IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LABORERS’ DISTRICT COUNCIL )
CONSTRUCTION INDUSTRY )
PENSION FUND and HALLANDALE )
BEACH POLICE OFFICERS AND )
FIREFIGHTERS’ PERSONNEL )
RETIREMENT FUND, derivatively on )
behalf of LULULEMON ATHLETICA, )
INC., )
)
Plaintiffs, )
)
v. ) C.A. No. 11293-CB
)
ROBERT BENSOUSSAN, MICHAEL )
CASEY, ROANN COSTIN, )
CHRISTINE M. DAY, WILLIAM H. )
GLENN, MARTHA A.M. MORFITT, )
RHODA M. PITCHER, THOMAS G. )
STEMBERG, JERRY STRITZKE, )
EMILY WHITE, and DENNIS J. )
WILSON, )
)
Defendants, )
)
and )
)
LULULEMON ATHLETICA, INC., a )
Delaware Corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: March 15, 2016
Date Decided: June 14, 2016
Jessica Zeldin and P. Bradford deLeeuw, ROSENTHAL, MONHAIT &
GODDESS, P.A., Wilmington, Delaware, Counsel for Plaintiffs.
Marlon E. Kimpson, Joshua C. Littlejohn, Max N. Gruetzmacher, and Meredith B.
Miller, MOTLEY RICE LLC, Mount Pleasant, South Carolina, Counsel for
Plaintiff Laborers’ District Council Construction Industry Pension Fund.
Gustavo F. Bruckner and Anna Manalaysay, POMERANTZ LLP, New York, New
York; Jayne A. Goldstein, POMERANTZ LLP, Weston, Florida, Counsel for
Plaintiff Hallandale Beach Police Officers and Firefighters’ Personnel Retirement
Fund.
Bradley R. Aronstam and S. Michael Sirkin, ROSS ARONSTAM & MORITZ
LLP, Wilmington, Delaware; Joseph S. Allerhand, Stephen A. Radin, Caroline
Hickey Zalka, Robert S. Ruff III, and Thomas G. James, WEIL, GOTSHAL &
MANGES LLP, New York, New York, Counsel for Defendants Robert
Bensoussan, Michael Casey, RoAnn Costin, Christine M. Day, William H. Glenn,
Martha A.M. Morfitt, Rhoda M. Pitcher, Thomas G. Stemberg, Jerry Stritzke and
Emily White.
Stephen P. Lamb and Daniel A. Mason, PAUL, WEISS, RIFKIND, WHARTON
& GARRISON LLP, Wilmington, Delaware; Audra J. Soloway and Brette
Tanenbaum, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New
York, New York, Counsel for Defendant Dennis J. Wilson.
John L. Reed, DLA PIPER LLP, Wilmington, Delaware, Counsel for Nominal
Defendant lululemon athletica inc.
BOUCHARD, C.
In December 2012, Dennis Wilson, the founder of lululemon athletica, inc.
(“Lululemon” or the “Company”) established a trading plan designed to comply
with federal securities laws whereby he delegated to a brokerage firm the authority
to sell some of his Lululemon shares under certain conditions. On June 5, 2013,
Wilson learned that Christine Day intended to resign from her position as the
Company’s Chief Executive Officer. On June 7, the brokerage firm sold some of
Wilson’s shares in accordance with the numerical parameters of the trading plan,
yielding over $49.5 million in proceeds for Wilson. On June 10, after the stock
market closed, the Company publicly announced Day’s intention to resign. The
next day, Lululemon’s stock price fell more than 17 percent.
The remarkable timing of Wilson’s June 7 stock sale received immediate
attention in the financial media and quickly became the subject of litigation. In
August 2013, two stockholders filed an action in the United States District Court
for the Southern District of New York (the “NY Action”) asserting various
derivative claims, including that Wilson breached his fiduciary duties as a director
of the Company under Brophy v. Cities Service Co.1 and its progeny by using
material non-public information to sell stock for his personal financial gain. In
April 2014, the district court dismissed all of the claims in the NY Action,
1
70 A.2d 5 (Del. Ch. 1949).
1
including the Brophy claim, because of plaintiffs’ failure to adequately allege that
making a demand on the Company’s board would have been futile.
In July 2015, after obtaining books and records from the Company under 8
Del. C. § 220, two other stockholders of the Company filed this action asserting
two derivative claims: a Brophy claim against Wilson similar to the one that had
been dismissed in the NY Action, and a breach of fiduciary duty claim against the
members of the Company’s board as of the date of the June 7 stock sale for failing
to investigate and take any action against Wilson relating to that sale.
Defendants moved to dismiss both of these claims, arguing that they are
precluded by the district court’s ruling in the NY Action. New York law governs
this question. For the reasons explained below, I conclude that the claims asserted
here are barred based on principles of both issue and claim preclusion.
I. BACKGROUND
Unless noted otherwise, the facts recited in this memorandum opinion are
based on the allegations of the Verified Stockholder Derivative Complaint (the
“Complaint”), the exhibits attached thereto, and facts of which the Court may take
judicial notice.
2
A. The Parties
Nominal defendant Lululemon is a Delaware corporation headquartered in
Vancouver, Canada, that manufactures and markets high-end, yoga-inspired
athletic wear. It operates hundreds of stores in multiple countries.
Plaintiffs Laborers’ District Council Construction Industry Pension Fund
and Hallandale Beach Police Officers and Firefighters’ Personnel Retirement Fund
are alleged to have been Lululemon stockholders at all relevant times.
The Complaint names eleven individuals as defendants. Each was a
Lululemon director on June 7, 2013, the date of the sale of Lululemon shares
owned by Wilson that is challenged in this action, and during the ensuing weeks
when it is alleged that the Company’s board should have investigated the
circumstances of that sale and taken action against Wilson. Eight of these eleven
individuals were members of the Company’s board of directors when the
Complaint was filed: Robert Bensoussan, Michael Casey, RoAnn Costin, William
Glenn, Martha A.M. Morfitt, Rhoda M. Pitcher, Thomas G. Stemberg, 2 and Emily
White (the “Demand Board”).
Three of the defendants were no longer directors of Lululemon when the
Complaint was filed: Dennis J. Wilson, Christine Day, and Jerry Stritzke. Wilson
2
On November 19, 2015, plaintiffs dismissed all claims against Stemberg, without
prejudice.
3
founded Lululemon in 1998. He served in various officer positions between 1998
and 2012, and resigned as a director in February 2015. Day was Lululemon’s
Chief Executive Officer before her resignation became effective in December
2013, and a director from June 2008 to December 2013. Stritzke was a director
from June 2012 to September 2013.
B. Wilson Sells Shares Through a 10b5-1 Trading Plan
On December 10, 2012, Wilson informed the Company that he planned to
sell a portion of his stake in Lululemon through a trading plan designed to comply
with Rule 10b5-1 of the Securities Exchange Act of 1934. Rule 10b5-1 “permits
insiders to implement written, pre-arranged stock trading plans when they are not
in possession of material non-public information.”3 Generally speaking, 10b5-1
plans offer a safe harbor for corporate insiders to sell stock by ceding trading
authority to third parties with exclusive discretion to execute trades under certain
pre-determined parameters.
