Lawrence Arduini v. Igt ( 2014 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
LAWRENCE ARDUINI, derivatively on No. 12-15750
behalf of International Game
Technology, D.C. No.
Plaintiff-Appellant, 3:11-cv-00255-
ECR-VPC
v.
PATTI S. HART; THOMAS J. OPINION
MATTHEWS; PATRICK W.
CAVANAUGH; ROBERT A. BITTMAN;
RICHARD R. BURT; ROBERT A.
MATHEWSON; ROBERT MILLER;
DAVID E. ROBERSON; PHILIP G.
SATRE,
Defendants-Appellees,
and
INTERNATIONAL GAMING
TECHNOLOGY,
Nominal Defendant-Appellee.
Appeal from the United States District Court
for the District of Nevada
Edward C. Reed, Jr., Senior District Judge, Presiding
Argued and Submitted
April 10, 2014—San Francisco, California
Filed December 17, 2014
2 ARDUINI V. HART
Before: Mary M. Schroeder and Consuelo M. Callahan,
Circuit Judges, and Robert W. Pratt, Senior District Judge.*
Opinion by Judge Callahan
SUMMARY**
Shareholder Derivative Actions/Issue Preclusion
The panel affirmed the district court’s dismissal of a
shareholder derivative action on the basis that issue
preclusion barred relitigation of whether plaintiff, Lawrence
Arduini, made a sufficient “demand” on a corporation’s board
of directors before filing suit.
Under Federal Rule of Civil Procedure 23.1, a shareholder
must either demand action from the corporation’s directors
before filing a shareholder derivative suit, or plead with
particularity the reasons why such demand would have been
futile.
The panel held that issue preclusion prevented Arduini
from relitigating the issue of demand futility. The panel
noted that before Arduini filed his derivative action against
International Gaming Technology and its board of directors,
four separate shareholders filed separate derivative suits
*
The Honorable Robert W. Pratt, Senior District Judge for the U.S.
District Court for the Southern District of Iowa, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
ARDUINI V. HART 3
against the company that were subsequently consolidated and
dismissed. See Fosbre v. Matthews, 2010 WL 2696615(D. Nev. July 2, 2010). The panel determined that the issue
of demand futility was the same in both Fosbre and Arduini’s
action, and therefore there was an identity of issues.
The panel held that Arduini and the Fosbre plaintiffs were
in privity because International Gaming Technology was the
true party in interest and there was no indication that the
Fosbre plaintiffs were inadequate representatives. Further,
there was no inequity in applying issue preclusion because
the Fosbre plaintiffs fully litigated their demand futility
claim. There was no due process violation because there was
no requirement that shareholders be given notice of dismissal
in a derivative suit where the issue of demand futility is fully
litigated and dismissed on the merits. Moreover, the panel
noted that the record showed that Arduini’s counsel in this
case had actual notice of the Fosbre proceedings.
COUNSEL
Francis A. Bottini, Jr. and Albert Y. Chang (argued), Chapin
Fitzgerald Sullivan & Bottini LLP, San Diego, California, for
Plaintiff-Appellant.
Richard G. Campbell, Jr. and Robert F. Meich, Armstrong
Teasdale LLP, Reno, Nevada; Boris Feldman (argued), David
S. Steuer, Cynthia Dy, and Cheryl W. Foung, Wilson Sonsini
Goodrich & Rosati, Palo Alto, California, for Nominal
Defendant-Appellee.
4 ARDUINI V. HART
OPINION
CALLAHAN, Circuit Judge:
Shareholders are required to make a “demand” on the
corporation’s board of directors before filing a derivative suit,
unless they sufficiently allege that demand would be futile
because the board would not act on the demand. Here, before
Plaintiff Lawrence Arduini (“Arduini”) filed his derivative
action against International Gaming Technology (“IGT”) and
its board of directors, four shareholders filed separate
derivative suits that were subsequently consolidated. The
district court then dismissed the consolidated suit for failure
to make a demand on the corporation’s board or sufficiently
allege demand futility, and on appeal, we affirmed that
dismissal. The district court then dismissed Arduini’s action,
holding that Arduini had failed to make a demand on the IGT
board and could not allege demand futility based on issue
preclusion due to its ruling in the prior derivative suit. We
hold that under Nevada law and the facts of this case, the
district court properly held that issue preclusion barred
relitigation of demand futility, and we affirm.
I
Defendant-Appellee International Game Technology
(“IGT”) is a Nevada corporation that makes and services
electronic gaming systems. Appellant Arduini, an IGT
shareholder, alleges that certain IGT senior officers made
intentionally misleading statements about the bright financial
prospects of IGT when, in fact, IGT’s prospects were dim,
and that IGT’s board of directors failed to adequately oversee
the officers and the company. Based on this alleged
mismanagement, on April 8, 2011, Arduini filed a
ARDUINI V. HART 5
shareholder derivative complaint, Arduini v. Hart, No. 3:11-
cv-255-ECR-VPC (D. Nev.). Arduini made no pre-suit
demand on the current IGT board, instead alleging that
demand would be futile. The case was eventually transferred
to Senior District Judge Edward C. Reed.
A
Before Arduini filed his complaint, Judge Reed presided
over Fosbre v. Matthews, an IGT derivative suit with
substantially similar allegations. No. 3:09-CV-0467-ECR-
RAM, 2010 WL 2696615 (D. Nev. July 2, 2010). Fosbre
was a consolidated suit involving what were originally four
separate derivative suits filed by four different IGT
shareholders who were represented by four separate sets of
counsel.
