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Starbucks Seeks Dismissal of Shareholders’ Amended Complaint

DEC. 12, 2017

David V. Myers et al. v. Troy Alstead et al.

DATED DEC. 12, 2017
DOCUMENT ATTRIBUTES
  • Case Name
    David V. Myers et al. v. Troy Alstead et al.
  • Court
    United States District Court for the Western District of Washington
  • Docket
    No. 2:16-cv-01580
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2017-100277
  • Tax Analysts Electronic Citation
    2017 WTD 240-30
    2017 TNT 240-29

David V. Myers et al. v. Troy Alstead et al.

DAVID V. MYERS and SHIVA Y. STEIN,
derivatively on behalf of STARBUCKS
CORPORATION,
Plaintiffs,
v.
TROY ALSTEAD, MARY N. DILLON,
ROBERT M. GATES, MELLODY HOBSON,
KEVIN R. JOHNSON, SCOTT MAW,
JOSHUA COOPER RAMO, HOWARD
SCHULTZ, CLARA SHIH, JAVIER G.
TERUEL, MYRON E. ULLMAN, III, CRAIG
E. WEATHERUP,
Defendants,
and

STARBUCKS CORPORATION,
Nominal Defendant.

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

NOMINAL DEFENDANT
STARBUCKS CORPORATION’S
REPLY IN SUPPORT OF MOTION
TO DISMISS AMENDED
COMPLAINT FOR BREACH OF
FIDUCIARY DUTIES AND UNJUST
ENRICHMENT

NOTE ON MOTION CALENDAR:
December 15, 2017


TABLE OF CONTENTS

INTRODUCTION

ARGUMENT

I. THE AMENDED COMPLAINT CONTAINS NO NEW ALLEGATIONS SHOWING THAT THE BOARD’S INVESTIGATION OF PLAINTIFFS’ DEMAND WAS INADEQUATE

II. THE BALLMER AND PAGE DECISIONS DO NOT REVIVE PLAINTIFFS’ CLAIM THAT THE BOARD’S INVESTIGATION WAS UNREASONABLE OR CONDUCTED IN BAD FAITH

A. The Court Considered and Distinguished the Ballmer and Page Decisions When It Granted the Company’s Motion to Dismiss the Prior Complaint

B. The Amended Complaint’s “Added” Allegations Are Nothing New and Do Not Show Starbucks Engaged in Illegal or Wrongful Conduct

C. The Ballmer Decision Does Not Constitute “Well-Settled” Law

CONCLUSION

TABLE OF AUTHORITIES

CASES

Auerbach v. Bennett, 47 N.Y.2d 619 (1979)

Baron v. Siff, 1997 WL 666973 (Del. Ch. Oct. 17, 1997)

Barovic v. Ballmer, 72 F. Supp. 3d 1210 (W.D. Wash. 2014)

Brehm v. Eisner, 746 A.2d 244 (Del. 2000)

Brosz v. Fishman, 2016 WL 7494883 (S.D. Ohio Dec. 29, 2016)

City of Orlando Police Pension Fund v. Page, 970 F. Supp. 2d 1022 (N.D. Cal. 2013)

Grafman v. Century Broad. Corp., 762 F. Supp. 215 (N.D. Ill. 1991)

Halpert Enters. v. Harrison, 2008 U.S. App. LEXIS 22557 (2d Cir. Oct. 15, 2008)

In re Abbott Labs. Deriv. S’holders Litig., 325 F.3d 795 (7th Cir. 2003)

In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011)

In re Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192 (D. Ariz. 2009)

In re Merrill Lynch & Co. Sec. Deriv. & ERISA Litig., 773 F. Supp. 2d 330 (S.D.N.Y. 2011)

Levine v. Liveris, 216 F. Supp. 3d 794(E.D. Mich. 2016)

Levine v. Smith, 591 A.2d 194 (Del. 1991)

Massey v. BAC Home Loans Servicing LP, 2013 U.S. Dist. LEXIS 147342 (W.D. Wash. Feb. 13, 2013)

