Case Name: In re: Apple Inc. E-Book Derivative Litigation
Case No.: 2014-1-CV-269543 (lead case)

This is a consolidated shareholder derivative action by plaintiffs Darrell Burns, Destiny Crane, Steven Berzner, and Sandy Milo, who are shareholders of nominal defendant Apple Inc. Before the Court is plaintiffs’ unopposed motion for preliminary approval of a settlement.

I. Factual and Procedural Background

This action arises from Apple’s alleged anti-competitive behavior after entering the e-book market in January 2010, prompting federal multidistrict antitrust litigation (“the Antitrust Action”) that culminated in a $450 million settlement in 2013. The initial complaints herein were filed in 2014 and 2015. On December 21, 2015, the Court (Hon. Kirwan) overruled defendants’ demurrer to a prior version of the consolidated complaint with respect to the argument that plaintiffs failed to plead demand futility. The Court denied defendants’ motion to reconsider this ruling on February 19, 2016.

Plaintiffs filed the operative Second Consolidated Amended Shareholder Derivative Complaint (“SCAC”) on March 2, 2016, asserting a single claim for breach of fiduciary duty against Apple, its executive Eduardo Cue, and its current/former board members Timothy Cook, Arthur Levinson, Ronald Sugar, Millard Drexler, Albert Gore, Jr., Andrea Jung, Robert A. Iger, William Campbell, and Susan L. Wagner. (SCAC, ¶ 1.) Plaintiffs allege that Apple’s board members breached their fiduciary duties by (i) failing to institute meaningful and adequate internal controls such that the company was protected from antitrust violations, (ii) failing to exercise reasonable oversight of Apple’s compliance with antitrust laws in light of red flags demonstrating that the company’s internal controls were inadequate, and (iii) consciously deciding to violate or fail to comply with the Final Judgment and Order Entering Permanent Injunction in the Antitrust Action (the “Final Judgment”). (Ibid.)

At an April 15th, 2016 case management conference, the Court lifted the initial stay of discovery in this action over defendants’ objection. Apple’s board created a Special Litigation Committee (“SLC”) and moved to stay the action while the committee investigated the merits of plaintiffs’ claims. That motion was denied on August 1, 2016, but the SLC proceeded with its investigation. The parties engaged in discovery and, ultimately, settlement negotiations and mediation.

The parties have now reached a settlement. Before the Court is a motion for preliminary approval of the settlement and proposed notice to shareholders.

II. Legal Standard for Approving a Derivative Settlement

“A court reviewing a settlement agreement considers whether the proposed settlement is fair and reasonable in light of all relevant factors. [Citations.] A court reviews the settlement of a derivative suit as a means of protecting the interests of those who are not directly represented in the settlement negotiations.” (Robbins v. Alibrandi (2005) 127 Cal.App.4th 438, 445.) “The duty of a court reviewing a settlement of a class action provides a useful analogy because the court in such cases seeks to protect the members of the class who, like the corporation and non-named shareholders in a derivative suit, may have no independent representation and little control over the action.” (Id. at p. 449, fn. 2.) Thus, in evaluating the fairness of this derivative settlement, the Court’s analysis is guided by relevant legal authorities regarding the approval of class action settlements.

Generally, “questions whether a settlement was fair and reasonable, whether notice to the class was adequate, … and whether the attorney fee award was proper are matters addressed to the trial court’s broad discretion.” (Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 234-235, citing Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794.)

In determining whether a class settlement is fair, adequate and reasonable, the trial court should consider relevant factors, such as the strength of plaintiffs’ case, the risk, expense, complexity and likely duration of further litigation, … the amount offered in settlement, the extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the presence of a governmental participant, and the reaction of the class members to the proposed settlement.

(Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at pp. 244-245, internal citations and quotations omitted.)

The list of factors is not exclusive and the court is free to engage in a balancing and weighing of factors depending on the circumstances of each case. (Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 245.) The court must examine the “proposed settlement agreement to the extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a whole, is fair, reasonable and adequate to all concerned.” (Ibid., quoting Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1801, internal quotation marks omitted.)

The burden is on the proponent of the settlement to show that it is fair and reasonable. However “a presumption of fairness exists where: (1) the settlement is reached through arm’s-length bargaining; (2) investigation and discovery are sufficient to allow counsel and the court to act intelligently; (3) counsel is experienced in similar litigation; and (4) the percentage of objectors is small.”

(Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 245, citing Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1802.)

The presumption does not permit the Court to “give rubber-stamp approval” to a settlement; in all cases, it must “independently and objectively analyze the evidence and circumstances before it in order to determine whether the settlement is in the best interests of those whose claims will be extinguished,” based on a sufficiently developed factual record. (Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal.App.4th 116, 130.)

III. Settlement Process

Since the discovery stay in this action was lifted, plaintiffs have reviewed tens of thousands of pages of non-public documents from Apple. They served written discovery requests to which defendants responded in significant part. Plaintiffs also conducted an interview of the Monitor appointed by the federal court overseeing the Antitrust Action to review Apple’s internal controls and procedures relating to antitrust compliance and make recommendations for improvements and the hiring of an Antitrust Compliance Officer (“ACO”) to oversee enhancements to Apple’s antitrust compliance program and ensure compliance with the Final Judgment.

Plaintiffs sent a settlement demand on May 18, 2016 and on November 15, 2016, the parties participated in a full-day mediation with Hon. Layn R. Phillips, a retired federal judge. Prior to the mediation, the parties submitted briefs and term sheets to Judge Phillips and exchanged portions of their mediation submissions and other information including Apple’s insurance policies. While the parties did not reach an agreement at the mediation, they continued to negotiate with Judge Phillips’s assistance and reached an agreement-in-principle regarding a nonmonetary settlement on March 3, 2017.

IV. Provisions of the Settlement

The non-monetary settlement provides for the adoption and implementation of certain “Antitrust Resolutions” to be maintained until at least 2022. (Stipulation of Settlement, Ex. A.) Among other things, they require Apple’s Audit and Finance Committee (“AFC”) to meet quarterly, and within four weeks of any formal antitrust investigation. The AFC must also review quarterly written updates from the ACO regarding the results of any antitrust risk assessments and antitrust violations or complaints, an evaluation of the efficacy of Apple’s antitrust compliance measures, and related matters. The Board is also required to discuss any material litigation or potential litigation regarding antitrust issues on a quarterly basis.

The AFC shall also conduct an annual review regarding antitrust matters, including reviewing a report by management and/or any other committee or employee group dedicated to antitrust compliance to assess antitrust risk at both the enterprise level and on a product line basis. The AFC will assess the adequacy of Apple’s antitrust policies pursuant to this review and provide the results of its work to the Board. It will meet at least annually with the top executives it deems critical to the success of Apple’s antitrust efforts to discuss the state of these policies.

Meanwhile, the ACO will be required to meet with employees responsible for any new product launch to discuss the antitrust impact of that product, and will provide a report of these meetings to the Board and CEO. The ACO is also required to obtain a third party review of Apple’s antitrust compliance policy on an annual basis.

The settlement further provides that the Board will formally adopt the “Antitrust Compliance Policies” resulting from the Final Judgment and the Monitor’s recommendations for an additional four years.

In exchange for these reforms, the “Releasing Persons” will release all claims, etc. “existing individually or derivatively on behalf of Apple, against any of the Released Persons whether known or unknown, … which arise out of or relate in any way to the allegations in Plaintiffs’ Complaints,” excluding claims in other pending derivative actions which are set forth in the settlement agreement. The parties have agreed that Apple will not oppose plaintiffs’ request for $2,750,000 in combined attorney fees, litigation costs, and class representative service awards.

V. Fairness of the Settlement

The corporate governance reforms discussed above address the issues raised by the complaint, and Apple agrees that this action was the direct and proximate cause of its decision to implement them. The reforms required by the settlement go well beyond the Antitrust Compliance Policies resulting from the Final Judgment (set forth in Exhibit A.1 to the Stipulation), and the settlement further requires that the Antitrust Compliance Policies remain in effect for an additional four years. While the settlement does not result in a monetary recovery to Apple, the governance reforms inure to its benefit; at an early stage in this derivative litigation, the tradeoff of the released claims for these reforms would appear to be fair, reasonable, and adequate. (See In re Hewlett-Packard Company Shareholder Derivative Litigation (N.D. Cal., Mar. 13, 2015, No. 3:12-CV-06003-CRB) 2015 WL 1153864, at *5; see also Granada Investments, Inc. v. DWG Corp. (6th Cir. 1992) 962 F.2d 1203, 1205 [affirming approval of non-monetary settlement in derivative action; derivative settlements are particularly welcome because such litigation is “notoriously difficult and unpredictable”]; Maher v. Zapata Corp. (5th Cir. 1983) 714 F.2d 436, 466 [“a settlement may fairly, reasonably, and adequately serve the best interest of a corporation, on whose behalf the derivative action is brought, even though no direct monetary benefits are paid by the defendants to the corporation”]; In re Johnson & Johnson Derivative Litigation (D.N.J. 2012) 900 F.Supp.2d 467, 485 [reforms “tailored to remedy the corporate governance failings inherent in J & J’s decentralized management structure” supported approval of a non-monetary derivative settlement].)

