusory statements or mere notice pleading.”89 Instead, “[w]hat the

pleader must set forth are particularized factual statements that are essential to the

claim.”90

B. The Demand Excusal Analysis in This Case

“The court ‘counts heads’ of the members of a board to determine whether a

majority of its members are disinterested and independent for demand futility

purposes.”91 The Board in place when this litigation was filed had 14 members: the

Post-Acquisition Board members (Sorenson, Marriott, Jr., Harrison, Kellner,

Muñoz, Bush, Lee, Henderson, Reinemund, Schwab, Duncan, Hippeau, and Lewis),

excluding Romney who was replaced by non-party Margaret M. McCarthy

87 See, e.g., White v. Panic, 783 A.2d 543, 546-47 (Del. 2001); see also Gen. Motors, 897 A.2d at 170. 88 Brehm, 746 A.2d at 255. 89 Id. at 254. 90 Id. 91 See In re Zimmer Biomet Hldgs. Inc. Deriv. Litig., 2021 WL 3779155, at *10 (Del. Ch. Aug. 25, 2021). 20 (together, the “Demand Board”).92 The plaintiff does not challenge the impartiality

of McCarthy. Nor does the plaintiff claim that any director received a material

personal benefit from the challenged conduct.

The plaintiff only alleges that four members of the Demand Board—

Sorenson, Marriott, Jr., Harrison, and Reinemund—lack (or lacked) independence.93

Even if the plaintiff could sufficiently demonstrate that these four directors lacked

independence, it must also impugn the disinterestedness of at least three others to

show that a majority of the Demand Board could not consider a demand.94 The

plaintiff attempts to make that showing by arguing that the Post-Acquisition Board

members all face a substantial likelihood of personal liability.95

“To establish a substantial likelihood of liability at the pleading stage, a

plaintiff must ‘make a threshold showing, through the allegation of particularized

facts, that their claims have some merit.’”96 Because Marriott’s certificate of

incorporation contains a provision exculpating its directors for breaches of the duty

92 Am. Compl. ¶¶ 20-21, 23, 27-37, 227. 93 Pl.’s Answering Br. 59. 94 See Zuckerberg, 2021 WL 4344361, at *17. 95 Pl.’s Answering Br. 20-21. 96 In re TrueCar, Inc. S’holder Deriv. Litig., 2020 WL 5816761, at *12 (Del. Ch. Sept. 30, 2020) (quoting Rales, 634 A.2d at 934). 21 of care, as permitted under 8 Del. C. § 102(b)(7),97 “the plaintiff[] must plead with

particularity facts that support a meritorious claim for breach of the duty of

loyalty.”98 The Complaint focuses on three areas of potential liability based on the

Board’s alleged failure to: (1) conduct pre-Acquisition due diligence into Starwood’s

cybersecurity; (2) remedy deficiencies in Starwood’s information protection systems

post-Acquisition; and (3) timely disclose the data security incident.

The outcome of my analysis on each issue is that none of the Post-Acquisition

Board members face a substantial likelihood of liability for a non-exculpated claim.

Any claim based on pre-Acquisition due diligence is time-barred. The remaining

claims fall short of pleading a breach of the directors’ duty of loyalty. At least 10 of

the 14 Demand Board members were therefore both disinterested and independent

with respect to a pre-suit litigation demand. I need not decide whether the remaining

four directors lacked independence.

1. The Plaintiff’s Challenge to Pre-Acquisition Due Diligence is Time Barred.

The plaintiff asserts that the 11 members of the Pre-Acquisition Board face a

substantial likelihood of personal liability for their “decision to complete the

97 Defs.’ Ex. 4 at 12. 98 Zimmer, 2021 WL 3779155, at *12; see Zuckerberg, 2021 WL 4344361, at *8-15 (holding that exculpated care claims do not satisfy the second prong of Aronson and do not render a director incapable of impartially considering a litigation demand). 22 Acquisition without conducting any due diligence into Starwood’s cybersecurity.”99

The defendants contend that the claim is time barred.100 Delaware’s three-year

statute of limitations applies by analogy to equitable claims seeking legal relief.101

Absent tolling, the limitations period “begins to run from the time of the [allegedly]

wrongful act, without regard for whether the plaintiff became aware of the

wrongdoing at that time.”102

Here, the plaintiff’s breach of fiduciary duty claim seeking monetary damages

is subject to the analogous three-year statute of limitations.103 The alleged wrongful

act—the Pre-Acquisition Board’s approval of the Acquisition, allegedly without

adequate cybersecurity due diligence—occurred before Marriott announced that

approval on December 22, 2015.104 At the latest, the statute of limitations began to

99 Pl.’s Answering Br. 21 (emphasis removed). 100 See Defs.’ Reply Br. 8 n.3; Defs.’ Supp. Br. 5 (Dkt. 81). 101 See Kraft v. Wisdom-Tree Invs., Inc., 145 A.3d 969, 979-81, 983 (Del. Ch. 2016) (explaining that for equitable claims seeking legal relief, such as “a breach of fiduciary duty action seeking monetary damages,” the “analogous limitations period [will] operate as a strong presumption of laches”); see also 10 Del. C. § 8106. 102 Kraft, 145 A.3d at 989 (citing Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004)); see also Tilden v. Cunningham, 2018 WL 5307706, at *14 (Del. Ch. Oct. 26, 2018) (“[T]he law in Delaware is crystal clear that a claim accrues as soon as the wrongful act occurs.”). 103 See Kraft, 145 A.3d at 983. Defs.’ Ex. 29 at 97 (explaining that the Board approved the merger agreement on 104

November 15, 2015 and recommended stockholder approval). 23 run on September 23, 2016 when the Acquisition closed.105 The plaintiff filed this

action more than three years later on December 3, 2019. The plaintiff’s due

diligence-based claim is therefore barred as untimely “absent tolling or other

extraordinary circumstances.”106 The plaintiff contends that the defendants waived

their untimeliness defenses and also advances two tolling arguments. None of the

plaintiff’s arguments have merit.

a. Waiver

The plaintiff first contends that defendants waived their untimeliness

argument because it was not raised in their opening brief.107 “Under the briefing

rules, a party is obliged in its motion and opening brief to set forth all of the grounds,

authorities and arguments supporting its motion.”108

No such waiver occurred. As I wrote to counsel when requesting

supplemental briefing, it was not apparent from the Complaint that the plaintiff was

