A federal judge in California on Friday largely granted Facebook’s request to dismiss a shareholder derivative suit targeting the company’s directors over its alleged mishandling of users’ private data, finding that most claims could be dealt with in a similar dispute pending in Delaware Court of Chancery.
U.S. District Judge Haywood Gilliam Jr. of the Northern District of California found that the forum selection provision in the company’s bylaws routing derivative claims to Delaware didn’t deprive plaintiffs suing the company and board members in the wake of Facebook’s Cambridge Analytica scandal of their day in court. The judge, however, gave plaintiffs an opportunity to amend claims they brought under the federal securities laws—claims where the Delaware court would not have jurisdiction.
“Although the Delaware Court of Chancery does not have jurisdiction to hear plaintiffs’ federal claims, the court has discretion to sever the federal claims and dismiss the remaining claims to be brought in the prescribed forum,” Gilliam wrote. “This path is appropriate here, as the Delaware Court of Chancery ‘unquestionably has a well-recognized expertise in the field of state corporation law,’” he wrote
Representatives from Facebook, which is represented in the case by lawyers at Gibson, Dunn & Crutcher, didn’t immediately respond to a request for comment Friday.
Mark Molumphy of Cotchett, Pitre & McCarthy, whose firm is lead counsel in the matter, said the plaintiffs plan to proceed on their federal claims, which are based on allegations that Facebook didn’t adequately disclose its practices regarding third-party access to user data in public securities filings. Molumphy noted that the initial complaint was filed in July 2018 after public revelations about Cambridge Analytica’s unauthorized access of Facebook data. Molumphy said that government investigations and congressional testimony since that time have shown “this is not a case of unauthorized accessed by a single company.”
“This was authorized access to numerous companies and device makers, including some of the largest companies in the world,” Molumphy said. “The world has changed in nine months at Facebook and the number of details and facts that have come out since July of last year are game changers.”
In Friday’s order, Gilliam found that the plaintiffs had not sufficiently shown they met their burden to plead demand futility—to show that it would have been useless to take their concerns to the board before filing suit. Gilliam found that Facebook clearly took steps in the wake of an earlier privacy-related settlement with the Federal Trade Commission to put in place internal controls and monitoring practices related to user privacy.
“Plaintiffs simply allege that the Cambridge Analytica leak proves that these were inadequate,” wrote Gilliam, adding that generalized allegations weren’t enough for plaintiffs to meet their burden. “The court recognizes that Facebook’s alleged privacy issues are a serious matter. But the standard for demand futility is strict, and requires a particularized showing,” he wrote.
Cotchett’s Molumphy said Friday that plaintiffs plan to ask Gilliam to allow them to enforce a state court writ for Facebook’s corporate books and record that has been stayed with the judge’s ruling pending.
“We believe that’s going to be a treasure trove of insider information about board knowledge of this conduct—who was involved and when they knew,” Molumphy said.
Read Judge Gilliam’s ruling: