Burbrink v. Campbell et al, No. 2:2015cv00377 - Document 90 (W.D. Wash. 2015)
Court Description: ORDER granting Nominal dft's 76 Rule 23.1 Motion to Dismiss by U.S. District Judge John C Coughenour.(RS)
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Burbrink v. Campbell et al Doc. 90 THE HONORABLE JOHN C. COUGHENOUR 1 2 3 4 5 6 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 7 8 9 JUDITH BURBRINK, 10 Plaintiff, 11 CASE NO. C15-0377-JCC ORDER GRANTING RULE 23.1 MOTION TO DISMISS v. 12 PHYLLIS J. CAMPBELL, et al., 13 Defendant. 14 15 This matter comes before the Court on Nominal Defendant Nordstrom’s Rule 23.1 16 Motion to Dismiss (Dkt. No. 76), Nordstrom’s Request for Judicial Notice (Dkt. No. 77) and 17 Plaintiff’s Opposition (Dkt. No. 81). The Court heard oral argument on September 22, 2015. 18 Having thoroughly considered the parties’ briefing, the relevant record, and oral argument 19 presented to the Court, the motion is hereby GRANTED for the reasons explained herein. 20 I. BACKGROUND 21 Plaintiff Judith Burbrink, a Nordstrom shareholder, brings the above-captioned matter 22 derivatively on behalf of Nominal Defendant, the Nordstrom Corporation (“Nordstrom” or “the 23 Company”) and its shareholders. (Dkt. No. 11 at 4.) At the heart of Plaintiff’s suit are allegations 24 of abuse regarding the Company’s flight department; including that, in approving the use of the 25 flight department and misrepresenting its fiscal impact to shareholders, the Board of Directors 26 breached their fiduciary duties and committed corporate waste. (Id. at 36–42.) Plaintiff further ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 1 Dockets.Justia.com 1 alleges that certain related parties, owned by members of the Nordstrom family, aided and 2 abetted in the directors’ breach of fiduciary duties and unjustly enriched themselves. (Id.) 3 A. Preliminary Discussion of Nordstrom’s Request for Judicial Notice 4 In conjunction with its Rule 23.1 motion to dismiss, Nominal Defendant Nordstrom filed 5 several exhibits and asks the Court either consider them “incorporated by reference” into the 6 Complaint, or to take judicial notice of them. (Dkt. No. 77.) Nordstrom requests the Court to 7 consider the following: 8 Document Excerpts from Nordstrom’s March 31, 1998 10 proxy statement Excerpts from Nordstrom’s March 31, 1999 11 proxy statement 9 12 Excerpts from Nordstrom’s April 10, 2000 13 proxy statement 14 Excerpts from Nordstrom’s April 11, 2001 proxy statement 15 Excerpts from Nordstrom’s April 18, 2002 16 proxy statement 17 Excerpts from Nordstrom’s April 17, 2003 18 proxy statement 19 Excerpts from Nordstrom’s April 15, 2004 proxy statement 20 21 Excerpts from Nordstrom’s April 18, 2005 proxy statement 22 Excerpts from Nordstrom’s April 13, 2006 23 proxy statement 24 Excerpts from Nordstrom’s April 12, 2007 25 proxy statement Excerpts from Nordstrom’s April 10, 2008 26 proxy statement ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 2 Where Referenced in Complaint Dkt. No. 11 at 14 Dkt. No. 11 at 14 (¶ 57 refers to the “amount of services” provided by the Company to RelatedParty JBW from years 1999–2007) Dkt. No. 11 at 14 (¶ 57 refers to the “amount of services” provided by the Company to RelatedParty JBW from years 1999–2007) Dkt. No. 11 at 14 (¶ 57 refers to the “amount of services” provided by the Company to RelatedParty JBW from years 1999–2007) Dkt. No. 11 at 14 (¶ 57 refers to the “amount of services” provided by the Company to RelatedParty JBW from years 1999–2007) Dkt. No. 11 at 14 (¶ 57 refers to the “amount of services” provided by the Company to RelatedParty JBW from years 1999–2007) Dkt. No. 11 at 14 (¶ 57 refers to the “amount of services” provided by the Company to RelatedParty JBW from years 1999–2007) Dkt. No. 11 at 14 (¶ 57 refers to the “amount of services” provided by the Company to RelatedParty JBW from years 1999–2007) Dkt. No. 11 at 14 (¶ 57 refers to the “amount of services” provided by the Company to RelatedParty JBW from years 1999–2007) Dkt. No. 11 at 13, 25, 29, 34. Dkt. No. 11 at 15, 22 – 23, 25, 29, 34. Excerpts from Nordstrom’s April 9, 2009 Dkt. No. 11 at 13, 24, 25, 29, 34. 1 proxy statement Dkt. No. 11 at 13, 25, 29, 34. 2 Excerpts from Nordstrom’s April 8, 2010 proxy statement 3 Excerpts from Nordstrom’s March 31, 2011 Dkt. No. 11 at 13, 25, 29, 34. proxy statement 4 Excerpts from Nordstrom’s March 30, 2012 Dkt. No. 11 at 13, 25, 29, 34. 5 proxy statement Excerpts from Nordstrom’s March 26, 2013 Dkt. No. 11 at 29 (¶ 108 references “every proxy statement since 2007). 6 proxy statement Excerpts from Nordstrom’s March 27, 2014 Dkt. No. 11 at 13, 14, 19, 29, 33. 7 proxy statement Nordstrom’s Corporate Governance and Dkt. No. 11 at 12. 8 Nominating Committee Charter Dkt. No. 11 at 25, 28, 29, 30, 31, 32. 9 Nordstrom’s Passenger Usage Report Survey of rates provided by ARGUS Dkt. No. 11 at 23. 10 International, Inc. Letter from M. Todd Scott to Hung Ta Dkt. No. 11 at 21–22. 11 December 30, 2014 Dkt. No. 11 at 21–22. 12 Letter from M. Todd Scott to Hung Ta February 10, 2015 N/A (Nordstrom requests that judicial notice 13 Excerpts from Nordstrom’s March 26, 2015 proxy statement be taken). 14 Nordstrom’s Form 10-K dated March 16, N/A (Nordstrom requests that judicial notice 2015. be taken). 15 Nordstrom’s Articles of Incorporation N/A (Nordstrom requests that judicial notice be taken). 