In August last year, the National Center for Public Policy Research filed a complaint against Starbucks and its officers and directors, National Center for Public Policy Research v. Schultz, alleging that they caused Starbucks to adopt a group of policies that discriminate based on race in violation of a “wide array of state and federal civil rights laws.” Starbucks characterized the policies as designed to “realize its ‘commitment to Inclusion, Diversity, and Equity[.]’”  Starbucks, its officers and directors moved to dismiss, and a hearing on the motion was held on August 11, 2023. At the hearing, the Federal District Court for the Eastern District of Washington granted the motion to dismiss with prejudice and closed the case.   A month on, the Court’s Order has now been released. While the Order discusses the various legal bases for the dismissal, the Court’s sentiment was perhaps best summed up by its statement in the Order that “[t]his Complaint has no business being before this Court and resembles nothing more than a political platform.” Much like the recent decision of the Delaware Chancery Court in Simeone v. The Walt Disney Company, the Court concluded that “[c]ourts of law have no business involving themselves with reasonable and legal decisions made by the board of directors of public corporations.”  Are we starting to see a trend with regard to board business decisions about corporate social policy? 

The complaint. In its complaint, NCPPR alleged that the defendants “crafted and publicized these [DEI] policies with fanfare, preening over the supposed moral virtue their adoption signaled.” NCPPR claimed that the individual defendants “endangered Starbucks and the interests of all its shareholders in Starbucks” in violation of their fiduciary obligations and acted “outside their corporate authority to lawfully pursue business on behalf of Starbucks’ owners.” The reason? NCPPR alleged that the reason they did so was because “it benefits them personally to pose as virtuous advocates of ‘Inclusion, Diversity, and Equity,’ even if it harms the company and its owners—a classic example of (admittedly non-pecuniary) self-dealing.” The plaintiff requested a declaratory judgment that the policies violated the 1866 Civil Rights Act (42 U.S.C. § 1981) and Title VII, as well as state civil rights laws, and exposed the company to material liability.  Moreover, the complaint charged that Starbucks’ officers and directors breached their fiduciary duties and acted outside their authority by adopting the DEI policies for Starbucks, all the while “enjoying the social benefits of making Starbucks adopt, implement, and retain” the DEI policies.

The hearing. During the hearing, defendants’ counsel contended that the key issue presented was “[w]ho gets to make decisions? Who gets to take action on behalf of Starbucks? Is it Plaintiff or is it Starbucks’ board of directors? A fundamental principle of Washington corporate law is that a corporation’s board of directors has exclusive authority to make decisions concerning the management of the corporation’s business and affairs.”

Decisions by a board, counsel contended, are entitled to broad deference by the courts under the business judgment rule. To survive the motion, defendants argued, the plaintiff in this derivative action “must convince the court that he can fairly and adequately represent the interests of the corporation” and that “the board’s refusal of the demand was wrongful…. At its most basic level…, the court must determine whether the plaintiff has brought the action to enforce the rights of the corporation and to act in its best interests or has brought the action for an ulterior motive or to advance a personal agenda.”

Counsel for the plaintiff argued that “the business judgment rule does not shield knowingly violating the law.”  There, the Court interjected, asking whether he had any legal citations indicating that Starbucks did “violate the law? Your opinion is they violate the law, and that’s fine. Do you have any courts that have agreed with you?” As plaintiff’s counsel waffled, the Court said: “So the answer is ‘No’? Is the answer ‘No’? I’ll take the answer ‘No.’”  (However, counsel did later point to a case concerning another company.)  And the Court continued, admonishing plaintiff that “small shareholders in corporate America have other options other than bothering federal courts with these types of frivolous lawsuits.”

As to the question of illegality raised by plaintiff, defendants’ counsel responded that Starbucks’ Board, “after thoughtful consideration and investigation, disagreed. The board had good reason to do so. Courts have held that diversity policies are not on their face reverse discrimination…. As the Delaware Court of Chancery recently stated in June regarding the ongoing dispute between Disney and the governor of Florida [referring to Simeone], the weighing of social, political, and legal risks associated with the decision to act or not act by disinterested fiduciaries does not evidence a potential lack of due care, let alone bad faith.”

The Order.  In the Order, the Court observed that, “[a]s a corporation, Starbucks implement[ed] initiatives that concern issues related to diversity, equity, and inclusion.” To that end, the Court said, “Starbucks hire[d] independent advisers to evaluate Starbucks’ progress on civil rights and provide recommendations for how Starbucks can better advance DEI for its employees, customers, and communities.”

As described by the Court, plaintiff is “an advocacy group committed to conservative causes in government and the private sector.” To that end, plaintiff “is engaged in a nationwide campaign to litigate against so-called ‘woke’ corporate practices concerning issues of diversity, equity, and inclusion,” the Court said, referring at some length to a document published by plaintiff “called ‘Balancing the Boardroom 2022,’ which describes its shareholder activism as ‘fighting back’ against ‘the evils of woke politicized capital and companies.’” The Court also observed that plaintiff owned only 56 shares of Starbucks stock out of approximately 1.15 billion shares outstanding and had submitted several shareholder proposals, including “a proposal to require Starbucks Board nominees to disclose their ‘ideological perspectives’ and a proposal to create a board committee to review the impact of the Company’s ‘woke business practices.’ These proposals were rejected with only 1% and 3% of the total possible votes cast in favor.”

Last year, the Court continued, a law firm acting on behalf of plaintiff published an open demand letter requesting that Starbucks retract its DEI initiatives and threatening litigation for alleged breach of fiduciary duties. The Starbucks Board “considered and rejected the Demand because according to Starbucks it was not in the best interests of Starbucks to accept the Demand and retract the Initiatives.” Plaintiff then filed its complaint “(1) seeking declaratory judgment that the Initiatives violate federal and state laws; (2) alleging that Starbucks’ directors and employees breached their fiduciary duties by adopting the Initiatives; (3) challenging these Initiatives as ultra vires acts, and; (4) seeking injunctive relief against the Initiatives’ continuation.”

The Court granted the motion to dismiss. First, the Court agreed with Starbucks that plaintiff did not fairly and adequately represent the interests of shareholders. Noting that a shareholder who brings derivative litigation “assumes a position … of a fiduciary character,” the Court highlighted that the rules applicable to class actions require that the plaintiff “fairly and adequately represent the interests of shareholders” and that the action may not “disserve the legitimate interests of the company or its shareholders.” In the Court’s view, it was “clear Plaintiff is pursuing its personal interests rather than those of Starbucks. It has shown obvious vindictiveness toward Starbucks,…and lacks the support of the vast majority of Starbucks shareholders.” Plaintiff’s “clear goal,” the Court continued, was “dismantling what it sees as destructive DEI and ESG initiatives in corporate America….Based on the briefing and nature of Plaintiff’s self-described political interests, it is clear to the Court that Plaintiff did not file this action to enforce the interests of Starbucks, but to advance its own political and public policy agendas.”  In addition, as the owner of only 56 shares, plaintiff still sought “to override the authority of the Starbucks Board and obtain disproportionate control of Starbucks’ decision making to advance its own agenda in a manner contrary to the desires of Starbucks Board, management, and the vast majority of other shareholders. Plaintiff’s views are not a fair and adequate representation of Starbucks.”

Second, the Court maintained that plaintiff had not shown that Starbucks “acted wrongfully in denying Plaintiff’s Demand.” Under Washington corporate law, the Court observed, “a corporation’s board of directors have exclusive authority to make decisions concerning the management of the corporation’s business.” The business  judgment rule under Washington corporate law requires that “[a] director shall discharge the duties of a director, including duties as member of a committee: (1) in good faith; (2) with the care of an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner the director reasonably believes to be in the best interests of the corporation.”  The complaint contained no allegation that the Board’s “refusal of the Demand was wrongful, that its investigation was unreasonable or not undertaken in good faith, that it was not sufficiently informed, or that its process was in any way inadequate.” Moreover, the process followed by the Board involved engagement of “outside counsel, management, and relevant subject matter experts to assist it in evaluating the Demand’s contentions. Only after this careful deliberation did Starbucks determine that it was not in the best interests of Starbucks to retract the challenged Initiative.”  Plaintiff, the Court concluded, failed to rebut the presumption of the business judgment rule.

Accordingly, the Court dismissed the complaint, but did not leave it there: “Plaintiff is apparently unhappy with its investment decisions in so-called ‘woke’ corporations. This Court is uncertain what that term means but Plaintiff uses it repeatedly as somehow negative. This Complaint has no business being before this Court and resembles nothing more than a political platform. Whether DEI and ESG initiatives are good for addressing long simmering inequalities in American society is up for the political branches to decide.  If Plaintiff remains so concerned with Starbucks’ DEI and ESG initiatives and programs, the American version of capitalism allows them to freely reallocate their capital elsewhere.” 

Posted by Cydney Posner