Facebook Claims Conflict Of Interest, Seeks Dismissal Of Derivative Lawsuit

By David Cohen 

Can the same law firm unsuccessfully bid to lead a class-action suit against a company, and then file a related derivative lawsuit against the same company? Facebook says no, requesting in a filing with Delaware’s Court of Chancery that the derivative suit filed by Robbins Geller Rudman & Dowd be thrown out due to a conflict of interest, but its argument may stand on shaky ground.

Thomson Reuters News & Insight reported that the law firm was one of the bidders to lead a class-action lawsuit by investors related to Facebook’s initial public offering, and, as such, it should not be able to sue the company.

According to Thomson Reuters, the filing read:

Indeed, they now claim as an injury to Facebook the costs and damages in class-action litigation that their own counsel instigated.

Robbins Geller Partner Sam Rudman denied a conflict of interest, telling Thomson Reuters:

To the extent their argument is based on the fact that we were counsel to plaintiffs in the securities class action, we have withdrawn as counsel in that case.

Experts contacted by Thomson Reuters seemed to feel that Facebook’s motion to dismiss was shaky, with Columbia Law School Prof. John Coffee saying that most courts have found similar conflict-of-interest accusations to be “more nominal than real,” and adding:

I’m not saying there couldn’t be conflict, but if all you have is a theoretical conflict, the courts have not been persuaded. This used to pop up more, but now firms have become more specialized, and you don’t usually see the major securities firms bringing derivative actions.

University of Connecticut School of Law Prof. Alexandra Lahav told Thomson Reuters Robbins Geller’s role in the derivative action would have to be materially adverse to its former class-action clients for it to be considered a conflict of interest, adding:

Their substantive position is the same regardless of whether they represent the shareholders or the shareholders derivatively. The only question ought to be, “Is this a firm that can do a good job representing these shareholders derivatively?,” which shouldn’t hinge on a technicality.

Readers: Do you think the derivative suit filed by Robbins Geller Rudman & Dowd should be dismissed?

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