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Hirschfeld v. Beckerle

United States District Court, D. New Jersey

September 27, 2019




         Presently before the Court is a motion by nominal Defendant Johnson & Johnson (“Johnson & Johnson”) and joined by Individual Defendants Mary C. Beckerle, D. Scott Davis, Ian E. L. Davis, Jennifer A. Doudna, Alex Gorsky, Mark B. McClellan, Anne M. Mulcahy, William D. Perez, Charles Prince, A. Eugene Washington, and Ronald A. Williams (“Individual Defendants”) (together, with Johnson & Johnson, “Defendants”), [1] to dismiss the shareholder derivative complaint of Plaintiff Marc Hirschfeld (“Plaintiff”) pursuant to Federal Rule of Civil Procedure 12(b)(6). In this shareholder derivative litigation, Plaintiff, representing other similarly situated investors of Johnson & Johnson’s stock, alleges that Individual Defendants- members of Johnson & Johnson’s Board of directors-violated their fiduciary duties. Specifically, Plaintiff maintains that Individual Defendants failed to prevent Johnson & Johnson from continuing to sell talc-based body powders, despite knowledge of research allegedly linking perineal talc application to ovarian cancer and tests allegedly indicating that Johnson & Johnson’s talc contained asbestos or asbestos-like fibers. Defendants move to dismiss the Complaint on the basis that Plaintiff failed to make a pre-suit demand on Johnson & Johnson’s Board of Directors, as is required by the New Jersey Business Corporation Act (“NJBCA”), N.J.S.A. 14A:3-6.3, and alternatively, even if that statute were inapplicable, Plaintiff has failed to adequately plead that a demand would have been futile. For the reasons stated herein, Defendants’ motion is GRANTED, and Plaintiff's claims are dismissed without prejudice.


         The facts are taken from the Complaint and assumed to be true for purposes of this motion. This action arises from the same factual underpinnings that are involved in thousands of cases in multiple courts across the country. Compl. at ¶ 10. Plaintiff alleges that since as early as 1971, Johnson & Johnson has been aware of tests indicating that the talc used in certain of its products contained asbestos or asbestos-like fibers. Id. at ¶ 5. Since as early as 1982, Johnson & Johnson allegedly has been aware of credible scientific studies concluding that a woman’s repeated use of talc-based body powders in her genital region significantly increases her risk of developing ovarian cancer. Id. at ¶ 6. Despite this knowledge, Johnson & Johnson allegedly continues to sell its talc-based Baby Power and Shower to Shower products and disavows the presence of any asbestos contained in its products, or that there is any link between perineal talc usage and ovarian cancer. Id. According to the Complaint, based on this willful conduct, the Individual Defendants (or their predecessors on the Board) directly violated their fiduciary obligations by: (i) refusing to place any cancer-related warning on Johnson & Johnson Baby Powder or Shower to Shower products; (ii) continuing to market such products as safe, and promoting the perineal use of those products by women; (iii) actively lobbying against Federal Drug Administration testing of asbestos levels in cosmetic talc products; (iv) forming a task force within a trade association to which Johnson & Johnson belonged to defend talc usage and undermine studies showing that it posed a public health risk; and (v) terminating research that it initiated and funded if the studies did not support Johnson & Johnson’s claim that talc was safe and/or not linked to an increased risk of ovarian cancer. Id. at ¶ 9.

         Plaintiff filed this suit on October 9, 2018, bringing one count for breach of fiduciary duties by Individual Defendants. In the Complaint, Plaintiff frankly admits that he “has not made a demand on the Board of Directors of the Company to file a suit asserting the claims specified herein” because “[s]uch a demand would be futile and useless.” Id at ¶ 99.[2] Subsequently, Defendants filed the present motion, arguing that Plaintiff’s claims must be dismissed because the NJBCA eliminated the concept of demand futility, and, furthermore, Plaintiff’s demand futility allegations are inadequate.


         Under Fed.R.Civ.P. 12(b)(6), a complaint may be dismissed for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). When reviewing a motion to dismiss on the pleadings, courts “accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v. Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (quotations omitted). Under such a standard, the factual allegations set forth in a complaint “must be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Indeed, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “[A] complaint must do more than allege the plaintiff's entitlement to relief. A complaint has to ‘show’ such an entitlement with its facts.” Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009).

