A forum selection clause, controlled by Austrian law, was recently interpreted by the Delaware Court of Chancery as a mandatory forum selection clause requiring the dispute to be litigated in Vienna.  In Germaninvestments A.G. v. Allomet Corporation, C.A. No. 2018-0666-JRS (Del. Ch. May 23, 2019), the court also determined that the choice of law provision designating Austrian law and the forum selection clause requiring litigation in Vienna were both enforceable.

N.B. The Delaware Supreme Court reversed this decision in an opinion dated Jan. 27, 2020.

Procedural Background:

The court observed that Rule 12(b)(3), which addresses improper venue, was “the proper procedural rubric” for addressing a motion to dismiss based on a forum selection clause.  The court also explained that a motion under Rule 12(b)(3) does not “shackle” the court to the plaintiff’s complaint, but rather the court is permitted to consider extrinsic evidence from the outset.  See footnote 63. 

The court also noted that Chancery Rule 44.1 provides the procedure for presenting foreign law to the court to allow the court to interpret a document governed by foreign law.  The rule provides that a party is required to give notice in the pleadings or other reasonable written notice that the law of a foreign country will control.  Prior decisions have recognized that expert affidavits may be considered along with expert testimony.

Key Statements of Law:

·     The court explained the well-settled rule that Delaware courts will give effect to the terms of private agreements providing for forum selection clauses.  See footnote 64 and accompanying text.

·     In order for a forum selection clause to be considered exclusive under Delaware law, the “contractual language must be crystalline in stating the parties’ intent to litigate only in the designated forum.”  See footnote 66.

·     The Delaware courts also generally honor contractually-designated choice of law provisions as long as the jurisdiction selected “bears some material relationship to the transaction.”  See footnote 70.

·     A key issue is whether the forum selection clause states that it is exclusive, or whether the language will be construed as merely permissive. See footnote 80 (citing Delaware cases holding that a mandatory forum selection clause must make clear that the litigation is required to proceed in the designated forum).

·     In this instance, the applicable Austrian law applied to require litigation only in Vienna.

·     The court also rejected the argument that DGCL Section 168 applied because the statute relates to replacements for lost stock certificates, and in this instance the issue was whether the original stock certificate should have been issued.

In the first of two decisions on the same day addressing two separate covenants not to compete, in Lyons Insurance Agency, Inc. v. Wilson, C.A. No. 2017-0092-SG (Del. Ch., Sept. 28, 2018), the Delaware Court of Chancery explained the essential elements for enforceability of a non-competition provision in an agreement. The second case highlighted below deals with the interfacing and tension between California law and Delaware law on this topic. Many other decisions involving covenants not to compete, or non-competition agreements, in general have been highlighted on these pages over the last 13 years. 

Brief Overview:Related image

The Lyons case involved a rather lengthy procedural history, but for purposes of this brief blog post the most notable facts involved an employee of an insurance agency who attempted to bring his “book of business” to a new agency notwithstanding a covenant not to compete.  A Pennsylvania court had granted an injunction to prevent the enforcement of the covenant not to compete, but after that injunction expired in two years, the employee left for another insurance brokerage.  The Lyons Insurance Agency sued to enforce the covenant not to compete that it had made the employee sign before he joined a third employer–which he joined in just over two years.

Notable Procedural Aspect:

The court in this case refused to grant a preliminary injunction because of a liquidated damages provision which raised questions about irreparable harm. This decision was presented on cross-motions for summary judgment.

Noteworthy Principles of Law:

This decision includes the familiar prerequisites under Delaware law for the enforcement of a covenant not to compete. See page 14.  The three basic elements familiar to most readers are that a covenant not to compete under Delaware law must: (1) be reasonable in geographic scope and temporal duration; (2) advance a legitimate economic interest of the party seeking its enforcement; and (3) survive a balancing of the equities in order to be enforceable. See footnote 85.

Notable about this case is the nuance involving the geographic scope of the territorial area that was restricted under the applicable clause. See page 15.

The employee argued that the covenant was not enforceable because the geographic scope was undefined and too broad. The court disagreed.  The most important aspect of this nuanced issue is that the court relied on prior case law to enforce non-competition agreements that limited activity that “competes” with a former employer, which is enforceable, as opposed to a provision that seeks to limit activity that is “merely similar to” the business of a former employer—which is not enforceable, even when a geographic area is not specified. See footnote 91.

The court also discussed the truism under Delaware law one cannot be liable for aiding and abetting a breach of contract. See footnote 115. The court also discussed the elements for tortious interference with contractual relationships. See footnote 116.

Lastly the court discussed the remedies available in this case, which required further clarification of factual issues by the parties. This decision includes many practical statements of law that have broad application for those who labor in the field of commercial litigation.


The second Chancery decision on September 28, 2018 involving a covenant not to compete was styled NuVasive, Inc. v. Miles, C.A. No. 2017-0720-SG (Del. Ch., Sept. 28, 2018).  This second Chancery decision on the same date involving a covenant not to compete was most noteworthy for its discussion regarding choice of law principles.  This case should be contrasted with a prior Chancery decision in the matter of Ascension Insurance Holdings, LLC v. Underwood, in which a choice of law analysis was applied to prevent the application of Delaware law based on California public policy preventing the enforcement of a covenant not to compete.

