Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page1 of 631 ROBBINS GELLER RUDMAN& DOWD LLP2 SHAWN A. WILLIAMS (213113)Post Montgomery Center3 One Montgomery Street, Suite 1800San Francisco, CA 941044 Telephone: 415/288-4545415/288-4534 (fax)5 shawnw@rgrdlaw.com– and –6 TRAVIS E. DOWNS III (148274)BENNY C. GOODMAN III (211302)7 ERIK W. LUEDEKE (249211)655 West Broadway, Suite 19008 San Diego, CA 92101-3301Telephone: 619/231-10589 619/231-7423 (fax)travisd@rgrdlaw.com10 bennyg@rgrdlaw.comeluedeke@rgrdlaw.com11POMERANTZ GROSSMAN HUFFORDDAHLSTROM & GROSS LLPMARC I. GROSSJEREMY A. LIEBERMANJASON S. COWART600 Third AvenueNew York, NY 10016Telephone: 212/661-1100212/661-8665 (fax)migross@pomlaw.comjalieberman@pomlaw.comjscowart@pomlaw.com12Co-Lead Counsel for Plaintiffs13[Additional counsel appear on signature page.]14UNITED STATES DISTRICT COURT15NORTHERN DISTRICT OF CALIFORNIA16OAKLAND DIVISION17In re GOOGLE INC. SHAREHOLDER18 DERIVATIVE LITIGATION1920This Document Relates To:ALL ACTIONS.2122232425262728887151_1))))))))Master File No. CV-11-04248-PJHSECOND AMENDED VERIFIEDCONSOLIDATED SHAREHOLDERDERIVATIVE COMPLAINTDEMAND FOR JURY TRIALCase4:11-cv-04248-PJH Document92 Filed11/01/13 Page2 of 631INTRODUCTION AND OVERVIEW OF THE AMENDMENTSTO PLAINTIFFS’ SECOND AMENDED COMPLAINT21.This is a shareholder derivative action on behalf of nominal party Google, Inc.3(“Google” or the “Company”) for damages and other relief. Defendants are Google’s controlling4shareholders and senior most executives – defendants Eric E. Schmidt, Larry Page and Sergey Brin –5and directors – defendants John L. Hennessy, K. Ram Shriram, Shirley M. Tilghman, L. John Doerr6and Paul S. Otellini (together, the “defendants”).72.As corporate fiduciaries, defendants, individually and collectively, owe Google a duty8of loyalty (and good faith) to conduct the Company’s business and operations in accordance with the9applicable federal laws. Under Delaware law, directors who breach their duty of loyalty may be held10liable to the corporation for damages arising from their faithless acts and/or omissions.113.The Second Amended Complaint alleges that defendants, individually and12collectively, breached their fiduciary duty of loyalty by allowing Canadian online pharmacies to13place ads for the sale of prescription drugs without a prescription on Google’s website in violation of14the Federal Food, Drug, and Cosmetic Act (“FD&C Act”) and other laws. And, as a result of15defendants’ disloyalty, in August 2011, Google paid $500 million, as well as admitted to and16accepted responsibility for violating 21 U.S.C. §331(a) and (d) and 21 U.S.C. §952, to resolve claims17brought by the United States Department of Justice (“DOJ”).184.On September 26, 2013, the Court granted defendants’ motion to dismiss (the19“Order”) because the previous complaint did not adequately allege futility of demand. More20particularly, the Court concluded that the previous complaint only alleged “that one director21(Schmidt) is ‘interested,’ and one director (Tilghman) lacks independence.”Order at 14.22Reasonable doubt as to defendant Schmidt’s disinterestedness existed because he admitted that he23became aware of the illegal Canadian ads on Google’s website in around 2004. Id. at 10.24Reasonable doubt that defendant Tilghman was independent from interested director Schmidt existed25because of Tilghman’s “position as president of Princeton University, where Schmidt is an alumnus26‘who created a $25 million endowment fund, and was a former trustee who exercised control over27Tilghman’s compensation and employment.’” Id. at 13.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-1-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page3 of 6315.As to defendants Page and Brin, on the issue of disinterestedness, the Court2 concluded that the previous complaint did not “identify any specific action or knowledge on the part3 of either” of these defendants, id. at 9, and, “in order to raise a reasonable doubt that Page [or Brin]4 was ‘disinterested,’” plaintiffs “must provide actual factual allegations that Page [or Brin] was aware5 of the illegal ads.” Id. at 11. The Second Amended Complaint cures this defect by pleading, with6 particularity, facts demonstrating that Page and Brin received emails from, and participated in7 conversations with other top Google officials regarding Google’s advertising policy for online8 pharmacies that gave them personal knowledge that online pharmacies were selling prescription9 drugs without a prescription via Google’s website. See ¶¶6, 28-70, infra. Indeed, defendant Schmidt10 received many of the same emails as defendants Page and Brin received and, understandably as a11 result, had to admit his personal knowledge of the illegal Canadian ads during his September 21,12 2011 testimony before the United States Senate Judiciary Committee.136.For example, ¶¶49 and 60, allege that on October 21, 2003, defendants Page and Brin14 received an email forwarding a copy of Drugstore.com’s press release. The Drugstore.com press15 release described the dangers of Canadian pharmacies, stating:161718192021While the problem of enforcing our existing laws against illegal pharmacies iscomplicated, an immediate solution to the problem is very simple. Illegalpharmacies rely on the incredible amount of traffic generated by theiradvertisements on major Internet search engines, such as Google, MSN, andYahoo. The first step in protecting public health and safety, drugstore.commanagement states, is for the search engines to voluntarily stop accepting roguepharmacy ads. Until then, or until Congress forces search engines to stop acceptingsuch advertising, consumers are warned to be very cautious about ads forprescription medications that sound too good to be true.25“It’s unfortunate that major search engines, which are trusted by the public, areenabling rogue pharmacies to trick the public,” continued Neupert. “Whiletechnology has effectively helped streamline the delivery of prescription drugs andsubstantially lowered the cost of drugs, our public policy to safeguard thetransactions has not kept pace. We sincerely hope that Yahoo, MSN, Google, andother search engines do the right thing and refuse to carry these ads. If not, thenCongress needs to protect the public by making it unlawful to sell advertising spaceto companies that provide illegal pharmacy services, such as re-importation, shippingwithout a legitimate prescription, and misrepresentation.”267.222324Taken together, the Second Amended Complaint’s factual allegations are sufficient to27 raise a reasonable doubt as to Page and Brin’s disinterestedness, because, as the evidence shows, by28 October 2003, each of them was aware of the illegal Canadian ads. Yet, when faced with this887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-2-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page4 of 631 illegality, they continued Google’s advertising policy regarding online pharmacies in a manner that2 allowed Canadian online pharmacies to continue to sell prescription drugs illegally via Google’s3 website. As a result, defendants Page and Brin, individually and collectively, breached their4 fiduciary duty of loyalty by failing to conduct Google’s business in accordance with the applicable5 laws. Thus, defendants Page and Brin are each “interested” because they each face a substantial6 likelihood of liability for breaching their fiduciary duty of loyalty (and good faith). Order at 8-9.78.Moreover, as a byproduct of the interestedness of Page, Brin and/or Page and Brin,8 defendants Hennessy and Shriram lack independence for purposes of demand futility. A reasonable9 doubt that defendants Hennessy and Shriram were independent from “interested” director Page or10 “interested” director Brin exists because Hennessy and Shriram “‘have executive positions at11 Stanford University,’ where Page and Brin are alumni, and because ‘Stanford has received over12 $14.4 million from Google since 2006.’” Id. at 12.139.In sum, the Second Amended Complaint cures the pleading defects identified in the14 Court’s September 26, 2013 Order. The factual allegations of the Second Amended Complaint,15 when taken as true, raise a reasonable doubt the three directors (Schmidt, Page and Brin) are16 “interested,” because each of them had personal knowledge of the illegal Canadian ads. Id. at 11,17 14. The Second Amended Complaint’s allegations also raise a reasonable doubt that three directors18 (Tilghman, Hennessy and Shriram) lack independence from one or more “interested” directors. Id.1910.Accordingly, a majority of the Google nine person Board of Directors (“Board”) is20 not disinterested and/or independent. And, even if Page or Brin (but not both) are somehow deemed21 disinterested for purposes of demand futility, a majority of the nine person Google Board still will22 not be disinterested and/or independent. Therefore, a pre-suit demand upon the Google Board to23 bring, let alone vigorously prosecute the derivative claims is futile and excused as a matter of law.2425INTRADISTRICT ASSIGNMENT11.A substantial portion of the misconduct challenged in this Second Amended26 Complaint occurred in Santa Clara County. However, pursuant to the Court’s Related Case Order,27 dated September 19, 2011, the case was transferred to the Oakland Division.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-3-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page5 of 6312JURISDICTION AND VENUE12.This Court has jurisdiction over the actions brought by plaintiffs Patricia H. McKenna3 (Case No. CV-11-04248-PJH) and Avrohom Gallis (Case No. CV-11-04270-LHK) under 28 U.S.C.4 §1332(a)(1), because plaintiffs and defendants are citizens of different states and the amount in5 controversy exceeds $75,000, exclusive of interest and costs. These actions are not collusive actions6 designed to confer jurisdiction on a court of the United States that it would not otherwise have.713.This Court has jurisdiction over the action brought by plaintiff James Clem (Case No.8 CV-11-04249-RMW) under Article III of the United States Constitution and 28 U.S.C. §13319 because the underlying wrongdoing results from violations of the FD&C Act, 21 U.S.C. §331(a) and10 (d), and the Controlled Substances Act, 21 U.S.C. §952. This Court has supplemental jurisdiction11 under 28 U.S.C. §1367(a) over all other claims that are so related to claims in the action within such12 original jurisdiction that they form part of the same case or controversy under Article III of the13 United States Constitution. This action is not a collusive action designed to confer jurisdiction on a14 court of the United States that it would not otherwise have.1514.This Court has jurisdiction over each defendant named herein because each defendant16 is either a corporation that conducts business in and maintains operations in this District, or is an17 individual who has sufficient minimum contacts with this District so as to render the exercise of18 jurisdiction by the courts of this District permissible under traditional notions of fair play and19 substantial justice.2015.Venue is proper in this Court under 28 U.S.C. §1391(a) because: (i) Google maintains21 its executive offices and principal place of business in this District; (ii) one or more of the defendants22 either resides in or maintains offices in this District; (iii) a substantial portion of the transactions and23 wrongs complained of herein, including the defendants’ primary participation in the wrongful acts24 detailed herein, and aiding and abetting in violation of fiduciary duties owed to Google, occurred in25 this District; and (iv) defendants have received substantial compensation in this District by doing26 business here and engaging in numerous activities that had an effect in this District.2728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-4-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page6 of 6312THE PARTIES16.Plaintiffs McKenna, Gallis and Clem purchased Google shares on May 18, 2005,3 November 5, 2007, and June 29, 2007, respectively. Each plaintiff has continuously held their4 Google shares since purchase and each plaintiff continues to own their Google shares. Plaintiffs5 McKenna, Gallis and Clem are citizens of the States of Pennsylvania, New York and California,6 respectively.717.Nominal party Google is a Delaware corporation, with its executive offices located at8 1600 Amphitheatre Parkway, Mountain View, CA 94043. Google is the world’s largest Internet9 search engine and generates revenue primarily by delivering relevant, cost-effective online10 advertising. Google is a citizen of the State of California.1118.Defendant Page, a Google founder, has been a Google Director since September12 1998. He has also served as the Company’s Chief Executive Officer (“CEO”) since April 4, 2011.13 Page previously served as Google’s President, Products, from 2001 to April 3, 2011, CEO from14 1998 to 2001, and Chief Financial Officer (“CFO”) from 1998 to 2002. Page is a citizen of the State15 of California.1619.Defendant Brin, a Google founder, has been a Google Director since September 1998.17 Brin previously served as Google’s President, Technology, from 2001 to April 3, 2011, and as the18 Company’s President and Chairman from 1998 to 2001. Brin is a citizen of the State of California.1920.Defendant Schmidt has been a Google Director since 2001. He has also been the20 Executive Chairman of the Google Board since April 4, 2011. Schmidt previously served as21 Google’s CEO from 2001 to 2011, and Chairman of the Google Board from 2001 to 2004 and 200722 to April 2011. The Court held that defendant Schmidt is “interested” because he was aware of the23 illegal Canadian ads. See Order at 10. Schmidt is a citizen of the State of California.2421.Defendant Hennessy has been a Google Director since 2004. Hennessy also serves or25 served as the President of Stanford University, where “interested” directors Page and Brin are alumni26 and Google has donated more than $14.4 million since 2006. Hennessy is a citizen of the State of27 California.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-5-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page7 of 63122.Defendant Shriram has been a Google Director since 1998. Shriram is also on the2 board of trustees of Stanford University, where “interested” directors Page and Brin are alumni and3 Google has donated more than $14.4 million since 2006. Shriram is a citizen of the State of4 California.523.Defendant Tilghman has been a Google Director since 2005. Tilghman also serves or6 served as the President of Princeton University, where “interested” director Schmidt, an alumnus of7 Princeton University, created a $25 million endowment fund and, as a former Trustee, exercised8 control over Tilghman’s compensation and employment. This Court held that defendant Tilghman9 lacks independence from “interested” director Schmidt. See Order at 13. Tilghman is a citizen of10 the State of New Jersey.1124.Defendant Doerr has been a Google Director since 1999. Doerr also served on the12 board of directors of Drugstore.com, when Drugstore.com’s CEO was urging Google to clamp down13 on illegal online pharmacy ads that were appearing on its website. ¶52, infra. Doerr is a citizen of14 the State of California.1525.Defendant Otellini has been a Google Director since 2004. Otellini is a citizen of the16 State of California.1718AIDING AND ABETTING AND CONCERTED ACTION26.In committing the wrongful acts particularized herein, defendants have pursued or19 joined in the pursuit of a common course of conduct, and have acted in concert with one another in20 furtherance of their common plan or design. In addition to the wrongful conduct particularized21 herein as giving rise to primary liability, defendants further aided and abetted and/or assisted each22 other in breach of their respective duties.2327.Each of the defendants aided and abetted and rendered substantial assistance in the24 wrongs detailed herein. In taking such actions to substantially assist the commission of the25 wrongdoing detailed herein, each defendant acted with knowledge of the primary wrongdoing,26 substantially assisted the accomplishment of that wrongdoing, and was aware of his, her, or its27 overall contribution to and furtherance of the wrongdoing.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-6-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page8 of 631SCHMIDT, PAGE AND BRIN’S KNOWLEDGEOF THE ILLEGAL CANADIAN ADS228.At all relevant times, defendants Schmidt, Page and Brin served as Google’s top three3executive officers. By virtue of their Class B share ownership, they also are Google’s controlling4shareholders.529.As detailed below, the evidence shows that defendants Schmidt, Page and Brin6became aware of the illegal Canadian ads by no later than October 2003, and when faced with this7illegality, continued Google’s advertising policy for online pharmacies in a manner that allowed8Canadian online pharmacies to continue to sell prescription drugs without a prescription via9Google’s website.1030.As a result, defendants Schmidt, Page and Brin, who, as directors, owe Google a duty11of loyalty to conduct the Company’s business in accordance with federal law, face a substantial12likelihood of liability to Google for damages arising from the illegal pharmacy ads. Thus, a13reasonable doubt as to the disinterestedness of defendants Schmidt, Page and/or Brin, exists; and a14pre-suit demand on them, individually or collectively, to bring the derivative claims is excused as a15matter of law.16Defendant Schmidt Is Interested Because17 He Knew About the Illegal Canadian Ads1831.Defendant Schmidt admitted on September 21, 2011, while testifying before the19 United States Senate Judiciary Committee, that he was aware of the illegal Canadian ads on20 Google’s website, and that he acquired this knowledge around 2004. Specifically, when asked21 whether the online Canadian pharmacy ads that ultimately forced Google to enter into a Non22 Prosecution Agreement with the DOJ, in which Google paid $500 million and specifically admitted23 and accepted responsibility for violating 21 U.S.C. §§331(a) and (d) and 21 U.S.C. §952 “was the24 result of oversight or inadvertence, or were there some employees in the company that were doing25 this without your knowledge,” defendant Schmidt answered, “well, certainly not without my26 knowledge.” Defendant Schmidt also testified that he “first learned of the issue,” i.e., the illegal27 Canadian ads issue, around 2004.