Separate Derivative Suit subject to Issue Preclusion

In 2010 in Fosbre v. Matthews (2010 WL 2696615), four separate derivative suits against International Gaming Technology ("IGT") and its board of directors were consolidated and eventually dismissed for failure to make a demand on the board or plead demand futility.  In Arduini v. IGT, plaintiff Lawrence Arduini unsuccessfully argued that his additional allegations prevented issue preclusion. The plaintiffs in Fosbre brought suit against IGT for breach of fiduciary duties and unjust enrichment.  They alleged demand futility, but not sufficient to survive dismissal by the district court.  The Court of Appeals agreed and affirmed, explaining that the allegations did not show particularized facts of intentional misconduct, fraud, or a knowing violation of the law.  At the same time, another similar securities fraud class action against IGT was pending (IBEW v. IGT, 2011 WL 915115 ) dismissal.  The court denied the defendant's motion to dismiss, finding some of the allegations sufficient to show IGT intentionally misled investors.  Shortly after the motion to dismiss was denied in IBEW Arduini filed his derivative suit.

IGT moved to dismiss Arduini’s complaint arguing that demand futility was fully litigated in Fosbre.  Arduini claimed the additional facts he pleaded separated the suits, but the court held that the allegations were or could have been made before and barred relitigation. The district court also held IBEW unrelated to demand futility and rejected Arduini’s argument that the denial of the motion to dismiss in IBEW precluded an identity of the issues.

Arduini appealed to the Ninth Circuit, contending that the issues were different, he was not in privity with the Fosbre plaintiffs, and fairness and due process weighed against issue preclusion.  The Court agreed with IGT in that the underlying allegations for demand futility need not be identical for issue preclusion.  Since Arduini’s claims were raised or could have been raised in Fosbre, the issue was identical for preclusion.  The Ninth Circuit also rejected his claim based on IBEW; only two directors from IBEW were on IGT’s current board and he did not explain how demand would be futile on the others.  Arduini's privity claims were also rejected.  Although Arduini was not the same party in Fosbre, IGT was the real party in interest to the derivative suit.  He could also not demonstrate any inadequate representation by the Fosbre plaintiffs.  Finally, the Court rejected Arduini's argument for inadequate notice of the Fosbre dismissal because notice was not required for an involuntary dismissal and was received regardless.

The Ninth Circuit held dismissal proper.