Chancery Allows Delaware Expedited Relief Request Despite NY Forum Selection Clause

A recent Delaware Court of Chancery decision entertained a request for expedited relief in Delaware despite a New York forum selection clause, in part due to the unavailability of the New York Courts that were not fully operational due to the coronavirus shutdown. Francis Pileggi and Chauna Abner co-authored an article with an overview of the ruling in Conduent Business Services v. Skyview Capital, C.A. No. 2020-0232-JTL, Transcript Ruling at **33-34 (Del. Ch. Mar. 30, 2020), for the Delaware Business Court Insider in its recent edition. The full article appears below.

“While New York Court System is ‘Unavailable’ Delaware Court of Chancery Permits Parties to Seek Relief in Delaware Despite a New York Forum Selection Clause”

by: Francis G.X. Pileggi and Chauna A. Abner

Amidst the COVID-19 pandemic, the Delaware Court of Chancery recently held that despite a forum selection clause designating New York as the appropriate venue to litigate disputes arising under an agreement, the parties could seek relief in the Court of Chancery because New York courts were unavailable.  Conduent Bus. Servs., LLC v. Skyview Capital, LLC, C.A. No. 2020-0232-JTL, Transcript Ruling, at **33-34 (Del. Ch. Mar. 30, 2020).

In Conduent Business Services, the complaint asserted an anticipatory breach of an asset purchase agreement and sought a declaratory judgment interpreting the terms of the agreement. Id. at 10. That agreement had a forum selection clause designating New York as the forum to litigate disputes arising from the contract. Id. at *19. Before the Court was plaintiff’s motion for expedited proceedings.

The defendant argued that plaintiff’s claim for relief was not colorable because venue was not appropriate. Id. at *20. The defendant contended that the applicable law under the contract is New York law, and the Court should not impose “an exception to what remains New York law for which the parties bargained.” Id. at *18. The defendant argued that “part of the corpus of New York law right now is how the New York courts are handling commercial cases. And that includes, as both sides have briefed, that right now they are not handling this.” Id. at **17-18. Finally, the defendant noted that the New York courts provided for emergency applications and the plaintiff did not make that application. Id. at **18-19.

In response, the plaintiff urged that it was not “trying to stomp on the venue clause” and that it was “just trying to make sure that [it] can protect [it]sel[f] from irreparable harm while the New York courts are closed.” Id. at *32.

In ruling on whether venue was appropriate, Vice Chancellor Laster stated: “frankly, I think the fact that the New York Court is unavailable is pretty dispositive.” Id. *10. He explained that there is no dispute that “under normal circumstances, the forum selection clause in New York would be binding.” Id. at *33. Thus, he phrased the issue as “whether the circumstances, where New York — for understandable reasons given, the current crisis that the city is facing — has decided not to accept expedited commercial matters constitutes a situation that allows the parties to resort to other tribunals that are potentially capable of granting emergent or expedited relief.” Id.

In holding that venue was proper in the Court of Chancery to resolve the motion to expedite, the Court reasoned that “case law holds that where a forum selection clause specifies a forum that is unavailable, parties can resort to a different forum, where appropriate jurisdiction exists” and that case law applies here. Id. The Court explained that this ruling was not intended to disrespect the courts of New York, but it acknowledges that “[t]he reality is that [New York courts] face an extraordinary situation right now, and so it’s understandable that they’d be in a position where they can’t handle disputes.” Id. at **33-34.

Given the uncertain times that the COVID-19 pandemic has resulted in, including the unknown long-term effects, if any, that it will have on courts throughout the country, the Court’s ruling that “people can go to other courts, if the jurisdictional bases are met, and seek relief in those courts” is of paramount importance. Id. at *34. Although this is a transcript ruling, in Delaware, parties may cite transcript rulings in briefs as authority.

Chancery Court finds muni bond giant Nuveen used size, “lies” and pressure to squash small rival

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Chancery Court recently ruled that municipal bond powerhouse Nuveen LLC improperly used “lies” and “threats” in a successful campaign to damage the business of much smaller rival Preston Hollow Capital LLC but it declined to enjoin the alleged wrongs because Nuveen had discontinued them in Preston Hollow Capital LLC v. Nuveen LLC, et al. , No.2019-0169-SG memorandum opinion (Del. Ch. April 9, 2020). A prior Chancery decision in this case handed down last year, highlighted on these pages, addressed defamation claims, among other issues.