At the Court’s direction, plaintiffs’ counsel filed a supplemental declaration addressing the merits and potential value of plaintiffs’ claims on April 26, 2018. The supplemental declaration addresses the specific challenges plaintiffs would face in seeking a monetary recovery in this action, including Judge Kirwan’s rulings on demurrer that they did not state a claim against defendant Cue and they did not plead demand futility with regard to the board’s conduct preceding the Final Judgment in the Antitrust Action. As to their surviving theory that the board failed to comply with the Final Judgment and cooperate with the Monitor, plaintiffs acknowledge that it would be difficult to prove damages resulting from this conduct now that the Antitrust Action has been successfully resolved. Finally, plaintiffs’ counsel explains that Apple’s SLC concluded after an eleven-month investigation that it is not in Apple’s best interest for this action to proceed, and will move to terminate the litigation in the event that settlement is not achieved. In light of these and the other considerations addressed in counsel’s supplemental declaration, the Court concludes that a monetary recovery in this action is unlikely. Given the significant governance reforms that were achieved in these circumstances, the Court finds that the settlement is fair and reasonable.

The Court retains an independent right and responsibility to review the attorney fee provision of the settlement agreement and award only so much as it determines to be reasonable. (See Garabedian v. Los Angeles Cellular Telephone Co. (2004) 118 Cal.App.4th 123, 127-128.) In derivative settlements, “[t]he court therefore must consider whether the negotiated fee will result in unwarranted harm to the corporation and the shareholders, such as would be the situation if the cost of the settlement to the corporation far exceeded its value to the corporation and shareholders.” (Robbins, supra, 127 Cal.App.4th at p. 450 [reducing fee award to $150,000 where value of reforms was modest at best]; see also In re Galena Biopharma, Inc. Securities Litigation (D. Or., June 24, 2016, No. 314CV00367SILEAD) 2016 WL 3457165, at *11 [valuing non-trivial corporate governance reforms at $1 million].) Here, the settlement achieves material corporate governance reforms that would appear to support the fee award requested by plaintiffs. Nevertheless, as a cross-check, plaintiffs’ counsel should submit lodestar information prior to the final approval hearing so the Court can compare the lodestar information with the requested fees.
VI. Notice

Like a class notice, a notice of a derivative settlement should include “[a] brief explanation of the case, including the basic contentions or denials of the parties.” (Cal. Rules of Court, rule 3.766(d).) The notice should explain the settlement and the procedure for making an objection.

Here, the notice and summary notice inform shareholders of the nature of the action and of the settlement, including a summary of the governance reforms discussed above and a statement regarding the amount of fees that plaintiffs’ counsel will seek. The notice will be filed with the Securities and Exchange Commission on a Form 8-K and Apple will post a link to the Form 8-K on its investor website. In addition, the summary notice will be published for one day in Investor’s Business Daily.

The Court finds that the proposed form and method of notice are reasonably calculated to apprise shareholders of the settlement. At the Court’s direction, the notice was modified to state that shareholders may appear and object at the final fairness hearing without submitting any written objection. In addition, the first page of the notice was modified to reflect that the consideration for the settlement is the board’s agreement to adopt the Antitrust Resolutions, rather than monetary consideration, and to state the amount of attorney fees and expenses that plaintiffs’ counsel will request.

With these modifications, the notice to shareholders is adequate.

VII. Conclusion and Order

Plaintiffs’ motion for preliminary approval is GRANTED. The final approval hearing shall take place on July 13, 2018 at 9:00 a.m. in Dept. 1.

The Court will prepare the order.