105 Am. Compl. ¶ 104; see Mot. to Dismiss Hr’g Tr. at 51-52, 54 (“The Court: [W]hat are you alleging is the wrongful act that would have triggered the statute of limitations? Is it the acquisition or is it the board approval? [Counsel]: It is the acquisition, Your Honor. It is not the board approval.”). 106 Kraft, 145 A.3d at 982-83. 107 Pl.’s Supp. Br. 2 (Dkt. 82). 108 Franklin Balance Sheet Inv. Fund v. Crowley, 2006 WL 3095952, at *4 (Del. Ch. Oct. 19, 2006) (citing Ct. Ch. R. 7(b), 171); see Thor Merritt Square, LLC v. Bayview Malls LLC, 2010 WL 972776, at *5 (Del. Ch. Mar. 5, 2010) (“The failure to raise a legal issue in an opening brief generally constitutes a waiver of the ability to raise that issue in connection with a matter under submission to the court.”). 24 challenging the closing of the Acquisition as an affirmative act of the Board.109 The

plaintiff’s answering brief squarely presented the argument that the Board’s

“decision to complete the acquisition without conducting . . . due diligence into

Starwood’s cybersecurity” was itself a breach of the duty of loyalty.110 The

defendants raised the untimeliness of that “reformulated” claim in their reply

brief,111 which appropriately “consisted of material necessary to respond to the

answering brief.”112

b. Equitable Tolling and Fraudulent Concealment

The plaintiff also argues that the claim is not time-barred because the statute

of limitations was tolled pursuant to fraudulent concealment and equitable tolling.113

The doctrines of fraudulent concealment and equitable tolling “permit[] tolling of

the limitations period where ‘the facts underlying the claim [are] so hidden that a

reasonable plaintiff could not timely discover them.’”114 Fraudulent concealment

may be demonstrated where a defendant conceals information through an affirmative

109 Dkt. 78 at 2-3. 110 Pl.’s Answering Br. 21-22; compare Am. Compl. ¶ 228. 111 Defs.’ Reply Br. 8 n.3. 112 Crowley, 2006 WL 3095952, at *4. 113 Pl.’s Supp. Br. 5. 114 Weiss v. Swanson, 948 A.2d 433, 451 (Del. Ch. 2008) (quoting In re Dean Witter P’ship Litig., 1998 WL 442456, at *6 (Del. Ch. July 17, 1998)). 25 act of “actual artifice” that prevents a plaintiff from gaining knowledge of the facts

or misdirects a plaintiff from the truth.115 Equitable tolling can toll the statute of

limitations for self-dealing claims, even without actual concealment, where a

plaintiff relies “on the competence and good faith of a fiduciary.”116

The plaintiff asserts that the defendants cannot “point to a single allegation in

the Complaint” demonstrating that stockholders were on notice that the Pre-

Acquisition Board did not conduct cybersecurity due diligence.117 But it is the

plaintiff’s burden to plead specific facts demonstrating that the statute of limitations

was tolled before this litigation was filed.118 Assuming the facts alleged in the

Complaint as true, neither tolling doctrine is applicable.

The plaintiff does not allege any affirmative acts of concealment that could

support the application of fraudulent concealment. “Mere silence is insufficient

. . . .”119 The only acts that the plaintiff cites are public statements by Sorenson and

115 Id. (quoting In re Tyson Foods, Inc., 919 A.2d 563, 585 (Del. Ch. 2007)); State v. Pettinaro Enters., 870 A.2d 513, 531 (Del. Ch. 2005) (“Fraudulent concealment may be found to exist where a defendant knowingly acted to prevent a plaintiff from learning facts or otherwise made misrepresentations intended to ‘put the plaintiff off the trail of inquiry.’” (quoting Halpern v. Barran, 313 A.2d 139, 143 (Del. Ch. 1973))). 116 Weiss, 948 A.2d at 451. 117 Pl.’s Supp. Br. 7. 118 Weiss, 948 A.2d at 451. 119 Krahmer v. Christie’s Inc., 911 A.2d 399, 407 (Del. Ch. 2006). 26 others touting Marriott’s “extensive” due diligence of Starwood.120 There is no

reason to doubt the truth of those statements generally. The plaintiff points to no

representation that Marriott was undertaking cybersecurity diligence in particular.

Nor does the plaintiff allege specific facts that would suggest Marriott’s statements

were meant to throw stockholders “off the trail of inquiry.”121

As to equitable tolling, there are no allegations in the Complaint that permit a

reasonable inference of wrongful self-dealing. In fact, the plaintiff does not allege

that any of the individual defendants benefitted from the conduct challenged in the

Complaint. For claims that do not involve self-dealing, “equitable tolling operates

in much the same way as the doctrine of fraudulent concealment,” and an affirmative

act of concealment is required.122 Again, the plaintiff has not made that showing.

120 Pl.’s Supp. Br. 5 (citing Am. Compl. ¶¶ 12, 104, 174, 179, 180-83). The court need not consider similar statements about the Company’s general due diligence in Marriott’s Form S-4, filed in connection with the Acquisition. See Pl.’s Supp. Br. 7 (asking that the court decline to take judicial notice of the Form S-4). 121 Pettinaro Enters., 870 A.2d at 531. 122 Litman v. Prudential-Bache Props., Inc., 1994 WL 30529, at *3 (Del. Ch. Jan. 14, 1994). In Litman, then-Vice Chancellor Chandler discussed then-Chancellor Allen’s decision in Kahn v. Seaboard Corp., 625 A.2d 269 (Del. Ch. 1993), where the court explained that affirmative acts of concealment may not be necessary to apply the doctrine of equitable tolling if “the parties to the litigation stand in a fiduciary relationship to each other and where the plaintiff alleges self-dealing.” Litman, 1994 WL 30529, at *3 (emphasis added). Litman held that “[i]n situations that do not involve self-dealing, equitable tolling . . . operate[s] to toll a limitations period when the defendant has engaged in certain acts that would prevent the plaintiff from discovering the alleged wrong.” Id. 27 c. Tolling During Inspection Demand

Finally, the plaintiff argues the statute of limitations was tolled while the

plaintiff pursued an inspection demand pursuant to 8 Del. C. § 220. Even if the

analogous statute of limitations began to run on September 23, 2016 when the

Acquisition closed, it was not tolled by the plaintiff’s January 4, 2019 books and

records demand.123 The plaintiff relies on precedent where the court has tolled the

statute of limitations during the pendency of Section 220 litigation.124 The plaintiff

does not, however, cite any authority to support the notion that service of a books

and records demand alone tolls the statute of limitations for a subsequent plenary

lawsuit.

