In re Facebook, Inc. Shareholder Derivative Privacy Litigation

• Court: District Court, N.D. California
• Decided: November 12, 2019
• Docket: 4:18-cv-01792
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 IN RE FACEBOOK, INC. 7 SHAREHOLDER DERIVATIVE Case No. 18-cv-01792-HSG PRIVACY LITIGATION 8 ORDER DENYING PLAINTIFFS’ MOTION TO LIFT DISCOVERY STAY 9 This Document Relates To: Re: Dkt. No. 114 10 ALL ACTIONS 11

12 13 Pending before the Court is Plaintiffs’ motion to lift the Private Securities Litigation 14 Reform Act (“PSLRA”) discovery stay. See Dkt. No. 114-1 (“Mot.”). The Court finds this matter 15 appropriate for disposition without oral argument and the matter is deemed submitted. See Civ. 16 L.R. 7–1(b). After careful consideration, the Court DENIES Plaintiffs’ motion to lift the stay. 17 I. BACKGROUND 18 The Court assumes familiarity with the facts and briefly recounts the factual and 19 procedural history relevant to the present motion. Plaintiffs bring this consolidated shareholder 20 derivative action against nominal Defendant Facebook and individual Defendants for claims 21 related to Facebook’s data privacy protection policies and practices, in the wake of the revelation 22 that Cambridge Analytica misappropriated millions of Facebook users’ information for use in 23 political campaigns. See Dkt. No. 56 (“Compl.”) ¶¶ 1–15. Before filing the operative complaint, 24 Plaintiffs did not make a demand on the Board, nor did they make a books and records demand 25 under § 220 of Delaware General Corporation Law. See id. ¶ 378. 26 In July 2018, the Court held that the PSLRA automatic discovery stay applied to this case, 27 because the derivative complaint asserted federal claims under the Securities Exchange Act. Dkt. 1 Court did not lift the PSLRA discovery stay. Id. at 2. Two months later, Plaintiff Natalie 2 Ocegueda made a books and records demand under § 1601 of the California Corporations Code in 3 California State Superior Court (“State Court Action”). See Dkt. No. 93-3. Defendants filed a 4 motion to stay the inspection of Facebook’s corporate books and records, which the Court granted 5 in February 2019. See Dkt. No. 111. In doing so, the Court found that the Securities Litigation 6 Uniform Standards Act of 1998 (“SLUSA”) permitted the Court to stay discovery proceedings in 7 the State Court Action, and that the relevant considerations weighed in favor of doing so. Id. at 3. 8 On March 22, 2019, the Court granted Defendants’ motions to dismiss and dismissed all of 9 Plaintiffs’ derivative state claims without prejudice to reassertion in the Delaware Court of 10 Chancery. Dkt. No. 113. The Court upheld the enforceability of an exclusive forum selection 11 clause, making the Delaware Court of Chancery the exclusive forum for a derivative action. Id. at 12 7–12. But because the Delaware Court of Chancery did not have jurisdiction over Plaintiffs’ 13 federal securities claims, the Court separately addressed those claims and found that Plaintiffs 14 failed to plead demand futility under FRCP 23.1. Id. at 12–22. The Court therefore dismissed the 15 federal securities claims, but gave Plaintiffs an opportunity to amend their complaint to plead 16 particularized allegations demonstrating that demand was futile. Id. at 25. 17 Plaintiffs then filed this motion requesting that the Court lift the PSLRA discovery stay in 18 light of its order granting Defendants’ motions to dismiss. See generally Mot. According to 19 Plaintiffs, “circumstances [ ] changed” in the less than two months between the Court’s order 20 staying the State Court Action and the filing of their motion, which purportedly warrants lifting 21 the PSLRA discovery stay. Id. at 1. 