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UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF CALIFORNIA 

 IN RE PAYPAL HOLDINGS, INC.

SHAREHOLDER DERIVATIVE 

LITIGATION

_____________________________________

This Document Relates To: 

ALL ACTIONS 

Case No. 17-cv-00162-RS 

(CONSOLIDATED WITH NOS. 3:17-CV-02206-RS; 

3:17-CV-02428-RS; AND 5:17-CV-02446-RS) 

ORDER GRANTING MOTION TO 

DISMISS 

I. INTRODUCTION 

In this shareholder derivative action, nominal defendant Paypal Holdings, Inc. (“Paypal”) 

moves to dismiss plaintiffs’ operative complaint for failure to plead particularized facts 

demonstrating that a pre-suit demand on Paypal’s Board of Directors would have been futile. For 

the reasons set forth below, the motion to dismiss is granted, and the complaint is dismissed in its 

entirety, with leave to amend. 

II. BACKGROUND1

Nominal defendant Paypal is a publicly traded company that offers technology platforms 

allowing consumers and merchants to make digital and mobile payments. In December 2013, 

eBay, Inc., the then parent company of Paypal, bought a startup company called Braintree, best 

 

1

 The factual background is based on the averments in the operative complaint, Liss v. Schulman, Case No. 17-cv-02446-RS, Dkt. No. 1, which must be taken as true for purposes of this motion. 
ORDER GRANTING MOTION TO DISMISS

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known for its acquisition of another startup called Venmo, creator of a smartphone application 

facilitating money transfers between users. eBay operated Braintree as a separate service within 

Paypal until 2015, when Paypal was spun off into a separate publicly traded company. 

According to plaintiffs, unbeknownst to the public, Venmo was engaging in unfair and 

deceptive trade practices, which came to light on March 28, 2016, when Paypal received a civil 

investigative demand (“CID”) from the Federal Trade Commission (“FTC”). The CID was part of 

an ongoing investigation into whether Paypal, through its Venmo service, had been engaging in 

deceptive or unfair practices in violation of the Federal Trade Commission Act (“FTCA”). 

Plaintiffs allege that defendants issued or caused to be issued various public disclosure documents 

that failed to disclose the nature of these illegal business practices. Plaintiffs contend that Venmo’s 

unlawful conduct artificially inflated Paypal’s financial results, as evidenced by the fact that news 

of the FTC investigation caused Paypal’s market capitalization to fall by $1 billion. On May 20, 

2016, the Texas Attorney General announced a settlement with Paypal relating to Venmo’s 

business practices, which included using customers’ phone contacts without clearly disclosing 

how such contacts would be used. This news resulted in Paypal’s market capitalization falling by 

another $145 million. 

After receiving the CID but before publicly disclosing it, defendants Casares, Christodoro, 

Donahoe, Dorman, McGovern, Moffett, Omidyar, Schulman, and Yeary, Paypal Board members, 

issued a proxy statement to the company’s shareholders in which each sought reelection to the 

Board. Plaintiffs allege that this proxy statement was misleading because it failed to mention the 

CID or Venmo’s illegal practices but rather touted Paypal’s strong corporate governance and the 

Board members’ monitoring of the company. In addition, plaintiffs contend that defendant 

Donahoe, Paypal’s Board Chairman, was privy to material nonpublic information about Paypal’s 

“true business health” and took advantage of the company’s inflated stock price to sell over 1.8 

million shares of his personally held Paypal stock for proceeds of over $70 million. 

Defendant Daniel Shulman is Paypal’s president, Chief Executive Officer, and has been a 

director since July 2015. Defendant John Rainey is Paypal’s Senior Vice President and Chief 
ORDER GRANTING MOTION TO DISMISS

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Financial Officer and has been since August 2015. Defendant John Donahoe, as noted above, is 

Paypal’s Chairman of the Board and has been a director since July 2015. Defendant Patrick 

Dupuis served as Paypal’s Senior Vice President and Interim CFO from July 2015 to August 

2015. He was also Paypal’s CFO from November 2010 to July 2015. Defendants David Moffett, 

Pierre Omidyar, Gail McGovern, Frank Yeary, David Dorman, Jonathan Christodoro, and Wences 

Casares are non-officer directors. 

