Opinion
No. C-04-2297 SC, Related Case Nos. C-04-2443 SC, C-04-2518 SC.
October 26, 2004
ORDER RE: DEFENDANTS' MOTIONS TO DISMISS
I. INTRODUCTION
Nominal Plaintiffs Laurent Torriani and Jonathan Betts ("Plaintiffs") have brought derivative actions against Nominal Defendant OmniVision Technologies, Inc. ("Nominal Defendant OmniVision" or "OmniVision") and against individuals Shaw Hong, Raymond Wu, John T. Rossi, Edward C.V. Winn, and Joseph Jeng ("Individual Defendants"). Nominal Defendant OmniVision and the Individual Defendants have brought Motions to Dismiss both Plaintiffs' actions. Because of the similarities between the Motions, in this Order the Court has considered the Motions together. Because this Court finds that Plaintiffs lack standing to bring these derivative actions, the Court GRANTS the Motions to Dismiss. The Court stresses that this Order is concerned solely with derivative actions C-04-2443 SC and C-04-2518 SC. Nothing in this Order applies to the class action pending before this Court, C-04-2297 SC.
Furthermore, the Individual Defendants joined Nominal Defendant's Motion. Individual Defendants' Motion at 1.
II. BACKGROUND
OmniVision is a Delaware corporation headquartered in Sunnyvale, California. Torriani Complaint at 5. OmniVision develops and sells semiconductor image sensor devices. Id. Individual Defendants are directors and officers at Omnivision.Id. at 5-7.
On June 9, 2004, OmniVision announced that it was carrying out a review of previously released financial results. Id. at 19. Although the review was expected to lead to an upward revision of the results from certain quarters, the damage to confidence in OmniVision's accounting practices led to a sharp sell-off in its stock. Id.
Over the several quarters preceding the announcement, OmniVision had issued a series of allegedly false and misleading statements. Id. at 20. Furthermore, Plaintiffs allege that several OmniVision directors and executives improperly sold stock during the period in question. Id. at 5-8.
Subsequent to the June 9 announcement, numerous lawsuits were filed alleging that a range of unlawful conduct had occurred. Pending in this District is a related federal class action suit, C-04-2297 SC. Also, in addition to the derivative actions which are the subject of this order, separate derivative actions are pending in the Superior Court for the County of Santa Clara. Nominal Defendant's Motion at 5. III. LEGAL STANDARD
When presented with a motion to dismiss, "all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party." Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996). "[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). See also Gompper v. VISX, Inc., 298 F.3d 893, 896 (9th Cir. 2002).
Furthermore, "it is appropriate to address the question of standing in deciding a motion to dismiss because the elements of standing are an indispensable part of the plaintiff's case."Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1140 (9th Cir. 2003) (internal quotations and citations omitted). If the plaintiff lacks standing, dismissal is appropriate. Id. IV. DISCUSSION
Having considered the papers submitted by the parties, this Court does not reach the merits of Plaintiffs' allegations. Even if this Court accepts as true all allegations in the complaints, as it must under the above standard, Plaintiffs lack standing as required under Rule 23.1 of the Federal Rules of Civil Procedure. Rule 23.1 governs the procedural requirements for bringing a derivative action in federal court and applies in this diversity case. Kona Enterprises v. Estate of Bishop, 179 F.3d 767, 769 (9th Cir. 1999). Under Rule 23.1, the contemporaneous ownership rule requires that a plaintiff in a derivative action "was a shareholder or member at the time of the transaction of which plaintiff complains." Fed.R.Civ.P. 23.1.
The critical facts here are the dates of acquisition of OmniVision stock by Plaintiffs and the dates of the actions which are the subject of the complaint. Plaintiff Torriani purchased OmniVision stock on April 13, 2004. Torriani Complaint at 4. Plaintiff Betts purchased OmniVision stock on May 10, 2004. Betts Complaint at 4. Prior to these dates, neither plaintiff was a shareholder. The transactions of which Plaintiffs complain about include a series of allegedly false press releases and financial filings dating from February 19, 2003 to March 16, 2004. Torriani Complaint at 13-18; Betts Complaint at 13-18. Since the "relevant period" is not precisely described in either complaint, the Court assumes that the relevant period at issue is February 19, 2003 to March 16, 2004. Because there are no allegations of overlap between the relevant period and the periods in which the Plaintiffs held OmniVision stock, this Court finds that neither Plaintiff was a shareholder at the time of the transactions of which they complain. Therefore, Plaintiffs lack standing to bring this suit.
The Court notes that Plaintiffs also allege a series of unlawful insider sales of OmniVision stock. However, the complaints make no allegations of overlap between such sales and the periods in which Plaintiffs owned the stock. Torriani Complaint at 4-7; Betts Complaint at 4-7. Therefore, the allegations of insider trading fail to cure the lack of standing described above.
