United States District Court, D. Arizona
DAVID G. CAMPBELL, UNITED STATES DISTRICT JUDGE
Plaintiffs ask the Court to lift the stay in this matter. Doc. 57. Plaintiffs’ motion is fully briefed, and the Court held a hearing on February 17, 2016. The Court will lift the stay in part, permit Plaintiffs to amend their complaint, and then permit Defendants to file a motion to dismiss. The Court will not allow discovery at this stage of the litigation. If the Court denies the motion to dismiss, it will decide whether additional litigation should occur before resolution of the securities fraud action.
A. Partial Lifting of the Stay.
In March 2012, securities fraud class actions were filed against First Solar, Inc., and several of First Solar’s officers and directors, and were consolidated into a single proceeding. See CV-12-00555. Shareholder derivative actions followed, and were consolidated in this case. On December 17, 2012, the Court granted Defendants’ motion to stay this litigation pending resolution of the securities fraud case. Doc. 45.
The securities fraud case proceeded apace through the summary judgment stage, but the Court encountered inconsistent case law in the Ninth Circuit that bore directly on the motion for summary judgment. The Court denied the motion for summary judgment, but suggested that the Ninth Circuit take an interlocutory appeal to clarify its case law concerning loss causation because the clarification could result in summary judgment in the securities fraud case. The Ninth Circuit agreed, and the securities fraud case is now on appeal. Defendants estimate that the initial decision on that appeal will be rendered in mid-2017. If en banc proceedings are required, the appeal could stretch into 2018.
Given this lengthy and unexpected delay in the securities fraud case, the Court concludes that this derivative action should not remain stayed entirely. There appear to be some preliminary issues that can and should be resolved now. Whether the resolution of those issues should be followed by more complete litigation of this action is a question to be decided later. For now, the Court concludes that the stay should be lifted to permit amendment of the complaint and resolution of a motion to dismiss focused on Plaintiffs’ alleged lack of standing under Rule 23.1.
This is a derivative action brought by shareholders of First Solar, Inc. on behalf of the corporation. The Supreme Court has provided this explanation of derivative actions:
The derivative form of action permits an individual shareholder to bring suit to enforce a corporate cause of action against officers, directors, and third parties. Devised as a suit in equity, the purpose of the derivative action was to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of faithless directors and managers. To prevent abuse of this remedy, however, equity courts established as a precondition for the suit that the shareholder demonstrate that the corporation itself had refused to proceed after suitable demand, unless excused by extraordinary conditions.
Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95-96 (1991) (formatting, quotation marks, and citations omitted).
Federal Rule of Civil Procedure 23.1 governs shareholder derivative actions. Consistent with the historical nature of these suits, the rule imposes several requirements, including that the complaint allege with particularity “any effort made by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members, ” and any “reasons for not obtaining the action or not making the effort.” Fed.R.Civ.P. 23.1(b)(3).
Plaintiffs’ amended complaint alleges that they “did not make a demand on the Board to institute this action against the Individual Defendants because such demand would be a futile and useless act.” Doc. 36, ¶ 216. The complaint contains 21 lengthy paragraphs explaining why a demand would have been futile. Id., ¶¶ 217-232, 234-238. Plaintiffs also allege that any demand was excused because the directors’ conduct was not a valid exercise of business judgment. Id., ¶ 233.
Defendants make clear that they intend to file a motion to dismiss based on Plaintiffs’ failure to make a demand on First Solar’s board and Plaintiffs’ alleged inability to show that such a demand would have been futile. Doc. 59 at 14. Plaintiffs intend to oppose such a motion, and ask the Court to permit limited discovery and an amendment of their complaint before the motion is filed. Defendants respond that discovery is not allowed in a Rule 23.1 case until Plaintiffs have cleared the threshold requirements of Rule 23.1.
Federal courts of appeals have held that the availability of discovery in a Rule 23.1 case is within the discretion of the district court. See, e.g., Halebian v. Berv, 644 F.3d 122, 133 (2nd Cir. 2011); Fagin v. Gilmartin, 432 F.3d 276, 285 (3rd Cir. 2005). Defendants note that the Ninth Circuit has not addressed this issue, but cite district court cases holding that discovery is not permitted until a plaintiff has cleared the Rule 23.1 threshold. See, e.g., In re MIPS Techs., Inc. Derivative Litig., 542 F.Supp.2d 968, ...