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-7-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page9 of 63132.Among other things, defendant Schmidt’s admission was based on emails that he2 received from other top ranking Google officials about the Company’s advertising policy regarding3 online pharmacies. Defendant Schmidt received the first of these emails in August 2003, and the4 emails show that, although defendant Schmidt was aware of the illegal Canadian ads and that U.S.5 consumers could purchase prescription drugs without a prescription on Google’s website, he6 continued Google’s advertising policy for online pharmacies in a manner that allowed Canadian7 online pharmacies to continue to illegally sell prescription drugs via Google’s website. Defendants8 Page and Brin received many of the same emails as defendant Schmidt received.933.For example, on August 22, 2003, defendant Schmidt received an email from Regan10 Hurley, Google’s then Director of Northwest Region. The email summarized Hurley’s conversation1112with Drugstore.com during which Drugstore.com alerted Google to the illegality and risks associatedwith permitting rogue pharmacies to advertise prescription drugs on Google’s website. The email13141516stated, in relevant part, as follows:Goal: Educate Google executives on the risks associated with the continued paidsponsorship of rogue pharmacies17Multiple national agencies have declared the Importation process illegal and a risk toUS consumers. The key takeaways are:18*Importation of medication is illegal19*Risk of counterfeit product20*Risk of contaminated product21*Risk of expired or duplicative therapy2223*Unregulated by both US and Canadian/Mexican Authorities (FDA and FDAequivalent) as no consistent safety and quality controls exist for purchasing andreceipt of prescription medications24Agencies include:25*FDA· Federal Drug Administration26*Violation of Food, Drug, and Cosmetic Act to import prescription product.27*Foreign product may not meet all the requirement [sic] for US approval, and thusqualifies as an unapproved product28887151_1*Medications are frequently labeled incorrectlySECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-8-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page10 of 631*Extremely unlikely that a pharmacy could ensure all applicable legalrequirements are met23*Individuals and business that cause those shipments also violate the act and aretherefore civilly and criminally liable. (RX Depot store front issue cease anddesist)434.On August 22, 2003, in response to Hurley’s email regarding Drugstore.com’s56critique of Google’s policy regarding online pharmacy advertisers, defendant Schmidt emailed to7 defendant Brin (and others), stating:89This is a request to not accept advertisers who are advertising items like viagra fromonline pharmacies that may or may not be properly licensed. Please review therequest and let me know your thoughts.10Thanks eric1135.On October 21, 2003, defendant Schmidt received a copy of an email from Sheryl12 Sandberg, Google’s then Vice President of Global Online Sales & Operations to Alana Karen and13 other top Google insiders, that further alerted him to the problems with Google’s advertising policy14for online pharmacies. The email stated, in relevant part, as follows:1516171819202122232425262728887151_1As I believe everyone is aware, there is a lot of concern about pharma policy[Google’s Internet pharmacy advertising policies]. I think we need the followinginfo pulled together. Please send to Alana and to me:*Revenue breakdown (Betsy, Eric) – what do we know about how muchrevenue comes from pharma? How much is online vs. direct?*Who are our direct pharma customers (Maryann [Belliveau])? Are they approvedby the NABP? (Is prescriptiondrugs.com approved?)*What is the complete list of pharma companies that are approved by the NABP(Alana [Karen])?*If we wanted to tighten up but not go all the way to approved by NABP what arethe options (Alana [Karen])?*Alana [Karen] – please check with legal and if they are ok, please have someonego to a good sample of our online advertisers and try to buy vicodin or somethingsimilar that you need a prescription for. Have them take notes on theirexperience and see if they ask for prescription. Not sure if you have to go all theway to purchase to answer the question. Better not to.36.On October 21, 2003, defendant Schmidt received another email from Sandbergforwarding to Schmidt a description of Google’s purported current advertising policy for onlineSECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH-9-Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page11 of 631 pharmacies (the “pharma” policy) and a potential future pharma policy. The email stated, in relevant2 part, as follows:34567891011121314151617181920212223242526Current Pharma PolicyWe allow the advertisement of online pharmacies ONLY IF they require aprescription or a doctor’s consultation. If advertiser will sell prescription drugswithout prescription or doctor’s consultation, we disapprove.*This includes foreign pharmacies*Pharmaceutical comparison or finder Sites are judged by same criteriaWe will not allow the advertisement of pharmaceutical drugs that are not yetapproved by FDA such as Cialis and Levitra.We do not allow pharmaceutical advertising to target the UK. Also stricter policiesin Japan.Potential Pharma PolicyWe will not allow the advertisement of online pharmacies unless approved byVerified Internet Pharmacy Practice Sites (VIPPS) program of NABP (NationalAssociation of Boards of Pharmacy). If there are reciprocal approval boards forInternet sites in other countries, we will approve sites approved by those boards aswell.*There are few International boards that have approved Internet sites as of yet*Note: Current best way to do this is to block all keywords which effectively blocksnon-pharma related ads and pharmaceutical companies themselves until we havetechnical fix.Unlicensed questionTo be VIPPS certified, a pharmacy must comply with the licensing and inspectionrequirements of their state and each state to which they dispense pharmaceuticals.Backing into this question, ‘unlicensed pharmacies’ are not necessarily complyingwith the licensing and inspection requirement of their state and each state to whichthey dispense pharmaceuticals.I think it is safe to say that we have been accepting sites that do not necessarily meetthose requirements.Former Data Pull infoREDACTEDREDACTED2728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 10 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page12 of 63137.On October 22, 2003, defendant Schmidt received an email from Mary Ann2 Belliveau, Google’s then Vertical Market Manager for Healthcare, pointing out that Google’s current34“pharma” policy allows online pharmacies advertising with Google to sell prescription drugs withouta prescription. The email stated, in relevant part, as follows:57Just to avoid any confusion – Sheryl (Sandberg) is talking about “OnlinePharmacies” not pharmaceutical companies (which we subcategorized as “pharma”).So we’re talking about online pharmacies like www.fastestrx.com not drugmanufacturers like Pfizer and Novartis.8“Rogue” online pharmacies generally fall into two categories –9A) Canadian Pharmacies selling discounted drugs into the US market. Some press ispositive i.e. senior citizens who have no drug coverage and can save money buyingthese drugs from Canada. Some press is negative (counterfeit drugs, safety issues)610111213141516B) US online pharmacies charging high prices for prescription drugs (mostly dietpills, pain killers and erectile dysfunction medication). Most press on US onlinepharmacies is negative and escalating quickly.I’ll try to address most of Sheryl’s questions. This is obviously a thorny subject andthe inability of our government to police the rogue pharmacies puts us in an awkwardposition.1) Betsy and Eric N started this project when Eric, Regan and I met withdrugstore.com – REDACTED202) Eric N can send · you a full list of direct and online pharmacy clients (there aremany and the names and urls change constantly). Most of these advertisers are notVIPPS approved (see VIPPS approved list below). We do work with several VIPPSapproved clients currently – i.e. drugstore.com, medcohealth.com – but theycurrently advertise other areas of their business (over the counter products, content).Currently, the VIPPS approved clients like drugstore.com cannot compete with theCPCs of the “rogue pharmacies” who sell drugs directly online and have a totallydifferent back end metric (CPCs are too high – shutting out the VIPPS pharmacies).213) VIPPS approved list http://www.nabp.net/vipps/consumerllistall.asp17181922Detail Web Business Name Website Address23accuratepharmacy.com www.accuratepharmacy.com24AdvanceRx.com www.AdvanceRx.com25Anthem Prescription www.anthemprescription.com26Caremark Inc. www.rxrequest.com27ellckpharmacy.com www.clickpharmacy.com28CVS Washington, Inc., dba CVS.com www.cvs.com887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 11 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page13 of 631drugstore.com WWW.drugstore.com2Express Pharmacy Services/Eckerd.com www.Eckerd.com3Familymeds.com www.Familymeds.com4Medco Health Solutions, Inc. www.medcohealth.com5NCS Healthcare dba Care For Life www.careforlife.com6RxWEST Pharmacy www.rxwest.com7Tel-Drug, Inc./CIGNA www.teldrug.com8walgreens.com, Inc. www.walgreens.com910114) If we wanted to tighten up but not go all the way we could refuse advertising forcontrolled substances (the online sale of narcotics is obviously causing the mostproblems). However, this would be very difficult to monitor as the list is long andwould have to include the generic names of these drugs. It also would address onlypart of this issue and we would still face potential criticism in other areas – i.e.counterfeit drugs, watered down drugs, etc.12145) You absolutely can buy vicodin, valium, xanax from these advertisers withoutseeing a live doctor. It’s very easy and it’s been done by numerous reporters. Mostof these advertisers are not shy about what they’re doing http://www. google.com/search?sourceid=navclient&ie=UTF-8&oe=UTF-8&q=pain+klllers.15Please. call me if you have any questions16Thanks, Mary Ann1738.13As result of the October 21 and 22, 2003 emails, defendant Schmidt knew, among18 other things, that online pharmacies advertising on Google were selling prescription drugs without a1920prescription, and that Google users could buy Vicodin, Valium and Xanax from Google advertiserswithout a prescription and without even seeing a doctor.21222339.A few days later, on October 27, 2003, defendant Schmidt received yet another emaildiscussing the fact that Google’s official policy of not allowing pharmacies to advertise on Google if24 they sold prescription drugs without a prescription was a sham and that the only requirement that25 Google imposed on Internet pharmacies was that they claim to require a prescription. The26 October 27, 2003 email from Sandberg, Google’s then Vice President of Global Online Sales &2728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 12 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page14 of 631 Operations, sent via emg@google.com, the email listserv for the Google executive management2 group that includes Schmidt, Page and Brin, stated, in relevant part, as follows:3456789101112131415161718192021222324252627I believe pharma policy may be a topic in today’s EMG meeting.Our current policy is that we allow the advertisement of online pharmacies, bothdomestic and foreign, only if the site claims to require a prescription.Pharmaceutical comparison or finder sites are judged by same criteria. We do notallow the advertisement of pharmaceutical drugs that are not yet approved by FDAsuch as Cialis and Levitra. We do not allow pharmaceutical advertising to target theUK and have stricter policies in Japan. As with all of our policies, we do not verifywhat these sites actually do, only what they claim to do.Public awareness of the ability of people to get drugs through online pharmacies isincreasing and as we all know, drugstore.com is using the press to try to force us andothers to change their policies. Overture/Yahoo, who has long had the same policywe have, is likely to change their policy to be more restrictive this week. We mayget a heads up before they announce a policy change.Our options are:1) Keep policy the same. Good for consumers overall as it increases availability ofpharmaceuticals but means that the bad stories will continue.2) Classify pharma ads as nonfamily. This means that anyone with a safe searchfilter on will not see them. I think we should do this regardless of any other steps wechose to take.3) Mark pharma ads. The idea would be to mark pharma ads with a Pharma-specificlabel. If you clicked on the label, we would take you to a page which would have acarefully worded warning on pharma practices. (Larry – this is Salar’s idea of whatyou were suggesting. Is this what you had in mind?)4) Only accept pharmas that have been approved by Verified Internet PharmacyPractice Sites (VIPPS) program of NABP (National Association of Boards ofPharmacy). If there are reciprocal approval boards for Internet sites in othercountries, we’ will approve sites approved by those boards as well. This would be avery restrictive policy as fewer than 20 pharmas have been approved by this board(Drugstore.com is of course one of them). Interestingly enough, one of the pharmaswith questionable practices highlighted in the NYTimes article had actually beenapproved by them, but the Board claims that this was a mistake they will not repeat.Despite this, this is our most conservative option.5) Involve a third-party verifier. Based on my conversation with Overture, thisseems to be what they are considering. They do it for wine sellers now. The way itworks for wine sellers on Overture is that in order to advertise wine on Overture, youfirst have to register with a company called Square Trade. The advertiser paysSquare Trade $50 to be certified that they are adhering to all local and national laws.Square Trade mystery shops its customers to make sure they do what they claim todo. Overture is considering extending this to pharma. eBay also uses third-partyverifiers for some categories. We have never done this so it would be a real policyshift for us. We have long held that we can’t police the web; if we do this, we will be28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 13 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page15 of 631taking a much more active posture towards controlling what our advertisers do thenwe ever have before.2We do not make these decisions based on revenue, but as background,·REDACTED3I am flying this afternoon but Alana Karen is in the office to answer any questions.4Sheryl540.Two days later, on October 29, 2003, defendant Schmidt received another email from67Sandberg, via emg@google.com, describing a conversation she had with Drugstore.com regarding,8 among other things, Google’s advertising policy for online pharmacies. The email stated, in relevant9 part, as follows:10Regan, Maryann, Alex, and I spoke to our friends at Drugstore.com today.11Their points were the following:12•They argue that they are doing this to save the world.•They claim that all non-VIPPS approved online pharmacies are illegal (whichwe do not believe to be the case).•They will continue to push us and all others to restrict online advertising foronline pharma.•They believe others will announce changes and are therefore “leaders” andwe are killing people. (No joke – Kal said this.)•They said they will give us a heads up if they are putting out press releaseswith our name, but I am not sure I believe them.1314151617181920The points we made were:21•We listened and made sure they knew we heard all of their policy concerns.22•We asked if they were concerned that they had a commercial interest in thispolicy change. Their response was that they care only for consumers.•We asked them to not send out meeting agendas or mock press releases withour name in it without our approval.•We told them that we were thinking through the policy concerns and that ifwe had any changes to announce, we would let them know. We would not,however, be participating in their suggested announcement (attached).232425262728887151_1Frosty call at best. Their tactics are outrageous. I felt like I was back in Washingtonon a really bad day . . . .SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 14 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page16 of 631Omid – If you need an email that can be forwarded to BC and JD, draft below.2EMAIL THAT CAN BE FORWARDED:3POLICY ISSUE4Our current policy is that we allow the advertisement of online pharmacies, bothdomestic and foreign, only if the site claims to require a prescription.Pharmaceutical comparison or finder sites are judged by same criteria. We do notallow the advertisement of pharmaceutical drugs that are not yet approved by FDAsuch as Cialis and Levitra. We do not allow pharmaceutical advertising to target theUK and have stricter policies in Japan. As with all of our policies, we do not verifywhat these sites actually do, only what they claim to do.56789101112131415There is much discussion about the practices some online pharmacies follow. Whilewe do not allow pharmacies who claim not to require prescriptions to run, it ispossible that some of the pharmacies we approve do not follow their own statedpolicies carefully. We are considering not showing these ads to children by ceasingto show ads to users with a safe-search (family safe) filter on. We are alsoconsidering finding some other way to mark online pharma ads. A final decision onthese steps has not been made.We are not prepared to adopt a more restrictive stance, such as only approvingpharmas approved by the Verified Internet Pharmacy Practice Sites (VIPPS) programof NABP (National Association of Boards of Pharmacy). Our policy is designed toprovide maximum information and choice to users and being this restrictive is inconflict with that goal.This is an area where the law is still developing. We are planning on watching anylegislative changes very closely and will react appropriately.16DRUGSTORE.COM1718192021222324Over the past two weeks, Drugstore.com has been using very aggressive tactics to getus, Yahoo, MSN, Overture, and others to only accept ads from pharmas approved byVIPPS. They have sent out press releases, tried to call a meeting of all of theseplayers, and tried to put public and private pressure on us to change our policy.Yesterday they sent a mock press release to us and other search players whichincluded sample quotes from us without our knowledge or acquiescence (attached).They also state the case much more broadly than we believe to be true; e.g., callingall non-VIPPS approved pharmacies “illegal” which they are not.We take their concerns very seriously and many members of our exec team havespoken with them in the past week. Most recently, we spoke with their CEO today.We listened to their policy concerns and made sure that they knew we heard them.We did not agree to any policy changes but said that we will let them know if wewere making any changes. They made it clear that they will continue to fight this inthe public realm.2541.On November 17, 2003, defendant Schmidt received an email from Sandberg via2627emg@google.com noting that Google faced a serious public relations issue as the only remaining28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 15 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page17 of 631 search engine still accepting ads from online pharmacies without attempting to verify their practices.2 The email stated, in relevant part, as follows:34567891011Please forgive my bringing up an issue we have already discussed, but I think this isworth at least one more email, and potentially more discussion. Given that Overturemoved so aggressively and they supply ads to Yahoo and MSN, and given that AOLis blocking all of these ads, we are the only player in our industry still acceptingthese ads. I continue to think that although there is some commercial harm toshutting down these ads, the PR/brand risk we are taking by being out there on ourown may not be worth it. I thought this was worth bringing up again as the actionsof our competitors this week has increased our PR/brand risk significantly.