May 18, 2021

Exclusive Forum Bylaws: Farewell to Section 14(a) Claims?

In Lee v. Fisher, (ND Cal.; 4/21), a California federal magistrate dismissed federal disclosure claims and state law derivative claims filed in that court on the basis of an exclusive forum bylaw designating the Delaware Court of Chancery as the exclusive forum for derivative suits.  This excerpt from a recent Gibson Dunn memo summarizes the decision:

Plaintiff argued that the court could not enforce the Forum Bylaw as to the federal Section 14(a) claim because (1) that claim was subject to exclusive federal jurisdiction and could not be asserted in the Delaware Court of Chancery, and (2) enforcing the Forum Bylaw would violate the Exchange Act provision that prohibits waiving compliance with the Exchange Act (the “anti-waiver” provision).

The court rejected plaintiff’s arguments and enforced the Forum Bylaw, effectively precluding the plaintiff from asserting a Section 14(a) claim in any forum. First, the court noted the strong policy in favor of enforcing forum selection clauses, which the Ninth Circuit has held supersedes anti-waiver
provisions like those in the Exchange Act. See Yei A. Sun v. Advanced China Healthcare, Inc., 901 F.3d 1081 (9th Cir. 2018). Second, relying on the Ninth Circuit’s holding in Sun that a forum selection clause should be enforced unless the forum “affords the plaintiffs no remedies whatsoever,” the court held that the Forum Bylaw was enforceable because the plaintiff could file a separate state law derivative action in Delaware, even if that action could not include federal securities law claims.

The memo points out that these two decisions represent a departure from past practice – typically, courts have applied exclusive forum bylaws only to state law claims. It says that the decision “strikes a blow” against the plaintiffs bar’s emerging tactic of asserting federal securities claims in the guise of derivative actions, and “furthers the purpose of exclusive forum bylaws to prevent duplicative litigation in multiple forums.”

Tulane’s Ann Lipton is less impressed with the Court’s decision. Here’s an excerpt from her recent blog on the case:

I’ve got to say, the logic – which originates in Yei A. Sun – baffles me.  As I understand it, the federal policy in favor of forum selection clauses is so great that even if the statute says ‘’you may not waive this claim,” waivers that occur via the operation of a forum selection clause will still be respected unless there’s an additional statute or judicial decision that says “no, seriously, we weren’t kidding about the anti-waiver thing.”

Because Exchange Act claims can’t be brought in state court, these decisions effectively permit companies to use their exclusive forum bylaws to preclude plaintiffs from bringing Section 14(a) claims by foreclosing them from proceeding in federal court. Obviously, the implications of that are pretty staggering, but I doubt very much that we’ve heard the last of this issue.

John Jenkins