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In re Fitbit, Inc. Stockholder Derivative Litigation

Court of Chancery of Delaware

January 14, 2019



          Joseph R. Slights III Vice Chancellor

         WHEREAS, Plaintiffs filed a derivative complaint on behalf of Fitbit, Inc. alleging that certain members of the Fitbit board of directors and certain other Fitbit fiduciaries sold stock in Fitbit's initial and follow-on public offerings before negative news regarding the efficacy of one of Fitbit's key products was disclosed to the market, and that other directors allowed them to do so;

         WHEREAS, the Court issued a Memorandum Opinion on December 14, 2018, in which it denied Defendants' motion to dismiss upon concluding that Plaintiffs alleged sufficient facts to plead with particularity that demand was excused under Court of Chancery Rule 23.1 with respect to Plaintiffs' insider trading and breach of fiduciary duty claims (the "Opinion")[1];

         WHEREAS, on December 24, 2018, nominal defendant, Fitbit, filed an application for certification of an interlocutory appeal of the Opinion (the "Application");

         WHEREAS, the Application asserts three grounds for interlocutory appeal under Supreme Court Rule 42: (1) "the opinion conflicts with the decisions of the trial courts upon [a] question of law"-citing Supreme Court Rule 42(b)(iii)(B); (2) "the case involves a question of law resolved for the first time in this state"- citing Supreme Court Rule 42(b)(iii)(A); and (3) [r]eview of the interlocutory order may terminate the litigation"-citing Supreme Court Rule 42(b)(iii)(G);

         WHEREAS, on January 7, 2019, Plaintiffs opposed the Application (the "Opposition"); and

         WHEREAS, the Court having carefully considered the Application, Plaintiffs' response and the criteria set forth in Supreme Court Rule 42, IT IS HEREBY ORDERED, this 14th day of January, 2019, that:

         1. Supreme Court Rule 42(b)(i) provides that "[n]o interlocutory appeal will be certified by the trial court or accepted by the Court unless the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment." Rule 42(b)(ii) provides that instances where the trial court certifies an interlocutory appeal "should be exceptional, not routine, because [interlocutory appeals] disrupt the normal procession of litigation, cause delay, and can threaten to exhaust scarce party and judicial resources." For this reason, "parties should only ask for the right to seek interlocutory review if they believe in good faith that there are substantial benefits that will outweigh the certain costs that accompany an interlocutory appeal."[2]

         2. When certifying an interlocutory appeal, "the trial court should identify whether and why the likely benefits of interlocutory review outweigh the probable costs, such that interlocutory review is in the interests of justice. If the balance is uncertain, the trial court should refuse to certify the interlocutory appeal."[3]

         3. The Opinion does not decide a substantial issue of material importance that merits appellate review before a final judgment. Specifically, it does not conflict with existing jurisprudence or involve a substantial issue of first impression. Although review of the appeal could terminate the litigation, this alone is insufficient to warrant certification of the appeal. In light of these findings, I cannot say that the benefits of an interlocutory appeal outweigh the costs or serve considerations of justice. The Application's arguments to the contrary are rejected for the following reasons.

         4. First, the Opinion does not decide an issue that "relate[s] to the merits of the case."[4] Indeed, I went out of my way to make clear that I was not making a final determination on the merits in denying Defendants' motion to dismiss. Rather, "given the serious nature of these claims," I "emphasize[d]" that I had determined only that "Plaintiffs have alleged facts that are adequate to survive dismissal given the liberal pleading stage inferences to which they are entitled. Whether they can prove these facts very much remains to be seen."[5] The Supreme Court has found that interlocutory review is inappropriate where "no final determination was being made on the merits of plaintiff's claims, but only that plaintiff would be afforded the right to pursue discovery related to the allegations of the complaint."[6] That is the case here.

         5. In making this determination, I acknowledge that an implicit risk of refusing to certify an appeal following the denial of a Rule 23.1 motion to dismiss is that the Supreme Court may determine, well after the parties have engaged in expensive litigation efforts, that Plaintiffs should not have been granted standing to pursue their claims derivatively on behalf of the Company in the first place. Defendants focus on this risk in arguing that the denial of their motion to dismiss determines a substantial issue of material importance.[7] The logical extension of this argument, of course, is that a court decides a substantial issue of material importance, for purposes of Supreme Court Rule 42, every time the court determines that a plaintiff has met its burden to well-plead demand excusal, i.e., every time the court denies a Rule 23.1 motion to dismiss and thereby affirms the stockholder plaintiff's standing to take control of the litigation asset from the board and pursue claims derivatively on behalf of the corporation. That is not the law, nor should it be.[8] The decision to allow circumvention of the board's otherwise exclusive authority to pursue claims on behalf of the corporation is guided by settled standards of law and the trial court's assessment of the sufficiency of the pleadings. To allow automatic appeal of those determinations would ignore the exacting standards of Supreme Court Rule 42. Thus, while I have vested Plaintiffs with standing to pursue derivative claims because they carried their pleading burden under Aronson and Rales, that decision alone does not merit interlocutory appellate review.[9]

         6. Second, the Opinion does not conflict with existing trial court decisions. The Application asserts that the Court erroneously inferred scienter on the part of outside directors Jonathan Callaghan, Steven Murray, and Christopher Paisley "based solely upon" the so-called "core operations doctrine, "[10] which some courts have held does not apply in the context of Rule 23.1's heightened pleading standard.[11] As emphasized in the Opinion, however, Plaintiffs well-pled that the products featuring the PurePulseTM technology accounted for 80% of Fitbit's revenue. [12] In other words, Plaintiffs alleged that the success or failure of PurePulse'TM could make or break the Company. These well-pled facts supported a more than reasonable inference that the Fitbit board of directors would have known when serious problems with the PurePulse' technology, as alleged, began to emerge.

         7. This scenario is factually distinguishable from cases where plaintiffs have attempted to invoke the core operations doctrine as sole support for an inference of board-level knowledge. In Sandys, for example, plaintiffs argued for an inference of knowledge based on "core financials fundamental to the business" but, importantly, did not allege that the financials revealed information that was potentially devastating to the company's future.[13] In Pfeiffer, the court relied on the internal metrics of the company's performance as the "core operational information at issue" to infer that the board knew of the company's decline.[14] Here, I did not grant a presumption based on red flags buried in Fitbit's financial statements, [15] but rather accepted a reasonable ...

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