March 10, 2022

Seventh Circuit Strikes Down Delaware Forum Selection Clause and Clears Path to Federal Court for Securities Exchange Act Claims

Paul J. Walsen, Molly K. McGinley, Lisa R. Stark, Jonathan R. Vaitl

The Seventh Circuit issued a resounding message: Delaware forum selection clauses in corporate bylaws cannot lawfully prevent a plaintiff from bringing claims under the Securities Exchange Act of 1934 (the Exchange Act or the Act) in federal court. The Court, in its decision in Seafarers Pension Plan v. Bradway, chose not to follow other federal courts that have enforced Delaware forum selection clauses in corporate bylaws to effectively bar shareholders from bringing Exchange Act claims.

Although Section 115 of the General Corporation Law of the State of Delaware (Section 115) authorizes the adoption of forum selection bylaw (and charter) provisions that “require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all courts in this State,” the Seventh Circuit’s decision is not inconsistent with the statute. Notably, while the Court did not look to the legislative history of Section 115, the synopsis for Senate Bill No. 75, the legislation that enacted the 2015 amendments to the General Corporation Law of the State of Delaware (the DGCL), including Section 115, states in pertinent part: “Section 115 also is not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction.”

Overview of the Decision

The Seafarers dispute arose from the temporary grounding of all 737 MAX airliners following two airplane crashes in 2018 and 2019 that killed 346 people. Seafarers Pension Plan brought a derivative action in the Northern District of Illinois on behalf of Boeing under Section 14(a) of the Exchange Act of 1934, alleging that officers and directors of Boeing made materially false and misleading public statements in proxy materials related to the development and operation of the 737 MAX airliner. The defendants moved to dismiss the action based on a forum selection clause in the Boeing bylaws, which provided that “the Court of Chancery of the State of Delaware shall be the sole and exclusive forum . . . for any derivative action . . . .” The district court agreed with the defendants and dismissed the case.

The Seventh Circuit reversed the district court in a 2–1 decision. The Court began by recognizing that the Exchange Act gives federal courts exclusive jurisdiction over claims brought under the Exchange Act. Furthermore, the Exchange Act contains an anti-waiver provision that prohibits contractual waivers of compliance with the requirements of the Act. Against this backdrop, the Court considered whether Boeing’s forum selection clause, as applied to the plaintiff’s §14(a) claim, complied with Delaware statutory law and concluded that it did not.

The Court first turned to Section 115, which provides that a corporation’s bylaws, “consistent with applicable jurisdictional requirements,” may require that internal corporate claims be brought “in any or all of the courts in this State.” The Court focused on two aspects of Section 115: the requirement that a forum selection clause be “consistent with applicable jurisdictional requirements” and the reference to “the courts in this State” (emphasis supplied). The Court determined that Boeing’s forum selection clause was inconsistent with exclusive federal jurisdiction for claims brought under the Exchange Act. As the Court explained, by requiring that such actions must be brought in the Court of Chancery of the State of Delaware, the Boeing forum selection clause effectively barred plaintiffs from bringing a derivative claim under Section 14(a). Additionally, the Court emphasized that Section 115 refers to “the courts in this State,” rather than “the courts of this State,” which indicates that Section 115 contemplates forum selection clauses encompassing both federal and state courts located in Delaware.

While the Court did not look to the legislative history of Section 115, the synopsis for Senate Bill No. 75, the legislation which enacted the 2015 amendments to the DGCL, including Section 115, states in pertinent part: “Section 115 also is not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction.”

In a dissenting opinion, Judge Easterbrook questioned whether a federal right to pursue a derivative claim under §14(a) exists, noting that the U.S. Supreme Court “has never held or even intimated” that there is such a right. Judge Easterbrook also questioned the notion of exclusive federal jurisdiction in the context of a derivative action, since state law defines how and when such actions can be brought.

Impact of Decision

Given the Court’s reliance on Delaware law to provide a rationale for its holding, the most obvious question arising from this decision is whether Delaware courts will agree with the Seventh Circuit’s interpretation of Section 115. Considering the legislative history of Section 115, which neither the majority—nor Judge Easterbrook’s dissent—mentioned, it is likely that the Delaware courts will conclude that Section 115 cannot be used to deprive shareholders of the ability to bring claims arising under federal law in Delaware federal courts. The Delaware Chancery Court will have an opportunity to address this very question in a class action brought by Seafarers in Delaware under the same facts. In the Chancery Court action, stayed pending the outcome of the Seventh Circuit appeal, Seafarers challenges the legality of the forum-selection clause under Sections 115 and 109(b) of the Delaware General Corporation Law.

The Ninth Circuit also will have a chance to weigh in on this issue, where a decision of the district court for the Northern District of California in Lee v. Fisher is currently under appeal. The forum-selection clause in Fisher is identical to the one at issue in Seafarers: it requires that actions be brought in the Delaware Chancery Court. Similar to the district court in Seafarers, the Fisher Court enforced the forum-selection clause and dismissed the action. Notably, the Fisher Court explained that, under Ninth Circuit precedent, strong federal policy favors enforcing forum-selection clauses over anti-waiver provisions in state or federal statutes. If the Ninth Circuit agrees, a Circuit split would exist, ripe for resolution by the U.S. Supreme Court.

