On October 29, 2018, a Boeing 737 MAX crashed shortly after takeoff, killing everyone on board. Five months later, a second Boeing 737 MAX crashed after takeoff. Within days of the second crash, regulators around the world grounded all 737 MAX aircraft for a prolonged period. As a result of the grounding, Boeing suffered billions of dollars in losses.

In 2019, a group of Boeing shareholders filed a derivative action against the company alleging that Boeing’s directors were liable for losses incurred by the company and its shareholders because they failed to exercise proper oversight over the company’s activities. The plaintiffs were the New York State Common Retirement Fund, which is a public pension fund for New York State and local government employees, and the Fire and Police Pension Association of Colorado, which invests pension funds for Colorado firefighters, police officers, and their beneficiaries. The plaintiffs alleged that “Boeing’s directors and officers failed them in overseeing mission-critical airplane safety to protect enterprise and stockholder value,” as summarized by the court. Boeing moved to dismiss the complaint, arguing among other things that the plaintiffs had not alleged viable duty of oversight claims under Caremark.

The court noted that the plaintiffs were pursuing “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” and that to survive the motion to dismiss, the plaintiffs needed to allege “that a majority of the Company’s directors face a substantial likelihood of liability for Boeing’s losses.” The court found that “[t]his may be based on the directors’ complete failure to establish a reporting system for airplane safety, or on their turning a blind eye to a red flag representing airplane safety problems,” and concluded that “the stockholders have pled both sources of board liability.” The court dismissed only the claim that the board could face liability for not firing its CEO and other executives.

The court cited and quoted from numerous Boeing documents the plaintiffs had obtained from the company pursuant to a Section 220 request and had referenced in their opposition in deciding the motion. Based in part on these documents, the court found that the plaintiffs had alleged that Boeing’s board “often met without mentioning or discussing safety at all;” “did not have a means of receiving internal complaints about airplane safety;” and that “[t]he Board publicly lied about if and how it monitored the 737 MAX’s safety.” Based on these and other allegations, the court found that the plaintiffs alleged facts sufficient to show that “nine of the twelve board members at the time the original complaint was filed face a substantial likelihood of liability for failure to fulfill their oversight duties.” The court noted that Caremark did not insulate directors who did not make a “a good faith effort—i.e., try—to put in place a reasonable board-level system of monitoring and reporting.” The court further found that the plaintiffs had adequately alleged liability under the second Caremark prong by alleging “particularized facts that the board knew of evidence of corporate misconduct—the proverbial red flag—yet acted in bad faith by consciously disregarding its duty to address that misconduct.”

The ruling illustrates that while derivative claims remain difficult to plead, they can be viable where extensive evidence is obtained pre-complaint that allows the plaintiff to plead a reasonably conceivable claim that the board’s oversight activities failed to meet the requirements set out in Caremark.