Pemberton ex rel. Patterson Cos. v. Anderson, Case No. 18-CV-2818 (PJS/HB)

412 F.Supp.3d 1058

Sally PEMBERTON, derivatively and ON BEHALF OF PATTERSON COMPANIES, INC., Plaintiff,

v. Scott P. ANDERSON; Ann B. Gugino; Mark S. Walchirk; John D. Buck; Alex N. Blanco; Jody H. Feragen; Sarena S. Lin; Ellen A. Rudnick; Neal A. Schrimsher; Les C. Vinney; James W. Wiltz; Paul Guggenheim; David Misiak ; Tim Rogan; Defendants,andPatterson Companies, Inc., Nominal Defendant.

Case No. 18-CV-2818 (PJS/HB)

United States District Court, D. Minnesota.

Signed September 10, 2019

Phillip Kim, THE ROSEN LAW FIRM, P.A.; Mark E. Czuchry, CZUCHRY LAW FIRM, LLC; Timothy W. Brown, THE BROWN LAW FIRM, P.C., for plaintiff.

Patrick S. Williams, Aaron G. Thomas, and Jordan L. Weber, BRIGGS AND MORGAN, P.A., for defendants.

ORDER

Patrick J. Schiltz, United States District Judge

Plaintiff Sally Pemberton, on behalf of nominal defendant Patterson Companies, Inc. ("Patterson"), brings this shareholder-derivative action against 14 current and former officers and directors of Patterson, alleging violations of federal securities law, breaches of fiduciary duty, unjust enrichment, and waste of corporate assets arising out of Patterson's alleged participation in an antitrust conspiracy. Defendants have moved to dismiss, arguing that Pemberton failed to make a pre-suit demand on Patterson's board of directors. For the reasons that follow, the Court grants defendants' motion and dismisses the complaint without prejudice.

I. BACKGROUND

Patterson is a Minnesota corporation with its principal executive offices in St. Paul, Minnesota. Compl. ¶ 25. Patterson operates Patterson Dental, which sells supplies, equipment, and services to dental practitioners. Compl. ¶ 2. Patterson is the second-largest distributor of dental supplies and equipment in the United States. Compl. ¶ 2. Patterson and its chief competitors, Benco Dental Supply Co. ("Benco") and Henry Schein, Inc. ("Schein"), together control about 85 percent of the "sale of all dental products and services made through distributors in the United States." Compl. ¶ 3.

Pemberton alleges that Patterson, Benco, and Schein engaged in a long-running and wide-ranging antitrust conspiracy. One aspect of the alleged conspiracy involved a boycott of group purchasing organizations ("GPOs"). In recent years, independent dentists have formed GPOs to combine purchasing power and gain leverage to negotiate lower prices from distributors. Compl. ¶ 4. Pemberton alleges that Patterson, Benco, and Schein conspired to refuse to offer discounted prices or otherwise negotiate with GPOs. Compl. ¶ 5. Pemberton also alleges that these distributors engaged in other anticompetitive conduct pursuant to the conspiracy, including fixing margins on dental supplies and equipment, blocking the entry of rival distributors into the market, and agreeing not to poach one another's customers or sales representatives. Compl. ¶ 5. Pemberton alleges that, as a result of the individual defendants' participation in or failure to prevent this misconduct, Patterson has been damaged in multiple ways, including by being exposed to investigations, legal fees, lawsuits, and settlements. Compl. ¶¶ 214-21.

On February 12, 2018, the Federal Trade Commission ("FTC") filed an administrative complaint against the distributors, accusing them of antitrust violations. Compl. ¶ 6. The FTC complaint alleges that the distributors have conspired since at least 2013 to fix the prices of dental-supply products and refuse to sell to GPOs. Compl. ¶ 6.

II. ANALYSIS

A. Standard of Review

In reviewing a motion to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6), a court must accept as true all of the factual allegations in the complaint and draw all reasonable inferences in the plaintiff's favor. Aten v. Scottsdale Ins. Co. , 511 F.3d 818, 820 (8th Cir. 2008). Although the factual allegations need not be detailed, they must be sufficient to "raise a right to relief above the speculative level ...." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The complaint must "state a claim to relief that is plausible on its face." Id. at 570, 127 S.Ct. 1955.

B. Demand Futility

"A shareholder derivative suit is a creation of equity in which a shareholder may, in effect, ‘step into the corporation's shoes and ... seek in its right the restitution he could not demand in his own.’ " In re UnitedHealth Grp. Inc. S'holder Derivative Litig. , 754 N.W.2d 544, 550 (Minn. 2008) (quoting Cohen v. Beneficial Indus. Loan Corp. , 337 U.S. 541, 548, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949) ). "A derivative action actually belongs to the corporation, but the shareholders are permitted to bring the action where the corporation has failed to take action for itself." Janssen v. Best & Flanagan , 662 N.W.2d 876, 882 (Minn. 2003).

