Court Opinion

ID: 4350838
Source: CourtListenerOpinion
Date Created: 2018-12-14 18:07:56.491988+00
Date Added: 2024-06-11T14:33:44.783223
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE FITBIT, INC. STOCKHOLDER :               CONSOLIDATED
DERIVATIVE LITIGATION          :               C.A. No. 2017-0402-JRS

                         MEMORANDUM OPINION

                       Date Submitted: September 6, 2018
                       Date Decided: December 14, 2018

Peter B. Andrews, Esquire, Craig J. Springer, Esquire and David M. Sborz, Esquire
of Andrews & Springer LLC, Wilmington, Delaware; Jessica Zeldin, Esquire of
Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware; Melinda A.
Nicholson, Esquire and Michael R. Robinson, Esquire of Kahn Swick & Foti, LLC,
Madisonville, Louisiana; Robert C. Schubert, Esquire of Schubert Jonckheer &
Kolbe LLP, San Francisco, California; and Edward F. Haber, Esquire of Shapiro
Haber & Urmy LLP, Boston, Massachusetts, Attorneys for Plaintiffs.

Elena C. Norman, Esquire of Young Conaway Stargatt & Taylor, LLP, Wilmington,
Delaware and Jordan Eth, Esquire, Anna Erickson White, Esquire and Ryan M.
Keats, Esquire of Morrison & Foerster LLP, San Francisco, California, Attorneys
for Defendants James Park, Eric N. Friedman, Jonathan D. Callaghan, Steven
Murray, Christopher Paisley, William R. Zerella, and Nominal Defendant Fitbit, Inc.

SLIGHTS, Vice Chancellor
      In this derivative action, stockholders of Fitbit, Inc. (or the “Company”) allege

that certain members of the Company’s Board of Directors (the “Board”) and the

chief financial officer breached their fiduciary duties by using insider knowledge of

a faulty product to profit personally from the Company’s stock issuances. Plaintiffs

seek to recover on behalf of the Company the profits realized by the fiduciaries as a

result of their breaches.

      The alleged insider knowledge concerns the accuracy of Fitbit’s

“PurePulse™” technology. PurePulse™ was designed to allow Fitbit devices to

calculate and record a user’s real-time heart rate with superior accuracy. Fitbit hailed

the technology as best in class. Indeed, PurePulse™ was meant to differentiate Fitbit

from its competitors and soon accounted for almost 80% of the Company’s revenue.

According to Plaintiffs, however, PurePulse™ was not what it was cracked up to be.

As Fitbit touted the promise of its new technology, behind the scenes, PurePulse™

consistently failed accuracy tests and caused “paranoia” among Fitbit management.

      Amidst this paranoia, it is alleged that members of the Board manipulated

Fitbit’s June 18, 2015 initial public offering (the “IPO”) and its November 13, 2015

secondary offering (the “Secondary Offering”) (together with the IPO, the

“Offerings”) to prop up active trading notwithstanding PurePulse’s failures. The

Board first structured the IPO to permit insiders to sell an unusually large percentage

of the stock being offered to the market. Then, just a few months later, in advance

                                           1
of the Secondary Offering, the Board voted to waive “lock-up” agreements that were

intended to prevent insiders from selling more shares for a period after the IPO.

Without the waivers, insiders would have been restricted from transferring shares

until March 2016, when the stock traded at a significantly lower price compared to

the prevailing price at the time of the Secondary Offering.

      Plaintiffs allege that six Fitbit fiduciaries breached their duty of loyalty by

structuring the Offerings to favor insiders, and that five of the fiduciaries violated

Delaware law by profiting directly from the Offerings based on insider knowledge.

Defendants have moved to dismiss under Court of Chancery Rule 23.1 for failure,

without excuse, to make a pre-suit demand upon the Board, and Court of Chancery

Rule 12(b)(6) for failure to state a claim upon which relief may be granted.

      In this Memorandum Opinion, I conclude that Plaintiffs have pled

particularized facts that raise a reasonable doubt that a majority of the Board could

impartially consider Plaintiffs’ insider trading and breach of fiduciary duty claims

and that Plaintiffs have stated viable claims.1 Accordingly, the Motion to Dismiss

must be denied.2

1
  Given these findings, I deny as moot Plaintiffs’ Motion to Strike (D.I. 31) the 25 self-
selected exhibits spanning over 650 pages that were appended to the Motion to Dismiss.
2
  To be clear, and this must be emphasized given the serious nature of these claims, I have
found that Plaintiffs have alleged facts that are adequate to survive dismissal given the
liberal pleading stage inferences to which they are entitled. Whether they can prove these
facts very much remains to be seen.

                                            2
                                   I. BACKGROUND

       I draw the facts from the allegations in the Verified Second Amended

Consolidated Stockholder Derivative Complaint (the “SAC”), documents

incorporated by reference or integral to that pleading and judicially noticeable facts.3

In resolving the Motion to Dismiss, I have accepted as true the SAC’s well-pled

factual allegations and have drawn all reasonable inferences in Plaintiffs’ favor.

    A. The Parties and Relevant Non-Parties

       Plaintiffs, Anne Bernstein, Michael Hackett and Bright Agyapong, are current

holders of Fitbit common stock. Bernstein and Agyapong have owned Fitbit shares

continuously since before the closing of the IPO and Hackett has owned shares

continuously since before the Secondary Offering.4

3
  See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (holding
that on a motion to dismiss, the Court may consider documents that are “incorporated by
reference” or “integral” to the complaint (quoting In re Santa Fe Pac. Corp. S’holder Litig.,
669 A.2d 59, 69 (Del. 1995)); D.R.E. 201–02 (codifying Delaware’s judicial notice
doctrine). See also Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016)
(holding that where, as here, the nominal defendant has produced documents in response
to a demand for books and records under 8 Del. C. § 220 on the condition that such
documents be deemed incorporated by reference in any complaint that might later be filed,
it is appropriate for the Court to consider the documents in their entirety as opposed to only
the portions “cherry-picked” by the plaintiff).
4
  Defendants argue that, contrary to the pled facts, none of the Plaintiffs have been
stockholders “since prior to the closing of the IPO” (SAC ¶ 22) and, therefore, none of
them have standing to prosecute these derivative claims. I decline to address this argument
at the pleading stage as it implicates a fact-intensive inquiry that extends beyond the
allegations in the SAC or properly considered evidence. With that said, standing is a
predicate to the Court’s exercise of subject matter jurisdiction and must be addressed as a
“threshold issue.” El Paso Pipeline GP Co. LLC v. Brinckerhoff, 152 A.3d 1248, 1256
                                              3
         Nominal defendant, Fitbit, is a Delaware corporation founded in 2007 that

produces wearable devices that monitor health and wellness for consumers.5 The

most well-known of these devices, and the ones relevant here, are Fitbit’s fitness

wrist bands.

         The “Director Defendants,” as described below, are those Board members

who Plaintiffs allege structured the Offerings to benefit Fitbit insiders and voted to

waive the lock-up agreements that permitted Fitbit insiders prematurely to sell stock

in the Secondary Offering. The “Selling Defendants” are those Director Defendants

and the Company’s chief financial officer who Plaintiffs allege personally profited

from their inside knowledge of PurePulse’s flaws by participating in the Offerings

when the market was unaware of this information.

         1. Director Defendants

         Defendant, James Park, is a co-founder of Fitbit and has been its CEO and

President since September 2007.6 Park has served as a member of the Board since

(Del. 2016). Accordingly, before the parties commence merits discovery, they shall first
engage in limited “standing discovery” to address the discrepancies in Plaintiffs’ stock
ownership. Upon completion of that discovery, the Court will revisit the standing issue
and adjudicate it as “a question of law.” Id. See also Stratton v. American Ind. Ins. Co.,
2010 WL 37006617, at *8 (Del. Super. Ct. Sept. 16, 2010) (ordering “limited discovery”
on the standing issue when the facts as pled in plaintiff’s complaint to establish standing
were denied by the defendants).
5
    SAC ¶¶ 23, 32.
6
    SAC ¶ 24.

                                            4
March 2007 and as its Chairman since May 2015.7 Between the IPO and Secondary

Offering, Park sold more than 3.3 million shares of Fitbit stock for more than

$83 million.8 He is, therefore, a Selling Defendant.

           Defendant, Eric Friedman, is a co-founder of Fitbit.9 He has been an executive

officer of the Company since September 2007 and is currently its Chief Technology

Officer.10 He has also been a member of the Board since March 2007.11 Between

the IPO and Secondary Offering, Friedman sold over 2.2 million shares of Fitbit

stock for more than $51 million.12 He is, therefore, a Selling Defendant.

           Defendant, Jonathan Callaghan, has served as a member of the Board since

September 2008.13 Callaghan is also a founder and managing member of True

Ventures, a venture capital firm that was an early Fitbit investor and has controlled

as much as one third of Fitbit’s total voting power.14 Between June and August

7
    Id.
8
    Id.
9
    SAC ¶ 26.
10
     Id.
11
     Id.
12
     Id.
13
     SAC ¶ 27.
14
  Id. True Ventures II, L.P., an entity affiliated with True Ventures, is the corporate entity
that holds Fitbit stock and voting power. Id. n.13. True Ventures and its affiliated entities
are collectively referred to as “True Ventures.”

