laborers' district council construction, 2015 wl...

LABORERS' DISTRICT COUNCIL CONSTRUCTION..., 2015 WL 7069530...

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2015 WL 7069530 (Del.Ch.) (Trial Motion, Memorandum and Affidavit)Chancery Court of Delaware.

LABORERS' DISTRICT COUNCIL CONSTRUCTION INDUSTRY PENSIONFUND and Hallandale Beach Police Officers and Firefighters' Personnel

Retirement Fund, derivatively on behalf of Lululemon Athletica, Inc. Plaintiffs,v.

Robert BENSOUSSAN, Michael Casey, Roann Costin, Christine M. Day,William H. Glenn, Martha A.M. Morfitt, Rhoda M. Pitcher, Thomas G.

Stemberg, Jerry Stritzke, Emily White, and Dennis J. Wilson, Defendants,and

Lululemon Athletica, Inc., a Delaware Corporation, Nominal Defendant.

No. 11293-CB.November 9, 2015.

Plaintiffs' Omnibus Opposition to Defendants' Motions to Dismiss

Rosenthal, Monhait & Goddess, P.A., Jessica Zeldin (Del. Bar No. 3558), P. Bradford deLeeuw (Del. Bar No. 3569), 919 N.Market Street, Suite 1401, P.O. Box 1070, Wilmington, Delaware 19899, (302) 656-4433, Plaintiffs' Delaware Counsel.

Motley Rice LLC, Marion E. Kimpson, Joshua C. Littlejohn, Max N. Gruetzmacher, Meredith B. Miller, 28 BridgesideBoulevard, Mount Pleasant, South Carolina 29464, (843) 216-9000, Counsel for Laborers' District Council ConstructionIndustry Pension Fund.

Pomerantz LLP, Gustavo F. Bruckner, Anna Manalaysay, 600 Third Avenue, New York, NY 10016, (212) 661-1100, PomerantzLLP, Jayne A. Goldstein, 1792 Bell Tower Lane, Suite 203, Weston, Florida 33326, (954) 315-3454, Counsel for HallandaleBeach Police Officers and Firefighters' Personnel Retirement Fund.

TABLE OF CONTENTSINTRODUCTION .................................................................................................................................... 7STATEMENT OF FACTS ...................................................................................................................... 12A. The Company. ..................................................................................................................................... 12B. The December 12, 2012 Form 8-K and the trading plan .................................................................... 13C. Wilson's January 2013 trades .............................................................................................................. 14D. Lululemon's share price recovers and Wilson's trading resumes ........................................................ 14E. Wilson sells a large stake the trading day before the announcement of that Lululemon's CEO willresign .........................................................................................................................................................

16

PROCEDURAL HISTORY ..................................................................................................................... 17I. LITIGATION IN THE DELAWARE COURT OF CHANCERY ...................................................... 17II. OTHER LITIGATION IN THE SOUTHERN DISTRICT OF NEW YORK ... 20 ARGUMENT .... 23I. NEITHER COLLATERAL ESTOPPEL NOR RES JUDICATA PRECLUDE THIS ACTION. ......... 23A. Plaintiffs' allegations are not collaterally estopped because the Board's decision not to investigateWilson's June 7 trades was neither “identical” nor “necessarily decided” in the SDNY Action .............

2 5

B. Plaintiffs were not afforded a full and fair opportunity to litigate in the prior action, thus barringany collateral estoppel defense here ........................................................................................................

33

C. Res judicata does not bar Plaintiffs' claims because controlling New York law holds that adismissal “without prejudice” is not an adjudication on the merits ........................................................

35

D. Because the SDNY Plaintiffs did not adequately represent the interests of Lululemon or itsstockholders, neither collateral estoppel nor res judicata are applicable ................................................

39

II. DEMAND ON THE BOARD IS FUTILE. ........................................................................................ 46

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A. Applicable standards for evaluating demand futility .......................................................................... 46B. Demand is excused because a majority of the Current Board made a conscious decision not toinvestigate Wilson's June 7 stock sales ...................................................................................................

49

III. PLAINTIFFS HAVE STATED A CLAIM FOR INSIDER TRADING AGAINST WILSONUNDER BROPHY AND ITS PROGENY ...............................................................................................

56

A. Plaintiffs have stated a Brophy claim ................................................................................................. 56CONCLUSION ......................................................................................................................................... 59

CasesArduini v. Hart, 774 F.3d 622 (9th Cir. 2014) .................................... 26Aronson v. Lewis, 473 A.2d 805 (Del. 1984) overruled in part byBrehm v. Eisner, 746 A.2d 244 (Del. 2000) ........................................

8, 46, 47

Asbestos Workers Local 42 Pension Fund v. Bammann, 2015 WL2455469 (Del. Ch. May 21, 2015) ......................................................

10, 29, 30, 39

Asbestos Workers Philadelphia Pension Fund v. Bell, 990 N.Y.S.2d436 (Sup. Ct. 2014) .............................................................................

23

Bader v. Goldman Sachs Grp., Inc., 455 F. App'x 8 (2d Cir. 2011) .... 23, 27, 28Bank of New York v. First Millennium, Inc., 607 F.3d 905 (2d Cir.2010) ....................................................................................................

36

Brautigam v. Blankfein, 8 F. Supp. 3d 395 (S.D.N.Y. 2014)aff'd sub nom. Brautigam v. Dahlback, 598 F. App'x 53 (2d Cir.2015) ....................................................................................................

24, 27

Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ........................................ 8, 45, 46Brophy v. Cities Service, Inc., 70 A.2d 5 (1949) ................................. 8, 55Brown v. Felsen, 442 U.S. 127 (1979) ................................................ 22Buckley v. O'Hanlon, No. 04-955GMS, 2007 WL 956947 (D. Del.Mar. 28, 2007) .....................................................................................

51

Camarano v. Irvin, 98 F.3d 44 (2d Cir. 1996) .................................... 34Canty v. Day, 13 F. Supp. 3d 333 (S.D.N.Y. 2014) aff'd, 599 F.App'x 20 (2d Cir. 2015) ......................................................................

20, 32, 34, 42

City of Providence v. Dimon, No. CV 9692-VCP, 2015 WL 4594150(Del. Ch. July 29, 2015) ......................................................................

10, 22, 37

D'Arata v. New York Cent. Mut. Fire Ins. Co., 76 N.Y.2d 659 (1990) 22, 23David B. Shaev Profit Sharing Account v. Armstrong, No. CIV.A.1449-N, 2006 WL 391931 (Del. Ch. Feb. 13, 2006) aff'd, 911 A.2d802 (Del. 2006) ....................................................................................

47

Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007) ......................... 41Elfenbein v. Gulf & Western Industries, Inc., 590 F.2d 445 (2d Cir.1978) ....................................................................................................

34, 35

Fuchs Family Trust v. Parker Drilling Co., 2015 WL 1036106 (Del.Ch. Mar. 4, 2015) ................................................................................

26

Gaft v. Mitsubishi Motor Credit of Am., No. 07 Civ. 527 (NG), 2009WL 3148764 (E.D.N.Y 2009) .............................................................

34

Genger ex rel. AG Properties Co. v. Sharon, 910 F. Supp. 2d 581(S.D.N.Y. 2012) ...................................................................................

21

Gilberg v. Barbieri, 53 N.Y.2d 285 (1981) ......................................... 31Green v. Santa Fe Indus., Inc., 70 N.Y.2d 244 (1987) ........................ 38Grimes v. Donald, 673 A.2d 1207 (Del. 1996) ................................... 45Grobow v. Perot, 539 A.2d 180 (Del. 1988) ....................................... 46Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) ............................. 55Henik ex rel. LaBranche & Co. v. LaBranche, 433 F. Supp. 2d 372(S.D.N.Y. 2006) ...................................................................................

28, 29, 38

In re China Agritech, Inc., Shareholder Derivative Litigation, C.A.No. 7163-VCL, 2013 WL 2181514 (Del. Ch. May 21, 2013) .............

46, 47

In re Dow Chem. Co. Derivative Litig., No. CIV.A. 4349-CC, 2010WL 66769 (Del. Ch. Jan. 11, 2010) ....................................................

44, 46

In re Lululemon Athletica Inc. 220 Litig., C.A. No. 9039-VCP, 2015WL 1957196 (Del. Ch. Apr. 30, 2015) ...............................................

17, 18, 57

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In re Oracle Corp., 867 A.2d 904 (Del. Ch. 2004) aff'd sub nom. Inre Oracle Corp. Derivative Litig., 872 A.2d 960 (Del. 2005) .............

55

In re Primedia, Inc. Shareholders' Litigation, Civ. No. 6511-VCL,2013 WL 6797114 (Del. Ch. Oct. 20, 2013) .......................................

8, 48, 50

In re Sonus Networks S'holders Litig., 499 F.3d 47 (1st Cir. 2007) ..... 28In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del. 2006) ............. 47, 52Ji v. Van Heyningen, No. CA 05-273 ML, 2006 WL 2521440 (D.R.I.Aug. 29, 2006) .....................................................................................

39

Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del.2011) ....................................................................................................

48, 49

Kalyanaram v. New York Inst. of Tech., 549 F. App'x 11 (2d Cir.2013) cert. denied, 135 S. Ct. 105 (2014) reh'g denied, 135 S. Ct.743 (2014) ............................................................................................

23

King v. VeriFone Holdings, Inc., 12 A.3d 1140 (Del. 2011) ............... 25, 40King v. VeriFone Holdings, Inc., 994 A.2d 354 (Del. Ch. 2010)judgment rev'd, 12 A.3d 1140 (Del. 2011) ..........................................

5

Kotler v. Donelli, 528 Fed. App'x. 10 (2d Cir. 2013) .......................... 22Landau v. LaRossa, Mitchell & Ross, 11 N .Y .3d 8 (2008) ............... 34Lefkowitz v. McGraw-Hill Global Educ. Holdings, LLC, 23 F. Supp.3d 344 (S.D.N.Y. 2014) ......................................................................

22

Levin ex rel. Tyco Int' Ltd. v. Kozlowski, 831 N.Y.S.2d 354 (Sup. Ct. 2006)aff'd sub nom. Levin v. Kozlowski, 846 N.Y.S.2d 37 (2007) ............... 29London v. Tyrrell, No. 3321-CC, 2008 WL 2505435 (Del. Ch. June24, 2008) ..............................................................................................

45

McCall v. Scott, 239 F.3d 808 (6th Cir.) amended on denial of reh'g,250 F.3d 997 (6th Cir. 2001) ..............................................................

54

Monahan v. N.Y.C. Dep't. of Corrections, 214 F.3d 275 (2d Cir.2000)...............................................................................................................

33

Papilsky v. Berndt, 466 F.2d 251 (2d Cir. 1972) ................................ 22, 38Pfeiffer v. Toll, 989 A.2d 683 (Del.Ch Mar. 3 2010) .......................... 48, 50Pyott v. Louisiana Mun. Police Employees' Ret. Sys., 74 A.3d 612(Del. 2013) ...........................................................................................