Miller v. American Tel. & Tel. Co., 507 F.2d 759 (3d Cir. 1974)

Morefield v. Bailey, 959 F. Supp. 2d 887 (E.D. Va. 2013)

NASD Dispute Resolution, Inc. v. Judicial Council, 488 F.3d 1065 (9th Cir. 2007)

Quantum Tech. Partners II, L.P. v. Altman Browning & Co., 2009 U.S. Dist. LEXIS 53672 (D. Or. June 24, 2009)

Sciabacucchi v. Burns, 2016 U.S. Dist. LEXIS 99427 (S.D.N.Y July 29, 2016)

Thomas v. Bible, 983 F.2d 152 (9th Cir. 1993)

Zucker v. Hassell, 2016 WL 7011351 (Del. Ch. Nov. 30, 2016)

Zucker v. Hassell, 165 A.3d 288 (Del. 2017)


INTRODUCTION

As shown by the Company’s Motion to Dismiss, Dkt. #28 and Def. Ex. 1,1 the Amended Complaint suffers from a dearth of new allegations that were not previously considered and dismissed by the Court. Order, Dkt. #24. Similarly, the Opposition, Dkt. #30, merely repeats the same arguments made in Plaintiffs’ last opposition that were rejected by the Court. The Opposition contains no new arguments that the Board’s investigation was unreasonable or in bad faith. It contains no new arguments that the Company, its Board, or its officers violated the law or engaged in wrongdoing. The Court should dismiss the Amended Complaint with prejudice.

ARGUMENT

I. THE AMENDED COMPLAINT CONTAINS NO NEW ALLEGATIONS SHOWING THAT THE BOARD’S INVESTIGATION OF PLAINTIFFS’ DEMAND WAS INADEQUATE

Plaintiffs again argue that the Board’s investigation of their Demands was flawed because it did not interview the exact individuals Plaintiffs suggest, produce a long written report, or hire “independent” counsel to conduct the investigation. As noted in the Motion to Dismiss, the allegations on these points have not changed from the first complaint to the Amended Complaint. Dkt. #28 at 10 n.6. Not surprisingly, the arguments in the Opposition are virtually identical to the arguments advanced in response to the first motion to dismiss, and in some instances are verbatim recitations from Plaintiffs’ first opposition. Compare Dkt. #20 at 13-21, with Dkt. #30 at 12-19. As explained in Defendants’ prior briefing on these points, Dkt. #15 at 18-22, Dkt. #21 at 7-11, and Dkt. #28 at 6-10, Plaintiffs offer no convincing argument that the Board’s investigation was inadequate.

The bottom line is that “there is ‘no prescribed procedure that a board must follow” when responding to a demand. Order at 9 (quoting Levine v. Smith, 591 A.2d 194, 214 (Del. 1991), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000)); Dkt. #28 at 6-7 (citing additional authority). There is no requirement that a board interviews particular individuals, or even conducts interviews at all. See Quantum Tech. Partners II, L.P. v. Altman Browning & Co., 2009 U.S. Dist. LEXIS 53672, at *31 (D. Or. June 24, 2009); Dkt. #28 at 8 (citing additional authority). There is no requirement that a board’s investigation spans a certain number of meetings, or that a board’s discussion and decision regarding the matter fill a minimum number of minutes or hours. See Morefield v. Bailey, 959 F. Supp. 2d 887, 902 (E.D. Va. 2013); Dkt. #28 at 9 (citing additional authority). There is no requirement that a board writes or produces a written report. See Levine, 591 A.2d at 200; Baron v. Siff, 1997 WL 666973, at *1-3 (Del. Ch. Oct. 17, 1997); Dkt. #15 at 21-22 (citing additional authority). There is no requirement that a board retains independent counsel. See Grafman v. Century Broad. Corp., 762 F. Supp. 215, 220-21 (N.D. Ill. 1991); Levine, 591 A.2d at 214; Dkt. #15 at 20-21 (citing additional authority). It is all dependent upon the particular circumstances of the issue that the board must investigate. Plaintiffs’ citation to Brosz v. Fishman, 2016 WL 7494883, at *6 (S.D. Ohio Dec. 29, 2016), on this point is inapposite because the Amended Complaint does not (and indeed could not) claim that Wilson Sonsini was conflicted or acted unprofessionally in advising the Board. Besides, the Board itself conducted the investigation, including the interviews of witnesses, and did not delegate its responsibility to outside counsel.