Vice Chancellor Sam Glasscock’s April 9 post-trial memorandum opinion found key Nuveen employees tortiously interfered with the Dallas-based PHC’s vital business relationships and opportunities with a half dozen major banks and bond broker-dealers by intentionally mispresenting PHC’s “predatory” investment practices and pushing them to drop PHC to keep Nuveen, self-serving and disingenuous

Both parties are Delaware-chartered finance companies that specialize in municipal bonds–debt securities issued by cities, counties, states and other governmental entities to finance public works projects–but while PHC had $1.3 billion in equity capital, Nuveen and two sister companies headquartered in Chicago had assets of $150 billion in its municipal bond division alone.

The players

The main players in the $3.82 trillion municipal securities market are issuers–the municipalities who sell the bonds, investors–including financing companies like the litigants, banks and smaller buyers, and broker-dealers that provide marketing, pricing and underwriting services.

The type of municipal bonds at issue in the litigation, private placements bought by one investor, are called “100% placements” and are more lucrative, carry a higher risk, require fast-paced communications with trusted broker-dealer connections and are highly competitive.

PHC’s relatively small but fast-growing share of such 100% placements caused Nuveen to see the company as a threat, prompting a series of written and oral warnings from Nuveen officials to brokers and banks that regularly participate in high-yield municipal bond offerings.

That in turn, motivated PHC to file a February 2019 Chancery Court suit claiming Nuveen tortiously interfered with its business relationships by maliciously launching a campaign to wreck its bond business, sabotaging its vital relations with banks and institutional investors, the opinion said.

Predatory practices?

Vice Chancellor Glasscock found evidence that several high-ranking Nuveen bond specialists warned Goldman Sachs, Deutsche Bank and J.P. Morgan units about “predatory” practices that they said PHC commonly employed and threatened to stop doing business with them unless they dropped PHC.

As to the tortious interference charge, the opinion said, first, PHC proved it had a reasonable probability of a business opportunity with those clients because it could demonstrate a “bona fide expectancy“ of opportunity since it could “identify a specific party who was prepared to enter into a business relationship but was dissuaded” by the defendant.

Concerning the second prong required to prove the tort, the vice chancellor found Nuveen intentionally interfered with PHC’s business expectations, despite Nuveen’s contention that it was merely targeting problematic 100% placements rather than PHC’s business in general and that Nuveen officials’ references to getting rid of “Preston Hollow” were just a “shortcut” for eliminating those deals.

Self-serving and disingenuous”

The court found that testimony “both self-serving and disingenuous” because it was clear that “Nuveen personnel meant what they said…Stop doing business with Preston Hollow or face the consequences,” including time in a type of virtual corporate penalty box and losing their business with Nuveen.

The vice chancellor prominently noted that Nuveen’s witnesses routinely employed numerous “circumlocutions for falsehoods” such as: “hedge,” “bluff,” “exaggeration,” “role-play,” “scenario,” “overstatement,”  blustering,” “short-cutting,” “puff,” “shorthand,” and “overblowing,” causing him to wonder whether the word “lie” was in their vocabulary.

He found that Nuveen’s interference caused PHC demonstrable harm because the defendant’s “lies” and “threats” pressured banks and brokers to change policies and behavior in a way that “curtailed the business expectancies of Preston Hollow.”

The court rejected Nuveen’s defense that its actions were shielded by the business competition exception because to excuse liability under Section 768 of the Second Restatement of Torts regarding the privilege to compete, the defendant must show: the matter in dispute involved the competition, the actor did not employ a wrongful means and did not create or continue an unlawful restraint of trade and the actor’s purpose was only to advance competition.

Since he found that Nuveen clearly employed a wrongful means–the second factor of the list, Vice Chancellor Glasscock said it was unnecessary to examine the rest because of Nuveen’s misrepresentation and economic pressure.

“Reckless indifference to the truth”

Nuveen’s statements to a half-dozen banks and brokers that it had evidence to support its allegations that PHC lied to issuers when It actually had only rumors “amounts to a reckless indifference to the truth” and its use of economic pressure to drive a competitor out of business constitutes wrongful means, the court said.

“I find that Nuveen was not simply attempting to achieve a competitive edge: it meant to use the leverage resulting from its size in the market to destroy Preston Hollow,” the vice chancellor wrote.

