IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
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`IN RE: FACEBOOK, INC.
`DERIVATIVE LITIGATION
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`:
`:
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`CONSOLIDATED
`C.A. No. 2018-0307-JRS
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`RHODE ISLAND GROUP’S APPLICATION FOR
`CERTIFICATION OF INTERLOCUTORY APPEAL
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`Pursuant to Supreme Court Rule 42 and Court of Chancery Rule 72(b),
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`Plaintiffs Employees’ Retirement System of Rhode Island, City of Warwick
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`Retirement System (collectively, the “Rhode Island Plaintiffs”), and their counsel
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`(collectively, the “R.I. Group”)1 move for certification of an interlocutory appeal
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`from the Court’s October 5, 2021 Order Establishing Leadership Structure (the
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`“Order”), which appointed the competing “CalSTRS Group” to lead this action.
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`In accordance with Supreme Court Rule 42(b)(iii), the Rhode Island Plaintiffs
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`and their counsel have determined in good faith that this application meets the
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`criteria set forth in Supreme Court Rule 42(b).
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`I.
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`INTRODUCTION
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`Courts around the country look to the Delaware Court of Chancery for
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`guidance on important questions of corporate law. And this Court has now held—
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`for the first time—that there is no inherent conflict in allowing plaintiff’s counsel
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`1 Defined terms have the same meaning as those used in the Rhode Island Group’s
`application for leadership.
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`EFiled: Oct 15 2021 01:20PM EDT
`Transaction ID 67018009
`Case No. 2018-0307-JRS
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`who are litigating derivative claims on behalf of a Delaware corporation to
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`simultaneously represent different clients in other actions who assert direct claims
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`for monetary damages against that same corporation.2
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`That conclusion places the Order in significant tension with prior decisions of
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`this Court and the courts of other jurisdictions. And given this Court’s prominent
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`role as the “Mother Court of corporate law,”3 the Order will likely be cited for years
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`to come and have significant implications for the practice of stockholder litigation
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`in state and federal courts across the country. The Order presents a substantial issue
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`of material importance that merits appellate review before a final judgment.
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`II.
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`BACKGROUND
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`The Order appointed three law firms as co-lead counsel to prosecute this
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`derivative action on behalf of the nominal defendant, Facebook. Two of those
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`firms—Kaplan Fox and Scott+Scott—are currently representing other clients who
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`are prosecuting direct claims against Facebook for money damages.
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`Kaplan Fox is liaison counsel to a class of consumers asserting privacy claims
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`against Facebook.4 And Scott+Scott is co-lead counsel in two, related class actions
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`2 As discussed below, neither Ebix nor Tesla involved lawyers representing different
`clients bringing direct claims against the company for monetary damages.
`3 Kamen v. Kemper Fin. Servs., Inc., 908 F.2d 1338, 1343 (7th Cir. 1990), rev’d on
`unrelated grounds, 500 U.S. 90 (1991).
`4 Ex. B. to Cook Aff. (filed Aug. 3, 2021) (Trans. ID 66816840).
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`2
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`by advertisers. In Styleform IT v. Facebook, Inc., et al., No. CGC-18-571075 (Cal.
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`Sup. Ct.), Scott+Scott’s client asserts federal racketeering claims against Facebook
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`and Zuckerberg on behalf of a putative class of advertisers.5 Scott+Scott also
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`represents advertisers in Klein v. Facebook, Inc., 20-CV-08570-LHK (N.D. Cal.),
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`who allege claims under federal antitrust laws. In both cases, Scott+Scott’s
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`advertiser clients allege that Facebook and Zuckerberg misled advertisers, in the
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`2012 to 2015 timeframe, by promising it would share more user data than it would
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`ultimately provide.6 Here, by contrast, Scott+Scott’s stockholder clients allege that,
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`during that same timeframe, Zuckerberg and other individual defendants caused
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`Facebook to defraud users by promising users that it would share less user data than
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`it actually provided.7 Exhibit A provides a comparison of overlapping allegations.
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`III. ARGUMENT
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`A. Standard Of Review
`Pursuant to Supreme Court Rule 42(b)(i), the Court may certify an
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`interlocutory appeal when “the order of the trial court decides a substantial issue of
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`5 Ex. D (Styleform complaint); Ex. E (Styleform motion; signed by Scott+Scott); Ex.
