In Re The Boeing Company Derivative Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE THE BOEING COMPANY ) C.A. No. 2019-0907-MTZ DERIVATIVE LITIGATION )
MEMORANDUM OPINION Date Submitted: June 25, 2021 Date Decided: September 7, 2021
Joel Friedlander, Jeffrey M. Gorris, and Christopher M. Foulds, FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; Richard M. Heimann and Katherine Lubin Benson, LIEFF CABRASER HEIMANN & BERNSTEIN, LLP, San Francisco, California; Steven E. Fineman, Nicholas Diamond, Sean Petterson, Rhea Ghosh, and Kartik S. Madiraju, LIEFF CABRASER HEIMANN & BERNSTEIN, LLP, New York, New York, Attorneys for Co-Lead Plaintiffs.
Blake Rohrbacher, Kevin M. Gallagher, and Ryan D. Konstanzer, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Joshua Z. Rabinovitz, KIRKLAND & ELLIS LLP, Chicago, Illinois, Attorneys for Defendants and Nominal Defendant The Boeing Company.
ZURN, Vice Chancellor. A 737 MAX airplane manufactured by The Boeing Company (“Boeing” or
the “Company”) crashed in October 2018, killing everyone onboard; a second one
crashed in March 2019, to the same result. Those tragedies have led to numerous
investigations and proceedings in multiple regulatory and judicial arenas to find out
what went wrong and who is responsible. Those investigations have revealed that
the 737 MAX tended to pitch up due to its engine placement; that a new software
program designed to adjust the plane downward depended on a single faulty sensor
and therefore activated too readily; and that the software program was insufficiently
explained to pilots and regulators. In both crashes, the software directed the plane
down.
The primary victims of the crashes are, of course, the deceased, their families,
and their loved ones. While it may seem callous in the face of their losses, corporate
law recognizes another set of victims: Boeing as an enterprise, and its stockholders.
The crashes caused the Company and its investors to lose billions of dollars in value.
Stockholders have come to this Court claiming Boeing’s directors and officers failed
them in overseeing mission-critical airplane safety to protect enterprise and
stockholder value.
Because the crashes’ second wave of harm affected Boeing as a company, the
claim against its leadership belongs to the Company. In order for the stockholders
to pursue the claim, they must plead with particularity that the board cannot be
1 entrusted with the claim because a majority of the directors may be liable for
oversight failures. This is extremely difficult to do. The defendants have moved to
dismiss this action, arguing the stockholders have failed to clear this high hurdle.
The narrow question before this Court today is whether Boeing’s stockholders
have alleged that a majority of the Company’s directors face a substantial likelihood
of liability for Boeing’s losses. This may be based on the directors’ complete failure
to establish a reporting system for airplane safety, or on their turning a blind eye to
a red flag representing airplane safety problems. I conclude the stockholders have
pled both sources of board liability. The stockholders may pursue the Company’s
oversight claim against the board. But the stockholders have failed to allege the
board is incapable of maintaining a claim against Boeing’s officers. The
stockholders’ other claim against the board, regarding their handling of the chief
executive officer’s retirement and compensation, is also dismissed.
I. BACKGROUND
I draw the following facts from the Verified Amended Consolidated
Complaint, as well as the documents attached and integral to it.1
1 Docket Item (“D.I.”) 131 [hereinafter “Am. Compl]. See, e.g., Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch. Dec. 28, 2018); In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014). Citations in the form of “Defs.’ Ex. —” refer to the exhibits in support of Defendants’ Motion, available at D.I. 147 through D.I. 152 and D.I. 160. Citations in the form of “Pls.’ Ex. —” refer to exhibits in support of Plaintiffs’ opposition to the Motion, available at D.I. 155. And citations in
2 Co-Lead Plaintiffs are Boeing stockholders. Co-Lead Plaintiff Thomas P.
DiNapoli is Comptroller of the State of New York, Administrative Head of the New
York State and Local Retirement System, and Trustee of the New York State
the form of “Hr’g Tr. —” refer to the transcript of the June 25, 2021 oral argument on Defendants’ Motion, available at D.I. 169. Prior to filing this action, Plaintiffs pursued and received books and records pursuant to 8 Del. C. § 220. Plaintiffs received over 44,100 documents totaling over 630,000 pages. It is reasonable to infer that exculpatory information not reflected in the document production does not exist. See Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *24 & n.314 (Del. Ch. Aug. 24, 2020). The Amended Complaint cites documents Plaintiffs obtained under Section 220. The parties do not contest that under the incorporation by reference doctrine, I may consider those documents and Defendants’ exhibits in support of the Motion to determine whether the Amended Complaint has accurately referenced their contents in support of its claims and in pleading demand futility. Reiter on Behalf of Cap. One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *5–6 (Del. Ch. Oct. 18, 2016). In briefing, Plaintiffs did not assert that any of the exhibits Defendants submitted would be improper to consider on the Motion. See D.I. 155 at 1 n.1 & 42–44. At argument, Plaintiffs’ counsel suggested that the Court should not consider Dennis Muilenburg’s “Lion Air Talking Points” for the Board’s November 23, 2018 call, submitted as Defendants’ Exhibit 86. See Hr’g Tr. 125–27. Specifically, Plaintiffs’ counsel argued that “it is on its face a draft set of talking points that Mr. Muilenburg had”; and that “it’s not incorporated by reference” because Plaintiffs “didn’t plead that they were recited . . . to the board,” “it’s not a board meeting,” and “[i]t’s not a presentation,” but “could have been.” Id. 125. But Plaintiffs pled that “[t]alking points for the call circulated among Muilenburg and other executives expressed skepticism about media accounts of MCAS’s role in the crash.” Am. Compl. ¶ 224. Plaintiffs’ brief in opposition to the Motion also relied on the talking points. See D.I. 155 at 26. Defendants submitted Exhibit 86 in reply. See Defs.’ Ex. 86. I therefore consider Defendants’ Exhibit 86 on the Motion. At Defendants’ urging, I have considered their proffered exhibits to determine if they show that Plaintiffs “misrepresented their contents” or if any inference that Plaintiffs seek is unreasonable. Flannery v. Genomic Health, Inc., 2021 WL 3615540, at *8 (Del. Ch. Aug. 16, 2021) (citing Voigt v. Metcalf, 2020 WL 614999, at *9 (Del. Ch. Feb. 10, 2020)). Through that lens, I find they do no such work for Defendants; in fact, Defendants’ exhibits support Plaintiffs’ allegations.
3 Common Retirement Fund (“NYSCRF”). NYSCRF is a public pension fund for
New York State and local government employees. Co-Lead Plaintiff Fire and Police
Pension Association of Colorado (“FPPA”) is the Trustee for the Fire and Police
Members’ Benefit Investment Fund, which contains assets of governmental defined
benefit pension plans for Colorado firefighters, police officers, and their
beneficiaries. As of June 8, 2020, FPPA held approximately 9,165 shares of Boeing
stock, and NYSCRF held approximately 1,186,627 shares of Boeing stock.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE THE BOEING COMPANY ) C.A. No. 2019-0907-MTZ DERIVATIVE LITIGATION )
MEMORANDUM OPINION Date Submitted: June 25, 2021 Date Decided: September 7, 2021
Joel Friedlander, Jeffrey M. Gorris, and Christopher M. Foulds, FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; Richard M. Heimann and Katherine Lubin Benson, LIEFF CABRASER HEIMANN & BERNSTEIN, LLP, San Francisco, California; Steven E. Fineman, Nicholas Diamond, Sean Petterson, Rhea Ghosh, and Kartik S. Madiraju, LIEFF CABRASER HEIMANN & BERNSTEIN, LLP, New York, New York, Attorneys for Co-Lead Plaintiffs.
Blake Rohrbacher, Kevin M. Gallagher, and Ryan D. Konstanzer, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Joshua Z. Rabinovitz, KIRKLAND & ELLIS LLP, Chicago, Illinois, Attorneys for Defendants and Nominal Defendant The Boeing Company.
ZURN, Vice Chancellor. A 737 MAX airplane manufactured by The Boeing Company (“Boeing” or
the “Company”) crashed in October 2018, killing everyone onboard; a second one
crashed in March 2019, to the same result. Those tragedies have led to numerous
investigations and proceedings in multiple regulatory and judicial arenas to find out
what went wrong and who is responsible. Those investigations have revealed that
the 737 MAX tended to pitch up due to its engine placement; that a new software
program designed to adjust the plane downward depended on a single faulty sensor
and therefore activated too readily; and that the software program was insufficiently
explained to pilots and regulators. In both crashes, the software directed the plane
down.
The primary victims of the crashes are, of course, the deceased, their families,
and their loved ones. While it may seem callous in the face of their losses, corporate
law recognizes another set of victims: Boeing as an enterprise, and its stockholders.
The crashes caused the Company and its investors to lose billions of dollars in value.
Stockholders have come to this Court claiming Boeing’s directors and officers failed
them in overseeing mission-critical airplane safety to protect enterprise and
stockholder value.
Because the crashes’ second wave of harm affected Boeing as a company, the
claim against its leadership belongs to the Company. In order for the stockholders
to pursue the claim, they must plead with particularity that the board cannot be
1 entrusted with the claim because a majority of the directors may be liable for
oversight failures. This is extremely difficult to do. The defendants have moved to
dismiss this action, arguing the stockholders have failed to clear this high hurdle.
The narrow question before this Court today is whether Boeing’s stockholders
have alleged that a majority of the Company’s directors face a substantial likelihood
of liability for Boeing’s losses. This may be based on the directors’ complete failure
to establish a reporting system for airplane safety, or on their turning a blind eye to
a red flag representing airplane safety problems. I conclude the stockholders have
pled both sources of board liability. The stockholders may pursue the Company’s
oversight claim against the board. But the stockholders have failed to allege the
board is incapable of maintaining a claim against Boeing’s officers. The
stockholders’ other claim against the board, regarding their handling of the chief
executive officer’s retirement and compensation, is also dismissed.
I. BACKGROUND
I draw the following facts from the Verified Amended Consolidated
Complaint, as well as the documents attached and integral to it.1
1 Docket Item (“D.I.”) 131 [hereinafter “Am. Compl]. See, e.g., Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch. Dec. 28, 2018); In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014). Citations in the form of “Defs.’ Ex. —” refer to the exhibits in support of Defendants’ Motion, available at D.I. 147 through D.I. 152 and D.I. 160. Citations in the form of “Pls.’ Ex. —” refer to exhibits in support of Plaintiffs’ opposition to the Motion, available at D.I. 155. And citations in
2 Co-Lead Plaintiffs are Boeing stockholders. Co-Lead Plaintiff Thomas P.
DiNapoli is Comptroller of the State of New York, Administrative Head of the New
York State and Local Retirement System, and Trustee of the New York State
the form of “Hr’g Tr. —” refer to the transcript of the June 25, 2021 oral argument on Defendants’ Motion, available at D.I. 169. Prior to filing this action, Plaintiffs pursued and received books and records pursuant to 8 Del. C. § 220. Plaintiffs received over 44,100 documents totaling over 630,000 pages. It is reasonable to infer that exculpatory information not reflected in the document production does not exist. See Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *24 & n.314 (Del. Ch. Aug. 24, 2020). The Amended Complaint cites documents Plaintiffs obtained under Section 220. The parties do not contest that under the incorporation by reference doctrine, I may consider those documents and Defendants’ exhibits in support of the Motion to determine whether the Amended Complaint has accurately referenced their contents in support of its claims and in pleading demand futility. Reiter on Behalf of Cap. One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *5–6 (Del. Ch. Oct. 18, 2016). In briefing, Plaintiffs did not assert that any of the exhibits Defendants submitted would be improper to consider on the Motion. See D.I. 155 at 1 n.1 & 42–44. At argument, Plaintiffs’ counsel suggested that the Court should not consider Dennis Muilenburg’s “Lion Air Talking Points” for the Board’s November 23, 2018 call, submitted as Defendants’ Exhibit 86. See Hr’g Tr. 125–27. Specifically, Plaintiffs’ counsel argued that “it is on its face a draft set of talking points that Mr. Muilenburg had”; and that “it’s not incorporated by reference” because Plaintiffs “didn’t plead that they were recited . . . to the board,” “it’s not a board meeting,” and “[i]t’s not a presentation,” but “could have been.” Id. 125. But Plaintiffs pled that “[t]alking points for the call circulated among Muilenburg and other executives expressed skepticism about media accounts of MCAS’s role in the crash.” Am. Compl. ¶ 224. Plaintiffs’ brief in opposition to the Motion also relied on the talking points. See D.I. 155 at 26. Defendants submitted Exhibit 86 in reply. See Defs.’ Ex. 86. I therefore consider Defendants’ Exhibit 86 on the Motion. At Defendants’ urging, I have considered their proffered exhibits to determine if they show that Plaintiffs “misrepresented their contents” or if any inference that Plaintiffs seek is unreasonable. Flannery v. Genomic Health, Inc., 2021 WL 3615540, at *8 (Del. Ch. Aug. 16, 2021) (citing Voigt v. Metcalf, 2020 WL 614999, at *9 (Del. Ch. Feb. 10, 2020)). Through that lens, I find they do no such work for Defendants; in fact, Defendants’ exhibits support Plaintiffs’ allegations.
3 Common Retirement Fund (“NYSCRF”). NYSCRF is a public pension fund for
New York State and local government employees. Co-Lead Plaintiff Fire and Police
Pension Association of Colorado (“FPPA”) is the Trustee for the Fire and Police
Members’ Benefit Investment Fund, which contains assets of governmental defined
benefit pension plans for Colorado firefighters, police officers, and their
beneficiaries. As of June 8, 2020, FPPA held approximately 9,165 shares of Boeing
stock, and NYSCRF held approximately 1,186,627 shares of Boeing stock.
Nominal Defendant Boeing is a global aerospace corporation that designs,
manufactures, and sells commercial airplanes and other aviation equipment for the
airline, aerospace, and defense industries. Boeing conducts its business in four
segments. Its Boeing Commercial Airplanes (“BCA” or “Commercial Airplanes”)
segment is by far the most lucrative, generating approximately 61.7% of the
Company’s revenue in 2017 and 45% of its revenue in 2019. That decrease resulted
from two fatal crashes involving Boeing’s 737 MAX airplanes in 2018 (the “Lion
Air Crash”) and 2019 (the “Ethiopian Airlines Crash”). Those tragedies caused
preventable loss of life, as well as the grounding of Boeing’s entire 737 MAX fleet
in March 2019 (the “737 MAX Grounding”) and attendant financial and reputational
harm to the Company. Plaintiffs seek to hold the defendants in this action
4 accountable for those harms under the principles articulated in In re Caremark
International Inc. Derivative Litigation2 and Marchand v. Barnhill.3
The defendants are current and former Boeing officers (the “Officer
Defendants”) and members of Boing’s Board of Directors (the “Board”) (the
“Director Defendants,” and together with the Officer Defendants, “Defendants”),
who allegedly failed to oversee and monitor airplane safety. The Director
Defendants include Dennis A. Muilenburg, W. James McNerney Jr., Kenneth M.
Duberstein, David L. Calhoun, Mike S. Zafirovski, Admiral Edmund P.
Giambastiani Jr., Susan C. Schwab, Caroline B. Kennedy, Arthur D. Collins Jr.,
Edward M. Liddy, Ronald A. Williams, Lynn J. Good, Randall L. Stephenson,
Robert A. Bradway, and Lawrence W. Kellner.4
Many of Boeing’s Board seats were long-term and awarded to political
insiders or executives with financial expertise. For example, Duberstein, the
longest-tenured Defendant and a lobbyist with “ultimate insider status,” served as a
McDonnell Douglas director from 1989 to 1997, and then as a Boeing director from
1997 through April 2019, including as Lead Director from 2005 through April 2018. 5
2 698 A.2d 959 (Del. Ch. 1996). 3 212 A.3d 805 (Del. 2019). 4 Plaintiffs allege Defendant Raymond L. Conner was “vice chairman of Boeing” from 2014 to 2017. Am. Compl. ¶ 39. It is unclear whether Conner was vice chairman of the Board. If he was a director, he is included as a “Director Defendant.” 5 Am. Compl. ¶ 23.
5 Duberstein was succeeded in that role by Defendant David L. Calhoun, a private
equity executive, who has been a Boeing director since 2009; was appointed Board
Chairman in October 2019 in the wake of the 737 MAX crashes; and was appointed
Boeing’s President and CEO in January 2020.
The Officer Defendants have also had extensive tenures at Boeing. They
include the following:
• McNerney has been with Boeing since at least 2001. He served as
Boeing’s CEO, President, and Chairman of the Board from 2005 until
February 2016.
• Muilenburg is a career Boeing executive who started with the Company
in 1985. He became Boeing’s Vice Chairman, President, and COO in
December 2013; CEO in July 2015; and CEO and Chairman of the
Board in March 2016, succeeding McNerney. After the 737 MAX
crashes, in October 2019, Muilenburg was removed as Chairman and
ultimately retired from the Company in December 2019.
• Defendant J. Michael Luttig served as Boeing’s EVP and General
Counsel from May 2006 to May 2019. In May 2019, following the
grounding of the 737 MAX, Luttig was named Counselor and Senior
Advisor to CEO Muilenburg and the Board, but left the Company in
December 2019.
6 • Defendant Raymond L. Conner joined Boeing in 1977. He served as
Boeing’s Vice Chairman from 2014 until his retirement in 2017, and
President and CEO of BCA from 2014 until November 2016.
• Defendant Kevin G. McAllister was Boeing’s Executive Vice President
and President and CEO of BCA from November 2016 (succeeding
Conner) until his ouster in October 2019, following the Ethiopian
Airlines Crash.
• Defendant Greg Hyslop has been Boeing’s chief engineer since July
2016, overseeing all aspects of safety and technical integrity of Boeing
products and services. Hyslop is also a member of Boeing’s Executive
Council and reports to the Company’s President and CEO.
• Defendant Diana L. Sands is a member of Boeing’s Executive Council
and has served as Senior Vice President of Boeing’s Office of Internal
Governance and Administration since April 2014. As Boeing’s chief
ethics and compliance officer, she leads Boeing’s ethics, compliance,
corporate audit and trade controls activities, and reports to Boeing’s
President and CEO and to Boeing’s Audit Committee, discussed infra.
• Defendant Greg Smith has served as Boeing’s CFO since 2011.
