Voss ex rel. Situated ex rel. Marvell Tech. Grp., Ltd. v. Sutardja

LEE VOSS, SEBASTIANO D'ARRIGO, JAMES DIBIASE, and MARIE DIBIASE,on behalf of themselves and all others similarly situatedand derivatively on behalf of MARVELL TECHNOLOGY GROUP, LTD., Plaintiffs, v. SEHAT SUTARDJA, JUERGEN GROMER, JOHN G. KASSAKIAN, ARTURO KRUEGER,RANDHIR THAKUR, PANTAS SUTARDJA, WEILI DAI, and DOES 1-20, Defendants,- and -MARVELL TECHNOLOGY GROUP, LTD., Nominal Defendant.

Case No.: 14-CV-01581-LHK

Case No.: 14-CV-02523-LHK

Case No.: 14-CV-03214-LHK

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

January 26, 2015

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS WITH LEAVE TO AMEND

Plaintiffs Lee Voss ("Voss"), Sebastiano D'Arrigo ("D'Arrigo"), James DiBiase ("James DiBiase"), and Marie DiBiase ("Marie DiBiase") (collectively, "Plaintiffs") have brought class and shareholder derivative claims against nominal defendant Marvell Technology Group, Ltd. ("Marvell") and individual defendants Sehat Sutardja ("Sehat Sutardja"), Juergen Gromer ("Gromer"), John G. Kassakian ("Kassakian"), Arturo Krueger ("Krueger"), Randhir Thakur ("Thakur"), Pantas Sutardja ("Pantas Sutardja"), and Weili Dai ("Dai") (collectively, the "Individual Defendants" and, with Marvell, "Defendants"). ECF No. 52¹ ("Compl."). Before the Court is Defendants' Motion to Dismiss. ECF No. 53 ("Mot.").

Having considered the parties' arguments, the relevant law, and the record in this case, the Court hereby GRANTS Defendants' Motion to Dismiss with leave to amend.

I. BACKGROUND

A. Factual Allegations

Marvell, a Bermuda corporation with principal place of business in Santa Clara, California, is a publicly traded fabless semiconductor company that designs and develops a wide variety of integrated circuit devices. Compl. ¶¶ 16, 48. The company was founded in 1995 by Sehat Sutardja, along with his wife, Dai, and brother, Pantas Sutardja. Id. ¶ 47. The Individual Defendants are all current and former officers and directors of Marvell. Id. ¶¶ 17-23. Specifically, Sehat Sutardja is chief executive officer and chairman of Marvell's Board of Directors ("Board"). Id. ¶ 17. Dai is Marvell's president. Id. ¶ 23. Pantas Sutardja has held multiple offices at Marvell, including vice president and chief technology officer. Id. ¶ 20. The remaining individuals—Gromer, Kassakian, Krueger, and Thakur—are non-employee members of the Board at Marvell. Id. ¶¶ 18-19, 21-22. Sehat Sutardja, Pantas Sutardja, and Dai own approximately 19% of Marvell's stock. Id. ¶¶ 20, 164. Gromer, Kassakian, Krueger, and Thakur apparently own between 0.0039% and 0.0053% of Marvell's stock. See id. ¶ 142 (noting that "there were 503.4 million shares of Marvell common stock outstanding as of March 20, 2014);ECF No. 54-2 (Securities and Exchange Commission ("SEC") Form 4 stating that Gromer owns 24,333 shares of Marvell common stock); ECF No. 54-3 (SEC Form 4 stating that Kassakian owns 26,519 shares of Marvell common stock); ECF No. 54-4 (SEC Form 4 stating that Krueger owns 24,519 shares of Marvell common stock); ECF No. 54-5 (SEC Form 4 stating that Thakur owns 19,573 shares of Marvell common stock). In total, then, the Individual Defendants own and control about 20% of Marvell's stock.

Plaintiffs, for their part, are four shareholders who together own 23,425 shares of Marvell common stock, roughly 0.0047% of the total. Compl. ¶¶ 13-15, 142. Plaintiffs have brought a direct shareholder class action on behalf of all Marvell shareholders, as well as a shareholder derivative action on behalf of Marvell, seeking to remedy alleged wrongs committed by the Individual Defendants between 2003 and 2013. Id. ¶ 1. The Individual Defendants, Plaintiffs allege, have breached their fiduciary duties, engaged in fraudulent and dishonest conduct by willfully infringing patents held by Carnegie Mellon University ("CMU"), and unjustly enriched themselves as a result. Id. According to Plaintiffs, the Individual Defendants injured Marvell and its shareholders by, inter alia, causing Marvell to engage in willful patent infringement, failing to prevent willful patent infringement, jeopardizing shareholders' right to dividends, making false and misleading statements to shareholders by failing to disclose Marvell's willful patent infringement, and earning compensation based on revenues that were inflated by such willful infringement. Id. ¶¶ 2, 9, 170.

