Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-15750/USCOURTS-ca9-12-15750-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

LAWRENCE ARDUINI, derivatively on

behalf of International Game

Technology,

Plaintiff-Appellant,

v.

PATTI S. HART; THOMAS J.

MATTHEWS; PATRICK W.

CAVANAUGH; ROBERT A. BITTMAN;

RICHARD R. BURT; ROBERT A.

MATHEWSON; ROBERT MILLER;

DAVID E. ROBERSON; PHILIP G.

SATRE,

Defendants-Appellees,

and

INTERNATIONAL GAMING

TECHNOLOGY,

Nominal Defendant-Appellee.

No. 12-15750

D.C. No.

3:11-cv-00255-

ECR-VPC

OPINION

Appeal from the United States District Court

for the District of Nevada

Edward C. Reed, Jr., Senior District Judge, Presiding

Argued and Submitted

April 10, 2014—San Francisco, California

Filed December 17, 2014

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2 ARDUINI V. HART

Before: Mary M. Schroeder and Consuelo M. Callahan,

Circuit Judges, and Robert W. Pratt, Senior District Judge.*

Opinion by Judge Callahan

SUMMARY**

Shareholder Derivative Actions/Issue Preclusion

The panel affirmed the district court’s dismissal of a

shareholder derivative action on the basis that issue

preclusion barred relitigation of whether plaintiff, Lawrence

Arduini, made a sufficient “demand” on a corporation’s board

of directors before filing suit. 

Under Federal Rule of Civil Procedure 23.1, a shareholder

must either demand action from the corporation’s directors

before filing a shareholder derivative suit, or plead with

particularity the reasons why such demand would have been

futile. 

The panel held that issue preclusion prevented Arduini

from relitigating the issue of demand futility. The panel

noted that before Arduini filed his derivative action against

International Gaming Technology and its board of directors,

four separate shareholders filed separate derivative suits

* The Honorable Robert W. Pratt, Senior District Judge for the U.S.

District Court for the Southern District of Iowa, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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ARDUINI V. HART 3

against the company that were subsequently consolidated and

dismissed. See Fosbre v. Matthews, 2010 WL 2696615

(D. Nev. July 2, 2010). The panel determined that the issue

of demand futility was the same in both Fosbre and Arduini’s

action, and therefore there was an identity of issues. 

The panel held that Arduini and the Fosbre plaintiffs were

in privity because International Gaming Technology was the

true party in interest and there was no indication that the

Fosbre plaintiffs were inadequate representatives. Further,

there was no inequity in applying issue preclusion because

the Fosbre plaintiffs fully litigated their demand futility

claim. There was no due process violation because there was

no requirement that shareholders be given notice of dismissal

in a derivative suit where the issue of demand futility is fully

litigated and dismissed on the merits. Moreover, the panel

noted that the record showed that Arduini’s counsel in this

case had actual notice of the Fosbre proceedings. 

COUNSEL

Francis A. Bottini, Jr. and Albert Y. Chang (argued), Chapin

Fitzgerald Sullivan & Bottini LLP, San Diego, California, for

Plaintiff-Appellant.

Richard G. Campbell, Jr. and Robert F. Meich, Armstrong

Teasdale LLP, Reno, Nevada; Boris Feldman (argued), David

S. Steuer, Cynthia Dy, and Cheryl W. Foung, Wilson Sonsini

Goodrich & Rosati, Palo Alto, California, for Nominal

Defendant-Appellee.

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4 ARDUINI V. HART

OPINION

CALLAHAN, Circuit Judge:

Shareholders are required to make a “demand” on the

corporation’s board of directors before filing a derivative suit,

unless they sufficiently allege that demand would be futile

because the board would not act on the demand. Here, before

Plaintiff Lawrence Arduini (“Arduini”) filed his derivative

action against International Gaming Technology (“IGT”) and

its board of directors, four shareholders filed separate

derivative suits that were subsequently consolidated. The

district court then dismissed the consolidated suit for failure

to make a demand on the corporation’s board or sufficiently

allege demand futility, and on appeal, we affirmed that

dismissal. The district court then dismissed Arduini’s action,

holding that Arduini had failed to make a demand on the IGT

board and could not allege demand futility based on issue

preclusion due to its ruling in the prior derivative suit. We

hold that under Nevada law and the facts of this case, the

district court properly held that issue preclusion barred

relitigation of demand futility, and we affirm.

I

Defendant-Appellee International Game Technology

(“IGT”) is a Nevada corporation that makes and services

electronic gaming systems. Appellant Arduini, an IGT

shareholder, alleges that certain IGT senior officers made

intentionallymisleading statements about the bright financial

prospects of IGT when, in fact, IGT’s prospects were dim,

and that IGT’s board of directors failed to adequately oversee

the officers and the company. Based on this alleged

mismanagement, on April 8, 2011, Arduini filed a

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ARDUINI V. HART 5

shareholder derivative complaint, Arduini v. Hart, No. 3:11-

cv-255-ECR-VPC (D. Nev.). Arduini made no pre-suit

demand on the current IGT board, instead alleging that

demand would be futile. The case was eventually transferred

to Senior District Judge Edward C. Reed. 

A

Before Arduini filed his complaint, Judge Reed presided

over Fosbre v. Matthews, an IGT derivative suit with

substantially similar allegations. No. 3:09-CV-0467-ECRRAM, 2010 WL 2696615 (D. Nev. July 2, 2010). Fosbre

was a consolidated suit involving what were originally four

separate derivative suits filed by four different IGT

shareholders who were represented by four separate sets of

counsel.

