Derivative action against officials of company whose customers’ personal data were stolen dismissed

On October 20, 2014, the District Court of New Jersey dismissed a shareholder’s derivative action against the officers of a Delaware company alleging breach of fiduciary duty in connection with three data breaches. The decision offers interesting inputs for companies’ officials with regard to potential data breaches’ risks and liabilities.

This case involves a shareholder who seeks to compel a corporate board of directors to bring a lawsuit on the company’s behalf.

Wyndham Worldwide Corporation (“WWC”) is a hospitality company operating hotels globally. WWC’s subsidiaries often collect customers’ personal and financial data. On three occasions between April 2008 and January 2010 personal data was stolen. The hackers obtained the personal information of over six-hundred thousand customers.

The Federal Trade Commission (“FTC”) commenced a legal action against the company for its security practices.

Separately, Plaintiff Dennis Palkon (“Plaintiff”), a WWC shareholder, demanded several times the Board of Directors to bring a lawsuit based on the online breaches against the responsible personnel. The board unanimously refused the demand.

Eventually, Plaintiff filed a derivative action alleging that Wyndham’s corporate officials breached their fiduciary duties of care and loyalty to the company, and damaged WWC’s reputation, by (1) failing to implement adequate data security mechanisms and internal controls to protect customers’ personal and financial information and (2) failing to timely disclose the breaches.

Defendants moved to dismiss Plaintiff’s Complaint arguing that WWC board’s refusal to pursue Plaintiff’s demand was a good-faith exercise of business judgment, the Complaint failed to state a claim upon which relief could be granted, and the alleged damages were speculative and unripe.

The District Court granted Defendants’ motion and dismissed Plaintiff’s action with prejudice. According to the opinion, the board’s refusal to pursue the plaintiff’s lawsuit was a good-faith exercise of business judgment, as required by Delaware law. In addition, the Court found that WWC’s board conducted a reasonable investigation and therefore had “a firm grasp of Plaintiff’s demand when it determined that pursuing it was not in the corporation’s best interest”.

Palkon ex rel. Wyndham Worldwide Corp. v. Holmes, No. 2:14-cv-01234 (D.N.J. Oct. 20, 2014) is available at…                Open Pdf

For more information, contact Francesca Giannoni-Crystal

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