Graham v. Peltz (In re Wendy's Co. S'holder Derivative Action)
| Decision Date | 11 August 2022 |
| Docket Number | 21-3975 |
| Citation | 44 F.4th 527 |
| Parties | IN RE: The WENDY'S COMPANY SHAREHOLDER DERIVATIVE ACTION. James Graham, derivatively on behalf of The Wendy's Company, Plaintiff-Appellee, Thomas Caracci, derivatively on behalf of The Wendy's Company, Plaintiff-Appellant, v. Nelson Peltz; Peter W. May; Emil J. Brolick; Clive Chajet ; Edward P. Garden ; Janet Hill; Joseph A. Levato; J. Randolph Lewis; Peter H. Rothschild; David E. Schwab, II; Roland C. Smith ; Raymond S. Troubh; Jack G. Wasserman; Michelle J. Mathews-Spradlin; Dennis M. Kass; Matthew Peltz; Todd A. Penegor; Robert D. Wright; The Wendy's Company, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
ARGUED: Roger A. Sachar, NEWMAN FERRARA LLP, New York, New York, for Appellant. Stuart J. Guber, EVANGELISTA WORLEY LLC, Atlanta, Georgia, for Appellee James Graham. Cara Peterman, ALSTON & BIRD, Atlanta, Georgia, for Appellees Nelson Peltz, et al. ON BRIEF: Roger A. Sachar, NEWMAN FERRARA LLP, New York, New York, Melinda A. Nicholson, KAHN SWICK & FOTI, LLC, New Orleans, Louisiana, for Appellant. Stuart J. Guber, EVANGELISTA WORLEY LLC, Atlanta, Georgia, Nina M. Varindani, FARUQI & FARUQI, LLP, New York, New York, Richard S. Wayne, William K. Flynn, STRAUSS TROY, Cincinnati, Ohio, for Appellee James Graham. Cara Peterman, John L. Latham, Courtney Quirós, Evan N. Glustrom, ALSTON & BIRD, Atlanta, Georgia, Eric K. Combs, DINSMORE & SHOHL LLP, Cincinnati, Ohio, for Appellees Nelson Peltz, et al.
Before: WHITE, BUSH, and READLER, Circuit Judges.
Hackers compromised customer-payment information at several Wendy's franchisee restaurants. That difficulty for Wendy's and its franchisees soon became a difficulty for the company's directors and officers, when a number of shareholders took legal action against Wendy's directors and officers on the corporation's behalf to remedy any wrongdoing that might have allowed the breach to occur. Three shareholder derivative legal efforts ensued—two actions and one pre-suit demand—leading to a series of mediation sessions between the interested parties. Two of the efforts resulted in a settlement, which the district court approved after appointing one of the settling shareholder's attorneys as the lead counsel. Those decisions drew unsuccessful objections from Thomas Caracci, a shareholder who had been pursuing one of the derivative actions, but had not participated in the latest settlement discussions. Caracci now appeals a host of decisions made by the district court, which together had the effect of dramatically reducing Caracci's entitlement to an attorney's fees award. Because the court acted within the bounds of its wide discretion to manage shareholder litigation, we affirm.
Founded in Columbus, Ohio in 1969, Wendy's is the second-largest hamburger fast-food chain in the United States. See The Wendy's Co., Quarterly Report (Form 10-Q) (May 11, 2022). Since its founding, Wendy's has been known for its "old fashioned" square hamburger patties. Today, many of its restaurants are operated by company franchisees.
What was likely inconceivable when Wendy's first began flipping burgers later became a modern reality for its business: point-of-sale systems were digitized, meaning customers may purchase their single (or double or even triple) and fries through electronic means. While those developments brought numerous conveniences to restauranteurs and their customers alike, they also brought new means of fraud and theft achieved through cyberattacks. For Wendy's, that threat was realized when the company discovered that their point-of-sale systems at several franchise locations contained "malware"—that is, malicious software that allows cybercriminals to extract data for financial gain. Following an investigation, Wendy's removed the malware and publicly disclosed the incident.
