Bryceland v. Minogue , 557 F. App'x 1 ( 2014 )

Not for Publication in West's Federal Reporter
United States Court of Appeals
For the First Circuit
No. 13-1914
MARTA BRYCELAND,
Plaintiff, Appellant,
v.
MICHAEL R. MINOGUE, W. GERALD AUSTEN, LOUIS E. LATAIF,
DOROTHY E. PUHY, MARTIN P. SUTTER, HENRI A. TERMEER,
PAUL G. THOMAS, and ABIOMED, INC.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor IV, U.S. District Judge]
Before
Lynch, Chief Judge,
Souter,* Associate Justice,
and Lipez, Circuit Judge.
Ex Kano S. Sams II, with whom Lionel Z. Glancy, Michael
Goldberg, Brian Murray, Glancy Binkow & Goldberg LLP, David Pastor,
Pastor Law Office, LLP, Patrick Powers, Powers Taylor, LLP, Willie
C. Briscoe, and The Briscoe Law Firm, PLLC were on brief, for
appellant.
John D. Donovan, Jr., with whom Daniel V. Ward, Matthew
Mazzotta, Elizabeth D. Johnston, and Ropes & Gray LLP were on
brief, for appellees.
June 10, 2014
*
Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
SOUTER, Associate Justice. Marta Bryceland appeals the
dismissal of her shareholder derivative action brought on behalf of
Abiomed, Inc. Because Bryceland's complaint fails to plead with
the required particularity that a demand to the directors for
remedial action would have been futile, we affirm.
On defendants' motion to dismiss under Fed. R. Civ. P.
12(b)(6), the following facts are taken as stated in the complaint.
Abiomed is a Delaware corporation with its principal place of
business in Massachusetts. It develops products to assist or
replace the pumping of the human heart, and the company's promotion
of one such device, the Impella 2.5, led to this lawsuit.
In June 2011, a letter to Abiomed from the Food and Drug
Administration (FDA) alleged that some advertising materials
appeared to market the Impella 2.5 for uses that the FDA had not
approved. Abiomed publicly disclosed its receipt in the company's
later mandatory quarterly filing with the Securities and Exchange
Commission (SEC):
[W]e received a warning letter from the FDA
stating that some of our promotional materials
marketed the Impella 2.5 for uses that had not
been approved by the FDA. We have cooperated
with the FDA in addressing its concerns and
believe that we have resolved the matter
without any penalties. Although we believe
that this issue has been resolved, if similar
matters come up in the future, we may not be
able to resolve them without facing
significant consequences. Such matters could
result in reduced demand for our products and
would have a material adverse effect on our
operations and prospects.
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In April 2012, the FDA wrote to Abiomed again alleging
that some Impella 2.5 promotional materials continued to violate
FDA regulations. Abiomed's next SEC filing disclosed this letter
as well:
In June 2011 we received a warning letter from
the FDA stating that some of our promotional
materials marketed the Impella 2.5 for uses
that had not been approved by the FDA. We
cooperated with the FDA and made changes to
our promotional materials in response to the
warning letter. However, in April 2012, we
received a follow up letter from the FDA
stating that some of our promotional materials
continued to market the Impella 2.5 in ways
that are not compliant with FDA regulations.
We are cooperating with the FDA in addressing
its concerns. While we hope to be able to
resolve this matter without incurring
penalties, we may not be able to resolve it,
or any similar matters that may come up in the
future without facing significant
consequences. Such matters could result in
reduced demand for our products and would have
a material adverse effect on our operations
and prospects.
In October 2012, Abiomed received a subpoena from the
U.S. Attorney's Office for the District of Columbia, which was
investigating Abiomed's marketing materials. Abiomed made the
subpoena known in a special press release:
On October 26, 2012, Abiomed was informed that
the United States Attorney's Office for the
District of Columbia is conducting an
investigation that is focused on the Company's
marketing and labeling of the Impella 2.5. On
October, 31, 2012, Abiomed accepted service of
a Health Insurance Portability and
Accountability Act administrative subpoena
related to this investigation. The subpoena
seeks documents related to the Impella 2.5 and
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we understand the investigation focuses
primarily on marketing and labeling issues.
Abiomed is in the process of responding to the
subpoena and intends to cooperate fully.