21, 41, 42

Rales v. Blasband, 634 A.2d 927 (Del. 1993) ..................................... 45Reilly v. Reid, 45 N.Y.2d 24 (1978) .................................................... 21Rogosin v. Steadman, 71 F.R.D. 514 (S.D.N.Y. 1976) ....................... 39Ryan v. New York Tel. Co., 62 N.Y.2d 494 (1984) ............................. 31, 32S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) ........... 22Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del.2006) ....................................................................................................

47

Thomas v. New York City, 814 F. Supp. 1139 (E.D.N.Y. 1993) .......... 21VNB Realty, Inc. v. Bank of Am. Corp., No. 11 CIV. 6805 DLC, 2013WL 5179197 (S.D.N.Y. Sept. 16, 2013) .............................................

40, 43

Wietschner v. Dimon, 2015 WL 4915597 (N.Y. Sup. Ct. N.Y. Cty.Aug. 14, 2015) .....................................................................................

29, 30

Statutes8 Del. § 220 ......................................................................................... 5Other AuthoritiesRestatement (Second) of Judgments, § 42(1)(e) .................................. 38, 43, 44

INTRODUCTION

“Representative litigation plays an important role in protecting the interests of stockholders, but it will not optimally serveinvestors unless suits are actually filed on the basis of real concern that wrongdoing has occurred and after a proper

investigation.” 1















































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The compelling allegations of wrongdoing in this case were “actually filed on the basis ... [of] a proper investigation” under 8

Del. § 220 (“Section 220”). They are well pled. In stark contrast to the prior derivative plaintiffs in New York, 2 the plaintiffs 3

in this case have identified “a real concern that wrongdoing has occurred” by Lululemon's board of directors 4 for failing to act ata time when they were obligated to act. What was this inaction? The Board failed to look into - much less investigate - nearly $50million in insider trades made by Lululemon's then-chairman and largest shareholder, Dennis “Chip” Wilson (“Wilson”), whichwere executed the trading day before the surprise public announcement that the Company's long-time CEO would be resigning.

When news of the CEO's departure was revealed to the public, the Company's stock price dropped dramatically, decliningnearly 17%. Wilson's $50 million in stock sales that occurred just before this significant corporate event immediately raisedsuspicions in the press that Wilson had impermissibly traded Lululemon shares while in possession of material non-publicinformation. Indeed, The Wall Street Journal and Reuters, among others, published prominent articles on the conveniently-timed trades in the immediate aftermath.

Setting aside the fact that Wilson's sales on June 7, 2013, represented 210,000 more shares than he had ever previously sold inone day, the only explanation offered by Defendants to counter the miraculous timing of the trades is that Wilson had enteredinto a Rule 10b5-1 trading plan several months earlier. In other words, they contend that the mere existence of a 10b5-1 tradingplan - regardless of what may be alleged about the unusual timing and amount of the trades - is dispositive of the issue ofwhether an insider may have benefited from material non-public information. Perhaps a 10b5-1 trading plan is dispositive insome insider trading cases. But not in this case. Significantly, Wilson's trading plan was not the type of plan where the insider'ssales are prospectively charted out in specific increments and then executed, for example, on the second Tuesday of everymonth until the share allotment under the plan is exhausted. Instead, his plan was what many refer to as a “blind trust” planwhereby the insider cedes control over trading decisions, subject to certain restrictions expressly laid out in the plan, to a third-party who, in theory, has no contact with the inside seller. That is, so long as the insider does not provide the blind trustee withmaterial non-public information, he is free to execute trades within the plan's restrictions.

As Defendants would have it, this is precisely what occurred on June 7, 2013, and any suggestion to the contrary is nothing short

of “wild speculation.” 5 Wilson's blind trustee, namely his personal stock broker at Merrill Lynch, Pierce, Fenner & Smith,decided to sell on his own and without any direct or indirect influence from Wilson.

What is lost on Defendants, however, is that the trading plan, rather than serve as a silver bullet affirmative defense, actuallystrengthens Plaintiffs' allegations that the amount of the June 7 trades was unusual. This is because Wilson did not just sellhundreds of thousands more shares than he had ever sold previously on June 7 - he also sold every last share available (for themonth of June) under the trading plan that day. As Vice Chancellor Parsons noted during the Section 220 litigation: “[s]o [thebroker is] going to sell every single share that he can today, because it's never going to be better than today. For this month,

anyway. So I'm going to get that out there. It looks like maybe that person had some information.” 6

Plaintiffs' allegations go far beyond “wild speculation.” Instead, they address the burden Delaware courts have consistently

placed on Plaintiffs at the pleadings stage under Brophy 7 : well-pleaded allegations that the trades in question are unusual in

timing and amount. 8 Plaintiffs have easily satisfied this burden, as set forth herein.



Regarding demand futility, eight of the eleven directors on the Current Board made a decision to look the other way in the face

of Wilson's miraculous trades. No inquiry, no investigation, nothing. Under Aronson v. Lewis, 9 this decision is not protectedby the business judgment rule, thereby exposing these eight directors, a clear majority of the Board, to a substantial likelihoodof liability and rendering any demand futile.

In addition to attacking the substance of Plaintiffs' Brophy and demand futility allegations, Defendants argue that this caseshould be dismissed on collateral estoppel and res judicata grounds. Both of these arguments fail.

First, with respect to collateral estoppel, Defendants cannot meet their burden and show that Plaintiffs' demand futilityallegations are “identical” to the thinly-pled demand futility allegations in the SDNY Action, a case where substantial portionsof the derivative complaint were copied verbatim from a securities fraud action. That case addressed Wilson's trades as anafterthought, rather than a core allegation. Even then the SDNY Plaintiffs alleged that demand was futile because Wilsondominated the Board, and not because, as is the case here, the Board made a decision - confirmed through a Section 220investigation - not to investigate the June 7 trades.

Second, in order to establish an affirmative defense of res judicata, Defendants must show, among other things, that the previousaction involved an adjudication on the merits. Defendants cannot establish that the previous action was adjudicated on the meritsbecause a dismissal without prejudice is, ipso facto, not on the merits. New York and Second Circuit precedent are clear on thispoint. Because Defendants cannot satisfy the “adjudication on the merits” element, res judicata cannot bar this action. Even ifthey could, this action is not part of the same “distinct factual grouping” as that present the SDNY Action, such that the claims

are the same for res judicata purposes under New York law. 10

Finally, even if this case were precluded by collateral estoppel or res judicata, the record in the SDNY Action plainly showsthat the previous representation by the SDNY Plaintiffs was grossly inadequate and conflicted, as opposed to representationthat “optimally serv[es] investors.” Indeed, the representation in the SDNY Action bears all the hallmarks of an imprudent and

“feckless fast filer.” 11 Preclusion cannot bind subsequent litigants in representative litigation where the prior plaintiffs wereinadequate. For these reasons and those set forth below, Defendants' preclusion arguments must fail.

STATEMENT OF FACTS

A. The Company.

Lululemon is a Delaware corporation with its principal executive offices located at 400-1818 Cornwall Avenue, Vancouver,British Columbia V6J1C7. Lululemon is an athletic apparel company, which produces high-end, yoga-inspired athletic wear.

Lululemon's common stock is traded on the NASDAQ stock exchange. 12

B. The December 12, 2012 Form 8-K and the trading plan.

On December 12, 2013, Lululemon publicly disclosed in a Form 8-K that Dennis J. Wilson (“Wilson”), the Company's chairman,

founder, and largest shareholder, intended to establish a Rule 10b5-1 trading plan (hereinafter the “trading plan”). 13

Following their Section 220 investigation, Plaintiffs learned that the trading plan divided the 5.7 million shares to be sold intotwo groups: 300,000 shares eligible to be sold between January 10, 2013, and December 31, 2013, at market prices (“Group



One”); and 5.4 million shares eligible to be sold between January 10, 2013 and June 30,2014 (“Group Two”) at no less than$81.25 per share (the “Trigger Price”). In addition to dividing the shares into two groups, the trading plan provided a cap that

limited the number of shares that could be sold in any given calendar month to one million. 14

C. Wilson's January 2013 trades.

Beginning on January 10, 2013 and continuing until January 14, 2013, Wilson sold 300,000 shares of Lululemon common stock

for proceeds of $21.3 million. 15 Given that these sales were made at prices below the Trigger Price, they corresponded with

the 300,000 Group One shares Wilson could sell under the trading plan. 16

Following these January 2013 stock sales, Wilson ceased all trading for nearly four months. 17 During this four month period,Lululemon disclosed that it was experiencing significant quality control problems resulting in a product recall of one of theCompany's most popular yoga pants. Not surprisingly, the Company's share price dropped significantly, and by April 1, 2013,

it traded 12.4% lower than when Wilson last sold shares on January 14. 18

D. Lululemon's share price recovers and Wilson's trading resumes.

On April 3, 2013, Lululemon announced that the Company's chief product officer was terminated from her position

“in conjunction with a reorganization of [the Company's] product organization.” 19 The market reacted positively to thereorganization and presumably other quality control measures taken in March and April 2013, and by May 10, 2013, the

Company's stock price reached an all-time intra-day high of $81.30 per share. 20

Starting that same day, and over the course of the next eleven days, through May 21, 2013, Wilson sold 1 million shares ofLululemon stock. Given that these sales were made at prices above the Trigger Price, they corresponded with the 1 million

Group Two shares Wilson could sell that month under the trading plan. 21

Following the May 21 trade, which exhausted his 1 million share monthly cap under the trading plan May, Wilson would not

trade again until June 4, 2013. 22 The day before the June 4 sales, Lululemon disclosed for the first time that it would begin

restocking its stores with the popular Luon yoga pants that had been subject to the March recall. 23 This positive news resultedin a spike of over 3% from Lululemon's opening share price on June 3. On June 4, Wilson sold 392,455 shares for proceeds

in excess of $31 million. 24

E. Wilson sells a large stake the trading day before the announcement of that Lululemon's CEO will resign.

Following a Board meeting held in March 2013, Wilson and Christine Day (“Day”), Lululemon's Chief Executive Officer

(“CEO”), engaged in follow-up discussions regarding their respective ten-year visions for the Company. 25 During the courseof these discussions, which culminated on June 5, 2013, it became clear to Day that “we [she and Wilson] are too far apart on

[her] capacities as a leader to bring strategy and vision to the [C]ompany.” 26 In short, Wilson had indicated to Day that shewas no longer the correct person to run his Company. While the current record does not reveal when he formed this opinion,or when Day first became aware of it, it is reasonable to infer that these events occurred during the course of their post-March2013 Board meeting discussions - well prior to June 5, 2013. On that day, Day confirmed to Wilson her expectation as to thetransition timetable for her successor, saying: “[m]y answer to your question from earlier is that I will finish out the year to

allow for a smooth transition of 9 months.” 27



Finally, on June 7, 2013, Day informed the full Board of her decision to depart the Company. 28 That same day, Wilson sold

607,545 shares of Lululemon stock - this time his largest one-day sale ever - for proceeds of nearly $50 million. 29 News ofDay's resignation was not disclosed publicly until after the market closed on June 10, 2013. Predictably, on the very next trading

day, June 11, Lululemon's stock price fell more than 17%, closing at $67.85 per share. 30

News outlets, including The Wall Street Journal and Reuters, immediately raised questions about the unusual timing and amount

of Wilson's recent trades. 31 In all, from January 10, 2013 to June 7, 2013, or less than 5 months, Wilson sold 2.3 million shares

of Lululemon stock under the trading plan for total proceeds in excess of $184 million. 32

PROCEDURAL HISTORY

I. Litigation in the Delaware Court of Chancery

On May 3, 2013, Hallandale commenced its Section 220 books and records action against Lululemon. LDC sent its books andrecords demand to Lululemon on August 8, 2013, and filed a Section 220 complaint against the Company on October 25, 2013.The demand letters sought access to the Company's books and records in order to investigate whether Wilson and the Boardviolated their fiduciary duties to the Company.