In Technicorp, the court explained that “the institution of other litigation to

ascertain the facts involved in the later suit will toll the statute of limitations while

that litigation proceeds.”125 Likewise, in Sutherland, the court noted that the Section

220 lawsuit tolled the applicable three-year statute of limitations . . . during the

123 Am. Compl. ¶¶ 79, 218; see supra 23-24. No allegation that the Board undertook the “wrongful act” of closing the Acquisition is found in the Complaint. The Board’s recommendation that stockholders approve the Acquisition is the last affirmative act of the Board in the pre-Acquisition time period. 124 See Technicorp Int’l II v. Johnston, 2000 WL 713750, at *9 (Del. Ch. May 31, 2000); Sutherland v. Sutherland, 2009 WL 857468, at *4-5 (Del. Ch. Mar. 23, 2009). 125 2000 WL 713750, at *9. 28 pendency of the plaintiff’s Section 220 action”126 Here, despite the running of the

statute of limitations during its Section 220 investigation, the plaintiff did not file a

Section 220 lawsuit. Further, “there is no hard and fast rule tolling the running of

the statute of limitations during the pendency of books and records litigation.”127

Nor did the plaintiff obtain a tolling agreement with the defendants while its

investigation continued.128

Tolling considerations are different for a Section 220 demand and a Section

220 lawsuit. The former has no formal schedule. A stockholder could serve a

Section 220 demand that fails to satisfy even the basic statutory requirements of

Section 220(b) and use the demand effectively as a placeholder. A Section 220

126 2009 WL 857468, at *5. 127 Sutherland, 2009 WL 1177047, at *1; see also Sutherland v. Sutherland, 2010 WL 1838968, at *5 n.19 (Del. Ch. May 3, 2010) (explaining that a court should consider whether the plaintiff “was, or should have been, aware of [the derivative] claims during the pendency of the § 220 Action”). In Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., the court explained that a plaintiff could defeat a laches defense by showing “that it asserted its rights in a timely manner by making [a] demand [under Section 220] and filing th[at] action.” 714 A.2d 96, 104-05 (Del. Ch. 1998) (emphasis added). The court did not say that a timely demand alone would toll the statute of limitations until a subsequent plenary action was filed. Rather, the court was discussing how a stockholder can demonstrate that it asserted its rights or claim—both through a books and records demand and in pursuing litigation—in a manner that defeats a laches defense. Id. 128 As a result, there is no basis to apply the doctrine of equitable estoppel, as the plaintiff suggests. See Pl.’s Supp. Br. 10-11. The plaintiff asserts that the defendant “slow-rolled” the process of producing documents in response to its Section 220 demand, leading the plaintiff to rely on that conduct to its detriment. Id. But the plaintiff had the right to file Section 220 litigation, a plenary suit, or demand a tolling agreement. 29 lawsuit, by contrast, is a summary proceeding with “expedited discovery and a

prompt hearing.”129 Unlike a demand, a Section 220 action presents “strong

evidence that [a] plaintiff was aggressively asserting its claims.” 130 There may be

an instance where a stockholder’s dogged pursuit of its statutory books and records

rights provides a basis for tolling. But this lawsuit, where the stockholder took

nearly 11 months between serving a demand and filing a plenary lawsuit, is not it.

2. The Plaintiff’s Challenges to Cybersecurity Oversight Post- Closing Do Not Excuse Demand. The plaintiff next argues that a majority of the Demand Board faces a

substantial likelihood of liability for their “conscious and bad faith decision not to

remedy Starwood’s severely deficient information protection systems post-

Acquisition.”131 As often stated, oversight liability under Caremark is “possibly the

most difficult theory in corporation law upon which a plaintiff might hope to win a

judgment.”132 To prevail, the plaintiff must plead particularized facts showing that

either (1) “the directors utterly failed to implement any reporting or information

system or controls” or (2) “having implemented such a system or controls,

129 Cutlip v. CBA Int'l, Inc. I, 1995 WL 694422, at *1 (Del. Ch. Oct. 27, 1995). 130 Gotham P’rs, 714 A.2d at 105. 131 Pl.’s Answering Br. 34. 132 In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996). 30 consciously failed to monitor or oversee its operations thus disabling themselves

from being informed of risks or problems requiring their attention.”133

Compliance risk oversight generally falls within the governance

responsibilities of the board of directors.134 Key enterprise risks affecting a

corporation’s “mission critical” components has been a focus of Delaware courts in

assessing potential oversight liability, particularly where a board has allegedly failed

to implement reporting systems or controls to monitor those risks.135 Cybersecurity,

however, is an area of consequential risk that spans modern business sectors. In the

past several years alone, cyberattacks have affected thousands of companies and

government agencies. High-profile data breaches have exposed customer data at

businesses from Yahoo! to Target and Home Depot.136 Targeted attacks have shut

133 Stone v. Ritter, 911 A.2d 362, 370 (Del. Ch. 2006). 134 See Okla. Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *18 (Del. Ch. Dec. 18, 2017) (“[E]valuation of risk is a core function of the exercise of business judgment.”); Marchand v. Barnhill, 212 A.3d 805, 824 (Del. 2019) (describing the board’s duty to “put in place a reasonable system of monitoring and reporting about the corporation’s central compliance risk”). 135 See, e.g., Marchand, 212 A.3d at 824 (finding that board-level monitoring on food safety was needed where “food safety . . . essential and mission critical” to an ice cream manufacturer); In re Boeing Co. Deriv. Litig., 2021 WL 4059934, at *26 (Del. Ch. Sept. 7, 2021) (finding airplane safety “mission critical” to an airplane manufacturer’s business); see also In re Clovis Oncology, Inc. Deriv. Litig., 2019 WL 4850188, at *14-15 (Del. Ch. Oct. 1, 2019) (denying motion to dismiss in the context of Caremark’s second prong where red flags about a “monoline” company’s single promising drug were ignored). Stockholder litigation followed. See, e.g., In re Home Depot, Inc. S’holder Deriv. Litig., 136

