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Sciabacucchi v. Salzberg

Court of Chancery of Delaware

December 19, 2018

MATTHEW SCIABACUCCHI, on behalf of himself and all others similarly situated, Plaintiff,
v.
MATTHEW B. SALZBERG, JULIE M.B. BRADLEY, TRACY BRITT COOL, KENNETH A. FOX, ROBERT P. GOODMAN, GARY R. HIRSHBERG, BRIAN P. KELLEY, KATRINA LAKE, STEVEN ANDERSON, J. WILLIAM GURLEY, MARKA HANSEN, SHARON MCCOLLAM, ANTHONY WOOD, RAVI AHUJA, SHAWN CAROLAN, JEFFREY HASTINGS, ALAN HENDRICKS, NEIL HUNT, DANIEL LEFF, and RAY ROTHROCK, Defendants, and BLUE APRON HOLDINGS, INC., STITCH FIX, INC., and ROKU, INC., Nominal Defendants.

          Submitted: September 27, 2018

          Kurt M. Heyman, Melissa N. Donimirski, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Jason M. Leviton, Joel A. Fleming, BLOCK & LEVITON LLP, Boston, Massachusetts; Counsel for Plaintiff.

          William B. Chandler III, Randy J. Holland, Bradley D. Sorrels, Lindsay Kwoka Faccenda, WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; Boris Feldman, David J. Berger, WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California; Counsel for Defendants Katrina Lake, Steven Anderson, J. William Gurley, Marka Hansen, Sharon McCollam, Anthony Wood, Ravi Ahuja, Shawn Carolan, Jeffrey Hastings, Alan Hendricks, Neil Hunt, Daniel Leff, Ray Rothrock, and Nominal Defendants Stitch Fix, Inc. and Roku, Inc.

          Catherine G. Dearlove, Sarah T. Andrade, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Michael G. Bongiorno, WILMER CUTLER PICKERING HALE AND DORR LLP, New York, New York; Timothy J. Perla, WILMER CUTLER PICKERING HALE AND DORR LLP, Boston, Massachusetts; Counsel for Defendants Matthew B. Salzberg, Julie M.B. Bradley, Tracy Britt Cool, Kenneth A. Fox, Robert P. Goodman, Gary R. Hirshberg, and Brian P. Kelley, and Nominal Defendant Blue Apron Holdings, Inc.

          MEMORANDUM OPINION

          LASTER, V.C.

         The Securities Act of 1933 (the "1933 Act") bars any person from offering or selling securities except pursuant to a registration statement approved by the Securities and Exchange Commission (the "SEC") or in compliance with an exemption. The 1933 Act grants private rights of action to purchasers of securities so they can enforce its registration and disclosure requirements.

         When Congress enacted the 1933 Act, it gave state and federal courts concurrent jurisdiction over claims by private plaintiffs and barred defendants from removing actions filed in state court to federal court. In 1998, Congress amended the 1933 Act in a manner that cast doubt on this jurisdictional allocation. In 2018, the Supreme Court of the United States held that state courts continue to have concurrent jurisdiction over claims by private plaintiffs and that defendants cannot remove actions filed in state court to federal court.[1]

         Before their initial public offerings, the three nominal defendants adopted provisions in their certificates of incorporation that require any claim under the 1933 Act to be filed in federal court (the "Federal Forum Provisions"). Contrary to the federal regime, the provisions preclude a plaintiff from asserting a 1933 Act claim in state court.

         This decision concludes that the Federal Forum Provisions are ineffective. In Boilermakers, [2] Chief Justice Strine held while serving on this court that a Delaware corporation can adopt a forum-selection bylaw for internal-affairs claims. In reaching this conclusion, he reasoned that Section 109(b) of the Delaware General Corporation Law (the "DGCL"), which specifies what subjects bylaws can address, authorizes the bylaws to regulate "internal affairs claims brought by stockholders qua stockholders."[3] But he stressed that Section 109(b) does not authorize a Delaware corporation to regulate external relationships. The Boilermakers decision noted that a bylaw cannot dictate the forum for tort or contract claims against the company, even if the plaintiff happens to be a stockholder.[4]

         Section 102(b)(1) of the DGCL specifies what charter provisions can address. Its scope parallels Section 109(b), so the reasoning in Boilermakers applies to charter-based provisions.