A trial was held on February 19, 2014, to determine whether LDC had articulated a proper purpose under Section 220 to seek

books and records regarding, among other things, Wilson's June 2013 trades. In an order dated April 2, 2014, 33 the courtconcluded that there was a credible basis to infer wrongdoing by Wilson, with regard to a possible Brophy claim, as well asagainst the Board in connection with its failure to investigate the suspicious trades, and ordered that six of the seven categories

requested by LDC be produced. 34 Regarding Wilson's trade, Vice Chancellor Parsons explained:

So I've got a credible basis to believe that he had that information [regarding Day's resignation]. He had inside information.That's not wrongdoing that he has inside information. I have the fact that under the trading plan, more shares than had everbeen traded on any other day were traded on that particular day, and it's, you know, it's 50 percent more than what had beentraded previously. That might be a little bit off in the numbers, but in that range. It's not insignificantly higher. It's a fairly

significant amount that it's higher. 35

The Court also addressed the Board's role in relation to the June 7 trades:

So [the broker is] going to sell every single share that he can today, because it's never going to be betterthan today. For this month, anyway. So I'm going to get that out there. It looks like maybe that person hadsome information. And he's not thinking about Mr. Wilson's other 95 percent of his shares. His focus iscompletely on what's happening here. And so then they come in and they say, well, this looks so suspicious.

What did the board do to investigate? I don't know. 36

On April 16, 2014, Plaintiffs received a portion of the documents responsive to their Section 220 demand, while other documentswere withheld based on attorney-client privilege. On June 13, 2014, Plaintiffs filed a motion to enforce the April 2014 220 Order

and receive the remainder of the court-ordered documents. 37 A hearing was held on Plaintiffs' motion to enforce on December1, 2014. During that hearing, Vice Chancellor Parsons reiterated his earlier statement that Wilson's June 7 trade was suspicious:

I'm talking about the June 7 trade. That's what I've always been. I'm saying I'm sitting there, a board member, I get a call andsays, oh, we're going to have a meeting in an hour. And 37 minutes before the meeting they send me notice, oh, by the way,



our CEO is stepping down next week. And then the next day, or within a week, I get a notice that - I guess the very same day,

I get a notice that Wilson, the big guy, is selling 600,000 shares of stock. And you're thinking, “Wait. What's going on” 38

Nearly five months later, 39 on April 30, 2015, the court ordered the production of additional, previously-withheld documents

relating to Plaintiffs' Section 220 demands. 40 Lululemon's final production - which includes the documents most critical tothis case - was not made until May 7, 2015. On July 15, 2015, Plaintiffs filed this action.

II. Other Litigation in the Southern District of New York

Meanwhile, a securities fraud complaint had been filed on July 2, 2013, in the Federal District Court for the Southern District

of New York, naming the Company, Wilson and Day as defendants. 41 The SDNY 10(b) Case alleged violations of the federalsecurities laws related to various allegedly false and misleading statements pertaining to several of the Company's recent quality

missteps, most notably the “sheering” issues associated with the Company's Luon yoga pant recall. 42

On August 12, 2013, and August 23, 2013, the two shareholder derivative complaints respectively comprising the SDNY Actionwere filed in the Southern District of New York. Neither of the SDNY Plaintiffs had made a books and records demand underSection 220 prior to filing suit.

On November 1, 2013, and again on January 15, 2014, amended complaints were filed in the SDNY 10(b) Case. 43 Two dayslater, on January 17, 2014, the SDNY Action's complaint was also amended. The amendment to the SDNY Action, however,not only comprised the very same allegations made in the January 15, 2014 amended complaint filed in the SDNY 10(b) Case,

but the SDNY Plaintiffs copied verbatim substantial portions of the amended allegations made in the SDNY 10(b) Case. 44 OnJanuary 31, 2014, defendants moved to dismiss the SDNY Action on the basis that the SDNY Plaintiffs had failed to make apre-suit demand on the Board to initiate litigation, and that their complaint failed to adequately plead demand futility under

Fed. R. Civ. P. 23.1 and Delaware law. 45 A hearing on this motion to dismiss was scheduled for April 4, 2014.

On March 25, 2014, LDC filed a motion to intervene in the SDNY Action 46 and, on March 27, Hallandale joined the

intervention motion. 47 The motion to intervene specifically requested that if the court was inclined to dismiss the SDNYAction, that it do so without prejudice so as not to preclude any claims that Plaintiffs may bring at the conclusion of their

investigation. 48 On April 4, 2014, oral argument was heard in the SDNY Action and counsel for both LDC and Hallandalewere in attendance to argue the motion to intervene. On April 9, 2014, the court issued its order on the motion to dismiss the

SDNY Action, 49 denying as moot Plaintiffs' motions to intervene and dismissing the SDNY Action, albeit “without prejudice,”

consistent with Plaintiffs' request. 50

ARGUMENT

I. Neither collateral estoppel nor res judicata preclude this action.

Defendants carry the burden for both asserted preclusion doctrines: collateral estoppel and res judicata. 51 As recentlyarticulated by the Delaware Supreme Court in Pyott, the law of the state where the judgment was entered will govern the

preclusion analysis. 52 In evaluating the application of issue or claim preclusion, New York courts have explained that they“must be careful not to apply the doctrine[s] ‘too harshly,’ and thus, ‘[i]n properly seeking to deny a litigant two days in court ...

deprive [the litigant] of one.’ ” 53 In this respect, “[c]ollateral estoppel ... is grounded on concepts of fairness and should not be

rigidly or mechanically applied.” 54 With respect to res judicata, “[c]ourts traditionally have exhibited understandable caution

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in according res judicata effect to a prior derivative action in which the present plaintiff stockholder did not participate.” 55

Under New York law, a prior judgment precludes a subsequent suit only “whe[re] the same evidence is needed to support both

claims, and whe[re] the facts essential to the second were present in the first.” 56 The Delaware Chancery Court, applying NewYork law has characterized this inquiry as evaluating whether the first and second suit concerns the same or a “distinct factual

grouping.” 57 As explained more fully below, Defendants cannot meet their burden regarding either collateral estoppel or resjudicata defenses.

A. Plaintiffs' allegations are not collaterally estopped because the Board's decision not to investigate Wilson's June 7trades was neither “identical” nor “necessarily decided” in the SDNY Action.

Collateral estoppel is an equitable doctrine based upon the notion that a party should not have to re-litigate an issue previously

decided - provided that the present issue is identical to one previously decided in another action. 58 “If the issues are not

identical, there is no collateral estoppel.” 59 The fact that the prior and subsequent suits merely share some facts or similar

legal issues will not establish the requisite identity of issues. 60 Instead, the “ ‘[u]se of collateral estoppel ‘must be confinedto situations where the matter raised in the second suit is identical in all respects with that decided in the first proceeding and

where the controlling facts ... remain unchanged.’ ” 61

The allegations in the SDNY Action, when compared to the allegations in the case at bar, are not identical. The gravamen of thewrong in the SDNY Action concerned “directors and officers who repeatedly either condoned or turned a blind eye to seriousquality control problems with Lululemon's products ... and simultaneously issued a series of material false and misleading

statements.” 62 For example, the SDNY Plaintiffs devoted over fifty pages in their amended complaint to allegations concerningalleged false statements relating to quality control problems and the Luon pant sheering scandal, while merely devoting one

page to allegations regarding issues related to Wilson's stock sales. 63 Even then, the SDNY Plaintiffs' advanced half-hearted

and facially unsupported allegations that demand was excused because Wilson dominated the Board. 64

Plaintiffs' allegations could not be more different. Contrary to Defendants' suggestion, 65 Plaintiffs have not alleged that Wilsondominated or otherwise controlled the Board such that its independence from him was compromised, and nothing in Plaintiffs'complaint alleges that the Board ignored red flags related to the Company's quality control problems from its Luon pant debacle.And rather than dream up unsupported allegations - or copy page after page of allegations from another case - Plaintiffs took

the time and effort, consistent with this Court's repeated admonitions, 66 to investigate materially different Board conduct. Thiscase, as foreshadowed by Vice Chancellor Parsons, is about whether the Board “mismanaged the situation” after Wilson's trades

were made. 67 The SDNY Action never came close to pleading these facts. Plaintiffs' Section 220 investigation, not a securitiesfraud complaint about a corporate trauma, forms the gravamen of Plaintiffs' case: following the publication of The Wall StreetJournal and Reuters articles about the unusual timing and amount of Wilson's trades, the Board did nothing more than look the

other way. 68 None of the SDNY Plaintiffs' few allegations about Wilson's stock sales, or his control over the Board, comesclose to identifying the Board's conscious decision to do nothing after his highly suspicious trades were questioned by the

media. This decision (or conscious indecision) is undeserving of the protections of the business judgment rule. 69

For their part, Defendants attempt to recast Plaintiffs' allegations so that they to appear to be the same as those presented by

the SDNY Plaintiffs in an effort to show that their “identity of issues” burden has been met. 70 They assert, for example,that Plaintiffs' case is about whether the Board “intentionally facilitated Wilson's alleged insider trading” or that it “willingly

participated in securities fraud in order to enrich Mr. Wilson.” 71 Defendants further attempt to argue that because Judge Forrestpreviously decided (in a generic sense) that demand on the Board was not excused, the issue of demand futility is nothing

more than a fait accompli even under the non-identical circumstances presented here. 72 Under Defendants' overly-simplistic



formulation, whenever a New York court issues an order dismissing a case for failing to plead demand futility, any subsequentderivative case alleging that demand is excused would be precluded - even where the subsequent case's issues are not identical.

Two recent opinions applying New York and Delaware law easily dispel this view. In Brautigam v. Blankfein, the U.S. DistrictCourt for the Southern District of New York denied defendants' attempt to preclude a subsequent action on collateral estoppelgrounds, finding that “the [first] action dealt with factually distinct circumstances which affected the analysis regarding whether

demand was excused.” 73 Likewise, in Bader v. Goldman Sachs Group, Inc., the Second Circuit overturned a dismissal by

the lower court on the basis that the issue of demand futility was barred by collateral estoppel. 74 The Court explained thatwhile the first action was dismissed for failing to adequately plead demand futility, “[it] did not reach the issue of whether

the receipt of undervalued stock options causes a director to be ‘interested.’ ” 75 The Court continued, “[i]n this [subsequent]case, by contrast, [Plaintiffs] Second Amended Complaint alleged that six [as opposed to three in the first action] of the twelve

directors ... were interested by virtue of having received undervalued stock options.” 76 The Court also noted that “under this

circuit's rule, collateral estoppel applies to bar relitigation only of identical issues.” 77

The same is true here. In the SDNY Action, Judge Forrest never reached the distinct issue of whether Lululemon's Board, asit was comprised in 2013, was protected by the business judgment rule for failing to investigate, or even inquire into, Wilson'ssuspicious trades. The Court did not decide this issue because it was never raised by the SDNY Plaintiffs. Nor could it havebeen, absent a Section 220 investigation. Thus, under New York law and the law of the Second Circuit, the issues in this caseare not identical to those in the prior SDNY Action.

