In Re Polycom, Inc. Derivative Litigation

Case Name:   In Re Polycom, Inc. Derivative Litigation

Case No.:       1-13-CV-256608

 

This is a consolidated shareholder derivative suit by shareholders of nominal defendant Polycom, Inc. (“Polycom”).  The consolidated cases are Aaron Ware v. Andrew M. Miller, et al., Case No. 1-13-CV-256608 (lead), filed November 22, 2013, and James Clem v. Miller, et al., Case No. 1-13-CV-257764, filed December 13, 2013.  Ware and Clem (“Plaintiffs”) each sue Polycom and certain directors and officers of Polycom for breach of fiduciary duty, unjust enrichment, and corporate waste.  Both actions arise out of a July 23, 2013 company regulatory filing which revealed that Polycom’s CEO Andrew M. Miller (“Miller”) was forced to resign after an investigation by the Audit Committee of the Board of Directors had discovered certain “irregularities” in Miller’s submission of expense reimbursement requests.[1]  Plaintiffs allege that despite these irregularities, the Polycom Board still provided Miller with an extremely lucrative “golden parachute,” including a $500,000 severance payment, bonuses and stock awards.[2]  Plaintiffs also allege that Miller breached his duties to Polycom shareholders by failing to pursue critical business opportunities that would have allowed the company to achieve a solution to technological deficiencies in its products, and to maintain its relationship with a key customer.[3]
Ware alleges that in press releases and Form 10-Qs filed with the U.S. Securities and Exchange Commission (“SEC”), the defendants concealed from shareholders that Miller was submitting improper expense reimbursements, and that Polycom’s internal controls were inadequate.[4]

 

Clem alleges false statements and omissions in the company’s annual Proxy Statement filed with the SEC on April 19, 2013 in which the Proxy omitted Miller’s false expense reports, misrepresented Miller’s compensation, and provided a false perception of Miller’s qualification for leadership.[5]  Clem also alleges that the Board caused Polycom to repurchase over $128 million of its own artificially inflated stock, which is now the subject of a securities class action filed in the U.S. District Court for the Northern District of California.[6]

 

Polycom now moves to stay this case pending resolution of two federal actions.

 

Polycom submits that a securities class action entitled Nathanson v. Polycom, Inc., No. 3:13-cv-03476-SC the (“Securities Class Action”) was filed in the U.S. District Court for the Northern District of California on July 26, 2013.[7]  According to Polycom, the Securities Class Action was brought on behalf of all persons who purchased or acquired Polycom securities between January 20, 2011 and July 23, 2013 and alleges that Polycom and the other defendants violated federal securities laws because Miller’s false expense reports caused Polycom’s financial statements to be false.

 

Polycom also submits that a derivative action entitled In re Polycom, Inc. Derivative Litigation, Lead Case No. 3:13-cv-03880-SC (the “Federal Derivative Action”) was filed in the U.S. District Court for the Northern District of California on August 21, 2013, alleging the individual defendants issued or authorized materially false and misleading statements or omissions regarding Miller’s improper submission of expense reimbursements, Miller’s compliance with Polycom’s Code of Business Ethics, Polycom’s operating expenses and financial results, and the efficacy of Polycom’s internal controls with regard to executive expense reimbursement.[8]  According to Polycom, the plaintiffs in the Federal Derivative Action (like Plaintiffs here) allege that they did not make a pre-suit demand on the Polycom Board of Directors because it would have been futile.

 

Polycom argues that the Court should stay this action pending the outcome of the Federal Derivative Action because the federal action involves substantially identical factual and legal issues that could lead to inconsistent findings or rulings on common issues like demand futility.  Polycom argues a stay would preserve resources and avoid unnecessary costs that would be imposed on Polycom if it was forced to simultaneously litigate this action in tandem with the Federal Derivative Action.  Polycom further argues that a stay is necessary to prevent prejudice to Polycom because it is a defendant in the substantially similar federal Securities Class Action, and simultaneous litigation would force Polycom to prosecute the same allegations of wrongdoing here that it is defending itself against in the Securities Class Action.

