In Re The Boeing Company Derivative Litigation

Facts

A 737 MAX airplane crashed in October 2018, killing everyone onboard. A second one crashed in March 2019, killing everyone onboard. Investigations have revealed that the 737 MAX tended to pitch up due to its engine placement; that a new software program designed to adjust the plane downward depended on a single faulty sensor and therefore activated too readily; and that the software program was insufficiently explained to pilots and regulators. In both crashes, the software directed the plane down. Ps have come to this Court claiming D's directors and officers failed them in overseeing mission-critical airplane safety to protect enterprise and stockholder value. Ps seek to hold Ds accountable for those harms under the principles articulated in In re Caremark International Inc. Derivative Litigation and Marchand v. Barnhill. Ds are current and former Boeing officers. Many of D's Board seats were long-term and awarded to political insiders or executives with financial expertise. Ps allege that Ds failed to carry out their respective duties to monitor the safety and airworthiness of D's aircraft. It is alleged that Ds lent their oversight authority to D's agenda of rapid production and profit maximization. That misplaced Board focus caused D to bleed millions of dollars in fees, fines, and lost revenue, yet D rewarded several of the Ds with hefty compensation and retirement packages. At first, D's culture emphasized engineering and safety, and Boeing emerged as a leading global aerospace manufacturer. In 1997, D acquired McDonnell Douglas, another airplane manufacturer with a long history of pushing profits, shirking quality control, and designing products involved in numerous safety incidents. With former McDonnell Douglas leaders at the helm, D's corporate culture shifted from 'safety to profits-first' and 'focusing on costs-cutting rather than designing airplanes.' As a result, many of D's engineers felt disenchanted, and in 2000 they staged a forty-day strike to improve Company culture and regain a voice in decision-making. By 2001, D relocated its headquarters from Seattle to Chicago in order 'to escape the influence of the resident flight engineers.' In the early 2000s, D saw a sharp rise in safety violations imposed by the FAA. Between 2000 and 2020, the FAA flagged twenty airplane safety violations for poor quality control, poor maintenance, and noncompliant parts, as well as D's failure to provide its airline clients with crucial safety information. D faced fines ranging between $6,000 and $13 million. Quality suffered and eventually, in 2005, McNerney was named CEO. McNerney did not have a technical background, and after his appointment, D was described as a 'weird combination of a distant building with a few hundred people in it and a non-engineer with no technical skills whatsoever at the helm.' D's safety record in the years that followed was spotty. The list of safety problems grew longer and longer. In response, D did not implement or prioritize safety oversight at the highest level of the corporate pyramid. None of D's Board committees were specifically tasked with overseeing airplane safety, and every committee charter was silent as to airplane safety. This stood in contrast to many other companies in the aviation space whose business relies on the safety and flightworthiness of airplanes. None of the 5 board committees were specifically tasked with safety. Airplane safety was not a regular set agenda item or topic at Board meetings. Management's periodic reports to the Board did not include safety information. Management communications focused primarily on the business impact of airplane safety crises and risks. The Board did not have a means of receiving internal complaints about airplane safety. D's principal internal safety reporting process was the Safety Review Board (SRB). The SRB was Boeing's principal internal safety reporting process, but it had no link to the Board and no Board reporting mechanism. Without a Board-level reporting mechanism, safety issues and whistleblower complaints reported to the SRB did not come to the Board's attention. Neither the Audit Committee nor any other Board committee reviewed whistleblower complaints related to product safety. When D considered and approved the 737 MAX, according to three people present, no Board member asked about the safety implications of reconfiguring the 737 NG. D prioritized (1) expediting regulatory approval and (2) limiting the expensive pilot training required to fly the new model. D 'wanted to A, save money and B, to minimize the certification and flight-test costs.' Because D was months behind Airbus in developing a new airplane, it set a 'frenetic' pace for the 737 MAX program, resulting in hastily delivered technical drawings and sloppy, deficient blueprints. Because of that engine placement, the 737 MAX tended to tilt too