In re Bidz.Com Inc. Derivative Litig..

• Decision Date: 24 February 2011
• Docket Number: No. CV 09–4984 PSG (Ex).,CV 09–4984 PSG (Ex).
• Citation: 773 F.Supp.2d 844
• Court: U.S. District Court — Central District of California
• Parties: In re BIDZ.COM, INC. DERIVATIVE LITIGATION.

773 F.Supp.2d 844

In re BIDZ.COM, INC. DERIVATIVE LITIGATION.

No. CV 09–4984 PSG (Ex).

United States District Court, C.D. California.

Feb. 24, 2011.

Brian J. Robbins, David L. Martin, Shane P. Sanders, Robbins Umeda LLP, San Diego, CA, Hamilton Lindley, Joe Kendall, Kendall Law Group LLP, Dallas, TX, S. Benjamin Rozwood, Robbins Umeda LLP, Beverly Hills, CA, Ligaya Hernandez, Robin Winchester, Barroway Topaz Kessler Meltzer & Check, LLP, Radnor, PA, Nichole Browning, Barroway Topaz Kessler Meltzer & Check, LLP, San Francisco, CA, for Plaintiffs.Joel Alan Feuer, Andrew John Demko, Gibson Dunn & Crutcher LLP, Los Angeles, CA, Lindsey Elizabeth Blenkhorn, Gibson Dunn & Crutcher, San Francisco, CA, Mark T. Hiraide, Petillon Hiraide Loomis Zagzebski & Zagzebski LLP, Torrance, CA, for Defendants.

Proceedings: (In Chambers) Order Granting Bidz.com's Motion to Dismiss

PHILIP S. GUTIERREZ, District Judge.

Pending before the Court are Nominal Defendant Bidz.com, Inc.'s Motion to Dismiss, and a Motion to Dismiss filed by Individual Defendants. The Court finds the matter appropriate for decision without oral argument. See Fed.R.Civ.P. 78; L.R. 7–15. After considering the moving and opposing papers, the Court GRANTS Defendant Bidz.com, Inc's Motion to Dismiss, rendering the Individual Defendant's Motion to Dismiss MOOT.

I. Background

Nominal Defendant Bidz.com, Inc. (“Bidz”) is an online jewelry retailer that sells its products through online auctions. See First Amended Consolidated Shareholder Derivative Complaint (“FAC”) ¶ 2. The company is managed by a five-member Board of Directors (“the Board”), comprised of the following individuals: founder and Chief Executive Officer David Zinberg (“Zinberg”); Chief Financial Officer, Treasurer, and Secretary Lawrence Y. Kong (“Kong”); Chairman of the Board Peter G. Hanelt (“Hanelt”); Former Chief Financial Officer Gary Y. Itkin (“Itkin”); and Man Jit Singh (“Singh”) (collectively, the “Board of Directors”). Id. ¶¶ 23–30. Also relevant are non-board members Chief Technology Officer and President Kuperman (“CTO” or “Kuperman”) and Chief Operating Officer Claudia Liu (“COO” or “Liu”) (along with the Board of Directors, the “Individual Defendants”). Id. ¶¶ 26–27. From August 2007 to the present (“the relevant period”), Bidz allegedly engaged in several wrongful or deceptive business practices. The Board allegedly knew and approved of “shill bidding” ¹ in Bidz's online auctions to inflate the prices of Bidz's products, see id. ¶¶ 40–62, 64, 69–77, had an appraiser inflate the appraisals of Bidz's jewelry, see id. ¶¶ 85–90, used inaccurate descriptions and photographs of the items sold to customers, see id. ¶¶ 91–98, used phony error messages and other improper practices to ensure that its items would not be sold below a certain price, see id. ¶¶ 99–101, sold counterfeit merchandise, see id. ¶¶ 102–105, and hired the auditing firm of Stonefield Josephson, Inc. (“Stonefield”) despite criticism of the firm by the Public Company Accounting Oversight Board (“PCAOB”), see id. ¶¶ 78–84. During the relevant period, the Individual Defendants “knew about the existence of shill bidding (and other improper practices) at Bidz, and yet took no action to prevent or remedy the situation.” In other words, the Board failed to oversee the operations of the company.

In November 2007, the alleged problems at the company were revealed when the website Citron Research published two reports (“the Citron reports”) that included accusations of shill bidding. See id. ¶ 6, 55–62. Zinberg held a conference call after the first Citron report was published, during which he denied the allegations of shill bidding and defended the company. See id. ¶ 57. Following publication of the Citron reports, the price of Bidz stock dropped approximately 27%. See id. ¶ 59. In addition to the Citron reports accusing Bidz of allowing shill bidding in its auctions, three anonymous complaints were posted on the website Ripoff Report accusing Bidz of shill bidding, and the Better Business Bureau gave Bidz an “F” rating based on complaints of inflated jewelry valuations and fake merchandise. See id. ¶¶ 49–52. As a result of the company's alleged lack of oversight and internal controls, Bidz also allegedly made false and misleading statements in press releases, in SEC filings, and during conference calls. See id. ¶¶ 106–23. Before the accusations of shill bidding surfaced, Zinberg and Liu allegedly engaged in insider trading based on the knowledge of the company's alleged deceptive practices. See id. ¶¶ 169–82.

