Guidance on Use of Deposition Testimony in Motions to Dismiss
The record upon which a court evaluates a motion to dismiss is often outcome-determinative. If based upon the well-pleaded allegations of a plaintiff's complaint, the court cannot determine that it is reasonably conceivable that the plaintiff may obtain a recovery, the court must dismiss the complaint. As a general matter, the plaintiff controls the record by virtue of how and what the plaintiff pleads. The Delaware Supreme Court has held, however, that the record fairly before the court on a motion to dismiss may include documents "integral to and incorporated into the complaint." The recent Court of Chancery decision in In re Gardner Denver Shareholders Litigation, Cons. C. A. No. 8505-VCN (Feb. 21, 2014), provides useful guidance concerning how the Court of Chancery will treat deposition transcripts where, as is happening more frequently, a plaintiff pursues but abandons a preliminary injunction after deposing several witnesses, and then amends the complaint by selectively quoting from the deposition record.
Gardner Denver involved a class action in which the plaintiff claimed that the defendant directors breached their fiduciary duties in agreeing to a merger between Gardner Denver and an affiliate of Kohlberg Kravis Roberts & Co. (KKR) and that KKR aided and abetted those breaches. The plaintiff withdrew his request for a preliminary injunction in exchange for waiver of certain contractual provisions in the merger agreement and additional disclosures to stockholders. Following the closing of the merger, the plaintiff amended his complaint with allegations that included "several quotations from, and numerous characterizations of, selective portions of deposition testimony obtained in expedited discovery." The defendants in their opening brief in support of their motion to dismiss quoted and characterized portions of the deposition testimony other than those explicitly or implicitly referenced in the amended complaint. The plaintiff then moved to strike those portions of the deposition testimony, which he argued were extraneous to his pleading and not properly before the court on a motion to dismiss.
Court Finds a Motion to Strike May be Appropriate
Although the court recognized that disputes about the record on a motion to dismiss are often resolved sua sponte by the trial court, it also held that nothing in Court of Chancery Rule 12(b)(6) "expressly prohibits a plaintiff from moving to ask the court to define the relevant universe of facts and documents integral to the complaint." The court appeared sympathetic to the plaintiff's contention that absent a motion to strike, the plaintiff would face the dilemma of "either amend[ing] his complaint to place in context the new material or run[ning] the risk that the court accepts the new material as bases to dismiss the complaint." The court noted as well that the defendants did not contest the availability of this procedural request and so resolved the issue before deciding the motion to dismiss.
Court Finds Deposition Transcripts Integral to Complaint
The court recognized that it would only consider the deposition transcripts if it concluded that each transcript was integral to the alleged claims. The five deposition transcripts at issue were of the former CEO of Gardner Denver, the board chair, the current CEO and CFO, who was also a director, a representative of the financial adviser to Gardner Denver, and a representative of KKR. The court found that the plaintiff could not complain about lack of notice of the deposition transcripts "if the plaintiff's action not only created the transcripts, but made them integral to the claims of the amended complaint." The court further noted that because the plaintiff took the depositions, "the transcripts do not suffer from the limitation on cross-examination that has motivated the court's excluding of certain documents from its review at this procedural stage." Consistent with precedent regarding when documents may be viewed as integral to a complaint, the court held that "a deposition transcript may be deemed integral to a plaintiff's claims if it was a substantial source for the allegations in the amended complaint." On that basis, the court found that all five deposition transcripts were substantial sources for the plaintiff's allegations underlying his substantive claims and found all five transcripts to be integral to the amended complaint.
Accepting Statements by Deponent and Cited by Defendants
It is hornbook law that on a motion to dismiss the court must accept as true the well-pleaded allegations in a complaint, including those based on deposition testimony, and must view in the plaintiff's favor all reasonable inferences from the plaintiff's allegations. Importantly, "reasonable inferences favoring the plaintiff cannot be disregarded in favor of contrary inferences favoring the defendant." The court therefore stated that "the parties should expect that the court will disregard the additional deposition transcript references quoted and characterized by the defendants in the opening brief absent endorsement of their truthfulness by the plaintiff, which the plaintiff has not done."
Gardner Denver provides important guidance on how the Court of Chancery will treat portions of deposition transcripts relied upon by a defendant in support of a Rule 12(b)(6) motion to dismiss that are not quoted or relied upon in the plaintiff's allegations in a complaint. Where the deposition transcripts are the source of the plaintiff's allegations, the court is likely to find that the transcripts are integral to the complaint. The court will make that determination transcript by transcript with each transcript viewed as a separate document. Unless the court finds, however, that the plaintiff has endorsed the truthfulness of the testimony upon which a defendant asks the court to rely, the court likely will not consider the additional transcript references on a motion to dismiss. In short, even though a plaintiff's extensive reliance upon deposition testimony may lead the court to conclude that the entire transcript is integral to the complaint, the court may not permit a defendant to rely on additional transcript testimony where the plaintiff has not endorsed the truthfulness of the statements at issue.