16 National Business Aviation Association, NBAA N/A (Nordstrom requests that judicial notice 17 Management Guide be taken). John J. Sheehan, Business and Corporate N/A (Nordstrom requests that judicial notice 18 Aviation Management be taken). Stephen A. Radin, The Business Judgment N/A (Nordstrom requests that judicial notice 19 Rule be taken). 20 When ruling on a motion to dismiss, a district court may not typically consider evidence 21 outside the pleadings without converting the motion into a Rule 56 motion for summary 22 judgment. U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). However, documents that are 23 “incorporated by reference” in the complaint or facts for which judicial notice are taken may be 24 considered without conversion into a Rule 56 motion. Id. (citing Van Buskirk v. CNN, 284 F.2d 25 977, 908 (9th Cir. 2002)). 26 The doctrine of “incorporation by reference” has been articulated in various ways. Courts ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 3 1 typically require that a document be “referred to extensively” in the complaint or “form the 2 basis” of the complaint to be considered incorporated by reference. Ritchie, 342 F.3d at 908. An 3 insurance coverage plan “forms the basis” of a complaint based on coverage and a newspaper 4 article containing an allegedly defamatory statement “forms the basis” of the corresponding 5 defamation complaint. Parrino v. FHIP, Inc., 146 F.3d 699, 705–06 (9th Cir. 1998) (insurance); 6 Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005) (citing Horsley v. Feldt, 304 F.3d 1125, 7 1135 (11th Cir. 2002)) (newspaper). Another route to incorporation exists “if the contents of the 8 document are alleged in a complaint, the document’s authenticity is not in question and there are 9 no disputed issues as to the document’s relevance . . .” Coto Settlement v. Eisenberg, 593 F.3d 10 1031, 1038 (9th Cir. 2010) (where a billing agreement was not explicitly referred to in the 11 complaint but necessary to the claim and its authenticity was not disputed, it was validly 12 considered on a motion to dismiss). 13 A court may also review materials on a motion to dismiss if they are the subject of 14 judicial notice. Judicial notice may be taken of factual matters that are either generally known or 15 “capable of accurate and ready determination by resort to sources whose accuracy cannot be 16 reasonably questioned.” Ritchie, 342 F.3d at 908–09; Fed. R. Evid. 201(b). Judicial notice should 17 be taken with reserve, however, as its function is to deprive a party of the opportunity to attack 18 opposing evidence through rebuttal and cross-examination. Rivera v. Philip Morris, Inc., 395 19 F.3d 1142, 1151 (9th Cir. 2005). 20 The Court considers all of the proxy statements but the 2015 statement, as well as the 21 passenger usage report, the Corporate Charter, and the ARGUS rate survey listed above, to be 22 “incorporated by reference,” because their contents are alleged in the Complaint, their 23 authenticity is not in question, 1 and there is no dispute as to their relevance. 24 25 26 1 As demonstrated by Plaintiff’s reliance on the very same documents. (Dkt. No. 81 at 15, 24, 25, 31.) ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 4 1 The Court declines to take judicial notice of the remaining documents: the letters between 2 counsel, the 2015 proxy statement excerpt, the 10-K form, Nordstrom’s Articles of 3 Incorporation, the NBAA Management Guide, and the two articles (Sheehan and Radin). Nor 4 does the Court consider these documents “incorporated by reference.” While at a later stage of 5 litigation, it may very well prove appropriate to weigh the validity and credibility of their 6 contents, the Court does not find consideration of these documents necessary at the motion to 7 dismiss stage. The Court’s primary inquiry here is not whether Plaintiff’s allegations are true, but 8 whether her Complaint meets the pleading standards to overcome Defendants’ various 9 challenges. 10 B. The Flight Department 11 For “nearly twenty years,” Nordstrom, a fashion retailer, has operated its own flight 12 department. (Dkt. No. 11 at 4; Dkt. No. 76 at 9.) According to Nordstrom, the flight department 13 serves as “an integral part of its business,” in enabling employees “to travel efficiently, often on 14 short notice, throughout North America, and on other trips for business purposes.” (Dkt. No. 76 15 at 9.) What started as the leasing of a single aircraft from JBW Aircraft Leasing Company, Inc. 16 (“JBW”) in 1998 grew steadily over the years, until in 2007 when the flight department 17 expanded considerably. (Dkt. No. 11 at 14–15.) The Company’s 2008 proxy statement revealed 18 that in 2007 its flight department dramatically increased in size, assuming responsibility for the 19 “housing, flying, servicing, and repairing of aircraft owned by members of the Nordstrom 20 family.” (Id. at 4, 14–15.) The flight department’s 2007 expansion came about by virtue of the 21 approval of what are referred to throughout this Order as the “related-party transactions,” 22 wherein Nordstrom began to offer aviation-related services to related parties owned by members 23 of the Nordstrom family. 