(Of course, feel free to ignore this email if no one thinks this decision is worthrevisiting.)Sheryl42.On November 18, 2003, defendant Schmidt received an email from CindyMcCaffrey, Google’s then Vice President of Corporate Marketing via emg@google.com echoing12131415161718192021Sandberg’s concerns about Google’s advertising policy for online pharmacies. The email stated, inrelevant part, as follows:I definitely think it’s worth revisiting. This is a very serious matter and needs to beaddressed quickly. I understand that Sheryl had a very tough interview this morningwith the same Washington Post reporter Larry talked to a few weeks ago (David K.will be sending a summary). She did a great job, but we do not have a good responseto this issue and it is not going to go away. The industry is moving fast to removemost pharma ads; our gesture to address this will be perceived as just not enoughcompared with what the other companies are doing. I understand that we should notlet other companies, press, etc. influence our decision-making around policy, but Ithink you should understand that this has become a big, big issue and the potential ofserious harm to our brand among our users is very real. The Post plans to run with astory next week. We’ll be cast as the only company not moving quickly enough toaddress this issue.22If we can make something happen quickly, we can get back to reporter this week andsave ourselves from disaster in the media. We just don’t need this.2343.On November 18, 2003, defendant Schmidt received an email via emg@google.com24 echoing Sandberg and McCaffrey’s concerns and providing more details about the Washington Post25 article. The email stated, in relevant part, as follows:262728887151_1Here’s the scoop on the Washington Post call:*A story is scheduled to run in next week’s paper; I expect it will be very negativefor Google and will position us in an unfavorable light.SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 16 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page18 of 6312*The reporter will devote this article to the role search engines and portals playbetween illegal online pharmacies and consumers. As all of Google’s competitorshave recently adapted their policies to restrict these ads, we’ll be criticized forholding out and not reacting quickly.345*The article will also challenge our interpretation of the law. The reporter and reps.from the FDA (who will be quoted) believe that Google AdWords is facilitating theillegal distribution of pharm. drugs online. They have analyzed our pharm.advertisers extensively and have determined that a majority of these businesses areillegal.67891011121314*And as Cindy noted below . . . as much as we push the message that we arecurrently reviewing our policies and will ultimately do the right thing, our efforts arenot perceived as aggressive enough – this is amplified by the recent changes byOVER (Overture).*The message we also use about providing the broadest range of choices to our usersalso doesn’t hold water in this case, as most of these questionable online pharmaciescharge a 3x premium over sites like walgreens.com.*Lastly, the story of the 15 year-old who became addicted to Hydrocodone will alsobe reflected in this article – and as we all know, the father blames Google AdWordsfor connecting his son to an online pharm. that sold him these pills sans prescription.Sheryl has recently spoken to the father and further explained our point of view, buthe’s of the opinion that we should remove these ads entirely.It would be great to be finalize [sic] any changes we might make this week, so wecan brief the Washington Post before this article goes to print.15David1644.Based on the emails, and conversations contained therein, defendant Schmidt became17aware of the illegal Canadian ads by no later than October 2003, and, when faced with this illegality,18continued Google’s advertising policy for online pharmacies in a manner that allowed Canadian19online pharmacies to continue to sell prescription drugs without a prescription via Google’s website.2045.By doing so, defendant Schmidt breached his fiduciary duty of loyalty (and good21faith) owed to Google and, under Delaware law, is liable to the corporation for the damages arising22from his breach of fiduciary duty. Thus, the foregoing evidence, taken as true, is sufficient to raise a23reasonable doubt as to defendant Schmidt’s disinterestedness, as defined in the Court’s Order at 8-924(“As is particularly relevant here, a reasonable doubt as to a director’s disinterestedness also exists25where a director faces a ‘substantial likelihood’ of liability for breaching his fiduciary duty of loyalty26(and good faith).”). Therefore, because defendant Schmidt is interested in the outcome of this2728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 17 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page19 of 631 litigation, a pre-suit demand for him to bring, let alone vigorously prosecute the derivative claims is2 futile and excused as a matter of law.3 Defendant Page Is Interested BecauseHe Knew About the Illegal Canadian Ads446.Defendant Page became aware of the illegal Canadian ads on Google’s website in5October 2003. Just as defendant Schmidt, defendant Page received emails from, and participated in6conversations with other top ranking Google officials regarding the Company’s advertising policy7for online pharmacies. Although Google’s so-called “pharma” policy purportedly did not allow the8sale of prescription drugs without a prescription, defendant Page knew that Canadian online9pharmacies could, and did, sell prescription drugs without a prescription on Google’s website, and10when confronted with this illegality, defendant Page continued Google’s policy, with disastrous11consequences for the Company.1247.For example, on October 21, 2003, defendant Page received an email from Sandberg,13Google’s then Vice President of Global Online Sales & Operations, forwarding a description of1415 Google’s purported current advertising policy for online pharmacies and a potential future pharma16 policy. The email stated, in relevant part, as follows:17Current Pharma Policy1819We allow the advertisement of online pharmacies ONLY IF they require aprescription or a doctor’s consultation. If advertiser will sell prescription drugswithout prescription or doctor’s consultation, we disapprove.20*This includes foreign pharmacies21*Pharmaceutical comparison or finder Sites are judged by same criteria22We will not allow the advertisement of pharmaceutical drugs that are not yetapproved by FDA such as Cialis and Levitra.2324We do not allow pharmaceutical advertising to target the UK. Also stricter policiesin Japan.25Potential Pharma Policy26We will not allow the advertisement of online pharmacies unless approved byVerified Internet Pharmacy Practice Sites (VIPPS) program of NABP (NationalAssociation of Boards of Pharmacy). If there are reciprocal approval boards forInternet sites in other countries, we will approve sites approved by those boards aswell.2728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 18 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page20 of 631*There are few International boards that have approved Internet sites as of yet23*Note: Current best way to do this is to block all keywords which effectively blocksnon-pharma related ads and pharmaceutical companies themselves until we havetechnical fix.4Unlicensed question5To be VIPPS certified, a pharmacy must comply with the licensing and inspectionrequirements of their state and each state to which they dispense pharmaceuticals.67Backing into this question, ‘unlicensed pharmacies’ are not necessarily complyingwith the licensing and inspection requirement of their state and each state to whichthey dispense pharmaceuticals.89I think it is safe to say that we have been accepting sites that do not necessarily meetthose requirements.10Former Data Pull info11REDACTED12REDACTED1348.On October 21, 2003, defendant Page also received an email from Tim Armstrong,14 Google’s then President of Americas Operation, describing a troubling conversation with1516Drugstore.com regarding Google’s online pharmacies advertising policy, which Drugstore.comviewed as overly permissive because it allowed the pharmacies to sell prescription drugs without a1718192021prescription. The email stated, in relevant part, as follows:I just spoke with their [Drugstore.com’s] CEO – Kal and our RSM Regan. He hadthe following things to say –He will be sending the press release to us as soon as it is done22We will be in the release regardless of how we feel about because this is his chanceto protect his vertical23AOL is handling this correctly in his mind, so they will not be in the press release24Drugstore.com is making a full assault on Washington, DC. Peter Neupert, theirchairman, is spending the next few weeks in DC to lobby and do press interviews –Drugstore also hired a PR/Lobby group to help them out25262728887151_1We discussed Google’s reaction to issues like these – we·look at the user experience,we look at the clarity of the situation, precedent for Google of taking actions orfiltering – all of these issuesHis take on the situation: This is his shot to clean out the black market players and toprotect his verticalSECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 19 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page21 of 6312345My message back to him was: We understand his passion for the subject, but wewould rather work this out together instead of in the press. We would like to not bein the release and being in the release may cause us to strongly word our messageabout open information and user choice – and that Drugstore may have self-servingreasons that are not connected to users health issues (in a smoother manner). I didmention the press release may backfire with us because it would force us to be vocalabout self-serving nature of the press release.The net-net is this – he is set on doing this and he sees this as his opportunisticchance to get Washington on his side.67Look for the release and if it is really damaging, we can call him back and discuss itwith him. I told him to expect a call from us after we have a copy of the release –TA849.On October 21, 2003, defendant Page received an email forwarding a copy of910Drugstore.com’s press release. The Drugstore.com press release described the dangers of Canadian11 pharmacies, the Verified Internet Pharmacy Practice Sites (“VIPPS”) certification program of the12 National Association of Boards of Pharmacy (“NABP”) and that only a handful of pharmacies had13 earned VIPPS certification. The Drugstore.com press release also singled out Google for their role,14 along with a few other search engines, in driving traffic to rogue pharmacies by permitting them to15advertise on Google’s website. More specifically, the Drugstore.com press release that defendant161718192021222324252627Page received on October 21, 2003, stated, in relevant part, as follows:While the problem of enforcing our existing laws against illegal pharmacies iscomplicated, an immediate solution to the problem is very simple. Illegalpharmacies rely on the incredible amount of traffic generated by theiradvertisements on major Internet search engines, such as Google, MSN, andYahoo. The first step in protecting public health and safety, drugstore.commanagement states, is for the search engines to voluntarily stop accepting roguepharmacy ads. Until then, or until Congress forces search engines to stop acceptingsuch advertising, consumers are warned to be very cautious about ads forprescription medications that sound too good to be true.“It’s unfortunate that major search engines, which are trusted by the public, areenabling rogue pharmacies to trick the public,” continued Neupert. “Whiletechnology has effectively helped streamline the delivery of prescription drugs andsubstantially lowered the cost of drugs, our public policy to safeguard thetransactions has not kept pace. We sincerely hope that Yahoo, MSN, Google, andother search engines do the right thing and refuse to carry these ads. If not, thenCongress needs to protect the public by making it unlawful to sell advertising spaceto companies that provide illegal pharmacy services, such as re-importation, shippingwithout a legitimate prescription, and misrepresentation.”28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 20 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page22 of 63150.A few days later, on October 27, 2003, defendant Page received yet another email2 discussing the fact that Google’s official policy of not allowing pharmacies to advertise on Google if34they sold prescription drugs without a prescription was a sham and that the only requirement thatGoogle imposed on Internet pharmacies was that they clam to require a prescription. The October56727, 2003 email from Sandberg, Google’s then Vice President of Global Online Sales & Operations,to Page, sent via emg@google.com, the e-mail listserv for Google’s executive management that8 includes Page, Schmidt and Brin, stated, in relevant part, as follows:91011121314I believe pharma policy may be a topic in today’s EMG meeting.Our current policy is that we allow the advertisement of online pharmacies, bothdomestic and foreign, only if the site claims to require a prescription.Pharmaceutical comparison or finder sites are judged by same criteria. We do notallow the advertisement of pharmaceutical drugs that are not yet approved by FDAsuch as Cialis and Levitra. We do not allow pharmaceutical advertising to target theUK and have stricter policies in Japan. As with all of our policies, we do not verifywhat these sites actually do, only what they claim to do.16Public awareness of the ability of people to get drugs through online pharmacies isincreasing and as we all know, drugstore.com is using the press to try to force us andothers to change their policies. Overture/Yahoo, who has long had the same policywe have, is likely to change their policy to be more restrictive this week. We mayget a heads up before they announce a policy change.17Our options are:181) Keep policy the same. Good for consumers overall as it increases availability ofpharmaceuticals but means that the bad stories will continue.1519202122232425262728887151_12) Classify pharma ads as nonfamily. This means that anyone with a safe searchfilter on will not see them. I think we should do this regardless of any other steps wechose to take.3) Mark pharma ads. The idea would be to mark pharma ads with a Pharma-specificlabel. If you clicked on the label, we would take you to a page which would have acarefully worded warning on pharma practices. (Larry – this is Salar’s idea of whatyou were suggesting. Is this what you had in mind?)4) Only accept pharmas that have been approved by Verified Internet PharmacyPractice Sites (VIPPS) program of NABP (National Association of Boards ofPharmacy). If there are reciprocal approval boards for Internet sites in othercountries, we’ will approve sites approved by those boards as well. This would be avery restrictive policy as fewer than 20 pharmas have been approved by this board(Drugstore.com is of course one of them). Interestingly enough, one of the pharmaswith questionable practices highlighted in the NYTimes article had actually beenapproved by them, but the Board claims that this was a mistake they will not repeat.Despite this, this is our most conservative option.SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 21 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page23 of 63165) Involve a third-party verifier. Based on my conversation with Overture, thisseems to be what they are considering. They do it for wine sellers now. The way itworks for wine sellers on Overture is that in order to advertise wine on Overture, youfirst have to register with a company called Square Trade. The advertiser paysSquare Trade $50 to be certified that they are adhering to all local and national laws.Square Trade mystery shops its customers to make sure they do what they claim todo. Overture is considering extending this to pharma. eBay also uses third-partyverifiers for some categories. We have never done this so it would be a real policyshift for us. We have long held that we can’t police the web; if we do this, we will betaking a much more active posture towards controlling what our advertisers do thenwe ever have before.7We do not make these decisions based on revenue, but as background,·REDACTED8I am flying this afternoon but Alana Karen is in the office to answer any questions.9Sheryl23451051.Two days later, on October 29, 2003, defendant Page received an email from11 Sandberg via emg@google.com describing a conversation she had with Drugstore.com regarding,1213among other things, Google’s advertising policy for online pharmacies. The email stated, in relevantpart, as follows:1415161718Regan, Maryann, Alex, and I spoke to our friends at Drugstore.com today.Their points were the following:•They argue that they are doing this to save the world.•They claim that all non-VIPPS approved online pharmacies are illegal (whichwe do not believe to be the case).•They will continue to push us and all others to restrict online advertising foronline pharma.•They believe others will announce changes and are therefore “leaders” andwe are killing people. (No joke – Kal said this.)•They said they will give us a heads up if they are putting out press releaseswith our name, but I am not sure I believe them.192021222324The points we made were:252627•We listened and made sure they knew we heard all of their policy concerns.•We asked if they were concerned that they had a commercial interest in thispolicy change. Their response was that they care only for consumers.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 22 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page24 of 631•We asked them to not send out meeting agendas or mock press releases withour name in it without our approval.