Lead Denied in Facebook Spinoff Lawsuit, Block & Leviton Cry Dispute, Call for Appeal

The Facebook logo can be seen in Davos, Switzerland on January 20, 2020. REUTERS / Arnd Wiegmann

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(Reuters) – Shareholder company Block & Leviton is refusing to quietly back out of a high-profile derivative lawsuit against members of the board of directors of Facebook Inc.

The company has asked a Delaware Chancery Court judge for leave to appeal its Oct.5 order naming three other plaintiff companies to lead the breach of duty case, which accuses Facebook directors of protecting CEO Mark Zuckerberg at the company’s expense in a $ 5 billion contract. settlement with the U.S. Federal Trade Commission in 2019.

Block & Leviton argues that rival Scott + Scott shareholder lawyers, Kaplan Fox & Kilsheimer and Prickett, Jones & Elliott cannot represent Facebook’s interests in the derivative lawsuit because Scott + Scott is also representing plaintiffs in two antitrust cases asking significant damages from the company. Block & Leviton’s application to appeal to the Delaware Supreme Court argues that no Delaware court has previously authorized a shareholder company to pursue derivative actions on behalf of a company while simultaneously representing different clients making assert direct claims against the company.

“This is an exceptional case,” says the file. “The Court of Chancery affirming that attorneys can act as trustees for a Delaware corporation in derivative litigation while simultaneously representing other clients in other actions…

Vice Chancellor Joseph Slights dismissed Block & Leviton’s conflicting arguments when he chose the other companies and their clients, led by the California State Teachers’ Retirement System (known as CalSTRS), to be in charge of the breach of duty lawsuit against the board of directors of Facebook. members.

The judge paid considerable attention to the issue of conflict, acknowledging that other Delaware courts – notably in the transcription orders of then Vice-Chancellor Leo Strine in In re Duke Energy in 2012 and the Vice- then Chancellor Tamika Montgomery-Reeves in In re Towers Watson & 2018 Co. – expressed reservations about corporate shareholders suing in a derivative manner on behalf of a corporation while directly suing the corporation.

But Slights cited two other Delaware Chancellery Court decisions – former Vice Chancellor John Noble’s decision in 2014 In re Ebix Inc and his own 2018 opinion in In re Tesla Motors Inc – as finding that a principal shareholder can simultaneously pursue derivative and direct claims against members of the board of directors.

In the Ebix decision, Slights said, the court ruled that any potential conflict was not “invalidating” because the claims in the direct and derivative lawsuits were “not inconsistent internally.” The judge said he had considered Scott + Scott’s direct lawsuits against Facebook, one a racketeering class action lawsuit in California state court for app developers, the other an antitrust lawsuit brought by advertisers in federal court in San Francisco. According to the Ebix test, he said, the allegations in these cases were not inconsistent with those in the derivative case, so he was “satisfied that there was no conflict that would prevent the lawyer to correctly represent the CalSTRS group “.

Slights said the risk of distant conflict did not outweigh the superiority of the 389-page CalSTRS proposed complaint, which offered two different theories as to why it would have been futile to demand action from Facebook’s board. . Block & Leviton’s complaint for two Rhode Island pension funds, which weighed just 219 pages, focused on allegations that the board was in the grip of majority shareholder Zuckerberg when it agreed the 2019 FTC settlement, which reportedly cost the company billions more. than what he owed in penalties in order to protect Zuckerberg from his personal liability.

The CalSTRS lawsuit raised similar allegations, but also alleged that Facebook’s board members were liable under In re Caremark International Inc for failing to ensure the company was living up to its previous 2012 agreement with the FTC to protect user data. (Facebook’s board, represented by Gibson, Dunn & Crutcher, argued that shareholders cannot show that the board was beholden to Zuckerberg or acted in bad faith.)

Slights said the CalSTRS complaint was more comprehensive and offered shareholders the best opportunity to win.

CalSTRS attorneys Samuel Closic of Prickett Jones, Geoffrey Johnson of Scott + Scott and Frederic Fox of Kaplan Fox did not respond to my email requesting comment on the Block & Leviton filing. Fox and Closic previously addressed Block & Leviton’s conflict allegations during a September 30 hearing into the principal plaintiff’s competing bids. Both said they were offended by the suggestion that their companies or CalSTRS would abandon their ethical obligations in favor of complainants in Scott + Scott’s other Facebook cases. (Kaplan Fox, who is also on the CalSTRS team, is the liaison lawyer in a third case against Facebook, but the new Block & Leviton case focuses almost entirely on the alleged Scott + Scott case.)

The companies further argued that Block & Leviton significantly exaggerated the risk that their lawsuits in unrelated lawsuits against Facebook would have real implications in the spinoff case. “Our customers are taking this attack very seriously,” Fox told Slights. “It unfairly damages our reputation and our reputation. “

The new Block & Leviton case argued that the circumstances of the Facebook case are different from those of the Ebix and Tesla cases cited by Slights. In these cases, the same principal plaintiffs brought direct and derivative claims in the same action, “making it much easier for the court to monitor and guard against conflicts”. And the shareholders of Tesla and Ebix have sought direct damages only against the members of the board of directors, and not against the company they represent in a derivative manner.

“This is very different from the situation presented here, where Scott + Scott clients in direct actions are seeking multi-million dollar damages against Facebook,” the file says.

Will Block & Leviton’s claims of a split among Chancellery judges over an issue with “dramatic” implications influence Slights? The odds are still against interlocutory scrutiny, and Slights said his decision was based on the details of the alleged Facebook dispute rather than a sweeping legal interpretation. But he also said during the September 30 hearing that choosing between two sets of qualified plaintiffs was his least favorite part of the job. If he wants the Delaware Supreme Court to provide him with further advice, Block & Leviton may have a chance.

Read more:

Shareholder companies fight to run Facebook privacy spinoff lawsuit in Delaware

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias.

Alison frankel

Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A graduate of Dartmouth University, she worked as a reporter in New York covering the legal industry and law for more than three decades. Prior to joining Reuters, she was a writer and editor for The American Lawyer. Frankel is the author of Double Eagle: The Epic Tale of the World’s Most Valuable Coin. Contact her at [email protected]

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