Bloomberg reports:
A Papa John's investor filed a putative class action against the pizza chain Aug. 30 for allegedly misleading shareholders about Schnatter's conduct, not having adequate systems in place to prevent inappropriate workplace conduct, and negatively affecting the company's business and reputation. Schnatter, who is also named as a defendant in the U.S. District Court for the Southern District of New York complaint, resigned from his position as chairman of the Papa John's board in July after reports that he'd used a racial slur on a conference call.
Schnatter's conduct hurt the company's bottom line, the investor complaint alleged. Pizza sales slowed after Schnatter's use of the slur became public, according to a Bloomberg report. The company's stock price also declined by 4.84 percent, the complaint said.
I found myself rolling my eyes as I read this silliness. It immediately called to mind Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961 (Del. Ch. 2003), aff'd, 845 A.2d 1040 (Del. 2004):
The market for MSO products is uniquely tied to the personal image and reputation of its founder, Stewart. MSO retains “an exclusive, worldwide, perpetual royalty-free license to use [Stewart's] name, likeness, image, voice and signature for its products and services.”7 In its initial public offering prospectus, MSO recognized that impairment of Stewart's services to the company, including the tarnishing of her public reputation, would have a material adverse effect on its business. ...
Stewart was accused of insider trading in Imclone stock:
Ultimately Stewart's prompt efforts to turn away unwanted media and investigative attention failed. Stewart eventually had to discontinue her regular guest appearances on CBS' The Early Show because of questioning during the show about her sale of ImClone shares. After barely two months of such adverse publicity, MSO's stock price had declined by slightly more than 65%. In August 2002, James Follo, MSO's chief financial officer, cited uncertainty stemming from the investigation of Stewart in response to questions about earnings prospects in the future.
Plaintiff sued claimed that "the director defendants and defendant *971 Patrick breached their fiduciary duties by failing to ensure that Stewart would not conduct her personal, financial, and legal affairs in a manner that would harm the Company, its intellectual property, or its business." The court tossed the claim:
Even if I accept that the board knew that Stewart's personal actions could result in harm to MSO, it seems patently unreasonable to expect the Board, as an exercise of its supervision of the Company, to preemptively thwart a personal call from Stewart to her stockbroker or to fully control her handling of the media attention that followed as a result of her personal actions, especially where her statements touched on matters that could subject Stewart to criminal charges. Plaintiff has not cited any case to support this new “duty” to monitor personal affairs. Since the defendant directors had no duty to monitor Stewart's personal actions, plaintiff's allegation that the directors breached their duty of loyalty by failing to monitor Stewart because they were “beholden” to her is irrelevant. Count II is dismissed for failure to state a claim.
The court further explained that:
Regardless of Stewart’s importance to MSO, she is not the corporation. And it is unreasonable to impose a duty upon the Board to monitor Stewart’s personal affairs because such a requirement is neither legitimate nor feasible. Monitoring Stewart by, for example, hiring a private detective to monitor her behavior is more likely to generate liability to Stewart under some tort theory than to protect the Company from a decline in its stock price as a result of harm to Stewart’s public image.
So the claim that Papa John's board "is liable not having adequate systems in place to prevent inappropriate workplace conduct" should be a non-starter.