22 II. DISCUSSION 23 As an initial matter, the Court notes that Plaintiffs are not clear as to the contours of the 24 relief they seek. Their motion claims to request “limited relief from the stay of discovery under 25 the [PSLRA]” to “aid in pleading demand futility.” Mot. at 1. Under this theory, Plaintiffs seek 26 “[m]any, if not all, of the requested records” that were “produced by Facebook to plaintiffs in 27 related litigation, including substantially similar derivative actions and inspection demand 1 contend that they have an independent right to the “specified corporate records of Facebook” 2 requested in the State Court Action, which the Court already stayed under the SLUSA. See Mot. 3 at 14; Dkt. No. 111. Notably, Defendants argue that the documents requested in the State Court 4 Action are different than and go “far beyond anything that has been produced by Facebook to any 5 shareholder.” Dkt. No. 118 (“Opp.”) at 8. Thus, it is not entirely clear to the Court what specific 6 materials Plaintiffs seek. Further, Plaintiffs are inconsistent as to whether they are relying on 7 Delaware or California law for the proposition that they have an independent right to a books and 8 records inspection, even with a PSLRA stay in place. 9 In an effort to avoid confusion, the Court separates Plaintiffs’ apparent theories and 10 analyzes each one independently. For the reasons discussed below, the Court finds that regardless 11 of the theory on which Plaintiffs purport to proceed, they have failed to establish that the Court 12 should lift the PSLRA discovery stay so that they can obtain either documents produced by 13 Facebook to other litigants, or the documents requested in their State Court Action. 14 A. Documents Produced in Other Proceedings 15 The Court first addresses what it construes as Plaintiffs’ request to lift the PSLRA 16 discovery stay so that they can obtain documents produced to “a half-dozen other Facebook 17 stockholders.” See Mot. at 10. 18 Under the PSLRA, “all discovery and other proceedings shall be stayed during the 19 pendency of any motion to dismiss, unless the court finds upon the motion of any party that 20 particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that 21 party.” 15 U.S.C. § 78u-4(b)(3)(B); SG Cowen Sec. Corp. v. U.S. Dist. Court for N. Dist. of CA, 22 189 F.3d 909, 912–13 (9th Cir. 1999) (“[D]iscovery should be permitted in securities class actions 23 only after the court has sustained the legal sufficiency of the complaint.”). While the Ninth Circuit 24 has not directly addressed the applicability of the PSLRA automatic discovery stay to derivative 25 actions, courts in this circuit have found that the PSLRA does stay discovery in derivative actions 26 alleging violations of federal securities laws. See, e.g., In re Asyst Techs., Inc. Derivative Litig., 27 No. C-06-04669 EDL, 2008 WL 916883, at *2 (N.D. Cal. Apr. 3, 2008); In re Countrywide Fin. 1 Group, Ltd. Deriv. Litig., No. C–06–03894 RMW, 2007 WL 1545194, at *2 (N.D. Cal. May 29, 2 2007); In re Altera Corp. Deriv. Litig., No. C 06–03447 JW, 2006 WL 2917578 (N.D. Cal. Oct. 3 11, 2006); Melzer v. CNET Networks, Inc., No. C 06–03817 WHA, 2006 WL 3716477, at *2 4 (N.D. Cal. Dec. 15, 2006). 5 Here, Plaintiffs essentially repackage the arguments from their first motion seeking to lift 6 the PSLRA discovery stay. They again argue that they will suffer undue prejudice because they 7 are at an “increasing information disadvantage in relation to other interested parties” to whom 8 Defendants “already produced documents and information.” Mot. at 6–9; see also Dkt. No. 60 at 9 4–6 (prior motion arguing that Plaintiffs would be at a disadvantage “if denied access to 10 documents produced to other plaintiffs and government investigators”). The Court already 11 rejected that argument, Dkt. No. 65 at 2, and finds that Plaintiffs present no reason to hold 12 otherwise now. 13 Defendants cite numerous cases from this circuit recognizing that an “informational 14 disadvantage,” without more, does not justify lifting a PSLRA discovery stay. See Opp. at 6 15 (citing Avila v. LifeLock Inc., No. CV-15-01398-PHX-SRB, 2016 WL 7799624, at *2 (D. Ariz. 16 Apr. 22, 2016); Asyst Techs., 2008 WL 916883, at *2; Countrywide, 542 F. Supp. 2d 1180 n. 29; 17 In re Am. Funds Sec. Litig., 493 F. Supp. 2d 1103, 1106 (C.D. Cal. 2007)). Plaintiffs fail to 18 distinguish these cases in any meaningful way. Instead, they argue that the cited cases are 19 inapposite because none of those plaintiffs were “granted leave to amend their complaint for 20 purposes of repleading demand futility.” Dkt. No. 119 (“Reply”) at 9. 