Late last week, Chief Judge Richard Seeborg of the Northern District of California dismissed the breach of fiduciary duty case for a second and final time, finding that it insufficiently pleaded demand futility. The shareholders’ suit centers on allegations initially brought by the Federal Trade Commission (FTC) contending that Alphabet Inc. was responsible for non-compliance with the Children’s Online Privacy Protection Act (COPPA) in view of YouTube channels directed towards children that count as “child-directed sites” subject to the law.
COPPA strictures apply to websites or online services directed at children or when there is “actual knowledge” that data is being collected from children, the court explained. Alphabet, the owner of YouTube, the world’s largest video-sharing service, originally believed COPPA did not apply to YouTube because most of its content was not child-directed and its terms prohibited children under 13 from using the platform without a parent or guardian’s permission. “Crucially, its belief was bolstered by the FTC referring to YouTube as a general audience site in a 2013 amendment to COPPA rules,” the opinion said.
In 2015, Google launched YouTube Kids, a child-directed mobile application. The FTC investigated YouTube’s COPPA compliance then filed suit. Simultaneously, the parties reached a $170 million settlement that did include an admission of fault on Google’s part and the company changed its practices.
In the instant case, the plaintiffs allege that Alphabet’s board of directors breached their duties of care and loyalty. They argued the element of demand futility “by averring the majority of the Board could not conduct an independent and objective investigation into the purported COPPA violation because the directors faced a substantial likelihood of liability for their alleged misconduct,” Judge Seeborg specified.
The plaintiffs first argued that the board failed to implement an adequate reporting and monitoring system regarding child safety risks. The court declined this argument, finding among other things, that allegations in the amended complaint were insufficient to show that company leaders knew or should have known that the company was violating the law.
The plaintiffs next argued that board members failed to respond in good faith to red flags, and in particular the FTC investigation and consumer complaints concerning alleged COPPA violations. Judge Seeborg also rejected this contention, in light of the fact that the board’s audit committee “held special meetings to discuss the government investigation involving COPPA, cooperated with the FTC during its investigation, and provided reports to the Board.” Those efforts demonstrated a good faith effort to implement a board-level monitoring and reporting system, the opinion said.
Judge Seeborg concluded that further amendment would be futile and dismissed the complaint without leave to amend.
The shareholders are represented by Johnston Fistel LLP, Robbins LLP, and Stephens & Stephens LLP. Alphabet and the individual defendants are represented by Wilson Sonsini Goodrich & Rosati.
Notably, minor plaintiffs through their guardians filed suit against YouTube for purported COPPA violations in 2019. A sister Northern District court tossed the case after finding that there was no private right of action under COPPA, and any enforcement of the law properly lies with the FTC. The plaintiffs appealed the adverse judgment last August and currently, merits briefing is underway.