                                              5
2013, True Ventures paid $999,999 for 677,904 shares of Fitbit’s Series D

Convertible Preferred Stock.15       These shares were automatically converted to

Class B shares of the Company in the IPO.16 During the IPO and Secondary

Offering, True Ventures sold over 7.9 million shares of Fitbit stock for more than

$195 million.17 For reasons explained below, Callaghan is a Selling Defendant.

           Defendant, Steven Murray, has served as a member of the Board since June

2013.18 He is a partner at SoftBank Capital, a venture capital firm, where he has

worked since 1996.19 Between June and August 2013, SoftBank paid $15 million

for 10,168,572 shares of Fitbit’s Series D Convertible Preferred Stock.20 These

shares were automatically converted to Class B shares of the Company in the IPO.21

During the IPO and Secondary Offering, SoftBank sold over 2 million shares of

15
     SAC ¶ 27.
16
     Id.
17
     Id.
18
     SAC ¶ 28.
19
   Id. SoftBank PrinceVille Investments, L.P., an entity affiliated with SoftBank Capital,
is the corporate entity that holds Fitbit stock and voting power. Id. n.14. SoftBank Capital
and its affiliated entities are collectively referred to as “SoftBank.”
20
     SAC ¶ 28.
21
     Id.

                                             6
Fitbit stock for more than $49 million.22 For reasons explained below, Murray is a

Selling Defendant.

           Defendant, Christopher Paisley, has served as a member of the Board since

January 2015.23 He did not sell Fitbit stock during the Offerings and is not, therefore,

a Selling Defendant.24

           2. The CFO

           Defendant, William Zerella, has served as Fitbit’s CFO since June 2014.25 In

connection with the Secondary Offering, Zerella sold 216,000 shares of the

Company’s stock for more than $6 million.26 He is, therefore, a Selling Defendant.

           3. Individual Non-Defendant Directors

           Brad Feld was a member of the Board from August 2010 until May 2015.27

Although he had left the Board at the time of the IPO, Plaintiffs allege that Feld

participated in Board discussions regarding the IPO in advance of the offering and

continued to attend Board meetings after he left the Board.28 Feld is a managing

22
     Id.
23
     SAC ¶ 29.
24
     Id.
25
     SAC ¶ 25.
26
     Id.
27
     SAC ¶ 30.
28
     Id.
                                             7
member of the Foundry Group Funds.29 At the time of the Offerings, the Foundry

Group Funds held between 26% and 27% of Fitbit’s voting power.30 Neither Feld

nor the Foundry Group Funds are named as defendants.

           Laura Alber and Glenda Flanagan joined the Board after the Offerings.31

While not named as defendants, they were members of the Board at the time this

action was filed and are relevant, therefore, to the demand futility analysis.32

      B. Fitbit’s PurePulse™ Technology

           In September 2012, Fitbit released the Fitbit One™ and Fitbit Zip™ as its first

activity trackers that synched wirelessly to smartphones.33 The Fitbit Flex™—

Fitbit’s first wrist-based device—launched in May 2013 and incorporated an LED

display of specific user data.34 Although these second-generation products tracked

more health and wellness data categories than the original “Fitbit™” devices, none

measured heart rate activity.35 In October 2013, the Company launched the Fitbit

29
     Id.
30
     Id.
31
     SAC ¶ 31.
32
     Id.
33
     SAC ¶ 36.
34
     SAC ¶ 37.
35
     Pls.’ Corrected Answering Br. in Opp’n to Defs.’ Mots. to Dismiss (“PAB”) 6 (D.I. 33).

                                              8
Force®, which added new features to the Flex™.36 The Force® was a “lemon,”

however, that ultimately prompted lawsuits and a product recall after widespread

complaints of skin irritation.37 In the wake of the Force® fiasco, Fitbit was left with

an inventory of dated and unmarketable products.38 It was in need of an innovative

device that would drive sales and continue growth.39

           In October 2014, Fitbit announced its development of PurePulse™, a wrist-

based heart rate monitoring technology.40 A launch of two devices featuring the

technology, the Charge HR™ and the Surge™, followed soon after.41                 The

incorporation of heart rate data allowed Fitbit to market important health metrics and

to raise the price of the products containing PurePulse™ technology.42 Indeed, the

price of the Charge HR™ was half again the price of essentially the same device

without PurePulse™.43

36
     SAC ¶ 39.
37
     Id.
38
     Id.
39
     Id.
40
     SAC ¶ 40.
41
     SAC ¶ 41.
42
     SAC ¶¶ 43, 45.
43
     SAC ¶ 45.

                                           9
           Fitbit implemented an aggressive marketing campaign featuring its heart rate

tracking technology leading up to the IPO.44 For instance, a Fitbit press release

issued on October 27, 2014, claimed that PurePulse™ “‘provides continuous and

automatic wrist-based heart rate tracking, without an uncomfortable chest strap . . .

and applies Fitbit’s finely tuned algorithms to deliver heart rate tracking 24/7.’”45

Fitbit’s advertising campaign in late 2014–2015 also proclaimed the efficacy—and

significance—of PurePulse™ technology with slogans like: “The Difference

Between Good and Great . . . Is Heart”; “For Better Fitness, Start with Heart”; “Get

More Benefits with Every Beat—Without an Uncomfortable Chest Strap”; “Every

Beat Counts”; and “Know Your Heart.”46 On February 12, 2015, Fitbit’s website

featured a blog post from an ultra-marathoner who wrote

           [A] heart rate monitor is an invaluable tool for maximizing your
           training . . . .

           When I’m training, I monitor my heart rate to stay within certain
           parameters during certain stages of the run . . . during interval training
           I push toward the upper ranges for set intervals of time during speed
           bursts.

           To make the most out of your ChargeHR or Surge, wear it 24/7 to get
           used to watching fluctuations in your heartbeat and correlating those

44
     SAC ¶ 47.
45
     Id.
46
     SAC ¶ 49.

                                              10
           with the way you feel. This will give you a more innate understanding
           of how your body works . . . .47

What Fitbit did not tout, or even reveal, is that PurePulse™ only worked at low or

resting heart rates.48

      C. The Real PurePulse™ Story

           The truth, as Plaintiffs allege it, is that PurePulse™ was “wildly inaccurate”;

and only people within Fitbit, including the Selling Defendants, knew it.49 Internal

PurePulse™ testing results for the fifteen months preceding the Secondary Offering

consistently showed that PurePulse™ had accuracy problems that were never

sufficiently addressed.50       As early as September 2014—the month before the

technology was announced—heart rate measuring errors reached as high as 53% in

testing.51 A month later, errors still remained near 35%.52

           Fitbit tracked PurePulse’s developing problems and its executives were

updated monthly on these issues through summary presentations.53 An internal

47
     SAC ¶ 52.
48
     SAC ¶ 50.
49
     SAC ¶ 88.
50
     SAC ¶ 103.
51
     Id.
52
     Id.
53
     SAC ¶¶ 104–05.

                                              11
presentation, dated January 22, 2015, which was emailed to Friedman, identified

“Heart Rate Sensor Failing” as the most common problem reported by users for

returned devices.54 The presentation also notes, “Sensor testing—[heart rate monitor

(‘HRM’)] continuing investigation possible noise/crosstalk issue,” suggesting that

Fitbit had begun to investigate its heart rate monitoring devices before the end of

January 2015.55 On February 19, 2015, Park and Friedman received an “Executive

Update” dated “January & February 2015.”56 This presentation included charts

summarizing analyses of returned Charge HR™ and Surge™ units.57 For Charge

HR™ devices, “HRM not working” was the most common “symptom/defect.”58

“Data accuracy” was also noted as a common “symptom/defect.”59 For Surge™

devices, “Heart Rate Sensor Failing” was the prevailing defect.60 These same

concerns were reiterated in subsequent presentations emailed to Friedman.61

54
     SAC ¶ 105.
55
     SAC ¶ 106.
56
     SAC ¶ 107.
57
     SAC ¶¶ 107–08.
58
     SAC ¶ 107.
59
     Id.
60
     SAC ¶ 108.
61
     SAC ¶ 109.

                                        12
           Fitbit attempted to develop various technological repairs or enhancements to

address the PurePulse™ flaws.62 In May 2015, Friedman received a presentation

informing him and other Fitbit executives of the Company’s efforts to correct the

heart rate technology.63       Specifically, Fitbit had begun developing a software

algorithm codenamed “Hydra” that could be incorporated into future products to

reduce the misreporting of heart rate data.64 The May 2015 presentation noted that

the “Hydra team” had “previously” presented a laboratory analysis showing

improvements for workout and running modes.65 The presentation also included

charts documenting the results of comparisons between a chest strap monitor and the

version of the Surge™ without Hydra (i.e., the version available for purchase on the

market).66 During running or similarly stressful activities, the Surge™ substantially

underreported heart rates by roughly 10–40 beats per minute.67 During biking, the

Surge™ underreported heart rates by as much as 50 beats per minute.68 During

62
     SAC ¶ 110.
63
     Id.
64
     Id.
65
     SAC ¶ 111.
66
     SAC ¶ 112.
67
     SAC ¶¶ 112–13.
68
     SAC ¶ 114.