By contrast, the instant decision in the NuVasive matter applied a new California law, that was enacted after the Ascension case was decided, now known as Section 925 of the amended California Labor Code.  Section 925 as amended exempts from the California law that restricts importing the law of another state for covenants not to compete, those instances where the employee is “represented by legal counsel in negotiating the terms of the choice of law provision in the covenant not to compete.” See page 2.  In this case, the former president and COO of NuVasive was represented by counsel in the negotiation of the choice of law and forum provisions of the employment agreement at issue.  Although Section 925 is not retroactive under California law, the court found that the California legislature strongly expressed the public policy of California which in this case allowed the enforcement of the choice of Delaware law by the parties, as well as the choice of Delaware forum.

Noteworthy Aspects of NuVasive, Inc. Decision:

  • In a parallel action, a California court upheld the Delaware forum provision prior to this decision in NuVasive.
  • The Court of Chancery in this matter based its analysis not only on the new exception under California law to the enforcement of the law of other states for covenants not to compete, but also the Restatement (Second) of Conflicts of Laws § 188 (1971). See also footnote 46. Based on the court’s analysis, the court found that in the narrow circumstances of this case where an employee had legal representation during the negotiation of a covenant not to compete, the public policy of California was not violated, nor did it violate comity, to uphold the parties’ choice of Delaware law and Delaware forum under the circumstances allowing for the enforcement of a covenant not to compete in this case.
  • Because this decision only involved the issue of what state’s law would apply, the court did not decide the actual enforceability issue at this time.

The Delaware Court of Chancery found that a forum selection clause that was merely permissive rather than exclusive, did not justify enforcing one forum only. In the case styled In re Bay Hills Emerging Partners, I, L.P., C.A. No. 2018-0234- JRS (Del. Ch. July 2, 2018), the court was presented with a case challenging the removal of general partners of a Delaware limited partnership. Many prior decisions upholding (mostly) exclusive forum selection clauses have been highlighted on these pages over the last 13 years.

Brief Background Facts:

Shortly after the Delaware action was filed, the limited partner initiated litigation in the Commonwealth of Kentucky in which it sought judicial declarations that its removal of the general partners was proper, along with other legal and equitable relief.

The defendants in Delaware moved to dismiss the action primarily on the basis of the forum selection clause in the relevant agreements that required the plaintiff in the Delaware case to litigate the dispute in Kentucky. The court disagreed, primarily because the applicable forum selection clause was only permissive, and not a mandatory, exclusive forum selection clause. This is recurring issue in corporate and commercial litigation.

The applicable clause stated that Franklin County Circuit Court in Kentucky is “a proper venue” but it did not designate that court as the “exclusive” forum.

Procedural Posture:

Even though the Kentucky action was filed eight days after the Delaware action, and the claims were nearly identical, the court sua sponte decided to stay the Delaware action in favor of the Kentucky action.

The court reviewed the motion under Rule 12(b)(3), which does not limit the court to the complaint but allows the court to consider extrinsic evidence. In addition to the forum selection clause, the motion to dismiss the Delaware action was based on forum non conveniens as well as “the interests of comity” and the doctrine of sovereign immunity because the Commonwealth of Kentucky was one of the interested parties.

Analysis of the Court:

One of the more interesting aspects of this decision was the analysis of 6 Del. C. § 17-109(d) which prohibits limited partners from waiving the right to litigate matters relating to the internal affairs of the limited partnership in the courts of Delaware.

Forum Selection Clauses:

The court recognized the well-settled rule in Delaware that courts generally should give effect to the selection in a private agreement to resolve disputes in a particular forum.

The Delaware courts often grant motions to dismiss where the parties use express language clearly indicating that the forum selection clause excludes the court where a party improperly filed an action. See footnotes 33 and 34.

Choice of Law Clauses:

There was a choice of law provision in this agreement which provided that the laws of the Commonwealth of Kentucky apply regardless of choice of law principles.

Delaware courts generally honor contractually-designated choice of law provisions, as long as the jurisdiction bears some material relationship to the transaction. See footnote 36.  In this case there is little doubt about the material relationship to Kentucky because the limited partner in each of the limited partnerships involved was a statutorily created entity that manages the retirement systems for the Commonwealth of Kentucky.

Notably, the court referred to the cases where there is a “false conflict” meaning that there is no material difference between the laws of competing jurisdictions–in which case the “court should avoid the choice of law analysis all together.” See footnote 38.  The court applied that principle in this case to decline to undertake a choice of law analysis.

Key Takeaways:

The key rulings with the most widespread applicability that can be gleaned from this case are the following:

1)         Where two cases are filed within a short time of each other, the court will treat them as being filed contemporaneously, and a forum non conveniens analysis will apply.  In this case it applied to favor a stay of the Delaware case and an application of Kentucky law because there were no unique issues of Delaware law presented.

2)         The court recognized the general enforceability of forum selection clauses, as well as choice of law provisions.  Many forum selection clause cases have been highlighted on these pages.

3)         The court observed that both the Delaware LLC Act and the Delaware LP Act prevent non-managers of LLCs and non-general partners of LPs from waiving their right to litigate internal affairs issues in Delaware, but those provisions do not require them to litigate in Delaware; nor do those provisions require LLC managers or general partners of limited partnerships to litigate in Delaware.