A sharp drop in Abiomed's stock price followed. Some four months
later, and after this lawsuit had been brought, the FDA wrote
Abiomed that the agency had completed its evaluation and that the
company had addressed the problems to the agency's satisfaction.
The current status of the U.S. Attorney's investigation is unknown.
At oral argument, defendants' counsel represented that Abiomed has
heard nothing from the U.S. Attorney's Office since responding to
the subpoena.
Bryceland, an Abiomed shareholder, brought this
derivative action in federal court on behalf of the corporation
against its seven directors, one of whom is also the President and
CEO. Bryceland's overarching theory, running through the multiple
counts of the complaint, is that the defendants breached their
fiduciary duties to Abiomed because, with them at the helm, the
company both unlawfully marketed the Impella 2.5 and issued public
statements that were overly sunny in the face of the corporation's
potential liability. Bryceland takes particular exception to the
fact that, in the intervals between the unfavorable disclosures,
the directors approved the issuance of press releases of positive
financials without reiterating cautions about the potential
liability associated with the FDA inquiry.
-4-
Defendants moved to dismiss the complaint on the grounds
that it failed both to plead with particularity that a demand for
corrective action would have been futile, and to state a claim of
substantive liability. The district court dismissed for want of a
particularized futility allegation.1
Among other things, Bryceland says that the district
court failed to accept her allegations as true, to treat them
collectively, and to draw inferences in her favor. But because our
review of the dismissal of a derivative suit for failure to plead
with particularity is de novo, see Union de Empleados de Muelles de
P.R. PRSSA Welfare Plan v. UBS Fin. Servs. Inc. of P.R., 704 F.3d
155, 162-63 (1st Cir.), cert. granted, 133 S. Ct. 2857, and cert.
dismissed, 134 S. Ct. 40 (2013), rather than answer each of
Bryceland's assignments of error, it will suffice to highlight the
deficiencies in her complaint. We accept as true all well-pleaded
facts and draw all reasonable inferences in her favor. Mass. Ret.
Sys. v. CVS Caremark Corp., 716 F.3d 229, 237 (1st Cir. 2013).
A derivative action permits a shareholder to enforce
corporate rights that the corporation itself is unable or unwilling
to enforce on its own. See Union de Empleados, 704 F.3d at 159.
1
The complaint contains no allegation that before filing suit
Bryceland had sought to learn any details of actions by the
directors that might have been disclosed if she had requested
access to corporate records, to which she was entitled under Del.
Code Ann. tit. 8, § 220. The defendants have represented without
contradiction that she made no such pretrial request.
-5-
Before invoking this procedural device a shareholder must demand
that the corporation take action, unless such a demand would be
futile, and the shareholder's complaint must accordingly either
state that her demand was rebuffed (or inadequately honored) or
explain why a demand would have proven pointless. See id. In such
a case, despite the relative laxity of pleading requirements
generally, see Fed. R. Civ. P. 8(a)(2), a special rule governing
derivative actions requires the complaint to "state with
particularity" the shareholder's efforts to make a demand or her
reasons for failing to do so, id. 23.1(b)(3). Because Bryceland's
complaint does not claim that she made a demand for action by the
defendants, and it is undisputed that she made none, this appeal
turns on the requirement that she plead with particularity the
futility of a demand, and, given Abiomed's incorporation in
Delaware, we look to Delaware law to determine the substance of
what the complaint must particularly allege. See Union de
Empleados, 704 F.3d at 163. Delaware law offers two tests for
assessing a demand-futility pleading.
The first comes from Aronson v. Lewis, where the Delaware
Supreme Court explained that demand will be excused as futile if,
"under the particularized facts alleged, a reasonable doubt is
created that: (1) the directors are disinterested and independent
[or] (2) the challenged transaction was otherwise the product of a
valid exercise of business judgment." 473 A.2d 805, 814 (Del.
-6-
1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244(Del. 2000). While only the second Aronson prong explicitly refers
to a challenged transaction, subsequent cases indicate that the
first prong's inquiry into disinterest and independence also
focuses on a specific transaction. See Pogostin v. Rice, 480 A.2d
619, 624 (Del. 1984), overruled on other grounds by Brehm, 746 A.2d
244. In short, under Aronson, demand will be excused as futile if
the complaint alleges particular facts that call into question
whether the board discharged its duty of loyalty (Aronson's first
prong) or its duty of care (Aronson's second prong) at the time of
a specific transaction.