The court declined to consider PHC’s claim that Nuveen violated New York’s Donnelly CT OF 1899 (N.Y. Gen. Bus. Law §§ 340–47.) by allegedly organizing a boycott among broker-dealers (many of whom are based in New York).  He found it would be “an imprudent determination” of an unclear New York law.

No mea culpa, no money damages

As to the normally requested remedy in such cases–money damages–the vice chancellor noted PHC has not requested that here, although it has a related suit pending in the Delaware Superior Court for defamation—which must be heard by a jury and where damages are an available remedy.

He said he could not grant the injunction PHC seeks barring Nuveen from further wrongs and ordering it to issue a mea culpa apology letter disavowing its tortious behavior because Nuveen stopped the wrongs PHC sued over and clarified its statements, removing the necessary threat of irreparable harm.

Chancery Grants Section 220 Request Post-Trial

The Delaware Court of Chancery recently granted, in part, a stockholder’s request, after a trial without live testimony, for corporate books and records pursuant to DGCL Section 220, in a matter styled Paraflon Investments Ltd. v. Linkable Networks, Inc., C.A. No. 2017-0611-JRS (Del. Ch. April 3, 2020).

Readers of these pages over the last 15 years will recognize a familiar pattern in the procedural history of this Section 220 case, as did the Court. See footnote 1 and accompanying text. The company typically resists the request for records, suit is filed, and after trial the Court (sometimes) grants the requests in whole or in part.

Many of the hundred-plus highlights on this blog of Section 220 decisions reflect the reality that Section 220 is not a precise tool.

This pithy decision provides a succinct overview of the pre-trial statutory prerequisites, for example, to comply with the form and manner aspects of a demand, and the elements of a statutory claim that need to be established at trial by a preponderance of the evidence.

This opinion also discusses several nuances of this type of statutory claim that have been developed via case law over the last few decades but are not obvious from a reading of the statute. This type of statutory analysis should be compared with a purely contract-based demand for books and records in the LLC context.

Chancery Court finds charges over lululemon board’s CEO exit pact too thin to pass pre-suit demand

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently dismissed a shareholder’s derivative suit because he could not prove lululemon Athletica, Inc.’s directors breached their duty of loyalty by giving ex-CEO Laurent Potdevin $5 million to leave the athletic wear company instead of firing him for alleged misconduct in Shabbouel v. Potdevin, et al., No. 2018-0847-JRS memorandum opinion, (Del. Ch. April 2, 2020).

In its April 2 memorandum opinion, the Court ruled that plaintiff David Shabbouel’s allegations failed Delaware’s pre-suit demand test because the deferential business judgment rule gave the directors the latitude to settle with Potdevin to avoid a legal battle’s cost, risk and embarrassment.

Therefore, the vice chancellor concluded, Shabbouel is not excused from first demanding the lululemon board take up his charge that the directors disloyally used the resignation settlement to shield them from liability for ignoring Potdevin’s alleged sexual favoritism, harassment and creation of a “toxic culture”.

‘Inappropriate incidents’

The opinion says Potdevin abruptly resigned from the Delaware-chartered firm based in Vancouver in 2018 after the board investigated claims of two vaguely-described “inappropriate incidents” tied to his romantic involvement with a clothing designer who worked for him during his 2014-2017 tenure as CEO.

Shabbouel’s suit claimed the directors ignored “red flags” of “well-documented malfeasance” and instead of firing Potdevin for cause, the directors breached their fiduciary duties and wasted company assets by giving him a $5 million severance to leave quietly.

Plaintiff claimed it would have been futile for him to ask those directors to sue themselves for putting their own interests ahead of those of the company because of their conflict of interest.

High bar set higher

But the Court explained that the plaintiff had an even higher bar to clear than the usual pre-suit demand hurdle because lululemon had adopted an exculpatory clause in its charter that exempted the directors from any money liability for ordinary negligence, requiring Shabbouel to prove breach of loyalty or bad faith.

He fell “well short” of either mark, the opinion said, because the charges do not meet either of the prongs of the Delaware Supreme Court’s seminal Aronson v. Lewis opinion.  Aronson v. Lewis, 473 A.2d 805, 813–14 (Del. 1984)

That ruling requires that under Chancery Court Rule 23.1(b), when a derivative plaintiff decides to forego making a demand he must make particularized pleadings to support claims that the directors were interested in the deal or that the transaction was either not the product of a valid business judgment or that it was a waste of corporate assets.

