qualcommThere is no private right of action under the Foreign Corrupt Practices Act. However, a company’s announcement of an FCPA investigation or enforcement action frequently will draw a follow-on civil lawsuit in the form of a shareholders’ derivative lawsuit, in which a shareholder plaintiff alleges that the company’s board failed to prevent the company from committing these violations. But while these kinds of lawsuits arise frequently, they are less frequently successful, as illustrated most recently in a Delaware Chancery Court shareholders’ derivative lawsuit involving the telecommunications equipment company Qualcomm.


On March 1, 2016, the SEC entered a cease-and-desist order against Qualcomm in connection with the company’s activities in China and Korea. The order stated that the company violated the FCPA by, among other things, providing Chinese officials with meals, gifts, and entertainment in order to secure contracts and had hired relatives of Chinese officials that were deciding whether to select the company’s mobile technology products. The SEC also alleged that the company’s records did not accurate reflect the gifts and other expenses and that the company lacked internal controls to prevent unauthorized transactions. Simultaneous with the orders release, the company agreed to pay a $7.5 million penalty and to file periodic reports with the SEC.


Shareholder plaintiffs filed a derivative lawsuit in Delaware Chancery Court against the company’s board and its CFO. The complaint alleged the defendants had consciously disregarded red flags which in turn led to the FCPA violations and ultimately to the cease-and-desist order. The plaintiffs asserted claims for breach of fiduciary duty, waste, and unjust enrichment.


In contending that the defendants had disregarded red flags, the plaintiffs cited various reports regarding FCPA compliance in China and Korea that the board and its audit committee received in 2009 and 2010. Among other things the reports showed that certain gifts were not being appropriately logged and reported on whistleblower reports of FCPA violations.


The defendants moved to dismiss the plaintiffs’ complaint for failure to make demand or to allege demand futility. In a June 16, 2017 ruling (here), Delaware Vice Chancellor Tamika R. Montgomery-Reeves granted the defendants’ motion, holding that the plaintiffs had not adequately alleged demand futility.


In ruling on the motion, Vice Chancellor Montgomery-Reeves stated that in order for the plaintiffs to establish demand futility with respect to the specific wrongdoing alleged, the plaintiffs would have to establish that the underlying claims pose a substantial threat to the liability to the board. In order to meet this standard, the claims against the board must be sufficiently strong that a majority of the members of the board face a “substantial likelihood” of personal liability. In determining whether or not the plaintiffs’ allegations met this standard, she considered each of the plaintiffs’ three claims separately.


First, with respect to Count I of the complaint, in which the plaintiffs alleged a breach of fiduciary duty for improper oversight (what is known as a Caremark claim), the Vice-Chancellor said in order for plaintiffs to establish this type of claim, they would have to plead that the board had knowledge of “red flags” indicating corporate misconduct and had acted in bad faith by consciously disregarding its duty to address the misconduct. She found that the complaint in this case “fails to allege particularized facts giving rise to an inference that a majority of the board faces a substantial likelihood of liability on the Caremark claim alleged.”


Specifically, with respect to the Caremark claim, she found that the Complaint fails to plead facts that give rise to an inference that the Board acted in bad faith. The complaint, she said, “does not allege that the board consciously disregarded the red flags.” To the contrary, he documents on which the plaintiffs rely in order to try to show that there were red flags “include planned remedial action.” These responses to the red flags, the Vice Chancellor said, “show that the board did not act in bad faith.” There is no indication that “the board believed Qualcomm would continue to violate the FCPA without consequences” and “no allegations suggest that the Qualcomm board consciously disregarded the red flags.”


With respect to the plaintiff’s argument that the FCPA establishes a statutory floor for adequate internal controls, and because the cease-and-desist order identifies internal control violations, the complaint therefor necessarily states a claim, the Vice-Chancellor said that “Delaware law, not the FCPA establishes the standard for director liability, and under Delaware law, Plaintiffs’ Complaint does not allege bad faith.”


The Vice-Chancellor also found that the plaintiffs had not established a substantial likelihood of liability with respect to their claim for waste. The complaint, she said, does not allege that the board directed the company to enter any wasteful transactions, and as to the illegal bribes, nothing in the complaint establishes that the board authorized those payments. The corporation, she said, may well have a claim against the employees who provided the unauthorized gifts, but absent any particularized allegations tying the bribery to the board, the directors are “competent to decide whether Qualcomm should pursue the claim.”


