In re Google Inc. Shareholder Derivative Litigation

Case Name:   In re Google Inc. Shareholder Derivative Litigation

Case No.:       1-14-CV-261485

 

Plaintiffs The Police Retirement System of St. Louis, Marilyn Clark, and Pradeep Shah (“Plaintiffs”) bring this consolidated shareholder derivative action on behalf of themselves and all other shareholders of nominal defendant Google, Inc. (“Google”) against Google and various officers and directors of Google[1] alleging that Google entered into illegal “gentleman’s agreements” with numerous other companies located in Silicon Valley to prevent each company from actively recruiting each other’s employees in order to eliminate hiring competition and drive down employee wages.  In the operative Consolidated Amended Shareholder Derivative Complaint (“CASDC”), filed June 3, 2014, Plaintiffs allege that by 2005, “an exclusive group of tech elites, including defendants Sergey Brin (“Brin”), Larry Page (“Page”), and [Eric E. Schmidt (“Schmidt”)]…entered into illegal anticompetitive agreements …  creating and/or ratifying policies and protocols that would substantially suppress innovation.”[2]  Plaintiffs allege that Google’s anticompetitive agreements triggered an investigation by the Antitrust Division of the United States Department of Justice (“DOJ”) in 2009, which resulted in a September 2010 settlement that required Google and five other companies to end their anticompetitive agreements.[3]

 

Plaintiffs further allege that beginning in May 2011, technology employees filed a series of class action lawsuits against Intel, and these actions were consolidated under the caption In re High-Tech Employee Antitrust Litigation, No. 5:11-cv-02509-LHK (N.D. Cal.) (the “Employee Action”).[4]  Plaintiffs allege that on January 27, 2012, the parties in the Employee Action filed an unredacted Joint Case Management Conference Statement (“CMC Statement”) that quoted the contents of certain internal documents from Intel and other companies that were uncovered in discovery in the Employee Action, and this was the first time the public learned that the anticompetitive practices detailed herein were the result of “gentleman’s agreements” between the officers and directors of the companies involved in the collusive scheme, including Google.[5]  Plaintiff further allege on April 24, 2014, the parties to the Employee Action informed the court that had reached an agreement to settle the case for $324.5 million, but the class representative and one of the four plaintiffs in the case have questioned whether the settlement amount was adequate.[6]

 

The CASDC asserts six causes of action for (1) breach of fiduciary duty (against the Individual Defendants); (2) abuse of control (against Brin, Schmidt, and Page); (3) gross mismanagement (against Brin, Schmidt and Page); (4) waste of corporate assets (against the Individual Defendants); (5) unjust enrichment (against Defendants); (6) indemnification and contribution (against the Individual Defendants).

 

Plaintiffs allege that The Police Retirement System of St. Louis has continuously held Google stock since at least January 1, 2007; Clark has continuously held Google stock since at least June 2007, and Shah has continuously held Google stock since at least January 1, 2007.[7]

 

Plaintiffs preemptively address potential statute of limitations issues by alleging the following:

 

  • The statute of limitations does not bar Plaintiffs’ shareholder derivative action.  Plaintiffs have brought this complaint within the applicable statute of limitations.[8]
  • Alternatively, the statute of limitations was tolled during Executive Officer Defendants’ adverse domination of Google and the concealment by Defendants of their wrongful acts.  Here, Defendant Directors and Google were wholly under the adverse domination of Brin, Page, and Schmidt, who collectively control almost two-thirds of shareholder votes.  Consequently, Director Defendants were “deemed to be in the same position as an incompetent person or a minor without legal capacity either to know or to act in relation to” the wrongful conduct.  Beal v. Smith (1920) 46 Cal.App. 271, 279.  Moreover, Defendants concealed, and continue to conceal, their wrongful acts and this is a continuing conspiracy.  The statute of limitations has therefore been tolled since Brin, Page, and Schmidt adversely dominated Google.  The statute of limitations should not bar Plaintiff, an innocent stockholder, from bringing this shareholder derivative suit.  Additionally, Plaintiffs did not and could not have discovered the liability of Defendants until plaintiffs in the Employee Action filed the Case Management Conference Statements referenced herein.[9]

 

Google and the Individual Defendants (collectively “Defendants”) now demur to the CASDC.  Defendants argue that Plaintiffs’ derivative claims are barred by the applicable three-year statute of limitations for derivative actions.  Defendants argue the claims are not tolled under the “adverse domination” doctrine because this doctrine is not endorsed by Delaware law.  Defendants argue that Plaintiffs were on notice of their claims by September 2010 when the United States Department of Justice (“DOJ”) filed its complaint and settlement against Google and other companies, which triggered inquiry notice.