The authority on which Defendants' most notably rely are easily distinguishable. 78 In Henik v. LaBranche, the only twoarguments advanced by plaintiffs' in the second case were (i) that the dismissal did not constitute a final decision on the merits,

and (ii) that the plaintiffs were not in privity with the plaintiffs in the first action. 79 In other words, the subsequent plaintiffs didnot contend that the issues presented in their case were not identical to the issues considered in the first case, a tacit admission

that they were advancing the exact same theories and relying on the same core facts as the plaintiffs in the first case. 80

Levin v. Kozlowsky is based on a distinct set of facts, most notably that the first-filed case was dismissed because plaintiffs had

not met the unique requirements under Bermudian law for pursuing derivative claims. 81 Furthermore, counsel for the later-filed action was “actively involved” in the previous action and had already “put forth its best arguments” there, appearing as“Of Counsel” or “Counsel for Derivative Plaintiffs” on at least 20 different pleadings in the prior action, including the amended

complaint and the appellate brief. 82 The Court also explained - and the plaintiffs conceded - that the allegations in the two

cases were “substantially identical.” 83

In Wietschner v. Dimon, in the subsequent action the plaintiffs once again conceded that their issues were identical to thosein the first action:

The court thus finds, and plaintiff does not dispute, that Central Laborers' Pension Fund and Steinbergdecided demand futility issues that are virtually identical to those raised by defendants' motion to dismiss

the second cause of action. 84

In Asbestos Workers Local 42 Pension Fund v. Bammann, the “sole question” was whether the identical issue was necessarily

decided. 85 The Court distinguished Brautigam and Bell and found that the underlying conduct giving rise to the claims wasidentical - whether a majority of the Company's directors face a substantial likelihood of personal liability for failure to oversee

risk undertaken at the company. 86



Defendants can therefore point to no case under New York or Second Circuit law which stands for the proposition that the“identity of issues” element of collateral estoppel can be met simply by determining whether demand futility itself, in thebroadest sense, was previously decided in the prior action. Because Plaintiffs' demand futility allegations are far from identicalto the demand futility issues litigated in the SDNY Action, collateral estoppel does not preclude this action.

B. Plaintiffs were not afforded a full and fair opportunity to litigate in the prior action, thus barring any collateralestoppel defense here.

There is no dispute that Plaintiffs' obligations regarding the second element of collateral estoppel is contingent and arises onlyafter Defendants have met their initial burden. As shown above, Defendants have not met the threshold issue of identity sothe Court may end its analysis here.

If, however, Defendants are found to have met their burden under the first prong, Plaintiffs nevertheless did not have a full andfair opportunity to litigate, as is required by the second prong. Under New York law:[a] determination whether the first action or proceeding genuinely provided a full and fair opportunity requires considerationof ‘the ‘realities of the [prior] litigation’, including the context and other circumstances which ... may have had the practical

effect of discouraging or deterring a party from fully litigating the determination which is now asserted against him. 87

The “point of the inquiry, of course, is ... to decide whether [the prior determination] should be given conclusive effect beyond

the case in which it was made.” 88 Although courts may consider many specific factors in their analysis of this issue, 89 thequestion as to whether a party has had a full and fair opportunity to contest a prior determination “cannot be reduced to a

formula.” 90

Here, Plaintiffs did not sit on their rights, but instead served Section 220 demands to inspect Lululemon's books and recordsbefore any derivative action was filed. The demand sought documents that were necessary to consider, as a threshold matter,whether the Board was capable of objectively considering a litigation demand. Moreover, after reviewing the poorly-pleadcomplaint in the SDNY Action, Plaintiffs moved to intervene in order to protect Lululemon's claims as well as shareholders'interests in seeing the claims dismissed, if at all, without prejudice. After issuing its preliminary order dismissing the SDNYAction “without prejudice,” in a clear nod towards the relief requested in Plaintiffs' motion to intervene, the Court denied the

intervention motion as moot. 91

As explained more fully below, the SDNY Plaintiffs failed to adequately represent the interests of Lululemon shareholdersby, among other things, (i) failing to conduct their own independent investigation of the claims and instead relying on theSDNY 10(b) Case and Plaintiffs' Section 220 investigations, and (ii) refusing to support Plaintiffs' motion to intervene so asto help bolster their very thinly-pled allegations. The SDNY Plaintiffs (and other Lululemon stockholders) were therefore notadequately represented by their counsel, and Plaintiffs here should not be foreclosed from pursuing their case as a consequence.

C. Res judicata does not bar Plaintiffs' claims because controlling New York law holds that a dismissal “withoutprejudice” is not an adjudication on the merits.

The doctrine of res judicata requires that the party seeking to invoke the defense on the basis of a prior dismissal must show eachof the following: “(1) the previous action involved an adjudication on the merits; (2) the previous action involved the plaintiffsor those in privity with them; [and] (3) the claims asserted in the subsequent action were, or could have been, raised in the

prior action.” 92 Defendants cannot satisfy elements (1) and (3) above, rendering the doctrine of res judicata inapplicable here.



1. Under New York law, a dismissal “without prejudice” is not a final adjudication on the merits.

The Court of Appeals of New York, as recently as 2008, has reaffirmed the basic proposition that “a dismissal ‘without prejudice’

lacks a necessary element of res judicata-by its terms such a judgment is not a final determination on the merits.” 93 The rule

in the Second Circuit is the same: “[w]here a dismissal is without prejudice, res judicata does not apply.” 94

There is no dispute that in the SDNY Action, Judge Forrest dismissed the amended complaint “without prejudice.” 95 Undereither New York substantive law or federal common law, such a dismissal has no res judicata effect. This Court's analysis ofres judicata should end here.

Defendants may attempt to argue, however, that because the dismissal order in the SDNY Action included the words “in theevent plaintiffs seek to pursue these claims after making a demand on the Board” after the words “without prejudice,” that thisphrase necessarily implies that the dismissal was without prejudice only to the extent that the SDNY Plaintiffs, or any otherstockholders (including Plaintiffs here), wish to make a demand on the Board. Otherwise, or so Defendants may claim, thedismissal was “with” prejudice on the issue of demand futility. Assuming Defendants even raise this argument, Plaintiffs pointout that the Second Circuit has already addressed the exact issue of what “without prejudice” means when these words areincluded with additional phraseology:

Our confusion [with the lower court's use of the phrase “without prejudice to its renewal”] results from JudgeBroderick's expansion of the phrase “without prejudice.” The district court's dismissal of the complaint“without prejudice to its renewal” could certainly be read as an order granting the plaintiff leave to amendher complaint. However, we find it impossible to determine to any real degree of certainty what the districtcourt intended. Therefore, we choose to import no meaning to this phrase beyond the meaning repeatedlygiven by this court to the phrase “without prejudice.” The action is terminated; however, a subsequent suit

will not be barred by the doctrine of res judicata. 96

The SDNY Action's dismissal presents an analogous situation. There are various ways the additional language in the court'sorder may be interpreted, and any self-serving reading that Defendants propose does not, as Elfenbein makes clear, determine

with any reasonable degree of certainty what the court actually intended. 97 This Court and the parties can with the utmostconfidence interpret what res judicata means in New York state courts and in the Second Circuit: a later-filed suit will not bebarred by res judicata if the prior case is dismissed “without prejudice.” Because Defendants cannot satisfy the “adjudicatedon the merits” element of res judicata, Plaintiffs' claims are not barred by the SDNY Action.

2. The claims asserted in this action are not the same and could not have been raised in the SDNY Action.

Even if the SDNY Action resulted in a final adjudication on the merits (which it was not), res judicata still would not barPlaintiffs' claims. The Second Circuit has held that “claim preclusion bars the re-litigation only of claims that were, or couldhave been, brought in an earlier litigation between the same parties or their privies ... [i]t has no effect on claims that could

not have been brought in the prior action.” 98 The SDNY Plaintiffs could not have brought the claims asserted in this casebecause at the time, the necessary facts were not known or knowable absent a successful Section 220 investigation. The SDNYPlaintiffs' case ended once Wilson filed his Form 4's disclosing the June 7 trades. In stark contrast, the claims asserted heredid not even begin until the Wall Street Journal Article was published on June 13, 2012, raising red flags that Wilson's Junetrades were conveniently timed and therefore suspicious.

Additionally, as Vice Chancellor Parsons pointed out in City of Providence, which applied New York law, the true inquiryregarding whether the first and second action set forth the same claims for purposes of res judicata involves a judicial



determination into whether the second action concerns a “distinct factual grouping” when compared to the first action. 99

Plaintiffs easily meet this test. The factual grouping at issue in the SDNY action is two-fold: whether the Board breachedits fiduciary duties by ignoring red flag warnings related to the Luon pant scandal, and, to a lesser extent, whether Wilsondominated the Board. As explained above and set forth in Plaintiffs' complaint, those allegations are not in this case. Instead,Plaintiffs have made detailed allegations, with the benefit of internal Company documents, pertaining to how the June 7 tradeswere red flag events and how they were subsequently ignored by the Board. Because the allegations in the SDNY Action arenot part of the same factual grouping as the allegations in this case, res judicata does not bar Plaintiffs' claims.

D. Because the SDNY Plaintiffs did not adequately represent the interests of Lululemon or its stockholders, neithercollateral estoppel nor res judicata are applicable.

Defendants seek to deprive Plaintiffs access to this Court, but one cannot be bound by a judgment against a party who purportsto represent him if that previous party failed to prosecute the action with due diligence and reasonable prudence, and the

opposing party was on notice of facts making that failure apparent. 100 In circumstances such as those present here, “there maybe grounds warranting a different preclusion analysis and result where the plaintiff shareholder in the first action is alleged to

have inadequately represented the interests of all the shareholders.” 101 In this respect:

If nonparty stockholders are to be conclusively bound by the results of an action prosecuted by a stockholder ostensiblyrepresenting their interests, however, fundamental considerations of fairness and justice demand that the representation beadequate. One of the principal criteria for adequacy of representation is that the representation must be of such character as to

insure the vigorous prosecution of the claim. 102

An inadequate representation “inquiry... is broad and can extend to whatever factors are needed to assure the Court of theadequacy of the representation of the class to be represented, and raises questions both as to the plaintiff's role and role

of his counsel.” 103 Indeed, “[f]ailure to ... allege demand futility with sufficient particularity may well reflect the kind offeeble prosecution of the claim which would invoke fairness issues when it came time to bar subsequent suits by nonparty

shareholders.” 104 In this respect, “[a] specter of unfairness appears ... in the derivative context[] where a derivative plaintiffwith a viable claim may be estopped from proceeding based on the inadequate efforts of a fellow stockholder in privity, a feckless

fast filer .... [which] ... may be addressed by a showing that the first filer was an inadequate corporate representative.” 105

Here, the record in the prior SDNY Action bears all the hallmarks of a “feckless fast filer” whose previous representation wasgrossly inadequate, conflicted, and which this Court should find insufficient to allow Defendants to invoke either collateralestoppel or res judicata.

