Home > Uncategorized > Google’s $500 Million DOJ Settlement—Any Merit to the Derivative Case?

Google’s $500 Million DOJ Settlement—Any Merit to the Derivative Case?

Google recently reached a $500 million settlement with the Department of Justice over allegations that Google sold ad space that made it possible for foreign pharmacies to unlawfully advertise and sell prescription drugs to U.S. residents.  Almost immediately after the settlement was announced a Google shareholder filed a derivative action on behalf of Google in Federal Court in San Jose California against various Google officers and directors including independent directors.

The derivative action alleges that the defendants breached their fiduciary duties to Google by allowing the alleged unlawful conduct.  Interestingly, the plaintiff in the derivative action did not first make a demand that the board evaluate and then bring the action against the alleged offending parties.  Instead, plaintiff alleges that it would have been futile for plaintiff to make such a demand since defendants are members of the board.  But if a demand had been made, the board could have considered appointing an independent special committee to evaluate the allegations.  Perhaps plaintiff did not want to risk the possibility that an independent special committee could decide that bringing such an action would not be beneficial to Google as such a decision might be justified under the business judgment rule.

The complaint essentially alleges that each individual defendant was an experienced business professional who knew or should have known that it was illegal for pharmacies outside the U.S. to ship prescription drugs into the U.S.; that as directors and officers defendants owed Google a fiduciary duty to implement and maintain internal controls to ensure compliance with statutes, laws, rules and regulations including the Federal Food, drug and Cosmetic Act and Controlled Substance Act; and that each defendant nevertheless did not proactively manage Google’s risk and compliance and failed to cause Google to implement and maintain internal controls and policies for compliance with the federal law mandates.

The complaint alleges no specific evidence to support the allegations.  The complaint also does not establish why it is overall beneficial to Google for such a lawsuit to be brought.  It would be problematic if such a lawsuit could be maintained each time a company reaches a settlement over allegations of unlawful activity, even in circumstances where the alleged unlawful actions might be established.  After all, as each
public company is generally required to design and implement risk and internal controls, and directors are responsible for oversight, in each such instance it might automatically be argued that risk and internal compliance controls were inadequate to prevent the alleged unlawful activity and that the directors were responsible for related oversight.  Thus, if allegations of the sort that have been alleged against Google are sufficient, the likely result would be a run of similar derivative suits.

More to follow . . . .

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