The data breach alarmed several of Wendy's shareholders, including Thomas Caracci, James Graham, and Michael Coahn. Caracci, relying on Section 220 of the Delaware General Corporation Law, sought to inspect Wendy's corporate books and records to examine whether the cyberbreach was attributable to corporate mismanagement or wrongdoing by Wendy's officers and directors. Wendy's produced documents to Caracci, subject to a confidentiality agreement. Later that same year, Graham filed a derivative lawsuit against several of Wendy's officers and directors. Graham alleged that those corporate officials failed to properly oversee the company's cybersecurity risks. Defendants moved to dismiss Graham's complaint in part on the basis that it failed to adequately plead demand futility—the requirement that a plaintiff shareholder in a derivative lawsuit allege that it would have been futile for the shareholder to first afford the company's board of directors the opportunity to redress the alleged wrong to the corporation. See Fed. R. Civ. P. 23.1(b)(3) (); Rales v. Blasband , 634 A.2d 927, 932–35 (Del. 1993) (). Not long thereafter, Coahn demanded that the company's board investigate and litigate potential breaches of fiduciary duty related to the data breach. The next day, Caracci, relying on the Section 220 documents received from Wendy's, filed his own derivative suit.
Graham and Caracci agreed that their two cases should be consolidated, a request the district court obliged. Both Graham and Caracci also filed separate motions asking that his respective counsel be appointed lead counsel. And from there, the pair's relationship became frosty at best, with the two rarely seeing eye-to-eye on the litigation's development.
The story unfolds this way. Defendants sought to resolve the pending litigation and the Coahn demand through settlement talks. At the outset of the settlement discussions, defendants provided Graham, Caracci, and Coahn with documents—including the Section 220 documents—subject to confidentiality restrictions, including the mediation privilege. But negotiations soon stalled, largely over the issue of attorney's fees. Caracci's counsel objected to a proposal from the other shareholders’ counsel to "work together as equals." Caracci's counsel seemingly had other ideas, instead requesting over 90% of the fees award, up to $3 million in all.
Several months passed. Working with a cybersecurity expert, counsel for Graham and Coahn opted to submit their own settlement proposal to defendants. The proposal prompted defendants to renew mediation before a new mediator—a former managing partner of the law firm King & Spalding. Caracci declined an invitation to participate in the mediation. After a day-long negotiation session, the participating parties reached material agreements as to corporate governance measures that would be at the heart of an eventual settlement. In particular, Wendy's agreed to establish a technology committee to oversee cybersecurity-related matters, with managers formally reporting to that committee. With the aid of the mediator, Graham, Coahn, and defendants later reached an agreement as to attorney's fees. $950,000 was slated for Graham's and Coahn's counsel, subject to court approval, and the district court could order up to $200,000 to be paid out of this amount to third parties and their counsel.
Tasked with overseeing the potential settlement, the district court issued several rulings, all over Caracci's objections. To start, the district court appointed Graham's counsel as the lead counsel. In so doing, the court emphasized counsel's efforts in working with the other interested shareholders, their prior experience with cybersecurity corporate litigation, and the qualifications of the cybersecurity expert retained by Graham's attorneys. Once in the lead role, Graham filed a consolidated complaint utilizing the same Section 220 documents referenced in Caracci's complaint. Graham then sought preliminary approval of the settlement, a request the district court granted. In deciding as much, the court rejected Caracci's contention that the other parties had colluded to effectuate the settlement. Influential to the district court was a sworn declaration submitted by the mediator indicating that "the parties at all times engaged at arms-length" and that nothing led the mediator "to believe that the parties, their counsel, or [Wendy's] were engaging in collusive or inappropriate conduct."
Several months later, the court allowed Caracci to conduct limited discovery to investigate the fairness and adequacy of the proposed settlement. Limits on the scope of that discovery, however, left the process less fulsome than Caracci had hoped. Nor was Caracci able to obtain the district court's permission to disclose "information revealed during" settlement discussions to use in an objection to the final settlement, especially given the court's denial of relief from the mediation privilege.
No other shareholder objected to the settlement. After conducting a fairness hearing and considering Caracci's objections, the district court granted final approval to the settlement. Caracci's timely appeal followed.
Caracci takes issue with numerous aspects of the district court's handling of these consolidated cases: its appointment of a lead counsel, its approval of the settlement, and its interlocutory orders on discovery and the mediation privilege. While these are distinct legal issues, each implicates the district court's discretionary role in supervising complex litigation. Accordingly, as will be a theme throughout, the district court's answers to these questions are each reviewed for an abuse of discretion. See In re Bendectin Litig ., 857 F.2d 290, 297 (6th Cir. 1988) (); In re Flint Water Cases , 960 F.3d 820, 826 (6th Cir. 2020) (managing discovery); In re Univ. of Mich. , 936 F.3d 460, 465 (6th Cir. 2019) (...
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