In these roles, Defendants allegedly failed to carry out their respective duties
to monitor the safety and airworthiness of Boeing’s aircraft, and the extent of those
7 alleged failures only surfaced in the wake of corporate trauma. Rather than
prioritizing safety, Defendants lent their oversight authority to Boeing’s agenda of
rapid production and profit maximization. That misplaced Board focus caused
Boeing to bleed millions of dollars in fees, fines, and lost revenue, yet the Company
rewarded several of the Defendants with hefty compensation and retirement
packages.
A. Boeing Shifts Its Focus From Engineering And Safety To Profits And Rapid Production.
Founded in 1916, Boeing thrived as “an association of engineers.” 6 Its
executives were “conversant in engineering requirements.” 7 As a result, Boeing’s
culture emphasized engineering and safety, and Boeing emerged as a leading global
aerospace manufacturer.
As the Company grew, its focus on safety and engineering fell away. In 1997,
Boeing acquired McDonnell Douglas, another airplane manufacturer with a long
history of pushing profits, shirking quality control, and designing products involved
in numerous safety incidents. With former McDonnell Douglas leaders at the helm,
Boeing’s corporate culture shifted from “safety to profits-first” and “focusing on
6 Am. Compl. ¶ 44. 7 Id.
8 costs-cutting rather than designing airplanes.”8 As observed by a longtime Boeing
physicist:
If your business model emphasizes productivity, employee engagement, and process improvement, costs go down faster. This was the essence of the “quality” business model Boeing followed in the mid- 90s.
The 777 had the best “learning curve” in the business. On the other hand, if your industry is mature, and your products are commodity-like, business school theory says a cost-cutting model is appropriate.
Wal-Mart perfected its particular version of the cost-cutting business model. Amazon adapted that model to its industry. Boeing has adapted it to high-end manufacturing.9
As a result, many of Boeing’s engineers felt disenchanted, and in 2000 they staged
a forty-day strike to improve Company culture and regain a voice in decision
making. By 2001, Boeing relocated its headquarters from Seattle to Chicago in order
“to escape the influence of the resident flight engineers.” 10
The internal shift to focus on cost-cutting exacerbated the inherent risks
associated with Boeing’s business. In the early 2000s, Boeing saw a sharp rise in
safety violations imposed by the Federal Aviation Administration (the “FAA”).
8 Id. ¶ 47. 9 Id. ¶ 55 (quoting Stan Sorscher, a longtime Boeing physicist and negotiator for the Society for Professional Engineering Employees in Aerospace). 10 Id. ¶ 5; see also id. ¶ 50. As Boeing’s then-CEO Phil Condit explained, “When the headquarters is located in proximity to a principal business—as ours was in Seattle—the corporate center is inevitably drawn into day-to-day business operations.” Id.
9 Between 2000 and 2020, the FAA flagged twenty airplane safety violations for poor
quality control, poor maintenance, and noncompliant parts, as well as the Company’s
failure to provide its airline clients with crucial safety information. 11 Consequently,
Boeing faced fines ranging between $6,000 and $13 million.
Quality suffered, and the Company was widely criticized, with prosecutors
asking, “Where was the leadership?”12 Management scandals ultimately led to the
ouster of two successive CEOs. Then, in 2005, McNerney was named CEO.
McNerney did not have a technical background, and after his appointment, Boeing
was described as a “weird combination of a distant building with a few hundred
people in it and a non-engineer with no technical skills whatsoever at the helm.” 13
The Company’s safety record in the years that followed was spotty. In 2013,
the new 787 Dreamliner suffered a series of lithium-ion battery fires and was
grounded by the FAA. In 2014, the National Transportation Safety Board (“NTSB”)
directed Boeing to modify its process for developing safety assessments for designs
incorporating new technology, after having determined that (1) Boeing had made
misleading and unfounded claims about the lithium-ion battery system in its safety
assessment reports to the FAA; (2) Boeing’s certification engineers had not properly
11 See id. ¶ 49. In comparison, the FAA cited Boeing’s competitor, Airbus, for only three safety violations during the same period. Id. 12 Id. ¶ 52. 13 Id. ¶ 53.
10 tested the lithium-ion battery system; and (3) Boeing’s safety assessment was
insufficient. Al Jazeera also conducted and released an investigative report that
detailed employee reports of ineffective quality control at a Dreamliner plant that
resulted in “foreign object debris” being left in the aircraft, and disclosed that a
Boeing customer was refusing to accept Dreamliners manufactured in that plant due
to quality concerns.14
In addition to the Dreamliner issues, in July 2013, one of Boeing’s 777
airplanes crashed, killing three and seriously injuring dozens. An NTSB report
concluded that the crash was caused, at least in part, by inadequate plane
documentation and training manuals, and recommended improvements in those
areas.
Boeing’s safety woes continued into 2015 as reflected in thirteen separate
pending or potential civil enforcement cases relating to quality control, safety
protocol violations, and manufacturing errors in production lines. The FAA
investigated these claims and Boeing’s failure to take appropriate corrective actions.
In December 2015, Boeing entered into an unprecedented settlement with the FAA
(the “FAA Settlement”) and agreed to pay historic fines of $12 million, with up to
$24 million in additional fines deferred pending Boeing acting on a five-year
implementation of “additional significant systemic initiatives, to strengthen its
14 Id. ¶¶ 118–21.
11 regulatory compliance processes and practices.”15 On February 25, 2021, the FAA
announced in a press release it had assessed an additional $6.6 million in deferred
civil penalties and settlement costs against Boeing.16
B. Boeing Lacked Any Formal, Board-Level Process To Oversee Airplane Safety.
Boeing did not implement or prioritize safety oversight at the highest level of
the corporate pyramid. None of Boeing’s Board committees were specifically tasked
with overseeing airplane safety, and every committee charter was silent as to
airplane safety. The Board recognized as much: former director John H. Briggs,
who retired in 2011, observed that the “board doesn’t have any tools to oversee”
safety.17 This stood in contrast to many other companies in the aviation space whose
business relies on the safety and flightworthiness of airplanes. 18
From 2011 until August 2019, the Board had five standing Committees to
monitor and oversee specific aspects of the Company’s business: (1) Audit,
(2) Finance, (3) Compensation, (4) Special Programs, and (5) Governance,
Organization and Nominating. The Audit Committee was Boeing’s primary arbiter
for risk and compliance. Specifically, it “evaluat[ed] overall risk assessment and
15 Id. ¶ 123. 16 Pls.’ Ex 1. 17 Am. Compl. ¶ 57. 18 Id. ¶ 67 (identifying board-level safety committees and control at Southwest Airlines, Delta Airlines, United Airlines, JetBlue, Spirit Airlines, and Alaska Airlines).
12 risk management practices”; “perform[ed a] central oversight role with respect to
financial statement, disclosure, and compliance risks”; and “receiv[ed] regular
reports from [Boeing’s] Senior Vice President, Office of Internal Governance and
Administration with respect to compliance with our ethics and risk management
policies.”19
The Audit Committee’s charter identifies its responsibilities as
• “[o]btain[ing] and review[ing], on an annual basis, a formal written
report prepared by the independent auditor describing [Boeing’s]
internal quality-control procedures”;
• reviewing “[a]ny material issues raised by the most recent internal
quality-control review, or peer review, of [Boeing], or by any inquiry
or investigation by governmental or professional authorities, within the
preceding five years, respecting one or more independent audits carried
out by [Boeing]”;
• “[d]iscuss[ing] with management the Company’s policies, practices
and guidelines with respect to risk assessment and risk management”;
• “[a]t least annually receiv[ing] reporting by the [Senior Vice President,
Office of Internal Governance and Administration] on the Company’s
19 Id. ¶ 59.
13 compliance with its risk management processes, and by the General
Counsel on pending Law Department investigations of alleged or
potentially significant violations of laws, regulations, or Company
policies”; and
• “[m]eet[ing] with the [Senior Vice President, Office of Internal
Governance and Administration] to review the Company’s ethics and
business conduct programs and the Company’s compliance with related
laws and regulations.”20
The Audit Committee was obligated to regularly report to the Board regarding those
topics, including “the Company’s compliance with legal or regulatory
requirements,” and “the implementation and effectiveness of the Company’s ethics
and compliance programs to support the Board’s oversight responsibility.”21
Although the Audit Committee was tasked with handling risk generally, it did
not take on airplane safety specifically. Its yearly updates regarding the Company’s
compliance risk management process did not address airplane safety. For example,
when the Board discussed audit plans in 2014 and 2017, respectively, it did not
mention or address airplane safety. Specifically as to the 737 MAX, from its
development through its grounding in 2019, the Audit Committee never mentioned
20 Id. ¶ 61. 21 Id. ¶ 62.
14 “safety.” 22 Nor did it address product safety issues related to the design,
development, or production of the 737 MAX, or ask for presentations on the topic.
Rather, consistent with Boeing’s emphasis on rapid production and revenue,
the Audit Committee primarily focused on financial risks to the Company. For
example, its February 2011 audit plan focused on “production rate readiness
activities” and “supplier management rate readiness.” 23 Its presentations centered
on whether Boeing had liquidity, capital, and supply chain resources sufficient to
fund aggressive production of the 737 MAX.24 Even after the Lion Air Crash in
2018, chief compliance officer Sands’s risk management update to the Audit
Committee in December 2018 did not identify product safety as a “compliance risk”
for 2018.25
The Audit Committee also oversaw an Enterprise Risk Visibility (“ERV”)
process.26 The ERV process annually provided senior management and the Board
with a “comprehensive view of key Boeing Risks and the actions taken to address
them,” as curated from “[a]ll business units, major functions, and risk and
22 Id. ¶¶ 60, 62–64. 23 Id. ¶ 64. 24 See Defs.’ Ex. 6; Defs.’ Ex. 10; Am. Compl. ¶¶ 60, 63; see also infra note 32. 25 Am. Compl. ¶ 65. 26 Defs.’ Ex. 7 at -14500; Hr’g Tr. 9.
15 compliance disciplines.” 27 The Audit Committee annually reviewed the top
strategic, operational, and compliance risks the ERV process identified, and
subsequently reported those risks to the Board, which in turn reviewed
management’s mitigation of those risks. 28 The ERV process also played an
important role in Boeing’s internal Corporate Audit group, which evaluated priority
risk areas within the Company. 29 Based on the results of annual ERV risk
assessments, the Corporate Audit group annually submitted an audit plan to review
top risks.30 But neither the Corporate Audit group nor the ERV process specifically
emphasized airplane safety; they primarily focused on production and financial
risks.31
Airplane safety was not a regular set agenda item or topic at Board meetings.
Audit Committee and ERV materials reveal that airplane safety risks were not
discussed.32 While the Board sometimes discussed production line safety, the Board
27 Defs.’ Ex. 7 at -14501. 28 Id. at -14502–04. 29 Defs.’ Ex. 9 at -14488; Defs.’ Ex. 10 at -17591; Hr’g Tr. 9. 30 Defs.’ Ex. 9 at -14488–89. 31 See Defs.’ Ex. 7; Defs.’ Ex. 8 at -11183–84; Defs.’ Ex. 9; Defs.’ Ex. 10 at -17575–92; Defs.’ Ex. 23; Defs.’ Ex. 24 at -16424, -16426; Defs.’ Ex. 25 at -16997; see also infra note 32. 32 Defs.’ Ex. 6; Defs.’ Ex. 7 at -14501–04; Defs.’ Ex. 9 at -14489–90, -14495; Defs.’ Ex. 10; Defs.’ Ex. 13; Defs.’ Ex. 23; Defs.’ Ex. 24 at -16424, -16426; Defs.’ Ex. 25 at -16981; see also Am. Compl. ¶¶ 64–66. Discussions or mentions of “safety” are similarly absent from the Audit Committee Report and Enterprise Risk Visibility Review sections of the Board meeting minutes Defendants submitted. Ex. 8 at -11183–84, -11187; Defs.’ Ex. 11
16 often met without mentioning or discussing safety at all. 33 The Board did hear
presentations discussing “Environment, Health & Safety,”34 including regarding the
workplace safety program “Go4Zero.” 35 Communications mentioning “safety,”
“quality,” or “risk” do not reflect substantive discussion related to airplane safety. 36
at -12506; Defs.’ Ex. 12 at -12648–49; Defs.’ Ex. 19 at -11606; Defs.’ Ex. 26 at -13570, -13573; Defs.’ Ex. 27 at -11921–23; Defs.’ Ex. 28; Defs.’ Ex. 29; Defs.’ Ex. 34 at -12382– 83; Defs.’ Ex. 37 at -12972; Defs.’ Ex. 39 at -8135; Defs.’ Ex. 44; see also Am. Compl. ¶ 64. Defendants’ Exhibits 28, 29, 39, and 44 were largely redacted in Defendants’ Section 220 production. 33 Defs.’ Ex. 11; Defs.’ Ex. 12; Defs.’ Ex. 18; Defs.’ Ex. 37; Defs.’ Ex. 38; Defs.’ Ex. 40; Defs.’ Ex. 42; Defs.’ Ex. 43; Defs.’ Ex. 44; Defs.’ Ex. 46; Defs.’ Ex. 50; Defs.’ Ex. 51; Defs.’ Ex. 52. These documents do not support Defendants’ argument that the Board had a reporting structure and processes to oversee airplane safety and the 737 MAX. See Hr’g Tr. 8. 34 See, e.g., Defs.’ Ex. 9 at -14495 (listing “safety” within “Environment, Health & Safety” in the Appendix D Risk Universe); Defs.’ Ex. 10 at -17589 (“Supply Chain Operations (SCO) Environment, Health & Safety, Safety Management System Renton 737 Programs Governance” and “Evaluate processes for Renton site safety oversight related to ‘Go for Zero’ execution to achieve overall relevant Enterprise Safety objectives”); see also Defs.’ Ex. 7; Defs.’ Ex. 10 at -17572–73, -17583, -17587; Defs.’ Ex. 20 at -13047, -13066; Defs.’ Ex. 23 at -15866; Defs.’ Ex. 24 at -16426; Defs.’ Ex. 25 at -16981; Defs.’ Ex. 84 at -618225, -618235, -618240, -618242, -618248. 35 See, e.g., Defs.’ Ex. 19 at -11603 (“Mr. Shanahan then provided a Safety Update. He began by reviewing the evolution of the ‘Go for Zero’ safety program since 2007. He next reviewed safety performance and workplace injury statistics for operations and non- operations activities. Mr. Shanahan then reviewed safety focus areas, including improvements in final assembly and structures manufacturing, ongoing prevention activities and the roles of data analytics in improving safety performance.”); see also Defs.’ Ex. 10 at -17589; Defs.’ Ex. 16 at -11076; -11078; Defs.’ Ex. 17 at -11646. 36 Defs.’ Ex. 6 at -20519; Defs.; Ex. 8 at -11183; Defs.’ Ex. 16 at -11073, -11077–80; Defs.’ Ex. 17 at -11646; Defs.’ Ex. 20 at -13057; Defs.’ Ex. 21 at -2692; Defs.’ Ex. 22 at -18837– 38 (“Model-Based Engineering (MBE) – Progress . . . Improve safety, quality, productivity, cost”); Defs.’ Ex. 25 at -16997; Defs.’ Ex. 37 at -12967; Defs.’ Ex. 39 at -8133, -8135; Defs.’ Ex. 40 at -8086; Defs.’ Ex. 41 at -8315; Defs.’ Ex. 42 at -12481; Defs.’ Ex. 43 at -12842; Defs.’ Ex. 44 at -2501; Defs.’ Ex. 45 at -1960; Defs.’ Ex. 50 at -2711;
17 Management’s periodic reports to the Board did not include safety
information. Muilenburg sent the Board a monthly business summary and
competitor dashboard, and management made occasional presentations at Board
meetings.37 Those management communications focused primarily on the business
impact of airplane safety crises and risks.38
Further, the Board did not have a means of receiving internal complaints about
airplane safety. Before 2019, Boeing’s principal internal safety reporting process
was the Safety Review Board (“SRB”). The SRB was Boeing’s principal internal
safety reporting process, but it had no link to the Board and no Board reporting
mechanism.39 The SRB operated below the level of the most senior officers; the
complaints and concerns fielded by the SRB were handled by Boeing’s mid-level
management like the Program Functional Chief Design Engineer, the Chief Pilot,
the Chief Project Engineer, and the Product Safety Chief Engineer and factory
leaders. Without a Board-level reporting mechanism, safety issues and
whistleblower complaints reported to the SRB did not come to the Board’s attention.
Defs.’ Ex. 52 at -11401; Defs.’ Ex. 62 at -13680–81; Defs.’ Ex. 63 at -13682; Defs.’ Ex. 70 at -13684. 37 See, e.g., Defs.’ Ex. 62. 38 Am. Compl. ¶¶ 7, 8, 14, 17, 18, 57–76; see Defs.’ Ex. 60 at -13677; Defs.’ Ex. 73 at -2944; Defs.’ Ex. 74 at -2947; see also supra notes 34-36 and accompanying text. 39 Hr’g Tr. 30–33; Am. Compl. ¶¶ 74–76.
18 Neither the Audit Committee, nor any other Board committee, reviewed
whistleblower complaints related to product safety.
C. Boeing Develops The 737 MAX In An Effort To Outpace Its Competitors.
With the Board so distanced from safety information, and on the heels of
recent safety incidents and inquiries, Boeing continued to push production and
forego implementing meaningful systems to monitor airplane safety. Boeing’s
primary production focus was on its “blockbuster” 737 MAX, which became one of
the Company’s key revenue sources.40
By 2008, Boeing was falling behind on production and sales as compared to
its primary competitor, Airbus. In 2010, Airbus announced its fuel-efficient
A320neo, which sold well and quickly gained ground on Boeing’s 737, which had
not been updated since the late 1990s. As Boeing clients began considering Airbus’s
fuel-efficient jets, Boeing felt production and sales pressure.
