In re Sprint Nextel Derivative Litig.
| Decision Date | 03 February 2020 |
| Docket Number | Case No. 12-2242-JWB-KGG (Lead Case) |
| Citation | 437 F.Supp.3d 927 |
| Parties | IN RE SPRINT NEXTEL DERIVATIVE LITIGATION |
| Court | U.S. District Court — District of Kansas |
This matter is before the court on motions to dismiss by Defendant Sprint Communications, Inc. and by the individually-named Defendants.2 (Docs. 88, 91.) The motions have been fully briefed. (Docs. 96, 97, 98-1, 99-1,3 111, 112, 113.) For the reasons stated herein, Defendants' motions to dismiss are GRANTED.
The following summary of allegations is taken from Plaintiffs' consolidated and verified amended complaint. (Doc. 82-1.4 ) Sprint Communications, Inc. (hereinafter "Sprint" or "the Company") is a mobile telecommunications service provider that does business nationally and internationally. Sprint is a nominal defendant in this derivative action, which is brought by several shareholders on behalf of Sprint.
Ten individuals who serve or have served on Sprint's Board of Directors are named as Defendants (hereinafter "the Individual Defendants.") The Individual Defendants allegedly owed the Company a duty to exercise a high degree of due care, loyalty, and diligence in the management and administration of the affairs of Sprint, including conducting its business in an ethical and legal manner. (Doc. 82-1 at 6-8.) In essence, Plaintiffs allege that Defendants breached their duties by knowingly or recklessly causing or allowing Sprint to violate New York State's tax laws pertaining to the sale of wireless voice services.
During the relevant period - July 2005 to April 2012 - Sprint sold wireless calling plans that included voice services for either a set or unlimited number of minutes, in exchange for fixed monthly charges. The fixed monthly charges were billed to customers regardless of whether they actually used the network and regardless of whether calls were made to people or phones within the same state (intrastate calls) or outside the state (interstate calls). (Id. at 13.) Sprint billed for calls on a per-minute basis only if the minutes used exceeded the number of minutes allowed under the plan. Calls within the number of minutes allowed were not billed on a per-minute basis. (Id. )
According to the complaint, since August of 2002, New York State (and localities within the State) required the payment of sales taxes on the full amount of fixed monthly charges for wireless voice services sold to customers in New York.5 (Id. at 14.) Sprint, as the provider of the services, was required to collect the sales taxes from customers and pay them to the State. The New York sales tax provision applied to sales of mobile telecommunications services "that are voice services ... sold for a fixed periodic charge (not separately stated), whether or not sold with other services." (Id. ) Plaintiffs allege this law required the payment of sales taxes on the full amount of fixed periodic charges for wireless voice services sold by Sprint to its customers in New York.
A guidance memorandum issued in 2002 by the New York State Department of Taxation & Finance included an example of a customer who buys a cellular calling plan that provides up to 2500 minutes for a flat-rate charge of $49.95 per month. The memorandum said that if the customer did not exceed the calling minutes allowed, and was charged $49.95 for the month, "[s]uch charge is subject to sales tax under [the New York law], regardless of whether the calls made under the plan were intrastate, interstate, or international calls." (Id. at 15.) If the customer exceeded the allowed minutes, the $49.95 flat rate was subject to New York sales tax, as were any separate charges for intrastate calls included in the excess minutes, but separate charges for interstate or international calls included in the excess minutes were not subject to New York sales tax. (Id. at 16.)
New York tax rules generally provided that if one service in a bundle was subject to sales tax if sold on its own, the charge for the entire bundle was subject to sales tax. But a wireless carrier could "unbundle" the charge for a service, such as internet access services, that would not be subject to sales tax if sold on its own. Thus, if a customer purchased both cellular telephone service and internet access in a bundle, the provider could "unbundle" the internet access portion of the charge and not pay sales tax on that portion. This was referred to as "component taxation." The provider could do this so long as the services were not for voice services and the provider used an objective, reasonable and verifiable standard for identifying each of the components of the bundled charge. (Id. at 17.)
