In Lee v. Fisher, 34 F.4th 777 (9th Cir. 2022), the Ninth Circuit affirmed the dismissal of a shareholder derivative suit against The Gap Inc. (Gap), alleging violations of Section 14(a) of the Securities Exchange Act of 1934, based on a Gap bylaw requiring that any derivative action be brought in the Delaware Court of Chancery. Due to the Exchange Act’s exclusive federal jurisdiction provision, this decision would effectively allow corporations to close all courthouse doors to derivative actions alleging violations of Section 14(a). Earlier this year, however, the Seventh Circuit held in Seafarer’s Pension Plan ex rel. Boeing Co. v. Bradway that a similar Boeing bylaw was unenforceable because it would mean the plaintiff’s derivative Section 14(a) claim may not be heard in any forum.
The plaintiff filed a derivative action in the Northern District of California alleging that Gap and its directors failed to engender meaningful diversity in company leadership and made false and misleading statements in its proxy statements about the level of diversity it had achieved in violation of Section 14(a) and a variety of state laws. The defendants moved to dismiss based on the document of forum non conveniens based on Gap’s forum-selection bylaw, which directed that any derivative action be brought in the Delaware Court of Chancery. The district court found the bylaw to be enforceable and dismissed the case, prompting the plaintiff to appeal to the Ninth Circuit, arguing that the bylaw was unenforceable because it violates public policy by foreclosing her ability to bring a derivative Section 14(a) claim in any court.
The Ninth Circuit affirmed. The court began by noting Supreme Court precedent that creates a strong presumption in favor of enforcing forum selection clauses and places the burden on the plaintiff to establish “extraordinary circumstances” weighing against the application of the forum selection clause. It then looked to Ninth Circuit precedent to determine whether a strong federal public policy against the enforcement of this forum-selection clause was present.
The court held that the strong public policy in favor of enforcing forum-selection clauses supersedes both the Exchange Act’s anti-waiver provision and federal courts’ obligation to hear cases within their jurisdiction. It also rejected the plaintiff’s argument under the Exchange Act’s exclusive jurisdiction provision because it found that the bylaw did not contravene the exclusivity provision because the bylaw did not force the Delaware Court of Chancery to adjudicate Section 14(a) claims, it merely prevented federal courts from hearing Section 14(a) claims brought derivatively. The court also rejected the plaintiff’s arguments that Delaware law created a public policy that prevented enforcement of the forum-selection bylaw, noting that the plaintiff would still have some reasonable recourse in the Delaware Court of Chancery.
Significantly, the court further found that the plaintiff waived the argument that the bylaw was contrary to Delaware corporation law by failing to make it in the district court or in her opening brief. In so holding, the court side-stepped the argument that carried the day in the Seventh Circuit in Seafarers Pension Plan v. Bradway, 23 F.4th 714 (7th Cir. 2022). There, a divided panel of the Seventh Circuit held that a forum selection bylaw mandating that all derivative actions filed against the Boeing Company be brought in the Delaware Court of Chancery was unenforceable as applied to a derivative 14(a) claim, because Section 115 of the Delaware General Corporation Law does not empower corporations to use forum-selection bylaws to avoid claims subject to exclusive federal jurisdiction.
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