The Fosbre plaintiffs had made no demand on the IGT

board. Rather, they argued that such a demand was excused

because: 1) the IGT board extended the employment contract

of Thomas J. Matthews (“Matthews”), IGT’s former CEO

and chairman of IGT’s board of directors, and allowed him to

resign rather than terminating him for cause; 2) Directors

Burt, Mathewson, Miller, and Rentschler received such high

compensation from IGT that their ability to impartially

consider a demand was compromised; 3) Directors Burt, Hart,

Mathewson, and Roberson were members of IGT’s auditing

committee and Directors Burt, Miller, Rentschler, and Satre

were members of IGT’s governance committee and faced a

substantial likelihood of liability for breaches of their

fiduciary duties as committee members; 4) Matthews was

incapable of considering a demand due to his employment as

IGT Chairman and Director Patti S. Hart (“Hart”), who

replaced Matthews as CEO, was incapable of considering a

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6 ARDUINI V. HART

demand due to her new position; and 5) Directors Burt,

Bittman, and Matthews engaged in insider trading of IGT

stock. Id. at *3–7. On July 2, 2010, Judge Reed granted

IGT’s motion to dismiss in Fosbre, holding that the

consolidated complaint’s demand futility allegations were

insufficient. Id. at *8.

The Fosbre plaintiffs appealed, and on April 2, 2012, we

affirmed the district court’s dismissal. Israni v. Bittman,

473 F. App’x 548 (9th Cir. 2012) (unpublished disposition). 

In Israni, we first rejected the allegations of director interest

based on the directors’ approval of the revised employment

agreement for former CEO Matthews. The plaintiffs had

argued that the directors approved Matthews’ contract in an

effort to have their own compensation increased. We found

these allegations were insufficient to show the directors’

interest because they did not explain how approval of the

contract would influence the directors’ compensation, nor

why this approval was not a “valid exercise of business

judgment.” Id. at 550 (citing Brehm v. Eisner, 746 A.2d 244,

257, 263 (Del. 2000)).

Second, we rejected the complaint’s allegations of

director interest based on high director compensation, as a

“director’s receipt of compensation alone does not excuse

demand, and the complaint did not provide sufficient factual

allegations to show the fees here were unusual or

uncustomary.” Id. at 550–51 (citing Orman v. Cullman,

794 A.2d 5, 29 n.62 (Del. Ch. 2002)).

Third, we rejected the allegation that certain directors’

membership on IGT’s audit and governance committees

supported demand futility because the complaint “failed to

plead facts regarding what information the committee

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ARDUINI V. HART 7

members saw and failed to act on” and did not “contain

particularized facts showing that the committee members

engaged in ‘intentional misconduct, fraud or a knowing

violation of the law,’ as required under Nevada law.” Id. at

551 (citing, inter alia, In re Caremark Int’l Inc. Derivative

Litig., 698 A.2d 959, 971 (Del. Ch. 1996); In re AMERCO

Derivative Litig., 252 P.3d 681, 700–01 (Nev. 2011)).

Fourth, we rejected the plaintiffs’ contention that the

insider directors’ employment with IGT supported a finding

of demand futility “because the complaint did not allege the

insider directors were beholden to an interested party.” Id.

(citation omitted). Finally, we declined to consider the

alleged insider trading by IGT directors Burt, Bittman, and

Matthews did not support a finding of demand futility

because the Fosbre plaintiffs “could not show that a majority

of the IGT board was not impartial even if demand were

excused with respect to these three defendants.” Id.

B

At the same time the Fosbre case was pending before

Judge Reed, he also presided over International Brotherhood

of Electrical Workers Local 697 Pension Fund v. IGT, No.

3:09-CV-419-ECR-RAM (“IBEW”), a securities fraud class

action lawsuit raising similar allegations to those asserted in

Fosbre and by Arduini. Judge Reed denied the defendants’

motion to dismiss on March 15, 2011, finding that at least

some of the plaintiffs’ claims sufficiently alleged that IGT

intentionally misled investors to the investors’ detriment. 

2011 WL 915115, at *9 (D. Nev. Mar. 15, 2011). The parties

eventually settled the case and on October 22, 2012, IBEW

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8 ARDUINI V. HART

was dismissed with prejudice, before any decision on the

pending class certification motion.1

C

Shortly after Judge Reed’s March 2011 denial of the

motion to dismiss in IBEW, Arduini filed his derivative

complaint. On April 19, 2011, IGT filed a motion to dismiss

in Arduini v. Hart arguing, inter alia, that the action should

be dismissed under the doctrine of issue preclusion because

demand futility was previously litigated in favor of IGT in the

Fosbre case. Judge Reed granted the motion on March 14,

2012, finding an identity of issues and parties between

Arduini and Fosbre. Arduini v. Hart, No. 3:11-cv-00255-

ECR-UPC, 2012 WL 893874 (D. Nev. Mar. 14, 2012).

The district court first held that “demand futility was

squarely at issue [in Fosbre] and [Arduini’s] reasons for

failing to make a demand on the board are essentially the

same in this action, or any additional reasons could have been

raised in the previous action.” Id. at *3. The court rejected

Arduini’s argument that his new factual allegations precluded

a finding of identity of issues:

The fact that the Fosbre plaintiffs did not

plead “every possible cause of action or

1

Judge Reed also presided over another IGT shareholder derivative suit

with similar allegations, Sprando v. Hart, No. 3:10-cv-00415-ECR-VPC

(D. Nev.). The district court dismissed the Sprando complaint, even

though the shareholder had made a demand on the IGT board, because the

board had not refused that shareholder’s demand for investigation and

action. 2011 WL 3055242, at *4–5 (D. Nev. July 22, 2011). We

subsequently affirmed that dismissal. Sprando v. Hart, 527 F. App’x 646

(9th Cir. 2013) (unpublished disposition).

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ARDUINI V. HART 9

include every possible time period or

defendant does not alter the central issue –

whether demand on [defendants] would have

been futile.” In re Bed Bath & Beyond, No.

06-cv-5107 (JAP), 2007 WL 4165389, at *6

(D.N.J. Nov. 19, 2007). Nor do Plaintiff’s

arguments that he has allegations specific to

the demand futility issue that are different

from the allegations brought up in Fosbre

preclude our use of issue preclusion. “Facts

excusing a failure to make demand that could

have been pleaded in the first complaint, or by

amendment before dismissal, should be

barred” because “a party who has litigated an

ultimate fact may not bring forward different

evidentiary facts in order to relitigate the

finding.” In re Sonus [Networks, Inc.