Plaintiffs did not make a pre-suit demand on the Board and assert that demand would have 

been futile because a majority of the Board faces a substantial likelihood of liability on plaintiffs’ 

claims. Nominal defendant Paypal contends that demand is not excused with respect to any of 

plaintiffs’ claims and seeks to dismiss the operative complaint in its entirety. 

III. LEGAL STANDARD 

A complaint must contain “a short and plain statement of the claim showing that the 

pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). While “detailed factual allegations are not 

required,” a complaint must have sufficient factual allegations to “state a claim to relief that is 

plausible on its face.” Ashcroft v. Iqbal, 566 U.S. 662, 678 (2009) (citing Bell Atlantic v. Twombly, 

550 U.S. 544, 570 (2007)). A claim is facially plausible “when the pleaded factual content allows 

the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” 

Id. This standard asks for “more than a sheer possibility that a defendant acted unlawfully.” Id.

The determination is a context-specific task requiring the court “to draw on its judicial experience 

and common sense.” Id. at 679. 

A motion to dismiss a complaint under Federal Rule of Civil Procedure 12(b)(6) tests the 

legal sufficiency of the claims alleged in the complaint. See Parks Sch. of Bus., Inc. v. Symington, 

51 F.3d 1480, 1484 (9th Cir. 1995). Dismissal under Rule 12(b)(6) may be based on either the 

“lack of a cognizable legal theory” or on “the absence of sufficient facts alleged under a 

cognizable legal theory.” UMG Recordings, Inc. v. Shelter Capital Partners LLC, 718 F.3d 1006, 

1014 (9th Cir. 2013). When evaluating such a motion, the Court must “accept all factual 

allegations in the complaint as true and construe the pleadings in the light most favorable to the 
ORDER GRANTING MOTION TO DISMISS

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nonmoving party.” Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir. 2005). When a plaintiff has 

failed to state a claim upon which relief can be granted, leave to amend should be granted unless 

“the complaint could not be saved by any amendment.” Gompper v. VISX, Inc., 298 F.3d 893, 898 

(9th Cir. 2002) (citation and internal quotation marks omitted). 

A basic principal of corporate law is that a corporation is run by its management and the 

corporation itself has the right to make claims. See Potter v. Hughes, 546 F.3d 1051, 1058 (9th 

Cir. 2008). Because a shareholder derivative suit is an extraordinary action that allows a 

shareholder to step into the shoes of a corporation and make claims on behalf of the corporation, 

Federal Rule of Civil Procedure 23.1 “establishes stringent conditions for bringing such a suit.” 

Quinn v. Anvil Corp., 620 F.3d 1005, 1012 (9th Cir. 2010). Specifically, Rule 23.1 requires a 

shareholder either to demand action from the corporation’s directors before filing suit, or plead 

with factual particularity the reasons why such a demand would have been futile. Fed. R. Civ. P. 

23.1(b)(1). 

IV. DISCUSSION 

Because Paypal is incorporated in Delaware, that state’s law governs whether plaintiffs’ 

failure to make a pre-suit demand on the Board can be excused as futile. See La. Mun. Police 

Emps.’ Ret. Sys. v. Wynn, 829 F.3d 1048, 1058 (9th Cir. 2016). Two tests govern whether demand 

would have been futile, only one of which is relevant here.2 The Rales test applies to claims that—

like those asserted in the complaint—do not challenge a conscious business decision, but instead 

challenge board inaction, such as failure to oversee the company’s affairs, or to prevent disclosure 

violations or insider trading. See In re Polycom Litig., 78 F. Supp. 3d 1006, 1013 (N.D. Cal. 2015) 

(“Plaintiffs’ oversight and false and misleading statement claims are governed by the Rales test.”). 

 

2

 Under the Aronson test, to show demand futility, a plaintiff must provide factual allegations that 

raise a reasonable doubt that “(1) the directors were disinterested and independent [or] (2) the 

challenged transaction was otherwise the product of a valid exercise of business judgment.” See

Brehm v. Eisner, 746 A.2d 244, 253 (Del. 2000), quoting Aronson v. Lewis, 473 A.2d 805, 814 

(Del. 1984). Where there is no transaction being challenged, the ordinary Aronson analysis does 

not apply. See Rales v. Blasband, 634 A.2d 927, 933-34 (Del. 1993). 
ORDER GRANTING MOTION TO DISMISS

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To satisfy the Rales test, a plaintiff must plead “particularized facts creating a reasonable doubt 

that a majority of the Board would be disinterested or independent in making a decision on a 

demand.” Rales, 634 A.2d at 930. Because the complaint does not challenge the independence of 

any member of the Board, the relevant inquiry is whether plaintiffs have alleged sufficiently that a 

majority of the directors are “interested” because they face a “substantial likelihood of liability.” 