Plaintiffs allege that beginning in July 2005, Defendants knowingly caused or recklessly allowed Sprint to implement a nationwide program of unbundling its wireless offerings for sales tax purposes. (Id. at 18.) As part of the program, Sprint allegedly began treating part of its fixed monthly access charges for voice services as if it were charges for interstate calls on a per-minute basis and, in states like New York, it began not collecting or paying sales tax on those charges. (Id. ) Prior to unbundling its wireless calling plans in this manner, Sprint classified the full amount of its monthly access charges for wireless voice services as "network access." But when it implemented its unbundling program, Sprint began classifying part of the fixed monthly access charge as "usage airtime: interstate," which caused that portion to be treated as non-taxable under New York sales tax laws, even though Defendants allegedly "knew that this did not comport with New York tax law." (Id. at 21.) Plaintiffs allege the percentage figures Sprint used to divide the charge between "network access" and "usage airtime: interstate" varied by calling plan and over time in an arbitrary and inconsistent manner. (Id. at 22.) As a result of this classification, Sprint excluded about one fourth of its fixed monthly voice service charges to New York customers from its calculation of New York sales taxes. Defendants allegedly thereby caused Sprint to underpay New York State and local sales taxes of more than $100 million and subjected Sprint to liability including substantial penalties and interest. Plaintiffs allege that Sprint's approach "was and is unequivocally illegal" under New York law and that the Individual Defendants participated in or failed to prevent the wrongdoing. (Id. at 19, 23.)
A qui tam plaintiff filed suit in New York state court under the New York False Claims Act on March 31, 2011, alleging that Sprint illegally avoided its New York sales tax obligations. The New York Attorney General ("NYAG") intervened in that action in 2012. (Id. at 2-3.) On December 21, 2018, the NYAG announced that Sprint had agreed to pay $330 million in settlement of the suit. (Id. at 25.)
Count I of the amended complaint alleges breaches of fiduciary duties against the Individual Defendants. It alleges the Individual Defendants acted knowingly, or in reckless disregard of facts they should have known through reasonable inquiry, such that they are responsible for the mismanagement of Sprint in the following respects: they allowed or participated in a scheme to evade the payment of state and local taxes; they concealed that fact from shareholders and the public; they subjected Sprint to adverse publicity and liability that impaired its earnings and caused a $330 million settlement; and they failed to implement reporting or monitoring procedures that would have alerted them to the Company's change in tax policy, to the qui tam action, or to the fact that New York taxing authorities disagreed with Sprint's tax position. (Id. at 41.) Count II of the amended complaint alleges that the Individual Defendants were unjustly enriched at the expense of and to the detriment of Sprint. Plaintiffs seek both damages and equitable relief. (Id. at 43.)
Demand futility. The amended complaint alleges that Plaintiffs have not made any demand on Sprint's Board of Directors to institute this action because such a demand would be futile.6 (Doc. 82-1 at 38.) It alleges, among other things, that the Individual Defendants' actions show bad faith and could not be the product of sound business judgment; that the Individual Defendants participated in or approved of the wrongful acts or omissions, that they did so knowingly and concealed their actions from outside detection; and they cannot be relied on to independently decide whether to commence and vigorously prosecute the demanded actions against themselves. (Id. at 39.) Further, even if the Individual Defendants would otherwise be protected against personal liability by officers and directors liability insurance, these policies "may contain provisions that eliminate coverage for any action brought directly by Sprint against these defendants ... [under an] ‘insured versus insured exclusion,’ " such that the Individual Defendants would not bring such a suit. (Id. at 40.)
Sprint argues in its motion to dismiss that the preclusive effect of a prior judgment bars this action. It additionally argues Plaintiffs have failed to adequately plead or establish demand futility. (Doc. 97 at 2.) The Individual Defendants adopt these same arguments and further contend a derivative action is precluded because a different shareholder made a demand on the Board of Directors and the Board decided not to pursue the claims. They also argue Count II fails to state a claim for unjust enrichment against the Individual Defendants. (Doc. 96 at 4-5.)
a. Rule 12(b)(6). In order to withstand a motion to dismiss for failure to state a claim, a complaint must contain enough allegations of fact to state a claim to relief that is plausible on its face. Robbins v. Oklahoma , 519 F.3d 1242, 1247 (10th Cir. 2008) (citing Bell Atl. Corp. v. Twombly , 550 U.S. 544, 127 S. Ct. 1955, 1974, 167 L.Ed.2d...
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