Stern v. General Elec. Co.

• Decision Date: 28 January 1991
• Docket Number: No. 167,D,167
• Citation: 924 F.2d 472
• Parties: , 19 Fed.R.Serv.3d 663 Philip M. STERN, Plaintiff-Appellant, v. GENERAL ELECTRIC COMPANY, John F. Welch, Jr., Lawrence A. Bossidy, Edward E. Hood, Jr., Richard T. Baker, James G. Boswell II, Silas C. Cathcart, Charles D. Dickey, Jr., Lawrence E. Fouraker, Henry H. Henley, Jr., Henry L. Hillman, Robert E. Mercer, Gertrude G. Michelson, Barbara Scott Preiskel, Lewis T. Preston, Frank H.T. Rhodes, Andrew C. Sigler, and Walter B. Wriston, Defendants-Appellees. ocket 87-7481.
• Court: U.S. Court of Appeals — Second Circuit

Page 472

924 F.2d 472

59 USLW 2466, 19 Fed.R.Serv.3d 663

Philip M. STERN, Plaintiff-Appellant, v. GENERAL ELECTRIC COMPANY, John F. Welch, Jr., Lawrence A Bossidy, Edward E. Hood, Jr., Richard T. Baker, James G Boswell II, Silas C. Cathcart, Charles D. Dickey, Jr. Lawrence E. Fouraker, Henry H. Henley, Jr., Henry L Hillman, Robert E. Mercer, Gertrude G. Michelson, Barbara Scott Preiskel, Lewis T. Preston, Frank H.T. Rhodes, Andrew C. Sigler, and Walter B. Wriston, Defendants-Appellees.

No. 167, Docket 87-7481.

United States Court of Appeals, Second Circuit.

Argued Oct. 16, 1990.

Decided Jan. 28, 1991.

Whitney North Seymour, Jr., New York City (Craig A. Landy, Peter James Clines, Brown & Seymour, of counsel), for plaintiff-appellant.

Robert B. Fiske, Jr., New York City (Davis Polk & Wardwell, of counsel), for individual defendants-appellees.

Philip A. Lacovara, Fairfield, Conn., for defendant-appellee General Electric Co.

Before OAKES, Chief Judge, PIERCE and WINTER, Circuit Judges.

OAKES, Chief Judge:

Philip M. Stern appeals from a judgment of the United States District Court for the Southern District of New York, Mary Johnson Lowe, Judge, granting the motion of General Electric Company ("GE") and sixteen of its directors (the "Directors") to dismiss Stern's complaint. For the reasons set forth below, we affirm as to Counts Two and Three of the complaint, but reverse as to Counts One and Four and remand with instructions to modify the judgment to allow Stern to replead.

BACKGROUND

On May 21, 1986, Stern filed a shareholders' derivative action against the Directors, alleging that the Directors had expended substantial sums from the corporation's treasury for the support of the "Non-Partisan Political Support Committee for General Electric Employees" ("GE/PAC"). The gravamen of the complaint is that GE/PAC funds had been used to support congressional incumbents without regard to their past position on business issues, and that this practice was harmful to the interests of GE's shareholders. Counts One and Four of the complaint charge the Directors with breaching their fiduciary obligations to GE by wasting corporate assets. Specifically, Count One alleges that the Directors expended corporate funds to solicit contributions to and administer GE/PAC, despite the fact that GE realized no benefit from GE/PAC's activities, while Count Four charges that the Directors authorized expenditures of corporate funds to support GE/PAC that were excessive in relation to the amount of contributions collected. Counts Two and Three allege that, by supporting the activities of GE/PAC, the Directors breached their fiduciary duties to GE by exposing the company to liability under the Federal Regulation of Lobbying Act ("FRLA"), ch. 753, 60 Stat. 839 (1946) (codified at 2 U.S.C. Secs. 261-270), and under the federal anti-bribery statute, Pub.L. No. 87-849, 76 Stat. 1121-22 (1962) (codified at 18 U.S.C. Sec. 203).

In an opinion and order dated May 14, 1987, the district court granted appellees' motion to dismiss Stern's complaint, and Stern promptly moved for reargument. While his motion was pending, Stern filed an administrative complaint with the Federal Election Commission ("FEC"), alleging that GE/PAC's use of funds during the 1986 election cycle violated the Federal Election Campaign Act of 1971 ("FECA"), Pub.L. No. 92-225, 86 Stat. 3 (codified as amended at 2 U.S.C. Secs. 431-455). On November 18, 1988, the FEC dismissed the complaint, on the ground that expenditures made by political action committees for the purposes of lobbying are lawful under the FECA. Stern appealed this decision to the United States District Court for the District of Columbia, which affirmed. See Stern v. FEC, No. 89-0089, slip op. (D.D.C. Aug. 31, 1989), aff'd, 921 F.2d 296 (D.C.Cir.1990).

On March 26, 1990, Judge Lowe denied Stern's motion for reargument in the

present action. Stern now appeals from that order and from the original order and judgment of May 1987.