far upwards, or 'pitch up,' in flight. D addressed the issue with new software: the Maneuvering Characteristics Augmentation System, or 'MCAS.' MCAS moved the leading edge of the plane's entire horizontal tail, known as the 'horizontal stabilizer,' to push the airplane's tail up and its nose down. MCAS would activate only if the plane pitched up at both a high angle of attack (or AOA) and a high G-force (the plane's acceleration in a vertical direction). During 2016 flight testing, Boeing changed MCAS to allow it to activate at low speeds; as such, it 'could be automatically triggered simply by a high AOA.' The external sensor for AOA was highly vulnerable to false readings or failure for numerous reasons, such as general weather, lightning, freezing temperatures, software malfunctions, or birds. This vulnerability was well-known: between 2004 and 2019. Failed AOA sensors were flagged to the FAA in more than 216 incident reports, including instances that required emergency landings. MCAS had only one AOA sensor, creating a 'single point of failure' that violated the fundamental engineering principle requiring redundancy 'so that one single error in a complex system does not cause total system failure.' In 2013, D engineers proposed that the 737 MAX implement a Dreamliner safety feature called 'synthetic airspeed' to detect a false AOA signal.Managers rejected that proposal due to additional cost and pilot training, and MCAS remained dependent on a single fickle AOA sensor. Engineers remained skeptical. D's analyses and FAA disclosures about MCAS underestimated its lethality. Internal safety analyses concluded that MCAS could cause 'catastrophic' failures if it took a pilot more than ten seconds to identify and respond to the software's activation. The analyses assumed the pilot would react within four seconds, and so concluded that the likelihood of a 'hazardous event' due to an MCAS failure was nearly inconceivable. D's four-second reaction time assumption was a 'gross underestimate.' D's technical pilots deceived the FAA by failing to disclose that MCAS as revised activated only upon the AOA sensor signal, regardless of speed, increasing the likelihood that MCAS would activate. Between 2014 and 2017, D touted that flight simulator training would not be necessary on the 737 MAX. Boeing and its well-connected leadership had significant sway over the FAA, and the FAA often permitted D to self-regulate. D put 'tremendous pressure' on its Chief Technical Pilot Mark Forkner to obtain Level B pilot training for the 737 MAX. In November 2016 Forkner texted a colleague that MCAS was 'running rampant' on a flight simulator when operating at a low speed and then texted: 'so basically I lied to the regulators (unknowingly).' The 737 MAX airplane manuals and pilot training materials for U.S.-based airlines lacked specific information about MCAS. No substantive description of MCAS appeared in D's three documents for pilots flying new models. After securing Level B training, D continued to conceal issues with the 737 MAX. In August 2017, to make the AOA alert work, customers needed to purchase an optional 'add-on' feature for $80,000 called an 'AOA indicator display.' The “AOA disagree alerts”  did not work in at least 80% of the 737 MAX planes Boeing delivered-including planes that crashed. Boeing did not tell the FAA or its customers that the majority of its planes had inoperable AOA disagree alerts until after the first crash. Even then, D continued to insist that the AOA indicator display was not a 'required' safety feature and that it was appropriate to offer it as an optional 'add-on.' The 737 MAX had become the fastest-selling airplane in D's history. D never required or provided simulator training. D struggled to keep up with demand and customer expectations and to meet the Board's production and delivery target of fifty-seven airplanes per month. In July and August 2018, deliveries averaged approximately thirty-nine airplanes per month. Falling behind, Boeing employees worked in a 'factory in chaos,' facing intense pressure to maintain production schedules. Employees grew concerned about the airplane's safety. Concerns came in from employees regarding unrelenting and dangerous economic pressure from senior management to produce the 737 MAX rapidly and cheaply. Some of these complaints made their way to senior management, but none made it to the Board. After the first crash and black box data (the pilots searched the Quick Reference Handbook's checklist for abnormal flight events, but it said nothing about MCAS), the FAA concluded what many at Boeing already knew: that there was an unacceptably high risk of catastrophic failure if MCAS was not changed, estimating that the then-existing fleet of Boeing 737 MAX planes would average one fatal crash stemming from MCAS every two to three years if the software was not corrected. The press started to publish articles that D