         However, Rule 12(b)(6) only requires a “short and plain statement of the claim showing that the pleader is entitled to relief” in order to “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555. The complaint must include “enough factual matter (taken as true) to suggest the required element. This does not impose a probability requirement at the pleading stage, but instead simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element.” Phillips, 515 F.3d at 234 (citation and quotations omitted); Covington v. Int’l Ass’n of Approved Basketball Officials, 710 F.3d 114, 118 (3d Cir. 2013) (“[A] claimant does not have to set out in detail the facts upon which he bases his claim. The pleading standard is not akin to a probability requirement; to survive a motion to dismiss, a complaint merely has to state a plausible claim for relief.” (citation and quotations omitted)).

         In sum, under the current pleading regime, when a court considers a dismissal motion, three sequential steps must be taken: first, “it must take note of the elements the plaintiff must plead to state a claim.” Connelly v. Lane Constr. Corp., 809 F.3d 780, 787 (3d Cir. 2016) (quotations omitted). Next, the court “should identify allegations that, because they are no more than conclusions, are not entitled to the assumption of truth.” Id. (quotations omitted). Lastly, “when there are well-pleaded factual allegations, the court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Id. (quotations and brackets omitted).


         Defendants move to dismiss on two grounds: first, they argue that Plaintiff failed to make a pre-suit demand on the Board of Directors of Johnson & Johnson, which is required by the NJBCA, and second, that even if no such statutory requirement exists, Plaintiff has failed to adequately plead that making a demand would have been futile. Because I find that the NJBCA makes pre-suit demand mandatory, unless the corporation opts out of the requirement, where Johnson & Johnson has not, Plaintiff’s suit is dismissed, and I need not reach the demand futility argument.

         A. New Jersey Pre-Suit Demand Law

         Under Federal Rule of Civil Procedure 23.1, “a shareholder may file a derivative suit against the board of directors to claim enforcement of a right of the corporation where the corporation has failed to assert that right.” Kanter v. Barella, 489 F.3d 170, 176 n. 5 (3d Cir. 2007). Shareholder derivative suits typically require plaintiffs to make pre-suit demand on the board of directors that the board bring suit on behalf of the corporation. Blasband v. Rales, 971 F.2d 1034, 1048 (3d Cir. 1992). The reason for this requirement is that “[t]he decision to bring a lawsuit or to refrain from litigating a claim on behalf of the corporation is a decision concerning the management of the corporation and consequently is the responsibility of the directors.” Id. (citations omitted). See also In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., 493 F.3d 393, 399 (3d Cir. 2007). Rule 23.1 contains specific procedural requirements for pleadings in derivative suits; plaintiffs must “plead with particularity their efforts to obtain the desired action from the directors or the reasons for not obtaining the action or making the effort to obtain that action.” Freedman v. Redstone, 753 F.3d 416, 423 (3d Cir. 2014) (citing Fed.R.Civ.P. 23.1).

         Although Federal Rule of Civil Procedure 23.1 provides the procedural vehicle for addressing the adequacy of a shareholder derivative complaint, “[t]he substantive requirements of demand are a matter of state law.” Id. at 424 (quoting Blasband v. Rales, 971 F.2d 1034, 1047-48 (3d Cir. 1992)); see also Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96–97 (1991) (holding that “although Rule 23.1 clearly contemplates both the demand requirement and the possibility that demand may be excused, it does not create a demand requirement of any particular dimension”). This is because “[c]orporations…are creatures of state law, …and it is state law which is the font of corporate directors’ powers.” Kamen, 500 U.S. at 98 (citations omitted). Thus, “gaps in…statutes bearing on the allocation of governing power within the corporation should be filled with state law unless the state la[w] permit[s] action prohibited by the Acts, or unless its application would be inconsistent with the federal policy underlying the cause of action....’” Id. at 99 (citations omitted). Because “the contours of the demand requirement-when it is required, and when excused-determine who has the power to control corporate litigation, ” the requirement is, therefore, governed by state substantive law. Id. at 101.

         Under New Jersey law, prior to 2013, courts evaluated the adequacy of pre-suit demand pleadings under New Jersey Rule of Court 4:32-5, which “codified the common law requirement that a derivative suit plaintiff plead with particularity either his efforts to induce board members to take the desired remedial action, or the reasons why such efforts would have been useless.” In re Prudential Ins. Co. Derivative Litig., 282 N.J.Super. 256, 268 (Ch. Div. 1995). In mandating that a plaintiff who did not make a demand explain why doing so would have been useless-a concept known as demand futility-New Jersey courts required a plaintiff to ‚Äúplead with particularity facts creating a reasonable doubt that: (1) the directors are disinterested and independent, or (2) the challenged transaction was ...

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