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BORIS FELDMAN, State Bar No. 128838
Email: boris.feldman@wsgr.com
ELIZABETH C. PETERSON, State Bar No. 194561
Email: epeterson@wsgr.com
GIDEON A. SCHOR, NY State Bar No. 2337251 (admitted pro hac vice)
Email: gschor@wsgr.com
CHERYL W. FOUNG, State Bar No. 108868
Email: cfoung@wsgr.com
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 565-5100
Attorneys for Defendants
Larry Page, Sergey Brin,
Eric E. Schmidt, L. John Doerr, John L.
Hennessy, Paul S. Otellini, K. Ram Shriram,
Shirley M. Tilghman,
and Nominal Defendant Google Inc.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
OAKLAND DIVISION
In re GOOGLE INC. SHAREHOLDER
DERIVATIVE LITIGATION
This Document Relates To:
ALL ACTIONS
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Master File No. CV-11-04248-PJH
DEFENDANTS’ NOTICE OF MOTION
AND MOTION TO DISMISS SECOND
AMENDED VERIFIED
CONSOLIDATED SHAREHOLDER
DERIVATIVE COMPLAINT AND
MEMORANDUM OF POINTS AND
AUTHORITIES IN SUPPORT
DATE: March 26, 2014
TIME: 9:00 a.m.
JUDGE: Hon. Phyllis J. Hamilton
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TABLE OF CONTENTS
Page
NOTICE OF MOTION AND MOTION .............................................................................................1
ISSUES TO BE DECIDED (Local Rule 7-4(a)(3)).............................................................................1
MEMORANDUM OF POINTS AND AUTHORITIES.....................................................................2
INTRODUCTION ................................................................................................................................2
A. As the Delaware Court Has Already Held, the Second Amended
Complaint’s New Allegations Fail to Establish a Substantial Likelihood of
Liability ........................................................................................................................2
B. The Second Amended Complaint Fails to Establish that Any Outside
Director Is Beholden to Any Inside Director ..............................................................5
FACTUAL BACKGROUND ..............................................................................................................6
A. The Original Problem: Rogue Online Pharmacies Located World-Wide
Run Google Ads Linking to Sites Through Which U.S. Consumers
Purchase and Import Prescription Drugs.....................................................................7
1. Google’s Business ...........................................................................................7
2. Roguery by Certain Online Pharmacies as of 2003........................................7
3. Google Considers Revising Its Policy.............................................................9
B. Google’s Solution to the Original Problem: In 2003-2004, Google
Implements a New Policy to Address the Roguery and, in 2004-2005,
Details the New Policy in Congressional Testimony................................................10
1. Google’s Internal Debates Balance Complex Issues....................................10
2. Google’s New Policy.....................................................................................11
3. Google Details New Policy in Congressional Testimony............................14
C. Assessment of Google’s Solution to the Original Problem: How the New
Policy Fared................................................................................................................15
D. The Second Amended Complaint Fails to Allege the Requisite Knowledge ..........15
E. The Instant Litigation and the DeKalb Litigation .....................................................16
ARGUMENT ......................................................................................................................................18
I. THE COMPLAINT SHOULD BE DISMISSED BECAUSE PLAINTIFFS’
DEMAND FUTILITY ALLEGATIONS DO NOT ESTABLISH THAT THE
INSIDE DIRECTORS FACE A SUBSTANTIAL LIKELIHOOD OF LIABILITY .........18
A. General Legal Standards Concerning Pleading of Demand Futility ........................18
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B. Specific Legal Standards Defining When a Director Is “Interested” .......................19
C. This Court Should Adopt the Delaware Chancery Court’s Ruling That the
Second Amended Complaint’s New Allegations Fail to Establish
Knowledge on the Part of Any Inside Director.........................................................22
D. In Any Event, the Second Amended Complaint Does Not Allege that Any
Inside Director Knew Google’s Hosting of the Canadian Pharmacy Ads to
Be Illegal.....................................................................................................................26
II. THE COMPLAINT SHOULD BE DISMISSED BECAUSE PLAINTIFFS’
DEMAND FUTILITY ALLEGATIONS DO NOT ESTABLISH THAT THE
OUTSIDE DIRECTORS LACK INDEPENDENCE ...........................................................30
A. Specific Legal Standards Defining When a Director Lacks Independence .............30
B. Because No Director Is Alleged to Be Interested, No Director Can Lack
Independence..............................................................................................................31
C. Having Resigned from the Princeton Presidency, Shirley Tilghman Does
Not Lack Independence from Eric Schmidt ..............................................................32
(i) Ms. Tilghman’s Service as President...................................................................32
(ii) Mr. Schmidt’s Service as Trustee .......................................................................33
(iii) Mr. Schmidt’s Donation.....................................................................................34
III. THE COMPLAINT FAILS TO STATE A CLAIM.............................................................35
No Claim For Breach of Fiduciary Duty ...............................................................................35
No Claim For Waste ...............................................................................................................36
No Claim For Unjust Enrichment ..........................................................................................36
CONCLUSION...................................................................................................................................37
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TABLE OF AUTHORITIES
Page(s)
CASES
Baca ex rel. Insight Enters., Inc. v. Crown, No. 09-1283-PHX, 2010 WL
2812697 (D. Ariz. Jan. 8, 2010) .............................................................................................18
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d
1040 (Del. 2004) .....................................................................................................................18
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ..............................................................................35
Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006).........................................................................18
Cede & Co. v. Technicolor, 634 A.2d 345 (Del. 1993) .....................................................................20
Citron ex rel. United Techs. Corp. v. Daniell, 796 F. Supp. 649 (D. Conn.
1992) .......................................................................................................................................19
David B. Shaev Profit Sharing Account v. Armstrong, No. 1449-N, 2006
WL 391931 (Del. Ch. Feb. 13), aff’d, 911 A.2d 802 (Del. 2006).........................................19
Dichter-Mad Family Partners, LLP v. United States, 709 F.3d 749 (9th Cir.
2013) .......................................................................................................................................11
DiLorenzo v. Norton, No. 07-144 RJL, 2009 U.S. Dist. LEXIS 66862
(D.D.C. July 31, 2009) ...........................................................................................................21
Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) ............................................................................20
Hartsel v. Vanguard Group, Inc., No. 5394-VCP, 2011 WL 2421003 (Del.
Ch. June 15, 2011), aff’d, 38 A.3d 1254 (Del. 2012) ................................................21, 22, 28
In re Allergan, Inc., No. 10-01352 DOC, 2011 WL 1429626 (C.D. Cal. Apr.
12, 2011) .................................................................................................................................19
In re Autodesk, Inc., S’holder Deriv. Litig., No. C-06-7185-PJH, 2008 WL
5234264 (N.D. Cal. Dec. 15, 2008) .................................................................................19, 20
In re Baxter Int’l, Inc. S’holders Litig., 654 A.2d 1268 (Del. Ch. 1995) ....................................19, 20
In re Bidz.com, Inc., Deriv. Litig., 773 F. Supp. 2d 844 (C.D. Cal. 2011)........................................34
In re Computer Sciences Corp. Deriv. Litig., No. 06-05288-MRP, 2007 WL
1321715 (C.D. Cal. Mar. 26, 2007), aff’d, 310 F. App’x 128 (9th
Cir. 2009) ................................................................................................................................18
In re Dow Chem. Co. Deriv. Litig., No. 4349-CC, 2010 WL 66769 (Del.
Ch. Jan. 11, 2010) ...................................................................................................................19
In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808 (Del. Ch.
2005), aff’d, 906 A.2d 766 (Del. 2006)............................................................................33, 34
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In re The Goldman Sachs Group, Inc., S’holder Litig., No. 5215-VCG,
2011 WL 4826104 (Del. Ch. Oct. 12, 2011) ...................................................................33, 34
In re VeriSign, Inc., Deriv. Litig., 531 F. Supp. 2d 1173 (N.D. Cal. 2007) ................................11, 31
Jackson Nat’l Life Ins. Co. v. Kennedy, 741 A.2d 377 (Del. Ch. 1999)............................................36
Jacobs v. Yang, No. 206-N, 2004 WL 1728521 (Del. Ch. Aug. 2, 2004),
aff’d mem., 867 A.2d 902 (Del. 2005) ...................................................................................34
King v. Baldino, 648 F. Supp. 2d 609 (D. Del. 2009), aff’d, 409 F. App’x
535 (3d Cir. 2010)...................................................................................................................19
La. Mun. Police Emps. Ret. Sys. v. Hesse, No. 12-cv-4017 ALC, 2013 U.S.
Dist. LEXIS 123338 (S.D.N.Y. July 26, 2013) ...............................................................22, 28
La. Mun. Police Emps. Ret. Sys. v. Wynn, No. 12-cv-509 JCM, 2013 U.S.
Dist. LEXIS 14013 (D. Nev. Feb. 1, 2013) .....................................................................22, 28
Midwestern Teamsters Pension Trust Fund v. Deaton, No. H-08-1809, 2009
U.S. Dist. LEXIS 50521 (S.D. Tex. May 7, 2009) adopted by
Midwestern Teamsters Pension Trust Fund v. Deaton, No. H-08-
1809, 2009 U.S. Dist. LEXIS 129701 (S.D. Tex. May 26, 2009). .......................................26
Orman v. Cullman, 794 A.2d 5 (Del. Ch. 2002) ................................................................................31
Rales v. Blasband, 634 A.2d 927 (Del. 1993)..............................................................................18, 19
Stone ex rel. AmSouth Bancorp. v. Ritter, 911 A.2d 362 (Del. 2006) .........................................19, 20
Wood v. Baum, 953 A.2d 136 (Del. 2008) ...................................................................................21, 28
Zepeda v. PayPal, Inc., 777 F. Supp. 2d 1215 (N.D. Cal. 2011).......................................................11
STATUTES, RULES, AND REGULATIONS
18 U.S.C. § 1955 .................................................................................................................................22
21 U.S.C. § 331 ...................................................................................................................................27
21 U.S.C. § 952 ...................................................................................................................................27
Del. Code Ann. tit. 8, § 102(b)(7).......................................................................................................20
Del. Gen. Corp. Law § 220.................................................................................................................17
Fed. R. Civ. P. 8 ....................................................................................................................................1
Fed. R. Civ. P. 9(b)..........................................................................................................................1, 35
Fed. R. Civ. P. 12(b)(6)...................................................................................................................1, 18
Fed. R. Civ. P. 23.1 .........................................................................................................................1, 18
Civil L.R. 7-4(a)(3) ...............................................................................................................................1
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NOTICE OF MOTION AND MOTION
NOTICE IS HEREBY GIVEN that, on March 26, 2014, at 9 a.m., or as soon thereafter as
ordered by the Court, before the Honorable Phyllis J. Hamilton, located at the United States
District Court, 1301 Clay Street, Oakland, California, Nominal Defendant Google Inc. (“Google”
or the “Company”) and Individual Defendants Larry Page, Sergey Brin, Eric E. Schmidt, L. John
Doerr, John L. Hennessy, Paul S. Otellini, K. Ram Shriram, and Shirley M. Tilghman (collectively
“Defendants”) will move to dismiss the Second Amended Verified Consolidated Shareholder
Derivative Complaint (“Second Amended Complaint” or “SAC”) with prejudice under Federal
Rules of Civil Procedure 12(b)(6), 9(b), 8, and 23.1, and applicable state law. This Motion is
based on Plaintiffs’ failure to make a demand on Google’s Board of Directors or plead
particularized facts showing why such demand is excused, and their failure to properly plead any
claims upon which relief may be granted. This Motion is based on this Notice and Motion; the
Memorandum of Points and Authorities; the Declaration of Gideon A. Schor and exhibits; the
Request for Judicial Notice; all papers filed herein; oral argument of counsel; and the record in this
action.
ISSUES TO BE DECIDED (Civil L.R. 7-4(a)(3))
Whether Plaintiffs have cured their earlier deficient allegations and now adequately plead
demand futility with sufficient particularity?
Whether Plaintiffs have cured their earlier deficient allegations and now adequately plead
their state law claims?1
1 The Court need not reach this issue if it grants the Motion to Dismiss for failure to plead
demand excusal.
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MEMORANDUM OF POINTS AND AUTHORITIES
INTRODUCTION
Plaintiffs’ Second Amended Complaint,2 which is Plaintiffs’ third complaint in this action,
fails to cure the defects that doomed both of the previous complaints. Accordingly, the Second
Amended Complaint should be dismissed with prejudice.
