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finding claims that the individual defendants breached their fiduciary duties by engaging in a common scheme to cause or allow the company to disseminate false or misleading information, including press releases and SEC filings, so that the company's stock price would trade at artificially inflated prices and the individual defendants could sell their personal stock at inflated prices sounded in fraud and were subject to Rule 9(b)
Summary of this case from In re Galena Biopharma, Inc. Derivative Litig.Opinion
No. CV-05-123-PHX-SRB.
March 17, 2006
ORDER
Before the Court are Nominal Defendant TASER International, Inc.'s Motion to Dismiss the Consolidated Shareholder Verified Derivative Complaint (Doc. 42), brought pursuant to Federal Rule of Civil Procedure 23.1, the Motion of the Individual Defendants to Dismiss the Consolidated Shareholder Verified Derivative Complaint (Doc. 41), presumably brought pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), and Defendants' Request for Judicial Notice (Doc. 43). I. BACKGROUND
This information is taken from the Complaint. The Court notes that the Complaint and other submissions by Plaintiffs are replete with handwritten editing marks and inappropriate symbols, sometimes make it difficult to determine where a quotation begins or ends. The Court will strike any future documents that are not in the proper and final format. See LRCiv 7.1. Additionally, the Court is disturbed by Plaintiffs' decision to not follow proper Bluebook form and simply provide a blanket statement that "all citations and footnotes are deemed omitted and all emphasis is deemed added unless otherwise noted." (Compl. ¶ 86 n. 5; Pl's Opp'n to Indiv. Defs.' Mot. at 3 n. 7;). All future submissions to this Court must be in proper Bluebook form or they will be stricken.
This is a shareholders derivative action brought on behalf of TASER, maker of a "stun" gun that incapacitates those struck by its electrically-charged "barbs." Plaintiffs are shareholders "seeking to remedy [D]efendants' alleged violations of state law, including breaches of fiduciary duties, insider trading, gross mismanagement, waste of corporate assets and unjust enrichment that occurred between October 18, 2004 and the present (the 'Relevant Period')." (Compl. ¶ 1.) Nominal Defendant TASER is a Delaware corporation based in Scottsdale, Arizona, and its devices are marketed "for use in the law enforcement, private security and personal defense markets." (Compl. ¶ 28.) In addition, Plaintiffs have named as Defendants the three co-founders of present-day TASER, Phillips W. Smith ("Phillips Smith"), Patrick W. Smith ("Rick Smith"), and Thomas P. Smith ("Thomas Smith") (collectively, "the Smiths"); members of TASER's Board of Directors, Bernard B. Kerik ("Kerik"), Mark W. Kroll ("Kroll"), Bruce R. Culver ("Culver"), Matthew R. McBrady ("McBrady"); Chief Financial Office Daniel Behrendt ("Behrendt"); and Chief Operating Officer Kathleen C. Hanrahan ("Hanrahan") (collectively with the Smiths, "Individual Defendants"). Plaintiffs assert that this Court has jurisdiction on the basis of complete diversity, pursuant to 28 U.S.C. § 1332(a)(2), and because the amount in controversy exceeds $75,000.
The Court will use all capital letters when referring to the company, "TASER," and use the lower case "taser" when referring to the device.
The recent history of TASER began in 1993, when the Smiths founded the present-day Company. The original device, created in 1969 by John Cover, used gunpowder to propel the barbs that administered an electrical shock. The use of gunpowder led to taser's classification as a firearm and made it subject to regulatory oversight by the Bureau of Alcohol, Tobacco and Firearms ("ATF"). Plaintiffs claim that the ATF "essentially outlawed [tasers] for civilian use," and so between 1976 and 1993, "the weapon was largely a curiosity and it was only used by a few scattered police departments around the country." (Compl. ¶ 58.)
When the Smiths founded TASER in 1993, they changed the design of the weapon so that the barbs were propelled by compressed nitrogen and not gunpowder. This took the weapon out of ATF oversight "or any other type of regulatory review or approval." (Compl. ¶ 60.) Plaintiffs claim that TASER became "self-regulated," and that the Smiths, even if they had wanted to, "did not possess the experience, expertise or financial resources to conduct sophisticated testing on the new design. Instead, the newly-designed weapon was tested on a single pig in 1996, and later, on 5 dogs in 1999." (Compl. ¶ 61.)
Despite the change, TASER was "near bankruptcy" in 1999. (Compl. ¶ 62.) That year, the Smiths re-designed the taser again so that it looked more like a conventional handgun, which made it more appealing to law enforcement. Plaintiffs then shifted their marketing focus from the consumer market to law enforcement agencies. TASER's customer base and sales increased following these changes. According to Plaintiffs, "the keystone of the Company's marketing pitch was that the M26 [model introduced in 1999], while powerful, was 'completely safe', that it was 'non-lethal', and that the Smiths weren't aware of a single death caused by the [taser]." (Compl. ¶ 64.)
TASER offered its stock to the public in an initial public offering ("IPO") in 2001, and "the Offering Documents for the IPO emphasized the non-lethal nature of the Company's weapon." (Compl. ¶ 65.) As noted in the IPO Prospectus, TASER spent a total of $14,000 on research and development in 1999 and 2000, and Plaintiffs claim that these "minimal" expenditures reflected "the Individual Defendants mind-set with respect to the need for independent vigorous, peer-reviewed testing. . . ." (Compl. ¶ 67.) TASER's annual revenues "more than doubled" between the 2001 IPO and early 2004, and the company's stock price went from $2 a share to over $8 a share during that time. On June 21, 2004, the Individual Defendants increased TASER's annual revenue growth guidance for fiscal year 2004 from 100% to 150%. During the ten trading days that followed the June 21, 2004 announcement, TASER's common stock price went from $30.25 to over $44 a share. Plaintiffs claim that the Individual Defendants "convince[d] investors of the Company's ability to achieve these dramatic growth projections" by "assur[ing] the Market of the safety of its existing weapons." (Compl. ¶ 71.)
The June 2004 announcement and subsequent "rocket-like stock performance" caught the attention of national media, which started to issue reports questioning TASER's safety record. This included a New York Times article published on July 18, 2004 that "reported on the checkered safety history of TASER's weapons, and it quoted a number of independent researchers who argued, inter alia, that TASER's weapons should be subjected to truly independent regulatory scrutiny." (Compl. ¶ 72.) One researcher urging further study into TASER's safety was quoted in the article as saying "[s]hocking a couple of pigs and dogs doesn't prove anything." (Compl. ¶ 73.) This article "also identified several large police departments (TASER's bread-and-butter customers) who, after having used the weapons, had severely circumscribed their use. . . ." (Compl. ¶ 72.) In addition, the article said "nationally-renowned, independent biomedical engineers" concluded that "'TASER has significantly overstated the weapons [sic] safety.'" (Compl. ¶ 73.)
The Individual Defendants responded with a press release, media statements and interviews "all with the goal of assuring the world that their weapons were safe and that their safety claims were backed by vigorous independent testing." (Compl. ¶¶ 74-75.) These began on July 19, 2004 with a press release that "denounced the New York Times, the article's author, and the credibility of its reporting. Several of the Individual Defendants were quoted in the press release, including defendants Rick Smith, Thomas Smith and Kerik." (Compl. ¶ 74.)