Wilson’s 10b5-1 plan (the “Trading Plan”) authorized Merrill Lynch, Pierce,
Fenner & Smith Incorporated to sell up to 5.7 million shares of Wilson’s
Lululemon stock in two groups.4 In the first group, Merrill Lynch could sell up to
300,000 shares at prevailing market prices between January 10, 2013 and
3
Compl. ¶ 31; see also 17 C.F.R. § 240.10b5-1(c).
4
See Compl. Exs. D-E.
4
December 31, 2013. In the second group, Merrill Lynch could sell up to 5.4
million shares for no less than $81.25 per share between January 10, 2013 and June
30, 2014. No more than 1 million shares could be sold in any given month under
the Trading Plan.
In the representations and warranties section of the Trading Plan, Wilson
promised not to disclose any material nonpublic information to any Merrill Lynch
employee or otherwise “exercise any influence over how, when or whether to
effect sales of Shares” while the plan was in effect.5 Wilson’s intent to establish
the Trading Plan, as well as a general description of the amount of shares the
Trading Plan covered and the period of its applicability, were disclosed publicly in
a Form 8-K dated December 11, 2012.6
When the Trading Plan was established, Wilson owned approximately 30%
of the Company’s outstanding shares. During the dates listed below in January,
May, and June of 2013, each of which fell within the trading windows of the
Trading Plan, Merrill Lynch sold 2.3 million shares of Wilson’s Lululemon stock
for total proceeds of $184,408,558.7 After these trades were made, Wilson owned
5
Compl. Ex. F §§ 6.6–6.7.
6
lululemon athletica inc., Current Report (Form 8-K) (Dec. 11, 2012).
7
Compl. ¶ 56.
5
about 39.9 million shares, or approximately 27% of the Company’s outstanding
shares.
Month Day Shares Sold Price Proceeds
10 87,200 $70.35 $6,134,878
10 12,800 $70.92 $907,786
11 55,600 $70.40 $3,913,968
January 2013
11 44,400 $70.83 $3,144,634
14 68,800 $72.00 $4,953,545
14 31,200 $71.19 $2,221,081
Total 300,000 $21,275,892
10 18,675 $81.25 $1,517,394
13 2,977 $81.25 $241,896
14 397,351 $81.38 $32,336,583
15 159,188 $81.40 $12,958,588
May 2013
16 6,532 $81.30 $531,054
17 37,862 $81.26 $3,076,636
20 2,201 $81.25 $178,831
21 375,214 $81.68 $30,645,641
Total 1,000,000 $81,486,623
4 369,128 $81.84 $30,210,949
June 2013 4 23,327 $81.31 $1,919,933
7 607,545 $81.50 $49,515,161
Total 1,000,000 $81,646,043
GRAND
2,300,000 $184,408,558
TOTAL
The nature and timing of these trades track the mechanics of Wilson’s
Trading Plan. In January, when the Company’s stock traded below $81.25, Merrill
Lynch exhausted Wilson’s “group one” share allotment by selling 300,000 shares
6
at then-prevailing market prices. Merrill Lynch thus could not sell any more
shares under the Trading Plan until Lululemon’s stock price reached $81.25 per
share, which did not occur until May 2013.
According to the Complaint, several setbacks depressed Lululemon’s stock
price between January and May. On January 14, 2013, the Company reported a
downward revision of its guidance for the holiday shopping season. Two months
later, in mid-March, Lululemon announced a recall of black Luon yoga pants—one
of the Company’s most popular items—due to unacceptable levels of sheerness.
The Company’s stock price declined to $63.32 in early April. Prices rebounded
after the Company announced certain organizational changes, including the
termination of its Chief Product Officer. On May 10, Lululemon stock reached a
new all-time intraday high of $81.30 per share. That day, Merrill Lynch re-
initiated sales of Wilson’s stock after its value reached the $81.25 per-share
threshold for the “group two” allotment in the Trading Plan. Merrill Lynch sold
the full monthly allotment of 1 million shares available under the Trading Plan in
May at prices above $81.25 per share.
C. The June 2013 Trades and Day’s Resignation
On June 3, 2013, the Company announced that it would begin restocking its
stores with the previously recalled black Luon yoga pants. After this
announcement, Lululemon’s stock price appreciated three percent. On June 4,
7
Merrill Lynch sold 392,455 of Wilson’s shares, at prices ranging from
approximately $81.30 to $81.84 per share.
On June 5, 2013, Wilson and Day discussed their respective long-term
strategic visions for the Company and came to an apparent impasse that led Day to
send Wilson an email later that night, stating that she intended to resign as CEO
and that she would like to announce her forthcoming resignation the following
week. 8 In a series of emails on June 5 and 6, Day also informed outside director
Michael Casey that she would resign, that she would inform the board of her
decision soon, and that only a handful of individuals, including Wilson, knew
about her decision at that point.9 On Friday, June 7, Day informed the board of her
intent to resign as soon as a replacement could be found. 10 Day’s planned
departure was publicly announced after the market closed on Monday, June 10.
The next day, on June 11, Lululemon’s stock price fell more than 17%, to close at
$67.85 per share.
On June 7, before the public announcement of Day’s intent to resign, Merrill
Lynch sold 607,545 of Wilson’s shares—the remainder of his 1 million share
8
Compl. ¶ 47; Compl. Ex. G.
9
Compl. ¶ 48-49; Compl. Ex. H.
10
Compl. ¶ 52.
8
allotment for June 2013—at an average price of $81.50 per share. The June 7 trade
is at the heart of plaintiffs’ claims in the Complaint. 11
The size and timing of the June 7 trade generated media interest. According
to an internal Lululemon email, representatives for Wilson told a reporter for the
Wall Street Journal that the June 2013 trades were made under the Trading Plan
and that Wilson “had no influence on trades conducted by Merrill Lynch pursuant
to either of these plans.”12 The reporter requested information about the triggers
under the Trading Plan with regard to the June trades and certain earlier sales by
Wilson. On June 12, 2013, the Wall Street Journal and Reuters released articles
questioning Wilson’s trading activity, particularly the June 7 trade. The Wall
Street Journal article stated, in relevant part:
On Friday, the day Lululemon’s board was notified that CEO
Christine Day intended to vacate her post, Mr. Wilson sold 607,545
shares at a price of $81.50 apiece, for proceeds of $49.5 million. The
company announced the CEO’s departure plans after the market
closed on Monday. On Tuesday, Lululemon’s stock fell more than
17% to $67.85. A sale at that price would have brought Mr. Wilson
about $8 million less than he reaped by selling his stock the previous
week. 13
11
Although plaintiffs question the propriety of trades before June 7, their arguments are
premised solely on defendants’ alleged actions and inaction concerning the June 7 trade.
See Ans. Br. 58 & n.162.; see also Tr. of Oral Arg. (“Tr.”) 57, 100 (Mar. 15, 2016).
12
Compl. Ex. J.
13
Compl. ¶ 55.