24 Nordstrom itself owns two aircraft, a 22-seat 2006 Bombardier and an 8-seat 2005 25 Bombardier. (Dkt. No. 11 at 15.) Additionally, the company “dry leases” two planes—meaning, 26 ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 5 1 uses them when they are not in use by their owners—from JBW. 2 (Id. at 16.) It is Company 2 policy only to use Company Aircraft or dry-lease planes for business travel. (Dkt. No. 76 at 14.) 3 In addition to the aircraft it owns and leases, Nordstrom employs several pilots—as of 4 August 2014 nine of them are full-time 3—as a part of its flight department in addition to ground 5 crew and maintenance staff. (Dkt. No. 11 at 16.) When the resources and employees of the 6 Nordstrom flight department are not in use for Company travel, the department provides paid 7 services to “related-party planes,” including management, maintenance, and pilot services. (Dkt. 8 No. 11 at 16; Dkt. No. 76 at 14.) The “related-party planes,” owned by related parties named as 9 defendants in this suit, are as follows: 10 1) The two “dry-leased” planes from JBW mentioned above, a 22-seat 2006 Bombardier and an 11-seat 2007 Cessna. When not used under the Company’s dry lease, the Nordstrom family flies on these planes; flight records indicate that family members flew 501, 418, and 377 hours on these two planes in Fiscal Years 2011, 2012, and 2013, respectively; 2) An 11-seat 2008 Pilatus registered to Related Party Defendant JD Plane, which is owned by James F. Nordstrom, Jr. and Daniel Nordstrom; 3) An 11-seat floatplane 4 registered to Related Party Defendant TB Plane, which is owned by Sally A. Nordstrom; 4) Two 8-seat floatplanes registered to Related Party Defendant JWL, Ltd., which is owned by John N. Nordstrom; 5) A 12-seat 2001 Pilatus registered to Related Party Defendant 247N, LLC, which is owned by Blake Nordstrom and Chris Hughes; and 6) An 8-seat floatplane registered to Related Party Defendant M&B Beaver, which is owned by Blake Nordstrom and his wife. 11 12 13 14 15 16 17 18 19 20 21 22 23 2 JBW is owned by members of the Nordstrom family. As of February 2013, it was owned by John N. Nordstrom, 24 Bruce A. Nordstrom, and D. Wayne Gittinger (a former Nordstrom director and Bruce Nordstrom’s brother-in-law, 25 26 now deceased). (Dkt. No. 11 at 9.) Plaintiff’s complaint alleges that Nordstrom employs twelve pilots (Dkt. No. 11 at 16), though Nordstrom’s motion indicates that it has had as few as eight and as many as ten pilots employed full-time (Dkt. No. 76 at 14.) 4 A floatplane is a type of seaplane, supported on the water by one or more floats. “floatplane,” MERRIAM-WEBSTER ONLINE DICTIONARY. 2015. http://www.merriam-webster.com/dictionary/floatplane (last visited August 11, 2015). 3 ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 6 1 (Dkt. No. 11 at 16–17.) Nordstrom charges these “related parties” for the services, hangar 2 space, and employee time used. (Dkt. No. 76 at 15.) The rates to charge the related parties for 3 aviation services were set after consultation with an independent industry expert, ARGUS 4 International (“ARGUS”). (Dkt. No. 76 at 15; Dkt. No. 75 at 10; Dkt. No. 78 at 14.) Plaintiff 5 alleges, however, that Nordstrom undercharges these related parties—owned by Nordstrom 6 family members—for its flight department services. (Dkt. No. 11 at 18–19.) For example, on a 7 fourteen day trip to Hawaii in 2013, the Company allegedly charged John Nordstrom three days’ 8 worth of pilot fees. (Id. at 18.) Similarly, on December 28, 2013, two sets of two-pilot crews 9 flew the dry-leased JBW planes from King County, Washington to Puerto Vallarta, Mexico and 10 stayed until January 4, 2014. Plaintiff alleges that the Company only charged Bruce Nordstrom 11 for two days’ worth of pilot fees. (Id. at 19.) 12 Plaintiff alleges that the flight department now costs Nordstrom shareholders millions of 13 dollars. (Dkt. No. 11 at 4.) Plaintiff also alleges that the Company take-over of responsibility for 14 aircraft owned by the Nordstrom family coincides with the global financial crisis between 2007 15 and 2008 during which time the price of Nordstrom stock dropped from approximately $55 per 16 share to $6.61 per share. (Dkt. No. 11 at 14–15.) Plaintiff suggests that the transactions by which 17 the company assumed responsibility for family aircraft amounted to a “secret bail-out of the 18 [Nordstrom] family.” (Dkt. No. 81 at 9.) 19 C. The Parties 20 As demonstrated by the filing of three separate motions to dismiss, the Complaint 21 identifies numerous defendants. The Court adopts the following umbrella terms for the four 22 categories of defendants in this case: (1) the “Director Defendants,” referring to all of the current 23 and former members of the Nordstrom Board of Directors named in the Complaint, (2) the 24 “Family Member Defendants” (a sub-section of the Director Defendants), (3) the “Governance 25 Committee Defendants” (a sub-section of the Director Defendants), and (4) the “Related-Party 26 ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 7 1 Defendants.” 