Ocegueda ex rel. Facebook v. Zuckerberg

526 F.Supp.3d 637

Natalie OCEGUEDA, derivatively ON BEHALF OF FACEBOOK, Plaintiff,

v.Mark ZUCKERBERG, et al., Defendants.

Case No. 20-cv-04444-LB

United States District Court, N.D. California, San Francisco Division.

Signed March 19, 2021

Albert Y. Chang, Yury A. Kolesnikov, Francis A. Bottini, Jr., Bottini and Bottini, Inc., La Jolla, CA, for Plaintiff.

Andrew Brian Clubok, Pro Hac Vice, Susan E. Engel, Pro Hac Vice, Stephen Paul Barry, Pro Hac Vice, Latham & Watkins LLP, Washington, DC, Elizabeth L. Deeley, Latham & Watkins LLP, San Francisco, CA, Daniel Robert Gherardi, Latham and Watkins LLP, Menlo Park, CA, William J. Trach, Pro Hac Vice, Latham and Watkins LLP, Boston, MA, for Defendants.

ORDER GRANTING MOTION TO DISMISS

Re: ECF No. 46

LAUREL BEELER, United States Magistrate Judge

INTRODUCTION

In this shareholder derivative action, the Facebook defendants (nominal defendant Facebook and members of its board of directors and executive team) moved to dismiss the complaint, which challenges Facebook's alleged lack of diversity (on its board and executive team, and in its workplace), its allegedly discriminatory advertising practices, and its failure to curb hate speech as (1) a violation of the directors’ fiduciary duty to the corporation and its shareholders and (2) false and misleading statements (because they contradict Facebook's public proxy statements about its commitment to diversity), in violation of § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and SEC Rule 14a-9, 17 C.F.R. § 240.14a-9. The defendants moved to dismiss in part on the following grounds. First, the plaintiff did not make a pre-suit demand on the board or plead with particularity that a demand was excused as futile, as required by Federal Rule of Civil Procedure 23.1. Second, the plaintiff sued in the wrong forum: Facebook's Restated Certificate of Incorporation has a binding forum-selection clause requiring derivative actions to be filed in the Delaware Court of Chancery. Third, the plaintiff did not plausibly state a § 14(a) claim because she did not identify any materially false and misleading statements, in violation of Rule 8(a) and the heightened pleading standards of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (PLSRA).

The court grants the motion to dismiss. The plaintiff did not make a pre-suit demand, and her excuses — the defendants’ disregard of unlawful practices, alleged liability for false statements, and lack of independence — do not plausibly plead futility. The forum-selection clause also precludes the lawsuit here. Finally, the plaintiff's allegations do not plausibly plead a materially false statement under § 14(a) primarily because the aspirational assertions in the proxy statements are non-actionable.

STATEMENT

Facebook, a social network, is a Delaware corporation headquartered in Menlo Park, California.¹ Its May 22, 2012 Restated Certificate of Incorporation has a forum-selection clause:

Unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for (1) any derivative action or proceeding brought on behalf of the corporation, (2) any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any director, officer, employee or agent of the corporation to the corporation or the corporation's stockholders, ... in each such case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this ARTICLE IX.²

It also has a limitation-of-liability clause for its directors:

1. Limitation of Liability. To the fullest extent permitted by law, no director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director....³

Plaintiff Natalie Ocegueda has been a Facebook shareholder since she bought her stock on May 21, 2012.⁴ The defendants are members of Facebook's board of directors, or were previously, and some also are members of its executive team. Their names — which are relevant to the plaintiff's individual challenges to them (as discussed in the analysis) — are Mark Zuckerberg (also Facebook's founder, chairman, and CEO), Sheryl Sandberg (also Facebook's COO), Marc Andreessen, Andrew Houston, Erskine Bowles (director from September 2011 to at least April 12, 2019), Jeffrey Zients (director from May 2018 to April 10, 2020), Susan Desmond-Hellman (director from March 2013 to October 30, 2019), Nancy Killefer, Tracey Travis, Robert Kimmitt, Reed Hastings (director from June 2011 to at least April 12, 2019), and Peter Thiel.⁵