Then, on October 18, 2004, TASER issued a press release in which Plaintiffs say the Individual Defendants "wildly mischaracterized" a major, independent study by the Air Force Research Laboratory the Department of Defense Joint Non-Lethal Weapons Program Human Effects Center of Excellence (the "JNLW-HECOE study"). (Compl. ¶ 18.) Plaintiffs say this press release came at a crucial moment for the Individual Defendants because TASER was facing "bourgeoning . . . safety concerns." (Compl. ¶ 16.) Plaintiffs allege that neither the JNLW-HECOE study nor its summary was available to the public at that time, which put the Individual Defendants "in a position to characterize the report's findings in a manner that best suited them." (Compl. ¶¶ 16, 80.) Specifically, Plaintiffs say the Individual Defendants said the study "'concluded' that TASER technology was generally effective without significant risk of unintended results." (Compl. ¶ 76.) The press release quotes Rick Smith who said,
The HECOE study is the latest chapter in a series of comprehensive medical and scientific studies which conclude that TASER technology is safe and effective. This study re-affirms the life-saving value of TASER technology and is consistent with the recent independent findings of researchers in the United Kingdom and Canada.
This comprehensive independent study further supports the safety of TASER conducted energy devices. The HECOE report adds to the growing number of government and medical studies that have validated the safety and effectiveness of this impressive new technology.
(Compl. ¶ 76.)
The press release went on to say "[t]he HECOE report summary concludes that TASER technology is not likely the primary factor in the cause of in-custody fatalities. 'Based on the documentation and research reviewed, this report concludes that EM[I] [presumably, Electro Muscular Incapacitation] is likely not the primary causative factor in reported fatalities.'" (Compl. ¶ 76.) The press release also said that the study "does recommend further research on EMI exposure in sensitive populations and EMI-drug interactions." (Compl. ¶ 76.)
Plaintiffs say "this announcement by the Individual Defendants was meant to undo the beginnings of the bad publicity that the Company had started to receive. Crucially, TASER's stockholders were forced to rely on the Individual Defendants' characterization of the findings of the JNLW-HECOE report; at that time, only they knew about the report's contents, as it was not available to the public at that time." (Compl. ¶ 77.) Plaintiffs allege that the Individual Defendants "failed to disclose to the public (and the Market) the serious safety concerns raised by the JNLW-HECOE report summary." (Compl. ¶ 80.) Plaintiffs claim that TASER did not report to the public the study's summary which said, "[a]lthough likely to be uncommon, some severe unintended effects might occur. In some cases, key data gaps and uncertainties preclude the development of effectiveness and risk probabilities. . . . [This report] does recommend further research on EMI exposure in sensitive populations and EMI-drug interactions." (Compl. ¶ 80.) Plaintiffs say that the market "reacted favorably" to TASER's announcement of the study's results, with the price of TASER's common stock rising 5% higher "in a single day's trading following the Company's 10/18/04 announcement." (Compl. ¶ 77.)
The next day, on October 19, 2004, the Individual Defendants increased TASER's guidance on revenue growth from 150% to 175% over the prior year. Over the next seven trading days, TASER's stock price increased to an all-time high, and on November 4, 2004, TASER announced a two-for-one stock split.
Plaintiffs allege that in the weeks following the October 18 and 19, 2004 announcements, "certain Company insiders, including every senior officer and every director on TASER's board, collectively sold over $88 million in TASER common stock. Most of the defendants' [sic] sold highly material percentages of their TASER holdings, and most of the defendants sold these huge percentages of their stock in a 2 or 3 day trading period." (Compl. ¶ 17.) Specifically, Plaintiffs allege that between October 28 and December 1, 2004 the Individual Defendants, "based on their knowledge of material non-public information regarding the Company . . . sold a total of 1,773,605 shares of TASER common stock at an average selling price of $49.77, garnering total proceeds of $88,134,751. . . ." (Compl. ¶ 137.) In all, Plaintiffs allege that Defendants sold TASER stock ("Selling Defendants") in the following amounts:
• Phillips Smith sold nearly 100% of his TASER holdings, or 656,550 shares, between October 28 and November 10, 2004 for a total of $32,604,908;
• Rick Smith sold "well in excess of 20%" of his TASER holdings, or 350,000 shares, between October 28 and November 10, 2004 for a total of $17,615,500;
• Thomas Smith sold "well in excess of 20%" of his TASER holdings, or 350,000 shares, between October 28 and November 10, 2004, for a total of $17,615,500;
• Kroll sold 100% of his TASER holdings, or 25,001 shares, on November 9 and December 1, 2004 for a total of $1,137,286.92.
• Kerik sold 100% of his TASER holdings, or 102,166 shares, on November 11, 2004 for a total of $5,855,849;
• McBrady sold 100% of his holdings, or 29,998 shares, on October 28, 2004 for a total of $1,229,618;
• Culver sold approximately 6% of his holdings, or 90,000 shares, on November 5 and 8, 2004 for a total of $4,428,802.
• Hanrahan sold 160,000 shares on October 28 and November 10, 2004 for a total of $7,106,645;
• Behrendt sold 10,000 shares on November 9, 2004 for a total of $540,600.
(Compl. ¶¶ 137,143.)
Plaintiffs say Hanrahan's sales represented 93.6% of her holdings, including her stock options, and Behrendt's sales represented 66.6% of his holding, including stock options. (Compl. ¶¶ 36-37.)
Plaintiffs claim that the $88 million in proceeds from the Selling Defendants' stock sales during that five-week period was "more than 3.5 times greater than the Company's total profits throughout its history" of $23,787,401.00. (Compl. ¶ 139.)
On November 26, 2004, the New York Times published another article saying that the laboratory that conducted the JNLW-HECOE study disagreed with TASER's characterization that the "federal study endorses the safety of its guns. . . ." (Compl. ¶ 84.) The article went on to say that the laboratory "actually found that the guns could be dangerous and that more data was needed to evaluate their risks." (Compl. ¶ 84.) Amnesty International issued a report critical of TASER on November 30, 2004 and "claimed that 74 people had died in TASER-related incidents since 2001." (Compl. ¶ 86.) This was followed by other negative news reports and TASER's statements in response.
On January 6, 2005, TASER disclosed that it had received an informal inquiry letter from the Securities and Exchange Commission ("SEC") "regarding the Company's statements about the safety of its weapons and a recent order of TASER products received from one of the Company's distributors worth $700,000, which was booked late in [the fourth quarter of fiscal year 2004] as the Company was facing a possible revenue shortfall. (Compl. ¶ 19.) Plaintiffs say "also called in to [sic] question was a $1.5 million deal the defendants had announced on December 20, 2004, with Davidson's Inc. ('Davidson's'), involving the sale of 1,000 consumer stun guns. The sale of such a huge number of weapons this late in the quarter was particularly suspicious because, inter alia, the defendants had admitted in SEC filings earlier that year that the consumer market was all-but-dead to the Company." (Compl. ¶ 19.) The next day TASER's stock fell 18% to $22.72 per share. (Compl. ¶ 20.) Subsequent negative news reports, "including reports of additional deaths linked to the weapons," and the company lowering its revenue guidance several times led to further stock price declines to around $10 per share at the time Plaintiffs filed this Complaint in May 2005. (Compl. ¶ 23.)
