In addition to the board, the derivative lawsuit targeted former CEO Laurent Potdevin, who was forced out in 2018 for having an affair with an employee and fostering a “toxic culture” at the clothing chain. It was filed in the Chancery Court by an individual shareholder.
The suit claimed Potdevin turned Lululemon’s leadership into a hard-partying “boys club” and “engaged in a pattern and practice of harassment and sexual favoritism,” including by giving preferential treatment to his girlfriend and giving other male executives a pass for similar behavior.
Vice Chancellor Joseph R. Slights III dismissed the case. The plaintiff failed to demand an internal board investigation before suing or establish that the demand would have been futile, the judge said.
Derivative suits, which are technically filed on a company’s behalf against its board, require either a pre-suit demand or a showing that a majority of directors were too conflicted to evaluate such a request fairly, often because they face significant legal exposure themselves.
Because Lululemon’s charter shields its board from liability for simple mismanagement, Slights noted, the suit needed to clear the higher bar of showing the directors acted disloyally by putting their own interests ahead of the company’s. It “falls well short of that mark,” he said.
The allegation that the directors negotiated the severance package “with undue haste, to sweep its oversight failures under the carpet,” is really an end run that attempts to reframe a so-called Caremark claim, the judge found. Caremark allegations, which involve claims that a board effectively failed to oversee a company at all, are notoriously hard to win, he noted.
“I am obliged to do what plaintiff apparently would prefer I not do—evaluate his failure of oversight allegations,” Slights wrote.
Given that Lululemon had an ethics code and a whistleblower hotline, and “used those systems to detect Potdevin’s misbehavior,” it’s “no wonder” the suit didn’t include a formal oversight claim, the judge said.
Because the individual directors faced no real risk of personal liability, the lack of a pre-suit demand dooms the case, he found.
The plaintiff was represented by Cooch & Taylor PA and Robbins Arroyo LLP. Lululemon and its board were represented by Ross Aronstam & Moritz LLP and Weil Gotshal & Manges LLP.
The case is Shabbouei v. Potdevin, Del. Ch., No. 2018-0847, 4/2/20.
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