In my annual roundup of the issues to watch in the world of D&O that I posted early in the fall, I included in my list of topics the possibility of an increase in antitrust-related enforcement activity. I raised this concern in part because of fears arising from the emerging make-up of the Biden Administration’s antitrust regulatory team. For some readers, it may not have been apparent how these antitrust regulatory concerns might translate into D&O claims activity. Anyone looking for an example of how antitrust enforcement activity can lead to D&O claims will want to review the two shareholder derivative actions filed late last week against certain directors and officers of Alphabet, the parent of Google, as well as against directors and officers of Google itself. The complaints assert breach of fiduciary duty claims against the defendants relating to antitrust enforcement actions that have been filed against Alphabet and against Google by federal and state regulators.
On December 3, 2021, the same plaintiff law firm filed two separate shareholder derivative lawsuits in the Northern District of California. The first was filed on behalf of the Police and Retirement System of the City of Detroit and the second was filed on behalf the Bucks County Employment System. The Detroit Police lawsuit can be found here and the Bucks County lawsuit can be found here.
The Detroit Police Action
The Detroit Police lawsuit is filed against certain current and former directors and officers of Alphabet, as well against Alphabet itself as nominal defendant. The complaint in the Detroit Police action states that the lawsuit arises out of “the prolonged and ongoing monopolistic and anticompetitive busines practices, which the Individual Defendants cased Alphabet to adopt and maintain.” The complaint alleges that under the defendants’ oversight, the defendants caused Alphabet to “systematically engage in anticompetitive acts,” including
(i) leveraging its dominant position in general search to expand to other markets and eliminate competition in vertical search; (ii) forcing anticompetitive tying agreements on manufacturers and mobile carriers for its Android mobile devices in order to secure a monopolistic applications store charging supracompetitive fees; (iii) monopolizing in-application payment processing on Android; (iv) unfairly leveraging in ad servers, exchanges and markets, resulting in suprcompetitive fees for publishers, advertisers, and consumers, among other anticompetitive conduct in these business segments; (v) unfairly extracting supracompetitive fees from small publishers and the destruction of the competitive header bidding that arose in response to Alphabet’s original anticompetitive conduct in the ad purchase tools market, among other anticompetitive conduct in this segment; (vi) locking competitors out of voice-assisted search access points and future search access points to maintain general search monopoly; and (vii) unlawfully acquiring and agreeing with competitors to destroy competition and prevent nascent competitors from gaining market share.
According to the complaint, these alleged acts have resulted in enforcement actions being brought against the company by the U.S. Department of Justice and 48 state attorneys general. In addition, the U.S. House of Representatives have required testimony from the company and released a report “detailing Alphabet’s monopolistic conduct.”
As a result, the complaint alleges, “Alphabet has suffered substantial harm and faces the potential fines in the billions of dollars.” The company “has spent millions of dollars on investigations and civil actions.” The company’s reputation has suffered “immense harm.”
The complaint seeks to recover damages from the individual defendants on the company’s behalf. The complaint asserts five substantive claims: breach of fiduciary duty against the company’s directors; breach of fiduciary duty against the company’s officers; breach of fiduciary duty against certain individuals in their capacities as controlling shareholders; unjust enrichment; and corporate waste.
The Bucks County Employees’ Retirement System Action
The Bucks County Employees lawsuit is filed against certain current and former directors and officers of Google, the predecessor to and main subsidiary of Alphabet, as well as against Alphabet as nominal defendant. The complaint alleges that Google “engaged in a decades-long course of anticompetitive conduct that violates the antitrust laws.”
According to the complaint, this misconduct includes: “(1) leveraging its dominant position in general search to expand to other markets and muscle out opponents in vertical search; (2) using its dominance in mobile operating systems via Android to then create and maintain a monopolistic applications (‘apps’) store charging monopolistic prices; (3) extracting high fees from publishers and advertisers through its ownership of key players throughout the digital ad stack; (4) using acquisitions, tying, and bundling to dominate the navigation market; and (5) using acquisitions to kill nascent competitors and gain their market share.”
