In re Intel Corp. Derivative Litigation

• Citation: 621 F.Supp.2d 165
• Decision Date: 04 June 2009
• Docket Number: Civil Action No. 08-93-JJF.
• Parties: In re: INTEL CORPORATION DERIVATIVE LITIGATION.
• Court: U.S. District Court — District of Delaware

621 F.Supp.2d 165

In re: INTEL CORPORATION DERIVATIVE LITIGATION.

Civil Action No. 08-93-JJF.

United States District Court, D. Delaware.

June 4, 2009.

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Joseph H. Weiss, Esquire; David C. Katz, Esquire; Moshe Balsam, Esquire and Ilya Nuzov, Esquire of Weiss & Lurie, Jules, Brody, Esquire of Stull, Stull & Brody, New York, NY, Seth D. Rigrodsky, Esquire and Brian D. Long, Esquire of Rigrodsky & Long, Wilmington, DE, for Plaintiff.

Jonathan C. Dickey, Esquire and Marshall R. King, Esquire of Gibson, Dunn & Crutcher LLP, New York, NY, Donald J. Wolfe, Jr., Esquire and Stephen C. Norman, Esquire of Potter Anderson & Corroon LLP, Wilmington, DE, for Defendants.

OPINION

FARNAN, District Judge.

Presently before the Court is Defendant's Motion To Dismiss The Amended Consolidated Complaint Or, In The Alternative, Stay This Action. (D.I. 21.) For the reasons discussed, the Court will grant Defendant's Motion to the extent it seeks dismissal with prejudice of Plaintiff's Amended Complaint (D.I. 15) for failure to adequately plead demand futility pursuant to Rule 23.1 of the Federal Rules of Civil Procedure.

BACKGROUND

I. Procedural Background

Plaintiff Martin Smilow brought this derivative lawsuit against former and current members of the Board of Directors (the "Board") of Intel Corporation ("Intel"), alleging that they failed to prevent the company from committing anti-competitive practices to monopolize the microprocessor market. (See D.I. 15.) On September 5, 2008, Defendants filed the instant Motion To Dismiss based on (1) failure to adequately plead demand futility, (2) failure to state a claim, (3) the statute of limitations, or (4) failure to plead contemporaneous ownership. In the alternative, Defendants requested that the Court stay this action pending the outcome of parallel antitrust litigation between Advanced Micro Devices, Inc. ("AMD") and Intel. (See generally D.I. 21; D.I. 22.)

II. Factual Background

This action stems from Intel's alleged unfair domination of the x86 microprocessor market through anti-competitive and monopolistic practices. Plaintiff points to a number of ongoing investigations pertaining to Intel's trade practices as evidence of Intel's anti-competitive behavior:

• In 2001, the European Commission ("EC") began looking into claims by Advanced Micro Devices, Inc. ("AMD") that Intel used unfair trade practices. In July 2007, the EC issued a press release stating it had reached a "preliminary view that Intel has infringed the EC treaty rules on abuse of a dominant position...." (D.I. 15 ¶ 71.) Roughly one year later, the Wall Street Journal reported that European Union antitrust regulators had made new charges against Intel, including that Intel paid a computer manufacturer to delay the launch of certain AMD-based machines and awarded rebates conditioned upon the manufacturers' use of only Intel chips. (Id. ¶ 81.)

• In April 2004, Japan's Fair Trade Commission ("JFTC") began investigating the sales and marketing activities of a Japanese subsidiary of Intel. In March, 2005, the JFTC issued a report concluding, among other things, that since May 2002 the Intel subsidiary "has made the five major Japanese OEMs refrain from adopting competitors' CPUs for all or most of the PCs manufactured and sold by them...." (Id. ¶ 69.)

• In June 2005, the South Korean Fair Trade Commission ("SKFTC") inquired into the marketing and rebate programs of Intel's Korean subsidiary. In June 2008, the Wall Street Journal reported that the SKFTC fined Intel $25.4 million based on its conclusion that Intel had violated South Korean antitrust laws. (Id. ¶ 79.)

• In January 2008, Business Week reported that the New York State Attorney General sought information from Intel and AMD regarding whether Intel "stifled competition and hurt consumers by illegally coercing computer makers to use its chips." (Id. ¶ 74.) The article further reported that the Federal Trade Commission had begun an investigation into alleged anti competitive behavior by Intel. (Id.)

