Courts Continue To Dismiss Shareholder Suits Based On FCPA Violations

On March 16, 2015, Judge Paul G. Gardephe of the Southern District of New York dismissed a shareholder derivative suit filed by Sylvia Pritika against the CEO and others of Avon Products Inc. ("Avon") alleging breach of fiduciary duty, unjust enrichment, and corporate waste by causing or permitting Avon to violate the Foreign Corrupt Practices Act of 1977 ("FCPA").1The shareholder suit was filed in the wake of Avon's disclosures that it had commenced an FCPA-focused internal investigation of several foreign operations; that the DOJ and SEC had begun their own investigation into potential FCPA violations; and that Avon had made a $12 million settlement offer to resolve the government's investigations. As widely reported, Avon ultimately paid $135 million to the DOJ and SEC on December 17, 2014 to settle the government's FCPA probes and entered into a deferred prosecution agreement with the DOJ, while Avon's China affiliate pled guilty to a criminal information alleging conspiracy to violate the FCPA's accounting provisions.

FCPA Shareholder Derivative Suits

The Pritika opinion is just the latest in a recent string of decisions rebuffing plaintiffs' attempts to bootstrap FCPA violations into shareholder litigation. Courts have routinely dismissed FCPA-related derivative actions at the motion to dismiss stage on procedural grounds. The most significant hurdle for plaintiffs has been the demand requirement imposed by many states, including Delaware and New York, at the motion to dismiss stage. The demand requirement obliges a plaintiff to ask the board to bring a suit on behalf of the corporation before filing a derivative suit itself or, alternatively, to plead with particularity facts showing a demand would have been futile.

Because such derivative suits typically are filed without first making a demand on the board, plaintiffs have been forced to argue - to little avail - demand futility. In fact, the Fifth Circuit recently upheld a district court's decision to dismiss an FCPA-based derivative suit against energy services company Parker Drilling and its board of directors based on the demand requirement.2 The lower court found that the complaint, which alleged that the defendants failed to implement or monitor adequate internal anti-bribery controls and benefitted from the potential wrongdoing, was devoid of particularized facts regarding the basis of defendants' knowledge of compliance concerns and inadequate controls, and the specific...