Jared Pankratz v. Steven A. Kriegsman et al

REPLY In Support of MOTION to Dismiss Case Nominal Defendant's Notice of Motion and Motion to Dismiss Complaints Pursuant to Rules 12

C.D. Cal.November 20, 2014

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY THOMAS J. NOLAN (SBN 66992) Thomas.Nolan@skadden.com PETER B. MORRISON (SBN 230148) Peter.Morrison@skadden.com ALLEN L. LANSTRA (SBN 251510) Allen.Lanstra@skadden.com SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 300 South Grand Avenue, Suite 3400 Los Angeles, CA 90071-3144 Telephone: (213) 687-5000 Facsimile: (213) 687-5600 CLIFFORD H. PEARSON (SBN 108523) cpearson@pswlaw.com ALEXANDER SAFYAN (SBN 277856) asafyan@pswlaw.com PEARSON, SIMON & WARSHAW LLP 15165 Ventura Boulevard, Suite 400 Sherman Oaks, CA 91403 Telephone: (818) 788-8300 Facsimile: (818) 788-8104 Attorneys for Defendants and Nominal Defendant GEORGE S. TREVOR (SBN 127875) gtrevor@pswlaw.com PEARSON, SIMON & WARSHAW LLP 44 Montgomery Street, Suite 2450 San Francisco, CA 94104 Telephone: (415) 433-9000 Facsimile: (415) 433-9008 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA IN RE CYTRX CORP. STOCKHOLDER DERIVATIVE LITIGATION ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Master File No.: 2:14-cv-06414 GHK (PJWx) REPLY IN SUPPORT OF NOMINAL DEFENDANT’S MOTION TO DISMISS COMPLAINTS PURSUANT TO RULES 12(b)(3) AND 23.1, OR, IN THE ALTERNATIVE, MOTION TO STAY Date: December 8, 2014 Time: 9:30 a.m. Judge: Hon. George H. King Ctrm.: 650 THIS DOCUMENT RELATES TO: 1) Case No. 2:14-cv-06414-GHK (PJWx) (“Pankratz”) 2) Case No. 2:14-cv-06451-GHK (PJWx) (“Taylor”) Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 1 of 24 Page ID #:524 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY TABLE OF CONTENTS INTRODUCTION ........................................................................................................ 1 ARGUMENT ................................................................................................................ 6 I. PLAINTIFFS CANNOT REFUTE THE ARGUMENT THAT CYTRX’S FORUM SELECTION BYLAW IS VALID AND ENFORCEABLE ..................................................................................... 6 A. The Bylaw Is Facially Valid .......................................................... 6 1. Under The Internal Affairs Doctrine, Delaware Law Determines The Validity Of The Bylaw ............................. 6 2. Plaintiffs Erroneously Rely On Galaviz .............................. 7 B. The Bylaw Is Enforceable “As Applied” .................................... 10 1. Plaintiffs Cannot Show That The Bylaw Was Affected By Fraud, Undue Influence, Or Overweening Bargaining Power ....................................... 11 2. Plaintiffs Cannot Show That They Will Be So Inconvenienced So As To Be Denied Their Day In Court .................................................................................. 13 3. The Bylaw Does Not Contravene Public Policy ............... 13 II. IN THE ALTERNATIVE, THE ACTIONS SHOULD BE STAYED ................................................................................................ 14 A. This Action Should Be Stayed In Favor Of The Delaware Derivative Action Because They Are Virtually Identical Actions ......................................................................................... 15 B. This Action Should Be Stayed For The Securities Class Actions ......................................................................................... 17 CONCLUSION ........................................................................................................... 19 Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 2 of 24 Page ID #:525 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 iii NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY TABLE OF AUTHORITIES Cases Page(s) American Life Insurance Co. v. Parra, 25 F. Supp. 2d 467 (D. Del. 1998) ................................................................... 12 AmerisourceBergen Corp. v. Roden, 495 F.2d 1143 (9th Cir. 2007) .......................................................................... 17 Argueta v. Banco Mexicano, 87 F.3d 320 (9th Cir. 1996) .............................................................................. 10 Ash v. Alexander, No. 99 Civ. 3820 (JSR) 2000 WL 20704 (S.D.N.Y. Jan. 12, 2000) ................................................... 5, 15 ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) ................................................................................... 14 Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) ..................................................................... passim Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) ......................................................................................... 13 City of Providence v. First Citizens BancShares, Inc., C.A. Case No. 9795-CB 2014 WL 4409816 (Del. Ch. Sept. 8, 2014) ...................................................... 9 CMAX, Inc. v. Hall, 300 F.2d 265 (9th Cir. 1962) ............................................................................ 14 In re Countrywide Financial Corp. Derivative Litigation, 542 F. Supp. 2d 1160 (C.D. Cal. 2008) ............................................................ 14 Cucci v. Edwards, No. SACV 07-532 PSG (MLGx) 2007 WL 3396234 (C.D. Cal. Oct. 31, 2007) .................................................. 17 Double Z Enterprises, Inc. v.General Marketing Corp., No. C.A. 97C-08-076 2000 WL 970718 (Del. Super. Ct. June 1, 2000) ............................................. 11 Edgar v. MITE Corp., 457 U.S. 624 (1982) ........................................................................................... 6 In re Facebook, Inc. IPO Sec. & Derivative Litigation, 922 F. Supp. 2d 445 (S.D.N.Y. 2013) ................................................................ 8 Filtrol Corp. v. Kelleher, 467 F.2d 242 (9th Cir. 1972) ........................................................................ 5, 14 Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 3 of 24 Page ID #:526 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 iv NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011) ................................................... 2, 8, 11 Kidsco Inc. v. Dinsmore, 674 A.2d 483 (Del. Ch. 1995) ........................................................................ 