9
Some internal Company emails produced to plaintiffs in response to their
books and records demands discussed the propriety of the June trades. A June 13
email notification sent to Lululemon’s regional managers states that Wilson’s
recent 10b5-1 sales were “in alignment with the SEC guidelines for these types of
stock sales.”14 When Stritzke asked in a June 29 email whether the Company “had
an attorney look at the facts surrounding the last trade made under [Wilson’s]
previous plan,”15 Erin Nicholas, Lululemon’s Director of Legal, responded as
follows:
We haven’t had an attorney look into the facts surrounding the last
trade made under [Wilson’s] plan. We were advised that the trade
was made pursuant to the parameters of the plan by his advisors and
assisted with the drafting of the Form 4 for that transaction.16
The record does not reveal how Company representatives arrived at the position
that the June 7 trade followed the Trading Plan’s parameters.
D. Litigation Preceding this Action
In 2013, several lawsuits were filed concerning, among other things,
Wilson’s trading activity and the Company’s public disclosures about the subject.
14
Compl. Ex. N.
15
Id.
16
Compl. Ex. M.
10
1. The New York Securities Action
On June 2, 2013, a class action was filed in the United States District Court
for the Southern District of New York in which the plaintiffs challenged certain
public disclosures Lululemon had made about the quality of its products and the
nature of its response to then-existing quality-control issues as materially false and
misleading under the federal securities laws. 17 The class action plaintiffs argued
that scienter was present on the theory that the “suspicious timing and amounts” of
Wilson’s January-June stock sales evidenced an intent to deceive through the
Company’s public statements.18 The Court rejected that argument, finding that the
trades were not sufficiently suspicious to justify an inference of scienter because
no allegations showed either that Wilson had non-public information about
Lululemon’s quality control issues or that he had violated the Trading Plan.19
2. The New York Derivative Action
On August 12 and 23, 2013, two Lululemon stockholders not involved in
this action (the “NY plaintiffs”) filed derivative complaints in the United States
District Court for the Southern District of New York. The actions were
17
See In re Lululemon Sec. Litig., 14 F. Supp. 3d 553, 561-62 (S.D.N.Y. 2014), aff’d, 604
F. App’x. 62 (2d Cir. 2015) (involving claims under Sections 10(b) and 20(a) of the
Securities Exchange Act and Rule 10b-5 thereunder).
18
Id. at 584-85.
19
Id. at 585-86.
11
consolidated (as defined above, the “NY Action”) and an amended complaint was
filed on January 17, 2014. It named as defendants the same eleven individuals
who are defendants in this action and two additional executive officers of
Lululemon: John E. Currie and Sheree Waterson. The amended complaint
contained seven claims. One of the claims asserted against Wilson was a Brophy
claim for breach of fiduciary duty for allegedly selling shares while in the
possession of non-public information concerning Day’s imminent announcement
of her resignation as CEO. 20
In March 2014, the Delaware plaintiffs sought to intervene in the NY Action
for the purpose of asking the district court to grant a limited stay of that action
pending the resolution of actions they each had commenced under 8 Del. C. § 220
to obtain books and records from the Company or, alternatively, to make any
dismissal of the Brophy claim in the NY Action without prejudice.21 In their
20
Transmittal Aff. of Bradley R. Aronstam (“Aronstam Aff.”) Ex. 9 (Verified Amended
Shareholder Derivative Complaint, Canty v. Day (“Canty Compl.”)) ¶¶ 220-24. The
other claims were for (1) violation of Section 14(a) of the Securities Exchange Act and
Rule 14a-9 thereunder based on certain statements in the Company’s 2013 proxy
statement, (2) breach of fiduciary duty for disclosure violations, (3) breach of fiduciary
duty for failing to maintain internal controls, (4) unjust enrichment, (5) abuse of control,
and (6) gross mismanagement. Id. at ¶¶ 209-33.
21
Aronstam Aff. Ex. 17 (Memorandum in Support of the Laborers’ District Council
Construction Industry Pension Fund’s Motion to Intervene) at 1.
12
intervention papers, the Delaware plaintiffs characterized the Brophy claim in the
NY Action as “virtually identical” to a potential claim they were investigating.22
On April 9, 2014, the district court issued an opinion granting defendants’
motion to dismiss the amended complaint “because plaintiffs have failed to
adequately allege particularized facts showing demand on lululemon’s Board of
Directors was excused.” 23 The district court’s analysis of the demand futility issue
is discussed below in addressing the preclusive effect of that ruling. On April 3,
2015, the Second Circuit affirmed the district court’s ruling.24
3. The Books and Records Actions
In May and October 2013, the two plaintiffs in this action commenced
separate actions against Lululemon in the Court of Chancery seeking various
corporate books and records under 8 Del. C. § 220, including documents relating to
the Trading Plan, and Wilson’s January, May, and June 2013 stock sales. On April
2, 2014, after trial had been held before Vice Chancellor Parsons in one of the
actions, the Court largely denied plaintiffs’ requests.25
22
Id. at 6.
23
Canty v. Day, 13 F. Supp. 3d 333, 350 (S.D.N.Y. 2014), aff’d, 599 Fed. App’x 20 (2d
Cir. 2015).
24
Canty v. Day, 599 Fed. App’x 20 (2d Cir. 2015).
25
See In re Lululemon Athletica Inc. 220 Litig., C.A. No. 9039-VCP, at 4-5, 17-32 (Del.
Ch. Apr. 2, 2014) (TRANSCRIPT).
13
Vice Chancellor Parsons first found that the circumstances surrounding the
January 10-14, May 10-21, and June 4 trades did not provide a credible basis to
infer that Wilson had engaged in wrongful conduct.26 The Court then found that
“there are enough questionable features about the nearly-perfectly-timed June 7
trade . . . to conclude that there is a credible basis for suspecting wrongdoing as to
that trade,” including that: (1) the sales happened the same day that Day notified
the board of her resignation, (2) the June 7 sales were significantly larger than
previous sales, and (3) only one million shares could be sold in total in June,
meaning that the June 7 sales exhausted Wilson’s monthly allotment.27 The Court
concluded that inspection of certain books and records was warranted but noted
that the proceedings were at a “very preliminary stage” and that the terms of the
Trading Plan “ultimately may exculpate Wilson of any wrongdoing.”28
After the Court’s ruling, Lululemon produced certain documents to plaintiffs
on April 16, 2014, but withheld others based on attorney-client privilege. On June
11, 2014, the separate Section 220 cases were consolidated. Shortly thereafter,
plaintiffs filed a motion seeking the production of the remaining responsive
26
Id. at 17-25.
27
Id. at 26-32.
28
Id. at 28-29.
14
documents. In a memorandum opinion issued April 30, 2015, 29 the Court granted
the motion in part. On May 7, 2015, Lululemon produced additional documents.
E. Procedural History
On July 15, 2015, plaintiffs filed the Complaint, alleging that Wilson’s June
7 trading activity was suspicious because (1) it represented the largest volume of
shares Merrill Lynch sold in a single day under the Trading Plan, and (2) it
occurred one trading day before the Company released market-moving information
concerning Day’s resignation as CEO of the Company that Wilson knew about
before Merrill Lynch made the June 7 trade. The Complaint contains two claims.
In Count I, plaintiffs assert that the individual defendants breached their fiduciary
duties of loyalty and good faith by failing to investigate Wilson’s trading activity.
In Count II, plaintiffs assert a Brophy claim against Wilson for breaching his
fiduciary duties by using material non-public information to execute or influence
stock sales for his personal financial gain.
On August 18, 2015, defendants moved to dismiss the Complaint under
Court of Chancery Rules 23.1 and 12(b)(6). After the completion of briefing, the
Court heard oral argument on March 15, 2016.