A recent Court of Chancery decision elucidated several principles applicable to a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6). In The Dow Chemical Company v. Organik Kimye Holding, A.S.C.A. No. 12090-VCG (Del. Ch. May 25, 2018), the court explained several principles applicable to Rule 12(b)(6) motions that are eminently quotable for use in future briefs. For example:

  • As long as a claimant “alleges facts in his description of a series of events from which a claim may reasonably be inferred and makes a specific claim for the relief he hopes to obtain, he need not announce with any greater particularity the precise legal theory he is using.” Slip op. at 11 to 13.
  • The minimal notice pleading rules under Delaware law merely require “fair notice in a general way of the cause of action asserted, which shifts to [the party moving to dismiss] the burden to determine the details of the cause of action by way of discovery for the purpose of raising legal defenses.” Slip op. at 17.
  • The court declined to rule on whether the Delaware Uniform Trade Secrets Act preempted common law claims, and relatedly, explained that choice of law issues are fact-intensive in order to apply the “most significant relationship” test, and typically not appropriate for resolution on a motion to dismiss.

Meyer Natural Foods LLC v. Duff, C.A. No. 9703-VCN (Del. Ch., June 4, 2015). This Court of Chancery letter ruling is noteworthy to the extent that the Court granted dissolution of an LLC despite: (i) no deadlock (one member owned 51%); (ii) an ongoing profitable company; (iii) language in the LLC agreement barring voluntary dissolution; (iv) the ability of the LLC to continue to operate within the scope of its purpose clause, at least in theory; and (v) the court went beyond the four-corners of the agreement to explore the core purpose of the LLC. Specifically, notwithstanding an integration clause, the court considered other agreements that were contemporaneously entered into by the parties in connection with the formation of the LLC, only one of which had a Delaware choice of law clause. That factual consideration was key to addressing the “practicability” requirement for dissolution in 16 Del. C. Section 18-802

Key facts as noted by the Court:

The operative facts here are that PNB’s business depended on the integrated supply and distribution of natural beef, the Output and Supply Agreement is no longer effective, Respondents no longer believe that non-compete obligations apply, and no one wants to remain in the business as originally structured.

This decision should be juxtaposed with other rulings denying requests for dissolution even in the face of a deadlock, for example, as highlighted on these pages. But see recent decision highlighting broad equitable basis for court to consider dissolution of an LLC.

SIGA Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 314, 2012 (May 24, 2013). This Delaware Supreme Court decision was the subject of a BloombergBusinessweek article on Sunday, May 26. The Court of Chancery’s opinion was highlighted on these pages at this link. Also, several other prior Chancery decisions in this case were also outlined on these pages.

Issue Addressed: Is an agreement to negotiate in good faith in accordance with a term sheet an enforceable obligation?

Short Answer: Yes, and a court may award expectation damages if the record supports a finding that an agreement would have been reached but for the defendant’s bad faith negotiations. This aspect of the trial court’s 117-page decision was upheld, but Delaware’s high court reversed and remanded the damages award to reconsider damages in light of this opinion.

One Takeaway from this Supreme Court Opinion: The detailed facts must be tethered to any lesson or principle of law taken from this opinion, but at least one ineluctable result of this ruling is that any attorney or businessperson who sends a term sheet to another party in the context of having a duty to negotiate in good faith, must read this opinion in order to determine whether liability will attach as a result of refusing to finalize a definitive agreement in a manner that may be construed, based on this opinion, to be based on less than good faith.

Brief Background

The prior decisions linked above provide more background, but a bare bones distillation of the factual setting involves SIGA and PharmAthene negotiating simultaneously for a license agreement and a merger agreement, with the goal that if the merger was not consummated that at least a license would result. After trial, the Court of Chancery found that the term sheet contained the essential terms for the license and that if a merger was not consummated, that a final and formal license agreement would be entered into. See Supreme Court Slip op. at 9.

Key fact: The parties signed a merger agreement which provided that if the merger were terminated, the parties agreed to negotiate in good faith a definitive license agreement based on the term sheet. (Notably, at the bottom of the two-page term sheet was a “footer” that stated: “non binding terms”.  In the context of the other overwhelming facts, that footer was not determinative.)

Bullet Points on Legal Principles from Opinion

  • Delaware’s high court discussed choice of law principles but determined that it was not necessary to decide the issue because New York and Delaware law were not meaningfully different on the relevant issues. See footnotes 34 to 36 and accompanying text. Nonetheless, the court discussed the reasoning that can be employed when two related, and somewhat overlapping contracts, have two different choice of law provisions.
  • In the context of proposing terms substantially different than the term sheet, the court described “bad faith” as:

 “not simply bad judgment or negligence, but rather it implies the conscious doing of a wrong because of dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that it contemplates a state of mind affirmatively operating with furtive design or ill will.” See footnote 66 and related text.

  • The elements of a promissory estoppel claim were recited and then the court reasoned that such a claim does not apply to this case because a fully enforceable contract governs the promise at issue–that is, the merger agreement with its provision to negotiate in good faith. See Slip op. at 30-31.
  • Two types of “agreements to negotiate in good faith” are referred to as “Type I” and “Type II” based on federal decisions described in footnotes 82 and 85 and accompanying text. Type II agreements do not guarantee the parties will reach agreement on a final contract due to good faith differences that may arise, but a Type II agreement: “does, however, bar a party from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement”. Footnote 85.
  • DAMAGES: The Delaware Supreme Court announces new law in this opinion: When the parties have a Type II agreement to negotiate in good faith, and the record supports the trial court’s finding that the parties would have reached an agreement but for the defendant’s bad faith negotiations, the plaintiff is “entitled to recover contract expectation damages.” Slip op. at 37.  Expectation damages presuppose that “the plaintiff can prove damages with reasonable certainty.” See footnote 99. Because this is the first time the Delaware Supreme Court clarified this issue of damages, it reversed and remanded for Chancery to reconsider the award of damages in light of this opinion.
  • Attorneys’ Fees: The Court of Chancery awarded fees based on both the bad faith exception to the American Rule as well as a fee-shifting provision in the Bridge Loan Agreement between the parties. The high court affirmed the award of attorneys’ fees based on the fee-shifting provision and a finding that the fees requested were reasonable. See footnote 110 and related text.
  • The high court did not address the bad faith basis for awarding fees except to note in footnote 109 that the Court of Chancery has inherent equitable authority to award fees–separate from the award of costs pursuant to 10 Del. C. Section 5106 (citing Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 2013 WL 1914714  at *12 (Del. May 9, 2013)).
  • The Supreme Court also remanded for the Court of Chancery to reconsider the award of expert fees  so as to tailor them to the bases of liability on which PharmAthene prevailed. See footnotes 111 and 112.