2, 9 Landis v. North American Co., 299 U.S. 248 (1936) ......................................................................................... 14 M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) ................................................................................... 3, 10, 11 Manetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509 (9th Cir. 1988) ............................................................................ 10 McDermott Inc. v. Lewis, 531 A.2d 206 (Del. 1987) ................................................................................... 7 North ex rel.Chemed Corp. v. McNamara, No. 1:13-cv-833 2014 WL 4684377 (S.D. Ohio Sept. 19, 2014) ................................................ 13 Rogers v. Guaranty Trust Co. of New York, 288 U.S 123 (1933) ............................................................................................ 6 Rosenblum v. Sharer, No. CV 07-6140 PSG (PLAx) 2008 WL 9396534 (C.D. Cal. July 28, 2008) .................................................. 17 Sabbag v. Cinnamon, No. 5:10-cv-02735-JF (HRL) 2010 WL 8470477 (N.D. Cal. Dec. 10, 2010) ................................................. 15 In re Sagent Technology, Inc., Derivative Litigation, 278 F. Supp. 2d 1079 (N.D. Cal. 2003) ............................................................. 7 In re STEC, Inc. Derivative Litigation, Nos. CV 10-00667, 10-00220-JVS (MLGx) 2012 WL 8978155 (C.D. Cal. Jan. 11, 2012) ............................................... 6, 18 In re Verisign Derivative Litigation, 531 F. Supp. 2d 1173 (N.D. Cal. 2007) ............................................................. 6 Statutes and Rules Del. Code tit. 8, § 109 ......................................................................................... 3, 9, 14 Fed. R. Civ. P. 12(b)(3) ......................................................................................... 5, 18 Fed. R. Civ. P. 23.1 .................................................................................................... 18 Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 4 of 24 Page ID #:527 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 v NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY Other Authorities Restatement (Second) of Conflict of Laws § 302 (1971) ............................................. 7 Joseph A. Grundfest & Kristen A. Savelle, The Brouhaha Over Intra- Corporate Forum Selection Provisions: A Legal, Economic, and Political Analysis, 68 Bus. Law. 325 (2013) .................................................................................... 9 Deborah A. DeMott & David F. Cavers, Shareholder Derivative Actions: Law & Practice § 1:1 (2014-2015 ed.)…………………………… ……………………….1 1 Ved P. Nanda & Ralph B. Lake, The Law of Transnational Business Transactions (2014) .................................................................................................... 12 Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 5 of 24 Page ID #:528 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY INTRODUCTION “A derivative suit differs in a fundamental respect from a class action brought by a corporation’s shareholders. Both are representative actions, but the claims asserted in a derivative suit are those of the corporation, while the claims asserted in a class action are individual claims of injury suffered by the shareholders themselves.” Deborah A. DeMott & David F. Cavers, Shareholder Deriv. Actions: Law & Prac. § 1:1 (2014-2015 ed.). 1 Because the real party in interest is the corporation, not the shareholder-plaintiff, the law expects and requires that a derivative suit be pursued on behalf of the corporation—not the representative shareholders. The Opposition is illustrative, as Plaintiffs discard the best interests of CytRx and its shareholders in a self-interested pursuit of duplicative, last-in-time derivative litigation. 2 Unconcerned with what is good for the corporation, unconcerned that the derivative litigation had already been proceeding in Delaware by the time Plaintiffs filed their Complaints, and unconcerned with the reality that if the derivative litigation indeed has merit it will bear fruit for the corporation in Delaware just as it would in this Court, the Opposition displays Plaintiffs’ fixation on protecting their self-interests at the corporation’s expense. Plaintiffs simply do not care whether the same lawsuit is pursued in multiple jurisdictions. In their desperate attempt to preserve their self-interests, Plaintiffs advance several reasons to ignore the Bylaw and reject the alternative motion to stay the cases for the nearly identical derivative litigation in the Delaware Court of Chancery (the “Delaware Derivative Action”) and/or the consolidated securities class action litigation pending in this Court and the class action litigation pending in Los Angeles County Superior 1 Regarding citations, all emphasis is added, and all internal citations, quotations and alterations are omitted, unless otherwise noted. 2 “Motion” or “Mot.” refers to the Nominal Defendant’s Motion to Dismiss Complaints Pursuant to Rules 12(b)(3) and 23.1, Or, In The Alternative, To Stay, filed with this Court on October 20, 2014. (ECF No. 24.) “Opposition” or “Opp’n” refers to Plaintiffs’ Opposition to the Motion, filed with this Court on November 6, 2014. (ECF No. 36.) Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 6 of 24 Page ID #:529 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY Court (collectively, the “Securities Class Actions”). Each reason is incorrect and should be rejected. Forum Selection Bylaw. Plaintiffs filed their shareholder derivative lawsuits in the wrong forum. Under CytRx’s forum selection bylaw (the “Bylaw”), derivative actions must be filed in the Delaware Court of Chancery. Although their claims on behalf of a Delaware corporation all arise under Delaware law (and thus will not be prejudiced by being adjudicated in Delaware instead of California), Plaintiffs insist on maintaining their actions in this Court. Plaintiffs do not profess that their forum selection is in CytRx’s interests. Indeed, they know they cannot, as forum selection provisions protect the corporation’s interest in avoiding the very type of multi-forum, duplicative litigation that Plaintiffs seek to foist upon CytRx and its shareholders here. Rather, they advance meritless arguments to ignore the Bylaw. First, Plaintiffs misconstrue Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) (“Boilermakers”), and Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011). In a case of first impression, the Galaviz court held that Board-adopted forum selection bylaws are unenforceable because the contractual element of mutual consent is missing. 