The primary basis for Plaintiffs' claims is a lawsuit filed in 2009 by CMU in the Western District of Pennsylvania accusing Marvell of willfully infringing CMU patents. Compl. ¶ 6; see Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd. ("CMU I"), 986 F. Supp. 2d 574, 599 (W.D. Pa. 2013) (noting that "CMU filed its complaint in this case on March 6, 2009"). After a four-week trial, the jury found on December 26, 2012, that Marvell had willfully infringed two CMU patents, awarding damages to CMU in the amount of $1,169,140,271. Compl. ¶ 2; CMU I, 986 F. Supp. 2d at 582, 599. In its order addressing post-trial motions and adopting the jury's finding ofwillfulness, the trial court in CMU I concluded that "CMU has shown by clear and convincing evidence that Marvell acted in disregard of an objectively high likelihood that its actions constituted infringement of a valid patent." 986 F. Supp. 2d at 632. The court also found that "Marvell acted in a subjectively reckless manner with respect to the risk of infringing the subject patents." Id. at 633.

On March 31, 2014, the trial court awarded supplemental and enhanced damages, increasing the judgment to $1,535,889,387.60. Compl. ¶ 2 & n.1; Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd. ("CMU II"), No. CIV.A. 09-290, 2014 WL 1320154, at *26 (W.D. Pa. Mar. 31, 2014). In settling on an enhanced damages figure, the trial court explained that "this award is sufficient to penalize Marvell for its egregious behavior and to deter future infringement activities." CMU II, 2014 WL 1320154, at *25; accord Compl. ¶ 3. Marvell disputes the trial court's findings and has appealed to the Federal Circuit. See ECF No. 54-6 (Marvell's notice of appeal dated May 14, 2014). That appeal remains pending. See Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd, No. 14-1492 (Fed. Cir.).

Plaintiffs allege that the $1.5 billion judgment has a high probability of materially and adversely affecting Marvell and its cash flows, including the company's ability to declare and pay dividends to shareholders. Compl. ¶¶ 5-6. Plaintiffs first cite Marvell's Form 8-K, filed on February 24, 2014, which states: "Developments in the CMU litigation could affect Marvell's ability to pay the dividend on March 27, 2014 under Bermuda law, where Marvell is incorporated." Id. ¶¶ 5, 135. The operative Complaint, which Plaintiffs filed five months after the March 27 dividend was due, fails to mention that Marvell paid the dividend on March 27, 2014, as previously declared. See ECF No. 54-10 (NASDAQ.com table indicating that Marvell paid the declared dividend on March 27, 2014). Plaintiffs then cite Marvell's Form 10-K annual report, which the company filed on March 27, 2014. Compl. ¶ 6; see ECF No. 54-1 (excerpts from Marvell's Form 10-K). That report states: "if we are required to pay most or all of the damages awarded by the jury after all appeals have been exhausted, this could have a material adverseeffect on our business, financial condition, results of operations and cash flows." Compl. ¶ 6. The Form 10-K also indicates that Marvell "do[es] not believe a material loss is probable" as a result of the CMU litigation. ECF No. 54-1 at 16. Since the Form 10-K's filing, Marvell has continued to pay dividends to shareholders. See ECF No. 54-10 (NASDAQ.com table indicating that Marvell paid previously declared dividends on July 2, 2014).

B. Procedural History

On April 7, 2014, plaintiff Voss filed his class and derivative shareholder Complaint in this Court. ECF No. 1. Plaintiff D'Arrigo did the same on June 2, 2014. No. 14-02523, ECF No. 1. Soo too did plaintiffs James DiBiase and Marie DiBiase on July 16, 2014. No. 14-03214, ECF No. 1. That same date, the Court issued an order granting the parties' stipulation to consolidate the Voss and D'Arrigo actions. ECF No. 31. On August 6, 2014, the Court granted the motion to consolidate the DiBiase action with the Voss and D'Arrigo actions, ordering Plaintiffs to file a consolidated amended complaint. ECF No. 49.

Plaintiffs filed their Verified Consolidated Shareholder Derivative and Class Action Complaint on August 15, 2014. ECF No. 52. The federal diversity statute, according to the Complaint, provides the Court with subject matter jurisdiction. Compl. ¶ 11.² The Complaint lists four causes of action: (1) breach of fiduciary duties of care, loyalty, and good faith, asserted against all Defendants, id. ¶¶ 168-71; (2) breach of fiduciary duty for failing to maintain adequate internal controls, asserted against the Individual Defendants only, id. ¶¶ 172-75; (3) unjust enrichment, asserted against Sehat Sutardja, Pantas Sutardja, and Dai only, id. ¶¶ 176-79; and (4)breach of duty of honest services, asserted against Sehat Sutardja, Pantas Sutardja, and Dai only, id. ¶¶ 180-86. It appears, then, that Plaintiffs assert a direct claim only in the first cause of action; the remaining causes of action are framed as derivative claims. See Mot. at 8 n.4.

In response to the Complaint, Defendants filed the instant Motion to Dismiss on September 4, 2014. ECF No. 53. Defendants concurrently filed a Request for Judicial Notice. ECF No. 54. On October 30, 2014, Plaintiffs opposed the Motion to Dismiss. ECF No. 60 ("Opp."). At the same time, Plaintiffs filed their own Request for Judicial Notice. ECF No. 62. Defendants replied on November 25, 2014. ECF No. 65 ("Reply"). Defendants concurrently filed a Supplemental Request for Judicial Notice, ECF No. 66, to which Plaintiffs partially objected on December 2, 2014, ECF No. 67.

II. LEGAL STANDARDS

A. Rule 12(b)(6)

Rule 8(a)(2) of the Federal Rules of Civil Procedure...