Plaintiffs’ latest pleading is fatally flawed in two respects.3
A. As the Delaware Court Has Already Held, the Second Amended Complaint’s New
Allegations Fail to Establish a Substantial Likelihood of Liability
As the Delaware Chancery Court has already held, the allegations regarding the inside
directors’ knowledge that are now included in the Second Amended Complaint concern the wrong
time period and hence are irrelevant.4 This Court should follow the Delaware court’s reasoning
and dismiss the Second Amended Complaint.
The substance of these new allegations in the Second Amended Complaint, consisting
mostly of long quotations from emails among Google employees, is copied from the complaint
unsealed earlier this year in the DeKalb action pending in Delaware Chancery Court.5 In granting
2 Plaintiffs’ Second Amended Complaint is abbreviated herein for citational purposes as
“SAC.” Plaintiffs’ Amended Complaint (i.e., the immediate predecessor of the Second Amended
Complaint) is abbreviated herein for citational purposes as “AC.”
3 The Second Amended Complaint’s new allegations – i.e., those allegations that did not
appear in Plaintiffs’ Amended Complaint – are identified in a redline version comparing the
Second Amended Complaint and the Amended Complaint that is submitted herewith. See
Declaration of Gideon A. Schor dated December 6, 2013, submitted herewith (“Schor Decl.”) Ex.
1.
4 The inside directors are defendants Larry Page, Sergey Brin, and Eric Schmidt. SAC ¶¶ 28,
30. The only directors alleged by the Second Amended Complaint to face a substantial likelihood
of liability are the inside directors. SAC ¶ 122. The Second Amended Complaint makes no
allegation that the outside directors face a substantial likelihood of liability.
5 See infra at 3 n.7. During oral argument on Defendants’ motion to dismiss the Amended
Complaint, Plaintiffs asked for “leave to amend one more time” because a complaint in Delaware
Chancery Court had been recently “unsealed” and contained lines from supposedly relevant emails
and other documents. Transcript of oral argument on July 3, 2013, Schor Decl. Ex. 2 (“7/3/13
Tr.”) 33-34. The “unsealed” Delaware complaint to which Plaintiffs were referring was the
DeKalb complaint (although, to be precise, the “unsealed” complaint still contains a small number
of redactions). For the Court’s convenience, a copy of the unsealed DeKalb complaint is attached
to the Schor Declaration as Exhibit 3.
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the stay motion filed by the DeKalb defendants,6 Chancellor Leo Strine reviewed those precise
allegations and compared them to the allegations in Plaintiffs’ (now dismissed) Amended
Complaint,7 for the purpose of determining whether the DeKalb complaint was any better than the
Amended Complaint, and thus whether DeKalb should be allowed to proceed simultaneously with
the instant action. In ordering that DeKalb be stayed, the Chancellor ruled that the DeKalb
allegations were no better than, or even different from, those in the Amended Complaint. 1/29/13
Tr. 27 (“I don’t see the Delaware [i.e., DeKalb] complaint as being any better positioned with
respect to arguing the key issues.”); 1/29/13 Tr. 16 (“[U]ltimately you haven’t come up with
anything that’s really different.”); 1/29/13 Tr. 25 (“I invested an awful lot of time in reading the
pleadings and I don’t see a material improvement.”).
The Chancellor’s ruling turned on what the inside directors knew before and after a
particular chronological point – namely, Google officials’ congressional testimony in 2004 and
2005 regarding the details of Google’s new policy and how the new policy would address, among
other things, the problem of ads by Canadian pharmacies.8 Thus, for the Chancellor, the DeKalb
allegations regarding what the directors knew in 2003 and 2004 – i.e., before Google officials
disclosed the new policy to Congress – shed no light whatsoever on whether any directors faced a
substantial likelihood of liability. As the Chancellor tartly put it, “[T]he problem with the
obsession with 2003 and 2004 is it’s not translated by you all into a cogent theory.”9 The reason
for this holding was that, given Google’s creation of a new policy and disclosure of that new policy
to Congress, the issue of whether there was a substantial likelihood of liability depended on
6 All Defendants in the instant action were and are defendants in the DeKalb action.
7 The Amended Complaint was submitted to and reviewed by Chancellor Strine in connection
with the motion to stay the DeKalb action. Transcript of oral argument on January 29, 2013, Schor
Decl. Ex. 4 (“1/29/13 Tr.”) 23 (“I have a diligent staff who went through and we compared the
allegations . . . .”); 1/29/13 Tr. 25 (“I invested an awful lot time in reading the pleadings and I don’t
see a material improvement.”). The allegations in SAC ¶¶ 33-65 are drawn from the DeKalb
complaint ¶¶ 102-33. Compare Schor Decl. Ex. 3 ¶¶ 102, 105, 107, 108, 110, 112, 116, 119, 121,
129, 132, 133, with SAC ¶¶ 33-65.
8 1/29/13 Tr. 26 (Google “got called to Congress in 2004 and 2005” and “Google told Congress
what it was doing.”); 1/29/13 Tr. 28 (“Again, to me, the problem I have is – call me ridiculous in
the sense that I actually focus on chronological time.”).
9 1/29/13 Tr. 25-26.
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whether any inside directors knew the new policy – not the old policy – to be ineffective.
As the Chancellor observed, only allegations concerning 2005-2007 – when the new policy
had a sufficient track record to permit review and assessment by Google – could shed light on
whether the new policy was effective.10 The Chancellor explained that the critical issue in the case
is what the inside directors knew after the congressional testimony and after Google’s two third-
party verifiers had been hired: “The real issue is, what was done after it went to Congress, after
they put in place these two programs with these two things? Were those attended to? Were there
insiders who actually knew they were deficient and were just a beard? What I mean by as a beard,
just something that’s covering up, that’s making it look like there’s compliance when knowing that
there isn’t.”11 The Chancellor reviewed the Amended Complaint as well and concluded that the
key issue in the instant action is the same as that in DeKalb: “[Plaintiffs in the California federal
action] basically say Page, Brin and Schmidt knowingly did this in order to pump up profits,
despite knowing that what they had done to supposedly address the concerns was inadequate to
actually address the concerns that people were – that Canadian pharmacies were using Google to
find American customers and to make illegal sales.”12 In concluding, the Chancellor again
explained that what the inside directors knew after the congressional testimony was the issue “that
both the California and the Delaware plaintiffs have to address. I don’t think anybody’s addressed
them better or worse.”13 Because the DeKalb allegations that Plaintiffs have now imported into the
Second Amended Complaint all concerned events in 2003 and hence did not address this issue any
better than did the Amended Complaint, the Chancellor stayed the DeKalb case in favor of the
instant action.14
10 1/29/13 Tr. 9 (“[T]he key really is that, when they did what they told Congress they were
doing to address the problems that you pointed out existed, that what they did they knew to be
ineffective. And that really is stuff that we’d be talking about in 2005, 2006, and 2007.” (emphasis
added)).
11 1/29/13 Tr. 29 (emphasis added).
12 1/29/13 Tr. 23 (emphasis added).
13 1/29/13 Tr. 30.
14 1/29/13 Tr. 9, 25, 31.
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In engrafting the DeKalb allegations onto the Amended Complaint to create the Second
Amended Complaint, Plaintiffs are simply relying on allegations that the Chancellor has already
ruled added nothing to the (now-dismissed) Amended Complaint. Those allegations, the
Chancellor held, fail to address the key issue, which is whether any inside directors face a
substantial likelihood of liability – that is, whether any inside directors, after the congressional
testimony in 2004 and 2005, knew the new policy to be ineffective. In short, the Second Amended
Complaint’s new allegations, which all concern pre-testimony events in 2003, were dead-on-
arrival. Defendants respectfully request that this Court adopt Chancellor Strine’s conclusion and
hold that the Second Amended Complaint’s new allegations of purported knowledge do not cure
the inadequacies of the Amended Complaint’s knowledge allegations.15
B. The Second Amended Complaint Fails to Establish that Any Outside Director Is
Beholden to Any Inside Director
The Second Amended Complaint’s allegations regarding independence do not establish
that any of the outside director defendants is beholden to any of the inside director defendants. In
fact, the Second Amended Complaint’s allegations do the opposite: the Second Amended
Complaint admits – albeit with coy obliqueness – that defendant Tilghman stepped down as
President of Princeton University.16 Thus, the basis for the Court’s prior conclusion that defendant
Tilghman was beholden to defendant Schmidt is now absent from the case: defendant Tilghman’s
15 Even if this Court were not to adopt Chancellor Strine’s conclusion, the Court would still be
compelled to hold that Plaintiffs fail to allege a substantial likelihood of liability and thus fail to
allege interestedness on the part of any director. Where, as here, a plaintiff alleges breach of the
duty of loyalty based on bad faith and purports to allege that a director faces a substantial
likelihood of liability for having failed to prevent certain conduct, the allegation of a substantial
likelihood of liability cannot succeed unless the plaintiff alleges that the director knew the conduct
at issue to be illegal. As explained infra in Point I.D., the Second Amended Complaint fails to
allege that any inside director knew that Google’s hosting of the advertisements in question was
illegal. For this reason alone, the Second Amended Complaint should be dismissed for failure to
plead demand futility.
16 SAC ¶ 23 (Tilghman “serves or served as President of Princeton” (emphasis added)); see
also “Christopher L. Eisgruber named 20th president of Princeton University,” available at
http://www.princeton.edu/main/news/archive/S36/65/54C75 (Schor Decl. Ex. 5) (noting end of
Tilghman’s term as President effective July 1, 2013); “Eisgruber installed as president of
Princeton; upholds ideal of liberal arts,” available at
http://www.princeton.edu/main/news/archive/S37/98/69Q43 (Schor Decl. Ex. 23) (referring to
“former president[] Shirley M. Tilghman”).
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resignation from the Princeton presidency has terminated both her fundraising responsibility at
Princeton and Princeton’s control over the terms (whether performance-based or otherwise) of her
employment as President. Accordingly, there is no reason to believe that a decision by her to
authorize litigation against Schmidt could result in adverse consequences for her personally.
In sum, the Second Amended Complaint’s new allegations do not raise a reasonable doubt
as to the disinterestedness or independence of a majority of Google’s directors. Accordingly, the
Second Amended Complaint should be dismissed for failure to allege demand futility. Because
Plaintiffs have had sufficient opportunities to amend,17 the dismissal of the Second Amended
Complaint should be with prejudice.
FACTUAL BACKGROUND
This shareholder derivative action was filed following an announcement on August 24,
2011, that Google had entered into a non-prosecution agreement (“NPA”) with the Department of
Justice (“DOJ”) on August 19, 2011.18 In the NPA, Google agreed to civil forfeiture of $500
million following the government’s investigation of Google’s acceptance of ads placed by online
Canadian pharmacies that did not comply with U.S. law restricting the importing and dispensing of
prescription drugs.19 The DOJ entered into the NPA with Google alone; the NPA does not name,
let alone impugn, any of the individual defendants in this action.20
Plaintiffs, who have sued certain of Google’s directors on Google’s behalf, have never
made a demand on Google’s Board of Directors to investigate potential wrongdoers and decide
whether and how to pursue legal action.21 Nor have Plaintiffs excused their admitted failure to
make a demand. This Court dismissed both Plaintiffs’ original complaint and their Amended
Complaint for failure to plead demand futility.22 As explained below, the Second Amended
17 See 7/3/13 Tr. 33-34 (Plaintiffs’ counsel asking for leave to amend “one more time”).
18 The NPA is attached to the Schor Declaration as Exhibit 6.
19 NPA ¶¶ 1, 4-6; SAC ¶ 109.
20 NPA passim.
21 SAC ¶ 122.
22 Order dated May 8, 2012, Schor Decl. Ex. 7 (“2012 Order”) at 20; Order dated September
26, 2013, Schor Decl. Ex. 8 (“2013 Order”) at 14.
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Complaint likewise fails to plead demand futility and should be similarly dismissed.