See In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 990 (9th Cir. 1999). 

Under Paypal’s certificate of incorporation, authorized by Section 102(b)(7) of Delaware 

General Corporation Law, Paypal limits director liability for breaches of fiduciary duty “[t]o the 

fullest extent permitted by law.” (Paypal’s Request for Judicial Notice, Ex. F, Dkt. No. 28-6).3

Accordingly, “a serious threat of liability may only be found to exist if the plaintiff pleads a nonexculpated claim,” which requires plaintiffs to allege particularized facts showing that the 

directors engaged in “disloyal,” “fraudulent, illegal or bad faith conduct,” and “acted with 

scienter.” Wood v. Baum, 953 A.2d 136, 141 (Del. 2008). Negligent or even reckless conduct is 

insufficient. See McPadden v. Sidhu, 964 A.2d 1262, 1274-75 (Del. Ch. 2008). 

A. The Section 14(a) Claim 

Plaintiffs allege that defendants Casares, Christodoro, Donahoe, Dorman, McGovern, 

Moffett, Omidyar, Schulman, and Yeary violated Section 14(a) of the Exchange Act by 

disseminating a proxy statement to shareholders on April 14, 2016, that contained false and 

misleading statements. Because this conduct implicates a majority of the Board, plaintiffs assert 

that demand is excused. 

Section 14(a) makes it “unlawful for any person . . . to solicit or to permit the use of his 

name to solicit any proxy” in contravention of SEC rules and regulations. 15 U.S.C. § 78n(a). SEC 

Rule 14a-9 provides that no proxy solicitation shall contain “any statement which, at the time and 

in the light of the circumstances under which it is made, is [materially] false or misleading[,] . . . 

 

3

 Paypal requests judicial notice of its restated certificate of incorporation; notice will be taken of 

the existence of this document, but its contents will not be taken as true. 
ORDER GRANTING MOTION TO DISMISS

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or which omits to state any material fact necessary” to render “the statements . . . not false or 

misleading.” 17 C.F.R. § 240.14a-0(a). “[A] Section 14(a), Rule 14a-9 plaintiff must demonstrate 

that the misstatement or omission was made with the requisite level of culpability and that it was 

an essential link in the accomplishment of the proposed transaction.” Desaigoudar v. Meyercord, 

223 F.3d 1020, 1022-23 (9th Cir. 2000). Where, as here, the claim “sounds in fraud,” both Federal 

Rule of Civil Procedure 9(b) and the heightened pleading standard of the Private Securities 

Litigation Reform Act (“PSLRA”) apply, and the plaintiff must “identify: (1) each statement 

alleged to have been misleading; (2) the reason or reasons why the statement is misleading; and 

(3) all facts on which that belief is formed.” Id.; In re Countrywide Fin. Corp. Deriv. Litig., 554 F. 

Supp. 2d 1044, 1076 (C.D. Cal. 2008).4

In the proxy, defendants solicited shareholder votes for reelection to the Board, claiming a 

commitment by Paypal and its Board to “strong” and “good” “corporate governance.” Compl. ¶¶ 

71-72. Plaintiffs argue that these statements were misleading because they did not mention 

Venmo’s allegedly illegal business practices. Paypal argues persuasively that Venmo’s alleged 

unlawful conduct is properly characterized as “uncharged” and “unadjudicated” because the CID 

merely announced the existence of an FTC investigation, which is still ongoing.5 Federal securities 

laws do not impose upon companies a “duty to disclose uncharged, unadjudicated wrongdoing.” 

City of Pontiac Policemen & Firemen Retirement Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 

2014); see also In re Teledyne Defense Contracting Deriv. Litig., 849 F. Supp. 1369, 1382 (C.D. 