Finally, she found that the plaintiffs had to establish a substantial likelihood of liability on the claim for unjust enrichment. She said that the complaint provided “no basis for [the] conclusory statement” that the company’s FCPA violations inflated its financial results in a way that magnified the board’s incentive compensation.



As I have observed in the past (for example here), while plaintiffs’ lawyers frequently are quick to file follow-on civil suits in the wake of an FCPA investigation or enforcement action, in many instances these suits are unsuccessful as the suits often fail to clear the initial pleading hurdles. As was the case here, a frequent basis on which these suits are dismissed is the failure to establish demand futility. To be sure, there are FCPA follow-on actions that survive motions to dismiss (as discussed for example here), but in many other instances the cases do not survive.


I have been making both of these observations (that is, that FCPA follow-on civil suits are filed frequently and that these suits frequently face difficulties getting past the initial pleading hurdles) just about as long as I have been writing this blog. Yet the plaintiffs continue to file these cases – and not only that, but continue to file them fairly frequently. And in fairness, despite the obvious procedural and substantive challenges these suits entail, they may nevertheless be appealing cases, given that they usually follow in the wake of regulatory or enforcement agency findings of significant misconduct. The challenge for the plaintiffs is tying the misconduct back to the board. I suspect that because of the seriousness of the underlying misconduct frequently involved, these kinds of cases will continue to be filed.


It is hard to know what the level of FCPA enforcement activity will be under the new administration. During the election campaign, then-candidate Trump said that the FCPA “a horrible law and it should be changed.” On the other hand, during their respective confirmation hearings, both Attorney General Jeff Sessions and SEC Chair Jay Clayton specifically indicated that the FCPA is a statute that they intend to enforce. The likelihood is that these agencies will remain active in this area – and, by extension, that we will continue to see follow-on civil actions as well.


To the extent we do continue to see these kinds of follow-on actions, one comment in the Vice Chancellor’s opinion is relevant. The plaintiffs had attempted to argue, in effect, that the FCPA established a standard of conduct, and that by definition because the defendants violated the FCPA standard their complaint necessarily stated a claim. The Vice Chancellor’s response – that the law of Delaware not the FCPA is the relevant standard in determining the question of director liability — is the flip side of the observation that there is no private right of action under the FCPA. A claimant cannot establish director liability simply by asserting a violation of the FCPA. The only relevant question in determining director liability is whether the director violated Delaware law, not whether the company violated the FCPA.


One particular aspect of the underlying cease and desist order is the allegation relating to family member hiring. The Qualcomm case is one of several high profile examples where a company’s hiring of foreign officials’ family members has led to FCPA enforcement action. BNY Mellon, for example, was also the target of an FCPA enforcement action based on its hiring of family members of foreign officials. These particular kind of allegation remain controversial, but it has definitely raised awareness of the potential pitfalls of this kind of hiring activity.


One final note about the Vice Chancellor’s ruling. I don’t practice in Delaware so this may all just be due to unfamiliarity, but I thought it was unusual that the Vice Chancellor’s dismissal order was set out in the form of a letter to counsel. No reason why a ruling shouldn’t be presented in the form of a letter I suppose, but I just haven’t seen that sort of thing before. I wonder if any Delaware practitioners out there can shed some light on whether or not opinion letters are a customary thing in the state’s courts.


Fortis Settlement Hits a Snag: Readers undoubtedly will recall the milestone $1.3 billion settlement reached in the Netherlands in the collective investor action brought by shareholders of Fortis. (The March 2016 settlement is discussed at length here.) It now looks as if the settlement may have hit a little bit of a procedural snag. On June 16, 2017, Ageas, Fortis’s successor in interest, issued a press release stating that the Amsterdam court had issued an interim decision in connection with the settlement. According to the press release, the court announced that the settlement is not binding, owing to the court’s concerns about the distributions to be made to active claimants, non-active claimants, and claimant organizations. The court allowed the parties to submit a supplemental and amended agreement addressing the court’s concerns before October 17, 2017.


Special thanks to a loyal reader for sending me a link to the press release.