Not a Caremark claim?

The Vice Chancellor observed that Shabbouel tried to satisfy that requirement by charging that the board “failed to implement adequate internal controls to ensure that lululemon’s activities complied with a all applicable laws,” which appeared to be one of the suit’s Caremark claims of inadequate oversight.  In re Caremark Int’l, Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).

But according to the opinion, the plaintiff says he is not charging a failure of the directors’ duty of oversight that violate legal and regulatory compliance standards — which is the crux of the famous Caremark ruling.  Instead, he maintains he is charging the board breached its duty by using the CEO’s separation agreement to sweep its oversight failures under the carpet.

Can’t meet either Aronson

The Court found the suit does not satisfy either prong of the pre-suit demand requirement.  It doesn’t plead particularized facts that at least five of lululemon’s 10 directors: appeared on both sides of the agreement, derived a personal benefit from it, or were beholden to an interested person.

The Court reasoned that to properly plead this prong of Aronson, plaintiff would have had to show that the agreement “extinguished a substantial likelihood of board liability,” but Shabbouel admits that lululemon established an ethics code and a whistleblower hotline and used those systems to detect misconduct.

Moreover, the Court noted, there were no allegations that once they discovered the inappropriate behavior, the directors acted in bad faith by ignoring it or significantly delaying its response; instead they hired independent counsel to investigate, reviewed counsel’s report, appointed a director to negotiate with Potdevin and secured his quiet departure.

That is far from a “conscious indifference to red flags” that might generate liability exposure – especially since the company’s exculpatory charter provision requires that the challenged decision “must be so egregious on its face that board approval cannot meet the test of business judgment,” the opinion says.

Benefits cancel waste claim

The settlement was not a waste of assets because it secured the CEO’s release of all claims against lululemon, liberated the firm from his troublesome tenure, swiftly remediated an allegedly “toxic” culture and avoided a potentially costly and embarrassing lawsuit, the vice chancellor said.

The Court ruled that the directors had to make a quick fire-or-settle choice and it was “the board’s prerogative to decide when it had enough information to decide how to separate Potdevin from the company — not plaintiff’s.”

The Court acknowledged that there is an “outer limit” at which such a separation pact would be unconscionable and constitute waste but this agreement did not come close to that limit for pre-suit demand purposes, so “there is nothing wrong with your television set”, he said, referring to a 1960’s science fiction TV series famous for plot twist endings.

Delaware Supreme Court Allows Federal Forum Clause in Charter

The Delaware Supreme Court recently issued a highly anticipated decision in Salzberg v. Sciabacucchi, No. 346-2019 (Del. Mar. 18, 2020).  Many law professors and other commentators have written much learned commentary and published extensive scholarly analysis of the issues raised in the Court of Chancery’s decision, and have opined on what the Supreme Court was likely to decide in this case–and how the commentators thought the appeal should be decided.  Moreover, I expect that there will be a flood of additional learned commentary and analysis about this decision in the near future.  See, e.g., recent analysis of the Supreme Court’s opinion in this case by Professor Bainbridge for the Washington Legal Foundation.

Therefore, I will only limit this post to a few highlights that should be an incentive to read all 53-pages of the court’s opinion, to which a full-length law review article could easily be devoted. The photo nearby features one of the oldest venues, the Roman Forum.

The highlights of the Chancery decision in this case can be found on these pages.

Federal Forum Clause at Issue:

Delaware’s High Court referred to the Federal Forum Selection Provisions in the certificate of incorporation of the several companies whose charter provisions were jointly challenged in this case.  In essence, the clauses purported to require that the U.S. Federal District Court would be the sole and exclusive forum for the resolution of any complaint arising under the Securities Act of 1933 and that any person purchasing shares of stock in the companies with those provisions consented to the forum selection provision.

Highlights of Court’s Analysis:

The court began its analysis with the text of Section 102 of the DGCL which governs matters contained in the certificate of incorporation.  The court emphasized that Section 102(b)(1) authorizes two broad types of provisions:  (i) Any provision for the management of the business and for the conduct of the affairs of the corporation; and (ii) Any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.