223 F. Supp. 3d 1317 (N.D. Ga. 2016); Davis v. Steinhafel, Lead Case No. 14-cv-203 (PAM/JJK) (D. Minn. July 7, 2016) (ORDER); Okla. Firefighters Pension & Ret. Sys. v. 31 down hospitals and taken offline major fuel pipelines.137 Regulators in the United

States and abroad have become more active in issuing cybersecurity guidance and

undertaking enforcement activities in response.138 The President of the United States

has named cybersecurity a “top priority and essential to national and economic

security.”139

Delaware courts have not broadened a board’s Caremark duties to include

monitoring risk in the context of business decisions.140 Oversight violations are

Brandt, C.A. No. 2017-0133-SG (Del. Ch. Feb. 23, 2017); In re Yahoo! Inc., S’holder Litig., No. 17-CV-307054 (Cal. Super. Ct. Mar. 2, 2018). 137 See Robert McMillan and Melanie Evans, Ransomware Attack Hits Universal Health Services, Wall St. J. (Sept. 30, 2020); Christopher Bing and Stephanie Kelly, Cyber Attack Shuts Down U.S. Fuel Pipeline ‘Jugular,’ Biden Briefed, Reuters (May 8, 2021). 138 See, e.g., Cal. Civ. Code §§ 1798.110, 1798.150 (West 2021) (imposing data collection obligations on companies doing business in California and providing consumers with a private right of action to address harms caused by data breaches); European Union General Data Protection Regulation, Council Regulation 2016/679 (mandating data security measures and breach notification); Commission Statement and Guidance on Public Company Cybersecurity Disclosures, 83 Fed. Reg. 8,166 (Feb. 22, 2018) (Sec. & Exch. Comm’n) (“[T]he Commission believes that the development of effective disclosure controls and procedures is best achieved when a company’s directors, officers, and other persons responsible for developing and overseeing such controls and procedures are informed about the cybersecurity risks and incidents that the company has faced or is likely to face.”); Jared Ho, Corporate Boards: Don’t Underestimate Your Role in Data Security Oversight, Fed. Trade Comm’n (Apr. 28, 2021). 139 Exec. Order No. 14,208, 86 Fed. Reg. at 26,633 (2021). 140 See, e.g., Reiter v. Fairbank, 2016 WL 6081823, at *8 (Del. Ch. Oct. 18, 2016) (“This Court has been careful to distinguish between failing to fulfill one’s oversight obligations with respect to fraudulent or criminal conduct as opposed to monitoring the business risk of the enterprise.”); In re Goldman Sachs Grp., Inc. S’holder Litig., 2011 WL 4826104, at *21 (Del. Ch. Oct. 12, 2011) (stating that the Court of Chancery has “not definitively stated whether a board’s Caremark duties involve a duty to monitor business risk”); Corbat, 2017 32 typically found where companies—particularly those operating within a highly-

regulated industry—violate the law or run afoul of regulatory mandates.141 But as

the legal and regulatory frameworks governing cybersecurity advance and the risks

become manifest, corporate governance must evolve to address them.142 The

corporate harms presented by non-compliance with cybersecurity safeguards

increasingly call upon directors to ensure that companies have appropriate oversight

systems in place.

The growing risks posed by cybersecurity threats do not, however, lower the

high threshold that a plaintiff must meet to plead a Caremark claim. For either prong

of Caremark, “a showing of bad faith conduct . . . is essential to establish director

WL 6452240, at *18 (stating that a “failure to monitor or properly limit business risk” is a “theory of director liability that this Court has never definitively accepted”); In re Facebook, Inc. Section 220 Litig., 2019 WL 2320842, at *14 (Del. Ch. May 30, 2019) (“The legal academy has observed that Delaware courts are more inclined to find Caremark oversight liability at the board level when the company operates in the midst of obligations imposed upon it by positive law yet fails to implement compliance systems, or fails to monitor existing compliance systems, such that a violation of law and resulting liability occurs.”). 141 E.g., La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313, 355 (Del. Ch. 2012) (finding it was reasonable to infer directors approved a business plan allowing for illegal off-label marketing); In re Massey Energy Co., 2011 WL 2176479, at *20-21 (Del. Ch. May 31, 2011) (“[A] fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the law.”). 142 See Leo E. Strine, Jr., Kirby M. Smith & Reilly S. Steel, Caremark and ESG: Perfect Together: A Practical Approach to Implementing an Integrated, Efficient and Effective Caremark and EESG Strategy, 106 Iowa L. Rev. 1885, 1893 (describing “the first principle of corporate law: corporations may only conduct lawful business by lawful means”).

33 oversight liability.”143 Only a “sustained or systemic failure of the board to exercise

oversight . . . will establish the lack of good faith that is a necessary condition to

liability.”144 The Complaint in this case falls well short of demonstrating that the

Post-Acquisition Board members face a substantial likelihood of liability for a

sustained, bad faith failure of oversight. Demand is therefore not futile on that basis.

a. Cybersecurity Reporting Systems and Controls To the extent the plaintiff attempts to put forward a claim under Caremark’s

first prong, I find that effort unpersuasive. Delaware law imposes on directors a duty

to ensure that board-level monitoring and reporting systems are in place. But

because doing so is a disinterested business judgment, “directors have great

discretion to design context- and industry-specific approaches tailored to their

companies’ businesses and resources.”145 For directors to face liability under

Caremark’s first prong, a plaintiff must show that the director “made no good faith

effort to ensure the company had in place any ‘system of controls.’”146

143 Stone, 911 A.2d at 370. 144 Caremark, 698 A.2d at 971. 145 Marchand, 212 A.3d at 821; Citigroup, 964 A.2d at 125 (explaining that although “directors of Delaware corporations have certain responsibilities to implement and monitor a system of oversight” that “obligation does not eviscerate the core protections of the business judgment rule”). 146 Marchand, 212 A.3d at 822. 34 Marriott’s Board consistently ranked cybersecurity as a primary risk facing

the Company.147 The plaintiff does not, however, assert that the Post-Acquisition