`F (Styleform reply; signed by Scott+Scott) (previously filed as Exs. 1-3 to Cook
`Letter (Sept. 17, 2021) (Trans. ID 66941533)).
`6 Ex. D (operative complaint in Styleform) (previously filed as Ex. 1 to Cook Letter
`(Sept. 17, 2021) (Trans. ID 66941533)) ¶¶1-33; Klein v. Facebook, 20-CV-08570-
`LHK, ECF 86 (Am. Compl.) ¶¶1-23.
`7 Ex. C (CalSTRS Plaintiffs’ operative complaint) (available at Trans. ID 66773507)
`¶¶128-158.
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`material importance that merits appellate review before a final judgment.” If, after
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`consideration of the eight factors enumerated in Rule 42(b)(iii), and an “assessment
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`of the most efficient and just schedule to resolve the case,” the Court determines that
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`the “likely benefits outweigh the probable costs, such that interlocutory review is in
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`the interests of justice,” then the Court may certify the application.
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`B. This Is A Substantial Issue Of Material Importance That Merits
`Appellate Review Before A Final Judgment
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`Applying the equally strict standard that governs petitions for a writ of
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`
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`mandamus,8 federal courts have recognized that, in the right circumstances, it is
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`appropriate to grant interlocutory review of leadership decisions because there is no
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`other, realistic avenue of review available.9
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`The Court should reach the same conclusion here. The R.I. Group recognizes
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`that interlocutory appeals should be exceptional. This is an exceptional matter—in
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`8 Bauman v. U.S. Dist. Court, 557 F.2d 650, 654 (9th Cir. 1977) (“mandamus will
`issue only in ‘drastic,’ ‘exceptional’ and ‘extra-ordinary’ circumstances.”).
`9 In re Mersho, 6 F.4th 891, 902 (9th Cir. 2021) (granting petition for mandamus
`where, as here, “Petitioners [had] no realistic alternative to challenge the [trial]
`court's decision absent [interlocutory] relief.”); Cohen v. U.S. Dist. Ct., 586 F.3d
`703, 713 (9th Cir. 2009) (“mandamus is the proper vehicle to challenge the
`appointment of lead plaintiff at this stage in the litigation.”); In re Cavanaugh, 306
`F.3d 726, 728–29 (9th Cir. 2002) (“the Cavanaugh group petitioned for a writ of
`mandamus, arguing that it should have been appointed lead plaintiff. Because the
`district court’s order raises new and important problems, and issues of law of first
`impression, we conclude that it is appropriate to consider the issues at this time.”)
`(cleaned up).
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`which “there are substantial benefits that will outweigh the certain costs that
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`accompany an interlocutory appeal”10— for two reasons.
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`First, the question presented is an important and recurring one that might
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`otherwise evade appellate review. In this high-profile case, the Order has endorsed
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`what the Court has previously described as a “conflict” that “should be apparent to
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`everyone.”11 The Court of Chancery affirming that lawyers can act as fiduciaries for
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`a Delaware corporation in derivative litigation while simultaneously representing
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`other clients in other actions who are prosecuting multi-million-dollar direct claims
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`for damages against that same corporation is a statement that will have dramatic
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`implications for the way that the stockholder-plaintiff bar operates.
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`It will not only change the dynamics of derivative litigation in the Court of
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`Chancery, but it will also influence the way that federal securities claims are litigated
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`in federal court, where there is substantial authority concluding that this is an
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`10 Sup. Ct. R. 42(b)(ii).
`11 Brandin v. Deason (“Affiliated Computer Services”), 2123-VCL (Del. Ch. May
`9, 2007) (Transcript) (Ex. G) at 54.
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`impermissible conflict for both lawyers12 and plaintiffs.13
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`12 In re Altria Grp., Inc. Derivative Litig., 2021 WL 2566758, *3 (E.D. Va.) (“Gilbert
`and Sandys have raised issues of potential conflicts with Motley Rice bringing this
`suit on behalf of Altria while simultaneously representing plaintiffs suing Altria in
`other actions. Although the Court need not decide now whether this disqualifies
`Motley Rice, as other factors weigh in favor of appointing SGS and Scott+Scott, the
`possibility of a conflict of interest weighs against the appointment of Motley Rice as
`lead counsel.”); Ahn v. Hanil Dev. Corp., 2008 WL 11340365, *3 (C.D. Cal.)