S’holder Derivative Litig., 499 F.3d 47, 63

(1st Cir. 2007)].

Id.

The district court also rejected Arduini’s specific

argument that the denial of the motion to dismiss in IBEW

precluded a finding of identity of issues, holding that its

IBEW ruling “did not relate in any way to the issue of demand

futility in a shareholder derivative case.” Id. at *3 n.3. The

district further held that Arduini was in privity with the

plaintiffs in Fosbre, as “plaintiffs in a shareholder derivative

action represent the corporation, and therefore the question of

whether demand on the board of directors would have been

futile is an issue that is the same no matter which shareholder

serves as plaintiff.” Id. at *3 (citing Sonus, 499 F.3d at 64).

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10 ARDUINI V. HART

The district court issued its final judgment on March 15,

2012, and Arduini timely appealed.

II

A

Under Federal Rule of Civil Procedure 23.1 (“Rule

23.1”), a shareholder must either demand action from the

corporation’s directors before filing a shareholder derivative

suit, or plead with particularity the reasons why such demand

would have been futile.2 A court looks to the law of the state

of incorporation to determine when demand would be futile. 

Rosenbloom v. Pyott, 765 F.3d 1137, 1148 (9th Cir. 2014). 

We review for abuse of discretion a district court’s dismissal

of a derivative suit based on failure to show demand futility. 

Id. at 1147. We review de novo a district court’s application

of issue preclusion. Kendall v. Visa U.S.A., Inc., 518 F.3d

1042, 1050 (9th Cir. 2008).

Because IGT is incorporated in Nevada, Nevada law

defines demand futility in this case. Nevada courts look to

Delaware law for guidance on demand futility. Shoen v. SAC

Holding Corp., 137 P.3d 1171, 1179–84 (Nev. 2006). 

Derivative suits allow a shareholder “to ‘compel the

corporation to sue’ and to thereby pursue litigation on the

corporation’s behalf against the corporation’s board of

directors and officers.” Id. at 1179. However, “because the

power to manage the corporation’s affairs resides in the board

of directors, a shareholder must, before filing suit, make a

demand on the board . . . to obtain the action that the

2 Nevada Rule of Civil Procedure 23.1 contains a similar demand futility

requirement.

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ARDUINI V. HART 11

shareholder desires.” Id.; Rosenbloom, 765 F.3d at 1147–48

(discussing demand futilityrequirement under Delaware law).

In order to show demand futility under Nevada law, the

plaintiff must allege “particularized facts” demonstrating:

(1) in those cases in which the directors

approved the challenged transactions, a

reasonable doubt that the directors were

disinterested or that the business judgment

rule otherwise protects the challenged

decisions; or (2) in those cases in which the

challenged transactions did not involve board

action or the board of directors has changed

since the transactions, a reasonable doubt that

the board can impartially consider a demand.

Shoen, 137 P.3d at 1184 (citation omitted). Lack of director

independence can be shown through allegations

demonstrating that “the majority is ‘beholden to’ directors

who would be liable.” AMERCO, 252 P.3d at 697–98 (citing,

inter alia, Shoen, 137 P.3d at 1183). “[T]o show

interestedness, a shareholder must allege that a majority of

the board members would be ‘materially affected, either to

[their] benefit or detriment, by a decision of the board, in a

manner not shared by the corporation and the stockholders.’”3

Shoen, 137 P.3d at 1183 (citation omitted). Moreover,

“[a]llegations of mere threats of liability through approval of

the wrongdoing or other participation . . . do not show

sufficient interestedness to excuse the demand requirement.” 

 

3

 Where a board consists of an even number of directors, as is the case

here, plaintiffs must plead that at least half ofthe directors are “interested”

to show demand futility. AMERCO, 252 P.3d at 698.

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12 ARDUINI V. HART

Id. (citations omitted). “[I]nterestedness through potential

liability is a difficult threshold to meet,” as “directors and

officers may only be found personally liable for breaching

their fiduciary duty of loyalty if that breach involves

intentional misconduct, fraud, or a knowing violation of the

law.” Id. at 1184.

B

Under Nevada law, issue preclusion “applies to prevent

relitigation of [] a specific issue that was decided in a

previous suit between the parties, even if the second suit is

based on different causes of action and different

circumstances.” Five Star Capital Corp. v. Ruby, 194 P.3d

709, 713–14 (Nev. 2008).

4

In order for an issue decided in

another case to have preclusive effect,

“(1) the issue decided in the prior litigation

must be identical to the issue presented in the

current action; (2) the initial ruling must have

been on the merits and have become final; . . .

(3) the party against whom the judgment is

asserted must have been a party or in privity

with a party to the prior litigation”; and (4) the

issue was actually and necessarily litigated.

Alcantara v. Wal-Mart Stores, Inc., 321 P.3d 912, 916–17

(Nev. 2014) (quoting Five Star Capital, 194 P.3d at 713).

4 Nevada law distinguishes between issue preclusion and claim

preclusion, which “applies to preclude an entire second suit that is based

on the same set of facts and circumstances as the first suit.” Id. at 713–14

(citation omitted). We express no opinion on whether claim preclusion

could apply in this case.

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ARDUINI V. HART 13

III

Arduini contends that issue preclusion does not applyhere

because: 1) the issues in Fosbre and this case are not

identical; 2) he is not in privity with the Fosbre plaintiffs for

the purposes of issue preclusion; and 3) the equities and due

process weigh against applying issue preclusion here. 

Arduini does not dispute that Fosbre was a final ruling on the

merits or that the issue of demand futility was actually and

necessarily litigated in Fosbre.

A

Arduini first argues that issue preclusion does not apply

because he assserted new allegations regarding demand

futility that were absent from the Fosbre complaint. 