Plaintiffs, as shareholders during the Relevant Period, filed suit derivatively on behalf of TASER. At the time the suit was filed, TASER's board of directors ("Board") consisted of Phillips Smith, Rick Smith, Thomas Smith, Culver, Kerik, Kroll and McBrady (the "Demand Directors"). Plaintiffs state they "did not make a pre-suit demand on the Demand Directors to institute this action because such a demand would be a futile, wasteful and useless act. . . ." (Compl. ¶ 143.) Plaintiffs allege demand would have been futile because the Demand Directors sold TASER common stock while in possession of "material adverse non-public information regarding the Company," including the "true conclusions of the JNLW-HECOE report, the Company's declining sales trends during [the fourth quarter of 2004], and the Company's improper accounting." (Compl. ¶ 143(A).)
Plaintiffs allege that because of their stock sales, "all of the Demand Directors (who collectively comprised the entire Board at the time this action was initiated) are directly interested in challenged financial conduct which renders them incapable of independently and disinterestingly [sic] considering any pre-suit demand to remedy the conduct described herein. . . ." (Compl. ¶ 143(A).) In particular, Defendants Culver, McBrady and Kroll were members of the Audit Committee, which approved the various company statements and transactions during the Relevant Period, as well as "the improper and misleading press releases concerning the safety and projected demand for the Company's weapons." (Compl. ¶ 143(B).) Also, because the Audit Committee "ratified the suspiciously timed Davidson's transaction," Plaintiffs say "it would be patently frivolous to believe that they could act in an independent and disinterested manner in a responding to a demand to investigate the propriety" of that transaction. (Compl. ¶ 143(B).)
In addition, Defendants Culver and Kroll served on the Compensation Committee, which "determines salaries and bonuses" for the Company's officers, "considers, reviews and grants options under the Company's compensation plans and administers the plans," and it "considers matters of director compensation, benefits and other forms of remuneration." (Compl. ¶ 143(C).) Because of their positions on the Compensation Committee, Culver and Kroll were "in a position to . . . control the compensation awarded to the Officer Defendants, including, but not limited to the Smith brothers [Rick and Thomas]." (Compl. ¶ 143(C).) Plaintiffs allege that "even after the numerous issues surrounding the Company began to receive public attention, and even though the Company did not meet its target revenue growth goals for FY 2004, Culver and Kroll awarded the Officer Defendants compensation worth tens of millions of dollars for the Company's FY 2004 performance." (Compl. ¶ 143(C).) Plaintiffs also allege that Culver could not be disinterested or independent in considering a pre-suit demand because he was the "sole original outside investor in TASER, and all of the Individual Defendants, including the Smiths, have materially enhanced Culver's significant net worth in return for his early patronage of the Company." (Compl. ¶ 143(C).)
Plaintiffs bring five counts in all against the Defendants. Count one is against the "Selling Defendants" for breach of fiduciary duties "for insider selling and misappropriation of information." (Compl. ¶¶ 144-148.) Counts two through five are against all Individual Defendants for: breach of fiduciary duties "for dissemination of misleading and inaccurate information" (count two); breach of fiduciary duty of good faith "in connection with the management of TASER" (count three); waste of corporate assets (count four); and unjust enrichment (count five). (Compl. ¶¶ 149-166.)
For relief, Plaintiffs demand judgment against all Individual Defendants and in favor of the company "for the amount of damages sustained by the Company as a result of the Individual Defendants' insider selling, breaches of fiduciary duties, dissemination of false and misleading information, gross mismanagement, waste of corporate assets and unjust enrichment." (Compl. at 122, ¶ A.) Plaintiffs seek "[e]xtraordinary equitable and/or injunctive relief as permitted by law, equity and state statutory provisions sued hereunder, including attaching, impounding, imposing a constructive trust on or otherwise restricting the proceeds of the Selling Defendants' trading activities or their other assets so as to assure that Plaintiffs on behalf of TASER have an effective remedy." Additionally, Plaintiffs are seeking restitution to TASER from the Individual Defendants and an order to disgorge "all profits, benefits and other compensation obtained" by them; an award of Plaintiffs' costs and attorneys' fees; and any other relief the Court deems just and proper.
Defendants have filed two motions to dismiss. In one, nominal Defendant TASER seeks dismissal for Plaintiffs' failure to plead particularized facts demonstrating that demand on the TASER Board would have been futile. The second motion by the Individual Defendants seeks dismissal for Plaintiffs' failure to state a claim for breach of fiduciary duty, gross mismanagement and abuse of control; for failing to state a claim for insider trading, waste of corporate assets and unjust enrichment; and all claims against the Director Defendants for non-intentional conduct. Defendants have also requested that the Court take judicial notice of certain documents.
II. JUDICIAL NOTICE
As a preliminary matter, the Court will address Defendants' request for judicial notice. Generally, on a motion to dismiss, a court limits its review to the contents of the complaint, and may consider material that is properly presented to the court as part of the complaint. See Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001) (citation omitted). In addition, a court may take judicial notice of "matters of public record" without converting a motion to dismiss into a motion for summary judgment. Id. (citing Fed.R.Evid. 201; MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986)). Thus, "[j]udicial notice is appropriate for SEC filings, press releases, and accounting rules as they are 'capable of accurate and ready determination by resort to sources whose accuracy cannot be reasonably questioned.'" In re Network Assoc., Inc. II Sec. Litig., 2003 WL 24051280, at *1 n. 3 (N.D. Cal. Mar. 25, 2003) (citing Fed.R.Evid. 201(b); Plevy v. Haggerty, 38 F. Supp. 2d 816, 821 (C.D. Cal. 1998); Urbanek v. United States, 731 F.2d 870, 873 n. 3 (Fed Cir. 1984)). A court may take judicial notice of a certificate of incorporation of a Delaware corporation because "it is a publicly filed document. . . ." McMichael v. U.S. Filter Corp., 2001 WL 418981, *8 (C.D. Cal. Feb. 23, 2001) (citations omitted). A court may also consider documents that are referenced in the complaint, if the authenticity of those documents is not at issue and the complaint relies on those documents. Lee, 250 F.3d at 688-89 (citations omitted). However, "a court may not take judicial notice of a fact that is 'subject to reasonable dispute.'" Id. (quoting Fed.R.Evid. 201(b)).
Defendants in this case have requested judicial notice of five exhibits. ( See Def.'s Request for Judicial Notice at 1-2; Declaration of David B. Rosenbaum in Support of Defendants' Motions to Dismiss Consolidated Complaint ("Rosenbaum Decl."), Exhibits A, B, C, E and F.) Exhibits A, B and C are all referenced in the Complaint and consist of TASER's October 18, 2004 press release about the JNLW-HECOE study (Exhibit A), the JNLW-HECOE study summary (Exhibit B), and the April 1, 2005 full JNLW-HECOE study (Exhibit C). The Court will take judicial notice of Exhibits A and B, the press release and the study summary, because they are referenced in the Complaint and the Complaint relies on them. Although the Court is taking judicial notice of Exhibits A and B, the Court will accept as true, for purposes of these Motions to Dismiss, that the study summary was not available to the public until some time after October 18, 2004. The Court will not take judicial notice of the full JNLW-HECOE study, Exhibit C, because its contents are not essential to the Complaint. The Court will take judicial notice of Exhibit E, an excerpt from TASER's Form 10-KSB filed with the SEC for the fiscal year ending December 31, 2004, and Exhibit F, TASER's certificate of incorporation.
