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.