`(“[T]he simultaneous representation of Plaintiff’s individual claims against HDI and
`Plaintiff's derivative claims on behalf of HDI, qualifies as an open and obvious
`ethical violation on the part of Plaintiff’s counsel. Accordingly, Plaintiff’s counsel
`are disqualified from representing Plaintiff as a derivative representative.”); Stull v.
`Baker, 410 F. Supp. 1326, 1336–37 (S.D.N.Y. 1976) (“[I]t is difficult to understand
`how an attorney can properly represent the interests of a corporation and its present
`shareholders in a derivative action brought on their behalf, and, at one and the same
`time, properly represent its present and/or former shareholders in a class action
`against the corporation, without compromising his independence of professional
`judgment and loyalty to these two groups of clients with potentially conflicting
`interests.”); Ruggiero v. Am. Bioculture, Inc., 56 F.R.D. 93, 95 (S.D.N.Y. 1972)
`(“[T]here is [also] a substantial question as to whether the attorneys for the Freed
`plaintiffs can represent them in the derivative suit and the class action [against the
`nominal defendant] without violating the Canons of Ethics.”)
`13 See, e.g., Joe Schroeder Legacy, LLC v. Serv. 247 of Illinois, Inc., 2021 WL
`170729, *4 (N.D. Ill.) (“[C]ourts that have confronted a similar scenario, where the
`plaintiffs in a derivative suit have directly sued the corporation previously, have
`routinely held that the plaintiffs cannot fairly and adequately represent the
`corporation.”); Tatintsian v. Vorotyntsev, 2018 WL 2324998, *1 (S.D.N.Y.)
`(“Because pursuing direct and derivative claims simultaneously in this action
`presents an impermissible conflict of interest that may prevent Tatintsian from fairly
`and adequately representing the interests of Shoplink, Tatintsian’s derivative claims
`must be dismissed.”); In re Bank of Am. Corp. Sec., Derivative, & Employee Ret.
`Income Sec. Act (ERISA) Litig., 2010 WL 5248815, *1 (S.D.N.Y.) (“[A] plaintiff
`who maintains a direct claim against a corporation is not a fair and adequate
`representative of other shareholders in enforcing a right of the corporation
`derivatively.”); Wall St. Sys., Inc. v. Lemence, 2005 WL 292744, *3 (S.D.N.Y.) (“An
`individual shareholder has a conflict of interest, and therefore cannot adequately
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`Exhibit B provides a list of decisions from federal courts in the First, Second,
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`Third, Fourth, Fifth, Seventh, Ninth, and Eleventh Circuits as well as state courts in
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`Connecticut, Illinois, Maryland, Massachusetts, and New York, all concluding that
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`someone who is litigating direct claims against a corporation cannot adequately
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`represent that corporation in a derivative action. But courts around the country look
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`to Delaware for guidance and “‘best practices’ of corporate governance” and
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`corporate litigation.14 If Delaware says that it is permissible for plaintiff’s counsel in
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`a derivative action to simultaneously represent clients who are directly suing the
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`nominal defendant for damages in another action, other jurisdictions will listen.
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`Second, the R.I. Group has no other realistic avenue to obtain review of the
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`represent other shareholders, when he simultaneously brings a direct and derivative
`action.”); see also Ex. B (collecting cases).