In 2010 and early 2011, Boeing considered two options for updating its
existing 737 Next Generation (“737 NG”) model: either develop an entirely new
airplane, which could take a decade, or redesign the current model with larger, more
efficient engines in six years. In an effort to regain competitive ground, and amid
concerns about production cost and timing, Boeing elected to update the 737 NG. If
40 See Am. Compl. ¶ 6.
19 developed as a “derivative plane,” Boeing would only need to secure FAA
certification for those changes between the 737 NG and the new plane.41 The FAA
assesses the minimum level of “differences training” required for a pilot to fly a new
airplane by evaluating the similarity between the new and prior versions of the
airplane.42
At a June 2011 Board meeting, the Board and senior management considered
the potential redesign of the 737 NG. Jim Albaugh, Head of BCA, pressed the
production and sales benefits of the 737 NG’s potential “re-engine”: gains in fuel
efficiency, non-recurring investment costs, capital costs, and expedited re-design
schedules.43 The Board concluded the reconfigured airplane would have larger and
more fuel-efficient engines intended to “restore[] competitive advantage over
[Airbus’s] NEO.”44
So at an August 2011 Board meeting, the Board approved development of
Boeing’s next generation of narrow-body commercial aircraft: the 737 MAX, which
would be a reconfigured version of the 737 NG that “incorporat[ed] new engine
technology and such other modifications and upgrades as are deemed appropriate in
41 Id. ¶ 138. 42 Id. ¶ 163. 43 Id. ¶ 133. 44 Id.
20 light of prevailing market conditions.”45 The August 2011 Board minutes describe
the “strategy and objectives associated with a re-designed 737 airplane, including
increasing customer value, maintaining market share and a competitive advantage
over the Airbus 320neo, reducing risk and enabling wide body product
investment.”46 According to three people present at the August Board meeting, no
Board member asked about the safety implications of reconfiguring the 737 NG with
larger engines. Rather, the Board inquired about engine options, program personnel,
development schedule contingencies, and customer contract provisions regarding
performance and penalties; the Board’s primary concern was “how quickly and
inexpensively the Company could develop the 737 MAX model to compete with
Airbus’s A320neo.” 47 The Board delegated to McNerney all authority over the
multi-year effort to approve the 737 MAX’s final specifications, and deliver and
build it, without having to return to the Board.
1. Boeing Implements The “MCAS” System In The 737 MAX.
In developing and marketing the 737 MAX, Boeing prioritized (1) expediting
regulatory approval and (2) limiting expensive pilot training required to fly the new
model. As explained by a former Boeing engineer who worked on the 737 MAX’s
45 Id. ¶ 135; see id. ¶¶ 6, 133–34. 46 Id. ¶ 267. 47 Id. ¶ 134.
21 flight controls, Boeing “wanted to A, save money and B, to minimize the
certification and flight-test costs.”48
Because the Company was months behind Airbus in developing a new
airplane, Boeing set a “frenetic” pace for the 737 MAX program, resulting in hastily
delivered technical drawings and sloppy, deficient blueprints.49 Boeing’s engineers
were instructed to maintain “commonality” with the 737 NG in order to expedite
FAA certification.50 But maintaining commonality posed unique design issues.
In particular, the 737 MAX’s larger engine needed to be situated differently
on the airplane’s wings, shifting its center of gravity. Because of that engine
placement, the 737 MAX tended to tilt too far upwards, or “pitch up,” in flight.51
Initial attempts to resolve the issue with aerodynamic solutions failed. So Boeing
addressed the issue with new software: the Maneuvering Characteristics
Augmentation System, or “MCAS.”52 MCAS moved the leading edge of the plane’s
entire horizontal tail, known as the “horizontal stabilizer,” to push the airplane’s tail
up and its nose down.53
48 Id. ¶ 138. 49 Id. ¶ 137. 50 Id. ¶ 138 (explaining that “commonality” is “an industry term that evaluates how similar one model is to its predecessor”). 51 Id. ¶ 150. 52 Id. ¶¶ 9, 152–53, 155. 53 Id. ¶ 152.
22 As originally designed, MCAS would activate only if the plane pitched up at
both a high angle of attack (or “AOA”) and a high G-force (the plane’s acceleration
in a vertical direction). During 2016 flight testing, Boeing changed MCAS to allow
it to activate at low speeds; as such, it “could be automatically triggered simply by a
high AOA.”54
The external sensor for AOA was highly vulnerable to false readings or failure
for numerous reasons, such as general weather, lightning, freezing temperatures,
software malfunctions, or birds. The AOA’s sensor’s vulnerability was well-known:
between 2004 and 2019, failed AOA sensors were flagged to the FAA in more than
216 incident reports, including instances that required emergency landings. MCAS
had only one AOA sensor, creating a “single point of failure” that violated the
fundamental engineering principle requiring redundancy “so that one single error in
a complex system does not cause total system failure.”55 If the single AOA sensor
was triggered, even for a flawed reason unrelated to the plane’s pitch, MCAS would
“correct” the aircraft by pushing its nose down.56
54 Id. ¶ 155. 55 Id. ¶¶ 159–60. A 2011 FAA Advisory Circular warned that “[h]azards identified and found to result from probable failures are not acceptable in multiengine airplanes,” and that “[i]n these situations, a design change may be required . . . such as increasing redundancy.” Id. ¶ 159. 56 Id. ¶ 190 (“[A]n analysis performed by the manufacturer showing that if an erroneously high single [AOA] sensor input is received by the flight control system, there is a potential for repeated nose-down trim commands of the horizontal stabilizer.”).
23 In 2013, Boeing engineers proposed that the 737 MAX implement a
Dreamliner safety feature called “synthetic airspeed” to detect a false AOA signal.57
Managers rejected that proposal due to additional cost and pilot training, and MCAS
remained dependent on a single fickle AOA sensor. Engineers remained skeptical;
in late 2015, one queried: “[a]re we vulnerable to single AOA sensor failures with
the MCAS implementation or is there some checking that occurs?”58
Boeing’s analyses and FAA disclosures about MCAS underestimated its
lethality. In 2014, Boeing submitted a System Safety Assessment (an “Assessment”)
to the FAA calculating the effect of possible MCAS failures. The Assessment did
not consider the possibility that MCAS could trigger repeatedly, effectively giving
the software unlimited authority over the plane. Boeing concluded MCAS was not
a “safety-critical system.”59 After MCAS was revised to rely on the single AOA
sensor, internal safety analyses concluded that MCAS could cause “catastrophic”
failures if it took a pilot more than ten seconds to identify and respond to the
software’s activation.60 But the analyses assumed the pilot would react within four
seconds, and so concluded that the likelihood of a “hazardous event” due to an
57 Id. ¶ 161. 58 Id. ¶ 160. 59 Id. ¶ 154. 60 Id. ¶ 156.
24 MCAS failure was nearly inconceivable.61 It would later be revealed that Boeing’s
four-second reaction time assumption was a “gross underestimate.” 62
Boeing did not update the 2014 FAA Assessment for MCAS as revised.
Boeing’s technical pilots deceived the FAA by failing to disclose that MCAS as
revised activated only upon the AOA sensor signal, regardless of speed, increasing
the likelihood that MCAS would activate.
2. Boeing Pushes Expedited Certification And Rapid Production. Based on purported commonality with the 737 NG, Boeing sought “Level B”
pilot training for the 737 MAX, which can be done on a tablet computer without
costly flight simulator training.63 More extensive training would incur additional
costs, defeat the economies from commonality with the 737 NG, and make the 737
MAX less competitive with the Airbus 320neo. Between 2014 and 2017, Boeing
touted that flight simulator training would not be necessary on the 737 MAX.
Boeing and its well-connected leadership had significant sway over the FAA,
and the FAA often permitted Boeing to self-regulate. Boeing put “tremendous
61 Id. 62 Id. 63 Id. ¶ 164.
25 pressure” on its Chief Technical Pilot Mark Forkner to obtain Level B pilot training
for the 737 MAX.64
In August 2016, the FAA issued a provisional report establishing Level B
training for the 737 MAX. In November, after Boeing had revised MCAS, Forkner
texted a colleague that MCAS was “running rampant” on a flight simulator when
operating at a low speed and then texted: “so basically I lied to the regulators
(unknowingly).”65 Still, Forkner stressed to the FAA that it should not reference
MCAS in its report because it was “outside the normal operating envelop[e].”66
In July 2017, the FAA published the final 737 MAX report providing for
Level B differences training determination. Based on Boeing’s failure to submit a
new Assessment on the revised MCAS and misrepresentation of MCAS’s safety
risks, the FAA deleted all information about MCAS from the July 2017 report.67
Forkner emailed a Boeing colleague bragging that his “jedi mind tricks” had worked
on the FAA.68
64 Id. ¶ 105. 65 Id. ¶ 169; see id. Ex. A; id. Ex. B at A-10. 66 Id. ¶ 170 (“[O]ne of the Program Directives we were given was to not create any differences . . . That is what we sold to the regulators who have already granted us the Level B differences determination. To go back to them now, and tell them there is in fact a difference . . . would be a huge threat to that differences training determination.”). 67 Id. ¶ 106; id. Ex. B. 68 Id. ¶ 171.
26 As a result of the FAA’s decision, the 737 MAX airplane manuals and pilot
training materials for U.S.-based airlines lacked specific information about MCAS.69
Specifically, no substantive description of MCAS appeared in Boeing’s three
documents for pilots flying new models: (1) the Flight Crew Operations Manual
(“FCOM”), the primary pilot reference; (2) the Quick Reference Handbook, a
shorter emergency manual for abnormal flight situations; and (3) the Flight Crew
Training Manual, which provides general recommendations on flying maneuvers
and techniques. After the Lion Air and Ethiopian Airlines Crashes, senior FAA
officials testified before Congress that MCAS should have been explained in those
manuals.
After securing Level B training, Boeing continued to conceal issues with the
737 MAX. The airplane was supposed to have an “AOA disagree alert” to identify
malfunction in the airplane’s AOA sensor and prevent it from triggering MCAS’s
“repeated nose-down trim commands of the horizontal stabilizer.”70 That alert was
a standard feature of the 737 NG.71 Boeing included the alert in the March 2017
“type certificate” submitted to the FAA, so the alert was required in all planes
produced.72 But in August 2017, Boeing learned the alert did not function due to a
69 Id. ¶¶ 106, 173; id. Ex. B. 70 Id. ¶¶ 175, 190. 71 Id. ¶ 175. 72 Id. ¶ 177.
27 software issue; to make it work, customers needed to purchase an optional “add-on”
feature for $80,000 called an “AOA indicator display.” 73 The AOA disagree alerts
did not work in at least 80% of the 737 MAX planes Boeing delivered—including
the Lion Air and Ethiopian Airlines planes that crashed. Boeing did not tell the FAA
or its customers that the majority of its planes had inoperable AOA disagree alerts
until after the Lion Air Crash in 2018. And even after the 2019 Ethiopian Airlines
Crash, Boeing continued to insist that the AOA indicator display was not a
“required” safety feature and that it was appropriate to offer it as an optional “add
on.”74 Boeing decided to repair the AOA disagree alert via a software update that
was not scheduled to roll out until 2020.
3. Boeing Successfully Markets The 737 MAX In Emerging Markets And Presses The Board’s Business Objectives; Boeing’s Employees Question The 737 MAX’s Safety, But Those Concerns Never Reach The Board.
Four months after announcing the 737 MAX in 2011, Boeing had logged more
than 1,000 orders and commitments for the airplane from airlines and leasing
customers worldwide. By 2014, Boeing had over 2,700 737 MAX orders from fifty-
seven customers. And by the end of 2016, Boeing had 4,300 orders from ninety-two
73 Id. ¶ 176. 74 Id. ¶ 180.
28 customers. The 737 MAX had become the fastest-selling airplane in Boeing’s
history.
Many of those sales originated from Boeing’s target customers in emerging
markets. Boeing pursued those customers in a cost-saving and revenue-enhancing
strategy, knowing that in many countries with expanding fleets of low-cost airlines,
the quality of pilot training was not consistently as high as in the United States.
Those countries took their safety cues from the FAA. Although Lion Air and Garuda
Indonesia Airlines both initially requested simulator training on their newly
purchased 737 MAX airplanes, Boeing pressed that computer-based training was
sufficient.75 Boeing never required or provided simulator training. By December
2017, Boeing had sold numerous 737 MAX airplanes to airlines in Southeast Asia,
including Lion Air.
Boeing began fulfilling customer orders in May 2017.76 By 2018, Boeing’s
profits from the 737 MAX skyrocketed.77 The BCA accounted for approximately
60% of the Company’s record $101.1 billion in annual revenue and approximately
75 Id. ¶ 143 (explaining that “rather than provide costly simulator training, Boeing employees emphasized that the ‘FAA, [European regulators], Transport Canada, China, Malaysia, and Argentinia [sic] authorities have all accepted the [computer-based training] requirement’”). 76 Id. ¶ 144. 77 Id. ¶ 146.
29 $8 billion, or 80%, of the Company’s annual net earnings.78 By the end of 2018, the
value of Boeing’s total backlog of orders—a measure of financial health for an
airplane manufacturer—had risen to $490 billion, with the BCA accounting for $412
billion and nearly 5,900 jetliners, more than 4,000 of which were 737 MAX
airplanes.
Boeing struggled to keep up with demand and customer expectations and to
meet the Board’s production and delivery target of fifty-seven airplanes per month.
In July and August 2018, deliveries averaged approximately thirty-nine airplanes per
month. Falling behind, Boeing employees worked in a “factory in chaos,” facing
intense pressure to maintain production schedules.79
As Boeing’s 737 MAX’s sales accelerated, its employees grew concerned
about the airplane’s safety. For example, in summer 2018, a longtime general
manager and engineer at the 737 MAX plant in Renton, Washington, tried to raise
“Recovery Operations & Safety Concerns” with the 737 program’s general manager
and factory leader, writing, “[R]ight now all my internal warning bells are going
off. . . . And for the first time in my life, I’m sorry to say that I’m hesitant about
putting my family on a Boeing airplane.”80 At a meeting, the engineer expressed
78 Id. 79 Id. ¶ 148. 80 Id. ¶ 87.
30 that he had “seen larger operations shut down for far less safety issues . . . in the
military and those organizations have national security responsibilities.” 81 The
manager responded, “The military isn’t a profit making organization.” 82 The
engineer retired from Boeing soon thereafter. Before and after the Lion Air Crash,
similar concerns came in from other employees regarding unrelenting and dangerous
economic pressure from senior management to produce the 737 MAX rapidly and
cheaply.83
81 Id. ¶ 89. 82 Id. 83 See id. ¶ 90 (“Separately, in 2018, . . . a Boeing engineering manager working on the 737 MAX, expressed frustration to Director of Global Operations . . . that Boeing had selected ‘the lowest cost supplier and sign[ed] up to impossible schedules,’ which reflected unrelenting and dangerous economic pressure from senior management: [‘]I don’t know how to fix these things . . . it’s systemic. It’s culture. It’s the fact that we have a senior leadership team that understand very little about the business and yet are driving us to certain objectives. . . . Sometimes you just have to let things fail big so that everyone can identify a problem . . . maybe that’s what needs to happen rather than just continuing to scrape by.[’]”); id. ¶ 91 (“In July 2018, Boeing’s Test and Evaluation department voiced concerns to ‘Boeing Executive Leadership’ regarding the ‘considerable pressure’ the 737 MAX program faced over production schedules. The department’s letter identifies the ‘ero[sion of] safety margins’ due to the declining average experience among senior production pilots. [Boeing’s] Employee Relations Director . . . forwarded the communication to defendant Hyslop, Boeing’s chief engineer, but . . . mischaracterized the letter as seeking mainly compensation and additional benefits, without flagging the safety concerns of overworked employees.”); id. ¶ 92 (“[I]n November 2018, after the Lion Air Crash, . . . a Quality Assurance Inspector and nearly 30-year Boeing veteran, recounted mistreatment ‘for reporting serious quality problems,’ explaining that ‘[n]o one should have to go through this when trying to do what is right – to assure the quality of our product.’ He added, ‘I have stood alone during these past months trying to assure that we have addressed these quality issues. I had only hoped that management would have stood with me.’ [The employee] identified another whistleblower . . . a former quality specialist and compliance monitor, whom he said was also harassed in retaliation for reporting of ‘quality concerns’ related to the 737 MAX.”).
31 While some of these complaints made their way to senior management, none
made it to the Board. The Board was unaware of whistleblower complaints
regarding airplane safety, compliance, workforce exhaustion, and production
schedule pressure at the 737 MAX facility.
D. Undisclosed Issues With The 737 MAX Ultimately Cause The Lion Air and Ethiopian Airlines Crashes; The Board Continues To Shirk Safety Oversight, Receiving Only Sporadic Updates About The 737 MAX From Management.
On October 29, 2018, a new 737 MAX flying as Lion Air Flight 610 crashed
in the Java Sea minutes after taking off from Jakarta, Indonesia, killing all 189
passengers and crew. Satellite data show the plane rising and falling repeatedly, as
MCAS continually activated to force the airplane’s nose downwards. The plane’s
black box data revealed that the pilots searched the Quick Reference Handbook’s
checklist for abnormal flight events, but it said nothing about MCAS, which was
later identified as the cause of the tragedy. Within days of recovering the black box,
Boeing started revising MCAS.
The FAA quickly conducted a risk assessment analysis and concluded what
many at Boeing already knew: that there was an unacceptably high risk of
catastrophic failure if MCAS was not changed, estimating that the then-existing fleet
of Boeing 737 MAX planes would average one fatal crash stemming from MCAS
every two to three years if the software was not corrected. Boeing then conducted
its own risk assessment and reached a conclusion consistent with the FAA’s. On
32 November 6, Boeing issued an Operations Manual Bulletin to the airlines (the
“Manual Bulletin”), stating, “[i]n the event of erroneous AOA sensor data, the pitch
trim system can trim the stabilizer nose down in increments lasting up to 10
seconds.”84 It did not name MCAS.