5 2 1. Director Defendants 3 The following persons are members of the Nordstrom Board of Directors and are 4 identified as defendants in the Complaint: 5 1) Phyllis J. Campbell, a director since 2004; 2) Michelle M. Ebanks, a director since 2011; 3) Enrique Hernandez, Jr., a director since 1997, a member of the Corporate Governance Committee since 2004, and chair of the Governance Committee between 2007 and 2009; 10 4) Jeanne P. Jackson, a former director from 2002 to 2009; 11 5) Robert G. Miller, a director since 2005; 12 6) Philip G. Satre, a director since 2006, a Governance Committee member since approximately 2007, and the Governance Committee Chair since approximately 2010; 7) Brad Smith, a director since 2013; 8) Felicia D. Thornton, a director from 2010 to 2012; 9) B. Kevin Turner, a director since 2010; 10) Robert D. Walter, a director since 2008 and a Governance Committee member since 2011; 11) Alison A. Winter, a director since 2001 and a Governance Committee member since approximately 2006; 12) Blake W. Nordstrom, a director since 2005, the President of the Nordstrom Company, the son of Bruce Nordstrom and the brother of Erik and Peter Nordstrom; 6 7 8 9 13 14 15 16 17 18 19 20 21 22 23 24 25 26 5 The Defendants split themselves up by different designations: Defendants Phyllis J. Campbell, Michelle M. Ebanks, Enrique Hernandez, Jr., Jeanne P. Jackson, Robert G. Miller, Philip G. Satre, Brad Smith, Felicia D. Thornton, Kevin Turner, Robert D. Walter, and Alison A. Winter refer to themselves as the “Outside Directors.” (Dkt. No. 78 at 9.) ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 8 13) Erik B. Nordstrom, a director since 2006, an Executive Vice President and President of “Nordstrom Direct,” the son of Bruce Nordstrom and the brother of Blake and Peter Nordstrom; and 14) 1 Peter E. Nordstrom, a director since 2006, an Executive Vice President and President of Merchandising, the son of Bruce Nordstrom and the brother of Blake and Erik Nordstrom. 2 3 4 5 (Dkt. No. 11 at 7–8.) 6 2. Family Member Defendants 7 Nordstrom was founded as a shoe retailer in 1901 by John W. Nordstrom and Carl 8 Wallin. “Nordstrom Company History,” http://shop.nordstrom.com/c/company-history (last 9 visited August 11, 2015). While Nordstrom has been a public company since 1971, it continues 10 to be controlled and operated significantly by members of the Nordstrom family. (See Dkt. No. 11 11 at 13–14.) Members of the Nordstrom family own at least 27% of the Company. 6 12 Of the directors named as defendants, Blake Nordstrom, Erik Nordstrom, and Peter 13 Nordstrom are members of the Nordstrom family and referred to collectively as the “Family 14 Member Defendants.” 15 3. Governance Committee Defendants 16 Of the directors named as defendants, Enrique Hernandez, Jr., Philip G. Satre, Robert D. 17 Walter, and Alison A. Winter all served on the Board’s Governance Committee, which approved 18 the “related-party transactions” by which the Company flight department began to offer services 19 to the Related-Party Defendants listed below, and are collectively referred to as the “Governance 20 Committee Defendants.” (Dkt. No. 11 at 9.) 21 4. Related Party Defendants 22 The “Related-Party Defendants” are entities with which Nordstrom’s flight department 23 transacts. Named in the Complaint, they are as follows: 24 25 6 According to the most recent proxy statement, Bruce A. Nordstrom, the grandson of founder John W. Nordstrom, 26 owns 13.84% of the company; his sister Anne E. Gittinger owns 8.16%’ and his sons, Defendants Blake, Erik, and Peter Nordstrom collectively own 4.82%. (Dkt. No. 11 at 14.) ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 9 1) Hangar Three, LLC, owned by Blake Nordstrom, James F. Nordstrom, Jr. and John N. Nordstrom, which entered into a sublease with the Company for land at the King County International Airport; 2) JBW Aircraft Leasing Company, Inc. (“JBW”), owned by John N. Nordstrom, Bruce Nordstrom, and Bruce Nordstrom’s brother-in-law D. Wayne Gittinger (deceased), which has two planes that receive aviationrelated services from Nordstrom; 3) JD Plane, LLC (“JD Plane”), co-owned by James F. Nordstrom, Jr. and Daniel Nordstrom, which has a plane that receives aviation-related services from Nordstrom; 4) JW, Ltd., owned by John N. Nordstrom, which has two planes that receive aviation-related services from Nordstrom; 5) M&B Beaver, LLC, owned by Blake Nordstrom and his wife Molly Nordstrom, which has a plane that receives aviation-related services from Nordstrom; 6) SDJ, LLC, owned by James F. Nordstrom, Jr., which has a plane that receives aviation-related services from Nordstrom; 7) TB Plane, LLC, owned by Sally A. Nordstrom, which has a plane that receives aviation-related services from Nordstrom; 8) 247N, LLC, co-owned by Chris Hughes and Blake Nordstrom, which has a plane that receives aviation-related services from Nordstrom; 9) 1 Blake Nordstrom is also sued in his capacity as a related party who received related-party services from Nordstrom. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 (Dkt. No. 11 at 9–10.) 20 D. The Board’s Treatment of Nordstrom’s Flight Department 21 Plaintiff argues that, in approving the related-party transactions with the above-named 22 related-party defendants (entities owned by members of the Nordstrom family), and 23 misrepresenting the fiscal impact of the transactions, the Director Defendants breached their 24 fiduciary duties to Company’s shareholders and committed corporate waste. (Dkt. No. 11 at 36– 25 42.) 