The Fosbre plaintiffs had made no demand on the IGT
board. Rather, they argued that such a demand was excused
because: 1) the IGT board extended the employment contract
of Thomas J. Matthews (“Matthews”), IGT’s former CEO
and chairman of IGT’s board of directors, and allowed him to
resign rather than terminating him for cause; 2) Directors
Burt, Mathewson, Miller, and Rentschler received such high
compensation from IGT that their ability to impartially
consider a demand was compromised; 3) Directors Burt, Hart,
Mathewson, and Roberson were members of IGT’s auditing
committee and Directors Burt, Miller, Rentschler, and Satre
were members of IGT’s governance committee and faced a
substantial likelihood of liability for breaches of their
fiduciary duties as committee members; 4) Matthews was
incapable of considering a demand due to his employment as
IGT Chairman and Director Patti S. Hart (“Hart”), who
replaced Matthews as CEO, was incapable of considering a
6 ARDUINI V. HART
demand due to her new position; and 5) Directors Burt,
Bittman, and Matthews engaged in insider trading of IGT
stock. Id. at *3–7. On July 2, 2010, Judge Reed granted
IGT’s motion to dismiss in Fosbre, holding that the
consolidated complaint’s demand futility allegations were
insufficient. Id. at *8.
The Fosbre plaintiffs appealed, and on April 2, 2012, we
affirmed the district court’s dismissal. Israni v. Bittman,
473 F. App’x 548 (9th Cir. 2012) (unpublished disposition).
In Israni, we first rejected the allegations of director interest
based on the directors’ approval of the revised employment
agreement for former CEO Matthews. The plaintiffs had
argued that the directors approved Matthews’ contract in an
effort to have their own compensation increased. We found
these allegations were insufficient to show the directors’
interest because they did not explain how approval of the
contract would influence the directors’ compensation, nor
why this approval was not a “valid exercise of business
judgment.” Id. at 550 (citing Brehm v. Eisner, 746 A.2d 244,
257, 263 (Del. 2000)).
Second, we rejected the complaint’s allegations of
director interest based on high director compensation, as a
“director’s receipt of compensation alone does not excuse
demand, and the complaint did not provide sufficient factual
allegations to show the fees here were unusual or
uncustomary.” Id. at 550–51 (citing Orman v. Cullman,
794 A.2d 5, 29 n.62 (Del. Ch. 2002)).
Third, we rejected the allegation that certain directors’
membership on IGT’s audit and governance committees
supported demand futility because the complaint “failed to
plead facts regarding what information the committee
ARDUINI V. HART 7
members saw and failed to act on” and did not “contain
particularized facts showing that the committee members
engaged in ‘intentional misconduct, fraud or a knowing
violation of the law,’ as required under Nevada law.” Id. at
551 (citing, inter alia, In re Caremark Int’l Inc. Derivative
Litig., 698 A.2d 959, 971 (Del. Ch. 1996); In re AMERCO
Derivative Litig., 252 P.3d 681, 700–01 (Nev. 2011)).
Fourth, we rejected the plaintiffs’ contention that the
insider directors’ employment with IGT supported a finding
of demand futility “because the complaint did not allege the
insider directors were beholden to an interested party.” Id.(citation omitted). Finally, we declined to consider the
alleged insider trading by IGT directors Burt, Bittman, and
Matthews did not support a finding of demand futility
because the Fosbre plaintiffs “could not show that a majority
of the IGT board was not impartial even if demand were
excused with respect to these three defendants.” Id.B
At the same time the Fosbre case was pending before
Judge Reed, he also presided over International Brotherhood
of Electrical Workers Local 697 Pension Fund v. IGT, No.
3:09-CV-419-ECR-RAM (“IBEW”), a securities fraud class
action lawsuit raising similar allegations to those asserted in
Fosbre and by Arduini. Judge Reed denied the defendants’
motion to dismiss on March 15, 2011, finding that at least
some of the plaintiffs’ claims sufficiently alleged that IGT
intentionally misled investors to the investors’ detriment.
2011 WL 915115, at *9 (D. Nev. Mar. 15, 2011). The parties
eventually settled the case and on October 22, 2012, IBEW
8 ARDUINI V. HART
was dismissed with prejudice, before any decision on the
pending class certification motion.1
C
Shortly after Judge Reed’s March 2011 denial of the
motion to dismiss in IBEW, Arduini filed his derivative
complaint. On April 19, 2011, IGT filed a motion to dismiss
in Arduini v. Hart arguing, inter alia, that the action should
be dismissed under the doctrine of issue preclusion because
demand futility was previously litigated in favor of IGT in the
Fosbre case. Judge Reed granted the motion on March 14,
2012, finding an identity of issues and parties between
Arduini and Fosbre. Arduini v. Hart, No. 3:11-cv-00255-
ECR-UPC, 2012 WL 893874 (D. Nev. Mar. 14, 2012).
The district court first held that “demand futility was
squarely at issue [in Fosbre] and [Arduini’s] reasons for
failing to make a demand on the board are essentially the
same in this action, or any additional reasons could have been
raised in the previous action.” Id. at *3. The court rejected
Arduini’s argument that his new factual allegations precluded
a finding of identity of issues:
The fact that the Fosbre plaintiffs did not
plead “every possible cause of action or
1
Judge Reed also presided over another IGT shareholder derivative suit
with similar allegations, Sprando v. Hart, No. 3:10-cv-00415-ECR-VPC
(D. Nev.). The district court dismissed the Sprando complaint, even
though the shareholder had made a demand on the IGT board, because the
board had not refused that shareholder’s demand for investigation and
action. 2011 WL 3055242, at *4–5 (D. Nev. July 22, 2011). We
subsequently affirmed that dismissal. Sprando v. Hart, 527 F. App’x 646
(9th Cir. 2013) (unpublished disposition).
ARDUINI V. HART 9
include every possible time period or
defendant does not alter the central issue –
whether demand on [defendants] would have
been futile.” In re Bed Bath & Beyond, No.
06-cv-5107 (JAP), 2007 WL 4165389, at *6
(D.N.J. Nov. 19, 2007). Nor do Plaintiff’s
arguments that he has allegations specific to
the demand futility issue that are different
from the allegations brought up in Fosbre
preclude our use of issue preclusion. “Facts
excusing a failure to make demand that could
have been pleaded in the first complaint, or by
amendment before dismissal, should be
barred” because “a party who has litigated an
ultimate fact may not bring forward different
evidentiary facts in order to relitigate the
finding.” In re Sonus [Networks, Inc.
