Case 3:19-cv-06880-RS Document 91 Filed 04/07/22 Page 1 of 9
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`UNITED STATES DISTRICT COURT
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`NORTHERN DISTRICT OF CALIFORNIA
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`IN RE ALPHABET DERIVATIVE
`STOCKHOLDER LITIGATION
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`Case No. 19-cv-06880-RS
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`ORDER GRANTING MOTION TO
`DISMISS
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`I. INTRODUCTION
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`In this shareholder derivative action, Plaintiffs seek to hold Alphabet, Inc., and its directors
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`liable for breach of fiduciary duties and unjust enrichment predicated on the company’s alleged
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`violation of the Children’s Online Privacy Protection Act (“COPPA”). 16 C.F.R. § 312. Having
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`come up short on their initial attempt to show demand futility, Plaintiffs’ renewed effort fares no
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`better. The essential facts remain unchanged: the Board reasonably thought YouTube was
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`compliant with COPPA because the FTC had labeled it a general audience site, and YouTube had
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`no actual knowledge of any violations. The FTC’s novel interpretation of the law—that individual
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`channels within YouTube could be child-directed—does not render the board’s actions
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`unreasonable, as they had set up and exercised adequate oversight functions. While Plaintiffs point
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`to memos previously unmentioned, they do not move the Complaint across the threshold for
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`demand futility. Thus, for the reasons further set out below, Alphabet’s motion to dismiss is
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`granted and individual Defendants’ motion to dismiss is denied as moot.
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`Case 3:19-cv-06880-RS Document 91 Filed 04/07/22 Page 2 of 9
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`A. YouTube’s COPPA Compliance
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`II. BACKGROUND
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`Alphabet owns YouTube, the world’s largest video-sharing service. Initially, Alphabet did
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`not believe YouTube was subject to COPPA. The statute prohibits collecting children’s data
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`without parental consent if they are under the age of 13. It applies when a website or online
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`service is “directed to children,” or there is “actual knowledge” that data is being collected from
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`children. Actual knowledge is established only when a site learns an individual user is a child
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`through the entry of a birthdate, birthyear, or current grade in school. 64 Fed. Reg. 59889–92. A
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`site that is not “child-directed” is a “general audience” site. Alphabet did not believe YouTube was
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`such a general audience site for several reasons. Most of its content was not child-directed, and its
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`terms of service prohibit children under 13 from using YouTube’s services without the permission
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`of a parent or guardian. Crucially, its belief was bolstered by the FTC referring to YouTube as a
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`general audience site in a 2013 amendment to COPPA rules. 78 Fed. Reg. 3972, 3982 n.126. In
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`2015, Google launched YouTube Kids as a child-directed mobile application intended for children
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`ages 2 to 12.
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`The FTC later began investigating YouTube’s COPPA compliance, and eventually filed a
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`complaint against Alphabet. The case was based on a novel theory whereby individual YouTube
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`channels directed towards children counted as child-directed sites within YouTube. Upon the
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`filing of the complaint, the parties settled for $170 million. The settlement did not include an
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`admission of liability. Google later released a web-based version of YouTube Kids, started
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`requiring YouTube channel owners to identify their child-directed content on the platform, and
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`limited data collection of YouTube channels aimed at children.
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`B. Previous Complaint
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`In the Verified Consolidated Amended Complaint (“the previous Complaint”), Plaintiffs
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`averred that Alphabet violated COPPA and its Board of Directors knew the company was
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`noncompliant. Plaintiffs asserted Defendants breached their fiduciary duties of care and loyalty for
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`two reasons. First, the directors failed to implement a board-level system of monitoring or
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`ORDER GRANTING MOTION TO DISMISS
`CASE NO. 19-cv-06880-RS
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`Case 3:19-cv-06880-RS Document 91 Filed 04/07/22 Page 3 of 9
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`reporting on child safety. Second, they failed to respond in good faith to red flags, specifically the
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`FTC investigation and consumer complaints concerning alleged violations of COPPA.
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`Plaintiffs argued demand futility by averring the majority of the Board could not conduct
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`an independent and objective investigation into the purported COPPA violation because the
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`directors faced a substantial likelihood of liability for their alleged misconduct. Plaintiffs relied on
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`the fact that Defendants knew of the magnitude of child-directed content on YouTube combined
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`with the absence of COPPA compliance policies and internal controls. Plaintiffs pointed to a
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`supposed lack of Board minutes and materials discussing COPPA compliance. They emphasized
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`this was the case even after Defendants were repeatedly informed of the FTC investigation.
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`Plaintiffs accused the Audit Committee and Board of not adopting a COPPA compliance policy
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`despite their knowledge of the investigation. The alleged motivation behind the Board’s conduct
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`was to increase Alphabet’s profits.