Several key failures in the SDNY Action, when viewed together, render the SDNY Plaintiffs' representation grossly

inadequate. 106 First, the SDNY Plaintiffs failed to conduct type of investigation which Delaware Courts strongly urge Plaintiffs

to undertake before filing a derivative complaint alleging that demand is excused. 107 Then, when presented with an opportunityto amend their complaint, the SDNY Plaintiffs copied over 100 paragraphs of allegations, verbatim, from another complaint

alleging very different claims against a different set of Defendants. 108 When Plaintiffs sought to intervene in the SDNY Action,in an effort to preserve the opportunity to interpose a factually-complete and thoroughly investigated complaint that would standa chance to overcome a motion to dismiss, the SDNY Plaintiffs resisted this overture and blithely characterized the motion as

one from “ ‘niche’ plaintiffs and their counsel ... seeking to carve out roles for themselves.” 109 This posture reveals that theSDNY Plaintiffs sought only to preserve their own control over the litigation, while standing on a feebly-pleaded complaint, atthe expense of Lululemon and its shareholders. This is the precise circumstance (“stockholders ... [who are] acting on behalf

of their law firms instead of the corporation”) that the Delaware Supreme court expressed “concerns” about in Pyott. 110



The SDNY Plaintiffs' first complaint was filed on August 12, 2013. This rushed complaint allowed no time to conduct the typeof investigation which Delaware Courts urge plaintiffs to undertake before alleging demand futility. By failing to seek accessto Lululemon's books and records before filing suit, the SDNY Plaintiffs were utterly “unable to plead any facts about what the[Company's] board did, when they did it, what they discussed, what conclusions they reached, and why the board did or did

not do anything.” 111 Given their failure to conduct even a reasonable investigation, it comes as no surprise that ultimately theSDNY Plaintiffs' allegations proved to be “general and conclusory rather than factual and specific, and thus fail ... to excuse

demand.” 112 While this speed racer approach might benefit the SDNY Plaintiffs' counsel, it in no way benefited Lululemon.

Although the Delaware Supreme Court has held that there is no “fast-filer irrebuttable presumption” of inadequacy, 113 thisfactor is but one which may be considered in an inadequate representation analysis and, given the repeated admonitions byDelaware courts to utilize Section 220 before filing a derivative complaint, ought to be given substantial weight here.

Compounding the SDNY Plaintiffs' failure to use the “tools at hand,” they then resorted to relying - almost verbatim - on others'work in crafting significant portions of their amended allegations. This failure was apparent to Defendants:Plaintiffs allege no facts supporting these conclusory claims ... [and] [i]nstead, plaintiffs add 101 paragraphs copied almostverbatim from the complaint in the federal securities litigation against Lululemon ... [f]orty-one of those 101 new paragraphssimply replace the words ‘lululemon’ or ‘the Company’ in the federal securities action with the word ‘Defendants' - a term

plaintiffs use here to encompass thirteen individuals, eleven of whose names do not even appear in the securities complaint. 114

The SDNY Plaintiffs even appear to rely on confidential witness statements that the lawyers in the securities fraud case obtained,

not the SDNY Plaintiffs. 115 When this point was raised by Defendants in their motion to dismiss briefing, the SDNY Plaintiffs'counsel refused to confirm whether or not they contacted these confidential witnesses. If not, this is “impermissible” conduct“in light of counsel's ‘personal, non-delegable responsibility’ under Rule 11 to ‘validate the truth and legal reasonableness of

the papers filed.’ ” 116

Defendants were indisputably on notice that the SDNY Action's extreme degree of outright copying and its reliance onunsubstantiated factual allegations demonstrated nothing less than an utter failure in “due diligence and reasonable prudence” by

the SDNY Plaintiffs in prosecuting that action. 117 In fact, as noted above, Defendants themselves pointed out these indicators

of grossly deficient management of the litigation in their motion to dismiss. 118 “Where the representative's management ofthe litigation is so grossly deficient as to be apparent to the opposing party, it likewise creates no justifiable reliance interest in

the adjudication on the part of the opposing party.” 119 As such, Defendants should not presume to rely here on the previous

adjudication. 120

II. Demand on the Board is futile.

A. Applicable standards for evaluating demand futility

Delaware has set forth two tests for determining whether a demand on a board of directors would be futile: the Aronson and Ralestests. When a shareholder derivative complaint “challenge[s] a board decision,” a plaintiff “must show that demand was futile

under the two-pronged Aronson test.” 121 Under the Aronson test, a plaintiff demonstrates demand futility when “a reasonabledoubt is created that: (1) the directors are disinterested and independent; or (2) the challenged transaction was otherwise the

product of a valid exercise of business judgment.” 122

In 1993, the Delaware Supreme Court announced that a refined demand futility test would apply when the challenged conduct

was an omission or failure to act by the board rather than a particular directorial decision. 123 Under the Rales test, “a court mustdetermine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt



that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested

business judgment in responding to a demand.” 124 The term reasonable doubt means “there is a reason to doubt” that a board

is incapable of making an independent or disinterested decision with respect to a plaintiffs demand. 125 Moreover, reasonable

doubt “must be decided by the trial court on a case-by-case basis employing an objective analysis.” 126 In evaluating whethera plaintiff has adequately pled reasonable doubt, a court must accept as true each of the complaint's particularized factual

allegations and draw every fair inference flowing from those alleged facts in the plaintiff's favor. 127

Though the Aronson and Rales tests appear to be different, they actually “have been described as complementary versions ofthe same inquiry .... The fundamental question presented by the defendant's Rule 23.1 motion is whether the Demand Board

could have validly considered a litigation demand.” 128

Because Plaintiffs have alleged that a majority of the Current Board failed to take action, under Delaware law, they are

challenging a Board decision. 129 The proper inquiry then, is whether Plaintiffs have created a reason to doubt that this decision- which Plaintiffs contend was made in the face of red flag warnings of misconduct - was made “on an informed basis, in good

faith, and in the honest belief that the action taken was in the best interests of the company.” 130

As an initial matter, “a failure to act in good faith may be shown ... where the fiduciary intentionally fails to act in the face of a

known duty to act demonstrating a conscious disregard for his duties.” 131 This would invariably include circumstances, suchas those here, where a board, having been placed on actual or constructive notice of potential serious improprieties by a fellowdirector, decided not to inquire further into the matter and instead made a conscious (and uninformed) decision to look the other

way. 132 Circumstances such as these, of course, also implicate the duty of loyalty. 133

B. Demand is excused because a majority of the Current Board made a conscious decision not to investigate Wilson'sJune 7 stock sales.

1. The timing and amount of Wilson's June 7 sales was a red flag event and should have been investigated by theBoard.

Delaware courts recognize that allegations of insider sales that are “unusual in timing and amount” support a pleadings-stage

inference that the seller took advantage of confidential corporate information not yet available to the public. 134

Plaintiffs' complaint more than sufficiently alleges that Wilson's June 7 trades were unusual in timing and amount. On the issue

of timing, Wilson's broker executed these sales the trading day before the CEO's resignation would be disclosed to investors. 135

This was a remarkably convenient time to sell, as it occurred immediately before the surprise departure of the Company's long-

tenured CEO - by any measure, a significant corporate event. 136 The Company's stock price dropped as soon as this newsbecame public.

Regarding the amount of these sales, Plaintiffs have alleged what Delaware courts require them to assert when attempting to

bring a Brophy claim: they compare the suspicious trades with the seller's previous trading history. 137 After doing so, Plaintiffsuncovered the following:

1. The June 7 sales involved 210,000 more shares than Wilson's next-highest single-day sale and more than doubled (321,000more shares) any other single-day trade made in all of 2011 and 2012; and2. The aggregate value of the June 7 trades ($49,515,161) was $32 million more than any single-day proceeds when compared

to sales made in 2011 and 2012. 138




Plaintiffs also alleged that the 607,545 shares sold on June 7 was the maximum Wilson could have sold in one month under his

trading plan. 139 In other words, despite the fact that on June 3, 2013, Lululemon announced that the corporate trauma related

to the Luon pants had come to an end, 140 Wilson's broker -just four days later on June 7 - decided on his own (with perfectclairvoyance) to sell every share available under the plan that day. Given the magnitude of the June 7 trade, in comparison withWilson's previous trading patterns, it is entirely reasonable to infer that the sales were spurred by information other than whatwould normally (and legally) be available, such as the upcoming public announcement of Day's resignation.

Under Pfeiffer and Primedia, the well-pleaded facts above easily support a pleadings-stage inference that the June 7 tradeswere unusual in timing and amount. Yet, Plaintiffs went many steps further. Using the documents produced in their Section220 investigation, they also alleged precisely what Wilson knew about Day's resignation and when he knew it, including the

timetable for public disclosure. 141 Though such detail is not required at the pleadings stage, 142 it provides a cogent rebuttalto the inference that Defendants seek, which is that Willon's trading plan effectively negates any and all “unusual” suspicionsthat may otherwise be inferred from the timing and amount of his trades.

When combined with news coverage published in The Wall Street Journal and Reuters about the June 7 sales, these events

were a red flag. 143 After this red flag was prominently discussed in the media, Lululemon's directors should have taken steps

to inquire further, consistent with their fiduciary duties of loyalty and good faith under Delaware law. 144 Instead, they madea conscious decision to remain uninformed and look the other way.

Defendants speculate that the Board could have performed what effectively amounts to an oral inquiry into the matter, 145

whereby the directors never actually called a meeting to discuss Wilson's trades but instead communicated by phone or inperson about these events, and that those hypothetical discussions somehow amount to an investigation of red flag warnings ofpotentially serious impropriety by a fellow Board member. Even if this were true, it begs the question why nothing in the Section

220 production or the privilege log suggests that these alleged discussions actually occurred. 146 In fact, the email exchange

between Nicholas and Stritzke 147 that occurred almost one month after the June 7 sales strongly suggests the opposite is true:why ask the Company's Director of Legal whether a lawyer has “look[ed] at the facts surrounding the last trade]” if a Board

investigation, however informal, is underway? 148

When Plaintiffs' particularized allegations about the unusual timing and amount of the June 7 trades are taken as true, whichthey must be at this stage, they easily overcome any competing inference that Defendants' advance related to Wilson's tradingplan. They also confirm the existence of red flags. As set forth below, the Board had both actual and constructive knowledge

of these red flags, thus prompting their affirmative obligation to investigate the matter. 149

2. The Wall Street Journal and Reuters articles placed the Board on notice of the unusual timing and amount ofWilson's trade.

