Notice Entry of Order

Cal. Super. - 6th Dist.December 19, 2019

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19CV360501 Santa Clara - Civil ROBBINS LLP BRIAN J. ROBBINS (190264) brobbins@robbins 11p. c0m STEPHEN J. ODDO (174828) soddo@r0bbins1]p.com STEVEN R. WEDEKING (235759) swedeking@robbinsllp.com EMILY R. BISHOP (319383) ebish0p@r0bbinsllp.com 5040 Shoreham Place San Diego, CA 92122 Telephone: (619) 525-3990 Facsimile: (619) 525-3991 Attorneys for Plaintiff Jessica McCall Electronically Filed by Superior Court of CA, County of Santa Clara, on 12/21/2020 1:29 PM Reviewed By: R. Walker Case #1 9CV360501 Envelope: 551 0027 SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF SANTA CLARA JESSICA MCCALL, Plaintiff, V. ALIGN TECHNOLOGY, INC., Defendant. VVVVVVVVVV Case No. 19CV360501 NOTICE OF ENTRY OF ORDER Complaint Filed: December 19, 2019 Assigned t0: Hon. Sunjl R. Kulkarni DEPT. 1 NOTICE OF ENTRY OF ORDER 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TO ALL PARTIES AND THEIR COUNSEL OF RECORD: PLEASE TAKE NOTICE of the Order entered by the Honorable Sunil R. Kulkarni 0n December 18, 2020, attached hereto as Exhibit A. DATED: December 21, 2020 1504115 Respectfully submitted, ROBBINS LLP BRIAN J. ROBBINS STEPHEN J. ODDO STEVEN R. WEDEKING EMILY R. BISHOP /s/ Steven R. Wedeking STEVEN R. WEDEKING 5040 Shoreham Place San Diego, CA 92122 Telephone: (619) 525-3990 Facsimile: (619) 525-3991 E-Mail: brobbins@r0bbinsllp.com soddo@robbins 11p.com swedeking@robbinsllp.com ebishop@robbins 11p.com Attorneys for Plaintiff Jessica McCall -1- NOTICE OF ENTRY OF ORDER 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DECLARATION OF SERVICE I, the undersigned, declare: 1. I am employed in the County of San Diego, State 0f California. I am over the age of 18 years and not a party t0 this action. My business address is, 5040 Shoreham Place, San Diego, California 92122. 2. On December 21, 2020, I caused to be served copies, including exhfloits, if any, 0f the following document(s): NOTICE OF ENTRY OF ORDER 3. I served the documents on the persons below, as follows: CAZ HASHEMI Attorneys for Defendant Align Technology, IGNACIO E. SALCEDA Inc. CHERYL W. FOUNG WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, CA 94304- 1050 Telephone: (650) 493-9300 Facsimile: (650) 565-5100 E-mail: chashemi@wsgr.com isalceda@wsgr.com cfoung@wsgr.com NICHOLAS R. MILLER WILSON SONSINI GOODRICH & ROSATI Professional Corporation 1700 K StreetNW Fifth Floor Washington, D.C. 20006-3814 Telephone: (202) 973-8800 Facsimile: (202) 973-8899 E-mail: nmiller@wsgr.com 4. The documents were served by the following means: (E-SERVICE) I electronically served the documents 0n the parties listed above in conjunction With electronically filing the documents through an e-filing vendor approved by this Court. I certify that said transmission was completed, that all pages were received, and that a report was generated by the vendor Which confirms said transmission and receipt. The name 0f the vendor and the transaction receipt I.D. are provided in the vendor's e-mailed notification 0f service. -2- NOTICE OF ENTRY OF ORDER 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I declare under penalty 0f perjury under the laws 0f the State of California that the foregoing is true and correct. Executed on December 21, 2020, at San Diego, California. JEwIFER L. SILVERWOOD -3- NOTICE OF ENTRY OF ORDER EXHIBIT A KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA JESSICA MCCALL, Case N0.: 19CV360501 Plaintiff, ORDER CONCERNING DEFENDANT’S DEMURRER TO VS. AMENDED COMPLAINT ALIGN TECHNOLOGY, INC., et al., Defendants. Defendant Align Technology, Inc. (“Align”) is a Delaware corporation with its headquarters in San Jose. Plaintiff Jessica McCall has made two inspection demands 0fAlign under Delaware law. Even though Ms. McCall is a shareholder 0f Align, the company refused the demands. T0 achieve the relief she seeks, Ms. McCall filed a complaint (and then later an amended complaint) in this Court seeking t0 compel Align t0 permit inspection. Align demurs t0 the amended complaint 0n several grounds. As explained below, the Court OVERRULES Defendant’s demurrer. Ms. McCall’s amended complaint can proceed. Electronically Filed by Superior Court of CA, County of Santa Clara, on 12/18/2020 1:32 PM Reviewed By: R. Walker Case #19CV360501 Envelope: 5501389 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO I. BACKGROUND A. Factual Ms. McCall is a beneficial