 

In opposition, Plaintiffs argue the motion to stay should be denied because there is no actual risk to Polycom’s defense in the Securities Class Action until witnesses whose knowledge and statements may be imputed to Polycom testify under oath in this action and face impeachment.  Plaintiffs argue their counsel can coordinate parallel litigation to avoid imposing undue burdens or any risk of prejudice.  As for the Federal Derivative Action, Plaintiffs argue that little has been accomplished in that case, and Plaintiffs accuse Defendants of forum-shopping by not seeking to stay the Federal Derivative Action.  Plaintiffs argue that no undue burden or prejudice to Polycom would result from briefing Defendants’ pleadings challenges, and Plaintiffs’ counsel is experienced in coordinating discovery in related cases in multiple fora.  Plaintiffs argue that if the Court stays this action, the Court should mitigate prejudice to Plaintiffs by affording them access to all discovery generated in the related actions.

 

Analysis:  Trial courts generally have the inherent power to stay proceedings in the interests of justice and to promote judicial efficiency.  (Freiberg v. City of Mission Viejo (1995) 33 Cal.App.4th 1484, 1489.)  California Code of Civil Procedure section 410.30 subdivision (a) provides, “When a court upon motion of a party or its own motion finds that in the interest of substantial justice an action should be heard in a forum outside this state, the court shall stay or dismiss the action in whole or in part on any conditions that may be just.”

 

“[W]hen a federal action has been filed covering the same subject matter as is involved in a California action, the California court has the discretion but not the obligation to stay the state court action.  [Citations.]  [¶]  ‘In exercising its discretion the court should consider the importance of discouraging multiple litigation designed solely to harass an adverse party, and of avoiding unseemly conflicts with the courts of other jurisdictions.  It should also consider whether the rights of the parties can best be determined by the court of the other jurisdiction because of the nature of the subject matter, the availability of witnesses, or the stage to which the proceedings in the other court have already advanced.’  [Citation.]  The California Supreme Court also has isolated another critical factor favoring a stay of the state court action in favor of the federal action…– the federal action is pending in California not some other state.  [Citation.]”  (Caiafa Prof. Law Corp. v. State Farm Fire & Cas. Co. (1993) 15 Cal.App.4th 800, 804.)

 

Plaintiffs do not dispute Polycom’s position that the instant consolidated action is substantially identical to both the Federal Derivative Action and the Securities Class Action.  All of these actions are based on Miller’s false expense reports and the resulting misrepresentations and omissions in Polycom’s public documents, press releases and regulatory filings.  Particularly with regard to the Federal Derivative Action, there is an obvious potential for conflicting rulings between the two courts on common issues like demand futility and the duties of the Polycom Board.  Furthermore, Clem has filed a Notice of Related Case in which he admitted the Securities Class Action involves the same parties and is based on the same or similar claims and arises from the same or substantially identical transactions, incidents, or events requiring the determination of the same or substantially identical questions of law or fact.[9]  Finally, a “critical” Caifa factor that favors a stay is that the Federal Derivative Action and the Securities Class Action are both in California, not another state.  Based on these factors, the Court finds that the interests of justice support the requested stay of the instant consolidated action pending resolution of the Federal Derivative Action and the Securities Class Action.  The motion to stay is GRANTED.

 

[1] Ware Compl. ¶ 2; Clem Compl. ¶ 3.

[2] Ware Compl. ¶ 3; Clem Compl. ¶ 4.

[3] Ware Compl. ¶ 4; Clem Compl. ¶ 5.

[4] Ware Compl. ¶¶ 48, 50, 53, 55, 56, 58, 60, 62, 64.

[5] Clem Compl. ¶ 7.

[6] Clem Compl. ¶ 8.

[7] See First Amended Compl., Exh. E to Decl. Philip K. Rucker ISO Polycom’s Mot. to Stay.

[8] See Verified Consol. First Amended S’holder Deriv. Compl., Rucker Exh. F.

[9] See Clem Action, docket no. 4.

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