The Delaware Supreme Court reviewed several key U.S. Supreme Court decisions and prior decisions of the Delaware Supreme Court, including the recent SCOTUS opinion in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061, which held that federal and state courts have concurrent jurisdiction over class actions based on the 1933 Securities Act and that such claims are not removable to federal court.

Highlights of Court’s Decision:

  • The court determined that DGCL Section 115 did no alter the scope of DGCL Section 102(b)(1). Section 115 was added as an amendment to the DGCL in 2015 and was intended to codify the Boilermakers Chancery decision to preclude a charter or bylaw provision from excluding Delaware as a forum for internal corporate claims.  Slip op. at 16-17.
  • The opinion employs general principles of statutory construction of widespread applicability and usefulness. See Slip op. at 18-24.
  • Readers will enjoy a “deep dive” into the internal affairs doctrine. The appellate analysis concluded that the Court of Chancery’s opinion defined “internal affairs” too narrowly. See Slip op. at 31-38.  See also footnote 124-126 and related text, referring to the internal affairs doctrine as a principle of “serious constitutional proportions; not just a conflict of laws matter.”
  • The decision features a thorough discussion of why Section 102(b)(1) is more expansive than Section 115–the latter focuses on internal corporate claims. See Slip op. at 38.
  • The court described the facial challenge of constitutionality in this matter and concluded that the provision at issue neither violated federal law nor federal policy. See Slip op. at 43.
  • Both Delaware case law and decisions of the U.S. Supreme Court were relied on for the well-established presumption of enforceability of forum selection clauses. See footnotes 136-139 and accompanying text.
  • Especially notable is footnote 169, which addressed a concern that many had during the appeal of this case: enforcing the federal forum provision in this matter would, perhaps by analogy, “open the flood gates” for arbitration clauses in charters. But the Supreme Court explained that at least in terms of forum selection clauses for claims involving Delaware corporate internal affairs, in part based on the synopsis of Section 115, such a concern was unfounded.

Issue of Equitable Dissolution of LLC Analyzed

There is a precious paucity of Delaware decisions that thoroughly and directly address the potential equitable dissolution of an LLC, as compared to a statutory dissolution of an LLC based on the LLC Act, but that situation has been ameliorated by the recent Delaware Court of Chancery decision in SolarReserve CSP Holdings LLC v. Tonopah Solar Energy LLC, C.A. No. 2019-0791-JRS (Del. Ch., Mar. 18, 2020).

This case is noteworthy, in part, because it is only the second decision to both thoroughly and directly address the somewhat esoteric issue of the equitable dissolution of an LLC–other than the Court of Chancery decision styled In re Carlisle Etcetera LLC, 114 A.3d 592 (Del. Ch. 2015). See also, Trusa v. Nepo Chancery decision highlighted on these pages.

Because this writer represents a party in the case, and the appeal period has not yet expired, the only point I want to publicly publish about this case at this time is that it is must reading for anyone interested in the latest iteration of Delaware law on those circumstances when the Court of Chancery, may, or may not, consider equitable dissolution of an LLC when the criteria of the LLC Act cannot be satisfied.

Delaware Supreme Court revives companies’ right to herd securities suits into federal courts

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

In a milestone opinion, the Delaware Supreme Court has ruled that the state’s corporation law permits Delaware chartered companies to designate the federal courts for all shareholder securities suits alleging disclosure violations in their initial and secondary public offerings in Salzberg et al. v. Sciabacucchi et al. No. 346-2019, opinion (Del. March 18, 2019).

The en banc court’s unanimous March 18 opinion reversed a Chancery Court decision that invalidated the exclusive forum selection clauses in Blue Apron Holdings Inc., Roku Inc. and Stitch Fix Inc.’s charters. 

Vice Chancellor Travis Laster’s ruling found that such bylaws wrongly barred stockholders from suing in state court over issues that were outside Delaware’s internal governance purview. Sciabacucchi v. Salzberg, 2018 WL 6719718, (Del. Ch. Dec. 19, 2018).

Herded into federal court

The widely-anticipated high court ruling effectively lets companies steer shareholder plaintiffs into federal court where charges under the federal Securities Act of 1933 must survive a procedural test of their substance.  The justices also said their decision would not interfere with federal law or the jurisdiction of other states because its effect was basically procedural.

