9th Circuit Upholds Dismissal of Derivative Lawsuit in Favor of Forum Selection Clause Designating Delaware Court of Chancery as Exclusive Forum for All Derivative Claims – Trial, Appeals and Compensation

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As we have already explained (here), Lee v. Robert J. Fisher et al., Case No. 20 Civ. 6163 (ND Ca.), is among a growing number of derivative lawsuits filed against public companies (in this case, The Gap Inc.) alleging violations of federal securities law and statutory fiduciary duties of the State related to the defendant issuer’s alleged failure to fulfill diversity aspirations. In April 2021, the district court dismissed the suit without getting to the merits, instead applying the Delaware Court of Chancery forum selection clause in the company’s articles of association, despite the presence of proxy claims. derivative federal.

On May 13, the 9th Circuit Court of Appeals, in a reported decision, upheld the dismissal below, finding that Delaware’s forum selection clause was enforceable and did not violate public policy. The 9th Circuit’s decision contradicts a recent split decision by the 7th Circuit Court of Appeals (written here), in which the majority ruled that an identical choice of court clause in the Boeing Company’s bylaws was unenforceable. See Seamen’s Pension Scheme c. Robert A. Bradway et al.No. 1:19-CV-08095 (7th Cir. January 7, 2022) (Boeing). These split opinions from the Court of Appeals and the continued commentary surrounding them suggest that there will be ongoing litigation over the parameters and potential limits of the application of these forum selection clauses in federal power of attorney cases. derived.

The Court’s decision

In its decision, the Court of Appeal first noted that the plaintiff had not alleged that the choice of court clause was invalid, and therefore the only issue before the court was whether the clause was enforceable. The court explained that based on relevant precedent from the U.S. Supreme Court and the 9th Circuit cases that interpreted that precedent, district courts must apply forum selection clauses unless there is no there are “extraordinary circumstances” which render a clause unenforceable. Extraordinary circumstances could arise, for example, if the execution of the clause “would contravene a strong public order of the forum before which the action is brought, whether declared by law or by judicial decision”.

The court then rejected plaintiff’s argument that the application of the clause at issue was contrary to a clear public policy expressed by (i) the anti-waiver provision of the Exchange Act, 15 USC Section 78cc(a) ; (ii) the exclusive federal jurisdiction provision of the Exchange Act, 15 USC Section 78aa; (iii) the case law of the State of Delaware; and (iv) the general duty of a federal court to hear matters within its jurisdiction.

Plaintiff’s anti-waiver provision argument failed because “the strong federal policy in favor of the enforcement of forum selection clauses… supersedes[s] anti-waiver provisions in state laws as well as federal laws, whether the clause points to a state court, a foreign court, or another federal court. statement” of strong public policy adverse to enforcement, because enforcing the clause would result in the plaintiff’s Exchange Act claim being dismissed rather than adjudicated in a non-federal forum. The court held that the Delaware state case law cited by plaintiff also did not reflect strong public policy against enforcement, because despite its inability to bring an Exchange Act derivative action in the Delaware Court of Chancery , she hadn’t identified “the Delaware law making it clear that she couldn’t get
any reparation” before this court (emphasis added).1

Notably, the 9th Circuit panel declined to consider the 7th Circuit’s reliance on Section 115 of the Delaware General Corporations Act in Boeing for the proposition that the application of the forum selection clause with respect to federal claims under the Exchange Act was contrary to the public policy of Delaware, holding that the plaintiff had abandoned this argument because that she had only raised it in her brief in reply. Section 115 permits choice of court by-laws only if they are “consistent with applicable jurisdictional requirements”. The majority in Boeing highlighted the legislative history of section 115, which notes that it was not Parliament’s intention “to authorize a provision that seeks to prevent a suit in federal court based on federal jurisdiction, and nor is section 115 intended to limit or extend the jurisdiction of the Court of Chancery or the Superior Court.” In its Boeing dissenting, Judge Easterbrook disagreed that the federal courts have exclusive jurisdiction over Exchange Act-derived proxy claims at all stages of the litigation, and held that the Court of Chancery of Delaware had jurisdiction to entertain such a claim, at least in the early stages of litigation.2

Conclusion

Given the circuit’s division as to the applicability of the Delaware Court of Chancery’s forum selection clauses to all derivative claims, including federal proxy derivative claims, it seems likely that litigation regarding these matters will continue to infiltrate, at least outside the 7th and 9th Circuits. In this regard, Justice Smith’s decision in the 9th Circuit and Justice Easterbrook’s dissent in Boeing can provide persuasive authority that companies seeking to enforce their Delaware exclusive forum provisions will rely on.

Footnotes

1. The court also found unconvincing plaintiff’s argument that the federal courts are obligated to hear cases within their exclusive jurisdiction because “this obligation is overcome by the strong presumption in favor of the application of the clauses choice of court”.

2. The 9th Circuit panel noted that the 7th Circuit’s decision was also based on a finding that Boeing’s articles of association violated the Exchange Act’s anti-waiver provision and that, in contrast, ” [9th Circuit] precludes reliance on the anti-waiver provision of the Exchange Act.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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