(CN) - A federal judge granted a motion to dismiss a consolidated derivative complaint against eight members of Google's Board of Directors and two executive officers, who shareholders claimed pocketed millions of advertising dollars from Canadian pharmacies.
Four named plaintiff shareholders alleged that the defendant executives allowed Canadian pharmacies to advertise prescription medications to be imported to the United States via Google's AdWords advertising program. As a result, Google was slammed with a $500 million fine by the United States Department of Justice in 2011.
In 2003, Google was contacted by the U.S. Attorney's Office regarding the advertising. And, in 2004, the company actively blocked pharmacies in countries other than Canada from advertising prescription drugs online to Google users in the U.S., the shareholders claimed, an order by U.S. District Judge Phyllis Hamilton states.
Also in 2004, Google's then-vice president for global online sales and operations, Sheryl Sandberg, testified before a congressional committee, and admitted that Google "recognizes that there are bad actors on the Internet, including unlicensed online pharmacies that peddle unsafe and counterfeit products," the shareholders cited.
The advertising breached the Food, Drug and Cosmetic Act, which prohibits pharmacies outside the country from introducing or delivering prescription drugs into interstate commerce, and the Controlled Substances Act, prohibiting such conduct with regard to controlled substances, the shareholders said.
"[A]s corporate directors and officers of the company, defendants owe Google certain fiduciary duties: specifically, the duty of loyalty, and the duties of candor and good faith. Notwithstanding these duties, however, plaintiffs allege that Google's directors and officers caused Google to facilitate the illegal importation of prescription drugs by Canadian pharmacies for at least six years, and until Google became aware of an investigation by the DOJ into such practices." Google announced that it had settled with the Justice Department in August 24, 2011.
In response, the shareholders filed an original complaint in northern California federal court on August 29, 2011, and an operative consolidated complaint on October 24, 2011. The lawsuit alleged breach of fiduciary duty of loyalty, abuse of control, corporate waste and unjust enrichment.
Nominal defendant Google, together with the individual defendants, requested an order dismissing the complaint for failure to plead facts demonstrating demand futility, and for failure to state a claim.
The shareholders, the defendants also countered, failed to address Google's Board of Directors prior to commencing the action.
"It is undisputed here that plaintiffs failed to make a demand on Google's board prior to commencing the instant lawsuit. Thus, the question is simply whether plaintiffs have adequately pled in their complaint that demand was excused," Hamilton wrote in the order, levied Tuesday.
"Plaintiffs' allegations are in many parts stated against all defendants in a collective and general fashion, and contain no particularized allegations stating which particular director or directors had knowledge of unlawful advertising by Canadian pharmacies on Google's search engine.
"In sum, therefore, plaintiffs have not met their burden to establish demand futility under the 'disinterested' prong of the Rales test," she added.
Delaware law, the home state of Google, calls for a demand-futility test provided by Rales v. Blasband when board members who approved a challenged act have since changed, or when the challenged act does not constitute a business decision by the board.
Google was exposed to millions of dollars in investigative costs and expenses as a result of the advertising, the shareholders say, and will likely incur additional legal and professional fees and expenses.
The "defendants collectively pocketed millions in salary, fees, stock options, and other payments that were not justified in light of the violations of federal law that had occurred," the shareholders added.
Hamilton, however, granted the executives' motion to dismiss for failure to establish demand futility; and for failing to state a claim for breach of fiduciary duty, for corporate waste and for unjust enrichment.
She ordered an amended complaint to be filed by June 8. No new parties or claims may be added without leave of court.