The plaintiff alleges that the directors ignored red flags about Facebook's unlawful business practices — its lack of diversity (on the board, in senior management, and in its workplace), its discriminatory advertising, and its failure to curb hate speech — and thereby violated their fiduciary duty to the company and its shareholders and rendered materially false the assertions in Facebook's 2019 and 2020 proxy statements that Facebook is committed to diversity and inclusion.⁶

First, as to Facebook's lack of diversity, the plaintiff points to the composition of Facebook's board, its executive team, and its employees. She alleges that the board has only one black member and that, "[w]hile Facebook states that it is committed to building a diverse workforce, ... there are no Blacks or other minorities among its senior executives.⁷ Also, "[i]nstead of recommending well-qualified Black and minority candidates," the board's nominating committee has "perpetuated a lack of diversity on the Board under the pretext that the existing members’ ‘experience’ and long tenure on the Board is beneficial to Facebook."⁸ She alleges that Facebook discriminates in its hiring and promotion, quoting a July 2018 newspaper article about a Facebook diversity report: "Facebook is inching toward increasing the diversity of its workforce but it still has a big problem: It's hiring very few black and Hispanic women."⁹ A November 2018 article reported a former Black employee's experiences at Facebook and his assessment of a corporate environment that marginalized Black employees.¹⁰

Second, as to Facebook's discriminatory advertising practices, she cites Facebook's CEO Mark Zuckerberg's April 2018 testimony before the Senate Judiciary Committee about Facebook's advertising practices, which allowed advertisers to discriminate by race in housing ads. This testimony allegedly showed the board's knowledge of the issue. Despite its knowledge, the "illegal and discriminatory advertising continued and even proliferated" after the Congressional hearing.¹¹ In August 2018, the U.S. Department of Housing and Urban Development "filed a complaint" alleging that Facebook violated the Fair Housing Act by allowing advertisers to target ads to Facebook users based on race and color (among other categories) by targeting certain zip codes.¹² In September 2018, the ACLU sued Facebook for gender discrimination on the ground that Facebook allowed advertisers to target men for "Help Wanted" and job ads.¹³ In March 2019, Facebook settled five lawsuits and eliminated the ability of advertisers to target based on age, gender, and ZIP code for all ads offering housing, employment, or credit opportunities.¹⁴

Third, the plaintiff alleges that Facebook did not stop hate speech, including allegedly incendiary posts from then President Donald Trump in May 2020, which resulted in protests from Facebook employees and announcements by advertisers in June 2020 that they would boycott Facebook.¹⁵

Fourth, the plaintiff alleges that these practices contradict the representations in Facebook's 2019 and 2020 proxy statements that it is committed to diversity and inclusion, including "building a workforce that is as diverse as the communities [it] serves" and including individuals from diverse backgrounds at the board level.¹⁶

The Facebook defendants contest the plaintiff's allegations that Facebook's practices are unlawful, emphasizing its commitment to diversity and inclusion and citing — among other things — the actual composition of its board and its nomination process: two of nine directors are Black, a third Black director stepped down in March 2020 to join Berkshire Hathaway, four of nine directors are women, one is openly gay, and, since its adoption of its diversity policy in 2018, a majority of new nominees have been Black or women. It identifies diversity in its senior executives: several are non-white, including the head of infrastructure engineering, the head of new-product experimentation, the head of workplace, the Chief Diversity Officer, and the former Chief Marketing Officer. It points to its resolution of the advertising issues and its reaction to the Trump speech issues.¹⁷

The plaintiff's complaint has the following claims: (1) breach of fiduciary duty (against all defendants); (2) aiding and abetting the breach of fiduciary duty (against all defendants); (3) abuse of control (against Mark Zuckerberg); (4) unjust enrichment (against all defendants); and (5) false and misleading statements (against all defendants), in violation of § Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and SEC Rule 14a-9, 17 C.F.R. § 240.14a-9.¹⁸ She did not make a pre-suit demand under Rule 23.1 and alleged that it would be futile because the defendants abandoned their duties wholesale (ignoring red flags of unlawful practices), they face a substantial likelihood of liability for their false statements in the 2019 and 2020 proxy statements, and Facebook's CEO and COO cannot exercise independent and disinterested judgment.¹⁹

The defendants moved...