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Belendiuk v. Carrion

Court of Chancery of Delaware

July 22, 2014

Arthur V. Belendiuk, derivatively on behalf of Verizon Communications Inc. and Cellco Partnership d/b/a Verizon Wireless, Plaintiff,
v.
Richard L. Carrion, David J. Corning, Lenore Daddona, Alin D'Silva, James J. Gerace, Kathleen Grillo, M. Frances Keeth, John F. Killian, Robert W. Lane, Mike Lanman, Kyle Malady, Lowell C. McAdam, Daniel S. Mead, Anthony J. Melone, Randal S. Milch, Robert M. Miller, Sandra O. Moose, Joseph Neubauer, Donald T. Nicolaisen, Thomas H. O'Brien, Clarence Otis, Jr., Hugh B. Price, John T. Scott, III, Ivan G. Seidenberg, Francis J. Shammo, Chris Shunk, Rodney E. Slater, John W. Snow, John R. Stafford, John G. Stratton, Ajay Waghray, and Steven E. Zipperstein, Defendants, and Verizon Communications Inc. and Cellco Partnership d/b/a Verizon Wireless, Nominal Defendants.

Date Submitted: May 7, 2014

Ryan M. Ernst, Esquire and Daniel P. Murray, Esquire of O'KELLY ERNST & BIELLI, LLC, Wilmington, Delaware and Kenneth A. Levy, Esquire, Monroe, New York; Attorneys for Plaintiff.

Blake K. Rohrbacher, Esquire and Susan M. Hannigan, Esquire of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Nominal Defendant Verizon Communications Inc.

MASTER'S REPORT MOTION TO DISMISS

Abigail M. LeGrow Master in Chancery

In this double derivative action, a stockholder of Verizon Communications, Inc. ("Verizon") contends that the boards of directors of Verizon and its majority owned subsidiary wrongfully refused his demand that the boards take action to remedy alleged breaches of fiduciary duty and other wrongful conduct by directors and officers of Verizon and the subsidiary. The plaintiff contends that the wrongful conduct caused the subsidiary to pay a substantial fine to the federal government, and also exposed the subsidiary to other potential sanctions, including a loss of its licenses.

After Verizon moved to dismiss the plaintiff's complaint, the plaintiff filed two amended complaints. Notwithstanding those amendments, the complaint and the plaintiff's arguments in opposition to the motion to dismiss demonstrate a fundamental misunderstanding of the standards governing derivative actions. Unable to demonstrate that the board's investigation was conducted unreasonably or in bad faith, the plaintiff instead appears to argue that this Court nonetheless should review the substance of that decision and determine whether the documents the demand committee considered and the witnesses it interviewed were sufficient or "correct." Compounding matters, even if the plaintiff could establish wrongful refusal of the demand by Verizon's board, the plaintiff concedes he has not and cannot allege that demand on the subsidiary's board would be futile, arguing instead that he somehow made a demand on the subsidiary's board, even though the evidence shows otherwise, and even though he is not a stockholder of the subsidiary. Because the plaintiff cannot plead with the necessary particularity sufficient facts to allow him to maintain this action, I recommend that the Court grant Verizon's motion to dismiss the second amended complaint.

I. Background

The following facts are drawn from the second amended complaint (the "Complaint"), the documents expressly referred to and relied upon in the Complaint, [1] and a handful of documents of which the Court may take judicial notice, [2] giving the plaintiff the benefit of all reasonable inferences. The plaintiff, Arthur V. Belendiuk, is a stockholder of nominal defendant Verizon. At the time Belendiuk filed this action, the other nominal defendant, Cellco Partnership d/b/a/ Verizon Wireless ("Verizon Wireless"), was a majority owned subsidiary of Verizon.[3] The remaining defendants are past and present directors and officers of Verizon and past and present Verizon Wireless employees and members of Verizon Wireless's Board of Representatives (collectively, the "Individual Defendants").[4]

The facts forming the basis for Belendiuk's claims against the Individual Defendants stem from incorrect data charges that Verizon Wireless imposed on some of its customers between 2007 and 2010. In 2009, several news reports suggested that Verizon Wireless routinely charged its cellular phone customers for internet data usage when a customer had not accessed the internet. In September 2009, Verizon introduced a 50kb data "allowance" to prevent data charges for accidental data use, a decision Belendiuk criticizes as insufficient to remedy the problem.[5] On December 4, 2009, the Federal Communications Commission ("FCC") sent a letter of inquiry to Verizon Wireless that posed several questions regarding the data charge issue. On December 18, 2009, Verizon Wireless's Senior Vice President – Federal Regulatory Affairs, Kathleen Grillo, responded to that letter of inquiry. Grillo's response stated that the data charges "apply when a customer launches the Internet browser and then navigates away from the default Mobile Web homepage to sites other than a Verizon Wireless customer care site."[6]

The FCC launched an investigation into the data charge issue in January 2010, and sent a second letter of inquiry to Verizon Wireless in July 2010. On October 28, 2010, Verizon and the FCC entered into a consent decree wherein Verizon stated that its internal investigation had determined that "approximately 15 million pay-as-you-go customers might have been erroneously billed for data usage from November 2007 to October 2010" (the "Consent Decree").[7] In the Consent Decree, Verizon agreed to refund the overcharges, which it estimated to be approximately $52.8 million, to adopt new procedures to prevent similar issues in the future, and to make a series of compliance reports to the FCC.[8] Verizon also made a $25 million "voluntary contribution" to the U.S. Treasury.[9] In return, the FCC agreed that it would not use the facts developed in the its investigation to institute or refer an action against Verizon Wireless concerning the matters that were the subject of the investigation, absent new material evidence showing that Verizon's representations in the consent order were not accurate.[10] Belendiuk contends that, had Verizon Wireless acted "diligently and openly" regarding the data charge issue, it would not have had to pay this $25 million fine.[11] Belendiuk also alleges that Verizon Wireless substantially misrepresented the extent of the overcharges, which Belendiuk believes exposes Verizon Wireless to FCC sanctions, including possible revocation of Verizon Wireless's licenses, as well as reputational harm.[12]

While the FCC investigation was pending, a series of class action lawsuits also were filed on behalf of Verizon Wireless customers relating to the data charge issue. In May 2011, Verizon Wireless entered into an agreement to settle the class action claims, subject to confirmatory discovery by the plaintiffs and their expert. In connection with the settlement agreement, Verizon Wireless agreed to increase the amount of the refunds and credits issued to current and former customers.[13] The claims were dismissed with prejudice in March 2012.[14]

After Verizon Wireless entered into the Consent Decree, Belendiuk made a series of Freedom of Information Act ("FOIA") requests to the FCC to obtain the documents Verizon Wireless had provided to the FCC. When Belendiuk did not obtain all the information he sought, he filed a petition against the FCC in federal district court in 2012.[15] Verizon Wireless and the FCC disclosed the requested documents in 2013. Belendiuk also made at least two books and records demands under 8 Del. C. § 220.

On July 24, 2013, Belendiuk formally demanded (the "Demand") that the Verizon board of directors take legal action against

"each member of the [Verizon] board, the Board of Representatives of [Verizon Wireless] and senior officers of [Verizon or Verizon Wireless] who have served in any capacities [sic] from November 2007 through October 2010 (or who have participated in FCC compliance after October 2010) and who have engaged in breaches of fiduciary duty, negligence, gross negligence, recklessness, constructive fraud and waste of ...

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