MPEG LA, L.L.C. v. Dell Global B.V., C.A. No. 7016-VCP (Del. Ch. March 6, 2013).Delaware

This case is noteworthy for purposes of Delaware corporate and commercial law, to the extent that it addresses an issue raised because the defendants sought the application of the New York Rules of Civil Procedure for purposes of the substantive law in the case.  The case involves a contract dispute and the parties selected New York substantive law as their choice of law.

The court observed that the general rule is that the law of the forum state usually applies to procedural issues.  See cases cited at footnote 8.  The only exception to that general rule is where the procedural law of the forum state is “inseparably interwoven with substantive rights.”  The court concluded that that was not the situation involved in this matter, and therefore, the court refused to apply the procedural rules of New York to the issues in this case.

Chancellor Leo Strine Jr. of the Delaware Court of Chancery has co-authored an article with Professor Larry Hamermesh and Matthew Jennejohn, entitled: “Putting Stockholders First, Not the First-Filed Complaint. The abstract of the article follows:

 The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this article suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.


Soterion Corp. v. Soteria Mezzanine Corp., C.A. No. 6158-VCN (Del. Ch. Oct. 31, 2012).

Why This Case is Noteworthy: This decision addresses for the first time in Delaware the applicable standard to determine when the threat of a lawsuit can be tortious interference with prospective business relationships.  This opinion also features the rare instance when attorneys’ fees are assessed based on an exception to the American Rule (as compared with Rule 37 for motions to compel).

Brief BackgroundCoins (Money) by mystica - Coins 10 and 50 value.... from a treasure that I made :-) the texts on the coins are made to objects :-)

The core background facts of this case involve the sale of two imaging centers which, it was argued, were not consummated because of the threat of litigation that was sent in a letter to the prospective buyers with a copy of a draft complaint.  That draft complaint was not filed until three months later.  Moreover, several days prior to the eventual trial on that complaint, the plaintiff stipulated to a judgment dismissing the claims.  The defendants counterclaimed based on an argument that the threat of litigation constituted a tortious interference with prospective business relationships and was the cause of the two deals not closing. 

The claims in the complaint that were dismissed, in essence, argued that the sale of the two imaging centers was not properly authorized.  As indicated, the plaintiffs stipulated to a dismissal of those claims a few days before trial.  The court found that the plaintiffs knew that their claims were false and unjustified at the time they filed them, and, as a result, this case is a rare example of the court awarding fees incurred to defend those frivolous claims based on an exception to the American Rule.

However, the court also found after a thorough analysis that the counterclaims for tortious interference did not satisfy the necessary elements of that cause of action. 


Several highlights of key parts of this 52-page opinion include the following:

When Threat of Lawsuit Can Itself be Actionable as Tortious Interference

(1) For the first time in a Delaware opinion, the Court announces the applicable standard to be applied in order to determine whether the threat of litigation satisfies the elements of tortious interference with prospective business relationships, especially in the context of threatened litigation that is designed to thwart the sale of a business.  See footnote 141 and accompanying text.  The court determined that the applicable test would be based on Comment c of Section 767 of the Restatement (Second) of Torts.  This test requires proof that either the interferer had no belief in the merit of the suit, or while having some belief in its merit, the interferer institutes or threatens to institute the litigation in bad faith, intending only to harass the third-parties and not to bring the claim to definitive adjudication. 

(2) This should be contrasted with a situation involving the filing of a lawsuit when the claims are asserted in good faith, which is not improper.  See Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 160 (Del. Ch. 1985). 

(3) The court found, despite contrary testimony by the plaintiffs, that the plaintiffs never intended to bring their claims to definitive adjudication and they knew that their claims were false when they made them.  However, as for other torts, in order to prevail on a tortious interference claim, the claimant must establish proximate cause.  Delaware recognizes the traditional “but for” definition of proximate cause, which is defined as:  “One which in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.”  See footnotes 158 to 160.  The court found, however, that the threatened litigation was not the proximate cause of the two deals not closing, and therefore, the prerequisites to tort liability were not satisfied.  (But see basis for exception to American Rule on attorneys’ fees.) 

Elements of Tortious Interference with Prospective Business Opportunity

(1) The Court recited the elements of a claim for tortious interference with a prospective business opportunity.  See footnote 124 and accompanying text.  The court explained that the first prong requires the existence of a reasonable probability of a business opportunity, which means that the plaintiff:  “must identify a specific party who is prepared to enter into a business relationship but was dissuaded from doing so by the defendant and cannot rely on generalized allegations of harm.”  The court further explained that in order to qualify as a reasonably probable business opportunity, it must be:  “something more than a mere hope or the innate optimism of a salesman or mere perception of a prospective business relationship.”  As mentioned, the counterclaim defendants did not satisfy the proximate causation prerequisite that is an essential element of this tort.  See Slip op. at 34.  See also footnotes 124 to 137.

