Ninth Circuit Enforces Forum Selection Rules Against Federal Securities Claims

May 20, 2022

Click for PDF

Last year, we reported on a federal district court decision dismissing a federal securities lawsuit filed derivatively on behalf of The Gap, Inc. pursuant to a forum selection rule. designating the Court of Chancery of Delaware as the exclusive forum for derivative suits (the “Forum Rules”). To see Lee vs. Fisher, Case No. 20-cv-06163-SK, ECF No. 59 (ND Cal. April 27, 2021). Plaintiff appealed this decision to the Ninth Circuit Court of Appeals and, on May 13, 2022, the Ninth Circuit upheld. See Lee v. Fisher, case no. 21-15923. This decision is significant because it effectively bars plaintiffs from asserting claims under federal securities law when a company has designated a state court as the exclusive forum for derivative actions.

The applicant in Sinner filed derivative claims allegedly on behalf of Gap against certain directors and officers for their alleged failure to promote diversity at Gap and for allegedly making misleading statements about Gap’s commitment to diversity. The plaintiff claimed that the officers and directors violated both state law by allegedly violating their fiduciary duties and federal securities law by violating the proxy rules under section 14(a) of the Securities Exchange Act. In the district court, the defendants requested the dismissal forum not conveniens in accordance with the rules of the Forum. Plaintiff argued that the court could not apply the forum rules with respect to the federal claim under section 14(a) because (1) that claim was subject to exclusive federal jurisdiction and could not not be asserted in the Court of Chancery of Delaware, and (2) enforcement of the Forum Rules would violate the provision of the Exchange Act that prohibits waiver of compliance with the Exchange Act (the “anti-waiver” provision ). The district court disagreed and dismissed the lawsuit.

The Ninth Circuit upheld the district court’s decision in its entirety. The Court noted that under Supreme Court precedent, forum selection clauses should be applied in the absence of “extraordinary circumstances”. The Ninth Circuit had previously articulated three such circumstances, one of which, according to the plaintiff, was involved in this case: the application of the rules of the Forum “would violate a strong public policy of the forum in which the lawsuit is brought” . As before the district court, plaintiff pointed to the Exchange Act’s anti-waiver provision and exclusive federal jurisdiction over Exchange Act claims as evidence that enforcement of the Forum Rules would violate public policy. The Court rejected these arguments because none of these legislative provisions expressly state that failure to give effect to these provisions would violate public order. Further, the Court noted that it was relevant to its analysis that the plaintiff did not “identify[y] Delaware law clearly stating that she could not obtain any relief in the Court of Chancery of Delaware. The Ninth Circuit therefore upheld because the plaintiff failed to carry its “heavy burden” to overcome the forum provision.

Holding this everything derivative claims must be brought in the Court of Chancery of Delaware, this decision fulfills the purpose of the exclusive forum provisions: to avoid duplicate litigation in multiple forums and thereby increase efficiency and reduce costs for businesses . However, it is important to note that not all courts agree and this decision creates a potential split in the circuit. Earlier this year, the Seventh Circuit declined to enforce a substantially similar forum provision against a claim derived from Section 14(a). To see Seamen’s Pension Plan on behalf of Boeing Co. c. Bradway, 23 F.4e 714 (7th Cir. 2022). We will continue to monitor developments in this space.

Gibson Dunn attorneys are available to answer any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the Securities Litigation or Securities Regulation and Corporate Governance practice groups, or the following authors:

Brian M. Lutz – San Francisco/New York (+1 415-393-8379/+1 212-351-3881, [email protected])
Jason J. Mendro – Washington, DC (+1 202-887-3726, [email protected])
Ronald O. Mueller – Washington, DC (+1 202-955-8671, [email protected])
Michael J. Kahn – San Francisco (+1 415-393-8316, [email protected])

Also, please feel free to contact any of the following practice leaders and members:

Securities Litigation Group:
Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, [email protected])
Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, [email protected])
Craig Varnen – Co-Chair, Los Angeles (+1 213-229-7922, [email protected])
Shireen A. Barday – New York (+1 212-351-2621, [email protected])
Christopher D. Belelieu – New York (+1 212-351-3801, [email protected])
Jefferson Bell – New York (+1 212-351-2395, [email protected])
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Celio – Palo Alto (+1 650-849-5326, [email protected])
Paul J. Collins – Palo Alto (+1 650-849-5309, [email protected])
Jennifer L. Conn – New York (+1 212-351-4086, [email protected])
Thad A. Davis – San Francisco (+1 415-393-8251, [email protected])
Ethan Dettmer – San Francisco (+1 415-393-8292, [email protected])
Mark A. Kirsch – New York (+1 212-351-2662, [email protected])
Jason J. Mendro – Washington, DC (+1 202-887-3726, [email protected])
Alex Mircheff – Los Angeles (+1 213-229-7307, [email protected])
Robert F. Serio – New York (+1 212-351-3917, [email protected])
Jessica Valenzuela – Palo Alto (+1 650-849-5282, [email protected])
Robert C. Walters – Dallas (+1 214-698-3114, [email protected])
Avi Weitzman – New York (+1 212-351-2465, [email protected])

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Co-Chair, Washington, DC (+1 202-955-8287, [email protected])
James J. Moloney – Co-Chair, Orange County, CA (+949-451-4343, [email protected])
Lori Zyskowski – Co-Chair, New York (+1 212-351-2309, [email protected])
Brian J. Lane – Washington, DC (+1 202-887-3646, [email protected])
Ronald O. Mueller – Washington, DC (+1 202-955-8671, [email protected])
Thomas J. Kim – Washington, DC (+1 202-887-3550, [email protected])
Michael A. Titera – Orange County, CA (+1 949-451-4365, [email protected])

© 2022 Gibson, Dunn & Crutcher LLP

Publicity for Lawyers: The attached materials have been prepared for general information purposes only and are not intended to provide legal advice.

Comments are closed.