Diamond Foods, Inc. Derivative Litigation, C.A. No. 7657-CS
(Del. Ch. Feb. 28, 2013) [an enhanced version of this opinion is available to lexis.com subscribers].
Issue Addressed: Whether
a derivative suit filed in Delaware should be dismissed in favor of a similar
first-filed action in California. Short Answer: Yes.
Short Overview of Case
The factual background involves alleged manipulation of
the financial statements of the company by the former CEO and former CFO, which
led to the first group of derivative suits being filed rapidly in California
state court, and a second set of lawsuits brought in federal court in
California by the same plaintiffs who brought the instant suit in the Delaware
Court of Chancery. This opinion refers to these plaintiffs as the "Dual
Forum Plaintiffs." The federal claims in that federal suit were
dismissed, and the federal court found itself without jurisdiction over the
state law claims and did not address them. While that decision was being
appealed, the Dual Forum Plaintiffs filed what this court described as a
"near-identical complaint" in the Delaware Court of Chancery. The court
observed that the same claims filed in the Court of Chancery were the subject
of an appeal pending in federal court in California which the Dual Forum
Plaintiffs were asking that court to address as well.
The defendants filed a motion to dismiss under the
familiar McWane doctrine, sometimes known as the first-filed rule, and
based on "basic principles of equity" to prevent the plaintiffs from subjecting
Diamond to the excess cost of litigating with "the same plaintiff over the same
claims in two forums at once." See footnote 16 and accompanying
The court in this very brief (for a Chancery decision)
11-page decision made quick work of its criticisms of the procedural strategy
of the Dual Forum Plaintiffs. For example, the court reasoned that all
the legal principles that were applicable to the claims in the case were
well-settled in Delaware and that there were no novel questions to be
litigated. The court also underscored what it referred to as the "obvious
reality" that the Dual Forum Plaintiffs filed the same claims in the federal
court that they are simultaneously trying to litigate in Delaware.
The court described the "vinegar-laced arguments" as the
same ones they are making before the federal court on appeal, and that:
"The astringency of these arguments is more evident than their plausibility or
merit . . .."
The court concluded by saying that the Dual Forum
Plaintiffs: "May not burden Diamond and its stockholders with litigation
in a coastal state bordering the Atlantic, when they themselves chose to sue in
the federal courts of a state bordering the Pacific."
New York decision highlighted in the New York Law Journal available here,
in which a New York judge declined to apply the first-filed rule and thus,
refused to defer to a first-filed case in Delaware. Instead the court
determined that New York was the best forum to decide a case involving a merger
contest for the iconic New York Stock Exchange. Importantly for readers of this
blog, the New York judge cited both court decisions and a law review article by
Chancellor Strine in which she described the Chancellor's writings as rejecting
the first-filed rule, and instead focusing on other factors in determining how
to decide which case to give deference to, when similar cases are pending in
more than one jurisdiction.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Eckert Seamans.
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