 

4

 In the operative complaint, plaintiffs disclaim allegations of reckless or knowing conduct, 

apparently to avoid having to comply with the heightened pleading requirements regarding fraud. 

It is, however, difficult to read the complaint as plaintiffs desire, both because plaintiffs allege that 

the defendants involved “should have been aware of the deficiencies in their corporate governance 

at the time of the Proxy,” Compl. ¶ 71 (emphasis added), and because, as explained above, 

plaintiffs must allege scienter to support their position that demand on the Board would have been 

futile. 

5

 Paypal also denies that its settlement with the Texas AG in May 2016 constituted an 

“adjudication” because Paypal did not admit wrongdoing. A determination on that point is 

unnecessary, as the challenged proxy statement was issued before the announcement of the 

settlement. 
ORDER GRANTING MOTION TO DISMISS

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Cal. 1993) (dismissing a Section 14(a) claim because directors need not disclose alleged 

wrongdoing “when such charges have not yet been brought, let alone proven”). Accordingly, the 

remaining inquiry is whether defendants’ failure to disclose in their proxy materials the company’s 

receipt of the CID is actionable. 

According to plaintiffs, defendants knew or should have known that the proxy statements 

were misleading, because at the time the proxy was issued, Paypal had already received notice of 

the FTC’s investigation into Venmo’s business practices. As members of the Board’s Audit, Risk 

and Compliance Committee, defendants Moffett, McGovern, and Yeary were, plaintiffs assert, 

especially likely to have known about the alleged misrepresentation, because they were 

responsible for ensuring the accuracy of Paypal’s financial statements. See In re Zoran Corp. 

Derivative Litig., 511 F. Supp. 2d 986, 1016-16 (N.D. Cal. 2007) (finding duties to know 

information based on audit committee or compensation committee membership sufficient to show 

the defendants knew wrongdoing was occurring or were negligent in not knowing). Plaintiffs 

argue that the issuance of the allegedly false and misleading proxy was an essential link to 

stockholders reelecting defendants to the Board. Had shareholders known that the company had 

received a CID, plaintiffs contend, the directors would not have been reelected and the illegal 

scheme, which they allegedly presided over and subsequently failed to disclose, would not have 

persisted. 

Courts in this district, and in other circuits, have held that a Section 14(a) claim requires 

that the votes solicited by a false proxy statement directly authorize the loss-generating corporate 

action. See Kelley v. Rambus, Inc., 2008 WL 5170598 at *7 (N.D. Cal. Dec. 9, 2008). A complaint 

alleging generally that the mere election of directors was an essential link to the directors’ 

subsequent wrongdoing does not satisfy Section 14(a)’s requirements. See In re Diamond Foods, 

Inc. Deriv. Litig., 2012 WL 1945814 at * 7 (N.D. Cal. May 29, 2012); In re HP Deriv. Litig., 2012 

WL 4468423 at *11 (N.D. Cal. Sept. 25, 2012); In re Verisign, Inc. Deriv. Litig., 531 F. Supp. 2d 

1173, 1213 (N.D. Cal. 2007); Gen. Elec. Co. v. Cathcart, 980 F. 2d 927, 933 (3d Cir. 1992); 

Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F. 3d 783, 797 (11th Cir. 2010). 
ORDER GRANTING MOTION TO DISMISS

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Plaintiffs argue that allegations of this nature have been repeatedly held to satisfy the 

“essential link” requirement.6 This case is, however, distinguishable from the majority of 

authorities that plaintiffs rely upon, each of which involved directors accused of backdating stock 

options. In those cases, because the proxies facilitated the election of directors and approval of 

stock option plans, they formed the essential link to the Board’s continued diversion of company 

assets to its members. In the only cited case not involving stock option backdating, In Re Wells 

Fargo & Co. S’holder Deriv. Litig., 2017 WL 4414304 at *17, 19 & n.11 (N.D. Cal. Oct. 4, 2017), 

the district court held that in contrast to In re Diamond Foods, Inc. Deriv. Litig., the omitted 

material information went well beyond simple mismanagement. There, the challenged proxies 

solicited shareholder approval for executive compensation packages supposedly justified by record 

cross-sell and deposit levels. Because the proxy statements concealed the fact that the cross-sell 

figures were inflated by the company’s fraudulent practices, the court found that plaintiffs had 

alleged the proxy caused shareholders to approve a loss-causing transaction. Here, whether 

plaintiffs have adequately pleaded the loss causation element is less clear. The Section 14(a) claim 

is premised on a single proxy, which apparently only solicited votes for the reelection of several 

directors. That those individuals remained on the Board and subsequently presided over Venmo’s 

allegedly deceptive practices is thus insufficient to satisfy the “essential link” requirement. 