Specifically, Arduini points to: 1) his allegation that the

motion to dismiss in the IBEW securities fraud case was

denied; 2) statements of confidential witnesses that “further

bolster the allegations of Defendants’ knowledge of securities

fraud”; and 3) allegations regarding the IGT board’s

authorization of a $777 million stock repurchase and its

failure to seek recovery against Directors Matthews and

Cavanaugh. Arduini claims that these new allegations

preclude a finding of identity of issues because they raise

questions as to whether the board faces a substantial

likelihood of liability. In Arduini’s view, Nevada law

requires that each allegation regarding demand futility in the

second complaint be alleged in the first complaint before the

court may apply issue preclusion. IGT responds that while

the Fosbre and Arduini complaints have slightly different

allegations, the issue being litigated remained the same –

whether the plaintiffs had shown that demand on the IGT

board would be futile.

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14 ARDUINI V. HART

We agree with IGT. Under Nevada law, the underlying

demand futility allegations need not be identical before issue

preclusion applies. The question is, rather, whether the “same

ultimate issue” was decided in the prior case. Alcantara,

321 P.3d at 916–17. And an “issue,” using the plain meaning

of the term, is simply “a matter that is in dispute between two

or more parties.” Issue Definition, Merriam-Webster Online,

http://www.merriam-webster.com/dictionary/issue/ (last

visited November 4, 2014). The assertion of additional

allegations to support the subsequentshareholder’s contention

that demand was futile does not make this a new issue. 

Indeed, the Nevada Supreme Court has explained that

“[i]ssue preclusion cannot be avoided by attempting to raise

a new legal or factual argument that involves the same

ultimate issue previously decided in the prior case.” 

Alcantara, 321 P.3d at 916–17 (citing, inter alia, Paulo v.

Holder, 669 F.3d 911, 918 (9th Cir. 2011) (stating that “[i]f

a party could avoid issue preclusion by finding some

argument it failed to raise in the previous litigation, the bar on

successive litigation would be seriously undermined”)); see

also Sonus, 499 F.3d at 63 (“[E]ven under the doctrine of

issue preclusion, a party who has litigated an ultimate fact

may not bring forward different evidentiary facts in order to

relitigate the finding.”) (citing, inter alia, Restatement

(Second) of Judgments, § 27 cmt. c (1982)).

Here, the matter in dispute in both cases is simply

whether demand should be excused because the shareholders

have sufficiently alleged that making a demand on the current

IGT board would be futile. Arduini’s offer of some

additional allegations in support of his contention that

demand is futile does not make this a different issue under

Nevada law. To hold otherwise would mean that issue

preclusion would almost never apply – subsequent plaintiffs

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ARDUINI V. HART 15

could simply add more allegations (or more specific

allegations) of corporate malfeasance, and then claim there

was no identity of issues. Defendants would then be forced

to repeatedly relitigate demand futility, leading to “multiple

litigation,” wasted judicial resources, and potentially

inconsistent proceedings. See Alcantara, 321 P.3d at 916

(citing Berkson v. LePome, 245 P.3d 560, 566 (Nev. 2010));

Univ. of Nev. v. Tarkanian, 879 P.2d 1180, 1191 (Nev. 1994). 

Indeed, this appears to be the case here. IGT already litigated

demand futility in the Fosbre consolidated suit, which

involved four different plaintiffs represented by four separate

sets of counsel. Requiring IGT to show that the underlying

allegations asserted in Fosbre and here are identical would

run counter to issue preclusion’s purposes.

B

Even assuming that under Nevada law a court may look

to the underlying allegations to determine whether issue

preclusion applies to demand futility, IGT has shown that the

issue of demand futility here is identical to Fosbre. The vast

majority of Arduini’s demand futility allegations are identical

to those in Fosbre. Indeed, at oral argument, counsel for

Arduini conceded that the suit was identical to Fosbre. 

Further, the new allegations are cumulative, could have been

raised in the earlier suit, or make no difference to the demand

futility inquiry because they do not show that a majority of

the board was “interested.” See Sonus, 499 F.3d at 63–64.

It appears that only two of our sister circuits have

examined issue preclusion in the demand futility context in

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16 ARDUINI V. HART

published opinions.5In In re Sonus Networks, Inc.

Shareholder Litigation, 499 F.3d 47 (1st Cir. 2007), the First

Circuit held that issue preclusion barred relitigation of

demand futility, even though the second shareholder

derivative suit alleged additional facts, including the

existence of “red flags” in the company’s SEC filings. Id. at

63. The Sonus court found that the additional allegations

were cumulative and did not preclude a finding of identity of

issues, explaining: “The plaintiffs’ threshold difficulty is that

the vast majority of their allegations are not ‘new’ since the

state complaint was dismissed, but only ‘different.’ By that

we mean that the evidence was available and could have been

brought before the state court before it dismissed the state

action.” Id. at 62.6 The Sonus court further explained:

5 The Eighth Circuit briefly addressed issue preclusion and demand

futility in Cottrell v. Duke, 737 F.3d 1238 (8th Cir. 2013). It stated that

“[g]enerally, under Delaware law, a judgment rendered in a shareholderderivative lawsuit will preclude subsequent litigation by the corporation

and its shareholders” and “[p]reclusion principles may also apply to other

types of dismissals, for instance a shareholder’s dismissal for failure to

make demand on the board of directors.” Id. at 1243 (citations omitted). 

However, this explanation arose in the context of whether a federal court

should stay a federal shareholder-derivative proceeding while a parallel

state court proceeding was on-going.

6

 Several district and state courts applying their respective state law on

issue preclusion and demand futility have also found that new allegations

added to subsequent shareholder suits made no difference to the demand

futility analysis and thus did not bar issue preclusion. See, e.g., Holt v.