763 F. Supp. 2d at 1171. On the heels of scholarly and industry reaction to the unexpected holding in Galaviz, the Delaware Court of Chancery in Boilermakers undertook an extensive analysis of the question. As Boilermakers explained (and subsequent courts have agreed), Galaviz is based on a fundamental misunderstanding of Delaware law. Contrary to the foundation upon which Galaviz bases its reasoning, Delaware courts have “long rejected the so-called ‘vested rights’ doctrine, . . . which . . . asserts that boards cannot modify bylaws in a manner that arguably diminishes or divests pre-existing shareholder rights absent stockholder consent.” Boilermakers, 73 A.3d at 955 (comparing Galaviz, 763 F. Supp. 2d at 1174, with Kidsco Inc. v. Dinsmore, 674 A.2d 483, 492 (Del. Ch. 1995)). Instead, Delaware courts hold that “where a corporation’s articles or bylaws ‘put all on notice that the by-laws may be amended Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 7 of 24 Page ID #:530 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY at any time, no vested rights can arise that would contractually prohibit an amendment.’” Boilermakers, 73 A.3d at 955 (emphasis in original). Reexamining Galaviz with this corrected understanding of settled Delaware law in hand, one squarely arrives at Boilermakers’ holding that forum selection bylaws are facially valid. See Boilermakers, 73 A.3d at 939. The mutual consent that Galaviz mistakenly viewed as missing is, in fact, present, because “bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders.” Id. at 955. “Under that clear contractual framework, the stockholders assent to not having to assent to board-adopted bylaws.” Id. at 956. Where a corporate charter confers the power to adopt bylaws upon the directors without a shareholder vote pursuant to 8 Del. C. § 109(a), the shareholders are “on notice that, as to those subjects that are subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylaws addressing those subjects.” Id. at 950-51, 955-56. Forum selection for shareholder derivative actions is decidedly one of those subjects under § 109(b) because it concerns the internal affairs of the corporation. Id. at 950-51. Second, because the Bylaw is facially valid, the only inquiry is whether it is enforceable “as applied.” Under M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) (“Bremen”), the Bylaw is presumed enforceable. To overcome the presumption, Plaintiffs must demonstrate that the Bylaw is affected by “fraud, undue influence, or overweening bargaining power” or that enforcing it would be “unreasonable.” Boilermakers, 73 A.3d at 957 (citing Bremen). Other than recycling rejected arguments aimed at whether all forum selection bylaws are invalid (a facial challenge resolved by Boilermakers, as discussed above), Plaintiffs rest their “as-applied” challenge on the wishful suggestion that the Bylaw should not be enforced because it was enacted by the board of directors after the wrongdoing they are alleged to have committed. (Opp’n at 12.) Such a timeline is not determinative, nor is it factually applicable here, anyway. Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 8 of 24 Page ID #:531 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY In their desperation to generate a timeline to aid their cause, Plaintiffs attempt to relate their DreamTeam and spring-loaded options allegations back to a pre-Bylaw event—the filing of a Registration Statement in December 2012—which they now announce for the first time is “a necessary component of the second prong of Defendants’ scheme at the center of this Action.” (Id.) To further stage a false appearance of legitimacy, Plaintiffs also now assert that the Registration Statement “contains materially false and misleading statements” (Opp’n at 13 n.17), although nowhere do Plaintiffs explain what this actually means, much less supply citations of where the particularized facts purportedly supporting this bald claim are pled. Perhaps most revealing is that Plaintiffs’ ex post facto concoction of a DreamTeam scheme relating back to the December 2012 Registration Statement is belied by the pleadings they actually filed before learning of the Bylaw. In the first paragraph of their Complaints, Plaintiffs define the “Relevant Period” of their Complaints as “from 2013 to the present.” (Compl. ¶ 1.) This “Relevant Period” is, of course, after the December 2012 Registration Statement. As further example, the DreamTeam “scheme” is repeatedly described in the Complaints as commencing after the Bylaw’s adoption in July 2013. See, e.g., id. ¶ 36 (“During the period of the Individual Defendants’ illicit scheme of undisclosed paid promotions via DreamTeam, the Company’s stock price nearly quadrupled, from approximately $2.27 per share on November 1, 2013 to a high of $7.98 per share on January 30, 2014 . . . .”); ¶¶ 3, 33 (“In 2013, the defendants secretly hired stock promotion firm the DreamTeam Group . . . . [Authors] published approximately 13 articles on CytRx between November 2013 and March 2014”). Even Plaintiffs’ reliance on an allegation from a different lawsuit about a September 2013 article does not save them (Opp’n at 13 n.16), since the Bylaw was adopted in July 2013. Moreover, it defies logic to suggest that the “wrongdoing commenced in December 2012 with the filing of the false and misleading Registration Statement” (Opp’n at 13), on the ground that the Registration Statement “failed to disclose . . . Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 9 of 24 Page ID #:532 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY the relationship with DreamTeam.” (Compl. ¶ 36.) Plaintiffs do not deny, because they cannot, that CytRx hired or purportedly used DreamTeam until nearly a year after the Registration Statement was issued and after the Bylaw was adopted. For these reasons, Plaintiffs’ desperate redressing of their Complaints do not render the Bylaw unenforceable “as applied,” and the Motion to Dismiss under Rule 12(b)(3) should be granted. Motion to Stay. In the alternative, this Court should stay the case in favor of the Delaware Derivative Action and/or the Securities Class Actions. Regarding the Delaware Derivative Action, courts readily invoke a stay in light of a “parallel consolidated derivative action raising the same issues” and in light of the “significant risks . . . posed of piecemeal and inconsistent litigation.” Ash v. Alexander, 2000 WL 20704, at *3-4 (S.D.N.Y. Jan. 12, 2000) (where “both actions are derivative shareholder suits arising out of the same events and involving overlapping claims . . . [c]ontinuation of both suits . . . risks inconsistent findings with respect to the real party in interest in both actions.”). Plaintiffs provide no evidence or argument regarding: (1) “the hardship or inequity which a party may suffer in being required to go forward”; (2) “the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay”; and (3) “the possible damage which may result from the granting of a stay.” Filtrol Corp. v. Kelleher, 467 F.2d 242, 244 (9th Cir. 1972). Plaintiffs merely distort small distinctions between their Complaints and the consolidated complaint in the Delaware Derivative Action to distract the Court from the fact that they undeniably arise out of the same set of allegations and concern precisely the same subject matter—DreamTeam and “spring-loaded” options. (See Opp’n at 21.) Regarding the Securities Class Actions, “[c]ourts generally stay a shareholder derivative suit until the culmination of a securities class action when the cases arise from the same factual allegations and the evidence in the former could jeopardize the Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 10 of 24 Page ID #:533 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY company’s defense in the latter.” In re STEC, Inc. Derivative Litig., 2012 WL 8978155, at *4 (C.D. Cal. Jan. 11, 2012). In response, Plaintiffs argue only that the stay is a “delay tactic,” without explaining why any delay would be prejudicial or refuting the damage that will otherwise result to CytRx. (Opp’n at 18.) For each and all of these reasons, the Complaints should be dismissed, or, in the alternative, stayed. ARGUMENT I. PLAINTIFFS CANNOT REFUTE THE ARGUMENT THAT CYTRX’S FORUM SELECTION BYLAW IS VALID AND ENFORCEABLE A. The Bylaw Is Facially Valid 1. Under The Internal Affairs Doctrine, Delaware Law Determines The Validity Of The Bylaw As CytRx demonstrated in its Motion, under the internal affairs doctrine, Delaware law governs a challenge to the validity of the bylaws of a Delaware corporation, as adopted. (Mot. at 5-9.) In response, Plaintiffs label this analysis a “red herring” and hold that the doctrine is “irrelevant to the analysis before this Court.” (Opp’n at 9.) Plaintiffs offer no supporting authority for this proposition (because it does not exist), and ignore the long-standing body of law requiring that disputes regarding a corporation’s internal affairs be governed by the laws of the state of incorporation: It has long been settled doctrine that a court—state or federal—sitting in one State will as a general rule decline to interfere with . . . the management of the internal affairs of a corporation organized under the laws of another state but will leave controversies as to such matters to the courts of the state of the domicile. Rogers v. Guar. Trust Co. of N.Y., 288 U.S. 123, 130 (1933); see also Edgar v. MITE Corp., 457 U.S. 624, 645 (1982); In re Verisign Derivative Litig., 531 F. Supp. 2d 1173, 1214 (N.D. Cal. 2007) (“Under the ‘internal affairs’ doctrine, the law of the Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 11 of 24 Page ID #:534 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY state of incorporation governs liabilities of officers or directors to the corporation and its shareholders.”). This rule of law is supported by policies critical to the operation of domestic corporations, including certainty, predictability and uniformity of result, and conservation of resources by limiting disputes regarding governing law. See McDermott Inc. v. Lewis, 531 A.2d 206, 216 (Del. 1987). These factors make the application of the internal affairs doctrine imperative: Given the significance of these considerations, application of the internal affairs doctrine is not merely a principle of conflicts law. It is also one of serious constitutional proportions—under due process, the commerce clause and the full faith and credit clause—so that the law of one state governs the relationships of a corporation to its stockholders, directors and officers in matters of internal corporate governance. Id. As the Motion establishes, challenges regarding a corporation’s bylaws fall squarely within the internal affairs doctrine and thus must be determined by applying the law of the state of incorporation. See Mot. at 8 (collecting case authority); In re Sagent Tech., Inc., Derivative Litig., 278 F. Supp. 2d 1079, 1090 (N.D. Cal. 2003) (“‘Internal affairs’ are matters such as . . . adoption of bylaws [and] corporate charter and bylaw amendments.”) (citing Restatement (Second) of Conflict of Laws § 302 (1971)). “[A] foreign court that respects the internal affairs doctrine, as it must, when faced with a motion to enforce the bylaws will consider, as a first order issue, whether the bylaws are valid under the ‘chartering jurisdiction’s domestic law.’” Boilermakers, 73 A.3d at 938. 2. Plaintiffs Erroneously Rely On Galaviz Plaintiffs argue that Galaviz “makes it clear that the Clause is unenforceable” Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 12 of 24 Page ID #:535 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY and summarily deny CytRx’s argument and counter-authority that the Galaviz holding “rests[s] on a failure to appreciate the contractual framework established by the DGCL for Delaware corporations and their shareholders.” (Opp’n at 14, 15 (citing Mot. at 10 n.6).) Plaintiffs’ reliance on Galaviz is misplaced. 