II. THE BALLMER AND PAGE DECISIONS DO NOT REVIVE PLAINTIFFS’ CLAIM THAT THE BOARD’S INVESTIGATION WAS UNREASONABLE OR CONDUCTED IN BAD FAITH

A. The Court Considered and Distinguished the Ballmer and Page Decisions When It Granted the Company’s Motion to Dismiss the Prior Complaint

Although Plaintiffs admit that boards are “afforded wide latitude in how they conduct their investigation,” AC ¶ 89, they nonetheless contend that the Board’s investigation here was unreasonable and in bad faith because it did not follow the same investigative procedures conducted by the boards of Microsoft and Google, or deemed necessary by the courts reviewing those two investigations. Opp. at 1-6, 12-22 (citing Barovic v. Ballmer, 72 F. Supp. 3d 1210 (W.D. Wash. 2014); City of Orlando Police Pension Fund v. Page, 970 F. Supp. 2d 1022, 1024-25 (N.D. Cal. 2013). But the matters at issue and the investigations required by the boards of those two companies were vastly different than those at issue and investigated by the Starbucks Board. The “selection of appropriate investigative methods must always turn on the nature and characteristics of the particular subject being investigated. . . .” Auerbach v. Bennett, 47 N.Y.2d 619, 636 (1979); see also Dkt. #15 at 18-22 (citing additional authority). Here, the Starbucks Board conducted a reasonable investigation that was appropriate for the nature of the alleged wrong doing. See Dkt. #15 at 23-24 (citing authority and identifying investigations that were not deemed unreasonable that were far less fulsome than the one conducted by the Starbucks Board). As this Court ruled previously, “the facts of [Ballmer and Page] are immediately distinguishable from the instant matter.” Order at 10.

In Ballmer, 72 F. Supp. 3d at 1212-13, Microsoft’s board was required to investigate the culpability of directors and officers for the company’s continued violation of the terms of an antitrust settlement, despite repeated warnings by the European Commission, that required it to include “browser choice screens” in all Windows updates and systems. Id. Microsoft ultimately admitted that it had continued to violate the terms of the settlement even after the Commission’s warnings and paid a $732 million fine — the first time in history that the European Commission had punished a company for violating the terms of an antitrust settlement. Id. Through its investigation, the Microsoft board had to get to the bottom of how and why the company failed to comply with a settlement order, and then, after receiving notice from the Commission that it was in violation, persisted in violating the settlement. Id.

In Page, 970 F. Supp. 2d at1024-25, the Google board was required to investigate the culpability of directors and officers for the company’s continuing to allow and profit from certain Canadian pharmacies advertising on Google’s search engine for the illegal sale of prescription medication into the U.S., despite repeated warnings by regulators over many years, that ultimately resulted in a Department of Justice investigation, the company entering into a non-prosecution agreement, and Google admitting wrongdoing and paying a $500 million fine. Id. Through its investigation, the Google board had to get to the bottom of who was aware of the illegal advertising, who was aware of the repeated warnings, and how and why the company failed to heed them. Id.