 

Defendants also argue that Plaintiffs lack standing to sue derivatively because they only owned Google stock for a portion of the alleged wrongful conduct they challenge.

 

Judicial Notice

 

Defendants request judicial notice of documents attached as Exhibits A-U to the Declaration of Elizabeth C. Peterson ISO Demurrer.

 

  • Exh. A – United States Department of Justice Complaint, United States v. Lucasfilm, Ltd., Case No. 1:10-cv-02220-RBW (D.D.C. filed Dec. 21, 2010);
  • Exh. B – Shareholder Derivative Complaint, The Police Retirement System of St. Louis v. Cook, et al. (Apple Inc.), Case No. 1-14-CV-262174 (Super. Ct. Cal., Santa Clara Cnty. filed March 14, 2014);
  • Exh. C – Shareholder Derivative Complaint, Krawczyk v. Cook, et al. (Apple Inc.), Case No. 1-14-CV-266403 (Super. Ct. Cal., Santa Clara Cnty. filed June 11, 2014);
  • Exh. D – Consolidated Shareholder Derivative Complaint, In re Intel Corp. Shareholder Derivative Litigation, Case No. 1-14-CV-261831 (Super. Ct. Cal., Santa Clara Cnty. filed Apr. 24, 2014);
  • Exh. E – Shareholder Derivative Complaint, Achermann v. Bryant, et al. (Intel Corp.), Case No. 1-14-CV-265053 (Super. Ct. Cal., Santa Clara Cnty. filed May 8, 2014);
  • Exh. F – Shareholder Derivative Complaint, Steinberg v. Narayen, et al. (Adobe Systems, Inc.), Case No. 1-14-CV-263627 (Super. Ct. Cal., Santa Clara Cnty. filed Apr. 10, 2014);
  • Exh. G – Shareholder Derivative Complaint, Duggan v. Donahoe, et al. (eBay Inc.), Case No. 1-14-CV-264054 (Super. Ct. Cal., Santa Clara Cnty. filed Apr. 18, 2014);
  • Exh. H – United States Department of Justice Complaint, United States v. Adobe Systems, Inc., et al., Case NO. 1:10-cv-01629-RBW (D.D.C. filed Sept. 24, 2010);
  • Exh. I – Final Judgment, United States v. Adobe Systems, Inc., et al., Case No. 1:10-cv-1629-RBW (D.D.C. filed Mar. 18, 2011);
  • Exh. J – Stipulation and Proposed Final Judgment, United States v. Adobe Systems, Inc., et al., Case No. 1:10-cv-1629-RBW (D.D.C. filed Sept. 24, 2011);
  • Exh. K – Complaint, Hariharan v. Adobe Systems, Inc., et al., Case No. CIV 11574066 (Super. Ct. Cal., Alameda Cnty. filed May 4, 2011);
  • Exh. L – Letter, In re High-Tech Employee Antitrust Litigation, case No. 11-cv-2509-LHK (N.D. Cal. filed Apr. 24, 2014);
  • Exh. M – Notice of Motion and Motion for Preliminary Approval of Class Action Settlement, In re High-Tech Employee Antitrust Litigation, Case No. 11-CV-2509-LHK (N.D. Cal. filed May 22, 2014).
  • Exh. N – Press Release, Department of Justice, Office of Public Affairs, Sept. 24, 2010.
  • Exh. O – Miguel Helft, Tech firms Said to Be in Talks to Settle Inquiry Over Recruiting, N.Y. Times (Sept. 17, 2010);
  • Exh. P – Brent Kendall, Six Tech Firms Settle Federal Hiring Probe, Wall St. J. (Sept. 24, 2010);
  • Exh. Q – Steve Lohr, Six Technology Firms Agree to More Hiring Competition, N.Y. Times (Sept. 24, 2010);
  • Exh. R – Joelle Tesller, Apple, Google, Others Settle DOJ Inquiry Into Hiring Practices, Huffington Post (Sept. 24, 2010);
  • Exh. S – Ben Rooney, 6 tech giants settle DOJ hiring lawsuit, CNNMoney.com (Sept. 24, 2010).

