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Kokocinski v. Collins

United States Court of Appeals, Eighth Circuit

March 1, 2017

Charlotte Kokocinski, derivatively on behalf of Medtronic, Inc. Plaintiff- Appellant
Arthur D. Collins, Jr.; William A. Hawkins; Gary Ellis; Richard H. Anderson;David L. Calhoun; Victor J. Dzau; Shirley Ann Jackson; James T. Lenehan; DeniseM. O'Leary; Kendall J. Powell; Robert C. Pozen; Jean-Pierre Rosso; Jack W.Schuler; Michael R. Bonsignore; Gordon M. Sprenger; William R. Brody; OmarIshrak; Medtronic, Inc. Defendants-Appellees Special Litigation Committee Movant - Appellee

          Submitted: October 19, 2016

         Appeal from United States District Court for the District of Minnesota - Minneapolis

          Before GRUENDER, BEAM, and SHEPHERD, Circuit Judges.

          BEAM, Circuit Judge.

         Charlotte Kokocinski brought a shareholder derivative action on behalf of Medtronic, Inc., against current and former directors and officers of Medtronic, and against Medtronic as a nominal defendant. The district court[1] dismissed the action on the basis of a report by a special litigation committee, and we now affirm.

         I. BACKGROUND

         From roughly 2006 to 2008 Medtronic was the subject of a well-publicized controversy involving whistle-blower lawsuits, settlement and corporate-compliance-and-governance agreements with federal agencies, and a congressional and media investigations. These events stemmed from Medtronic's alleged improper promotion to physicians of the "off-label" use[2] of its "Infuse" product, a surgically implanted medical device that stimulates bone growth. Infuse was also the subject of a 2008 Public Health Notification by the Food and Drug Administration (FDA). Medtronic's revenue and share price suffered as a result of this negative publicity. In 2012, without first making a demand on Medtronic, Kokocinski brought a shareholder derivative action against Medtronic directors and officers (the individual defendants) seeking declaratory and injunctive relief and damages. The complaint alleged various bad acts and false and misleading statements by which the individual defendants violated § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), breached their fiduciary duties, wasted corporate assets, and had been unjustly enriched. Later that year, in response to demand letters and derivative complaints by other stockholders presenting similar allegations, Medtronic's board of directors (the Board) formed a special litigation committee (SLC) to investigate the claims. The district court dismissed Kokocinski's complaint without prejudice in 2013 for failing to establish demand futility. See Fed.R.Civ.P. 23.1(b).[3] Kokocinski then exercised her statutory right to review Medtronic's corporate records, Minn. Stat. § 302A.461, subd. 4, and in April 2014 she filed an amended complaint with bolstered allegations.

         The SLC formed by Medtronic was initially composed of three members: John Matheson, a law professor and expert in corporate and business law; former Hennepin County District Court Judge George McGunnigle; and former Governor of Utah Michael Leavitt. Of these three, only Governor Leavitt was a Board member. Governor Leavitt left the SLC in December 2012 due to the possible perception of interestedness due to his having formerly been the Secretary of Health and Human Services, which oversees the FDA, the agency tasked with approving Infuse. Professor Matheson and Judge McGunnigle proceeded to engage in an eighteen-month investigation in which they engaged an accountant, a loss-causation analyst, and an economist; retained independent legal counsel; reviewed over 2.6 million documents; and interviewed sixty individuals, including current and former directors, officers, and employees of Medtronic, Medtronic sales representatives, consulting physicians, a physician who had been solicited to use Infuse, and one unaffiliated surgeon who had used the Infuse product. In May 2014, the SLC issued a 69-page report concluding that it would not be in Medtronic's best interest to pursue litigation. It noted that setting forth detailed factual findings would not be in Medtronic's interest as Medtronic was currently involved in securities fraud and personal injury litigation involving similar allegations. Further it noted that it did not find support for the allegations and rejected the claims of the demand letters and derivative complaints.

         The individual defendants, Medtronic, and the SLC (even though it was not a named party to the litigation and had not filed a motion to intervene) each brought a motion to dismiss Kokocinski's amended complaint on the basis of the SLC's report. Applying Minnesota law, the district court determined the SLC's investigation and methodologies warranted deference to its report under the business-judgment rule (BJR), and it granted the motions.[4] After entering judgment, the district court denied Kokocinski's motion for relief from, or to amend, the judgment, and entered judgment on that motion as well. Kokocinski timely appeals from both memorandum orders and judgments, arguing that (1) the SLC was not properly formed; (2) it was not entitled to deference under the BJR; and (3) the district court committed reversible error in failing to permit the parties to engage in discovery.


