# HIRSCHFELD v. BECKERLE

> District Court, D. New Jersey · September 27, 2019

URL: https://www.frixlaw.com/law-library/cases/10266752

## Case

- **Court:** District Court, D. New Jersey
- **Decided:** September 27, 2019
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10266752

## How later opinions describe it (automated extraction)

- holding that “although Rule 23.1 clearly contemplates both the demand requirement and the possibility that demand may be excused, it does not create a demand requirement of any particular dimension”
- concluding that the “‘doctrine of futility,’ as it is known in some states, is not applicable in Georgia to business or nonprofit corporation derivative claims”

## Opinion text

*FOR PUBLICATION*

UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
___________________________________
:
MARC HIRSCHFELD, :
:
Plaintiff, : Civil Action No. 18-14796 (FLW) (DEA)
:
v. :
: OPINION
MARY C. BECKERLE, D. SCOTT :
DAVIS, IAN E.L. DAVIS, JENNIFER A. :
DOUDNA, ALEX GORSKY, MARK B. :
McCLELLAN, ANNE M. MULCAHY, :
WILLIAM D. PEREZ, CHARLES :
PRINCE, A. EUGENE WASHINGTON, :
RONALD A. WILLIAMS, :
:
Defendants, :
and :
:
JOHNSON & JOHNSON, :
:
Nominal Defendant. :
___________________________________ :

WOLFSON, Chief Judge:
Presently before the Court is a motion by nominal Defendant Johnson & Johnson
(“Johnson & Johnson”) and joined by Individual Defendants Mary C. Beckerle, D. Scott Davis,
Ian E. L. Davis, Jennifer A. Doudna, Alex Gorsky, Mark B. McClellan, Anne M. Mulcahy,
William D. Perez, Charles Prince, A. Eugene Washington, and Ronald A. Williams (“Individual
Defendants”) (together, with Johnson & Johnson, “Defendants”),1 to dismiss the shareholder
derivative complaint of Plaintiff Marc Hirschfeld (“Plaintiff”) pursuant to Federal Rule of Civil

1 Johnson & Johnson filed a formal motion to dismiss, while Individual Defendants submitted a
letter joining Johnson & Johnson’s motion. ECF No. 20-1.
Procedure 12(b)(6). In this shareholder derivative litigation, Plaintiff, representing other
similarly situated investors of Johnson & Johnson’s stock, alleges that Individual Defendants—
members of Johnson & Johnson’s Board of directors—violated their fiduciary duties.

Specifically, Plaintiff maintains that Individual Defendants failed to prevent Johnson & Johnson
from continuing to sell talc-based body powders, despite knowledge of research allegedly linking
perineal talc application to ovarian cancer and tests allegedly indicating that Johnson &
Johnson’s talc contained asbestos or asbestos-like fibers. Defendants move to dismiss the
Complaint on the basis that Plaintiff failed to make a pre-suit demand on Johnson & Johnson’s
Board of Directors, as is required by the New Jersey Business Corporation Act (“NJBCA”),
N.J.S.A. 14A:3-6.3, and alternatively, even if that statute were inapplicable, Plaintiff has failed
to adequately plead that a demand would have been futile. For the reasons stated herein,

Defendants’ motion is GRANTED, and Plaintiff's claims are dismissed without prejudice.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
The facts are taken from the Complaint and assumed to be true for purposes of this
motion. This action arises from the same factual underpinnings that are involved in thousands of
cases in multiple courts across the country. Compl. at ¶ 10. Plaintiff alleges that since as early as
1971, Johnson & Johnson has been aware of tests indicating that the talc used in certain of its

products contained asbestos or asbestos-like fibers. Id. at ¶ 5. Since as early as 1982, Johnson &
Johnson allegedly has been aware of credible scientific studies concluding that a woman’s
repeated use of talc-based body powders in her genital region significantly increases her risk of
developing ovarian cancer. Id. at ¶ 6. Despite this knowledge, Johnson & Johnson allegedly
continues to sell its talc-based Baby Power and Shower to Shower products and disavows the
presence of any asbestos contained in its products, or that there is any link between perineal talc
usage and ovarian cancer. Id. According to the Complaint, based on this willful conduct, the
Individual Defendants (or their predecessors on the Board) directly violated their fiduciary
obligations by: (i) refusing to place any cancer-related warning on Johnson & Johnson Baby
Powder or Shower to Shower products; (ii) continuing to market such products as safe, and