26 For one, Plaintiff alleges that the Director Defendants failed to properly review the costs ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 10 1 to the Company of the related-party transactions. (Dkt. No. 11 at 22–23.) Citing meeting minutes 2 from the Board of Directors’ Governance Committee, Plaintiff argues that any discussion or 3 review of the costs of related-party transactions between Nordstrom’s flight department and the 4 Related-Party Defendants was merely “perfunctory.” (Id.) Plaintiff further alleges that members 5 of the Governance Committee personally benefitted from the related-party transactions by flying 6 on the planes serviced by the Nordstrom flight department. (Id. at 25.) 7 Furthermore, Plaintiff alleges that the Director Defendants falsely represented to 8 shareholders in proxy statements that “payments [received from the Nordstrom family] exceeded 9 the estimated cost to the Company of providing those [aviation-related] services.” (Id. at 24.) In 10 2009, the Director Defendants issued a proxy statement that stated, “in the Board’s opinion, the 11 charges [to the Nordstrom family] were fair and beneficial to the Company because the payments 12 allowed the Company to subsidize the cost of operating the Company’s flight department.” (Id. 13 at 24.) 14 Finally, Plaintiff alleges that the Related-Party Defendants aided and abetted in the 15 Director Defendants’ breach of fiduciary duties and unjustly enriched themselves. (Dkt. No. 11 16 at 40–42.) 17 II. DISCUSSION 18 A. Demand Futility and Plaintiff’s Derivative Shareholder Standing 19 The premise of Nominal Defendant Nordstrom’s Rule 23.1 Motion to Dismiss is that 20 Plaintiff failed to make the requisite demand on the Nordstrom Board of Directors prior to filing 21 this lawsuit, and that accordingly she lacks derivative standing to sue on behalf of the 22 corporation. (Dkt. No. 76 at 9.) Plaintiff concedes that no such demand was made, but argues 23 that she is excused from this requirement as such a demand would have been futile. (Dkt. No. 11 24 at 26–27.) Pre-suit demand requirements and the futility exceptions thereto are governed by the 25 law of the state of incorporation. Kamen v. Kemper Fin. Serv., Inc., 500 U.S. 90, 108–109 26 (1991). Nordstrom is a Washington corporation with its headquarters in Seattle. (Dkt. No. 11 at ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 11 1 7.) Washington courts typically look to Delaware for guidance regarding shareholder derivative 2 litigation. See In re F5 Networkers, Inc., 207 P.3d 433, 439 (Wash. 2009) (adopting reasoning 3 from In re Cray, Inc., 431 F.Supp.2d 1114, 1121 (W.D. Wash. 2006)). 4 Federal Rule of Civil Procedure 23.1 provides, in relevant part: 5 8 “[W]hen one or more shareholders or members of a corporation . . . bring a derivative action to enforce a right that the corporation . . . may properly assert but has failed to enforce . . . [t]he complaint shall . . . state with particularity any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiff's failure to obtain the action or for not making the effort . . .” 9 Fed. R. Civ. P. 23.1(a)–(b). 6 7 10 Unlike a motion to dismiss pursuant to Rule 12(b)(6), a Rule 23.1 motion to dismiss for 11 failure to make a demand is not intended to test the legal sufficiency of a plaintiff’s substantive 12 claim, but rather “to determine who is entitled, as between the corporation and its shareholders, 13 to assert the plaintiff's underlying substantive claim on the corporation's behalf.” In re Veeco 14 Instruments, Inc. Sec. Litig., 434 F. Supp. 2d 267, 274 (S.D.N.Y. 2006) (citing Levine v. Smith, 15 1989 WL 150784, *5 (Del.Ch.1989), aff'd 591 A.2d 194 (Del.1991)). 16 In a shareholder derivative suit context, the claims asserted by the plaintiff belong not to 17 her, but to the corporation. See Fed. R. Civ. P. 23.1(a). For this reason, Rule 23.1 imposes a 18 “demand requirement,” of shareholders prior to bringing suit on the corporations behalf: “[a] 19 shareholder's right to bring a derivative action does not arise until he has made a demand on the 20 board of directors to institute such an action directly, such demand has been wrongfully refused, 21 or until the shareholder has demonstrated, with particularity, the reasons why pre-suit demand 22 would be futile.” Khanna v. McMinn, 2006 WL 1388744, *11 (Del. Ch. May 9, 2006). This 23 requirement stems from the well-settled principle that directors, rather than shareholders, manage 24 the affairs of the corporation, and that the decision to bring or not to bring a lawsuit is a decision 25 concerning the management of the corporation. Spiegel v. Buntrock, 571 A.2d 767, 772–3 26 (Del.1990)). ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 12 1 The pre-suit demand requirement, however, is excused if the plaintiff can demonstrate 2 “demand futility,” by showing that there exists “a reasonable doubt, as of the time the complaint 3 is filed, [that] the board of directors could have properly exercised its independent and 4 disinterested business judgment in responding to a demand.” In re F5 Networks, Inc., 207 P.3d 5 433, 437 (Wash. 2009). The Delaware test, which Washington courts apply, established in 6 Aronson v. Lewis provides a two-prong framework for demonstrating that demand is futile and 7 therefore excused. Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984). 