                                            13
spinning (i.e., stationary bicycling), the Surge™ reported “heart rates . . . almost

unintelligible for the test subject, swinging wildly back and forth from as much as

160 beats per minute to below 100 beats per minute.”69 It is alleged that Friedman

received this presentation just as Fitbit coincidentally was accelerating its efforts to

commence the IPO.70

         Despite reports of PurePulse’s inaccuracy, Fitbit and its executives continued

to hold out the technology as the differentiator in the wellness tracker industry. The

Company’s IPO Prospectus, issued on June 18, 2015, repeated positive claims about

the devices’ “highly accurate measurements.”71 Among other things, the Prospectus

lauded that Fitbit is a leader in the industry because its “health and fitness devices

leverage industry-standard technologies . . . as well as proprietary technologies, such

as [its] PurePulse continuous heart rate tracking and [its] algorithms that more

accurately measure and analyze user health and fitness metrics.”72

69
     SAC ¶ 115.
70
     SAC ¶ 110.
71
     SAC ¶¶ 5 n.3, 91.
72
     SAC ¶ 66.

                                           14
      D. The Fitbit IPO and Lock-up Agreements

           Fitbit’s public statements with respect to PurePulse™-equipped devices led to

investor enthusiasm and a strong reception for the IPO.73 It is alleged that, in the

midst of this artificially positive response, Fitbit insiders took advantage of their

confidential knowledge about PurePulse™ to structure the IPO in their favor.74

           1. The IPO Structure

           The Board structured Fitbit’s IPO to permit Park, Friedman, Callaghan,

Murray and the Foundry Group Funds to provide more than 39% of the

approximately 36.6 million IPO shares.75 And Fitbit fiduciaries, not the Company,

contributed the overallotment of roughly 5.5 million shares.76 Since the

overallotment was fully exercised, the fiduciaries’ shares ultimately came to 47% of

all shares sold in the IPO.77

           The Selling Defendants’ plan to unload unusually large blocks of Fitbit stock

began as early as February 27, 2015, when the Board and Zerella held a meeting to

73
     SAC ¶ 5.
74
     SAC ¶ 2.
75
     SAC ¶ 55.
76
     Id.
77
     Id.

                                             15
discuss the IPO.78 On May 1, 2015, the IPO Pricing Committee (consisting of

Callaghan, Murray and Paisley) determined the number of shares that Park,

Friedman, Callaghan and Murray could sell.79 That same day, the Board designated

Callaghan as its lead independent director.80 Murray and Callaghan’s respective

firms proceeded to collect nearly $75 million through the IPO, with Callaghan’s

True Venture’s share accounting for nearly $60 million.81

         As often occurs in an initial public offering process, Fitbit insiders entered

lock-up agreements with Fitbit IPO underwriters that prohibited insiders from selling

Fitbit stock until December 14, 2015—180 days after the IPO.82                   Because

December 14, 2015 fell during a “blackout period,” Selling Defendants would have

been prohibited from selling additional Fitbit shares until March 1, 2016, had the

lock-up agreements remained in place.83

78
     SAC ¶¶ 54–57.
79
     SAC ¶¶ 61, 63.
80
  SAC ¶ 62. Plaintiffs allege that this designation is problematic because, on February 17,
2015, Callaghan had resigned from his service on the Audit Committee “due to lack of
independence.” Id.
81
     SAC ¶ 63.
82
     SAC ¶¶ 70–71.
83
   SAC ¶ 143. The “blackout period” prohibits insiders from selling stock during a
designated time around the release of the Company’s quarterly earnings. Id.

                                            16
         2. The IPO Sales

         On June 17, 2015, the SEC declared effective Fitbit’s IPO Registration

Statement, which incorporated by reference the IPO Prospectus and related IPO

filings.84 As noted, the IPO Prospectus advertised Fitbit’s role as a leader in health

and fitness because of its PurePulse™ technology and “highly accurate” devices.85

The SEC filings also underscored the importance of PurePulse™ devices to Fitbit’s

bottom line, stating that “the Fitbit Charge™, Fitbit Charge HR™, and Fitbit

Surge™ . . . were the primary drivers of our revenue growth in the first quarter of

2015.”86 Notably, concerns regarding the accuracy of the PurePulse™ technology

and Company efforts to correct the problems were nowhere to be found in the IPO

disclosures.87

         Fitbit conducted its IPO on June 18, 2015, and sold over 22 million shares at

$20 per share, raising approximately $416 million in proceeds.88 Park, Friedman,

Callaghan and Murray sold about 6.2 million shares for over $115 million.89 The

84
     SAC ¶ 65.
85
     See SAC ¶¶ 66, 91.
86
     SAC ¶ 96.
87
     SAC ¶ 68.
88
     SAC ¶ 67.
89
     SAC ¶ 6.

                                           17
proceeds, as broken down by Selling Defendant, are depicted in the following

chart90:

      E. The Fitbit Secondary Offering, Lock-up Waivers and Additional Insider
         Stock Sales

           In the months that followed the IPO, Fitbit’s now-publicly traded common

stock traded above the $20 IPO price, reaching a high of $51.64 on August 5, 2015.91

The Company continued to herald PurePulse™ technology and to introduce

purported advancements.92 According to Fitbit, the software updates “improve[d]

upon an already positive heart rate tracking offering.”93 Around this time, Park

90
  PAB 12. Within the chart, True Ventures-owned Fitbit stock is attributed to Callaghan,
and Softbank-owned Fitbit stock is attributed to Murray. SAC ¶¶ 27–28.
91
     SAC ¶ 69.
92
     SAC ¶ 86.
93
     Id.

                                           18
professed on an earnings call that he had “never been more confident in Fitbit’s

future.”94 Behind the scenes, however, a different story was playing out. On

June 23, 2015, five days after Fitbit’s IPO, Fitbit management circulated an internal

memorandum that included an analysis of ways to improve PurePulse’s accuracy

and noted thousands of customer complaints about heart-rate monitoring.95 The next

month, Friedman received a presentation concerning updates on the status of testing

the Hydra algorithm.96 The presentation described additional challenges in the

research process to improve the PurePulse™ technology, including that “Hydra

workout algorithms are ill-suited to walking and can result in HR [heart rate]

overestimation.”97

           At this point, Hydra remained a work in progress and was not ready to be

implemented in new devices.98 A July 20, 2015 executive presentation specifically

highlighted testing results and the poor performance of the PurePulse™ technology

and confirmed that the development of the Hydra algorithm was “ongoing.”99

94
     SAC ¶ 89 (citing James Park, Nov. 2, 2015, Fitbit Earnings Call).
95
     SAC ¶ 116. Park received the memorandum by email on July 17, 2015. Id.
96
     SAC ¶ 117.
97
     Id.
98
     Id.
99
  SAC ¶¶ 12, 118. Plaintiffs allege Friedman and Park reviewed the presentation and
Friedman received the presentation by email on July 19, 2015. SAC ¶ 118.

                                              19
Notably, the communication circulating this presentation expressed pervasive

concern regarding public disclosure of PurePulse’s flaws:

         [Friedman] & [Park] instructed us that these slides not be distributed in
         any form as a leave behind, whether it be printed, emailed, Dropbox’ed
         etc. at the end of the session.

         Frankly, I think they’d like you to destroy the slides once the
         presentation is over, but I’ve cc’ed [Friedman] so that he can correct
         the appropriate level of paranoia if I got it wrong .100

         Defendants began planning for the Secondary Offering during a Board

meeting on July 30, 2015, or just over a week after this email was circulated

internally within Fitbit.101 At the meeting, the Board reviewed a presentation from

an advisor in which it was observed that, since 2011, only a “small subgroup” of

companies that had conducted an IPO in Fitbit’s range of success had quickly

thereafter conducted a secondary offering.102

         Another presentation emailed to Friedman on October 20, 2015, a few weeks

before the Secondary Offering issued, listed “Improve heart rate accuracy during

exercise” as Fitbit’s first objective for the third quarter.103 The presentation also

detailed continued improvement efforts behind Hydra as well as “Project Tiwi,”

100
      SAC ¶ 12 (emphasis omitted) (smiley emoji in original).
101
      SAC ¶¶ 73–74.
102
      SAC ¶ 73.
103
      SAC ¶ 119.

