Saturday, April 4, 2015

How Would a Forum Selection Bylaw Play Out in This Scenario?

When forum selection bylaws first became a thing, the response from the plaintiffs’ bar was a bit muted.  This is because at least some plaintiffs’ firms viewed forum selection bylaws as beneficial, in that they had the potential to cut down on competition among plaintiffs’ firms for control over a given case.  No longer would a firm filing a case in Delaware have to fear that a competing firm, filing a case in another jurisdiction, would settle on sweetheart terms – or worse, end up getting dismissed, with collateral estoppel effects – before the Delaware firm had a chance litigate. 

 Which brings us to the Walmart litigation and a dispute between two plaintiffs’ firms.

 [More under the jump]

As Alison Frankel reports, after news reports broke that Walmart’s management had covered up bribes by its Mexican subsidiary, a derivative action was filed in Arkansas (Walmart’s principal place of business) by the law firm of Scott + Scott.  Meanwhile, another law firm, Grant & Eisenhofer, began preparing to file a lawsuit in Delaware, where Walmart is incorporated.  G&E spent literally years duking it out with Walmart over a books and records request in order to research the claims in accordance with Delaware standards, while Scott + Scott ploughed ahead in another jurisdiction.

The Arkansas case was just dismissed for failure to establish demand futility, raising the possibility that if G&E files a complaint now, the Delaware courts will hold that the matter is res judicata.

G&E now claims that Scott + Scott’s insistence on moving forward while the books and records request was pending amounted to malpractice.

(And at this point I just have to add a disclaimer:  I am not expressing any opinion on the merits of G&E’s allegations, or the propriety of either firm’s actions.)

But assuming that G&E is correct, the multiforum litigation benefitted Walmart’s management.  Management was able to delay (what G&E claims was) a stronger case in order to litigate a weaker one, and now can leverage its victory in the weaker case to defeat the stronger one.

What would have happened, then, if Walmart had adopted a forum selection clause, say, one modeled on the clauses at issue in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013)?

You might assume that a forum selection clause would have benefitted G&E, and hurt Walmart's management, by requiring litigation in Delaware and eliminating destructive competition between plaintiffs’ firms.

But that bylaw explicitly allowed management to decide whether to invoke the forum selection provision to dismiss a particular case.  Moreover, according to the Boilermakers decision upholding forum selection clauses, in general they must include a "fiduciary out" given management discretion whether to invoke them.

In other words, if a forum selection clause favoring Delaware had been in place, Walmart’s management would have had the option of allowing Scott + Scott to go forward (assuming, of course, that Scott + Scott was not dissuaded from filing in the first place).  And thus, Walmart would have been in a position to decide whether it preferred to enforce the clause and face G&E after a books and records request, or whether it preferred to waive the clause and let the plaintiffs’ firms compete.  It would even have been in a position to decide whether to settle on sweetheart terms with a competing firm that filed in another jurisdiction, if it was so inclined.

(In the actual case, Walmart did not choose to litigate in 2 jurisdictions - it actually tried to stay the Arkansas action in favor of Delaware.  I'm just thinking in terms of hypotheticals.)

If Walmart had had a forum selection bylaw in place but had not chosen to invoke it, would G&E’s client, as a shareholder of Walmart, have been able to invoke the forum selection clause to force the dismissal of Scott + Scott’s suit?  Almost certainly not; at best, it could claim that Walmart’s management breached its duties by not invoking the clause.

So it seems to me, one of the troubling things about forum selection clauses is that they may operate as one-way ratchets, where management can choose to let plaintiffs engage in destructive competition, or not, as it decides will redound to its benefit.  And that doesn’t even get into the mischief that might result if companies encourage limited destructive competition by designating Delaware and maybe one other jurisdiction as potential fora (as Delaware’s proposed amendments to its Corporation Law would permit).

Ann Lipton | Permalink


Very nice points, Ann. I think you're right, if i understand the facts as you state them here. Great practice tip . . . ? Executed this way by design . . . ?

Posted by: joanheminway | Apr 15, 2015 8:00:40 PM

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