Plaintiffs Farris Hassan and David Hughes (collectively, “Plaintiffs”) were Bidz shareholders during the relevant period, and they brought a derivative action against Bidz and the Individual Defendants for engaging in the allegedly deceptive business practices. Plaintiffs assert causes of action for breach of fiduciary duty, insider selling, violation of California Corporations Code § 25402, waste, and unjust enrichment.

On April 27, 2010, the Court granted Bidz's motion to dismiss for failure to adequately allege that pre-suit demand on the Board of Directors would have been futile. See Dkt. # 78 (the “April 27 Order”). The Court gave Plaintiffs leave to amend and a Verified Amended Consolidated Shareholder Derivative Complaint was filed on May 27, 2010. See Dkt. # 81. Not long after, Bidz filed the pending motion to dismiss for failure to make pre-suit demand and the Individual Defendants filed a motion to dismiss for failure to state a claim.² See Dkts. # 86, 89. The Court considers Bidz's and the Individual Defendants' motions separately.

II. Bidz' Motion to Dismiss

Bidz's moves to dismiss Plaintiffs' derivative action pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1 on the grounds that Plaintiffs failed to make any pre-litigation demand on Bidz's Board of Directors and failed to adequately allege, with the requisite specificity, that demand would have been futile.

A. Legal Standard

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss a cause of action if the plaintiff fails to state a claim upon which relief can be granted. Although detailed factual allegations are not required to survive a Rule 12(b)(6) motion to dismiss, a complaint “that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.’ ” Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

In resolving a Rule 12(b)(6) motion, the Court must engage in a two-step analysis. See id. at 1950. The Court must first accept as true all non-conclusory, factual allegations made in the complaint. See Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993). Based upon these allegations, the Court must draw all reasonable inferences in favor of the plaintiff. See Mohamed v. Jeppesen Dataplan, Inc., 579 F.3d 943, 949 (9th Cir.2009). After accepting as true all non-conclusory allegations and drawing all reasonable inferences in favor of the plaintiff, the Court must then determine whether the complaint alleges a plausible claim to relief. See Iqbal, 129 S.Ct. at 1950. In determining whether the alleged facts cross the threshold from the possible to the plausible, the Court is required “to draw on its judicial experience and common sense.” Id. “Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.” Id.

Additionally, the Federal Rules of Civil Procedure impose unique pleading requirements in derivative actions. Under Federal Rule of Civil Procedure 23.1, a shareholder seeking to vindicate the interests of a corporation may bring a derivative action on the corporation's behalf only if the shareholder pleads with particularity that a demand was made on the board or the reasons why a demand would have been futile. See Fed.R.Civ.P. 23.1(b)(3). In the context of a pre-suit demand, directors are entitled to a presumption that they fulfilled their fiduciary duties, and “the burden is upon the plaintiff in a derivative action to overcome that presumption” with particularized factual allegations. Beam v. Stewart, 845 A.2d 1040, 1048–49 (Del.2004).

B. Discussion

As in the original Complaint, the Amended Complaint includes Plaintiffs' acknowledgement that no pre-suit demand was made upon Bidz's Board of Directors. See FAC ¶ 187. Bidz moves to dismiss the First Amended Complaint on the same grounds that warranted dismissal of the Complaint; that Plaintiffs were required under Delaware law to include particularized factual allegations to create a reasonable doubt that a majority of the board could have remained independent and disinterested in responding to their demand, and that Plaintiffs have failed to adequately allege that a majority of the Board of Directors were incapable of responding to a demand. See Mot. 5:5–11. For the following reasons, the Court dismisses the case pursuant to Rule 12(b)(6) and Rule 23.1.

1. Whether the Rales Test or the Aronson Test Applies in this Case

In the April 27 Order, the Court applied the Rales demand futility test. See Dkt. # 78. Nothing alleged by Plaintiffs changes the Court's reasoning in the April 27 Order and the Court again applies the Rales test to determine whether pre-suit demand on the Board of Directors is excused as futile.

The Federal Rules of Civil Procedure do not specify the type of allegations required to adequately allege that demand would have been futile. As a result, a federal court is required to look to the law of the state of incorporation defining the demand futility requirement. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96, 108–09, 111 S.Ct. 1711,...