Ninth Circuit Agrees To Rehear Derivative Suit Previously Dismissed Based on Forum Selection Bylaw

The Ninth Circuit Court of Appeals recently agreed to rehear en banc the dismissal—based on a Delaware exclusive forum selection bylaw provision—of a shareholder derivative suit asserting violations of Section 14(a) of the Securities Exchange Act. Last May, a three-judge panel affirmed the dismissal of claims against Gap Inc.’s officers and directors relating to their alleged failure to uphold their commitment to diversity and inclusion without reaching the merits, instead enforcing the exclusive Delaware Court of Chancery selection clause (as previously discussed here).

The case raises significant issues as to whether Delaware state-court forum selection clauses can be enforced when the plaintiff has asserted a derivative federal securities claim.

The Petition

In its petition, the appellant argued that en banc review was necessary to resolve an inter-circuit split.^[1] In particular, the appellant claimed that the panel’s decision conflicted with a divided Seventh Circuit decision, which “found an identical forum clause to be contrary to both Delaware law and federal law” (as previously discussed here). The petition emphasized the “overriding need for national uniformity” as to whether these clauses can result in a waiver of shareholder claims purportedly subject to exclusive federal jurisdiction, pointing to the anti-waiver and exclusive federal jurisdiction provisions of the Exchange Act.^[2]

In its response, Gap Inc. insisted that the Ninth Circuit’s previous decisions “require enforcing forum selection clauses even when doing so prevents plaintiffs from bringing a federal securities claim.”^[3] Gap Inc. also disagreed that the panel had created a conflict, as the Seventh Circuit’s decision was purportedly based on Delaware law rather than the Exchange Act.

As we have previously noted, Judge Easterbrook dissented in the Seventh Circuit case. He reasoned that enforcement of the Delaware Court of Chancery forum clause did not necessarily deprive the plaintiff of a federal remedy since even if a shareholder could not bring a derivative Section 14(a) claim in federal court, the shareholder could still bring a direct Section 14(a) claim in federal court in its own name. In addition, Judge Easterbrook pointed out that state law governed several aspects of the purported derivative Section 14(a) claim.

Conclusion

Delaware corporations use exclusive forum selection clauses as a means of managing litigation, including by preventing forum shopping and minimizing the costs and uncertainty of multi-forum litigation. Corporations may also specifically prefer that cases be heard in Delaware, given its well-developed body of case law and expertise in resolving corporate law disputes. The en banc grant may provide greater clarity as to the scope of these clauses and whether they can be enforced against federal derivative securities claims.

^{[1] The case is Lee v. Fisher et al., No. 21-15923. The petition is available at: https://fingfx.thomsonreuters.com/gfx/legaldocs/movakmljjva/frankel-gapderivative—enbancpetition.pdf.}

^{[2] Section 27(a) provides federal courts with exclusive jurisdiction over “all suits in equity and actions at law brought to enforce any liability or duty created by [the Exchange Act] or the rules or regulations thereunder.” 15 U.S.C. § 78aa(a).  Section 29(a) renders void “[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of [the Exchange Act] or of any rule or regulation thereunder.” 15 U.S.C. § 78cc(a).}

^{[3] The response to the petition is available at: https://fingfx.thomsonreuters.com/gfx/legaldocs/zdvxdynrnvx/frankel-gapderivative—enbancopposition.pdf.}