On September 18, 2012, the Southern District of New York denied a motion to stay derivative suits against various News Corporation directors and officers pending resolution of a similar derivative action in the Delaware Court of Chancery. Shields v. Murdoch, 2012 WL 4097199 (S.D.N.Y. Sept. 18, 2012) (Gardephe, J.). The court found that abstention from federal jurisdiction was not appropriate under Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976) (Brennan, J.) because the federal suits asserted Exchange Act claims in addition to the state law claims asserted in the Delaware suit. Shields, 2012 WL 4097199, at *6.

Background

Following revelations of phone-hacking at News of the World, one of News Corporation’s publications, a number of plaintiffs brought suit in the Delaware Chancery Court on March 16, 2011 (the “Delaware Action”). Id. at *1. The operative complaint in the Delaware Action alleges four state law breach of fiduciary duty claims. Id. at *4. After the Delaware Action was filed, other plaintiffs filed three separate derivative suits in the Southern District of New York. Id. at *3. Two of these suits (the “Federal Actions”) asserted violations of Section 14(a) of the Exchange Act, in addition to state law claims. Id. On December 8, 2011, the defendants in the three federal suits moved for a stay pending the resolution of the Delaware Action. Id. at *4.

The Court Holds That Abstention Is Not Appropriate Under the Colorado River Doctrine Because the Federal Actions and the Delaware Action Are Not Parallel

Under the Colorado River doctrine, “a federal court, in ‘exceptional’ circumstances, may dismiss a federal suit based on ‘considerations of wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation.’” Id. at *5 (quoting Colorado River, 424 U.S. at 817-18). “Before a court evaluates the appropriateness of abstention under Colorado River, it must make a threshold determination that the federal and state court cases are ‘parallel.’” Id. “Federal and state proceedings are concurrent or parallel for purposes of absention when the two proceedings are essentially the same; that is, there is an identity of parties, and the issues and relief sought are the same.” Id. (internal quotation marks omitted). “If a court finds that the federal and state cases are not parallel, Colorado River abstention does not apply, whether or not issues of state law must be decided by the federal court.” Id. at *6 (internal quotation marks omitted).

Here, the Federal Actions alleged violations of Section 14(a) of the Exchange Act, in addition to state law claims. Id. at *3-4 “[B]ecause federal courts have exclusive jurisdiction over Exchange Act claims,” the court determined that the Federal Actions and the Delaware Action “are not parallel, and Colorado River abstention is therefore inappropriate.” Id. (internal quotations marks, alterations, and citation omitted).

The defendants argued that abstention was nonetheless warranted because the question of demand futility would have to be determined under Delaware state law. Id. at *6. The court acknowledged that “abstention may be warranted if the demand futility issue is particularly complex or if there is a high likelihood that the demand futility issue will dispose of the instant litigation.” Id. at *7 (internal quotation marks and alterations omitted). Here, however, the court found that the defendants “ha[d] not demonstrated that the demand futility issue [was] ‘particularly complex.’” Id. “[N]or ha[d] they shown that it [was] highly likely that the Delaware court [would] find that [the] [p]laintiffs failed to satisfy the demand futility requirement”; thus, “[t]he possibility that the Delaware court’s finding on the demand futility issue [would] dispose of the federal actions [was] not sufficient to warrant abstaining from deciding [the] [p]laintiffs’ federal claims.” Id.

Finally, the court rejected the defendants’ argument that the plaintiffs “‘should not be allowed to sidestep the stay called for here, by tacking on a meritless Section 14(a) claim.’” Id. at *8. The court found that the defendants “ha[d] not demonstrated that [the] [p]laintiffs’ Section 14(a) claims [were] meritless” and, “[i]n any event, in determining whether abstention is appropriate under Colorado River,” it was “not required to evaluate the merits of a plaintiff’s claims.” Id.

The Court Finds That Even If the Actions Were Parallel, Abstention Would Not Be Appropriate Under the Colorado River Doctrine

“To determine whether abstention under Colorado River is appropriate, a district court is required to weigh six factors, with the balance heavily weighted in favor of the exercise of jurisdiction.” Id. at *5 (internal quotation marks omitted). These factors are:

(1) the assumption of jurisdiction by either court over any res or property; (2) the inconvenience of the federal forum; (3) the avoidance of piecemeal litigation; (4) the order in which jurisdiction was obtained; (5) whether state or federal law supplies the rule of decision; and (6) whether the state court proceeding will adequately protect the rights of the party seeking to invoke federal jurisdiction.

Id.

The Southern District of New York determined that “[e]ven if the federal and state actions here were parallel, abstention would not be appropriate, because a majority of the Colorado River factors weigh in favor of the exercise of federal jurisdiction.” Id. at *8. First, because neither the Delaware Chancery Court nor the Southern District of New York had assumed jurisdiction over any res or property, the court found that this factor “weighs against abstention.” Id. at *9. Second, the court observed that “[t]he federal forum is not inconvenient for the [d]efendants” because “News Corp. maintains its executive offices in New York City” and “at least eight of the individual defendants are citizens of either New York or Connecticut.” Id.

Third, because the Delaware Chancery Court does not have jurisdiction over the Exchange Act claims asserted in the Federal Actions, “abstention might only serve to encourage piecemeal litigation of the issues raised in the federal suit.” Id. at *10 (internal quotation marks omitted). “A related aspect of piecemeal litigation … is whether resolution in one forum will resolve the claims as to all parties.” Id. at *11 (internal quotation marks omitted). Here, one of the Federal Actions names two defendants not included in the Delaware Action. The court explained that “[w]here the parties to the suits are not identical and thus not all bound by the judgment of any given court, the problem of piecemeal litigation is exacerbated by the risk of inconsistent results.” Id. (internal quotation marks omitted). The court found that “[t]his factor thus weighs slightly against abstention.” Id. at *12.

Fourth, the court determined that “[b]ecause the Delaware Action is more advanced than the [F]ederal [A]ctions, this factor weighs in favor of abstention.” Id. at *13. Fifth, “[b]ecause [f]ederal law supplies the rule of decision for [the] [p]laintiffs’ Section 14(a) claims, this factor weighs heavily against abstention.” Id. Finally, “[b]ecause [the] [p]laintiffs’ federal claims cannot be vindicated in the state court proceeding, it will not adequately protect their rights.” Id. The court found that “[t]his factor therefore weighs heavily against abstention.” Id.

“Given that all but one of the six Colorado River factors weigh against abstention,” the court found that “exceptional circumstances that justify the surrender of federal court jurisdiction … do not exist.” Id. at *14 (internal citation and quotation marks omitted). “Accordingly, even if the federal and state actions were parallel,” the court held that “a stay … would not be [ ] warranted.” Id.