In Re Diamond Foods, IncDerivative Litigation, C.A. No. 7657-CS (Del. Ch. Feb. 28, 2013).

Issue Addressed: Whether a derivative suit filed in Delaware should be dismissed in favor of a similar first-filed action in California. Short Answer: Yes.

Short Overview of Case

The factual background involves alleged manipulation of the financial statements of the company by the former CEO and former CFO, which led to the first group of derivative suits being filed rapidly in California state court, and a second set of lawsuits brought in federal court in California by the same plaintiffs who brought the instant suit in the Delaware Court of Chancery.  This opinion refers to these plaintiffs as the “Dual Forum Plaintiffs.”  The federal claims in that federal suit were dismissed, and the federal court found itself without jurisdiction over the state law claims and did not address them.  While that decision was being appealed, the Dual Forum Plaintiffs filed what this court described as a “near-identical complaint” in the Delaware Court of Chancery.  The court observed that the same claims filed in the Court of Chancery were the subject of an appeal pending in federal court in California which the Dual Forum Plaintiffs were asking that court to address as well.

The defendants filed a motion to dismiss under the familiar McWane doctrine, sometimes known as the first-filed rule, and based on “basic principles of equity” to prevent the plaintiffs from subjecting Diamond to the excess cost of litigating with “the same plaintiff over the same claims in two forums at once.”  See footnote 16 and accompanying text.

The court in this very brief (for a Chancery decision) 11-page decision made quick work of its criticisms of the procedural strategy of the Dual Forum Plaintiffs.  For example, the court reasoned that all the legal principles that were applicable to the claims in the case were well-settled in Delaware and that there were no novel questions to be litigated.  The court also underscored what it referred to as the “obvious reality” that the Dual Forum Plaintiffs filed the same claims in the federal court that they are simultaneously trying to litigate in Delaware.

The court described the “vinegar-laced arguments” as the same ones they are making before the federal court on appeal, and that:  “The astringency of these arguments is more evident than their plausibility or merit . . ..”

The court concluded by saying that the Dual Forum Plaintiffs:  “May not burden Diamond and its stockholders with litigation in a coastal state bordering the Atlantic, when they themselves chose to sue in the federal courts of a state bordering the Pacific.”

Compare: recent New York decision highlighted in the New York Law Journal available here, in which a New York judge declined to apply the first-filed rule and thus, refused to defer to a first-filed case in Delaware. Instead the court determined that New York was the best forum to decide a case involving a merger contest for the iconic New York Stock Exchange. Importantly for readers of this blog, the New York judge cited both court decisions and a law review article by Chancellor Strine in which she described the Chancellor’s writings as rejecting the first-filed rule, and instead focusing on other factors in determining how to decide which case to give deference to, when similar cases are pending in more than one jurisdiction.