Golden, 880 F. Supp. 2d 199, 203 (D. Mass. 2012); Harben v. Dillard,

No. 4:09cv00395 BSM, 2010 WL 3893980, at *5 (E.D. Ark. Sept. 30,

2010); In re Bed Bath & Beyond, 2007 WL 4165389, at *5–6; Hanson v.

Odyssey Healthcare, Inc., No. 3:04-cv-2751-N, 2007 WL 5186795, at *6

(N.D. Tex. Sept. 21, 2007); LeBoyer v. Greenspan, No. CV 03-5603-GHK

(JTLx), 2007 WL 4287646, at *2 (C.D. Cal. June 13, 2007); In re Career

Educ. Corp. Derivative Litig., C.A. No. 1398-VCP, 2007 WL 2875203,

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ARDUINI V. HART 17

The question was whether demand on the

board of directors would have been futile,

which is an issue that would have been the

same no matter which shareholder served as

nominal plaintiff. The defendants have

already been put to the trouble of litigating the

very question at issue, and the policy of

repose strongly militates in favor of

preclusion.

Id. at 64 (citations omitted).

In contrast, in Freedman v. Redstone, 753 F.3d 416 (3d

Cir. 2014), the Third Circuit looked to the specific allegations

of a New York state derivative suit to determine whether it

precluded a finding that a certain director was disinterested in

a subsequent derivative suit. The Third Circuit explained that

under New York law, in demand futility cases, “a prior ruling

on a director’s independence does not necessarily apply in a

future proceeding addressing the same topic” because “[a]

determination of a director’s independence [] is concerned

with a possibly fluid relationship and, accordingly, differs

from the determination of a fixed historical fact in the first

litigation.” Id. at 425.

The Freedman court then held that the issues were not

identical because: 1) the two suits alleged different facts in

support of their contention that this director was not

disinterested; and 2) seven years had passed between the

at *12–13 (Del. Ch. Sept. 28, 2007). But see Ji v. Van Heyningen, No. CA

05-273 ML, 2006 WL 2521440, at *3–5 (D.R.I. Aug. 29, 2006) (declining

to apply issue preclusion in derivative suit despite similar demand futility

allegations in prior suit).

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18 ARDUINI V. HART

filing of the two complaints, and “it would be inappropriate”

to assume that the director had the same relationship with one

of the executives being sued after that passage of time. Id. at

426. However, the transactions at issue in the New York

state case occurred at least two years before the transactions

at issue in Freedman such that Freedman was a completely

different suit than the New York state case. Given the

passage of time and the fact that the suits involved different

transactions, Freedman is distinguishable from Arduini’s

case.

We are persuaded by the reasoning of Sonus, which

applies with equal force here. With the exception of the

allegations regarding the denial of the motion to dismiss in

IBEW, all of Arduini’s allegations were either raised or could

have been raised in the Fosbre complaint. Moreover,

Arduini’s additional allegations make no difference to the

ultimate demand futility analysis because they do not show

that the current board would be held liable and would thus be

incapable of considering Arduini’s demand, considering that

only two of the eight current board members were on the

board in 2007 and 2008. See Shoen, 137 P.3d at 1183–84 (to

show interestedness, shareholder must allege that a majority

of the board members would be materially affected by a

decision of the board in a manner not shared by the

corporation and the stockholders). Indeed, even if all of the

current IGT board members had been named as defendants in

this suit, that fact alone would be insufficient to show that

demand would be futile. See Aronson v. Lewis, 473 A.2d

805, 818 (Del. 1984) (noting a bare claim that the directors

would have to sue themselves does not raise a legally

cognizable claim under Delaware corporate law), overruled

on other grounds by Brehm, 746 A.2d at 253–54.

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ARDUINI V. HART 19

The Arduini complaint alleges that demand is futile

because the current board “faces a sufficiently substantial

likelihood of liability for their breach of fiduciary duties”

based on: 1) the naming of IGT, Matthews, and Cavanaugh

as defendants in the IBEW complaint; 2) the denial of the

motion to dismiss in IBEW; and 3) the failure of the current

board to file any lawsuits against those responsible for the

conduct at issue in IBEW. Arduini argues that his demand

futility claim is different from that in Fosbre because of his

additional allegations regarding the denial of the motion to

dismiss in IBEW, statements of confidential witnesses, and

IGT’s stock repurchases.

Arduini’s arguments are not persuasive. The denial of the

motion to dismiss in IBEW might have increased the

probability that the corporation would eventually be found

liable for securities fraud, considering the strict pleading

requirements for federal securities class action suits. 

However, this possibility alone, without more specific

allegations, does not show that demand on the current

directors would be futile. Only two of the current directors

were on the board at the time of the alleged securities fraud

and thus could potentially be held liable for the board’s

failure to act.7 Further, the denial of the motion to dismiss

was not a final order and since the parties settled, there was

no ultimate finding of liability in IBEW which could call into

doubt the current directors’ impartiality.

7 The IGT board at the time of the filing of the Arduini complaint

consisted of Hart, Miller, Roberson, Satre, Alves, Chaffin, Creed, and

Sadusky. Miller and Hart are the only directors who were on the board at

the time of the events alleged in the complaint in 2007–2008.

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20 ARDUINI V. HART

The Nevada Supreme Court’s opinion in Shoen v. SAC

Holding Corp., 137 P.3d 1171 (Nev. 2006), is instructive. 

There, the court explained, “[a]llegations of mere threats of

liability through approval of the wrongdoing or other

participation . . . do not show sufficient interestedness to

excuse the demand requirement,” as “directors and officers

may only be found personally liable for breaching their

fiduciary duty of loyalty if that breach involves intentional

misconduct, fraud, or a knowing violation of the law.” Id. at

1183–84. Here, Arduini’s claims concerning the IBEW

litigation do not allege that a majority of the current directors

directly participated in any wrongdoing, but rather at most

allege that the directors failed to act when presented with

allegations of wrongdoing of their predecessors. Such an

allegation does not create “a reasonable doubt that the board

can impartially consider a demand.” See id.8

Overall, we affirm the district court’s determination that

the demand futility issues in Fosbre and Arduini’s suit were

identical for the purposes of issue preclusion.