Plaintiffs argue that "[t]hese exhibits may not be considered by the court in ruling upon the Defendants' Motion because they are outside the scope of the Complaint." (Pls.' Opp'n to Indiv. Defs.' Mot. at 2 n. 5) (citing In re Fin. Corp. of Am. S'holder Litig. v. Arthur Anderson Co., 796 F.2d 1126, 1127 (9th Cir. 1986)). In re Financial Corporation merely says that the court's review normally "is limited . . . to the contents of the complaint." In re Fin. Corp., 796 F.2d at 1127. However, as discussed at the start of this section, when a party requests judicial notice of material not in the complaint, the court may, in certain instances, use its discretion and consider that material without converting the motion to dismiss into a motion for summary judgment. Because Plaintiffs did not frame their comment about the exhibits as an objection, the Court will proceed with its analysis about which exhibits it will consider.
III. MOTION TO DISMISS FOR FAILING TO DEMONSTRATE THAT DEMAND ON THE BOARD WOULD BE FUTILE
In a stockholder derivative suit, "a stockholder asserts a cause of action belonging to the corporation." Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993) (citations omitted). Under Federal Rule of Civil Procedure 23.1, a shareholder bringing a derivative action must, in addition to verifying the complaint, "allege with particularity the efforts, if any, made by the Plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the Plaintiff's failure to obtain the action or for not making the effort." This is known as the "demand" requirement, and its purpose is "to afford the directors an opportunity to exercise their reasonable business judgment and waive a legal right vested in the corporation in the belief that its best interests will not be promoted by not insisting on such right." Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96, 111 S. Ct. 1711, 1716 (1991) (citations and internal quotations omitted). See also In re Silicon Graphics, Inc. Secs. Litig., 183 F.3d 970, 989-90 (9th Cir. 1999) ("A shareholder seeking to vindicate the interests of a corporation through a derivative suit must first demand action from the corporation's directors or plead with particularity the reasons why such demand would have been futile.") (citing Fed.R.Civ.P. 23.1); Rales, 634 A.2d at 932 ("the right of a stockholder to prosecute a derivative suit is limited to situations where the stockholder has demanded that the directors pursue the corporate claim and they have wrongfully refused to do so or where demand is excused because the directors are incapable of making an impartial decision regarding such litigation.") (citation omitted) (noting that Chancery Court Rule 23.1, like Federal Rule of Civil Procedure 23.1 "constitutes the procedural embodiment of this substantive principle of corporation law").
In a shareholder derivative action such as this one, the court "must apply the demand futility exception as it is defined by the law of the State of incorporation." Kamen, 500 U.S. at 108-09, 111 S. Ct. at 1723. Thus, the Court will apply Delaware law, the state where TASER is incorporated, to determine whether Plaintiffs' failure to make a demand on the Board is excused.
Under Delaware law, "[t]o show futility . . . a plaintiff must allege particularized facts creating a reasonable doubt that (1) the directors are disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." In re Silicon Graphics, 183 F.3d at 990 (noting that "[a]t the pleading stage, Board independence and compliance with the business judgment rule are presumed.") (citing Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)). Here, both parties acknowledge that Plaintiffs are not challenging a specific transaction. (TASER's Mot. to Dismiss at 6; Pls.' Opp'n to Nominal Def. TASER's Mot. to Dismiss ("Pls.' Opp'n to TASER's Mot.") at 10.) In such a situation, the appropriate inquiry "is whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations." Rales, 634 A.2d at 934. Thus, demand is excused when "the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand." Id. (holding that demand is futile "if the derivative plaintiff satisfies this burden"). See also Levine v. Smith, 591 A.2d 194, 205 (Del. 1999) ("The premise of a shareholder claim of futility of demand is that a majority of the board of directors either has a financial interest in the challenged transaction or lacks independence or otherwise failed to exercise due care.") (citations omitted), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). The Rales court rejected the defendants' proposed rule "that a plaintiff must demonstrate a reasonable probability of success on the merits." Rales, 634 A.2d at 930.
Because TASER's Board at the time this action was filed consisted of seven individuals (the Smiths, Culver, Kerik, Kroll and McBrady), the Court must determine whether a majority of the directors — at least four — were either interested or lacked independence in order to excuse demand on the Board.
A. Director Interest
"[A] director is considered interested where he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders." Rales, 634 A.2d at 936 (citations omitted) (noting that "[d]irectorial interest also exists where a corporate decision will have a materially detrimental impact on a director, but not on the corporation and the stockholders."). However, a cursory allegation that a director sold company stock at a time when he possessed material, non-public information does not make that director "interested." Guttman v. Huang, 823 A.2d 492, 502 (Del.Ch. 2003). Instead, a plaintiff must plead "particularized facts regarding the directors that create a sufficient likelihood of personal liability because they have engaged in material trading activity at a time when (one can infer from particularized pled facts that) they knew material, non-public information about the company's financial condition." Id. (noting that "to have their impartiality comprised, [the directors] must face a substantial likelihood of liability for breach of fiduciary duty for one of two alternative reasons: (1) that they personally profited from stock sales while in knowing possession of material, non-public information or (2) that they committed a non-exculpated breach of fiduciary duty by failing to oversee the company's compliance with legally mandated accounting and disclosure standards."). In Guttman, the Delaware court found that the plaintiffs did not plead particularized facts regarding the insider trading claims because the plaintiffs did not detail, for example, "the precise roles the directors played at the company, [and] the information that would have come to their attention in those roles. . . ." Id. at 503. Also, the defendants' stock sales in Guttman were "quite disparate" in time, occurring over a nine-month period. Id.
In this case, Plaintiffs present a far stronger case than did the plaintiffs in Guttman. Here, Plaintiffs have pleaded particularized facts regarding the insider trading claims. First, Plaintiffs have alleged that the Smiths are immediate family members who jointly founded TASER and were responsible for many of the public statements about TASER's safety and future performance. At the time this suit was filed, Rick Smith was TASER's CEO, Thomas Smith was TASER's President, and Phillips Smith, father of Rick and Thomas, was Chairman of the Board. (Compl. ¶¶ 143(D)-(F).) Plaintiffs allege that the Smiths "have controlled the Company on a day to day basis for over 11 years" and that they "dominate and control the entire Board." (Compl. ¶ 143(F).) Plaintiffs allege that in the two to three weeks that followed the October announcements about the JNLW-HECOE study and 175% revenue growth, the Smiths alone sold over $67 million in TASER stock. (Compl. ¶ 143(A)(i)-(iii).) A decision by the Board to bring suit against the Smiths could have potentially significant financial consequences for them. In light of these consequences, the Smiths have a disqualifying financial interest that disabled them from impartially considering a response to a demand by Plaintiffs. In addition, TASER appears to concede that the three Smiths are interested parties that would disable them from impartially considering a response to a demand by Plaintiffs. (TASER's Mot. to Dismiss at 9) (arguing that "[t]o excuse demand, therefore, Plaintiffs must plead particularized facts establishing a substantial likelihood that the Company's four outside directors committed intentional, and not merely negligent, grossly negligent or even reckless, misconduct.")