S’holder Derivative Litig., 499 F.3d 47, 63
(1st Cir. 2007)].
Id.The district court also rejected Arduini’s specific
argument that the denial of the motion to dismiss in IBEW
precluded a finding of identity of issues, holding that its
IBEW ruling “did not relate in any way to the issue of demand
futility in a shareholder derivative case.” Id. at *3 n.3. The
district further held that Arduini was in privity with the
plaintiffs in Fosbre, as “plaintiffs in a shareholder derivative
action represent the corporation, and therefore the question of
whether demand on the board of directors would have been
futile is an issue that is the same no matter which shareholder
serves as plaintiff.” Id. at *3 (citing Sonus, 499 F.3d at 64).
10 ARDUINI V. HART
The district court issued its final judgment on March 15,
2012, and Arduini timely appealed.
II
A
Under Federal Rule of Civil Procedure 23.1 (“Rule
23.1”), a shareholder must either demand action from the
corporation’s directors before filing a shareholder derivative
suit, or plead with particularity the reasons why such demand
would have been futile.2 A court looks to the law of the state
of incorporation to determine when demand would be futile.
Rosenbloom v. Pyott, 765 F.3d 1137, 1148 (9th Cir. 2014).
We review for abuse of discretion a district court’s dismissal
of a derivative suit based on failure to show demand futility.
Id. at 1147. We review de novo a district court’s application
of issue preclusion. Kendall v. Visa U.S.A., Inc., 518 F.3d
1042, 1050 (9th Cir. 2008).
Because IGT is incorporated in Nevada, Nevada law
defines demand futility in this case. Nevada courts look to
Delaware law for guidance on demand futility. Shoen v. SAC
Holding Corp., 137 P.3d 1171, 1179–84 (Nev. 2006).
Derivative suits allow a shareholder “to ‘compel the
corporation to sue’ and to thereby pursue litigation on the
corporation’s behalf against the corporation’s board of
directors and officers.” Id. at 1179. However, “because the
power to manage the corporation’s affairs resides in the board
of directors, a shareholder must, before filing suit, make a
demand on the board . . . to obtain the action that the
2
Nevada Rule of Civil Procedure 23.1 contains a similar demand futility
requirement.
ARDUINI V. HART 11
shareholder desires.” Id.; Rosenbloom, 765 F.3d at 1147–48
(discussing demand futility requirement under Delaware law).
In order to show demand futility under Nevada law, the
plaintiff must allege “particularized facts” demonstrating:
(1) in those cases in which the directors
approved the challenged transactions, a
reasonable doubt that the directors were
disinterested or that the business judgment
rule otherwise protects the challenged
decisions; or (2) in those cases in which the
challenged transactions did not involve board
action or the board of directors has changed
since the transactions, a reasonable doubt that
the board can impartially consider a demand.
Shoen, 137 P.3d at 1184 (citation omitted). Lack of director
independence can be shown through allegations
demonstrating that “the majority is ‘beholden to’ directors
who would be liable.” AMERCO, 252 P.3d at 697–98 (citing,
inter alia, Shoen, 137 P.3d at 1183). “[T]o show
interestedness, a shareholder must allege that a majority of
the board members would be ‘materially affected, either to
[their] benefit or detriment, by a decision of the board, in a
manner not shared by the corporation and the stockholders.’”3
Shoen, 137 P.3d at 1183 (citation omitted). Moreover,
“[a]llegations of mere threats of liability through approval of
the wrongdoing or other participation . . . do not show
sufficient interestedness to excuse the demand requirement.”
3
Where a board consists of an even number of directors, as is the case
here, plaintiffs must plead that at least half of the directors are “interested”
to show demand futility. AMERCO, 252 P.3d at 698.
12 ARDUINI V. HART
Id. (citations omitted). “[I]nterestedness through potential
liability is a difficult threshold to meet,” as “directors and
officers may only be found personally liable for breaching
their fiduciary duty of loyalty if that breach involves
intentional misconduct, fraud, or a knowing violation of the
law.” Id. at 1184.
B
Under Nevada law, issue preclusion “applies to prevent
relitigation of [] a specific issue that was decided in a
previous suit between the parties, even if the second suit is
based on different causes of action and different
circumstances.” Five Star Capital Corp. v. Ruby, 194 P.3d
709, 713–14 (Nev. 2008).4 In order for an issue decided in
another case to have preclusive effect,
“(1) the issue decided in the prior litigation
must be identical to the issue presented in the
current action; (2) the initial ruling must have
been on the merits and have become final; . . .
(3) the party against whom the judgment is
asserted must have been a party or in privity
with a party to the prior litigation”; and (4) the
issue was actually and necessarily litigated.
Alcantara v. Wal-Mart Stores, Inc., 321 P.3d 912, 916–17
(Nev. 2014) (quoting Five Star Capital, 194 P.3d at 713).
4
Nevada law distinguishes between issue preclusion and claim
preclusion, which “applies to preclude an entire second suit that is based
on the same set of facts and circumstances as the first suit.” Id. at 713–14
(citation omitted). We express no opinion on whether claim preclusion
could apply in this case.
ARDUINI V. HART 13
III
Arduini contends that issue preclusion does not apply here
because: 1) the issues in Fosbre and this case are not
identical; 2) he is not in privity with the Fosbre plaintiffs for
the purposes of issue preclusion; and 3) the equities and due
process weigh against applying issue preclusion here.
Arduini does not dispute that Fosbre was a final ruling on the
merits or that the issue of demand futility was actually and
necessarily litigated in Fosbre.
A
Arduini first argues that issue preclusion does not apply
because he assserted new allegations regarding demand
futility that were absent from the Fosbre complaint.