promoting the perineal use of those products by women; (iii) actively lobbying against Federal
Drug Administration testing of asbestos levels in cosmetic talc products; (iv) forming a task
force within a trade association to which Johnson & Johnson belonged to defend talc usage and
undermine studies showing that it posed a public health risk; and (v) terminating research that it
initiated and funded if the studies did not support Johnson & Johnson’s claim that talc was safe
and/or not linked to an increased risk of ovarian cancer. Id. at ¶ 9.
Plaintiff filed this suit on October 9, 2018, bringing one count for breach of fiduciary
duties by Individual Defendants. In the Complaint, Plaintiff frankly admits that he “has not made

a demand on the Board of Directors of the Company to file a suit asserting the claims specified
herein” because “[s]uch a demand would be futile and useless.” Id at ¶ 99.2 Subsequently,
Defendants filed the present motion, arguing that Plaintiff’s claims must be dismissed because
the NJBCA eliminated the concept of demand futility, and, furthermore, Plaintiff’s demand
futility allegations are inadequate.
II. LEGAL STANDARD

2 According to Defendants, another shareholder previously made a demand on Johnson &
Johnson’s Board with respect to matters similar to those alleged in the Complaint. See Decl. of
D. Wong Yang ¶ 3. In response to that demand letter, the Board retained independent legal
counsel, “to investigate, review, and analyze the facts and circumstances surrounding the
allegations raised in the demand letter, as well as any subsequently received demands or
shareholder derivative lawsuits making similar allegations.” Id.
Under Fed. R. Civ. P. 12(b)(6), a complaint may be dismissed for “failure to state a claim
upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). When reviewing a motion to dismiss
on the pleadings, courts “accept all factual allegations as true, construe the complaint in the light

most favorable to the plaintiff, and determine whether, under any reasonable reading of the
complaint, the plaintiff may be entitled to relief.” Phillips v. Cnty. of Allegheny, 515 F.3d 224,
233 (3d Cir. 2008) (quotations omitted). Under such a standard, the factual allegations set forth
in a complaint “must be enough to raise a right to relief above the speculative level.” Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Indeed, “the tenet that a court must accept
as true all of the allegations contained in a complaint is inapplicable to legal conclusions.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “[A] complaint must do more than allege the
plaintiff's entitlement to relief. A complaint has to ‘show’ such an entitlement with its facts.”
Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009).
However, Rule 12(b)(6) only requires a “short and plain statement of the claim showing
that the pleader is entitled to relief” in order to “give the defendant fair notice of what the . . .

claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555. The complaint must
include “enough factual matter (taken as true) to suggest the required element. This does not
impose a probability requirement at the pleading stage, but instead simply calls for enough facts
to raise a reasonable expectation that discovery will reveal evidence of the necessary element.”
Phillips, 515 F.3d at 234 (citation and quotations omitted); Covington v. Int’l Ass’n of Approved
Basketball Officials, 710 F.3d 114, 118 (3d Cir. 2013) (“[A] claimant does not have to set out in

detail the facts upon which he bases his claim. The pleading standard is not akin to a probability
requirement; to survive a motion to dismiss, a complaint merely has to state a plausible claim for
relief.” (citation and quotations omitted)).
In sum, under the current pleading regime, when a court considers a dismissal motion,
three sequential steps must be taken: first, “it must take note of the elements the plaintiff must

plead to state a claim.” Connelly v. Lane Constr. Corp., 809 F.3d 780, 787 (3d Cir. 2016)
(quotations omitted). Next, the court “should identify allegations that, because they are no more
than conclusions, are not entitled to the assumption of truth.” Id. (quotations omitted). Lastly,
“when there are well-pleaded factual allegations, the court should assume their veracity and then
determine whether they plausibly give rise to an entitlement to relief.” Id. (quotations and
brackets omitted).

III. DISCUSSION
Defendants move to dismiss on two grounds: first, they argue that Plaintiff failed to make
a pre-suit demand on the Board of Directors of Johnson & Johnson, which is required by the
NJBCA, and second, that even if no such statutory requirement exists, Plaintiff has failed to
adequately plead that making a demand would have been futile. Because I find that the NJBCA
makes pre-suit demand mandatory, unless the corporation opts out of the requirement, where
Johnson & Johnson has not, Plaintiff’s suit is dismissed, and I need not reach the demand futility
argument.