The stakes in the defendant companies’ appeal of plaintiff Matthew Sciabacucchi’s victory in the Chancery Court were raised by the U.S. Supreme Court’s 2018 decision in Cyan v. Beaver County Employees’ Retirement Fund, in which the high court said 1933 Act securities claims could be filed in federal or state courts. Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1066 (2018).

That precipitated a surge of Section 11 disclosure actions in state courts, mandatory forum selection clauses in corporate charters and Sciabacucchi’s suit for a declaratory judgment invalidating the charter provisions of the three defendant companies in which he had invested.

Based on Boilermakers?

Vice Chancellor Travis Laster’s decision in the plaintiff’s favor was based on Boilermakers v. Chevron Corp. a ruling by former Chief Justice Leo E. Strine when he was on the Chancery Court bench.  Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013)

Vice Chancellor Laster interpreted that ruling as holding that Delaware corporations could adopt a forum selection bylaw to regulate “internal affairs claims brought by stockholders qua stockholders,” but not “to regulate external relationships” such as securities law matters.

He held that Delaware General Corporation Law Section 102(b)(1) empowers companies to adopt bylaws only relating to the area of internal affairs, such as alleged violations of the duties of officers and directors, but not securities law claims.

The appeal

On appeal, the defendant companies led by William B. Chandler, of Wilson Sonsini Goodrich & Rosati — the former Delaware Chancellor — argued that Section 102(b)(1) has always been interpreted broadly to mean “for the management of the business”, even when that involves “intra-corporate” matters such as stock sales.

The defendant companies maintained that claims under Section 11 of the ’33 Act are indeed external an inappropriate for charter bylaws because they involve stockholders only in the role of purchaser or seller.

Definition too restrictive

However, the unanimous high court found the vice chancellor’s definition of internal governance to be too restrictive, noting that the U.S. Supreme Court had decided, in Matsushita Electric v. Epstein, that Delaware courts can settle claims subject to exclusive federal jurisdiction without violating federal law or policy. Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367, 377, 382 (1996).

Justice Valihura acknowledged that “intra-corporate” matters such as Section 11 disclosure claims are not at the heart of traditional corporate governance territory and might be close to the outer band of external matters in some respects.

She also noted the concern that Delaware’s endorsement of forum selection bylaws might be viewed by sister states as “an out-of-our-lane power grab,” but she said there is a strong argument that as a facial matter at least, it does not violate principles of “horizontal sovereignty” among states.

The high court reversed the declaratory judgment ruling and the $3 million fee award the plaintiff’s lawyers received for successfully invalidating the bylaws.

Delaware high court’s advice on state partnership law could block Sanofi whistleblower suit

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Supreme Court recently advised a federal appeals court that the state’s partnership law bars a limited liability partnership formed by three Sanofi-Aventis U.S. LLC employees from continuing a whistleblower action over allegedly false Plavix blood thinner marketing because one of them dropped out, in United States of America, et al. v. Sanofi-Aventis U.S. LLC, et al., No. 256-2019, certified questions answered (Del. March 17, 2020).

The March 17 opinion answered several certified questions of Delaware law posed by the United States Court of Appeal for the Third Circuit to help it decide whether to uphold the dismissal of an amended federal qui tam complaint against Sanofi, Bristol-Meyers Squibb Co. and Aventis, Inc. under the False Claims Act 31 U.S.C. § 3729.

A New Jersey District Court tossed the suit, agreeing with three defendant drug developers that the original plaintiff partnership died when a member left and that a revised partnership that filed a second amended complaint in the qui tam suit could not step into its shoes because it would be a “new party” in violation of the FCA’s “first-to-file” rule. In re: Plavix Marketing, Sales Practices and Products Liability Litigation (No. II) 315 F. Supp. 3d 817 (D.N.J. 2018), appeal docketed, No. 19-2472 (3d Cir. July 3, 2018)

The central appeal issue

A central appeal issue that the justices were asked to resolve was whether the state’s current partnership statute, the Delaware Revised Uniform Partnership Act, viewed the partnership as legally indistinct from its three members for all purposes because of its unique charter language.

Justice Karen Valihura’s opinion on behalf of the en banc high court ruled that:

·     The membership change caused the dissolution of the original partnership, which is not entitled to continue to prosecute the whistleblower action as part of a “winding up” process.