This case is very different. Unlike Microsoft and Google, Starbucks did not ignore repeated warnings from government agencies that it was violating the law. The opposite is true. Starbucks and the Dutch tax authorities actually entered into an Advanced Pricing Agreement (“APA”) in 2007 that constitutes a “tax ruling” governing Starbucks’ payment of taxes in the Netherlands for the next ten years. AC ¶ 66. Unlike Microsoft and Google, Starbucks has not admitted any violation of law or wrongdoing. In fact, it is clear from the Dutch appeal of the EC Decision that Starbucks and the Netherlands believed when they entered into the APA, and continue to believe to this day, that the APA is lawful and proper. Even Plaintiffs admit that “tax rulings by national tax authorities, such as Starbucks’ APA with the Dutch government” are “often used to confirm transfer pricing arrangements” and “are not per se illegal.” AC ¶ 68. Unlike the Microsoft and Google situations, there was no mystery to anyone how Starbucks wound up paying the corporate taxes it did in the European Union; it did so through the APAan agreement it is not alleged to have violatedthat was well-known to Starbucks’ management and Board from the beginning, and was periodically reported on to the Board.

The procedures used in the Microsoft and Google investigations or deemed necessary by the courts in Ballmer and Page, therefore, would have been wildly disproportionate to the actual questions that needed answering for the Starbucks Board to reasonably evaluate the demands at issue in this case. See Sciabacucchi v. Burns, 2016 U.S. Dist. LEXIS 99427, at *26-27 (S.D.N.Y July 29, 2016) (declining to apply such standards and noting that Ballmer and Page are “best understood” as cases “requir[ing] a board to engage in a wider investigation” when “the company itself was liable for misconduct”). Plaintiffs’ “one size fits all” notion has been rejected by numerous courts. Dkt. #15 at 18-24 (citing authority). If Plaintiffs’ preferences were the rule, boards would be unable to fashion investigations appropriate to the matters at issue. It would deny them the opportunity to make their own business judgment and “exercise [their] broad discretion without excessive judicial fetters.” Halpert Enters. v. Harrison, 2008 U.S. App. LEXIS 22557, at *5-6 (2d Cir. Oct. 15, 2008); In re Merrill Lynch & Co. Sec. Deriv. & ERISA Litig., 773 F. Supp. 2d 330, 349 (S.D.N.Y. 2011); Dkt. #15 at 18-19 (citing additional authority). It would place form over substance, resulting in every shareholder demand letter triggering expensive and time-consuming investigations.

B. The Amended Complaint’s “Added” Allegations Are Nothing New and Do Not Show Starbucks Engaged in Illegal or Wrongful Conduct

The Court’s previous Order found that, unlike Microsoft and Google, “Starbucks is not accused of any illegal activity or wrongdoing. The Commissioner’s decision targeted the Netherlands’ actions in entering into the APA with Starbucks, and the resolution was focused on how the Netherlands could amend the wrongdoing by collecting the underpaid taxes.” Order at 10. In an effort to convince the Court that the Board investigation at issue in this case was unreasonable and in bad faith because it did not follow the same procedures performed by the boards of Microsoft and Google, Plaintiffs argue that they have “address[ed] the concerns expressed by the Court” with respect to Ballmer and Page by adding allegations in the Amended Complaint showing “direct wrongdoing.” Opp. at 2.

No Indication of Illegality or Wrongdoing. Plaintiffs allege that the EC Decision found that a transfer pricing report submitted by Starbucks to the Dutch in connection with the negotiation of the APA “failed to properly assess the arm’s length nature of commercial conditions” for transfer pricing purposes, and that the transfer price of a royalty payment between two Starbucks subsidiaries did not correctly reflect arms’ length market pricing. Opp. at 2, 12-17; AC ¶¶ 70, 71. Unlike the facts alleged in Ballmer and Page where the companies admitted violations of law, Starbucks and the Netherlands disagree with the EC Decision, do not admit that the APA violated any European Union law or rule, and have appealed the EC Decision.