A. New Jersey Pre-Suit Demand Law
Under Federal Rule of Civil Procedure 23.1, “a shareholder may file a derivative suit
against the board of directors to claim enforcement of a right of the corporation where the
corporation has failed to assert that right.” Kanter v. Barella, 489 F.3d 170, 176 n. 5 (3d Cir.
2007). Shareholder derivative suits typically require plaintiffs to make pre-suit demand on the
board of directors that the board bring suit on behalf of the corporation. Blasband v. Rales, 971
F.2d 1034, 1048 (3d Cir. 1992). The reason for this requirement is that “[t]he decision to bring a
lawsuit or to refrain from litigating a claim on behalf of the corporation is a decision concerning

the management of the corporation and consequently is the responsibility of the directors.” Id.
(citations omitted). See also In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., 493 F.3d
393, 399 (3d Cir. 2007). Rule 23.1 contains specific procedural requirements for pleadings in
derivative suits; plaintiffs must “plead with particularity their efforts to obtain the desired action
from the directors or the reasons for not obtaining the action or making the effort to obtain that
action.” Freedman v. Redstone, 753 F.3d 416, 423 (3d Cir. 2014) (citing Fed.R.Civ.P. 23.1).

Although Federal Rule of Civil Procedure 23.1 provides the procedural vehicle for
addressing the adequacy of a shareholder derivative complaint, “[t]he substantive requirements
of demand are a matter of state law.” Id. at 424 (quoting Blasband v. Rales, 971 F.2d 1034,
1047-48 (3d Cir. 1992)); see also Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96–97 (1991)
(holding that “although Rule 23.1 clearly contemplates both the demand requirement and the
possibility that demand may be excused, it does not create a demand requirement of any

particular dimension”). This is because “[c]orporations…are creatures of state law,…and it is
state law which is the font of corporate directors’ powers.” Kamen, 500 U.S. at 98 (citations
omitted). Thus, “gaps in…statutes bearing on the allocation of governing power within the
corporation should be filled with state law unless the state la[w] permit[s] action prohibited by
the Acts, or unless its application would be inconsistent with the federal policy underlying the
cause of action....’” Id. at 99 (citations omitted). Because “the contours of the demand
requirement—when it is required, and when excused—determine who has the power to control
corporate litigation,” the requirement is, therefore, governed by state substantive law. Id. at 101.
Under New Jersey law, prior to 2013, courts evaluated the adequacy of pre-suit demand
pleadings under New Jersey Rule of Court 4:32-5, which “codified the common law requirement

that a derivative suit plaintiff plead with particularity either his efforts to induce board members
to take the desired remedial action, or the reasons why such efforts would have been useless.” In
re Prudential Ins. Co. Derivative Litig., 282 N.J. Super. 256, 268 (Ch. Div. 1995). In mandating
that a plaintiff who did not make a demand explain why doing so would have been useless—a
concept known as demand futility—New Jersey courts required a plaintiff to “plead with
particularity facts creating a reasonable doubt that: (1) the directors are disinterested and
independent, or (2) the challenged transaction was otherwise the product of a valid exercise of
business judgment. If either prong is satisfied, demand will be excused under Rule 4:32–5.” In re

PSE & G S'holder Litig., 173 N.J. 258, 282 (2002).
In 2013, however, New Jersey enacted a statutory demand requirement as part of the
NJBCA, categorically requiring shareholders to make a pre-suit demand on a corporation prior to
filing a derivative suit. Indeed, the statutory language purposely omitted any “demand-futility”
language:
No shareholder may commence a derivative proceeding until:
(1) a written demand has been made upon the corporation to take suitable action;
and
(2) 90 days have expired from the date the demand was made unless the
shareholder has earlier been notified that the demand has been rejected by the
corporation or unless irreparable injury to the corporation would result by
waiting for the expiration of the 90-day period.
N.J.S.A. 14A:3-6.3. When first enacted, this statutory demand requirement (and all other
provisions of the NJBCA that dealt with shareholder derivative proceedings, N.J.S.A. 14A:3-6.1,
et seq.) applied to a corporation only if that corporation made the provisions applicable in its

certificate of incorporation. See Corporations–Shares and Shareholders—Derivative Actions and
Proceedings, 2013 NJ Sess. Law Serv. Ch. 42, N.J.S.A. 14A:3–6.9 (2013).
In January 2018, the NJBCA was amended so as to apply the shareholder derivative
provisions automatically, making the provisions applicable unless the corporation indicated
otherwise in its certificate of incorporation. In particular, section 14A:3-6.9 of the NJBCA
provides that, “in any derivative proceeding or shareholder class action” against a New Jersey