`14 Frank v. Elgamal, 2014 WL 957550, *20 n.217 (Del. Ch.) (citing Myron T. Steele
`& J.W. Verret, Delaware’s Guidance: Ensuring Equity
`for
`the Modern
`Witenagemot, 2 VA. L. & BUS. REV. 189, 206 (2007) (“The Delaware judges, from
`their vantage point at the center of the corporate governance arena, offer their
`insights to the community of those who regularly think about best practices, and in
`doing so can help to bring certain questions to the forefront of the collective mind
`on these issues.”); E. Norman Veasey & Christine T. Di Guglielmo, What Happened
`in Delaware Corporate Law and Governance from 1992–2004? A Retrospective on
`Some Key Developments, 153 U. PA. L. REV. 1399, 1404 (2005) (“Delaware judges
`have had a substantial role in shaping best practices in corporate governance.”);
`Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?,
`44 UCLA L. REV. 1009, 1016 (1997) (“Delaware courts generate in the first instance
`the legal standards of conduct (which influence the development of the social norms
`of directors, officers, and lawyers) largely through what can best be thought of as
`‘corporate law sermons.’”)).
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`Court’s decision.15 Revisiting the leadership decision after final judgment would
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`require undoing the results of years of litigation, at the risk of extreme prejudice to
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`all of the parties. If there is to be meaningful appellate review, it must be now.
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`C. The Order Creates A Conflict Of Authority On An Important
`Question of Law
`Two significant factors that support certification of an interlocutory appeal are
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`whether “[t]he interlocutory order involves a question of law resolved for the first
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`time in this State” or “[t]he decisions of the trial courts are conflicting upon the
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`question of law.”16 Here, as the Order recognized, the Order conflicts with Duke
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`Energy.17 It is also in tension with Affiliated Computer Services,18 and Yahoo!.19 The
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`Order is also in tension with Delaware authority addressing the fiduciary obligations
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`of plaintiff’s counsel in a derivative action. Just as, in a class action, “representative
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`15 Mersho, 6 F.4th at 902.
`16 Sup. Ct. R. 42(b)(iii)(A)-(B).
`17 Order at 10-11 n.23 (citing, with “But see” signal, In re Duke Energy Corp. Deriv.
`Litig., 7705-CS (Del. Ch. Dec. 21, 2012) (Transcript) (Ex. H) at 27 (“when it comes
`to … third-party suits against your company … you cannot simultaneously be a
`derivative plaintiff and then be rooting for the third party to win.”)).
`18 Affiliated Computer Services, Tr. at 54 (it “should be apparent to everyone, that
`there is a conflict” when a law firm seeks to represent “both … a derivative plaintiff
`and … a class plaintiff in litigation” against the nominal defendant).
`19 Police and Fire Retirement System of The City of Detroit v. Yahoo!, Inc., 3561-
`CC (Del. Ch. Mar. 4, 2008) (Transcript) (Ex. I) at 13 (firm seeking leadership was
`also prosecuting direct claims in federal court in California), 41-42 (“The other thing
`that troubles me, frankly, is the California litigation and whether or not that puts
`the … firm in a bind being out there[.]”).
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`plaintiffs and their counsel voluntarily accept a fiduciary obligation towards
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`members of the putative class,”20 derivative plaintiffs and their counsel assume a
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`fiduciary relationship with the company.21 It is difficult to understand how a law
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`firm that owes fiduciary duties to both Facebook and a class of plaintiffs suing
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`Facebook faces anything other than the “inherent conflict of interest” that disables
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`other dual fiduciaries.22
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`Finally, it would be appropriate for the Court to certify an interlocutory appeal
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`because this is the first time that any court in this state has held that counsel may
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`simultaneously represent clients bringing derivative claims on behalf of a Delaware
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`20 In re M & F Worldwide Corp. S’holders Litig., 799 A.2d 1164, 1174 n.34 (Del.
`Ch. 2002).
`21 Parfi Holding AB v. Mirror Image Internet, Inc., 954 A.2d 911, 942 (Del. Ch.
`2008) (“A derivative plaintiff serves in a fiduciary capacity”) (cleaned up); In re S.
`Peru Copper Corp. S'holder Derivative Litig., 52 A.3d 761, 767 n.5 (Del. Ch. 2011)
`(same) aff’d sub nom. Americas Mining Corp. v. Theriault, 51 A.3d 1213 (Del.
`2012); In re Fuqua Indus., Inc. S’holder Litig., 752 A.2d 126, 129 (Del. Ch. 1999)
`(same); Louisiana Mun. Police Employees’ Ret. Sys. v. Pyott, 46 A.3d 313, 350 (Del.