29
In re Lululemon Athletica Inc. 220 Litig., 2015 WL 1957196 (Del. Ch. Apr. 30, 2015).
15
II. LEGAL ANALYSIS
All defendants moved to dismiss the Complaint on two grounds: (1) that the
Court’s finding in the NY Action that demand was not excused precludes re-
litigation of the issue in this action under principles of issue and claim preclusion,
and (2) that even if re-litigation of the issue were not barred, plaintiffs have failed
under Court of Chancery Rule 23.1 to allege particularized facts to show that it
would be futile to make a demand on the Company’s board to initiate litigation. In
addition, Wilson separately moved to dismiss the Brophy claim under Court of
Chancery Rule 12(b)(6) for failure to state a claim for relief. Because the entire
Complaint will be dismissed on preclusion grounds, I do not reach the other issues.
A. Legal Standard
“In considering a motion to dismiss under Chancery Court Rule 23.1 for
failure to make a presuit demand, as is true in the case of a motion to dismiss under
Court of Chancery Rule 12(b)(6), the Court confines its attention to the face of the
complaint.”30 Because “strict application of this rule would deprive defendants of
the ability to argue for preclusion if, for example, a plaintiff does not plead facts
regarding the potentially preclusive litigation or incorporate documents from that
litigation into the complaint, . . . ‘it is axiomatic that a court must still consider the
30
White v. Panic, 793 A.2d 356, 363 (Del. Ch. 2000), aff’d, 783 A.2d 543 (Del. 2001).
16
prior adjudication in order to determine whether issue preclusion bars that
plaintiff’s claims.’” 31
Defendants argue that the Complaint is barred under principles of issue and
claim preclusion based on the decision in the NY Action. “[T]he United States
Supreme Court has held that a state court is required to give a federal judgment the
same force and effect as it would be given under the preclusion law of the state in
which the federal court is sitting.”32 Here, that state is New York. New York law
thus governs the preclusive effect of the district court’s dismissal of the state law
claims in the NY Action. The parties agree on this choice of law. 33 There is “no
significant difference between New York’s preclusion law and federal preclusion
law . . . .” 34
31
In re Wal-Mart Stores, Inc. Del. Deriv. Litig., 2016 WL 2908344, at *8 (Del. Ch. May
13, 2016) (quoting M & M Stone Co. v. Pennsylvania, 388 F. App’x 156, 162 (3d Cir.
2010)).
32
Pyott v. La. Mun. Police Emps.’ Ret. Sys., 74 A.3d 612, 615-16 (Del. 2013) (citing
Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001)).
33
See Defs.’ Op. Br. 24-25; Pls.’ Ans. Br. 23-34.
34
Poventud v. City of N.Y., 750 F.3d 121, 157 n.5 (2d Cir. 2014) (quoting Pike v.
Freeman, 266 F.3d 78, 90 n.14 (2d Cir. 2001)).
17
B. Plaintiffs’ Claims are Barred by Issue Preclusion
Issue preclusion (or collateral estoppel) is an equitable doctrine that “applies
to prohibit re-litigation of factual issues previously adjudicated.” 35 It is rooted in
concepts of fairness that disfavor allowing a party that litigated and lost an issue to
litigate the same issue again—or, more colorfully, to take “another whack at the
piñata.”36 Under New York law, “only two requirements must be satisfied” to
invoke issue preclusion against “a party, or one in privity with a party,” who seeks
“to relitigate an issue decided against it:”
First, the party seeking the benefit of collateral estoppel must prove
that the identical issue was necessarily decided in the prior action and
is decisive in the present action. Second, the party to be precluded
from relitigating an issue must have had a full and fair opportunity to
contest the prior determination. The burden is on the party attempting
to defeat the application of collateral estoppel to establish the absence
of a full and fair opportunity to litigate. 37
Plaintiffs do not dispute that privity exists here,38 but they do contest that the
other requirements of issue preclusion under New York law have been satisfied.
35
Asbestos Workers Local 42 Pension Fund v. Bammann, 2015 WL 2455469, at *15
(Del. Ch. May 21, 2015) (applying New York law); see also Levin ex rel. Tyco Int’l Ltd.
v. Kozlowski, 831 N.Y.S.2d 354 (TABLE), 2006 WL 3317048, at *7 (N.Y. Sup. Ct. Nov.
14, 2006), aff’d, 846 N.Y.S.2d 37 (N.Y. App. Div. 2007); D’Arata v. N.Y. Cent. Mut.
Fire Ins. Co., 564 N.E.2d 634, 636 (N.Y. 1990).
36
Bammann, 2015 WL 2455469, at *19; see also Levin, 2006 WL 3317048, at *7.
37
D’Arata, 564 N.E.2d at 636.
38
Tr. 67.
18
Thus, the two issues that require decision are whether the district court in the NY
Action decided the same demand futility issue that is decisive here and, if so,
whether plaintiffs were deprived of a full and fair opportunity to contest that prior
determination. Those issues are addressed below.
1. Identity of Issues
Plaintiffs allege that the Demand Board disregarded a number of red flags
concerning Wilson’s June 7 stock sales that “pointed to Wilson having access to
and potentially using material non-public information for his own personal
financial gain.”39 From this premise, plaintiffs assert that demand is futile on the
theory that the members of the Demand Board are not independent because they
“consciously shirked their obligation to investigate Wilson’s suspicious stock
sales” and thus face a substantial likelihood of liability. 40 The district court in the
NY Action considered and decided the same issue.
Specifically, the NY plaintiffs argued that demand was excused because
Lululemon’s outside directors “failed to take any punitive action toward Wilson
after learning of his June 2013 trading, and that this failure shows both domination
and control by Wilson and a substantial likelihood of liability for these Director
39
Compl. ¶ 71.
40
Id. at ¶¶ 67, 70-72.
19
Defendants” so as to cast reasonable doubt on their independence.41 The district
court expressly rejected “both formulations” of the NY plaintiffs’ challenges to the
independence of the Company’s outside directors.42
The district court, which referred to the eight members of the Demand Board
as the “Director Defendants,” 43 first concluded that the NY plaintiffs failed to
overcome the presumption of directorial independence concerning any of the
Director Defendants on a theory of domination and control by Wilson:
Plaintiffs fail to plead particularized allegations as to the
disinterestedness or independence of any of the Director Defendants
as it relates to Wilson and his June 2013 trading. Plaintiffs primarily
rely on the argument that Wilson allegedly engaged in insider trading
prior to Day’s resignation announcement on June 10, 2013, that the
Director Defendants knew it at that time or very shortly thereafter, and
by doing nothing, demonstrated their lack of independence. The
allegations in the Amended Complaint do not support this story or the
inferences plaintiffs urge this Court to make.
First, though plaintiffs allege that the Director Defendants knew
of Day’s resignation no later than June 7, 2013, they do not allege any
facts as to the Director Defendants’ knowledge of Wilson’s trading
during the period June 4-7, 2013. Second, though plaintiffs allege that
Wilson’s stock sales were made pursuant to a trading plan that was
executed in December 2012 and permitted stock sales on a semi-
regular basis, they do not allege any facts that show Wilson’s trading
41
Canty, 13 F. Supp. 3d at 336.
42
Id.