7 A “stockholder who is 8 able to articulate particularized facts showing that there is a reasonable doubt either that (a) a 9 majority of the board is independent for purposes of responding to the demand, or (b) the 10 underlying transaction is protected by the business judgment rule,” is excused from the demand 11 requirement for derivative standing under Rule 23.1. Brehm v. Eisner, 746 A.2d 244, 254–55 12 (Del. 2000). If either prong is satisfied, demand is excused. Id. at 256. 13 For the purposes of the Aronson inquiry, “reasonable doubt” is “akin to the concept that 14 the stockholder has a ‘reasonable belief’ that the board lacks independence or that the transaction 15 is not protected by the business judgment rule.” Grimes v. Donald, 673 A.2d 1207, 1217 n. 17 16 (Del. 1996) overruled by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 8 “[The] concept [of 17 reasonable doubt] is sufficiently flexible and workable to provide the stockholder with ‘the keys 18 to the courthouse’ in an appropriate case where the claim is not based on mere suspicions or 19 stated solely in conclusory terms.” Id. at 1207. 20 “Rule 23.1 is not satisfied by conclusory statements or mere notice pleading. On the other 21 hand, the pleader is not required to plead evidence. What the pleader must set forth are 22 particularized factual statements that are essential to the claim.” Brehm, 746 A.2d at 254. 23 24 7 Aronson was overruled by the Delaware Supreme Court in 2000 by Brehm v. Eisner, but only to the extent that 25 dicta in the Aronson case encouraged appellate courts to review decisions under Rule 23.1 under a deferential 26 standard. 746 A.2d 244, 253–54. Its demand futility test remains good law. The Brehm decision overruled the portion of Aronson and its progeny, including Grimes, that indicates a deferential standard of review of orders on motions to dismiss under Rule 23.1. See, supra, note 6. 8 ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 13 1 As the Court finds that (1) the Nordstrom Board of Directors’ ability to exercise 2 independent, disinterested judgment was not compromised, and (2) the Complaint does not 3 generate a reasonable doubt regarding whether the related-party transactions represent the 4 exercise of sound business judgment, Nominal Defendant Nordstrom’s motion to dismiss 5 Plaintiff's case for failure to make a demand (Dkt. No. 76) is GRANTED. 6 B. The Board of Directors Contained a Disinterested, Impartial Majority at the Time Plaintiff Filed Suit 7 8 The first prong of the Aronson demand futility test is met if Plaintiff can show that there 9 is not a disinterested, impartial majority of the board of directors to consider her demand. 10 Aronson, 473 A.2d at 812. The Court assesses the board composition as of the day Plaintiff filed 11 her Complaint, March 12, 2015. Id. at 810; Dkt. No. 1. Directors are generally considered 12 “interested” if (1) they have a “material financial or familial interest” in the transaction at issue, 13 (2) they are “incapable of acting independently for some other reason such as dominion or 14 control,” or (3) they participated in the alleged misconduct such that they “face a substantial 15 likelihood of liability.” In re Affliated Computer Servs., Inc. Shareholders Litig., 2009 WL 16 296078, at *8 (Del. Ch. Feb. 6, 2009) (citing Aronson, 473 A.2d at 815). 17 1. The Family Member Defendants are Not Disinterested or Impartial 18 As of March 12, 2015, the Nordstrom Board of Directors consisted of thirteen people— 19 twelve of whom are named as defendants to this suit: (1) Campell, (2) Ebanks, (3) Hernandez, 20 (4) Miller, (5) B. Nordstrom, (6) E. Nordstrom, (7) P. Nordstrom, (8) Satre, (9) Smith, (10) 21 Turner, (11) Walter, (12) Winter, and (13) Shellye L. Archambeau, who is not named as a 22 defendant and who joined the board in February 2015. 9 (Dkt. No. 11 at 27.) Of these thirteen, 23 three are Family Member Defendants Blake, Erik, and Peter Nordstrom. Neither party disputes 24 that the Nordstrom brothers are “interested” for the purposes of the Aronson test. (See Dkt. No. 25 26 9 The Complaint also names as Director Defendants Jackson and Thornton, neither of whom were still on the board when the Complaint was filed. ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 14 1 76 at 1, 5.) Courts often consider close family relationships a relevant factor capable of rendering 2 directors unable to impartially consider a demand. See In re Tyson Foods, Inc., 919 A. 2d 563, 3 584 (Del. Ch. 2007) (members of the Tyson family lacked independence due to “consanguinity 4 or marriage”); Mizel v. Connelly, 1999 WL 550369, at *4 (Del Ch. 1999) (grandson unable to 5 independently consider a demand that would be adverse to his grandfather); Cal. Pub. 6 Employees’ Ret. Sys. v. Coulter, 2002 Del. Ch. LEXIS 144, at *28-29, 2002 WL 31888343 (Del. 7 Ch.2002) (considering a director’s son’s primary employment with the corporation as one of 8 several factors supporting a reasonable doubt whether the director could consider demand 9 impartially); Gerber v. EPE Holdings, LLC, 2013 WL 209658 at *4, n. 48 (Del Ch. Jan. 18, 10 2013) (citing the New York Stock Exchange Listed Company Manual § 303A.02 which 11 provides, inter alia, that a director is not independent if she or an immediate family member has 12 been an employee or executive officer of the company in the last three years). 