If anything, the Amended Complaint indicates that the EC Decision was not a finding of wrongdoing by Starbucks. The EC Decision states that the Dutch “accepted” the transfer pricing “methodology” in the APA and in doing so the Dutch “confer[ed] a selective advantage” on Starbucks. AC ¶ 72. In fact, the sections of the EC Decision from which Plaintiffs lifted quotes for the Amended Complaint emphasize that “the Commission will explain why it considers that several of the methodological choices underlying the transfer pricing report should not have been accepted by the Dutch tax administration in the [Starbucks] APA.” EC Decision, Dkt. #17-2, Ex. 5 at ¶ 271 (emphasis added). Like the initial complaint, the Amended Complaint does not even specify any particular law that Plaintiffs allege Starbucks to have violated. The only law Plaintiffs cite is Article 107(1) of the Treaty on the Functioning of the European Union, which prohibits EU “Member States” from providing aid to companies. AC ¶¶ 11, 66, 72.

Plaintiffs argue that the decisions to enter into the APA and pay Dutch taxes consistent with the APA were not valid business judgments, and instead constituted corporate wrongdoing. In addition to Ballmer and Page, Plaintiffs cite to In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011), Miller v. American Tel. & Tel. Co., 507 F.2d 759 (3d Cir. 1974), and In re Abbott Labs. Deriv. S’holders Litig., 325 F.3d 795 (7th Cir. 2003). Opp. at 21. All of these decisions dealt with allegations of intentional, knowing or conscious violations of law. See Massey Energy, 2011 WL 2176479 at *20 (“knowingly causing [company] to seek profit by violating the law”); Miller, 507 F.2d at 763 (a conscious decision to ignore or perpetuate illegaility); Abbott Labs, 325 F.3d at 809 (same). Here, even if Starbucks violated a law (none is alleged), there are no allegations indicating that Starbucks or any Starbucks director, officer or executive knew it. In fact, such intentionality is virtually impossible in matters dealing with complicated transfer pricing guidelines and tax rulings with a foreign government. Cf. In re Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192, 1203, 1210-13 (D. Ariz. 2009) (no indication individuals knew accounting methods were incorrect when there were multiple Generally Accepted Accounting Principles that could result in different conclusions as to the proper accounting).

These Allegations Are Not New. The portions of the Amended Complaint that Plaintiffs claim contain the new allegations are simply quotations from and a summary of the EC Decision followed by repetitions of Plaintiffs’ allegations that the EC Decision revealed wrongful conduct by Starbucks. See Def. Ex. 1-27 to 1-29. The Court’s previous Order rejected exactly this allegation concerning the EC Decision: “Here, Starbucks is not accused of any illegal activity or wrongdoing. The Commissioner’s decision targeted the Netherlands’ actions in entering into the APA with Starbucks, and the resolution was focused on how the Netherlands could amend the wrongdoing by collecting the underpaid taxes.” Order at 10. The EC Decision was incorporated by reference into Plaintiffs’ initial complaint, and the Court considered and cited to the EC Decision in noting that the European Commission had not found wrongdoing by Starbucks.2 Id. (citing EC Decision, Dkt. #17-2, Ex. 5 at ¶ 103).

Repetition of facts already before the Court adds nothing to the allegations the Court has rejected and gives no reason for the Court to reconsider its holding that the EC Decision did not find that Starbucks engaged in illegal activity or wrongdoing. See Massey v. BAC Home Loans Servicing LP, 2013 U.S. Dist. LEXIS 147342, at *17 (W.D. Wash. Feb. 13, 2013) (dismissing amended complaint with prejudice where plaintiff failed “to allege any new facts”); Cf. Thomas v. Bible, 983 F.2d 152, 154 (9th Cir. 1993) (“Under [the law of the case] doctrine a court is generally precluded from reconsidering an issue that has already been decided by the same court. . . .”).

C. The Ballmer Decision Does Not Constitute “Well-Settled” Law

Citing Ballmer, Plaintiffs contend Defendants’ citation to cases applying Delaware law is “disingenuous” because it ignores “well-settled [ ] Washington law.” Opp. at 13. 3 Plaintiffs claim Ballmer creates a rule under Washington law that a board’s investigation is per se unreasonable when it does not include certain procedures. Opp. at 14. But a single case hardly amounts to “well-settled” law and, regardless, Ballmer is not binding. See NASD Dispute Resolution, Inc. v. Judicial Council, 488 F.3d 1065, 1069 (9th Cir. 2007) (“[A] district court opinion does not have binding precedential effect.”). Further, as explained above and as this Court previously recognized, Ballmer is readily distinguishable from the facts at hand. Order at 10.

