Gubricky ex rel. Chipotle Mexican Grill, Inc. v. Ells
2017 WL 2459749, 255 F.Supp.3d 1119, 2017 U.S. Dist. LEXIS 87035 (2017)
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Rule of Law:
Under Delaware law, to establish demand futility in a shareholder derivative action alleging a board's failure of oversight (a 'Caremark' claim), a plaintiff must plead particularized facts showing that a majority of the board faces a substantial likelihood of personal, non-exculpated liability, which requires demonstrating the directors consciously disregarded known risks or 'red flags' of corporate misconduct.
Facts:
- In April 2008, a foodborne illness outbreak at a Chipotle restaurant in Kent, Ohio, led the company to establish the 'Norwalk Protocol' for managing sick employees.
- On February 4, 2015, Chipotle's annual SEC filing acknowledged a heightened risk of foodborne illness due to its use of fresh produce and manual cooking methods.
- In June or July 2015, Chipotle altered its paid sick leave policy, eliminating paid sick days for employees with less than one year of service.
- In early August 2015, a norovirus outbreak in Hazel Dell, Washington, was linked to a sick employee who had been told to come to work.
- In late August 2015, a norovirus outbreak at a Chipotle in Simi Valley, California, sickened at least 234 people.
- Between August and September 2015, a salmonella outbreak linked to tomatoes sickened 64 people across 22 Chipotle restaurants in Minnesota.
- Beginning in October 2015, a multi-state E. coli outbreak sickened 53 people, causing Chipotle to temporarily close 43 restaurants in Oregon and Washington.
- In early December 2015, a norovirus outbreak centered at a Boston Chipotle sickened 141 people and was linked to an employee working while sick.
Procedural Posture:
- Shareholder Sean Gubricky filed a shareholder derivative action on behalf of Chipotle Mexican Grill, Inc. against ten of its directors and officers in the United States District Court for the District of Colorado (a court of first instance).
- In his complaint, Gubricky did not make a pre-suit demand on Chipotle's Board of Directors, alleging that such a demand would have been futile.
- The Defendants filed a Motion to Dismiss, arguing that Gubricky failed to plead demand futility with the particularity required by Federal Rule of Civil Procedure 23.1 and Delaware law.
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Issue:
Under Delaware law, does a shareholder plaintiff sufficiently plead demand futility in a derivative action by alleging a series of damaging foodborne illness outbreaks, without presenting particularized facts that a majority of the board of directors had knowledge of and consciously disregarded specific red flags signaling systemic failures in the company's food safety protocols?
Opinions:
Majority - William J. Martinez
No. A shareholder plaintiff fails to sufficiently plead demand futility without particularized facts showing a majority of the board consciously disregarded known risks. Under Delaware's Rales test, which applies to oversight failure claims, the plaintiff must show that a majority of the board could not have exercised disinterested business judgment. Because Chipotle's corporate charter includes an exculpatory clause protecting directors from monetary damages for breaches of the duty of care, the plaintiff must plead a non-exculpated claim, such as a breach of the duty of loyalty or bad faith. For an oversight ('Caremark') claim, this requires pleading with particularity that directors either utterly failed to implement a reporting system or, having implemented one, consciously disregarded red flags of misconduct. Here, the plaintiff's alleged 'red flags'—such as the company's acknowledged business risks, an internal audit showing under-spending, and the outbreaks themselves—do not establish that the board had contemporaneous knowledge of systemic failures and consciously chose to ignore them. The board was not even aware of several early outbreaks until months later, and the other issues amounted to business judgments that, in hindsight, were ill-advised but not evidence of bad faith or a conscious disregard of duty.
Analysis:
This case exemplifies the 'impossibly sky-high' pleading burden that Delaware law places on plaintiffs in shareholder derivative suits alleging director oversight failures. It reinforces the strength of the business judgment rule and the protective power of § 102(b)(7) exculpatory clauses, which force plaintiffs to plead bad faith rather than mere negligence. The court's analysis demonstrates that even a catastrophic series of publicly known failures is insufficient to establish demand futility without specific allegations linking a majority of individual directors to a conscious disregard of known risks. This precedent significantly narrows the path for holding directors accountable for passive failures in oversight, requiring plaintiffs to uncover evidence of actual, knowing misconduct before a suit can proceed.
