## Facts

- A Chipotle shareholder brought a derivative action on behalf of Chipotle against directors and officers following multiple foodborne-illness outbreaks linked to Chipotle restaurants in 2015.
- The complaint alleged Chipotle adopted a post-2008 “Norwalk Protocol” addressing employee illness and food safety, including a rule that ill employees stay home for five days after symptoms; only employees with more than one year of service received paid sick leave.
- Chipotle’s business model emphasized fresh ingredients and in-store preparation; its public filings acknowledged this increased food-safety risk, and the company maintained some risk-monitoring functions, including internal audit and a risk department.
- In 2015, Chipotle experienced multiple outbreaks over several months; the complaint alleged the board was not told of at least one August 2015 outbreak until December 2015, but did not plead detailed facts about board knowledge of other outbreaks or their causes.
- An internal audit report described internal audit as under budget and only partially compliant with certain risk-assessment standards; the report also reflected internal audit’s view that fuller documentation was unnecessary for restaurant operations and that the risk department reported no “material food-safety events.”
- The complaint asserted a Caremark-type oversight theory: directors allegedly failed to implement and monitor adequate food-safety and risk-management controls, harming the corporation.
- The complaint also alleged misleading public statements about food safety, but specifically attributed preparation of the challenged statements only to one officer-director.

## Issues

1. Whether the complaint pleaded demand futility with particularized facts under Delaware law (applied through Rule 23.1) so that a pre-suit demand on the board was excused.
2. Whether the complaint sufficiently alleged a substantial likelihood that a majority of directors faced non-exculpated, bad-faith oversight liability under Caremark such that they could not impartially consider a demand.
3. Whether allegations regarding public misstatements created a substantial likelihood of liability for a majority of the board.

## Decision

- The court granted defendants’ motion to dismiss under Rules 23.1 and 12(b)(6) for failure to plead demand futility with the required particularity.
- The court held the complaint did not plead facts supporting a reasonable inference that a majority of directors faced a substantial likelihood of non-exculpated liability for bad-faith oversight failures.
- The court found the allegations showed the existence of some food-safety and risk-monitoring measures, undermining any claim that the board “utterly failed” to implement reporting or controls.
- The court concluded the pleading lacked particularized allegations that directors knew of concrete “red flags” and consciously failed to act, as opposed to making poor judgments or being negligent.
- Misstatement-based allegations did not establish demand futility because the complaint attributed preparation of the challenged statements only to one director-officer and did not plead particularized facts tying most directors to knowing false statements.
- The dismissal was without prejudice to allow the plaintiff to consider making a demand; the court indicated it would convert the dismissal to with prejudice if the plaintiff declined to make a demand.

## Legal Principles

- In a Delaware-governed derivative action, demand is excused only if particularized facts create reasonable doubt that, at filing, a majority of the board could exercise independent and disinterested business judgment in responding to a demand.
- Under Caremark, oversight liability requires particularized facts showing either (1) an utter failure to implement any reporting or information system or controls, or (2) conscious failure to monitor or oversee implemented systems, amounting to bad faith.
- Where the corporation’s charter contains a DGCL § 102(b)(7) exculpation clause, demand futility cannot be established by alleging only duty-of-care violations; the pleading must support a reasonable inference of non-exculpated liability (e.g., bad faith or disloyalty) for a majority of directors.
- General allegations of adverse events and imperfect controls, without well-pleaded facts showing director knowledge of specific warning signs and deliberate inaction, do not satisfy Rule 23.1’s particularity requirement for excusing demand.
- Allegations of misleading disclosures must be pleaded with particularized facts connecting most directors to the challenged statements and to knowledge or bad-faith approval; attributing statements to a single director-officer typically will not render a board majority interested.

## Conclusion

The court dismissed the derivative action because the complaint did not plead, with particularity, facts showing that a majority of the board was interested or lacked independence under Delaware demand-futility standards; the alleged food-safety failures and disclosure theories did not plausibly support non-exculpated, bad-faith oversight liability for most directors.


Gubricky ex rel. Chipotle Mexican Grill, Inc. v. Ells, 255 F. Supp. 3d 1119 (D. Colo. 2017)