Specifically, Arduini points to: 1) his allegation that the
motion to dismiss in the IBEW securities fraud case was
denied; 2) statements of confidential witnesses that “further
bolster the allegations of Defendants’ knowledge of securities
fraud”; and 3) allegations regarding the IGT board’s
authorization of a $777 million stock repurchase and its
failure to seek recovery against Directors Matthews and
Cavanaugh. Arduini claims that these new allegations
preclude a finding of identity of issues because they raise
questions as to whether the board faces a substantial
likelihood of liability. In Arduini’s view, Nevada law
requires that each allegation regarding demand futility in the
second complaint be alleged in the first complaint before the
court may apply issue preclusion. IGT responds that while
the Fosbre and Arduini complaints have slightly different
allegations, the issue being litigated remained the same –
whether the plaintiffs had shown that demand on the IGT
board would be futile.
14 ARDUINI V. HART
We agree with IGT. Under Nevada law, the underlying
demand futility allegations need not be identical before issue
preclusion applies. The question is, rather, whether the “same
ultimate issue” was decided in the prior case. Alcantara,
321 P.3d at 916–17. And an “issue,” using the plain meaning
of the term, is simply “a matter that is in dispute between two
or more parties.” Issue Definition, Merriam-Webster Online,
http://www.merriam-webster.com/dictionary/issue/ (last
visited November 4, 2014). The assertion of additional
allegations to support the subsequent shareholder’s contention
that demand was futile does not make this a new issue.
Indeed, the Nevada Supreme Court has explained that
“[i]ssue preclusion cannot be avoided by attempting to raise
a new legal or factual argument that involves the same
ultimate issue previously decided in the prior case.”
Alcantara, 321 P.3d at 916–17 (citing, inter alia, Paulo v.
Holder, 669 F.3d 911, 918 (9th Cir. 2011) (stating that “[i]f
a party could avoid issue preclusion by finding some
argument it failed to raise in the previous litigation, the bar on
successive litigation would be seriously undermined”)); see
also Sonus, 499 F.3d at 63 (“[E]ven under the doctrine of
issue preclusion, a party who has litigated an ultimate fact
may not bring forward different evidentiary facts in order to
relitigate the finding.”) (citing, inter alia, Restatement
(Second) of Judgments, § 27 cmt. c (1982)).
Here, the matter in dispute in both cases is simply
whether demand should be excused because the shareholders
have sufficiently alleged that making a demand on the current
IGT board would be futile. Arduini’s offer of some
additional allegations in support of his contention that
demand is futile does not make this a different issue under
Nevada law. To hold otherwise would mean that issue
preclusion would almost never apply – subsequent plaintiffs
ARDUINI V. HART 15
could simply add more allegations (or more specific
allegations) of corporate malfeasance, and then claim there
was no identity of issues. Defendants would then be forced
to repeatedly relitigate demand futility, leading to “multiple
litigation,” wasted judicial resources, and potentially
inconsistent proceedings. See Alcantara, 321 P.3d at 916
(citing Berkson v. LePome, 245 P.3d 560, 566 (Nev. 2010));
Univ. of Nev. v. Tarkanian, 879 P.2d 1180, 1191 (Nev. 1994).
Indeed, this appears to be the case here. IGT already litigated
demand futility in the Fosbre consolidated suit, which
involved four different plaintiffs represented by four separate
sets of counsel. Requiring IGT to show that the underlying
allegations asserted in Fosbre and here are identical would
run counter to issue preclusion’s purposes.
B
Even assuming that under Nevada law a court may look
to the underlying allegations to determine whether issue
preclusion applies to demand futility, IGT has shown that the
issue of demand futility here is identical to Fosbre. The vast
majority of Arduini’s demand futility allegations are identical
to those in Fosbre. Indeed, at oral argument, counsel for
Arduini conceded that the suit was identical to Fosbre.
Further, the new allegations are cumulative, could have been
raised in the earlier suit, or make no difference to the demand
futility inquiry because they do not show that a majority of
the board was “interested.” See Sonus, 499 F.3d at 63–64.
It appears that only two of our sister circuits have
examined issue preclusion in the demand futility context in
16 ARDUINI V. HART
published opinions.5 In In re Sonus Networks, Inc.
Shareholder Litigation, 499 F.3d 47 (1st Cir. 2007), the First
Circuit held that issue preclusion barred relitigation of
demand futility, even though the second shareholder
derivative suit alleged additional facts, including the
existence of “red flags” in the company’s SEC filings. Id. at
63. The Sonus court found that the additional allegations
were cumulative and did not preclude a finding of identity of
issues, explaining: “The plaintiffs’ threshold difficulty is that
the vast majority of their allegations are not ‘new’ since the
state complaint was dismissed, but only ‘different.’ By that
we mean that the evidence was available and could have been
brought before the state court before it dismissed the state
action.” Id. at 62.6 The Sonus court further explained:
5
The Eighth Circuit briefly addressed issue preclusion and demand
futility in Cottrell v. Duke, 737 F.3d 1238 (8th Cir. 2013). It stated that
“[g]enerally, under Delaware law, a judgment rendered in a shareholder-
derivative lawsuit will preclude subsequent litigation by the corporation
and its shareholders” and “[p]reclusion principles may also apply to other
types of dismissals, for instance a shareholder’s dismissal for failure to
make demand on the board of directors.” Id. at 1243 (citations omitted).
However, this explanation arose in the context of whether a federal court
should stay a federal shareholder-derivative proceeding while a parallel
state court proceeding was on-going.
6
Several district and state courts applying their respective state law on
issue preclusion and demand futility have also found that new allegations
added to subsequent shareholder suits made no difference to the demand
futility analysis and thus did not bar issue preclusion. See, e.g., Holt v.
