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