As for the four outside directors — Culver, Kerik, Kroll and McBrady — Plaintiffs have provided information about the precise roles played by these directors as well as the type of information to which they had access. Three of them, Culver, Kroll and McBrady, served on the Board's Audit Committee. The Audit Committee's charter says that committee members meet before the Company issues quarterly financial results and earnings guidance. (Compl. ¶ 40.) Plaintiffs allege that "as a result of the information they received as members of the Audit Committee, [Culver, Kerik, Kroll and McBrady] were aware of the Company's true operating condition when they caused the Company to raise the Company's growth guidance to 175%." (Pls.' Opp'n to TASER's Mot. at 18.) Plaintiffs argue that by inference the Audit Committee members "closely monitored and were aware of declining sales trends" and "could not possibly approve Company earnings press release and earnings guidance without knowing how the quarter at issue was progressing." (Pls.' Opp'n to TASER's Mot. at 18-19.)
Plaintiffs have also alleged that the stock sales by the outside directors occurred over a five-week time period, with almost all of the sales taking place between October 28 and November 11, 2004. Plaintiffs allege that the outside directors sold their stock while in possession of material, non-public information, "including but not limited to, the true conclusions of the JNLW-HECOE report, the Company's declining sales trends during [the fourth quarter of fiscal year] 2004, and the Company's improper accounting." (Compl. ¶ 143(A).) Thus, Plaintiffs allege, the outside directors (along with the Smiths) "are directly interested in challenged financial conduct which renders them incapable of independently and disinterestingly [sic] considering any pre-suit demand to remedy the conduct described. . . ." (Compl. ¶ 143(A).)
Except for Culver, each of the outside directors is alleged to have sold 100% of his TASER holdings during the weeks that followed the October announcements for a combined total of approximately $13.4 million. It is hard to imagine that any of the four outside directors would be disinterested enough to have considered a demand by Plaintiffs. Thus, the Complaint contains sufficiently particularized facts to support a rational inference that these directors possessed material information about TASER that did not exist in the market at that time.
B. Director Independence
Even if the four outside directors could be considered disinterested, they could not all be considered independent enough to have impartially considered Plaintiffs' demand. In the situation where a Delaware court finds less than a majority of directors are interested, the court will examine whether the remaining directors are "sufficiently independent to make an impartial decision despite the fact that they are presumptively disinterested." Rales, 634 A.2d at 936 (holding that three of eight directors were interested parties and that the amended complaint raised a reasonable doubt as to the independence of two remaining directors, making demand futile).
In this case, Plaintiffs allege that each of the outside directors breached their fiduciary duties "in that they authorized and/or failed to prevent and/or correct the improper statements alleged herein." (Compl. ¶ 143(H).) This, according to Plaintiffs, prevents the outside directors from "exercis[ing] independent objective judgment in deciding whether to bring this action or whether to vigorously prosecute this action because they are personally interested in the outcome." (Compl. ¶ 143(H).) Plaintiffs allege that Defendants Culver, McBrady and Kroll, as members of the Board's Audit Committee, "recommended that the Board include the improper financial statements and publish the improper and misleading press releases concerning the safety and projected demand for the Company's weapons. In addition to the foregoing, the members of the Audit Committee have already ratified the suspiciously-timed Davidson's transaction." (Compl. ¶ 143(B).)
Plaintiffs allege further that because Defendants Culver and Kroll served on the Board's Compensation Committee, they have "demonstrated their lack of independence from the Officer Defendants" by awarding them "compensation worth tens of millions of dollars for the Company's FY 2004 performance," despite the negative public attention and "even though the Company did not meet its target revenue growth goals for FY 2004." (Compl. ¶ 143(C).) In addition, Plaintiffs allege that because Culver was the sole original outside investor in TASER, "all of the Individual Defendants, including the Smiths, have materially enhanced his net worth in return for his early patronage of the Company." (Compl. ¶ 143(C).) Thus, Plaintiffs argue, "it is unreasonable to believe that Culver could independently and disinterestingly [sic] consider a pre-suit demand to commence an action against these same individuals that have materially benefitted him over a long-term period." (Compl. ¶ 143(C).)
The Court finds that Plaintiffs have alleged facts that create a reasonable doubt that, at the time this Complaint was filed, a majority of the Board "could have properly exercised its independent and disinterested business judgment" in responding to a demand by Plaintiff. Therefore, demand on the Board is excused as futile.
C. Heightened Pleading Standard
Defendants argue that Plaintiffs face a heightened pleading requirement "because TASER's certificate of incorporation precludes claims by the Company against its directors for non-intentional conduct." (TASER's Mot. to Dismiss") at 8). While Defendants have not directed the Court to the specific language limiting a director's liability, TASER's certificate of incorporation does say "[a] director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for conduct as a director, provided that this Article does not eliminate the liability of any director for any act or omission for which such elimination of liability is not permitted under the Law." (Rosenbaum Decl., Ex. F.) Under Delaware law, a certificate of incorporation may include:
A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit.
Del. Code Ann. Tit. 8, § 102(b)(7).
Based on TASER's certificate of incorporation and Delaware law, it appears that TASER's certificate could insulate its directors from liability that does not amount to a breach of the duty of loyalty, intentional misconduct, or a knowing violation of the law. When a company's "charter insulates the directors from liability for breaches of the duty of care, then a serious threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts." Guttman, 823 A.2d at 501 (citing In re Baxter Int'l, Inc. S'holders Litig., 654 A.2d 1268, 1270 (Del. Ch. 1995)).
When there is an insulating charter provision, a court must make two inquiries. The first is whether "the underlying conduct complained of in the complaint . . . renders any of the board members 'interested,' and, if so, whether any of the other members of the board are compromised in their ability to act independently of [them]." Id. If a majority of the board is impartial under the first test, then the court must "consider whether the complaint sets forth particularized facts that plead a non-exculpated claim of breach of fiduciary duty against a majority of the board, thereby stripping away their first-blush veneer of impartiality." Id.
Even under a heightened pleading requirement, as argued by Defendants, demand in this case would be futile. As discussed in the following section, Plaintiffs have adequately pleaded non-exculpated claims including breach of fiduciary duties for insider trading and disseminating misleading and inaccurate information. Therefore, at this stage, TASER's certificate of incorporation does not insulate the Directors from liability for non-exculpated claims.
IV. MOTION TO DISMISS FOR FAILING TO STATE A CLAIM
The second motion is filed by the Individual Defendants and argues that the Complaint should be dismissed, presumably pursuant to Federal Rule of Civil Procedure 12(b)(6), because Plaintiffs have failed to state a claim for: breach of fiduciary duty, gross mismanagement and abuse of control; insider trading; waste of corporate assets and unjust enrichment. Defendants also argue that claims against the director defendants for non-intentional conduct must be dismissed.
When considering a motion to dismiss for failure to state a claim, "the court must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987) (citations omitted). "The trial court may not grant a motion to dismiss for failure to state a claim 'unless it appears beyond doubt that the Plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Id. (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 101-102 (1957)).
The parties dispute the proper legal standard to be applied to Defendants' Motion to Dismiss Plaintiffs' breach of fiduciary duty claims: Federal Rule of Civil Procedure 8, the general notice pleading standard, or Rule 9(b), the standard to apply when claims are grounded in fraud. (Pls.' Opp'n to Indiv. Defs.' Mot. at 1-4; Individual Defs.' Reply Mem. in Further Support of Mot. to Dismiss ("Indiv. Defs.' Reply") at 2-6). Plaintiff's argue that Rule 8's lenient notice pleading standard applies to their claims. Under Rule 8 of the Federal Rules of Civil Procedure, a plaintiff is only required to provide "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). "The purpose of notice pleading [under Rule 8] is to 'give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests.'" In re Marino, 37 F.3d 1354, 1357 (9th Cir. 1994) (quoting Conley, 355 U.S. at 47, 78 S. Ct. at 103).