The next day, November 7, the FAA issued an Emergency Airworthiness
Directive (the “Emergency Directive”), indicating that “an unsafe condition exists
that requires immediate action by an owner/operator.”85 The Emergency Directive
described “an analysis performed by the manufacturer showing that if an erroneously
high single [AOA] sensor input is received by the flight control system, there is a
potential for repeated nose-down trim commands of the horizontal stabilizer.”86 The
FAA mandated that Boeing revise its flight manuals “to provide the flight crew
horizontal stabilizer trim procedures to follow under certain conditions.” 87 In
response, Muilenburg emailed Greg Smith warning the mandate might harm
productivity: “[w]e need to be careful that the [airplane flight manual] doesn’t turn
into a compliance item that restricts near-term deliveries.”88
84 Id. ¶ 188. 85 Id. ¶ 189. 86 Id. ¶ 190. 87 Id. ¶ 191. 88 Id. ¶ 211.
33 On November 12, The Wall Street Journal published an article entitled
“Boeing Withheld Information on 737 Model, According to Safety Experts and
Others” (the “WSJ Article”).89 It reported that “neither airline managers nor pilots
had been told such a[n MCAS] system had been added to the latest 737 variant—
and therefore aviators typically weren’t prepared to cope with the possible risks.”90
It reported disdain by pilots who questioned why they were not properly trained on
the MCAS system.91 Finally, the WSJ Article reported that the FAA learned the new
flight control systems “were not highlighted in any training materials or during
lengthy discussions between carriers and regulators about phasing in the latest 737
derivatives” and that Boeing purposefully withheld that critical information. 92
1. The Board Passively Receives Lion Air Crash Updates From Muilenburg, But Does Not Initiate Action.
Management did not bring the Lion Air Crash to the Board’s attention for over
a week. Muilenburg first contacted the Board, Smith, and McAllister regarding the
Lion Air Crash on November 5.93 His half-page email identified the players in the
89 Id. ¶¶ 195–98; id. Ex. D. 90 id. Ex D; id. ¶ 198. Id. Ex. D (“It’s pretty asinine for them to put a system on an airplane and not tell pilots 91
who are operating the airplane, especially when it deals with flight controls . . . . Why weren’t they trained on it?”); id. ¶ 198. 92 id. Ex. D; id. ¶ 197. 93 id. ¶¶ 208–09; Defs.’ Ex. 55.
34 investigation, reported that the Indonesian investigator “publicly said today that the
airspeed indicator on the airplane that crashed was damaged during the last four
flights of the airplane,” and concluded, “We believe the 737 MAX fleet is safe.”94
It did not mention MCAS, the lack of redundancy for a faulty sensor, or the missing
sensor alert or specific pilot instructions.
Muilenburg updated the Board again between November 8 and 23, spurred by
unfavorable information about the 737 MAX and Lion Air Crash becoming public.95
On November 13, Director Arthur Collins forwarded Muilenburg a news summary:
“I am sure you have already read [the WSJ Article] and will brief the [B]oard on this
topic.” 96 Muilenburg consulted with then-current and former Lead Directors
Calhoun and Duberstein about the WSJ Article and its fallout.97 Calhoun advised
Muilenburg to contact the Board. And so on November 13, Muilenburg sent a memo
to the Board regarding the Lion Air Crash.98 He told the Board the WSJ Article was
“categorically false” and “wrongly claims Boeing withheld from customers and
flight crews information related to a pitch augmentation system that’s unique to the
94 Defs.’ Ex. 55. 95 See Defs.’ Ex. 53; Defs.’ Ex. 56; Defs.’ Ex. 57; Defs.’ Ex. 58. 96 Am. Compl. ¶ 212. 97 See id. Ex. E. 98 See id. Ex. D.
35 737 MAX.”99 And he blamed the Lion Air flight crew for the crash.100 He did not
explain that Boeing knew MCAS was vulnerable and susceptible to failure, nor that
pilots were not informed about or trained on MCAS.
The next day, Muilenburg informed Duberstein that Calhoun “suggested that
my note to the Board focus solely on the Lion Air matter given the importance and
visibility,” and that he would update the Board on Lion Air the following
weekend.101 Duberstein’s response focused on the negative public reaction to the
Lion Air Crash and its impact on production: “Press is terrible. Very tough. Lots
of negative chatter I’m picking up. Not pleasant. We need to address more
aggressively concerns merging re 737 line, deliveries, and Lion Air.”102 Muilenburg
responded that he was “working all angles” on public relations, government
relations, and investor relations, including “working airline operations leaders to get
messages and counter pilot comments (who are motivated to get separate type rating
for MAX – equals more pay).”103
On November 17, Boeing executives, including Muilenburg, Smith,
McAllister, Hyslop, and Luttig, discussed a Bloomberg article that Muilenburg
99 Id.; Defs.’ Ex. 57. 100 Am. Compl. Ex. D. 101 See id. Ex. E. 102 Id. 103 Id.; id. ¶ 214.
36 characterized as “filled with misleading statements and inaccuracies – implying that
we hid MCAS from operators and that procedures were not covered in
training/manuals.”104
On November 18, after The New York Times published an article addressing
MCAS’s role in the Lion Air crash, Muilenburg sent the Board another letter.105 He
bemoaned “a steady drumbeat of media coverage—and continued speculation—on
what may have caused the accident” and again falsely suggested that the 737 MAX
was safe.106 Muilenburg took the same position in November 19 and 20 internal
messages to Boeing employees and executives.
Then, on November 21, Muilenburg emailed the Board to invite them to an
“optional” November 23 Board call for an update on the Lion Air Crash from
Muilenburg, Luttig, and Smith.107 This was the first time the Board convened after
the crash. There are no minutes. Management’s talking points for the call explained
that erroneous AOA data “contributed to the mishap,” and that the Lion Air repair
shop may not have followed the approved repair process on the sensor. 108 The
104 Id. ¶ 217. 105 Defs.’ Ex. 58; Am. Compl. ¶ 218. 106 Defs.’ Ex. 58. 107 Am. Compl. ¶¶ 223–24; Defs.’ Ex. 59 (“Consider this phone call ‘optional’, understanding that many of you have family and friend activities planned for this coming weekend.”). 108 Defs.’ Ex. 86.
37 talking points included an explanation of MCAS, and described Boeing’s post-Lion
Air Crash updates to operators regarding erroneous AOA sensors and MCAS. They
also explained the “further safety enhancement” of a software update “that will limit
the airplane’s response in case of erroneous AOA sensor data” and “further reduce
the risk associated with a discrepant AOA sensor and help reduce pilot workload.”109
The talking points also provided that “the function performed by MCAS” was
referenced in the FCOM, that the “appropriate flight crew response to uncommanded
trim, regardless of cause, is contained in existing procedures,” and that “any
suggestion that we intentionally withheld information about airplane functionality
from our customers simply isn’t true.”110 They disclosed a meeting the week before
with the acting FAA Administrator, who “understood how MCAS works and
believes the 737 MAX is a safe airplane,” and who knew about the repair shop
investigation. Finally, the talking points expressed frustration with people
“commenting freely, including customers, pilot unions, media, and aerospace
industry punditry,” and addressed Lion Air’s orders, other customers’ orders, and
Boeing’s stock price.111
109 Id. 110 Id. 111 Am. Compl. ¶ 224; Defs.’ Ex. 86.
38 Muilenburg’s subsequent written communications to the Board again blamed
Lion Air’s crew, and stressed that Boeing’s external statement denying its fault was
“showing up in the initial media coverage, which has focused largely on Lion Air’s
operations, maintenance practices and decision to fly with malfunctioning angle of
attack sensors.” 112 Muilenburg encouraged Boeing’s public relations team to
maintain that the 737 MAX was safe, and on December 13, he reported to the Board
that “members of our Communications team met with Wall Street Journal editors in
New York to further discuss ongoing coverage and restate our expectation for fair
and fact-based reporting.”113
2. The Board Formally Addresses The Lion Air Crash For The First Time In December 2018, But Does Not Focus On The 737 MAX’s Safety Then Or Thereafter.
After the November 23 optional update, the Board did not formally convene
and address the Lion Air Crash until its regularly scheduled Board meetings on
December 16 and 17. Consistent with the fact that safety was not a regular topic of
Board discussion, the minutes reflect that the Board’s primary focus relating to the
737 MAX and Lion Air Crash was on restoring profitability and efficiency in light
of longstanding supply chain issues. Over the course of two days, the Board
112 Am. Compl. ¶ 226. 113 Defs.’ Ex. 60; see Am. Compl. ¶ 227.
39 allocated five total minutes to eight different “Watch Items,” one of which was
“progress working through supply chain and factory disruption affecting MAX
deliveries.”114 The Board allocated another five minutes to reviewing a four-page
legal memo “including matters related to the Lion Air incident.” 115 And it allocated
ten minutes to Compliance Risk Management.116 The associated risk management
report contained one page on the FAA Settlement, which said nothing about the 737
MAX or airplane safety generally. 117 In the Executive Session presentation, the
“Lion Air incident” was listed as a “Hot Topic.”118
The Audit Committee met, too. The material it intended to present to the full
Board included an “Ethics and Compliance Update,” but did not contain any
meaningful information about the 737 MAX’s safety or safety generally. 119 An
Ethics and Compliance Update presentation dated December 17, 2018, included a
chart summarizing “Substantiated Cases” of eight categories of “Inquiries and
Investigations,” including “Safety, Health & Environmental” alongside “Sexual
Harassment,” “Proper Use of Co. Time or Resources,” and “Information
114 Defs.’ Ex. 61 at 2; Defs.’ Ex. 84 at -618197, -618203. Defs.’ Ex. 14; Defs.’ Ex. 61 at 2; Defs.’ Ex. 84 at -618197, -618204–07. That memo 115
was wholly redacted in Defendants’ Section 220 production. 116 Defs.’ Ex. 84 at -618197. 117 Id. at -618233. 118 Am. Compl. ¶ 231. 119 Defs.’ Ex. 84 at -618218–28.
40 Integrity.”120 The agendas for the Audit Committee’s forthcoming 2019 meetings
did not indicate any focus on airplane safety.121 The December 16 and 17 Board
meeting did not result in any meaningful action to address airplane safety by either
the full Board or the Audit Committee.
The Board next received information about the Lion Air Crash on January 16,
2019, when Muilenburg sent his monthly business summary and competitor
dashboard.122 It began with a one-paragraph “brief update on the ongoing Lion Air
flight 610 accident investigation” that was proceeding with Boeing’s “full
support.”123 Muilenburg also noted that Boeing is “exploring potential 737 MAX
software enhancements that, if made, would further improve the safety systems,”
and maintained that “airlines around the world continue to operate the MAX safely”
and were “ma[king] significant new orders and commitments, expressing strong
confidence in the airplane.” 124 After mentioning safety in passing, Muilenburg
moved on to a detailed discussion of the market’s confidence in the 737 MAX, and
Boeing’s “financials” and “strong operating performance and solid cash generation,”
which were “driven by solid commercial . . . deliveries . . . as well as continued
120 Id. at -618225. 121 Id. at -618301. 122 Am. Compl. ¶ 233; Defs.’ Ex. 62. 123 Defs.’ Ex. 62. 124 Id.
41 focus on productivity.”125 He expressed that Boeing had “set a new industry and
company record and validated our team’s 737 recovery efforts,” and noted that 2019
was “already off to a strong start,” as the Company was “focus[ed]” on “driving 737
production line stability and preparation for the 57 aircraft per month rate
decision.”126 The dashboard concluded with an overview of political issues affecting
the Company.127
Muilenburg sent his next monthly business summary and competitor
dashboard to the Board on February 13.128 It did not mention the Lion Air Crash.129
Muilenburg wrote that Boeing would continue to work with the FAA on a
“737 MAX software enhancement that, when implemented, will further improve
system safety;” that “[d]espite recent media speculation,” nothing had been decided
about the “software update and its timing;” and that “[w]e’ll keep engaging media
and other stakeholders on the merits of the airplane, our processes and our
people.”130 It went on:
And on 737, we’re driving production line stability and engaging key suppliers, with a particular focus on CFM engines, as we prepare for a decision later this year on increasing rate to 57 airplanes per month. . . .
125 Id. 126 Id. 127 Id. 128 Am. Compl. ¶ 234; Defs.’ Ex. 63. 129 See generally Defs.’ Ex. 63. 130 Id. at -13683.
42 We remain on track to achieve our quarterly delivery target of 206 planes (including 147 737s), and ramp-up of 737 deliveries in February and March remains an intense focus area.131 And it highlighted financials, noting that “Boeing stock [recently] closed at an all-
time high.”132
One week later, on February 20, Executive Vice President and General
Counsel Michael Luttig provided a report to the Audit Committee summarizing
significant legal matters, including the “Lion Air Accident.”133
3. The Board Decides To Forego Investigation, And Boeing Belatedly Admits It Deceived The FAA.
The Board next met formally on February 24 and 25. As reflected in the
Executive Session presentation, two of the “Other Updates” on “Key Topics” were
“737 Production” and “Lion Air Accident.”134 On February 25, the Board issued an
addendum to its meeting minutes summarizing a legal update from Luttig.135 The
addendum states that the Board “decided to delay any investigation until the
conclusion of the regulatory investigations or until such time as the Board
determines that an internal investigation would be appropriate.” 136
131 Id. at -13862. 132 Id. 133 Defs.’ Ex. 15. The remainder of that report was redacted in the Section 220 production. 134 Defs.’ Ex. 64 at -575. 135 Pls.’ Ex. 4; Am. Compl. ¶ 238. 136 Pls.’ Ex. 4.
43 By January 2019, the Department of Justice (“DOJ”) had opened a criminal
investigation into whether Boeing had defrauded the FAA when obtaining
certification of the 737 MAX. In February 2019, Boeing gave the DOJ Forkner’s
November 2016 text messages admitting he had lied to the FAA.137 Muilenburg and
Luttig were aware of the text messages in the first couple of months of 2019.
Muilenburg, Luttig, and Boeing did not provide those text messages to the FAA until
October 2019. The FAA demanded an explanation for Forkner’s remarks and
“Boeing’s delay in disclosing the document to its safety regulator.” 138
As stated in Boeing’s eventual 2021 agreement with the DOJ, Boeing “did not
timely and voluntarily disclose to the Fraud Section the offense conduct described
in the Statement of Facts” and Boeing’s cooperation “was delayed and only began
after the first six months of the Fraud Section’s investigation, during which time the
Company’s response frustrated the Fraud Section’s investigation.”139 As a result,
Boeing agreed to pay a “Total U.S. Criminal Monetary Amount” of $2.513 billion,
composed of a criminal monetary penalty of $243.6 million, compensation payments
to Boeing’s 737 MAX airline customers of $1.77 billion, and the establishment of a
$500 million crash-victim beneficiaries fund.140
137 Am. Compl. ¶¶ 10, 235, 290; id. Ex. A; id. Ex. B. 138 Pls.’ Ex. 5; Am. Compl. ¶ 278. 139 Am. Compl. Ex. B ¶¶ 4(b)–(c); id. ¶¶ 13, 106, 123, 239, 290. 140 Id. ¶ 296; id. Ex. B.
44 4. MCAS Causes The Ethiopian Airlines Crash.
On March 10, less than one month after the Board declined to pursue an
internal investigation, another 737 MAX crashed. Ethiopian Airlines Flight ET 302
went down shortly after taking off, killing all 157 passengers and crew. The pilots
followed Boeing’s recommended emergency procedures, but could not regain
control of the plane because MCAS repeatedly activated.
5. Muilenburg Does Damage Control, But The Board Does Not Assess The Safety Of Boeing’s Airplanes.
Boeing quickly issued a public statement before authorities released any
details about the Ethiopian Airlines Crash. On March 11, the Company emphasized
that if the Ethiopian Airlines pilot followed the checklist of procedures in the flight
manual, he “[would] always be able to override the flight control using electric trim
or manual trim.”141 But by that time, one-third of the world’s fleet of in-service 737
MAX aircraft had been grounded, and several United States Senators called for the
FAA to ground the 737 MAX.
That same day, Muilenburg emailed the Board. While stating that “[o]ur
objective is to ensure our teams are centered on our priorities, including safety,
quality and stability,” 142 Muilenburg’s comments were not geared toward taking
141 Id. ¶ 248. 142 Defs.’ Ex. 66 at -620851.
45 action to address and improve the 737 MAX’s safety. Nor were they made in
response to any Board inquiry as to the airplane’s safety. Instead, Muilenburg
addressed the Board’s objectives for the 737 MAX: “ongoing production
operations,” revenue, and reputational achievement.143 He advised the Board that
management was engaging in extensive outreach with Boeing’s customers and
regulators to “reinforce our confidence in the 737 MAX.”144 He touted that the FAA
had issued a notification reinforcing the 737 MAX’s airworthiness, and “mentioned
the pending MAX software enhancement with the expectation it will mandate
upgrade in April.”145 He concluded by addressing how Boeing intended to handle
the Ethiopian Airlines Crash in the media and internal communications, and directed
inquiries to Boeing’s media relations team.
Thereafter, Muilenburg reviewed and responded to an all-employee email
prepared by that team. He thought the note was “solid,” but “lack[ed] a statement
about our confidence in the fundamental safety of the MAX.” 146
This goes back to our discussion last night on answering two basic questions: is the MAX safe? And was MCAS involved? We need to make a strong statement on the first, and be clear that there are no supporting facts on the second.147
143 Id. 144 Id. 145 Id. 146 Am. Compl. ¶ 243. 147 Id.
46 Muilenburg emailed the Board again on March 12, providing a “quick interim
update” before a formal Board call the following day.148 Muilenburg stated that “[a]s
you’ve seen in the news flow today, additional international authorities have
grounded the 737 MAX,” but assured the Board that those decisions were driven
solely by “public/political pressure, not by any new facts.” 149
During this pivotal period, Boeing was engaged in continuous conversations
with the FAA, and Muilenburg spoke with Department of Transportation Secretary
Elaine Chao and President Donald Trump in an attempt to keep the 737 MAX flying.
On March 12, FAA officials reiterated their position that domestic flights of the 737
MAX would continue. At least one director, Liddy, praised Muilenburg’s efforts
during this period.150
6. The FAA Grounds The 737 MAX, But The Board’s Focus Remains On Restoring Boeing’s Reputation And Sales.
On March 13, the FAA’s investigation of the Ethiopian Airline Crash
indicated that the plane experienced the same pattern of repeated steep dives and
148 Defs.’ Ex. 68. 149 Id. 150 Am. Compl. ¶ 252 (“I, for one, really appreciate the strong leadership you’re demonstrating in a very challenging situation. Your leadership will prevail.”).
47 climbs caused by MCAS that preceded the Lion Air Crash. The FAA grounded the
737 MAX, becoming the final major aviation regulator to do so.
After the FAA grounded the planes, the Board held a call with management
regarding the Ethiopian Airlines Crash and whether Boeing should itself ground the
fleet.151 The Board did not consider, deliberate, or decide on grounding the plane or
other immediate remedial measures until after the second crash and the FAA’s
grounding over Boeing’s objection. No Board minutes or agendas between
November 2018 and March 2019 reference a discussion about grounding the 737
MAX.