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    Paul J. Walsen

    K&L Gates LLP

    Paul J. Walsen focuses his practice on a range of complex and multi-district litigation, including securities and shareholder derivative litigation, contract litigation, business torts and product-related consumer class action defense. Paul also has conducted internal investigations on behalf of boards of directors and special board committees. He has advised clients in a broad variety of industries, including investment management, finance, real estate investment and development, manufacturing, construction, insurance, technology and professional services. He has extensive trial experience, and has obtained and defended against emergency temporary, preliminary and permanent injunctive relief in cases involving corporate acquisitions, real estate transactions, intellectual property and other types of claims.

    Before attending law school, Paul was a senior consultant within the consulting arm of what was then known as a “Big Eight” accounting firm, where he worked on a variety of mission-critical matters for clients in the automotive, financial and retail industries.

    Molly K. McGinley

    K&L Gates LLP

    Molly K. McGinley concentrates her practice at K&L Gates in commercial litigation with a focus on complex litigation, including investment company litigation, securities litigation and consumer class action defense. Molly is a member of the firm’s securities and transactional litigation practice and class action litigation defense groups. Molly has litigated in numerous state and federal jurisdictions, representing a broad range of clients, including small companies, Fortune 500 Companies and investment advisers. She has handled various commercial disputes, including contract and business tort litigation and internal investigations. Molly represents clients in numerous industries including energy, healthcare, digital health, technology, and financial services.

    Investment Company and Securities Litigation

    Molly’s investment company litigation experience includes representing investment advisers and independent trustees in class actions, derivative lawsuits, and actions brought pursuant to Section 36(b) of the Investment Company Act of 1940. She also has represented publicly held corporations and corporate officers and directors in securities derivative and class action lawsuits.

    Consumer Class Action Defense

    Molly’s consumer class action defense experience includes litigating numerous Telephone Consumer Protection Act (TCPA) claims in various jurisdictions and advising clients with respect to ongoing TCPA compliance. She also is a leader of the firm’s biometric data compliance and defense affinity group and has advised clients with respect to putative class action litigation under the Illinois Biometric Information Privacy Act (BIPA) and compliance with BIPA. Molly also has defended products manufacturers in consumer fraud lawsuits, involving claims under various state consumer fraud statutes, breach of implied and express warranty claims and unjust enrichment claims.

    Professional Background

    Prior to joining the firm, Molly was a law clerk for the Honorable Mary Anne Mason in the Chancery Division of the Circuit Court of Cook County, Illinois

    Lisa R. Stark

    K&L Gates LLP

    Lisa Stark is a partner in the firm’s Wilmington office and Editor-in-Chief of Business Law Today. Lisa has over 15 years of corporate experience in such areas as mergers and acquisitions, strategic investments, initial public offerings, proxy contests, and hostile takeovers. She also has experience advising private and public companies and their boards of directors on corporate governance matters. Lisa also advises private equity and venture capital funds in connection with their investments in Delaware corporations.

    Lisa began her career as a corporate litigator and worked on some of the most prominent deal-related cases of the past two decades including:

    • In re Siliconix Inc. Shareholders Litigation, No. Civ. A. 18700, (Del. Ch. June 19, 2001)
    • Loventhal v. Hilton Hotels Corp., C.A. No. 17803 (Sept. 27, 2000)
    • Harrah’s Entm’t, Inc. v. JCC Holding Co., 802 A.2d 294 (Del. Ch. 2002)
    • Benchmark Capital Partners IV L.P. v. Vague, C. A. No. 1979 (Del. Ch. July 15, 2002)
    • Goldman v. Isaacs, No. C.A. No. 18732 (Del. Ch. Dec. 17, 2001)
    • Hollinger Int’l, Inc. v. Black, 844 A.2d 1022 (Del. Ch.), judgment entered, (Del. Ch. 2004), aff’d, 872 A.2d 559 (Del. 2005).

    She continues to provide advice and litigate in connection with deal-related litigation.

    Lisa is very active in the Business Law Section of the American Bar Association. In addition to being Editor-in-Chief of the Editorial Board of Business Law Today, the Business Law Section’s monthly business law publication, Lisa is also the content director and Jurisprudence Subcommittee co-chair for the Private Equity and Venture Capital Committee, and she is a Delaware Court liaison for the Mergers and Acquisitions Committee. She also sits on the Business Law Section’s Marketing Board.

    Jonathan R. Vaitl

    K&L Gates LLP

    Jonathan Vaitl is an associate at the firm’s Harrisburg office. He is a member of the litigation practice area.

    Prior to joining the firm, Jonathan served as a law clerk for the Honorable John E. Jones of the United States District Court of the Middle District of PA, where he drafted opinions in all phases of civil litigation in areas such as employment discrimination, civil rights, corporate securities, commercial or contractual disputes, and constitutional challenges to Pennsylvania statutes. As a law clerk, Jonathan also handled federal criminal proceedings, from initial appearances to sentencings to post-conviction motions.