stockholder 0f Align, a Delaware corporation with principal executive offices in San Jose. (Amended Complaint,W 1, 8, 9.) In February 2019, she sent a demand t0 Align t0 exercise her statutory right t0 inspect its books and records under title 8, section 220 0f the Delaware General Corporation Law Code (“Section 220”). (Id., 1] 71.) Align rejected this demand in April 2019. (Id.) Ms. McCall sent a second demand in May 2020. (Ibid) Her stated purpose for the demand was t0 investigate whether Align engaged in anticompetitive conduct t0 protect its monopolies in the clear aligner and intraoral scanner markets, as well as t0 investigate misleading and improper statements by its fiduciaries about the Company’s competitive position in the market and financial condition. (Id, 1] 2.) These issues are related t0 securities and consumer class action lawsuits pending against the Company, as well as a private antitrust lawsuit by a competitor, 3Shape Trios A/S (“3 Shape”). (161.,W 5, 26, 27, 69.) The May 2020 demand stated that after reviewing the requested books and records, Ms. McCall would take appropriate action, including potentially: (i) suggesting corporate governance reforms t0 the board; (ii) presenting a litigation demand t0 the board; 0r (iii) filing a derivative action in lieu 0f making a demand, if she deemed such a demand futile. (Id., 1] 72.) In early June 2020, the Company refused Ms. McCall‘s May 2020 demand, claiming that Ms. McCall had not established a credible basis t0 suspect wrongdoing and that Ms. McCall‘s document demands were overbroad. (Amended Complaint, 1] 6.) The Company continues t0 refuse t0 allow Ms. McCall t0 inspect the documents demanded. (1d,, 1] 7.) B. Procedural Ms. McCall filed this action t0 compel inspection under Section 220 in December 2019, based 0n her February 2019 inspection demand.1 She amended her complaint in June 2020 t0 1 Earlier in 2019, the Court (Judge Williams) entered judgment for Defendant in another action, in which Ms. McCall sought a petition for writ 0f mandate compelling Align t0 respond t0 the February 2019 demand. (McCall v. Align Technology, Inc. (Super. Ct. Santa Clara County, 2 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO address her May 2020 demand, continuing t0 assert a single cause 0f action under Section 220. Align now files this demurrer t0 challenge the amended complaint. The Court provided a tentative ruling 0n December 16, 2020, and n0 party contested the ruling 0r appeared at the December 17 hearing. The Court now issues its final order. II. LEGAL STANDARD The function 0f a demurrer is t0 test the legal sufficiency 0f a pleading. (Trs. ofCapital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621 .) Consequently, “[a] demurrer reaches only t0 the contents 0f the pleading and such matters as may be considered under the doctrine ofjudicial notice.” (South Shore Land C0. v. Petersen (1964) 226 Cal.App.2d 725, 732, internal citations and quotations omitted; see also Code CiV. Proc., § 430.30, subd. (a).) “It is not the ordinary function 0f a demurrer t0 test the truth 0f the plaintiff’s allegations 0r the accuracy with which he describes the defendant’s conduct. Thus, the facts alleged in the pleading are deemed t0 be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.) In ruling on a demurrer, the allegations 0f the complaint must be liberally construed, with a View t0 substantial justice between the parties. (Glennen v. Allergan, Inc. (2016) 247 Cal.App.4th 1, 6.) Nevertheless, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions 0r conclusions 0f law 0r fact.” (George v. Automobile Club ofSouthem California (201 1) 201 Cal.App.4th 1112, 1120.) A demurrer will succeed where the allegations and matters subject t0 judicial notice clearly disclose a defense 0r bar t0 recovery. (Casterson v. Superior Court (2002) 101 Cal.App.4th 177, 183.) III. SUBJECT MATTER JURISDICTION Section 220 provides that if a corporation refuses t0 permit an inspection, “the stockholder may apply t0 the Court 0f Chancery for an order t0 compel such inspection. The Court 0f Chancery is hereby vested with exclusive jurisdiction t0 determine whether 0r not the 2019, N0. 