A. The Original Problem: Rogue Online Pharmacies Located World-Wide Run Google
Ads Linking to Sites Through Which U.S. Consumers Purchase and Import
Prescription Drugs
1. Google’s Business
Google is the world’s leading Internet search engine.23 It “generates revenue primarily by
delivering relevant, cost-effective online advertising.”24 Google’s largest advertising program,
AdWords, displays advertisements in response to queries by Google’s search engine users.25
Advertisers pay fees to Google for each advertisement.26 When users enter queries into
Google’s search window and hit enter, the search engine responds by filling the screen with a list
of links constituting the search results.27 In many instances, one or more links appearing near the
top of the page (sometimes under the heading “sponsored” or “ads”) are advertisements; the
company or entity to which any advertisement in this separate group relates paid Google a fee to
place its advertisement in proximity to the search results.28 More specifically, these advertisers bid
on keywords to have their advertisements appear when the user enters a query that matches the
selected keywords.29 Advertisers can also select the countries where their advertisements will
display; the selection is known as “geotargeting.”30
2. Roguery by Certain Online Pharmacies as of 2003
By 2003, pharmacies, like many other businesses, had established online presences.31 A
23 SAC ¶ 17. Google is a Delaware corporation with its principal executive offices in
Mountain View, California. SAC ¶ 17.
24 SAC ¶ 17.
25 SAC ¶ 72.
26 SAC ¶ 72.
27 SAC ¶¶ 71, 72.
28 SAC ¶¶ 71, 72; Buyer Beware: The Danger of Purchasing Pharmaceuticals over the
Internet: Hearing before the Permanent Subcomm. on Investigations of the Committee on
Governmental Affairs, 108th Cong. 684 (2004) (Statement of Sheryl Sandberg, Vice President,
Global Online Sales and Operations, Google Inc.) (Schor Decl. Ex. 9) (“Sandberg”) at 262.
29 SAC ¶ 72; Sandberg at 262.
30 SAC ¶ 72.
31 See, e.g., SAC ¶¶ 35, 37, 39, 49.
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number of these were termed “rogue pharmacies” because they perpetrated, or enabled, drug
transactions with U.S. consumers that violated U.S. law.32
The rogue pharmacies were located not just in Canada, but world-wide – including the
U.S.33 Indeed, while Plaintiffs reference a Washington Post article that mentioned a teenager who
obtained painkillers from an online rogue pharmacy, Plaintiffs omit to mention that the rogue
pharmacy was located in Florida.34 Thus, the article is irrelevant to Plaintiffs’ claims, which
concern online pharmacies located in Canada.35
The roguery of both foreign and domestic pharmacies included duping U.S. consumers into
purchase of substandard drugs and enabling U.S. consumers to purchase prescription drugs sans
prescription.36 But the roguery of foreign pharmacies also consisted of enabling U.S. consumers to
make online purchases of prescription drugs from foreign countries (including but not limited to
Canada) and to import them into the U.S., regardless of whether the drugs were substandard or the
purchase was without a prescription.37 Importing prescription drugs from a foreign country is itself
a violation of U.S. law.38
Google’s mission was and is to “organize the world’s information” – that is, to make the
greatest amount of information and consumer choice available to its users.39 The sheer size of the
32 SAC ¶ 33.
33 SAC ¶¶ 33, 37, 98; see also SAC ¶¶ 74, 75, 82, 93, 112.
34 SAC ¶¶ 55, 79 (referencing Gilbert M. Gaul & Mary Pat Flaherty, Google to Limit Some
Drug Ads, Washington Post, Dec. 1, 2003, at A01, Schor Decl. Ex. 10 (“Washington Post 2003”)
(cited in SAC ¶ 55) (noting that Google’s decision to create a new more restrictive policy toward
online pharmaceutical advertisers “comes after the company was contacted by the father of a
teenage boy in suburban Chicago who said his son had used Google’s search engine to locate and
later order Vicodin from a Web site in Florida.”) (emphasis added)).
35 See, e.g., SAC ¶ 3.
36 See, e.g., SAC ¶¶ 33, 37, 43, 49; Sandberg at 264.
37 SAC ¶¶ 73, 74, 81, 98, 101, 104-06; NPA ¶¶ 2(f), 2(g); Sandberg at 265 n.5; see also SAC
¶¶ 7, 29, 33.
38 Sandberg 265 n.5.
39 SAC ¶¶ 40, 48, 51, 62; Sandberg at 262; Safety of Imported Pharmaceuticals: Strengthening
Efforts to Combat the Sales of Controlled Substances Over the Internet: Hearing Before the
Subcomm. on Oversight and Investigations of the Committee on Energy and Commerce, 109th
Cong. 46 (2005) (Statement of Andrew McLaughlin, Senior Policy Counsel, Google Inc.) (Schor
Decl. Ex. 11) (“McLaughlin”) at 191, 198.
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Internet makes that undertaking staggering: a Google search covers over four billion webpages.40
Thus, Google had long taken the position that it could not police the web.41 Nonetheless, until late
2003, Google did have a policy restricting advertisements by online pharmacies (including foreign
pharmacies42): it allowed such advertisements only for FDA-approved drugs and only where the
pharmacies’ websites stated that a prescription was required.43
3. Google Considers Revising Its Policy
By 2003, numerous developments led Google to consider revising its policy concerning ads
by online pharmacies. For example, Google’s users needed protection from rogue pharmacies that
were selling counterfeit and unsafe products online.44 Governmental authorities were proving
unable to prosecute rogue online pharmacies and law-breaking consumers.45 In addition,
Drugstore.com, a large non-rogue online pharmacy, saw its market share threatened by rogue
online pharmacies and began aggressively pressuring large search engines – Google, Yahoo!, and
MSN/Overture – to bar advertising by online pharmacies that were not certified by the VIPPS46
program of the National Association of Boards of Pharmacy (“NABP”).47 In 2003, only 14 online
40 Sandberg at 262.
41 SAC ¶ 39; McLaughlin at 198 (“[W]e are not a law enforcement agency”).
42 The policy also barred online pharmacies from targeting the United Kingdom and applied
more stringent restrictions in Japan. SAC ¶ 36.
43 SAC ¶ 40.
44 Sandberg at 264.
45 SAC ¶ 37. See also Washington Post 2003 (noting that Rep. John D. Dingell “expressed
frustration with the slow pace of federal regulators in attacking the Internet problem”); id. (noting
that Rep. James C. Greenwood attributes problem to fact that “Internet pharmacies are regulated by
the states and the laws are often inconsistent or confusing”); SAC ¶ 33 (noting that importation of
drugs into the U.S. violates law, and that law-breakers include not just businesses but also
individual consumers who obtain drugs through foreign online pharmacies).
46 “VIPPS” stands for Verified Internet Pharmacy Practice Sites. SAC ¶ 36. To be VIPPS-
certified, an online pharmacy had to comply with the licensing and inspection requirements of its
own state and every state to which it dispensed pharmaceuticals. Id. Canadian pharmacies were
ineligible for VIPPS certification. NPA ¶ 2(q).
47 SAC ¶¶ 48, 49; see also SAC ¶¶ 36, 37, 39, 40. Among Drugstore.com’s tactics: issuing
mock press releases with fabricated quotes falsely attributed to Google; calling all VIPPS-
uncertified pharmacies “illegal,” an assertion that Google flatly disputed; and accusing Google of
“killing” consumers by permitting ads from VIPPS-uncertified pharmacies. SAC ¶ 40.
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pharmacies were VIPPS-certified.48 Drugstore.com informed Google and other search engines
that, if they did not voluntarily bar advertisements by online pharmacies that were not VIPPS-
certified, then Congress would have to outlaw the search engines’ hosting of such
advertisements.49 Thus, according to Drugstore.com, the hosting of advertisements by pharmacies
not certified by VIPPS was not illegal at the time and would not be illegal absent future
congressional enactment.50
B. Google’s Solution to the Original Problem: In 2003-2004, Google Implements a New
Policy to Address the Roguery and, in 2004-2005, Details the New Policy in
Congressional Testimony
1. Google’s Internal Debates Balance Complex Issues
Google personnel internally debated possible solutions to the problems presented by rogue
online pharmacies.51 In particular, much thought was given to how to restrict the roguery without
limiting Google’s ability to provide maximum information and consumer choice to its users.52
Among the various approaches discussed were accepting advertisements only from (i) VIPPS-
certified online pharmacies or (ii) online pharmacies certified by another third-party verifier.53
VIPPS-certification was the most restrictive option available, as it would bar ads from all
but a small number of online pharmacies, would exclude pharmacies that were not VIPPS-certified
but were still law-abiding, and thus would severely limit consumer choice.54 Moreover, VIPPS
48 SAC ¶ 60.
49 SAC ¶¶ 48, 49. Drugstore.com also made clear that it was lobbying Washington to take
action against the search engines. SAC ¶ 48.
50 See SAC ¶ 49.
51 SAC ¶¶ 35-42, 47-55, 61-65.
52 SAC ¶¶ 36 (Google employee warning against overinclusive solutions: “to block all
keywords” – e.g., codeine – “effectively blocks non-pharma related ads and pharmaceutical
companies themselves”), 39, 40, 48; McLaughlin at 198 (noting overbreadth problem).
53 See SAC ¶ 39.
54 SAC ¶¶ 39, 40 (“Our policy is designed to provide maximum information and choice to
users and being this restrictive [i.e., approving ads only from VIPPS-certified pharmacies] is in
conflict with that goal.”); see also SAC ¶ 37 (noting that Canadian pharmacies sell discounted
drugs to U.S. senior citizens); Shan Li & Tiffany Hsu, Google to Ppay penalty for ads, L.A. TIMES,
Aug. 25, 2011 (Schor Decl. Ex. 12) (quoted in SAC ¶ 111) (noting that foreign internet pharmacies
discount drugs by “as much as 85% compared with drugstore prices in the United States”).
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was hardly foolproof: an online pharmacy that a New York Times article had described as having
questionable practices was itself erroneously certified by VIPPS.55
2. Google’s New Policy
Far from failing to act in the face of online pharmacies’ conduct, Google formulated a new
policy, announced on December 1, 2003, that directly addressed the conduct. Principally, the new
policy required any online pharmacy located in the U.S. or Canada to be certified by SquareTrade,
Inc. (“SquareTrade”), a third-party verifier,56 before that pharmacy could run an advertisement on
Google. As a pre-condition for certification, SquareTrade verified that the pharmacy was licensed
in at least one state in the U.S. or Canada.57 Since SquareTrade did not and would not certify any
online pharmacy located outside of the U.S. and Canada, the new policy effectively barred all
advertisements from all online pharmacies located outside of the U.S. and Canada.58
For several reasons, Plaintiffs’ conclusory assertion that SquareTrade was “window
dressing” is refuted by Plaintiffs’ own substantive allegations and by the documents incorporated
therein.59
First, the demonstrable goal of SquareTrade’s guidelines was to weed out, not shield,
55 SAC ¶ 39. Google’s task was made even more complex by the fact that rogue pharmacies
were evading efforts to restrict their roguery, constantly reforming under new names and playing a
cat-and-mouse game with regulators and search engines. SAC ¶ 37 (“the names and urls change
constantly”); The Power of Google: Serving Consumers or Threatening Competition?: Hearing
Before the Subcomm. on Antitrust, Competition Policy, and Consumer Rights of the Comm. of the
Judiciary, 112th Cong. 16 (2011) (Statement and Response of Eric Schmidt, Executive Chairman,
Google Inc.) (Schor Decl. Ex. 13) (“Schmidt”) at 120; McLaughlin at 198-99; see also Schmidt at
113, 117, 130, 137.
56 In 2006, Google replaced SquareTrade with PharmacyChecker.com LLC
(“PharmacyChecker”) as its third-party verifier. SAC ¶ 90.
57 SAC ¶¶ 82, 83.
58 See Sandberg at 265 (“[O]nline pharmacy advertisers must be members in good standing of
the Square Trade Licensed Pharmacy Program . . . . The Square Trade Program is only open to
online pharmacies based in the U.S. or Canada.”); see also SAC ¶¶ 82, 107, 109, 112.
59 SAC ¶ 82. See Dichter-Mad Family Partners, LLP v. United States, 709 F.3d 749, 784 (9th
Cir. 2013) (affirming dismissal where conclusory assertions were “plainly contradict[ed]” by other
factual assertions in complaint); accord In re VeriSign, Inc., Deriv. Litig., 531 F. Supp. 2d 1173,
1195 (N.D. Cal. 2007) (granting motion to dismiss derivative action where conclusory assertion of
board inaction was contradicted by other complaint allegations); Zepeda v. PayPal, Inc., 777 F.