Board “utterly failed” to implement any reporting system or internal controls to

address it.148 Instead, the Complaint and documents incorporated into it demonstrate

that the directors surpassed Caremark’s baseline requirement that they “try” in good

faith to put a “reasonable compliance and reporting system in place.”149

The Complaint, for example, describes how the Board and Audit Committee

were “routinely apprised” on cybersecurity risks and mitigation, provided with

annual reports on the Company’s Enterprise Risk Assessment that specifically

evaluated cyber risks, and engaged outside consultants to improve and auditors to

audit corporate cybersecurity practices.150 The Complaint also describes internal

controls over the Company’s public disclosure practices.151 And when management

received information that the plaintiff describes as “red flags” indicating

147 E.g., Am. Compl. ¶¶ 100, 118. 148 See Rojas v. Ellison, 2019 WL 3408812, at *9 (Del. Ch. July 29, 2019); Horman v. Abney, 2017 WL 242571, at *8 & n.46 (Del. Ch. Jan. 19, 2017) (noting that, in the Caremark context, “utterly failed” is a “linguistically extreme formulation” that means “absolute, total” (citations omitted)). 149 Marchand, 212 A.2d at 821. 150 See Am. Compl. ¶¶ 118-130; supra notes 6-10 (describing ongoing updates to directors on information protection and cybersecurity). 151 Am. Comp. ¶¶ 42-44. 35 vulnerabilities, the reports were delivered to the Board.152 To the extent that the

plaintiff contends the Post-Acquisition Board faces liability under the first prong of

Caremark, that argument is meritless.153 The Complaint itself shows that the Board

has systems in place to assess cybersecurity risks.

b. No Failure to Monitor or Oversee Operations

The plaintiff’s primary argument is that the Post-Acquisition Board faces a

substantial likelihood of liability under the second prong of Caremark for

consciously disregarding “red flags” indicating that Marriott was violating positive

law.154 For purposes of Caremark, a plaintiff must plead that the board knew about

“red flags” alerting them to corporate misconduct and “consciously failed to act after

learning about evidence of illegality.”155 The plaintiff has not, however, pleaded

152 Compare Marchand, 212 A.2d at 809 (“Consistent with this dearth of any board-level effort at monitoring, the complaint pleads particularized facts supporting an inference that during a crucial period when yellow and red flags about food safety were presented to management, there was no equivalent reporting to the board.”). 153 See Home Depot, 223 F. Supp. 3d at 1326 (applying Delaware law and finding, in the context of a data security incident, that allegations of “numerous instances where the Audit Committee received regular reports from management on the state of [the company’s] data security, and the Board in turn received briefings from both management and the Audit Committee” led to the conclusion that “the Board was fulfilling its duty of loyalty to ensure that a reasonable system of reporting existed”); see also Corporate Risk Hlds. LLC v. Rowlands, 2018 WL 9517195, at *4 (S.D.N.Y. Sept. 28, 2018) (finding swift efforts “to address [security] breach with contingency plans to ascertain and mitigate the harm” foreclosed claim under the “first category of Caremark liability”). 154 Pl.’s Answering. Br. 34-35. 155 Pyott, 46 A.3d at 341; see also Melbourne Mun. Firefighters’ Pension Tr. v. Jacobs, 2016 WL 4076369, at *12 (Del. Ch. Aug. 1, 2016) (distinguishing Pyott and Massey 36 with particularity that the Post-Acquisition Board learned of legal or regulatory

violations. And even if it had, the Board did not consciously choose to remain idle.

i. No known violations of law The plaintiff argues that the Post-Acquisition Board knew that Starwood’s

systems violated the law because it learned in February 2017 that Starwood’s

“[b]rand standards did not mandate PCI compliance, tokenization, or point-to-point

encryption.”156 But the PCI DSS standards are required by financial institutions with

which companies contract, not mandated by law.157 Nor is tokenization, which can

reduce the amount of cardholder data in a digital environment and streamline PCI

DSS compliance efforts.158 Pleading non-compliance with non-binding industry

because “the Board, at all times, was under the impression that its conduct did not violate applicable . . . laws”); South v. Baker, 62 A.3d 1, 14-15 (Del. 2012) (explaining that a plaintiff who cannot plead actual director involvement in “decisions that violated positive law” can “plead that the board consciously failed to act after learning about evidence of illegality—the proverbial ‘red flag’”); see generally Elizabeth Pollman, Corporate Disobedience, 68 Duke L.J. 709, 723 (2019). 156 Am. Compl. ¶ 124. 157 Those standards, set by the PCI Security Standards Council, founded by American Express, Discover, JCB International, Mastercard and Visa, are intended to reduce credit card fraud. See PSI Security Standards Council, PCI Security https://www.pcisecuritystandards.org/pci_security/. 158 See PCI Security Standards Council, Tokenization Product Security Guidelines (Apr. 2015) https://www.pcisecuritystandards.org/documents/Tokenization_Product_Security_ Guidelines.pdf. 37 standards, like the PCI DSS, is not the same as pleading that directors knowingly

permitted a company to violate positive law.159

The plaintiff also argues that the failure to improve Starwood’s deficient

systems risked the violation of various laws, including the FTC Act, state privacy

acts and unfair competition laws, and “international regulatory standards.”160

Simply listing statues “in vague, broad terms” without alleging what law was

violated and how is insufficient to state a Caremark claim.161 The only law the

parties specifically address in their briefs is the FTC Act. The plaintiff asserts that

the Board’s knowledge of PCI DSS non-compliance is enough to support a

reasonable inference that its members knew Starwood’s cybersecurity practices fell

short of the FTC’s heightened requirements.162 The defendants respond that the FTC

only “recommends” data security practices and requires companies to maintain

159 Wilkin v. Narachi, 2018 WL 1100372, at *12 (Del. Ch. Feb. 28, 2018) (“Pleading violations of nonbinding recommendations does not constitute pleading a violation of positive law such that the board faces a substantial likelihood of liability and cannot consider demand.”). 160 Am. Compl. ¶¶ 58-63. 161 See Narachi, 2018 WL 1100372, at *12 (finding demand not excused where the plaintiff listed various statutes and regulations but did not specify what law was violated because “[m]erely discussing these statutes in vague, broad terms does not support a finding that Director Defendants’ decisions somehow violated these statutes”); Desimone v. Barrow, 924 A.2d 908, 928 (Del. Ch. 2007) (“I do not accept cursory contentions of wrongdoing as a substitute for the pleading of particularized facts. Mere notice pleading is insufficient to meet the plaintiff's burden to show demand excusal in a derivative case.”). 162 Pl.’s Answering Br. 41 n.18. 38 “reasonable” cybersecurity practices.163 Whether the FTC expects PCI DSS

standards or tokenization, however, does not change the fact that there are no

allegations in the Complaint that the Post-Acquisition Board knew about the FTC’s

requirements or that Marriott was violating them. A Caremark claim requires that a

plaintiff demonstrate scienter.164 The plaintiff here has not.