•We told them that we were thinking through the policy concerns and that ifwe had any changes to announce, we would let them know. We would not,however, be participating in their suggested announcement (attached).234567891011121314151617181920Frosty call at best. Their tactics are outrageous. I felt like I was back in Washingtonon a really bad day . . . .Omid – If you need an email that can be forwarded to BC and JD, draft below.EMAIL THAT CAN BE FORWARDED:POLICY ISSUEOur current policy is that we allow the advertisement of online pharmacies, bothdomestic and foreign, only if the site claims to require a prescription.Pharmaceutical comparison or finder sites are judged by same criteria. We do notallow the advertisement of pharmaceutical drugs that are not yet approved by FDAsuch as Cialis and Levitra. We do not allow pharmaceutical advertising to target theUK and have stricter policies in Japan. As with all of our policies, we do not verifywhat these sites actually do, only what they claim to do.There is much discussion about the practices some online pharmacies follow. Whilewe do not allow pharmacies who claim not to require prescriptions to run, it ispossible that some of the pharmacies we approve do not follow their own statedpolicies carefully. We are considering not showing these ads to children by ceasingto show ads to users with a safe-search (family safe) filter on. We are alsoconsidering finding some other way to mark online pharma ads. A final decision onthese steps has not been made.We are not prepared to adopt a more restrictive stance, such as only approvingpharmas approved by the Verified Internet Pharmacy Practice Sites (VIPPS) programof NABP (National Association of Boards of Pharmacy). Our policy is designed toprovide maximum information and choice to users and being this restrictive is inconflict with that goal.21This is an area where the law is still developing. We are planning on watching anylegislative changes very closely and will react appropriately.22DRUGSTORE.COM23Over the past two weeks, Drugstore.com has been using very aggressive tactics to getus, Yahoo, MSN, Overture, and others to only accept ads from pharmas approved byVIPPS. They have sent out press releases, tried to call a meeting of all of theseplayers, and tried to put public and private pressure on us to change our policy.Yesterday they sent a mock press release to us and other search players whichincluded sample quotes from us without our knowledge or acquiescence (attached).They also state the case much more broadly than we believe to be true; e.g., callingall non-VIPPS approved pharmacies “illegal” which they are not.2425262728887151_1We take their concerns very seriously and many members of our exec team havespoken with them in the past week. Most recently, we spoke with their CEO today.SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 23 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page25 of 6312We listened to their policy concerns and made sure that they knew we heard them.We did not agree to any policy changes but said that we will let them know if wewere making any changes. They made it clear that they will continue to fight this inthe public realm.352.On October 29, 2003, defendant Page emailed Sandberg and asked her to send the45above meeting summary to defendant Doerr, who at that time also sat on the board of directors of6 Drugstore.com. On October 30, 2003, Sandberg forwarded her meeting summary to Doerr. Based7 on Doerr’s simultaneous service on both the Drugstore.com board of directors and the Google8 Board, it may be inferred that Doerr also became aware of the illegal Canadian ads by October 2003.91053.On November 17, 2003, defendant Page received an email from Sandberg viaemg@google.com noting that Google faced a serious public relations issue as the only remaining1112131415161718search engine still accepting ads from online pharmacies without attempting to verify their practices.The email stated, in relevant part, as follows:Please forgive my bringing up an issue we have already discussed, but I think this isworth at least one more email, and potentially more discussion. Given that Overturemoved so aggressively and they supply ads to Yahoo and MSN, and given that AOLis blocking all of these ads, we are the only player in our industry still acceptingthese ads. I continue to think that although there is some commercial harm toshutting down these ads, the PR/brand risk we are taking by being out there on ourown may not be worth it. I thought this was worth bringing up again as the actionsof our competitors this week has increased our PR/brand risk significantly.19(Of course, feel free to ignore this email if no one thinks this decision is worthrevisiting.)20Sheryl2154.On November 18, 2003, defendant Page received an email from McCaffrey, Google’s22 then Vice President of Corporate Marketing, via emg@google.com echoing Sandberg’s concerns23 about Google’s advertising policy for online pharmacies. The email stated, in relevant part, as2425262728887151_1follows:I definitely think it’s worth revisiting. This is a very serious matter and needs to beaddressed quickly. I understand that Sheryl had a very tough interview this morningwith the same Washington Post reporter Larry talked to a few weeks ago (David K.will be sending a summary). She did a great job, but we do not have a good responseto this issue and it is not going to go away. The industry is moving fast to removemost pharma ads; our gesture to address this will be perceived as just not enoughSECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 24 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page26 of 63123compared with what the other companies are doing. I understand that we should notlet other companies, press, etc. influence our decision-making around policy, but Ithink you should understand that this has become a big, big issue and the potential ofserious harm to our brand among our users is very real. The Post plans to run with astory next week. We’ll be cast as the only company not moving quickly enough toaddress this issue.45If we can make something happen quickly, we can get back to reporter this week andsave ourselves from disaster in the media. We just don’t need this.655.On the same date, November 18, 2003, defendant Page received an email via7 emg@google.com echoing Sandberg and McCaffrey’s concerns and providing more details about891011121314151617181920212223242526the Washington Post article. The email stated, in relevant part, as follows:Here’s the scoop on the Washington Post call:*A story is scheduled to run in next week’s paper; I expect it will be very negativefor Google and will position us in an unfavorable light.*The reporter will devote this article to the role search engines and portals playbetween illegal online pharmacies and consumers. As all of Google’s competitorshave recently adapted their policies to restrict these ads, we’ll be criticized forholding out and not reacting quickly.*The article will also challenge our interpretation of the law. The reporter and reps.from the FDA (who will be quoted) believe that Google AdWords is facilitating theillegal distribution of pharm. drugs online. They have analyzed our pharm.advertisers extensively and have determined that a majority of these businesses areillegal.*And as Cindy noted below . . . as much as we push the message that we arecurrently reviewing our policies and will ultimately do the right thing, our efforts arenot perceived as aggressive enough – this is amplified by the recent changes byOVER (Overture).*The message we also use about providing the broadest range of choices to our usersalso doesn’t hold water in this case, as most of these questionable online pharmaciescharge a 3x premium over sites like walgreens.com.*Lastly, the story of the 15 year-old who became addicted to Hydrocodone will alsobe reflected in this article – and as we all know, the father blames Google AdWordsfor connecting his son to an online pharm. that sold him these pills sans prescription.Sheryl has recently spoken to the father and further explained our point of view, buthe’s of the opinion that we should remove these ads entirely.It would be great to be finalize [sic] any changes we might make this week, so wecan brief the Washington Post before this article goes to print.David2728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 25 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page27 of 63156.Based on the emails, and the conversations contained therein, defendant Page became2 aware of the illegal Canadian ads by no later than October 2003, and, when faced with this illegality,3 continued Google’s advertising policy for online pharmacies in a manner that allowed Canadian4 online pharmacies to continue to sell prescription drugs without a prescription on Google’s website.557.By doing so, defendant Page breached his fiduciary duty of loyalty (and good faith)6 owed to Google and, under Delaware law, is liable to the corporation for the damages arising from7 his breach of fiduciary duty. Thus, the foregoing evidence, taken as true, is sufficient to raise a8 reasonable doubt as to defendant Page’s disinterestedness. This is especially true since defendant9 Page’s knowledge of the illegal Canadian ads mirrors almost exactly defendant Schmidt’s10 knowledge of the illegal Canadian ads. Therefore, because defendant Page is “interested” in the11 outcome of this litigation, a pre-suit demand for him to bring, let alone vigorously prosecute the12 derivative claims is futile and excused as a matter of law.13 Defendant Brin Is Interested BecauseHe Knew About the Illegal Canadian Ads1458.Defendant Brin became aware of the illegal Canadian ads on Google’s website in late152003 through emails from, and conversations with other top ranking Google officials regarding16Google’s advertising policy regarding online pharmacies – including an August 2003 email from17defendant Schmidt explaining that Drugstore.com had requested that Google “not accept advertisers18who are advertising items like viagra from online pharmacies that may or may not be properly19licensed.” However, when confronted with this illegality, Brin continued Google’s advertising20policy for online pharmacies in a manner that permitted Canadian online pharmacies to continue to21sell prescription drugs without a prescription on Google’s website.2259.For example, defendant Brin received an August 22, 2003 email summarizing23Hurley’s conversation with Drugstore.com alerting Google to rogue online pharmacies violating24U.S. law by selling prescription drugs without a prescription via search engines like Google’s25website. The email stated, in relevant part, as follows:26Goal: Educate Google executives on the risks associated with the continued paid27sponsorship of rogue pharmacies28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 26 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page28 of 631Multiple national agencies have declared the Importation process illegal and a riskto US consumers. The key takeaways are:2*Importation of medication is illegal3*Risk of counterfeit product4*Risk of contaminated product5*Risk of expired or duplicative therapy67*Unregulated by both US and Canadian/Mexican Authorities (FDA and FDAequivalent) as no consistent safety and quality controls exist for purchasing andreceipt of prescription medications8Agencies include:9*FDA· Federal Drug Administration1011*Violation of Food, Drug, and Cosmetic Act to import prescription product.12*Foreign product may not meet all the requirement [sic] for US approval, and thusqualifies as an unapproved product13*Medications are frequently labeled incorrectly14*Extremely unlikely that a pharmacy could ensure all applicable legalrequirements are met1516*Individuals and business that cause those shipments also violate the act and aretherefore civilly and criminally liable. (RX Depot store front issue cease anddesist)1760.On October 21, 2003, defendant Brin received an email forwarding a copy of1819Drugstore.com’s press release. The Drugstore.com press release described the dangers of Canadian20 pharmacies, the VIPPS certification program of the NABP and that only 14 pharmacies had earned21 VIPPS certification. The Drugstore.com press release also singled out Google for their role, along22 with a few other search engines, in driving traffic to rogue pharmacies by permitting them to23 advertise on Google’s website. More specifically, the Drugstore.com press release that defendant24Page received on October 21, 2003, stated, in relevant part, as follows:25262728887151_1While the problem of enforcing our existing laws against illegal pharmacies iscomplicated, an immediate solution to the problem is very simple. Illegalpharmacies rely on the incredible amount of traffic generated by their advertisementson major Internet search engines, such as Google, MSN, and Yahoo. The first step inprotecting public health and safety, drugstore.com management states, is for thesearch engines to voluntarily stop accepting rogue pharmacy ads. Until then, or untilSECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 27 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page29 of 63123Congress forces search engines to stop accepting such advertising, consumers arewarned to be very cautious about ads for prescription medications that sound toogood to be true.7“It’s unfortunate that major search engines, which are trusted by the public, areenabling rogue pharmacies to trick the public,” continued Neupert. “Whiletechnology has effectively helped streamline the delivery of prescription drugs andsubstantially lowered the cost of drugs, our public policy to safeguard thetransactions has not kept pace. We sincerely hope that Yahoo, MSN, Google, andother search engines do the right thing and refuse to carry these ads. If not, thenCongress needs to protect the public by making it unlawful to sell advertising spaceto companies that provide illegal pharmacy services, such as re-importation, shippingwithout a legitimate prescription, and misrepresentation.”861.456A few days later, on October 27, 2003, defendant Brin received yet another email9 discussing the fact that Google’s official policy of not allowing pharmacies to advertise on Google if1011they sold prescription drugs without a prescription was a sham and that the only requirement thatGoogle imposed on Internet pharmacies was that they clam to require a prescription. The October12131427, 2003 email from Sandberg, Google’s then Vice President of Global Online Sales & Operations,to Brin, via emg@google.com, the email listserv for Google’s executive management group that15 included Brin, Schmidt and Page, stated, in relevant part, as follows:16I believe pharma policy may be a topic in today’s EMG meeting.17Our current policy is that we allow the advertisement of online pharmacies, bothdomestic and foreign, only if the site claims to require a prescription.Pharmaceutical comparison or finder sites are judged by same criteria. We do notallow the advertisement of pharmaceutical drugs that are not yet approved by FDAsuch as Cialis and Levitra. We do not allow pharmaceutical advertising to target theUK and have stricter policies in Japan. As with all of our policies, we do not verifywhat these sites actually do, only what they claim to do.1819202123Public awareness of the ability of people to get drugs through online pharmacies isincreasing and as we all know, drugstore.com is using· the press to try to force us andothers to change their policies. Overture/Yahoo, who has long had the same policywe have, is likely to change their policy to be more restrictive this week. We mayget a heads up before they announce a policy change.24Our options are:251) Keep policy the same. Good for consumers overall as it increases availability ofpharmaceuticals but means that the bad stories will continue.22262728887151_12) Classify pharma ads as nonfamily. This means that anyone with a safe searchfilter on will not see them. I think we should do this regardless of any other steps wechose to take.SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 28 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page30 of 63123) Mark pharma ads. The idea would be to mark pharma ads with a Pharma-specificlabel. If you clicked on the label, we would take you to a page which would have acarefully worded warning on pharma practices. (Larry – this is Salar’s idea of whatyou were suggesting. Is this what you had in mind?)345674) Only accept pharmas that have been approved by Verified Internet PharmacyPractice Sites (VIPPS) program of NABP (National Association of Boards ofPharmacy). If there are reciprocal approval boards for Internet sites in othercountries, we’ will approve sites approved by those boards as well. This would be avery restrictive policy as fewer than 20 pharmas have been approved by this board(Drugstore.com is of course one of them). Interestingly enough, one of the pharmaswith questionable practices highlighted in the NYTimes article had actually beenapproved by them, but the Board claims that this was a mistake they will not repeat.Despite this, this is our most conservative option.89101112135) Involve a third-party verifier. Based on my conversation with Overture, thisseems to be what they are considering. They do it for wine sellers now. The way itworks for wine sellers on Overture is that in order to advertise wine on Overture, youfirst have to register with a company called Square Trade. The advertiser paysSquare Trade $50 to be certified that they are adhering to all local and national laws.Square Trade mystery shops its customers to make sure they do what they claim todo. Overture is considering extending this to pharma. eBay also uses third-partyverifiers for some categories. We have never done this so it would be a real policyshift for us. We have long held that we can’t police the web; if we do this, we will betaking a much more active posture towards controlling what our advertisers do thenwe ever have before.14We do not make these decisions based on revenue, but as background,·REDACTED15I am flying this afternoon but Alana Karen is in the office to answer any questions.16Sheryl1762.Two days later, on October 29, 2003, defendant Brin received an email from1819Sandberg via emg@google.com describing a conversation she had with Drugstore.com regarding,20 among other things, Google’s advertising policy for online pharmacies. The email stated, in relevant21 part, as follows:22Regan, Maryann, Alex, and I spoke to our friends at Drugstore.com today.23Their points were the following:24•They argue that they are doing this to save the world.•They claim that all non-VIPPS approved online pharmacies are illegal (whichwe do not believe to be the case).•They will continue to push us and all others to restrict online advertising foronline pharma.25262728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 29 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page31 of 631•They believe others will announce changes and are therefore “leaders” andwe are killing people. (No joke – Kal said this.)•They said they will give us a heads up if they are putting out press releaseswith our name, but I am not sure I believe them.234The points we made were:5•We listened and made sure they knew we heard all of their policy concerns.•We asked if they were concerned that they had a commercial interest in thispolicy change. Their response was that they care only for consumers.•We asked them to not send out meeting agendas or mock press releases withour name in it without our approval.