purposefully withheld critical information. Management did not bring the crash to the Board's attention for over a week. The Board did not formally convene and address the Lion Air Crash until its regularly scheduled Board meetings on December 16 and 17. The minutes reflect that the Board's primary focus relating to the 737 MAX and Lion Air Crash was on restoring profitability and efficiency in light of longstanding supply chain issues. The Audit Committee did not present any meaningful information about the 737 MAX's safety or safety generally. By January 2019, DOJ had opened a criminal investigation into whether D had defrauded the FAA when obtaining certification of the 737 MAX. IForkner's text messages were revealed admitting he had lied to the FAA. In a 2021 agreement with the DOJ, D 'did not timely and voluntarily disclose to the Fraud Section the offense conduct described in the Statement of Facts' and Boeing's cooperation 'was delayed and only began after the first six months of the Fraud Section's investigation, during which time the Company's response frustrated the Fraud Section's investigation.' D agreed to pay a 'Total U.S. Criminal Monetary Amount' of $2.513 billion, composed of a criminal monetary penalty of $243.6 million, compensation payments to D's 737 MAX airline customers of $1.77 billion, and the establishment of a $500 million crash-victim beneficiaries fund. On March 10, less than one month after the Board declined to pursue an internal investigation, another 737 MAX crashed. The pilots followed D's recommended emergency procedures, but could not regain control of the plane because MCAS was repeatedly activated. The FAA grounded the 737 MAX, becoming the final major aviation regulator to do so. Over the next six weeks, communications to the Board focused on restoring D's reputation and returning the 737 MAX to service. On March 15, Arthur Collins and then-Lead Director David Calhoun recommended a Board meeting devoted to product safety. “In light of the two 737 MAX 8 crashes and subsequent global fleet grounding, the previous grounding of Air Force KC-46 tankers, and the Amazon 767 cargo plane crash, I believe we should devote the entire board meeting (other than required committee meetings and reports) to a review of quality within Boeing.” The Board initiated Board-level safety reporting for the first time. On May 6, for the first time, the Airplane Committee formally requested information about the cause of the crashes. The Airplane Committee also recommended that the Board establish another committee dedicated to safety. And so on August 26, the Board established the Aerospace Safety Committee 'for the purpose of assisting the Board in the oversight of the safe design, development, manufacture, production, operations, maintenance, and delivery of the aerospace products and services of the Company.' By late 2019, management began receiving 'granular weekly reports of potential safety issues discussed at meetings of rank-and-file engineers - something that did not happen in the past.' The Board publicly lied about if and how it monitored the 737 MAX's safety. The 737 MAX fleet was grounded for twenty months, until November 18, 2020. In 2020, D estimated that it had incurred non-litigation costs of $20 billion, and litigation-related costs in excess of $2.5 billion. Litigation continues on multiple fronts, and customers canceled orders. In January 2021, D consented to the filing of a criminal information charging the Company with conspiracy to defraud the United States and thereby incurring billions of dollars in penalties. The corporate harm D suffered inspired numerous books and records requests and derivative actions filed in this Court in 2019. The Court consolidated the plenary actions. Count I asserts a derivative claim for breach of fiduciary duty against Ds alleging they consciously breached their fiduciary duties and violated their corporate responsibilities by failing to implement any reasonable information and reporting system to monitor and oversee the safety of D's airplanes; consciously disregarding their duty to investigate and to remedy any misconduct uncovered; and (3) after falsely assuring the public about the safety of the 737 MAX and MCAS and deciding to cash out Muilenburg's unvested equity-based compensation. Count II asserts a derivative claim for breach of fiduciary duty against Ds alleging they consciously breached their fiduciary duties or, at a minimum, acted with gross negligence by consciously and repeatedly failing to implement and actively monitor or oversee a compliance and safety program; consciously disregarding their duty to investigate red flags and to remedy any misconduct uncovered; and covering up the extreme safety risks of D's aircraft. Dz moved to dismiss pursuant to Court of Chancery Rules 12(b)(6) and 23.1.

Issues

Rule of Law

Holding and Decision

Legal Analysis

© 2007-2025 ABN Study Partner.