8 As new evidence showing demand futility, Arduini also points to

confidential witness allegations regarding the Defendants’ alleged

knowledge of IGT’s misrepresentations and omissions in 2007 and 2008

and allegations regarding IGT’s $777 million stock repurchases in 2007

and 2008. While these specific allegations were not presented in Fosbre,

the Fosbre complaint did contain similar allegations that IGT officers

authorized stock buybacks and took advantage ofthe buybacks to sell their

IGT stock at inflated prices. The Arduini complaint’s additional or

different details on Defendants’ knowledge of IGT’s misrepresentations

and their participation in the stock buyback do not raise a “new” issue

precluding a finding of identity of issues for the reasons discussed supra. 

Moreover, these allegations concern only two of the current board

members and could have been raised in the Fosbre complaint. See Sonus,

499 F.3d at 63–64.

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ARDUINI V. HART 21

IV

A

Arduini next argues that issue preclusion does not apply

because there is no identity of parties between his suit and

Fosbre. In his view, he was not in privity with the Fosbre

plaintiffs because they failed to establish derivative standing

and did not adequately represent IGT and its shareholders. 

He asserts that there is no privity because “shareholders who

fail to establish their representative capacity can only act on

their own behalf and are not in privity with other

shareholders.” Arduini cites Pyott v. Louisiana Municipal

Police Employees’ Retirement System, 46 A.3d 313, 330 (Del.

Ch. 2012) (“Pyott I”), for the proposition that initially

shareholders assert “only their individual claim to obtain

equitable authority to sue,” and that if an action is dismissed

for failure to establish demand futility, “plaintiffs never

attained the status as a representative of the corporation and

its shareholders.”9 He reasons that pursuant to Pyott I, the

dismissal of the first derivative suit “would not preclude other

shareholders from establishing their own derivative standing

in a new action.” See id. at 330–35.

The fact that Arduini was not a party to the Fosbre case

does potentially raise concerns. The Nevada Supreme Court

has stated that “[i]ssue preclusion can only be used against a

party whose due process rights have been met by virtue of

that party having been a party or in privity with a party in the

9 The Delaware Supreme Court subsequently reversed Pyott I on

different grounds in Pyott v. Louisiana Municipal Police Employees’

Retirement System, 74 A.3d 612 (Del. 2013) (“Pyott II”).

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22 ARDUINI V. HART

prior litigation.” Alcantara, 321 P.3d at 917 (quoting Bower

v. Harrah’s Laughlin, Inc., 215 P.3d 709, 718 (Nev. 2009)).

We have not found any Nevada case addressing whether

shareholders in derivative suits are in privity for the purposes

of issue preclusion. However, the majority of courts that

have addressed this issue have held that shareholders

asserting derivative suits are in privity. In Pyott II, for

example, the Delaware Supreme Court, applying California

law, held that “derivative stockholders are in privity with

each other because they act on behalf of the defendant

corporation.” 74 A.3d at 614. The court noted that the

Delaware lower courts were split on whether there is privity

between derivative stockholders as a matter of Delaware law,

but that “numerous other jurisdictions” had held there was

privity.

10

 Id. at 618 (citations omitted).

Similarly, in Sonus, the First Circuit explained that “the

prevailing rule [is] that the shareholder in a derivative suit

represents the corporation,” and “if the shareholder can sue

on the corporation’s behalf, it follows that the corporation is

bound by the results of the suit in subsequent litigation, even

if different shareholders prosecute the suits.” 499 F.3d at 64;

see also Ross v. Bernhard, 396 U.S. 531, 538 (1970) (“The

claim pressed by the stockholder against directors . . . ‘is not

his own but the corporation’s.’”) (citation omitted); Goldman

v. Northrop Corp., 603 F.2d 106, 109 (9th Cir. 1979) (parties

in separate derivative suits were the same although

represented by different shareholders because “[t]he

10 While the Pyott II court applied California law, California and Nevada

law regarding issue preclusion are similar. Compare Pyott II, 74 A.3d at

617 (applying California law), with Five Star Capital, 194 P.3d at 713

(applying Nevada law).

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ARDUINI V. HART 23

corporation was the sole real party in interest in both

cases”).11

Such reasoning applies equallyto Nevada derivative suits,

where the shareholders are acting on behalf of the corporation

and its shareholders and the underlying issue of demand

futility is the same regardless of which shareholder brings

suit. We therefore hold that shareholders bringing derivative

suits are in privity for the purposes of issue preclusion under

Nevada law.

B

Arduini contends that even assuming he was otherwise in

privity with the shareholders in Fosbre, those shareholders

were inadequate representatives of IGT because they failed to

properly plead demand futility, failed to amend their

defective complaint after it was dismissed, and on appeal,

submitted documents that were never filed in the district

court. Due to this alleged inadequate representation, Arduini

11 Further, Nevada has adopted Restatement (Second) of Judgments

§ 41(1) (1982), which provides that “[a] person who is not a party to an

action but who is represented by a party is bound by and entitled to the

benefits of a judgment as though he were a party.” Alcantara, 321 P.3d

at 917. Under § 41, a person is “represented” by a party who is, inter alia,

the trustee, executor, guardian, or “[t]he representative of a class of

persons similarly situated, designated as such with the approval of the

court, of which the person is a member.” Id. These examples of

representation are analogous to that ofshareholder derivative suits, where

a shareholder is acting on behalf of the corporation and also other

shareholders.