Golden, 880 F. Supp. 2d 199, 203 (D. Mass. 2012); Harben v. Dillard,
No. 4:09cv00395 BSM, 2010 WL 3893980, at *5 (E.D. Ark. Sept. 30,
2010); In re Bed Bath & Beyond, 2007 WL 4165389, at *5–6; Hanson v.
Odyssey Healthcare, Inc., No. 3:04-cv-2751-N, 2007 WL 5186795, at *6
(N.D. Tex. Sept. 21, 2007); LeBoyer v. Greenspan, No. CV 03-5603-GHK
(JTLx), 2007 WL 4287646, at *2 (C.D. Cal. June 13, 2007); In re Career
Educ. Corp. Derivative Litig., C.A. No. 1398-VCP, 2007 WL 2875203,
ARDUINI V. HART 17
The question was whether demand on the
board of directors would have been futile,
which is an issue that would have been the
same no matter which shareholder served as
nominal plaintiff. The defendants have
already been put to the trouble of litigating the
very question at issue, and the policy of
repose strongly militates in favor of
preclusion.
Id. at 64 (citations omitted).
In contrast, in Freedman v. Redstone, 753 F.3d 416 (3d
Cir. 2014), the Third Circuit looked to the specific allegations
of a New York state derivative suit to determine whether it
precluded a finding that a certain director was disinterested in
a subsequent derivative suit. The Third Circuit explained that
under New York law, in demand futility cases, “a prior ruling
on a director’s independence does not necessarily apply in a
future proceeding addressing the same topic” because “[a]
determination of a director’s independence [] is concerned
with a possibly fluid relationship and, accordingly, differs
from the determination of a fixed historical fact in the first
litigation.” Id. at 425.
The Freedman court then held that the issues were not
identical because: 1) the two suits alleged different facts in
support of their contention that this director was not
disinterested; and 2) seven years had passed between the
at *12–13 (Del. Ch. Sept. 28, 2007). But see Ji v. Van Heyningen, No. CA
05-273 ML, 2006 WL 2521440, at *3–5 (D.R.I. Aug. 29, 2006) (declining
to apply issue preclusion in derivative suit despite similar demand futility
allegations in prior suit).
18 ARDUINI V. HART
filing of the two complaints, and “it would be inappropriate”
to assume that the director had the same relationship with one
of the executives being sued after that passage of time. Id. at
426. However, the transactions at issue in the New York
state case occurred at least two years before the transactions
at issue in Freedman such that Freedman was a completely
different suit than the New York state case. Given the
passage of time and the fact that the suits involved different
transactions, Freedman is distinguishable from Arduini’s
case.
We are persuaded by the reasoning of Sonus, which
applies with equal force here. With the exception of the
allegations regarding the denial of the motion to dismiss in
IBEW, all of Arduini’s allegations were either raised or could
have been raised in the Fosbre complaint. Moreover,
Arduini’s additional allegations make no difference to the
ultimate demand futility analysis because they do not show
that the current board would be held liable and would thus be
incapable of considering Arduini’s demand, considering that
only two of the eight current board members were on the
board in 2007 and 2008. See Shoen, 137 P.3d at 1183–84 (to
show interestedness, shareholder must allege that a majority
of the board members would be materially affected by a
decision of the board in a manner not shared by the
corporation and the stockholders). Indeed, even if all of the
current IGT board members had been named as defendants in
this suit, that fact alone would be insufficient to show that
demand would be futile. See Aronson v. Lewis, 473 A.2d
805, 818 (Del. 1984) (noting a bare claim that the directors
would have to sue themselves does not raise a legally
cognizable claim under Delaware corporate law), overruled
on other grounds by Brehm, 746 A.2d at 253–54.
ARDUINI V. HART 19
The Arduini complaint alleges that demand is futile
because the current board “faces a sufficiently substantial
likelihood of liability for their breach of fiduciary duties”
based on: 1) the naming of IGT, Matthews, and Cavanaugh
as defendants in the IBEW complaint; 2) the denial of the
motion to dismiss in IBEW; and 3) the failure of the current
board to file any lawsuits against those responsible for the
conduct at issue in IBEW. Arduini argues that his demand
futility claim is different from that in Fosbre because of his
additional allegations regarding the denial of the motion to
dismiss in IBEW, statements of confidential witnesses, and
IGT’s stock repurchases.
Arduini’s arguments are not persuasive. The denial of the
motion to dismiss in IBEW might have increased the
probability that the corporation would eventually be found
liable for securities fraud, considering the strict pleading
requirements for federal securities class action suits.
However, this possibility alone, without more specific
allegations, does not show that demand on the current
directors would be futile. Only two of the current directors
were on the board at the time of the alleged securities fraud
and thus could potentially be held liable for the board’s
failure to act.7 Further, the denial of the motion to dismiss
was not a final order and since the parties settled, there was
no ultimate finding of liability in IBEW which could call into
doubt the current directors’ impartiality.
7
The IGT board at the time of the filing of the Arduini complaint
consisted of Hart, Miller, Roberson, Satre, Alves, Chaffin, Creed, and
Sadusky. Miller and Hart are the only directors who were on the board at
the time of the events alleged in the complaint in 2007–2008.
20 ARDUINI V. HART
The Nevada Supreme Court’s opinion in Shoen v. SAC
Holding Corp., 137 P.3d 1171 (Nev. 2006), is instructive.
There, the court explained, “[a]llegations of mere threats of
liability through approval of the wrongdoing or other
participation . . . do not show sufficient interestedness to
excuse the demand requirement,” as “directors and officers
may only be found personally liable for breaching their
fiduciary duty of loyalty if that breach involves intentional
misconduct, fraud, or a knowing violation of the law.” Id. at
1183–84. Here, Arduini’s claims concerning the IBEW
litigation do not allege that a majority of the current directors
directly participated in any wrongdoing, but rather at most
allege that the directors failed to act when presented with
allegations of wrongdoing of their predecessors. Such an
allegation does not create “a reasonable doubt that the board
can impartially consider a demand.” See id.8
Overall, we affirm the district court’s determination that
the demand futility issues in Fosbre and Arduini’s suit were
identical for the purposes of issue preclusion.