Nonetheless, Boeing jumped at the opportunity to claim credit for the
grounding. Later on March 13, Muilenburg told the Board that Boeing had managed
to get its own messaging out about the grounding before the FAA released its
statement.152
That evening, Muilenburg followed up with his monthly business update,
which began with his efforts to rehabilitate Boeing’s image.153 In particular, he
shared that “Kevin McAllister and I spent time walking the 737 production line in
Renton, where we filmed a joint video for team members.”154 With the comment
151 See Defs.’ Ex. 69; Am. Compl. ¶¶ 255–56. 152 Defs.’ Ex. 69. 153 Defs.’ Ex. 70. 154 Id.
48 that “safety . . . is our top priority,” Muilenburg disclosed that for the first time, he
“added safety metrics to our monthly report.”155 This marked one of the first formal
implementations of safety reporting to the Board. Muilenburg initiated this update.
His addition continued to focus on production, including “year-to-date targets and
actuals for lost workday cases, recordable injuries and near misses.”156 His March
business summary then turned to the 737 MAX’s business performance and ability
to meet delivery targets.157
Over the next six weeks, Muilenburg’s communications to the Board focused
on restoring Boeing’s reputation and returning the 737 MAX to service. And some
Directors’ messages to Muilenburg echoed his focus on reputational and production
triage. For example, on March 21, Giambastiani emailed Muilenburg to direct him
to an article from Aviation Week and emphasized a comment suggesting the pilots
were at fault for the two crashes. 158 And on March 26, Duberstein emailed
Muilenburg to inquire about the reputational impact of an emergency landing of a
Southwest 737 MAX due to engine problems, complaining that the report “[l]ed the
network news” and was “[a]nother reputational hit at us and no comment from us.”159
155 Id. 156 Id. 157 Id. 158 Am. Compl. ¶ 259 (“More importantly for the pilot . . . FLY THE PLANE.”). 159 Id. ¶ 260.
49 On April 4, a preliminary report on the Ethiopian Airlines Crash identified
MCAS as a contributing cause for the accident. After sending a draft to the full
Board, Boeing issued a press release maintaining that most “accidents are caused by
a chain of events” and that was the case for the two crashes.160
E. In April 2019, The Board Adopts Safety Oversight Measures.
Some directors questioned Boeing’s approach. On March 15, Arthur Collins
and then-Lead Director David Calhoun recommended a Board meeting devoted to
product safety. As Collins explained to Calhoun,
In light of the two 737 MAX 8 crashes and subsequent global fleet grounding, the previous grounding of Air Force KC-46 tankers, and the Amazon 767 cargo plane crash, I believe we should devote the entire board meeting (other than required committee meetings and reports) to a review of quality within Boeing. This would start with an update on what we know about each of the three previously mentioned situations, but then include a review of quality metrics and actions that are either currently in place or planned to assure that the highest level of quality is designed into all Boeing products or incorporated into all manufacturing, customer training, and service support activities. In addition to providing necessary information for the Board, this type of agenda would underscore the board’s (and management’s) unwavering commitment to quality and safety above all other performance criteria. I recognize that this type of approach needs to be communicated carefully so as not to give the impression that the board has lost confidence in management (which we haven’t) or that there is a systemic problem with quality throughout the corporation (which I don’t believe there is), but I’m sure this can be done. . . . I’ll leave the decision in your hands with Dennis [Muilenburg].161
160 Id. ¶ 262. 161 Id. Ex. C.
50 Collins followed up on the “category of ‘lessons learned,’” reminding Calhoun that,
at Medtronic (on whose board they both had served), Collins “began each board
meeting, executive committee meeting, and operating review with a review of
product quality/safety—before any discussion of financial performance, market
share/competitive activities, new product development timetables, and certainly
stock price.”162 He stressed that people “paid close attention to the priorities of
senior management, and everyone in the corporation understood that nothing was
more important to the CEO and the board than quality/safety,” and that “[i]t’s hard
to quantify the impact of this approach, but it certainly was important.” 163
Calhoun forwarded Collins’s messages to Muilenburg, who responded that it
was “[g]ood input”; that he “added Safety data to the Board lead-off briefing, and
just added it to my monthly Board note too”; and that “just so you know, Safety data
is the first data we look at during our internal ExCo reviews.” 164 Thereafter,
Muilenburg and Calhoun held a call regarding Collins’s suggestions for making
safety a Board priority.165
At the Board’s next regularly scheduled meeting on April 28 and 29, the Board
focused on the Ethiopian Airlines Crash and its implications for the Company. In
162 Id. 163 Id. 164 Id. I infer “ExCo” refers to management’s Executive Council. 165 See id.
51 contrast to prior Board meetings, the Board dedicated approximately two hours and
fifteen minutes to discussing the 737 MAX. For the first time, the Board critically
assessed MCAS, the FAA certification process, and pilot training requirements.
The Board also initiated Board-level safety reporting for the first time. On
April 4, the Board established the Committee on Airplane Policies and Processes
(the “Airplane Committee”). Even then, the Airplane Committee’s fact-finding
sessions intended to inform the Committee’s conclusions and recommendations
were sparsely attended: Giambastiani was the sole Board attendee at more than half
of the Committee’s eighteen fact-finding sessions with internal and external experts,
including on topics such as airline training requirements and an overview of BCA’s
safety process.
Between April and August 2019, the Airplane Committee entertained
presentations on seven new topics—including “[c]ommercial airplane design and
manufacturing and policies and processes,” “aircrew training requirements,” and
“engineering and safety organizational structures in related industries”—none of
which had been the subject of previous Board briefings.166 For example, in April
2019, Lynne Hopper, Boeing’s Vice President of BCA Engineering, and Beth
Pasztor, BCA’s Vice President of Safety, Security & Compliance, presented to the
Board for the first time.
166 Id. ¶ 70.
52 On May 6, for the first time, the Airplane Committee formally requested
information about the cause of the crashes. As Committee chair, Giambastiani asked
Hyslop to provide information about pilot training requirements, Boeing’s “Quick
Action” checklists for emergencies, and airlines that had purchased an AOA disagree
alert. 167 And in late June, Giambastiani proposed that product safety reports
evaluated by the SRB “should feed to [A]udit [C]ommittee” and “should go to
CTO/CFO and [be] shared with Board”; that the Audit Committee should have
“visibility of high risk issues”; and that “the entire list of safety issues on the MAX
[should be] reported to Dennis [Muilenburg]/Greg [Hyslop].” 168
The Airplane Committee also recommended that the Board establish another
committee dedicated to safety. And so on August 26, the Board established the
Aerospace Safety Committee “for the purpose of assisting the Board in the oversight
of the safe design, development, manufacture, production, operations, maintenance,
and delivery of the aerospace products and services of the Company.” 169 It was also
responsible for overseeing the airplane certification process and Company protocols
for engaging with the FAA. In turn, the Aerospace Safety Committee quickly
recommended that the Board create yet another oversight committee. On September
167 Id. ¶ 72. 168 Id. ¶ 81 (alteration in original). 169 Id. ¶ 73.
53 30, the Board created a Product and Services Safety Organization that was
responsible for, among other things, investigating “cases of undue pressure and
anonymous product and service safety concerns raised by employees,” and
represented Boeing’s first mechanism or reporting line to convey employee
complaints to the Board.170
Product safety reporting processes up to executives and the Board were
operational by October 20. And at the December 15 Board meeting, the Audit
Committee received a compliance risk management report from chief compliance
and ethics officer Sands that, for the first time, included a category for “Safety.” In
comparison, Sands’s report from the December 2018 Board meeting following the
Lion Air Crash had not covered product safety at all.
Muilenburg also embraced the new focus on safety. In an email to McAllister,
Hyslop, Smith, and other senior Boeing officials, he wrote,
As part of our lessons learned from the MAX, we need to have a clear understanding of how safety risk is being assessed, and appropriately “test” those items that are assessed as “medium” or at a “minor” or “major” hazard level to ensure the right visibility/action/communication. . . . This is an exceptionally important process improvement area for us all.171
170 Id. ¶ 93. 171 Id. ¶ 82.
54 By late 2019, Muilenburg began receiving “granular weekly reports of potential
safety issues discussed at meetings of rank-and-file engineers - something that did
not happen in the past.”172 And Muilenburg eventually acknowledged that access to
better information would have supported grounding the 737 MAX fleet shortly after
the Lion Air Crash.173
F. The Board Attempts To Preserve Its Image, Despite Eschewing Safety Oversight Initiatives Until April 2019.
The Board publicly lied about if and how it monitored the 737 MAX’s safety.
As the Board was establishing formal safety monitoring processes, then-Lead
Director Calhoun held a series of interviews with major newspapers with the
following corporate objective: “Position the Boeing Board of Directors as an
independent body that has exercised appropriate oversight.” 174 As to the Lion Air
Crash, Calhoun represented that the Board had been “notified immediately, as a
board broadly,” after the Lion Air crash and met “very, very quickly” thereafter;175
participated in evaluating the safety risk associated with the 737 MAX; and
considered grounding the 737 MAX after the Lion Air Crash, but concluded the
172 Id. ¶ 83. 173 Id. ¶ 84 (“[I]f we knew back then what we know now, we would have grounded right after the first accident.”). 174 Id. ¶ 263. 175 Id. ¶¶ 268–69.
55 crash “was an anomaly” that did not warrant grounding the airplane. 176 As to the
Ethiopian Airlines Crash, Calhoun represented that the Board met within twenty-
four hours of the crash to discuss potential grounding of the 737 MAX and
recommended that the 737 MAX be grounded. Each of Calhoun’s representations
was false.
In addition, Calhoun and the Board would publicly denounce Muilenburg.
Muilenburg had come under fire from the FAA, but as of November 5, 2019,
Calhoun maintained that, “[f]rom the vantage point of our board, Dennis has done
everything right.” 177 With additional scrutiny, regulators learned the extent of
Boeing’s deceit under Muilenburg’s leadership, and the FAA came down on him.
On December 22, after learning that the FAA had reprimanded Muilenburg and after
The New York Times published an article reporting on his deficiencies, the Board
called a meeting and voted to terminate Muilenburg and replace him with Calhoun,
“to restore confidence in the Company moving forward as it works to repair
relationships with regulators, customers, and all other stockholders.” 178
The Board did not terminate Muilenburg for cause, and publicly characterized
his departure as his “resignation,” and later as his “retirement.”179 In doing so, the
176 Id. ¶ 271. 177 Id. ¶ 280. 178 Id. ¶¶ 284–85. 179 Id. ¶¶ 288–89.
56 Board enabled Muilenburg to retain unvested equity awards worth approximately
$38,642,304.180 The Board also announced that Luttig would “retire,” allowing him
to keep his unvested equity awards as well.181 As alleged, the Board chose this path
because “[a]ny public dispute between Boeing and Muilenburg would have exposed
the Board’s prolonged support of Muilenburg and lack of safety oversight.” 182
Calhoun became CEO in January 2020. In that role, he publicly questioned
Muilenburg’s leadership, shifting blame away from the Board. Calhoun stated that
the Board “never seriously questioned [Muilenburg’s] strategy, in part because
before the first MAX crash off the coast of Indonesia in October 2018, the company
was enjoying its best run in years,” and painted Muilenburg as a money-hungry
leader that was willing to prioritize profits over quality and safety.183 In Calhoun’s
words, “If [the Board] w[as] complacent in any way, maybe, maybe not, I don’t
know. . . . We supported a C.E.O. who was willing and whose history would suggest
that he might be really good at taking a few more risks.”184
180 Id. ¶ 286. 181 Id. ¶ 289. 182 Id. ¶ 287. 183 Id. ¶ 291 (quoting a New York Times article as stating, “[Calhoun had] never be able to judge what motivated [Muilenburg], whether it was a stock price that was going to continue to go up and up, or whether it was just beating the other guy to the next rate increase,” and that “[i]f anybody ran over the rainbow for the pot of gold on stock, it would have been [Muilenburg]”). 184 Id. (alterations in original).
57 G. Corporate Trauma Inspires This Suit.
The 737 MAX fleet was grounded for twenty months, until November 18,
2020. During that period, Boeing was federally mandated to cure the defects in the
737 MAX’s MCAS system and AOA sensor and to revamp pilot training. But these
measures did not rectify the significant damage the Lion Air and Ethiopian Airlines
Crashes and the 737 MAX Grounding caused to Boeing’s profitability, credibility,
reputation, and business prospects. Nor did they unwind Boeing’s exposure to
substantial criminal, regulatory, and civil liability. In 2020, Boeing estimated that it
had incurred non-litigation costs of $20 billion, and litigation-related costs in excess
of $2.5 billion. Litigation continues on multiple fronts, and customers cancelled
orders. And in January 2021, Boeing consented to the filing of a criminal
information charging the Company with conspiracy to defraud the United States and
thereby incurring billions of dollars in penalties.185
The corporate harm Boeing suffered inspired numerous books and records
requests and derivative actions filed in this Court in 2019. The Court consolidated
the plenary actions and appointed NYSCRF and FPPA as Co-Lead Plaintiffs on
August 3, 2020.186 Plaintiffs filed the Verified Amended Consolidated Complaint
on January 29, 2021 (the “Amended Complaint”), addressing the DOJ’s criminal
185 Id. ¶ 11; Am. Compl. Ex. B. 186 D.I. 88.
58 penalties.187 Count I asserts a derivative claim for breach of fiduciary duty against
the Director Defendants, alleging they consciously breached their fiduciary duties
and violated their corporate responsibilities by (1) before the Lion Air Crash, failing
to implement any reasonable information and reporting system to monitor and
oversee the safety of Boeing’s airplanes; (2) after the Lion Air Crash, despite being
made aware of red flags concerning the operation, development, and nondisclosure
of MCAS, consciously disregarding their duty to investigate and to remedy any
misconduct uncovered; and (3) after the Ethiopian Airlines Crash, falsely assuring
the public about the safety of the 737 MAX and MCAS and deciding to cash out
Muilenburg’s unvested equity-based compensation.188 Count II asserts a derivative
claim for breach of fiduciary duty against the Officer Defendants, alleging they
consciously breached their fiduciary duties or, at a minimum, acted with gross
187 See generally Am. Compl. 188 Id. ¶ 305. Plaintiffs originally alleged that the Director Defendants breached their fiduciary duties before the Lion Air Crash by ignoring several red flags concerning airplane safety. Id. At oral argument, Plaintiffs shifted this theory. See Hr’g Tr. 135–36 (“MR. FRIEDLANDER: Frankly, Your Honor, I think it’s better not to think of those as red flags for Marchand in the sense of that -- like Marchand never uses the concept of red flags. . . . I would say these are points of emphasis to illustrate the problems that the reporting system had . . . because there’s an affirmative obligation to create a reporting system of the type described in Marchand. We’re saying they didn’t do it, and then we said which Marchand requires. And as a second argument, and they had red flags and nonetheless they still didn’t do it. But really it’s all incorporated under the affirmative obligation of Marchand to create it. THE COURT: So you would like me to look at those more under prong one as a deficient reporting system [rather] than under prong two, red flags? MR. FRIEDLANDER: Yeah. But I think they’re important . . . .”).
59 negligence by (1) consciously and repeatedly failing to implement and actively
monitor or oversee a compliance and safety program; (2) consciously disregarding
their duty to investigate red flags and to remedy any misconduct uncovered; and (3)
covering up the extreme safety risks of Boeing’s aircraft.
On March 19, Defendants moved to dismiss pursuant to Court of Chancery
Rules 12(b)(6) and 23.1 (the “Motion”). 189 Defendants submitted eighty-eight
exhibits in support of the Motion.190 The parties briefed the Motion as of June 4.191
I heard argument on June 25 and took the Motion under advisement. 192
II. ANALYSIS
Defendants have moved to dismiss all claims against them pursuant to Court
of Chancery Rule 23.1 for failure to plead that demand is futile.
Plaintiffs assert Defendants’ breaches of fiduciary duty harmed Boeing. Thus,
the claims belong to Boeing and the decision whether to pursue the claim
presumptively lies with the Board. 193 But our law recognizes that, “[i]n certain
189 D.I. 145; D.I. 146. 190 D.I. 147; D.I. 148; D.I. 149; D.I. 150; D.I. 151; D.I. 152; D.I. 160. 191 D.I. 146; D.I. 155; D.I. 159. 192 D.I. 167; Hr’g Tr. 193 White v. Panic, 783 A.2d 543, 550 (Del. 2001) (“In most situations, the board of directors has sole authority to initiate or to refrain from initiating legal actions asserting rights held by the corporation.”); see Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (“A cardinal precept of the General Corporation Law of the state of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation.”), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
60 circumstances, stockholders may pursue litigation derivatively on behalf of the
corporation as a matter of equity to redress the conduct of a torpid or unfaithful
management . . . where those in control of the company refuse to assert (or are unfit
to consider) a claim belonging to it.”194 “Because stockholder derivative suits by
[their] very nature . . . impinge on the managerial freedom of directors, our law
requires that a stockholder satisfy the threshold demand requirements of Court of
Chancery Rule 23.1 before he is permitted to assume control of a claim belonging
to the corporation.”195
Rule 23.1 requires pleadings to “comply with stringent requirements of factual
particularity that differ substantially from the permissive notice pleadings governed
solely by Chancery Rule 8(a).”196 To satisfy Rule 23.1, the stockholder must plead
with particularity either that she made a demand on the company’s board of directors
to pursue particular claims and was refused, or why any such demand would be
futile, thereby excusing the need to make a demand altogether. 197 Where, as here,
194 In re CBS Corp. S’holder Class Action & Deriv. Litig., 2021 WL 268779, at *27 (Del. Ch. Jan. 27, 2021), as corrected (Feb. 4, 2021) (quoting Cumming v. Edens, 2018 WL 992877, at *11 (Del. Ch. Feb. 20, 2018) (internal quotation marks omitted)). 195 Horman v. Abney, 2017 WL 242571, at *6 (Del. Ch. Jan. 19, 2017) (quoting Aronson, 473 A.2d at 811) (internal quotation marks omitted). Brehm, 746 A.2d at 254; accord In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 196
106, 120–21 (Del. Ch. 2009). 197 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044 (Del. 2004); Wood v. Baum, 953 A.2d 136, 140 (Del. 2008).
61 the stockholder plaintiff foregoes a demand on the board, she “must plead
particularized facts creating a reasonable doubt concerning the Board’s ability to
consider the demand.”198
Demand futility turns on “whether the board that would be addressing the
demand can impartially consider [the demand’s] merits without being influenced by
improper considerations.” 199 While the continued utility of a binary approach to
demand futility has been called into question, for now, Delaware still applies one of
two tests when deciding whether demand upon the board would be futile. 200 The
first, established in Aronson v. Lewis, “applies to claims involving a contested
transaction i.e., where it is alleged that the directors made a conscious business
decision in breach of their fiduciary duties.”201 The second, established in Rales v.