Supp. 2d 1215, 1222 (N.D. Cal. 2011) (granting motion to dismiss where conclusory allegations
were contradicted by other facts pleaded in complaint).
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wrongdoers. The Wall Street Journal reported that just as VIPPS guidelines were under the
auspices of the NABP, so SquareTrade’s guidelines were under the auspices of the National
Community Pharmacists Association (“NCPA”), which represented 24,000 independent U.S.
pharmacies.60 Those NCPA pharmacies had a clear motivation to establish guidelines that would
bar advertisements from rogue pharmacies, with which the NCPA pharmacies were competing.
Second, Plaintiffs’ insinuation that the paucity of VIPPS-certified pharmacies was due to
the alleged stringency of the VIPPS certification criteria is misleading.61 The paucity was due in
part to the steep $4,375 fee that each online pharmacy had to pay for VIPPS certification.62 For
small but law-abiding pharmacies, that fee was prohibitive.63 By contrast, the fee paid for
SquareTrade certification was only $200 plus $50 per month for three months.64 By keeping its fee
low, SquareTrade broadened the array of SquareTrade-certified pharmacies and thus benefited
consumers with broader online choices.65 The low fee also ended the unfair (i.e., wealth-based
rather than merit-based) exclusion of smaller legitimate pharmacies from online commerce.66
Third, SquareTrade was already in use by Google’s competitors and other large internet
companies, and thus was the industry standard at the time. For example, Yahoo! – which was
Google’s main search-engine competitor, along with MSN – was already using SquareTrade to
verify online pharmacy advertisers.67 Overture, which was a subsidiary of Yahoo! and a supplier
of advertisements to both Yahoo! and MSN, was using SquareTrade for online wine
advertisements and informed Google that it was considering using SquareTrade for online
60 Carl Bialik, Web Engine Ads for Pharmacies In Canada Rile Some in the U.S., Wall Street
Journal Online, June 2004 (Schor Decl. Ex. 14) (“WSJ 2004”) (cited in SAC ¶ 84) at 2.
61 As noted above at 10-11, the VIPPS criteria and certification process were hardly foolproof
and had themselves been successfully gamed by at least one rogue online pharmacy that had
obtained VIPPS certification but was still engaging in misconduct.
62 WSJ 2004 at 2.
63 WSJ 2004 at 2.
64 WSJ 2004 at 2.
65 See WSJ 2004 at 2.
66 See WSJ 2004 at 2.
67 WSJ 2004 at 1-2; SAC ¶¶ 6, 40.
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pharmacy advertisements.68 eBay already used SquareTrade to verify products sold on its
website.69 Even Drugstore.com, the great advocate of VIPPS certification, had obtained
certification by SquareTrade.70 It bears noting that when Google began using VIPPS in 2009, it
became the first major search engine to use VIPPS.71
Fourth, as explained in Google’s congressional testimony of 2004, SquareTrade’s
verification process was substantive and meaningful. SquareTrade undertook to confirm that each
of its certified online pharmacies: was licensed and was employing only licensed pharmacists, with
SquareTrade reverifying licensure with licensing bodies every three months; was the true owner of
the website running the advertisement at issue; would agree not to sell prescription drugs without a
prescription obtained from the buyer’s personal doctor after an in-person visit, rather than by a
phone or online consultation; would perform an age verification for all prescriptions; would
commit to complying with all laws applicable both where the pharmacy was located and where the
buyer was located; and would verify the DEA number of anyone prescribing a controlled
substance.72
Canadian online pharmacies had to satisfy additional obligations for certification. As
Google official Sheryl Sandberg testified to Congress in 2004 (see infra at Factual Background,
Part B.3.):
While licensed Canadian pharmacies are permitted to obtain SquareTrade
certification, they are also required to agree that they will not target US consumers,
whether by providing shipping rates and information, by comparing the efficacy of
Canadian drugs to FDA-approved drugs, or by any other means that would lead a US
consumer to believe that s/he can purchase pharmaceutical drugs from [the]
Company’s website. Canadian pharmacies must also put a disclaimer on the home
page of their website that states: “The FDA, due to the current state of their
regulations, has taken the position that virtually all shipments of prescription drugs
imported from a Canadian pharmacy by a U.S. consumer will violate the law.”73
68 SAC ¶¶ 39, 41.
69 SAC ¶ 39.
70 WSJ 2004 at 2.
71 SAC ¶ 109; NPA ¶ 2(q).
72 Sandberg at 264-65.
73 Sandberg at 265 n.5.
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Fifth, the website of every certified pharmacy had to display an electronic certification seal,
which, when clicked by the user, revealed the pharmacy’s member profile, including the basis for
believing the pharmacy to be legitimate.74
Sixth, as further explained in Google’s congressional testimony of December 2005 (see
infra at Factual Background, Part B.3.), the new policy clearly had “teeth.”75 In the almost two
years following the launch of Google’s SquareTrade program, Google rejected an average of more
than 1,500 pharmaceutical advertisements per month, and more than 30,000 in total.76
Finally, nothing in the Second Amended Complaint suggests that, when the new policy was
begun, the emphasis placed by SquareTrade and Google on verification of licensure was
misplaced. Plaintiffs’ allegations offer no reason why, at that point in time, licensure of a
Canadian online pharmacy by a Canadian authority was not a reasonable basis for expecting that
pharmacy to engage only in law-abiding conduct. Certainly, the FDA considered Canada’s drug-
regulation system to be reliable. Plaintiffs rely on part of an article quoting an FDA commissioner,
but omit mentioning that another part of the same article quotes the same commissioner as stating
“clearly Canada has a very strong regulatory system,” notwithstanding wrongdoers who seek to
evade regulatory scrutiny.77
3. Google Details New Policy in Congressional Testimony
On July 22, 2004, Sheryl Sandberg, Google’s Vice President of Global Online Sales and
Operations, gave testimony in Congress detailing the specific elements of Google’s new policy,
including the details of certification by SquareTrade.78 On December 13, 2005, Andrew
McLaughlin, Google’s Senior Policy Counsel, gave similar congressional testimony, adding an
74 Sandberg at 265-66. Separate from its hiring of SquareTrade, Google also would not permit
advertisements from websites advertising prescription drugs (or using prescription drug names as
keywords) unless the website clearly stated that a prescription was required. Sandberg at 266.
Further, Google continued to reject advertisements of FDA-unapproved drugs. Sandberg at 266.
75 McLaughlin at 197.
76 McLaughlin at 196-97.
77 WSJ 2004 at 1; SAC ¶ 84.
78 The Sandberg testimony is attached to the Schor Declaration as Exhibit 9.
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assessment of the new policy’s performance since its adoption.79
C. Assessment of Google’s Solution to the Original Problem: How the New Policy Fared
Except as discussed below, Plaintiffs’ allegations do not dispute that Google’s new policy
successfully restricted rogue online pharmacies throughout the world from running advertisements
linking to sites by which U.S. consumers purchase and import prescription drugs. Plaintiffs’
claims challenge only the Canadian portion of the new policy.
Specifically, Plaintiffs allege that Canadian online pharmacies certified by SquareTrade
and PharmacyChecker were targeting U.S. consumers in violation of the new policy, and that some
Google employees assertedly assisted in the claimed violation.80 Plaintiffs also allege that,
notwithstanding the new policy, uncertified pharmacies had learned to advertise in the U.S. (i) by
running advertisements in countries where certification was not required, and then later changing
the targeting to the U.S.,81 and (ii) by omitting drug terms from ad text but not from keyword lists
(thereby evading Google’s own manual review of uncertified pharmacy advertisements),82 with
some Google employees assisting in this evasion of manual review.83 Plaintiffs further allege that,
after the new policy was in effect, online Canadian pharmacies were selling prescription drugs
without a prescription and, in any event, were running advertisements linking to sites through
which U.S. consumers were purchasing and importing prescription drugs (regardless of whether
the purchases were without a prescription).84 Finally, Plaintiffs allege that Canadian law did not
bind Canadian online pharmacies insofar as they sold drugs to U.S. consumers.85
D. The Second Amended Complaint Fails to Allege the Requisite Knowledge
In several respects, the Second Amended Complaint fails to allege the requisite knowledge
79 The McLaughlin testimony is attached to the Schor Declaration as Exhibit 11.
80 SAC ¶¶ 88, 89; NPA ¶¶ 2(k), 2(l), 3.
81 SAC ¶ 97; NPA ¶ 2(m).
82 SAC ¶¶ 87, 95, 96.
83 SAC ¶ 96. This allegation does not appear in the NPA. The Second Amended Complaint
does not particularize the basis for this allegation.
84 SAC ¶¶ 81, 83, 86, 88, 90; NPA ¶¶ 2(j), 2(k), 2(l).
85 SAC ¶ 106; NPA ¶ 2(g).
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on the part of Google’s directors.
To describe the most fundamental failure, one must first assume arguendo that the Second
Amended Complaint contains particularized allegations that it was illegal for search engines to
host online Canadian pharmacies’ advertisements linking to sites through which U.S. consumers
purchase and import prescription drugs.86 The Second Amended Complaint still does not allege
that any of Google’s directors, including Eric Schmidt, knew such hosting to be illegal.
Furthermore, the Second Amended Complaint contains no particularized allegations that
any director knew of the new policy’s inability to prevent online Canadian pharmacies from
advertising prescription drugs for sale to U.S. consumers. Thus, the Second Amended Complaint
contains no particularized allegations that any director knew any of the new policy’s alleged
shortcomings described above (see Factual Background, Part C.). Nor did the NPA assert any such
knowledge by any Google director; the NPA does not even name any Google director. In other
words, the Second Amended Complaint does not allege that any director knew that licensed,
certified Canadian pharmacies could and would still “go rogue” – i.e., would breach their
agreement with SquareTrade to abide by the laws of the place of their purchasers and to refrain
from targeting U.S. consumers.87
E. The Instant Litigation and the DeKalb Litigation
Plaintiffs filed their original consolidated complaint herein on October 24, 2011. On May
8, 2012, this Court granted Defendants motion to dismiss, with leave to amend.
Plaintiffs filed the Amended Complaint on June 8, 2012. Notably, the only directors now
alleged to face a substantial likelihood of liability were the three inside directors, Messrs. Page,
Brin, and Schmidt. Defendants moved to dismiss, and the briefing on the motion was completed
86 As explained infra in Point I.D., Defendants contend that the Second Amended Complaint
does not actually contain such allegations.
87 In its decision dated September 26, 2013, this Court made a ruling concerning Eric
Schmidt’s knowledge. Notwithstanding that ruling, however, the Second Amended Complaint
fatally fails to allege that Mr. Schmidt knew that it was illegal for Google to host the
advertisements in question. See supra at preceding paragraph; infra at Point I.D. Moreover,
nothing in the Second Amended Complaint’s allegations, including those specifically about Mr.
Schmidt, demonstrates that Mr. Schmidt, after the new policy had developed a track record (see
supra at 4), knew the new policy to be ineffective.
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on September 5, 2012.
On January 29, 2013, Chancellor Strine granted the motion to stay the DeKalb action in
favor of the instant action. The relevant portions of the Chancellor’s ruling are quoted and
discussed above (see Introduction, Part A.). In particular, the Chancellor ruled that the DeKalb
allegations – which were based on internal Google documents and emails obtained by the DeKalb
plaintiff pre-litigation under Section 220 of the Delaware General Corporation Law88 – did not
make the DeKalb complaint any better than, or even different from, the Amended Complaint
herein.89
On July 3, 2013, this Court heard oral argument on Defendants’ motion to dismiss the
Amended Complaint. During the argument, Plaintiffs asked the Court for leave to amend “one
more time” should the Court grant the motion to dismiss.90 The basis of the request was that the
DeKalb complaint – whose allegations the Chancellor had already found wanting for purposes of
establishing demand futility – had recently been unsealed.91 Thus, Plaintiffs sought leave to amend
based on already rejected, albeit newly unsealed, allegations.92
On September 26, 2013, this Court granted Defendants’ motion to dismiss the Amended
Complaint, holding that only Eric Schmidt was alleged to face a substantial likelihood of liability
(and thus was alleged to be interested) and that only Shirley Tilghman was alleged to be beholden
to an interested director (and thus was alleged to lack independence).93 Thus, because the
Amended Complaint alleged that there was a reasonable doubt as to the disinterestedness and
independence of only two directors, the Court dismissed the Amended Complaint for failure to
plead demand futility.94 The Court granted leave to amend, this time in order to permit Plaintiffs
88 Section 220 authorizes shareholders of any Delaware corporation to examine the
corporation’s books and records.
