Federal District Court In Delaware Dismisses Derivative Action Against E.I. DuPont Board

Posted On Tuesday, September 30, 2014
By: Douglas K. Rosenblum

Earlier this month, Judge Sue Robinson of the U.S. District Court for the District of Delaware granted Defendants’ Motion to Dismiss Plaintiff’s Second Amended Complaint in E.I. Du Pont de Nemours & Co. ex rel. Zomolosky v. Kullman, et al., Civ. No. 13-94-SLR, 2014 U.S. Dist. LEXIS 127853 (D.Del. Sept. 12, 2014).  Robert Zomolosky is a Du Pont shareholder who brought this derivative litigation against various former and present members of Du Pont’s Board of Directors over their handling of multiple of licensing and litigation issues against Monsanto Company. 

In bringing a derivative action, shareholders must generally demonstrate that they have made a demand upon the Board to take the requested action.  Demand is excused, however, “if a plaintiff raises a reasonable doubt that a majority of the board was disinterested or independent, or that the challenged acts were a result of the board’s valid business judgment.”  When a board did not act, refrained from acting, or violated its oversight duties, “the plaintiff must create a reasonable doubt that, as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.”  In this case, Plaintiff alleges that the board refrained from preventing infringement of Monsanto’s patents, thereby leading to litigation against the company.  Further, Plaintiff alleges that the board condoned wrongdoing, as demonstrated by giving Du Pont’s CEO, Ellen Kullman, a raise.

Interestingly, the Court noted that Du Pont’s charter absolves the board of directors of personal liability for breaches of fiduciary duty except those based on fraudulent, illegal, or bad faith conduct.  The Court found that the allegations raised in the Second Amended Complaint were insufficient to infer that the directors had constructive knowledge that Du Pont was infringing and that failure to prevent such infringement was a breach of their fiduciary duties.  Although Plaintiff sought to establish that the board failed to exercise oversight in the face of red flags – namely Du Pont paying repeated patent infringement settlements – the Court found Plaintiff’s allegations to be conclusory and legally insufficient.  Du Pont’s actions with respect to Monsanto were taken upon consideration and consultation with counsel.  The Court refused to infer a “pattern of unlawful infringement” based upon litigation that dated back 10 years.  Further, business plans and “board letter updates” were provided to the directors.  The Court noted that these documents provided board members with updates on research and development, but the Court refused to infer that these documents provided notice of infringement.

As this case demonstrates, the burden the Plaintiff must meet in pleading such derivative actions is a relatively high one.  Boards of directors are given rather wide latitude in relying on their in-house and outside counsel in strategic legal matters.