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The logo of Facebook is seen in Davos, Switzerland Januar 20, 2020. REUTERS/Arnd Wiegmann
(Reuters) - The shareholder firm Block & Leviton is refusing to walk away quietly from a high-profile derivative suit against Facebook Inc board members.
The firm has asked a Delaware Chancery Court judge for permission to appeal his Oct. 5 order appointing three other plaintiffs firm to lead the breach-of-duty case, which accuses Facebook directors of protecting CEO Mark Zuckerberg at the company’s expense in a $5 billion settlement with the U.S. Federal Trade Commission in 2019.
Block & Leviton contends that rival shareholder lawyers from Scott + Scott, Kaplan Fox & Kilsheimer and Prickett, Jones & Elliott cannot represent Facebook’s interests in the derivative suit because Scott + Scott is also representing plaintiffs in two antitrust cases seeking big-money damages from the company. Block & Leviton's request to bring an appeal at the Delaware Supreme Court argues that no Delaware court has previously allowed a shareholder firm to pursue derivative claims on behalf of a corporation while simultaneously representing different clients asserting direct claims against the company.
“This is an exceptional matter,” the filing said. “The Court of Chancery affirming that lawyers can act as fiduciaries for a Delaware corporation in derivative litigation while simultaneously representing other clients in other actions ... is a statement that will have dramatic implications for the way that the stockholder-plaintiff bar operates.”
Vice Chancellor Joseph Slights rejected Block & Leviton’s conflict arguments when he picked the other firms and their clients, led by the California State Teachers’ Retirement System (known as CalSTRS), to be in charge of the breach-of-duty suit against Facebook board members.
The judge gave considerable attention to the conflicts issue, acknowledging that other Delaware courts – most notably in transcript orders from then-vice chancellor Leo Strine in 2012’s In re Duke Energy and then-vice chancellor Tamika Montgomery-Reeves in 2018’s In re Towers Watson & Co. – have expressed reservations about shareholder firms suing derivatively on behalf of a corporation while also suing the corporation directly.
But Slights cited two other Delaware Chancery Court decisions – former vice chancellor John Noble’s ruling in 2014’s In re Ebix Inc and his own 2018 opinion in In re Tesla Motors Inc – holding that a lead shareholder can pursue simultaneous derivative and direct claims against board members.
In the Ebix decision, Slights said, the court held that any conflict potential was not “disabling” because claims in the direct and derivative suits were “not internally inconsistent.” The judge said he had reviewed Scott + Scott’s direct suits against Facebook, one a racketeering class action in California state court for app developers, the other an antitrust suit by advertisers in federal court in San Francisco. Under the Ebix test, he said, the claims in those cases were not inconsistent with those in the derivative case, so he was "satisfied there is no conflict that would prevent counsel from properly representing the CalSTRS group.”
Slights said the remote risk of conflict did not outweigh the superiority of the 389-page CalSTRS proposed complaint, which offered two different theories for why it would have been futile to demand action from Facebook’s board. Block & Leviton’s complaint for two Rhode Island pension funds, which weighed in at a mere 219 pages, focused on allegations that the board was under the sway of controlling shareholder Zuckerberg when it agreed to the 2019 FTC settlement, which allegedly cost the company billions more than it owed in penalties in order to shield Zuckerberg from personal liability.
The CalSTRS suit raised similar claims but also alleged that Facebook board members were liable under In re Caremark International Inc for failing to assure that the company lived up to its previous 2012 agreement with the FTC to safeguard user data. (Facebook’s board, represented by Gibson, Dunn & Crutcher, has argued that shareholders can’t show the board was beholden to Zuckerberg or acted in bad faith.)
Slights said the CalSTRS complaint was more comprehensive and gave shareholders the best opportunity for victory.
CalSTRS lawyers Samuel Closic of Prickett Jones, Geoffrey Johnson of Scott + Scott and Frederic Fox of Kaplan Fox didn’t respond to my email requesting comment on Block & Leviton’s filing. Fox and Closic previously addressed Block & Leviton’s conflict allegations at a Sept. 30 hearing on the competing lead plaintiff bids. Both said they were offended by the suggestion that their firms or CalSTRS would abandon their ethical duties to advantage plaintiffs in Scott + Scott’s other Facebook cases. (Kaplan Fox, which is also part of the CalSTRS team, is liaison counsel in a third case against Facebook but the new Block & Leviton filing focuses almost entirely on the purported Scott + Scott filing.)
The firms moreover argued that Block & Leviton was vastly exaggerating the risk that their prosecution of unrelated suits against Facebook would have any real implications in the derivative case. “Our clients take this attack very seriously,” Fox told Slights. “It unfairly impugns our and their reputations.”
Block & Leviton’s new filing argued that the circumstances in the Facebook case are different from those in the Ebix and Tesla cases cited by Slights. In those cases, the same lead plaintiffs brought both direct and derivative claims in the same action, “making it much easier for the court to monitor and guard against conflicts.” And shareholders in Tesla and Ebix sought direct money damages only against board members, not against the company they represented derivatively.
“That is very different than the situation presented here, where Scott + Scott’s clients in the direct actions are seeking multi-million-dollar damage awards against Facebook,” the filing said.
Will Block & Leviton’s claims of a split among Chancery judges on an issue with “dramatic” implications sway Slights? Odds are always against interlocutory review, and Slights said his decision was based on the particulars of the alleged Facebook conflict rather than on a sweeping legal interpretation. But he also said at the Sept. 30 hearing that picking between two sets of well-qualified plaintiffs firms is his least favorite part of the job. If he’s looking for the Delaware Supreme Court to provide some extra guidance, maybe Block & Leviton has a chance.
Read more:
Shareholder firms fight to lead Facebook privacy derivative suit in Delaware
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