89 See supra at 3-4.
90 See 7/3/13 Tr. 33-34.
91 7/3/13 Tr. 34.
92 7/3/13 Tr. 34.
93 2013 Order at 9-10, 13.
94 2013 Order at 14.
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the opportunity to add allegations from the DeKalb complaint.95
The Second Amended Complaint was filed on November 1, 2013. Again, the only
directors alleged to face a substantial likelihood of liability were the three inside directors.
ARGUMENT
I. THE COMPLAINT SHOULD BE DISMISSED BECAUSE PLAINTIFFS’
DEMAND FUTILITY ALLEGATIONS DO NOT ESTABLISH THAT THE INSIDE
DIRECTORS FACE A SUBSTANTIAL LIKELIHOOD OF LIABILITY
A. General Legal Standards Concerning Pleading of Demand Futility
Plaintiffs admit that they have not made a pre-suit demand on Google’s board of
directors.96 Thus, Plaintiffs must “‘allege with particularity’” the facts showing why demand
would have been futile.97 The particularity requirement renders Plaintiffs’ burden of pleading
demand futility “‘more onerous than that required to withstand a Rule 12(b)(6) motion.’”98 In
assessing whether Plaintiffs have met their burden, the Court “must determine whether the
particularized factual allegations create a reasonable doubt that, as of the time the complaint was
filed, a majority of the board as constituted at that time could have properly exercised its
independent and disinterested business judgment in responding to the demand.”99 Where an
amended complaint makes a demand futility allegation, the court must determine the
disinterestedness and independence of the board as constituted when the amended (not the
original) complaint was filed.100
95 2013 Order at 14.
96 SAC ¶ 122.
97 2013 Order at 7 (quoting Fed. R. Civ. P. 23.1).
98 Baca ex rel. Insight Enters., Inc. v. Crown, No. 09-1283-PHX, 2010 WL 2812697, at *5 (D.
Ariz. Jan. 8, 2010) (citation omitted); In re Computer Sciences Corp. Deriv. Litig., No. 06-05288-
MRP, 2007 WL 1321715, at *4 (C.D. Cal. Mar. 26, 2007) (noting that Nevada law follows
Delaware law), aff’d, 310 F. App’x 128 (9th Cir. 2009).
99 2013 Order at 7 (citing Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993)).
100 Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 2006). When the Second Amended
Complaint was filed on November 1, 2013, Google’s board had ten directors: Larry Page, Sergey
Brin, Eric Schmidt, John Doerr, John Hennessy, Ram Shriram, Shirley Tilghman, Paul Otellini,
Ann Mather, and Diane Greene. Schor Decl. Ex. 15. Where, as here, a board has an even number
of directors, the plaintiff must establish demand futility with respect to half of the directors
(because only half are needed to block a board vote to authorize litigation on behalf of the
company). See Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040,
(continued...)
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At the pleading stage, each director’s good faith and independence are presumed; Plaintiffs
must allege particularized facts rebutting that presumption.101 Because demand futility concerns
the board’s present objectivity rather than the company’s past conduct, courts have dismissed
complaints on demand-futility grounds in cases where genuinely illegal (and not just improper)
conduct occurred in the past, including cases involving criminal convictions and fines for violation
of federal drug laws,102 violation of the Bank Secrecy Act,103 and bribery and government
procurement violations.104
B. Specific Legal Standards Defining When a Director Is “Interested”
A reasonable doubt as to a director’s disinterestedness arises where the director “faces a
‘substantial likelihood’ of liability for breaching his fiduciary duty of loyalty (and good faith).”105
Because Google’s certificate of incorporation eliminates director liability for breach of the duty of
(...continued from previous page)
1046 n.8 (Del. 2004).
101 2012 Order at 10, 14, 15; In re Autodesk, Inc., S’holder Deriv. Litig., No. C-06-7185-PJH,
2008 WL 5234264, at *6-7 (N.D. Cal. Dec. 15, 2008) (“Directors are presumed to be faithful to the
corporation and able objectively to consider a demand”).
102 See In re Allergan, Inc., No. 10-01352 DOC, 2011 WL 1429626, at *1 (C.D. Cal. Apr. 12,
2011) ($600 million sanction to resolve civil and criminal cases with FDA, including guilty plea
and criminal fine of $375 million, for illegal marketing and promotion scheme of Botox); King v.
Baldino, 648 F. Supp. 2d 609, 614 (D. Del. 2009) (federal misdemeanor violation of Federal Food,
Drug and Cosmetic Act, payment of $425 million for off-label marketing practices), aff'd, 409 F.
App’x 535 (3d Cir. 2010).
103 See Stone ex rel. AmSouth Bancorp. v. Ritter, 911 A.2d 362, 365-66 (Del. 2006) (criminal
investigation of bank resulted in entry of deferred prosecution agreement with federal government
imposing, inter alia, $40 million fine and $10 million payment to Federal Reserve for violation of
Bank Secrecy Act); David B. Shaev Profit Sharing Account v. Armstrong, No. 1449-N, 2006 WL
391931, at *2-3 (Del. Ch. Feb. 13, 2006) (Citigroup paid $5 billion in civil settlements and fines to
SEC and New York State arising from helping structure Enron’s special purpose entities and
issuing falsely positive reports on Enron and WorldCom), aff’d, 911 A.2d 802 (Del. 2006).
104 See Citron ex rel. United Techs. Corp. v. Daniell, 796 F. Supp. 649, 651 (D. Conn. 1992)
(overcharging government on defense-related contracts resulting in government investigations and
conviction of company executives for role in obtaining classified information during bid for
government contract); In re Baxter Int’l, Inc. S’holders Litig., 654 A.2d 1268, 1269 (Del. Ch.
1995) (scheme to systematically overcharge Veterans Administration resulting in government
investigation and debarment of two defendant-officers from being awarded government contracts);
In re Dow Chem. Co. Deriv. Litig., No. 4349-CC, 2010 WL 66769, at *12 (Del. Ch. Jan. 11, 2010)
(member of Kuwaiti Parliament charging joint venture with bribery).
105 2013 Order at 8-9 (quoting Rales, 634 A.2d at 936).
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care (i.e., the duty to be adequately informed),106 Plaintiffs are limited to claims for breach of the
duty of loyalty107 based on bad faith.108 Good faith is a subsidiary element of the duty of loyalty.
To establish that a defendant breached the duty to act in good faith, Plaintiffs must plead
particularized facts demonstrating that the defendant “[1] intentionally acts with a purpose other
than that of advancing the best interests of the corporation, . . . [2] acts with the intent to violate
applicable positive law, or . . . [3] intentionally fails to act in the face of a known duty to
act . . . .”109
Here, Plaintiffs’ allegations seek to establish the third category of bad faith – “intentional[]
fail[ure] to act in the face of a known duty to act.”110 In claiming that the inside directors had a
duty of good faith, the Second Amended Complaint alleges that the inside directors: “faced . . . a
known duty to act, here Google’s legal duty to comply with the federal laws related to the
importation of prescription drugs”; had a duty to “maintain controls and policies designed to ensure
Google’s compliance with these [federal] laws”; and breached their duties by “consciously failing
to prevent the Company from engaging in the unlawful acts complained of herein.”111
106 See Del. Code Ann. tit. 8, § 102(b)(7) (authorizing Delaware corporations to adopt charter
provisions that eliminate director liability for breach of duty of care); Ex. 16 at 10, § VII (providing
that, “[t]o the fullest extent” possible under Delaware General Corporation Law, “a director of the
Corporation shall not be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director”); Baxter Int’l, 654 A.2d at 1270 (holding that,
under Section 102(b)(7), corporation can eliminate personal liability for every claim of breach of
fiduciary duty except breach of duty of loyalty, such as acts in bad faith, including but not limited
to fraud and other illegality); Autodesk, 2008 WL 5234264, at *10 (same); Cede & Co. v.
Technicolor, 634 A.2d 345, 367 (Del. 1993) (defining duty of care as duty to be adequately
informed).
107 To establish breach of the duty of loyalty, a plaintiff must plead particularized facts showing
that the defendant placed his own interests ahead of those of the company and its shareholders.
Stone, 911 A.2d at 370.
108 See 2012 Order at 9-10 (requiring particularized allegations that director faces substantial
likelihood of liability for breach of duty of good faith); Guttman v. Huang, 823 A.2d 492, 501
(Del. Ch. 2003) (“a serious threat of liability may only be found to exist if the plaintiff pleads a
non-exculpated claim against the directors based on particularized facts”); Autodesk, 2008 WL
5234264, at *10 (plaintiffs must meet “a scienter-based standard” under exculpatory clause).
109 Stone, 911 A.2d at 369-70 (citation omitted, brackets added).
110 Id. (emphasis added).
111 SAC ¶¶ 133-34 (emphasis added). Similarly, the Second Amended Complaint alleges that
the inside directors: had a duty of good faith requiring them to “conduct the Company’s business
and affairs in accordance with the federal laws prohibiting the illegal sale of prescription drugs,”
(continued...)
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The words “conscious” and “intentional” each require Plaintiffs to particularly allege
knowledge on the part of the inside directors.112 Pursuant to this requirement, it is necessary but
not sufficient for Plaintiffs to allege that: online Canadian pharmacies were running Google
advertisements linking to sites through which U.S. consumers purchased and imported prescription
drugs; Google’s inside directors knew that the pharmacies were running those advertisements; and
Google’s inside directors knew that it was illegal for those pharmacies to run those advertisements.
Rather, Plaintiffs must also allege that each inside director knew that it was illegal for Google to
host such advertisements. Thus, in dismissing an action on demand-futility grounds, the Delaware
Supreme Court held that “the Complaint alleges many violations of federal securities and tax laws
but does not plead with particularity the specific conduct in which each defendant ‘knowingly’
engaged, or that the defendants knew that such conduct was illegal.”113
In shareholder derivative actions, Delaware courts decline to infer knowledge that
particular conduct is illegal where the legal provisions alleged to have been violated had never
been interpreted to apply to corporations such as the nominal corporate defendant. Thus, in a
case where the plaintiffs charged that Trustees caused their Funds to purchase certain securities and
“consciously decided to continue to own them despite reports of a U.S. crackdown on offshore
illegal betting enterprises,” the Delaware Chancery Court rejected the plaintiffs’ argument “that
because Trustees failed to act to sell the securities once they were apprised of the step up in
enforcement actions in the mid-2000s, they face a substantial likelihood of liability.”114 Although
(...continued from previous page)
SAC ¶ 69; had knowledge “of the illegal Canadian ads,” SAC ¶¶ 69 and 122; and both “failed” to
run Google’s business and affairs in accordance with these federal laws and “allowed Canadian
online pharmacies to illegally sell prescription drugs via Google’s website,” SAC ¶¶ 69, 122.
112 We assume arguendo that Plaintiffs’ allegation of “conscious fail[ure]” sufficiently satisfies
the case law’s requirement of an allegation of “intentional[] fail[ure].”
113 Wood v. Baum, 953 A.2d 136, 141-42 (Del. 2008) (particularized allegations must
demonstrate that directors acted with scienter “[w]here, as here, directors are exculpated from
liability except for claims based on ‘fraudulent,’ ‘illegal’ or ‘bad faith’ conduct”) (emphasis
added); DiLorenzo v. Norton, No. 07-144 RJL, 2009 U.S. Dist. LEXIS 66862, at *20 (D.D.C. July
31, 2009) (same).
114 Hartsel v. Vanguard Group, Inc., No. 5394-VCP, 2011 WL 2421003, at *26 (Del. Ch. June
15, 2011), aff’d, 38 A.3d 1254 (Del. 2012).