43
The district court also included within the definition of “Director Defendants” one
additional director, Stritzke, who was still a director of Lululemon when the NY Action
was filed. Id. at 339.
20
was inconsistent with that plan. Third, though plaintiffs allege that
both Wilson’s trading and the fact that he had a trading plan were
public knowledge, they do not allege any facts that tend to show that
the Director Defendants knew Wilson’s trading was inconsistent with
that plan.
Instead, plaintiffs ask this Court to infer that the Director
Defendants were under such domination and control by Wilson that
they deliberately exposed themselves to the risk of individual liability
related to Wilson’s June 2013 trading, which they believed to be
improper, rather than resigning from the Board. Though Wilson may
have exercised significant influence over the Board and the
company’s culture, there are no particularized allegations in the
Amended Complaint that credibly suggest such a conclusion.
*****
In sum, plaintiffs’ allegations concerning Wilson’s stock sales,
as they relate to the Director Defendants, are general and conclusory
rather than factual and specific, and thus fail to overcome the
presumption of directorial independence and to excuse demand. 44
Later in its opinion, the district court confirmed that its conclusion that the NY
plaintiffs had failed to adequately allege that any of the Director Defendants were
not independent was not just based on a theory of domination and control by
Wilson, but also was based on the their failure “to plead particularized allegations
giving rise to a substantial likelihood of liability as to any of the Director
Defendants arising out of Wilson’s June 2013 trading.”45 On appeal, the Second
44
Id. at 346-47.
45
Id. at 349 n.12. In a heading in their brief, plaintiffs further asserted that the “decision
not to investigate Wilson’s June 7 trades” was not “necessarily decided” in the Derivative
Action. Pls.’ Ans. Br. 25. Plaintiffs provided no explanation in their brief to support this
assertion and thus waived the argument. See Emerald P’rs v. Berlin, 2003 WL
21003437, at *43 (Del. Ch. Apr. 28, 2003) (“It is settled Delaware law that a party
21
Circuit affirmed the district court’s rejection of both theories that the NY plaintiffs
had advanced to challenge the Director Defendants’ independence. 46
Plaintiffs here do not confront the express language of the district court’s
decision rejecting the NY plaintiffs’ challenges to the Demand Board’s
independence. Instead, they argue that issue preclusion should not apply because
the “allegations” in the NY Action are not identical to the allegations in this action.
Plaintiffs assert that the NY plaintiffs “devoted over fifty pages in their amended
complaint to allegations concerning alleged false statements relating to quality
control problems and the Luon pant sheering scandal, while merely devoting one
page to allegations regarding issues related to Wilson’s stock sales.” 47 Plaintiffs
waives an argument by not including it in its brief.”). Given the discussion in the district
court’s opinion quoted above, moreover, it is plain that the district court necessarily
decided that demand was futile with respect to the outside directors’ failure to investigate
Wilson’s June 7 trade based on both a “domination and control” theory and a “substantial
likelihood of liability” theory in order to address the arguments the NY plaintiffs asserted
based on both of those theories. See Ryan v. N.Y. Tel. Co., 467 N.E.2d 487, 490 (N.Y.
1984) (“Of course, the issue must have been material to the first action or proceeding and
essential to the decision rendered therein.”).
46
Canty, 599 Fed. App’x. at 22. Although appellate briefing in the NY Action
challenged the independence of the entire board, the Second Circuit’s analysis focused
specifically on the independence of the members of the Audit Committee. See Aronstam
Aff. Ex. 11 (Brief for Plaintiff-Appellant) at 29.
47
Pls.’ Ans. Br. 26.
22
cite for support the decisions in Brautigam v. Blankfein48 and Bader v. Goldman
Sachs Group, Inc. 49
Accepting for the sake of argument plaintiffs’ characterization of the
amended complaint in the NY Action, the fact that it contained additional
allegations concerning other claims is irrelevant. All that is relevant is whether the
district court necessarily decided the same demand futility issue presented here,
which it did for the reasons explained above. The fact that the amended complaint
may have contained fewer factual details concerning the theory of demand futility
presented here, moreover, misconceives the test for issue preclusion.
A leading New York commercial litigation treatise states that claims
“grounded on the same gravamen of the wrong upon which the action is brought”
preclude “the plaintiff from raising the prior cause of action in the guise of a new
legal theory or claim.” 50 This rule applies “even if there are variations in the facts
alleged.”51 This Court similarly explained in a recent case applying New York law
to preclude re-litigation of the issue of demand futility that “the underlying conduct
48
8 F. Supp. 3d 395 (S.D.N.Y. 2014), aff’d sub nom. Brautigam v. Dahlback, 598 F.
App’x 53 (2d Cir. 2015).
49
455 F.App’x 8 (2d Cir. 2011).
50
Robert L. Haig, Commercial Litigation in New York State Courts § 93:3 (4th ed. 4C
West’s N.Y. Prac. Series 2015).
51
Id.
23
is what is at issue, not whether the Complaint raises additional facts, or a more
compelling characterization of those facts, regarding the same conduct previously
at issue.” 52 “To hold otherwise would mean that issue preclusion would almost
never apply—subsequent plaintiffs could simply add more allegations (or more
specific allegations) of corporate malfeasance, and then claim there was no identity
of the issues.”53
As explained above, the district court determined that demand was not futile
by looking at the same underlying conduct that forms the basis of plaintiffs’ attack
on the independence of the Demand Board here: the failure to do anything to
investigate Wilson’s June 7 stock sales when the outside directors allegedly knew
that Wilson had engaged in insider trading. As the district court framed the issue,
“[p]laintiffs primarily rely on the argument that Wilson allegedly engaged in
insider trading prior to Day’s resignation announcement on June 10, 2013, that the
Director Defendants knew it at that time or very shortly thereafter, and by doing
nothing, demonstrated their lack of independence.” 54 As explained above, the
district court specifically rejected this argument on both “formulations” that the
NY plaintiffs advanced to challenge the independence of the outside directors.
52
Bammann, 2015 WL 2455469, at *18 (precluding re-litigation of demand futility).
53
Arduini v. Hart, 774 F.3d 622, 630 (9th Cir. 2014).
54
Canty, 13 F. Supp. 3d at 346.
24
It is of no moment that the breach of fiduciary duty claim plaintiffs assert
here (Count I) is different from the one that was asserted in the NY Action. The
Brophy claim (Count II) plaintiffs assert in this action is the substantively the same
as the one asserted in the NY Action. More significantly, plaintiffs have advanced
the same theory of demand futility with respect to both of their claims in this
action, i.e., that the members of the Demand Board are not independent because
they face a substantial likelihood of liability. As discussed above, the district court
rejected that argument and thus decided the same issue that governs the plaintiffs’
only theory for challenging the Demand Board’s independence in this case.
Finally, I agree with defendants that the Brautigam and Bader decisions on
which plaintiffs rely are inapposite. Brautigam held that the challenged conduct
was not the same in two cases challenging Goldman Sachs’s inclusion of troubled
loans in subprime residential mortgage-backed securities. The two cases
concerned different collateralized debt obligations involving “factually distinct
circumstances which affected the analysis regarding whether demand was
excused.”55 Bader held that a ruling that demand was required in a case
challenging disclosures in a 2007 Goldman proxy statement concerning stock
options alleged to have been undervalued did not preclude a challenge to similar
55
Brautigam, 8 F. Supp. 3d at 402.