In support of their assertion that they have standing, Plaintiffs allege that "the conduct of the Defendants constitutes a continuing harm exception to the provisions of Fed.R.Civ.P. 23.1." Plaintiffs' Memorandum in Opposition to Nominal Defendant at 17. In explaining the continuing harm exception, the Fifth Circuit has written, "where the complaint charged continuing wrongs, occurring at the time plaintiff owned stock, the complaint should not be dismissed on defendant's contention that the claims actually arose prior to the time plaintiff acquired his stock." Bateson v. Magna Oil Corp., 414 F.2d 128, 130 (5th Cir. 1969).
Courts, including this one, use "continuing harm" and "continuing wrong" interchangeably.
However, case law concerning the continuing harm doctrine does not support Plaintiffs' position and in fact undercuts it. Plaintiffs point to Hoff v. Sprayregan, 52 F.R.D. 243 (S.D.N.Y. 1971) to support their theory of continuing harm. Plaintiffs' Memorandum in Opposition to Nominal Defendant at 17. However, inHoff, while the allegedly improper transaction occurred before the plaintiffs became shareholders, payments completing the transaction occurred after the plaintiffs' stock acquisitions. 52 F.R.D. at 247-48. This is distinguishable from the case at hand, where none of the alleged improper transactions occurred subsequent to Plaintiffs' stock acquisitions. Plaintiffs also rely on In re Bank of New York Derivative Litigation, 320 F.3d 291 (2d Cir. 2003), and Saylor v. Bastedo, 78 F.R.D. 150 (S.D.N.Y. 1978). However, the In re Bank of New York court held that to invoke the continuing wrong doctrine, "a proper plaintiff must have acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired." 320 F.3d at 298. Again, the facts at hand are distinguishable because the core of the transactions at issue, such as the issuance of allegedly false press releases or allegedly improper insider trading, occurred before Plaintiffs' stock acquisitions. Similarly,Saylor holds that the continuing wrong exception applies "to a shareholder acquiring an interest in a corporation injured by a plan commenced before the date of share acquisition but not fully executed until afterward." 78 F.R.D. at 152-53. Here, there is nothing in Plaintiffs' papers that describes how any sort of improper transaction was "fully executed" after April 13, 2004, the earliest day on which either of the plaintiffs first acquired shares.
Plaintiffs attempt to salvage their theory of continuing wrong by asserting that the cost of defending against related class action lawsuits and the negative impact on OmniVision's standing in the capital markets constitute continuing harm to OmniVision. Plaintiffs' Memorandum in Opposition to Nominal Defendant at 18. While it is true that there may be such a negative impact on OmniVision, such open-ended injuries are well outside the bounds of the continuing wrong doctrine. Defendants' legal woes and OmniVision's reduced standing in the financial markets may continue for years, so were this Court to find that such speculative injuries fulfilled the continuing wrong doctrine, the contemporaneous ownership rule would become virtually meaningless. Furthermore, even if this Court agreed with Plaintiffs that the cost of defending against related class action lawsuits and the negative impact on Omnivision's standing in the capital markets constitute continuing harm to OmniVision sufficient to meet the standing requirements of Rule 23.1, such injuries are not the foundation of the complaints. Torriani Complaint at 2. Thus, this Court holds that Plaintiffs have not made sufficient allegations to allow an exception to the rule that a "derivative plaintiff has no standing to sue for misconduct that occurred prior to the time he became a shareholder of the corporation." In re Sagent Tech. Inc., 278 F. Supp. 2d 1079, 1096 (N.D. Cal. 2003).
On a side note, the Court acknowledges that Rule 23.1 is aimed at preventing plaintiffs from acquiring stock with an preexisting plan to file a derivative lawsuit, in other words, a "purchased grievance." Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 532 n. 6 (1984). The continuing harm exception provides an escape valve for shareholders who fail the literal command of the contemporaneous ownership rule but are clearly not trying to purchase a grievance. See In re Bank of New York, 320 F.3d at 298. Here, there is no evidence of an improper motive on the part of the Plaintiffs. However, the mere absence of an improper motive does not automatically create a continuing harm exception. Plaintiffs must still sufficiently allege facts that would trigger the continuing harm exception, but as described above, Plaintiffs have not done so.
Finally, a plaintiff must keep in mind that "the continuous ownership requirement stems from the equitable nature of derivative litigation which allows a shareholder to step into the corporation's shoes and to seek in its right the restitution he could not demand on his own." Lewis v. Chiles, 719 F.2d 1044, 1047 (9th Cir. 1983) (internal quotations and citations omitted). However, here, the complaints on their face do not allege an injury to the corporation that has occurred since Plaintiffs have been shareholders.
Because the lack of contemporaneity between Plaintiffs' stock acquisitions and the "relevant period" is the crux of this Order, should either Plaintiff choose to file an amended complaint as allowed below, the Court stresses that any amended complaint should focus more precisely on the "relevant period."
V. CONCLUSION
For the foregoing reasons, the Court hereby GRANTS Nominal Defendant's and Individual Defendants' Motions to Dismiss. Having granted the Motions, the Court does not at this time consider Nominal Defendant's Request for Judicial Notice. Plaintiffs are allowed 30 days to file amended complaints.
IT IS SO ORDERED.