In 2014, Public School Teachers’ Pension and Retirement Fund of Chicago (“Chicago Teachers”), a shareholder of Intuitive Surgical, Inc., filed a First Amended Complaint against the company’s directors and officers, alleging wrongdoing in connection with the cover-up of safety defects in the company’s flagship product, the da Vinci robotic surgery system.

On April 2, 2015, after more than a year of failed attempts by the defendants to make the case go away using various procedural tactics, the Honorable Judge Gerald J. Buchwald of the Superior Court for the State of California, San Mateo County, ordered the defendants to finally answer Chicago Teachers’ allegations. In so doing, the court rejected the defendants’ latest argument, which was that instead of bringing the lawsuit, Chicago Teachers should have first made a pre-suit demand on the company’s board of directors asking them to investigate the allegations, and that it hadn’t shown that such a demand would have been pointless, as required by law.

The court roundly rejected this argument. First, the Court noted that “[g]iven the entirety of the allegations, it defies reason that Intuitive’s nine directors could be blind to widespread regulatory violations being committed with respect to the Company’s sole product.” As such, the court found that Chicago Teachers had “shown that all nine directors faced a substantial likelihood of personal liability for failure of oversight.” The court then found that under the allegations, “all nine directors faced a probable liability risk of personal liability for false and misleading statements” made in the company’s SEC filings. Finally, the court found that the allegations showed that five of the company’s nine directors, constituting a majority of the board, sold company stock “motivated by inside information” about the undisclosed safety defects and regulatory violations, exposing them to a “substantial personal liability risk for insider trading.”

The court concluded that under these circumstances, “[n]one of the nine directors . . . were sufficiently disinterested, independent, or conflict-free such that a fair and neutral decision would have been made on any pre-suit demand.” Accordingly, the court denied the defendants’ motion to dismiss and ordered them to answer Chicago Teachers’ allegations within 20 days.

Click here to access a copy of the August 11, 2017 Notice of Hearing and Proposed Derivative Settlement.

Click here to access a copy of the August 9, 2017 Order Setting Settlement Hearing and Approving Notice of Proposed Derivative Settlement.