198 CBS, 2021 WL 268779, at *28; Citigroup, 964 A.2d at 121 (“Demand is not excused solely because the directors would be deciding to sue themselves. Rather, demand will be excused based on a possibility of personal director liability only in the rare case when a plaintiff is able to show director conduct that is so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists.” (footnotes and internal quotation marks omitted)). 199 Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). 200 See United Food & Commerc. Workers Union v. Zuckerberg, 250 A.3d 862, 877 (Del. Ch. 2020) (observing that “the Aronson test has proved to be comparatively narrow and inflexible in its application, and its formulation has not fared well in the face of subsequent judicial developments”). 201 Wood, 953 A.2d at 140 (citing Aronson, 473 A.2d at 814) (explaining the two demand futility tests). Under Aronson, the plaintiff must plead particularized facts that create a reasonable doubt that (i) the directors are disinterested and independent or (ii) the challenged transaction was otherwise the product of a valid exercise of business judgment. Id.
62 Blasband,202 applies where a majority of the current members of the board “had not
participated in the challenged decision,”203 or “where the subject of a derivative suit
is not a business decision . . . [such as when the board is alleged to have violated its]
oversight duties.”204
Here, the parties agree that Rales governs.205 “The central question of a Rales
inquiry, no matter the context, is the same: ‘whether the board can exercise its
business judgment on the corporate behalf in considering demand.’”206 In refining
that question, Rales instructs that a director cannot objectively exercise her business
judgment in considering a demand if she is either (1) “interested,” meaning, among
other things, that she faces a “substantial likelihood of liability” for her role in the
alleged corporate wrongdoing; or (2) not independent of another interested
fiduciary.207
202 634 A.2d at 927. 203 Zuckerberg, 250 A.3d at 887. 204 Wood, 953 A.2d at 140; see also Horman, 2017 WL 242571, at *6 (holding that Rales applies “when a plaintiff challenges board inaction such as when a board is alleged to have consciously disregarded its oversight duties”). 205 See D.I. 146 at 58 (“Whether the Board’s decision to terminate Muilenburg is considered under Aronson or Rales, . . . Plaintiffs fail to establish demand futility.” (citing Zuckerberg, 2020 WL 6266162, at *9–18)); id. at 60 (assessing Plaintiffs’ claims under Rales); D.I. 155 at 38 (citing and applying Rales). 206 McElrath ex rel. Uber Techs. v. Kalanick, 2019 WL 1430210, at *8 (Del. Ch. Apr. 1, 2019) (quoting Inter-Mktg. Gp. USA, Inc. v. Armstrong, 2019 WL 417849, at *4 (Del. Ch. Jan. 31, 2019)), aff’d sub nom. McElrath v. Kalanick, 224 A.3d 982 (Del. 2020). 207 Rales, 634 A.2d at 934, 936 (noting that, at bottom, the court must “determine whether or not the particularized factual allegations of a derivative stockholder complaint create a
63 “On a motion to dismiss pursuant to Rule 23.1, the Court considers the same
documents, similarly accepts well-pled allegations as true, and makes reasonable
inferences in favor of the plaintiff—all as it does in considering a motion to dismiss
under Rule 12(b)(6).”208 Given the heightened pleading requirements of Rule 23.1,
however, “conclusory allegations of fact or law not supported by allegations of
specific fact may not be taken as true.”209 “Because of the absence of a precise
formula in the Rule for pleading compliance with the demand requirement, the
sufficiency of a complaint under Rule 23.1 is determined on the basis of the facts of
each case.”210
“Rule 23.1 does not abrogate Rule 12(b)(6).”211 But because “the standard
under Rule 12(b)(6) is less stringent than the standard under Rule 23.1, a complaint
that survives a Rule 23.1 motion to dismiss generally will also survive a Rule
reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand”); CBS, 2021 WL 268779, at *28 (same); In re Clovis Oncology, Inc. Deriv. Litig., 2019 WL 4850188, at *11 (Del. Ch. Oct. 1, 2019) (stating that when board oversight is challenged, “such improper influence arises if a majority of the board’s members are compromised because [] they face a substantial likelihood of personal liability with respect to at least one of the alleged claims” (internal quotation marks omitted)). 208 Beam, 833 A.2d at 976 (Del. Ch. 2003) (citing White, 783 A.2d at 549), aff’d, 845 A.2d 1040 (Del. 2004). 209 Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988), overruled on other grounds by Brehm, 746 A.2d at 244. 210 Brehm, 746 A.2d at 268 (Hartnett, J. concurring). 211 Id.
64 12(b)(6) motion to dismiss, assuming that it otherwise contains sufficient facts to
state a cognizable claim.”212 The standards governing a motion to dismiss under
Court of Chancery Rule 12(b)(6) for failure to state a claim for relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are “well-pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and ([iv]) dismissal is inappropriate unless the “plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible to proof.” 213
Thus, the touchstone “to survive a motion to dismiss is reasonable
‘conceivability.’” 214 This standard is “minimal” 215 and plaintiff-friendly. 216
“Indeed, it may, as a factual matter, ultimately prove impossible for the plaintiff to
prove his claims at a later stage of a proceeding, but that is not the test to survive a
motion to dismiss.”217 Despite this forgiving standard, the Court need not “accept
conclusory allegations unsupported by specific facts” or “draw unreasonable
212 In re Walt Disney Co. Deriv. Litig., 825 A.2d 275, 285 (Del. Ch. 2003). 213 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citations omitted). 214 Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 537 (Del. 2011). 215 Id. at 536 (citing Savor, 812 A.2d at 896). 216 See, e.g., Clouser v. Doherty, 175 A.3d 86 (Del. 2017) (TABLE); In re USG Corp. S’holder Litig., 2021 WL 930620, at *3–4 (Del. Ch. Mar. 11, 2021). 217 Cent. Mortg. Co., 27 A.3d at 536.
65 inferences in favor of the non-moving party.”218 “Moreover, the court is not required
to accept every strained interpretation of the allegations proposed by the plaintiff.”219
I conclude that (1) Plaintiffs have pled facts sufficient to render demand futile
for claims against the Director Defendants, with one carveout, but (2) Plaintiffs have
failed to plead demand futility for the claims against the Officer Defendants.
Accordingly, the Motion is granted and denied in part as to Count I, and granted as
to Count II.
A. With One Exception, Plaintiffs Have Pled That Demand Is Futile For Claims Against The Director Defendants.
For Count I, Plaintiffs assert demand is futile because “from at least
November 18, 2019 (the date of filing of the first derivative complaint alleging
demand futility) through and including today, a majority of the members of the
Board have faced a substantial likelihood of liability for failing to make any good
faith effort to implement and oversee a board-level system to monitor and report on
safety.”220 At bottom, Plaintiffs’ position is that nine of the twelve board members
218 Price v. E.I. du Pont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), (citing Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)), overruled on other grounds by Ramsey v Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255 (Del. 2018). 219 In re Trados Inc. S’holder Litig., 2009 WL 2225958, at *4 (Del. Ch. July 24, 2009) (internal quotation marks omitted) (quoting In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006)). 220 Am. Compl. ¶ 299.
66 at the time the original complaint was filed221 face a substantial likelihood of liability
for failure to fulfill their oversight duties under the standards set forth in
Caremark,222 as applied by the Delaware Supreme Court in Marchand.223
As Chancellor Allen first observed in Caremark, and as since emphasized by
this Court many times, perhaps to redundance,224 the claim that corporate fiduciaries
have breached their duties to stockholders by failing to monitor corporate affairs is
“possibly the most difficult theory in corporation law upon which a plaintiff might
hope to win a judgment.”225 A decade after Caremark, our Supreme Court affirmed
the doctrine Chancellor Allen announced there and clarified that our law will hold
directors personally liable only where, in failing to oversee the operations of the
company, “the directors knew that they were not discharging their fiduciary
221 Id. ¶¶ 22–43; see id. ¶ 301 (alleging that when the original complaint was filed, six of the twelve Board members had served for at least five years before the 2019 Ethiopian Airlines Crash); D.I. 146 at 6 n.2 (detailing changes on the Board since the original complaint was filed). 222 698 A.2d 959. 223 212 A.3d 805. 224 See Chou, 2020 WL 5028065, at *1 (“It has become among the hoariest of Chancery clichés for an opinion to note that a derivative claim against a company’s directors, on the grounds that they have failed to comply with oversight duties under Caremark, is among the most difficult of claims in this Court to plead successfully.”). 225 Caremark, 698 A.2d at 967; Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL4292024, at *7 (Del. Ch. Nov. 30, 2007) (same); Desimone v. Barrows, 924 A.2d 908, 939 (Del. Ch. 2007) (same); Guttman v. Huang, 823 A.2d 492, 506 n.33 (Del. Ch. 2003) (same).
67 obligations.”226 At the pleading stage, a plaintiff must allege particularized facts that
satisfy one of the necessary conditions for director oversight liability articulated in
Caremark: either that (1) “the directors utterly failed to implement any reporting or
information system or controls”; or (2) “having implemented such a system or
controls, [the directors] consciously failed to monitor or oversee its operations thus
disabling themselves from being informed of risks or problems requiring their
attention.”227 I respectfully refer to these conditions as Caremark “prong one” and
“prong two.”
“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.” 228 Rather, the plaintiff must plead with particularity “a
sufficient connection between the corporate trauma and the board.” 229 “To be sure,
even in this context, Caremark does not demand omniscience.” 230 But it does
mandate that “to satisfy their duty of loyalty, directors must make a good faith effort
to implement an oversight system and then monitor it.” 231
226 Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). 227 Id. 228 Desimone, 924 A.2d at 940. 229 La. Mun. Police Emps.’ Ret. Sys. v. Pyott, 46 A.3d 313, 340 (Del. Ch. 2012), rev’d on other grounds, 74 A.3d 612 (Del. 2013). 230 Clovis, 2019 WL 4850188, at *13. 231 Marchand, 212 A.3d at 821.
68 The Caremark standard “draws heavily upon the concept of director failure to
act in good faith,”232 and does not constitute a freestanding fiduciary duty that could
independently give rise to liability.233 Because “[t]he test is rooted in concepts of
bad faith,” “a showing of bad faith is a necessary condition to director oversight
liability.”234 As our Supreme Court explained in In re Walt Disney Co. Derivative
Litigation, the “intentional dereliction of duty” or “conscious disregard for one’s
responsibilities,” which “is more culpable than simple inattention or failure to be
informed of all facts material to the decision,” reflects that directors have acted in
bad faith and cannot avail themselves of defenses grounded in a presumption of good
faith.235 In order to plead a derivative claim under Caremark, therefore, a plaintiff
must plead particularized facts that allow a reasonable inference the directors acted
with scienter which in turn “requires [not only] proof that a director acted
232 Stone, 911 A.2d at 369. 233 Citigroup, 964 A.2d at 122–23. 234 Id. at 123. 235 906 A.2d 27, 66 (Del. 2006); Citigroup, 964 A.2d at 125 (“[O]ne can see a similarity between the standard for assessing oversight liability and the standard for assessing a disinterested director’s decision under the duty of care when the company has adopted an exculpatory provision pursuant to § 102(b)(7). In either case, a plaintiff can show that the director defendants will be liable if their acts or omissions constitute bad faith. A plaintiff can show bad faith conduct by, for example, properly alleging particularized facts that show that a director consciously disregarded an obligation to be reasonably informed about the business and its risks or consciously disregarded the duty to monitor and oversee the business.”).
69 inconsistent[ly] with his fiduciary duties,” but also “most importantly, that the
director knew he was so acting.”236
1. The Motion Is Denied In Part As To Count I; Plaintiffs Have Pled Particularized Facts Demonstrating A Majority Of The Director Defendants Face A Substantial Likelihood Of Caremark Liability.
Plaintiffs’ Caremark theory breaks the Company’s 737 MAX trauma into
three periods of time: before the first crash, between the two crashes, and after the
second crash. As crystallized at argument, Plaintiffs’ theory before the Lion Air
Crash maps onto Caremark’s first prong, asserting the Board utterly failed to
implement any reporting or information systems or controls.237 Plaintiffs further
assert the first Lion Air Crash was a red flag the Board ignored under prong two,
while continuing to fall short under prong one. Plaintiffs contend the Board’s prong
two deficiencies culminated in the Ethiopian Airlines Crash. And after both crashes,
Plaintiffs assert the Director Defendants breached their fiduciary duties by allowing
Muilenburg to retire with his unvested equity compensation. Plaintiffs have
236 In re Massey Energy Co., 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011) (emphasis omitted); Citigroup, 964 A.2d at 123 (“[T]o establish oversight liability a plaintiff must show that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as by failing to act in the face of a known duty to act.”). 237 See Hr’g Tr. 135–36.
70 sufficiently alleged the Director Defendants face a substantial likelihood of liability
under their Caremark theories, but not with regard to Muilenburg’s compensation.
a. Plaintiffs Have Stated A Claim Under Caremark Prong One.
Directors may use their business judgment to “design context- and industry-
specific approaches tailored to their companies’ businesses and resources. But
Caremark does have a bottom-line requirement that is important: the board must
make a good faith effort—i.e., try—to put in place a reasonable board-level system
of monitoring and reporting.”238 This oversight obligation is “designed to ensure
reasonable reporting and information systems exist that would allow directors to
know about and prevent wrongdoing that could cause losses for the Company.”239
“[O]nly a sustained or systematic failure of the board to exercise oversight—such as
an utter failure to attempt to assure a reasonable information and reporting system
exists—will establish the lack of good faith that is a necessary condition to
liability.”240
Our Supreme Court’s recent decision in Marchand addressed the contours of
a Caremark prong one claim when the company is operating in the shadow of
238 Marchand, 212 A.3d at 821 (footnote omitted). 239 Citigroup, 964 A.2d at 131. 240 Id. at 122 (internal quotation marks omitted).
71 “essential and mission critical” regulatory compliance risk.241 Distinct from many
Caremark cases evaluating the company’s systems to monitor financial wrongdoing
like accounting fraud,242 Marchand addressed the regulatory compliance risk of food
safety and the failure to manage it at the board level, which allegedly allowed the
company to distribute mass quantities of ice cream tainted by listeria. Food safety
was the “most central safety and legal compliance issue facing the company.” 243 In
the face of risk pertaining to that issue, Marchand noted the board’s oversight
function “must be more rigorously exercised.” 244 This “entails a sensitivity to
compliance issues intrinsically critical to the company.” 245
Marchand held the board had not made a “good faith effort to put in place a
reasonable system of monitoring and reporting” when it left compliance with food
safety mandates to management’s discretion, rather than implementing and then
overseeing a more structured compliance system. 246 The Court considered the
241 Marchand, 212 A.3d at 824; see Clovis, 2019 WL 4850188, at *12. 242 E.g., Stone, 911 A.2d 362; Hughes, 897 A.2d 162; Citigroup, 964 A.2d 106. 243 Marchand, 212 A.3d at 824 (stating “food safety was essential and mission critical”); see also id. at 822 (observing that food safety “has to be one of the most central issues at the company” and “a compliance issue intrinsically critical to the company’s [monoline] business operation”). 244 Clovis, 2019 WL 4850188, at *13 (citing Marchand, 212 A.3d at 824). 245 Id. (alterations, footnotes, internal quotation marks omitted) (quoting Marchand, 212 A.3d at 822). 246 Marchand, 212 A.3d at 821–24.
72 absence of various board-level structures “before the listeria outbreak engulfed the
company.” 247 The Court concluded that the complaint fairly alleged several
dispositive deficiencies:
• no board committee that addressed food safety existed; • no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed; • no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed; • during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board; • the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture; and • the board meetings are devoid of any suggestion that there was any regular discussion of food safety issues.248
Like food safety in Marchand, airplane safety “was essential and mission
critical” to Boeing’s business, 249 and externally regulated. 250 Considering
247 Id. at 822. 248 Id. 249 Id. at 824. 250 See Chou, 2020 WL 5028065, at *18 (“[W]hen regulations governing drug health and safety are at issue, ABC’s Board must actively exercise its oversight duties in order to properly discharge its duties in good faith. The allegations here are a prime example: flouting laws meant to ensure the safety and purity of drugs destined for patients suffering from cancer is directly inimical to the central purpose of ABC’s business.”); Clovis, 2019 WL 4850188, at *13 (“[W]hen a company operates in an environment where externally imposed regulations govern its ‘mission critical’ operations, the board’s oversight function must be more rigorously exercised.”).
73 Marchand’s mandate that the board rigorously exercise its oversight function with
respect to mission critical aspects of the company’s business, such as the safety of
its products that are widely distributed and used by consumers, as well as the failings
Marchand identified as giving rise to the reasonable inference that the board faced
a substantial likelihood of liability under prong one, I conclude that Plaintiffs have
carried their burden under Rule 23.1 for their prong one claim. To be clear, I do not
track the deficiencies Marchand identified because they are any sort of prescriptive
list; “[a]s with any other disinterested business judgment, directors have great
discretion to design context- and industry-specific approaches tailored to their
companies’ businesses and resources.”251 I echo Marchand because it is dispositive
in view of Plaintiffs’ remarkably similar factual allegations.
i. The Board had no committee charged with direct responsibility to monitor airplane safety.
The Amended Complaint alleges the Board had no committee charged with
direct responsibility to monitor airplane safety. While the Audit Committee was
charged with “risk oversight,” safety does not appear in its charter. Rather, its
oversight function was primarily geared toward monitoring Boeing’s financial
risks.252
251 Marchand, 212 A.3d at 821. 252 See Hr’g Tr. 30–33.
74 Perhaps because the Audit Committee was not asked to do so, the pleading
stage record indicates the Audit Committee did not regularly or meaningfully
address or discuss airplane safety. The yearly report the Audit Committee received
on Boeing’s compliance risk management process did not include oversight of
airplane safety.253 Specifically as to the 737 MAX, the Audit Committee never
assessed its safety risks, including those regarding MCAS and the AOA sensor,
during its development before the Lion Air Crash or after; nor did the Audit
Committee ask for presentations or information on the topic. 254 Similarly, the ERV
process and Corporate Audit group did not address airplane safety.255
Defendants press that the Audit Committee addressed “risk” broadly, pointing
to one-off instances like when it responded to FAA questions about the Dreamliner
battery incident, or when it referred to “quality” or “safety” in passing. But those
occasional occurrences fail to dislodge Plaintiffs’ allegations that the Board did not
specifically charge the Audit Committee with monitoring airplane safety. And to
the extent Defendants point to risk analysis mechanisms and reports, like the ERV
process and the Corporate Audit group, 256 in the absence of any allegation or
253 Hr’g Tr. 20–23. 254 Id. 32. 255 See supra notes 31–32. 256 See Defs.’ Ex. 7; Defs.’ Ex. 9; Defs.’ Ex. 10; Defs.’ Ex. 23; Defs.’ Ex. 24; Defs.’ Ex. 25.
