R. Andre Klein v. Timothy D. Cook

Background

R. Andre Klein filed a shareholder derivative action on behalf of Apple Inc. He alleged that Apple entered into agreements with other companies not to solicit or recruit one another’s employees. His claims included violations of Section 14(a) of the Securities Exchange Act of 1934 based on alleged omissions from Apple’s proxy statements; breach of fiduciary duty and aiding and abetting; gross mismanagement; waste of corporate assets; and breach of the duty of honest services.

Klein did not make a pre-suit demand asking Apple’s board to cause the company to pursue the claims. Instead, he alleged that such a demand would have been futile because the directors were interested in, involved in, or otherwise unable to evaluate the claims independently. The case had been stayed while related shareholder litigation proceeded in California state court.

Statute of Limitations

The court held that Klein’s Section 14(a) claims based on the 2012 and 2013 proxy statements were time-barred. The court determined that a 2010 complaint and press release from the U.S. Department of Justice gave shareholders enough information to investigate possible wrongdoing involving Apple’s anti-poaching agreements and senior executives. Because the relevant proxy statements were issued more than one year before Klein filed his complaint, the claims based on those statements were untimely. The court held that the Section 14(a) claim based on the 2014 proxy statement was timely.

The court rejected defendants’ statute-of-limitations argument as to Klein’s common-law claims. It concluded that, viewing the allegations in Klein’s favor, those claims sounded in negligence rather than fraud and therefore had a four-year limitations period. The court held that the common-law claims were timely to the extent they sounded in negligence. It did not decide whether the claims were barred by Apple’s articles of incorporation or whether they instead sounded in fraud.

Issue Preclusion

Issue preclusion is a rule that can prevent a party from relitigating an issue already decided in an earlier case. The defendants argued that two orders in the related state-court litigation prevented Klein from arguing that demand on Apple’s board was futile.

The court rejected that argument. It held that the earlier state trial-court order sustaining a demurrer while allowing amendment was not final enough to preclude litigation of the issue. It also held that the later appellate decision did not address the same demand-futility issue because it evaluated a different Apple board at a different time. The court therefore denied dismissal based on issue preclusion.

Demand Futility

The court held that Klein adequately pleaded demand futility as to Cook, Drexler, and Levinson. The allegations supported reasonable inferences that Cook, as an Apple senior executive and a member of both Apple’s and Nike’s boards, was involved in or aware of the alleged agreements; that Drexler, as J.Crew’s chief executive officer and chair, communicated with Steve Jobs about an agreement involving J.Crew; and that Levinson, as Genentech’s former chief executive officer, board chair, and Apple director, was involved in or aware of an agreement involving Genentech.

The court held that Klein did not adequately plead demand futility as to Iger or Jung. The allegations did not provide particularized facts showing that Iger knew about the Pixar-Apple agreement, had ratified illegal agreements, or lacked independence because of his relationship with Jobs. The allegations concerning Jung were largely conclusory and did not show that she knew about the agreements or faced a substantial likelihood of liability.

Because the Apple board had eight members when Klein filed suit, he needed to plead facts raising a reasonable doubt about at least four directors’ independence or disinterest. The complaint did not allege demand futility as to three other board members who were not defendants. Because Klein adequately pleaded futility as to only three of the five relevant defendants, the court held that he had not satisfied the pre-suit demand requirement and granted dismissal on that ground.

Disposition

The court granted defendants’ motion to dismiss the Section 14(a) claims based on the 2012 and 2013 proxy statements as time-barred. It denied the motion to dismiss the common-law claims as time-barred. It denied the motion to dismiss based on issue preclusion. It granted the motion to dismiss based on inadequate pleading of demand futility, with leave to amend.

The court allowed Klein to file an amended complaint within two weeks of the order’s entry. The amended complaint had to omit the 2012 and 2013 proxy claims and include particularized allegations addressing demand futility and continuous stock ownership. In a footnote, the court also stated that the complaint was dismissed with prejudice as to William V. Campbell because no motion to substitute a party was made within the required period after notice of Campbell’s death.