Defendants argue that the more stringent standard under Rule 9(b) applies to Plaintiff's claim for breach of fiduciary duty, gross mismanagement and abuse of control because Plaintiffs alleged that Defendants "caus[ed] or allow[ed] the Company to disseminate to the Market materially misleading and inaccurate information through public statements" during the Relevant Period. (Mot. of the Individual Defs. to Dismiss Shareholder Derivative Compl. ("Indiv. Defs.' Mot. to Dismiss") at 3.) Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). "Rule 9(b)'s particularity requirement applies to state-law causes of action." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003). "Rule 9(b) applies to 'averments of fraud' in all civil cases in federal district court, even when "fraud is not a necessary element of claim." Id. If a plaintiff alleges "a unified course of fraudulent conduct and rel[ies] entirely on that course of conduct as the basis of a claim," then "the claim is said to be 'grounded in fraud' or to 'sound in fraud,' and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b)." Id. (citations omitted). In the case where a plaintiff alleges some fraudulent and some non-fraudulent conduct, "only the allegations of fraud are subject to Rule 9(b)'s heightened pleading requirements." Id. at 1104-05. "Allegations of non-fraudulent conduct need satisfy only the ordinary notice pleading standards of Rule 8(a)." Id. at 1105. "[I]f particular averments of fraud are insufficiently pled under Rule 9(b), a district court should 'disregard' those averments, or 'strip' them from the claim" and examine the rest of the allegations to determine whether they state a claim. Id.
In this case, although not pleaded as fraud claims, certain claims by Plaintiffs allege a seemingly unified course of fraudulent conduct. Plaintiffs claim that the Individual Defendants breached their fiduciary duties of care, loyalty, and good faith by "causing or allowing the Company to disseminate to the Market materially misleading and inaccurate information through public statements, including, but not limited to press releases and SEC filings" so that the Company's stock price "would trade at artificially inflated prices and the Selling Defendants could sell their personal holdings of TASER common stock at inflated prices." (Compl. ¶¶ 151-152.) Plaintiffs allege that the statements made by the Individual Defendants during the key period of October 18, 2004 to late December 2004 were "each materially false and misleading when made because the Individual Defendants failed to disclose and/or misrepresented the following adverse facts, which were known to the Individual Defendants, or recklessly disregarded by them, at all relevant times. . . ." (Compl. ¶ 94.) Plaintiffs allege that the following types of statements were false or misleading:
(a) that, contrary to their representations, the studies conducted on the Company's TASER weapons were inconclusive as to their safety;
(b) that the Company's revenues and earnings would be negatively impacted once the truth of these studies became known;
(c) that they had misrepresented the central finding in the JNLW-HECOE report;
(d) that the torrent of bad publicity that the Company had received during 4Q 04 was causing the Company to lose potential sales, and/or was causing sales trends to slow;
(e) that going into the last month of 4Q 04, internal Company sales projections indicated that the Company would not meet its revenue guidance for 4Q 04 and FY 2004;
(f) that the 'last minute' order of TASER weapons the Company had received from Davidson' lacked true economic substance and that it did not reflect the true demand for TASER weapons and that the Davidson' [sic] deal was largely done to help the Company meet its sales goals for 4Q 04 and FY 2004; and
(g) based on the foregoing, the Individual Defendants had no reasonable basis for their positive statements regarding the safety of, and demand for, the Company's weapons.
(Compl. ¶ 94.)
Moreover, Plaintiffs have titled paragraphs 51-56 "Conspiracy, Aiding and Abetting, and Concerted Action." (Compl. ¶¶ 51-56.) In each of those paragraphs, Plaintiffs allege that the Individual Defendants pursued "a common course of conduct" or a "conspiracy" or "common enterprise" "commencing by at least October 2004 and continuing thereafter." ( See Compl. ¶¶ 51-56.) In particular, Plaintiffs allege:
[T]he Individual Defendants collectively and individually initiated a "course of conduct that was designed to and did: (i) conceal the fact that the Company was improperly misrepresenting the safety of its weapons, as well as its financial results and prospects, in order to allow the Individual Defendants to artificially inflate the price of the Company's shares; (ii) maintain the Individual Defendants' executive and directorial positions at TASER and the profits, power and prestige that the Individual Defendants enjoyed as a result of these positions; and (iii) deceive the investing public, including shareholders of TASER, regarding the Individual Defendants' management of TASER's operations, the safety of the Company's weapons, the Company's financial health and stability, and future business prospects, specifically related to the Company's weapons and financial results and products that had been misrepresented by the Individual Defendants throughout the Relevant Period. In furtherance of this plan, conspiracy and course of conduct, the Individual Defendants collectively and individually took the actions set forth herein.(Compl. ¶ 52.)
The Court would be hard pressed to find that these allegations about conduct and statements made over a two-month period do not amount to a course of fraudulent conduct perpetrated for one purpose — so that the Individual Defendants could allegedly unload their stock before the market caught wind of TASER's true situation. Therefore, the Court will apply the heightened pleading standard found in Federal Rule of Civil Procedure 9(b) to Plaintiffs' claims of fraudulent conduct for allegedly disseminating misleading or inaccurate information. The Court will apply Rule 8 to Plaintiffs' other claims.
A. Breach of Fiduciary Duty for Insider Selling and Misappropriation of Information
Plaintiffs claim that all of TASER's officers and directors breached their fiduciary duties by selling stock in the company at a time when they possessed material, adverse, non-public information about the company. In particular, Plaintiffs allege that Defendants possessed information "concerning the Company's product safety, the findings of the JNLW-HECOE, declining sales trends, the Company's financial condition and future business prospects." (Compl. ¶ 146.)
The standard under Delaware law for insider selling claims was announced in Brophy v. Cities Service, Inc., in which the Delaware Supreme Court said "that, if a person in a confidential or fiduciary position, in breach of his duty, uses his knowledge to make a profit for himself, he is accountable for such profit." 70 A.2d 5, 8 (Del. 1949) (holding that directors who misuse company information to profit at the expense of innocent buyers of company stock should disgorge their profits) (citation omitted). To state a claim for insider trading then, a plaintiff must "allege particularized facts that support a rational inference that . . . [the] directors possessed information . . . that was materially different than existed in the marketplace at the time they traded. . . ." Guttman, 823 A.2d at 505 (citing Stepak v. Ross, 1985 WL 21137, *5 (Del.Ch. 1985) ("In order for there to be a recovery . . . it must be shown that each sale by each individual defendant was entered into and completed on the basis of, and because of, adverse material non-public information.)). Information is "material" if there is a "substantial likelihood that the nonpublic fact would have assumed actual significance in the deliberations of a person deciding whether the buy, sell, vote, or tender stock." In re Oracle Corp., 867 A.2d 904, 934 (Del.Ch. 2004) (citations and internal quotations omitted).