75 indication that they were devoted to airplane safety, the reasonable inference is that
they fall within the Audit Committee’s financial and regulatory risk mandate.
At the pleading stage, the existence of the Audit Committee, Corporate Audit
group, and ERV process cannot support the conclusion that the Board established
any committee or process charged with direct responsibility to monitor airplane
safety. To the contrary, the Board did not establish the Airplane Committee, which
was explicitly tasked with overseeing airplane safety, until April 2019; the Airplane
Committee was the first Board committee to formally request information about the
cause of the crashes.
The lack of Board-level safety monitoring was compounded by Boeing’s lack
of an internal reporting system by which whistleblowers and employees could bring
their safety concerns to the Board’s attention. More than three months after the
Ethiopian Airlines Crash, Giambastiani proposed that once safety concerns were
evaluated by the SRB, they should be elevated to the Audit Committee, CTO, and
CFO, and thereafter be shared with the Board.
ii. The Board did not monitor, discuss, or address airplane safety on a regular basis.
Zooming out from the committee level, Plaintiffs have alleged specific facts
supporting the conclusion that the Board writ large did not formally address or
monitor safety. The Board did not regularly allocate meeting time or devote
76 discussion to airplane safety and quality control until after the second crash. Nor did
the Board establish a schedule under which it would regularly assess airplane safety
to determine whether legitimate safety risks existed.
The period after the Lion Air Crash is emblematic of these deficiencies. The
Board’s first call on November 23 was explicitly optional. The crash did not appear
on the Board’s formal agenda until the Board’s regularly scheduled December
meeting; those board materials reflect discussion of restoration of profitability and
efficiency, but not product safety, MCAS, or the AOA sensor. 257 The Audit
Committee devoted slices of five-minute blocks to the crash, through the lens of
supply chain, factory disruption, and legal issues—not safety.258
The next board meeting, in February 2019, addressed factory production
recovery and a rate increase, but not product safety or MCAS.259 At that meeting,
the Board affirmatively decided to delay its investigation into the 737 MAX,
notwithstanding publicly reported concerns about the airplane’s safety. Weeks later,
after the Ethiopian Airlines Crash,260 the Board still did not consider the 737 MAX’s
257 See id. ¶¶ 230–31; Defs.’ Ex. 61; see also Defs.’ Ex. 64 at -575 (identifying the Lion Air Crash as a “key topic” with no mention of safety). 258 Defs.’Ex. 14; Defs’ Ex. 61 at 2; Defs’. Ex. 84 at -618197, -618203–07. 259 Am. Compl. ¶ 237; Defs.’ Ex. 64 at -575. 260 Am. Compl. ¶ 248; Defs.’ Ex. 66 at -620851.
77 safety. It was not until April 2019—after the FAA grounded the 737 MAX fleet—
that the Board built in time to address airplane safety.261
Defendants argue the Board “regularly discussed” safety as part of its strategic
initiatives, pointing to slide decks that nod to “safety” as an “enduring value”262 and
as part of a “production system” that was simultaneously focused on “[a]ccelerating
productivity.”263 They also point out that the Board was updated on the 737 MAX’s
development, production, and certification,264 and that the Board inspected the plants
where the 737 MAX was assembled, including on a June 2018 inspection of the
Everett production site.265 Defendants stress that the Board “oversaw the quality and
safety of the 737 MAX program through monitoring the progress of the FAA’s
extensive certification review of the 737 MAX.”266
But the invocations of safety Defendants highlight must be considered in the
broader context Plaintiffs plead. The Board focused on the 737 MAX’s production,
development, and certification in order to assess production timelines and revenue
261 Am. Compl. ¶ 79; Defs.’ Ex. 75; Defs.’ Ex. 77. 262 Defs.’ Ex. 16 at -11080, -13052. 263 Defs.’ Ex. 17 at -11645; see also Defs.’ Ex. 20 at -13057 (including the tagline “[e]nsuring the safety, integrity and quality of Boeing products” in a test evaluation update). 264 D.I. 146 at 19–22; Defs.’ Ex. 8 at -11183; Defs.’ Ex. 28; Defs.’ Ex. 29; Defs.’ Ex. 39 at -8133; Defs.’ Ex. -8086; Defs.’ Ex. 41 -8314; Defs.’ Ex. 52 at -11403. 265 Defs.’ Ex. 26; Defs.’ Ex. 27; Defs.’ Ex. 28; Defs.’ Ex. 29. 266 D.I. 146 at 20.
78 expectations, and to strengthen the Company’s relationships with FAA officials—
not to consider customer safety. 267 The Board and management’s passive
invocations of quality and safety, and use of safety taglines, fall short of the rigorous
oversight Marchand contemplates.
And under Marchand, minimal regulatory compliance and oversight do not
equate to a per se indicator of a reasonable reporting system. “[T]he fact that
[Boeing] nominally complied with F[A]A regulations does not imply that
the board implemented a system to monitor [airplane] safety at the board level.
Indeed, these types of routine regulatory requirements, although important, are not
typically directed at the board.”268 The fact that Boeing’s management was seeking
minimal regulatory certification and periodically informing the Board of its progress
in pursuit of production-based business objectives “does not rationally suggest that
the board implemented a reporting system to monitor [airplane] safety or [Boeing’s]
operational performance,” as “[t]he mundane reality that [Boeing] is in a highly
regulated industry and complied with some of the applicable regulations does not
foreclose any pleading-stage inference that the directors’ lack of attentiveness rose
267 Am. Compl. ¶¶ 127–28 (addressing board presentations containing taglines such as “Performance, schedule, and cost certain . . . Stingy with a purpose” and “Transforming production system to support market demand,” and “Imperatives” such as “Break Cost Curve,” “Faster to Market,” and “Affordability Culture”). 268 Marchand, 212 A.3d at 823.
79 to the level of bad faith indifference required to state a Caremark claim.” 269 As
Marchand made plain, the fact that the company’s product facially satisfies
regulatory requirements does not mean that the board has fulfilled its oversight
obligations to prevent corporate trauma.
iii. The Board had no regular process or protocols requiring management to apprise the Board of airplane safety; instead, the Board only received ad hoc management reports that conveyed only favorable or strategic information.
As alleged, the Board did not simply fail to assess safety itself; it also failed
to expect or demand that management would deliver safety reports or summaries to
the Board on a consistent and mandatory basis. The Amended Complaint’s
allegations and exhibits incorporated by reference show that the Board received
intermittent, management-initiated communications that mentioned safety in name,
but were not safety-centric and instead focused on the Company’s production and
revenue strategy. And when safety was mentioned to the Board, it did not press for
further information, but rather passively accepted management’s assurances and
opinions.270
269 Id. See Defs. Ex. 53; Defs.’ Ex. 56; Defs.’ Ex. 58; Defs.’ Ex. 59; Defs.’ Exs. 62–63; Defs.’ 270
Ex. 86; Am. Compl. ¶¶ 214, 224, 225, 227, 228.
80 For mission-critical safety, discretionary management reports that mention
safety as part of the Company’s overall operations are insufficient to support the
inference that the Board expected and received regular reports on product safety.271
Boeing’s Board cannot leave “compliance with [airplane] safety mandates to
management’s discretion rather than implementing and then overseeing a more
structured compliance system.”272 An effective safety monitoring system is what
allows directors to believe that, unless issues or “red flags” make it to the board
through that system, corporate officers and employees are exercising their delegated
powers in the corporation’s best interest.273
Here, the reports the Board received throughout the 737 MAX’s development
and FAA certification were high-level reports focused on the Company’s operations
and business strategy; the Board did not expect any safety content.274 After the Lion
Air Crash, management’s communications to the Board demonstrate the lack of a 275 Board process or protocol governing such communications. None of
271 See Marchand, 212 A.3d at 823–24. 272 Clovis, 2019 WL 4850188, at *12 (describing Marchand). 273 See Forsythe v. ESC Fund Mgmt. Co. (U.S.), 2007 WL 2982247, at *7 (Del. Ch. Oct. 9, 2007). 274 See Defs.’ Ex. 40 at -8086; Defs.’ Ex. 41. 275 See, e.g., Am. Compl. ¶ 91(“In July 2018, Boeing’s Test and Evaluation department voiced concerns to ‘Boeing Executive Leadership’ regarding the ‘considerable pressure’ the 737 MAX program faced over production schedules. The department’s letter identifies the ‘ero[sion of] safety margins’ due to the declining average experience among senior production pilots. [Boeing’s] Employee Relations Director . . . . forwarded the
81 Muilenburg’s communications in the weeks following the Lion Air Crash were
initiated by a Board request, either as a one-off or as part of a standing protocol.
Muilenburg sent them at his discretion. 276 In the absence of a safety mandate,
Muilenburg’s self-directed communications to the Board focused on discrediting
media reports faulting MCAS, and on blaming Lion Air repair shops and crew.
Muilenburg did not send any communication to the Board about the Lion Air
Crash until November 5, 2018, roughly one week after it happened.277 In that email,
he disclosed that an airspeed indicator was damaged, but treated the Lion Air crash
as a public relations problem and maintained to the Board that the “737 MAX fleet
is safe.”278 Muilenburg contacted the Board again after the WSJ Article was printed:
he gave lip service to the idea that “[t]he safety of our planes is our top priority,” but
claimed the references to withholding information “are categorically false,” that
existing flight crew procedures were adequate, and that the 737 MAX was safe.279
Muilenburg’s assurances to the Board that the 737 MAX was safe were based on
unreliable information, as he emphasized the “rigorous test program” Boeing
communication to defendant Hyslop, Boeing’s chief engineer, but . . . mischaracterized the letter as seeking mainly compensation and additional benefits, without flagging the safety concerns of overworked employees.”). 276 See Defs.’ Ex. 53; Defs.’ Ex. 56; Defs.’ Ex. 57; Defs.’ Ex. 58; Am. Compl. ¶¶ 206, 229. 277 At argument, Boeing’s counsel explained this was so because the crash occurred overseas and in the water. See Hr’g Tr. 27. 278 Defs.’ Ex. 55. 279 Am. Compl. Ex. D.
82 endured “[t]o earn FAA certification.”280 His primary focus was the restoration of
Boeing’s public image.281
In the months that followed, Muilenburg’s updates focused on Boeing’s image
and the accident’s impact on the 737 MAX’s production and delivery schedule, not
product safety.282 His monthly dashboard reports to the Board and regular updates
on Company engineering initiatives addressed production and cost expectation and
challenges, but not safety. 283 He repeatedly told the Board the 737 MAX was safe
and blamed pilot and maintenance error.284 Nothing indicates that the Board pressed
him for more information about the cause of the accident or questioned
management’s conclusion.285
280 Id.; accord Defs.’ Ex. 57. 281 Am. Compl. Ex. D; accord Defs.’ Ex. 57. 282 See, e.g., Defs.’ Ex. 56 (focusing on “our strong performance [a]s supported by our continued 737 recovery); Defs.’ Ex. 58 (stating that Boeing “must allow [the investigation] to run its course,” maintaining the “[b]ottom line” that “the 737 MAX is safe,” and ultimately concluding with an update on “737 production” and touting that the Company completed “43 deliveries for October,” “an all-time high for the month and a positive sign or production recovery plane and supplier management efforts are working”); Defs.’ Ex. 60. 283 See Defs.’ Ex. 21; Defs.’ Ex. 22 at -18838. 284 See, e.g., Am. Compl. ¶¶ 218, 225; Defs.’ Ex. 58. 285 While Muilenburg himself was Chairman of the Board at this time, Defendants have not attempted to impute his knowledge to the Board as a whole. See Am. Compl. ¶ 37.
83 Muilenburg’s notes did not reference any Board-level directives for reporting
or on investigating the Lion Air Crash. 286 Rather, they indicated that Boeing’s
management was taking charge while the Board remained a passive recipient of
updates: management would “determine whether any action is required,” and
Muilenburg would “share additional details, if available, in [his] monthly update.”287
Those updates, too, were discretionary and not Board-ordered safety reports.
The Board’s reliance on management-directed intermittent safety reporting
continued after the Ethiopian Airline Crash. The Board passively accepted
Muilenburg’s assurances that Boeing’s “teams are centered on our priorities,
including safety, quality and stability,” 288 as an “ongoing” component of its
“production operations”; 289 and that public and regulatory backlash was driven
solely by “public/political pressure, not by any new facts” about the 737 MAX’s
safety.290 The Board did not press for more information. On March 12, Muilenburg
emailed the Board about engagement with high federal executive branch officials to
286 See Defs.’ Ex. 57. 287 E.g., Defs.’ Ex. 55. 288 Defs.’ Ex. 66 at -620851. 289 Id. 290 Defs.’ Ex. 68.
84 keep the 737 MAX flying.291 One outside director praised Muilenburg’s “strong
leadership.”292
It was not until April 2019, the month following the Ethiopian Airline Crash,
that Boeing’s Vice President of BCA Engineering and BCA’s Vice President of
Safety, Security & Compliance presented to the Board. This was the first time that
the Board or any of its committees heard a presentation from either member of
management, “despite their roles leading engineering and safety, respectively, for
Boeing’s largest segment.”293
The nature and content of management’s ad hoc reports to the Board indicate
that the Board had no regular process or protocols requiring management to apprise
the Board of airplane safety.294 Nothing in the Amended Complaint or documents
291 Id. 292 Am. Compl. ¶ 252. 293 Id. ¶ 71. 294 Hr’g Tr. 14–16 (“THE COURT: Where can I see that expectation and practice from the board’s side rather than management coming forward and – you’ve pointed me to some examples of management coming forward to the board. Can you point me to any examples of where the board has expressed its expectation that management do so? MR. RABINOVITZ: I can’t point you to a written protocol, Your Honor . . . [But] the fact that this practice existed is a meaningful indication of the protocol that did exist between management and the board. The board doesn’t need to say so. The proof is in the pudding, as it were. . . . THE COURT: Just before you do that, just to put a bit of a finer point on it, the protocol that you’re offering is manifested only when management chose to elevate issues to the board? MR. RABINOVITZ: This specific part, right. Elevating specific safety issues when management believed they warranted board attention. I cannot point to that in writing.”).
85 submitted supports the inference that the Board requested those reports or expected
those reports to contain safety information.295
Management’s ad hoc reports were also one-sided at best and false at worst,
conveying only favorable and optimistic safety updates and assurances that the
quality of Boeing’s aircraft would drive production and revenue. Management
reported its unsupported conclusion that MCAS and the AOA sensor did not cause
the crashes and that the 737 MAX remained airworthy and able to meet production
goals. Management told the Board that “the function performed by MCAS” was
referenced in the Flight Crew Operations Manual, and expressed frustration with
public commentary.296 Muilenburg also told the Board that Boeing was developing
a “737 MAX software enhancement that, when implemented, will further improve
system safety,” and that “[d]espite recent media speculation,” nothing had been
decided about the “software update and its timing”—understating that
“enhancement[’s]” lifesaving importance.297
Because the Board did not have any formal procedures in place to monitor the
safety of Boeing’s airplanes, the Board was not privy to the truth about MCAS, AOA
sensor vulnerabilities, or how those issues were handled in FAA certification and
295 See id. 14–16, 19–21, 32, 47–48. 296 Am. Compl. ¶ 224. 297 Id. ¶ 234; Defs.’ Ex. 63 at -13683.
86 pilot training. 298 It accepted Muilenburg’s denials, deflections, and repeated
insistence that the 737 MAX was safe, even after the press faulted MCAS and
insufficient training for the Lion Air Crash.
The fact that management only communicated with the Board regarding
safety on an ad hoc basis as necessary to further business strategy, and the fact that
management only gave the board “certain favorable information” but not “important
reports that presented a much different picture,” indicate that the Board failed to
implement a reasonable reporting system to monitor the safety of Boeing’s
airplanes.299
iv. Management saw red, or at least yellow, flags, but that information never reached the Board.
In Marchand, the Supreme Court agreed with the plaintiff that management’s
knowledge about growing safety issues in the company and failure to report those
issues to the board was “further evidence that the board had no food safety reporting
system in place.”300 Where management received reports that contained what could
be considered red, or at least yellow, flags, and the board minutes of the relevant
298 See Hr’g Tr. 32 (“MR. RABINOVITZ: I do not think there is anything in the record suggesting that the board was briefed on the MCAS at all before the – before the first 737 MAX accident.”). 299 See Marchand, 212 A.3d at 822. 300 Id. at 817.
87 period revealed no evidence that these were disclosed to the board, it is reasonable
to infer the absence of a reporting system. 301 Here, as in Marchand, Boeing
management knew that the 737 MAX had numerous safety defects, but did not report
those facts to the Board.
In the critical period leading up to the Lion Air Crash, Boeing management
received formal complaints from employees who questioned the safety of the 737
MAX. Further, Boeing’s Internal Safety Analysis found that if a pilot took more
than ten seconds to identify and respond to the MCAS activation, the result would
be catastrophic. Forkner made MCAS’s vulnerability issues known within the
Company. But before the Lion Air Crash, there is no evidence that management
apprised the Board of the AOA disagree sensor’s malfunctions or the probability of
catastrophic failure.302
After the Lion Air Crash, Boeing started revising MCAS and, like the FAA,
performed a risk assessment that concluded an unacceptably high risk of catastrophic
failure. Boeing also pushed out the Manual Bulletin, and the FAA issued the
301 Id. at 822. 302 See Hr’g. Tr. 32 (“MR. RABINOVITZ: I do not think there is anything in the record suggesting that the board was briefed on the MCAS at all before the – before the first 737 MAX accident.”).
88 Emergency Directive.303 But management told the Board the 737 MAX was safe,
and did not brief the Board on the risks of MCAS.
Thus, safety concerns known to management failed to make their way to the
Board, supporting the conclusion that the Board failed to establish a reporting
system.
v. In addition to the inferences drawn above, the pleading-stage record supports an explicit finding of scienter.