         The Boilermakers distinction between internal and external claims answers whether a forum-selection provision can govern claims under the 1933 Act. It cannot, because a 1933 Act claim is external to the corporation. Federal law creates the claim, defines the elements of the claim, and specifies who can be a plaintiff or defendant. The 1933 Act establishes a statutory regime that applies when a particular type of property-securities- is offered for sale in particular scenarios that the federal government has chosen to regulate. The cause of action belongs to a purchaser of a security, and it arises out of an offer or sale. The defined term "security" encompasses a wide range of financial products. Shares of stock are just one of many types of securities, and shares in a Delaware corporation are just one subtype. A claim under the 1933 Act does not turn on the rights, powers, or preferences of the shares, language in the corporation's charter or bylaws, a provision in the DGCL, or the equitable relationships that flow from the internal structure of the corporation. Under Boilermakers, a 1933 Act claim is distinct from "internal affairs claims brought by stockholders qua stockholders."[5]

         This result derives from first principles. The certificate of incorporation differs from an ordinary contract, in which private parties execute a private agreement in their personal capacities to allocate their rights and obligations. When accepted by the Delaware Secretary of State, the filing of a certificate of incorporation effectuates the sovereign act of creating a "body corporate"-a legally separate entity. The State of Delaware is an ever-present party to the resulting corporate contract, and the terms of the corporate contract incorporate the provisions of the DGCL. Various sections of the DGCL specify what the contract must contain, may contain, and cannot contain. The DGCL also constrains how the contract can be amended.

         As the sovereign that created the entity, Delaware can use its corporate law to regulate the corporation's internal affairs. For example, Delaware corporate law can specify the rights, powers, and privileges of a share of stock, determine who holds a corporate office, and adjudicate the fiduciary relationships that exist within the corporate form. When doing so, Delaware deploys the corporate law to determine the parameters of the property rights that the state has chosen to create.

         But Delaware's authority as the creator of the corporation does not extend to its creation's external relationships, particularly when the laws of other sovereigns govern those relationships. Other states exercise territorial jurisdiction over a Delaware corporation's external interactions. A Delaware corporation that operates in other states must abide by the labor, environmental, health and welfare, and securities law regimes (to name a few) that apply in those jurisdictions. When litigation arises out of those relationships, the DGCL cannot provide the necessary authority to regulate the claims.

         This limitation applies even when the party asserting the claim happens to be a stockholder. Envision a customer who happens to own stock and who wishes to assert a product liability claim against the corporation. Even though the corporation's relationships with its customers are part of its business and affairs, and even though the customer-stockholder plaintiff would own stock, the shares are incidental to the operative legal relationship. Only a state exercising its territorial authority can regulate the product liability claim. Because the claim exists outside of the corporate contract, it is beyond the power of state corporate law to regulate.

         This limitation applies even when shares of a Delaware corporation comprise the property that is the subject of the external claim. If a third party engages in the tort of conversion by stealing a stock certificate, the shares constitute the stolen property. The claim for conversion is not an attribute of the shares, nor does it arise out of the corporate contract. The fact that the stolen property consists of shares is incidental to the claim. The legal relationship does not change if the corporation itself takes the shares. The conversion claim is still not an attribute of the shares, and it still does not arise out of the corporate contract. The same is true when a plaintiff asserts a claim for fraud involving shares. The speaker may have made fraudulent statements about the shares, or which relate to the shares, but the claim for fraud is not an attribute of the shares and does not arise out of the corporate contract.

         Whether a purchaser of securities may have bought shares in a Delaware corporation is incidental to a claim under the 1933 Act. That happenstance does not provide a sufficient legal connection to enable the constitutive documents of a Delaware corporation to regulate the resulting lawsuit. The claim does not arise out of the corporate contract and does not implicate the internal affairs of the corporation. To the contrary, assuming the securities in question are shares, the claim arises from the investor's purchase of the shares. At the time the predicate act occurs, the purchaser is not yet a stockholder and lacks any relationship with the corporation that is grounded in corporate law.

         The constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware's corporate law. In this case, the Federal Forum Provisions attempt to accomplish that feat. They are therefore ineffective and invalid.

         I. FACTUAL BACKGROUND

         The facts are drawn from the materials presented in support of the cross-motions for summary judgment. The operative facts are undisputed.

          A. The Federal Backdrop

         The question of Delaware law presented by this case emerges from a backdrop of federal law. A basic understanding of the 1933 Act provides essential context.