•We told them that we were thinking through the policy concerns and that ifwe had any changes to announce, we would let them know. We would not,however, be participating in their suggested announcement (attached).678910111213141516171819202122232425262728887151_1Frosty call at best. Their tactics are outrageous. I felt like I was back in Washingtonon a really bad day . . . .Omid – If you need an email that can be forwarded to BC and JD, draft below.EMAIL THAT CAN BE FORWARDED:POLICY ISSUEOur current policy is that we allow the advertisement of online pharmacies, bothdomestic and foreign, only if the site claims to require a prescription.Pharmaceutical comparison or finder sites are judged by same criteria. We do notallow the advertisement of pharmaceutical drugs that are not yet approved by FDAsuch as Cialis and Levitra. We do not allow pharmaceutical advertising to target theUK and have stricter policies in Japan. As with all of our policies, we do not verifywhat these sites actually do, only what they claim to do.There is much discussion about the practices some online pharmacies follow. Whilewe do not allow pharmacies who claim not to require prescriptions to run, it ispossible that some of the pharmacies we approve do not follow their own statedpolicies carefully. We are considering not showing these ads to children by ceasingto show ads to users with a safe-search (family safe) filter on. We are alsoconsidering finding some other way to mark online pharma ads. A final decision onthese steps has not been made.We are not prepared to adopt a more restrictive stance, such as only approvingpharmas approved by the Verified Internet Pharmacy Practice Sites (VIPPS) programof NABP (National Association of Boards of Pharmacy). Our policy is designed toprovide maximum information and choice to users and being this restrictive is inconflict with that goal.This is an area where the law is still developing. We are planning on watching anylegislative changes very closely and will react appropriately.SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 30 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page32 of 631DRUGSTORE.COM2Over the past two weeks, Drugstore.com has been using very aggressive tactics to getus, Yahoo, MSN, Overture, and others to only accept ads from pharmas approved byVIPPS. They have sent out press releases, tried to call a meeting of all of theseplayers, and tried to put public and private pressure on us to change our policy.Yesterday they sent a mock press release to us and other search players whichincluded sample quotes from us without our knowledge or acquiescence (attached).They also state the case much more broadly than we believe to be true; e.g., callingall non-VIPPS approved pharmacies “illegal” which they are not.345678910We take their concerns very seriously and many members of our exec team havespoken with them in the past week. Most recently, we spoke with their CEO today.We listened to their policy concerns and made sure that they knew we heard them.We did not agree to any policy changes but said that we will let them know if wewere making any changes. They made it clear that they will continue to fight this inthe public realm.63.On November 17, 2003, defendant Brin received an email from Sandberg via11 emg@google.com noting that Google faced a serious public relations issue as the only remaining1213search engine still accepting ads from online pharmacies without attempting to verify their practices.The email stated, in relevant part, as follows:14151617181920212223Please forgive my bringing up an issue we have already discussed, but I think this isworth at least one more email, and potentially more discussion. Given that Overturemoved so aggressively and they supply ads to Yahoo and MSN, and given that AOLis blocking all of these ads, we are the only player in our industry still acceptingthese ads. I continue to think that although there is some commercial harm toshutting down these ads, the PR/brand risk we are taking by being out there on ourown may not be worth it. I thought this was worth bringing up again as the actionsof our competitors this week has increased our PR/brand risk significantly.(Of course, feel free to ignore this email if no one thinks this decision is worthrevisiting.)Sheryl64.On November 18, 2003, defendant Brin received an email from McCaffrey, Google’sthen Vice President of Corporate Marketing, via emg@google.com echoing Sandberg’s concerns24 about Google’s advertising policy for online pharmacies. The email stated, in relevant part, as25 follows:262728887151_1I definitely think it’s worth revisiting. This is a very serious matter and needs to beaddressed quickly. I understand that Sheryl had a very tough interview this morningwith the same Washington Post reporter Larry talked to a few weeks ago (David K.will be sending a summary). She did a great job, but we do not have a good responseto this issue and it is not going to go away. The industry is moving fast to removeSECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 31 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page33 of 6312345most pharma ads; our gesture to address this will be perceived as just not enoughcompared with what the other companies are doing. I understand that we should notlet other companies, press, etc. influence our decision-making around policy, but Ithink you should understand that this has become a big, big issue and the potential ofserious harm to our brand among our users is very real. The Post plans to run with astory next week. We’ll be cast as the only company not moving quickly enough toaddress this issue.If we can make something happen quickly, we can get back to reporter this week andsave ourselves from disaster in the media. We just don’t need this.665.On November 18, 2003, defendant Brin received an email via emg@google.com78echoing Sandberg and McCaffrey’s concerns and providing more details about the Washington Post9 article. The email stated, in relevant part, as follows:10Here’s the scoop on the Washington Post call:11*A story is scheduled to run in next week’s paper; I expect it will be very negativefor Google and will position us in an unfavorable light.1213141516171819202122232425*The reporter will devote this article to the role search engines and portals playbetween illegal online pharmacies and consumers. As all of Google’s competitorshave recently adapted their policies to restrict these ads, we’ll be criticized forholding out and not reacting quickly.*The article will also challenge our interpretation of the law. The reporter and reps.from the FDA (who will be quoted) believe that Google AdWords is facilitating theillegal distribution of pharm. drugs online. They have analyzed our pharm.advertisers extensively and have determined that a majority of these businesses areillegal.*And as Cindy noted below . . . as much as we push the message that we arecurrently reviewing our policies and will ultimately do the right thing, our efforts arenot perceived as aggressive enough – this is amplified by the recent changes byOVER (Overture).*The message we also use about providing the broadest range of choices to our usersalso doesn’t hold water in this case, as most of these questionable online pharmaciescharge a 3x premium over sites like walgreens.com.*Lastly, the story of the 15 year-old who became addicted to Hydrocodone will alsobe reflected in this article – and as we all know, the father blames Google AdWordsfor connecting his son to an online pharm. that sold him these pills sans prescription.Sheryl has recently spoken to the father and further explained our point of view, buthe’s of the opinion that we should remove these ads entirely.26It would be great to be finalize [sic] any changes we might make this week, so wecan brief the Washington Post before this article goes to print.27David28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 32 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page34 of 63166.Based on the emails and conversations contained therein, defendant Brin became2 aware of the illegal Canadian ads around August 2003, and, when faced with this illegality,3 continued Google’s advertising policy for online pharmacies in a manner that allowed Canadian4 online pharmacies to continue to sell prescription drugs without a prescription via Google’s website.567.By doing so, defendant Brin breached his fiduciary duty of loyalty (and good faith)6 owed to Google and, under Delaware law, is liable to the corporation for the damages arising from7 his breach of fiduciary duty. Thus, the foregoing evidence, taken as true, is sufficient to raise a8 reasonable doubt as to defendant Brin’s disinterestedness. This is especially true since defendant9 Brin’s knowledge of the illegal Canadian ads is essentially the same as defendant Schmidt and10 Page’s knowledge of the illegal ads.Therefore, because defendant Brin is “interested” in the11 outcome of this litigation, a pre-suit demand for him to bring, let alone vigorously prosecute the12 derivative claims is futile and excused as a matter of law.1368.In sum, by October 2003 at the latest, defendants Schmidt, Page and Brin, and each of14 them, had personal knowledge of the fact that Google’s purported advertising policy for online15 pharmacies allowed Canadian online pharmacies to sell prescription drugs without a prescription on16 Google’s website. However, when confronted with the illegal Canadian ads, defendant Schmidt,17 Page and Brin, and each of them, continued Google’s so-called “pharma” policy in a manner that18 allowed Canadian online pharmacies to continue to illegally sale prescription drugs via Google’s19 website.2069.As Google’s directors and most senior executive officers, defendants Schmidt, Page21 and Brin owed Google a fiduciary duty of loyalty (and good faith) to conduct the Company’s22 business and affairs in accordance with the federal laws prohibiting the illegal sale of prescription23 drugs. However, despite their knowledge of the illegal Canadian ads, defendants Schmidt, Page and24 Brin, and each of them, failed to do so. And, as a result, in August 2011, Google was forced to pay25 $500 million to the DOJ for violating 21 U.S.C. §331(a) and (d) and 21 U.S.C. §952.2670.Under Delaware law, directors who breach their fiduciary duty may be held liable to27 the corporation for damages. Here, the emails and other documentary evidence, taken as true, show28 that defendants Schmidt, Page and Brin, and each of them, is “interested” in the outcome of this887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 33 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page35 of 631 litigation, as each faces a substantial likelihood of liability for the damages Google suffered as a2 result of the illegal Canadian ads. Further, because they are each an “interested” director, a pre-suit3 demand for defendant Schmidt, Page and Brin, individually and collectively, to bring, let alone4 vigorously prosecute the derivative claims is excused as a matter of law.56DEFENDANTS’ WRONGFUL ACTS AND OMISSIONS71.Google is the world’s largest Internet search and technology corporation. The7 Company offers various advertising services that permit online pharmacy advertisers in Canada, and8 elsewhere, to post their advertising message and a link to their website above and next to search9 results in response to search queries relevant to the advertiser.1072.Online pharmacies advertise through various Google services including the11 Company’s largest advertising program, AdWords. AdWords displays sponsored advertisements in12 response to queries by the Company’s search engine users. In addition, advertisers are able to “geo13 target” their advertising campaigns by selecting the countries where the advertisements will display.14 In return for these services, advertisers pay fees to Google for each advertisement. Most advertisers15 pay Google on a cost-per-click basis, meaning the more a person (or people) clicks on an ad, the16 more Google is paid. Google does, however, also offer a cost-per-impression basis, where an17 advertiser will pay Google based on the number of times its ads appear on Google’s websites. In18 order to place an ad with Google, advertisers bid, in an auction-like format, on keywords in order to19 have their advertisements appear when the user enters the selected keywords into the Company’s20 search engine. A keyword is a specific word or phrase selected by the advertiser that the Company21 uses to trigger the display of advertisements in response to a user’s query. When Google first began22 accepting advertising, the Company prohibited certain ads – such as ads for tobacco products or ads23 that contain potentially misleading content – but did not attempt to stop advertising for controlled24 prescription drugs, or filter out ads by “rogue” pharmacies that engaged in illegal practices.2573.As a U.S. company, Google is subject to the FD&C Act, which prohibits foreign26 pharmacies from introducing or delivering prescription drugs into interstate commerce. The FD&C27 Act also prohibits the shipment of prescription drugs from pharmacies outside the United States.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 34 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page36 of 631 Similarly, the Controlled Substances Act of 1970 prohibits the shipment of controlled prescription2 drugs into the U.S. from overseas pharmacies.1374.The U.S. government uses these laws to ensure the safety of drugs that are sold in the4 U.S. If the drugs do not come from U.S. pharmacies, the Food and Drug Administration (“FDA”)5 has no way to ensure they meet its labeling, manufacturing, storage and distribution requirements.6 Often, drugs originating from foreign sources are not dispensed to patients pursuant to a valid7 prescription. Instead, many times an online user does not even need to see a doctor, and instead8 simply has to fill out an online form. This allows dangerous and addictive drugs to get into the9 hands of users without proper oversight by the FDA or a healthcare provider.1075.Although Canada has its own regulatory regime for prescription drugs, Canadian11 pharmacies that ship prescription drugs to U.S. residents are not subject to Canadian regulatory12 authority. Further, many online Canadian pharmacies sell drugs obtained from countries other than13 Canada, where pharmacy regulations are lacking.1476.By 2003, Google in general, and defendants Schmidt, Page and Brin in particular, had15 become aware of the risks of sponsoring ads by pharmacies outside the U.S. Nevertheless, when16 faced with illegal Canadian pharmacy ads, defendants resisted internal and external efforts to17 develop a more restrictive policy for Canadian online pharmacy ads, and/or made superficial18 changes to the policy so that Canadian online pharmacies could continue to illegally sell drugs via19 Google’s website.2077.For example, in March 2003, the NABP, the preeminent professional organization in21 the U.S. that supports the state boards of pharmacy in protecting public health, warned Google’s then22 Healthcare Vertical Market Manager, Belliveau, about the dangers of illegal online pharmacies, the23241Not all prescription drugs are listed as controlled prescription drugs in the ControlledSubstancesMany prescription drugs are listed in Schedules II through V of the Controlled25 Substances Act.Act because of their high potential for abuse or addiction. Schedule II through Vdrugs primarily are narcotic pain relievers and central nervous system depressants and26 prescriptionstimulants. A complete list of controlled prescription drugs, by schedule, is available on the DEAof Diversion Control Internet site (http://www.deadiversion.usdoj.gov/schedules/27 Officeindex.html).28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 35 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page37 of 631 misleading nature of Google’s “sponsored links” for these sites, and the U.S. federal laws which2 Google may be violating. The NABP also warned that it was “deeply concerned that these rogue3 Internet [pharmacy] sites could be a front for criminals seeking to introduce adulterated medications,4 counterfeit drugs, or worse, to the American market.”578.To protect its business and consumers, the NABP recommended to Google that it6 limit sponsored links to only pharmacies certified by the VIPPS program. VIPPS is the leading7 pharmacy accreditation service in the country. It was created by a coalition of state and federal8 regulatory associations, professional associations, and consumer advocacy groups who developed9 the criteria which VIPPS uses to accredit pharmacies. VIPPS conducts on-site inspections of10 pharmacies, has a stringent standard against the issuance of prescriptions based on an online11 consultation without a physical examination and, importantly, does not certify Canadian online12 pharmacies that ship to U.S. patients. However, Google rejected NABP’s recommendations.1379.Similarly, on or about December 1, 2003, Peter J. Pitts, the FDA’s Associate14 Commissioner for External Affairs, stated that the FDA was “literally placing calls to the search15 engines trying to get a meeting going” concerning their business dealings with online pharmacies.16 Around the same time, Google was also contacted by the father of a teenage boy who was17 hospitalized after he used the Company’s search engine to locate and order Vicodin2, which the18 Company said it took “very seriously.”1980.Mounting public and private pressure forced defendants to make minor improvements20 to Google’s advertising policy but they refused to use a robust system like the one offered by VIPPS21 or to prevent Canadian pharmacies from advertising altogether. On December 1, 2003, Google22 announced it would use a third-party company to screen out ads from rogue pharmacies that do not23 require prescriptions. The release never mentioned how Google would treat Canadian pharmacies in24 the new plan. Google’s decision only came several weeks after rival companies, Yahoo and25 Microsoft, began banning similar advertising. Furthermore, the FDA began publicly pressuring262Vicodin is a trademark name for commercially available hydrocodone, a controlled substance27 and a syntheticopiate.