In short, there is no known illegal conduct, lawbreaking, or violations of a

regulatory mandate alleged in the Complaint that could support a finding that the

Post-Acquisition Board faces a substantial likelihood of liability for failed oversight.

That reality distinguishes this case from those relied upon by the plaintiff. In

Massey, the plaintiffs pleaded “a myriad of particularized facts” demonstrating the

board’s knowledge of serious violations of mining safety laws and that the directors

knowingly “caus[ed] [the company] to seek profit” through unlawful acts.165 In

163 Am. Compl. ¶¶ 57-59; Statement of the FTC, FTC v. LifeLock (Dec. 17, 2015) (explaining that “the reasonableness of security will depend on the facts and circumstances of each case”). 164 E.g., Hays v. Almeida, 2019 WL 3389172, at *3 (Del. Ch. July 26, 2019) (ORDER) (rejecting the argument that directors faced oversight liability where “the complaint [did] not allege that the directors knew that Walgreens was violating the law or even engaging in the conduct that risked violating the law”); Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *16 (Del. Ch. Aug. 24, 2020) (“Because a Caremark claim must plead bad faith, ‘a plaintiff must allege facts that allow a reasonable inference that the directors acted with scienter which, in turn, requires not only proof that a director acted inconsistently with his fiduciary duties, but also most importantly, that the director knew he was so acting.’” (quoting Corbat, 2017 WL 6452240, at *14)). 165 Massey, 2011 WL 2176479, at *20. 39 Westmoreland, the United States Court of Appeals for the Seventh Circuit found that

the plaintiffs pleaded particularized facts that the board “took no action to ensure the

company’s timely compliance with the law,” despite the repeated warnings from the

FDA—which were passed along to the board—that the company was in violation of

FDA regulations.166 And in Abbott Labs, the Seventh Circuit likewise found that a

board’s failure to rectify known, ongoing, and pervasive violations of FDA

regulations could constitute bad faith and excuse demand.167 The plaintiff in this

action has not pleaded particularized facts that the Post-Acquisition Board

knowingly permitted Marriott to violate the law.168

166 Westmoreland Cty. Emp. Ret. Sys. v. Parkinson, 727 F.3d 719, 726-29 (7th Cir. 2013). 167 In re Abbott Lab’ys Deriv. S’holders Litig., 325 F.3d 795, 808-09 (7th Cir. 2003). 168 In October 2020, the United Kingdom Information Commissioner’s Office fined Marriott £18.4 million ($24.0 million) in connection with the cyberattack for violating the General Data Protection Regulation (GDPR). See ICO Fines Marriott 18.4 Million Pounds for Failing to Secure Customer Data, Reuters (Oct. 30, 2020); see Am. Compl. ¶¶ 164-65. The GDPR was adopted on April 14, 2016 and became enforceable on March 25, 2018. See GDPR, supra note 137. The GDPR requires, among other things, that customers handling European Union citizens’ data implement reasonable data protection measures to protect consumers’ personal data and privacy from loss or exposure. See GDPR Art. 5; Am. Compl. ¶ 62. The plaintiff alleges that “the defendants failed to comply with various provisions of the GDPR which required Marriott to implement appropriate technical and organizational measures to ensure a level of security appropriate to the risk.” Am. Compl. ¶ 163. But the Complaint lacks any particularized facts suggesting that the Post- Acquisition Board intentionally violated the GDPR or knowingly permitted GDPR violations to continue unabated. There are no allegations suggesting that Marriott’s directors “viewed themselves or [Marriott] as above the law.” Corbat, 2017 WL 6452240, at *24 (explaining that alleged “failed” efforts “to comply with the wide range of laws and regulations that govern large financial institutions” are “not enough to support a plausible inference of bad faith” and that [b]ad results alone do not imply bad faith.”); In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006) (noting that “a failure to act in good 40 ii. No conscious disregard of “red flags”

The plaintiff also contends that the Post-Acquisition Board faces a substantial

risk of liability for ignoring several “red flags” about Starwood’s inadequate data

protection systems post-closing. Those “red flags” are not of illegality, as previously

discussed.169 The plaintiff does not allege that the directors were told, for example,

that Starwood’s standards ran afoul of regulatory or legal requirements. The so-

called “red flags” were updates to the Board about aspects of Starwood’s

cybersecurity measures that needed improvement.170

The purported “red flags” the plaintiff focuses on are as follows. First, five

members of the Demand Board learned at a February 8, 2017 Audit Committee

meeting that Internal Audit rated Marriott as “Needs Improvement” for

cybersecurity and that its “incident response plan [wa]s not up to date.”171 Second,

the Board was told by Hoffmeister on February 10, 2017 that Starwood’s data

faith may be shown . . . where the fiduciary acts with the intent to violate applicable positive law” or “where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties” (citation omitted)). Although not briefed by the parties in any event, the ICO fine is not a basis to find that the Post- Acquisition Board faces a substantial likelihood of liability for a bad faith oversight violation. 169 See supra Section II.B.2.b.i. 170 See Citigroup, 964 A.2d at 124-26; see infra note 184. 171 Am. Compl. ¶¶ 118-19. 41 security standards did not mandate PCI compliance or tokenization.172 And third,

PwC told the Board that Starwood’s “[d]ecentralized technology management

model” created a “greater opportunity for deviation from the expected published

standard.”173 These “red flags” were effectively ignored, the plaintiff asserts,

because the Board waited a year before taking up Starwood’s information protection

systems again.174

Even if the gaps in Starwood’s data security evidenced the sort of compliance

failure that could support a viable claim under the second prong of Caremark, the

Complaint lacks particularized allegations that the Board consciously overlooked or

failed to address them.175 As the defendants point out, no “red flags” were

deliberately disregarded.176 Rather, management told the Board that it was

addressing or would address the issues presented.177

At the same February 10, 2017 meeting where the Board learned about

Starwood’s PCI non-compliance, Hoffmeister reported there “would be efforts made

172 Id. ¶ 124. 173 Id. 174 Id. ¶ 130; Defs.’ Ex. 15 at 1386. 175 See Desimone, 924 A.2d at 940 (“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.”). 176 Defs.’ Opening Br. 39-40. 177 Defs.’ Reply Br. 15. 42 immediately to remedy” Starwood’s lack of tokenization.178 In addition, the

presentation given to the Board confirmed that the Company had a plan in place to