On June 12, 2013 - less than forty-eight hours after the public disclosure of Day's resignation - the Board's lead director (MichaelCasey) was personally informed that reporter from The Wall Street Journal was inquiring into the suspicious nature of Wilson's

trades and planning to run a story on them. 150 With respect to the trades, the reporter noted that Wilson's “pretty incredible”

recent sales “raise[] some questions that we really need answers to.” 151

Later that day, The Wall Street Journal published a story about Wilson's trading under the headline “Timing of Stock Sales

Favors Lululemon Insider.” 152 The article outlined the suspicious timing of the trades, stating, among other things:



On Friday, the day Lululemon's board was notified that CEO Christine Day intended to vacate her post, Mr. Wilson sold 607,545shares at a price of $81.50 apiece, for proceeds of $49.5 million. The company announced the CEO's departure plans afterthe market closed on Monday. On Tuesday, Lululemon's stock fell more than 17% to $67.85. A sale at that price would have

brought Mr. Wilson about $8 million less than he reaped by selling his stock the previous week. 153

The next day, in an article headlined “Lululemon chairman sold stock before CEO's surprise departure, a Reuters article similarlynoted that “Wilson sold stock worth $50 million days before shares slumped on the news of Chief Executive Christine Day's

surprise departure.” 154

It is axiomatic that directors of Delaware corporations are on constructive notice of the contents of prominent news reports

that concern the companies where they serve as fiduciaries. 155 Furthermore, Casey - the Board's lead director (a positionwhose duties include serving as liaison from the Company to the rest of the independent directors) - was on actual notice of the

suspiciousness of the trades in light of the June 12, 2013, e-mail referenced above. 156 Finally, at least one independent directorfound the trades sufficiently suspicious to later ask whether “we [the Board] had an attorney look at the facts surroundingthe last trade made under Chip's previous plan” and who the Board contact for such an investigation would have been. Whilethe very fact of a director asking these questions implies that nothing was done by the Board in the aftermath of the trades,Nicholas' reply to Casey's question unequivocally confirmed the Board's inaction: “[w]e haven't had an attorney look into the

facts surrounding the last trade made under [Wilson's] plan.” 157

Because Plaintiffs have alleged with sufficient particularity that a majority of the current Board (eight of the current eleven

directors) knowingly made a decision not to take action following red flag warnings about Wilson's highly suspicious trades, 158

this decision is not protected by the business judgement rule. Therefore, Defendants face a substantial likelihood of liability fortheir breach of loyalty and good faith, making any demand on the Current Board to initiate this action futile.

III. Plaintiffs have stated a claim for insider trading against Wilson under Brophy and its progeny.

A. Plaintiffs have stated a Brophy claim.

Delaware law provides that “directors who misuse company information to profit at the expense of innocent buyers of their stock

should disgorge their profits.” 159 A breach of fiduciary duty claim premised on unlawful insider trading arises where “(1) thecorporate fiduciary possessed material, nonpublic company information; and (2) the corporate fiduciary used that information

improperly by making trades because she was motivated, in whole or in part, by the substance of that information.” 160 Plaintiffshave met this standard.

Wilson claims that Plaintiffs have not sufficiently alleged that he possessed material, non-public company information at any

time prior to June 5, 2015. 161 This is true. 162 The most suspicious trading, as outlined in Plaintiffs' complaint, occurred on June7. Plaintiffs have easily demonstrated that as of June 7, Wilson was one of only four individuals who know about Day's surprise

resignation. 163 Plaintiffs have also sufficiently alleged scienter (i.e., that Wilson was “motivated by” the announcement of

Day's resignation) by demonstrating that Wilson's June 7 trades were “unusual” in timing and amount. 164

Contrary to Defendants' assertions, there is no “materiality threshold” requiring Plaintiffs to allege that Wilson sold a certainpercentage of his Lululemon stock to support a claim for insider trading. Vice Chancellor Parsons aptly noted that while“the 607,000 plus shares sold on June 7 by Wilson ... represented only a small percentage of Wilson's total holdings in the

Company - specifically, less than 2 percent,” “[t]hat [materiality] argument is not persuasive in this case for several reasons.” 165

Specifically, “the amount of an individual's holdings that are sold is ... not the only factor that courts consider when analyzingan insider trading claim,” and here, “there is at least some indication that Wilson or his agent sold as many shares as he



possibly could on June 7, which would support an inference of scienter, especially based on the near-perfect timing of the trade

relative to the public announcement of the seemingly unexpected resignation of lululemon's CEO.” 166 Likewise, the existenceof Defendant Wilson's trading plan does not save Defendants from liability. See Defendant Wilson's Br. at 18. Indeed, ViceChancellor Parsons has previously stated that the mere existence of a 10b5-1 trading plan will not serve as an absolute defensefor defendants and will not preclude a finding of a credible basis for an inference of wrongdoing:

While Lululemon repeatedly avers that the trading plan conclusively demonstrates that no insider trading took place, such aconclusion would be premature based on the truncated record before me. While the trading plan may weigh against a findingthat insider trading occurred, and, indeed, ultimately might absolve Wilson of liability, its mere existence and the fact that its

mechanics literally may have been adhered to do not, in and of themselves, preclude insider trading. 167

Accordingly, because Plaintiffs have alleged (1) that Wilson was in possession of material non-public information, and (2)was motivated by that information to sell Lululemon shares on June 7. Defendants' motion to dismiss the insider trading claimshould be denied.

CONCLUSION

Try as they might, Defendants cannot bootstrap Plaintiffs' allegations to those already decided by Judge Forrest in the SDNYAction. Defendants also cannot overcome the fact that the SDNY Plaintiffs did not adequately represent Lululemon and itsstock holders in the previous action and that they were not aware of such deficiencies. With preclusion out of the way, theonly issue remaining is whether Plaintiffs have alleged with sufficient particularity whether the Board's decision not to inquireinto Wilson's miraculously well-timed June 7 trades is deserving of the protections of the business judgment rule. If landmarkDelaware Supreme Court decisions like Aronson, Disney, and Stone are to be taken at face value, the obvious answer to thisquestion is “no.” And because the answer to this question implicates more than a majority of Lululemon's Current Board, ademand to initiate this action would be a useless and futile act. Accordingly, for all the reasons stated herein, Defendants'motions must be denied.

ROSENTHAL, MONHAIT & GODDESS, P.A.

/s/P. Bradford deLeeuw

Jessica Zeldin (Del. Bar No. 3558)

P. Bradford deLeeuw (Del. Bar No. 3569)

919 N. Market Street, Suite 1401

P.O. Box 1070

Wilmington, Delaware 19899

(302) 656-4433

Plaintiffs' Delaware Counsel

OF COUNSEL:

MOTLEY RICE LLC



Marion E. Kimpson

Joshua C. Littlejohn

Max N. Gruetzmacher

Meredith B. Miller

28 Bridgeside Boulevard

Mount Pleasant, South Carolina 29464

(843) 216-9000

Counsel for Laborers' District Council Construction Industry Pension Fund

POMERANTZ LLP

Gustavo F. Bruckner

Anna Manalaysay

600 Third Avenue

New York, NY 10016

(212) 661-1100

Counsel for Hallandale Beach Police Officers And Firefighters' Personnel Retirement Fund

POMERANTZ LLP

Jayne A. Goldstein

1792 Bell Tower Lane, Suite 203

Weston, Florida 33326

(954) 315-3454

Counsel for Hallandale Beach Police Officers And Firefighters' Personnel Retirement Fund

November 2, 2015

PUBLIC VERSION: November 9, 2015

Footnotes



1 King v. VeriFone Holdings, Inc., 994 A.2d 354, 356 (Del. Ch. 2010) judgment rev'd, 12 A.3d 1140 (Del. 2011).

2 See Canty v. Day et al., C.A. No. l:13-cv-05629-KBF (S.D.N.Y Aug. 12, 2013) and Federman v. Day et al., C.A. No. 1:13-cv-05977-

KBF (S.D.N.Y Aug. 23,2013). On November 8, 2013, the Canty complaint was designated the operative complaint; all references

herein therefore cite to the docket in Canty, and these New York derivative actions are referenced collectively herein as the “SDNY

Action.” Plaintiffs Canty and Federman are referred to as the “SDNY Plaintiffs.”

3 Plaintiffs Laborers' District Council Construction Industry Pension Fund (“LDC”) and Hallandale Beach Police Officers and

Firefighters' Personnel Retirement Fund (“Hallandale”) are referenced collectively as the “Plaintiffs.”

4 Lululemon's board of directors in mid-2013, at the time of the underlying conduct, is referred to herein as the “Board,” and is

distinguished from the composition of the Company's board of directors at the time Plaintiffs' derivative complaint was filed in July

2015. That latter board of directors is referred to herein as the “Current Board.”

5 See Defendant Dennis J. Wilson's Opening Brief In Support of His Motion to Dismiss (“Defendant Wilson's Br.), at ¶ 17.

6 See In re lululemon athletica inc. 220 Litig., Consol. C.A. No. 9039-VCP (Del. Ch. April 2, 2014) (TRANSCRIPT) (the “April 2014

220 Order”) at 61, the full transcript of which is attached as Exhibit 15 to the Transmittal Affidavit of Bradley R. Aronstam that

accompanies Defendants' Motion to Dismiss.

7 Brophy v. Cities Service, Inc., 70 A.2d 5 (1949).

8 In re Primedia, Inc. Shareholders' Litigation, Civ. No. 6511-VCL, 2013 WL 6797114, *14 (Del. Ch. Oct. 20, 2013).

9 Aronson v. Lewis, 473 A.2d 805, 807 (Del. 1984) overruled in part by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

10 City of Providence v. Dimon, No. CV 9692-VCP, 2015 WL 4594150, at *8 (Del. Ch. July 29, 2015) (applying New York law).

11 Asbestos Workers Local 42 Pension Fund v. Bammann, 2015 WL 2455469, at * 18 fn. 147 (Del. Ch. May 21, 2015) (noting that

“[a] specter of unfairness appears ... in the derivative context[] where a derivative plaintiff with a viable claim may be estopped from

proceeding based on the inadequate efforts of a fellow stockholder in privity, a feckless fast filer .... [which] ... may be addressed by

a showing that the first filer was an inadequate corporate representative.”)

12 Compl. ¶ 11.

13 Id. 31.

14 Id. 33.

15 Id. 35.

16 Id. 36.

17 Id. 39.

18 Id. ¶40.

19 Id. ¶42.

20 Id. ¶43.

21 Id.

22 Id. 44.

23 Id. ¶ 45.

24 Id. ¶46.

25 See Compl. Ex. G (Wilson offering his “edits on the vision” in a document e-mailed to Day entitled “10 year chip edit vision - For

March 2013 Board - CONFIDENTIAL.pptx.”)

26 Compl. ¶ 47.

27 Id. ¶ 47-48.

28 Id. ¶50.

29 Id. 52.

30 Id. ¶53.

31 Id. ¶ 54.

32 Id. 56.

33 Vice Chancellor Parsons stated that the LDC and Hallandale cases were substantially similar and, following the trial in the LDC case,

consolidated the Hallandale and LDC actions to facilitate enforcement of his post-trial order.

