One of the more vexing litigation problems to emerge
recently has been the proliferation of multi-jurisdiction litigation, where
corporate defendants are forced to litigate essentially the same claim in
multiple courts at the same time. This problem is a particular issue in the
context of M&A litigation, although not contained to those kinds of lawsuits.
In the midst of what has become essentially a jurisdictional competition,
Delaware's courts have tried to establish themselves as the preferred and
presumptive court for corporate litigation.
As discussed here,
in June 2012, in a high-profile and controversial example of the efforts of
Delaware courts to control litigation involving Delaware corporations, Vice
Chancellor Travis Laster refused to give effect to the judgment of a California
federal court dismissing a derivative suit parallel to the case pending in
However, in a harsh rebuke to Laster, on April 4, 2013,
the Delaware Supreme Court entered an opinion reversing the Chancery Court
ruling and recognizing the California federal court's prior dismissal. The
Supreme Court's opinion represents a recognition that principles of federalism
and comity require Delaware's courts to respect the preclusive effects of the
California court's judgment.
In September 2010, Allergan pled guilty to a criminal
misdemeanor for misbranding its Botox product and paid a total of $600 million
in civil and criminal fines. Various plaintiffs' firms filed multiple
derivative suits both in federal court in California and in Delaware Chancery
Court. The California cases went forward more quickly, while in Delaware, at
least one of the plaintiffs sought to pursue a books and records action against
the company, in order to obtain further information pertinent to the company's
board's actions. The Delaware plaintiff used the information and documentation
to amend its complaint. The California plaintiffs ultimately also obtained the
same information and documentation and supplemented their complaint as well.
The defendants moved to dismiss the California action on
the ground that the plaintiffs had not made a demand on the Allergan board to
pursue the claims, nor had they established demand futility. The California
court granted the defendants' motion to dismiss. The defendants then sought to
have the Delaware action dismissed, arguing that the collateral estoppel effect
of the California dismissal was preclusive of the demand futility issue.
In an extensive June 11, 2012 opinion (here),
Vice Chancellor Laster firmly rejected the suggestion that the California
court's prior ruling compelled him to dismiss the Delaware action. He relied on
two grounds in rejecting the argument that the California judgment is
preclusive; first, he found that the California judgment was preclusive only as
to the individual California shareholder plaintiffs, and second, he found that
the California plaintiff did not adequately represent Allergan. The defendants
pursued an interlocutory appeal to the Delaware Supreme Court.
The April 3, 2013 Opinion
In an April 4, 2013 opinion written by Justice Carolyn
Berger for the full Court, the Delaware Supreme Court reversed the Chancery
Court's ruling, holding that the Vice Chancellor had erred with respect to both
aspects of his ruling. The Supreme Court concluded that the California judgment
was preclusive of the Delaware case and also rejected Vice Chancellor Laster's
conclusion that the California plaintiffs were inadequate representatives.
In rejecting the Chancery Court's conclusion that the
California judgment was not preclusive, the Supreme Court noted that the U.S.
Constitution's full faith and credit clause requires courts to give full force
and effect to the judgments of other jurisdiction's courts, including the
judgments of federal courts. Vice Chancellor Laster's refusal to give effect to
the California judgment was based on a "mistaken premise" that the question of
the effect of the California judgment was controlled by "demand futility" law
controlled by Delaware legal principles.
The Supreme Court stated that "once a court of competent
jurisdiction has issued a final judgment ... a successive case is governed by
principles of collateral estoppel, under the full faith and credit doctrine,
and not by demand futility law," adding that "in the Court of Chancery, the
motion to dismiss based on collateral estoppel was about federalism, comity, and
finality. It should have been addressed exclusively on that basis.'
Delaware's "undisputed interest" in governing the internal affairs of its
corporations "must yield to the stronger national interests that all state and
federal courts have in respecting each other's judgments."
The Supreme Court also rejected the Chancery Court's
conclusion that the California plaintiffs were inadequate plaintiffs. The
Supreme Court noted that Vice Chancellor Laster had "sua sponte
announced and applied an irrebutable presumption that derivative plaintiffs who
file their complaints without seeking books and records very shortly after the
announcement of a 'corporate trauma' are inadequate representatives." The
Supreme Court said that "we reject the 'fast filer' irrebutable presumption of
inadequacy." The Court noted that "undoubtedly there will be cases where a fast
filing stockholder also is an inadequate representative" but that "there is no
record support for the trial court's premise that stockholders who filed quickly,
without bringing a Section 220 books and records action, are a priori
acting on behalf of their law firms instead of the corporation." The Court
added that although it "understands the trial court's concerns about fast
filers," the remedies "for the problems they create should be directed at the
lawyers, not the stockholder plaintiffs or their complaints."
As I discussed
at the time, Vice Chancellor Laster's opinion in this case was a broadside
against certain segments of the plaintiffs' bar, who, in his view, rush to file
actions in other jurisdictions' courts, to the detriment of litigants that
proceeded more deliberately by first pursuing a books and records action in
Delaware court and then in due course filing an action in Delaware based on the
results of the books and records search.
While Laster's effort to create a Delaware-centric
solution to the chaos of multi-jurisdiction litigation is understandable, it
put the defendants in the unacceptable position not only have having to face a
multi-front war, but also having to fight the war in piecemeal fashion,
rather than trying to move toward a single, comprehensive solution.
The Supreme Court's opinion does not directly take on the
problems arising from multi-jurisdiction litigation, but merely recognizes that
basic principles of "federalism, comity and finality" required that the
judgment of California court be given full force and effect. However, the
Supreme Court did reject the Chancery Court's suggestion that the plaintiffs in
the California case were inadequate representatives simply because they failed
to first pursue a books and records action before launching their suit. As
Alison Frankel noted in an April 5, 2013 post on her On the Case blog (here),
the Supreme Court Opinion "puts an end to Chancery's recent insistence that
shareholder lawyers seek corporate books and records before filing derivative
In effect, Laster's Chancery Court opinion seemingly
embodied a belief that both that Delaware's courts should be in charge, and
that if the Delaware courts were in charge, an orderly process would replace
the unseemly spectacle of multi-jurisdiction litigation. There is no doubt that
the curse of multi-jurisdiction litigation imposes enormous, duplicative costs
on the litigation targets. But Vice Chancellor's Delaware-centric manifesto
threatened to exacerbate the problem rather than solve it, presenting as it did
the prospect for multiple conflicting rulings in different jurisdictions on
identical issues. The Supreme Court's opinion suggests a recognition that
the curse of multiple-jurisdiction litigation won't be resolved by Delaware's
courts grabbing authority or disdaining other courts.
In its April 4, 2013 client alert (here),
the Wachtell Lipton law firm noted that the Delaware Supreme Court's ruling
"makes clear that Delaware is sensitive to the unfairness that multiple
parallel lawsuits can work on corporations and their directors and is prepared
to enforce scrupulously rules of interstate comity that limit this mischief."
The Delaware Supreme Court's decision is a welcome
outcome for corporate litigants. As the Wilson Sonsini law firm noted in its
April 2013 client
alert about the decision, the ruling "may calm the concerns of those
facing multi-forum shareholder litigation that a resolution on the merits in
one forum will be given preclusive effect in Delaware (and presumably other
Just the same, though defendants undoubtedly will welcome
the Delaware Supreme Court's ruling, it will not eliminate the problem of
multiple-jurisdiction litigation. The unseemly scramble of competing claimants
to pursue claims against companies experiencing adverse developments or
involved in corporate transactions will continue. The solution to the problem
of multi-jurisdiction litigation has been and remains particularly elusive.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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