19CV349833.) The Court held that McCall had a plain, speedy, and adequate remedy at law: namely, an action under Section 220. KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO person seeking inspection is entitled t0 the inspection sought.” (Del. Code Ann. tit. 8, § 220(0) (2016).) In its moving papers, Align argues that-as a number 0f courts outside Delaware have held-this language requires all actions t0 enforce inspection rights under Section 220 t0 be filed in Delaware. McCall contends that-as other courts outside Delaware have held, and as the Delaware Court 0f Chancery has discussed-this language refers t0 the Court 0f Chancery’s jurisdiction relative t0 other Delaware courts. After Align’s demurrer was filed, the Delaware Court 0f Chancery addressed this issue in the specific context 0f shareholder inspection demands in Juul Labs, Inc. v. Grove (Del. Ch. 2020) 238 A.3d 904 (Juul). It explained that absent the exclusive forum-selection clause present in that case, nothing would prevent a California state court from hearing [a] claim t0 inspect books and records under Delaware law. A hoary Delaware decision once entertained a petition t0 inspect the books and records 0f a Connecticut corporation. See Richardson v. Swift, 12 Del. 137, 30 A. 781 (Del. Super. 1885). And this court has held that statutes conferring exclusive jurisdiction 0n the Delaware Court 0f Chancery as a matter 0f the internal allocation 0f authority within the Delaware court system d0 not (and cannot) exclude non-Delaware courts from hearing cases implicating those statutes. See In re Daniel Kloiber Dynasty Trust, 98 A.3d 924, 938-40 (Del. Ch. 2014); see also Stern v. South Chester Tube, 390 U.S. 606, 609-10, 88 S.Ct. 1332, 20 L.Ed.2d 177 (1968) (holding that federal court could exercise diversity jurisdiction over stockholder’s claim t0 inspect books and records); cf. Restatement (Second) 0f Conflict 0f Laws § 3 13 (“[A] court will usually entertain an action by a shareholder t0 compel the officers 0f a foreign corporation t0 allow him t0 inspect such 0f its books 0r properties as are within the state.”). (Juul, supra, 238 A.3d at p. 919, fn. 13.) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO In its reply brief, Align concedes that Juul resolves this issue in Ms. McCall’s favor. (See Reply, p. 7, fn. 3.) The Court will follow Juul 0n this point, and OVERRULES Defendant’s demurrer based 0n lack 0f subj ect matter jurisdiction. IV. FAILURE TO STATE A CLAIM “Stockholder inspection rights are a core matter 0f internal corporate affairs.” (Juul, supra, 238 A.3d at p. 915.) Accordingly, because Align is a Delaware corporation} Ms. McCall’s stockholder inspection rights are governed by Delaware law. (See id. at pp. 913-918.) Under Section 220, a stockholder is entitled t0 inspect a company’s books and records upon demonstration that he 0r she (1) is a stockholder 0f the company, (2) has made a written demand 0n the company, and (3) has a proper purpose for making the demand. (Kosinski v. GGP Inc. (Del. Ch. 2019) 214 A.3d 944, 950.) A purpose is “proper” where it reasonably relates t0 the stockholder’s interest as such. (Id. at p. 952.) “It is well established that a stockholder’s desire t0 investigate wrongdoing 0r mismanagement is a ‘proper purpose.’ ” (Seinfeld v. Verizon Communications, Inc. (Del. 2006) 909 A.2d 117, 121 (Seinfeld); see also KT4 Partners LLC v. Palantir Technologies Inc. (Del. 2019) 203 A.3d 738, 758 (KT4) [the investigation 0f possible wrongdoing by management is “[0]ne 0f the most traditional proper purposes for a § 220 demand”].) Here, Align does not challenge Ms. McCall’s status as a stockholder 0r the formal compliance 0f her inspection demands with statutory requirements. Nor does it contend that her stated purposes in making the demand are improper. Rather, it urges that Ms. McCall’s allegations fail t0 establish the necessary “credible basis” t0 infer possible mismanagement required for a claim under Section 220 t0 succeed at trial, and her specific demands are overbroad. 2 Align’s request for judicial notice 0f its certificate 0f incorporation (EX. 9 t0 the Declaration 0f Ignacio E. Salceda) is GRANTED. (EVid. Code, § 452, subd. (0).) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO A. The “Credible Basis” Standard at Trial and 0n Demurrer3 Ultimately, “[a] Section 220 plaintiff with a proper purpose must further prove that it has some credible evidence 0fwrongdoing sufficient t0 warrant continued investigation,” and the scope 0f relief under the statute “will typically be limited only t0 the inspection 0f those books and records that are necessary and essential t0 the satisfaction 0f the stated purpose, a burden 0f proof with which the plaintiff is charged.” (Highland Select Equity Fund, LP. v. Motient Corp. (Del. Ch. 2006) 906 A.2d 156, 164, italics original, afl’d sub nom. Highland Equity Fund, L.P. v. Motiem‘ Corp. (Del. 2007) 922 A.2d 415, and afl’d sub nom. Highland Equity Fund, L.P. v. Motient Corp. (Del. 2007) 922 A.2d 415.) T0 obtain reliefunder Section 220, a stockholder is not required t0 prove that wrongdoing or mismanagement have actually occurred: Stockholders need only show, by a preponderance 0f the evidence, a credible basis from which the [court] can infer there is possible mismanagement that would warrant further investigation-a showing that may ultimately fall well short 0f demonstrating that anything wrong occurred. That threshold may be satisfied by a credible showing, through documents, logic, testimony 0r otherwise, that there are legitimate issues 0f wrongdoing. (Seinfeld, supra, 909 A.2d at p. 123, internal citations and quotations omitted.) 3 Both parties cite extensively t0 unpublished opinions by Delaware courts, which, under Delaware law, may be considered but are not binding precedent. (See VIC] Racing, LLC v. T- Mobile USA, Inc. (3d Cir. 2014) 763 F.3d 273, 287, fn. 9.) Along the same lines, Ms. McCall’s request for judicial notice 0f hearing transcripts documenting bench rulings issued by the Delaware Court 0f Chancery (EXS. A and B t0 the Declaration 0f Steven R. Wedeking) is GRANTED. (EVid. Code, § 452, subd. (d).) A Delaware bench ruling can also provide persuasive authority, although it “typically reflects a case-specific determination that is intended for the parties, and may be less Clear.” (Focus Financial Partners, LLC v. Holsopple (Del. Ch., Nov. 2, 2020) 2020 IER Cases 422749, 2020 WL 6390038, *14.) Ms. McCall’s request for judicial notice 0f unpublished California trial court orders (EXS. C and D t0 the Wedeking Declaration), however, is DENIED. Unpublished California opinions “must not be cited 0r relied 0n by a court 0r a party in any other action.” (Cal. Rules 0f Court, rule 8.1 1 15(a); see also Schachter v. Citigroup, Inc. (2005) 126 Cal.App.4th 726, 738 [a trial court ruling has n0 precedential value].) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO The “credible basis” standard “sets the lowest possible burden 0f proof”: the only way t0 reduce it further “would be t0 eliminate any requirement that a stockholder show some evidence 0f possible wrongdoing.” (Seinfeld, supra, 909 A.2d at p. 123, italics original.) The standard 0f proof is 10w because a major purpose 0f Section 220 proceedings is t0 “help the stockholder t0 ferret out whether [alleged] wrongdoing is real and then possibly file a lawsuit if appropriate.” (KT4, supra, 203 A.3d at p. 758.) Indeed, a recognized “rise in books and records litigation is directly attributable t0 [the Supreme Court 0f Delaware’s] encouragement 0f stockholders, who can show a proper purpose, t0 use the ‘tools at hand’ t0 obtain the necessary information before filing a derivative action.” (Seinfeld, supra, 909 A.2d at p. 120; see also King v. VeriFone Holdings, Inc. (Del. 201 1) 12 A.3d 1140, 1145 (King) [“Delaware courts have strongly encouraged stockholder-plaintiffs t0 utilize Section 220 before filing a derivative action, in order t0 satisfy the heightened demand futility pleading requirements 0f Court 0f Chancery Rule 23.1.”].) In sum, [t]he Delaware Supreme Court has not required a stockholder seeking books and records t0 introduce evidence from which a court could infer the existence 0f an actionable claim. The Seinfeld test only requires that a stockholder establish, by a preponderance 0f the evidence, that there is a credible basis t0 infer possible corporate wrongdoing 0r mismanagement. The Delaware Supreme Court has explained that this standard strikes “an appropriate balance between providing stockholders who can offer some evidence 0f possible wrongdoing with access t0 corporate records and safeguarding the right 0f the corporation t0 deny requests for inspections that are based only upon suspicion 0r curiosity.” Seinfeld, 909 A.2d at 118. The Delaware Supreme Court has repeatedly urged stockholders t0 use Section 220 t0 investigate possible wrongdoing before filing derivative actions, recognizing that without doing so, plaintiffs typically lack the facts necessary t0 plead an actionable claim against the board that can survive a Rule 23.1 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO motion. The logical implication 0f this message is that t0 obtain books and records, a stockholder does not have t0 