corporation:
a. Except for sections [unrelated to the demand requirement], which must be
expressly made applicable by the corporation’s certificate of incorporation, the
provisions of P.L.2013, c. 42 (C.14A:3-6.1 et seq.) shall apply to actions brought
in state or federal court both within and outside of the State of New Jersey; and
b. The provisions of the corporation’s certificate of incorporation may vary the
applicability or effect of the provisions of P.L.2013, c. 42 (C.14A:3-6.1 et seq.)
on that corporation.
N.J.S.A. 14A:3-6.9.
B. Statutory Interpretation
In the present matter, although Johnson & Johnson has not opted out of the statutory
demand requirement under the NJBCA, Plaintiff argues that he should be excused from making a
demand so long as he can adequately plead futility. Indeed, Plaintiff’s central argument is not
textual, and, in that regard, generally does not dispute that the statutory language of the NJBCA
does not include a demand futility exception. Rather, Plaintiff contends that—the NJBCA
notwithstanding—pleading demand futility is still viable through NJ Rule 4:32–3. Nonetheless,
this Court’s analysis “begins where all such inquiries must begin: with the language of the statute
itself.” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) (citing Landreth
Timber Co. v. Landreth, 471 U.S. 681, 685 (1985)).

In interpreting a statute, “when the statutory language is clear and unambiguous, the
legislature's intent is best divined by reference to the plain meaning of a statute.” Sery v. Fed.
Bus. Centers, Inc., 365 F. App'x 396, 397 (3d Cir. 2010). “[T]he plain meaning of statutory
language is often illuminated by considering not only the particular statutory language at issue,
but also the structure of the section in which the key language is found, the design of the statute
as a whole and its object.” Alaka v. Attorney General, 456 F.3d 88, 104 (3d Cir. 2006) (internal
quotation marks omitted). When “the statute’s language is plain,” the court’s inquiry must end,

as “the sole function of the courts is to enforce it according to its terms.” Ron Pair Enters., 489
U.S. at 241 (citing Caminetti v. United States, 242 U.S. 470, 485 (1917)).3
Here, the statute is clear on its face that, in a derivative action, pre-suit demand is
mandatory in all circumstances: “No shareholder may commence a derivative proceeding
until…a written demand has been made upon the corporation to take suitable action.” N.J.S.A.

3 Although I cite to federal statutory interpretation case law, I note that “courts have no
consistent answer to th[e] question” of whether “the Erie Doctrine and its ‘reverse-Erie’ mirror
require state and federal courts to apply one another's statutory interpretation methodologies
when they interpret one another's statutes.” Abbe R. Gluck, Intersystemic Statutory
Interpretation: Methodology As "Law" and the Erie Doctrine, 120 Yale L.J. 1898, 1898 (2011).
Nonetheless, in the present case, the interpretative methodologies that I employ—for instance,
looking to the plain language of the statute—are consistent with both federal and New Jersey
case law, see, e.g., Fed. Bus. Centers, 365 F. App'x at 397, Morristown Assocs. v. Grant Oil Co.,
220 N.J. 360, 380 (2015) (“[W]e focus on the plain language of the statute because it is “the best
indicator” of the Legislature's intent.”), and “whichever [law] governs, the result is the same.”
1256 Hertel Ave. Assocs., LLC v. Calloway, 761 F.3d 252, 261 (2d Cir. 2014).
14A:3-6.3. The statute provides no exceptions to this requirement, which is particularly notable
because, in the same statutory section, the drafters did in fact include two other exceptions to the
requirement that a shareholder must wait 90 days after the demand has been made until filing suit
(i.e. if “the shareholder has earlier been notified that the demand has been rejected by the

corporation or unless irreparable injury to the corporation would result by waiting for the
expiration of the 90-day period,” N.J.S.A. 14A:3-6.3(2)). Clearly, having contemplated certain
exceptions, the drafters could have—but did not—include a futility exception to the demand
requirement. This Court “cannot…imply such an exception, for ‘[w]here [the legislature]
explicitly enumerates certain exceptions…additional exceptions are not to be implied, in the
absence of evidence of a contrary legislative intent.’” Shuker v. Smith & Nephew, PLC, 885 F.3d

760, 772 n.10 (3d Cir. 2018) (quoting United States v. Smith, 499 U.S. 160, 167 (1991)). Indeed,
as one New Jersey court interpreting another provision of the same statute has commented,
“[h]ad the Legislature intended to preserve the entire body of common law rights, it could have
expressly said so.” Feuer v. Merck & Co., 455 N.J. Super. 69, 86, (App. Div. 2018), aff'd, 238
N.J. 27 (2019). Thus, on its face, N.J.S.A. 14A:3-6.3, 6.9 makes pre-suit demand on a
corporation mandatory prior to filing a derivative suit, unless a corporation opted out of that
requirement in its certificate of incorporation.