(2) The court discussed the factors in Section 767 of the Restatement, that are applied in order for the Court to determine if intentional interference is improper or without justification.  See footnote 134.  Those seven factors address the circumstances under which threatened or filed litigation will be considered unjustified interference (or when it may not).

(3) Noteworthy is the reference to Section 772 of the Restatement, which is the “truth exception,” and which provides that:  “One who intentionally causes a third person not to enter into a prospective contractual relation with another does not interfere improperly with the other’s contractual relation, by giving the third person truthful information.”  See footnote 138 (citing cases where the disclosure of ongoing litigation to a third party in support of truthful statements is not actionable. )

Award of Attorneys’ Fees

(1) The court explained the rarity of applying the bad faith exception to the American Rule, (which is that everyone pays their own way for attorneys’ fees).  The court applied the exception in this case because the court found that the plaintiffs knew that the core allegations of their complaint were false when they filed the complaint.  The court cites cases in support of its holding at footnotes 167 through 170.  The court also rejected the arguments that counsel for the plaintiffs should be faulted for the dereliction of their clients. 

(2) The court distinguished a situation which would not be subject to the bad faith exception when:  “A party [was] acting merely under the incorrect perception of its legal rights.”  That is not considered bad faith conduct. Thus, the Court awarded the defendants all of their attorneys’ fees and expenses incurred up through the date shortly before trial when the plaintiffs agreed to have their complaint dismissed.  The award of fees as an exception to the American Rule should also be contrasted with the award of fees in connection with a motion to compel pursuant to Rule 37, which is not uncommon at all. (The only claims that proceeded to trial were the counterclaims on tortious interference, which failed, and for which fees were not awarded.)

Choice of Law

(1) Also instructive was the choice of law analysis in this case.  Because there were several entities that were involved in events that crisscrossed several states, the court conducted a choice of law analysis.  The court observed that the Delaware courts generally apply a four-factor test when determining which state’s law applies: (1) The place where the injury occurred, (2) The place where the conduct causing the injury occurred, (3) The domicile, residence, nationality, place of incorporation and place of business of the parties, and (4) The place where the relationship, if any, between the parties is centered.  See footnote 118.  The court also observed that mere incorporation within the state is not necessarily the determinative factor, but it is considered to be an important factor when determining which law to apply. 

(2) The court reasoned that the parties in this case voluntarily chose to form Delaware entities through which to conduct their commercial relationships, and those very entities are involved in this litigation.  The Court also reasoned that its decision to apply Delaware law is further supported by the fact that “a plurality of the parties are Delaware entities . . . .”  Slip op. at 33.

Louisiana Municipal Police Employees’ Retirement Systems v. Pyott, C.A. 5795-VCL (Del. Ch. June 11, 2012).

Issues Addressed

Whether collateral estoppel, Rule 23.1 or Rule 12(b)(6) apply to require the dismissal of a Delaware derivative suit based on the dismissal in California of a related derivative suit in which a federal court granted a Rule 23.1 motion to dismiss for failure to make a pre-suit demand.

Short Answer

The Court of Chancery reasoned that collateral estoppel would not apply, and motions to dismiss based on Rule 23.1 and Rule 12(b)(6) were both denied. But see: Delaware Supreme Court’s reversal of this Chancery decision by opinion dated April 4, 2013.

Post-Decision Procedural History

The Delaware Supreme Court reversed this Chancery decision by opinion dated April 4, 2013. Highlights of that decision are available on these pages at this link.

See transcript of bench ruling on July 6, 2012 granting a motion for interlocutory appeal of this opinion and rebutting the online criticism of the decision. Alison Frankel of Thomson Reuters provides an insightful article about the oral argument on the motion. The Delaware Supreme Court next makes an independent decision whether or not to accept the interlocutory appeal.

Editor’s Comment

This decision by the Court of Chancery is an iconic statement of the law relating to Delaware corporate litigation on several different levels.  Much has already been written about this decision that was issued earlier this month and much more will be written, but in these brief comments I focus on two aspects of the decision that may help to place it in context.  First, this opinion can be read as part of a continuing effort by the Delaware Court of Chancery to raise the bar and to establish and enforce the highest standards for derivative litigation and class action suits by shareholders against officers and directors.  In that vein, this decision is part of an evolutionary process which was preceded by other decisions that heralded its coming.  See, e.g., prior decision by the author of this Chancery decision highlighted here.

Another of the many noteworthy aspects of this decision is the principled manner in which the Court of Chancery has asserted its right to decide important issues of Delaware corporate law without deferring to the decisions of non-Delaware courts who either “get it wrong” or cannot be expected to address the issues with the same care and concern as the experts of the Delaware bench can bring to bear.  [This should be contrasted with very recent decisions where the Delaware Court of Chancery has deferred to a first-filed lawsuit in another jurisdiction even when Delaware law applied (see, e.g., recent decision highlighted here), and a recent Chancery decision that deferred to a federal court on an issue of federal law.  (See recent case highlighted here.)]

