Thursday, November 17, 2022

Better Markets amicus brief urges en banc appeals court to allow California federal court to hear proxy case despite forum selection clause

By Mark S. Nelson, J.D.

The full Ninth Circuit will rehear arguments in a case brought by shareholders of The Gap, Inc. alleging that the company misled investors about the company’s diversity efforts. The district court had dismissed the case on forum nonconveniens grounds based on Gap’s forum selection clause. A Ninth Circuit panel affirmed, but the full court later agreed to rehear the case and the panel opinion was vacated. Oral argument upon rehearing is expected to occur in mid-December 2022 and supplemental briefing by the parties is due November 28, 2022, with emphasis on two issues: (1) the legal impact of the fact that Gap’s forum-selection clause applies only to derivative claims, not direct claims, under the Exchange Act; and (2) the application of 8 Del. Code §115. An amicus brief submitted by Better Markets also attempts to detail a number of arguments other than 8 Del. Code §115 (Lee v. Fisher (Better Markets amicus brief), November 14, 2022).

8 Del. Code §115 not addressed. As previously reported, the Ninth Circuit panel’s May 2022 opinion affirmed the district court’s dismissal of the plaintiff’s Exchange Act Section 14(a) derivative suit because of Gap’s forum selection clause requiring the suit to be brought in Delaware state court. The panel noted that the plaintiff had conceded that the forum selection clause was valid and, thus, the only issue before the panel was the enforceability of the forum selection clause.

U.S. Supreme Court precedent, said the panel, required transfer of the case absent extraordinary circumstances, which the justices left undefined, but which the Ninth Circuit has understood to mean: (1) the forum selection clause was obtained by fraud or overreaching; (2) enforcement is against strong policy of the forum in which the suit was filed; or (3) the plaintiff would be deprived of a day in court.

The policy prong of the Ninth Circuit’s formulation was the only enforceability issue addressed in the May 2022 panel opinion. The plaintiff had argued that a strong policy against the forum selection clause in the forum, a federal district court in California, was implied by the Exchange Act’s anti-waiver provision, the Exchange Act’s provision making federal courts the exclusive forum for Exchange Act claims, Delaware state caselaw, and federal courts’ general obligation to hear cases over which they have jurisdiction.

The panel rejected all of the plaintiff’s arguments but noted with respect to federal courts’ more generalized obligations to hear cases over which they have jurisdiction that the plaintiff had not identified 8 Del. Code §115 and, thus, waived any argument based on that provision of Delaware law. Upon rehearing en banc, the plaintiff and Gap must explicitly address the application of 8 Del. Code §115 in their supplemental briefing.

The Seventh Circuit, in Seafarers Pension Plan v. Bradway, held that a forum selection clause identical to Gap’s was invalid under 8 Del. Code §115. The Seventh Circuit majority concluded that Delaware law resolved the case in favor of the plaintiff.

The complaint in Seafarers focused on the reelection of directors who had allegedly tolerated poor oversight of the design and construction of 737 Max airliners. The court recited that 8 Del. Code §115 allows forum selection clauses to limit claims about internal corporate affairs (such as derivative claims) to be brought exclusively “in any or all of the courts in this State.” But the majority noted that Boeing’s forum selection clause was contrary to the Exchange Act’s jurisdiction provision and federal courts in Delaware are courts “in” Delaware.

The Seventh Circuit then, among other things, looked at the legislative history of 8 Del. Code §115 and reasoned thus: “By eliminating federal jurisdiction over the Seafarers Plan’s exclusively federal derivative claims, Boeing’s forum bylaw forecloses suit in a federal court based on federal jurisdiction. That’s exactly what Section 115 was ‘not intended to authorize’” (footnote omitted).

The opening briefs (plaintiff Lee; Gap) submitted by the parties in the Ninth Circuit panel proceeding did not mention Seafarers, but the plaintiff’s reply brief did finally make the argument that Seafarers should apply to invalidate Gap’s forum selection clause, a theory the panel said was waived. The full Ninth Circuit has asked the parties to supplementally brief this issue. Lastly, although Better Markets’ amicus brief in the en banc proceeding mentioned Seafarers, it did so without also addressing 8 Del. Code §115, but it did address many of the other arguments made by the plaintiff and Gap, albeit while arguing in support of the plaintiff.

Exclusivity not waivable. A key point made by Better Market’s amicus brief is that the Exchange Act’s exclusivity provision is not waivable. According to Better Markets, the Ninth Circuit’s now vacated opinion would shunt an exclusively federal claim to a state court where it must be dismissed for lack of jurisdiction. Here, Better Markets disputed Gap’s assertion that the forum selection clause remains valid because the state court is not being asked to adjudicate the federal claim, just to dismiss it. Rather, Better Markets said the forum selection clause is invalid because the only forum the clause allows (Delaware state court) cannot adjudicate the claim.

Better Markets also questioned the Ninth Circuit panel’s use of the Supreme Court’s opinion in McMahon, which examined the Federal Arbitration Act and the Exchange Act and concluded that an agreement to arbitrate could supplant the Exchange Act’s exclusivity provision. Better Markets argued that the Ninth Circuit panel misunderstood McMahon to mean that the Exchange Act’s exclusivity provision is more generally waivable.

Better Markets also sought to note flaws in other arguments made by Gap. For one, Gap had argued that it was still subject to the substantive requirements of Exchange Act Section 14(a); Better Markets said the argument missed the point that a waiver violation can occur if a plaintiff is barred from enforcing those substantive requirements. With respect to Gap’s assertion that the plaintiff could still bring a direct claim, Better Markets observed that direct and derivative claims seek to address different harms and seek to obtain different remedies. In the instant case, the plaintiff alleged that Gap was harmed by its own discriminatory practices and would likely incur remediation costs.

Better Markets also noted the rising trend of companies amending their certificates of incorporation or bylaws to adopt forum selection clauses. According to Better Markets, which searched the SEC’s EDGAR database for specific forum selection clause language, within the last 10 years 167 companies have adopted a forum selection clause addressing derivative claims, including derivative claims brought under Exchange Act Section 14(a).

The case is No. 21-15923.