Teladoc Secures Magistrate’s Recommendation of Dismissal of Derivative Action

In a decision likely spelling the end of the case, a magistrate judge recommended on March 26 that a shareholder derivative action against 17 current or former directors and officers of Teladoc Health, Inc. be dismissed with prejudice. Paul, Weiss is defending the Teladoc defendants in the case.

The case—one of several brought during the #MeToo era that alleged securities violations related to executive misconduct—was brought following news about an extramarital affair between Teladoc’s former CFO and a junior subordinate that allegedly began in 2014. After senior management learned about the affair in late 2016, Teladoc engaged outside counsel to conduct an internal investigation, and ultimately disciplined the CFO. In December 2018, the Southern Investigative Research Foundation published an article detailing the story of the affair. Shortly thereafter, Teladoc’s stock dropped by approximately 7% and the CFO resigned with “good reason” pursuant to a separation agreement. Plaintiffs brought a derivative action challenging the company’s response to the affair, but did not first make a demand on the company’s board.

Magistrate Judge Barbara Moses of the Southern District of New York recommended dismissal of the suit because demand on the board was not excused, rejecting the plaintiffs’ arguments that the directors faced a substantial likelihood of personal liability, acted in bad faith, or were otherwise not disinterested and independent.

First, Judge Moses found that because the business judgment rule is particularly expansive in executive employment matters, and the charter contained an exculpatory provision for duty of care violations, the company’s choice of punishment did not “come[] close” to excusing demand. A company has broad discretion on whether and when to fire an executive, and need not terminate an executive just because it has grounds to do so. Second, Judge Moses rejected the plaintiffs’ challenge to the separation agreement, explaining that a release of claims from a departing executive (even if they are not meritorious) is valuable consideration, as is avoiding a contentious breakup with an executive. Third, Judge Moses rejected the plaintiffs’ challenge to the board’s decision-making process, emphasizing the exculpatory provision and finding “decidedly unreasonable” the plaintiffs’ assertions that the process was deficient. Fourth, Judge Moses found that the directors did not face a substantial risk of oversight liability under Caremark International. Inc. Derivative Litigation, which clarifies the board’s duties in the context of its oversight activities, because the plaintiffs conceded that the CFO was investigated and did not go entirely unpunished—the plaintiffs’ essential contention that he was not punished enough does not state a claim. The plaintiffs’ attempt to collect other instances of misconduct also failed because they were far too attenuated. Fifth, Judge Moses found that public statements concerning Teladoc’s commitment to integrity and ethics, including statements in its Code of Business Conduct and Ethics, were aspirational, not actionable, and in any event, were not rendered false by isolated instances of alleged misconduct. Finally, Judge Moses rejected all of the plaintiffs’ arguments that the board lacked independence, emphasizing that the alleged conflicts did not affect a majority of the board.

Paul, Weiss previously won the dismissal of the related shareholder class action claims against Teladoc in November 2020.

The Paul, Weiss team included litigation partners Daniel Kramer and Audra Soloway and counsel Caitlin Grusauskas.