The complaint also fails to identify actionable statements in the proxy under the heightened 

pleading standards of the PSLRA. For a statement to be false or misleading, it “must affirmatively 

create an impression of a state of affairs that differs in a material way from the one that actually 

exists.” Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1006 (9th Cir. 2002). In other words, 

“it is not enough to allege that [a] statement is incomplete; rather, the plaintiff must state facts 

showing that, due to its incompleteness, the statement affirmatively led the plaintiff in the wrong 

 

6 See In re Wells Fargo & Co. S’holder Derivative Litig., 2017 WL 4414304 at *17, 19 & n.11 

(N.D. Cal. Oct. 4, 2017), In re Fossil, Inc. Deriv. Litig., 713 F. Supp. 2d 644, 655 (N.D. Tex. 

2010); In re Maxim Integrated Prods. Deriv. Litig., 574 F. Supp. 2d 1046, 1066 (N.D. Cal. 2008); 

In re Zoran Corp. Deriv. Litig., 511 F. Supp. 2d 986, 1016 (N.D. Cal. 2007). 
ORDER GRANTING MOTION TO DISMISS

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direction (rather than merely omitted to discuss certain matters).” In re OmniVision Techs., Inc. 

Sec. Litig., 937 F. Supp. 2d 1090, 1101 (N.D. Cal. 2013). Plaintiffs allege that in the proxy, 

defendants “highlighted their supposed successful oversight of the Company,” “described their 

responsibilities, the duties of each committee, their active role in risk management, and touted 

PayPal and the board’s ‘strong governance standards’ in multiple places.” Compl. ¶ 70. According 

to plaintiffs, the existence of Venmo’s unfair trade practices rendered the proxy’s claims about 

strong corporate governance misleading. On the contrary, the statements identified by plaintiffs 

are too general to give rise to any particular impression about Venmo’s business practices and 

their legality, and therefore are not actionable as a matter of law. See, e.g., In re Braskam S.A. Sec. 

Litig., 2017 WL 1216592 at *13 (S.D.N.Y. Mar. 30, 2017) (noting that statements touting 

company’s “commitment to transparency and good corporate governance practices,” “trustworthy 

culture,” “commitment to integrity,” and “compliance with the laws,” were the type of statements 

that courts around the country “have consistently held to be inactionable”); In re Am. Apparel, Inc. 

S’holder Litig., 855 F. Supp. 2d 1043, 1073 (C.D. Cal. 2012) (holding that a statement regarding 

company’s commitment to “maintaining best practices” was inactionable); Retail Wholesale & 

Dept. Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1276 (9th Cir. 

2017) (holding that aspirational statements “to commit to certain ‘shared values’” and conduct 

were not actionable). 

In short, plaintiffs fail to identify a basis for inferring that defendants’ omission in the 

proxy materials of information regarding the FTC investigation caused Paypal’s shareholders to be 

misled, and formed an “essential link” to a loss-causing transaction. Because there is no indication 

that a majority of Paypal’s Board faced a substantial likelihood of liability on the Section 14(a) 

claim at the time the complaint was filed, demand is not excused with respect to that claim. 

B. The Breach of Fiduciary Duty Claim 

Plaintiffs’ breach of fiduciary duty claim appears to be premised on three different 

theories: 1) defendants made or caused to be made allegedly false and misleading statements in 

Paypal’s SEC filings, 2) defendants neglected their duty to monitor and prevent Paypal’s/Vemo’s 
ORDER GRANTING MOTION TO DISMISS

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unlawful conduct, and 3) defendant Donahue exploited his insider knowledge of Paypal’s true 

financial condition for personal gain before Venmo’s allegedly illegal business practices became 

public. Paypal argues that demand is not excused with respect to any of these theories because 

plaintiffs fail to plead facts demonstrating that defendants face a substantial likelihood of liability. 