introduce evidence from which a court could infer the existence 0f an actionable claim. (Lebanon County Employees ’ Retirement Fund v. Amerisourcebergen Corporation (Del. Ch., Jan. 13, 2020) 2020 WL 132752, *15 (Lebanon), footnotes omitted.) Considering this context, the use 0f a demurrer t0 challenge the adequacy 0f a plaintiff’s alleged evidence 0f wrongdoing in support 0f a Section 220 claim is dubious. As the Delaware Court 0f Chancery recently explained, [t]he regrettable reaction by defendant corporations [t0 Delaware courts’ encouragement 0f Section 220 actions] has been massive resistance. As one academic article commented, “defendants have turned books and records litigation into a surrogate proceeding t0 litigate the possible merits 0f the suit where they place obstacles in the plaintiffs’ way t0 obstruct them from employing it as a quick and easy pre-filing discovery tool.” (Pettry v. Gilead Sciences, Inc. (Del. Ch., NOV. 24, 2020, N0. CV 2020-0132-KSJM) 2020 WL 6870461, at *29, citation omitted; see also Khanna v. Covad Communications Group, Inc. (Del. Ch., Jan. 23, 2004, N0. 20481-NC) 2004 WL 187274, at *6 [a Section 220 action is not the proper forum for a detailed analysis equivalent t0 “a merits-based dismissal motion in [a] substantive action”; “[t]0 engage in the detailed analysis-an analysis possibly less plaintiff friendly than one that would be carried under [a motion t0 dismiss] because, in part, the facts might be those provided by the corporate insiders-would defeat the purposes 0f this summary proceeding and the underlying policy guidance that potential plaintiffs use the procedures 0f Section 220 t0 determine if a case exists for the shareholder t0 pursue”].) And as the Court 0f Chancery observed years ago, “[B]00ks and records actions are summary proceedings” that “are t0 be promptly tried.” The summary nature 0f the proceeding “dictate[s] against allowing preliminary motions addressed t0 the pleadings t0 be presented and decided... Such a practice would tend t0 promote delay, thereby undercutting the statutory KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO mandate and policy that the proceeding be summary in character.” A pretrial motion therefore “ought not t0 be presented for decision in advance 0f the final hearing 0n the merits except where necessary t0 avoid substantial prejudice.” (Louisiana Mun. Police Employees Retirement System v. Morgan Stanley & C0. Inc. (Del. Ch., Mar. 4, 201 1, N0. CIVA. 5682-VCL) 2011 WL 7733 16, at *3, citations omitted; see also Romero v. Career Educ. Corp. (Del. Ch., July 19, 2005, N0. 793-N) 2005 WL 5750613, at *2 (Romero) [the Court 0f Chancery “has held that the basis for a § 220 plaintiff’s suspicions ‘can best be addressed after the factual record is developed at trial’ ”], quoting Deephaven RiskArb Trading Ltd. v. UnitedGlobalCom, Inc. (Del. Ch., Aug. 30, 2004, N0. CIVA. 379-N) 2004 WL 1945546, at *8 (Deephaven).) In any event, the “credible basis” standard “does not refer t0 a plaintiff’s pleading burden under § 220, but rather, its burden 0f proof at trial.” (Romero, supra, 2005 WL 5750613, at *2, internal citation and quotations omitted.) With regard t0 the pleading burden itself, the Court 0f Chancery has stated that “a plaintiff must d0 more than merely ‘state, in a conclusory manner, a generally accepted proper purpose. [A plaintiff] must state a reason for the purpose, i.e., what it will do with the information, 0r an end t0 which that investigation may lead.’ ” (Beiser v. PMC- Sierra, Inc. (Del. Ch., Feb. 26, 2009, N0. CIV. A. 3893-VCL) 2009 WL 483321, at *3, quoting West Coast Management & Capital, LLC v. Carrier Access Corp. (Del. Ch., NOV. 14, 2006, N0. 2262-N) 2006 WL 4782497, at *6.) This is not a difficult requirement t0 satisfy. Finally, while it is true that the plaintiffmay not “merely state that he suspects corporate mismanagement” and must allege “some factual basis for that suspicion” (Wetland v. Central & South West Corp. (Del. Ch., May 9, 1989) 15 Del. J. Corp. L. 273, 276, 1989 WL 48740, *1), he 0r she need not “identify specific actions 0f specific officials” that were wrongful (Deephaven, supra, 2004 WL 1945546, at *8) 0r make a showing that would survive a motion t0 dismiss a substantive lawsuit. It is a “rare instance[] in the realm 0f Section 220 litigation where the plaintiff” s trial proof” 0n this point Will “come up short.” (Hoeller v. Tempur Sealy International, Inc. (Del. Ch., Feb. 12, 2019, N0. CV 2018-0336-JRS) 