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 36 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page38 of 631 search engines to accept drug ads from only licensed Internet pharmacies, and the Senate Permanent2 Subcommittee on Investigations began probing the role of companies that advertise illegal3 prescription drugs – before which Google’s Vice President of Global Online Sales & Operations,4 Sandberg, soon testified. See infra.5 Defendants Permitted Company Employees to Assist CanadianOnline Pharmacies in Evading Google’s Controls681.Despite knowing that it was illegal for pharmacies to ship prescription drugs to the7United States from Canada, and that U.S. consumers were purchasing prescription drugs online that8were advertised through Google’s AdWords, defendants consciously endorsed the Company’s9improper business strategy of permitting Canadian pharmacies to advertise through AdWords and10direct their advertisements at U.S. customers. Specifically, the verification service providers11selected to screen pharmacies certified Canadian pharmacies instead of filtering them out. In12addition, defendants permitted Google employees to assist Canadian online pharmacy advertisers in13creating advertisements that were designed to evade the internal controls put in place to detect and14prevent foreign pharmaceutical companies from advertising on Google. It is well established that15causing a company to operate in violation of the law is a breach of a fiduciary’s duty of loyalty. The16Individual Defendants’ instruction that the Company break the law in order to maximize short term17profits is a breach of their duty of loyalty.1882.In 2004, despite knowing that Canadian pharmacies were illegally advertising and the19NABP’s warnings and widespread criticisms, Google announced that its policy was to permit20Canadian pharmacies to advertise through AdWords, and actively block ads only from pharmacies in21other countries. Google put this policy into practice through its retention of a third-party verification22service, SquareTrade, Inc. (“SquareTrade”), to verify that online pharmacy advertisers were licensed23in at least one state in the United States or Canada. SquareTrade, which offers its seal of approval24for a wide range of online businesses ranging from cars to realtors, had a very low standard for25approval of pharmacies. But SquareTrade was nothing more than window dressing.2683.Unlike VIPPS, SquareTrade did not conduct on-site inspections and simply required27pharmacies seeking to advertise through AdWords to self-certify that they would act in accordance28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 37 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page39 of 631 with applicable U.S. laws and regulations. Moreover, SquareTrade certified online pharmacies as2 long as they were licensed in one state in the United States or in Canada. Consequently, Canadian3 online pharmacies could advertise prescriptions through AdWords to U.S. customers. Indeed,4 defendant Schmidt admitted in his correspondence with Senator Cornyn that, despite knowing about5 the illegal pharmacy advertisements since 2004, defendants made a conscious decision to allow6 Canadian pharmacies to post the illegal advertisements based on “a continuing discussion involving7 a variety of policy and implementation questions over several years.” These duplicitous decisions8 reflect defendants’ knowledge that it was illegal for pharmacies to ship prescription drugs to the9 United States from outside the country.1084.Google’s sponsorship of Canadian pharmacy ads brought widespread criticism. On11 June 9, 2004, the Wall Street Journal (“WSJ”) reported that Google’s decision to continue to carry12 Canadian ads drew criticism from U.S. regulators and angered U.S. druggists. Pitts, an FDA official,13 explained he was “disappointed” in Google’s decision, criticizing its pursuit of illegal profit: “You14 can’t make value judgments based on what is or is not in your financial interests . . . .” Likewise,15 state pharmacy boards disapproved of the Company’s decision, calling on Google and other search16 providers to use VIPPS to screen out Canadian pharmacies – just as the NABP advised Google to do17 in March 2003, described supra.1885.The need to resist sponsoring ads by rogue pharmacies was well-known to the19 Company and defendants. Not just one, but two high-level Google officials appeared before20 congressional committees claiming that Google guarded against such advertisements. Sandberg,21 then Google’s Vice President of Global Online Sales & Operations, attempted to tout Google’s22 “proactive” use of SquareTrade in her testimony to the Senate’s Permanent Subcommittee on23 Investigations on July 22, 2004. Despite Sandberg’s characterization of SquareTrade as using a24 “rigorous” verification process, defendants knew that it still allowed Canadian pharmacies to post25 illegal advertisements via Google. On December 13, 2005, a second high-ranking Company official,26 Andrew McLaughlin, then Google’s Director of Global Public Policy, again hyped SquareTrade’s27 verification process in similar testimony to the House Subcommittee on Oversight and28 Investigations.887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 38 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page40 of 63186.Although SquareTrade-certified pharmacies were supposedly in compliance with2 pharmacy laws and practices, the Company knew that many Canadian online pharmacies were3 committing rampant violations. Many of these pharmacies distributed prescription drugs, including4 controlled prescription drugs, based on an online consultation, rather than a valid prescription from a5 treating medical practitioner despite SquareTrade’s purported dispensing requirements. As the DOJ6 non-prosecution agreement makes clear, the Company was also on notice that many of these7 pharmacies charged a premium for doing so, because individuals seeking to obtain prescription8 drugs without a valid prescription were willing to pay higher prices for the drugs.987.For example, in July 2004, defendants learned that online pharmacies were10 circumventing SquareTrade’s certification process by intentionally avoiding the use of11 pharmaceutical terms in the text of their AdWords advertisements, while using the same terms as12 advertising “keyword” terms. A keyword is a specific word or phrase used by an advertiser that13 Google uses to trigger the display of advertisements in response to a user’s query. Advertisers bid,14 in an auction-like format, on keywords in order to have their advertisements appear when the user15 enters the selected keywords into the Company’s search engine. Once Google began using16 SquareTrade, it conducted a manual review of non-certified online pharmacy advertisements only if17 a pharmaceutical term appeared in the text of the advertisement. Defendants knew, however, that18 some pharmacy advertisers, including some from Canada, avoided this review by using the19 prescription drug terms as keywords only and not in advertising text.2088.Google also knew that SquareTrade-certified Canadian pharmacies broke their21 “promise” not to target U.S. consumers. From 2003 through 2009, Google provided customer22 support to a number of these Canadian online pharmacy advertisers, including assisting them in23 placing and optimizing their AdWords advertisements, despite knowing that these advertisers were24 attempting to actively violate U.S. federal drug laws. For example, on or about April 23, 2004, a25 Google employee based in Canada stated that, in connection with the advertisements of a large26 Canadian pharmacy, “the Google team is proactively adjusting creative and optimizing with Square27 Trade policy in mind.” About a month later, on or about June 4, 2004, the same employee emailed a28 member of the Company’s policy group and stated “[t]he Max team and [customer support] are sort887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 39 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page41 of 631 of furiously working on creative to appease our new policy before approvals gets to them and2 disapproves.”389.Moreover, Google permitted Canadian pharmacy advertisers to intentionally geo-4 target the United States in their AdWords campaigns. Google was aware of this practice, according5 to an August 23, 2005 e-mail by an employee in the Company’s policy group that stated “the6 majority of Canadian Pharmacies are in business to drive pharmacy traffic from the United States to7 Canada” and “target the US in their geo-targeting.”890.When Google changed third-party verification providers in 2006, the Company9 continued to receive reports that online Canadian pharmacies were breaking U.S. law with Google’s10 assistance.PharmacyChecker.com LLC (“PharmacyChecker”), Google’s new third-party11 verification provider, also certified Canadian pharmacies, and was intended to screen out advertisers12 of controlled prescription drugs. Defendants, however, knew that PharmacyChecker did not prevent13 Canadian pharmacies from advertising on AdWords and was otherwise ineffective, and that VIPPS14 was still the only viable option.1591.On July 7, 2008, Joseph A. Califano, Jr., head of the National Center on Addiction16 and Substance Abuse at Columbia University (“CASA”), described PharmacyChecker’s faults and17 warned defendant Schmidt, then Google’s Chairman and CEO, about Google’s illicit revenue:181920Although Google reports using a company called PharmacyChecker to screenout rogue pharmacies, CASA was able to find prominent displays of ads for rogueInternet pharmacies in a Google search for controlled drugs included in our analysis.This suggests that Google is profiting from advertisements for illegal sales ofcontrolled prescription drugs online.21 Califano, a former U.S. Secretary of Health, Education, and Welfare, advised Google to take22 immediate action to “[b]lock all advertisements . . . that do not come from licensed or certified23 online pharmacies;” “[s]creen such sites from Internet searches;” and “[p]rovide warnings that sale24 and purchase of controlled drugs over the Internet from unlicensed pharmacies and physicians25 without valid prescriptions are illegal.” Califano enclosed CASA’s 2008 report entitled “You’ve26 Got Drugs! V: Prescription Drug Pushers on the Internet,” which highlighted the fact that27 approximately 85% of websites selling controlled prescription drugs did not require a legitimate28 prescription in 2007 and 2008. The CASA report also mentioned various verification programs:887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 40 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page42 of 631 VIPPS employed a “rigorous” program, whereas PharmacyChecker’s process was “far from2 perfect.”392.Likewise, in a December 23, 2008 letter to defendant Schmidt, the NABP again4 recommended replacing Google’s third-party verification service with one that actually adheres to5 pharmacy laws and practice standards. Principal among PharmacyChecker’s flaws were that it6 certified sites that did not require a valid prescription and sourced their prescriptions from outside7 the U.S in contravention of U.S. law. Moreover, the NABP warned defendant Schmidt that “your8 sponsorship of these search results, and your third-party verification service’s certification of these9 Web sites, aids in a business practice that is contrary to US law, unsafe, and deceptive to US10 patients.”1193.The NABP explained that Canadian pharmacists selling drugs to the United States12 online can skirt Canadian regulation. Furthermore, the NABP also explained that many of the13 prescription drugs originate in third-world countries, “a practice that would not be considered lawful14 or safe were the final customer within Canada, or if a US pharmacy were dispensing prescription15 drugs to a US resident.”1694.A report published in 2009 by Bryan A. Liang, a California Western School of Law17 Professor, roundly criticized PharmacyChecker, finding that although PharmacyChecker purportedly18 “verifies” the legitimacy of online pharmacies, “little verification of potential advertisers actually19 takes place.” As a result, Google and other search engines were profiting from the online ads of20 illegal drug sellers, while at the same time “exert[ing] very little effort to ensure that online drug21 sellers from which they obtain advertisement revenue are legitimate.” Professor Liang stated in the22 WSJ on May 21, 2011 that “[o]n the basis of our analysis, I think [Google and other search23 providers] were turning a blind-eye . . . . They were making a lot of money on this.”24 Google Sponsors Rogue Sites that Circumvent Verification2595.As early as July 2004, the Company was on notice that online pharmacies were26 circumventing the SquareTrade and PharmacyChecker certification process by intentionally avoiding27 the use of certain pharmaceutical terms in the text of their AdWords advertisements, while using28 these same terms as advertising “keyword” terms, explained supra. Once the Company began using887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 41 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page43 of 631 SquareTrade, and continuing throughout the period during which the Company used2 PharmacyChecker, the Company conducted a manual review of non-certified online pharmacy3 advertisements only if a pharmaceutical term appeared in the text of the advertisement.496.Additionally, defendants knew or recklessly disregarded that the Canadian online5 pharmacies, with the assistance of Google employees, were continuing to employ the same tricks to6 circumvent PharmacyChecker’s certification process as they had when the Company used7 SquareTrade’s services, including avoiding manual review of the advertisements by using8 pharmaceutical terms as keywords only and not in advertising text. For example, in a February 13,9 2008 e-mail, a member of the Company’s policy group stated, “[t]he only ads that are getting10 blocked are those with explicit pharma terms in the ad texts; the shady, fraudulent advertisers know11 not to do this.” After it became aware of the Government’s investigation, the Company made12 changes to its systems in order to flag for review all ads that had prescription drug terms as13 keywords.1497.Some pharmacy advertisers that did not qualify for certification were also able to15 advertise through AdWords by changing their geographic targets and avoiding the certification16 process altogether.These online pharmacy advertisers initially prevented their AdWords17 advertisements from being run in the U.S., so that they would not be required to obtain a18 SquareTrade or PharmacyChecker certification. Once the advertisements began to run on the19 Company’s search engine, however, the pharmacies would change the geo-targeting of the20 advertisements so that they would appear in the United States in response to queries by U.S. users of21 the Company’s search engine. Although defendants knew that some online pharmacies later22 changed the geo-targeting of their AdWords advertising in order to avoid the certification23 requirements, defendants did nothing to prevent or monitor any changes to the online pharmacies’24 geo-targeting practices until after becoming aware of the DOJ’s investigation.2598.In 2008, CASA published a report that found that 85% of the online pharmacies26 advertising controlled drugs on search engines did not require a valid prescription. Also in 2008, a27 NABP study estimated that 96% of internet drug outlets appeared to be in violation of pharmacy28 related laws or standards. In December 2008, the NABP wrote a letter to Google urging it to drop887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 42 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page44 of 631 PharmacyChecker as its third-party verification service, noting that the Company had let through2 several advertisers “that source their prescription drugs from various locations outside of the United3 States . . . which is contrary to US law.” The NABP also specifically advised Google that the4 importation of prescription drugs from foreign countries is illegal.599.Despite these multiple warnings, and the fact that defendant Schmidt admitted to6 Senator Cornyn in testimony before a Senate subcommittee that he knew as early as 2004 that7 pharmacies were advertising illegally via AdWords and that Google was not blocking ads from8 Canadian pharmacies at all, defendants continued to allow Canadian online pharmacies to use9 AdWords until 2009. Defendants also permitted Google to continue using PharmacyChecker until10 2009, despite the existence of superior VIPPS service.11100.The U.S. Government and Google estimate that the total proceeds to the Company12 and Canadian online pharmacy advertisers generated from the advertising and sale of controlled13 prescription drugs by Canadian online pharmacies that advertised through the Company’s AdWords14 program was approximately $500 million.15 Google Belatedly Changes Its Advertising Policies After VariousGovernment Entities Begin Investigating Google16101. It was only after defendants learned in May 2009 that the DOJ, the Rhode Island U.S.17Attorney’s Office, and the FDA/OCI, were investigating Google that the Company took any18significant steps to prevent the unlawful sale of prescription drugs by online Canadian pharmacies to19U.S. consumers. Google’s quick response after learning about the investigation shows that20defendants could have, at any time of the six-year long scheme, stopped the Company from assisting21online pharmacies in violating U.S. federal law but consciously chose not to.22102. Among other things, on February 9, 2010, Google finally updated its Pharmacy23Policy in the United States and Canada to require online pharmacy advertisers to be certified by24VIPPS. The updated Pharmacy Policy went into effect on February 23, 2010. The updated25Pharmacy Policy stated the following, in relevant part:26Only VIPPS and CIPA certified pharmacies will be allowed to advertise27We’ve made the decision to further restrict the ads we accept for online pharmacysites in the U.S. and Canada. Starting at the end of this month, Google AdWords will28only accept ads from online pharmacies in the U.S. that are accredited by the887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 43 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page45 of 631234National Association Boards of Pharmacy VIPPS program, and from onlinepharmacies in Canada that are accredited by the Canadian International PharmacyAssociation (CIPA).Pharmacies can only target ads within their countryThese pharmacies may only target ads to users in the country in which they areaccredited. This policy change does not affect our online pharmacy policy forcountries outside the U.S. and Canada.57Accordingly, we’ll no longer be using any 3rd party verifier of online pharmaciesother than VIPPS and CIPA. AdWords advertisers who aren’t accredited by VIPPSand CIPA will no longer see their online pharmacy ads displayed once this policychange comes into effect.8103.6In addition, Google retained an independent company to enhance its back-end9 sweeps, which were designed to detect pharmacy advertisers exploiting flaws in the Company’s10 screening systems. Finally, Google began suing pharmacy advertisers that violated the Company’s11 terms of use and reporting suspected illegal pharmacies to the FDA.12104.However, Google’s eleventh hour policy changes were too little, too late. And, on13 August 19, 2011, as a direct result of defendants’ disloyalty, Google was forced to pay $500 million14 as well as admit and accept responsibility for violating federal drug and cosmetic laws by allowing15 Canadian online pharmacy advertisers to illegally sell prescription drugs via Google’s website.16105.The Non-Prosecution Agreement accompanying Google’s settlement with the DOJ17 confirms that Google, at the highest levels, was aware of the illegal Canadian ads and the risks of18 loss they presented to Google. For example, the Non-Prosecution Agreement states:1921(f)As early as 2003, the Company was aware that in most circumstancesit was illegal for pharmacies to ship controlled and non-controlled prescription drugsinto the United States from Canada. For example, in March 2003 and again inDecember 2008, the National Association of Boards of Pharmacy advised theCompany that the importation of prescription drugs from foreign countries is illegal.22106.23(g)The Company was aware that importation of prescription drugs toconsumers in the United States is almost always unlawful because the United StatesFood and Drug