DISCUSSION

1. Counts One and Four: Waste of Corporate Assets.

The district court dismissed the allegations of corporate waste in Counts One and Four ¹ on the theory that the allegations in those Counts were preempted by the FECA. The court first observed that Stern could not allege violations of the FECA directly because, under 2 U.S.C. Sec. 437c(b)(1), such claims fall within the FEC's exclusive jurisdiction. It then found that, to the extent the complaint alleges state-law theories of liability rather than direct FECA violations, "defendants are insulated by their [compliance with the FECA] from any end run attacks based upon state law." For the reasons set forth below, we believe the district court's analysis of Counts One and Four was mistaken. However, because we conclude that the pleadings in Counts One and Four fail to satisfy the requirements of Fed.R.Civ.P. 9(b), we agree that those Counts should be dismissed. We reverse the judgment as to Counts One and Four, then, only insofar as it denies Stern leave to replead.

Before examining the district court's own rationale for dismissing Counts One and Four, we pause to address the argument appellees advance in support of the district court's decision. Their claim is that the allegations in Counts One and Four were properly dismissed because they are "predicated upon" a finding that GE/PAC violated the FECA, and that they therefore fall within the FEC's exclusive jurisdiction to adjudicate FECA cases. This theory, we believe, misconstrues the nature of the allegations in Stern's complaint.

To be sure, the complaint does contend that GE/PAC violated the "explicit intent and purpose" of the FECA. This reference to the FECA, however, was contained in the background to the complaint and not in the substantive counts, and was probably intended only to buttress the allegations that the Directors' support of GE/PAC was wasteful. It in no way indicates that the Directors' liability for waste derives from GE/PAC's alleged violations of the FECA. Rather, Count One of the complaint alleges that the Directors' continued funding of GE/PAC--given that organization's support of politicians who lacked a clear pro-business stance--constituted a waste of corporate assets under state law, regardless of whether GE/PAC's activities were themselves permitted under the FECA. ² Likewise, Count Four alleges that the Directors' expenditures on GE/PAC were excessive in relation to the amount of contributions GE/PAC generated--again, solely as a matter of state law, and regardless of whether GE/PAC's activities were permitted under the FECA. Accordingly, appellees' contention that the complaint falls within the FEC's exclusive jurisdiction is without merit.

We turn, then, to the district court's own rationale for dismissing Counts One and Four--that the allegations of corporate waste were preempted by the FECA. This holding, we conclude, rests on an overly broad interpretation of the case law concerning the preemptive effect of federal statutes. Certainly, had Congress specifically intended to preempt state regulation of corporate political activity, a finding that the Directors' support of GE/PAC violated state law would interfere with the exclusive federal right to regulate the activities of political action committees and their corporate sponsors. The preemption provision of the FECA, however, relates only to state-law provisions "with respect to election to Federal office." 2 U.S.C. Sec. 453 (1988). The narrow wording of this provision suggests that Congress did not intend to preempt state regulation with respect to non-election-related activities. ³ Cf. Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 7-8, 107 S.Ct. 2211, 2215, 96 L.Ed.2d 1 (1987) (finding that the preemption clause of the Employee Retirement Income Security Act did not preempt a state statute relating to employee benefits, because the clause was narrowly worded to cover only employee benefit "plans").

Of course, the application of state law under Counts One and Four would be precluded even absent an explicit preemption provision if Congress had occupied the entire field of corporate political spending, leaving no room for supplemental state regulation. See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 67 S.Ct. 1146, 91 L.Ed. 1447 (1947); see also Louisiana Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 368-69, 106 S.Ct. 1890, 1898, 90 L.Ed.2d 369 (1986) (listing ways in which preemption may occur). We do not believe, however, that Congress has occupied the field to such an extensive degree. In Pacific Gas & Electric Co. v. State Energy Resources Conservation & Development Comm'n, 461 U.S. 190, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983), the Supreme Court upheld California's requirement that nuclear power plants establish waste disposal facilities, despite the fact that such facilities were not required under the Atomic Energy Act of 1954, ch. 1073, 68 Stat. 919 (codified as amended at 42 U.S.C. Sec. 2011, et seq.). The Court concluded that Congress had occupied the field of nuclear power only with respect to safety-motivated regulation, and that California could impose additional regulations to further its independent interest in ensuring the economic feasibility of new nuclear energy plants. See id. at 212-16, 103 S.Ct. at 1726-28. Likewise, in the present case, if Congress has occupied the field of corporate political activity at all, it has done so only to prevent the corruption of the political process. See FEC v. National Right to Work Comm., 459 U.S. 197, 209, 103 S.Ct. 552, 560, 74 L.Ed.2d 364 (1982) (noting that the FECA's provisions relating to corporate political spending were designed "to prevent both actual and apparent corruption"). Such regulation does not preclude New York from pursuing its independent interest in ensuring that corporate directors exercise sound judgment in the expenditure of corporate funds. ⁴

State-law regulation of the Directors' support of...