Plaintiffs argue that various defendants issued and/or caused Paypal to issue numerous 

false and misleading statements that failed to disclose the existence of Venmo’s illegal business 

practices, which were allegedly responsible for the company’s inflated financials. According to 

plaintiffs, defendants caused Paypal to discuss in its Q2 and Q3-2015 quarterly reports and annual 

report for FY 2015, laws applicable to Paypal and Venmo and the consequences of violations, 

without disclosing that Venmo was in fact committing violations.7 Plaintiffs contend that the 

importance to Paypal of Venmo’s compliance with all laws and regulations warrants a reasonable 

inference, at the pleading stage, that defendants were aware of, or consciously turned a blind eye 

to, Venmo’s illegal business practices. On the contrary, a derivative complaint may not rely on 

broad group allegations or presume a director’s knowledge of wrongdoing based on his or her 

status as a director. See South v. Baker, 62 A.3d 1, 17 (Del. Ch. 2012) (“As numerous Delaware 

decisions make clear, an allegation that the underlying cause of a corporate trauma falls within the 

delegated authority of a board committee does not support an inference that the directors on that 

committee knew of and consciously disregarded the problem for purposes of Rule 23.1.”). 

Plaintiffs argue that group allegations are appropriate when a group of directors is privy to 

the same information and fails to act, see, e.g., Shaev v. Baker, 2017 WL 1735573 at *10 n.8 

(N.D. Cal. May 4, 2017) (“Because Plaintiffs allege that the Board as a whole or specific 

committees within the Board had knowledge of the [wrongdoing], the Court does not evaluate 

demand futility on a director-by-director basis.”). Yet the complaint is devoid of any particularized 

 

7

 The operative complaint details a number of other statements purportedly authorized by several 

individual defendants when Paypal was still a subsidiary of eBay. Because those disclosures took 

place before Paypal was spun off, and thus before plaintiffs became shareholders of Paypal, 

plaintiffs do not have standing to challenge those statements. 
ORDER GRANTING MOTION TO DISMISS

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allegations regarding whether, prior to issuing the challenged statements, defendants received 

information that would have put them on notice that the statements were misleading.8 Instead, 

plaintiffs allege (1) that the directors as a group likely were aware of Venmo’s alleged violations 

because they were charged with overseeing Venmo, (2) that defendants Donahoe, Moffett, and 

Omidyar likely had knowledge because they conducted due diligence in connection with eBay’s 

purchase of Braintree/Venmo, and (3) that defendant members of the Board’s Audit, Risk and 

Compliance committee face a high likelihood of liability because they were responsible for 

compliance, and reviewed and approved the challenged statements. These allegations contain no 

indication that any of the defendants knew specific facts regarding wrongdoing by Venmo, or 

were personally involved in illegal conduct beyond a general responsibility to monitor Paypal’s 

and Venmo’s compliance with applicable laws and regulations.9 

“Without any particularized allegations explaining what the Directors knew, when they 

knew it, or anything more than ‘general allegation[s] that the Board participated’ in making or 

causing false or misleading statements to be made, the Court cannot infer that the board acted in 

bad faith, knowingly, or with intent to deceive.” In re Polycom, 78 F. Supp. 3d at 1017 (citing In 

re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989–90 (9th Cir. 1999), abrogated on other 

grounds as stated in South Ferry LP v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008)); see also In 

re Maxwell Techs. Deriv. Litig., 2014 WL 2212155 at *12 (S.D. Cal. May 27, 2014) (“Allegations 

that financial statements contained false statements and material omissions, and that the director 

defendants reviewed the statements pursuant to the responsibilities are insufficient to allow a court 

to conclude that there is a substantial likelihood of liability.”). Therefore, because plaintiffs do not 

 

8

 Crucially, Paypal did not receive notice from the FTC that Venmo was under investigation until 

March 28, 2016, after the issuance of the challenged disclosures. 

9

 Relying on Pfeiffer v. Toll, 989 A.2d 683 (Del. Ch. 2010) and Barovic v. Ballmer, 72 F. Supp. 3d 

1210 (W.D. Wash. 2014), plaintiffs argue that defendants’ knowledge of Venmo’s alleged 

wrongdoing can be presumed under the “core operations” doctrine. This doctrine is inapplicable 

because plaintiffs have not shown, and indeed are unlikely to show, that Venmo’s handling of 

customer information was a “core operation” of Paypal such that Paypal’s directors can be 

charged with knowledge about those practices. 
ORDER GRANTING MOTION TO DISMISS

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provide a basis to assume that defendants knew about Venmo’s alleged wrongdoings at the time 

the challenged statements were issued, they cannot show that a majority of the Board faced a 

substantial likelihood of liability. 