Administration (“FDA”) cannot ensure the safety and effectivenessof foreign prescription drugs that are not FDA-approved and because the drugs maynot meet FDA’s labeling requirements, may not have been manufactured, stored, anddistributed under proper conditions, and may not have been dispensed pursuant to avalid prescription. While Canada had its own regulatory regime for prescriptiondrugs, Canadian pharmacies that ship prescription drugs to U.S. residents are notsubject to Canadian regulatory authority, and many sell drugs obtained fromcountries other than Canada, which lack adequate pharmacy regulations.2024252627The Non-Prosecution Agreement further states:28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 44 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page46 of 631107.2(h)As early as 2003, the Company was on notice that online Canadianpharmacies were advertising prescription drugs to the Company’s users in the UnitedStates through the Company’s AdWords advertising program. Although theCompany took steps to block pharmacies in countries other than Canada fromadvertising in the United States through AdWords, the Company continued to allowCanadian pharmacy advertisers to geo-target the United States in their AdWordsadvertising campaigns. The Company knew that U.S. consumers were makingonline purchases of prescription drugs from these Canadian online pharmacies. Forexample, in a November 18, 2003 email, a Company employee discussed theadvertising budgets of several Canadian online pharmacy advertisers and noted that“[a]ll ship from Canada into the US via Express Mail.” In an August 23, 2005 email,an employee in the Company’s policy group stated, “the majority of CanadianPharmacies are in business to drive pharmacy traffic from the United States toCanada” and “target the US in their geo-targeting.”345678Further still, the Non-Prosecution Agreement states:9108.Moreover, the Non-Prosecution Agreement states:1015(k)From 2003 through 2009, the Company provided customer support tosome of these Canadian online pharmacy advertisers to assist them in placing andoptimizing their AdWords advertisements and in improving the effectiveness of theirwebsites. For example, on or about April 23, 2004, a Google employee based inCanada reported in an email concerning the advertisements of a large Canadianpharmacy advertiser that “the Google team is proactively adjusting creative andoptimizing with Square Trade policy in mind.” On or about June 4, 2004, the sameemployee emailed a member of the Company’s policy group and stated, “The Maxteam and [customer support] are sort of furiously working on creative to appease ournew policy before approvals gets to them and disapproves.”16109.11121314On August 24, 2011, the DOJ issued a press release entitled “Google Forfeits $50017 million Generated by Online Ads & Prescription Drug Sales by Canadian Online Pharmacies.”18 Among other things, the press release emphasized that the amount forfeited by Google included the19 gross revenues made by online Canadian pharmacies from their sales to U.S. consumers, stating:2021222324252627Online search engine Google Inc. has agreed to forfeit $500 million for allowingonline Canadian pharmacies to place advertisements through its AdWords programtargeting consumers in the United States, resulting in the unlawful importation ofcontrolled and non-controlled prescription drugs into the United States, announcedDeputy Attorney General James M. Cole; Peter F. Neronha, U.S. Attorney for theDistrict of Rhode Island; and Kathleen Martin-Weis, Acting Director of the U.S.Food and Drug Administration’s Office of Criminal Investigations (FDA/OCI). Theforfeiture, one of the largest ever in the United States, represents the gross revenuereceived by Google as a result of Canadian pharmacies advertising through Google’sAdWords program, plus gross revenue made by Canadian pharmacies from theirsales to U.S. consumers.The shipment of prescription drugs from pharmacies outside the United Statesto customers in the United States typically violates the Federal Food, Drug andCosmetic Act and in the case of controlled prescription drugs, the ControlledSubstances Act. Google was aware as early as 2003, that generally, it was illegal for28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 45 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page47 of 631pharmacies to ship controlled and non-controlled prescription drugs into the UnitedStates from Canada.23456The importation of prescription drugs to consumers in the United States isalmost always unlawful because the FDA cannot ensure the safety and effectivenessof foreign prescription drugs that are not FDA-approved because the drugs may notmeet FDA’s labeling requirements; may not have been manufactured, stored anddistributed under proper conditions; and may not have been dispensed in accordancewith a valid prescription. While Canada has its own regulatory rules for prescriptiondrugs, Canadian pharmacies that ship prescription drugs to U.S. residents are notsubject to Canadian regulatory authority, and many sell drugs obtained fromcountries other than Canada which lack adequate pharmacy regulations.789“The Department of Justice will continue to hold accountable companies whoin their bid for profits violate federal law and put at risk the health and safety ofAmerican consumers,” said Deputy Attorney General Cole. “This settlement ensuresthat Google will reform its improper advertising practices with regard to thesepharmacies while paying one of the largest financial forfeiture penalties in history.”10111213141516171819“This investigation is about the patently unsafe, unlawful, importation ofprescription drugs by Canadian on-line pharmacies, with Google’s knowledge andassistance, into the United States, directly to U.S. consumers,” said U.S. AttorneyNeronha. “It is about taking a significant step forward in limiting the ability of rogueon-line pharmacies from reaching U.S. consumers, by compelling Google to changeits behavior. It is about holding Google responsible for its conduct by imposing a$500 million forfeiture, the kind of forfeiture that will not only get Google’sattention, but the attention of all those who contribute to America’s pill problem.”“Today’s agreement demonstrates the commitment of the Food and DrugAdministration to protect the US consumer and hold all contributing partiesaccountable for conduct that results in vast profits at the expense of the publichealth,” said FDA/OCI Acting Director Martin-Weis. “The result of thisinvestigation has been a fundamental transformation of Internet pharmacyadvertising practices, significantly limiting promotion to US consumers by rogueonline pharmacies. This accomplishment could not have been possible without theresourceful commitment of the Rhode Island United States Attorney’s Office, as wellas the tireless efforts of our law enforcement partners detailed to the OCI RhodeIsland Task Force.”2021222324252627An investigation by the U.S. Attorney’s Office in Rhode Island and theFDA/OCI Rhode Island Task Force revealed that as early as 2003, Google was onnotice that online Canadian pharmacies were advertising prescription drugs toGoogle users in the United States through Google’s AdWords advertising program.Although Google took steps to block pharmacies in countries other than Canadafrom advertising in the U.S. through AdWords, they continued to allow Canadianpharmacy advertisers to target consumers in the United States. Google was awarethat U.S. consumers were making online purchases of prescription drugs from theseCanadian online pharmacies, and that many of the pharmacies distributedprescription drugs, including controlled prescription drugs, based on an onlineconsultation rather than a valid prescription from a treating medical practitioner.Google was also on notice that many pharmacies accepting an online consultationrather than a prescription charged a premium for doing so because individualsseeking to obtain prescription drugs without a valid prescription were willing to payhigher prices for the drugs.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 46 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page48 of 6312Further, from 2003 through 2009, Google provided customer support to someof these Canadian online pharmacy advertisers to assist them in placing andoptimizing their AdWords advertisements, and in improving the effectiveness oftheir websites.345678In 2009, after Google became aware of the investigation by the Rhode IslandU.S. Attorney’s Office and the FDA/OCI Rhode Island Task Force of its advertisingpractices in the online pharmacy area, and as a result of that investigation, Googletook a number of steps to prevent the unlawful sale of prescription drugs by onlinepharmacies to U.S. consumers. Among other things, Google began requiring onlinepharmacy advertisers to be certified by the National Association of Boards ofPharmacy’s Verified Internet Pharmacy Practices Sites program, which conducts sitevisits; has a stringent standard against the issuance of prescriptions based on onlineconsultations; and, most significantly, does not certify Canadian online pharmacies.In addition, Google retained an independent company to enhance detection ofpharmacy advertisers exploiting flaws in the Google’s screening systems.9101112Under the terms of an agreement signed by Google and the government,Google acknowledges that it improperly assisted Canadian online pharmacyadvertisers to run advertisements that targeted the United States through AdWords,and the company accepts responsibility for this conduct. In addition to requiringGoogle to forfeit $500 million, the agreement also sets forth a number of complianceand reporting measures which must be taken by Google in order to insure that theconduct described in the agreement does not occur in the future.1314151617The investigation of Google had its origins in a separate, multimillion dollarfinancial fraud investigation unrelated to Google, the main target of which fled toMexico. While a fugitive, he began to advertise the unlawful sale of drugs throughGoogle’s AdWords program. After being apprehended in Mexico and returned to theUnited States by the U.S. Secret Service, he began cooperating with law enforcementand provided information about his use of the AdWords program. During the ensuinginvestigation of Google, the government established a number of undercoverwebsites for the purpose of advertising the unlawful sale of controlled and noncontrolled substances through Google’s AdWords program.18110.Later on the same date, Google acknowledged that it should not have allowed illegal19Canadian drug ads, stating:2022We banned the advertising of prescription drugs in the U.S. by Canadian pharmaciessome time ago. However, it’s obvious with hindsight that we shouldn’t have allowedthese ads on Google in the first place. Given the extensive coverage this settlementhas already received, we won’t be commenting further.23111.21Jason Helfstein, an Internet research analyst at Oppenheimer & Co., said that while24 the penalty imposed by the DOJ was large, what is more distressing for Google is the blow to its25 reputation. “The most surprising thing isn’t the amount of money, it is that Google made a mistake26 with its ads, and Google doesn’t usually make mistakes,” he said.2728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 47 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page49 of 631112.According to an article by the Associated Press entitled, “Google settles Pharmacy ad2 probe for $500 million,” the settlement “delivered a stinging rebuke for Google, whose motto is3 ‘don’t be evil.’” The article further stated the following:45678In announcing the settlement, authorities left little doubt that Google hadmisbehaved. From its vantage point, Google crossed into a shady area ofprescription-drug advertising in pursuit of higher profits, which have boosted itsstock price and enriched its employees since the company’s initial public offering in2004.In that sense, the potential damage to Google’s reputation may be moretroubling to the company than the amount of money it’s paying to sweep the problemunder the rug. The $500 million is a sum Google can easily afford; it had $39 billionin cash at the end of June.9***101112A separate U.S. Food and Drug Administration investigation into drugs thatclaimed to be manufactured in Canada found that 85 percent of the drugs examinedcame from 27 different countries, including some that were found to be counterfeit,said Kathleen Martin-Weis, acting director of the FDA’s Office of CriminalInvestigations.13141516Investigators noted that Google did not allow online pharmacies from anyother country aside from Canada to advertise to American consumers.The probe did not touch the overseas online pharmacies, Neronha said,because American officials did not have the authority to bring charges. He said thecase raised some “novel legal theories,” given that if it had gone to trial, prosecutorswould have to prove an Internet search engine helped pharmacies violate federal law.1718192021Investigators snared Google’s ad system by creating seven undercoverwebsites offering prescription drugs to be sold without a prescription or thecompletion of an online medical questionnaire, Martin-Weis said. An undercoverinvestigator informed Google employees creating the advertising for the productsthat they were manufactured overseas and did not require customers to have a validprescription, she said.“In each instance, despite this knowledge, Google employees created a fulladvertising campaign for each of the undercover websites,” Martin-Weis said.2223Investigators said they quickly spent the money they had set aside for the adbuys and then pored over 4 million pages of e-mails and financial records to maketheir case. The undercover websites were live for four months, investigators said.24113.On August 27, 2011, the WSJ published an article entitled, New Heat for Google25CEO. The article emphasized that defendant Page, as the “public face of Google” “knew of, and26allowed, the ads for years.” Further, the article stated, in relevant part:2728887151_1Sorting through more than four million documents, prosecutors found internalemails and documents that, they say, show Mr. Page was aware of the allegedly illicitSECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 48 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page50 of 631ad sales. Under this week’s $500 million settlement, those emails won’t be released,avoiding the possibility of disclosure at trial.234“Larry Page knew what was going on,” Peter Neronha, the Rhode Island U.S.Attorney who led the probe, said in an interview. “We know it from theinvestigation. We simply know it from the documents we reviewed, witnesses thatwe interviewed, that Larry Page knew what was going on.”567***Mr. Neronha didn’t say when the Justice Department believes Mr. Pagelearned of the matter, though people familiar with the investigation allege it wasseveral years ago. He declined to discuss the content of the emails, citing grand jurysecrecy.8***910Mr. Page, 38 years old, five months ago assumed direct leadership of Googleas chief executive. Mr. Page has increasingly become the public face of Google as itnavigates a thicket of government investigations.1112131415The Justice Department contends that Google knew it was potentiallyviolating U.S. law since at least 2003, but didn’t take effective action to ban the adsuntil it mounted an undercover sting operation against the Internet search giant in2009.In the years leading up to the investigation, senior Google executives testifiedrepeatedly in Congress that the company had “rigorous” controls to stop unlawfuladvertisements. Those included retaining a series of third-party services to screen outsites that didn’t comply with U.S. law.1617But Mr. Neronha said those efforts amounted to “window-dressing,” allowingGoogle to continue earning revenues from the allegedly illicit ad sales even as itprofessed to be taking action against them.1819Google employees helped undercover Justice Department agents in the stingoperation evade controls designed to stop companies from advertising illegally, hesaid.2021“Suffice it to say that this is not two or three rogue employees at the customerservice level doing this on their own,” Mr. Neronha said in an interview. “This was acorporate decision to engage in this conduct.”222324U.S. state pharmacy regulators warned Google in 2003 and 2008 that theimportation of drugs from abroad was illegal, according to letters reviewed by TheWall Street Journal. Google allowed ads from Canadian online pharmacies to targetU.S. consumers until 2009, when it became aware of the government investigation,the Justice Department contends.25114.In fact, defendant Schmidt admits that he knew about and sanctioned Google’s illegal26ad strategy since 2004, stating in testimony before the U.S. Senate, “I believe I first learned of this27issue around [2004] through meetings and internal discussions.” As Schmidt also stated in his later28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 49 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page51 of 631 written responses to inquiries from Senator Cornyn, “not blocking licensed Canadian pharmacies2 certified by SquareTrade and PharmacyChecker from advertising in the United States was the result3 of a continuing discussion involving a variety of policy and implementation questions over several4 years, and involved many employees in the company beyond those on the policy team.”56DAMAGE TO GOOGLE115.Google has been, and will continue to be, severely damaged and injured by7 defendants’ misconduct. Further, as a direct and proximate result of defendants’ breach of loyalty,8 Google has expended and will continue to expend significant sums of money. These expenditures9 include, but are not limited to: (i) costs incurred from the investigations into the Company’s10 acceptance of advertisements placed by online pharmacy advertisers that violated federal law;11 (ii) costs incurred from the compensation and benefits paid to the defendants that breached their12 fiduciary duties to the Company; (iii) the $500 million revenue forfeiture, fines, penalties and13 disgorgement resulting from the Company’s violations of the federal law; and (iv) the cost of14 implementing the settlement with the DOJ.15116.In addition, Google’s business, goodwill, and reputation with its business partners,16 regulators, and shareholders have been gravely impaired. Moreover, Google’s corporate motto,17 “Don’t be evil,” is now in question and the Company’s hard earned reputation as a good corporate18 citizen has been rendered meaningless by defendants’ fiduciary breaches.For at least the19 foreseeable future, Google will suffer from what is known as the “liar’s discount,” a term applied to20 the stocks of companies who have been implicated in improper behavior and have misled the21 investing public, such that Google’s ability to raise equity capital or debt on favorable terms in the22 future is now impaired.23117.Nevertheless, the Google Board has taken no action against the directors and officers24 responsible for the damage and injury to the Company, including themselves. By this action,25 plaintiffs seek redress for and vindication of Google’s rights against its wayward fiduciaries.2627DERIVATIVE AND DEMAND FUTILITY ALLEGATIONS118.Plaintiffs incorporate ¶¶1-117.