                                             20
which was described as a “hardware” solution to the problem of “heart rate

accuracy.”104

            On October 28, 2015, with Morgan Stanley representing the Fitbit IPO

underwriters in attendance, the Board approved the Secondary Offering and a waiver

of the lock-up agreements.105 Fitbit publicly announced the waivers in a Form 8-K

on November 2, 2015,106 and contemporaneously filed a Form S-1 announcing the

Secondary Offering.107 The Form S-1 stated that the Secondary Offering would

include 21 million shares, with the Company offering seven million shares and the

Selling Defendants (along with the Foundry Group Funds) offering the remaining

14 million shares.108 The Selling Defendants also offered the underwriters an option

for an overallotment of 3.15 million shares.109 If the underwriters exercised the

104
      Id.
105
   SAC ¶¶ 76–77. “[I]n connection with the Public Offering, Morgan Stanley, on behalf
of the Underwriters, has agreed to release certain of the Company’s employees and
contractors (the “Eligible Service Providers”) . . . from the IPO Lock-Up Agreements with
respect to 10% of the aggregate number of shares of Class A Common Stock . . . .”
SAC ¶ 77 (citing Oct. 28, 2015 meeting minutes, Ex. A).
106
      SAC ¶ 78.
107
      SAC ¶ 79.
108
      Id.
109
      Id.

                                           21
overallotment option, the Selling Defendants’ shares would account for 71% of the

Secondary Offering.110 The Company did not offer an overallotment option.111

         On November 12, 2015, the Board revised the terms of the Secondary

Offering to remove four million shares from what Fitbit intended to sell, thereby

increasing the likelihood that the underwriters would exercise the Selling

Defendants’ overallotment option.112 After these changes, the Selling Defendants

were set to offer roughly 85% of the Secondary Offering shares.113

         Fitbit’s Secondary Offering Registration Statement and Prospectus contained

the same descriptions as the IPO filings with respect to Fitbit’s devices and

competitive strengths.114 Nevertheless, as with the Company’s IPO, Defendants

continued to appreciate at the time of the Secondary Offering that Fitbit’s

PurePulse™ technology was flawed.115 In spite of this knowledge, the Board

proceeded with the Secondary Offering on November 18, 2015, and the Selling

Defendants sold 9.62 million shares of Fitbit stock at $28.13 per share for proceeds

110
      SAC ¶ 82.
111
      SAC ¶ 79.
112
      SAC ¶¶ 82–84.
113
      SAC ¶ 84.
114
      SAC ¶¶ 91–92.
115
      SAC ¶ 127.

                                          22
exceeding $270 million.116 The proceeds, as broken down by Selling Defendant, are

depicted in the chart below117:

      F. The PurePulse™ Problems Are Revealed

         Fitbit’s devices with PurePulse™ technology continued to fail tests, with

results varying by user activity, age, gender and skin color, as late as December

2015.118 On January 5, 2016, the cat was let out of the bag when a consumer class

action was filed, captioned McLellan, et al. v. Fitbit, Inc., 3:16-cv-00036-JD

116
   SAC ¶¶ 139–40, 144. The Selling Defendants collected $386 million between the IPO
and the Secondary Offering. SAC ¶ 140.
117
   PAB 25. Here again, within the chart, True Ventures-owned Fitbit stock is attributed
to Callaghan, and Softbank-owned Fitbit stock is attributed to Murray. SAC ¶¶ 27–28.
118
      SAC ¶ 104.

                                          23
(N.D. Cal. Jan. 5, 2016) (the “Consumer Action”).119 The plaintiffs in that lawsuit

alleged:

            Expert analysis has further corroborated the inability of the
            PurePulse™ Trackers to perform as promised and warranted. A board-
            certified cardiologist tested the PurePulse™ Trackers against an
            electrocardiogram (“ECG”), the gold standard of heart rate monitoring,
            on a number of subjects at various exercising intensities . . . .

            The results were as expected: the PurePulse™ Trackers consistently
            misrecorded the heart rates by a significant degree. At intensities over
            110 bpm [beats per minute], the Heart Rate Trackers often failed to
            record any heart rate at all. And even when they did record heart rates,
            the Heart Rate trackers were inaccurate by an average of 24.34 bpm,
            with some readings off by as much as 75 bpm. With those margins of
            error, the Heart Rate Trackers are effectively worthless as heart rate
            monitoring devices.120

On the day the Consumer Action was filed, the intraday high for Fitbit stock was

$30.96.121 Just two days later, the stock hit a low of $20.25—a drop of more than

33%.122 As alleged, the stock devaluation was caused by the unanticipated release

of the truth about PurePulse™: the technology did not work and Fitbit could not fix

it.123

119
      SAC ¶¶ 15 n.9, 145.
120
      SAC ¶ 145.
121
      SAC ¶ 146.
122
      Id.
123
      SAC ¶ 15.

                                              24
         On March 1, 2016, the earliest date the Selling Defendants would have been

able to sell their shares had the lock-up agreements remained in place, Fitbit stock

traded at $12.35 per share.124 At the time the SAC was filed, Fitbit stock traded at

$5.00 per share.125

      G. Procedural History

         This past summer, Judge James Donato of the Unites States District Court for

the Northern District of California denied Fitbit’s motion to dismiss the Consumer

Action.126 In January 2016, a federal securities class action, captioned Robb v. Fitbit

Inc., et al., 3:16-cv-00151-SI (N.D. Cal. Jan. 11, 2016) (the “Securities Action”),

was also filed, which alleged securities fraud under Sections 10(b) and 20(a) of the

Securities Exchange Act of 1934 and Rule 10b-5, and violations of Sections 11 and

15 of the Securities Act of 1933, for issuing materially false or misleading statements

related to IPO sales.127      All Defendants—Park, Friedman, Zerella, Callaghan,

124
      SAC ¶¶ 143–44.
125
      SAC ¶ 154.
126
    Compendium of Unreported Authorities Cited in PAB (“Pls.’ Compendium”) Tab 3
(McLellan v. Fitbit, Inc., Case No. 3:16-cv-00036-JD (N.D. Cal. June 5, 2018) (ORDER)).
The order stated, “Given the magnitude of the aberrant heart rate readings and multiple
allegations that the devices under-report heart rate, [plaintiff] has plausibly alleged an
‘unreasonable safety hazard’ that may arise when users rely on Fitbit heart rate readings
during exercise.” Id. at 4.
127
      SAC ¶¶ 15, 17.

                                           25
Murray and Paisley—were named as individual defendants in the Securities

Action.128 On October 26, 2016, Judge Susan Illston denied the defendants’ motion

to dismiss the Securities Action and thereafter denied the defendants’ motion for

partial reconsideration.129 The Securities Action was settled on April 23, 2018,

nearly a year after this action commenced.130

          This stockholder derivative action is the result of a Court-ordered

consolidation of three complaints, the first of which was filed on May 26, 2017.131

The operative complaint was amended on June 30, 2017, and again on March 20,

2018 in response to the consolidations.132 On April 4, 2018, Defendants moved to

dismiss the SAC under Court of Chancery Rules 23.1 and 12(b)(6).133

128
   Pls.’ Compendium Tab 2 (Robb v. Fitbit, Inc., Case No. 16-cv-00151-SI, at 3 n.3
(N.D. Cal. Oct. 26, 2016) (ORDER) (denying motion to dismiss)).
129
   Id. at 3; Pls.’ Compendium Tab 1 (Robb v. Fitbit, Inc., Case No. 16-cv-00151-SI, at 3
(N.D. Cal. Jan. 19, 2017) (ORDER) (denying motion for partial reconsideration)).
130
   Opening Br. in Supp. of Defs.’ Mot. to Dismiss (“DOB”) 14 (D.I. 21); Transmittal Aff.
of Nicholas Rohrer in Supp. of DOB (“Rohrer Aff.”), Ex. 18 (D.I. 22).
131
   Bernstein initiated a derivative action on May 26, 2017, captioned Bernstein v. James
Park, et al., C.A. No. 2017-0402-JRS (D.I. 1). Hackett initiated an action on June 9, 2017,
captioned Hackett v. James Park, et al., C.A. No. 2017-0444-JRS. On June 21, 2017, the
Court consolidated these actions into the present Action (D.I. 6). Agyapong initiated his
derivative action on August 8, 2017, captioned Agyapong v. Park, et al., C.A. No. 2017-
0562-JRS. The Court consolidated that action with this one on September 8, 2017
(D.I. 11).
132
      D.I. 7, D.I. 18.
133
      D.I. 20.

                                            26
                                    II. ANALYSIS

         The SAC states two causes of action: Count I is a derivative claim for breach

of fiduciary duty (i) against all Defendants for allowing the Selling Defendants to

sell stock in the Offerings based on insider information and (ii) against the Director

Defendants for waiving the lock-up agreements134; Count II is a derivative claim for

breach of fiduciary duty against the Selling Defendants under Brophy v. Cities

Service Co.,135 which permits a corporation to recover from its fiduciaries for harm

caused by insider trading.136

         I start my analysis with an assessment of Plaintiffs’ showcase claim

(the Brophy claim), as stated in Count II, and conclude that Plaintiffs have pled

particularized facts that “create a reasonable doubt that, as of the time the complaint

[was] filed, the board of directors could have properly exercised its independent and

disinterested business judgment in responding to a demand.”137 I next consider

whether Plaintiffs have pled demand futility with respect to the Board’s decision to

waive the lock-up agreements, as alleged in Count I. Again, I find that they have.