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the plaintiffs relied on “media reports and other news of prosecutions and the like under § 1955 in
the mid-2000s,”115 “these reports and prosecutions did not involve owners of securities in illegal
gambling enterprises. As such, they did not make clear that passive stock ownership was also
illegal.”116 Here, not only do Plaintiffs allege no prosecutions of Canadian (or any other foreign)
pharmacies for running the advertisements in question; Plaintiffs also allege no prosecutions of any
search engine for hosting such advertisements.117
C. This Court Should Adopt the Delaware Chancery Court’s Ruling That the
Second Amended Complaint’s New Allegations Fail to Establish Knowledge
on the Part of Any Inside Director
This Court should adopt Chancellor Strine’s ruling and hold that the new allegations of the
Second Amended Complaint fail to establish knowledge on the part of any inside director.
All of the Second Amended Complaint’s new allegations of director knowledge concern
events in 2003 prior to the implementation of Google’s new policy regarding rogue pharmacy
advertisements. As explained above (see Introduction, Part A.), Chancellor Strine ruled, in staying
115 Under 18 U.S.C. § 1955, it is a crime to “own” any part of an illegal gambling business.
Hartsel, 2011 WL 2421003, at *1, *26.
116 Hartsel, 2011 WL 2421003, at *26 (emphasis added); see also La. Mun. Police Emps. Ret.
Sys. v. Hesse, No. 12-cv-4017 ALC, 2013 U.S. Dist. LEXIS 123338, at *23-24, *28 (S.D.N.Y.
July 26, 2013) (in response to plaintiffs’ claim that suit by New York Attorney General, SEC
investigation, and qui tam action demonstrated company’s tax strategy to be illegal, court rejected
claim and, under Delaware law, noted that no court had held strategy illegal: “Aside from the fact
that some of these allegations are not in the Complaint, there is no explanation as to how they
demonstrate Defendants knew the company was pursuing an ‘illegal’ tax strategy, as opposed to a
‘risky’ tax strategy. . . . [T]here are no claims Defendants agreed the company’s tax strategy
contravened the law but condoned its implementation anyway, constituting bad faith. Knowledge
of the tax strategy alone, which only implies Sprint differed in its interpretation of the tax code
from the New York authorities, does not lead to a reasonable inference the Directors intentionally
engaged in misconduct.” (emphasis added)); La. Mun. Police Emps. Ret. Sys. v. Wynn, No. 12-cv-
509 JCM, 2013 U.S. Dist. LEXIS 14013, at *30-31 (D. Nev. Feb. 1, 2013) (although SEC
commenced informal inquiry into donation/bribe to Macau authorities that had been approved by
board, court held that complaint failed to allege that directors knew donation to be illegal: “The
complaint lacks particular allegations that defendants knew they were engaged in wrongdoing in
approving the Macau donation. At most, the complaint alleges that defendants knew the donation
was made in an effort to obtain the land concession and recites the obligations of the company
under the FCPA; however, this does not demonstrate bad faith on behalf of the directors in
approving the Macau donation.”).
117 To whatever extent such prosecutions would establish that hosting the advertisements was
illegal, such prosecutions would be necessary but not sufficient: Plaintiffs would still have to
allege knowledge that such hosting was illegal.
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the DeKalb action, that knowledge allegations concerning 2003 – i.e., concerning events occurring
prior to the start of the new policy – are irrelevant to the DeKalb action. Although non-binding
here (as noted infra at 23), the Chancellor’s view was that such allegations are irrelevant to the
instant action as well. Significantly, the Chancellor was considering the exact allegations added to
the Second Amended Complaint and found them to be no better than the allegations in the now-
dismissed Amended Complaint.118
Further, the Chancellor ruled, what are relevant are allegations regarding whether – after
the new policy was implemented and had a track record – any inside director had knowledge of the
new policy’s inability to prevent Canadian online pharmacies from running the ads in question.
None of the Second Amended Complaint’s new allegations, however, concern any inside director’s
knowledge regarding the new policy after its implementation. Thus, if this Court adopts
Chancellor Strine’s ruling, then this Court must conclude that the Second Amended Complaint’s
new allegations fail to allege the requisite knowledge on the part of any inside director, and thus
fail to allege that any inside director faces a substantial likelihood of liability. At a minimum, the
Court must conclude that the new allegations of the Second Amended Complaint do not increase
the number of inside directors facing a substantial likelihood of liability beyond the number found
in this Court’s decision dismissing the Amended Complaint.119
For several reasons, Defendants respectfully submit that this Court should adopt Chancellor
Strine’s ruling.
First, although Defendants do not contend that the Chancellor’s ruling is binding on this
Court – the Delaware Chancery Court has no appellate or supervisory authority here – Defendants
do contend that his ruling is highly persuasive authority. It is a decision by an (arguably the)
authority on Delaware law, and it is based on the same (not just similar) facts.
118 See supra at Introduction, Part A.
119 See 2013 Order at 11, 14 (holding that Larry Page and Sergey Brin do not, and that Eric
Schmidt does, face a substantial likelihood of liability and dismissing Amended Complaint for
failure to plead demand futility); supra at Factual Background, Part D. As discussed infra in Point
I.D., the allegations of the Second Amended Complaint – in combination with Chancellor Strine’s
ruling and the case law requiring that a director be alleged to have knowledge of illegality –
actually decrease that number, from one (i.e., Eric Schmidt) to zero.
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Second, because of the risk of inconsistent decisions, principles of comity militate in favor
of this Court’s adopting the Chancellor’s holding. Indeed, it was because of principles of comity
that Chancellor Strine stayed the DeKalb action in favor of the instant action. If this Court adopts
the Chancellor’s ruling, this Court will not be according any more deference to Delaware than it
has already received from Delaware.
Third, even apart from the Chancery Court’s authoritative voice regarding Delaware law,
and even apart from principles of comity, Chancellor Strine’s ruling should be adopted by this
Court because it simply makes sense. Plaintiffs’ core allegation here is that the inside directors
failed to act – i.e., that, despite having a duty “to conduct the Company’s business and affairs in
accordance with federal laws prohibiting illegal sale of prescription drugs,” the inside directors
each “failed to do so.”120 Yet, as the Chancellor recognized, Plaintiffs’ substantive allegations
indisputably assert that the inside directors did act, by implementing the new policy of third-party
verification.121 As the allegations make clear, the new policy was announced in December 2003;
third-party verifier SquareTrade was promptly selected in January 2004 and formally hired in April
2004; and the new policy was detailed in congressional testimony in July 2004 and December
2005.122 In sum, the implementation and disclosure to Congress of the new policy clearly
constitute action rather than failure to act.
Consequently, Plaintiffs’ only possible failure-to-act theory – or, as Chancellor Strine put
it, Plaintiffs’ only “cogent theory” – is that one aspect of the new policy was flawed (i.e., it was
120 SAC ¶ 69 (emphasis added); see also SAC ¶ 134 (alleging “fail[ure] to prevent the
Company from engaging in the unlawful acts complained of herein”).
121 In calling the new policy and Square Trade “minor improvements,” Plaintiffs concede that
action was indeed taken against the original problem, which was rogue pharmacy advertisements
globally (and not just in Canada): “Mounting public and private pressure forced defendants to
make minor improvements to Google’s advertising policy but they refused to use a robust system
like the one offered by VIPPS or to prevent Canadian pharmacies from advertising altogether. On
December 1, 2003, Google announced that it would use a third-party company to screen out ads
from rogue pharmacies that do not require prescriptions.” SAC ¶ 80 (emphasis added); see also
SAC ¶ 99 (“Defendants also permitted Google to continue using PharmacyChecker until 2009,
despite the existence of superior VIPPS service.”); see generally supra at Factual Background, Part
A. (“The Original Problem”) and Part B. (“Google’s Solution to the Original Problem”).
122 SAC ¶¶ 80, 82, 85; Sandberg at 264-67; McLaughlin at 193-96.
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still allowing Canadian online pharmacies to run the ads in question), and that the inside directors
failed to act with respect to that flaw. But, under that theory, Plaintiffs had to allege that the inside
directors knew of the new policy’s flaw. More specifically, under the case law applicable to
Plaintiffs’ claim of breach of the duty of good faith (see supra at 20-22), Plaintiffs must allege that
the inside directors knew that (i) the new policy was not preventing Canadian online pharmacies
from running the ads in question, (ii) it was illegal for those pharmacies to continue running those
ads, and (iii) it was illegal for Google to continue hosting those ads. As the Chancellor recognized,
the allegations unsealed in DeKalb, and hence the new allegations in the Second Amended
Complaint herein, fail to allege any such knowledge. The new allegations concern events
predating implementation of the new policy123 and thus cannot logically allege any of the three
required kinds of knowledge, which all concern events postdating implementation of the new
policy. For this reason, Plaintiffs’ new demand-futility allegations fail with respect to the inside
directors.
Any suggestion by Plaintiffs that the new policy, particularly SquareTrade, was “window
dressing” (SAC ¶ 82) should not long detain this Court. Plaintiffs’ claims, which focus on
Canadian pharmacies, do not genuinely challenge the new policy’s success at restricting rogue
pharmacies in the rest of the world.124 The congressional testimony given in December 2005
demonstrates beyond dispute that the new policy had “teeth”: because of the new policy, over
30,000 ads by rogue pharmacies were rejected.125 Finally, even with respect to Canadian
pharmacies, the new policy and Square Trade were hardly “window dressing.” As a condition of
certification, SquareTrade undertook to verify each Canadian pharmacy’s licensure; required each
Canadian pharmacy agree to follow the law of their purchaser’s locale and not to advertise to U.S.
123 The Second Amended Complaint’s new allegations concerning director knowledge all
relate to events occurring in March through November 2003 – before the start of the new policy,
and well before SquareTrade had developed any track record. SAC ¶¶ 33-66; see also SAC ¶ 77.
124 See, e.g., NPA ¶ 2(h) (acknowledging that Google “took steps to block pharmacies in
countries other than Canada from advertising in the United States through AdWords”); Sandberg at
265 (noting that SquareTrade certification was available only to pharmacies in U.S. and Canada).
125 McLaughlin at 196-97.
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consumers; and further required each Canadian pharmacy to warn U.S. consumers that “‘[t]he
FDA, due to the current state of their regulations, has taken the position that virtually all shipments
of prescription drugs imported from a Canadian pharmacy by a U.S. consumer will violate the
law.’”126 None of the Defendants is alleged to have known at the time that a Canadian pharmacy’s
certification by SquareTrade, as part of SquareTrade’s licensure-agreement-and-warning regime,
would not provide a reasonable basis to expect that pharmacy to be purely law-abiding.127
D. In Any Event, the Second Amended Complaint Does Not Allege that Any
Inside Director Knew Google’s Hosting of the Canadian Pharmacy Ads to Be
Illegal
Neither the new, nor the old, allegations of the Second Amended Complaint allege that any
inside director knew that it was illegal for Google to host the ads in question. Thus, even if the
Court does not adopt Chancellor Strine’s ruling, the Court must still dismiss the Second Amended
Complaint for failing to plead that any inside director had the requisite knowledge and hence faces
a substantial likelihood of liability. Because the Second Amended Complaint does not even
purport to allege that any outside director faces a substantial likelihood of liability, the fact that no
director at all is alleged to face a substantial likelihood of liability means that no director is alleged
to be interested. The Second Amended Complaint must accordingly be dismissed.128
Nothing in the new allegations of the Second Amended Complaint alleges that any inside
director knew Google’s hosting of the ads in question to be illegal. To the contrary, the
Drugstore.com press release, which in Plaintiffs’ telling is what started the ball rolling, put
Google’s inside directors on notice that Google’s hosting of these ads was not illegal. The press
126 Sandberg at 265 n.5 (quoting text of warning). See Midwestern Teamsters Pension Trust
Fund v. Deaton, No. H-08-1809, 2009 U.S. Dist. LEXIS 50521, at *13, *28-30 (S.D. Tex. May 7,
2009) (holding that company’s adoption of revised policies, which included self-certification of
compliance with legal requirements, was good-faith solution to earlier violations of federal law that
court could not deem inadequate), adopted by Midwestern Teamsters Pension Trust Fund v.
Deaton, No. H-08-1809, 2009 U.S. Dist. LEXIS 129701 (S.D. Tex. May 26, 2009).
127 Certainly, the detail with which Google officials’ congressional testimony described the
particulars of the new policy, including its application to Canadian pharmacies (see supra at 13-
15), refutes any assertion that the officials contemporaneously knew any aspect of the new policy
to be ineffective.
128 See 2013 Order at 8 (holding that, absent allegation of interestedness, Court need not reach
independence analysis).
