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IN RE SYMBOL TECHNOLOGIES SECURITIES LITIGATION

April 18, 1991

IN RE SYMBOL TECHNOLOGIES SECURITIES LITIGATION. TOSHIMI OYE, ON BEHALF OF SYMBOL TECHNOLOGIES, INC., PLAINTIFFS,
v.
JEROME SWARTZ, ET AL., AND SYMBOL TECHNOLOGIES, INC., NOMINAL DEFENDANT.



The opinion of the court was delivered by: Wexler, District Judge.

MEMORANDUM AND ORDER

Plaintiff Toshimi Oye brings this derivative action on behalf of Symbol Technologies, Inc. ("Symbol Technologies" or "the Corporation") against defendants Jerome Swartz ("Swartz"), Raymond R. Martino ("Martino"), Frederic P. Heiman ("Heiman"), Kenneth M. Schlenker ("Schlenker"), Charles S. Strauch ("Strauch"), Harvey P. Mallement ("Mallement"), Edwin A. Deagle, Jr. ("Deagle"), Saul P. Steinberg ("Steinberg"), Lowell C. Freiberg ("Freiberg"), Brian T. Burke ("Burke") and Richard Bravman ("Bravman"). Defendants are officers and directors of Symbol Technologies; it is alleged that they wrongfully used their positions as fiduciaries to secure personal gains to the detriment of the Corporation. The complaint asserts two grounds to support a cause of action for breach of fiduciary duty, alleging misappropriation of corporate information (Count I) and corporate waste (Count II). Jurisdiction is premised upon diversity of citizenship, pursuant to 28 U.S.C. § 1332. Presently before the Court is defendants' motion to dismiss the complaint pursuant to Rules 23.1 and 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons discussed below, defendants' motion is granted, with leave granted to plaintiff to amend the complaint to the extent noted in this opinion.

BACKGROUND

Symbol Technologies is a Delaware corporation with its principal executive offices located in Suffolk County, New York. The Corporation develops, manufactures and sells portable bar code scanning equipment which employs laser technology to read data encoded in bar code symbols. Additionally, Symbol Technologies, through its wholly-owned subsidiaries, MSI Data Corporation ("MSI") and Vectran Corporation ("Vectran"), designs, manufactures and sells a number of other products including portable data collection systems and radio York frequency data communication products. Symbol Technologies is a publicly-held corporation which currently trades on the New York, Boston, Philadelphia and Midwest Stock Exchanges. This action arises from a number of transactions involving the sale of Symbol Technologies stock during the period from May, 1989 through September, 1989. These same transactions are the subject of a class action against the Corporation which is also pending before this Court. The two actions were consolidated for pre-trial purposes by order dated June 21, 1990.

Plaintiff alleges that by April 30, 1989 (prior to the transactions complained of), defendants knew or should have known that Symbol Technologies was experiencing serious problems with orders for its portable data terminals, ("PDTs"), as well as with other MSI and Vectran products. Specifically, it is alleged that the lead times for these products had been extended beyond sixty days, which was the Corporation's stated time frame for product delivery, and that defendants knew or should have known that this would have an adverse impact on revenues, earnings, and the volume of orders. It is further alleged in the complaint that by April 30, 1989, defendants knew that the market for its core scanner products was maturing and that the Corporation was dependent on PDTs for a greater portion of revenues.

On July 25, 1989, Symbol Technologies reported net earnings and earnings per share for the three-month and six-month periods ending June 30, 1989. These reports indicated a substantial increase in earnings over the corresponding periods for 1988. The adverse information regarding lagging orders for PDTs and other MSI and Vectran products was not disclosed until October 30, 1989, after which the price of Symbol Technologies stock began to decline. Plaintiff contends that the defendants' failure to disclose adverse information known to them, in light of continuing representations by the Corporation regarding increased earnings, had the effect of artificially inflating the value of Symbol Technologies stock.

Count I of the complaint asserts a claim against the officers and directors for selling stock in the Corporation in the absence of disclosure. The information on which the defendants allegedly traded was non-public and was known to them only by virtue of their fiduciary status. As such, plaintiff's claim impliedly asserts that the information was an asset belonging to the Corporation; by using the information for their own benefit and to the detriment of Symbol Technologies, the defendants are alleged to have breached a fiduciary duty owed to the Corporation.

Count II of the complaint asserts a claim against the directors and officers for breach of fiduciary duty based on corporate waste. Essentially, plaintiff seeks to recover all present and future costs and expenses incurred by the Corporation in defending the class action litigation, or as a result of a settlement or judgment in that action. Plaintiff also alleges that the Corporation has suffered a present injury in the marketplace as a result of defendants' acts.

DISCUSSION

Several issues are raised by defendants' motion to dismiss. First, defendants challenge the entire complaint for failure to make a demand upon the board of directors prior to bringing this action, or to sufficiently plead the reasons for not doing so, as required by Rule 23.1 of the Federal Rules of Civil Procedure. Second, Count I of the complaint is challenged under Rule 12 (b)(6) as to certain defendants against whom no allegation is made that they personally sold stock or otherwise participated in the acts constituting the breach of duty that is alleged. Third, defendants challenge the sufficiency of the allegations contained in Count II, claiming that they are speculative and premature and therefore fail to state a claim upon which relief may be granted. Finally, this Court must consider whether a derivative action for breach of fiduciary duty should be permitted to proceed, and the extent to which fiduciaries may be held liable for damages, when a class action is also pending in which those same fiduciaries (the defendants herein) may be held liable for the same underlying conduct.

I. Motion to Dismiss Under Rule 23.1

Rule 23.1 of the Federal Rules of Civil Procedure requires that a complaint in a shareholder derivative action allege with particularity: (1) the plaintiff's efforts to obtain relief from the corporation prior to bringing the action; or (2) the reasons for not making that effort. See Fed.R.Civ.P. 23.1; Kaster v. Modification Sys., Inc., 731 F.2d 1014, 1017-18 (2d Cir. 1984). The first part of the Rule as stated above is referred to as the "demand requirement," and it is the general rule that a shareholder must make a demand upon the board of directors to bring the action on behalf of the corporation. Moreover, the shareholder must generally give the board of directors an opportunity to either take action, or refuse to do so, before bringing the suit derivatively. The second part of the Rule acknowledges that there are exceptional circumstances under which the demand requirement may be excused. See Fed.R. Civ.P. 23.1; see, e.g., Cathedral Estates v. Taft Realty Corp., 228 F.2d 85, 88 (2d Cir. 1955) (noting that "it is clear that under Rule 23 (b) and its predecessors a demand need not be made on the directors where such demand would be `futile,' `useless,' or `unavailing'") (citations omitted).

Until recently it has been unclear what the controlling law is when determining whether the demand requirement of Rule 23.1 is satisfied, or alternatively, excused. In a recently decided case, RCM Securities Fund, Inc. v. Heine, 928 F.2d 1318 (2d Cir. 1991), the Second Circuit clarified the proper influences of the federal rule and the state law pertaining to shareholder demand. In RCM, the Court held that:

  Rule 23.1 is a rule of pleading that creates a federal standard
  as to the specificity of facts alleged with regard to efforts
  made to urge a corporation's directors to bring the action in
  question. However, the adequacy of those efforts is to be
  determined by state law absent a finding that application of
  state law would be ...

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