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`C. Order Dismissing Previous Complaint
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`Defendants moved to dismiss the previous Complaint on the grounds that Plaintiffs failed
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`to plead demand futility. Alphabet’s motion was granted because Plaintiffs failed to satisfy the
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`Rales demand futility standard, as the facts provided were not sufficient to create a reasonable
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`doubt that a majority of the Board was disinterested or independent. Rales v. Blasband, 634 A.2d
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`927 (Del. 1993). Further, Plaintiffs did not show the board acted with scienter, as required by the
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`exculpatory provision in Alphabet’s charter. See Wood v. Baum, 953 A.2d 136, 141 (Del. 2008);
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`see also In re Paypal Holdings, Inc. Shareholder Derivative Litigation, 2018 WL 466527, at *3
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`(N.D. Cal. Jan. 18, 2018). (The individual Defendants’ motion was denied as moot.)
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`Plaintiffs did not adequately aver interestedness, because they did not show a substantial
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`likelihood of liability, or that individual directors acted with knowledge of wrongdoing. The
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`Board’s knowledge of the FTC investigation, even coupled with a lack of increased compliance
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`measures, did not establish the board was acting in an interested manner because of a fear of
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`liability. Instead, its conduct evidenced their good-faith belief that it was in compliance, which
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`was supported by the FTC’s previous reference to YouTube as a general audience site. The Board
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`ORDER GRANTING MOTION TO DISMISS
`CASE NO. 19-cv-06880-RS
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`Case 3:19-cv-06880-RS Document 91 Filed 04/07/22 Page 4 of 9
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`monitored the FTC’s investigation; that the Audit Committee did much of this work was evidence
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`of reasonable delegation, not abdication by the full Board. Ultimately, Plaintiffs’ conclusory
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`allegations and the FTC’s no-liability settlement did not show demand futility. Thus, Plaintiffs
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`failed to satisfy the first Rales prong. The Complaint was dismissed in its entirety, with leave to
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`amend.
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`D. Additions in the Operative Complaint
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`In the current Complaint, Plaintiffs repeat most of the arguments and facts laid out in the
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`previous Complaint, but offer several additional facts. Only the two most important additions will
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`be discussed in detail, as they are representative, and even considering all the other changes,
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`Plaintiffs do not establish demand futility. First, Plaintiffs describe how in early 2015, the FTC
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`sent educational letters to businesses appearing to collect personal information from children
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`under 13 to alert them of amendments to COPPA, reminding them that they needed to be in
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`compliance. It is not confirmed, however, whether YouTube or Google were recipients of the
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`letter.
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`Second, Plaintiffs point to a confidential memorandum received by the Board stating “[i]n
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`the U.S., we mitigated “privacy regulatory swirl” around the YouTube Kids launch.” Plaintiffs
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`claim the “privacy regulatory swirl” was brought to the Board’s attention as a result of a complaint
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`filed with the FTC on behalf of consumer watchdog groups about Alphabet’s COPPA compliance.
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`Plaintiffs accuse Defendants of making no effort to investigate or modify YouTube to ensure
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`compliance with COPPA in response to this complaint.
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`Defendants move for judicial notice and incorporation by reference of various documents.
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`Plaintiffs do not oppose these requests. Opp’n at 4 n.2. In any case, these requests are immaterial
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`to this disposition.
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`III. LEGAL STANDARD
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`A basic principle of corporate law is that a corporation is run by its management and the
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`corporation itself has the right to make claims. See Potter v. Hughes, 546 F.3d 1051, 1058 (9th
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`Cir. 2008). Because a shareholder derivative suit is an extraordinary action that allows a
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`Case 3:19-cv-06880-RS Document 91 Filed 04/07/22 Page 5 of 9
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`shareholder to step into the shoes of a corporation and make claims on behalf of the corporation,
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`Federal Rule of Civil Procedure 23.1 “establishes stringent conditions for bringing such a suit.”
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`Quinn v. Anvil Corp., 620 F.3d 1005, 1012 (9th Cir. 2010). Rule 23.1 requires a shareholder either
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`to demand action from the corporation’s directors before suing or plead with factual particularity
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`the reasons why such a demand would have been futile. Fed. R. Civ. P. 23.1(b)(1).