21 The Court is not persuaded. That Plaintiffs are seeking discovery for purposes of 22 repleading demand futility weighs against a finding that the PSLRA discovery stay should be 23 lifted. See SG Cowen, 189 F.3d at 913 (“Thus, as a matter of law, failure to muster facts sufficient 24 to meet the Act’s pleading requirements cannot constitute the requisite ‘undue prejudice’ to the 25 plaintiff justifying a lift of the discovery stay under § 78u–4(b)(3)(B).”). In essence, Plaintiffs 26 seek to “uncover facts sufficient to satisfy the Act’s pleading requirements,” which is “not a 27 1 permissible reason for lifting the discovery stay.” 1 See id. at 912. Congress’s attempt to address 2 discovery abuse through the PSLRA “would be rendered meaningless” if Plaintiffs could 3 circumvent the stay simply by dressing up a securities action as a derivative one. See id. at 913 4 n.1. 5 Accordingly, Plaintiffs have not established that they will be unduly prejudiced so as to 6 justify lifting the PSLRA discovery stay to allow them to obtain documents produced to other 7 litigants in related proceedings.2 8 B. Books and Records Inspection 9 The Court next addresses what it construes as Plaintiffs’ alternative theory that they are 10 entitled to a books and records inspection independent of and separate from discovery. Mot. at 11 11–14; Reply at 1, 9. To start, Plaintiffs are hazy as to whether they are seeking a books and 12 records inspection under Delaware or California law. In Plaintiffs’ opening motion, they argue 13 their “right of inspection” is “deeply rooted in common law and codified in Section 1601” of the 14 California Corporations Code. Mot. at 12–14. But they primarily cite Delaware case law, and 15 also claim that they have a right to obtain Facebook’s “‘books and records in order to better allege 16 demand futility’ under applicable Delaware law.” Mot. at 14 (citation omitted). Then in their 17 reply brief, Plaintiffs argue that the Court should not “prevent a lawful inspection that is 18 authorized by a California statute and is also proper under Delaware law, to aid in pleading 19

20 1 The Court recognizes that at least one court in this district considered the demand futility analysis distinguishable from a sufficiency of the complaint analysis. See Melzer, 2006 WL 21 3716477, at *4. The demand futility inquiry is slightly different in that it asks whether a plaintiff has standing to step into the shoes of the board to protect the interests of the corporation. In re 22 Silicon Graphics Inc. Secs. Litig., 183 F.3d 970, 989 (9th Cir. 1999). In this case where only federal securities claims remain, the analysis substantially overlaps, as both standards require 23 Plaintiffs to plead particularized facts establishing what statements were false or misleading, why those statements were materially false or misleading, and how each Defendant had scienter. See 24 Dkt. No. 113 at 19–20; Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 889 (9th Cir. 2009). 25 2 Delaware law (which governs the substantive demand futility analysis here) also recognizes the need to prevent fishing expeditions before a plaintiff meets the applicable pleading standards. See 26 Scattered Corp. v. Chicago Stock Exch., Inc., 701 A.2d 70, 77 (Del. 1997), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). A plaintiff is not entitled to discovery to 27 “assist their compliance with the particularized pleading requirement of Rule 23.1,” as a plaintiff’s 1 demand futility.”3 See Reply at 8. 2 Fundamentally, what Plaintiffs appear to request is for the Court to lift the SLUSA stay so 3 they can obtain the documents requested in the State Court Action. The Court finds that Plaintiffs 4 are not permitted to do so, under either Delaware or California law. 5 i. Delaware Law 6 Section 220 grants a stockholder of a Delaware corporation the right to inspect that 7 corporation’s books and records. King v. VeriFone Holdings, Inc., 12 A.3d 1140, 1145 (Del. 8 2011). This right is not absolute, and the stockholder must demonstrate “a proper purpose for 9 making such a demand.” Id. A proper purpose is defined as “a purpose reasonably related to such 10 person’s interest as a stockholder.” 8 Del. C. § 220. The Supreme Court of Delaware has found a 11 proper purpose when a plaintiff seeks a § 220 books and records inspection to aid in pleading 12 demand futility, even after a plaintiff has filed a derivative complaint. King, 12 A.3d at 1146. 