34 See the April 2014 220 Order at 38-42. Specifically, the Company was ordered to produce: (1) Wilson's trading plan; (2) any emails

from Wilson to Lululemon's compliance office regarding the trading plan; (3) any changes to the trading plan; (4) all documents

concerning Wilson's June trades; and (5) all documents concerning any inquiry by the board or any member of the board regarding

Wilson's trades between June 1 and June 30, 2013.

35 Id. at 60 (emphasis added).

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36 Id. at 61 (emphasis added).

37 In reLululemon Athletica Inc. 220 Litig., C.A. No. 9039-VCP, 2015 WL 1957196, at *3 (Del. Ch. Apr. 30, 2015).

38 See In re lululemon athletica inc. 220 Litig., Consol. C.A. No. 9039-VCP (Del. Ch. Dec. 1, 2014) (TRANSCRIPT), attached hereto

as Exhibit A, at 60.

39 During the substantial span of time between the filing of Plaintiffs' motion to enforce on June 13, 2014, and the Court's memorandum

opinion issued on April 30, 2015, Wilson departed Lululemon's Board. Compl. ¶ 22.

40 Lululemon 220 Litig., 2015 WL 1957196.

41 In re Lululemon Sec. Litig., C.A. No. 1:13-cv-04596 (S.D.N.Y. Jul 02, 2013), referenced herein as the “SDNY 10(b) Case.”

42 See SDNY 10(b) Case, ECF No. 1.

43 See SDNY 10(b) Case, ECF Nos. 28, 43.

44 See infra at 43.

45 SDNY Action, the docket of which is attached as Exhibit 7 to the Transmittal Affidavit of Bradley R. Aronstam that accompanies

Defendants' Motion to Dismiss, at ECF No. 22.

46 SDNY Action, ECF Nos. 36-38.

47 SDNY Action, ECF Nos. 43-46.

48 SDNY Action, ECF No. 37 at 15-16.

49 Canty v. Day, 13 F. Supp. 3d 333, 350 (S.D.N.Y. 2014) aff'd, 599 F. App'x 20 (2d Cir. 2015).

50 Id.; see discussion infra at Section I.C.

51 See, e.g., Thomas v. New York City, 814 F. Supp. 1139, 1148 (E.D.N.Y. 1993) (“Since res judicata is an affirmative defense, the

party asserting it has the burden of showing that the doctrine is applicable ... Likewise, the party seeking the benefit of collateral

estoppel bears the burden of proving that the issues resolved in a prior proceeding and those raised currently are identical.”) (internal

citations omitted.).

52 Pyott v. Louisiana Mun. Police Employees' Ret. Sys., 74 A.3d 612, 616 (Del. 2013).

53 Genger ex rel. AG Properties Co. v. Sharon, 910 F. Supp. 2d 581, 587 (S.D.N.Y. 2012) (quoting Reilly v. Reid, 45 N.Y.2d 24, 28

(1978)). There is no dispute here that there is no difference between federal common law and New York law concerning res judicata

and collateral estoppel. See Def. Br at 25 fn.115, citing Lefkowitz v. McGraw-Hill Global Educ. Holdings, LLC, 23 F. Supp. 3d

344, 358 fn. 12 (S.D.N.Y. 2014) (“there is no discernible difference between federal and New York law concerning res judicata

and collateral estoppel”).

54 D ‘Arata v. New York Cent. Mut. Fire Ins. Co., 76 N.Y.2d 659,664 (1990) (internal citations omitted); accord Kotler v. Donelli, 528

Fed. App'x. 10, 13 (2d Cir. 2013) (stressing the importance of a case-by-case analysis, as opposed to the rigid application of a bright-

line rule in determining the preclusive effect (if any) of a prior judgment).

55 Papilsky v. Berndt, 466 F.2d 251, 257 (2d Cir. 1972); see also Brown v. Felsen, 442 U.S. 127, 132 (1979) (“Because res judicata may

govern grounds and defenses not previously litigated ... it blockades unexplored paths that may lead to truth ... res judicata shields

the fraud and the cheat as well as the honest person. It therefore is to be invoked only after careful inquiry.”).

56 S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1464 (2d Cir. 1996).

57 City of Providence, 2015 WL 4594150, at *8.

58 See D'Arata, 76 N.Y.2d at 664; accord Kalyanaram v. New York Inst. of Tech., 549 F. App'x 11, 12 (2d Cir. 2013) cert. denied, 135

S. Ct. 105 (2014) reh ‘g denied, 135. S. Ct. 743 (2014).

59 Bader v. Goldman Sachs Grp., Inc., 455 F. App'x 8, 9 (2d Cir. 2011).

60 Id. at 9 (recognizing that even though the prior action involved similar facts related to undervalued stock options, this did not preclude

a second action that included additional facts against other directors related to undervalued stock options); see also Asbestos Workers

Philadelphia Pension Fund v. Bell, 990 N.Y.S.2d 436 (Sup. Ct. 2014) (denying motion to dismiss on collateral estoppel grounds

because “the factual allegations are not identical to the prior shareholder derivative actions and thus, collateral estoppel is inapplicable

to bar this action.”).

61 Brautigam v. Blankfein, 8 F. Supp. 3d 395, 401 (S.D.N.Y. 2014) (internal citations omitted) (applying federal law of collateral

estoppel), aff'd sub nom. Brautigam v. Dahlback, 598 F. App'x 53 (2d Cir. 2015).

62 See SDNY Action amended complaint (“SDNY Action Am. Comp.”) which is attached as Exhibit 9 to the Transmittal Affidavit

of Bradley R. Aronstam that accompanies Defendants' Motion to Dismiss, at 2. See also, SDNY Action motion to dismiss hearing

transcript at 51-52, attached hereto as Exhibit B (“[T]he key, the core of [the case] is the [luon pant] recall, which is a March event ...

Ms. Day ‘s resignation is not the core of their ... case.”). While this colloquy occurred during oral argument in the SDNY 10(b) Case,

those allegations are literally identical to those made in the SDNY Action, given that the SDNY Plaintiffs copied whole cloth from

the SDNY 10(b) amended complaint: “[The SDNY Plaintiffs] add 101 paragraphs copied almost verbatim from the complaint in the































federal securities litigation against lululemon. [....] Forty-one of these 101 new paragraphs simply replace the words ‘lululemon’ or

‘the Company’ in the federal securities action with the word ‘Defendants' - a term plaintiffs use here to encompass thirteen individuals,

eleven of whose names do not even appear in the securities complaint.”

63 Compare, SDNY Action Am. Comp ¶¶ 70-192, 204-205 with ¶¶ 193-198.

64 See generally, SDNY Action Order at 16-18 (Dkt. 54).

65 Defs' Br. at 14-15.

66 See, e.g., King v. VeriFone Holdings, Inc., 12 A.3d 1140, 1145 (Del. 2011) (“Delaware courts have strongly encouraged stockholder-

plaintiffs to utilize Section 220 before filing a derivative action, in order to satisfy the heightened demand futility pleading

requirements of... Rule 23.1.”) (emphasis added).

67 See supra at 17 (“What did the board do to investigate? I don't know.”).

68 See Compl. ¶ 76.

69 See infra section II.B.

70 Defendants also cite to inapplicable legal standards in stating that “demand futility allegations need not be identical.” (Defs' Br. at 29,

fn. 131) Fuchs Family Trust v. Parker Drilling Co. applied Texas law and the underlying complaint was dismissed with prejudice.

2015 WL 1036106, *5 (Del. Ch. Mar. 4, 2015). In Arduini v. Hart, the Ninth Circuit applied Nevada law. 774 F.3d 622, 625 (9th

Cir. 2014).

71 Defs' Br. at 49, 52.

72 Defs' Br. at 29-30.

73 Brautigam, 8 F. Supp. 3d at 402.

74 Bader, 455 Fed. Appx. at 8.

75 Id. at 8, 9.

76 d. at 9-10.

77 Id. at 10 fn. 1 (emphasis added). The Bader court also expressly distinguished the Second Circuit's collateral estoppel application

from the First Circuit's rule espoused in In re Sonus Networks S'holders Litig., 499 F.3d 47 (1st Cir. 2007).

78 Henik ex rel. LaBranche & Co. v. LaBranche, 433 F. Supp. 2d 372, 378 (S.D.N.Y. 2006); Levin ex rel. Tyco Int'l Ltd. v. Kozlowski,

831 N.Y.S.2d 354 (Sup. Ct. 2006) aff'd sub nom. Levin v. Kozlowski, 846 N.Y.S.2d 37 (2007); Wietschner v. Dimon, 2015. WL

4915597, 5 (N.Y. Sup. Ct. N.Y. Cty. Aug. 14, 2015) (appeal filed); and Asbestos Workers Local 42 Pension Fund v. Bammann 2015

WL 2455469 (Del. Ch. May 21, 2015) (appeal filed).

79 LaBranche, 433 F. Supp. 2d at 378.

80 Id. at 380.

81 Kozlowski, 831 N.Y.S.2d 354, at *2-3.

82 Id. at *3, 6.

83 Id. at *7, 11.

84 Wietschner, 2015 WL 4915597, at *5.

85 Bammann, 2015 WL 2455469, at *16.

86 Id. at *18.

87 Ryan v. New York Tel. Co., 62 N.Y.2d 494, 501 (1984).

88 Gilberg v. Barbieri, 53 N.Y.2d 285, 292 (1981) (internal citations omitted).

89 Ryan, 62 N.Y.2d at 501 (specifying such factors as the nature of the forum and the importance of the claim in the prior litigation,

the incentive and initiative to litigate and the actual extent of litigation, the competence and expertise of counsel, the availability of

new evidence, and the foreseeability of future litigation.).

90 Gilberg, 53 N.Y.2d at 292.

91 Canty v. Day, 13 F. Supp. 3d at 350 (“the pending motions to intervene by Laborers' District Council Construction Industry Pension

Fund and the Hallandale Beach Police Officers and Firefighters' Personnel Retirement Fund are DENIED as moot.”)

92 Monahan v. N.Y.C. Dep ‘t. of Corrections, 214 F.3d 275, 285 (2d Cir.2000).

93 Landau v. LaRossa, Mitchell & Ross, 11 N.Y.3d 8, 13 (2008) (emphasis added).

94 Gaft v. Mitsubishi Motor Credit of Am., No. 07 Civ. 527 (NG), 2009 WL 3148764, * 6, (E.D.N.Y 2009), citing Camarano v. Irvin,

98 F.3d 44, 47 (2d Cir. 1996); see also, Elfenbein v. Gulf& Western Industries, Inc., 590 F.2d 445, 449 (2d Cir. 1978) (holding

that “without prejudice” means that “[t]he action is terminated; however, a subsequent suit will not be barred by the doctrine of res

judicata .”).

95 Canty v. Day, 13 F. Supp. 3d at 350.



































96 Elfenbein, 590 F.2d at 449.

97 At the SDNY Action motion to dismiss hearing, Judge Forrest, at Defendants' invitation, refused to characterize the “without

prejudice” language in her preliminary order, stating instead “[l]et's put it this way. The counts are not dismissed with prejudice.” See

Exhibit B at 74. Plaintiffs submit that the court's likely intent, in light of their pending motion to intervene, was that the order would

not bar Plaintiffs' (or any other stockholders') future claims, but that the SDNY Plaintiffs (alone) would not, figuratively speaking,

get another bite at the demand futility apple.