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 50 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page52 of 631119.Pursuant to Rule 23.1 of the Federal Rules of Civil Procedures, plaintiffs bring this2 action for the benefit of Google to redress injuries suffered, and to be suffered, by Google as a result3 of the defendants’ breaches of fiduciary duty, abuse of control, corporate waste and unjust4 enrichment. Google is named as a nominal party in this action solely in a derivative capacity.5120.Plaintiffs will adequately and fairly represent the interests of Google and its6 shareholders in enforcing and prosecuting the derivative claims.7121.At the time of the filing of this action the Google Board consists of the following nine8 individuals: Page, Brin, Schmidt, Doerr, Hennessy, Otellini, Shriram, Tilghman and non-defendant9 Ann Mather.10122.Plaintiffs did not make a pre-suit demand on the Google Board, because such a11 demand would have been a useless and futile act, and, therefore, is excused. More particularly, a12 majority of the Google Board is not disinterested or independent, because three directors – Schmidt,13 Page and Brin are not disinterested as they face a substantial likelihood for breach of loyalty. These14 defendants were aware of the illegal Canadian ads by October 2003. However, when faced with this15 illegality, they continued Google’s policy for pharmacy advertisers in a manner that allowed16 Canadian online pharmacies to illegally sell prescription drugs via Google’s website. See ¶¶6, 2817 70, infra. Similarly, three directors –Tilghman, Hennessy and Shriram – lack independence from18 one or more “interested” directors Schmidt, Page and/or Brin, because they are executives and/or19 trustees of Princeton and/or Stanford Universities, where Schmidt, Page and Brin are alumni, and20 because the Universities have received tens of millions of dollars from Schmidt or Google. See ¶¶8,21 124-127.22 Demand Is Excused Because Defendants Page, Brin andSchmidt Dominate and Control the Board by Virtue of23 Their Majority Shareholder Voting Power24123.Google’s Board is dominated and controlled by defendants Page and Brin, co-25 founders of Google, and defendant Schmidt, the Company’s long time CEO, by way of their26 majority shareholder voting power. Page controls 28.4% of shareholder voting power, Brin controls27 28% of shareholder voting power, and Schmidt controls 9.5% of shareholder voting power.28 Combined, Page, Brin and Schmidt control two-thirds of the shareholder vote. As disclosed in the887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 51 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page53 of 631 Company’s Form S-1 filed with the SEC on April 29, 2004, defendants Schmidt, Page and Brin2 “operate the company collectively and . . . consult extensively with each other before significant3 decisions are made.”4 Defendants Hennessy, Shriram, Tilghman and DoerrAre Not Independent from Interested Directors5 Schmidt, Page and Brin6124.Due to their interrelated business, professional and personal relationships, certain7 defendants have developed debilitating conflicts of interest that prevent them from taking the8 necessary and proper action on behalf of the Company as requested herein. For example, demand is9 futile and thus excused because defendants Tilghman, Shriram, Hennessy and Doerr are not10 independent of Page, Brin and Schmidt.11 Defendants Hennessy and Shiriam Are Not Independent from InterestedDirectors Page, Brin and/or Page and Brin12125. Defendant Hennessy is the President of Stanford University and defendant Shriram13serves on the Stanford board of trustees. Google, at the direction of defendants Page and Brin,14Stanford graduates, donates millions of dollars every year to Stanford University. Since 2006,15Google has donated over $14.4 million to Stanford University. If Hennessy or Shriram voted to16initiate litigation against Page and Brin, they would effectively cause Google to stop making its17multi-million dollar yearly donation to Stanford University. This outcome would be particularly18disastrous to defendant Hennessy, because one of his principle duties as President of Stanford19University is ensure continued alumni support. Hennessy and Shriram will not risk their prestigious20positions at Stanford University or Google’s continued support of the University by voting to initiate21litigation against Page or Brin. Accordingly, defendants Hennessy and Shriram lack independence22from Page, Brin and/or Page and Brin, rendering a pre-suit demand on them futile.23Defendant Tilghman Is Not Independent from Interested Director Schmidt24126. Defendant Tilghman is the President of Princeton University. Prior to becoming25President, Tilghman was a Professor of Life Sciences at Princeton. Defendant Schmidt has donated26tens of millions of dollars to Princeton University. For instance, on October 13, 2009, Princeton27University announced that Schmidt created a $25 million endowment fund at Princeton University.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 52 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page54 of 631 Tilghman heaped praise on Schmidt for providing Princeton University with this generous gift,2 stating “This fund will allow Princeton’s scientists and engineers to explore truly innovative ideas3 that need the creation or application of new technologies, including the kinds of technological4 breakthroughs that most funding sources are too risk-averse to support.” Tilghman continued, “We5 are deeply grateful to Eric and Wendy [defendant Schmidt’s wife] not only for providing this6 support, but for providing the capacity and flexibility to make investments that are likely to have the7 broadest and most transformative impact.” Schmidt is a graduate of Princeton University and served8 as a trustee of the university from 2004 to 2008, at the same time as Tilghman served as a trustee of9 the university. During that time, Schmidt, as a trustee, exercised substantial control over Tilghman’s10 compensation and continued employment. Tilghman will not vote to initiate litigation against11 Schmidt out of loyalty for his past acts to her and Princeton University and because it would all but12 ensure that Schmidt would not provide any future donations to Princeton University. Accordingly,13 as the Court’s Order holds, defendant Tilghman lacks independence from interested defendant14 Schmidt, rendering a pre-suit demand on her futile.15 Defendant Doerr Is Not Independent fromInterested Directors Schmidt, Brin and/or Page16127. Defendant Doerr is a general partner at Kleiner Perkins Caufield & Byers, a venture17capital firm. Doerr has sought and obtained substantial investments from Google in private18companies that Kleiner Perkins Caufield & Byers is a major investor in through certain of its funds.19Doerr is the managing director of these investment funds. In 2007, Google bought Peakstream, Inc.20for $20.3 million. Kleiner Perkins Caufield & Byers, as part owner of Peakstream, received 24.5%21of that amount (approximately $5 million). Since that time, Google has continued to invest in22companies in which Kleiner Perkins Caufield & Byers also had major investments. Since 2008,23Google has invested $47.5 million in companies Kleiner Perkins Caufield & Byers also invested in.24In 2010 alone, Google, at the direction of defendants Page, Brin and Schmidt, invested over $2125million in companies in which Kleiner Perkins Caufield & Byers has a substantial interest. If Doerr26voted in favor of initiating litigation against Page, Brin or Schmidt, he would risk Google’s27continued financial support in companies he has as major investments. Doerr will not take such a28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 53 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page55 of 631 risk. Accordingly, defendant Doerr is not independent from “interested” directors Schmidt, Page2 and Brin, whether viewed collectively or individually. As such, a pre-suit demand on Doerr is futile.3 Demand Is Excused Because Schmidt, Page and BrinAre Interested Because Each Faces a Substantial4 Likelihood of Liability for Breach of Loyalty Arisingfrom Their Knowledge of and Faithless Response to5 the Illegal Canadian Ads128.6As detailed in ¶¶6, 28-70, defendants Schmidt, Page and Brin knew Google was7 facilitating the sale of Canadian prescription drugs to U.S. consumers and that such sales were89illegal. The Google Board received a blizzard of warnings that did or would have alerted them to thewrongdoing occurring at Google if these defendants had not recklessly been performing their duties.10129.1112At all relevant times, defendants Schmidt, Page and Brin were the three top levelexecutives at Google, and thus necessarily played an active role in approving the verification service13 the Company used to screen ads. Further, as key executives at Google, defendants Schmidt, Page14 and Brin were at least reckless if they did not know about the illegal online pharmaceutical15 advertising, considering the significant source of revenue Google received from the illegal16advertisements, and that illegal ads were blatantly being issued with the aid of Google employees.17Furthermore, as directors at the time, defendants Schmidt, Page and Brin knew the ad policy1819constituted a violation of federal law.130.20Plaintiffs have not made any demand on shareholders of Google to institute this21 action since such demand would be a futile and useless act for the following reasons:(a)22Google is a publicly traded Company with approximately 323 million shares23 outstanding, and thousands of shareholders;(b)24Making demand on such a number of shareholders would be impossible for25 plaintiffs who have no way of finding out the names, addresses or phone numbers of shareholders;26 and27131.Making demand on all shareholders would force plaintiffs to incur huge expenses,28 assuming all shareholders could be individually identified.887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 54 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page56 of 631COUNT I2Against All Defendants for Breach of Fiduciary Duty of Loyalty(and Candor and Good Faith)3132.Plaintiffs incorporate ¶¶1-131.133.Defendants owed Google and its shareholders a fiduciary duty of loyalty (and candor45and good faith). Under this duty, defendants, when faced with a known duty to act, here Google’s6legal duty to comply with the federal laws related to the importation of prescription drugs, were duty7bound to proactively maintain controls and policies designed to ensure Google’s compliance with8these laws.9134.However, defendants breached their duty of loyalty by consciously failing to prevent10the Company from engaging in the unlawful acts complained of herein.11135.As a result of defendants’ disloyalty, Google has been injured. Accordingly, Google12is entitled to damages.13COUNT II14Against Defendants Schmidt, Page and Brin for Corporate Waste15136.Plaintiffs incorporate ¶¶1-131.137.As a result of the foregoing misconduct, defendants have caused Google to waste1617valuable corporate assets.18138.As a direct and proximate result of defendants’ corporate waste, Google has sustained19and continues to sustain significant damages. As a result of the misconduct alleged herein,20defendants are liable to the Company.21COUNT III22Against Defendants Schmidt, Page and Brin for Unjust Enrichment23139.Plaintiffs incorporate ¶¶1-131.140.By their wrongful acts and omissions, defendants were unjustly enriched at the2425expense of and to the detriment of Google. Defendants were unjustly enriched as a result of the26salary, fees, stock options and other payments they received while breaching their fiduciary duty27owed to Google.28887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 55 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page57 of 631141.Plaintiffs, as shareholders of Google, seek restitution from defendants, and each of2 them, and seek an order of this Court disgorging all profits, benefits, and other improper payments3 obtained by defendants, and each of them, from their wrongful conduct and fiduciary breaches.4142.As a result of defendants’ unjust enrichment, Google has been injured and is entitled5 to damages.6PRAYER FOR RELIEF7WHEREFORE, plaintiffs demand judgment in the Company’s favor against all defendants as8 follows:9A.Declaring that plaintiffs may maintain this action on behalf of Google and that10 plaintiffs are adequate representatives of the Company;11B.Declaring that the defendants have breached and/or aided and abetted the breach of12 their fiduciary duties to Google;13C.Determining and awarding to Google the damages sustained by it as a result of the14 violations set forth above from each of the defendants, jointly and severally, together with interest15 thereon;16D.Determining and awarding to Google exemplary damages in an amount necessary to17 punish defendants and to make an example of defendants to the community according to proof at18 trial;19E.Awarding Google restitution from defendants, and each of them;20F.Awarding plaintiffs the costs and disbursements of this action, including reasonable21 attorneys’ and experts’ fees, costs and expenses; and22G.Granting such other and further equitable relief as this Court may deem just and23 proper.2425262728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 56 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page58 of 6312JURY DEMANDPlaintiffs demand a trial by jury.3 DATED: November 1, 201345ROBBINS GELLER RUDMAN& DOWD LLPTRAVIS E. DOWNS IIIBENNY C. GOODMAN IIIERIK W. LUEDEKE6s/ Benny C. Goodman IIIBENNY C. GOODMAN III78655 West Broadway, Suite 1900San Diego, CA 92101-3301Telephone: 619/231-1058619/231-7423 (fax)910ROBBINS GELLER RUDMAN& DOWD LLPSHAWN A. WILLIAMSPost Montgomery CenterOne Montgomery Street, Suite 1800San Francisco, CA 94104Telephone: 415/288-4545415/288-4534 (fax)1112131415POMERANTZ GROSSMAN HUFFORDDAHLSTROM & GROSS LLPMARC I. GROSSJEREMY A. LIEBERMANJASON S. COWART600 Third AvenueNew York, NY 10016Telephone: 212/661-1100212/661-8665 (fax)1617181920ROBBINS ARROYO LLPBRIAN J. ROBBINSFELIPE J. ARROYOSHANE P. SANDERSGINA STASSI600 B Street, Suite 1900San Diego, CA 92101Telephone: 619/525-3990619/525-3991 (fax)2122232425Co-Lead Counsel for Plaintiffs262728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 57 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page59 of 6315LAW OFFICE OF ALFRED G.YATES, JR., P.C.GERALD L. RUTLEDGE519 Allegheny Building429 Forbes AvenuePittsburgh, PA 15219Telephone: 412/391-5164412/471-1033 (fax)6Counsel for Plaintiff23478910111213141516171819202122232425262728887151_1SECOND AMENDED VERIFIED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT -CV-11-04248-PJH- 58 - Document92 Filedll/O1/13 Page6O of 631 I VERIFICATION2 I, Patricia M. McKenna, hereby declare as follows:3 I am a shareholder of Google Inc. I was a shareholder at the time of the wrongdoing4 complained. of and I remain a shareholder. I have retained competent counsel and I am ready,5 willing and able to pursue this action vigorously on behalf of Google Inc. I have reviewed the6 Second Amended Veri?ed Consolidated Shareholder Derivative Complaint. Based upon discussions7 with and reliance upon my counsel, and as to those facts of which I have personal knowledge, the8 Complaint is true and correct to the best of my knowledge, information and belief.9 I declare under penalty ofperjury that the foregoing is true and correct.I011 DATED: ()ctober_2013 atri?ia M. McKenna659?99-| 4:1 - 1 -Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page61 of 6312CERTIFICATE OF SERVICEI hereby certify that on November 1, 2013, I authorized the electronic filing of the foregoing3 with the Clerk of the Court using the CM/ECF system which will send notification of such filing to4 the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I5 caused to be mailed the foregoing document or paper via the United States Postal Service to the non6 CM/ECF participants indicated on the attached Manual Notice List.7I certify under penalty of perjury under the laws of the United States of America that the8 foregoing is true and correct. Executed on November 1, 2013.910111213s/ Benny C. Goodman IIIBENNY C. GOODMAN IIIROBBINS GELLER RUDMAN& DOWD LLP655 West Broadway, Suite 1900San Diego, CA 92101-3301Telephone: 619/231-1058619/231-7423 (fax)141516171819202122232425262728887151_1E-mail: bennyg@rgrdlaw.comCAND-ECF-Page 1 of 2Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page62 of 63Mailing Information for a Case 4:11-cv-04248-PJHElectronic Mail Notice ListThe following are those who are currently on the list to receive e-mail notices for this case.zzzzzzzzzzzzzzzzzzzzzzzFelipe Javier Arroyofarroyo@robbinsarroyo.com,notice@robbinsarroyo.comJason S. Cowartjscowart@pomlaw.comPatrick V. Dahlstrompdahlstrom@pomlaw.comMarshall Pierce Deesmdees@holzerlaw.comTravis E. Downs , IIItravisd@rgrdlaw.com,e_file_sd@rgrdlaw.com,e_file_sf@rgrdlaw.comMichael I. Fistel , Jrmfistel@holzerlaw.comBenny Copeline Goodman , IIIbennyg@rgrdlaw.com,e_file_sd@rgrdlaw.comKathleen Ann Herkenhoffkah@weiserlawfirm.com,jmf@weiserlawfirm.com,hl@weiserlawfirm.comDarren T. Kaplandkaplan@chitwoodlaw.comPeter John Koenigpeter@whk-law.com,serena@whk-law.com,beau@whk-law.comNicole Catherine Lavalleenlavallee@bermandevalerio.com,ysoboleva@bermandevalerio.comJeremy A Liebermanjalieberman@pomlaw.comErik William Luedekeeluedeke@rgrdlaw.comElizabeth Catherine Petersonepeterson@wsgr.com,vshreve@wsgr.com,cfoung@wsgr.com,bbahns@wsgr.com,dgavril@wsgr.com,ncarvalho@wsgr.com,dwalters@wsgr.com,bsantaguida@wsgr.comAnthony David Phillipsaphillips@bermandevalerio.com,ysoboleva@bermandevalerio.comBrian J. Robbinsnotice@robbinsarroyo.comDarren Jay Robbinse_file_sd@rgrdlaw.comShane Palmesano Sandersssanders@robbinsarroyo.com,notice@robbinsarroyo.comBryson Scott Santaguidabsantaguida@wsgr.comGina Stassigstassi@robbinsarroyo.com,notice@robbinsarroyo.comJoseph J. Tabacco , Jrjtabacco@bermandevalerio.com,ysoboleva@bermandevalerio.comDiane Marie Waltersdwalters@wsgr.com,vshreve@wsgr.comShawn A. Williamsshawnw@rgrdlaw.com,khuang@rgrdlaw.com,e_file_sd@rgrdlaw.com,e_file_sf@rgrdlaw.comManual Notice ListThe following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may wish to use your mouseto select and copy this list into your word processing program in order to create notices or labels for these recipients.BorisFeldmanWilson Sonsini Goodrich & RosatiA Professional Corporation650 Page Mill Roadhttps://ecf.cand.uscourts.gov/cgi-bin/MailList.pl?101422939128917-L_1_0-111/1/2013CAND-ECF-Page 2 of 2Case4:11-cv-04248-PJH Document92 Filed11/01/13 Page63 of 63Palo Alto, CA 94304-1050MarcL GrossPomerantz Haudek Block Grossman & Gross LLP100 Park Avenue26th FloorNew York, NY 10017R.James HogdsonPomerantz Haudek Block Grossman & Gross LLP100 Park Avenue16th FloorNew York, NY 10017Fei-LuQianPomerantz Haudek Grossman & Gross LLP100 Park Avenue16th FloorNew York, NY 10017https://ecf.cand.uscourts.gov/cgi-bin/MailList.pl?101422939128917-L_1_0-111/1/2013