In re Facebook, Inc. Shareholder Derivative Privacy Litigation

Background

Plaintiffs brought a consolidated shareholder derivative action against nominal defendant Facebook and individual defendants concerning Facebook’s data-privacy policies and practices. The claims followed revelations that Cambridge Analytica misappropriated millions of Facebook users’ information for use in political campaigns.

Before filing the operative complaint, plaintiffs did not make a demand on Facebook’s board and did not make a books-and-records demand under Section 220 of the Delaware General Corporation Law. The court had previously ruled that the Private Securities Litigation Reform Act (PSLRA) discovery stay applied because the complaint asserted federal securities claims. The PSLRA generally pauses discovery while a motion to dismiss is pending unless particularized discovery is necessary to preserve evidence or prevent unfair harm.

The court had also stayed a related California state-court inspection action brought by plaintiff Natalie Ocegueda under Section 1601 of the California Corporations Code. In March 2019, the court dismissed plaintiffs’ state derivative claims without prejudice to reassertion in the Delaware Court of Chancery, based on an enforceable exclusive forum-selection clause. It separately dismissed the federal securities claims for failure to plead demand futility under Federal Rule of Civil Procedure 23.1, while allowing plaintiffs an opportunity to amend.

Plaintiffs’ Motion

Plaintiffs asked the court to lift the PSLRA discovery stay to obtain documents that Facebook had produced to other shareholders and litigants, allegedly to help them plead demand futility in an amended complaint. Plaintiffs also appeared to seek access to the corporate records requested in the California state-court action. The court noted that plaintiffs were unclear about the exact materials sought and inconsistent about whether Delaware or California law supported their inspection request.

Court’s Analysis

The court rejected plaintiffs’ request for documents produced in other proceedings. Plaintiffs argued that they faced an increasing information disadvantage because Facebook had produced documents to other parties. The court had rejected substantially the same argument in an earlier motion and found no reason to change its view.

The court held that seeking discovery to obtain facts needed to satisfy pleading requirements was not the type of unfair harm that justified lifting the PSLRA stay. It reasoned that allowing plaintiffs to obtain discovery merely to develop particularized allegations would undermine the PSLRA’s purpose of limiting discovery abuse in federal securities actions.

The court also rejected plaintiffs’ alternative request for a books-and-records inspection. Under Delaware law, a stockholder may inspect a Delaware corporation’s books and records for a proper purpose, including, in some circumstances, investigating whether demand on the board would have been futile. But plaintiffs had not made a formal Delaware Section 220 demand. Even if the court treated their California inspection action as equivalent to a Delaware demand, the court found that the circumstances suggested an effort to circumvent the PSLRA stay: Ocegueda was involved in both actions, the same counsel represented her in both, and she had refused to enter a confidentiality agreement preventing use of the information in the federal case.

The court reached the same conclusion under California law. It explained that Section 1601 provides a right to inspect and copy specified corporate records at the company’s office, but found no applicable authority allowing such an inspection to proceed to help plead demand futility while the PSLRA stay was in effect. The court also concluded that continuing the state-court stay was consistent with the Securities Litigation Uniform Standards Act (SLUSA), which permits a federal court, upon a proper showing, to stay discovery in a state action to protect the federal court’s jurisdiction or judgments.

The court distinguished a case involving public-records requests because the defendant there did not bear the same production burden. Here, the requested inspection covered as many as 24 categories of documents, including emails, and the court found that producing them would impose a substantial burden on Facebook.

Disposition

The court denied plaintiffs’ motion to lift the PSLRA discovery stay. It also directed plaintiffs to file their amended complaint within 21 days of the order. This opinion addressed the discovery-stay motion; it did not itself rule on the sufficiency of any amended complaint.