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(Article from Securities Law Alert, June 2022) 

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On May 13, 2022, the Ninth Circuit affirmed the dismissal of a shareholder derivative action, which plaintiff had filed in a California federal district court despite a forum-selection clause in the company’s bylaws designating the Delaware Court of Chancery as the exclusive forum for derivative claims. Lee v. Fisher, 34 F.4th 777 (9th Cir. 2022) (Smith, J.). The court held that plaintiff had not carried her “heavy burden” to show that the forum-selection clause was unenforceable, as enforcement of the clause would not contravene strong federal public policy, despite this meaning that plaintiff’s ability to bring a Section 14(a) claim would be foreclosed because federal courts have exclusive jurisdiction over these claims.

The Court Must Examine Whether the Clause’s Enforcement Would Contravene a Strong Public Policy of the Forum

Plaintiff brought claims alleging that the company and its directors had made false statements in its proxy statements in violation of Section 14(a) of the Exchange Act. Plaintiff argued that the company’s forum-selection clause violated public policy and was unenforceable because it designated a state court as the exclusive forum. Under Section 78aa of the Exchange Act, only federal district courts may adjudicate Section 14(a) claims.[1] Thus, the company’s forum-selection clause prevented plaintiff from bringing a derivative Section 14(a) claim in any court. On the issue of the clause’s enforcement, the court explained that in Atlantic Marine Construction v. U.S. District Court, 571 U.S. 49 (2013), the Supreme Court established the rule that “a district court should transfer the case [and thereby enforce the forum-selection clause] unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.” To define the phrase “extraordinary circumstances,” the Ninth Circuit looked to M/S Bremen v. Zapata Off-Shore, 407 U.S. 1 (1972)[2] and focused on its second factor: whether the clause’s enforcement would contravene strong public policy. To determine whether a forum-selection clause contravenes public policy, the Ninth Circuit first looks to “the forum in which suit is brought” and then “determine[s] whether the plaintiff has identified a statute or judicial decision in that forum that clearly states strong public policy rendering the clause unenforceable.”

The Federal Policy in Favor of Enforcing Forum-Selection Clauses Supersedes the Exchange Act’s Antiwaiver Provisions

Plaintiff argued that the Exchange Act’s antiwaiver provision in Section 78cc(a), was proof of strong public policy rendering the clause unenforceable. However, the court disagreed, stating that “the strong federal policy in favor of enforcing forum-selection clauses supersedes antiwaiver provisions in state statutes as well as federal statutes . . . .” Quoting Sun v. Advanced China Healthcare, 901 F.3d 1081 (9th Cir. 2018). The court further pointed out that the Exchange Act’s antiwaiver provision does not contain a clear declaration of federal policy because it does not explicitly state that any waiver is void as against public policy.

Plaintiff claimed the clause should be unenforceable based on Seafarers Pension Plan v. Bradway, 23 F.4th 714 (7th Cir. 2022), which held that Section 115 of the Delaware General Corporation Law prohibited an identical forum-selection clause from entirely foreclosing plaintiff’s derivative action under Section 14(a) and held that the bylaw violated the Exchange Act’s antiwaiver provision. However, the court stated that plaintiff had waived reliance on Section 115 and, citing Advanced China Healthcare, the court explained that “[m]oreover, for the reasons previously discussed, our binding precedent forecloses reliance on the Exchange Act’s antiwaiver provision.”

Enforcement Does Not Violate Any Express Statutory Policy of the Exchange Act’s Exclusive Federal Jurisdiction Provision

The court also found that the Exchange Act’s exclusive federal jurisdiction provision, 15 U.S.C. § 78aa, does not provide a clear statutory declaration and instead merely forbids non-federal courts from adjudicating Section 14(a) claims. The court pointed out that the company’s bylaws did not force the Delaware Court of Chancery to adjudicate the derivative claim and would only result in the claim being dismissed in federal court. Therefore, the court concluded, “enforcement of the forum-selection clause does not violate any express statutory policy of the Exchange Act’s exclusive federal jurisdiction provision.”

Federal Courts’ Obligation to Hear Cases Is Overcome by the Strong Presumption in Favor of Enforcing Forum-Selection Clauses

As to plaintiff’s argument that federal courts are obliged to hear cases within their exclusive jurisdiction, the court determined that “this obligation is overcome by the strong presumption in favor of enforcing forum-selection clauses ‘regardless [of] whether the clause points to a state court, a foreign court, or another federal court.’” Quoting Sun v. Advanced China Healthcare, 901 F.3d 1081 (9th Cir. 2018).