13 California federal courts applying Delaware law in derivative actions have followed this approach, 14 though none of these cases involved a PSLRA discovery stay. See Oswald v. Humphreys, 2016 15 WL 6582025 (N.D. Cal. Nov. 7, 2016); In re Verifone Holdings, Inc. S’holder Derivative Litig., 16 No. C 07-06347 MHP, 2009 WL 1458233 (N.D. Cal. May 26, 2009). 17 As an initial matter, Plaintiffs did not make a § 220 books and records demand under 18 Delaware law. Plaintiffs acknowledge that other Facebook shareholders have initiated a § 220 19 demand in Delaware, but Plaintiffs seek the documents they themselves requested in the State 20 Court Action. See Mot. at 4. Nonetheless, even if the Court were to construe Plaintiffs’ § 1601 21 action as a § 220 demand, Plaintiffs still have not demonstrated that the books and records 22 inspection in the State Court Action was for a “proper purpose” under Delaware law. 23 Courts have held that a § 220 books and records inspection is not necessarily a discovery 24 demand. See, e.g., Am. Bank v. City of Menasha, 627 F.3d 261, 265 (7th Cir. 2010) (citing Saito v. 25 3 Plaintiffs are inconsistent in invoking or distinguishing Delaware law, depending on whether it is 26 to their advantage to do so. Compare Reply at 6–8, 13–14 (citing cases that address § 220 and demand futility under Delaware law as support for why the Court “should permit Plaintiffs to 27 complete this inspection proceeding in the California State Court”) with id. at 14 (distinguishing 1 McKesson HBOC, Inc., 806 A.2d 113, 114–15 (Del. 2002)). Even so, Delaware courts recognize 2 that a plaintiff may try to initiate a § 220 demand in “bad faith to circumvent the PSLRA.” Beiser 3 v. PMC-Sierra, Inc., No. CIV. A. 3893-VCL, 2009 WL 483321, at *3 (Del. Ch. Feb. 26, 2009); 4 see also Cohen v. El Paso Corp., No. CIV.A. 551-N, 2004 WL 2340046, at *2–3 (Del. Ch. Oct. 5 18, 2004) (“Conflict between the PSLRA with [sic] § 220 will potentially arise only when the § 6 220 action is seeking records that pertain directly to a federal securities law claim asserted in a 7 pending federal action . . .”). Accordingly, Delaware courts have implemented the following 8 safeguards for a books and records inspection to proceed “in the face of a PSLRA mandated stay 9 of discovery”: “(1) the plaintiff was not currently involved in the federal action, (2) the plaintiff’s 10 counsel was not currently involved in the federal action, and (3) the plaintiff agreed to enter a 11 confidentiality agreement preventing him from sharing the information obtained with the plaintiff 12 or counsel in the federal action.” Beiser, 2009 WL 483321, at *3. 13 As the Court already found in its order staying the State Court Action, the first two 14 safeguards are not present here. Dkt. No. 111 at 3 (“Ms. Ocegueda is both petitioner in the State 15 Court Action and Plaintiff in this case, and is represented by the same counsel in both actions.”). 16 And Plaintiffs do not dispute that Ms. Ocegueda refused to enter into a standard confidentiality 17 agreement. See Dkt. No. 118-1, Declaration of Brian M. Lutz ¶ 4; see Reply at 15. Therefore, 18 even if Plaintiffs had made a formal § 220 books and records demand (and they did not), given 19 that none of these safeguards are present, Plaintiffs fail to persuade the Court that any request for a 20 books and records inspection under Delaware law would not be simply an effort to bypass the 21 PSLRA discovery stay. Cf. Cohen, 2004 WL 2340046, at *3 (no indication that plaintiff’s § 220 22 action was for the improper purpose of circumventing the PSLRA discovery stay because all the 23 safeguards were present). 