3 In Galaviz, the court assessed the enforcement of a bylaw adopted by Oracle’s board without stockholder approval, as permitted by Oracle’s articles of incorporation, designating the Delaware Chancery Court as the exclusive forum for any derivative action. Galaviz, 763 F. Supp. 2d at 1172. Following the framework in Bremen, the court reported that plaintiffs did not “suggest[] the bylaw was the product of fraud or undue influence,” that there was no showing of inconvenience so as to “deprive [plaintiffs] of their day in court,” and that it would not violate fundamental public policy “to require resolution of shareholder derivative actions in a corporation’s home state.” Id. at 1173. The court acknowledged that were these “factors controlling here, there would be little basis to decline to enforce” the Oracle forum selection bylaw. Id. at 1174. The Galaviz court nonetheless refused to enforce the bylaw, reasoning that a contracting party may not unilaterally add or modify contractual provisions without mutual consent. Id. at 1174 (declining to enforce where “venue provision was unilaterally adopted . . . without the consent of existing shareholders who acquired their shares when no such bylaw was in effect”). But as Boilermakers dissects, the Galaviz opinion is erroneously premised on the so-called “vested rights doctrine,” which “asserts that boards cannot modify bylaws in a manner that arguably 3 Plaintiffs’ single other authority in support of their contention that the Bylaw is invalid is inapposite. (See Opp’n at 14.) In In re Facebook, Inc. IPO Securities & Derivative Litigation, 922 F. Supp. 2d 445 (S.D.N.Y. 2013), the court addressed a challenge to a forum selection clause in the corporation’s certificate of incorporation and declined to extend Galaviz. Id. at 462. Instead, it determined that the amended certificate of incorporation did not become effective under Delaware law until filed with the Secretary of State, and since the certificate was filed four days after the challenged conduct, “the claims and parties involved in [the] action [were] not subject to the forum selection clause in the Certificate.” Id. at 463. This analysis is inapplicable to this case. Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 13 of 24 Page ID #:536 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY diminishes or divests pre-existing shareholder rights absent stockholder consent.” 4 Boilermakers, 73 A.3d at 955. That doctrine, however, has long been rejected under the governing Delaware law. See Kidsco Inc., 674 A.2d at 492. Therefore, as Boilermakers held, “where a corporation’s articles or bylaws ‘put all on notice that the by-laws may be amended at any time, no vested rights can arise that would contractually prohibit an amendment.’” 5 Boilermakers, 73 A.3d at 955 (emphasis in original) (citing Kidsco Inc., 674 A.2d at 492). Completing the analysis based on a correct contractual framework, Boilermakers holds that forum selection bylaws are facially valid. See Boilermakers, 73 A.3d at 939. “Under that clear contractual framework, the stockholders assent to not having to assent to board-adopted bylaws.” Id. The mutual consent that Galaviz mistakenly viewed as missing is, in fact, present, because “bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders.” Id. at 955. Where a corporate charter confers the power to adopt bylaws upon the directors without a shareholder vote, as permitted by 8 Del. C. § 109(a), the shareholders are “on notice that, as to those subjects that are subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylaws addressing those subjects.” Id. at 950-51, 955-56. As Boilermakers confirms, forum 4 Despite Plaintiffs’ characterization of Galaviz as “seminal” (Opp’n at 3), that case of first impression has been widely criticized by courts and legal authorities. See Mot. at 10 n.6. See also Joseph A. Grundfest & Kristen A. Savelle, The Brouhaha Over Intra-Corporate Forum Selection Provisions: A Legal, Economic, and Political Analysis, 68 Bus. Law. 325, 407 (2013) (noting that “if the Galaviz analysis stands then much of standard corporate law practice regarding the amendment of bylaws must fall, and much larger bodies of corporate law must be rewritten.”); City of Providence v. First Citizens BancShares, Inc., 2014 WL 4409816, at *11 (Del. Ch. Sept. 8, 2014) (“For the reasons set forth in Chevron and this Opinion, the Galaviz and TriQuint decisions, to the extent they purport to apply Delaware law, are based on a misapprehension of Delaware law regarding the facial validity and as-applied analysis of forum selection bylaws.”). 5 Accordingly, Plaintiffs’ argument that the Bylaw cannot be enforced because it was “unilaterally adopted after Plaintiffs purchased stock” (Opp’n at 16 & n.19), is contrary to Delaware law. Boilermakers, 73 A.3d at 955 (citing Kidsco Inc., 674 A.2d at 492 (rejecting “vested rights doctrine”)). Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 14 of 24 Page ID #:537 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY selection for shareholder derivative actions is decidedly one of the proper subjects of a bylaw because it concerns the internal affairs of the corporation. Id. at 950-51. In sum, the contract between the shareholder and the corporation includes, as permitted by law, mutual assent to the board adopting a bylaw—without shareholder approval—providing that derivative actions must be filed in a particular forum. Plaintiffs have not provided any authority applying the holding in Galaviz over such reasoning or authority rejecting the reasoning of Boilermakers, nor have they demonstrated that this Court should ignore the law upholding the facial validity of forum selection bylaws on statutory and contractual grounds. Accordingly, the Bylaw is facially valid. B. The Bylaw Is Enforceable “As Applied” Whether a forum selection bylaw is valid “as applied” is guided by the analysis in Bremen. (See Opp’n at 10-11.) Under Bremen, the Bylaw is presumed valid and enforceable, unless it is affected by “fraud, undue influence, or overweening bargaining power” or “enforcement is shown by the resisting party to be ‘unreasonable.’” (Mot. at 9 (citing Boilermakers, 73 A.3d at 957 (citing Bremen)).) To overcome this presumption, Plaintiffs must show that the forum selection provision: (1) was the result of fraud, undue influence, or overweening bargaining power; (2) the selected forum is so ‘gravely difficult and inconvenient’ that the complaining party will ‘for all practical purposes be deprived of its day in court’; or (3) enforcement of the clause would contravene a strong public policy of the forum in which the suit is brought. Boilermakers, 73 A.3d at 957; see also Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 325 (9th Cir. 1996); Manetti-Farrow, Inc. v. Gucci Am., Inc., 858 F.2d 509, 514 (9th Cir. 1988); (Mot. at 9). Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 15 of 24 Page ID #:538 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY A party seeking to circumvent a forum selection provision bears a “heavy burden” to establish that it should not be enforced. Bremen, 407 U.S. at 17. Plaintiffs do not, and cannot, meet that burden. 1. Plaintiffs Cannot Show That The Bylaw Was Affected By Fraud, Undue Influence, Or Overweening Bargaining Power Plaintiffs advance no facts—much less particularized facts—that the Bylaw is affected by “fraud, undue influence, or overweening bargaining power.” Bremen, 407 U.S. at 12. Attempting to exploit the Galaviz court’s concern that Oracle’s forum selection bylaw was adopted “after the majority of the purported wrongdoing is alleged to have occurred,” Galaviz, 763 F. Supp. 2d at 1174, Plaintiffs advance a forced construction of their Complaints by now claiming that the December 2012 filing of the Registration Statement “was a necessary component of the second prong of Defendants’ scheme at the center of this Action.” (Opp’n at 12.) The argument fails for several independent reasons. As an initial matter, the filing of the December 2012 Registration Statement does not constitute a “majority of the purported wrongdoing” alleged to have occurred. Galaviz, 763 F. Supp. 2d at 1174. Accordingly, Plaintiffs’ challenge fails even pursuant to the infirm case law upon which it rests. In addition, even crediting Plaintiffs’ newly invented relation-back theory of the timeline scheme, the mere facts that an Registration Statement was filed in December 2012 and the Bylaw was adopted in July 2013 do not suffice to show “fraud, undue influence, or overweening bargaining power.” Bremen, 407 U.S. at 12. Plaintiffs accompany their argument with none of the factors considered for fraud, 6 undue influence, or overweening 6 “To invalidate a forum selection clause on the grounds of fraud, the party seeking to invalidate the clause must demonstrate that the clause itself was procured by fraud.” Double Z Enters., Inc. v. Gen. Mktg. Corp., 2000 WL 970718, at *3 (Del. Super. Ct. June 1, 2000) (enforcing forum selection provision where there were no allegations or evidence to suggest that there was fraud in the procurement of the (cont’d) Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 16 of 24 Page ID #:539 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY bargaining power. 7 Moreover, not only are there no allegations in the Complaints to support Plaintiffs’ convenient new theory, the allegations actually pled defeat the theory invented in the Opposition. Plaintiffs allege that the “Relevant Period” of their Complaints begins after the December 2012 filing (Compl. ¶ 1 (defining Relevant Period as “from 2013 to the present”)), and also that DreamTeam was purportedly hired in 2013, after the December 2012 Registration Statement was filed. (See id. ¶¶ 3, 33 (“In 2013, the defendants secretly hired stock promotion firm DreamTeam Group . . . . [Authors] published approximately 13 articles on CytRx between November 2013 and March 2014”); see also id. ¶ 36 (“During the period of the Individual Defendants’ illicit scheme of undisclosed paid promotions via DreamTeam, the Company’s stock price nearly quadrupled, from approximately $2.27 per share on November 1, 2013 to a high of $7.98 per share on January 30, 2014 . . . .”).) Furthermore, it defies logic to suggest that the “wrongdoing commenced in December 2012 with the filing of the false and misleading Registration Statement” (Opp’n at 13), because the Registration Statement “failed to disclose . . . the relationship with DreamTeam.” (Compl. ¶ 36.) There are no allegations, because there cannot be, that DreamTeam was hired by CytRx at the time of the filing of the December 2012 Registration Statement. 8 For these reasons, Plaintiffs have no basis for claiming any “fraud, undue influence, or overweening bargaining power.” (Mot. at 11.) ________________________ (cont’d from previous page) specific provision) (citing Am. Life Ins. Co. v. Parra, 25 F. Supp. 2d 467, 478 (D. Del. 1998)). 7 The undue influence and overweening bargaining power factors have been characterized as “overreaching” or “unconscionable conduct.” See 1 Ved P. Nanda & Ralph B. Lake, The Law of Transnational Business Transactions § 3:20 (2014). 8 Plaintiffs’ reliance on an allegation from a different pending action based on an article purportedly filed in September 2013 is also fatally flawed. (Opp’n at 13 n.16.) Though this allegation cannot be considered, the fact that the article was purportedly published in September 2013 merely confirms that CytRx’s Bylaw was enacted before any purported wrongdoing. Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 17 of 24 Page ID #:540 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY 2. Plaintiffs Cannot Show That They Will Be So Inconvenienced So As To Be Denied Their Day In Court Plaintiffs make no argument that litigating in Delaware would be so difficult or inconvenient so as to deprive them of a meaningful day in court, nor do they challenge CytRx’s analysis that there are no other obstacles to bringing their Delaware-based derivative claims in Delaware. (See Mot. at 12 (establishing that there are no subject matter or personal jurisdiction barriers; Plaintiffs have not alleged causes of action that must be brought exclusively in federal court).) 3. The Bylaw Does Not Contravene Public Policy Enforcing the forum selection bylaw furthers public policy by concentrating derivative litigation that relates to substantially similar subject matter. (Mot. at 13- 14.) Plaintiffs do not (and cannot) dispute the efficiencies resulting from the Bylaw and the undeniable public policy endorsing its enforceability. See, e.g., Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991) (“[A] clause establishing ex ante the forum for dispute resolution has the salutary effect of dispelling any confusion about where suits arising from the contract must be brought and defended . . . .”); Boilermakers, 73 A.3d at 952 (“[F]orum selection bylaws are designed to bring order to what the boards of Chevron and FedEx say they perceive to be a chaotic filing of duplicative and inefficient derivative and corporate suits against the directors and the corporations.”); North ex rel. Chemed Corp. v. McNamara, 2014 WL 4684377, at *7 (S.D. Ohio Sept. 19, 2014) (recognizing