I make an additional preliminary comment with the respectful caution of someone who makes his living by, at least in part, practicing before the Court that issued this opinion.  This decision extols the virtues of using § 220 of the Delaware General Corporation Law in order to obtain books and records of a corporation before filing a plenary lawsuit.  I have written often about the less than simple and less than completely predictable aspects of § 220.  For example, a recent decision by the Delaware Supreme Court rejected a § 220 request after more than a year of litigation. (See recent case highlighted here).  In addition, a recent law review article I co-authored observed that there is no directly controlling authority in Delaware that requires a corporation to provide, in response to a Section 220 demand, electronically stored information, which comprises the majority of business data which is never printed in hard copy.  See article here.  So, even though on an epistemological level, it makes eminent sense to advance the position that one should use Section 220 to obtain as much information as possible before preparing and filing a plenary complaint, on a practical level “from the trenches,” my experience and my close reading of § 220 cases, persuades me that § 220 can often be an expensive and lengthy process that does not always bear fruit or does not bear sufficient fruit to fulfill the promise of § 220 – – or make it worth the effort.

Aside: Some of the issues addressed in this case are at least tangentially related to the school of thought which argues that plaintiffs are increasingly choosing a forum outside of Delaware, even when Delaware law applies, in order to “try their luck” with judges who are less likely to apply the same degree of specialized close scrutiny that members of the Delaware Court of Chancery apply to the pleadings and lawyers before them. See, e.g., a recent essay on the topic published on the Foley & Lardner website. Sometimes referred to as “ABC” (anywhere but Chancery), a termed coined by Ted Mirvis, the highly-regarded Wachtell Lipton lawyer who is frequently involved in many high profile Chancery cases, we have written often on these pages about that phenomenon. E.g., here and here.

Finally, a review of the details of the decision follows:

Background of Pyott case:

In September 2010, Allergan, Inc. entered into a settlement with the United States Department of Justice and pled guilty to criminal misdemeanor misbranding and paid a total of $600 million in civil and criminal fees. Allergan, Inc., a Delaware corporation which develops and commercializes specialty pharmaceuticals, biologics, and medical devices, specifically Botox Therapeutic, entered into the settlement after admitting that they illegally promoted off-label uses of their popular drug.

The public announcement of this settlement prompted Louisiana Municipal Police Employees’ Retirement System (‘LAMPERS’) to file this action. Similar claims were filed in Federal Court in California which dismissed with prejudice that suit for failure to plead demand futility. The defendants supplemented their motion to dismiss in this action to invoke collateral estoppel.


The Court rejected the 3 arguments of defendants why this Delaware derivative suit should be dismissed in light of the dismissal of a very similar derivative suit in California: collateral estoppel, Rule 23.1, and Rule 12(b)(6). The Court of Chancery disagreed with many of the California Federal Court’s holdings, and held that the plaintiffs were not collaterally estopped from asserting demand futility in the Delaware derivative action. The Court focused on privity, not on whether the prior Rule 23.1 dismissal was on the merits.

Choice of Law

The Court emphasized that whether or not successive stockholders in a subsequent suit are in privity with the corporation and each other is a matter of Delaware law under the internal affairs doctrine and, thus, state law will govern. The Court reasoned that “whether a stockholder can sue derivatively after another stockholder attempted to plead demand futility is equally a matter involving the managerial prerogatives within a corporation,” and should not be governed by potentially different rules across the federal circuits, states, and territories. The ability of a stockholder in a Delaware corporation to bring such a suit should be governed uniformly by Delaware law.

The Same Party or a Party in Privity

Under Delaware precedent, the Court explained that until a derivative action passes the Rule 23.1 motion to dismiss stage, the stockholder is asking the Court for authority to sue in the name of the corporation. Where a Rule 23.1 motion is granted, the lack of authority to sue in the name of the corporation should be clear. Without authority to assert a corporation’s claim, the shareholder in the first case was asserting their own claim to obtain equitable authority to sue. The Court of Chancery previously has ”squarely” held that the adjudication of one stockholder’s individual claim does not have preclusive effect on a second stockholder’s ability to assert the claim.

When a stockholder representative pursues claims in a derivative action, authority for that action can be determined in the following ways: (1) the board of directors or an empowered committee can approve the litigation expressly or by failing to oppose it; (2) a court can determine that the stockholder plaintiff has the authority to proceed by denying a Rule 23.1 motion because the complaint adequately pleads either that demand should be excused as futile or that demand was made and wrongfully refused.

Moreover, when the same stockholder responds to a Rule 23.1 dismissal by filing a second complaint alleging demand futility, that same party may be confronted with the preclusive effect of a Rule 23.1 dismissal. However, when a different stockholder attempts to plead demand excusal, an earlier Rule 23.1 dismissal should not be preclusive; because the previous plaintiff lacked the authority to sue on behalf of the corporation and was not in privity with the corporation or stockholders.

Inadequate Representation

The Court of Chancery found that the California plaintiffs did not adequately represent the stockholders of Allegan or Allergan itself (if they were eventually given approval to represent Allergan). The decisions that offer a preclusive effect to a Rule 23.1 dismissal “universally recognize that another stockholder still can sue if the first plaintiff provided inadequate representation.” This inadequate representation was an independent basis to reject the argument that the California dismissal had a preclusive effect on the Delaware action.

Exception to First-Filed Rule

Many jurisdictions follow a “first-filed” rule which defers to the forum where the first action is filed, and entices fast filing to gain litigation control. Under this rule, the Court explained that plaintiffs’ lawyers cannot act appropriately as stockholders would want them to because by carefully and deliberately proceeding with the claim, the law firm risks losing control over the case to another who would file more immediately.