134
      SAC ¶¶ 199–204.
135
      70 A.2d 5 (Del. Ch. 1949).
136
      SAC ¶¶ 205–11.
137
   Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). The parties agree that both of
Plaintiffs’ claims are derivative. See DOB 18–19, PAB 29.

                                           27
I therefore deny the Motion to Dismiss under Rule 23.1. Because I find in the

demand futility analysis that the SAC states viable claims, I deny the motion to

dismiss under Rule 12(b)(6) as well.

      A. Legal Standard

          “A cardinal precept of the General Corporation Law of the State of Delaware

is that directors, rather than shareholders, manage the business and affairs of the

corporation.”138 Accordingly, where a plaintiff seeks to file a derivative suit—which

“[b]y its very nature . . . impinges on the managerial freedom of directors”—the

plaintiff must cross a threshold framed by Rule 23.1.139 To meet the requirements,

the plaintiff must demand that the board pursue the claim or, alternatively, must

demonstrate that demand on the board would be futile such that the demand

requirement should be excused.140

         Plaintiffs acknowledge they made no pre-suit demand upon the Board.141

Thus, they also acknowledge they must plead demand futility by meeting

Rule 23.1’s “stringent requirements of factual particularity that differ substantially

138
   Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm
v. Eisner, 746 A.2d 244 (Del. 2000) (citing 8 Del. C. § 141(a)).
139
      Aronson, 473 A.2d at 811.
140
   See Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040,
1044 (Del. 2004).
141
      SAC ¶ 180.

                                          28
from the permissive notice pleadings” embodied in Chancery Rule 8 and facilitated

by Rule 12(b)(6)’s reasonable conceivability standard.142

            A plaintiff can satisfy Rule 23.1 only by setting forth “particularized factual

statements that are essential to the claim.”143 In that sense, as noted, conclusory

statements or mere notice pleading are insufficient to satisfy Rule 23.1.144 “The

pleader is not required to plead evidence,”145 however, and “all reasonable inferences

from the pled facts must . . . be drawn in favor of the plaintiff in determining whether

the plaintiff has met its burden under Aronson.”146

      B. The “Demand Board”

            The goal of a demand futility analysis is to determine “whether the board that

would be addressing the demand can impartially consider its merits without being

influenced by improper considerations.”147 With this in mind, Plaintiffs maintain

that demand futility must be assessed in reference to the seven-member Board as

comprised at the time the first complaint in this consolidated action was filed on

142
      Brehm, 746 A.2d at 254.
143
      Id.
144
      Id.
145
      Id.
146
      Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1020 (Del. 2015).
147
      Rales, 634 A.2d at 934.

                                               29
May 26, 2017. Defendants see it differently and argue that demand futility should

be evaluated against Fitbit’s board as it existed—with nine members—when the

SAC was filed.148 I agree with Plaintiffs.

          Under Braddock v. Zimmerman,149 a plaintiff is excused from making a (new)

demand on the board in place at the time an amended (as opposed to original)

complaint is filed when three elements are present: “first, the original complaint was

well pleaded as a derivative action; second, the original complaint satisfied the legal

test for demand excusal; and third, the act or transaction complained of in the

amendment is essentially the same as the act or transaction challenged in the original

complaint.”150 Of these factors, Defendants challenge only whether the original

complaint satisfied the legal test for demand excusal. As explained below, because

I find that demand was excused in connection with the original complaint, I am

satisfied under Braddock that there would have been no need to make a new demand

at the time the SAC was filed. Accordingly, I evaluate demand futility with respect

to the Board that existed at the time the original complaint was filed (the “Demand

Board”).

148
      Reply Br. in Further Supp. of Defs.’ Mot. to Dismiss (“DRB”) 28 (D.I. 39).
149
      906 A.2d 776 (Del. 2006).
150
      Id. at 786.

                                             30
      C. Count II – The Brophy Claim

         The parties agree that the test set forth in Rales v. Blasband governs demand

futility with respect to Count II.151 As noted, under Rales, demand is excused only

if the plaintiff’s particularized factual allegations “create a reasonable doubt that, as

of the time the complaint is filed, the board of directors could have properly

exercised its independent and disinterested business judgment in responding to a

demand.”152 A board will be deemed interested in a transaction and unable to make

an impartial decision in response to a demand if a majority of the members face

“a ‘substantial likelihood’ of personal liability.”153

         In this case, the demand futility question as to Count II turns on whether a

majority of the Demand Board faces a substantial likelihood of liability on the

Brophy claim. As to that claim, Plaintiffs are required to well-plead that Fitbit

insiders: “1) . . . possessed material, nonpublic company information; and 2) . . .

used that information improperly by making trades because [they were] motivated,

in whole or in part, by the substance of that information.” 154 I address these elements

in turn.

151
      See DOB 22, PAB 29.
152
      Rales, 634 A.2d at 934.
153
      Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003) (quoting Rales, 634 A.2d at 936).
154
  In re Oracle Corp., 867 A.2d 904, 934 (Del. Ch. 2004). See also Guttman, 823 A.2d at
502 (“The balanced approach that is more in keeping with the spirit of [Aronson and Rales]
                                             31
       1. The SAC Well-Pleads that Knowledge of PurePulse™’s Design Flaws
          and the Company’s Attempts To Fix Them Were Material and
          Nonpublic

       Plaintiffs allege the Selling Defendants had reason to know that PurePulse™

devices had serious problems with accurately reporting heart rates and that Fitbit

was struggling to fix those problems. The Selling Defendants counter that these

issues were well known in the market and by no means the subject of inside

information. Relying mostly on negative online consumer reviews, the Selling

Defendants claim that “the market was flooded with information about the accuracy

of the heart-rate trackers.”155 The Selling Defendants also maintain that the internal

documents on which Plaintiffs rely do not conflict with Fitbit’s public statements.

According to the Selling Defendants, both acknowledge that “there were issues with

is to focus the impartiality analysis on whether the plaintiffs have pled particularized facts
regarding the directors that create a sufficient likelihood of personal liability because they
have engaged in material trading activity at a time when (one can infer from the
particularized facts that) they knew material, non-public information about the Company’s
financial condition.”).
155
    DRB 17; see, e.g., Rohrer Aff., Ex. 28 at ¶ 156 (“However, as early as January 2015,
product reviews on Amazon.com reported that the Charge HR was ‘absolutely horrible for
tracking heart rate during exercise,’ ‘completely inaccurate if you’re doing anything
besides steady state cardio like a jog,’ ‘horribly inaccurate when doing any . . . high
intensity interval training,’ ‘fairly useless as a HR monitor during any exercise other than
jogging,’ and prone to under-reporting users’ heart rates by up to 50%.”).

                                             32
the accuracy of the heart-rate tracking devices under certain circumstances, with

certain users, for some exercises.”156

         The Selling Defendants misconstrue the information Plaintiffs allege was

nonpublic. The challenged information is not that some consumers experienced

some issues with PurePulse™-equipped devices. Rather, it is the alleged internal

discussions regarding the scope and severity of PurePulse’s technology problems,

and the Company’s persistent inability to fix them, that Plaintiffs allege was known

by the insider traders but not by the public. In this regard, Plaintiffs point to internal

documents showing that PurePulse’s flaws were so significant that the Company

could not resolve them even after developing a curative algorithm (Project Hydra)

and hardware solution (Project Tiwi).157 Moreover, Plaintiffs have alleged with

particularity that at least Park and Friedman made an effort to keep these failures

confidential by directing employees to destroy documents in which management was

recounting the problems and the failed efforts to solve them.158 All the while, Fitbit

issued public statements claiming that PurePulse™ devices could track heart rates

156
      DRB 20–21.
157
      SAC ¶¶ 104–19.
158
   SAC ¶ 12. See also Pls.’ Compendium Tab 4 (Diep v. Sather, et. al., C.A. No. 12760-
VCL (Del. Ch. Mar. 17, 2017) (TRANSCRIPT) (“The fact that they had been locked up
for awhile and that this was the first time they could sell . . . heightens the likelihood that
there was incentive to keep this information quiet until people could at least unload
something.”)).

                                              33
with a high degree of accuracy. Contrary to Defendants’ argument, a statement in

the IPO Prospectus that Fitbit “must continually . . . improve and enhance our

existing products” does not sufficiently temper the Company’s endorsement of

PurePulse™ or its bullish forecast of the Company’s future, fueled by sales of

products with PurePulse™ technology.159

         Judge Illston determined on a motion to dismiss the Securities Action that the

precipitous and continuous decline in the Fitbit stock price following the filing of

the Consumer Action plausibly suggested the market did not know about the severity

of PurePulse’s flaws.160 The Selling Defendants respond to that finding with several

reasons why the stock price declined the way it did.161 Those reasons may well prove

true on a developed record. For now, however, just as the federal court found it

plausible that the market’s discovery of the PurePulse™ issues prompted the decline

in stock price, I find that the causal connection is pled with particularity and is

reasonably conceivable. Plaintiffs have adequately pled that the information at issue

was material and nonpublic.

