LAWRENCE ARDUINI, derivatively on behalf of International Game Technology, Plaintiff-Appellant,
PATTI S. HART; THOMAS J. MATTHEWS; PATRICK W. CAVANAUGH; ROBERT A. BITTMAN; RICHARD R. BURT; ROBERT A. MATHEWSON; ROBERT MILLER; DAVID E. ROBERSON; PHILIP G. SATRE, Defendants-Appellees, and INTERNATIONAL GAMING TECHNOLOGY, Nominal Defendant-Appellee
Argued and Submitted, San Francisco, California:
April 10, 2014.
[Copyrighted Material Omitted]
Appeal from the United States District Court for the District of Nevada. D.C. No. 3:11-cv-00255-ECR-VPC. Edward C. Reed, Jr., Senior District Judge, Presiding.
Shareholder Derivative Actions/Issue Preclusion
The panel affirmed the district court's dismissal of a shareholder derivative action on the basis that issue preclusion barred relitigation of whether plaintiff, Lawrence Arduini, made a sufficient " demand" on a corporation's board of directors before filing suit.
Under Federal Rule of Civil Procedure 23.1, a shareholder must either demand action from the corporation's directors before filing a shareholder derivative suit, or plead with particularity the reasons why such demand would have been futile.
The panel held that issue preclusion prevented Arduini from relitigating the issue of demand futility. The panel noted that before Arduini filed his derivative action against International Gaming Technology and its board of directors, four separate shareholders filed separate derivative suits against the company that were subsequently consolidated and dismissed. See Fosbre v. Matthews, 2010 WL 2696615 (D. Nev. July 2, 2010). The panel determined that the issue of demand futility was the same in both Fosbre and Arduini's action, and therefore there was an identity of issues.
The panel held that Arduini and the Fosbre plaintiffs were in privity because International Gaming Technology was the true party in interest and there was no indication that the Fosbre plaintiffs were inadequate representatives. Further, there was no inequity in applying issue preclusion because the Fosbre plaintiffs fully litigated their demand futility claim. There was no due process violation because there was no requirement that shareholders be given notice of dismissal in a derivative suit where the issue of demand futility is fully litigated and dismissed on the merits. Moreover, the panel noted that the record showed that Arduini's counsel in this case had actual notice of the Fosbre proceedings.
Francis A. Bottini, Jr. and Albert Y. Chang (argued), Chapin Fitzgerald Sullivan & Bottini LLP, San Diego, California, for Plaintiff-Appellant.
Richard G. Campbell, Jr. and Robert F. Meich, Armstrong Teasdale LLP, Reno, Nevada; Boris Feldman (argued), David S. Steuer, Cynthia Dy, and Cheryl W. Foung, Wilson Sonsini Goodrich & Rosati, Palo Alto, California, for Nominal Defendant-Appellee.
Before: Mary M. Schroeder and Consuelo M. Callahan, Circuit Judges, and Robert W. Pratt, Senior District Judge.[*] Opinion by Judge Callahan.
CALLAHAN, Circuit Judge:
Shareholders are required to make a " demand" on the corporation's board of directors before filing a derivative suit, unless they sufficiently allege that demand would be futile because the board would not act on the demand. Here, before Plaintiff Lawrence Arduini (" Arduini" ) filed his derivative action against International Gaming Technology (" IGT" ) and its board of directors, four shareholders filed separate derivative suits that were subsequently consolidated. The district court then dismissed the consolidated suit for failure to make a demand on the corporation's board or sufficiently allege demand futility, and on appeal, we affirmed that dismissal. The district court then dismissed Arduini's action, holding that Arduini had failed to make a demand on the IGT board and could not allege demand futility based on issue preclusion due to its ruling in the prior derivative suit. We hold that under Nevada law and the facts of this case, the district court properly held that issue preclusion barred relitigation of demand futility, and we affirm.
Defendant-Appellee International Game Technology (" IGT" ) is a Nevada corporation that makes and services electronic gaming systems. Appellant Arduini, an IGT shareholder, alleges that certain IGT senior officers made intentionally misleading statements about the bright financial prospects of IGT when, in fact, IGT's prospects were dim, and that IGT's board of directors failed to adequately oversee the officers and the company. Based on this alleged mismanagement, on April 8, 2011, Arduini filed a shareholder derivative complaint, Arduini v. Hart, No. 3:11-cv-255-ECR-VPC (D. Nev.). Arduini made no pre-suit demand on the current IGT board, instead alleging that demand would be futile. The case was eventually transferred to Senior District Judge Edward C. Reed.
Before Arduini filed his complaint, Judge Reed presided over Fosbre v. Matthews, an IGT derivative suit with substantially similar allegations. No. 3:09-CV-0467-ECR-RAM, 2010 WL 2696615 (D. Nev. July 2, 2010). Fosbre was a consolidated suit involving what were originally four separate derivative suits filed by four different IGT shareholders who were represented by four separate sets of counsel.