         L The 1933 Act

         After the Crash of 1929, in the midst of the Great Depression, Congress enacted the 1933 Act "to promote honest practices in the securities markets."[6] The 1933 Act requires a company offering securities to the public "to make full and fair disclosure of relevant information" by filing a registration statement with the SEC.[7]

         Congress created private rights of action for investors and provided that the causes of action could be asserted in state or federal court.[8] "More unusually, Congress also barred the removal of such actions from state to federal court. So if a plaintiff chose to bring a 1933 Act suit in state court, the defendant could not change the forum."[9]

         Section 11 of the 1933 Act "allows purchasers of a registered security to sue certain enumerated parties in a registered offering when false or misleading information is included in a registration statement."[10] Its purpose is to "assure compliance with the disclosure provisions of the Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering."[11] "If a plaintiff purchased a security issued pursuant to a registration statement, he need only show a material misstatement or omission to establish his prima facie case. Liability against the issuer of a security is virtually absolute, even for innocent misstatements."[12] "[E]very person who signed the registration statement" may be liable, [13] though defendants other than the issuer may avoid liability by proving a due diligence defense.[14]

         If a person offers securities without complying with the registration requirements of the 1933 Act, Section 12(a)(1) provides relief[15] Section 12(a)(2) of the 1933 Act provides an additional cause of action when a prospectus contains material misstatements or omissions.[16]

         2. The PLSRA and SLUSA

         In 1995, Congress passed the Private Securities Litigation Reform Act (the "PLSRA") to address "perceived abuses of the class-action vehicle in litigation involving nationally traded securities."[17] According to the congressional findings, "nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and 'manipulation by class action lawyers of the clients whom they purportedly represent' had become rampant in recent years."[18] The PSLRA imposed various procedural requirements for cases filed in federal court, including an automatic stay of discovery pending a decision on a motion to dismiss.[19]

         The PSLRA "had an unintended consequence: It prompted at least some members of the plaintiffs' bar to avoid the federal forum altogether."[20] "Rather than face the obstacles set in their path by the [PSLRA], plaintiffs and their representatives began bringing class actions under state law, often in state court."[21]

         In 1998, Congress adopted the Securities Litigation Uniform Standards Act ("SLUSA") to prevent plaintiffs from circumventing the PSLRA by filing state law claims in state court.[22] SLUSA's core provision states:

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging-
(1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or
(2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.[23]

         This decision refers to this provision as the "Federal Jurisdiction Statute."

         The Federal Jurisdiction Statute forces plaintiffs to sue in federal court if they wish to pursue class-wide relief involving publicly traded securities on a fraud-based theory, regardless of whether the cause of action invokes federal or state law.[24] To make sure that plaintiffs cannot bypass the Federal Jurisdiction Statute by ignoring it and filing in state court, SLUSA permits the removal of certain class actions to federal court.[25]

         SLUSA also modified the jurisdictional provision in the 1933 Act.[26] Before SLUSA, the 1933 Act provided that state and federal courts had concurrent jurisdiction over claims arising under the act.[27] SLUSA modified the statutory provision to say that concurrent jurisdiction existed "except as provided in [SLUSA].[28] Likewise, before SLUSA, the 1933 Act provided that claims brought in state court that asserted violations of the 1933 Act were not removable.[29] Congress amended this provision to preserve the prohibition on removal "[e]xcept as provided in [SLUSA]."[30]

         3. A Federal Split Spurs Corporations To Impose Their Preference For A Federal Forum.

         The federal courts split on how to interpret SLUSA's changes.[31] Some held that SLUSA only permitted the removal of covered class actions that raised state law claims, while others held that claims under the 1933 Act could now be removed to federal court.[32]

         Corporations and their advisors preferred federal court.[33] In an effort to lock in their preferred forum despite the split in authority on removal, corporations began adopting forum-selection provisions that identified the federal courts as the exclusive forum for 1933 Act claims.[34]

         B. The Initial Public Offerings

         On June 1, 2017, nominal defendant Blue Apron Holdings, Inc. filed a registration statement with the SEC for its shares of common stock and launched an initial public offering. Blue Apron is a Delaware corporation. Before filing its registration statement, Blue Apron adopted a charter-based Federal Forum Provision.

         On September 1, 2017, nominal defendant Roku, Inc. filed a registration statement with the SEC for its shares of common stock and launched an initial public offering. Roku is a Delaware corporation. Before filing its registration statement, Roku adopted a charter- based Federal Forum Provision.