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release stated that if search engines like Google did not voluntarily cease hosting the ads, then
Congress would have to enact legislation outlawing such hosting – the clear implication being that
unless and until Congress enacted such legislation, Google’s hosting of the ads broke no law.129
Even the NPA, while expressly stating that it was “unlawful” for Canadian pharmacies to
advertise and sell prescription drugs to U.S. consumers,130 said simply that Google “improperly
assisted” those pharmacies and that Google “accepts responsibility for [its] conduct.”131 In this
regard, Plaintiffs make egregiously incorrect statements when they say: that the $500 million paid
by Google as part of the NPA constituted “fines” and “penalties”;132 and that in the NPA Google
accepted responsibility for “violating” 21 U.S.C. § 331 and 21 U.S.C. § 952.133 In fact, the
payment was not a fine or penalty. There was no criminal action at all, as evidenced by the fact
that the NPA is a “non-prosecution agreement.” Rather, the payment was part of a civil
forfeiture.134 Even the contemplated civil forfeiture proceeding was to be brought against the
funds, not Google.135 Moreover, Google accepted responsibility not for “violati[on]” of Title 21
but for its “conduct.”136
In short, Plaintiffs do not allege that there were ever any prosecutions of search engines for
129 SAC ¶ 49 (“We sincerely hope that Yahoo, MSN, Google, and other search engines do the
right thing and refuse to carry these ads. If not, then Congress needs to protect the public by
making it unlawful to sell advertising space to companies that provide illegal pharmacy services,
such as re-importation, shipping without a legitimate prescription, and misrepresentation.”
(emphasis added)); supra at Factual Background, Part A.3.
130 See NPA ¶ 2(a) (“[I]t is unlawful for pharmacies outside the United States to ship
prescription drugs to customers in the United States.” (emphasis added)); NPA ¶ 2(f) (“[T]he
Company was aware that in most circumstances it was illegal for pharmacies to ship controlled
and non-controlled prescription drugs into the United States from Canada.” (emphasis added));
NPA ¶ 2(q) (referring to “the unlawful sale of prescription drugs by online pharmacies to U.S.
consumers”); NPA ¶ 8(a) (referring to “pharmacy advertisers that import or dispense prescription
drugs in violation of United States law”).
131 NPA ¶ 3.
132 SAC ¶ 115.
133 SAC ¶¶ 3, 31, 69, 104.
134 NPA ¶¶ 4-5.
135 NPA ¶ 6.
136 NPA ¶ 3.
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hosting the ads in question,137 or that there was ever case or statutory law expressly prohibiting
such hosting.138 Even Google’s nemesis, Drugstore.com, informed Google that hosting such ads
was not illegal. Consequently, if hosting had not then been established to be illegal, then Plaintiffs
could not possibly allege that the inside directors knew hosting to be illegal.
As for the “old”139 allegations in the Second Amended Complaint, the only inside director
as to whom these even arguably allege knowledge is Eric Schmidt – yet these allegations do not
allege that Mr. Schmidt knew Google’s hosting of the ads in question to be illegal. In his
testimony to Congress in 2011, Mr. Schmidt stated that Google employees’ conduct addressed in
the NPA was “not without [his] knowledge.” In response to his questioner’s follow-up request for
clarification, Mr. Schmidt stated that, in 2004, he became aware “that there were some potential
issues to consider regarding pharmacies advertising via AdWords, in violation of Google’s
policies.”140 While Plaintiffs allege that, in these statements, Schmidt admitted to knowledge of
the “illegal Canadian ads,”141 the allegation is legally inadequate for two reasons.
First, the phrase “illegal Canadian ads” is so misleading as to violate the requirement of
particularized pleading. If a plaintiff alleges that a director has knowledge of “illegal Canadian
ads,” it is wholly unclear whether the plaintiff means that the director (a) has knowledge of the
existence of the Canadian ads, which the plaintiff, not the director, is describing as illegal; (b) has
knowledge that it was illegal for the Canadian pharmacies to run such ads; or (c) has knowledge
that it was illegal for Google to host such ads. By repeatedly using the unclear phase “illegal
137 See supra at Point I.B.
138 See supra at Point I.B. (citing Wood, 953 A.2d at 141-42; Hartsel, 2011 WL 2421003, at
*26; La. Mun. Police Emps. Ret. Sys., 2013 U.S. Dist. LEXIS 123338, at *23-24, *28; La. Mun.
Police Emps. Ret. Sys., 2013 U.S. Dist. LEXIS 14013, at *30-31).
139 By “old” allegations, we mean allegations that are not meaningfully different from those in
the Amended Complaint.
140 2013 Order at 10 (quoting Schmidt Response clarifying testimony of Sept. 21, 2011).
141 See, e.g., SAC ¶ 4 (Schmidt “admitted that he became aware of the illegal Canadian ads on
Google’s website in around 2004” (emphasis added) (citing 2013 Order at 10)); SAC ¶ 5 (Schmidt
“had to admit his personal knowledge of the illegal Canadian ads during his September 21, 2011
testimony”); SAC ¶ 20 (this Court “held that defendant Schmidt is ‘interested’ because he was
aware of the illegal Canadian ads).
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Canadian ads,” Plaintiffs studiedly blur the crucially important distinctions among the three
different kinds of knowledge that must be alleged here. The consequences of Plaintiffs’ blurred
sweep-them-all-together pleading are not minor: such unacceptably loose language could mean
that individual directors could be held personally liable for $500 million in damages without ever
having the requisite knowledge. Accordingly, the Court should enforce the particularized pleading
requirement and hold that such pleading fails to allege knowledge that Google’s hosting was
illegal.
Second, Mr. Schmidt’s questioner never asked when he became aware of the “illegal
Canadian ads.”142 That phrase was coined by Plaintiffs, not by Mr. Schmidt or his questioner.
Rather, Mr. Schmidt simply referred to “conduct” – without referring to or commenting on its
legality – and stated that it had nothing to do with Google’s current practices.143 In his written
follow-up query, the questioner referred only to “conduct” and never once referred to or described
it as “illegal”:
Your answer would seem to suggest that you did indeed have knowledge of the
conduct set forth in paragraph 2 of the NPA. a. Did you know that Canadian online
pharmacies were advertising prescription drugs for sale in the U.S. using Google’s
AdWords or other Company advertising platforms between 2003 and 2009? b.
When did you learn of this conduct? c. How did you learn of this conduct? d. Did
you alert others in the company about this conduct? Who did you alert? When did
you do so? What did you say or write in alerting others in the company regarding
this conduct?”144
Thus, whether the “conduct” referred to was the pharmacies’ running of the ads, or Google’s
hosting of the ads, or Google employees’ assistance to advertisers,145 nothing in the questions or
the answers referred to or described the conduct as “illegal.” Given that the NPA itself did not
call Google’s conduct “illegal” (see supra at 27), it is hard to see how questions about conduct
described in the NPA can be understood to be a description of the conduct as “illegal.”
142 Cf. 2013 Order at 10 (“defendants concede that the questioner eventually clarified his
question to specifically ask when Schmidt became aware of the illegal Canadian pharmacy ads”).
143 Schmidt at 16.
144 Schmidt at 118-19 (emphasis added).
145 See supra at 15.
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As a result, Mr. Schmidt’s testimony, to whatever extent it admitted knowledge of conduct
(e.g., running ads, hosting ads, or assisting advertisers), most certainly did not admit knowledge
that Google’s hosting of the ads was illegal. Because Mr. Schmidt’s testimony did not admit
knowledge of illegality, the Second Amended Complaint’s “old” allegations do not allege that Mr.
Schmidt faces a substantial likelihood of liability. Accordingly, the Second Amended Complaint
should be dismissed for failure to plead interestedness on the part of any director and thus failure to
plead demand futility.
II. THE COMPLAINT SHOULD BE DISMISSED BECAUSE PLAINTIFFS’
DEMAND FUTILITY ALLEGATIONS DO NOT ESTABLISH THAT THE
OUTSIDE DIRECTORS LACK INDEPENDENCE
A. Specific Legal Standards Defining When a Director Lacks Independence
“A director is independent when his or her decision is based on the corporate merits of the
subject before the board rather than on extraneous considerations or influences.”146 A plaintiff
charging lack of independence “must allege particularized facts show[ing] that the Board is either
dominated by an officer or director who is the proponent of the challenged transaction or that the
Board is so under his influence that its discretion is sterilize[d].”147 A director is “controlled” if the
director “is beholden to the allegedly controlling entity, as when the entity has the direct or indirect
unilateral power to decide whether the director continues to receive a benefit upon which the
director is so dependent or is of such subjective material importance that its threatened loss might
create a reason to question whether the director is able to consider the corporate merits of the
challenged transaction objectively.”148 Note the word “continues” in the previous sentence.
Without more, the past receipt of a benefit does not establish a present lack of independence; only
if a director is threatened with the loss of a continuing benefit can there arise a doubt as to the
146 2013 Order at 11 (citation and internal quotation marks omitted).
147 2013 Order at 11 (citation and internal quotation marks omitted).
148 2013 Order at 12 (citation and internal quotation marks omitted) (emphasis added). A
director can also be “controlled” if the director’s domination by the other party is “through close
personal or familial relationship or through force of will.” 2013 Order at 12 (citation and internal
quotation marks omitted). But this alternative definition is irrelevant here, as Plaintiffs’ allegations
concern only the financial and business relationship between Mr. Schmidt and Ms. Tilghman and
say nothing of any “personal or familial relationship” or “force of will.” See SAC ¶ 126.
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director’s independence.149 “Nor is the naked assertion of a previous business relationship
sufficient to overcome the presumption of a director’s independence.”150 In short, what matters is
not whether there was a benefit or business relationship in the past but rather whether there is a
benefit or business relationship in the present and continuing into the future.
Plaintiffs do not even purport to challenge the independence of outside directors Ann
Mather, Diane Greene, and Paul Otellini. Moreover, Plaintiffs’ challenge to the independence of
outside directors Shirley Tilghman, Ram Shriram, John Hennessy, and John Doerr is substantively
the same in the Second Amended Complaint as it was in the Amended Complaint.151 Because the
Court has already rejected the Amended Complaint’s challenge to the independence of Messrs.
Shriram, Hennessy, and Doerr,152 the Court should once again reject Plaintiffs’ challenge as to
these three directors. Plaintiffs’ challenge to the independence of Shirley Tilghman in the
Amended Complaint – which challenge was upheld in the 2013 Order153 – is substantively the
same as in the Second Amended Complaint, but for reasons explained below has become baseless.
B. Because No Director Is Alleged to Be Interested, No Director Can Lack
Independence
This Court held in the 2013 Order that a director’s independence is relevant only if
Plaintiffs’ allegations identify an interested person and assert that such director lacks independence
from that interested person.154 Here, the Second Amended Complaint identifies only the inside
directors as interested persons.155 For the reasons discussed above, however, the Second Amended
149 Orman v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002) (“The naked assertion of a previous
business relationship is not enough to overcome the presumption of a director’s independence.
The law in Delaware is well-settled on this point.”); accord VeriSign, 531 F. Supp. 2d at 1198; see
also Orman, 794 A.2d at 25 n.50 (“A director may be considered beholden to (and thus controlled
by) another when the allegedly controlling entity has the unilateral power (whether direct or
indirect through control over other decision makers), to decide whether the challenged director
continues to receive a [material] benefit . . . .”) (emphasis added)).
150 2012 Order at 15 (emphasis added) (citation omitted).
151 Compare SAC ¶¶ 124-27, with AC ¶ 101.
152 2013 Order at 12-13.
153 2013 Order at 13.
154 2013 Order at 8.
155 SAC ¶ 122.
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Complaint fails to allege that the inside directors are interested.156 Thus, there is no occasion for
the Court to decide whether any director lacks independence; once the Court concludes that no one
is alleged to be interested, the Court’s inquiry is at an end, and the case should be dismissed for
failure to allege demand futility.
C. Having Resigned from the Princeton Presidency, Shirley Tilghman Does Not
Lack Independence from Eric Schmidt
In any event, the Court should now hold that Shirley Tilghman does not lack independence
from Eric Schmidt.
Prior to the filing of the Second Amended Complaint, Ms. Tilghman resigned from the
Princeton Presidency.157 This fact is acknowledged (albeit coyly) by the Second Amended
Complaint.158 As a result, Ms. Tilghman is not beholden to, and does not lack independence from,
Eric Schmidt. Thus, even assuming arguendo that Mr. Schmidt is interested (which he is not, see
supra at Point I.D.), the basis for the holding in the 2013 Order that Ms. Tilghman lacks
independence from Mr. Schmidt is now absent from the case.