Before filing a derivative suit, a shareholder must ordinarily make a demand on the corporation's board of directors. Winter v. Farmers Educ. Coop. Union of Am. , 259 Minn. 257, 107 N.W.2d 226, 233 (1961).

The derivative suit is recognized as an extraordinary remedy available to the shareholder as the corporation's representative only when there is no other road to redress. The demand upon the managing directors and shareholders is important in that it gives the management of the corporation an opportunity to consider the merits of the dispute and to determine, in the interests of the corporation and shareholders, whether it might be disposed of without the expense and delay of litigation. The demand requirement as a condition precedent to a shareholder's derivative suit is one not lightly to be dispensed with.

Id. (citation, quotation marks, and footnote omitted). A demand is not required, however, "where it is plain from the circumstances that it would be futile."¹ Id. at 234. Under Fed. R. Civ. P. 23.1(b)(3)(B), a plaintiff must allege with particularity her reasons for not making a demand.

There is no dispute that Pemberton did not make a demand on Patterson's board. Instead, she alleges that demand would have been futile because seven members of the nine-member board are defendants in this action and therefore face personal liability. Compl. ¶¶ 229-46. Pemberton argues that, whenever a majority of the board are conflicted in this manner, demand is excused as a matter of law. Pemberton points to the following language from Winter :

Ordinarily a demand should be made on the board of directors unless the wrongdoers constitute a majority of the board, and a demand should be made on the shareholders unless they are powerless to ratify the wrong alleged or unless the majority of their number is interested.

Winter , 107 N.W.2d at 233. Pemberton has alleged that a majority of the board face a "substantial likelihood" of personal liability, and thus, she argues, demand would have been futile. See Rales v. Blasband , 634 A.2d 927, 936 (Del. 1993) (where there is a "substantial likelihood" of personal liability, a director cannot consider a demand with the necessary disinterest).

The Court disagrees, for two reasons. First, Winter 's statement that demand is futile whenever a majority of the board are wrongdoers or are otherwise interested is dicta. Winter did not rely on any rule that wrongdoing by a majority of the board automatically renders demand futile; the alleged wrongdoing in Winter involved only one member of the board of directors. Instead, Winter found that a demand would have been futile because the business entity at issue was "a loose, nonstock cooperative without salaried officers or employees" and was essentially defunct, as its board had not had a regular meeting in years.² Winter , 107 N.W.2d at 233.

More importantly, the legal landscape has changed significantly since 1961, when Winter was decided. It is no surprise that Winter would cite a conflict of interest on the part of a majority of the board as a paradigmatic example of demand futility; at the time, the only entity that could take action in response to a demand was the board—and thus, if the board was conflicted, a demand could not be considered by an unconflicted decisionmaker. That changed in 1981, when the Minnesota legislature enacted a provision that is now codified at Minn. Stat. § 302A.241. 1981 Minn. Laws 1168. Section 302A.241 allows a board to create a special litigation committee ("SLC") "consisting of one or more independent directors or other independent persons to consider legal rights or remedies of the corporation and whether those rights and remedies should be pursued." Importantly, unlike most other committees that a board may establish, an SLC is not subject to the board's direction or control. Id. ; In re UnitedHealth , 754 N.W.2d at 550.

Because an SLC can consist of "independent persons" and is not subject to the board's direction or control, it can act as a disinterested decisionmaker in considering a demand, even when the board itself is conflicted—indeed, even when all members of the board are conflicted. As the Minnesota Supreme Court has recognized, an SLC "enable[s] a corporation to dismiss or settle a derivative suit despite a conflict of interest on the part of some or all directors." In re UnitedHealth Grp. , 754 N.W.2d at 550-51 (emphasis added). Recent decisions from this District have likewise recognized that § 302A.241 substantially narrows the circumstances in which demand would be futile. See Kitley ex rel. IsoRay, Inc. v. IsoRay, Inc. , No. 16-3297 (JRT/DTS), 2017 WL 4737244, at *6 (D. Minn. Oct. 19, 2017) ; In re Medtronic, Inc. Derivative Litig. , 68 F. Supp. 3d 1054, 1061 (D. Minn. 2014) ; Kococinski v. Collins , 935 F. Supp. 2d 909, 917 n.13 (D. Minn. 2013) ; see also La. Mun. Police Emps. Ret. Sys. v. Finkelstein , No. 27-CV-11-23986, 2012 WL 10057353, at *4, 2012 Minn. Dist. LEXIS 251, at *9-10 (Minn. Dist. Ct. May 29, 2012) ("In light of Minn. Stat. § 302A.241, demand is not futile even if a majority of a Minnesota corporation's directors are implicated in the alleged wrongdoing, because a...