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`Traditionally, Rales and Aronson were the two tests used to determine whether demand
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`was futile. Rales, 634 A.2d at 927; Aronson v. Lewis, 473 A.2d 805 (Del. 1984). The Delaware
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`Supreme Court recently affirmed a three-part test, the Zuckerberg test, that essentially combines
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`Aronson and Rales and is used to assess whether a derivative plaintiff has met their pleading
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`burden to show that a pre-suit demand would have been futile. See United Food & Com. Workers
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`Union & Participating Food Indus. Empls. Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034,
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`1059 (Del. 2021). This new test requires the court to determine, on a director-by-director basis,
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`“(i) whether the director received a material personal benefit from the alleged misconduct that is
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`the subject of the litigation demand; (ii) whether the director faces a substantial likelihood of
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`liability on any of the claims that would be the subject of the litigation demand; and (iii) whether
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`the director lacks independence from someone who received a material personal benefit from the
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`alleged misconduct that would be the subject of the litigation demand or who would face a
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`substantial likelihood of liability on any of the claims that are the subject of the litigation
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`demand.” Id. at 1058–59. If any of these conditions are met for at least half the members on the
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`board, then demand is excused as futile. Id. Cases decided under Rales and Aronson are still good
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`law. Id.
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`A. Material Personal Benefit
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`IV. DISCUSSION
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`Once more, Plaintiffs have not established demand futility. First, Plaintiffs have not
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`demonstrated that any of the directors stood to gain a material personal benefit from the alleged
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`COPPA violation. A personal benefit is one not equally shared by the stockholders. Zuckerberg,
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`262 A.3d at 1055. Plaintiffs argue the directors ignored COPPA compliance for the sake of profit
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`ORDER GRANTING MOTION TO DISMISS
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`Case 3:19-cv-06880-RS Document 91 Filed 04/07/22 Page 6 of 9
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`through YouTube’s child-directed content and targeted behavioral advertising. Plaintiffs’ claims
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`are vague, e.g., they do not aver a specific amount of revenue Alphabet derived from its
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`supposedly offensive conduct, nor how much the directors gained from ignoring it. Beyond that,
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`Plaintiffs’ theory is not that any of the directors personally benefited from the alleged violation;
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`rather, Plaintiffs argue the directors indirectly benefitted from increased revenue. Yet the
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`stockholders would have benefitted just as much. This is exactly the type of common benefit that
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`Zuckerberg held to be insufficient to show demand futility. 262 A.3d at 1055.
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`B. Substantial Likelihood of Liability
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`Second, Plaintiffs have not shown that the directors faced a substantial likelihood of
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`liability. To establish substantial likelihood of liability, Plaintiffs must make a threshold showing,
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`based on particularized facts, that their claims have some merit. Rales, 634 A.2d at 934, 936
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`(plaintiffs must show “the potential for a director’s liability is not a ‘mere threat’ but instead rises
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`to a ‘substantial likelihood’”). As addressed in the order dismissing the previous complaint,
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`Google’s charter exculpates directors for breaches of fiduciary duties, as authorized by Del. Code
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`8 § 102(b)(7) (2006). Thus, Plaintiffs must show the majority of the Board acted with scienter or
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`bad faith. Zuckerberg, 262 A.3d at 1042 n.18.
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`1. Caremark
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`A claim for breach of fiduciary duty challenging a board’s oversight failure is
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`characterized as a Caremark action. In re Caremark Int'l, 698 A.2d 959 (Del. Ch. 1996). Plaintiffs
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`must allege particularized facts that (1) “the directors utterly failed to implement any reporting or
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`information system or controls”; or (2) “having implemented such a system or controls, [the
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`directors] consciously failed to monitor or oversee its operations.” Stone ex rel. AmSouth
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`Bancorporation v. Ritter, 911 A.2d 362, 369 (Del. 2006). This is “possibly the most difficult
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`theory in corporation law upon which a plaintiff might hope to win a judgment.” Caremark, 698
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`A.2d at 967. Plaintiffs provide no basis to conclude that the Board could have possibly committed
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`a Caremark violation.
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`ORDER GRANTING MOTION TO DISMISS
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`Case 3:19-cv-06880-RS Document 91 Filed 04/07/22 Page 7 of 9
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`a. Adequate Reporting Systems
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`The Complaint provides no particularized facts to demonstrate Alphabet’s Board lacked
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`adequate reporting and monitoring of legal, regulatory and privacy risks. Alphabet’s Audit
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`Committee was responsible for oversight of legal risk, including regulatory compliance, and
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`provided regular reports to the Board of Directors. The Audit Committee held special meetings to
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`discuss the government investigation involving COPPA, cooperated with the FTC during its
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`investigation, and provided reports to the Board. This suffices to show good faith efforts to
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`implement a board-level monitoring and reporting system. See, e.g., Rojas v. Ellison, No. 2018-
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`0755-AGB, 2019 WL 3408812, at *8–9 (Del. Ch. July 29, 2019); see also Riley v. Chopra, No.
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`21-55518, 2022 WL 614450, at *1 (9th Cir. Mar. 2, 2022) (audit committee’s efforts and updates
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`were enough). Plaintiffs have not satisfied prong one of Caremark, particularly in light of the need
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`to show scienter or bad faith. Zuckerberg, 262 A.3d at 1042 n.18.
