July 27, 2022

Exclusive Forum Bylaws: Recent 9th Cir Decision Creates Circuit Split

In Lee v. Fisher, (9th Cir.; 5/22), the 9th Circuit upheld a prior district court ruling dismissing federal disclosure claims and state law derivative claims on the basis of an exclusive forum bylaw designating the Delaware Court of Chancery as the exclusive forum for derivative suits.  The Court reached that conclusion despite the fact that as a result of the application of the bylaw, the plaintiffs’ claims under Section 14(a) of the Exchange Act – which may only be asserted in federal court – would effectively be precluded.

This Troutman Pepper memo notes that the 9th Cir.’s decision creates a conflict with the 7th Cir., which recently held in Seafarers Pension Plan v. Bradway, (7th Cir.; 1/22), that the provisions of the DGCL authorizing exclusive forum bylaws did not permit Exchange Act claims to be brought in a Delaware court, since the Exchange Act gives federal courts exclusive jurisdiction over those claims.  This excerpt from the memo summarizes the implications of the circuit split:

The circuit split created by the Ninth Circuit’s and the Seventh Circuit’s divergent rulings has injected some uncertainty into a common practice among Delaware corporations in the context of derivative claims brought under the Exchange Act. The Seventh Circuit’s decision, which is friendly to derivative plaintiffs, partially upsets standard practice in corporate affairs — that is, deciding where derivative internal corporate disputes should be heard.

The Ninth Circuit’s decision, which is friendly to Delaware corporations, generates uncertainty by splitting with the Seventh Circuit. Naturally, would-be plaintiffs and defendants will likely forum shop to the extent possible and gravitate toward their respective safe harbors. This issue could become exacerbated to the extent other circuit courts contribute to the circuit split. In that event, the uncertainty would likely continue unless and until the Supreme Court has the opportunity to, and chooses to, resolve the burgeoning circuit split.

John Jenkins