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Ninth Circuit Enforces Exclusive Forum Provision Favoring State Court for Derivative Claims Despite Plaintiff’s Assertion of a Federal Securities Claim

May 23, 2022 Download PDF

On May 13, 2022, the Ninth Circuit affirmed the dismissal of a shareholder derivative lawsuit asserting both state and federal claims against Gap Inc.’s directors and officers for their alleged failure to uphold their commitments to diversity and inclusion.[1] The district court dismissed the lawsuit because the company’s bylaws require derivative lawsuits to be filed exclusively in the Delaware Court of Chancery. The appellate court affirmed, notwithstanding the fact that the dismissal left plaintiff with no forum in which to assert her derivative claims arising under the Securities Exchange Act of 1934 (the “Exchange Act”), over which federal courts have exclusive jurisdiction. The decision is a welcome development for corporate directors and officers, as shareholders have been increasingly adding federal claims to derivative lawsuits. Some shareholders seek a perceived advantage by litigating outside of the Delaware courts most familiar with these issues. The decision also creates a circuit split with the Seventh Circuit, which earlier this year refused to enforce an exclusive forum provision in substantially similar circumstances. Although other circuit courts have not yet weighed in on this issue, the circuit split between the Seventh and Ninth Circuits raises the possibility of Supreme Court review.

Lee v. Fisher

In September 2020, Gap shareholder Noelle Lee filed a derivative lawsuit against Gap and its directors and officers alleging that they failed to create meaningful diversity within company leadership roles and made false statements in Gap’s proxy statements about the level of diversity the company had achieved. The company’s bylaws contain a forum selection clause requiring “any derivative action or proceeding brought on behalf of the Corporation” to be filed in the Delaware Court of Chancery. Plaintiff asserted both state law fiduciary duty claims and a federal securities claim alleging a violation of Section 14(a) of the Exchange Act, which prohibits misleading statements in proxy materials. Because federal courts have exclusive jurisdiction over claims arising under the Exchange Act, plaintiff filed her lawsuit in federal court in the Northern District of California, notwithstanding the company’s exclusive forum provision directing derivative lawsuits to be filed in Delaware state court. The district court dismissed the complaint on forum non conveniens grounds, holding that the shareholder was bound by the company’s forum selection clause with respect to all of her claims.

The shareholder appealed, arguing that the forum selection clause should not be honored because its enforcement would contravene a strong public policy favoring the federal forum where the lawsuit was filed. The shareholder identified four pieces of “evidence” allegedly supporting her position: (1) the Exchange Act’s anti-waiver provision, which voids any provision that waives compliance with the Exchange Act; (2) a federal court’s obligation to hear cases over which it has subject matter jurisdiction; (3) the Exchange Act’s exclusive federal jurisdiction provision; and (4) Delaware state case law suggesting that an exclusive forum provision that prevented a shareholder from asserting a Section 14(a) claim would be inconsistent with the anti-waiver provision of the Exchange Act.

The Ninth Circuit unanimously affirmed the district court’s dismissal and rejected each of plaintiff’s arguments. First, the court relied on Ninth Circuit precedent holding that “the strong federal policy in favor of enforcing forum-selection clauses supersedes anti-waiver provisions in federal statutes, regardless whether the clause points to a state court, a foreign court, or another federal court.”[2] The court rejected plaintiff’s argument about a federal court’s obligation to hear cases within its jurisdiction for substantially similar reasons. [3]

Second, the court held that the Exchange Act’s exclusive federal jurisdiction provision does not create a strong public policy favoring the federal forum. The court explained that the federal jurisdiction provision simply “forbids non-federal courts from adjudicating Section 14(a) claims,” and that the Gap’s exclusive forum provision would not force the Delaware Court of Chancery to adjudicate the federal claim. Thus, as the Ninth Circuit reasoned, “enforcement of the forum-selection clause does not violate any express statutory policy of the Exchange Act’s exclusive federal jurisdiction provision.”[4] The court also noted that the Exchange Act’s exclusivity provision is waivable, though there was no indication it had been waived in this case.[5]

Finally, the Ninth Circuit held that plaintiff had failed to identify any Delaware statute or case law “clearly stating that she could not get any relief in the Delaware Court of Chancery.” In her reply brief, plaintiff pointed to the Seventh Circuit’s recent decision in Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022), which held that an identical forum-selection clause was unenforceable. A divided Seventh Circuit panel held that section 115 of the Delaware General Corporation Law (the “DGCL”)—which permits exclusive forum provisions for derivative lawsuits that are “consistent with applicable jurisdictional requirements”—would prohibit the use of a forum bylaw that would entirely foreclose a derivative action under Section 14(a) of the Exchange Act, and also that such a bylaw would violate the Exchange Act’s anti-waiver provision.[6] The Ninth Circuit did not consider plaintiff’s section 115 argument because it was raised for the first time in reply, and further held that the anti-waiver provision argument was foreclosed by binding Ninth Circuit precedent, as discussed above.[7]

Implications

The Ninth Circuit’s decision in Lee is an encouraging development for directors and officers of companies with exclusive forum provisions in their charters and bylaws, and particularly for Delaware corporations with provisions requiring that derivative lawsuits be brought in the Delaware Court of Chancery. Shareholders have increasingly sought a perceived advantage by litigating in federal courts rather than the Delaware courts that are more familiar with these issues. The decision in Lee suggests that defendants may be successful in seeking to dismiss derivative lawsuits filed in federal court based on exclusive forum provisions even if, as in Lee, plaintiffs are left without a forum in which to assert federal securities claims derivatively. The Lee decision is unlikely to be the final word on the matter, however, both because it declined to address plaintiff’s statutory argument under the DGCL (given her belated invocation of that issue) and because there is now a split between the Ninth and Seventh Circuits about the application of the Exchange Act’s anti-waiver provision in these circumstances. We will continue monitor for further developments, including a possible petition for Supreme Court review to resolve the new circuit split.

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[1]     Noelle Lee v. Robert Fisher, et al, No. 21-15923, ECF No. 46 (9th Cir. 2022).

[2]      Id. at 8 (citing Yei A. Sun v. Advanced China Healthcare, Inc., 901 F.3d 1081, 1090 (9th Cir. 2018) (alterations omitted)).

[3]      Id. (internal quotations omitted).

[4]      Id. at 8-9.

[5]      Id. at 9 (citing Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 228 (1987).

[6]      A handful of district courts have also addressed this issue, with most enforcing exclusive forum provisions requiring claims to be brought in state court even when doing so deprived plaintiffs of a forum in which to assert their federal securities claims. E.g., Vernon v. Stabach, 2014 WL 1806861 (S.D. Fla. May 7, 2014); Solid Q Holding, LLC v. Arenal Energy Corp., 2017 WL 935891 (D. Utah Mar. 8, 2017). Those decisions tend to rely on a 2008 decision from the Northern District of Illinois, Spenta Enterprises, Ltd. v. Coleman, 574 F. Supp. 2d 851 (N.D. Ill. 2008). But Spenta was specifically abrogated in the Seventh Circuit’s recent decision in Boeing, and the continued vitality of this string of district court opinions is uncertain.

[7]      Lee, ECF No. 46 at 10 (citing Seafarers Pension Plan ex rel. Boeing Co., 23 F.4th at 720).

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