Earlier last month, Judge Vince Chhabbria of the United States District Court for the Northern District of California dismissed a novel complaint that the court noted stretched the bounds of when directors of a company could reasonably be held accountable for the actions of its executives. Notwithstanding the case’s amusing subject matter, the decision applies typical Delaware standards to dismiss a shareholder derivative complaint formed on the basis of an executive’s out-of-office behavior.

The core of the complaint in Aviv v. Szulczewski, 21-cv-09047-VC centered on parties thrown by ContextLogic’s CEO and founder, Piotr Szulczewski. The plaintiff alleged that, in an effort to generate enthusiasm for the company’s e-commerce app called Wish, Szulczewski threw “influencer parties” at his Bel-Air mansion. Overnight, the complaint alleged, a “quiet residential neighborhood” was punctured with raucous, “loud and crowded” events that ran all hours of the day and night. The plaintiff claimed this was part of the company’s marketing strategy, hoping to use so-called online “influencers” attending the events to promote the Wish app. These parties resulted in numerous complaints from Szulczewski’s neighbors, which in turn led to citations “creat[ing] a public and private nuisance,” among other infractions.

Regardless of the alleged tangential connection between Szulczewski’s conduct and ContextLogic’s business, the court found the complaint failed to adequately plead that the company knew or should have known of the influencer parties and the legal issues they caused. The court chided the plaintiffs for failing to include any facts that indicated that the directors knew of Szulczewski’s influencer promotional strategy or of the alleged illegal activity. Applying the analysis set forth in Caremark International Inc. Derivative Litigation, the court held that failing to plead these facts was fatal to the plaintiff’s claim.

While amusing, the shareholder action in this case is another reminder that companies should be vigilant as to the actions of their executives and the implications those actions can have for shareholder litigation. Had the plaintiffs properly alleged facts indicating that ContextLogic knew of Szulczewski’s actions or approved his purported marketing strategy, for example, it is possible that this action could have satisfied the high bar set by Caremark, which could have had significant impacts for the company’s business. Engaging with counsel to ensure proper oversight of employee actions purportedly taken on behalf of the company, both at the office and at home, can be essential to avoiding litigation headaches down the road.

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Photo of Michael Guggenheim Michael Guggenheim

Michael Guggenheim is an associate in the Litigation Department and a member of the Securities Litigation and White Collar Defense & Investigation groups. He focuses on a wide range of business disputes and regulatory and investigative matters, including enforcement actions brought by the…

Michael Guggenheim is an associate in the Litigation Department and a member of the Securities Litigation and White Collar Defense & Investigation groups. He focuses on a wide range of business disputes and regulatory and investigative matters, including enforcement actions brought by the SEC and state attorneys general. In connection with the historic restructuring of Puerto Rico’s debts, Michael is a core part of the team that advises the Financial Oversight and Management Board for Puerto Rico on a variety of issues related to Puerto Rico Oversight, Management, and Economic Stability Act, including advising the Oversight Board on statutory and regulatory developments.

Michael has experience with every stage of litigation, including taking depositions, drafting dispositive and discovery motions, coordinating discovery, preparing witnesses for testimony, and drafting appellate briefs. He has represented clients in both state and federal courts, as well as in arbitrations and government investigations.

Michael maintains an active pro bono practice, which has included litigating against the State of New York to invalidate regulations that would circumvent statutorily mandated protections for children placed in foster care. In addition, he spent a five-month secondment at the New York City Law Department in the Administrative Law and Regulatory Litigation Division.

Michael earned his J.D. from Harvard Law School and his B.A., summa cum laude, from Rutgers University. While in law school, Michael worked for the Litigation Department of the San Francisco City Attorney, was a teaching assistant for the Harvard Law School Negotiation Workshop, and litigated election law cases with Common Cause. He also served as the Executive Managing Editor of the Harvard Law & Policy Review and coached the Boston College mock trial team. In his free time, Michael enjoys practicing yoga.