In re Facebook, Inc.
367 F. Supp. 3d 1108 (2019)
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Rule of Law:
A valid forum-selection clause in a corporation's certificate of incorporation is enforceable against shareholders in a derivative suit and requires dismissal of state law claims filed in another forum. To excuse the pre-suit demand requirement in a derivative suit, plaintiffs must plead particularized facts showing that a majority of the board faces a substantial likelihood of personal liability, which is not met by generalized allegations of ignoring 'red flags' dissimilar to the specific corporate harm alleged.
Facts:
- Facebook is a Delaware corporation with its headquarters in Menlo Park, California.
- In 2011, the Federal Trade Commission (FTC) entered into a consent decree with Facebook, requiring it to establish a comprehensive privacy program and undergo biennial third-party audits, with oversight responsibility falling to Facebook's Board of Directors.
- In 2015, news reports emerged that Cambridge Analytica, a political consulting firm, was improperly using data from millions of Facebook users.
- After the 2015 discovery, Facebook stated it had received written certifications from the responsible third parties that all improperly obtained data had been destroyed.
- In March 2018, it was reported that Cambridge Analytica may not have deleted the data and was still misappropriating user information to target political advertising.
- Facebook's Restated Certificate of Incorporation contains an exclusive forum-selection clause designating the Court of Chancery of the State of Delaware as the sole forum for any derivative action brought on behalf of the corporation.
- During a period when Facebook's stock price was allegedly artificially inflated, Individual Defendants Zuckerberg, Sandberg, and Koum collectively sold approximately $1.5 billion worth of their personally-held Facebook shares.
Procedural Posture:
- Jeremiah Hallisey and other shareholders filed a consolidated shareholder derivative complaint in the U.S. District Court for the Northern District of California against Individual Defendants and nominal Defendant Facebook, Inc.
- Facebook filed a motion to dismiss the state law claims based on the doctrine of forum non conveniens, citing its corporate charter's forum-selection clause.
- Facebook filed a motion to dismiss the federal law claims under Federal Rule of Civil Procedure 23.1 for failure to plead that a pre-suit demand on the board would have been futile.
- The Individual Defendants filed a separate motion to dismiss the complaint under Federal Rule of Civil Procedure 12(b).
- Christopher Leagre, a plaintiff in a parallel derivative action in Delaware, filed a motion to intervene in the California action.
- The U.S. District Court considered these pending motions.
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Issue:
Does a forum-selection clause in a Delaware corporation's certificate of incorporation require dismissal of state law derivative claims brought in a California federal court, and do plaintiffs' allegations that the board ignored generalized privacy 'red flags' satisfy the particularity requirement under FRCP 23.1 to excuse a pre-suit demand on the board?
Opinions:
Majority - Judge Haywood S. Gilliam, Jr.
Yes, as to the forum-selection clause; No, as to demand futility. The valid forum-selection clause in Facebook's corporate charter must be enforced, requiring the state law claims to be dismissed. The shareholders are bound by this provision, and they have not shown that the designated Delaware forum is inadequate or that exceptional public interest factors justify overriding the clause. As to the remaining federal claims, the plaintiffs have failed to plead with sufficient particularity that a pre-suit demand on the board would have been futile. Under Delaware law, plaintiffs must show that a majority of directors face a substantial likelihood of liability. The alleged 'red flags,' such as prior litigation and regulatory matters, were not sufficiently similar to the specific corporate harm of the Cambridge Analytica data misuse to establish that the board consciously disregarded its duties. Conclusory allegations that directors were 'beholden' to CEO Mark Zuckerberg or were pursuing an 'illegal business strategy' do not satisfy the high burden of pleading demand futility.
Analysis:
This decision reinforces the significant power of corporate forum-selection clauses to channel internal corporate governance disputes, such as shareholder derivative suits, into a single, pre-selected jurisdiction, typically Delaware's Court of Chancery. It significantly curtails plaintiffs' ability to 'forum shop' and consolidates litigation in a court with deep expertise in corporate law. The opinion also highlights the demanding standard for pleading demand futility, making it clear that plaintiffs cannot rely on a history of generalized or dissimilar corporate problems to excuse the requirement of first demanding that the board take action. This protects boards from derivative litigation unless shareholders can plead highly specific, particularized facts showing that a majority of the board consciously ignored their duties regarding the precise harm alleged.
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