2019 WL 551318, at *1.) In the Court’s View. it is KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO an even rarer case where it would be appropriate t0 terminate a Section 220 action 0n demurrer on this ground. B. Ms. McCall’s Allegations As alleged in the Amended Complaint, Align designs, manufactures, and markets products for treating malocclusion, 0r the misalignment 0f teeth. (Amended Complaint, 1] 11.) Its business is divided into two segments: (1) clear aligner products, marketed under the brand name Invisalign; and (2) intraoral scanning devices and related software and services, including the iTero scanner. (161., W 11-13.) Historically, Align has dominated these markets by aggressively deploying its patent portfolio. (Id,W 14-1 8.) But Ms. McCall alleges that as its patents began t0 expire, the Company secured a series 0f unlawful anticompetitive agreements with orthodontists and dentists t0 use the iTero scanner, a defacto closed system designed t0 work best with Invisalign products, thereby excluding its clear aligner rivals. (Id.,W 19-25.) This conduct led t0 a private antitrust lawsuit by Align’s maj 0r competitor in the scanner market, 3Shape, as well as a consumer class action lawsuit 0n behalf 0f purchasers of Invisalign aligners or iTero intraoral scanners. (Id,W 26-27.) Meanwhile, as an influx 0fnew competitors entered the high-end, comprehensive clear aligner market, Align’s fiduciaries assured analysts and investors that this new competition would be confined t0 the low-end, non-comprehensive product segment that made up only a small portion 0f Align’s revenues, and that it would not trigger price adjustments in Align’s comprehensive products. (Amended Complaint,W 28-29.) A11 the while, Align’s fiduciaries were planning and implementing an aggressive new discounting program t0 Align’s comprehensive product line that immediately drove down the Company’s average selling prices (“ASP”S), even as they continued t0 promise higher ASPS. (Id. atW 28-40.) Analysts and investors were shocked when Align revealed 0n October 24, 2018 that, as a result 0f steep discounts t0 its comprehensive products, ASPS for its clear aligners had declined approximately $85 quarter-over-quarter-one 0f the largest declines in its history as a public company. (Id. at W 41-46.) Align’s fiduciaries also revealed that they did not expect the Company’s ASPS t0 recover, but instead expected ASP t0 remain “flat” at the same level throughout 2019, 10 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO representing the “new normal” for the Company in the face 0f increased competition. (161., 1] 47.) This news caused Align’s stock price t0 fall by more than twenty percent. (Id, 1] 49.) Making matters worse, between July 1, 201 8 and August 3 1 , 2018, while the Company’s stock price was inflated due t0 the improper statements detailed above, Align’s fiduciaries caused 0r allowed the Company t0 repurchase approximately 425,891 shares 0f its stock at significantly inflated prices. (Id. atW 52-55.) Meanwhile, certain fiduciaries sold over $64 million worth 0f stock between when the misleading statements began 0n May 23, 2018 and the truth emerged 0n October 24, 2018. (Id. atw 56-68.) Based 0n these events, the Company is now the subject 0f a securities class action 0n behalf 0f investors who purchased Align shares at inflated prices. (161., 1] 69.) C. Discussion Align contends that Ms. McCall relies entirely 0n the pendency 0f other lawsuits-one 0f which has been dismissed-as a basis t0 obtain books and records. While a few Delaware opinions have stated that a plaintiff fails t0 show a credible basis t0 infer wrongdoing by relying solely 0n the fact that others have sued the company, those statements are largely either dicta 0r informed by a very different factual context.4 Here, Ms. McCall alleges facts t0 support her suspicions 0f wrongdoing as summarized above. That these same circumstances are also alleged in pending substantive lawsuits does not mean they cannot provide a credible basis for suspicion here, as Defendant’s own authority confirms. (See In re UnitedHealth Group, Inc. Section 220 Litigation (Del. Ch., Feb. 28, 2018, N0. CV 2017-0681-TMR) 201 8 WL 1110849, at *7 (UnitedHealth), afl’d sub nom. UnitedHealth Group Incorporated v. Amalgamated Bank as 4 See In re UnitedHealth Group, Inc. Section 220 Litigation (Del. Ch., Feb. 28, 2018, N0. CV 2017-0681-TMR) 201 8 WL 1110849, at *7, fn. 92 (holding that plaintiffs established a proper purpose), afl’d sub nom. UnitedHealth Group Incorporated v. Amalgamated Bank as Trusteefor Longview Largecap 500 Index Fund (Del. 2018) 196 A.3d 885); Graulich v. Dell Inc. (Del. Ch., May 16, 201 1, N0. CIVA5846-CC) 2011 WL 1843813, at *5, fn. 49 (plaintiff did not establish a proper purpose where he lacked standing t0 pursue untimely claims barred by claim preclusion); Louisiana Mun. Police Employees ’ Retirement System v. Lennar Corp. (Del. Ch., Oct. 5, 2012, N0. CIVA. 73 14-VCG) 2012 WL 4760881, at *4 (lawsuits were settled years ago without any admission 0f wrongdoing and were not mentioned in plaintiff” s demand letter). 