24 Plaintiffs’ cited cases are inapposite. See Reply at 13 (citing Oswald, 2016 WL 6582025; 25 Verifone, 2009 WL 1458233; King, 12 A.3d 1140). Oswald, Verifone, and King did not allege any 26 federal securities claims, and thus a PSLRA discovery stay did not apply to those actions. See 27 Oswald, 2016 WL 6582025, at *1 (alleging breach of fiduciary duties and corporate waste); 1 unjust enrichment); King, 12 A.3d 1142 (same).4 Plaintiffs also fare no better by citing Turocy v. 2 El Pollo Loco, No. SACV151343DOCKESX, 2017 WL 2495172 (C.D. Cal. May 10, 2017) and 3 Kococinski v. Collins, 935 F. Supp. 2d 909 (D. Minn. 2013). See Mot. at 8–14. In Turocy, the 4 district court lifted the PSLRA discovery stay so the plaintiffs could obtain § 220 materials the 5 defendant produced in a different derivative action proceeding in Delaware (in which the plaintiffs 6 were not participating). Turocy, 2017 WL 2495172, at *2. “Of note,” the plaintiffs were not 7 involved in the books and records action, which is not the case here. See id. at *1. In Kococinski, 8 an out-of-circuit case applying Minnesota law, the district court did not address whether a plaintiff 9 may proceed with a books and records inspection when a PSLRA stay is in place. The court in 10 passing commented that it “urge[d] [plaintiff] to consider exercising her statutory right to examine 11 [defendant’s] books and records in order to potentially bolster her allegations.” Kococinski, 935 F. 12 Supp. 2d at 911 n.1. Accordingly, these cases do not support Plaintiffs’ argument that they would 13 be entitled to a books and records inspection under Delaware law notwithstanding a PSLRA- 14 mandated discovery stay. 5 15 ii. California Law 16 As noted earlier, Plaintiffs chose not to pursue inspection of Facebook’s books and records 17 under Delaware law. Instead, Plaintiffs sought inspection of Facebook’s books and records under 18 § 1601 of the California Corporations Code. Section 1601 provides a shareholder with the right to 19

20 4 The Delaware Supreme Court in King distinguished Beiser on the basis that in Beiser, the court in the parallel derivative action did not grant leave to amend, “so any Section 220 inspection 21 would have been an empty excuse.” King, 12 A.3d at 1149. King did not address Beiser’s holding with respect to the PSLRA stay. Instead, the Delaware Supreme Court acknowledged the 22 uncertainty in the law concerning § 220 actions and a PSLRA discovery stay. Id. at 1144 n.13 (“Under the current state of the federal case law … [i]t is unclear whether the [PSLRA] … also 23 applies to derivative actions. The few courts that have applied … the PSLRA [discovery stay] to derivative actions have primarily done so where the action also includes a class action security 24 fraud claim.” (citing In re Openwave Sys. Inc. S’holder Derivative Litig., 503 F. Supp. 2d 1341, 1351 (N.D. Cal. 2007))). 25 5 The Ninth Circuit has not addressed the interplay between a § 220 demand and a PSLRA stay in a parallel derivative action. In the absence of any directly-applicable binding precedent, the Court 26 need not definitively decide whether the federal rules require the Court to lift the PSLRA discovery stay whenever confronted with a § 220 demand, even if the safeguards articulated in 27 Beiser are present. The Court here is simply noting that even if it were to analyze Plaintiffs’ State 1 inspect and copy “[t]he accounting books, records, and minutes of proceedings of the shareholders 2 and the board and committees of the board of any domestic corporation, and of any foreign 3 corporation keeping any records in this state ….” Cal. Corp. Code § 1601(a)(1). 4 “Section 1601 affords ‘no more than a right to inspect and copy records at the company office’ 5 and does not ‘impose on the corporation an affirmative duty to respond to written requests for 6 modes of disclosure falling outside the scope of the statute.’” Singhania v. Uttarwar, 136 Cal. 7 App. 4th 416, 431 (2006) (citation omitted). 8 There is a dearth of caselaw addressing the interplay between a § 1601 action and a parallel 9 case involving a PSLRA discovery stay, or even caselaw discussing whether a plaintiff may 10 proceed with a § 1601 action to assist in pleading demand futility.6 The Court presumes this is 11 why Plaintiffs invoke Delaware law for the proposition that they are allowed to “enforce their 12 statutory right of inspection” in the State Court Action. See Reply at 14. In the absence of any 13 applicable authority, the Court turns to Delaware law for guidance, given the similarity of the 14 issues and recognizing that Delaware law governs the substantive demand futility analysis in this 15 case. If the Court were to apply the equivalent analytical framework under Delaware law to 16 determine whether California law authorizes an independent § 1601 action, for the reasons already 17 discussed, the Court would reach the same conclusion in finding that Plaintiffs fail to establish that 18 the inspection they seek is not simply an effort to circumvent the PSLRA discovery stay. 19 The Court also may continue to stay the State Court Action under SLUSA. See Dkt. No. 20 111. Under SLUSA, upon a “proper showing,” a federal court may “stay discovery proceedings in 21 any private action in a State court as necessary in aid of its jurisdiction, or to protect or effectuate 22 its judgments, in an action subject to a stay of discovery pursuant to this paragraph.” 