8
As new evidence showing demand futility, Arduini also points to
confidential witness allegations regarding the Defendants’ alleged
knowledge of IGT’s misrepresentations and omissions in 2007 and 2008
and allegations regarding IGT’s $777 million stock repurchases in 2007
and 2008. While these specific allegations were not presented in Fosbre,
the Fosbre complaint did contain similar allegations that IGT officers
authorized stock buybacks and took advantage of the buybacks to sell their
IGT stock at inflated prices. The Arduini complaint’s additional or
different details on Defendants’ knowledge of IGT’s misrepresentations
and their participation in the stock buyback do not raise a “new” issue
precluding a finding of identity of issues for the reasons discussed supra.
Moreover, these allegations concern only two of the current board
members and could have been raised in the Fosbre complaint. See Sonus,
499 F.3d at 63–64.
ARDUINI V. HART 21
IV
A
Arduini next argues that issue preclusion does not apply
because there is no identity of parties between his suit and
Fosbre. In his view, he was not in privity with the Fosbre
plaintiffs because they failed to establish derivative standing
and did not adequately represent IGT and its shareholders.
He asserts that there is no privity because “shareholders who
fail to establish their representative capacity can only act on
their own behalf and are not in privity with other
shareholders.” Arduini cites Pyott v. Louisiana Municipal
Police Employees’ Retirement System, 46 A.3d 313, 330 (Del.
Ch. 2012) (“Pyott I”), for the proposition that initially
shareholders assert “only their individual claim to obtain
equitable authority to sue,” and that if an action is dismissed
for failure to establish demand futility, “plaintiffs never
attained the status as a representative of the corporation and
its shareholders.”9 He reasons that pursuant to Pyott I, the
dismissal of the first derivative suit “would not preclude other
shareholders from establishing their own derivative standing
in a new action.” See id. at 330–35.
The fact that Arduini was not a party to the Fosbre case
does potentially raise concerns. The Nevada Supreme Court
has stated that “[i]ssue preclusion can only be used against a
party whose due process rights have been met by virtue of
that party having been a party or in privity with a party in the
9
The Delaware Supreme Court subsequently reversed Pyott I on
different grounds in Pyott v. Louisiana Municipal Police Employees’
Retirement System, 74 A.3d 612 (Del. 2013) (“Pyott II”).
22 ARDUINI V. HART
prior litigation.” Alcantara, 321 P.3d at 917 (quoting Bower
v. Harrah’s Laughlin, Inc., 215 P.3d 709, 718 (Nev. 2009)).
We have not found any Nevada case addressing whether
shareholders in derivative suits are in privity for the purposes
of issue preclusion. However, the majority of courts that
have addressed this issue have held that shareholders
asserting derivative suits are in privity. In Pyott II, for
example, the Delaware Supreme Court, applying California
law, held that “derivative stockholders are in privity with
each other because they act on behalf of the defendant
corporation.” 74 A.3d at 614. The court noted that the
Delaware lower courts were split on whether there is privity
between derivative stockholders as a matter of Delaware law,
but that “numerous other jurisdictions” had held there was
privity.10 Id. at 618 (citations omitted).
Similarly, in Sonus, the First Circuit explained that “the
prevailing rule [is] that the shareholder in a derivative suit
represents the corporation,” and “if the shareholder can sue
on the corporation’s behalf, it follows that the corporation is
bound by the results of the suit in subsequent litigation, even
if different shareholders prosecute the suits.” 499 F.3d at 64;
see also Ross v. Bernhard, 396 U.S. 531, 538 (1970) (“The
claim pressed by the stockholder against directors . . . ‘is not
his own but the corporation’s.’”) (citation omitted); Goldman
v. Northrop Corp., 603 F.2d 106, 109 (9th Cir. 1979) (parties
in separate derivative suits were the same although
represented by different shareholders because “[t]he
10
While the Pyott II court applied California law, California and Nevada
law regarding issue preclusion are similar. Compare Pyott II, 74 A.3d at
617 (applying California law), with Five Star Capital, 194 P.3d at 713(applying Nevada law).
ARDUINI V. HART 23
corporation was the sole real party in interest in both
cases”).11
Such reasoning applies equally to Nevada derivative suits,
where the shareholders are acting on behalf of the corporation
and its shareholders and the underlying issue of demand
futility is the same regardless of which shareholder brings
suit. We therefore hold that shareholders bringing derivative
suits are in privity for the purposes of issue preclusion under
Nevada law.
B
Arduini contends that even assuming he was otherwise in
privity with the shareholders in Fosbre, those shareholders
were inadequate representatives of IGT because they failed to
properly plead demand futility, failed to amend their
defective complaint after it was dismissed, and on appeal,
submitted documents that were never filed in the district
court. Due to this alleged inadequate representation, Arduini
11
Further, Nevada has adopted Restatement (Second) of Judgments
§ 41(1) (1982), which provides that “[a] person who is not a party to an
action but who is represented by a party is bound by and entitled to the
benefits of a judgment as though he were a party.” Alcantara, 321 P.3d
at 917. Under § 41, a person is “represented” by a party who is, inter alia,
the trustee, executor, guardian, or “[t]he representative of a class of
persons similarly situated, designated as such with the approval of the
court, of which the person is a member.” Id. These examples of
representation are analogous to that of shareholder derivative suits, where
a shareholder is acting on behalf of the corporation and also other
shareholders.
