As we have previously discussed (here), Lee v. Robert J. Fisher et al., Case No. 20 Civ. 6163 (N.D. Ca.), is one of a growing number of derivative lawsuits brought against public companies (in this case, The Gap Inc.) alleging federal securities law and state-law fiduciary duty violations tied to the defendant issuer’s alleged failure to fulfill diversity aspirations. In April 2021, the district court dismissed the suit without reaching the merits, instead enforcing the Delaware Court of Chancery forum selection clause in the company’s bylaws, notwithstanding the presence of derivative federal proxy claims.
On May 13, the Court of Appeals for the 9th Circuit, in a published decision, affirmed the dismissal below, finding that the Delaware forum selection clause was enforceable and did not violate public policy. The 9th Circuit’s decision is at odds with a recent divided decision by the Court of Appeals for the 7th Circuit (written about here), in which the majority held that an identical forum selection clause in the bylaws of the Boeing Company was unenforceable. See Seafarers Pension Plan v. Robert A. Bradway et al., No. 1:19-CV-08095 (7th Cir. Jan. 7, 2022) (Boeing). These split Court of Appeals opinions, and the ongoing commentary surrounding them, suggest that there will be continuing litigation on the parameters of and the potential limits on the enforcement of such forum selection clauses in derivative federal proxy cases.
The Court’s Decision
In its decision, the Court of Appeals first noted that plaintiff did not allege that the forum selection clause was invalid, and thus the only question before the court was whether the clause was enforceable. The court explained that based on relevant U.S. Supreme Court precedent and the 9th Circuit cases that have interpreted that precedent, district courts must enforce forum selection clauses unless there are “extraordinary circumstances” that render a clause unenforceable. Extraordinary circumstances could arise, for example, if enforcement of the clause “would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision.”
The court then rejected plaintiff’s argument that enforcement of the clause at issue was contrary to clear public policy expressed by (i) the anti-waiver provision in the Exchange Act, 15 U.S.C. Section 78cc(a); (ii) the Exchange Act’s exclusive federal jurisdiction provision, 15 U.S.C. Section 78aa; (iii) Delaware state case law; and (iv) a federal court’s general obligation to hear cases within its jurisdiction.
Plaintiff’s anti-waiver provision argument failed because “the strong federal policy in favor of enforcing forum-selection clauses . . . supersede[s] antiwaiver provisions in state statutes as well as federal statutes, regardless of whether the clause points to a state court, a foreign court, or another federal court.” The court held that the Exchange Act’s exclusive federal jurisdiction provision does not provide a “clear statutory declaration” of a strong public policy disfavoring enforcement, because enforcement of the clause would result in dismissal of plaintiff’s Exchange Act claim rather than its being adjudicated in a nonfederal forum. The court found that the Delaware state case law cited by plaintiff also did not reflect a strong public policy disfavoring enforcement, as notwithstanding her inability to bring a derivative Exchange Act claim in the Delaware Court of Chancery, she had failed to identify “Delaware law clearly stating that she could not get any relief” in that court (emphasis added).
Notably, the 9th Circuit panel declined to consider the 7th Circuit’s reliance on Section 115 of the Delaware General Corporation Law in Boeing for the proposition that enforcing the forum selection clause with respect to federal Exchange Act claims was contrary to Delaware public policy, holding that plaintiff waived that argument because she raised it only in her reply brief. Section 115 authorizes forum selection bylaws only if they are “consistent with applicable jurisdictional requirements.” The majority in Boeing pointed to the legislative history of Section 115, which notes that it was not the legislature’s intent “to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction, nor is Section 115 intended to limit or expand the jurisdiction of the Court of Chancery or the Superior Court.” In his Boeing dissent, Judge Easterbrook disagreed that federal courts hold exclusive jurisdiction over derivative Exchange Act proxy claims at all stages of litigation, and opined that the Delaware Court of Chancery has jurisdiction to entertain such a claim, at least in the earlier stages of the litigation.
Given the circuit split as to the enforceability of Delaware Court of Chancery forum selection clauses for all derivative claims, including derivative federal proxy claims, it appears likely that litigation concerning these issues will continue to percolate, at least outside the 7th and 9th Circuits. In that connection, Judge Smith’s 9th Circuit decision and Judge Easterbrook’s dissent in Boeing may provide persuasive authority that corporations seeking to enforce their exclusive Delaware forum clauses will rely upon.