The Fosbre plaintiffs had made no demand on the IGT board. Rather, they argued that such a demand was excused because: 1) the IGT board extended the employment contract of Thomas J. Matthews (" Matthews" ), IGT's former CEO
and chairman of IGT's board of directors, and allowed him to resign rather than terminating him for cause; 2) Directors Burt, Mathewson, Miller, and Rentschler received such high compensation from IGT that their ability to impartially consider a demand was compromised; 3) Directors Burt, Hart, Mathewson, and Roberson were members of IGT's auditing committee and Directors Burt, Miller, Rentschler, and Satre were members of IGT's governance committee and faced a substantial likelihood of liability for breaches of their fiduciary duties as committee members; 4) Matthews was incapable of considering a demand due to his employment as IGT Chairman and Director Patti S. Hart (" Hart" ), who replaced Matthews as CEO, was incapable of considering a demand due to her new position; and 5) Directors Burt, Bittman, and Matthews engaged in insider trading of IGT stock. Id. at *3-7. On July 2, 2010, Judge Reed granted IGT's motion to dismiss in Fosbre, holding that the consolidated complaint's demand futility allegations were insufficient. Id. at *8.
The Fosbre plaintiffs appealed, and on April 2, 2012, we affirmed the district court's dismissal. Israni v. Bittman, 473 F.App'x 548 (9th Cir. 2012) (unpublished disposition). In Israni, we first rejected the allegations of director interest based on the directors' approval of the revised employment agreement for former CEO Matthews. The plaintiffs had argued that the directors approved Matthews' contract in an effort to have their own compensation increased. We found these allegations were insufficient to show the directors' interest because they did not explain how approval of the contract would influence the directors' compensation, nor why this approval was not a " valid exercise of business judgment." Id. at 550 (citing Brehm v. Eisner, 746 A.2d 244, 257, 263 (Del. 2000)).
Second, we rejected the complaint's allegations of director interest based on high director compensation, as a " director's receipt of compensation alone does not excuse demand, and the complaint did not provide sufficient factual allegations to show the fees here were unusual or uncustomary." Id. at 550-51 (citing Orman v. Cullman, 794 A.2d 5, 29 n.62 (Del. Ch. 2002)).
Third, we rejected the allegation that certain directors' membership on IGT's audit and governance committees supported demand futility because the complaint " failed to plead facts regarding what information the committee members saw and failed to act on" and did not " contain particularized facts showing that the committee members engaged in 'intentional misconduct, fraud or a knowing violation of the law,' as required under Nevada law." Id. at 551 (citing, inter alia, In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996); In re AMERCO Derivative Litig., 252 P.3d 681, 700-01 (Nev. 2011)).
Fourth, we rejected the plaintiffs' contention that the insider directors' employment with IGT supported a finding of demand futility " because the complaint did not allege the insider directors were beholden to an interested party." Id. (citation omitted). Finally, we declined to consider the alleged insider trading by IGT directors Burt, Bittman, and Matthews did not support a finding of demand futility because the Fosbre plaintiffs " could not show that a majority of the IGT board was not impartial even if demand were excused with respect to these three defendants." Id.
At the same time the Fosbre case was pending before Judge Reed, he also presided over
International Brotherhood of Electrical Workers Local 697 Pension Fund v. IGT, No. 3:09-CV-419-ECR-RAM (" IBEW " ), a securities fraud class action lawsuit raising similar allegations to those asserted in Fosbre and by Arduini. Judge Reed denied the defendants' motion to dismiss on March 15, 2011, finding that at least some of the plaintiffs' claims sufficiently alleged that IGT intentionally misled investors to the investors' detriment. 2011 WL 915115, at *9 (D. Nev. Mar. 15, 2011). The parties eventually settled the case and on October 22, 2012, IBEW was dismissed with prejudice, before any decision on the pending class certification motion.
Shortly after Judge Reed's March 2011 denial of the motion to dismiss in IBEW, Arduini filed his derivative complaint. On April 19, 2011, IGT filed a motion to dismiss in Arduini v. Hart arguing, inter alia, that the action should be dismissed under the doctrine of issue preclusion because demand futility was previously litigated in favor of IGT in the Fosbre case. Judge Reed granted the motion on March 14, 2012, finding an identity of issues and parties between Arduini and Fosbre. Arduini v. Hart, No. 3:11-cv-00255-ECR-UPC, 2012 WL 893874 (D. Nev. Mar. 14, 2012).
The district court first held that " demand futility was squarely at issue [in Fosbre ] and [Arduini's] reasons for failing to make a demand on the board are essentially the same in this action, or any additional reasons could have been raised in the previous action." Id. at *3. The court rejected Arduini's argument that his new factual allegations precluded a finding of identity of issues:
The fact that the Fosbre plaintiffs did not plead " every possible cause of action or include every possible time period or defendant does not alter the central issue -- whether demand on [defendants] would have been futile." In re Bed Bath & Beyond, No. 06-cv-5107 (JAP), 2007 WL 4165389, at *6 (D.N.J. Nov. 19, 2007). Nor do Plaintiff's arguments that he has allegations specific to the demand futility issue that are different from the allegations brought up in Fosbre preclude our use of issue preclusion. " Facts excusing a failure to make demand that could have been pleaded in the first complaint, or by amendment before dismissal, should be barred" because " a party who has litigated an ultimate fact may not bring forward ...