25
disclosures in a 2008 Goldman proxy statement because the theories supporting
demand excusal in the two cases were different. 56
Here, unlike in Brautigam, the same gravamen of wrongdoing underlies the
demand futility issue decided in the NY Action and this case, namely the failure to
do anything to investigate Wilson’s June 2013 stock sales despite the suspicious
circumstances surrounding those sales. And, unlike in Bader, both the present case
and the NY Action assert the same theory challenging the independence of all
members of the Demand Board, namely that they face a substantial likelihood of
liability for taking no action when they allegedly knew that Wilson had engaged in
insider trading.
2. Full and Fair Opportunity to Litigate
Because defendants have established that the identical issue of demand
futility raised here was necessarily decided in the NY Action and would be
decisive here, the burden shifts to the plaintiffs to demonstrate that they did not
have a full and fair opportunity to litigate in the NY Action.
56
Bader, 455 Fed. App’x at 9-10. Specifically, the court in the first case held that six
directors were not interested because “Goldman supported business or charitable entities
with which they were associated” and the court “did not reach” a claim that three
directors who received the options were interested because those allegations “only related
to a minority of the directors.” Id. at 9. By contrast, the second case alleged that six of
twelve directors “were interested by virtue of having received undervalued stock
options,” and therefore, unlike in the first case, “the question of whether the receipt of
undervalued options renders a director ‘interested’” was “dispositive of the demand
futility issue.” Id. at 9-10.
26
Under New York law, analysis of whether a plaintiff had a full and fair
opportunity to litigate in a previous action “cannot be reduced to a formula,” but
rather requires consideration of “the realities of the prior litigation, including the
context and other circumstances which may have had the practical effect of
discouraging or deterring a party from fully litigating the determination which is
now asserted against him.” 57 One of the realities of the prior litigation here is that
the Delaware plaintiffs moved to intervene in that action and made arguments to
the district court in an effort to prevent it from adjudicating a motion to dismiss in
a manner that could impede their ability to pursue their claims in Delaware after
obtaining books and records from the Company. Thus, plaintiffs had the
opportunity to present their views to the district court, including their views
concerning the desirability of obtaining books and records before pressing
derivative claims. As I read the district court’s opinion, however, it declined to
afford plaintiffs the opportunity to re-plead demand futility. 58
The other reality bearing on the prior litigation is that it is well-established
under New York law (as plaintiffs concede) that privity exists between different
stockholders of a corporation in derivative actions for purposes of preclusion:
57
Ryan, 467 N.E.2d at 491 (internal quotation marks and ellipses omitted).
58
See infra. section II.C.1.
27
. . . in derivative suits, shareholder plaintiffs are treated like equal and
effectively interchangeable members of a class action because their
claims belong to and are brought on behalf of the corporation, rather
than on behalf of themselves . . . . As a result, prior legal
determinations in derivative suits can bind all other similarly situated
plaintiffs who might bring subsequent derivative claims, thus avoiding
wasteful and duplicative litigation.59
Faced with this reality, plaintiffs argue that the NY Action should not have
preclusive effect on the theory that the NY plaintiffs were not adequate
representatives of the Lululemon stockholders.
Section 42 of the Restatement (Second) of Judgments, on which the NY
plaintiffs rely and which New York courts have followed in considering adequacy
of representation,60 outlines certain scenarios in which a person will not be bound
by a judgment. The scenario plaintiffs invoke here is whether “[t]he representative
failed to prosecute or defend the action with due diligence and reasonable
prudence, and the opposing party was on notice of facts making the failure
apparent.”61 Elaborating on this scenario, a comment in the Restatement
distinguishes between imperfect legal strategies, which would not warrant a
59
Levin, 2006 WL 3317048, at *10, quoted in Bammann, 2015 WL 2455469, at *16.
This rule represents the clear weight of authority nationally. See Wal-Mart, 2016 WL
2908344, at *13 n.69 (surveying decisions).
60
See, e.g., Henik ex rel LaBranche & Co. v. Labranche, 433 F. Supp. 2d at 381; Algie v.
RCA Global Commc’ns, Inc., 891 F. Supp. 839, 852 (S.D.N.Y. Apr. 12, 1994); Univ.
Club v. City of N.Y., 655 F. Supp. 1323, 1327 (S.D.N.Y. 1987).
61
Restatement (Second) of Judgments § 42(1)(e).
28
finding of inadequacy, and “grossly deficient” management of the litigation that
would be apparent to the opposing party so as to undermine that party’s reliance on
the prior adjudication:
The failure of a representative to invoke all possible legal theories or
to develop all possible resources of proof does not make his
representation legally ineffective, any more than such circumstances
overcome the binding effect of a judgment on a party himself. . . .
Where the representative’s management of the litigation is so grossly
deficient as to be apparent to the opposing party, it likewise creates no
justifiable reliance interest in the adjudication on the part of the
opposing party. Tactical mistakes or negligence on the part of the
representative are not as such sufficient to render the judgment
vulnerable. 62
Generally, “[r]epresentatives have been found inadequate when their interests are
directly opposed to the interests of the person being represented, which in this case
is” the Company. 63
Here, plaintiffs base their inadequacy argument on three factual contentions:
(1) the NY plaintiffs’ failure to utilize 8 Del. C. § 220 to seek books and records
from Lululemon before filing suit, (2) their opposition to the Delaware plaintiffs’
efforts to intervene in the NY Action, and (3) their copying of approximately 100
paragraphs of allegations from a securities class action challenging Lululemon’s
public disclosures when they amended their complaint in the NY Action. Each of
62
Id. § 42 cmt. f.
63
Wal-Mart, 2016 WL 290834, at *19 (citing Hansberry v. Lee, 311 U.S. 32, 44-46
(1940); Hoxworth v. Blinder, 74 F.3d 205, 208 (10th Cir. 1996)).
29
these contentions is, unfortunately, reflective of undesirable practices that pervade
representative litigation as lawyers for stockholders jockey for control of a case in
an effort to secure a payday for themselves, assuming they ultimately can confer a
benefit upon the stockholders or the corporation.
Plaintiffs’ third contention concerning the copying of allegations from
another pleading, if true, reflects poorly on how counsel for the NY plaintiffs
litigated their case. But no explanation has been provided as to how the copying of
any of these allegations substantively impacted their litigation of the demand
futility issues so as to call into question the legitimacy of district court’s
determination of that issue or the defendants’ reliance on that determination.
Plaintiffs’ first and second contentions go hand-in-hand. Despite repeated
admonitions of this Court to inspect a corporation’s books and records before
launching derivative claims, 64 the NY plaintiffs eschewed that route and, relatedly,
opposed the intervention motion so that they could move forward with their case
before plaintiffs’ counsel in Delaware could complete their inspection of the
Company’s records and pursue the Brophy claim themselves.
64
See, e.g., King v. Verifone Hldgs., Inc., 12 A.3d 1140, 1145 (Del. 2011) (“Delaware
courts have strongly encouraged stockholder-plaintiffs to utilize Section 220 before filing
a derivative action, in order to satisfy the heightened demand futility requirements of
Court of Chancery Rule 23.1”).