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24 ARDUINI V. HART

contends there is no identity of parties for the purposes of

issue preclusion.12

We agree that inadequate representation by the first

shareholder might prevent issue preclusion because a

shareholder may not bind a corporation unless he adequately

represents the interests of the corporation. This position finds

support in the text of Rule 23.1(a) and Nevada Rule of Civil

Procedure 23.1, which both state that “[t]he derivative action

may not be maintained if it appears that the plaintiff does not

fairly and adequately represent the interests of shareholders

or members who are similarly situated in enforcing the right

of the corporation or association.” Accord Pyott II, 74 A.3d

at 618 (under California law, if the first shareholders to bring

suit “were inadequate representatives, collateral estoppel will

not bar a second, identical claim”) (citing, inter alia,

Restatement (Second) of Judgments, § 42(1)). Such a rule is

necessary because “[p]recluding the suit of a litigant who has

not been adequately represented in the earlier suit would raise

serious due process concerns” and because of the possibility

for collusion between a nominal plaintiff and the defendants. 

See Sonus, 499 F.3d at 65 (citations omitted). Indeed, we

have noted that an “adequate [shareholder] representative

must have the capacity to vigorously and conscientiously

prosecute a derivative suit and be free from economic

interests that are antagonistic to the interests of the class.” 

12 IGT argues that this court should not consider Arduini’s arguments

regarding inadequate representation, the equities, and due process because

they were not raised below. We generally do not consider issues raised

for the first time on appeal. In re Rains, 428 F.3d 893, 902 (9th Cir. 2005)

(citation omitted). However, because “[p]recluding the suit of a litigant

who has not been adequately represented in [an] earlier suit would raise

serious due process concerns,” Sonus, 499 F.3d at 64, we choose to

address these issues.

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ARDUINI V. HART 25

Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir. 1990)

(citations omitted).

Other courts considering issue preclusion in the derivative

suit context have examined whether the first shareholder

adequately litigated his suit or engaged in collusive behavior

with the corporation. The Sonus court held that a subsequent

shareholder seeking to avoid issue preclusion must show that

the original plaintiffs were “grossly deficient”

representatives. Sonus, 499 F.3d at 66. Quoting the

Restatement (Second) of Judgments § 42 (1982) comment f,

the Sonus court explained that inadequate representation

under issue preclusion is not shown by the “failure of a

representative to invoke all possible legal theories or to

develop all possible resources of proof,” but requires

representation “so grossly deficient as to be apparent to the

opposing party.” Id. at 65–66.

Other courts have found that dismissals based on a failure

to answer interrogatories or post a security-for-cost bond did

not have preclusive effect due to concerns with “the ease with

which a disingenuous plaintiff could engineer a dismissal for

failure to answer discovery in order to evade the notice

requirement,” and because such dismissals were not true

dismissals on the merits. Id. at 65 (discussing Papilsky v.

Berndt, 466 F.2d 251, 258–60 (2d Cir. 1972)); Saylor v.

Lindsley, 391 F.2d 965, 968–70 (2d Cir. 1968).

Although Nevada does not appear to have specifically

adopted the Restatement (Second) of Judgments § 42(1), that

section provides that “[a] person is not bound by a judgment

for or against a party who purports to represent him” if,

among other things, “[t]he representative failed to prosecute

or defend the action with due diligence and reasonable

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26 ARDUINI V. HART

prudence, and the opposing party was on notice of facts

making that failure apparent.” Comment f to this section

explains that “a judgment is not binding on the represented

person where it is the product of collusion between the

representative and the opposing party, or where, to the

knowledge of the opposing party, the representative seeks to

further his own interest at the expense of the represented

person.” However, “[t]actical mistakes or negligence on the

part of the representative are not . . . sufficient to render the

judgment vulnerable.”13

Here, the Fosbre plaintiffs adequately litigated their case. 

The plaintiffs fully litigated the case through its dismissal

based on demand futility and then fully briefed and argued

their appeal in the Ninth Circuit. While it is common practice

for plaintiffs to amend their complaints after dismissal under

Federal Rule of Civil Procedure 12(b)(6), they are not

required to do so. In Fosbre, four sets of counsel represented

the plaintiffs, which suggests that appealing immediately

rather than amending was tactical, not collusive or selfinterested. Moreover, there is no showing that the Fosbre

plaintiffs could have amended their complaint in a way that

would have met the district court’s concerns.

While we disagreed with the Fosbre plaintiffs’ contention

that they had sufficiently pled demand futility, our dismissal

came only after thorough briefing and argument by those

13 The Restatement (Second) of Judgments § 42 provides exceptions to

§ 41. The Nevada Supreme Court, in discussing and adopting § 41, noted

the court’s “long-standing reliance on the Restatement (Second) of

Judgments in the issue and claim preclusion context.” Alcantara,

321 P.3d at 917. Thus it appears likely that Nevada would follow § 42 as

well.

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ARDUINI V. HART 27

plaintiffs. Our denial of their appeal does not indicate that

the Fosbre plaintiffs were inadequate representatives of IGT

shareholders. Further, although in the Fosbre appeal14 we

granted IGT’s motion to strike certain documents submitted

for the first time on appeal, we did not address the adequacy

of the Fosbre plaintiffs’ representation. Israni, 473 F. App’x

at 549. A mistake as to the breadth of the record on appeal,

without more, is not evidence of inadequate representation in

the appeal or for the purposes of issue preclusion. 

Furthermore, Arduini does not suggest, nor is there any

indication, that there was any collusion between the Fosbre

plaintiffs and IGT.15

While we leave for another day the precise contours of

what conduct constitutes inadequate representation, we

simply note that the Fosbre plaintiffs’ failure to amend their

complaint, loss of their appeal, and the submission of

documents on appeal that were not in the record below were

insufficient to render them inadequate representatives,

especially considering their vigorous pursuit of their appeal. 

In sum, we hold that Arduini has failed to show that the

Fosbre plaintiffs did not adequately represent IGT and its

shareholders.

14 The Fosbre appeal was captioned Israni v. Bittman. 473 F. App’x 548

(9th Cir. 2012).

15 Moreover, the district court, having presided over Arduini’s case, the

Fosbre case, and at least two other IGT cases, was well-situated to assess

such representation and expressed no concern about the Fosbre plaintiffs’

representation.