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`Plaintiffs try to draw parallels between this case, Marchand, and Boeing to show the Board
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`failed to implement the necessary system of monitoring or reporting. Marchand v. Barnhill, 212
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`A.3d 805, 822 (Del. 2019) (no board committee oversaw food safety, even though it was critical
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`for a food company); In re Boeing Company Derivative Litigation, No. 2019-0907-MTZ, 2021
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`WL 4059934, *5–7 (Del. Ch. Sep. 7, 2021) (none of Boeing’s committees was chartered to
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`oversee plane safety). However, these cases are distinguishable. In both cases the relevant
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`committees failed to oversee an issue, and the full board’s oversight was also lacking to the point
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`that there was an utter failure to monitor critical compliance risks. By contrast, here, the Audit
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`Committee Charter specifically tasks the committee with monitoring a bevy of specific risks,
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`including privacy, legal, and regulatory risks. Second Amended Complaint ¶¶ 166–67.
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`b. Satisfactory Monitoring
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`Plaintiffs also fall short of pleading a claim under Caremark’s second prong, that the
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`directors failed to monitor or oversee the information reporting operations they had implemented.
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`Plaintiffs’ do not support their averment regarding YouTube’s violation of COPPA through actual
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`knowledge of the collection of children’s data. The FTC has provided guidance to assess when a
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`ORDER GRANTING MOTION TO DISMISS
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`general audience site has actual knowledge of children accessing and providing personal
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`information. See 64 Fed. Reg. 59889–92; 78 Fed. Reg. 3972. Unless users input their age or a
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`proxy for age when registering, or a concerned parent reports to the site that the particular user is a
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`child, then the operator has no actual knowledge. Plaintiffs aver that YouTube was aware of child-
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`directed channels, but neither this nor their other averments amount to a viable claim that
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`YouTube was actually aware of underage users, let alone that the Board failed to monitor any
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`information.
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`Plaintiffs continue to assert Defendant’s reaction to the FTC’s investigation constitutes a
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`failure to monitor. As stated in the previous order, however, the mere existence of regulatory
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`investigations or litigation “do not necessarily demonstrate that a corporation’s directors knew or
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`should have known that the corporation was violating the law.” Order on MTD, at 7 (relying on
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`Rojas, 2019 WL 3408812, at *11). Defendants had a reasonable belief YouTube was not in
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`violation of COPPA. Yet they still undertook the sensible course of monitoring and complying
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`with the FTC’s investigation. That it was not the entire Board’s most pressing concern does not
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`mean the Board failed to monitor the investigation. The Board believed it was a general audience
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`site, as the FTC had referred to it as such before. The Board’s actions must be judged with the
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`information it had at the time, not with the benefit of hindsight, knowing that the FTC would
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`introduce a novel interpretation of the law. Neither the educational letters, which YouTube may or
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`may not have even received, nor the references to a “privacy regulatory swirl,” change this
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`analysis. Again, this conclusion is bolstered by the fact that Plaintiffs would also need to show
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`scienter or bad faith, a bar they have not approached. Plaintiffs have not established a substantial
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`likelihood of liability, so they cannot show demand futility.
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`C. Independence and Unjust Enrichment
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`Because Plaintiffs cannot establish any director’s interestedness, there is no need to
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`evaluate independence. Zuckerberg, 262 A.3d at 1059; see also In re Oracle Corp. Derivative
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`Litigation, 2011 WL 5444262, at *6 (N.D. Cal. Nov. 9, 2011). Because Plaintiffs’ breach of
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`fiduciary duty claim is dismissed, their unjust enrichment claim must be dismissed as well. In re
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`ORDER GRANTING MOTION TO DISMISS
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`Case 3:19-cv-06880-RS Document 91 Filed 04/07/22 Page 9 of 9
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`PayPal Holdings, Inc. S’holder Derivative Litig., No. 17-cv-00162-RS, 2018 WL 466527, at *6,
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`n.10.
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`CONCLUSION
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`For the reasons set forth above, Alphabet’s motion to dismiss is granted. As Plaintiffs have
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`already amended their Complaint once and further amendment would appear to be futile, dismissal
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`is without leave to amend. See AmerisourceBergen Corp. v. Dialysist W., Inc., 465 F.3d 946, 951
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`(9th Cir. 2006). The individual Defendants’ motion is denied as moot, without prejudice.
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`IT IS SO ORDERED.
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`Dated: April 7, 2022
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`______________________________________
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`RICHARD SEEBORG
`Chief United States District Judge
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`ORDER GRANTING MOTION TO DISMISS
`CASE NO. 19-cv-06880-RS
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