Not a Lexis Advance subscriber? Try it out for free.

Diaz v. Davis (In re Digimarc Corp. Derivative Litig.)

United States Court of Appeals for the Ninth Circuit

August 26, 2008, Argued and Submitted, Seattle, Washington; December 11, 2008, Filed

No. 06-35838

Opinion

 [*1226]  BYBEE, Circuit Judge:

George Diaz, sometime shareholder of Digimarc Corporation, filed this action derivatively on the corporation's behalf. Diaz alleges that the individual defendants, who are current and former officers and directors of Digimarc, breached their fiduciary duties to the corporation and its shareholders by issuing misleading financial statements and misrepresenting the business and prospects of Digimarc in violation of California corporations law and section 304 of the Sarbanes-Oxley Act, 15 U.S.C. § 7243.  [**2] The district court dismissed his Sarbanes-Oxley claim on the grounds that there is no private cause of action for a violation of section 304 and then realigned Digimarc as a plaintiff, thereby destroying diversity jurisdiction over Diaz' state law claims. For the reasons explained below, we agree with the district court that there is no private right of action under section 304, and that the District of Oregon accordingly lacked federal question jurisdiction over the suit. We disagree, however, with the district court's realignment of Digimarc as plaintiff for the purpose of determining diversity jurisdiction and therefore remand to that court for proceedings consistent with this opinion.

On September 13, 2004, Digimarc, a publicly-traded Delaware corporation headquartered in Oregon (and a self-described "leading supplier of secure personal identification systems" including personal identification documents and driver licenses based on digital watermarking technology), publicly announced that, due to accounting errors, the corporation had likely overestimated earnings for the previous six quarters. The announcement cited the improper capitalization of internal software development  [**3] costs as the most likely cause of these accounting errors. In short, the corporation had failed to record the costs of internal software development as expenses on its balance sheet, thereby artificially inflating its net earnings over the relevant period.

Although the full extent of the accounting errors (approximately $ 2.7 million in overstated earnings) was not revealed until April 5, 2005, when Digimarc formally issued a restatement of earnings, class action lawsuits were filed within one month of the September 13, 2004, announcement. On September 28, 2004, a class action complaint alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act was filed (and eventually consolidated with two others) in the District of Oregon. See Zucco Partners, LLC v. Digimarc Corp.,  [*1227]  445 F. Supp. 2d 1201 (D. Or. 2006). The Appellant in this action, meanwhile, filed a shareholder derivative suit in early October against Digimarc and certain of its officers and directors in California Superior Court for San Louis Obispo County. This action, which was consolidated with a similar suit filed by Patrick Sheehan in the same court, pled state law claims for violations of California Corporations Code § 25402,  [**4] breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment.

Read The Full CaseNot a Lexis Advance subscriber? Try it out for free.

Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.

549 F.3d 1223 *; 2008 U.S. App. LEXIS 24967 **

In re: DIGIMARC CORPORATION u DERIVATIVE LITIGATION. GEORGE DIAZ, derivatively on behalf of Digimarc Corporation, Plaintiff-Appellant, v. BRUCE DAVIS; E. K. RANJIT; PHILLIP J. MONEGO; PETER W. SMITH; ALTY VAN LUIJT; BRIAN J. GROSSI; JIM ROTH; JAMES T. RICHARDSON; JOHN TAYSOM; WILLIAM A. KREPICK; GEOFFREY RHOADS; and DIGIMARC CORPORATION, a Delaware corporation, Defendants-Appellees.

Prior History:  [**1] Appeal from the United States District Court for the District of Oregon. D.C. Nos. CV-05-01324-HA, CV-05-01325-HA. Ancer L. Haggerty, District Judge, Presiding.

In re Digimarc Corp. Derivative Litig., 2006 U.S. Dist. LEXIS 56134 (D. Or., Aug. 11, 2006)

Disposition: AFFIRMED in part, REVERSED in part, and REMANDED. The parties are to bear their own costs on appeal.

CORE TERMS

private right of action, district court, antagonism, issuer, shareholder, cause of action, courts, derivative action, diversity jurisdiction, Sarbanes-Oxley Act, antagonistic, inviting, state law claim, disgorgement, realigned, individual defendant, intent of congress, federal question, derivative, diversity, aligned, letters, parties, officers and directors, derivative suit, reimburse, factors, profits, costs, subject matter jurisdiction

Civil Procedure, Appeals, Standards of Review, De Novo Review, Subject Matter Jurisdiction, Federal Questions, General Overview, Supplemental Jurisdiction, Business & Corporate Law, Management Duties & Liabilities, Fiduciary Duties, Corporations, Governments, Legislation, Statutory Remedies & Rights, Causes of Action, Corporate Governance, Directors & Officers, Misfeasance & Nonfeasance, Clearly Erroneous Review, Jurisdiction, Diversity Jurisdiction, Actions Against Corporations, Derivative Actions, Procedural Matters, Citizenship, Business Entities, Responses, Defenses, Demurrers & Objections, Motions to Dismiss