Both parties cite to an unpublished decision of the Delaware Chancery court as the proper standard to apply on either a motion to dismiss or a motion for summary judgment. ( See Indiv. Defs.' Reply at 8; Pls.' Opp'n to Indiv. Defs.' Mot. at 6; and Pls.' Opp'n to TASER's Mot. at 16 n. 29). The Chancery court decision says that "[t]o proceed on an insider selling claim, a Plaintiff must shows (sic) that 'each sale by each individual defendant was entered into and completed on the basis of, and because of, adverse material non-public information.'" Zimmerman v. Braddock, 2005 Del. Ch. LEXIS 135, *32 (Del.Ch. Sept. 8, 2005) (citing Guttman, 823 A.2d at 505 and Stepak v. Ross, 1985 WL 21137, at *5 (Del.Ch. Sept. 5, 1985)). Defendants claim that Plaintiffs have conceded that Zimmerman is the proper standard to apply to state a claim for insider trading. (Indiv. Defs.' Reply at 8 (citing Pls.' Opp'n to TASER's Mot. at 16 n. 29).) This is not an accurate portrayal of Plaintiffs' statement which says that "[f]or the record, Plaintiffs stipulate that, to prove their insider trading claims at trial, they will have to demonstrate that 'each sale by each individual defendant was entered into and completed on the basis of, and because of adverse material non-public information.'"). The Court reads this as a stipulation for the proper standard to apply on a motion for summary judgment, or at trial, and not the standard on a motion to dismiss.
Plaintiffs here have sufficiently pleaded facts which support an inference that the Individual Defendants' stock sales were "entered into and completed on the basis of, and because of, adverse material non-public information." First, Plaintiffs have alleged the specific positions held by each officer and director of the company, creating a fiduciary duty. ( See Compl. ¶¶ 29-37.) They have alleged the type of material, non-public information to which each officer and director had access. (Compl. ¶¶ 29-37, 40-42, 77, 80.) In particular, Plaintiffs have alleged "(a) that, contrary to their representations, the studies conducted on the Company's TASER weapons were inconclusive as to their safety; (b) that the Company's revenues and earnings would be negatively impacted once the truth of these studies became known; [and] (c) that they had misrepresented the central finding in the JNLW-HECOE report." (Compl. ¶ 94(a)-(c).) Finally, the sheer size and timing of the Defendants' stock sales, as alleged by Plaintiffs, supports the inference that Defendants completed those sales on the basis of material, non-public information. ( See Compl. ¶¶ 14, 17, 18, 103-104, 137-139.) Therefore, Plaintiffs have stated sufficient information to maintain a claim for insider trading.
B. Breach of Fiduciary Duty for Disseminating Misleading and Inaccurate Information
Plaintiffs allege that the Individual Defendants breached their fiduciary duties of care, loyalty and good faith by "causing or allowing the Company to disseminate to the Market materially misleading and inaccurate information through public statements, including, but not limited to, press releases and SEC filings" so that "the Selling Defendants could sell their personal holdings of TASER common stock at [artificially] inflated prices." (Compl. ¶¶ 151-152.) The Court will apply Federal Rule of Civil Procedure 9(b)'s particularity requirement to this claim because Plaintiffs have alleged what amounts to a unified course of fraudulent conduct to deceive the public spanning the period from October 18, 2004 to late December 2004. ( See Compl. ¶¶ 51-56.)
Under Delaware law, "[w]henever directors communicate publicly or directly with shareholders about the corporation's affairs, with or without a request for shareholder action, directors have a fiduciary duty to shareholders to exercise due care, good faith and loyalty. It follows a fortiori that when directors communicate publicly or directly with shareholders about corporate matters the sine qua non of directors' fiduciary duty to shareholders is honesty." Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) (holding that "directors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable in a manner appropriate to the circumstances.") Thus, "[a] well-pleaded disclosure claim arising out of a communication that does not contemplate stockholder action and which implicates the broader duties of loyalty, "good faith" and care, as opposed to the more narrow duty of disclosure, must identify a disclosure violation through which corporate fiduciaries misinformed stockholders and set forth allegations that support the remedy sought. A plaintiff then will have to plead causation and identify actual quantifiable damages in order to plead sufficiently this category of disclosure violation." O'Reilly v. Transworld Healthcare, Inc. 745 A.2d 902, 917 (Del.Ch. 1999).
The Court finds that Plaintiffs have adequately pleaded, for purposes of a motion to dismiss, that Defendants disseminated inaccurate and/or misleading information. Plaintiffs have set forth allegations regarding TASER's public statements about the safety of its weapons, and, in particular, the conclusions of the JNLW-HECOE study. (Compl. ¶¶ 7, 15-16, 18, 68, 69, 74, 76-80, 84-85, 89-93.) Plaintiffs have also provided the Individual Defendants' statements about TASER's future revenue growth and the impact of negative publicity on TASER's sales. (Compl. ¶¶ 16-17, 78-80.)
Given the allegations that the Individual Defendants' were either interested or lacked independence, that there exists a reasonable inference that the Defendants engaged in insider trading, and a reasonable inference that the various disclosure allegations were part of a scheme to artificially inflate TASER's stock price so that Defendants could sell material portions of their holdings around the same time, the Court concludes that at this stage of the proceedings that Plaintiffs have adequately pleaded that the alleged disclosure violations implicated the duties of good faith, due care and loyalty.
C. Breach of Fiduciary Duty of Good Faith In Connection With the Management of TASER
In Count three, Plaintiffs allege that the Individual Defendants "acted with knowing or extremely reckless intent in their management of TASER's affairs, including, but not limited to, the management of the Company's business, and its claims regarding the safety of its products," thus breaching their fiduciary duty of good faith. (Compl. ¶ 157.)
Under Delaware law, "director liability may arise for the breach of the duty to exercise appropriate attention to potentially illegal corporate activities from 'an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss.'" In re Abbott Labs. Derivative S'holders Litig., 325 F.3d 795, 808 (7th Cir. 2003) (quoting In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 967 (Del.Ch. 1996)). Thus, "a sustained or systematic failure of the board to exercise oversight . . . will establish the lack of good faith that is a necessary condition to [director] liability." Id. (quoting Caremark, 698 A.2d at 971). As noted by the Seventh Circuit, the claims in Caremark were "'predicated upon ignorance of liability creating activities', where there were no facts to indicate the directors 'conscientiously permitted a known violation of law by the corporation to occur.'" Id. at 806 (quoting Caremark, 698 A.2d at 971-972).
Plaintiffs here say they are not "asserting a claim based on the 'failure to monitor' theory of liability discussed in Caremark." (Pls.' Opp'n to Indiv. Defs.' Mot. at 14.) Plaintiffs argue instead that they are raising a claim like the ones in Abbott, in which the plaintiffs "allege[d] facts that the directors were aware of violations. . . ." and, in which "reasonable inferences determined from all of the facts taken together are exactly the opposite of Caremark; members of the board in Abbott were aware of the problems." (Pls.' Opp'n to Indiv. Defs.' Mot. at 15 (quoting In re Abbott, 325 F.3d at 806).) Defendants argue that this case is unlike Abbott, in which the Food and Drug Administration "found actual violations of FDA regulations that the company repeatedly refused to correct." (Indiv. Defs.' Reply at 14 (citing In re Abbott, 325 F.3d at 799-800).) Defendants argue that in this case Plaintiffs "can allege only that the directors were aware of a six- month history of one-sided charges in the media regarding a product they concede was not subject to federal regulations." (Indiv. Defs.' Reply at 14) (emphasis in original.)