24 ARDUINI V. HART
contends there is no identity of parties for the purposes of
issue preclusion.12
We agree that inadequate representation by the first
shareholder might prevent issue preclusion because a
shareholder may not bind a corporation unless he adequately
represents the interests of the corporation. This position finds
support in the text of Rule 23.1(a) and Nevada Rule of Civil
Procedure 23.1, which both state that “[t]he derivative action
may not be maintained if it appears that the plaintiff does not
fairly and adequately represent the interests of shareholders
or members who are similarly situated in enforcing the right
of the corporation or association.” Accord Pyott II, 74 A.3d
at 618 (under California law, if the first shareholders to bring
suit “were inadequate representatives, collateral estoppel will
not bar a second, identical claim”) (citing, inter alia,
Restatement (Second) of Judgments, § 42(1)). Such a rule is
necessary because “[p]recluding the suit of a litigant who has
not been adequately represented in the earlier suit would raise
serious due process concerns” and because of the possibility
for collusion between a nominal plaintiff and the defendants.
See Sonus, 499 F.3d at 65 (citations omitted). Indeed, we
have noted that an “adequate [shareholder] representative
must have the capacity to vigorously and conscientiously
prosecute a derivative suit and be free from economic
interests that are antagonistic to the interests of the class.”
12
IGT argues that this court should not consider Arduini’s arguments
regarding inadequate representation, the equities, and due process because
they were not raised below. We generally do not consider issues raised
for the first time on appeal. In re Rains, 428 F.3d 893, 902 (9th Cir. 2005)
(citation omitted). However, because “[p]recluding the suit of a litigant
who has not been adequately represented in [an] earlier suit would raise
serious due process concerns,” Sonus, 499 F.3d at 64, we choose to
address these issues.
ARDUINI V. HART 25
Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir. 1990)
(citations omitted).
Other courts considering issue preclusion in the derivative
suit context have examined whether the first shareholder
adequately litigated his suit or engaged in collusive behavior
with the corporation. The Sonus court held that a subsequent
shareholder seeking to avoid issue preclusion must show that
the original plaintiffs were “grossly deficient”
representatives. Sonus, 499 F.3d at 66. Quoting the
Restatement (Second) of Judgments § 42 (1982) comment f,
the Sonus court explained that inadequate representation
under issue preclusion is not shown by the “failure of a
representative to invoke all possible legal theories or to
develop all possible resources of proof,” but requires
representation “so grossly deficient as to be apparent to the
opposing party.” Id. at 65–66.
Other courts have found that dismissals based on a failure
to answer interrogatories or post a security-for-cost bond did
not have preclusive effect due to concerns with “the ease with
which a disingenuous plaintiff could engineer a dismissal for
failure to answer discovery in order to evade the notice
requirement,” and because such dismissals were not true
dismissals on the merits. Id. at 65 (discussing Papilsky v.
Berndt, 466 F.2d 251, 258–60 (2d Cir. 1972)); Saylor v.
Lindsley, 391 F.2d 965, 968–70 (2d Cir. 1968).
Although Nevada does not appear to have specifically
adopted the Restatement (Second) of Judgments § 42(1), that
section provides that “[a] person is not bound by a judgment
for or against a party who purports to represent him” if,
among other things, “[t]he representative failed to prosecute
or defend the action with due diligence and reasonable
26 ARDUINI V. HART
prudence, and the opposing party was on notice of facts
making that failure apparent.” Comment f to this section
explains that “a judgment is not binding on the represented
person where it is the product of collusion between the
representative and the opposing party, or where, to the
knowledge of the opposing party, the representative seeks to
further his own interest at the expense of the represented
person.” However, “[t]actical mistakes or negligence on the
part of the representative are not . . . sufficient to render the
judgment vulnerable.”13
Here, the Fosbre plaintiffs adequately litigated their case.
The plaintiffs fully litigated the case through its dismissal
based on demand futility and then fully briefed and argued
their appeal in the Ninth Circuit. While it is common practice
for plaintiffs to amend their complaints after dismissal under
Federal Rule of Civil Procedure 12(b)(6), they are not
required to do so. In Fosbre, four sets of counsel represented
the plaintiffs, which suggests that appealing immediately
rather than amending was tactical, not collusive or self-
interested. Moreover, there is no showing that the Fosbre
plaintiffs could have amended their complaint in a way that
would have met the district court’s concerns.
While we disagreed with the Fosbre plaintiffs’ contention
that they had sufficiently pled demand futility, our dismissal
came only after thorough briefing and argument by those
13
The Restatement (Second) of Judgments § 42 provides exceptions to
§ 41. The Nevada Supreme Court, in discussing and adopting § 41, noted
the court’s “long-standing reliance on the Restatement (Second) of
Judgments in the issue and claim preclusion context.” Alcantara,
321 P.3d at 917. Thus it appears likely that Nevada would follow § 42 as
well.
ARDUINI V. HART 27
plaintiffs. Our denial of their appeal does not indicate that
the Fosbre plaintiffs were inadequate representatives of IGT
shareholders. Further, although in the Fosbre appeal14 we
granted IGT’s motion to strike certain documents submitted
for the first time on appeal, we did not address the adequacy
of the Fosbre plaintiffs’ representation. Israni, 473 F. App’x
at 549. A mistake as to the breadth of the record on appeal,
without more, is not evidence of inadequate representation in
the appeal or for the purposes of issue preclusion.
Furthermore, Arduini does not suggest, nor is there any
indication, that there was any collusion between the Fosbre
plaintiffs and IGT.15
While we leave for another day the precise contours of
what conduct constitutes inadequate representation, we
simply note that the Fosbre plaintiffs’ failure to amend their
complaint, loss of their appeal, and the submission of
documents on appeal that were not in the record below were
insufficient to render them inadequate representatives,
especially considering their vigorous pursuit of their appeal.
In sum, we hold that Arduini has failed to show that the
Fosbre plaintiffs did not adequately represent IGT and its
shareholders.
14
The Fosbre appeal was captioned Israni v. Bittman. 473 F. App’x 548
(9th Cir. 2012).
15
Moreover, the district court, having presided over Arduini’s case, the
Fosbre case, and at least two other IGT cases, was well-situated to assess
such representation and expressed no concern about the Fosbre plaintiffs’
representation.