30
In the Pyott case, the Delaware Supreme Court rejected a “‘fast-filer’
irrebuttable presumption of inadequacy” for “derivative plaintiffs who file their
complaints without seeking books and records, very shortly after the
announcement of a ‘corporate trauma.’” 65 Instead, a plaintiff must point to facts of
record under the circumstances of a particular case to support a finding of
inadequacy. 66 Although Pyott was not decided as a matter of New York law,
plaintiffs have not cited any authority suggesting that a New York court would
conduct a different analysis, and I have no reason to think otherwise.
The NY plaintiffs were represented by six different law firms. No
contention has been made that their counsel are not experienced in corporate
litigation, even if they did commit plagiarism. Nor have plaintiffs identified any
striking differences between the factual allegations that form the basis of the
relevant claims asserted in either action. The Brophy claims in both actions are
virtually identical, as the Delaware plaintiffs admitted to the district court, 67 and
the fiduciary duty claim asserted here essentially repackages in the form of a claim
the core of the NY plaintiffs’ demand futility allegations—that the outside
65
Pyott, 74 A.3d at 618.
66
Id.
67
See supra note 22 and accompanying text.
31
directors failed to do anything after supposedly knowing that Wilson had engaged
in insider trading. The lack of a substantive difference in the key factual
allegations follows from the fact that the NY plaintiffs had access to articles in the
media, including the June 12 article in the Wall Street Journal, before they filed
suit. Those articles provided the crucial details concerning the timing and amount
of Wilson’s June 7 stock sales relative to the Company’s public announcement of
Day’s resignation that, according to the Delaware plaintiffs, served as a red flag to
put the Company’s directors on notice of the need to take action against Wilson.68
In sum, although it is certainly better a practice for stockholder plaintiffs to use
“the tools at hand”69 to thoroughly investigate derivative claims before filing suit,
the NY plaintiffs’ failure to do so in this case falls, in my view, into the category of
an imperfect legal strategy and does not rise to the level of litigation management
that was so grossly deficient as to render them inadequate representatives. 70
68
Compl. ¶¶ 70-74.
69
See, e.g., Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 120 (Del. 2006).
70
I previously cautioned against judging inadequacy based on the contents of documents
obtained in response to a Section 220 demand because that approach “encourages
hindsight review of conduct that should be judged based on the circumstances as they
exist in real time,” and because “whether a representative litigated with sufficient
diligence necessarily depends on her knowledge and expectations at the time, rather than
on what happened later.” Wal-Mart, 2016 WL 2908344, at *22. For this reason, I will
not delve deeply into that subject and note only that some additional information
plaintiffs obtained here, such as the details of the Trading Plan, tends to exculpate Wilson
and the board, rather than to bolster plaintiffs’ theories of liability.
32
*****
For the reasons explained above, I conclude that the district court decided
the same demand futility issue that is decisive here, and that the plaintiffs were
adequately represented and had a full and fair opportunity to litigate that issue in
the NY Action. Thus, plaintiffs are barred from re-litigating the issue of demand
futility in this action under the doctrine of issue preclusion. I consider next
whether plaintiffs’ claims also are barred under the doctrine of claim preclusion.
C. Plaintiffs’ Claims are Barred by Claim Preclusion
Under New York law, a party seeking to invoke claim preclusion (or res
judicata) based on the dismissal of a prior action must demonstrate that “(1) the
previous action involved an adjudication on the merits; (2) the previous action
involved the plaintiffs or those in privity with them; (3) the claims asserted in the
subsequent action were, or could have been, raised in the prior action.”71 As
previously discussed, privity is not contested. The parties’ arguments thus focus
on the first and third requirements.
1. Adjudication on the Merits
“Under New York law, the dismissal of a derivative action for failure to
plead demand futility is a final judgment on the merits for purposes of res
71
Monahan v. N.Y. City Dept. of Corrs., 214 F.3d 275, 285 (2d Cir. 2000).
33
judicata.”72 New York law further provides, however, that “a dismissal ‘without
prejudice’ lacks a necessary element of res judicata—by its terms such a judgment
is not a final determination on the merits.”73
Focusing on one sentence in the district court’s opinion, plaintiffs argue that
the NY Action was dismissed without prejudice and thus may not be granted
preclusive effect here. The operative sentence, emphasized below, appears in the
following paragraph of the conclusion of the district court’s opinion:
For the reasons set forth above, defendants’ motion to dismiss the
Amended Complaint pursuant to Rule 23.1 is GRANTED, because
plaintiffs have failed to adequately allege particularized facts showing
demand on lululemon’s Board of Directors was excused. The Court
thus DISMISSES the complaint without prejudice, in the event
plaintiffs seek to pursue these claims after making a demand on the
board.74
In my view, plaintiffs’ interpretation misconstrues the plain meaning of this
sentence in the context in which it appears. 75
72
City of Providence v. Dimon, 2015 WL 4594150, at *6 (Del. Ch. July 29, 2015) (citing
Henik, 433 F. Supp. 2d at 379).
73
Landau, P.C. v. LaRossa, Mitchell & Ross, 11 N.Y.3d 8, 13 (N.Y. 2008).
74
Canty, 13 F. Supp. 3d at 350 (emphasis added).
75
Because I find the language at issue to be unambiguous, I do not consider extrinsic
evidence to construe its meaning. Cf. Nw. Nat. Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43
(Del. 1996) (“Where the contract language is clear and unambiguous, the parties’ intent is
ascertained by giving the language its ordinary and usual meaning. . . . Courts consider
extrinsic evidence to interpret the agreement only if there is an ambiguity in the
contract.”) (citations omitted); Sci. Applications Int’l. Corp. v. State, 876 N.Y.S.2d 182,
183 (N.Y. App. Div. 2009) (“A written agreement that is complete, clear and
34
The first sentence of the quoted paragraph reflects the district court’s
conclusion that plaintiffs lack standing to assert the derivative claims because they
failed to plead facts sufficient to call into question the disinterestedness and
independence of the Company’s board. In other words, the NY plaintiffs failed to
show that demand on the board was excused and, thus, the board retained the
prerogative to determine in the first instance whether it would be in the Company’s
best interests to pursue the derivative claims. 76 With that context in mind, the
obvious intent of the second sentence was to leave open the possibility that the
plaintiffs could still make a demand on the board to pursue the derivative claims
and, if the board refused to do so (either affirmatively or by inaction), the plaintiffs
could then seek to initiate litigation if they believed such refusal was wrongful.
But what the district court did not leave open was the opportunity for plaintiffs to
attempt to re-plead demand futility. Had that been the district court’s intention, it
simply would have made the dismissal “without prejudice” full stop, without any
of the elaboration set forth in the second sentence. 77
unambiguous on its face must be enforced according to the plain meaning of its terms,
and extrinsic evidence of the parties’ intent may not be considered unless a court first
finds that the agreement is ambiguous”) (citation and alterations omitted). Plaintiffs
agree with this approach. Tr. 71-72.
76
See Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
77
Plaintiffs asserted at argument that when the district court used the word “plaintiffs” it
was referring only “to those two plaintiffs in the derivative action” (i.e., Thomas Canty
and Tammy M. Federman) and not to any other stockholder of the Company. Tr. 69.