11 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Trusteefor Longview Largecap 500 Index Fund (Del. 201 8) 196 A.3d 885 [allegations 0f underlying substantive lawsuits provided a credible basis t0 infer wrongdoing].) Notably, most 0f Align’s demurrer consists 0f argument that the related lawsuits fail t0 state a claim. But the two lawsuits Align focuses on-the securities class action and the 3Shape antitrust suit-ultimately survived motions t0 dismiss.5 In any event, it is not appropriate for the Court t0 engage in a detailed analysis 0f the merits 0f pending 0r potential substantive lawsuits against Align for several reasons. First, as discussed above, a Section 220 action is generally not an appropriate forum t0 litigate the merits 0f potential substantive litigation by a shareholder, and this is particularly true at the pleading stage.6 (See UnitedHealth, supra, 2018 WL 1110849, at *7 [rej ecting defendant’s attempt t0 “require [the court t0] analyze the strengths and weaknesses 0f the underlying Qui Tam Action and potential derivative claims,” emphasizing that “[t]his Court has repeatedly stated that a Section 220 proceeding does not warrant a trial 0n the merits 0f underlying claims”].) Moreover, Ms. McCall’s stated purpose for investigating the alleged wrongdoing at issue here is not only t0 determine whether a derivative action may be appropriate, but t0 “take appropriate action” more generally, including potentially “suggesting corporate governance reforms t0 the board.” This is a proper purpose that renders considerations like whether Ms. McCall can establish a non-exculpated claim 0r plead facts that would survive demurrer in a potential substantive action tangential t0 the focus 0f this Section 220 action, which is more generally whether Ms. McCall can demonstrate a credible basis t0 infer 5 In the securities action, after granting an initial motion t0 dismiss with leave t0 amend, the district court granted in part and denied in part a motion t0 dismiss the amended complaint. (See SEB Investment ManagementAB v. Align Technology, Inc. (N.D. Cal., Sept. 9, 2020, N0. 18- CV-O6720-LHK) 2020 WL 5408056.) In the 3Shape lawsuit, the district court recently overruled Align’s objections t0 a magistrate’s report recommending that Align’s motion t0 dismiss be denied, adopted the report, and denied Align’s motion t0 dismiss. (See 3Shape Trios A/S v. Align Technology, Inc. (D. Del., NOV. 25, 2020, N0. CV 18-1332-LPS) 2020 WL 6938054.) As discussed below, the consumer class action appears t0 have been re-filed in a new venue following the plaintiff’s voluntary dismissal 0f its initial lawsuit. 6 Defendant cites a handful 0f unpublished opinions in which other Delaware courts have expressed more willingness t0 engage in a merits analysis 0f a Section 220 action at the pleading stage. For the reasons discussed herein, the Court is not persuaded that this is the best approach. 12 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO wrongdoing by Align that should be addressed through “appropriate action.” (See Rodgers v. Cypress Semiconductor Corporation (Del. Ch., Apr. 17, 2017, N0. CV 2017-0070-AGB) 2017 WL 1380621, at *5 [because shareholder demonstrated credible bases t0 infer wrongdoing by one director “and a genuine desire t0 pursue corrective actions outside 0f derivative litigation, it is irrelevant whether Rodgers has established a credible basis t0 infer a non-exculpated breach 0f fiduciary duty by any 0f the other members 0f Cypress’ b0ard”], abrogated 0n another ground by Tiger v. Boast Apparel, Inc. (Del. 2019) 214 A.3d 933.) In any event, while Align argues at length that disclosures in its public filings disprove Ms. McCall’s allegations that its fiduciaries concealed the likelihood that Align would be forced t0 discount its comprehensive product line,7 it does not