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Zillow Loses Bid to End Investors’ Derivative Suit on CFPB Probe

March 2, 2020, 5:02 PM

Zillow Group Inc. is stuck facing a shareholder derivative suit alleging its leadership misled investors about a financial regulator’s probe after a Washington federal district judge refused to dismiss the suit against the real estate platform.

Zillow’s investors sued after a real estate agent co-marketing program led to a Consumer Financial Protection Bureau investigation. The shareholders adequately pleaded that a pre-suit demand on Zillow’s board would have been futile, the U.S. District Court for the Western District of Washington said Feb. 28.

Plaintiffs in derivative suits must typically make a litigation demand on a company’s board before filing their own suit. But they can skip that step when making a demand would be futile because a majority of the directors couldn’t impartially consider it.

Zillow’s board had eight members when the shareholders sued, so the shareholders needed to create reasonable doubt about at least four directors’ ability to “exercise independent business judgment in responding to a demand” to establish futility, Judge John C. Coughenour’s order said. The company conceded that three directors weren’t independent for demand futility purposes, the order said.

Seven of the eight directors were named as defendants in the suit, but the bare threat of personal liability alone isn’t enough to challenge a director’s independence and disinterestedness, Coughenour said.

The investors alleged that two of the directors were on the audit committee when Zillow learned of the CFPB’s investigation in 2015 and were thus “on notice” that the co-marketing program potentially violated the law. Those directors signed forms containing “statements about Zillow’s legal and regulatory compliance that the Court has previously found, for motion to dismiss purposes, to be false and misleading,” the order said.

Those allegations are enough to support an inference that the two directors “could face a substantial likelihood of liability” making them incapable of impartially considering a pre-suit demand, Coughenour said.

Weiser Law Firm PC and Gainey McKenna & Egleston served as co-lead counsel for the shareholders. Mayer Brown LLP and Perkins Coie LLP represented Zillow.

The case is In re Zillow Grp. Inc. S’holder Derivative Litig., 2020 BL 74395, W.D. Wash., No. 17-cv-01568, motion to dismiss denied 2/28/20.

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Patrick L. Gregory at pgregory@bloomberglaw.com

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