Delaware Business Litigation Report

Chancery Confirms the Challenges in Pleading Caremark and Non-Shareholder Action Disclosure Claims

Fisher v. Sanborn, C.A. No. 2019-0631-AGB (Del. Ch. Mar. 30, 2021)
Under Court of Chancery Rule 23.1, a plaintiff attempting to bring a derivative action on behalf of a corporation faces a heightened “particularized” pleading standard. This pleading challenge is compounded when a plaintiff attempts to bring a Caremark failure of oversight claim – “possibly the most difficult theory in corporate law.” Similarly, a plaintiff alleging false or misleading disclosures not made in connection with soliciting shareholder action faces the additional pleading challenge of demonstrating that those disclosures were knowing or deliberate.

Here, the derivative plaintiff alleged both a Caremark and a non-shareholder action disclosure claim against certain Lending Tree directors and officers. Caremark claims can be pled in two ways: (1) by establishing an “utter failure” to implement a board level monitoring system, or (2) by establishing that the board consciously disregarded “red flags” thereby permitting violations of applicable law. The plaintiff attempted to plead a Caremark claim under both rationales, arguing that the defendants had both failed to monitor compliance with FTC laws at the board level, and permitted violations of appliable FTC laws by consciously ignoring red flags. For his disclosure claim, the plaintiff claimed that defendants, who allegedly had knowledge of violations of FTC laws, breached their duty of loyalty by making false and misleading statements in connection with the FTC’s investigation into these violations. 

The defendants moved to dismiss, arguing that plaintiff had failed to meet the pleading standard for either claim. The Court agreed. Noting that plaintiff acknowledged the existence of both a board audit committee as well as a risk committee charged with assessing FTC rule compliance, the Court found that plaintiff failed to plead that defendants “utterly failed” to implement a board-level monitoring system. The Court also found that the allegations that defendants had knowledge of an FTC investigation and that the Board was presented with documents showing an increase in customer complaints unrelated to FTC violations, did not constitute “red flags” giving notice of alleged continuing FTC violations. Thus, the Court dismissed the Caremark claim. The Court also dismissed plaintiff’s disclosure claim, finding that plaintiff failed to establish that the statements at-issue were misleading on their face or made “in bad faith – knowingly or intentionally.”

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