13 Considering the strong family ties between the Family Member Defendants and the 14 Nordstrom Company—as well as to the entities with which the Company contracted in the 15 related party transactions at issue—the Court concludes that these three defendants are not 16 impartial or disinterested under the first prong of the Aronson test. 17 2. Governing Committee Defendants 18 Plaintiff asserts that the four Governance Committee Defendants—Hernandez, Satre, 19 Walter, and Winter—face a “substantial likelihood of liability” such that they could not 20 impartially consider her demand. (Dkt. No. 81 at 23.) The Court disagrees. 21 a. Approval of Related-Party Transactions 22 Plaintiff asserts claims against the Governance Committee Defendants for breach of 23 fiduciary duty based particularly on their having approved the related-party transactions at issue 24 in this suit. (Dkt. No. 11 at 37–38.) Plaintiff alleges that the committee failed to undergo a 25 meaningful assessment of the costs to the Company of these transactions and cites to meeting 26 minutes in support of her allegation. However, the Governance Committee was provided a report ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 15 1 discussing the rates local aviation providers charge. (Dkt. No. 11 at 23; Dkt. No. 77-3 at 11.) 2 ARGUS prepared this report with information specific to the types of planes at issue as well as 3 the geographical region in which they were located. (Dkt. No. 77-3 at 11–13.) ARGUS is an 4 independent company that specializes in risk management in the context of aviation departments. 5 (Id. at 11; http://aviationresearch.com/AboutARGUS (last visited Sept. 21, 2015).) With respect 6 to the approval of the related-party transactions, the Governance Committee Defendants 7 justifiably relied on the ARGUS report. 8 Rev. Code Wash. § 23B.08.300(2)(b) shields a director from liability where she “rel[ied] 9 on information, opinions, reports, or statements, including financial statements and other 10 financial data, if prepared or presented by . . . persons as to matters the director reasonably 11 believes are within the person's professional or expert competence.” The report compiled by 12 ARGUS constitutes the very type of information upon which directors could reasonably rely. 13 Accordingly, the Governance Committee Members do not face a substantial likelihood of 14 liability for their role in approving the related-party transactions. 15 b. Remaining Claims 16 The rest of Plaintiff’s claims against the Governance Committee Defendants are common 17 to all director defendants: namely, (1) a breach of fiduciary duty claim for the issuance of certain 18 proxy statements and (2) corporate waste. (Dkt. No. 11 at 38–40.) The Court finds that the 19 Complaint fails to establish a substantial likelihood of liability with regard to either claim. In so 20 finding, the Court begins with the presumption “that in making a business decision the directors 21 of a corporation acted on an informed basis, in good faith, and in the honest belief that the action 22 taken was in the best interests of the company,” and includes strong presumptions of 23 disinterestedness and independence. In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 52 (Del. 24 2006) (citing Aronson, 473 A.2d at 812). 25 Furthermore, the Nordstrom Corporate Charter shields directors from liability for money 26 damages. An exculpatory provision in the charter provides, in relevant part: ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 16 “Any personal liability of a director to the corporation or its shareholders for monetary damages for conduct as a director is eliminated, except for liability for any acts or omissions that involve intentional misconduct [or] . . . any transaction from which the director will personally receive a benefit in money, property, or services to which the director is not legally entitled . . .” 1 2 3 4 (Dkt. No. 77-2 at 114.) The actions taken by the Governance Committee Defendants which 5 Plaintiff scrutinizes do not represent intentional misconduct or that for which any of those 6 Defendants “personally receive[d] a benefit.” The Court is not persuaded by Plaintiff’s argument 7 that her additional request for equitable relief renders the Corporate Charter inapplicable. 10 The 8 provisions in the Nordstrom Corporate Charter render the Governance Committee Defendants 9 highly unlikely to face a substantial likelihood of liability. 10 The Court concludes that the Governance Committee Defendants were not “interested” 11 under the Aronson test. In re Affliated Computer Servs., Inc. Shareholders Litig., 2009 WL 12 296078, at *8 (Del. Ch. Feb. 6, 2009) (citing Aronson, 473 A.2d at 815). 13 3. Remaining Directors as of March 12, 2015 14 The remaining six members of the Board of Directors as of the time of the filing of this 15 suit 11 are also disinterested and independent under the Aronson test. Plaintiff has not pled 16 particularized facts to indicate that any of these Directors possessed a material financial or 17 familial interest in the related-party transactions, that they were incapable of acting 18 independently, or that they face a substantial likelihood of personal liability. Rather, Plaintiff 19 only argues that the Board of Directors as a whole faces a substantial likelihood of liability based 20 on the issuance of proxy statements indicating that “payments [from the Nordstrom family] 21 exceeded the estimated cost to the Company of providing [aviation-related] services,” (Dkt.No. 22 11 at 22–23) and a later proxy statement that stated, “in the board’s opinion, the charges [to the 23 Nordstrom family] were fair and beneficial to the Company because the payments allowed the 24 25 10 Nor is the Court persuaded by Plaintiff’s reading of the unpublished Delaware Chancery Court cited by the 26 parties, MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *22 (Del. Ch. May 5, 2010). 