Opinion
Case No. 1:21-cv-00130
2022-03-29
Akhil GUPTA, derivatively ON BEHALF OF SONIM TECHNOLOGIES, INC., Plaintiff v. Thomas WILKINSON; Robert Plaschke; James Walker; Maurice Hochschild; Alan Howe ; Jeffrey D. Johnson; John Kneuer; Susan G. Swenson; Kenny Young; and Sonim Technologies, Inc., Defendants
Brian E. Farnan, Michael J. Farnan, Farnan LLP, Wilmington, DE, for Plaintiff. Travis Steven Hunter, Richards, Layton & Finger, PA, Wilmington, DE, Renee Mosley Delcollo, Greenberg Traurig LLP, Wilmington, DE, Kate M. Ikehara, Pro Hac Vice, Matthew W. Close, Pro Hac Vice, Los Angeles, CA, for Defendants.
Brian E. Farnan, Michael J. Farnan, Farnan LLP, Wilmington, DE, for Plaintiff.
Travis Steven Hunter, Richards, Layton & Finger, PA, Wilmington, DE, Renee Mosley Delcollo, Greenberg Traurig LLP, Wilmington, DE, Kate M. Ikehara, Pro Hac Vice, Matthew W. Close, Pro Hac Vice, Los Angeles, CA, for Defendants.
ORDER
ROBERT T. DAWSON, SENIOR UNITED STATES DISTRICT JUDGE
Before the Court is Defendants’ Motion to Dismiss (ECF No. 6). This matter has been briefed and is ready for consideration. (ECF Nos. 7, 8, 13, 16).
I. Background
On February 1, 2021, Plaintiff Akhil Gupta filed a verified shareholder derivative complaint against the Director Defendants Thomas Wilkinson, Robert Plaschke, James Walker, Maurice Hochschild, Alan Howe, Jeffrey D. Johnson, John Kneuer, Susan G. Swenson, and Kenny Young for breaches of their fiduciary duties as directors and/or officers of Sonim Technologies, Inc. ("Sonim"), unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets, violations of Sections 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and for contribution under Section 11(f) of the Securities Act of 1933 (the "Securities Act") and 21D of the Exchange Act. (ECF No. 1).
Plaintiff is a current shareholder of Sonim and has continuously held Sonim common stock at all relevant times. (ECF No. 1 ¶ 42)
On September 21, 2020, Plaintiff Ben Kusiak filed a similar action against the present defendants. Kusiak, v. Plashke, et al. , 1:20-cv-01270-MN. However, that Plaintiff took a voluntary dismissal.
Sonim is incorporated in the state of Delaware. (Id. ¶ 43). It is a communications company that provides ultra-rugged mobile phones and accessories designed specifically for task workers in mission-critical work environments, such as construction, energy and utility, hospitality, and the public sector service industries. (Id. ¶¶ 2, 104). Sonim offers three phones as its feature products: (1) the XP8, which was released in March 2018; (2) the XP5s, which was also released in March 2018; and (3) the XP3, which was released in April 2019. (Id. ¶ 107). Sonim's mobile devices are designed to withstand a variety of harsh environments. (Id. ¶ 106). The phones were marketed to "those who serve" in "extreme working environments," and who are engaged in "missions critical to communication[ ]," and who "need an extremely durable solution that provides reliable and secure voice, data and workflow applications." (Id. ¶¶ 108, 121). Plaintiff's complaint alleges that the Director Defendants were aware of the significant risks associated with the XP8 chipset and the software issues with the XP5 and XP3. (Id. ¶ 152).
Relevant to this action, Plaintiff alleges that the Defendants were aware of these issues prior to Sonim's initial public offering of stock in May 2019. (Id. ¶ 111). Plaintiff states that these defects were not disclosed to investors until four months after the IPO. Plaintiff also alleges that the Director Defendants caused Sonim to violate federal and state laws regarding diversity and discrimination by repeatedly refusing to nominate, appoint, or hire Black or Hispanic individuals or other underrepresented minorities to the Board or Sonim's executive management team.
At the time Plaintiff filed his complaint, Defendants Wilkinson, Howe, Kneuer, Swenson and Young served on Sonim's Board of Directors. (Id. ¶ 187). Plaintiff alleges that the Director Defendants face a substantial likelihood of liability which makes them unable to impartially investigate the allegations in Plaintiff's complaint. (Id. ¶ 188). Defendant Wilkinson is not an independent member of the board since he has served as Sonim's Chief Executive Officer since October 2019. (Id. ¶ 193). Defendant Howe has been a member of the board since October 2017 and is the Chairperson of the Audit Committee. (Id. ¶ 194). Defendant Kneuer has served on the board since March 2019, has served as chairman of the board since March 2020, and is a member of the Audit Committee and Compensation Committee. (Id. ¶ 195). Defendant Swenson has served on the Board since March 2019, is a member of the Nominating, Corporate Governance, and Audit Committees, and is the Chairperson of the Compensation Committee. (Id. ¶ 196). Defendant Young has served on the board since October 2018, is a member of the Compensation Committee, and is the Chair of the Nominating and Corporate Governance Committee. (Id. ¶ 197). The Director Defendants receive compensation from Sonim for their work.