159
      DRB 22 (citing Rohrer Aff., Ex. 1 at 16).
160
      Pls.’ Compendium Tab 2 at 18–19.
161
   See, e.g., DOB 33 (arguing that on the same day as the filing of the Consumer Action,
the Company launched a new product, the Fitbit Blaze™, which analysts panned); id. 33–
34 (arguing that the Indianapolis local news report concerning the results of the Ball State
Study on the accuracy of Fitbit devices aired on the same day that Fitbit announced its first
financial guidance for Q1 and FY 2016, which fell below analysts’ expectations).

                                              34
         2. The SAC Well Pleads that the Selling Defendants Acted With Scienter
            When They Sold Their Fitbit Shares

         The second Brophy element requires a plaintiff to well-plead (and ultimately

prove) that the corporate fiduciary used material inside information he possessed to

make trades based, at least in part, on the substance of that information.162 In other

words, Plaintiffs must show that the Selling Defendants acted with scienter.163

         In seeking dismissal, Defendants call the predicate question of whether

Plaintiffs have adequately pled that all of the Selling Defendants actually sold stock

in the Offerings. In doing so, Defendants implicitly question whether Plaintiffs have

well-pled that a majority of the Demand Board faces a substantial likelihood of

liability on the Brophy claim. It is undisputed that Park and Friedman sold their

Fitbit shares during the IPO and the Secondary Offering.164 The parties disagree,

however, as to whether True Ventures’s and SoftBank’s sales during the Offerings

can be attributed to Callaghan and Murray, respectively. Defendants argue that

Plaintiffs have failed to allege facts showing that Callaghan and Murray benefited

162
  Silverberg ex rel. Dendreon Corp. v. Gold, 2013 WL 6859282, at *14 (Del. Ch. Dec. 31,
2013).
163
      Guttman, 823 A.2d at 505.
164
    DRB 1 (“[O]nly two Directors of Fitbit’s seven-member demand board—Park and
Friedman—personally sold stock.”).

                                          35
financially from their funds’ sales.165 They also claim that Callaghan and Murray

could only be disabled from considering a pre-suit demand as a consequence of these

sales if Plaintiffs had named True Ventures and Softbank as defendants, which they

did not do.166 Neither argument is persuasive.

         The parties have not provided (and the Court has not found) any instance

where a Delaware court has considered whether a fiduciary may be held liable on a

Brophy claim for trades that an entity or fund associated with that fiduciary executed

in its name. While I see no basis or reason to state a hard and fast rule, I am satisfied

that finding ipso jure that the True Ventures and Softbank trades cannot be attributed

to Callaghan and Murray would frustrate the policy that animates Brophy.

Chancellor Harrington’s Brophy decision is a descendant of Chief Justice Layton’s

seminal Guth v. Loft, Inc. decision, in which our Supreme Court elucidated the scope

of the fiduciary duty of loyalty and the range of remedies available to address a

fiduciary’s usurpation of a corporate opportunity167:

         [T]he law charges the interest so acquired with a trust for the benefit of
         the corporation . . . while it denies to the betrayer all benefit and profit.
         The rule, inveterate and uncompromising in its rigidity, . . . rest[s] . . .
         upon a broader foundation of a wise public policy that, for the purpose

165
      DRB 8.
166
      DRB 9; Oral Arg. on Defs.’ Mot. to Dismiss Tr. 46:1–12 (Sept. 6, 2018) (D.I. 50).
167
      5 A.2d 503 (Del. 1939).

                                              36
         of removing all temptation, extinguishes all possibility of profit flowing
         from a breach of the confidence imposed by the fiduciary relation.168

Brophy applied this policy to insider trading, recognizing that “[p]ublic policy will

not permit an employee occupying a position of trust and confidence toward his

employer to abuse that relation to his own profit, regardless of whether his employer

suffers a loss.”169

         Here, the Selling Defendants seek a ruling that would permit a director to trade

on inside material information without consequence just because the director did not

trade personally but rather passed the information to an entity with which he is

affiliated (and over which he exercised control) to do the trading. That is not and

cannot be our law. Indeed, to allow these directors, through their controlled funds,

to profit from inside information without recourse would be inconsistent with the

policy of “extinguish[ing] all possibility of profit flowing from a breach of the

confidence imposed by the fiduciary relation” that undergirds Delaware’s insider

trading law.170

168
      Id. at 510 (emphasis supplied).
169
   Brophy, 70 A.2d at 8. See also Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d
831, 840 (Del. 2011) (citing Guth in its refusal to restrict disgorgement in Brophy cases
and explaining that “Brophy focused on the public policy of preventing unjust enrichment
based on the misuse of confidential corporate information”).
170
    I also note that Brophy liability in this context is akin to tipper liability under federal
law. Under Dirks v. Sec. & Exch. Comm’n, 463 U.S. 646 (1983), a tipper of inside
information can be liable only if the tipper personally benefited from the disclosure of
inside information. In Salman v. United States, 137 S. Ct. 420 (2016), the Supreme Court
                                              37
         Although no Delaware court has had occasion to consider whether Brophy

liability should be imposed under these circumstances, our courts have not

foreclosed the possibility of personal liability for trades executed by a controlled

fund either. In Kahn v. Kolberg Kravis Roberts & Co., L.P., for example, our

Supreme Court addressed a case in which plaintiffs alleged that designated directors

supplied nonpublic information to the directors’ sponsoring fund, which then traded

on the information.         Although the court upheld the special committee’s

recommendation not to pursue the Brophy claims, that ruling did not rest on a

holding that the directors could not, as a matter of law, be held liable for the improper

trades of their funds. Rather, the Court determined that the insider information was

immaterial, the claims were time-barred and the sponsor did not intend to profit

(and in fact did not profit) from the trades.171

         Callaghan and Murray are not simply board designees for their funds.172

Plaintiffs allege that Callaghan is a co-founder and managing member of True

Ventures, which held 37,731,585 Fitbit shares and received approximately

unanimously held that the requirement of personal benefit could be satisfied by a tipper’s
gift of inside information to a trading friend or relative.
171
      See Kahn, 23 A.3d at 841.
172
   Thus, Defendants’ reliance on In re Rouse Props., Inc. Fiduciary Litig., 2018
WL 1226015 (Del. Ch. Mar. 9, 2018) and Gilbert v. El Paso Co., 575 A.2d 1131
(Del. 1990) is misplaced.

                                           38
$136.7 million in proceeds from the Offerings.173 As for Murray, Plaintiffs allege

he is a partner of Softbank, which held 9,343,572 Fitbit shares and received

$33.8 million in proceeds from the Offerings.174 Both directors share voting and

dispositive power over the Fitbit stock owned by their respective funds.175 Plaintiffs’

particularized allegations are sufficient at the pleading stage to allow a reasonable

inference that Callaghan and Murray personally and materially profited from the

challenged stock sales through their ownership and control of their affiliated

funds.176

          Having determined that Plaintiffs have pled particularized facts supporting a

reasonable inference that four of the seven Demand Board members sold stock

during the Offerings, I turn next to the sufficiency of Plaintiffs’ allegations that these

four Board members acted with scienter.177 The Selling Defendants argue that

173
      Rohrer Aff., Ex. 9 at 116 n.10.
174
      Id. at 116 n.11.
175
      Id. at 116 n.10, n.11.
176
   I note that information regarding whether Callaghan and Murray personally profited
from the trades in question would not likely be found in a Section 220 books and records
production. In this regard, I am reminded of Justice Hartnett’s admonition in his
concurring opinion in Brehm v. Eisner: “Plaintiffs must not be held to a too-high standard
of pleading because they face an almost impossible burden when they must plead facts
with particularity and the facts are not public knowledge.” Brehm, 746 A.2d at 268
(Hartnett, J., concurring).
177
   Although this section explicitly addresses the inference of scienter as to Park, Friedman,
Callaghan and Murray for purposes of assessing demand futility, the analysis applies
equally to the question of whether Plaintiffs have well-pled that Zerella, as CFO, acted
                                             39
Plaintiffs have failed to point to any evidence that a majority of the Selling

Defendants received the material, nonpublic information that is at the heart of

Plaintiffs’ Brophy claim. Indeed, the evidence mentioned in the SAC expressly

identifies only Park and Friedman as having received the internal documents that

recount the problems Fitbit was experiencing with the PurePulse™ technology.