         Our standard of review on appeal depends on the proper way in which to construe the defendants' motions made on the basis of the SLC's report. The district court determined the motions should be construed as akin to a motion seeking voluntary dismissal of a shareholder's derivative action under Rule 23.1(c), borrowing from Rule 56 procedures. Borrowing a term from other cases, we will refer to the defendants' motions collectively as a "motion to terminate" the litigation. Kokocinski argues that the motion should have been converted to a Rule 56 motion for summary judgment warranting de novo review because it relied on the SLC's report, a matter outside the pleadings.[5] This is a matter of first impression for our circuit.[6]

         The First Circuit, applying Delaware law, has followed the lead of Delaware courts and classified such a motion as a "hybrid summary judgment motion for dismissal, " reviewing de novo. Sarnacki v. Golden, 778 F.3d 217, 221 (1st Cir. 2015) (quoting Zapata Corp. v. Maldonado, 430 A.2d 779, 787 (Del. 1981)). Other circuits have regarded it as a Rule 56 motion, also reviewing de novo. E.g., Booth Family Trust v. Jeffries, 640 F.3d 134, 139 (6th Cir. 2011); Gaines v. Haughton, 645 F.2d 761, 769 (9th Cir. 1981), overruled on other grounds by Churchill v. The F/V Fjord (In re McLinn), 739 F.2d 1395, 1397 (9th Cir. 1984) (en banc). The Eleventh Circuit, looking to Delaware law, has instead construed a motion to terminate as one arising under Rule 23.1 and applied an abuse-of-discretion standard of review. Peller v. S. Co., 911 F.2d 1532, 1536 (11th Cir. 1990). Minnesota courts have not characterized such motions consistently. See Janssen, 662 N.W.2d at 889-90.

         We agree that because of its reliance on the SLC's report, and because it does not go to the adequacy of the pleadings, the defendants' motion cannot be construed as a motion under Rule 12(b)(6). On the other hand, a ruling granting the motion would not go to the merits of Kokocinski's claims, and so it does not fit neatly into the summary-judgment box either. Further, unlike a motion for summary judgment, an assessment of the independence and adequacy of an SLC's investigation involves making findings based on credibility determinations and the weighing of evidence, and in the event the motion is denied the movant is not entitled to litigate those fact questions afterwards. See Johnson v. Hui, 811 F.Supp. 479, 485 (N.D. Cal. 1991); Janssen v. Best & Flanagan, 662 N.W.2d 876');">662 N.W.2d 876, 889-90 (Minn. 2003) (holding that once an SLC's investigation is deemed inadequate, suit must proceed to merits). Therefore, neither do we think it proper to construe the defendants' motion to terminate as one arising under Rule 56.

         We agree with the district court and the Eleventh Circuit that the closest fit for a motion to terminate in the Federal Rules is Rule 23.1(c). That Rule states in part that "[a] derivative action may be settled, voluntarily dismissed, or compromised only with the court's approval." Although Rule 23.1(c) applies only to derivative plaintiffs, Burks v. Lasker, 441 U.S. 471, 485 n.16 (1979), a shareholder's derivative claim actually belongs to the corporation, Ross v. Bernhard, 396 U.S. 531, 538 (1970). Thus, a Rule 23.1(c) "voluntary dismissal" appears to be a close analog to a corporate defendant's motion to terminate litigation which it possesses the right to pursue. Of course, this similarity is only skin deep where, as here, the corporation is a nominal defendant antagonistic to the action. But in the absence of a better fit, Rule 23.1(c) is most closely concerned with the issues raised in a motion to terminate. Review of an SLC's decision and its investigative methodologies ensures a "disinterested independence and . . . an unprejudicial exercise of judgment" into whether litigation is in the best interest of the corporation. Auerbach v. Bennett, 393 N.E.2d 994, 1001 (N.Y. 1979). Similarly, Rule 23.1 in part "clearly contemplate[s] judicial review of the conduct of derivative actions to insure that the actions are in the best interests of the corporation." Johnson, 811 F.Supp. at 484; see also 7C Charles A. Wright et al., Federal Practice & Procedure § 1839 (3d ed. 2007) ("[B]y requiring court approval and notice to the stockholders of any proposed dismissal or settlement, the corporate interests . . . can better be protected from unfair or disadvantageous agreements.").

         This characterization of the defendants' motion leads us to conclude the proper standard of review is for an abuse of the district court's discretion. The district court's inquiry on a motion to terminate involves determining whether the legal criteria of Minnesota law have been met based on its familiarity with the case, its weighing of the evidence, and its credibility determinations. As the Supreme Court has held, abuse-of-discretion is an appropriate standard in circumstances in which the district court must apply a fact-intensive legal standard, particularly where: (1) the district court is better positioned than the reviewing court to decide the issue because of its familiarity with the evidence-in such instances the normal "law-clarifying benefits" of the circuit courts will not be advanced with more searching review; and (2) the facts of each case are of a "multifarious, fleeting, special, [and] narrow" nature resulting in close calls, so as not to be susceptible of "useful generalization." Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 401-05 (1990) (quoting Pierce v. Underwood, 487 U.S. 552, 561-62 (1988)). Such is the case here. The district court must assess the weight and credibility of the evidence in order to evaluate the independence and adequacy of the SLC's investigation. In re UnitedHealth Grp. Inc. S'holder Derivative Litig. (UnitedHealth I), 754 N.W.2d 544, 561 (Minn. 2008). The range of circumstances district courts may face-the size of the corporation, the history and various relationships the SLC members may have with respect to the board and the corporation, the array of various ...

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