Indeed, that the drafters did not include a demand futility exception in the text is not
surprising because the statute at issue was modeled after a nearly identical provision in the
Model Business Corporation Act (“MBCA). See Stmts. Accompanying N.J. Assemb. Bill No.
3123 and S. Bill No. 2326 at 6:42–43 (“The bill is largely based on sections 7.40 to 7.47 of the
[MBCA].”). Courts in other jurisdictions interpreting similar MBCA-modeled statutes have
uniformly rejected arguments that these statutes did not eliminate the demand futility exception.4
For instance, in Idaho, before an MBCA-modeled statute was enacted, a futility exception “arose
by case law” and was “previously recognized by the courts.” McCann v. McCann, 61 P.3d 585

(Idaho 2002). In McCann, the Idaho Supreme Court analyzed Idaho’s MBCA-modeled statute
and noted that—identically to the NJBCA—contained “two exceptions” to the requirement that a
shareholder must wait 90 days after the demand was made until filing suit: (1) if “the corporation
had already previously rejected [the shareholder’s] requests;” and (2) if “the corporation was
being irreparably harmed.” Id. at 592–93. As the legislature included these exceptions, the Court
“presume[d] the legislature was aware of the common law futility exception when the statute . . .
was adopted,” and noted that “the legislature chose not to add a provision expressing the concept

of futility as an exception.” Id. at 593. Accordingly, the McCann Court held that the Idaho
statute was “a clear demonstration of the legislature’s intent to no longer recognize ‘futility’ as
an exception to the requirement of demand.” Id.5 Idaho is not alone. See, e.g., Speetjens v.
Malaco Inc., 929 So. 2d 303, 309 (Miss. 2006) (“The fact is, Mississippi’s written demand

4 Although New Jersey courts have not expressly ruled on the issue of whether the statute
eliminated demand futility, one court has indicated that the statute has made pre-suit demands
mandatory. See Tully v. Mirz, 457 N.J. Super. 114, 125 (App. Div. 2018) (“For example, in a
derivative suit, a would-be plaintiff is required to issue demand upon the corporation to take
action and to then allow ninety days to elapse, unless notified the demand was rejected by the
corporation, prior to commencing a derivative suit”) (citing N.J.S.A. 14A:3-6.3).

5 Plaintiff argues that McCann is distinguishable because, there, the two exceptions in the statute
were exceptions to the timing of a derivative action once a demand had already been made, rather
than exceptions to the demand requirement. The point that the McCann Court was making, however,
was that the legislature chose to include these common exceptions to the 90-day rule, but chose not
to include any exceptions to the requirement that demand be made in the first instance. Thus, viewing
the statutory section holistically, the court reasonably concluded that the legislature would have also
included a demand futility exception had it chosen to. I am in agreement with that reasoning.
statute does not contain an exception for futility, and unless and until the Legislature decides to
include one, it does not exist.”); Allen ex rel. Allen & Brock Constr. Co., Inc. v. Ferrera, 540
S.E.2d 761, 765 (N.C. Ct. App. 2000) (“Plaintiff contends that the futility exception remains

valid law under the present N.C. Gen.Stat. § 55–7–42….However, we have previously held that
the enactment of N.C. Gen.Stat. § 55–7–42 abolished the futility exception under North Carolina
law.”); Dunn v. Ceccarelli, 489 S.E.2d 563, 568 (Ga. Ct. App. 1997) (concluding that the
“‘doctrine of futility,’ as it is known in some states, is not applicable in Georgia to business or
nonprofit corporation derivative claims”). See also Ark. Teacher Ret. Sys. ex rel. Progress
Software Corp. v. Alsop, 2007 WL 7069609, at *8–9 (D. Mass. Sept. 22, 2007) (“Plaintiff[

]…attempts to import a futility exception into section 7.42. The plain language of section 7.42,
however, does not contain a futility exception.”).6 These courts recognized that nothing in these
MBCA-modeled statutes supports the existence of an implied demand futility exception, and I
agree the same is true under the NJBCA here.
Having determined that the plain language of the NJBCA does not support a futility
exception to pre-suit demand, I need not consult other sources to ascertain the statute’s meaning.

