In the second dismissal motion ruling in one of the many board diversity lawsuits filed in recent months, a magistrate judge has granted the defendants’ dismissal motion in the suit against the board of clothing retailer The Gap. This latest ruling follows the dismissal motion grant last month in the similar lawsuit against Facebook’s board. As discussed below, the court’s dismissal of the case against The Gap’s board was based on the forum selection clause in the company’s bylaws. Northern District of California Magistrate Judge Sallie Kim’s April 27, 2021 ruling in the case can be found here.
As discussed here, The Gap is one of several companies whose boards were targeted last year in shareholder derivative lawsuits pertaining to the diversity of the companies’ boards of directors. The plaintiff claims that the company’s board of directors allegedly failed to create meaningful diversity on the board and within the company’s leadership. The plaintiff further claims that the company made false statements about its diversity efforts. The plaintiff brought derivative claims in an action filed in the United States District Court on behalf of the company for breach of fiduciary duty; aiding and abetting breach of fiduciary duty; abuse of control; unjust enrichment; and violation of Section 14(a) of the Securities Exchange Act of 1934.
The defendants moved to dismiss the plaintiff’s complaint on the grounds of forum non conveniens. The defendants argued that the forum selection clause in the Company’s Bylaws designates the Delaware Court of Chancery as the exclusive forum for the plaintiff’s claims.
The forum selection clause provides, in pertinent part, that: “Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation; (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by and director, officer, employee or agent of the Corporation to the Corporation or the Corporation’s stockholders.”
The April 27, 2021 Order
In her April 27, 2021 order, Magistrate Judge Sallie Kim granted the defendants’ motion, enforcing the forum selection clause.
In arguing against dismissal, the plaintiff had argued not that the lawsuit did not fall within the scope of the clause, nor that the clause was invalid. Rather, the plaintiff had contended that the clause should not be enforced against her claims because enforcing the clause would be contrary to public policy.
In making the public policy argument, the plaintiff had argued that the clause contravenes the “anti-waiver provision” of the ’34 Act; Section 29 (a) of the ’34 act voids “any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title.” The plaintiff argued that if the court enforced the forum selection clause, she would not be able to bring her Section 14(a) claim, since federal courts have exclusive jurisdiction for ’34 act claims.
Magistrate Judge Kim rejected this argument, holding that the Ninth Circuit “has made clear that existence of an anti-waiver clause in a statute that the plaintiff intends to prosecute is insufficient to demonstrate the required strong public policy for purposes of overcoming a forum selection clause.”
Magistrate Judge Kim also rejected the plaintiff’s argument that the Supremacy Clause in the U.S. Constitution required the enforcement of the anti-waiver provision and barred the enforcement of the forum selection provision, saying that there was no case law to support that position and further that the Supreme Court’s continued enforcement of forum selection clauses “does not support that reasoning.”
In addition, Magistrate Judge Kim rejected the plaintiff’s argument that her inability to assert her Section 14(a) claim in Delaware Chancery Court itself precluded enforcement of the forum selection clause. The Magistrate Judge said that being diverted to the Delaware Court did not leave the plaintiff without remedies whatsoever, as would be required in order for her to avoid the forum selection clause. Because the plaintiff could not show that she would have no remedy at all in Delaware, the plaintiff, Magistrate Judge Kim held, had failed to defeat the forum selection clause.
Because the plaintiff had failed “to demonstrate that enforcing the forum selection clause would contravene a strong public policy of this forum,” the court enforced the clause and granted the defendants’ motion.
Because Magistrate Judge Kim granted the motion based on the forum selection clause, she did not reach the defendants’ other arguments or rule on the merits. By contrast, in the dismissal motion ruling in the Facebook board diversity lawsuit to which I linked above, the court in that case not only granted the dismissal based on Facebook’s forum selection clause, but also granted the motion that the plaintiff had not plausibly pled “demand futility” and had not plausibly alleged a violation of Section 14(a).
Though Magistrate Judge Kim did not in ruling on the dismissal motion reach the merits, she did provide what is the second dismissal motion grant in a board diversity lawsuit. So far, the plaintiff’s attorney’s track record on dismissal motions is not great. To be sure, Magistrate Kim’s dismissal motion grant does leave the door open for the plaintiff to re-file her lawsuit in the Delaware Chancery Court (other than her Section 14(a) claims). It remains to be seen whether or not the plaintiff will try that. However, the fact that the California attorney filing these lawsuits focused on suing California companies in California federal courts does suggest that this lawsuit might not be re-filed in Delaware.
Although the thing about this decision that makes the ruling so noteworthy is the fact that the ruling was made in a board diversity lawsuit, the significance of the enforcement of the forum selection clause should not be overlooked. Readers will recall that the idea for companies to adopt forum selection clauses gained prominence several years ago when duplicative merger objection litigation was becoming such a problem. Many companies adopted these kinds of provisions in order to try to ensure that they would not have to fight a multi-front war in the event of an M&A transaction. The presence of these kinds of clauses clearly has proven to be useful in other ways as well, further reinforcing the value of these kinds of provisions for the companies that adopt them. It is an interesting example of the myriad ways that the law affects corporate behavior, and vice versa.