This concentration on the time of transaction rendered
Aronson's test inapposite to the facts of the later case of Rales
v. Blasband, where the challenged decision was made not by the
board of the corporation on whose behalf the action was brought,
but rather by the board of a wholly owned subsidiary. 634 A.2d
927, 932-33 (Del. 1993). The Delaware Supreme Court explained:
[A] court should not apply the Aronson test
for demand futility where the board that would
be considering the demand did not make a
business decision which is being challenged in
the derivative suit. This situation would
arise in three principal scenarios: (1) where
a business decision was made by the board of a
company, but a majority of the directors
making the decision have been replaced; (2)
where the subject of the derivative suit is
not a business decision of the board; and (3)
where, as here, the decision being challenged
was made by the board of a different
corporation.
-7-
Id. at 933-34 (footnotes omitted). Rales announced a new test to
be used in these cases: demand will be excused as futile if "the
particularized factual allegations of a derivative stockholder
complaint create a 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." Id. at 934. Importantly to our case,
Rales applies where the subject of a derivative action is not a
board's business decision but rather its failure to oversee. See
Wood v. Baum, 953 A.2d 136, 140 (Del. 2008).
After analyzing Bryceland's suit as concerned not with a
specific decision but with a failure in oversight, the district
court applied the Rales test. Bryceland calls instead for the test
under Aronson, contending that her action challenges particular
decisions of the board, both the decision to market the Impella 2.5
unlawfully and the decision to issue public statements that were
misleadingly optimistic in light of Abiomed's potential liability.
We think the trial judge made the better call in following Rales,
though this case is not an easy one to categorize. In any event,
that choice is not crucial, because Bryceland's complaint fails to
plead particular facts that cast doubt on either the board's
disinterest or independence at any point (precluding success under
Rales or Aronson's first prong), or the board's business judgment
-8-
at the time of any specific decision (precluding success under
Aronson's second prong).
As for disinterest or independence, we will assume,
without deciding, that Bryceland raises a doubt to the requisite
degree about the disinterest of one of the directors, who doubles
as Abiomed's CEO. Her complaint alleges that this defendant
derives his principal income from his employment as an Abiomed
officer and that he certified a number of the company's SEC
filings, which Bryceland claims were misleading. And, given the
small size of the company, one might infer that its CEO would have
overseen (or at least have had knowledge of) the creation of the
controversial promotional materials and statements of corporate
prospects, giving him special reason to fear further probing into
the company's marketing decisions and publicity. Delaware courts
have accordingly suggested that there is reason to doubt the
disinterest of a director who has a substantial financial stake in
maintaining a position as an officer. See, e.g., Rales, 634 A.2d
at 937.
But one is not enough. Under either Aronson or Rales the
complaint must cast doubt on the disinterest or independence of a
majority of the board, see Rales, 634 A.2d at 937; Aronson, 473
A.2d at 815 & n.8, and to survive the motion to dismiss in reliance
on interest or lack of independence, Bryceland's allegations must
particularly raise doubt about the capacity of at least three more
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members of the seven-member board. It does not.2 Instead, the
complaint's deficiencies fall into two categories. The first
includes failure to state particular facts, in lieu of which the
complaint contains a series of conclusory statements that can
satisfy neither Aronson nor Rales. See Brehm, 746 A.2d at 254.
The second covers allegations that fail to show futility under
Delaware law, whether based on interest-dependence or the absence
of valid business judgment behind action taken.
As a representative example of merely conclusory
pleading, the complaint states that "Defendants face a substantial
likelihood of being held liable for breaching their fiduciary
duties." This allegation apparently attempts to cast doubt on the
board's current ability to respond disinterestedly or independently
to a demand (a claim under Rales) by pleading that the directors
face a substantial likelihood of personal liability for decisions
that breached their duty of care to exercise business judgment
(claims under Aronson's second prong). But the conclusory
allegation is supported by no particular detail of either.
The complaint does not plead facts indicating that the
directors were personally involved in creating or disseminating the
relevant marketing materials. Nor does it allege facts showing
that the directors hid from investors the trouble that this
2
Our further references to "defendants" or "directors" do not
include the one assumed to be interested.