The complaint alleges that as a result of these alleged actions, Google has “come under increasing regulatory scrutiny.” The scrutiny has culminated in at least four pending government lawsuits, with a fifth lawsuit from the Department of Justice anticipated. The misconduct has also resulted in numerous private lawsuits that have been consolidated into two multi-district litigations, as well as in Congressional scrutiny.
The officer defendants, the complaint alleges, “have actively pursued violations of antitrust law, including through conspiring with competitors, as well as approving, condoning, and directing strategies and actions that violate the antitrust laws.” The director defendants are “similarly liable” because they “failed to conduct direct oversight even though they were informed of the Company’s increasing antitrust liabilities, first in Europe and now in the United States.”
As a result of the alleged misconduct, the complaint alleges, Alphabet is facing “potentially multi-billion dollar antitrust liability and the risk of being broken up, and in addition is currently spending millions of dollars in defending against antitrust actions and investigations.” The complaint seeks to recover damages on Alphabet’s behalf.
The complaint asserts two substantive claims: first, a claim against the officer defendants for breach of fiduciary duty; and second, a claim against the director defendants for breach of fiduciary duty.
These new lawsuits have only just been filed and it remains to be seen how they will fare. In that regard, it is noteworthy that both complaints assert that the requisite pre-suit demand on the company’s board would be futile. The defendants undoubtedly will argue that the plaintiffs’ allegations are insufficient to establish demand futility.
In any event, and regardless of how the complaints ultimately may fare, the complaints in and of themselves represent interesting and significant examples of how antitrust regulatory and enforcement activity can translate into D&O claims. In that regard, it is important to note that the underlying regulatory and enforcement actions almost certainly would not trigger the company’s D&O insurance program.
The regulatory and enforcement actions target the company itself as the defendant. Public company D&O insurance (assuming here for the sake of discussion here that the company actually maintains D&O insurance) provides entity coverage only for Securities Claims — that is, claims alleging violations of the securities laws. The legal violations alleged in the underlying enforcement actions would not involve allegations of violations of the securities laws; they would allege violations of the antitrust (and other competition related) laws. In the absence of any securities law claims, the antitrust enforcement actions against the corporate entity would not trigger the company’s D&O insurance coverage.
However, the type of antitrust enforcement action follow-on lawsuits that have been filed against Alphabet’s and Google’s directors and officers presumptively would trigger the company’s D&O insurance program, subject of course to all of the applicable policy terms and conditions. The D&O insurance program’s coverage for individual directors and officers is not limited only to securities claims; rather, the insurance coverage protects them for any claims based on actual or alleged wrongful acts (again, subject to all of the policy’s terms and conditions). Thus, while the underlying enforcement actions likely would not trigger the D&O insurance coverage, while the follow-on derivative lawsuits potentially would trigger the coverage.
One important point to emphasize here is that the antitrust enforcement action follow-on lawsuits against Alphabet’s and Google’s boards are not unprecedented. There is in fact a long history of D&O lawsuits following in the wake of antitrust enforcement actions, particularly in the form of follow-on securities class action lawsuits.
Some recent examples of securities class action activity following on after antitrust enforcement include the securities suits filed against various generic drug businesses following civil and criminal charges based on alleged price-collusion in the industry (discussed here); similar securities litigation against companies in the poultry companies also followed in the wake of price-collusion enforcement activity in that industry (discussed here). The pattern of civil damages litigation following in the wake of antitrust enforcement goes back many years; and over the years, there have been many instances of this type of follow-on litigation – for example, as noted here, and here.
The pattern of this type of litigation following in the wake of antitrust enforcement activity is sufficiently well-established that, first, it should come as no surprise that Alphabet’s directors and officers have been hit with D&O litigation following in the wake of the plethora of antitrust enforcement actions, and, second, that to the extent that the Biden Administration pursues the activist antitrust enforcement approach that many commentators anticipate, there could be more D&O litigation following on in the wake of antitrust enforcement activity ahead.
There is the old saying that predictions are difficult, especially about the future. My crystal ball is no better than anyone else’s. But if I had to make a prediction about claims developments we might see over the next 12 to 24 months, I would say that not only are we likely to see an increase in antitrust enforcement activity, but that we will also see an increase in D&O claims following on in the wake of the enforcement actions.