35
This reading is consistent with how courts in Delaware and New York have
construed similar statements in New York decisions dismissing claims for failure
to establish demand futility. In Bammann, for example, Vice Chancellor
Glasscock considered the effect of a New York state court decision dismissing a
complaint for failure to plead demand futility where the dismissal was “without
prejudice for the Plaintiff to replead, if they are so advised, with respect to making
a demand subsequent to this day.” 78 Vice Chancellor Glasscock found that, “[o]f
course, though the dismissal was without prejudice to replead upon making
demand, the Plaintiff, either here or in that case, would not be able to replead the
demand futility issue.” 79 Similarly, in Henik, the United States District Court for
the Southern District of New York considered the effect of another New York state
court decision in which the action “was ‘dismissed without prejudice to the
bringing of a new action, if a pre-suit demand is either rejected or not considered
within a reasonable amount of time.’” 80 The court concluded that “[b]y
That may be true, but that by itself does not mean that the district court’s rulings would
not have preclusive effect on other stockholders of the Company. To the contrary, it is
well-established under New York law, and conceded by plaintiffs, that privity exists in
derivative actions between different stockholders of a corporation. See supra. section
II.B.2 & note 59.
78
Bammann, 2015 WL 2455469, at *18 n.149.
79
Id.
80
Henik, 433 F. Supp. 2d at 379.
36
implication, then, the [prior] action was dismissed with prejudice to the bringing of
a new action, absent showing that a pre-suit demand was rejected or not
considered.” 81 Here, as well, the necessary implication of the district court’s
decision in the NY Action is that the dismissal was with prejudice to the ability of
the plaintiffs to seek to replead demand futility. 82
2. Plaintiffs’ Claims Were or Could Have Been Raised
The third requirement of claim preclusion under New York law requires that
“the claims asserted in the subsequent action were, or could have been, raised in
the prior action.” 83 This requirement means that “‘once a claim is brought to a
final conclusion, all other claims arising out of the same transaction or series of
transactions are barred, even if based upon different theories or if seeking a
different remedy.’” 84 “When alternative theories are available to recover what is
81
Id. (emphasis added).
82
Plaintiffs cite as contrary authority the Second Circuit’s decision in Elfenbein v. Gulf &
Western Industries, Inc., 590 F.2d 445 (2d Cir. 1978). There, the court held that language
dismissing a case “without prejudice to its renewal” was sufficiently confusing that the
court chose “to import no meaning to the phrase beyond the meaning repeatedly given by
this court to the phrase ‘without prejudice.’” Id. at 449. Here, by contrast, the operative
language in the district court opinion is not ambiguous in my view and leads to only one
reasonable interpretation for the reasons discussed above, i.e., that plaintiff may not
replead demand futility but may seek to make a demand and thereafter pursue recourse if
such a demand is wrongfully refused.
83
Monahan, 214 F.3d at 285.
84
In re Hunter, 827 N.E.2d 269, 274 (N.Y. 2005) (quoting O’Brien v. City of Syracuse,
429 N.E.2d 1158, 1159 (N.Y. 1981)), quoted in City of Providence, 2015 WL 4594150,
at *7.
37
essentially the same relief for harm arising out of the same or related facts such as
would constitute a single ‘factual grouping,’ the circumstance that the theories
involve materially different elements of proof will not justify presenting the claim
by two different actions.”85 As a result, to the extent a complaint is filed arising
out of the same subject matter as a complaint in a case in which there has been a
judgment and “the claims . . . in the new complaint implicate events alleged to
have taken place before the filing of the original complaint, res judicata applies.” 86
Plaintiffs argue that the same subject matter requirement of claim preclusion
has not been satisfied because the NY plaintiffs “could not have brought the claims
asserted in this case because at the time, the necessary facts were not known or
knowable absent a successful Section 220 investigation.” 87 According to plaintiffs,
the NY plaintiffs’ case “ended once Wilson filed his Form 4’s disclosing the June
7 trades,” while “the claims asserted here did not even begin” until the Wall Street
Journal article was published on June 12, 2013, “raising red flags that Wilson’s
June trades were conveniently timed and therefore suspicious.”88
85
O’Brien, 429 N.E.2d at 1160.
86
UBS Sec. LLC v. Highland Capital Mgmt., L.P., 927 N.Y.S.2d 59, 64 (N.Y. App. Div.
2011).
87
Pls.’ Ans. Br. 38.
88
Id. at 38-39.
38
As a factual matter, plaintiffs are incorrect to suggest that the NY plaintiffs
were unaware of or did not have the opportunity to utilize the referenced the Wall
Street Journal article to advance their claims. That article was published seven
months before the amended complaint at issue in the NY Action was filed on
January 17, 2014, the article is specifically discussed in that complaint,89 the
district court’s opinion cites to those allegations in discussing the allegedly
suspicious timing of Wilson’s June 2013 trades, 90 and the NY plaintiffs
specifically referred to that article and to the “widespread media criticism of
Wilson’s suspicious trades” generally, in challenging the failure of the Company’s
board to take any action against Wilson concerning the June 7 trades. 91
As a legal matter, it cannot legitimately be disputed that the claims at issue
here arose out of the same transaction that forms the basis of the claims asserted in
the NY Action. Both actions take specific aim at Wilson’s June 7 trade. Indeed,
both actions assert a Brophy claim against Wilson based on his inside knowledge
89
Canty Compl. ¶¶ 32, 33, 169, 198.
90
Canty, 13 F. Supp. 3d at 340 (citing Canty Compl. ¶¶ 33, 169).
91
See Aronstam Aff. Ex. 11 (Brief for Plaintiff-Appellant) at 3, 34; see also Plaintiffs’
Memorandum of Law in Opposition to Defendants’ Motion to Dismiss Amended
Complaint at 3, Canty v. Day, C.A. Nos. 13-CV-5629-KBF & 13-CV-5977-KBF,
(S.D.N.Y. Feb. 14, 2014) (“Notably, following: (a) Wilson's stock sales between June 4
and June 7, 2010; and (b) the June 10, 2010 disclosure of Day’s resignation, which
immediately caused Lululemon's stock price to plummet by $18 per share, or 22%, the
financial media, including the Wall Street Journal . . . noticed the highly suspicious
timing of those events.”).
39
of Day’s imminent announcement of her resignation as CEO and, as discussed
previously, they both implicate the same issue of demand futility relevant to that
claim. Although the Complaint here asserts an additional claim for breach of
fiduciary duty on the theory that the board improperly failed to investigate
Wilson’s trading activity, that claim essentially repackages in the form of a claim
the NY plaintiffs’ theory for challenging the outside directors’ independence for
demand futility purposes. Plaintiffs have offered no logical reason why that claim
could not have been asserted in the NY Action, and I can conceive of none. Thus,
in my opinion, the same subject matter requirement of claim preclusion has been
satisfied here.
*****
For the reasons explained above, the three requirements of claim preclusion
under New York law have been satisfied, and plaintiffs have failed to demonstrate
that the NY plaintiffs were not adequate representatives of the Lululemon
stockholders. Accordingly, and as an alternative to dismissing the Complaint
under the doctrine of issue preclusion, the Complaint is dismissed under the
doctrine of claim preclusion.
III. CONCLUSION
For the foregoing reasons, the Complaint is dismissed in its entirety.
IT IS SO ORDERED.
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