15 U.S.C. § 23 78u-4(b)(3)(D). Here, Plaintiffs essentially ask the Court to reconsider its previous holding 24 staying the State Court Action. But Plaintiffs fail to proffer any convincing argument to persuade 25 the Court to reconsider, as the Court finds that continuing to stay the books and records inspection 26 6 The one California case Plaintiffs cite for the proposition that California courts “have 27 distinguished shareholder inspection rights from discovery” is from 1939, and thus understandably 1 is consistent with the purpose of SLUSA. 2 Although Plaintiffs cite American Bank as support for their argument, the Court finds that 3 case distinguishable. As Judge Posner explained in American Bank, the purpose of SLUSA is to 4 “prevent settlement extortion—using discovery to impose asymmetric costs on defendants in order 5 to force a settlement advantageous to the plaintiff regardless of the merits of his suit.” Am. Bank, 6 627 F.3d at 263 (citations omitted). But that purpose is “thwarted if the plaintiff in a federal 7 securities suit, by filing a parallel suit in state court under state [ ] law against the same defendant 8 that he had sued in federal court, could use state discovery procedure to impose the very burdens 9 on the defendant” the PSLRA sought to prevent. Id. (citations omitted). With this purpose in 10 mind, the Seventh Circuit found that a request for public records under Wisconsin’s public-records 11 law entitled a private securities plaintiff to those records, even when a PSLRA discovery stay was 12 in place. Id. at 266–67. The circuit court found significant that under Wisconsin’s public-records 13 law, the requestor and not the defendant would incur the costs associated with responding to 14 requests for public records, thereby alleviating concerns of settlement extortion. Id. at 266–67. 15 In contrast, Defendants here would incur substantial expense in producing the documents 16 in the State Court Action. Plaintiffs’ proffered explanation for why Defendants would have no 17 burden is that “Facebook’s obligation to permit inspection arises from Section 1601 and not from 18 any discovery process.” Reply at 11. The Court finds that argument unavailing. Unlike the 19 public-records law in American Bank, § 1601 has no provision authorizing Defendants to shift the 20 costs of production to Plaintiffs. And as the Court found in its prior order, the “sheer scope of 21 Plaintiff’s discovery request,” which seeks twenty-four categories of documents, including emails, 22 and which the Superior State Court suggested is overbroad, “places a substantial burden on 23 Defendant.” 7 Dkt. No. 111 at 3; see Dkt. No. 118-2, Ex. 1; Dkt. No. 118-3, Ex. 2. For at least 24 these reasons, American Bank does not support Plaintiffs’ request. 25

26 7 Plaintiffs are vague as to whether they request all twenty-four categories of documents or just the fourteen listed in Dkt. No. 114-2, Exhibit F. See Mot. at 14 n.5 (“In any event, Plaintiffs identify 27 the particular requests in the inspection demand that are likely to address the Court’s concerns in 1 The Court will not elevate form over substance. In short, whatever theory Plaintiffs are 2 || pursuing, they fail to establish that any books and records inspection they seek under Delaware or 3 California law is not for the improper purpose of circumventing the PSLRA discovery stay. 4 Wl. CONCLUSION 5 The Court DENIES Plaintiffs’ motion to lift the PSLRA discovery stay. Plaintiffs are 6 || directed to file their amended complaint within 21 days of the date of this order. 7 IT IS SO ORDERED. 8 || Dated: 11/12/2019 9 □ S. GILLIAM, JR. / 10 United States District Judge 11 12

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