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Federal Judge Dismisses eBay Derivative Litigation

Posted  September 14, 2011

Judge Leonard P. Stark of the U.S. District Court for Delaware has dismissed a derivative action against eBay Inc.

The plaintiff in In re eBay, Inc., the Robert F. Booth Trust, alleged that eBay’s board of directors violated the Clayton Act when they circulated a proxy statement recommending shareholders elect Dawn G. Lepore, a 10-year veteran of the board, to another term.  Section 8 of the Clayton Act prohibits one person from serving on the board of competing companies.

Plaintiff alleged that the nomination of Lepore violated antitrust law because she was on the board of directors of The New York Times Company.  Plaintiff asserted that eBay and New York Times are competitors in the market for classified ads.

The Federal Rules of Civil Procedure require that, prior to bringing a derivative action, a plaintiff request the board of directors remedy the alleged violation or show that such a request would be futile.  Judge Stark stated that to succeed on a claim of demand futility, “Plaintiff must plead facts from which one could reasonably infer that the board’s decision to renominate Lepore was in bad faith, could not be attributed to any rational business purpose, or reached by a grossly negligent process.”

The Robert F. Booth Trust alleged a request to the directors of eBay would have been futile as the complained of action was “per se illegal,” “ultra vires,” and “in bad faith.”  In support of these allegations, the plaintiff asserted that eBay was aware of section 8 of the Clayton Act, and knew Lepore was a member of New York Times’ board of directors.

Judge Stark held that plaintiff failed to prove any of these claims. There was insufficient evidence of per se illegality as there were “no facts that could support a reasonable inference that eBay’s board of directors renominated Lepore knowing that her service on both boards would constitute a violation.”  Further, Judge Stark found plaintiff misinterpreted the meaning of an ultra vires action under Delaware law as nominating a person to serve on the board of directors was not prohibited by the eBay charter. Finally, the court held that the bad faith claim failed for a lack of evidence that eBay’s board of directors believed eBay and New York Times competed in a manner that would cause the nomination to trigger a violation of the Clayton Act.

In dismissing the case, Judge Stark found that “Plaintiff failed to demonstrate that his objections to Lepore’s dual service would not have been impartially handled by the company’s board of directors.”  The court did not address the merits of the Clayton Act violation.

Tagged in: Antitrust Litigation,