Plaintiffs counter that they are not required to uncover and plead the “smoking

scienter gun” in order to state a Brophy claim. Rather, at this stage, it is enough that

they plead a series of particularized facts that would support a reasonable inference

of knowledge, and resulting scienter, on the part of the insider traders. I agree and

find they have done just that here.178

       Plaintiffs have alleged that the products featuring the PurePulse™ technology

accounted for 80% of Fitbit’s revenue,179 that Fitbit experienced serious problems

with scienter when trading in the Secondary Offering. As for Paisley, who was a member
of the Demand Board but did not trade in the Offerings, the analysis is relevant to his state
of knowledge as a member of the Board when the Court later considers whether he is
disabled from impartially considering a demand that the Company prosecute Count I.
178
  See Sanchez, 124 A.3d at 1020 (holding that plaintiff is entitled to reasonable inferences
when resisting a motion to dismiss under Rule 23.1).
179
    Defendants argue that the core operations doctrine has no place under Rule 23.1’s
heightened pleading standard (DRB 11-12). The cases Defendants cite, however, suggest
the doctrine is not sufficient on its own in the context of generally pled allegations to
establish scienter. See, e.g., Sandys v. Pincus, 2016 WL 769999, at *17 (Del. Ch. Feb. 29,
2016), rev’d on other grounds by Sandys v. Pincus, 152 A.3d 124 (Del. 2016) (rejecting
the core operations doctrine where plaintiffs’ allegations were “pled generally” and noting
that plaintiffs in Pfeiffer v. Toll had put forth additional allegations that outside directors
sold substantial amounts of stock during the period in question); In re Yahoo! Inc. S’holder
                                              40
with the technology early on, that Fitbit attempted to design fixes to the problems

and those fixes were not working, that management was keeping the Board apprised

of the problems and the efforts to address them, and that, all the while, Fitbit was

touting the promise and success of PurePulse™ to the market.180 These well-pled

facts, combined with the nature, timing and size of the Offerings, adequately support

a reasonable inference that the Selling Defendants sought to make trades based on

nonpublic information.181

         Plaintiffs have also adequately pled that the Board designed the Secondary

Offering to accommodate the Selling Defendants’ interests. Aside from initiating a

rather unusual Secondary Offering after a successful IPO, the Board adjusted the

terms of the offering at the eleventh hour to remove four million shares from what

Deriv. Litig., 153 F. Supp. 3d 1107, 1123 n.10 (N.D. Cal. 2015) (“‘[A] plaintiff must allege
more than that directors should have known or must have known about matters relating to
the corporation’s ‘core business’”) (citing In re Accuray, Inc. S’holder Deriv. Litig.,
757 F. Supp. 2d 919, 928 (N.D. Cal. 2010)); In re Rocket Fuel Inc. Deriv. Litig., 2016
WL 4492582, at *6 (N.D. Cal. Aug. 26, 2016) (“It is hardly clear from the [complaint] that
combatting ad fraud is the ‘core’ of Rocket Fuel’s business . . . . Without more, the court
cannot infer that the outside directors should or would have had detailed knowledge . . . .”).
The totality of the facts Plaintiffs have pled with particularity allow a reasonable pleading
stage inference that, because the problems with PurePulse™ were profound and
PurePulse™ drove the Company’s bottom line, both Fitbit management, including Zerella,
and the Board knew of the alleged material, nonpublic information.
180
      SAC ¶¶ 105–23.
181
   See Pfeiffer v. Toll, 989 A.2d 683, 693 (Del. Ch. 2010), abrogated on other grounds by
Kahn, 23 A.3d 831 (recognizing that allowing directors to claim ignorance of obvious
information affecting the company would “afford ostrich-like immunity to directors”).

                                             41
Fitbit intended to sell, increasing the likelihood that the underwriters would exercise

the Selling Defendants’ overallotment option.182 In addition to this adjustment, the

Board, without apparent explanation, waived the lock-up agreements for designated

insiders. With these waivers in hand, the Selling Defendants were able to execute

their Secondary Offering trades at $28.13 per share. Had the lock-up agreements

not been waived, the Selling Defendants would have realized only $12.50 per share

on the earliest day they would have been allowed to trade.

         Defendants’ exposure in the federal Securities Action is also a relevant factor

in the Rales analysis. As noted, all Defendants were also named as defendants in

the Securities Action. This court addressed a similar situation in Pfeiffer v. Toll,

where individual defendants in a Delaware action alleging a Brophy claim were also

named defendants in a companion federal securities action.183 In addressing the

defendants’ motion to dismiss, the court took notice of the federal court’s holding

that “the complaint sufficiently alleged that the defendants ‘made material

misrepresentations and omissions of material fact,’ [and] that the insider trading of

the individual defendants . . . raised a ‘powerful and cogent inference of scienter,’

182
   SAC ¶¶ 82–84. Cf. Silverberg, 2013 WL 6859282, at *14 (considering circumstantial
evidence, such as timing and scope, to find defendants acted with scienter).
183
      Pfeiffer, 989 A.2d at 690.

                                            42
and was ‘unusual in scope and timing.’”184 Given the board members’ exposure in

the federal companion litigation, Vice Chancellor Laster concluded that the plaintiff

had pled a reason to doubt whether the derivative defendants could consider a

demand impartially.185

         In the Securities Action, Park, Friedman and Zerella were alleged to have

violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and

Rule 10b-5 and all Defendants were alleged to have violated Sections 11 and 15 of

the Securities Act of 1933 for issuing materially false or misleading statements

related to the IPO.186 The plaintiffs in the Securities Action twice survived a motion

to dismiss under the rigorous standards for pleading securities fraud.187 Judge Illston

found that the plaintiffs’ allegations were “sufficient to establish scienter” as to Park,

Friedman and Zerella regarding their knowledge of PurePulse™’s inaccuracy.188

In denying the motion to dismiss, the court also determined that,

         Taken together, the allegations in this case are at least as cogent or
         compelling as a plausible alternative inference, namely that Fitbit
         executives were simply unaware of the high degree of inaccuracy in
184
  Id. (quoting City of Hialeah Empls.’ Ret. Sys. and Laborers Pension Trust Funds v. Toll
Bros., Inc., 2008 WL 4058690, at *2, *5 (E.D. Pa. Aug.29, 2008)).
185
      Pfeiffer, 989 A.2d at 690.
186
      SAC ¶¶ 17–18.
187
    Pls.’ Compendium Tab 2 at 3 (denying motion to dismiss); Pls.’ Compendium Tab 1
at 3 (denying motion for partial reconsideration).
188
      Pls.’ Compendium Tab 2 at 17–18.

                                           43
          PurePulse™ devices alleged. Particularly given the contributions these
          devices made to Fitbit’s revenue stream in 2015 . . . the Court finds that
          a holistic review of the allegations suffices to establish scienter.189

          I take judicial notice that another court reviewing similarly pled facts found

that those facts supported an inference of knowledge not only for Park, Friedman

and Zerella but also for all Defendants under a “holistic review” of the pleading.

And although the Securities Action has since settled, the settlement was not

approved until a year after Plaintiffs filed their original complaint. If the Company

had elected to move forward with Plaintiffs’ action against the Selling Defendants,

then the Company’s efforts almost certainly would have “undercut or even

compromise[d] the defense” of all defendants in the Securities Action.190

          Having considered the foregoing, I am satisfied that Plaintiffs have pled

particularized facts that support a reasonable inference that Park, Friedman,

Callaghan and Murray—four of seven demand Board directors—possessed material,

nonpublic information and relied on that information when making trades in the

Offerings. Accordingly, Plaintiffs have met their burden to plead that these directors

189
      Id. at 18.
190
   Pfeiffer, 989 A.2d at 690. For these same reasons, Paisley, who is also a defendant in
the Securities Action, would be disabled from impartially considering a demand to
prosecute the Brophy claims on behalf of the Company since positions the Company would
take in prosecuting those claims would likely compromise his defenses in the Securities
Action.

                                             44
face a substantial likelihood of personal liability on the Brophy claims, and demand

is excused as futile as to Count II.191

      D. Count I – The Breach of Fiduciary Duty Claim

         Plaintiffs’ breach of fiduciary duty claim as stated in Count I has two

components: (i) that all Defendants permitted the Selling Defendants to trade in the

Offerings based on insider information; and (ii) that the Director Defendants waived

the lock-up agreements that would have otherwise prevented the Selling Defendants

from making their trades.192 Defendants point out that Plaintiffs abandoned any

claim based on the theory that the directors failed to prevent insider trades.193

Indeed, Plaintiffs’ brief suggests that only the Director Defendants’ actions to

facilitate the Selling Defendants’ trades are relevant.194 Accordingly, I focus my

demand futility analysis on the second component of Count I and find that Plaintiffs

have waived the first component.195

191
      Rales, 634 A.2d at 936.
192
      SAC ¶ 201.
193
      DRB 24 (citing PAB 58–59 n.235).
194
    PAB 58–59 n.235 (focusing only on the Board’s approval of the lock-up waivers and
stating “Defendants’ argument concerning the Board’s ‘inaction’ and cases where directors
failed to detect accounting regularities . . . is irrelevant. Plaintiffs here allege much more
than inaction and instead assert affirmative steps the Board took to facilitate the Selling
Defendants’ trades upon inside information”).
195
   See Emerald P’rs LP v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed
are deemed waived.”).

