Welcome to Shearman & Sterling LLP’s Need-To-Know Litigation Weekly, which analyzes notable U.S. decisions, orders and developments each week in areas of Securities Litigation, M&A And Corporate Governance, Government/Regulatory Enforcement, Antitrust Litigation and IP Litigation. This weekly newsletter is intended to supplement our various publications and thought leadership concerning these important substantive areas.
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Northern District Of Illinois Denies Motion To Dismiss Securities Fraud Claims Against Surgical Implants Manufacturer, Finding Plaintiffs
On April 1, 2021, Judge Matthew F. Kennelly of the Eastern District of Illinois denied a motion to dismiss a claim under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 thereunder, against a surgical implants manufacturer (the “Company”) and certain of its current and former officers. Lowry v. RTI Surgical Holdings Inc., No. 20-cv-01939 (N.D. Ill. Apr. 1, 2021). Plaintiffs alleged that defendants made materially false and misleading statements regarding the Company’s accounting and revenue recognition practices which caused a stock drop once corrective disclosures were made. The Court denied defendants’ motion to dismiss the amended complaint, holding that plaintiffs sufficiently pled material misstatements and scienter.
Southern District Of Texas Denies Motion To Dismiss Securities Fraud Claims, Finding Plaintiffs Adequately Pled Material Misrepresentations And Scienter
On March 31, 2021, Judge Alfred H. Bennett of the Southern District of Texas denied a motion to dismiss claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) against a company that operates live adult entertainment businesses and bar-restaurants (the “Company”) and certain of its executives, as well as members of its audit, compensation, and nominating committees. Hoffman, et al v. RCI Hospitality Holdings, Inc., et al, No. 4:19-cv-01841 (S.D. Tex. Mar. 31, 2021). Plaintiffs alleged defendants made misleading statements or omissions concerning certain related-party transactions (RPTs), executive compensation, and other financial points in several of the Company’s Form 10-K annual reports. The Court denied defendants’ motion to dismiss the amended complaint, holding that plaintiffs sufficiently pled material misstatements and scienter.
SEC Commissioner Calls For Revisiting Approach To Corporate Penalties
On March 9, 2021, Caroline Crenshaw, a Commissioner of the Securities and Exchange Commission (“SEC”) asserted, in a speech before the Council of Institutional Investors, that the SEC has focused excessively on the indirect impact on innocent shareholders at the time of penalty when assessing corporate penalties. Instead, she called for the SEC to revisit its approach and give less weight to innocent shareholder impact as a mitigant against large corporate penalties.
M&A AND CORPORATE GOVERNANCE
Delaware Court Of Chancery Dismisses Caremark And Disclosure Claims Related To Alleged Consumer Protection Law Violations For Failure To Plead Demand Futility
On March 30, 2021, Chancellor Andre G. Bouchard dismissed a derivative suit brought by a stockholder of LendingClub Corporation (the “Company”) against certain of the Company’s current and former directors and officers for failure to plead demand futility. Fisher v. Sanborn, et al., No. 2019-0631-AGB (Del. Ch. March 30, 2020). Plaintiff asserted breach of fiduciary duty claims against defendants after the Federal Trade Commission (FTC) filed a complaint against the Company for allegedly violating certain consumer protection laws by engaging in deceptive and unfair practices in connection with its lending business. Specifically, plaintiff alleged that defendants (i) breached their oversight duties by failing to monitor and oversee the Company’s compliance with consumer protection laws, and (ii) misrepresented the subject of the FTC investigation. The Court, however, found the complaint did not adequately plead that defendants failed to implement a monitoring system relevant to consumer protection law compliance or consciously disregard indications of noncompliance, as required to be alleged under Caremark. The Court also found that the complaint did not adequately plead that defendants “deliberately lied to investors.” The Court therefore held that the complaint did not demonstrate that the directors faced a substantial likelihood of liability and thus pre-suit demand on the board was not excused.
Ninth Circuit Reverses Class Certification Based On District Court’s Failure To Resolve Factual Issues Relating To Uninjured Class Members
On April 6, 2021, the United States Court of Appeals for the Ninth Circuit vacated a district court order certifying three classes in a multi-district antitrust case alleging a price-fixing conspiracy by producers of packaged tuna, finding that the district court erred in determining that plaintiffs had satisfied to the predominance requirement of Federal Rule of Civil Procedure 23(b)(3). Olean Wholesale Grocery Coop v. Bumble Bee Foods, No. 19-56514 (9th Cir. Apr. 6, 2021). Specifically, the Court concluded that the district court abused its discretion in declining to resolve whether plaintiffs’ proposed use of statistical evidence to establish classwide impact swept a substantial number of uninjured purchasers into the putative class. A class cannot be certified, the Court held, when it contains more than a “de minimis” number of uninjured purchasers.
Supreme Court Finds Copying Of Computer Code A Fair Use
On April 5, 2021, the Supreme Court of the United States issued an opinion reversing a decision by the Court of Appeals for the Federal Circuit (CAFC) that had found Google liable for copying elements of Oracle’s Java computer code. Google LLC v. Oracle Inc., No. 18-956, 593 U.S. ____ (2021). According to the Court, Google’s copying, which was limited to only those lines of code needed to enable Java programmers to create new and transformative programs, was a fair use as a matter of law.