Defendants argue that Plaintiff's complaint should be dismissed because it does not meet the demand-futility pleading standard under Fed. R. Civ. P. 23.1(b)(3) and Delaware law. In addition, Defendants argue, briefly, that Plaintiff's claims should be dismissed under Fed. R. Civ. P. 12(b)(6).
Defendants filed a Request for Incorporation by Reference and Judicial Notice in Support of Motion to Dismiss Plaintiff's Complaint (ECF No. 9). Plaintiff filed a response in opposition (ECF No. 14) and Defendants filed a reply (ECF No. 15). Plaintiff only opposes Exhibits 2, 9 and 10. These exhibits are Plaintiff's prospectus filed with the Securities Exchange Commission ("SEC") on May 13, 2019, Sonim's 2019 10-K filed with the SEC on March 27, 2020, and Sonim's 2020 10-K filed with the SEC on March 18, 2021.
II. Fed. R. Civ. P. 12(b)(6) Standard
To state a claim upon which relief can be granted a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The complaint must set forth enough facts to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is facially plausible when the factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id.
When considering Rule 12(b)(6) motions to dismiss, the court must accept as true all factual allegations in the complaint and view them in the light most favorable to plaintiff. Umland v. Planco Fin. Servs. , 542 F.3d 59, 64 (3d Cir. 2008). The Court is "not bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain , 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986) (citations omitted).
III. Demand Futility Standard
In order to maintain a derivative action, the plaintiff's complaint must be verified and state with particularity any effort by the plaintiff to obtain a desired action from the board of directors or why the effort was never made. Fed. R. Civ. P. 23.1(b)(3). "Although Rule 23.1 provides the pleading standard for derivative actions in federal court, the substantive rules for determining whether a plaintiff has satisfied that standard ‘are a matter of state law.’ " King v. Baldino, 409 Fed.Appx. 535, 537 (3d Cir. 2010). "Thus, federal courts hearing shareholders’ derivative actions involving state law claims apply the federal procedural requirement of particularized pleading, but apply state substantive law to determine whether the facts demonstrate [that] demand would have been futile and can be excused." Kanter v. Barella, 489 F.3d 170, 176 (3d Cir. 2007). Thus, Delaware law governs the substantive requirements of Plaintiff's claim of demand futility.
"A basic principle of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation." Spiegel v. Buntrock, 571 A.2d 767, 772–73 (Del. 1990) ; see Del.Code Ann. tit. 8 § 141(a). "This includes the decision to commence litigation or, alternatively, to abstain from filing suit." Zomolosky v. Kullman , 640 Fed.Appx. 212, 216 (3d Cir. 2016) (citing Spiegel, 571 A.2d at 773 ). "It is clear that the demand requirement is not a mere formality, but rather is an important aspect of Delaware's substantive law." Blasband v. Rales, 971 F.2d 1034, 1048 (3d Cir. 1992). Plaintiff's complaint alleges demand futility and states:
In light of the breaches of fiduciary duty engaged in by the [Director] Defendants, most of whom are the Company's current directors, their collective engagement in fraud, the substantial likelihood of the directors’ liability in this derivative action and in the Securities Class Actions, their being beholden to each other, their longstanding business and personal relationships with each other, and their not being disinterested and/or independent directors, a majority of the Board cannot consider a demand to commence litigation against themselves on behalf of the Company with the requisite level of disinterestedness and independence.
(ECF No. 1 ¶ 36).
IV. Discussion
Delaware Courts have set out two tests to determine if a plaintiff has properly pleaded demand futility. The first was set out in Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). The second was set out in Rales v. Blasband , 634 A.2d 927 (Del. 1993). The parties agree that Plaintiff must satisfy the Rales test. (ECF No. 13 at 8 n. 4).
The Rales test applies when "the subject of a derivative suit is not a business decision of the Board but rather a violation of the Board's oversight duties." Wood v. Baum, 953 A.2d 136, 140 (Del. 2008).
"Under this test, the analysis focuses on the Board's inability to exercise its business judgment in evaluating the demand itself." Zomolosky , 640 Fed.Appx. at 216. In those circumstances, "the appropriate inquiry is whether [the plaintiff's] complaint raises a reasonable doubt regarding the ability of a majority of the Board to exercise properly its business judgment in a decision on a demand had one been made at the time this action was filed." Rales, 634 A.2d at 937. A plaintiff can satisfy Rales by alleging facts showing that the directors face a "substantial likelihood" of personal liability. Id. at 936.