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marketing had created; indeed, as the reproduced sections of
Abiomed's SEC filings make clear, the company was not shy in
disclosing its exposure to liability. Instead, Bryceland's
complaint challenges the directors' (presumed) approval of press
releases, issued during the intervals between the SEC filings, that
reported favorable financial facts. But she pleads no particular
basis to question the accuracy of these facts. At most, her
conclusion seems to assume that it was misleading for Abiomed to
issue these releases without an accompanying reminder about the
ongoing FDA investigation that had previously been disclosed
publicly through the SEC filings. Bryceland directs us to no
authority, and we have found none, supporting the proposition that
after a corporation discloses negative information, that
information must also accompany subsequently released financial
statements.
In sum, we see in this narrative no particular facts
that, as required under Aronson's second prong, cast doubt on
whether the directors exercised sound business judgment at any
point including the approval of the press releases. As previously
noted, the lack of particular facts evidencing a potential breach
of the duty of care and likelihood of ensuing liability
consequently disarms any Rales claim that defendants could not
disinterestedly or independently respond to a demand at the time
suit was filed.
-11-
Bryceland's complaint, to be sure, lists other supposed
reasons for questioning the directors' disinterest or independence,
and, although they are alleged with greater particularity, their
substance fails to cast the requisite doubt on the capacity or
intention of any director, whether at the moment a demand would
have been made or at the time of an antecedent business decision.
Thus, the complaint contends that, "to bring this suit, all of the
Company's directors would be forced to sue themselves." But under
Delaware law, a director is not rendered interested simply by being
named a defendant in an action. See Aronson, 473 A.2d at 818.
Were the law otherwise, every derivative suit would qualify for
futility on this basis alone, leaving the demand requirement a
hollow one. See id.The complaint also reveals in detail that all of the
directors hold financial interests in Abiomed and receive
compensation from the company. One defendant's financial interest
derives not only from his current directorship, but also from his
prior employment as a consultant to the company. But under
Delaware law, compensation is by itself insufficient to render a
director interested. See Grobow v. Perot, 539 A.2d 180, 188 (Del.
1988), overruled on other grounds by Brehm, 746 A.2d 244. While a
director may cease to be disinterested and face temptation to act
outside of loyal business judgment if her financial stake becomes
unaligned with the shareholders', see Rales, 634 A.2d at 936, that
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did not occur here, where the directors' financial interests are
said to comprise stock and stock options.
In addition, the complaint alleges a lack of disinterest
and independence on the part of several directors because they
serve together on the boards of other corporations, none of which
was involved in the events giving rise to this action. This
particular fact, however, says nothing about the directors' ability
or intention to discharge their duty of loyalty to Abiomed. Cf. In
re Dow Chem. Co. Derivative Litig., Civil Action No. 4349-CC, 2010
WL 66769, at *9 (Del. Ch. Jan. 11, 2010) ("That directors of one
company are also colleagues at another institution does not mean
that they will not or cannot exercise their own business judgment
with regard to the disputed transaction.").
As yet another try, though not raised in the complaint,
Bryceland's opposition to the motion to dismiss argues that three
of the directors lack disinterest or independence because of their
service on Abiomed's audit committee. The insinuation presumably
is that, given their familiarity with Abiomed's finances, these
directors had especial reason to know of a tendency to mislead in
the interim press releases. But under Delaware law, membership on
an audit committee is not taken, on its own, to imply directors'
knowledge of or participation in corporate wrongdoing. See Wood,
953 A.2d 142-43. And in any case, as we said before, Bryceland has
given us no reason to question either the accuracy of the
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financials as publicized, or their significance in light of the
prior public disclosure of the FDA inquiry.
Finally, Bryceland takes the position that even if each
of her allegations standing alone may be inadequate to meet Aronson
or Rales, collectively they suffice. But the series of general
allegations here do not become particular by amalgamation, and the
legally irrelevant facts are no more relevant when grouped
together. To the contrary, to the extent that the complaint
reveals anything about the directors' mental states or conduct, it
portrays a company that disclosed its exposure to liability as it
responded to a charge of unlawful behavior.
The order of dismissal is AFFIRMED.
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