However, previously the Court of Chancery has clearly held that when a stockholder plaintiff sues in a representative capacity, the first-filed rule does not control which plaintiff has the substantive right to proceed. This case seems to exemplify this race to file. Within 48 hours of Allergan announcing their settlement, LAMPERS filed a complaint, without using Section 220, without conducting an investigation, and without any real allegations which could potentially defeat a demand-futility motion. In California, the plaintiffs’ firms failed to fulfill their duties, motivated by the desire to gain control of the case, and in turn failed to provide adequate representation. Since the plaintiffs in the California action provided inadequate representation for Allergan, the Court concluded that the dismissal of the Delaware case is not required.

Rule 23.1 Inferences Permissible

A reasonable inference can be made from the allegations of the Delaware complaint and the documents presented, that the board knowingly approved and oversaw the business plan which endorsed illegal off-label marketing of Botox.  They held presentations, seminars, funded facilities, and incentivized physicians who would use Botox in these off-label capacities. The complaint only needs to make a “threshold showing, through the allegation of particularized facts, that their claim had some merit.” While the California Federal Court felt the complaint fell short because it lacked evidence of a decision by board members to promote any off-label marketing, this Court believes that at the pleadings stage, a court can draw inferences which are supported by particularized allegations of fact.  While at later stages of the case the plaintiffs will not be entitled to these presumptions and will need to prove their claims, at the pleadings stage, particularized allegations which support reasonable inferences suffice. Because this standard is met here, the Rule 23.1 motion to dismiss was denied.

One of many observations about this case is that Delaware Courts are not often persuaded by the rulings of non-Delaware courts on the finer points of Delaware law.

Rule 12(b)(6)

Because a complaint that “pleads a substantial threat of liability” for purposes of Rule 23.1 “will also survive a 12(b)(6) motion to dismiss,” this motion was also denied.

Additional highlights of the Court’s legal analysis follow the conclusion below.


Collateral estoppel, under Delaware precedent, does not mandate dismissal of this case. (1) The California plaintiffs acted in a self-serving way which ultimately meant inadequate representation. The California dismissal based on Rule 23.1 was not persuasive because it adopted a defendant-friendly inference, but the particularized allegations supported reasonable inferences of the board’s knowledge. The motion to dismiss pursuant to Rule 12(b)(6) was also denied for the same reasons.

(1) [This is my own footnote, not from the Court of Chancery’s opinion]. See generally, Smith v. Bayer Corp., 131 S. Ct. 2368 (2011)(collateral estoppel does not bar unnamed members of a putative class action from refiling a second class action if class certification in the first action is denied).

Highlights of Substantive Law that Make this Decision Iconic

The Preclusive Effect of a Dismissal Based on Rule 23.1

The Court of Chancery acknowledged substantial case law both in other jurisdictions and in prior decisions in Chancery that give preclusive effect to dismissals of derivative complaints pursuant to Rule 23.1.  See cases cited in footnotes 1 and 11.  The Court carefully distinguished those cases based on several principles.  For example, citing decisions of the U.S. Supreme Court and the Delaware Supreme Court, the Court invoked the internal affairs doctrine.  The Court described the internal affairs doctrine as a choice of law concept which applies the law of the state where a corporation was formed to matters related to the relationships among the corporation and its officers, directors and shareholders.

Collateral Estoppel

The Court spent a substantial part of the opinion describing collateral estoppel and the privity element of collateral estoppel.  The opinion is must reading on this nuance of Delaware law.  The Court only needed to address the privity requirement because that requirement for the application of collateral estoppel was not satisfied and, therefore, it was unnecessary to address the other two elements which involve whether a final judgment was on the merits, and whether the issue decided in the prior proceeding was identical.  Because the defendants only invoked collateral estoppel (i.e., issue preclusion), the Court did not consider the more expansive doctrine of res judicata (i.e., claim preclusion).  See footnote 6.

Nature of Derivative Action

The Court regarded the issue of pre-suit demand to be a matter of substantive law governed by the internal affairs doctrine, based on decisions of the U.S. Supreme Court and the Delaware Supreme Court.

The Court cited to a number of federal cases that “missed the point” as a matter of Delaware law, on representative litigation.  Namely, the Court instructed that:  “A stockholder whose litigation efforts are opposed by the corporation does not have authority to sue on behalf of the corporation until there has been a finding of demand excusal or wrongful refusal.” (citing Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993)).  That is, the derivative plaintiff lacks authority to sue on behalf of the corporation until the denial of a Rule 23.1 motion to dismiss.  This is because of the two-fold nature of a derivative action which is as follows.  First, “it is the equivalent of a suit by the shareholders to compel the corporation to sue.”  Second, “it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.”  See Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984).  See footnote 8 and accompanying text in the Pyott opinion.

The Court emphasized that simply because the underlying claim in a derivative action belongs to the corporation and ultimately will be asserted in the name of the corporation if the stockholder receives permission to sue, it does not support the proposition the stockholders are in privity for purposes of the preclusive effect of an order granting a Rule 23.1 motion to dismiss.  The Court observed that:  “At that phase of the case, the competing stockholders are asserting only their individual claim to obtain equitable authority to sue.”

Judicial Estoppel

The Court at footnote 10 provides extensive authority on the concept of judicial estoppel which prevents a party from asserting in a legal proceeding, a position inconsistent with a position previously taken by him in the same or in an earlier proceeding.  As applied to this case, the defendants previously argued in California that the plaintiff lacked authority to assert claims derivatively on behalf of the corporation based on Rule 23.1; and after having prevailed on that point, the same defendants now argue that the stockholder in that case did have authority to assert the claims on behalf of the corporation sufficient to bind all the other stockholders.  The Court applied judicial estoppel to prevent this reversal of position from being argued.