meaningfully grapple with Ms. McCall’s allegations that it entered into a series 0f unlawful anticompetitive agreements with orthodontists and dentists, 0r with the related issues raised by 3Shape’s complaint and the consumer class action (which has apparently been re-filed in the Northern District of California after the plaintiff voluntarily dismissed its initial lawsuit in the District 0f Delaware).8 Ms. McCall’s allegations 7 T0 support this argument, Align requests judicial notice 0f the Consolidated Class Action Complaint in the securities action (EX. 1 t0 the Salceda Declaration), additional portions 0f public statements cited in the Amended Complaint herein (EXS. 2-7 t0 the Salceda Declaration), and public filings (EXS. 6-8 t0 the Salceda Declaration and Exhibit 10 t0 the Salceda Declaration filed on reply). Align’s request is GRANTED as t0 the existence and contents 0f these documents only, and is unopposed in that regard. (EVid. Code, § 452, subds. (c), (d), and (h); StorMedia, Inc. v. Superior Court (1999) 20 Cal.4th 449, 456, fn. 9 [taking judicial notice 0f the existence 0f proxy statement and registration statement filed with SEC]; Ingram v. Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3 [“Since the contents 0f the letter and media release form the basis 0f the allegations in the complaint, it is essential that we evaluate the complaint by reference t0 these documents.”]; S.E.C. v. Mozilo (CD. Cal., NOV. 3, 2009, N0. CV09-3994HFWNABX) 2009 WL 3807124, at *7 [granting judicial notice 0f transcripts 0f earnings conference calls]; Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1564-1568 [court cannot take judicial notice 0f the truth 0f hearsay statements 0r facts set forth in otherwise judicially noticeable documents].) 8 In its demurrer, Align states that the consumer class action (Simon and Simon, PC v. Align Technology, Inc. (D. Del., N0. 1:19-CV-00506-LPS) “was dismissed and terminated,” Without providing the context surrounding the dismissal. (Italics original.) It appears from a review 0f the docket in that case that the action was voluntarily dismissed after a magistrate’s report issued recommending that Align’s motion t0 dismiss be granted with leave t0 amend, but before the magistrate’s report was adopted 0r rejected by the district court. The magistrate’s report did not 13 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO that Align embarked 0n a campaign 0f anticompetitive conduct t0 preserve its market share as its patents expired may raise a credible basis t0 suspect someone at Align directed this conduct 0r that the board failed t0 exercise its oversight duties in this regard. This theory is likely t0 raise factual issues that preclude its resolution 0n demurrer, and is not adequately addressed by the briefing before the Court in any event. Because a demurrer does not lie as t0 a portion 0f a cause 0f action (see Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1167), Align’s failure t0 adequately address this theory is fatal t0 its entire demurrer. Align’s arguments regarding the scope 0f Ms. McCall’s specific inspection demands fail for the same reason. If any 0f Ms. McCall’s demands, even in part, is supported by a credible basis t0 suspect wrongdoing, it would be inappropriate t0 terminate this action 0n demurrer. The Court cannot rule out this possibility 0n the record before it, and Align fails t0 cite any case where a court has rejected a Section 220 action at the pleading stage due t0 the overbreadth 0f the inspection demands at issue. And Align can meet and confer with Ms. McCall’s counsel concerning the inspection demands at issue t0 cabin truly-overbroad demands. The Court accordingly OVERRULES Align’s demurrer. V. CONCLUSION For the reasons discussed above, Align’s demurrer is OVERRULED in its entirety. IT IS SO ORDERED. Date: The Honorable Sunil R. Kulkarni Judge 0f the Superior Court address Align’s alternative request that the action be transferred t0 the Northern District 0f California (see Simon and Simon, PC v. Align Technology, Inc. (D. Del., Apr. 24, 2020, N0. CV 19-506 (LPS)) 2020 WL 1975139, at *9, fn. 8), which apparently prompted the plaintiff to re-file in that court. In its reply brief, Defendant characterizes the action in the Northern District (Simon and Simon, PC v. Align Tech, Inc. (N.D. Cal., N0. 3:20-CV-03754-VC) as a “new antitrust action” not cited in Ms. McCall’s complaint, which is a mischaracterization given this context. 14 December 18, 2020