28 ARDUINI V. HART
C
Arduini also argues that issue preclusion should not apply
because “[i]t is unfair to allow Defendants to avoid liability
for their malfeasance simply because the Fosbre plaintiffs
failed to meet pleading requirements” in light of the “strong
public policy favoring resolution of disputes on the merits.”
Arduini contends that applying issue preclusion in this type
of case would incentivize collusive behavior between
defendants and unscrupulous shareholders and penalize
shareholders who do not rush to the courthouse to become
“first filers.”
However, as noted above, issue preclusion does not apply
where the first shareholder did not adequately represent the
corporation, minimizing the risk of unfairness to
shareholders. See Fed. R. Civ. P. 23.1; Nev. R. Civ. P. 23.1;
Sonus, 499 F.3d at 64–65. Indeed, collusive behavior
between shareholders and defendants, if shown, would render
the shareholders inadequate representatives and thus issue
preclusion would not apply. It is also unfair to require
defendants to relitigate the issue of demand futility every time
a different shareholder files suit, provided that the first
shareholder adequately represented the company. See
Alcantara, 321 P.3d at 916 (“[I]ssue preclusion is applied to
conserve judicial resources, maintain consistency, and avoid
harassment or oppression of the adverse party.”) (citing
Berkson, 245 P.3d at 566). Thus we reject Arduini’s policy-
based challenge to the application of issue preclusion in this
case.
ARDUINI V. HART 29
D
Arduini lastly argues that application of issue preclusion
here violates his due process rights, because he was not
provided with notice of the Fosbre dismissal. He argues that
notice is required to ensure that dismissal is in the best
interests of the corporation and absent shareholders. Arduini
concludes that the fact that his counsel had notice of the
Fosbre proceedings is irrelevant, citing Taylor v. Sturgell,
553 U.S. 880 (2008).
Arduini’s due process argument fails. Rule 23.1 only
requires that “[n]otice of a proposed settlement, voluntary
dismissal, or compromise . . . be given to shareholders or
members in the manner that the court orders.” See also Nev.
R. Civ. P. 23.1 (“The action shall not be dismissed or
compromised without the approval of the court, and notice of
the proposed dismissal or compromise shall be given to
shareholders or members in such manner as the court
directs.”). There is no provision requiring notice of an
involuntary dismissal. Sonus, 499 F.3d at 65 (citing, inter
alia, Burks v. Lasker, 441 U.S. 471, 485–86 n.16 (1979)).
Further, Nevada follows Restatement (Second) of
Judgments § 41(2), which states that “[a] person represented
by a party to an action is bound by the judgment even though
the person himself does not have notice of the action, is not
served with process, or is not subject to service of process.”
Alcantara, 321 P.3d at 917. Even assuming that Arduini was
the true party in interest (rather than IGT), the Fosbre
plaintiffs were in essence representing all IGT shareholders
when they filed their derivative suit, thus binding subsequent
derivative plaintiffs even if they personally did not have
notice of the Fosbre dismissal.
30 ARDUINI V. HART
We recognize that at least one court has held that the
dismissal of a derivative suit for failure to prosecute, such as
the failure to answer interrogatories, would not have
preclusive effect based on lack of notice to the shareholders.
See Papilsky, 466 F.2d at 258–60. However, the Fosbre
plaintiffs “actively litigated the demand futility issue,” which
was decided on its merits, and thus there is less risk of
collusive behavior between the shareholder and the
corporation. See Sonus, 499 F.3d at 65; Papilsky, 466 F.2d at
259 (“Even without notice, a dismissal after a hearing on the
merits is a binding adjudication of the corporate claim and
precludes non-party stockholders from bringing a subsequent
derivative suit based on the same cause of action.”) (citation
omitted).
Further, Taylor v. Sturgell is inapposite. In Taylor, two
friends filed successive actions seeking to compel the release
of identical documents from a government agency under the
Freedom of Information Act. 553 U.S. at 885. After the
agency won the first suit, a lower court applied issue
preclusion to bar the second filed suit based on “virtual
representation,” a legal doctrine the Taylor court rejected. Id.at 895–901. However, the Taylor plaintiff and the plaintiff in
the first suit had no legal relationship with each other.
Here, both Arduini and the Fosbre plaintiffs were acting
in a representative capacity as shareholders on behalf of IGT.
Because the Fosbre plaintiffs adequately represented the
shareholders and issue preclusion applies, there is no need for
Arduini to receive personal notice of the Fosbre court’s
decisions. See Taylor, 553 U.S. at 897–98, 900, 905.
Furthermore, Arduini’s counsel had actual notice of the
Fosbre proceedings, as shown by his filings in a related state
ARDUINI V. HART 31
case. Accordingly, we reject Arduini’s due process
argument.
V
The district court properly found that issue preclusion
prevented Arduini from relitigating the issue of demand
futility. The issue of demand futility was the same in both
Fosbre and this case, and thus there is an identity of issues.
Even assuming the district court looks to the specific
allegations of demand futility to determine whether there is
identity of issues, the vast majority of Arduini’s demand
futility allegations are essentially identical to those raised in
Fosbre. The new allegations, moreover, are cumulative,
could have been raised in Fosbre, or make no difference to
the demand futility analysis because they do not show that at
least half of the current board was “interested.”
Arduini and the Fosbre plaintiffs were in privity because
IGT was the true party in interest and there is no indication
that the Fosbre plaintiffs were inadequate representatives.
Further, there is no inequity in applying issue preclusion here
because the Fosbre plaintiffs fully litigated their demand
futility claim. There was no due process violation because
there is no requirement that shareholders be given notice of
dismissal in a derivative suit where the issue of demand
futility is fully litigated and dismissed on the merits.
Moreover, the record shows that Arduini’s counsel had actual
notice of the Fosbre proceedings.
Because Arduini did not make a pre-suit demand and
cannot show demand futility, dismissal was proper and we
AFFIRM.