“consolidate Marriott + Starwood [s]ecurity.”179 The Board was also told about

several recommendations that PwC had made to appropriately update Starwood’s

brand standards and detailed “Intended Actions” to address those

recommendations.180 These facts are not reflective of a board that has decided to

turn a blind eye to potential corporate wrongdoing.181

Perhaps the entirety of Starwood’s deficiencies were not addressed

“immediately,” as Hoffmeister told the Board they could be. And, with hindsight

knowledge of the extent of the data breach, the implementation plan was probably

too slow. It wasn’t until the following year on February 9, 2018 that the Board was

178 Am. Compl. ¶ 126. 179 Id. ¶¶ 122, 124; Defs.’ Ex. 14 at 1284-85. 180 Am. Compl. ¶ 125. 181 See Corbat, 2017 WL 6452240 at *17 (finding no substantial likelihood of liability for bad faith failed oversight where the board was presented with an action plan by management and outside advisors); id. at *22 (finding no particularized allegations of board inaction where the company “dealt with [a] red flag in a manner that cannot be said to reflect bad faith”); Reiter, 2016 WL 6081823, at *13 (declining to draw inference that directors knew they were breaching fiduciary duties by allowing corporate violations of law where “the same reports that described the Company's heightened compliance risk simultaneously explained to the directors in considerable detail on a regular basis the initiatives management was taking to address those problems and to ameliorate . . . compliance risk”). 43 next updated about those migration efforts.182 But, the plaintiff does not allege that

the full Board had any reason to suspect that management was not promptly acting

on PwC’s recommendations.183 As the documents incorporated into the Complaint

confirm, management had “enhance[ed] monitoring,” “[e]xpand[ed] enterprise

security logging and event management,” and “[e]xpand[ed] the use of third party

monitoring” among other numerous actions between February 2017 and 2018.184 An

attempted yet failed remediation effort generally cannot implicate bad faith.185

Finally, the plaintiff asserts that the Post-Acquisition Board is exposed to

Caremark liability for its failure to immediately discontinue use of the Starwood

guest reservation system after learning, in September 2018, that it was infected with

182 Id. at 1366, 1386 (Oberg’s Enterprise Risk Assessment presentation, detailing a detailed “Cybersecurity Risk Scorecard” that described current risk mitigation efforts and tracked performance, including the anticipated “[m]igration of Starwood systems to the Marriott established technology standards” for end user devices by September 2019). 183 See Horman, 2017 WL 242571, at *13 (“Delaware courts have consistently rejected . . . the inference that directors must have known about a problem because someone was supposed to tell them about it.” (quoting Cottrell v. Duke, 829 F.3d 983, 995 (8th Cir. 2016) (alteration in original))). 184 Defs.’ Ex. 30 at 1372. 185 See Richardson v. Clark, 2020 WL 7861335, at *11 (Del. Ch. Dec. 31, 2020); see also Jacobs, 2016 WL 4076369, at *9 (“Simply alleging that a board incorrectly exercised its business judgment and made a ‘wrong’ decision in response to red flags . . . is not enough to plead bad faith.”); Home Depot, 223 F. Supp. 3d at 1326-27 (finding no substantial likelihood of liability for Caremark violation based on allegation that implementation to remedy deficiency in company’s data security was not completed fast enough where allegations did not demonstrate bad faith). 44 malware that could allow attackers to access customer data.186 The plaintiff does not

allege that the Board learned on September 17, 2018 that an immediate shutdown of

the system was necessary to protect consumer data but chose to continue its use

nonetheless. According to the Complaint, Marriott did not learn about the extent of

the breach and that customer data had been accessed until November 2018.187 The

Complaint and documents incorporated into it demonstrate that the Board continued

to receive detailed updates on the “incredible amount of work” management and

forensic specialists performed throughout November 2018 to investigate and address

the problem.188 There are no facts pleaded to suggest that the directors’ ignorance

on the extent of the breach in September 2018 is the result of a breach of fiduciary

duty.189 The plaintiff has therefore failed to demonstrate that a majority of the

Demand Board faces a substantial likelihood of liability for consciously disregarding

“red flags.”

186 Pl.’s Answering Br. 13-14, 37. 187 Am. Compl. ¶¶ 139-41. 188 Defs.’ Ex. 21 at 1946-47; Defs.’ Exs. 25-27. 189 See Horman, 2017 WL 242571, at *15 (explaining that the size of the ultimate harm is “not a sufficient basis on which to rest liability” absent facts showing a “board’s ignorance can only be explained by a breach of fiduciary duty” (quoting David B. Shaev Profit Sharing Acct. v. Armstrong, 2006 WL 391931, at *6 (Del. Ch. Feb. 13, 2006)). 45 iii. Notification Requirements Regarding the Breach

The plaintiff’s final theory of liability for the Demand Board is another

variation of alleged failure to comply with positive law—this time, based on the

timing of Marriott’s disclosure of the data breach. The plaintiff contends that

Marriott was “required by various state laws to expeditiously disclose the data

breach” and that the Board “knew they were required by their fiduciary duties to

cause Marriott to disclose this information” in compliance with those laws.190 By

not alerting the public about the incident until November 30, 2018—despite the

Board first learning of malware on September 18, 2018—the plaintiff alleges that

notification laws were violated.

