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In re Facebook, Inc. Shareholder Derivative Privacy Litigation

United States District Court, N.D. California

November 12, 2019

IN RE FACEBOOK, INC. SHAREHOLDER DERIVATIVE PRIVACY LITIGATION This Document Relates To ALL ACTIONS

          ORDER DENYING PLAINTIFFS' MOTION TO LIFT DISCOVERY STAY Re: Dkt. No. 114

          Haywood S. Gilliam, Jr. United States District Judge.

         Pending before the Court is Plaintiffs' motion to lift the Private Securities Litigation Reform Act (“PSLRA”) discovery stay. See Dkt. No. 114-1 (“Mot.”). The Court finds this matter appropriate for disposition without oral argument and the matter is deemed submitted. See Civ. L.R. 7-1(b). After careful consideration, the Court DENIES Plaintiffs' motion to lift the stay.

         I. BACKGROUND

         The Court assumes familiarity with the facts and briefly recounts the factual and procedural history relevant to the present motion. Plaintiffs bring this consolidated shareholder derivative action against nominal Defendant Facebook and individual Defendants for claims related to Facebook's data privacy protection policies and practices, in the wake of the revelation that Cambridge Analytica misappropriated millions of Facebook users' information for use in political campaigns. See Dkt. No. 56 (“Compl.”) ¶¶ 1-15. Before filing the operative complaint, Plaintiffs did not make a demand on the Board, nor did they make a books and records demand under § 220 of Delaware General Corporation Law. See id. ¶ 378.

         In July 2018, the Court held that the PSLRA automatic discovery stay applied to this case, because the derivative complaint asserted federal claims under the Securities Exchange Act. Dkt. No. 65. The Court rejected Plaintiffs' argument that they would suffer undue prejudice if the Court did not lift the PSLRA discovery stay. Id. at 2. Two months later, Plaintiff Natalie Ocegueda made a books and records demand under § 1601 of the California Corporations Code in California State Superior Court (“State Court Action”). See Dkt. No. 93-3. Defendants filed a motion to stay the inspection of Facebook's corporate books and records, which the Court granted in February 2019. See Dkt. No. 111. In doing so, the Court found that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) permitted the Court to stay discovery proceedings in the State Court Action, and that the relevant considerations weighed in favor of doing so. Id. at 3.

         On March 22, 2019, the Court granted Defendants' motions to dismiss and dismissed all of Plaintiffs' derivative state claims without prejudice to reassertion in the Delaware Court of Chancery. Dkt. No. 113. The Court upheld the enforceability of an exclusive forum selection clause, making the Delaware Court of Chancery the exclusive forum for a derivative action. Id. at 7-12. But because the Delaware Court of Chancery did not have jurisdiction over Plaintiffs' federal securities claims, the Court separately addressed those claims and found that Plaintiffs failed to plead demand futility under FRCP 23.1. Id. at 12-22. The Court therefore dismissed the federal securities claims, but gave Plaintiffs an opportunity to amend their complaint to plead particularized allegations demonstrating that demand was futile. Id. at 25.

         Plaintiffs then filed this motion requesting that the Court lift the PSLRA discovery stay in light of its order granting Defendants' motions to dismiss. See generally Mot. According to Plaintiffs, “circumstances [ ] changed” in the less than two months between the Court's order staying the State Court Action and the filing of their motion, which purportedly warrants lifting the PSLRA discovery stay. Id. at 1.

         II. DISCUSSION

         As an initial matter, the Court notes that Plaintiffs are not clear as to the contours of the relief they seek. Their motion claims to request “limited relief from the stay of discovery under the [PSLRA]” to “aid in pleading demand futility.” Mot. at 1. Under this theory, Plaintiffs seek “[m]any, if not all, of the requested records” that were “produced by Facebook to plaintiffs in related litigation, including substantially similar derivative actions and inspection demand enforcement proceedings in the Delaware Court of Chancery.” Id. at 2. But Plaintiffs also contend that they have an independent right to the “specified corporate records of Facebook” requested in the State Court Action, which the Court already stayed under the SLUSA. See Mot. at 14; Dkt. No. 111. Notably, Defendants argue that the documents requested in the State Court Action are different than and go “far beyond anything that has been produced by Facebook to any shareholder.” Dkt. No. 118 (“Opp.”) at 8. Thus, it is not entirely clear to the Court what specific materials Plaintiffs seek. Further, Plaintiffs are inconsistent as to whether they are relying on Delaware or California law for the proposition that they have an independent right to a books and records inspection, even with a PSLRA stay in place.

         In an effort to avoid confusion, the Court separates Plaintiffs' apparent theories and analyzes each one independently. For the reasons discussed below, the Court finds that regardless of the theory on which Plaintiffs purport to proceed, they have failed to establish that the Court should lift the PSLRA discovery stay so that they can obtain either documents produced by Facebook to other litigants, or the documents requested in their State Court Action.

         A. Documents Produced in Other Proceedings

         The Court first addresses what it construes as Plaintiffs' request to lift the PSLRA discovery stay so that they can obtain documents produced to “a half-dozen other Facebook stockholders.” See Mot. at 10.

         Under the PSLRA, “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.” 15 U.S.C. § 78u-4(b)(3)(B); SG Cowen Sec. Corp. v. U.S. Dist. Court for N. Dist. of CA, 189 F.3d 909, 912-13 (9th Cir. 1999) (“[D]iscovery should be permitted in securities class actions only after the court has sustained the legal sufficiency of the complaint.”). While the Ninth Circuit has not directly addressed the applicability of the PSLRA automatic discovery stay to derivative actions, courts in this circuit have found that the PSLRA does stay discovery in derivative actions alleging violations of federal securities laws. See, e.g., In re Asyst Techs., Inc. Derivative Litig., No. C-06-04669 EDL, 2008 WL 916883, at *2 (N.D. Cal. Apr. 3, 2008); In re Countrywide Fin. Corp. Derivative Litig., 542 F.Supp.2d 1160, 1179-80 (C.D. Cal. 2008); In re Marvell Tech. Group, Ltd. Deriv. Litig., No. C-06-03894 RMW, 2007 WL 1545194, at *2 (N.D. Cal. May 29, 2007); In re Altera Corp. Deriv. Litig., No. C 06-03447 JW, 2006 WL 2917578 (N.D. Cal. Oct. 11, 2006); Melzer v. CNET Networks, Inc., No. C 06-03817 WHA, 2006 WL 3716477, at *2 (N.D. Cal. Dec. 15, 2006).

         Here, Plaintiffs essentially repackage the arguments from their first motion seeking to lift the PSLRA discovery stay. They again argue that they will suffer undue prejudice because they are at an “increasing information disadvantage in relation to other interested parties” to whom Defendants “already produced documents and information.” Mot. at 6-9; see also Dkt. No. 60 at 4-6 (prior motion arguing that Plaintiffs would be at a disadvantage “if denied access to documents produced to other plaintiffs and government ...


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