As part of their second claim for relief, plaintiffs also allege that defendants breached their 

fiduciary duties “by creating a culture of lawlessness within Paypal, and/or consciously failing to 

prevent” Venmo from engaging in “unlawful” practices. Compl. ¶ 106. This allegation may be 

construed as an oversight claim, under which shareholders seek to hold directors liable for harm 

caused to the corporation for failing to be “active monitors” of the corporation’s affairs. In re 

Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996). To establish a “substantial 

likelihood of liability” based on a Caremark theory, a plaintiff must allege particularized facts 

showing that “(a) the directors utterly failed to implement any reporting or information system or 

controls; or (b) having implemented such a system or controls, consciously failed to monitor or 

oversee operations thus disabling themselves from being informed of risks or problems requiring 

their attention.” Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). “In either case, imposition of 

liability requires a showing that the directors knew that they were not discharging their fiduciary 

obligations.” Id. Plaintiffs do not allege a complete absence of reporting or information systems, 

nor do they plead particularized facts showing that defendants ignored “red flags” or internal 

controls in conscious disregard of their duty to monitor. Accordingly, plaintiffs fail to allege that 

any defendant faces a substantial likelihood of liability under a Caremark theory. 

Finally, plaintiffs allege a claim for breach of fiduciary duty based on defendant Donahoe’s 

execution of trades on material non-public information. Plaintiffs have not, however, pleaded 

particularized facts indicating that a majority of the Board would lack disinterestness or 

independence in making a decision on a demand as to that claim. As such, demand is not excused 

based on the insider trading claim. See, e.g., In re China Auto. Sys. Inc. Deriv. Litig., 2013 WL 

4672059 at *10 (Del. Ch. Aug. 13, 2013); In re Hecla Min Co. Deriv. S’holder Litig., 2014 WL 

689036 at *15 (D. Idaho Feb. 20, 2014). Even with respect to Donahoe’s liability, plaintiffs do not 

allege specific facts as to what material non-public information Donahoe possessed, or how he 
ORDER GRANTING MOTION TO DISMISS

CASE NO. 17-cv-00162-RS

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obtained it. Instead, plaintiffs rely upon conclusory statements about “suspicious” sales based on 

knowledge derived from being a member of Paypal’s board—allegations that are insufficient to 

establish a substantial likelihood of liability as to Donahoe. 

C. The Waste and Unjust Enrichment Claims 

Plaintiffs’ claims for corporate waste and unjust enrichment are premised on the breaches 

of fiduciary duty alleged in their second claim for relief. Because plaintiffs have failed to plead 

that a majority of Paypal’s directors face a substantial likelihood of liability for breach of fiduciary 

duty, they have also failed to plead that a majority of directors face a substantial likelihood of 

liability for waste and unjust enrichment.10

V. CONCLUSION

For the reasons explained above, plaintiffs fail to plead facts indicating that a majority of 

Paypal’s Board faced a substantial likelihood of liability on any of their claims at the time the 

complaint was filed. Accordingly, demand is not excused and all of the claims are dismissed, with 

leave to amend. If plaintiffs elect to amend the complaint, they must do so within thirty days of the 

date of this order. 

IT IS SO ORDERED. 

Dated: January 18, 2018 

______________________________________ 

RICHARD SEEBORG 

United States District Judge 

 

10 See, e.g., In re China Auto, 2013 WL 4672059 at *10 (demand not excused as to unjust 

enrichment claim that was premised on breach of fiduciary duty claims because plaintiffs failed to 

establish demand futility as to the fiduciary duty claims); In re JP Morgan Chase & Co. Deriv. 

Litig., 2014 WL 1297824 at *1 n.2 (S.D.N.Y. Mar. 31, 2014) (demand not excused as to waste and 

unjust enrichment claims that were premised on breach of fiduciary duty claims because plaintiffs 

failed to establish demand futility as to the fiduciary duty claims).