Seventh Circuit reverses dismissal of derivative action based on forum clause as applied to federal claim

A recent decision of the Seventh Circuit in Seamen’s Pension Scheme c. Bradway may complicate defendants’ ability to use choice of court rules as a basis for the dismissal of derivative suits arguing claims under the Securities Exchange Act of 1934.

In a split decision, the court ruled that, as a matter of Delaware state law – a choice of court clause adopted by the Boeing Corporation was unenforceable because Section 115 of the Delaware General Corporations Act prohibits any settlement that is inconsistent with “applicable jurisdictional requirements.” Although the federal Exchange Act only authorizes federal courts to exercise jurisdiction over claims under the Exchange Act and contains a non-waiver provision, the Boeing regulation in question stipulated that “the Delaware State Court of Chancery shall be the sole and exclusive forum for any derivative action or proceeding brought on behalf of the Company.” An Illinois district court held that this provision was binding and warranted a forum not conveniens dismissal of a derivative lawsuit based in part on alleged violations of the Exchange Act. But the Seventh Circuit overruled, finding that the settlement would entirely exclude plaintiff’s derivative federal lawsuit, “unlike Delaware corporate law, which complies with the non-waiver provision of Section 29(a) of the Federal Foreign Exchange Act. »

Notably, the court did not specifically rule that the settlement was unenforceable from the perspective federal law. Instead, he ruled that Delaware complied with the federal non-waiver provision and that from Boeing the rules of the forum therefore went against Delaware law. The court therefore had no reason to consider a situation in which state law would permit a waiver of rights that might seem impossible to waive under federal law.

The court began its analysis with Section 115 of the Delaware General Corporations Act, which permits forum clauses that “conform to applicable jurisdictional requirements” and require that internal corporate claims be brought before “the courts of this State”. The court interpreted the phrase “applicable jurisdictional requirements” to include those of federal law – and therefore not to allow a forum clause that would preclude a suit in federal court on the basis of exclusive federal jurisdiction. “By eliminating federal jurisdiction over [plaintiff’s] exclusively federal derivative claims, from Boeing the rules of the forum prohibit any action in federal court based on federal jurisdiction. This is exactly what Section 115 was “not intended to authorize”. »

As to the wording of Section 115 on “the courts of this State”, the Seventh Circuit “hesitates[d] give decisive weight only to a choice of preposition in the law”, but noted that the federal courts of Delaware are courts “of that State” even if they are not courts “of that State”. “If the law had said ‘the courts of this state,” the wording of the law might have given the defendants a better grip. »

The Seventh Circuit went on to distinguish three circumstances in which a regulation limiting the forum might still be enforceable:

A notable feature of the decision is the court’s choice not to rule on questions of federal law, even though the Exchange Act’s exclusive jurisdiction and non-waiver provisions underlie the court’s analysis. Instead, the court based its decision on state law grounds and only used federal law issues to determine how Delaware the law must be interpreted. This approach avoided the possibility of any tension between the federal government and Delaware law. But the approach leaves open the possibility that the Delaware state courts may ultimately disagree with the Seventh Circuit’s reading of Delaware law. At this point, federal courts would have to grapple with the federal question that the Seventh Circuit bypassed: whether state law can authorize an exclusive forum provision that precludes the assertion of a federal claim subject to exclusive federal jurisdiction and a federal anti-waiver provision.

Plaintiffs across the country will likely take notice of this ruling and attempt to append Exchange Act claims to derivative lawsuits filed in Federal Court. Courts in other circuits, however, have held that attempts to argue around a forum provision should be subject to scrutiny and have sometimes severed state law claims subject to forum provisions. , then dismissed the federal claims on the merits. In all cases, defendants should be prepared to argue the merits of any federal claim included in a derivative lawsuit, as an exclusive forum clause may not be sufficient aftersailors.

Seventh Circuit reverses dismissal of derivative action based on forum clause as applied to federal claim

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