 

Peterson Exhibits A-M are relevant court records from actions filed by the DOJ, the Employee Action, and derivative actions filed against other companies (e.g., Apple Inc., Adobe Systems, Inc., Intel Corp., eBay) for similar anticompetitive agreements as alleged here.  (See Cal. Evid. Code, § 452, subd. (d) [judicial notice of court records].)

 

Peterson Exhibit N is the DOJ’s September 24, 2010 press release regarding the settlement with Adobe, Apple, Google, Intel, Intuit and Pixar.  Because the CASDC expressly refers to the DOJ’s announcement of the settlement on its website on September 24, 2010,[10] there is no reasonable dispute as the existence of this announcement and it is capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.  (See Cal. Evid. Code, § 452, subd. (h); see also, Ingram v. Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3 [unopposed judicial notice of letter and media release not attached to but quoted and summarized in complaint].)

 

Peterson Exhibits O-S are media articles regarding the DOJ investigation and settlement from September 17 and 24, 2010.  On August 26, 2014, Defendants filed a supplemental request for judicial notice of Peterson Exhibit V, which is a printout of a September 24, 2010 statement posted on the Google Public Policy Blog regarding DOJ settlement.  The request is made under Evidence Code section 452 subdivision (h).

 

Plaintiffs oppose the request for judicial notice of the media articles on the grounds that the extent of press coverage of the DOJ’s investigation and settlement with tech companies in September of 2010 is disputed.

 

The sole purpose of Defendants’ request for judicial notice of the media articles is to have the Court interpret these articles as evidence of the extent of media coverage of the DOJ investigation and settlement.  However, the extent of media coverage of the DOJ’s investigation and settlement with various tech companies is reasonably subject to dispute, and constructive suspicion is not enough to trigger the statute of limitations.  (See Unruh-Haxton v. Regents of University of California (2008) 162 Cal.App.4th 343, 364-366 [court evaluating demurrer may not take judicial notice of “constructive suspicion” due to media coverage].)

 

Thus, Defendants’ request for judicial notice is GRANTED IN PART as to Peterson Exhibits A-M, but DENIED as to Peterson Exhibits N-S and V.

 

Demurrer
The parties agree that Delaware law applies and imposes a three-year statute of limitations on derivative claims.[11]

 

Delaware law allows for equitable tolling of the three-year statute of limitations for derivative suits “while a plaintiff has reasonably relied upon the competence and good faith of a fiduciary” and “[n]o evidence of actual concealment is necessary in such a case, but the statute is only tolled until the investor ‘knew or had reason to know of the facts constituting the wrong.’”  (In re Tyson Foods, Inc. Consol. S’holder Litig. (Del. Ch. 2007) 919 A.2d 563, 584-585.)  Here, Plaintiffs allege that despite the DOJ’s investigation, Google did not inform shareholders of the DOJ’s concerns, and an investor reviewing Google’s annual filings and proxy statements would not have seen any mention of the investigation, the settlement reached in September of 2010, or the final judgment signed on March 17, 2011.[12]  Plaintiffs allege that Google’s Proxy Statements on Form DEF 14-A filed with the Securities and Exchange Commission (“SEC”) on March 29, 2010, April 20, 2011, May 9, 2012, April 24, 2013, and even the most recent Form DEF 14-A filed on March 28, 2014, make no mention whatsoever of the DOJ investigation, settlement, or final judgment, and Google’s Annual Reports on Form 10-K filed with the SEC on February 12, 2010, February 11, 2011, January 26, 2012, January 29, 2013, and February 11, 2014, do not mention the DOJ’s investigation, settlement, or final judgment in the “Legal Proceedings” section or elsewhere.[13]

 

These allegations could support the inference that Plaintiffs justifiably relied on the good faith of the Individual Defendants as fiduciaries during this time.  Although the CASDC admits that the DOJ announced the settlement of its action on its own website on September 24, 2010,[14] it is appropriately a question of fact whether this announcement was sufficient to put Google shareholders on inquiry notice.

 

Defendants’ cited authorities are distinguishable and do not compel an opposite conclusion.  The Delaware Court of Chancery in In re Dean Witter P’ship Litig., (Del. Ch. 1998) 1998 Del. Ch. LEXIS 133, at *30, fn. 49 based inquiry notice on the plaintiff’s “possession of facts sufficient to make him suspicious or that ought to make him suspicious[.]”  Here, the CASDC does not admit or suggest Plaintiffs’ possession of facts in September 2010 that should have made them suspicious about Google’s involvement in the anticompetitive agreement scheme; rather, Plaintiffs allege lack of knowledge until the pertinent facts were made known in a 2012 filing in the Employee Action.

 

In Jepsco Ltd. v. B.F. Rich Co. (Del. Ch. Feb. 14, 2013) 2013 Del. Ch. LEXIS 45, a privately held corporation’s minority shareholder sued the corporation and a court-appointed custodian for breach of fiduciary duty arising from a confidential settlement that was entered into that involved the sale of the sole corporate asset.  Although the details of the settlement were under seal, the court’s orders, the custodian’s letters, and numerous other letters, motions, and other filings were matters of public record, and the minority shareholder/plaintiff admitted that it had actual knowledge of the settlement and the sale of the Asset before the statute of limitations lapsed.  (See Jepsco, supra, 2013 Del. Ch. LEXIS 45, *45.)  Thus, Jepsco is distinguishable and does not support a broad application of inquiry notice where there was allegedly no actual knowledge of the DOJ settlement.

 

In Fike v. Ruger (Del. 2000) 752 A.2d 112, minority members of a joint venture to develop certain commercial real estate sued for an accounting and declaratory and injunctive relief after the joint venture decided to sell the real estate.  In finding laches, the court held that “[t]he record clearly demonstrates that the joint venture’s poor financial picture was well known to Plaintiffs by the mid- to late-1980s” based on numerous examples of evidence, including the plaintiffs’ receipt of copies of the joint venture’s tax returns and financial statements for the relevant years, a letter sent to one of the plaintiffs noting that ongoing interest payments “had the potential to completely erode Fike’s equity in the venture”, the plaintiffs’ personal witnessing of the building falling into disrepair and tenants departing, and finally, the fact that “[t]he joint venture’s financial troubles were also chronicled in a September 1987 newspaper article discussing, inter alia, $ 50,000 in unpaid real estate taxes.”  (Fike, supra, 752 A.2d at pp. 113-114.)  The court also found that one of the plaintiffs “at least had actual knowledge of the claims more than three years prior to bringing suit in the Court of Chancery.”  (Id. at p. 115.)  Notably, Fike was a summary adjudication case, and the newspaper article was only one piece of evidence supporting the finding of laches.  Fike does not support Defendants’ attempt, on demurrer, to dismiss the action based solely on the DOJ’s public notice of the settlement, without Plaintiffs’ actual knowledge.

 

For these reasons, the demurrer based on statute of limitations grounds is OVERRULED.

 

Regarding standing, Delaware law requires a derivative plaintiff to aver with particularity that they held stock in the company “at the time of the transaction of which such stockholder complains.”  (8 Del. Code, § 327; see Del. Ch. Ct. R. 23.1; Desimone v. Barrows (Del. Ch. 2007) 924 A.2d 908, 927.)  Here, Plaintiffs allege that they have been Google shareholders since January or June 2007.  Defendants argue that the challenged wrongdoing began in 2005, and thus, Plaintiffs have not owned Google stock for the entire period of the alleged wrongdoing.

 

Defendants rely primarily on In re Accuray Inc. S’holder Deriv. Litig. (N.D. Cal. 2010) 757 F.Supp.2d 919 where the federal court found the allegations of standing to be insufficient.  “Plaintiffs generally allege that they were shareholders of ‘Accuray at the time of the continuing wrongs complained of herein.’  [Citation.]  This vague allegation does not satisfy the strict standard of Rule 23.1.  Plaintiffs do not identify when they purchased Accuray shares.”  (In re Accuray, supra, 757 F.Supp.2d at p. 926.)  The court noted that the plaintiffs’ declarations were not properly considered on a motion to dismiss, but even if the court were to consider them, “they would not support the allegation that all Plaintiffs continuously owned shares of Accuray throughout the entire period of Defendants’ alleged wrongdoing, February, 2007 to January, 2009.”  (Ibid, emphasis added.)  Notably however, this portion of In re Accuray is dictum, since the main standing issue was the plaintiffs’ failure to allege the dates of stock ownership with particularity.

