Choice of law considerations in litigation can sometimes be outcome determinative. In the following guest post, Sarah Abrams takes a look at a distinctive statutory defense that may be available to derivative litigation defendants when Massachusetts law applies and considers the D&O insurance underwriting implications. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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Experienced litigators and D&O claim professionals know that jurisdictional law can be an important factor when an entity selects its state of incorporation. For example, distinct derivative lawsuit defenses may be available to Massachusetts companies that can result in early dismissal of derivative litigation. A recent case involving a derivative lawsuit against Pegasystems, Inc. (Pegasystems) underscores how valuable these defenses may be. The early dismissal of an insured from litigation may also have important D&O insurance underwriting implications.
Pegasystems is a Massachusetts-based software company that specializes in customer relations management software and business process management (“BPM”) software, which it sells to major global companies and government agencies. The company has been publicly traded since 1996 as PEGA (NASDAQ). The derivative actions filed against Pegasystems, Inc. were brought in the wake of a competitor lawsuit alleging years-long corporate espionage and a follow-on securities class action alleging violations of 10b, 10b-5, and 20(a) (Pegasystems SCA).
The Pegasystems SCA alleged, in part, that from 2012 to 2020, Pegasystems engaged in a long-running campaign to spy on a competitor by employing consultants and contractors who accessed Appian’s confidential systems and product information and settled for $35M in 2024. However, despite the corporate espionage allegations against Pegasystems and a $2B jury verdict in Virginia (overturned on appeal due to procedural errors), the Pegasystems derivative actions were dismissed under Massachusetts’ Safe Harbor Act.
The following will discuss the allegations against Pegasystems, including the Pegasystems SCA, and the court’s decision, to determine what, if any, D&O underwriter lessons can be learned from the disposition of the Pegasystems investor lawsuits.
Pegasystems Litigation
In June and November 2024, shareholders of Pegasystems brought derivative suits against CEO Alan Trefler and other directors and officers, alleging breach of fiduciary duty in connection with a “corporate espionage” scheme targeting competitor Appian Corp., and failure to timely disclose Appian’s 2020 trade-secret lawsuit filed against Pegasystems (Appian Lawsuit).
Because it is relevant to the Pegasystems shareholder litigation and Pegasystems SCA, a brief disposition of the Appian lawsuit is as follows: in May 2022, a jury found Pegasystems had misappropriated Appian trade secrets through illicit means and, as a result, awarded Appian $2.036 billion. In July 2024, the Virginia Court of Appeals issued an opinion vacating the jury’s award and remanding the cases back to the trial court for a new trial. Appian petitioned the Supreme Court of Virginia for review of this decision, and the Court agreed to hear the case.
Shortly after the $2B jury award was returned in the Appian Lawsuit, the Pegasystems SCA was filed in the U.S. District Court for Massachusetts. Within months of the securities case being filed, shareholders sent demand letters to the Pegasystems board requesting an internal investigation into the alleged espionage scheme and the company’s delayed disclosure of the Appian Lawsuit. Pegasystems board purportedly responded to the shareholder demand by forming a Demand Review Committee (DRC) composed of three independent directors appointed, in part, by CEO Trefler and advised by Fried Frank.
In October 2024, Pegasystems’ DRC allegedly rejected shareholder demands to sue Trefler and other officers and moved to dismiss the derivative actions filed against it under Massachusetts General Laws, Chapter 156D, Section 7.44 (Mass Safe Harbor Act). Briefly, the Mass Safe Harbor Act allows dismissal of a rejected derivative demand if an independent committee, acting in good faith after reasonable inquiry, concludes that derivative litigation is not in the company’s best interest.
Important for Pegasystems and other Massachusetts-incorporated entities, the Act gives corporate boards a robust defense against derivative litigation, provided they follow the formal process: appoint an independent committee, retain separate counsel, document their inquiry, and issue a detailed report.
Mass Court’s Ruling
In granting Pegasystems Inc.’s motion to dismiss its investor derivative litigation, the Massachusetts Superior Court found, in part, that the DRC and its appointed directors were independent despite being nominated by Trefler. The Court further held that the appointed directors did not participate in the alleged illicit conduct, had no personal benefit from the corporate espionage, and were exculpated for ordinary-care breaches under Pegasystems’ charter. In addition, the Court found that the shareholders’ argument regarding the directors’ compensation did not rebut the statutory presumption of independence.
The Court also determined that the 116-page DRC report showed extensive investigation, document review, and interviews that indicated Pegasystems’ “competitive intelligence” practices were imprudent but not illegal and that the Board reasonably believed no earlier disclosure regarding the Appian Lawsuit was required. The Pegasystems’ DRC did recommend enhanced oversight of risk and intelligence programs, which the Court viewed as evidence of diligence, not bad faith. Finally, the Court held that the shareholders’ reliance on the vacated $2 billion verdict was insufficient to show a lack of good faith; thus, the business-judgment rule protected the DRC’s decision to reject Pegasystems’ investors’ derivative demand.
Discussion
As an initial matter, I think that the Pegasystems SCA settlement makes the dismissal of similarly pled derivative litigation noteworthy. As D&O Diary readers may recall, nearly half of the securities class actions filed between 2019 and 2024 involved parallel derivative actions. And, according to an August 2025 study from Cornerstone Research, among the parallel derivative actions involving monetary settlements, the median settlement amount was approximately $9.2 million.
Thus, a seemingly obvious takeaway from the Pegasystems litigation and recent derivative dismissal is that where a company is incorporated is important. Pegasystems, and likely its D&O insurers, still paid $35 million to settle the companion securities class action. Considering the increase in parallel derivative action filings and monetary settlements, D&O underwriters may want to be mindful that the Mass Safe Harbor Act potentially can help effect the dismissal of derivative litigation.
In addition, an appellate court decision highlights how valuable this Massachusetts defense could be. In 2023, the Fifth Circuit Court of Appeals, citing the Mass Safe Harbor Act, affirmed the dismissal of a shareholder derivative suit filed against the manager and trustees of a Massachusetts business trust and SEC-registered investment company. In doing so, the Court provided favorable appellate authority regarding the standard for trustee independence in Massachusetts, underscoring the deference and weight that should be accorded to good faith business judgments reached by an independent board.
Finally, the Pegasystems Court also focused on rigor in the DLC process, noting that an independent committee, well-documented investigation, recusal of conflicted directors, and detailed written findings support a Mass Safe Harbor Act shield. Applying this standard as a basis for dismissal under the Mass Safe Harbor Act may be noteworthy to D&O underwriters of a prospective risk that is incorporated in Massachusetts; consideration of an entity’s formalized demand-review protocols and an independent-director infrastructure may warrant consideration.
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