`Ch. 2012) (“the California plaintiffs’ firms failed to fulfill the fiduciary duties they
`voluntarily assumed as derivative action plaintiffs.”), rev’d on other grounds, 74
`A.3d 612 (Del. 2013).
`22 In re Tilray, Inc. Reorganization Litig., 2021 WL 2199123, *17 (Del. Ch.).
`The Order is also inconsistent with Delaware’s typical practice of requiring separate
`counsel for the corporation, once a derivative action moves past the pleadings stage
`because of the potential for conflicts. Brandin v. Gottlieb, 2000 WL 1005954, *26
`(Del. Ch.) (“In derivative suits brought in this court, the corporation typically has
`separate counsel…”); Kolbe v. Polaroid Corp., 1988 WL 110511, *1 (Del. Ch.) (“in
`a derivative action, it is the practice to have separate counsel for the corporation and
`the defendant directors.”).
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`corporation and different clients who are asserting direct claims against that
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`corporation for money damages.23
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`Neither Ebix nor Tesla is to the contrary.24 Unlike here, both Ebix and Tesla
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`involved direct and derivative claims brought by the same clients—making it less
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`likely that any conflict would arise. Unlike here, both Tesla and Ebix involved claims
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`brought in the same action—making it much easier for the Court to monitor and
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`guard against conflicts. And, unlike here, neither Tesla nor Ebix involved direct
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`claims that sought monetary damages from the company or would otherwise cause
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`it harm.
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`In Tesla, plaintiffs brought direct and derivative claims. But none of the direct
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`claims were brought against the company. Rather, both the direct and derivative
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`claims were brought against the directors, including the company’s controller, Elon
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`Musk.25 In Ebix, the only count that was asserted directly against the corporation
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`was for a declaratory judgment concerning the terms of an “Acquisition Bonus
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`Agreement” with another defendant (the Company’s CEO).26 If plaintiffs had
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`23 Sup. Ct. R. 42(b)(iii)(A).
`24 Contra Order at 10-11 n.23. Because the CalSTRS Group did not cite Ebix or
`Tesla until its final brief, the R.I. Group had no opportunity to address those cases
`in its prior briefing.
`25 In re Tesla Motors, Inc. Stockholder Litig., 2018 WL 1560293, *1 (Del. Ch.).
`26 In re Ebix, Inc. Stockholder Litig., 2014 WL 3696655, *1 (Del. Ch.). The
`remaining claims were all direct or derivative fiduciary claims against individual
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`10
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`prevailed on that count, the effect would have been to benefit the company by
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`preventing the CEO from obtaining a bonus to which he was not contractually
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`entitled.27 That is very different than the situation presented here, where
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`Scott+Scott’s clients in the direct actions are seeking multi-million-dollar damage
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`awards against Facebook.
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`IV. CONCLUSION
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`The R.I. Group respectfully requests that this Court certify the Order for
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`interlocutory appeal.
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`Dated: October 15, 2021
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`OF COUNSEL:
`
`BLOCK & LEVITON LLP
`Jason M. Leviton
`Joel Fleming
`Lauren G. Milgroom
`260 Franklin Street, Suite 1860
`Boston, Massachusetts 02110
`(617) 398-5600
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`BLOCK & LEVITON LLP
`
` /s/ Nathan A. Cook
`Nathan A. Cook (#4841)
`Mae Oberste (#6690)
`3801 Kennett Pike, Suite C-305
`Wilmington, DE 19807
`(302) 499-3600
`
`Counsel for Plaintiffs Employees’
`Retirement System of Rhode Island and
`City of Warwick Retirement System and
`Proposed Co-Lead Counsel
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`Words: 2,801
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`
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`directors. Id.
`27 Id., *7.
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`HEYMAN ENERIO GATTUSO &
`HIRZEL LLP
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`/s/ Kurt M. Heyman
`Kurt M. Heyman (#3054)
`Melissa N. Donimirski (#4701)
`Aaron M. Nelson (#5941)
`300 Delaware Avenue, Suite 200
`Wilmington, DE 19801
`(302) 472-7300
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`Additional Counsel for Plaintiffs
`Employees’ Retirement System of Rhode
`Island and City of Warwick Retirement
`System and Proposed Additional
`Delaware Counsel
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`12
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