Opinion ID: 2776673
Heading Depth: 2
Heading Rank: 2

Heading: Good Faith and Reasonableness

Text: The good faith and reasonableness inquiry focuses on the process used by the SLC, rather than the substantive outcome of the process. See Spiegel, 571 A.2d at 778 (The ultimate conclusion of the [special litigation] committee . . . is not subject to judicial review. (alterations in original)(quoting Zapata, 430 A.2d at 787) (internal quotation marks omitted)). Courts look to indicia of the SLC's investigatory thoroughness, such as what documents were reviewed and which witnesses interviewed. See Sarnacki, 4 F. Supp. 3d at 325. There is no question that the SLC relied on experienced independent counsel, reviewed relevant discovery materials, and released a lengthy final report, all indicia of a reasonable process and good faith. -14- Sarnacki first argues that the SLC abdicated its responsibilities, placing the entire investigation in its counsel's hands. This is in some tension with his suggestion that the SLC members could have been out to protect themselves. Second, he argues that the SLC's work was tainted, because SLC independent counsel collaborated closely with counsel representing the defendants in the Securities Class Action. Sarnacki again overstates the record. He takes statements from the SLC members' depositions that they were generally unaware of the scope of discovery to show that they were so uninvolved as to abdicate their roles to independent counsel. For example, SLC counsel obtained an extensive document production from the Securities Class Action defendants' counsel, but SLC members could not testify as to the details of how that production was generated or how documents from that production were selected for their personal review. Reliance on experienced outside counsel for the SLC is often taken as evidence that the SLC conducted its investigation reasonably and in good faith, not the opposite. See, e.g., Grafman v. Century Broad. Corp., 762 F. Supp. 215, 220 (N.D. Ill. 1991). There is no adverse inference to be drawn about the members delegating the discovery methodology or filtering decisions to counsel. The SLC members did personally review the relevant documents and make the final decisions about the contents of the -15- SLC report.5 The plaintiffs cite no case for the proposition that relying on counsel for discovery decisions, without more, is unreasonable or a sign of bad faith. Cf. Peller v. The Southern Co., 707 F. Supp. 525, 529 (N.D. Ga. 1988) (explaining that while an SLC's reliance on counsel is an accepted practice, insulating the investigation from scrutiny by privileging the SLC's documents is not good faith); Davidowitz v. Edelman, 583 N.Y.S.2d 340, 344 (N.Y. Sup. Ct. 1992) (finding an SLC's investigation unreasonable because [t]he committee did not join in their counsel's investigation or review, save in the most perfunctory manner). The errors in those cases did not happen here. Sarnacki argues that SLC counsel engaged in heavy reliance on discovery by the defendants' counsel in the federal Securities Class Action, and this should have been a red-flag warning to the SLC that they needed to supervise SLC counsel more closely. Since they failed to do so, the argument goes, the SLC effectively relied on conflicted counsel. This argument contains a fatal flaw: there is no evidence that SLC counsel was biased or conflicted, and the SLC's choice to 5 The defendants rely heavily on the SLC's final report to rebut Sarnacki's claims. Sarnacki rejects this by observing that the report was authored by SLC counsel, and so cannot show that the SLC members themselves were adequately involved in the process. We are doubtful that the claimed inconsistencies between the final SLC report and the SLC members' deposition testimony undermine the report in any serious way. Nonetheless, we do not place heavy emphasis on that report in reaching our conclusion. -16- save costs and avoid duplication in discovery by using what had already been produced in the securities action was eminently sensible. Cf. Kindt, 2003 WL 21453879, at  (finding an SLC's conclusion reasonably supported even as the SLC saved costs by foregoing a formal fairness opinion of a merger). The discovery from the class action case was plainly relevant to the SLC's decision. The cases Sarnacki cites, which involved a conflict by the SLC's own counsel, have no bearing here. E.g., Stepak v. Addison, 20 F.3d 398, 406-08 (11th Cir. 1994).6 Having dealt with Sarnacki's second argument, we point out that the differences between Sarnacki's claims and those of the class action did not render use of that discovery unreasonable or in bad faith. Sarnacki next places heavy emphasis on the SLC's reliance on two experts who were also used by the defendants in the 6 Sarnacki also emphasizes that the