In Re Alphabet Inc. Stockholder Derivative Litigation

Background

The plaintiffs brought a shareholder derivative action, meaning they sued on behalf of Alphabet, Inc. They alleged that Alphabet and its directors breached fiduciary duties and were unjustly enriched because YouTube violated the Children’s Online Privacy Protection Act (COPPA), a law restricting the collection of personal information from children under 13 without parental consent.

The Federal Trade Commission later investigated YouTube and pursued a case based on the theory that individual YouTube channels directed toward children could qualify as child-directed sites within YouTube. Alphabet and the FTC settled that case for $170 million without an admission of liability. YouTube later introduced additional measures concerning YouTube Kids, child-directed content, and data collection.

The plaintiffs had previously filed a complaint that the court dismissed for failing to adequately plead that making a demand on Alphabet’s board would have been futile. The court allowed amendment. In the operative complaint, the plaintiffs repeated most of their earlier allegations and added allegations concerning FTC educational letters sent to businesses and a confidential memorandum referring to “privacy regulatory swirl” around the launch of YouTube Kids.

Demand Futility Standard

Federal Rule of Civil Procedure 23.1 generally requires a shareholder bringing a derivative action either to demand that the corporation’s directors pursue the claim or to plead particularized facts showing why such a demand would have been futile. The court applied the three-part test adopted by the Delaware Supreme Court in United Food & Commercial Workers Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg. The court considered, director by director, whether each director received a material personal benefit, faced a substantial likelihood of liability, or lacked independence from someone who did.

Court’s Analysis

The court held that the plaintiffs had not shown that any director received a material personal benefit from the alleged COPPA violations. The plaintiffs alleged that directors indirectly benefited from increased revenue, but the court found that any such benefit would also have been shared by Alphabet’s stockholders and therefore was not the required personal benefit.

The court also held that the plaintiffs had not shown a substantial likelihood that the directors would be liable. Alphabet’s charter exculpated directors from liability for certain breaches of fiduciary duty, so the plaintiffs needed to plead facts showing scienter or bad faith.

The court analyzed the oversight allegations under Caremark, a legal standard for claims that directors failed to establish or monitor systems for overseeing corporate risks. It found that Alphabet’s Audit Committee was responsible for legal, regulatory, and privacy risks; held special meetings concerning the FTC investigation; cooperated with the FTC; and reported to the board. These facts showed good-faith efforts to establish a board-level monitoring and reporting system rather than an utter failure of oversight.

The court also rejected the claim that the directors failed to monitor the systems they had established. The plaintiffs had not adequately alleged that YouTube actually knew that underage users were providing personal information. The court further held that the FTC investigation, the possibly unreceived educational letters, and the reference to “privacy regulatory swirl” did not show that the board acted in bad faith or knowingly failed to address a legal violation. The board’s conduct had to be evaluated based on the information available at the time, rather than with hindsight concerning the FTC’s later interpretation of COPPA.

Because the plaintiffs failed to establish that any director was interested, the court did not need to decide the directors’ independence. It also held that the unjust-enrichment claim had to be dismissed because the related breach-of-fiduciary-duty claim failed.

Disposition

The court granted Alphabet’s motion to dismiss. It dismissed the complaint without leave to amend, finding that the plaintiffs had already amended once and that further amendment appeared futile. The court denied the individual defendants’ motion as moot, without prejudice. Judge Richard Seeborg signed the order on April 7, 2022.