The plaintiff’s argument suffers from many of the same flaws as those

regarding PCI DSS and tokenization. To start, the plaintiff does not allege that the

directors were informed about the applicable notification laws. Directors cannot be

liable under the second prong of Caremark for legal violations that they did not know

about.191

Of the notification laws of 31 states and territories that the plaintiff asserts

were violated by Marriott’s “83-day delay” in notifying individuals affected by the

190 Pl.’s Answering Br. 55. 191 See Horman, 2017 WL 242571, at *11 (explaining that directors are liable if they “become aware of the red flags and do nothing in response”). 46 breach,192 only three statutes—of Delaware, Maryland, and Michigan—are

addressed in the parties’ briefs. Those laws each concern notification requirements

in the event of the disclosure of personal data.193 Maryland’s Personal Information

Privacy Act requires a business that has discovered or has been notified of a security

breach to conduct a prompt investigation to determine if “Personal Information” has

or will be misused.194 If it has, the business is required to notify the affected

individuals “as soon as reasonably practicable.”195 Michigan’s notification law

likewise defines a “security breach” as the “unauthorized access and acquisition of

data that compromises the security or confidentiality of personal information.”196

192 Am. Compl. ¶ 172. 193 At argument, the plaintiff explained that it focused on Maryland and Michigan because those states’ notification laws were selected as bellwether claims in the Federal Action and on Delaware given the action in this court. See Reargument Hr’g Tr.; Pl.’s Answering Br. 56 n.26; Defs.’ Opening Br. 49-50; Defs.’ Reply Br. 21 n.8. 194 Md. Code Ann., Com. Law § 14-3504(b)(1) (West 2021). “Personal Information” is defined to include: An individual’s first name or first initial and last name in combination with any one or more of the following data elements, when the name or the data elements are not encrypted, redacted, or otherwise protected by another method that renders the information unreadable or unusable: . . . a passport number . . . [a]n account number, a credit card number, or a debit card number, in combination with any required security code, access code, or password, that permits access to an individual’s financial account. Id. § 14-3501(e)(1)(i). 195 Id. §§ 14-3504(b)(2), 14-3504(c)(2). 196 Mich. Comp. Laws Ann. § 445.63(b) (West 2021). “Personal information” is defined to include: 47 Delaware’s Consumer Security Breach Act also requires notification “without

unreasonable delay” when a resident’s “personal information was breached or is

reasonably believed to have been breached.”197

The plaintiff points to the fact that consumer class action claims based on the

Maryland and Michigan notification statutes survived a motion to dismiss in the

Federal Action as a basis for finding liability here.198 Those claims were not,

however, brought against the members of the Demand Board and cannot implicate

their liability. 199 Under the heightened pleading standards of Rule 23.1, the lack of

particularized allegations indicating that the directors consciously disregarded or

intentionally violated positive law is dispositive.

[T]he first name or first initial and last name linked to 1 or more of the following data elements of a resident of this state: (i) Social security number[;] (ii) Driver license number or state personal identification card number[;] (iii) Demand deposit or other financial account number, or credit card or debit card number, in combination with any required security code, access code, or password that would permit access to any of the resident's financial accounts. Id. § 445.63(r). 197 6 Del. C. § 12B-102(a). 198 Marriott, 440 F. Supp. 3d at 487, 490. 199 See generally id. Cf. Pfeiffer v. Toll, 989 A.2d 683, 690 (Del. Ch. 2010), abrogated on other grounds by Kahn v. Kohlberg Kravis Roberts & Co. L.P., 23 A.3d 831 (Del. 2011) (finding demand futile based, in part, on federal court decision holding that the same individual defendants acted with scienter regarding “the same trades at issue” in the Delaware action). 48 Regardless, there are no allegations that the Board knew personal data was

accessed such that the notification obligations had been triggered prior to November

2018.200 The plaintiff suggests that it “strains credulity” to conclude the Board did

not know personal information was accessed given the severity of the breach.201 But

as the defendants point out, discovering malware is not the same as discovering that

personal information has been accessed.202 The Complaint plainly states that

Marriott first discovered that “customers’ personal information” was potentially

accessed on November 19, 2018.203 Marriott’s notification of interested parties 10

days later and public announcement of its investigatory findings on the eleventh day

are not obvious violations of notification laws that suggest bad faith on the part of

the Board.204

200 See supra note 164 (discussing the scienter requirement for an oversight claim). 201 Pl.’s Answering Br. 57. 202 Am. Compl. ¶¶ 140, 217; Defs.’ Reply Br. 20. 203 Am. Compl. ¶ 140. 204 Id. ¶¶ 142-43. The plaintiff originally argued that the members of the Audit Committee face a substantial likelihood of liability for issuing a Form 10-Q on November 6, 2018 that “remained silent as to the Breach.” Id. ¶¶ 139, 248; Pl.’s Answering Br. 56. After the District Court in the Federal Action dismissed securities law claims for allegedly false and misleading disclosures with prejudice, the plaintiff here determined not to press its disclosure claims. See Mot. to Dismiss Hr’g Tr. 59. Had they not, the claim likely would have failed because the plaintiff does not ascribe any bad faith actions or motives to the Audit Committee members who approved the Form 10-Q. The claim would, at most, implicate the directors’ “‘erroneous judgment’ concerning the proper scope and content of the disclosure.” Orman v. Cullman, 794 A.2d 5, 41 (Del. Ch. 2002) (quoting Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 987 (Del. Ch. 2000)); see also 49 * * *

The data breach that is at the center of this case was momentous in scale and

put the data of hundreds of millions of people at risk. Critically, however, the

corporate trauma that came to fruition was at the hands of a hacker. Marriott was

the victim of an illegal act rather than the perpetrator. One could argue that the

Complaint depicts a preventable scenario because the directors did not respond to

internal reports about inadequate data security risks as swiftly as they might have.

But the difference between a flawed effort and a deliberate failure to act is one of

extent and intent. A Caremark violation requires a plaintiff to demonstrate the latter.

Here, the Complaint lacks particularized allegations demonstrating that the

Post-Acquisition Board knew that the vulnerabilities in Starwood’s data system ran

afoul of the law, that it nonetheless chose not to address them, or that it scorned legal

notification requirements. Having failed to show that those directors consciously

disregarded positive law or acted in bad faith, the plaintiff has not impugned the

ability of any member of the Demand Board to impartially consider a demand based

on a substantial likelihood of liability for failed oversight.

Morrison v. Berry, 2019 WL 7369431, at *18 (Del. Ch. Dec. 31, 2019) (“Bad faith, in the context of omissions, requires that the omission be intentional and constitute more than an error of judgment or gross negligence.”). 50 III. CONCLUSION

The plaintiff failed to allege particularized facts that could support a finding

that any member of the Demand Board faced a substantial likelihood of liability on

a non-exculpated claim. Any claim based on pre-Acquisition due diligence is time

barred. The remaining claims are unsupported by particularized allegations

demonstrating that the Post-Acquisition Board acted in bad faith with regard to

cybersecurity oversight, compliance, or notification of the data breach. As a result,

a demand made on the Demand Board would not have been futile with respect to the

plaintiff’s breach of fiduciary duty claim. The defendants’ Motion to Dismiss is

granted and the Complaint is dismissed pursuant to Court of Chancery Rule 23.1.