·     The second amended complaint was filed by a new plaintiff partnership, which appears to be now prosecuting the action.

·     It is not possible to determine, from the undisputed facts of the case, whether the new partnership inherited the litigation asset that might entitle it to file that second amended complaint in the underlying action.

If the Third Circuit adopts the position taken by the Delaware justices, the current qui tam plaintiffs could face an uphill battle to overturn the dismissal because the FCA’s first-to-file rule bars the “intervention” of a new private party to replace the original relator.

Blowing the whistle

Justice Valihura said two doctors and a Sanofi sales representative, acting as JKJ 2011 Partnership LLP, filed a November 2011 whistleblower complaint claiming the defendant pharmas hid key information about antiplatelet drug Plavix’s limited ability to prevent heart attacks and strokes.

A second amended complaint filed February 22, 2017 added new allegations of marketing misrepresentations, but by that time a new member had replaced one of the originals and the court asked the parties to brief the issue of whether JKJ was now a new partnership without standing.

The federal judge said although the DRUPA, under 6 Del. C. § 15-201, employed an “entity” approach that normally allowed membership changes without creating a new partnership, JKJ had expressly opted out of that provision and chose to be legally identical to its members under the “aggregate” form.

The District court therefore granted the defendants’ dismissal motion, reasoning that the new partnership that filed the second amended complaint was an intervenor.

Living with their choice

In their appeal, the plaintiffs argued that even if the new partnership had no standing, the original partnership’s members could continue the action as part of the winding up of its business, but in answer to the Third Circuit’s certified question on that issue, the high court said JKJ chose “not to be distinct from its members” and must live — or die — with that choice.

Besides, the underlying suit appears to have been taken over — validly or not — by the new partnership, the justices said.  But whether the right to litigate transferred to the new partnership “is a fact-based question that we cannot determine based on the undisputed facts” and “the dearth of case law in this area.”

More Closures in Delaware Due to Pandemic

Yesterday, on the same date as the announcement that the Governor of Delaware required the closure of “non-essential businesses” (that apparently is defined not to include law firms),  the Delaware Supreme Court ordered, in essence, all Delaware Courts closed to the public until April 15 (e.g., for in-person access) due to the pandemic that has nearly shutdown most of the U.S. and much of the world. This is a supplement to prior Standing Orders issued by Delaware Courts due to the Covid-19 coronavirus pandemic.

Today, the Chancellor of the Court of Chancery issued a “Statement” clarifying the impact on Chancery of the Supreme Court’s closure of in-person access to the Courts until April 15.

In sum, no trial dates beyond April 15 have been postponed and no existing filing deadlines or discovery deadlines have necessarily been suspended, though the Chancellor’s Statement today expressed that the Courts will be solicitous in extending deadlines, and the Court expects counsel and the parties to be cooperative–and to resolve any scheduling issues without Court involvement–in the tradition of professionalism that defines the Delaware Bar.

Delaware Supreme Court Declares Judicial Emergency Due to Coronavirus

By Delaware Supreme Court Order, effective March 16, 2020, Delaware’s high court declared a judicial emergency, following the Governor of Delaware declaring on Friday, March 13, a state of emergency due to the coronavirus, and also on the same day that President Trump proclaimed a National Emergency. The foregoing hyperlink provides the actual Court Order. One provision makes it easier for trial courts, in their discretion, to postpone trials and hearings at least for 30 days. This also follows Orders highlighted on these pages a few days ago in which each of the Delaware Courts announced policies to help those with symptoms of the virus address obligations to appear for court hearings, etc. Some of those have already been superseded by Orders effective on March 16, 2020, as noted below.

On March 16, 2020, the Court of Chancery issued “Standing Order No. 2” regarding the impact of the coronavirus on the court system, which supersedes Order No. 1 on the topic that was issued a few days ago. In sum, this latest Order provides for all Chancery hearings and trials to be help via telephonic or other electronic means, with exceptions allowable only upon demonstrably exigent need within the discretion of the presiding judicial officer. The Delaware Court system has devoted a specific page on their website to all its Orders relating to this National Emergency, including the Delaware Superior Court issuing an Order effective today, March 16, continuing all trials for 30 days.

Best wishes to my readers in these challenging times, and I hope you all stay healthy.

N.B. This post was updated and edited at about 2:25 p.m. EST

LexBlog