         On October 19, 2017, Stitch Fix, Inc. filed a registration statement with the SEC for its shares of common stock and launched an initial public offering. Stitch Fix is a Delaware corporation. Before filing its registration statement, Stitch Fix adopted a charter-based Federal Forum Provision.

         Roku and Stitch Fix adopted substantively identical provisions:

Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of the Corporation shall be deemed to have notice of and consented to [this provision].[35]

         Blue Apron hedged a bit. Its provision states that "the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933."[36] Except for this phrase, its provision tracked the other two.

         C. This Litigation

         Plaintiff Matthew Sciabacucchi bought shares of common stock under each nominal defendant's registration statement, either in the initial public offering or shortly thereafter. He therefore could sue under Section 11 of the 1933 Act to address any material misstatements or omissions in the registration statements.[37] He likewise could sue under Section 12(a)(1) to enforce the 1933 Act's registration requirements.[38] He potentially could sue under Section 12(a)(2) over a material misstatement or omission in a prospectus.[39]

         On December 29, 2017, Sciabacucchi filed this action. His complaint named as defendants twenty individuals who signed the registration statements for Blue Apron, Stitch Fix, and Roku and who have served as their directors since they went public. His complaint sought a declaratory judgment that the Federal Forum Provisions are invalid.

         D. The Supreme Court of the United States Interprets SLUSA.

         On March 20, 2018, the Supreme Court of the United States resolved the split in federal authority over SLUSA's implications for the jurisdictional and removal provisions in the 1933 Act. The justices held that class actions filed in state court which asserted violations of the 1933 Act could not be removed to federal court.[40] After the decision, under the federal regime, a plaintiff wishing to sue under the 1933 Act could maintain an action in either state or federal court.

         II. LEGAL ANALYSIS

         The parties have filed cross motions for summary judgment. Summary judgment may be granted if the moving party demonstrates that there is "no genuine issue as to any material fact" and that it is "entitled to a judgment as a matter of law."[41] A facial challenge to the Federal Forum Provisions presents a question of law suitable for disposition on a motion for summary judgment.[42]

         A. Existing Law Indicates That The Federal Forum Provisions Are Ineffective.

         The practice of including forum-selection provisions in the constitutive documents of a corporation is a relatively recent development.[43] The arc of the law in this area provides insight into the permissible scope of forum-selection provisions. The authorities indicate that the Federal Forum Provisions cannot accomplish what they attempt to achieve.

         1. The Origins Of The Corporate Forum-Selection Phenomenon

         The impetus for corporate forum-selection provisions came from an epidemic of stockholder litigation, in which competing plaintiffs filed a bevy of lawsuits, often in different multiple jurisdictions, before settling for non-monetary relief and an award of attorneys' fees.[44] These frequently meritless cases imposed costs on corporations and society without concomitant benefit. Courts had to expend resources coordinating the actions and processing non-substantive settlements.[45]

         In Revlon, [46] I replaced class counsel for failing to provide adequate representation when agreeing to a non-substantive settlement. When discussing the policy rationale for this outcome, I posited that "[a]ll else equal, the threat of replacement should cause representative counsel to invest more significantly in individual cases, which in turn should lead representative counsel to analyze cases to identify actions whose potential merit justifies the investment."[47] But I recognized that if Delaware sought to regulate abusive litigation, then plaintiffs' counsel might "accelerate their efforts to populate their portfolios by filing in other jurisdictions."[48] As a possible response, I suggested: "If they do, and if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes."[49]

         Because the Revlon case did not involve a forum-selection provision, I observed that "[t]he issues implicated by an exclusive forum selection provision must await resolution in an appropriate case."[50] It was nevertheless my expectation that a forum-selection provision implemented through the corporation's constitutive documents only would extend to "intra-entity disputes."[51]

         The Revlon dictum appears to have stirred practitioners and their clients to adopt forum-selection provisions.[52] Before Revlon, forum-selection provisions appeared in the charters or bylaws of sixteen publicly traded companies.[53] A year later, approximately 195 public companies had either adopted forum-selection provisions or proposed them.[54] By August 2014, 746 publicly traded corporations had adopted them.[55]

         2. Boilermakers

         In 2013, while serving as Chancellor, Chief Justice Strine issued the seminal decision on the validity of forum-selection provisions in the corporate contract. FedEx Corporation and Chevron Corporation had both adopted forum-selection bylaws. In Boilermakers, stockholders challenged these provisions, asserting that the corporations lacked authority to adopt them under Section 109(b) of the DGCL.