SLC members, in their depositions, could not recall basic information about their task. For example, Sarnacki emphasizes that the SLC members did not remember the contents of Sarnacki's demand letter. Their lack of memory, he argues, supports the view that the SLC members were so uninvolved in the investigation that they abdicated their responsibilities. This argument is unsupported by the record. See Sarnacki, 4 F. Supp. 3d at 326. While the SLC members failed to recall answers to many questions asked, substantial time passed between their depositions in this case (in March and April 2013) and the SLC's final report (in December 2010). Some details unknown to the SLC members pertained to the discovery process, which the SLC delegated to counsel. Finally, as Sarnacki explains in other parts of his brief, the SLC members' answers of Not that I recall often meant No we did not, rather than I do not remember. -17- Securities Class Action. The SLC retained Dr. Craig Moore, an economic expert, to analyze financial data. The SLC also retained the DiNatale Detective Agency to investigate allegations made by unnamed former employees. As to Dr. Moore, the defendants note that the SLC was aware of his potential conflict, reviewed the deposition transcript from the class action in which Dr. Moore was cross-examined, and reviewed deposition transcripts of the plaintiffs' experts from the class action. The SLC was perfectly capable of evaluating the soundness of Dr. Moore's opinion in light of his potential conflict. As to DiNatale, the defendants argue that the agency only provided written reports of factual interviews, to which Sarnacki replies that those reports were not passed along to the SLC members. If the DiNatale agency did not produce any information actually used in the SLC's decision, it could not have caused the SLC members to act in bad faith or unreasonably. The SLC's use of the defendants' experts is not always a best practice, but these facts do not raise a plausible inference of bad faith or unreasonableness under these circumstances. Sarnacki's last challenge is that the SLC's almost exclusive7 reliance on the Securities Class Action materials was 7 The SLC's reliance on the Securities Class Action discovery was not entirely exclusive. Near the end of the investigation, SLC counsel interviewed seven defendants in the derivative actions unnamed in the Securities Class Action. One SLC member described them as a matter of wrapping up, but the same member testified -18- necessarily incomplete. His complaint focuses on forward-looking statements dismissed from the Securities Class Action and names eleven individual defendants unnamed in the class action. These distinctions, he argues, show that relevant information was omitted from the discovery the SLC used. Insofar as the overlap in materials was extensive, it is also not indicative of any unreasonableness. Sarnacki does not identify a fact or line of investigation that Defendants missed. Sarnacki, 4 F. Supp. 3d at 327. Though the Securities Class Action did not include discovery about any forward-looking statements, it did include statements of present or historical fact. In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d at 72. The discovery for these claims is significantly similar. The forward-looking statements at issue here are alleged to be materially misleading because they projected growth based on high future demand, while the statements of historical fact at issue in the class action were alleged to be materially misleading because they claimed strong existing demand -- both allegedly in conflict with contemporary internal corporate data. See id. at 74-77. The basic narrative in the two cases is the same: Smith & Wesson and that the class discovery had shown nothing . . . to warrant further going down further paths, especially in light of the difficulty of proving fraud arising from forward-looking statements. Nonetheless, other than the SLC final report, the record contains no evidence that the SLC members themselves read transcripts or summaries of the interviews. -19- its management inflated expectations about their sales of guns in 2007 and early 2008 based on assertions about high demand that were false. The distinctions Sarnacki emphasizes are ones without a difference -- or at least, a difference that was not cured by the SLC's additional interviews. Sarnacki has not identified any key factual predicates which might be discoverable but did not fall within the class action discovery. At bottom, there is inadequate evidence to permit a reasonable finder of fact to conclude that SLC counsel was conflicted, that the SLC members read too few discovery materials, or that the SLC's involvement was merely perfunctory. On the undisputed facts, the SLC's investigation was reasonable and in good faith.