Why Prior Rule 23.1 California Dismissal did not have Preclusive Effect in Delaware

The Court relied on black letter law regarding the preclusive effect of a Rule 23.1 dismissal only when the plaintiff has the authority to assert the claims of the corporation, which would be true in three circumstances:  (1) When the corporation has brought the case or taken it over via a special litigation committee process; (2) The derivative plaintiff survived a Rule 23.1 motion to dismiss, thereby gaining authority to sue and then obtained a decision on summary judgment or at trial; or (3) A court has approved a derivative action settlement and made the determinations required by Rule 23.1.

However, the preclusive effect does not apply when the stockholder plaintiff lacks the authority to sue on behalf of the corporation, and it “particularly does not hold true for a decision determining that the stockholder plaintiff lacks authority to sue.”  The Court cited prior Chancery decisions that squarely held that the decision on one stockholder’s individual claim does not have preclusive effect on a second stockholder’s ability to assert the claim.  Kohls v. Kenetech Corp., 791 A.2d 763 (Del. Ch. 2000) aff’d 794 A.2d 1160 (Del. 2002).  Compare Beiser v. PMC-Sierra, Inc., 2009 WL 483321, at *3 (Del. Ch. Feb. 26, 2009) (one stockholder’s efforts to use Section 220 was limited by a different stockholder’s filing of a federal securities action that triggered the automatic stay under the Private Securities Litigation Reform Act).

The Court specifically disagreed with the prior Chancery decision in Career Education, specifically the part of the decision that followed federal cases holding that Rule 23.1 dismissal has a preclusive effect.  See 2007 WL 2875203, at *10.

Declining to follow the Chancery decision in Career Education, the Court explained that an earlier Rule 23.1 dismissal “does not have a preclusive effect on a subsequent derivative action brought by a different plaintiff because, as the earlier Rule 23.1 decision itself established, the prior plaintiff lacked authority to sue on behalf of the corporation and therefore was not in privity with the corporation or other stockholders.”  Following the decision in the Kohls case, however, the Court recognized that an earlier decision may by persuasive authority and could have an impact based on stare decisis.

The Fast-Filing Problem

The extensive citations in this opinion to scholarly articles and commentary by practitioners and academics on the role that derivative actions play in the “big picture” of corporate governance and in the enforcement of fiduciary obligations, demonstrates that the Court has thought long and hard about these issues, and this opinion demonstrates the care and attention with which the Court is addressing the larger issues raised in, and the societal consequences of, representative corporate litigation.  See footnotes 17 through 19 and accompanying text.  After discussing the “big picture” and the problems with derivative suits that are filed quickly without adequate investigation in order to give the plaintiffs’ firm the control that historically has come with filing the first complaint, the Court described a more ideal approach which it referred to as the “idealized derivative action.”

A thorough discussion of the concept of derivative actions and the Court’s description of the most ideal way for a derivative action to be prepared and investigated in a careful, methodical way, is juxtaposed with the approach of being the first to file a complaint without having the time for a proper investigation.  The Court describes its preferences for how a derivative action should be prepared and investigated prior to filing.  This case must be read by anyone planning to file a derivative action in Delaware.

Caremark Claim

The Court provides a “how-to manual” that explains how to properly file a Caremark claim, and also provides an exemplary exegesis of Caremark jurisprudence.  A Caremark claim is a breach of fiduciary duty claim that seeks to hold directors accountable for the consequences of a corporate trauma that results from an environment that the directors set in motion or “allowed a situation to develop and continue which exposed the corporation to enormous legal liability, and that in doing so they violated a duty to be active monitors of corporate performance.”  See In Re Caremark Int’l, Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996).  The Court discussed the extensive case law interpreting the Caremark decision and provided tips and suggestions for properly pleading a Caremark claim.

This opinion should be required reading for any lawyer who plans to file a Caremark complaint in Delaware.  The Court observed that the standard for Caremark liability is a high one that “parallels the standard for imposing damages when a corporation has an exculpatory provision adopted pursuant to 8 Del. C. § 102(b)(7).”  That is:  “Such a provision can exculpate directors from monetary liability for a breach of the duty of care, but not for conduct that is not in good faith or a breach of the duty of loyalty.”  (See Stone, 911 A.2d at 367, in connection with the explanation of the Court about the lack of good faith conduct that is a necessary condition for director oversight liability).  A citation in the text of the opinion (not a mere footnote) referred to “friend of this blog” Professor Stephen M. Bainbridge’s article entitled A Convergence of Good Faith and Oversight, 55 UCLA L. Rev. 559 (2008) (discussing the re-interpretation of Caremark as a good faith case and the potential liability risks to directors that result.)  See Slip op. at 50. Professor Bainbridge is often cited in Delaware corporate decisions.

DGCL Section 220

In connection with explaining how a successful Caremark claim can be plead, the Court spent a considerable amount of time exhorting the use of DGCL § 220.  As I have indicated elsewhere, on a conceptual level, it is hard to disagree with the wisdom of using § 220 in the hope of obtaining as much information as possible about the details and the factual basis for a Caremark claim.  My reservation is based on my experience and my knowledge of many of the Delaware decisions on § 220 which have (on occasion, at least), resulted in a denial of any right to books and records under § 220 after expensive trials and lengthy and expensive appeals, or the judicial determination that parties are entitled to documents under § 220 but being confronted with the reality that as of this writing there is no controlling Delaware authority to require the production of electronically stored information, which represents the vast majority of business data created today.