         The FedEx bylaw stated:

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 asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation's stockholders,
(iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or
(iv) any action asserting a claim governed by the internal affairs doctrine.
Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of any consented to the provisions of this [bylaw].[56]

         Chevron's bylaw originally tracked FedEx's, but in response to the lawsuit, Chevron's board amended it in two ways. First, the amended bylaw permitted suits to be filed in any state or federal court in Delaware having jurisdiction over the subject matter and the parties. Second, the amended bylaw would not apply unless the court in Delaware could exercise personal jurisdiction over all indispensable parties to the action.[57]

         The defendants argued that the provisions covered four types of suits:

Derivative suits. The issue of whether a derivative plaintiff is qualified to sue on behalf of the corporation and whether that derivative plaintiff has or is excused from making demand on the board is a matter of corporate governance, because it goes to the very nature of who may speak for the corporation.
Fiduciary duty suits. The law of fiduciary duties regulates the relationships between directors, officers, the corporation, and its stockholders.
D.G.C.L. suits. The Delaware General Corporation Law provides the underpinning framework for all Delaware corporations. That statute goes to the core of how such corporations are governed.
Internal affairs suits. As the U.S. Supreme Court has explained, "internal affairs," in the context of corporate law, are those "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders."[58]

         Although the defendants reserved the "internal affairs" label for the fourth category, all four types involved the internal affairs of a Delaware corporation. Chief Justice Strine described the categories as "all relating to internal corporate governance[.]"[59]

         Because the forum-selection provisions appeared in the bylaws, Chief Justice Strine examined their facial validity under Section 109(b). At the time, this statutory provision stated: "The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees."[60]

         Chief Justice Strine had no difficulty holding that the forum-selection bylaws fell within the scope of Section 109(b) because, as he repeatedly noted, they addressed internal-affairs claims:

As a matter of easy linguistics, the forum selection bylaws address the "rights" of the stockholders, because they regulate where stockholders can exercise their right to bring certain internal affairs claims against the corporation and its directors and officers. They also plainly relate to the conduct of the corporation by channeling internal affairs cases into the courts of the state of incorporation, providing for the opportunity to have internal affairs cases resolved authoritatively by our Supreme Court if any party wishes to take an appeal. That is, because the forum selection bylaws address internal affairs claims, the subject matter of the actions the bylaws govern relates quintessentially to "the corporation's business, the conduct of its affairs, and the rights of its stockholders [qua stockholders]."[61]

         Notably, Chief Justice Strine did not stop with the statutory language-"rights of its stockholders"-but emphasized that the forum-selection bylaws governed the rights of "stockholders qua stockholders."

         Consistent with this point of emphasis, Chief Justice Strine provided two examples of the causes of action that a bylaw could not regulate:

By contrast, the bylaws would be regulating external matters if the board adopted a bylaw that purported to bind a plaintiff, even a stockholder plaintiff, who sought to bring a tort claim against the company based on a personal injury she suffered that occurred on the company's premises or a contract claim based on a commercial contract with the corporation.[62]

         Leaving no doubt that a bylaw could not regulate cases of this type, Chief Justice Strine stated: "The reason why those kinds of bylaws would be beyond the statutory language of 8 Del. C. § 109(b) is obvious: the bylaws would not deal with the rights and powers of the plaintiff-stockholder as a stockholder."[63] Later in the opinion, Chief Justice Strine emphasized that the bylaws did not purport "in any way to foreclose a plaintiff from exercising any statutory right of action created by the federal government."[64]

         Boilermakers thus validated the ability of a corporation to adopt a forum-selection provision for internal-affairs claims. The phrase "internal affairs" appears four times in the opening paragraph, and the decision as a whole deployed either those words or an equivalent concept (such as "internal governance") over forty times. The decision also drew a line at internal-affairs claims. When describing cases where it would be "obvious" that a forum-selection provision would not apply, the decision cited causes of action that did not involve internal affairs, such as tort or contract claims that did not depend on the stockholder's rights qua stockholder.