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28 ARDUINI V. HART

C

Arduini also argues that issue preclusion should not apply

because “[i]t is unfair to allow Defendants to avoid liability

for their malfeasance simply because the Fosbre plaintiffs

failed to meet pleading requirements” in light of the “strong

public policy favoring resolution of disputes on the merits.” 

Arduini contends that applying issue preclusion in this type

of case would incentivize collusive behavior between

defendants and unscrupulous shareholders and penalize

shareholders who do not rush to the courthouse to become

“first filers.”

However, as noted above, issue preclusion does not apply

where the first shareholder did not adequately represent the

corporation, minimizing the risk of unfairness to

shareholders. See Fed. R. Civ. P. 23.1; Nev. R. Civ. P. 23.1;

Sonus, 499 F.3d at 64–65. Indeed, collusive behavior

between shareholders and defendants, if shown, would render

the shareholders inadequate representatives and thus issue

preclusion would not apply. It is also unfair to require

defendants to relitigate the issue of demand futility everytime

a different shareholder files suit, provided that the first

shareholder adequately represented the company. See

Alcantara, 321 P.3d at 916 (“[I]ssue preclusion is applied to

conserve judicial resources, maintain consistency, and avoid

harassment or oppression of the adverse party.”) (citing

Berkson, 245 P.3d at 566). Thus we reject Arduini’s policybased challenge to the application of issue preclusion in this

case.

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ARDUINI V. HART 29

D

Arduini lastly argues that application of issue preclusion

here violates his due process rights, because he was not

provided with notice of the Fosbre dismissal. He argues that

notice is required to ensure that dismissal is in the best

interests of the corporation and absent shareholders. Arduini

concludes that the fact that his counsel had notice of the

Fosbre proceedings is irrelevant, citing Taylor v. Sturgell,

553 U.S. 880 (2008).

Arduini’s due process argument fails. Rule 23.1 only

requires that “[n]otice of a proposed settlement, voluntary

dismissal, or compromise . . . be given to shareholders or

members in the manner that the court orders.” See also Nev.

R. Civ. P. 23.1 (“The action shall not be dismissed or

compromised without the approval of the court, and notice of

the proposed dismissal or compromise shall be given to

shareholders or members in such manner as the court

directs.”). There is no provision requiring notice of an

involuntary dismissal. Sonus, 499 F.3d at 65 (citing, inter

alia, Burks v. Lasker, 441 U.S. 471, 485–86 n.16 (1979)).

Further, Nevada follows Restatement (Second) of

Judgments § 41(2), which states that “[a] person represented

by a party to an action is bound by the judgment even though

the person himself does not have notice of the action, is not

served with process, or is not subject to service of process.” 

Alcantara, 321 P.3d at 917. Even assuming that Arduini was

the true party in interest (rather than IGT), the Fosbre

plaintiffs were in essence representing all IGT shareholders

when they filed their derivative suit, thus binding subsequent

derivative plaintiffs even if they personally did not have

notice of the Fosbre dismissal.

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30 ARDUINI V. HART

We recognize that at least one court has held that the

dismissal of a derivative suit for failure to prosecute, such as

the failure to answer interrogatories, would not have

preclusive effect based on lack of notice to the shareholders. 

See Papilsky, 466 F.2d at 258–60. However, the Fosbre

plaintiffs “actively litigated the demand futility issue,” which

was decided on its merits, and thus there is less risk of

collusive behavior between the shareholder and the

corporation. See Sonus, 499 F.3d at 65; Papilsky, 466 F.2d at

259 (“Even without notice, a dismissal after a hearing on the

merits is a binding adjudication of the corporate claim and

precludes non-party stockholders from bringing a subsequent

derivative suit based on the same cause of action.”) (citation

omitted).

Further, Taylor v. Sturgell is inapposite. In Taylor, two

friends filed successive actions seeking to compel the release

of identical documents from a government agency under the

Freedom of Information Act. 553 U.S. at 885. After the

agency won the first suit, a lower court applied issue

preclusion to bar the second filed suit based on “virtual

representation,” a legal doctrine the Taylor court rejected. Id.

at 895–901. However, the Taylor plaintiff and the plaintiff in

the first suit had no legal relationship with each other.

Here, both Arduini and the Fosbre plaintiffs were acting

in a representative capacity as shareholders on behalf of IGT. 

Because the Fosbre plaintiffs adequately represented the

shareholders and issue preclusion applies, there is no need for

Arduini to receive personal notice of the Fosbre court’s

decisions. See Taylor, 553 U.S. at 897–98, 900, 905. 

Furthermore, Arduini’s counsel had actual notice of the

Fosbre proceedings, as shown by his filings in a related state

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ARDUINI V. HART 31

case. Accordingly, we reject Arduini’s due process

argument.

V

The district court properly found that issue preclusion

prevented Arduini from relitigating the issue of demand

futility. The issue of demand futility was the same in both

Fosbre and this case, and thus there is an identity of issues. 

Even assuming the district court looks to the specific

allegations of demand futility to determine whether there is

identity of issues, the vast majority of Arduini’s demand

futility allegations are essentially identical to those raised in

Fosbre. The new allegations, moreover, are cumulative,

could have been raised in Fosbre, or make no difference to

the demand futility analysis because they do not show that at

least half of the current board was “interested.”

Arduini and the Fosbre plaintiffs were in privity because

IGT was the true party in interest and there is no indication

that the Fosbre plaintiffs were inadequate representatives. 

Further, there is no inequity in applying issue preclusion here

because the Fosbre plaintiffs fully litigated their demand

futility claim. There was no due process violation because

there is no requirement that shareholders be given notice of

dismissal in a derivative suit where the issue of demand

futility is fully litigated and dismissed on the merits. 

Moreover, the record shows that Arduini’s counsel had actual

notice of the Fosbre proceedings.

Because Arduini did not make a pre-suit demand and

cannot show demand futility, dismissal was proper and we

AFFIRM.

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