As indicated in the 2013 Order, the only articulated bases for holding that Ms. Tilghman
lacks independence from Mr. Schmidt are (a) Ms. Tilghman’s service as Princeton President, (b)
Mr. Schmidt’s service as a Princeton Trustee from 2004 to 2008, and (c) Mr. Schmidt’s donation
of $25 million to Princeton in 2009.159 As explained below, each of these purported bases fails to
allege any ground for concluding that Ms. Tilghman – as of the filing of the Second Amended
Complaint on November 1, 2013 – was beholden to, or lacked independence from, Mr. Schmidt.
(i) Ms. Tilghman’s Service as President: As noted, by November 1, 2013, Ms.
Tilghman was no longer President of Princeton. Thus, even assuming arguendo that her salary as
156 See supra at Point I.C. and I.D.
157 See supra at 5 & n.16.
158 SAC ¶ 23 (alleging that Ms. Tilghman “serves or served” as Princeton’s President
(emphasis added)); see supra at 5 & n.16.
159 2013 Order at 13; SAC ¶ 126.
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Princeton’s President had depended on her ability to fundraise,160 her resignation from her position
as President severed any possible causal relationship between her fundraising success and her
salary: her resignation ended not only any fundraising responsibility that the Princeton Presidency
imposed on her, but also any control that Princeton’s Trustees had over her salary. Thus, a vote by
her to initiate litigation against Mr. Schmidt could not possibly have adverse financial
consequences for her personally.161
(ii) Mr. Schmidt’s Service as Trustee: Mr. Schmidt was last a Princeton Trustee in 2008
– years before the commencement of this action, let alone the filing of the Second Amended
Complaint. Moreover, the Second Amended Complaint does not even allege that Mr. Schmidt
currently has control over Ms. Tilghman’s compensation and continued employment, only that he
had such control until 2008.162 Thus, even if Ms. Tilghman had not resigned from the Princeton
Presidency, Mr. Schmidt’s past service as Trustee would still not be sufficient to allege that Ms.
Tilghman is currently beholden to Mr. Schmidt. Because the Second Amended Complaint does
not even purport to allege that Mr. Schmidt had any control over her compensation and
employment after his term as Trustee ended in 2008, the Second Amended Complaint fails to
allege that Mr. Schmidt’s service as a Princeton Trustee renders Ms. Tilghman beholden to Mr.
Schmidt.
160 An allegation that a failure to fundraise effectively would have adversely affected Ms.
Tilghman’s terms of employment as Princeton’s President is absent from the Second Amended
Complaint but is required in order to allege lack of independence under Delaware law. See In re The
Goldman Sachs Group, Inc., S’holder Litig., No. 5215-VCG, 2011 WL 4826104, at *10 (Del. Ch.
Oct. 12, 2011) (holding that plaintiffs failed to raise reasonable doubt that president of Brown
University was independent: “Plaintiffs’ allegations do not provide information that [Brown’s
president Ruth Simmons] actively solicited this amount or how this or potential future donations
would affect Simmons.” (emphasis added)).
161 Cf. In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 824 (Del. Ch. 2005)
(holding that director was independent from CEO that had formerly served as treasurer of charity
led by director; CEO’s company had made donations totaling $18 million to that charity), aff’d,
906 A.2d 766 (Del. 2006). The Second Amended Complaint also fails to allege that Ms.
Tilghman’s salary was a “benefit upon which the director is so dependent or is of such subjective
material importance that its threatened loss might create a reason to question” the director’s
objectivity. 2013 Order at 12.
162 SAC ¶ 126 (“Schmidt is a graduate of Princeton University and served as a trustee of the
university from 2004 to 2008, at the same time as Tilghman served as a trustee of the university.
During that time, Schmidt, as a Trustee, exercised substantial control over Tilghman’s
compensation and continued employment.” (emphasis added)).
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Now that Ms. Tilghman is no longer the President and Mr. Schmidt is no longer a Trustee,
the assertion that Mr. Tilghman is currently beholden to Mr. Schmidt is doubly baseless. A vote by
her to initiate litigation against Mr. Schmidt could not possibly have adverse financial
consequences for her in the future.163
(iii) Mr. Schmidt’s Donation: Mr. Schmidt’s donation to Princeton occurred in 2009.
Plaintiffs do not allege that Mr. Schmidt ever made any more donations during the more than four
years that have elapsed between the 2009 donation and the filing of the Second Amended
Complaint. The lapse of time without a second gift accordingly indicates that any failure by Mr.
Schmidt to make future donations will result not from any vote by Ms. Tilghman to authorize
litigation against Mr. Schmidt, but rather from Mr. Schmidt’s own decision to make no donation
beyond the one in 2009. Nor does the Second Amended Complaint allege that the amount of the
donation in 2009 was material to Princeton University; an allegation of materiality – including the
percentage of Princeton’s total fundraising that Mr. Schmidt’s donation represented – is
mandatory, not optional.164
For all of these reasons, the Second Amended Complaint’s discussion of Ms. Tilghman and
163 See In re Bidz.com, Inc., Deriv. Litig., 773 F. Supp. 2d 844, 854 (C.D. Cal. 2011) (even if
directors “were beholden to [CEO] in 2004 – the time of the stock option award – there is no
particularized allegation suggesting that [CEO’s] undue influence continued to [the year] when this
case was filed”); Jacobs v. Yang, No. 206-N, 2004 WL 1728521, at *4-5 (Del. Ch. Aug. 2, 2004),
aff’d mem., 867 A.2d 902 (Del. 2005) (where Yahoo!’s founder does not control current
employment of CEO, the latter’s independence is not sufficiently challenged).
164 See Goldman Sachs Group, 2011 WL 4826104, at *9-10 (“The Plaintiffs do not provide the
ratios of the amounts donated by [the company], or [the company’s foundation] to overall donations,
or any other information demonstrating that the amount would be material to the charity. . . . The
Plaintiffs provide the amount donated to Brown University, but do not give any additional
information showing the materiality of the donation to Brown University. The Plaintiffs do not
provide the percentage this amount represented of the total amount raised by Brown, or even how
this amount was material to the Swearer Center.” (emphasis added)); J.P. Morgan Chase, 906 A.2d
at 822, 824 (bank’s donations of $18 million to the United Negro College Fund did not disqualify
that organization’s CEO and President from considering demand where “plaintiffs provide only the
dollar value, not the representative percentage, of [bank’s] contributions”; “plaintiffs do not even go
so far as to indicate what percentage of the museum’s overall contributions are made by” bank and
“never state how [bank’s] contributions could, or did, affect the decision-making process of the
president of one of the largest museums in the nation”); see also id. at 822 (holding that, where bank
made donation to American Museum of Natural History of which outside director Futter was
president and trustee, complaint failed to identify donations’ percentage of museum’s overall
contributions, or explain what influences donations have on “decision-making process of the
president of one of the largest museums in the nation”).
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Mr. Schmidt is insufficient to allege that Ms. Tilghman lacks independence from Mr. Schmidt or to
overcome the presumption that Ms. Tilghman will consider a demand objectively.
III. THE COMPLAINT FAILS TO STATE A CLAIM
Because the Second Amended Complaint does not cure the defects as required by this
Court,165 no claims are stated against any Defendant. As the Court noted, a complaint “‘requires
more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will
not do.’”166 Where allegations sound in fraud (see, e.g., SAC ¶¶ 81, 83), the complaint must allege
“specific facts” under Federal Rule of Civil Procedure 9(b).167
No Claim for Breach of Fiduciary Duty: Plaintiffs allege that all eight “defendants
breached their duty of loyalty by consciously failing to prevent the Company from engaging in the
unlawful acts complain of herein.”168 As the Court held, this claim requires pleading that defendants
“‘intentionally act[ed] with a purpose other than that of advancing the best interests of the
corporation . . . [and] act[ing] with the intent to violate applicable positive law.”169
As was explained above with respect to the inside directors,170 the Second Amended
Complaint fails to allege that any director, inside or outside, knew that it was illegal for Google to
host the ads in question. Absent such an allegation, Plaintiffs cannot allege an “intent to violate
applicable positive law.” Thus, the fiduciary-duty claims must be dismissed.171
Furthermore, the new allegations in the Second Amended Complaint concerning events in
2003 – prior to the implementation of the new policy – are necessarily irrelevant to Plaintiffs’
case.172 Plaintiffs’ case is premised on a theory of failure to act.173 Because implementation of the
165 2012 Order at 17-19.
166 2012 Order at 5 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
167 2012 Order at 6.
168 SAC ¶ 134.
169 2012 Order at 17 (citation omitted).
170 See supra at Point I.D.; Factual Background, Part D.
171 Plaintiffs’ boilerplate “aiding and abetting” allegations (SAC ¶¶ 26-27) add nothing.
172 See supra at Point I.C.
173 See supra at Point I.C.
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new policy constituted action rather than failure to act, the only viable failure-to-act theory available
to Plaintiffs is that Defendants failed to correct the flaw in the new policy (i.e., the inability to
prevent the Canadian ads at issue).174 As all of the new allegations concern the period predating the
new policy, the new allegations are beside the point.175
The continued naming of Mr. Otellini as a defendant remains a mystery. The Second
Amended Complaint does not include a single allegation regarding any action that he did or did not
take.
No Claim for Waste: The Second Amended Complaint alleges claims for waste against
Messrs. Schmidt, Page, and Brin.176 The Court reiterated that the pleading burden for waste is
particularly steep, requiring an exchange that is “‘so one sided that no business person of ordinary,
sound judgment could conclude that the corporation has received adequate consideration.’”177
Plaintiffs previously failed to allege facts indicating that there was an “‘unconscionable’” exchange
or even the more basic “amounts that constitute corporate waste.”178 The Second Amended
Complaint fails to plead anything new to cure these basic defects.
No Claim for Unjust Enrichment: The Second Amended Complaint reiterates a purported
claim against Messrs. Schmidt, Page, and Brin for unjust enrichment.179 An unjust enrichment claim
requires plaintiffs to plead “(1) an enrichment; (2) an impoverishment; (3) a relation between the
enrichment and the impoverishment; (4) the absence of justification; and (5) the absence of a remedy
provided by law.”180 Plaintiffs’ original complaint failed because there were no facts “establish[ing]
how each individual defendant was enriched” or how Google was impoverished as a result, or the
174 See supra at Point I.C.
175 See supra at Point I.C.
176 SAC ¶¶ 136-38.
177 2012 Order at 18-19 (citation omitted).
178 2012 Order at 19.
179 SAC ¶¶ 139-42.
180 2012 Order at 19 (citing Jackson Nat’l Life Ins. Co. v. Kennedy, 741 A.2d 377, 393 (Del.
Ch. 1999)).
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DEFS.’ NOT. OF MOT. & MOT. TO DISMISS SECOND
AMEND. COMPL.; MEMO IN SUPPORT
CV-11-04248-PJH
-37-
lack of justification.181 Defendants argued that the Amended Complaint had the same failings
(although the Court did not reach the issue182). The Second Amended Complaint similarly fails to
provide this missing information.183 This failure is fatal to the unjust enrichment claim.
CONCLUSION
For the reasons stated, the Second Amended Complaint should be dismissed with prejudice.
Dated: December 6, 2013 Respectfully submitted,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
By: /s/ Boris Feldman
Boris Feldman
Attorneys for Defendants
Larry Page, Sergey Brin,
Eric E. Schmidt, L. John Doerr, John L.
Hennessy, Paul S. Otellini, K. Ram Shriram,
Shirley M. Tilghman,
and Nominal Defendant Google Inc.
181 2012 Order at 19.
182 2013 Order at 14.
183 Plaintiffs have steadfastly failed to reconcile their allegations with the fact that Messrs.
Schmidt, Page, and Brin received – per their request – salaries of just $1 per year from 2005
through 2010. Schor Decl. Ex. 17 at 31; Ex. 18 at 47; Ex. 19 at 49; Ex. 20 at 54; Ex. 21 at 59; Ex.
22 at 45. With the exception of a nominal holiday bonus, they did not receive cash bonus
payments or stock awards during that same period. Id.
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