Plaintiffs have alleged that Defendants were aware of the issues related to the taser's safety. (Compl. ¶¶ 65-80). Plaintiffs have also alleged that most of the Board members "were undoubtedly aware that the company had spent minimal sums of money on safety testing, which should have been a red flag to any conscientious officer or director." (Pls.' Opp'n to Indiv. Defs.' Mot. at 15; Compl. ¶¶ 65-67.) In addition, Plaintiffs argue that the media scrutiny of the taser's safety that began in summer of 2004 raised red flags and yet Defendants "vigorously defend[ed] Taser's purported safety record and they increased revenue guidance to 175%." (Pls.' Opp'n to Indiv. Defs.' Mot. at 15.) While the problems before the TASER Board may not rise to the sustained six-year level of regulatory problems in Abbott, the Court finds that the alleged facts, taken together, lead to "reasonable inferences" that the Board was aware of taser's safety issue problems, and that Plaintiffs have stated a claim for breach of the duty of good faith.
D. Waste of Corporate Assets and Unjust Enrichment
Plaintiffs' fourth count alleges that the Individual Defendants "individually and/or jointly committed one or more of the acts or omissions to act as alleged here and aided and abetted in the Selling Defendants' use, without consideration to the Company, of material adverse non-public information to sell their personal holdings of TASER common stock at inflated prices for their own benefit and to the detriment of the Company and its shareholders, which constituted a waste of corporate assets." (Compl. ¶ 162.) The fifth count alleges that "by their wrongful acts and omissions the Individual Defendants were unjustly enriched at the expense of and to the detriment of TASER." (Compl. ¶ 165.) As a remedy, "Plaintiffs, as representatives of TASER, seek restitution" and an order from this Court "disgorging . . . all profits, benefits and other compensation obtained by the Individual Defendants. . . ." (Compl. ¶ 166.)
Neither party in this case provides much more than cursory discussion of these two claims. Nor do the parties provide the standards for deciding whether Plaintiffs have adequately pleaded these claims. The extent of Plaintiffs' discussion of these two claims occurs in a footnote that says "Plaintiffs have also adequately pled their Waste of Corporate Assets (Fourth Cause of Action, Comp. [sic], ¶¶ 159-163) and Unjust Enrichment claims (Fifth Cause of Action, Comp. [sic], ¶¶ 164-166) because those claims are alleged with facts that provide Defendants' [sic] with notice of the claims." (Pls.' Opp'n to Indiv. Defs.' Mot. at 16 n. 26 (citing Swierkiewicz v. Sorema N.A., 534 U.S. 506, 513 (2002).) Plaintiffs also say in this footnote that "[l]ike all their other arguments, Defendants' contention on these claims boils down to their assertion that these claims must be alleged with particularity, and this argument fails for the reason set forth supra at pp. 3-4." (Pls.' Opp'n to Indiv. Defs.' Mot. at 16 n. 26.) Plaintiffs' earlier arguments at pages three and four contest Defendants' assertion that Federal Rule of Civil Procedure 9(b)'s heightened pleading requirement applies to Plaintiffs' claims and that the Court need only apply Rule 8's notice pleading standard to Plaintiffs' claims. (Pls.' Opp'n to Indiv. Defs.' Mot. at 3-4.) Plaintiffs say nothing more about these claims.
Defendants argue slightly more and say that Plaintiffs have failed to state a claim for waste of corporate assets and unjust enrichment. Defendants refer the Court back to its argument related to Plaintiffs' insider trading claims and say that "[P]laintiffs fail to plead facts sufficient to demonstrate that the Individual Defendants obtained an unjust personal enrichment from alleged misuse of Taser's corporate assets. Furthermore, [P]laintiffs do not and cannot allege that they, as individual stockholders of the Company, or even the Company had any independent right to the proceeds of the Individual Defendants' stock sales." (Indiv. Defs.' Reply at 14-15.) Therefore, Defendants argue, Plaintiffs "cannot demonstrate that the Individual Defendants' stock sales constitute 'the unjust retention of a benefit' obtained 'at the expense of the Plaintiff.'" (Indiv. Defs.' Mot. to Dismiss at 15 (quoting Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988).)
In order for a court to order restitution, "it must first find the defendant was unjustly enriched at the expense of the plaintiff." Schock v. Nash, 732 A.2d 217, 232 (Del. 1999) (citation omitted). Thus, a plaintiff is "required to show that the defendants were unjustly enriched, that the defendants secured a benefit, and that it would be unconscionable to allow them to retain that benefit." Id. "Restitution is an appropriate remedy where a party is unjustly enriched at the expense of another." Highlands Ins. Group, Inc. v. Haliburton Co., 852 A.2d 1, 7 (Del.Ch. 2003) (citing Schock, 732 A.2d at 232). The elements of an unjust enrichment claim are: "(1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of justification and (5) the absence of a remedy provided by law." Jackson Nat'l Life Ins. Co. v. Kennedy, 741 A.2d 377, 393 (Del.Ch. 1999) (citations omitted).
Neither party has made convincing arguments either way as to why these claims should or should not be dismissed. Because the Court has already found that Plaintiffs have adequately stated claims for the first three counts, it will not dismiss Plaintiffs' claim for waste of assets or unjust enrichment, both of which relate to the first three counts.
E. Claims for Non-Intentional Conduct
Defendants argue that any claims against the Director Defendants (the Smiths, Kerik, Kroll, Culver and McBrady) based on non-intentional conduct must be dismissed. (Indiv. Defs.' Mot. to Dismiss at 15.) That is because TASER's certification of incorporation "eliminates director personal liability to the full extent permitted by Delaware law." (Indiv. Defs.' Mot. to Dismiss at 15.) As noted earlier, TASER's certificate of incorporation says "[a] director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for conduct as a director, provided that this Article does not eliminate the liability of any director for any act or omission for which such elimination of liability is not permitted under the Law." (Rosenbaum Decl., Ex. F.) Also, as noted earlier, the Delaware Code allows a corporation to exempt its directors from liability for violations of the duty of care, but not for violations of the duties of loyalty and good faith. See Del. Code Ann. Tit. 8 § 102(b)(7); Emerald Partners v. Berlin, 726 A.2d 1215, 1227 (Del. 1999) ("Section 102(b)(7) protections do not apply to violations of the fiduciary duties of good faith or loyalty"). The Emerald Partners court also noted that statutory liability shield provided by a certificate of incorporation such as TASER's "is in the nature of an affirmative defense." Id. at 1223. Generally, "affirmative defenses . . . will not form the basis for dismissal under Rule 12(b)(6)." In re Tower Air, Inc., 416 F.3d 229, 242 (3rd Cir. 2005) (citation omitted). Therefore, the Court will not consider TASER's exculpatory charter provision in this context of the Individual Defendants' motion to dismiss for failure to state a claim.
IT IS ORDERED denying Nominal Defendant Taser International, Inc.'s Motion to Dismiss the Consolidated Shareholder Verified Derivative Complaint (Doc. 42).
IT IS FURTHER ORDERED denying the Motion of the Individual Defendants to Dismiss the Consolidated Shareholder Verified Derivative Complaint (Doc. 41). IT IS FURTHER ORDERED granting in part and denying in part Defendants' Request for Judicial Notice (Doc. 43).