98 Bank of New York v. First Millennium, Inc., 607 F.3d 905, 919 (2d Cir. 2010).

99 City of Providence, 2015 WL 4594150, at *8.

100 See Restatement (Second) of Judgments, § 42(1)(e); see also Green v. Santa Fe Indus., Inc., 70 N.Y.2d 244, 253 (1987) (citing

Restatement § 42, “to establish privity the connection between the parties must be such that the interests of the nonparty can be said

to have been represented in the prior proceeding”).

101 Henik ex rel. LaBranche, 433 F. Supp. 2d at 381 (citing Restatement (Second) of Judgments, § 42(e)).

102 Papilsky v. Berndt, 466 F.2d at 260 (internal citations omitted).

103 Rogosin v. Steadman, 71 F.R.D. 514, 519 (S.D.N.Y. 1976).

104 Ji v. Van Heyningen, No. CA 05-273 ML, 2006 WL 2521440, at *5 (D.R.I. Aug. 29, 2006) (rejecting application of issue preclusion

to bar nonparty to initial derivative proceeding and stating that “the more prudent course is to decide the [subsequent] Motion to

Dismiss on the basis of the sufficiency of the allegations made in the Complaint in this [subsequent] case.”).

105 Bammann, 2015 WL 2455469, at *18 fn. 147.

106 Defendants' suggestion that inadequate representation must be pleaded, Def. Br. at 35, is illogical and nothing more than a red herring,

as it implies Plaintiffs must proactively plead a rebuttal to an affirmative defense for which Defendants carry the burden of proof.

Plaintiffs do not carry such a burden.

107 King v. VeriFone Holdings, Inc., 12 A.3d 1140, 1145 (Del. 2011) (“Delaware courts have strongly encouraged stockholder-plaintiffs

to utilize Section 220 before filing a derivative action, in order to satisfy the heightened demand futility pleading requirements of...

Rule 23.1.”) (emphasis added).

108 The SDNY Plaintiffs even included allegations stemming from confidential witnesses with whom it appears the SDNY Plaintiffs had

never spoken. See VNB Realty, Inc. v. Bank of Am. Corp., No. 11 CIV. 6805 DLC, 2013 WL 5179197, at *7 (S.D.N.Y. Sept. 16,

2013) (“By drawing its factual allegations from the statement of confidential witnesses in AIG's complaint, [plaintiff] is attempting

to rely on the substance of those allegations without being held responsible for certifying that they are supported by some factual

basis ... such reliance is impermissible, particularly in light of counsel's ‘personal, non-delegable responsibility’ under Rule 11 to

‘validate the truth and legal reasonableness of the papers filed.’ ”) (internal citations omitted).

109 See SDNY Plaintiffs' letter to Judge Forrest on April 2, 2014, SDNY Action ECF No. 51.

110 Pyott, 74 A.3d at 618.

111 Desimone v. Barrows, 924 A.2d 908, 951 (Del. Ch. 2007).

112 Canty v. Day, 13 F. Supp. 3d at 347.

113 In Pyott, the Delaware Supreme Court reversed the Chancery Court's “ ‘fast-filer’ irrebuttable presumption of inadequacy.” Pyott at

618. Foreshadowing the case at bar, however, the court also noted that it “understands the trial court's concerns about fast filers” and

that “[u]ndoubtedly there will be cases where a fast filing stockholder also is an inadequate representative.” Id.

114 SDNY Action, Defendants Memorandum in Support of Motion to Dismiss Amended Complaint, at 2 (ECF No. 22 Jan. 31, 2014).

115 Id. at 2-3.

116 VNB Realty, Inc., 2013 WL 5179197, at *7.

117 See Restatement (Second) of Judgments, § 42(1)(e) (“A person is not bound by a judgment for or against a party who purports to

represent him if (e) The representative failed to prosecute or defend the action with due diligence and reasonable prudence, and the

opposing party was on notice of facts making that failure apparent.”) (emphasis added).

118 SDNY Action, Defendants Memorandum in Support of Motion to Dismiss Amended Complaint, at 2-3 (ECF No. 22 Jan. 31, 2014)

(characterizing SDNY Plaintiffs' copying and citation to unknown confidential witnesses as “difficult to understand,” “problematic,”

“impermissible ... under Rule 11,” and “inappropriate.”)

119 Restatement (Second) of Judgments, § 42, comment f.

120 Remarkably, Defendants make a 180-degree turnabout in this case regarding the competency of the previous litigation: “[t]he record

in the federal derivative actions demonstrates diligent representation by respected counsel experienced in stockholder derivative

litigation.” Defs.' Br. at 35. Their self-serving revisionism is contradicted by their own previous pleadings, fn. 118 supra, and should

be afforded no weight here.

121 In re Dow Chem. Co. Derivative Litig., No. CIV.A. 4349-CC, 2010 WL 66769, *5 (Del. Ch. Jan. 11, 2010).


























122 London v. Tyrrell, No. 3321-CC, 2008 WL 2505435, at *4 (Del. Ch. June 24, 2008) (citation omitted).

123 Rales v. Blasband, 634 A.2d 927 (Del. 1993).

124 Id. at 934.

125 Grimes v. Donald, 673 A.2d 1207, 1217 fn.17 (Del. 1996) (“[T]he concept of reasonable doubt is akin to the concept that the

stockholder has a ‘reasonable belief that the board lacks independence or that the transaction was not protected by the business

judgment rule.”), overruled in part on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

126 Grobow v. Perot, 539 A.2d 180, 186 (Del. 1988), overruled in part on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

127 See, e.g., Dow, 2010 WL 66769, at *6 (“Upon reviewing a motion to dismiss for failure to demonstrate demand futility... the Court

must accept the well-pled factual allegations of the derivative complaint as true and draw all reasonable inferences in favor of

plaintiffs.”).

128 In re China Agritech, Inc., Shareholder Derivative Litigation, C.A. No. 7163-VCL, 2013 WL 2181514, at *16 (May 21, 2013).

129 See China Agritech, 2013 WL 2181514, at *23 (“The conscious decision not to take action [is] itself a decision.”), citing Aronson,

473 A.2d at 813 (equating “a conscious decision to refrain from acting” with a decision to act).

130 Aronson, 473 A.2d at 812 (Del. 1984) (emphasis added).

131 In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006).

132 See David B. Shaev Profit Sharing Account v. Armstrong, No. CIV.A. 1449-N, 2006. WL 391931, at *5 (Del. Ch. Feb. 13, 2006)

aff'd, 911 A.2d 802 (Del. 2006) (“A claim that an audit committee or board had notice of serious misconduct and simply failed to

investigate, for example, would survive a motion to dismiss, even if the committee or board was well constituted and was otherwise

functioning.”); see also China Agritech, 2013 WL 2181514, at *23.

133 Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006) (“Where directors fail to act in the face of a known

duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to

discharge that fiduciary obligation in good faith.”) (internal citations omitted).

134 Pfeiffer v. Toll, 989 A.2d 683, 694 (Del.Ch Mar. 3 2010), abrogated on other grounds by Kahn v. Kolberg Kravis Roberts & Co.,

L.P., 23 A.3d 831 (Del. 2011); see also Primedia, 2013 WL 6797114, at *14 (“[a] court may infer scienter when a trade is sufficiently

unusual in timing and amount.”).

135 Compl. ¶¶ 5; 51-52.

136 See Primedia, 2013 WL 6797114, at *14 (recognizing that allegations of “conveniently timed” insider trades occurring just before

the public announcement of a major corporate are sufficiently “unusual” at the pleadings stage to support a Brophy claim).

137 See Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 838 (Del. 2011).

138 Compl. 73.

139 Id. at¶ 73.

140 Id. at ¶ 45.

141 See, e.g., id. at ¶ 47-53.

142 Pfeiffer v. Toll, 989 A.2d at 694 (“[a]lthough the plaintiffs ... cannot establish the exact moment in time when the defendant [became

aware of material non-public information], they have plead a claim for merits discovery”).

143 Primedia, 2013 WL 6797114, at *13 (noting that purchases of large quantities of preferred stock just weeks before the public

announcement of a material sale of assets “were a red flag.”).

144 Defendants' contention regarding the import of Lululemon's exculpatory charter provision, see Defs.' Br. at 52, should be disregarded.

When, as here, a plaintiff has “sufficiently pled breach of the duties of loyalty and good faith,” an exculpatory provision “cannot

operate to insulate the defendants from a breach of fiduciary duty claim.” Buckley v. O'Hanlon, No. 04-955GMS, 2007 WL 956947,

at *6 (D. Del. Mar. 28, 2007).

145 Defs' Br. at 50-51.

146 Compl. ¶ 63.

147 Id. ¶¶ 62-63.

148 Id.

149 See In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006) (“[the] failure to act in good faith may be shown ... where the

fiduciary intentionally fails to act in the face of a known duty to act demonstrating a conscious disregard for his duties.”).

150 See Ex. J to Compl.

151 See lulu000125-128, attached hereto as Exhibit C.

152 Compl. ¶ 55.

153 Id. ¶ 55.















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154 Id. 54 fn.24.

155 The Sixth Circuit, applying Delaware law and without any evidence of direct knowledge by the board, imputed to the directors

knowledge of articles published by a major newspaper. McCall v. Scott, 239 F.3d 808 (6th Cir.) amended on denial of reh ‘g, 250

F.3d 997 (6th Cir. 2001).

156 See Ex. J to Compl.

157 Compl. ¶ 62.

158 Id. ¶¶ 68-76.

159 Guttman v. Huang, 823 A.2d 492, 505 (Del. Ch. 2003) (citing Brophy v. Cities Service, Inc., 70 A.2d 5 (1949)).

160 In re Oracle Corp., 867 A.2d 904, 934 (Del. Ch. 2004) aff'd sub nom. In re Oracle Corp. Derivative Litig., 872 A.2d 960 (Del. 2005).

161 Defendant Wilson's Br. ¶ 14.

162 While Plaintiffs concede that thus far they can only allege that the June 7 trades were unusual in timing and amount, if this Court

denies Defendants' motions to dismiss, Plaintiffs would be entitled to, under Delaware's broad discovery rules, discovery into whether

Wilson's other stock sales under the trading plan were also improper, particularly the June 4, 2013 sales. Regarding those June 4

trades, Plaintiffs point out that it is unlikely that a significant corporate event such as the departure of a long-tenured CEO came

completely out of left field on June 5 without any preliminary discussions between Wilson and Day, discussions that very well could

have placed Wilson on notice sooner than June 5 that Day was leaning in the direction of separating from the Company.

163 Compl. ¶ 47-52.

164 Id. ¶ 47-53; 72-73.

165 April 2014 220 Order at 27-28.

166 Id.

167 In re Lululemon Athletica Inc. 220 Litig., No. CV 9039-VCP, 2015 WL 1957196, at *13 (Del. Ch. Apr. 30, 2015).

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