California-based high technology firm Cisco Systems is the latest company to be hit with a racial diversity lawsuit, based on allegations that its directors breached their fiduciary duties to the company by failing to include an African-American on the company’s board, despite the company’s numerous statements about its commitment to diversity. Though this latest lawsuit is in many respects similar to the previously filed board diversity lawsuits, it does differ in that it was not filed by the plaintiffs’ firm that has filed most of these lawsuits and also because the lawsuit follows a pre-suit demand on Cisco’s board, by contrast to most of the prior suits where the plaintiffs had made no demand and instead argued demand futility. A copy of the complaint in the Cisco Systems action can be found here.
On September 23, 2020, the City of Pontiac General Employees’ Retirement System, a Cisco Systems shareholder, filed a derivative lawsuit in the Northern District of California against the company’s board of directors, as well as against the company itself as nominal defendant. The crux of the lawsuit is that there are no African-Americans on the company’s board.
The basic allegation against the company is that “while Cisco’s publicly facing communications state that the Company is ‘committed to’ and ‘embraces’ diversity at Cisco, including at the very top, Defendants have declined to carry out the Company’s policies and proclamations and have failed to increase racial diversity at Cisco.”
The complaint quotes extensively from various business and social science research studies purportedly showing that companies with racially diverse leadership outperform other companies, to underscore the allegation that the inclusion of diverse leadership in the best interests of the company. Yet despite this research and despite the company’s many statements about its commitment to diversity and inclusion, the complaint alleges, there are no African-Americans on the company’s board or in its senior leadership.
Notably, the complaint alleges that on August 5, 2020 the plaintiff sent the company’s board a pre-suit demand letter (copy here), in which the plaintiff demanded that the company’s board “immediately commence legal action against certain current and former Cisco directors and/or officers for breach of fiduciary duty and federal proxy law violations.”
The complaint alleges that “Cisco has been damaged and irreparably harmed by Defendants’ conscious continuing failure to actually do what they repeatedly told shareholders they would do – embrace racial diversity throughout Cisco’s corporate enterprise. By this action, Plaintiff seeks to remedy Defendants’ dereliction of their legal duty to act in the best interests of Cisco and remove institutional structures preventing the Company from fulfilling its stated diversity objectives.”
The complaint asserts substantive claims against the defendants for breach of fiduciary duty; unjust enrichment; and violation of the federal securities laws’ proxy disclosure requirements.
The complaint seeks as relief money damages; an accounting of all benefits and unjust enrichment the defendants have obtained as a result of their conduct; the entry of an order directing the company to adopt, implement, and maintain policies and procedures to promote greater racial diversity; nominate three new persons to the Cisco board, two of whom to be African Americans, and other person of a racial minority; for the company to invest $400 million for programs in the African American community; for 15% of all new positions to be filled by African Americans and to develop a program to ensure fair and equitable hiring; the institution of regular diversity and inclusion training for the board and senior executives; and to create a public reporting mechanism on the company’s diversity and inclusion progress.
By my count, this new lawsuit against Cisco Systems is the eighth of the board diversity lawsuits filed in recent months since the rise of the current racial justice movement. The Cisco Systems lawsuit is in many respects substantially similar to the prior board diversity lawsuits; the factually allegations echo the allegations in the other lawsuits, and the substantive claims and relief sought are almost identical.
But while there are numerous similarities between this lawsuit and the prior suits, there are some important differences.
First of all, this lawsuit, unlike all but one of the prior lawsuits, was not filed by the Bottini and Bottini law firm, the plaintiff’s firm that has been most active in filing these claims. Rather, this lawsuit was filed by the Robbins Geller law firm, which filed the one prior board diversity lawsuit that was not filed by the Bottini law firm. As noted here, the Robbins Geller law firm previously filed a board diversity lawsuit against Danaher Corporation. As I noted at the time of the Danaher lawsuit, the involvement of another plaintiffs’ firm in this type of litigation makes these lawsuits look a little bit less like the quixotic quest of a lone, self-appointed racial justice vigilante; with multiple firms now getting into the act, this litigation looks like a more generalized phenomenon.
The Cisco Systems lawsuit is different from the prior lawsuits in one other important respect, which is that the lawsuit files the plaintiff’s service of a pre-suit demand on the company’s board. In almost none of the prior lawsuits did the plaintiff made a pre-suit demand; the plaintiffs in those other cases are instead relying on the demand futility argument. The plaintiff in this case will argue that its pre-suit demand eliminates one of the defenses that the defendants might seek to assert in response to the complaint.
Cisco Systems issued the following statement with respect to the lawsuit in general, and the pre-suit demand in particular: “At Cisco, we are committed to full-spectrum diversity and have been very vocal on this subject. Cisco recently published our social justice beliefs and actions which are available here. With regard to this lawsuit, Cisco received a demand from this firm and advised them that the Board was in the process of investigating and evaluating the allegations. That process is ongoing. Rather than allowing the Board the opportunity to conduct its review and complete its work, the firm improperly filed suit. We intend to respond to this lawsuit in court.”
Cisco Systems is one of the company’s that was identified in a Newsweek article published in June about the 20 largest U.S. companies without African American board members. The complaint in the Cisco Systems action in fact expressly refers to the Newsweek article. Danaher and some of the other companies that have been targeted with board diversity lawsuits were also referenced in the article. It is starting to seem as if the plaintiffs’ firms intend to work their way through the list of companies, or at least the companies that have not already publicly announced plans to address racial diversity on their boards.
As I have noted in my prior posts about these board diversity lawsuits, the plaintiff lawyers involved have concluded that, in light of the current racial justice movement, these kinds of lawsuits represent an opportunity to pursue claims against corporate boards based on long-standing corporate practices – or perhaps long-standing corporate inaction. The current heightened focus on diversity and inclusion issues casts a harsh light on the lack of African Americans in corporate leadership and put pressure on companies and other organizations to take remedial steps.
Given investor and media scrutiny and the threat of litigation, it would seem prudent of companies lacking a Black director to proactively take steps to address the issue. Indeed, as I noted in a recent post (here), a number of companies have acted proactively and taken a pledge to add a Black director to their boards within a year. The plaintiffs’ lawyers filing these lawsuits undoubtedly would argue that that is part of their motivation in filing these lawsuits; to use the lawsuits and the threat of litigation to induce companies to take action and to address board diversity issues.
It will be interesting to see what happens to these lawsuits. In the meantime, it seems likely that we will see more of these kinds of lawsuits filed.
My thanks to a loyal reader for sending me copies of the Cisco Systems complaint and the demand letter.