Delaware law permits a corporation to adopt a charter provision that eliminates directors’ personal liability to the corporation except for claims based on a breach of the director's duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful dividends, stock purchases, or stock redemptions, or for any transaction that the director derived an improper personal benefit. See 8 Del. C. §§ 102(b)(7), 174. Article VI of Sonim's Charter exculpates Sonim's directors from monetary liability to Sonim except for claims based on fraudulent, illegal, or bad-faith conduct. (ECF No. 8-1 at 186). Defendants argue that Plaintiff must plead with particularity, on a director-by-director basis, that at least three of Sonim's five directors face a substantial likelihood of liability to Sonim for non-exculpated claims, i.e., those based on fraudulent, illegal or bad-faith conduct. Plaintiff responded that all of the Director Defendants breached their non-exculpable fiduciary duties of loyalty, candor, and good faith by issuing and permitting the dissemination of materially false and misleading statements relating to Sonim's products and the risks facing the company.
Under Delaware law, "[w]here, as here, directors are exculpated from liability except for claims based on ‘fraudulent,’ ‘illegal’ or ‘bad faith’ conduct, a plaintiff must also plead particularized facts that demonstrate that the directors acted with scienter, i.e., that they had "actual or constructive knowledge" that their conduct was legally improper. Wood , 953 A.2d at 141. Therefore, the issue before the Court is whether the Complaint alleges particularized facts that, if proven, would show that a majority of the Director Defendants knowingly engaged in fraudulent, illegal or bad-faith conduct.
Plaintiff sets forth his reasons for failing to make a demand on the Board in paragraphs 186 to 210 of his Complaint (ECF No. 1). Briefly, these reasons include (1) the Director Defendants engaged in a scheme to make false and misleading statements and omissions of material fact relating to Sonim's products, risks the company was facing, and discriminatory misconduct the company was engaging in; (2) some of the Director Defendants are members of various committees and are defendants in a securities class action; and (3) the Director Defendants have longstanding business and personal relationships with each other. (ECF No. 1).
Plaintiff clarified that he is not pleading an "Oversight" claim. (ECF No. 13 at 19–20); (See ECF No. 1 ¶¶ 200, 204).
Plaintiff's complaint contains conclusory allegations that the Director Defendants made false and misleading statements regarding Sonim's products and commitment to racial diversity. (Id. ¶ 191). Plaintiff attempts to use the core operations doctrine to support an inference of scienter. However, "the core operations doctrine is not sufficient on its own in the context of generally pled allegations to establish scienter." In re TrueCar, Inc. Stockholder Derivative Litigation , 2020 WL 5816761, at *16 (Del. Ch. Sep. 30, 2020) (quoting In re Fitbit, Inc. Stockholder Derivative Litigation, 2018 WL 6587159, at *15 & n.179 (Del. Ch. Dec. 14, 2018) (internal quotations omitted); See Behrmann v. Brandt , 2020 WL 4432536, at *13 (D. Del. July 31, 2020). Plaintiff's complaint only alleges that Sonim "derived 90% of its revenues from its product sales arrangements with channel partners." (ECF No. 1 ¶ 191). This fact alone does not support an inference of scienter. Further, Plaintiff does not state any way each Director Defendant acted with scienter in regards to his allegation that the Board lied about its commitment to racial diversity.
As a matter of law, there is not an inference of scienter based solely on a director's membership on a committee. Wood , 953 A.2d at 142–43 ; Rattner v. Bidzos, 2003 WL 22284323, at *12–13 (Del. Ch. Oct. 7, 2003). In addition, the allegation that the Director Defendants have longstanding business and personal relationships with each other that would render demand futile is without merit. Beam v. Stewart , 845 A.2d 1040, 1050 (Del. 2004). Finally, Plaintiff's allegation that demand is futile against the Director Defendants because of the threat of liability in a securities class action is without merit. Seminaris v. Landa , 662 A. 2d 1350, 1355 (Del. Ch. 1995).
V. Conclusion
For the reasons stated above, the Court finds that Defendants’ Motion to Dismiss (ECF No. 6) should be and hereby is GRANTED . As requested by the Defendants, the Court will not decide at this moment the Fed. R. Civ. P. 12(b)(6) portion of the motion. (ECF No. 7 at 24). However, Plaintiff shall have an opportunity to file an amended complaint. If Plaintiff fails to file an amended complaint within fourteen (14) days of this order, then this case will be DISMISSED WITH PREJUDICE for failing to allege demand futility.
IT IS SO ORDERED this 29th day of March 2022.