 

Plaintiffs argue that they have standing to pursue the derivative claims because they owned Google stock during the relevant period and they allege a continuing wrong.  Defendants argue the “continuing wrong” exception does not apply because the transactions at issue occurred “almost exclusively” in 2005 and 2006.

 

Desimone makes clear that the “continuing wrong” exception to section 327 “is a narrow one that typically is applied only in unusual situations, such as where a plaintiff acquires his stock after a particular transaction has begun but before it is completed.  What is clear is that it is not, as the plaintiff would seek to characterize it, a sweeping exception to the contemporaneous ownership requirement of § 327.  Importantly, the continuing wrong doctrine does not bestow standing upon a stockholder to challenge transactions occurring before he bought his stock simply because they are similar or related to transactions or other conduct that occurred later.  This court has traditionally been skeptical about the type of continuing wrong allegations made here and has refused to blind itself to the fact that a plaintiff was actually challenging a discrete series of individual transactions that pre-dated his stock ownership. . . . [O]ur Supreme Court has made it clear that the concept of a continuing wrong applies only when ‘the alleged wrongful acts are … so inexorably intertwined that there is … one continuing wrong.’  In the same vein, it is settled that the failure to remedy a wrong does not mean that the wrong is continuing.”  (Desimone, supra, 924 A.2d at pp. 924-925, footnotes omitted.)

 

Here, the conduct challenged in the CASDC is Google’s anticompetitive agreements with other tech companies.  As Defendants point out, most of these agreements were alleged to have been entered into before the period of Plaintiffs’ stock ownership in Google.[15]  However, the CASDC contains a number of allegations of communications and conduct that occurred during the period of Plaintiffs’ ownership of Google stock that could be characterized as enforcing or giving effect to the agreements.[16]  This alleged conduct goes beyond a mere failure to remedy a past wrong, and arguably constitutes wrongful acts that are inexorably intertwined with the original act of entering into the agreements.[17]

 

For these reasons, the demurrer based on standing grounds is also OVERRULED.

[1] These individuals include Sergey Brin (“Brin”), Larry Page (“Page”), Eric Schmidt (“Schmidt”), Robert Alan Eustace (“Eustace”), Omid Kordestani (“Kordestani”), Jonathan J. Rosenberg (“Rosenberg”), Shona L. Brown (“Brown”), Arnnon Geshuri (“Geshuri”), Paul Otellini (“Otellini”), L. John Doerr (“Doerr”), Ann Mather (“Mather”), John L. Hennessy (“Hennessy”), K. Ram Shriram (“Shriram”), Shirley M. Tilghman (“Tilghman”), Michael Moritz (“Moritz”), and Arthur D. Levinson (“Levinson”) (collectively the “Individual Defendants”).  Brin, Page, Schmidt, Eustace, Kordestani, Rosenberg, Brown, and Geshuri are referred to collectively in the CASDC as the “Executive Officer Defendants.”  Otellini, Doerr, Mather, Hennessy, Shriram, and Tilghman are referred to collectively as the “Director Defendants.”  Mortiz and Levinson are referred to collectively as the “Former Director Defendants.”

[2] Consolidated Amended Shareholder Derivative Complaint (“CASDC”) ¶ 4.

[3] CASDC ¶ 10.

[4] CASDC ¶ 11.

[5] CASDC ¶¶ 119, 121.

[6] CASDC ¶ 11.

[7] CASDC ¶¶ 20-22.

[8] CASDC ¶ 185.

[9] CASDC ¶ 186.

[10] CASDC ¶ 116.

[11] Plaintiffs allege that Google is a Delaware corporation.  (CASDC ¶ 23.)

[12] CASDC ¶ 117.

[13] Ibid.

[14] CASDC ¶ 116.

[15] CASDC ¶ 73.

[16] See, e.g., CASDC ¶ 85 [Geshuri explaining “no cold call” policy with Apple on Feb. 11, 2008]; ¶ 86 [March 7, 2007 communications with Steve Jobs to Schmidt regarding Google’s recruiting of an Apple engineer]; ¶ 87 [September 26, 2007 communications between Otellini and Intel executive regarding Google’s selective hiring of people at Intel].

[17] Even if the continuing wrong exception did not apply, this simply means that the CASDC alleges multiple discrete transactions, including at least one that occurred during the period of stock ownership by the Police Retirement System of St. Louis and Shah: namely, Google’s anticompetitive agreement with Dell Inc. in April 2007.  (See CASDC ¶¶ 73, 114.)

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