Plaintiffs have pled facts that allowing a reasonable inference that the
directors breached their duties of oversight with scienter: not only did the Director
Defendants act inconsistently with their fiduciary duties, but they also knew of their
shortcomings.304 In Marchand, the Delaware Supreme Court inferred scienter from
the lack of any board committee focused on safety; any regular process or protocols
requiring management to report on safety risks; any regular schedule for the board
to address safety; any board minutes or documents suggesting that they regularly
discussed safety; any evidence that red, or at least yellow, flags, were disclosed to
the board; and any evidence that management conveyed both favorable and
303 Am. Compl. ¶¶ 189–91. 304 See, e.g., Horman, 2017 WL 242571, at *7 (quoting Massey, 2011 WL 2176479, at *22).
89 unfavorable safety information to the board. 305 Those allegations support an
inference of scienter here as well.
But no inference is needed: the difficult scienter element is directly met by
the Board’s own words. They confirm that directors knew the Board should have
had structures in place to receive and consider safety information. Collins’s March
15, 2019 email to Calhoun is exemplary. In the absence of Board meetings and
discussions about safety before the crashes, Collins pitched that “we should devote
the entire board meeting (other than required committee meetings and reports) to a
review of quality within Boeing,” because “[i]n addition to providing necessary
information for the Board, this type of agenda would underscore the board’s (and
management’s) unwavering commitment to quality and safety above all other
performance criteria.” 306 Collins’s follow-up email on the “category of ‘lessons
learned’” reflected on his and Calhoun’s time at Medtronic, where they “began each
board meeting, executive committee meeting, and operating review with a review of
product quality/safety—before any discussion of financial performance, market
share/competitive activities, new product development timetables, and certainly
stock price,”307 so that “everyone in the corporation understood that nothing was
305 Marchand, 212 A.3d at 822. 306 Am. Compl. Ex. C. 307 Id.
90 more important to the CEO and the board than quality/safety.” 308 In response,
Muilenburg “added Safety data to the Board lead-off briefing, and . . . monthly
Board note too,”309 and the Board held its first meetings to formally address airplane
safety.
That the Board knowingly fell short is also evident in the Board’s public
crowing about taking specific actions to monitor safety that it did not actually
perform. Calhoun hustled to “[p]osition the Boeing Board of Directors as an
independent body that has exercised appropriate oversight.”310 He falsely touted that
the Board was immediately contacted and met “very, very quickly” after the Lion
Air Crash; 311 participated in evaluating the 737 MAX’s safety risks; considered
grounding the 737 MAX after the Lion Air Crash;312 met within twenty-four hours
of that crash to consider grounding; and recommended grounding. 313 Each of
Calhoun’s public representations was knowingly false.314 They evidence that at least
Calhoun knew what the Board should have been doing all along.
308 Id. 309 Id. 310 Am. Compl. ¶ 263. 311 Id. ¶¶ 268–69. 312 Id. ¶ 271. 313 Id. ¶¶ 274–75. 314 See, e.g., id. ¶¶ 271–76; Defs.’ Ex. 69. As stated, Count I of the Amended Complaint categorizes the Board’s public deception as a breach of fiduciary duty. Although the parties
91 *****
Plaintiffs have met their “onerous pleading burden” under Caremark prong
one, and are entitled to discovery to prove out that claim. 315 As espoused in
Marchand, the Board has a rigorous oversight obligation where safety is mission
critical, as the fallout from the Board’s utter failure to try to satisfy this “bottom-line
requirement” 316 can cause “material suffering,” even short of death, “among
customers, or to the public at large,” and attendant reputational and financial harm
to the company. 317 Plaintiffs allege a majority of the Director Defendants face
liability under that theory, and have stated a claim.
b. Plaintiffs Have Stated A Post-Lion Air Claim Under Caremark Prong Two.
Plaintiffs also contend the Director Defendants face a substantial likelihood
of liability under Caremark prong two because they ignored the Lion Air Crash and
other red flags about the 737 MAX’s safety before the Ethiopian Airlines Crash.318
“To state a prong two Caremark claim, Plaintiff must plead particularized facts that
the board knew of evidence of corporate misconduct—the proverbial red flag—yet
did not focus on that allegation in briefing or at argument, to the extent Plaintiffs pursue the Board’s misrepresentations as an independent breach, the Motion is DENIED. 315 Marchand, 212 A.3d at 824. 316 Id. at 821. 317 Chou, 2020 WL 5028065, at *1. 318 By the time of the October 2018 Lion Air Crash, Stephenson and McNerney were no longer on the Board.
92 acted in bad faith by consciously disregarding its duty to address that misconduct.”319
Plaintiffs have done so here.
A classic prong two claim acknowledges the board had a reporting system,
but alleges that system brought information to the board that the board then
ignored.320 In this case, Plaintiffs’ prong two claim overlaps and coexists with their
prong one claim; Plaintiffs assert the Board ignored red flags at the same time they
utterly failed to establish a reporting system.321
I can appreciate the breadth of Plaintiffs’ theory in view of the Board’s
pervasive failures under prong one and the scale of the tragedy that followed.
Boeing’s safety issues manifested in the Lion Air Crash—an accident the Board
319 Id. at *17 (alterations and internal quotation marks omitted) (quoting Reiter, 2016 WL 6081823, at *8). 320 See, e.g., Pettry on behalf of FedEx Corp. v. Smith, 2021 WL 2644475, at *7–12 (Del. Ch. June 28, 2021) (reciting the Caremark prong two standard, and finding that the board did not ignore red flags that were elevated through the company’s reporting system); Clovis, 2019 WL 4850188, at *13 (quoting Marchand, 212 A.2d at 821) (“Caremark’s second prong is implicated when it is alleged the company implemented an oversight system but the board failed to ‘monitor it.’”); cf. Chou, 2020 WL 5028065, at *17–26 (concluding that the board consciously ignored red flags that were raised to the board where “Plaintiffs allege[d] that the Director Defendants face a substantial likelihood of liability under both prongs of Caremark”). 321 See, e.g., Chou, 2020 WL 5028065, at *26 (“Because the Complaint survives under a ‘prong two’ theory, I need not decide whether the Director Defendants face a substantial likelihood of liability under ‘prong one’ of Caremark. I note, however, that the Davis Polk Report indicates that several years after acquiring Specialty, ABC had a woefully inadequate compliance system. While the implication of a ‘prong one’ claim is unnecessary to survive the Defendants’ Motion, it nonetheless speaks to a lax approach (at best) to compliance at ABC.”).
93 could not help but learn about, despite the lack of a Board-level monitoring system.
Unlike many harms in the Caremark context, which include financial misconduct
that the board can likely discover only through an internal system, the Board did not
require an internal system to learn about the Lion Air Crash and the attendant MCAS
failures.322 The Lion Air Crash and its causes were widely reported in the media;
those reports reached the Board; and the Board ignored them.323
But I need not decide today whether Plaintiffs’ prong two theory is cognizable
in view of my conclusion that the Board utterly failed under prong one. Defendants
press that “the Board had extensive reporting systems and controls,” including its
Audit Committee, ERV, ethics and compliance reporting portals, internal audits
group, and regular management and legal updates.324 Assuming Defendants are
correct, the Board nonetheless ignored the Lion Air Crash and the consequent
revelations about the unsafe 737 MAX.
The Lion Air Crash was a red flag about MCAS that the Board should have
heeded but instead ignored. The Board did not request any information about it from
management, and did not receive any until November 5, 2018, over one week after
it happened. In that communication, Muilenburg advanced management’s position
322 See, e.g., Am. Compl. ¶¶ 195–98, 208–09; id. Ex. D; Defs.’ Ex. 55; Hr’g Tr. 32. 323 See Am. Compl. ¶¶ 195–98, 208–09; id. Ex. D; Defs.’ Ex. 55. 324 D.I. 146 at 38.
94 that the 737 MAX was safe, and the Board passively accepted that position. The
November 12 WSJ Article circulated the theory that MCAS had serious engineering
defects that were concealed from regulators and pilots, which required immediate
investigation and remediation. The Board was aware of that article, but did not
question management’s contrary position. The Section 220 record does not reveal
evidence of any director seeking or receiving additional written information about
MCAS or the AOA sensor, Boeing’s dealings with the FAA, how it had obtained
FAA certification, the required amount of pilot training for the 737 MAX, or about
airplane safety generally.325
When the Board finally convened to address the Lion Air Crash, the call was
optional. The full Board did not anchor the tragedy as an agenda item until it met
for its regularly scheduled Board meeting in December 2018, and its focus at that
meeting was on the continued production of the 737 MAX, rather than MCAS,
potential remedial steps, or safety generally.326 And when the Board eventually
considered whether it should investigate the causes of the Lion Air Crash, at the
February 2019 Board meeting, the Board formally resolved to “delay any
325 See In re Tyson Foods, Inc., 919 A.2d 563, 578 (Del. Ch. 2007) (“[I]t is more reasonable to infer that exculpatory documents would be provided than to believe the opposite: that such documents existed and yet were inexplicably withheld.”). 326 Am. Compl. ¶ 231–32; Defs.’ Ex. 84 at -618203.
95 investigation until the conclusion of the regulatory investigations or until such time
as the Board determines that an internal investigation would be appropriate.” 327
Electing to follow management’s steady misrepresentations that the 737 MAX
fleet was safe and airworthy, the Board treated the crash as an “anomaly,” a public
relations problem, and a litigation risk,328 rather than investigating the safety of the
aircraft and the adequacy of the certification process. The Board’s declination to
test the modicum of information it received and seek the truth of the 737 MAX’s
safety, despite reported information calling it into question, do not indicate a mere
“failed attempt” to address a red flag.329 As alleged and supported by the Section
220 record, the Board was aware or should have been aware that its response to the
Lion Air Crash fell short.330
327 Am. Compl. ¶ 238; Pls.’ Ex. 4. 328 Am. Compl. ¶ 271. 329 Cf. Richardson v. Clark, 2020 WL 7861335, at *11 (Del. Ch. Dec. 31, 2020); In re Qualcomm FCPA S’holder Deriv. Litig., 2017 WL 2608723, at *4 (Del. Ch. June 16, 2017). 330 See Am. Compl. Ex. C (addressing “lessons learned’ and the Board’s need to begin addressing safety in a formal setting); Rich ex rel. Fuqi Int’l, Inc. v. Yu Kwai Chong, 66 A.3d 963, 983–84 (Del. Ch. 2013) (finding scienter where company’s directors “knew that there were material weaknesses in [the company’s] internal controls”); cf. In re GoPro, Inc., 2020 WL 2036602, at *13 (Del. Ch. Apr. 28, 2020) (declining to find that Plaintiffs offered “well-pled facts supporting an inference that a majority of the Demand Board personally knew about Karma’s defect, could meaningfully address the issue at the Board level and yet elected to do nothing”).
96 2. Plaintiffs Have Not Pled Particularized Facts Demonstrating The Director Defendants Face A Substantial Likelihood Of Liability With Respect To Muilenburg’s Retirement And Compensation.
Plaintiffs also allege that the Director Defendants consciously breached their
fiduciary duties by allowing Muilenburg to receive unvested equity-based
compensation in a quiet retirement, despite knowing that he misled the FAA and the
Board, and failed in his response to the Lion Air and Ethiopian Airlines Crashes.
Plaintiffs couch this claim as one for waste or, in the alternative, bad faith. 331 But
Plaintiffs have not alleged particularized facts sufficient to demonstrate that the
Director Defendants face a substantial likelihood of liability under these rigorous
standards.332
Plaintiffs do not meaningfully challenge the independence and
disinterestedness of the Board as to the terms of Muilenburg’s departure. Plaintiffs
theorize the Board bought Muilenburg’s silence because he knew the depth of the
Board’s ignorance about the 737 MAX. Plaintiffs contend that the Board acted out
of self-interest by allowing Muilenburg to retire and claim his unvested equity
331 See D.I. 155 at 56–61. 332 This is true whether the Board’s decision to terminate Muilenburg is considered under Aronson or Rales. See Zuckerberg, 250 A.3d at 877–90; see also D.I. 146 at 58 (“Whether the Board’s decision to terminate Muilenburg is considered under Aronson or Rales, . . .Plaintiffs fail to establish demand futility.”); id. at 60 (assessing Plaintiffs’ claims under Rales); D.I. 155 at 38 (citing and applying Rales).
97 because “Muilenburg could have accused the Board members of unfairly
scapegoating him for doing what the Board wanted.”333 They argue “[t]he Board’s
pronounced lack of safety oversight incentivized the Board members not to make an
enemy of Muilenburg at a time of public clamor over whether the Board bore any
culpability for the mass fatalities and resulting financial catastrophe at Boeing.”334
But Plaintiffs do not plead particularized facts supporting their theory that “[p]aying
Muilenburg encouraged his silence about his interactions with the Board.” 335
Nothing in the Section 220 production gives rise to the reasonable inference that
Muilenburg intended to retaliate against the Board by placing the blame at its feet.
This theory is conclusory.
Further, Plaintiffs have not pled particularized facts giving rise to the
inference that the Board would face a substantial likelihood of liability under waste
or bad faith theories. “[T]he standard for waste is a very high one that is difficult to
meet,”336 and “to prevail on a waste claim the plaintiff must overcome the general
presumption of good faith by showing that the board’s decision was so egregious or
irrational that it could not have been based on a valid assessment of the corporation’s
333 D.I. 155 at 59. 334 Id. at 60. 335 Id. 336 In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 759 (Del. Ch. 2005).
98 best interests.”337 “[T]o excuse demand on grounds of waste the Complaint must
allege particularized facts that lead to a reasonable inference that the director
defendants authorized ‘an exchange that is so one sided that no business person of
ordinary, sound judgment could conclude that the corporation has received adequate
consideration.’” 338 The burden to establish a claim for bad faith is similarly
stringent. A finding of bad faith in the fiduciary context is rare.339 “Absent direct
evidence of an improper intent, a plaintiff must point to a decision that lacked any
rationally conceivable basis . . . to survive a motion to dismiss.”340
The Amended Complaint and the Section 220 record do not support such
claims here, as it is reasonable to infer that the Board was validly exercising its
business judgment when it decided to allow Muilenburg to retire with compensation.
At that time, Boeing was facing substantial backlash and had spent millions of
337 Citigroup, 964 A.2d at 136 (alterations and internal quotation marks omitted). 338 Id. 339 See In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *20 (Del. Ch. Mar. 31, 2017) (citing In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *1 (Del. Ch. May 20, 2016)). That said, I acknowledge the bulk of this opinion concludes the Director Defendants face liability for bad faith dereliction of their oversight duties. 340 In re Essendant, Inc. S’holder Litig., 2019 WL 7290944, at *14 (Del. Ch. Dec. 30, 2019) (alteration and internal quotation marks omitted) (quoting Chen v. Howard-Anderson, 87 A.3d 648, 684 (Del. Ch. 2014)); see also Chelsea Therapeutics, 2016 WL 3044721, at *1 (stating that in cases where “there is no indication of conflicted interests or lack of independence on the part of the directors,” a finding of bad faith should be reserved for situations where “the nature of [the directors’] action can in no way be understood as in the corporate interest: res ipsa loquitur”).
99 dollars addressing the 737 MAX corporate trauma. Even accepting as true that the
Board allowed Muilenburg to go quietly and with full pockets to avoid further public
criticism, it is reasonable to infer that doing so was in furtherance of the legitimate
business objective of avoiding further reputational and financial harm to the
Company.341 Accordingly, Plaintiffs have failed to allege particularized facts that
the decision to forego Muilenburg’s termination for cause “was otherwise the
product of a valid exercise of business judgment.” 342 The Motion is therefore
granted as to Plaintiffs’ Muilenburg compensation claims.
B. The Motion Is Granted As To Count II’s Claim Against The Officer Defendants.
Defendants have also moved to dismiss all claims against the Officer
Defendants under Rules 23.1 and 12(b)(6). Defendants argue that Plaintiffs do not
plead with particularity facts establishing that demand is excused for Count II of
their Complaint, alleging breach of fiduciary duty by Boeing’s officers. 343
341 See Shabbouei v. Potdevin, 2020 WL 1609177, at *12 (Del. Ch. Apr. 2, 2020) (“[T]he Board was operating well-within the bounds of proper business judgment when it decided to settle with [the former CEO] rather than fire him ‘for cause,’ a decision that could have embroiled the Company in an embarrassing legal battle with its former CEO.”); Seinfeld v. Slager, 2012 WL 2501105, at *6 (Del. Ch. June 29, 2012) (“Other factors may also properly influence the board, including ensuring a smooth and harmonious transfer of power, securing a good relationship with the retiring employee, preventing future embarrassing disclosure and lawsuits, and so on.”). 342 Aronson, 473 A.2d at 814. 343 D.I. 146 at 60.
100 Defendants further argue that Delaware does not recognize Caremark claims against
officers, and that Plaintiffs have failed to allege that the Officer Defendants breached
their duty of care.344
In briefing, Plaintiffs did not address Defendants’ demand futility arguments
as to Count II.345 Instead, Plaintiffs’ theory under Rule 23.1 presumably turns on the
assumption that the Officer Defendants can face Caremark liability, and that
therefore demand was futile as to all Defendants facing the same claim. But
Plaintiffs have not pled this with the requisite particularity, nor have they argued that
any of the Director Defendants are beholden to or dominated by the Boeing officers
such that they would be unable to assess Count II regardless of the theory of
liability.346 Indeed, the Amended Complaint’s demand futility allegations do not
address the Officer Defendants, asserting only that “a majority of the members of
the Board have faced a substantial likelihood of liability for failing to make any good
faith effort to implement and oversee a board-level system to monitor and report on
344 See id. at 61–62. 345 See generally D.I. 155; D.I. 159 at 33. 346 E.g., In re MetLife, Inc. Deriv. Litig., 2020 WL 4746635, at *13 n.186 (Del. Ch. Aug. 17, 2020) (pointing out that plaintiffs did not argue that any board members were beholden to management so as to disable them from evaluating the claims); Rales, 634 A.2d at 936.
101 safety.”347 Accordingly, Count II is dismissed pursuant to Rule 23.1, and therefore
I need not address Defendants’ arguments under Rule 12(b)(6).
III. CONCLUSION
The Motion is GRANTED in part and DENIED in part. The parties shall
submit an implementing order with twenty days of this decision.
347 Am. Compl. ¶ 299.
Related
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In Re The Boeing Company Derivative Litigation, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-the-boeing-company-derivative-litigation-delch-2021.