                                             45
         The parties agree that when a plaintiff challenges a decision of the board to

take affirmative action, like waiving the lock-up agreements, demand futility must

be assessed under the two-pronged test stated in Aronson v. Lewis.196 Thus, Plaintiff

is obliged to plead particularized facts creating a “reasonable doubt” that either

“(1) [a majority of] the directors [is] disinterested and independent or (2) the

challenged transaction was otherwise the product of a valid exercise of business

judgment.”197

         A director is interested in the underlying transaction if he “appears ‘on both

sides of a transaction’ or expects ‘to derive any personal financial benefit from it in

the sense of self-dealing, as opposed to a benefit which devolves upon the

corporation or the stockholders generally.’” 198        Plaintiffs have alleged with

particularity that the Director Defendants voted to approve the waivers of the lock-

up agreements. And, as of the date Plaintiffs filed their complaint, four of seven

Director Defendants—Park, Friedman, Murray, and Callaghan—were beneficiaries

of the waivers when they sold shares in the Secondary Offering for significant

196
      See DOB 48–49, PAB 56.
197
      Aronson, 473 A.2d at 814.

  Chester Cty. Empls.’ Ret. Fund v. New Residential Inv. Corp., 2017 WL 4461131, at *6
198

(Del. Ch. Oct. 6, 2017) (quoting Aronson, 473 A.2d at 812).

                                           46
personal profit.199 If these pled facts are proven, entire fairness would be the

standard of review.200

            The Defendants argue that the waiver provided no unique benefits to the

Selling Defendants because it applied equally to “other employees, consultants, and

early investors” who were also subject to the lock-up agreements.201 This argument

misses the mark for the simple reason that Plaintiffs have well pled that, unlike other

constituencies who may have benefited from the waiver, the Selling Defendants

were armed with nonpublic information not available to others who might be

considering whether to participate in the Offerings.

            Defendants’ argument that Plaintiffs have failed to well-plead that the trades

were material to the Selling Defendants is also unpersuasive.202               While the

percentages of stock that Park, Friedman, Callaghan and Murray sold may have been

small in relation to their holdings, their profits were sizable to say the least.

199
    Cf. In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 592–93 (Del. Ch.
2007) (noting that spring-loaded and bullet-dodging options (options timed to enable
insiders to avoid losses from future harmful disclosures) “clearly involve[] a deception”
and implicate a “duty of loyalty”).
200
   See Lee v. Pincus, 2014 WL 6066108, at *12-13 (Del. Ch. Nov. 24, 2014) (holding that
entire fairness standard of review would apply to plaintiff’s claim that board members
breached their fiduciary duty by agreeing to waive contractual restrictions that had
prevented most pre-IPO investors from selling their stock for a designated period because
the directors personally were beneficiaries of the waiver).
201
      DOB 50.
202
      Id.

                                              47
Friedman and Murray are alleged to have made over $30 million from the Secondary

Offering and Park is alleged to have made more than twice that much. As pled, the

trades were material.203

      Plaintiffs have adequately pled facts that raise a reasonable doubt as to

whether the Demand Board was disinterested with respect to the waiver of the lock-

up agreements for designated employees and consultants. Accordingly, they have

well-pled demand futility under the first prong of Aronson as to Count I of the SAC.

      Under Delaware law, each director facing liability as a result of an action by

the board has a right to be considered individually “because the nature of their breach

of duty (if any), and whether they are exculpated from liability for that breach, can

vary by director.”204 Here, Plaintiffs allege that Paisley voted to waive the lock-up

agreements but did not subsequently sell shares in the Secondary Offering. As such,

he is situated differently from the remaining Director Defendants discussed above

who personally benefited from their votes to waive the lock-up agreements.

      Although not expressly separating Paisley in their opposition papers,

Plaintiffs have made clear their position that he is disabled from impartially

203
    See Chen v. Howard-Anderson, 87 A.3d 648, 670 (Del. Ch. 2014) (noting that a
director’s interest was material when he received more than $840,500 in benefits not shared
with other stockholders).
204
   In re Emerging Commc’ns Inc. S’holders Litig., 2004 WL 1305745, at *38 (Del. Ch.
June 4, 2004).

                                            48
considering a demand with respect to Count I for two reasons. First, as previously

noted, Paisley was a defendant in the Securities Action and faced the same likelihood

of liability as the remaining Defendants in that action. An election to move forward

with Plaintiffs’ demand in this action would undercut the defense in the Securities

Action for Paisley as well as for the other Director Defendants.

      Moreover, Plaintiffs cast doubt as to whether Paisley exercised his business

judgment when he voted to waive the lock-up agreements. In In re Emerging

Commc’ns, then-Vice Chancellor Jacobs found that a board member who voted to

approve a transaction—but did not directly benefit from it—nonetheless

“‘consciously and intentionally disregarded’ his responsibility to safeguard the

minority stockholders from the risk, of which he had unique knowledge, that the

transaction was unfair.”205 Because this director had a unique understanding of the

company’s intrinsic value, the court found that his vote of approval exposed him to

liability for breach of his fiduciary duty of loyalty. Here, Plaintiffs have alleged that

Paisley faces a similar likelihood of liability because he knowingly facilitated the

Selling Defendants’ insider trading when he voted to waive the lock-up

agreements.206 Thus, Plaintiffs have adequately pled that director Paisley is also

  In re Emerging Commc’ns, 2004 WL 1305745, at *40 (citing In re Walt Disney Co.
205

Derivative Litig., 825 A.2d 275, 289 (Del. Ch. 2003)).
206
    See also In re Tyson Foods, 919 A.2d at 592–93 (“A director who intentionally uses
inside knowledge not available to shareholders in order to enrich employees while avoiding
                                           49
disabled from considering a demand as to Count I under the second prong of

Aronson.

      E. Plaintiffs State Reasonably Conceivable Claims

            Under Court of Chancery Rule 12(b)(6), a complaint must be dismissed if the

plaintiff would be unable to recover under “any reasonably conceivable set of

circumstances susceptible of proof” based on the facts pled in the complaint.207

In considering a motion to dismiss, the Court must accept as true all well-pled

allegations in the complaint and draw all reasonable inferences from those facts in

plaintiff’s favor.208 The Court need not accept conclusory allegations that lack

factual support, however, or “accept every strained interpretation of the allegations

proposed by the plaintiff.”209 “In the context of a motion to dismiss for failure to

state a claim, the pleading standard does not reach so high a bar as Rule 23.1.”210

shareholder-imposed requirements cannot, in my opinion, be said to be acting loyally and
in good faith as a fiduciary.”).

  In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (citing Savor, Inc. v.
207

FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).
208
      In re Gen. Motors, 897 A.2d at 168.
209
      Id.
210
      Ryan v. Gifford, 918 A.2d 341, 357 (Del. Ch. 2007).

                                             50
Thus, if a complaint survives a motion under Rule 23.1, it will likely survive a

motion under Rule 12(b)(6).211

         Beyond renewing the same arguments they raised to attack the sufficiency of

Plaintiffs’ Brophy and fiduciary duty claims in the context of their Rule 23.1

dismissal motion, Defendants’ remaining argument in support of Rule 12(b)(6)

dismissal is that Plaintiffs’ claims are subject to exculpation under Section 102(b)(7)

of the DGCL and the exculpatory provision in Fitbit’s certificate of incorporation.212

At this pleading stage, I cannot agree. The exculpatory provision does not, and

cannot, provide director exculpation “for any transaction from which the director

derived an improper personal benefit,” implicating their duty of loyalty. 213 For

reasons discussed above, Plaintiffs have stated a viable Brophy claim against the

Selling Defendants and viable breach of the duty of loyalty claims against the

Director Defendants relating to the waiver of the lock-ups. As pled, these claims are

not subject to Section 102(b)(7) exculpation.

211
      McPadden v. Sidhu, 964 A.2d 1262, 1270 (Del. Ch. 2008).
212
      DOB 53–54, 58–60 (citing 8 Del. C. § 102(b)(7)).
213
   8 Del. C. §102(b)(7)(iv). See also In re Emerging Commc’ns, 2004 WL 1305745, at
*40 (holding that a director who facilitated a breach of the duty of loyalty by a fellow
director was not entitled to exculpation). I also note that although corporate officers and
directors owe identical fiduciary duties, Section 102(b)(7) does not exculpate officers from
monetary liability. See Gantler v. Stephens, 965 A.2d 695, 708, 709 n.37 (Del. 2009).
Accordingly, Zerella is not entitled to exculpation as a matter of law.

                                             51
                               III. CONCLUSION

      Based on the foregoing, I am satisfied Plaintiffs have adequately pled demand

futility and stated viable claims under Brophy and for breach of the fiduciary duty

of loyalty in connection with the Company’s PurePulse™ technology, IPO, lock-up

waivers and subsequent Secondary Offering. The Motion to Dismiss, therefore,

must be DENIED.

      IT IS SO ORDERED.

                                        52