## Facts

- Westinghouse Electric Corp. maintained corporate incentive funds used to pay monetary awards to officers and employees.
- Alexander Garber, a Westinghouse shareholder, filed a diversity shareholder derivative action against individual Westinghouse directors, seeking damages on behalf of the corporation for allegedly improper incentive awards.
- Garber’s amended complaint admitted he made no pre-suit demand on the board to pursue the claims.
- Garber asserted demand was futile because the directors allegedly authorized or were implicated in the challenged awards and would not sue themselves.
- Defendants moved to dismiss for noncompliance with Federal Rule of Civil Procedure 23.1 and Pennsylvania Rule of Civil Procedure 1506.
- The district court dismissed the amended complaint without prejudice and directed the clerk to mark the case “CLOSED.”
- Garber appealed.

## Issues

1. Whether a district court order dismissing a complaint “without prejudice,” coupled with closure of the case, was a final, appealable order.
2. Whether the amended derivative complaint pleaded demand futility with sufficient particularity to excuse a pre-suit demand under Federal Rule of Civil Procedure 23.1 and Pennsylvania Rule 1506.

## Decision

- The Third Circuit held it had appellate jurisdiction because, despite the “without prejudice” label, the order functioned as final where the case was closed and the record indicated Garber was standing on the pleading.
- The Third Circuit affirmed dismissal because Garber did not plead, with particularity, facts excusing demand.
- The court held that generalized allegations that directors approved or were involved in the transactions, without detailed facts showing inability to exercise independent business judgment, did not satisfy Rule 23.1 or Pennsylvania’s demand requirement.

## Legal Principles

- A shareholder derivative complaint must either plead a pre-suit demand and its wrongful refusal or plead with particularity the reasons demand was not made. Fed. R. Civ. P. 23.1.
- Conclusory statements that demand would be futile are insufficient; the complaint must allege specific, fact-based reasons showing why the board could not properly consider a demand.
- In a diversity derivative action, the demand-futility standard is informed by the law of the state of incorporation; Pennsylvania Rule 1506 mirrors the requirement that demand be made or excused by particularized allegations of futility.
- A dismissal “without prejudice” may be treated as final and appealable when the record shows the case has effectively ended and the plaintiff cannot or does not intend to amend.

## Conclusion

The Third Circuit treated the “without prejudice” dismissal as final because the case was closed and Garber proceeded as if the complaint was complete, and it affirmed dismissal of the derivative action because the complaint failed to plead demand futility with the particularity required by Rule 23.1 and Pennsylvania law.


Garber v. Lego, 11 F.3d 1197 (3d Cir. 1993)