         3. ATP

         After Boilermakers, commentators debated whether charter and bylaw provisions could regulate other aspects of stockholder litigation.[65] In ATP, the Delaware Supreme Court moved beyond forum selection by upholding the validity of a fee-shifting provision in the bylaws of a non-stock corporation that applied to "intra-corporate litigation."[66]

         The ATP decision addressed four questions of law that the United States District Court for the District of Delaware had certified to the Delaware Supreme Court.[67] The underlying suit involved a membership corporation that operated a men's tennis league (the "League"). The League's members included entities that owned and operated tournaments. Two members sued the League after the board of directors made changes to the tour schedule.[68] The plaintiffs asserted federal antitrust claims and state law claims for breach of fiduciary duty, tortious interference with contract, and conversion.[69] The district court granted the League's motion for judgment as a matter of law on the state law claims, and a jury found in the League's favor on the antitrust claims.[70]

         Having prevailed on all counts, the League moved to recover $17, 865, 504.51 in expenses.[71] As the sole basis for its recovery, the League relied on the following bylaw:

In the event that (i) any Claiming Party initiates or asserts any Claim . . . against the League or any member or owners (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party . . . does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys' fees and other litigation expenses) . . . that the parties may incur in connection with such Claim.[72]

         The district court denied the application, observing that the League had cited "no case in which a court held that a board-adopted corporate bylaw can form the basis for the recovery of attorney's fees from members who sue the corporation, much less in actions where the bylaws are not directly in the dispute."[73] The district court also noted that the bylaw had been "adopted only after the plaintiff became a member of the corporation"[74] and "less than five months before the complaint in this case was filed," at a time when the League's board was discussing the events giving rise to the litigation.[75] In the dispositive portion of its analysis, the court reasoned that "allowing antitrust defendants to collect attorneys' fees in this case would be contrary both to longstanding Third Circuit precedent and to the policies underlying the federal antitrust laws."[76]

         On appeal, in a per curiam ruling, the United States Court of Appeals for the Third Circuit reversed. The Court of Appeals held that the district court should have determined whether the fee-shifting bylaw was enforceable under Delaware law before considering whether it was preempted by the antitrust laws.[77] The Court of Appeals expressed "doubts that Delaware courts would conclude that Article 23.3 imposes a legally enforceable burden on [the plaintiffs]."[78]

         After the remand, the district court certified four questions to the Delaware Supreme Court:

1. May the Board of a Delaware non-stock corporation lawfully adopt a bylaw (i) that applies in the event that a member brings a claim against another member, a member sues the corporation, or the corporation sues a member (ii) pursuant to which the claimant is obligated to pay for "all fees, costs, and expenses of every kind and description (including, but not limited to, all reasonable attorneys' fees and other litigation expenses)" of the party against which the claim is made in the event that the claimant "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought"?
2. May such a bylaw be lawfully enforced against a member that obtains no relief at all on its claims against the corporation, even if the bylaw might be unenforceable in a different situation where the member obtains some relief?
3. Is such a bylaw rendered unenforceable as a matter of law if one or more Board members subjectively intended the adoption of the bylaw to deter legal challenges by members to other potential corporate action then under consideration?
4. Is such a bylaw enforceable against a member if it was adopted after the member had joined the corporation, but where the member had agreed to be bound by the corporation's rules "that may be adopted and/or amended from time to time" by the corporation's Board, and where the member was a member at the time that it commenced the lawsuit against the corporation?[79]

         The Delaware Supreme Court answered the first, second, and fourth question in the affirmative, but held that it could not answer the third question as a matter of law.

         When addressing the first question, the Delaware Supreme Court held that the bylaw fell within the scope of Section 109(b) of the DGCL. As the high court explained, "[a] bylaw that allocates risk among parties in intra-corporate litigation would . . . appear to satisfy the DGCL's requirement that bylaws must 'relat[e] to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.'"[80] The court therefore concluded that the fee-shifting bylaw was a facially valid exercise of corporate authority.

         For present purposes, the Delaware Supreme Court's repeated references to "intra- corporate litigation" are important.[81] Although the plaintiffs in the underlying action also asserted claims for antitrust violations, tortious interference, and conversion, the Delaware Supreme Court interpreted the certified question as only asking about the validity of the bylaw for purposes of "intra-corporate litigation."[82] The Delaware Supreme Court then held that the bylaw was facially valid because it "allocate[d] risk among parties in intracorporate litigation . . . ."[83] The Delaware Supreme Court did not suggest that that the corporate contract can be used to regulate other types of claims.

         4. The 2015 Amendments

         In 2015, the Corporation Law Council of the Delaware State Bar Association recommended that the General Assembly enact legislation that addressed both forum-selection provisions and fee-shifting provisions.[84] The General Assembly responded by adding Section 115 to the DGCL and amending Sections 102 and 109.[85]

         The new Section 115 addressed the ability of Delaware corporations to adopt forum-selection provisions in ...


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