U.S. Eighth Circuit - The FindLaw 8th Circuit Court of Appeals Opinion Summaries Blog

'Wal-Mex' Derivative Suit Dismissed on Quasi-Procedural Grounds

The Mexican arm of Walmart (known as Wal-Mex) has been at the center of several Walmart lawsuits recently. The latest, involving allegations that top brass at Walmart knowingly engaged in violations of the Foreign Corrupt Practices Act, has been dismissed by the Eighth Circuit, largely on quasi-procedural grounds and particularity.

Litigators, should take note: Demand clear specifics from your clients when they allege fraudulent activity. It could defeat a dismissal.

And it all Hits the Fan

In 2012, an embarrassing piece was published by the New York Times that alleged Walmart "had given millions of dollars in bribes to Mexican officials to facilitate Walmart's growth in Mexico." Stockowners then brought a barrage of lawsuits against the company. These lawsuits forced the company to cooperate in the government's investigation concerning how the company had run afoul of the FCPA in order to grease Wal-Mex through Mexican red-tape.

The complaint alleged that the board had breached its fiduciary duties and that it had compounded this sin by trying to stage a cover-up.

There's a Process to These Things

However, Walmart is a Delaware incorporated company, and under Delaware law, shareholders must first make demands of the target company before they can bring a derivative suit -- a kind of version of the exhaustion of remedies doctrine.

In this case, the shareholders did not do that. Instead, they claimed in court documents that doing so would have been futile because the board was essentially complicit in wrongdoing.

Plead With Particularity

This line of reasoning did not appease the Eight Circuit, which dismissed the case against the retail giant. Under applicable Delaware law (Erie applied), the shareholders were under an obligation to make a demand first on the board according to Delaware law. They did not make a clear enough allegation in their pleadings as to why such a demand would have been fruitless.

More to the point, the shareholders also did not plead their claims with particularity. Specifically, they did not name particular board members whom they felt were engaged in fraudulent activity.

In cases like this, it is not simply enough to say "the board." Unlike run of the mill complaints, complaints alleging injury caused by fraudulent activity must be pled with particularity. This is true both under the Federal Rules of Civil Procedure and in most state codes. Twombly will not cut it.

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