6 Plaintiff argues that several courts have discussed the vitality of demand futility under New Jersey
law after the enactment of the NJBCA. However, two of those cases were filed before the 2013
statute became effective on April 1, 2013, and, therefore, the plaintiff in those cases could not have
been subject to the statute’s demand requirement. See City of Roseville Emps.’ Ret. Sys. v. Crain, 11-
2919, 2013 WL 9829650 (D.N.J. Sept. 26, 2013) (Complaint filed May 20, 2011); Rachel’s Children
Reclamation Found., Inc. v. Elon, 49 Misc. 3d 1208(A), 2015 WL 6080392 (N.Y. Sup. Ct., Kings
Cty. Oct. 5, 2015) (Complaint filed Mar. 20, 2013). The third, Ricciutti v. McEwan, was decided
before the 2018 amendment to the NJBCA, when a corporation was still required to opt into the
statute. See A-2303-14T2, 2015 WL 10015196 (N.J. Sup. Ct. App. Div. Feb. 10, 2016). As the
decision does not say whether the corporation there had expressly opted into the NJBCA, Plaintiff
cannot rely on the case for the proposition that demand futility remains viable under the statute. Id.
Accordingly, none of these cases support Plaintiff’s position.
Nonetheless, because Plaintiff argues, albeit erroneously, that the statute’s legislative history
does not clearly indicate legislative intent to eliminate the futility exception, an examination of
the legislative history of both the MBCA and the NJBCA puts Plaintiff’s claims to rest. The
comment to MBCA § 7.42 states that the provision “requires a written demand” in order to “give

the corporation the opportunity to reexamine the act complained of in the light of a potential
lawsuit and take corrective action” and also to “eliminate[ ] the time and expense of litigating
whether demand is required.” MBCA § 7.42, cmt. Citing to this official commentary, the
Supreme Court has recognized that the MBCA “abolishes the futility exception to demand.”7
Kamen, 500 U.S. at 104 n.8. Nor, as Plaintiff contends, is the legislative history surrounding the
NJBCA silent on the issue of whether pre-suit demand is mandatory in all contexts: the Sponsor

Statements to the 2013 Assembly and Senate bill, which made the demand requirement opt-in at
the time, provided:
Under the bill, a New Jersey corporation may amend its certificate of
incorporation to supersede judicial case law developments regarding demand
requirements and adopt the statutory standards. This allows corporations to
avoid derivative suits that may impose unnecessary costs on the corporation. If
adopted by a corporation, demand is required in every derivative proceeding and
disinterested directors, shareholders, or court appointed professionals are
authorized to make a decision, after a good faith investigation, that the derivative
proceeding is not in the best interests of the corporation.
Stmts. Accompanying N.J. Assemb. Bill No. 3123 at 6:32–41, and S. Bill No. 2326 at 6:29–38
(emphasis added). Although the Sponsor Statement does not specifically mention demand

7 The NJBCA’s demand requirement is nearly identical to MBCA § 7.42—the only difference is that
MCBA § 7.42 requires a shareholder to make a written demand and wait to file a derivative suit until
90 days “from the date delivery of the demand was made,” whereas the NJBCA’s demand
requirement requires waiting 90 days “from the date the demand was made.” Compare N.J.S.A.
14A:3-6.3 and MBCA § 7.42.
futility, Plaintiff is hard-pressed to argue that the legislature intended such an exception to exist
in the face of a clear statement that “demand is required in every derivative proceeding.”8 Id.
Thus, neither the plain language nor the legislative history support reading a demand futility
exception into the NJBCA.

C. NJ Rule 4:32-5
Plaintiff’s main rebuttal rests on his argument that, despite the enactment of the NJBCA,
NJ Rule 4:32-5—the rule that, prior to 2013, was the source of New Jersey’s demand
requirement—still contains a futility exception, and that exception has not been abrogated. Put
differently, Plaintiff argues that, because that rule has not been repealed or amended in light of
N.J.S.A. 14A:3-6.3, demand futility remains a viable option in New Jersey. This argument fails
for two reasons.