To the extent Ballmer and Page stands for the proposition that a board’s investigation is unreasonable per se when it does not include certain procedures, Starbucks respectfully points out that these cases represent a minority position. See Dkt. #15 at 18-24 (citing authority). In fact, the Delaware Court of Chancery “has already declined to follow [Page] in a demand-refused context.” Zucker v. Hassell, 2016 WL 7011351, at *8 n. 100 (Del. Ch. Nov. 30, 2016), aff’d, 165 A.3d 288 (Del. 2017). Similarly, Levine v. Liveris, 216 F. Supp. 3d 794, 812 & n. 3 (E.D. Mich. 2016), concluded that Page’s reasoning about a board’s obligation to provide shareholders with an investigatory report “conflicts with the Delaware Supreme Court’s clear direction that the burden is on the plaintiff to seek information regarding the demand refusal.”

CONCLUSION

The Amended Complaint and Plaintiffs’ Opposition do nothing to change this Court’s conclusion that the Board’s investigation of Plaintiffs’ Demands was reasonable and in good faith. As such, Defendants request that the Amended Complaint be dismissed with prejudice.

Dated: December 12, 2017

Barry M. Kaplan
Barry M. Kaplan, WSBA #8661
Gregory L. Watts, WSBA #43995
Elon Slutsky, WSBA #50104
WILSON SONSINI GOODRICH & ROSATI, P.C.
701 Fifth Avenue, Suite 5100
Seattle, WA 98104-7036
Telephone: (206) 883-2500 | Fax: (206) 883-2699
Email: bkaplan@wsgr.com
Email: gwatts@wsgr.com
Email: eslutsky@wsgr.com

Attorneys for Defendants

FOOTNOTES

1Citations to “Amended Complaint” or “AC” are to the Amended Complaint, Dkt. #26. Citations to “AC Ex. __” are to exhibits attached to the Amended Complaint. Citations to “Order” or “Dkt. #24 are to the Court’s September 5, 2017 Order granting the Company’s motion to dismiss. Citations to “Def. Ex. __” are to the exhibits attached to the Declaration of Elon B. Slutsky dated October 31, 2017 (Dkt. #29). Citations to “MTD” and “Reply” are to Nominal Defendant Starbucks Corporation’s Motion to Dismiss filed Jan. 19, 2017 (Dkt. #15) and Nominal Defendant Starbucks Corporation’s Reply in Support of Motion to Dismiss filed Mar. 31, 2017 (Dkt. #21), respectively. Citations to “Dkt. #17-2” are to the Declaration of Elon B. Slutsky dated January 19, 2017. Citations to “MTD2” or “Dkt. #28” are to Nominal Defendant Starbucks Corporation’s Motion to Dismiss Amended Complaint filed October 31, 2017. Citations to “Opp” or “Dkt. #30” are to Plaintiffs’ Opposition to the Motion to Dismiss Amended Complaint filed November 21, 2017.

2Starbucks argued unopposed that the EC Decision was incorporated by reference into the initial complaint. Dkt. ## 18 & 24. The same is true of the Amended Complaint.

3Plaintiffs’ opposition to the first motion to dismiss also relied heavily on Ballmer, yet that opposition did not claim that Ballmer was controlling Washington precedent. Dkt. #20.

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Case Name
    David V. Myers et al. v. Troy Alstead et al.
  • Court
    United States District Court for the Western District of Washington
  • Docket
    No. 2:16-cv-01580
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2017-100277
  • Tax Analysts Electronic Citation
    2017 WTD 240-30
    2017 TNT 240-29
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