According to Plaintiff, these investigations constitute "red flags signaling persistent corporate malfeasance" that the Defendants have ignored in violation of their fiduciary duty of loyalty to Intel. (Id. ¶ 86(ii).) Plaintiff, an Intel shareholder, thus initiated this derivative lawsuit in February 2008 to recover for these alleged breaches of fiduciary duty.

LEGAL STANDARD

Federal Rule of Civil Procedure 23.1 requires a plaintiff to "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors ... and the reasons for the plaintiff's failure to obtain the action or for not making the effort." Fed.R.Civ.P. 23.1. Rule 23.1 only goes to the adequacy of a plaintiff's pleadings; however, "the substantive requirements of demand are a matter of state law." Blasband v. Rales, 971 F.2d 1034, 1047 (3d Cir.1992).

Under Delaware law, "the entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability." Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984) (overruled on other grounds). In the case of "claims involving a contested transaction i.e., where it is alleged that the directors made a conscious business decision in breach of their fiduciary duties," courts must apply the Aronson test to determine whether demand was futile. Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). Under this test, the trial court is confronted with two related but distinct questions: (1) whether threshold presumptions of director disinterest or independence are rebutted by well-pleaded facts; and, if not, (2) whether the complaint pleads particularized facts sufficient to create a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. Levine v. Smith, 591 A.2d 194, 205 (Del.1991) (overruled on other grounds). These two inquiries are disjunctive, meaning that if either prong is met, demand is excused. In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 808, 820 (Del.Ch.2005).

Under the first prong, "directorial interest exists whenever divided loyalties are present, or where the director stands to receive a personal financial benefit from the transaction not equally shared by the shareholders." Blasband, 971 F.2d at 1048. A director lacks independence when a director's decision is based on extraneous influences, rather than the merits of the transaction. Id. In order for a court to find that demand is futile due to director interest or a lack of independence, a majority of the board of directors, or one-half of an evenly-numbered board, must be interested or lack independence. Beam v. Stewart, 845 A.2d 1040, 1046 n. 8 (Del. 2004).

If the first prong is not satisfied, there is a presumption that the Board's actions were the product of a valid exercise of business judgment. Id. at 1049. Thus, to satisfy the second prong, a plaintiff must plead sufficient particularized facts to "raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision." In re J.P. Morgan Chase & Co., 906 A.2d at 824 (quoting In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 286 (Del.Ch.2003)) (citations omitted).

However, "where the subject of a derivative suit is not a business decision of the Board but rather a violation of the Board's oversight duties," the trial court must apply the Rales test. Wood, 953 A.2d at 140. Under the Rales test, the court must consider whether the plaintiff has alleged "particularized facts establishing a reason to doubt that `the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.'" Id. (citing Rales v. Blasband, 634 A.2d 927, 934 (Del.1993)). A plaintiff might do this, for instance, by showing that the directors would face a "substantial likelihood" of personal liability by complying with a shareholder's demand to pursue litigation. See Rales v. Blasband, 634 A.2d 927, 936 (Del.1993). However, "[w]here directors are contractually or otherwise exculpated from liability for certain conduct, `then a serious threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts.'" Wood, 953 A.2d at 141 (citing Guttman v. Huang, 823 A.2d 492, 501 (Del.Ch.2003)). Furthermore, if "directors are exculpated from liability except for claims based on `fraudulent,' `illegal' or `bad faith' conduct, a plaintiff must also plead particularized facts that demonstrate that the directors acted with scienter, i.e., that they had actual or constructive knowledge that their conduct was legally improper." Id.; see also Stone v. Ritter, 911 A.2d 362, 370 (Del.2006) (in discussing In re Caremark Int'l, 698 A.2d 959, 959 (Del.Ch.1996), explaining that "imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations").

THE PARTIES' CONTENTIONS

Defendants contend that under either the Aronson or Rales test, Plaintiff has failed to plead particularized facts establishing demand futility. Defendants raise six separate points in support of this position. First, Defendants contend that there is no basis to conclude that Board members lack independence or objectivity such that their ability to consider a shareholder demand would be impaired. Defendants note, among other things, that none of the twelve directors are alleged to have been a party to any antitrust violations. With respect specifically to outside directors, Defendants contend that none of them are alleged to have received any benefits other than his or her director compensation and that the Complaint includes no facts suggesting that they were controlled by management or any other...