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Delaware Chancery Court Grants Motion to Dismiss in Caremark Action Against Qualcomm Directors and Officers
08/08/2016On August 1, 2016, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Chancery Court granted a motion to dismiss “Caremark” claims against directors of Qualcomm, Inc. for failure to plead that demand on the board of directors was futile, finding that the complaint failed to set forth particularized allegations of fact supporting an inference that a majority of the board faced a substantial likelihood of personal liability. Melbourne Mun. Firefighter’s Pension Trust v. Paul E. Jacobs, et al. and Qualcomm, Inc., C.A. No. 10872, memo. op. (Del. Ch. Aug 1, 2016). The complaint alleged that directors and officers of Qualcomm consciously disregarded antitrust enforcement actions in several international jurisdictions, ignored red flags regarding the firm’s compliance with international antitrust laws, and failed to remedy its business practices to comply with international antitrust laws, resulting in the imposition of fines and judgments against the company from multiple regulators in a number of jurisdictions, including a $975 million fine issued by the National Development and Reform Commission of the People’s Republic of China.
To maintain a Caremark claim for a bad-faith failure of oversight, a plaintiff must plead: (1) that directors knew or should have known that the corporation was violating the law, (2) that directors acted in bad faith by failing to prevent or remedy those violations, and (3) that such failure resulted in damage to the corporation. See In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 971 (Del. Ch. 1996). As the Court noted, plaintiffs frequently attempt to meet this standard by alleging that a “corporate trauma” suffered by a company was preceded by “red flags” indicative of illegal activity that were overlooked or “consciously disregarded” by directors.
The Court agreed that a number of plaintiff’s allegations—particularly those based on SEC filings signed by the directors—demonstrated that the board knew about the antitrust proceedings and scrutiny afflicting the company. But the Court also found that the directors responded to these “red flags” in a manner that was not inappropriate and which did not rise to the level of consciously disregarding illegal activity. Specifically, the Court analyzed the board’s decisions to stay abreast of these investigations, to appeal antitrust judgments and fines where possible, and to increase lobbying and other advocacy efforts in the relevant jurisdictions to press for more favorable legal standards. The Court also noted that the board at all times believed and maintained that the company was not engaged in illegal activity.
The Court distinguished this response to alleged illegal behavior from two other Caremark cases—relied on by plaintiff—in which the Chancery Court found that directors acted in bad faith when they knew that a company was operating in violation of the law, but disregarded the violations. In re Massey Energy Co., C.A. No. 5430 (Del. Ch. May 31, 2011); La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012). The Court saw these cases as significantly different because, in each case, there were particularized allegations of the directors’ active awareness of illegal company behavior, and even an encouragement of such activity, rather than, as in the Qualcomm case, a good faith disagreement about whether the conduct was in fact illegal. The case thus sets an important precedent that could assist directors in defending Caremark suits that are based on supposedly illegal behavior that might fall into a grey area or which is currently contested.