First, NJ Rule 4:32-5, like Federal Rule of Civil Procedure 23.1, is a procedural rule
rather than a source of substantive law, that sets forth the adequacy of a plaintiff’s pleading in a
derivative action. Indeed, New Jersey limits the rule-making power of its Supreme Court to
“practice, procedure, and administration,” and dictates that “in areas of substantive law (as
opposed to procedural law, court rules must yield to legislation.” See State ex rel. Y.S., 934 A.2d
1140, 1144 (N.J. Super. Ct. Ch. Div. 2007) (citing Winberry v. Salisbury, 74 A.2d 406 (N.J.

1950)). See also N.J. State Bar Ass'n v. State, 387 N.J. Super. 24, 48 (App. Div. 2006)
(distinguishing “between the realm of practice and procedure, which is vested exclusively within
the Supreme Court, and the realm of substantive law, the exclusive domain of

8 That the NJBCA was amended in 2018 in no way alters or diminishes the significance of this
2013 Sponsor Statement. Indeed, the amendment simply broadened the statute’s reach by
making it opt out rather than opt in.
the Legislature”); N.J. Dist. Court Ass'n, Inc. v. N.J. Sup. Ct., 205 N.J. Super. 582, 586 (Law.
Div. 1985), aff'd sub nom., 208 N.J. Super. 527 (App. Div. 1986) (The Supreme Court’s “power
to promulgate rules is restricted to the realm of practice and procedure.”). As such, NJ Rule

4:32-5, enacted by the New Jersey Supreme Court, is a rule of procedure, not substance, and
Plaintiff here cannot rely on such a rule to contradict substantive legislation like the NJBCA. In
Kamen, the Supreme Court explained that demand futility is a matter of state substantive law:
“the function of the demand doctrine in delimiting the respective powers of the individual
shareholder and of the directors to control corporate litigation clearly is a matter of substance,’
not ‘procedure.’” Kamen, 500 U.S. at 96–97 (citations omitted). The Court held that Rule 23.1
“speaks only to the adequacy of the shareholder representative’s pleadings,” i.e., the requirement

for pleading with particularity, but does not “abridge, enlarge, or modify any substantive right,”
and the requirement for demand and any demand futility exception are defined by the law of the
state of incorporation. Id. at 96–97, 108–09. Like Rule 23.1, the procedural NJ Rule 4:32-3 sets
forth pleading standards for derivative suits in New Jersey, and, therefore, must yield to the
substantive NJBCA requiring that demand be made in all circumstances.
Second, even if Rule 4:32-5 were a source of substantive law, the fact that it contains
demand futility language and has not been amended is not necessarily inconsistent with N.J.S.A.

14A:3-6.3. As previously noted, the NJBCA is now an opt-out statute. Although demand is
required in all circumstances in cases involving corporations that have not opted out of the
statute, it is unclear at this juncture whether demand futility remains viable for corporations that
opt out of the statute’s protections. Hence, if a corporation were to opt out of the statute, the
common law demand requirement—including the traditional common law demand futility
exception—remains extant, and thus, a plaintiff could potentially still plead demand futility
through NJ Rule 4:32-3.9 Plaintiff, therefore, cannot avoid N.J.S.A. 14A:3-6.3’s substantive
demand requirement—when Johnson & Johnson has not opted out of such requirement—by
relying on the NJ Rule 4:32-3, which only provides procedural requirements.

Accordingly, Plaintiff’s failure to make a pre-suit demand on the board requires dismissal
of his Complaint.10
IV. CONCLUSION
For the foregoing reasons, Defendants’ motion is GRANTED and Plaintiff's claims are
dismissed without prejudice.

Dated: September 27, 2019 /s/ Freda L. Wolfson
Hon. Freda L. Wolfson
U.S. Chief District Judge

9 To be clear, as the issue is not before me, I not ruling on whether demand futility remains
viable for corporations that opt out of the NJBCA. I merely note that, as written, Rule 4:32-3
might still have some force even after the NJBCA’s passage, which weakens Plaintiff’s argument
that the legislature would have repealed or amended the Rule had it truly intended to eliminate
demand futility.

10 Plaintiff asks for leave to amend on several bases. However, because all of these bases relate to
bolstering the demand futility allegations, none can cure Plaintiff’s failure to make demand before
filing this suit. Thus, dismissal is appropriate, as Plaintiff cannot remedy the failure to make a
demand through amendment.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10266752. Public record. Not legal advice.