11 (1) Campbell, (2) Ebanks, (3), Miller, (4) Smith, (5) Turner, and (6) Archambeau (not a Defendant). ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 17 1 Company to subsidize the cost of operating the Company’s flight department.” (Dkt. No. 11 at 2 24.) 3 While it is possible to consider these proxy statements to be misleading in hindsight, the 4 Complaint does not plead sufficient, particularized facts to render Defendants Campbell, Ebanks, 5 Miller, Smith, or Turner liable for their existence. Nor does the Complaint establish that, at the 6 time they were issued, these statements did not represent the exercise of sound business 7 judgment. See Grobow v. Perot, 526 A.2d 914, 928 (Del. Ch. 1987) aff’d, 539 A.2d 180 (Del. 8 1988) (“However controversial, unpopular, or even wrong . . . a decision might turn out to be, it 9 is precisely the kind of business judgment that the rule is intended to enable an independent, 10 disinterested board of directors to make.”). This conclusion is buttressed by the added 11 protections afforded these Defendants by virtue of the Nordstrom Corporate Charter. 12 In summary, of the thirteen members of the Nordstrom Board of Directors as of March 13 12, 2015, ten were disinterested and independent. Accordingly, the first prong of the Aronson 14 test has not been satisfied. 15 C. The Business Judgment Rule has Not Been Rebutted 16 Furthermore, the Court finds that Plaintiff’s pleadings fail to generate a reasonable doubt 17 as to whether the related-party transactions represent the exercise of sound business judgment. 18 The second Aronson prong asks whether the transaction in question is entitled to the protections 19 of the “business judgment rule.” In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 286 20 (Del. Ch. 2003). The business judgment rule creates a legal presumption that a company’s 21 directors acted on an informed basis, in good faith, and in the honest belief that they acted in the 22 best interests of the corporation. Aronson v. Lewis, 473 A.2d 80, 812 (Del. 1984). 23 In order to rebut the presumption that a board’s actions are entitled to deference, a 24 plaintiff must plead particularized facts sufficient to raise a reason to doubt that either (1) the 25 action was taken honestly and in good faith, or (2) that the board was adequately informed in 26 making the decision. In re Disney, 825 A.2d at 286. ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 18 1 The Complaint has not rebutted the presumption that members of Nordstrom’s Board of 2 Directors acted honestly and in good faith, or that they were adequately informed in making their 3 decisions with respect to the related-party transactions. In so determining, the Court places 4 particular emphasis on the ARGUS report upon which the Directors relied. 5 With respect to Plaintiff’s corporate waste claim, there exists an especially high bar in 6 pleading sufficient facts to create a reasonable doubt regarding whether a transaction was a valid 7 exercise of business judgment. Schwartzman v. McGavick, 2007 WL 1174697, at *5 (W.D. 8 Wash. Apr. 19, 2007). As one Delaware court noted, “[t]o allege a claim of waste sufficient to 9 satisfy the criteria of Aronson and Rule 23. 1, the particularized pleaded facts must show that the 10 consideration received by [the corporation] in the transaction ‘was so inadequate that no person 11 of ordinary, sound business judgment would deem it worth that which the corporation paid.’” 12 Grobow v. Perot, 526 A.2d 914, 928 (Del. Ch.1987). Plaintiff has not satisfied this high bar, 13 especially considering the independent assistance the Directors sought and received from 14 ARGUS in setting their prices for aviation-related services. 15 In summary, Plaintiff’s pleadings do not generate a reasonable doubt with respect to 16 whether the Board of Directors exercised sound business judgment, and the second prong of 17 Aronson has not been satisfied. 18 III. CONCLUSION 19 For the foregoing reasons, Nominal Defendant’s Rule 23.1 Motion to Dismiss (Dkt. No. 20 76) is GRANTED. As Plaintiff lacks shareholder derivative standing to bring the above21 captioned matter, her case is hereby DISMISSED with prejudice. See Lucas v. Lewis, 428 F. 22 App’x 694, 696 (9th Cir. 2011) (“Because [Plaintiff] had not satisfied the demand requirements 23 prior to filing suit, the district court’s decision to dismiss with prejudice was appropriate.”). 24 Although the dismissal is with prejudice, Plaintiff is not precluded from later returning to the 25 26 ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 19 1 Court to allege wrongful refusal of her demand on the basis of events that had not yet occurred at 2 the time of this Order. Id. 3 DATED this 24 day of September 2015. 4 5 6 A 7 8 9 John C. Coughenour UNITED STATES DISTRICT JUDGE 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 ORDER GRANTING RULE 23.1 MOTION TO DISMISS PAGE - 20
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