that forum selection bylaws achieve “cost and efficiency benefits that inure to the corporation and its shareholders by streamlining litigation into a single forum”). Rather, and clearly without regard to the interests of the corporation they purport to represent, Plaintiffs attempt to argue that the forum selection clause is “fundamentally unfair” because it binds the shareholder “preemptively” to future decisions by the Board. Plaintiffs posit that “this may or may not be acceptable under Delaware corporate law.” (Opp’n at 17.) As discussed above, Plaintiffs’ Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 18 of 24 Page ID #:541 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY assertions here are baseless and rejected by Delaware law. See ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 560 (Del. 2014) (affirming that a “bylaw provision is enforceable against members who joined the corporation before the provision’s enactment and who agreed to be bound by rules ‘that may be adopted and/or amended from time to time’ by the board” citing 8 Del. C. § 109; Boilermakers, 73 A.3d at 956)). In addition to the internal affairs doctrine, no policy of California provides that the derivative action proposed by Plaintiffs cannot be adjudicated by the Delaware Court of Chancery. See, e.g., In re Countrywide Fin. Corp. Derivative Litig., 542 F. Supp. 2d 1160, 1173 (C.D. Cal. 2008) (“Thus, the Delaware Court of Chancery, which unquestionably has a well-recognized expertise in the field of state corporation law, is a particularly suitable forum to adjudicate those disputes.”). II. IN THE ALTERNATIVE, THE ACTIONS SHOULD BE STAYED This Court has the authority to control the disposition of all matters before it in a “manner which will promote economy of time and effort for itself, for counsel, and for litigants.” Filtrol, 467 F.2d at 244 (quoting CMAX, Inc. v. Hall, 300 F.2d 265, 268 (9th Cir. 1962)); see also Landis v. N. Am. Co., 299 U.S. 248, 254 (1936) (“[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the [cases] on its docket . . . .”). In determining whether a proceeding should be stayed, courts weigh competing interests including: (1) “the hardship or inequity which a party may suffer in being required to go forward”; (2) “the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay”; and (3) “the possible damage which may result from the granting of a stay.” Filtrol, 467 F.2d at 244. CytRx’s Motion establishes that all of these factors weigh in favor of a stay here. (Mot. at 14-20.) Plaintiffs have not put forward any affirmative argument to establish the basis of their competing interest. Indeed, the Opposition poses no Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 19 of 24 Page ID #:542 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY argument that CytRx, on whose behalf they bring the lawsuit, will suffer any harm from a stay. 9 A. This Action Should Be Stayed In Favor Of The Delaware Derivative Action Because They Are Virtually Identical Actions Plaintiffs fail to refute CytRx’s arguments that the CytRx shareholders can only maintain one derivative action on behalf of the corporation, and that simultaneous derivative actions are inherently injurious to the corporation. (Mot. at 16-17.) Plaintiffs rely solely on their argument that the complaints in the two cases differ slightly, while simultaneously conceding that their claims arise out of the same course of conduct. (Opp’n at 21 (“[T]he operative pleading in the Delaware Action makes passing references to the Dream Team stock promotion scandal”; “allegations of spring-loaded options are merely part of a much larger picture posed in this Action, while allegations of spring loaded options fundamentally comprise the entirety of the Delaware Action.”).) Plaintiffs provide no law in support of their position that this “distinction without a difference” outweighs the factors that support a stay. As CytRx showed, courts readily invoke a stay in light of a “parallel consolidated derivative action raising the same claims” in light of the “significant risks . . . posed of piecemeal and inconsistent litigation.” Ash, 2000 WL 20704, at *3 (where “both actions are derivative shareholder suits arising out of the same events and involving overlapping claims[,] . . . [c]ontinuation of both suits . . . risks inconsistent findings with respect to the real party in interest in both actions”). “Exact parallelism is not required. . . . It is enough if the two proceedings are substantially similar.” Sabbag v. Cinnamon, 2010 WL 8470477, at *5, *8 (N.D. Cal. Dec. 10, 2010) (“Proceeding with two separate derivative actions, each seeking to 9 Plaintiffs argue that CytRx challenges the purpose of derivative litigation. (Opp’n at 20.) CytRx’s brief nowhere challenges the validity of derivative litigation brought in the proper forum in the context of corporate governance. Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 20 of 24 Page ID #:543 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY remedy the same wrongs, serves only to injure the corporation and its shareholders by forcing the corporation to incur duplicative litigation expenses.”). Plaintiffs cite no law to the contrary, because none exists. Moreover, Plaintiffs’ characterization of the Delaware Derivative Action is misleading. Both the Delaware Derivative Action and the Complaints arise out of the same sets of allegations: that the directors “caused the Company to enter into a contract with DreamTeam to conduct a secret promotional campaign touting CytRx stock” (Derivative Compl. 10 ¶ 6; see also Compl. ¶ 3); and that the Board “either knew or recklessly disregarded that DreamTeam’s promotional articles failed to disclose that the authors were being paid” (Derivative Compl. ¶ 82; see also Compl. ¶ 32 at 18). The Delaware Derivative Action includes further allegations about DreamTeam, including that the directors breached their fiduciary duties by “failing to ensure that CytRx adequately disclosed the use of DreamTeam to promote its stock to retail investors.” (Derivative Compl. ¶ 72.) Similarly, though Plaintiffs downplay the role of the purported “spring-loaded options awards” in an attempt to somehow differentiate their actions from the Delaware Derivative Action, this strategy fails. While Plaintiffs claim that their “allegations and claims regarding spring-loaded options are merely part of a much larger picture posed in this Action” (Opp’n at 21), the Complaints abound with allegations about the option awards. (See, e.g., Compl. ¶ 41 (“These series of events present a variation on the classic case of spring-loading.”); see also ¶¶ 6, 39, 53, 62, 87-88, 91.) In fact, while selectively downplaying the options allegations in their Opposition (Opp’n at 21), Plaintiffs argue that demand is futile because of the Directors’ receipt of the options (Compl. ¶¶ 52-55, 62-64), and assert multiple causes of action based on such allegations. Finally, Plaintiffs do not even attempt to show that they will suffer any 10 “Derivative Compl.” refers to Exhibit 9 of the Declaration of Allen L. Lanstra, filed on October 20, 2014. (ECF No. 27.) Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 21 of 24 Page ID #:544 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY damage from a stay in favor of the Delaware Derivative Action. (Opp’n at 21.) B. This Action Should Be Stayed For The Securities Class Actions As CytRx showed, simultaneous prosecution of this Action and the Securities Class Actions will lead to duplicative litigation and an unnecessary waste of resources. Courts have stayed derivative actions until the underlying securities class action is resolved due to this concern. See, e.g., Rosenblum v. Sharer, 2008 WL 9396534, at *8 (C.D. Cal. July 28, 2008) (“[T]he interests of litigative efficiency and judicial economy weigh heavily in favor of entry of a stay” of derivative litigation because “to prevail in this derivative action, [plaintiff] will need to prove the same core factual allegations at issue in the securities class action.”); Cucci v. Edwards, 2007 WL 3396234, at *2 (C.D. Cal. Oct. 31, 2007) (staying derivative action during pendency of securities class action because “both actions rest on the same or closely related transactions, happenings or events, and thus will call for the determination of the same or substantially related questions of fact”). In response, Plaintiffs declare that the stay is a “delay tactic” by the corporation (Opp’n at 18), without explaining why any such resulting delay would prejudice the corporation. Plaintiffs also proffer a non-sequitur argument about “obvious stand-alone damages Plaintiffs allege CytRx has already suffered.” (Opp’n at 19.) Plaintiffs overlook that the motion to stay is based on the indisputable waste of resources that would result from allowing this Action to proceed simultaneously with the Securities Class Actions. Plaintiffs present no fact or law contradicting CytRx’s argument that it will suffer harm by litigating both actions simultaneously. (See Opp’n at 18-20.) Plaintiffs cite AmerisourceBergen Corp. v. Roden, 495 F.3d 1143 (9th Cir. 2007), for the proposition that “the mere potential for conflict in the results of adjudications does not, without more, warrant staying exercise of federal jurisdiction.” Id. at 1151. That case, however, involved abstention under the Younger doctrine, which has no bearing on the damages a corporation incurs when forced to prosecute a derivative Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 22 of 24 Page ID #:545 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY action while simultaneously defending a related pending action. In fact, Plaintiffs do not even argue that CytRx can prosecute this Action concurrent with the securities action without suffering harm. As established in CytRx’s Motion, “[c]ourts generally stay a shareholder derivative suit until the culmination of a securities class action when the cases arise from the same factual allegations and the evidence in the former could jeopardize the company’s defense in the latter.” In re STEC, Inc. Derivative Litig., 2012 WL 8978155, at *4. Plaintiffs cite to a number of derivative actions that have purportedly been “permitted” to proceed in tandem with securities actions arising from the same allegations. (Opp’n at 20 n.25.) All of these cases are inapposite. None of the parties in any of the four derivative actions that Plaintiffs identify ever moved for a stay in favor of related securities litigation; moreover, in many of the cases, the parties stipulated to a stay, and every case settled prior to final determination of the defendants’ motions to dismiss. 11 These cases were not “permitted” to proceed at all, and none had yet reached the stage where pursuing parallel litigation would harm the defendant corporate entity. Finally, one of the purported derivative suits cited by Plaintiffs, California Public Employees Retirement System v. UnitedHealth Group, Inc., No. 0:06-cv-02939-JMR-FLN (D. Minn.), is not a derivative action at all, but a securities class action that was consolidated into In re UnitedHealth Group Inc. PSLRA Litigation, No. 06-cv-01691-JMR-FLN (D. Minn.) (cited by Plaintiffs). See Cal. Pub. Emps.’ Ret. Sys., Dkt. No. 33 (Consolidation Order). 11 See In re Juniper Derivative Actions, No. 5:06-cv-03396-JW (N.D. Cal.), Dkt. Nos. 75 (entering first stay), 83 (entering second stay), 92 (entering third stay), 126 (approving settlement); In re Apple Inc. Derivative Litig., No. 5:06-cv-04128-JF (N.D. Cal.), Dkt. Nos. 195 (order vacating MTD hearing date), 205 (stipulation of settlement); Alaska Elec. Pension Fund v. Sperling, No. CV 2:06-cv-02124-ROS (D. Ariz.), Dkt. Nos. 56 (granting conditional stay pending investigation of claims by the company), 180 (granting stay pending mediation), 183 (stipulation to extend stay pending settlement); Wilder v. Doris, No. 4:07-cv-01500-CW (N.D. Cal.), Dkt. 100 (approving settlement). Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 23 of 24 Page ID #:546 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19 NOMINAL DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS COMPLAINTS, OR, IN THE ALTERNATIVE, TO STAY CONCLUSION For the foregoing reasons, CytRx requests that this Court dismiss these actions for improper venue under Rule 12(b)(3), and for failure to make a demand pursuant to Rule 23.1. In the alternative, the action should be stayed until the pending Delaware Derivative Action and Securities Class Actions are resolved. DATED: November 20, 2014 SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP By: /s/ Thomas J. Nolan Thomas J. Nolan Attorneys for Defendants and Nominal Defendant Case 2:14-cv-06414-GHK-PJW Document 43 Filed 11/20/14 Page 24 of 24 Page ID #:547