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In Metropolitan Life Ins. Co v. Tremont Group Holdings, et al. C.A. No. 7092-VCP (Del. Ch. Dec. 20, 2012). 

Plaintiff insurance carriers, who were limited partners in a Delaware limited partnership that invested in another fund which invested substantially all of its investment capital in Bernie Madoff’s investment firm, brought an action alleging a number of claims including, among others, fraud, breach of contract, breach of fiduciary duty, negligent misrepresentation, unjust enrichment, civil conspiracy and aiding and abetting. 

Issue: The defendants moved to dismiss the complaint arguing that: (i) the Court lacked personal jurisdiction over the individual defendants; (ii) the exculpation clause of the Limited Partnership Agreement (“LPA”) barred many of the claims asserted by the plaintiffs; (iii) the derivative claims are barred by res judicata and release because of the claims that were settled in the consolidated action in New York and the failure to make demand; and (iv) for the remaining claims the plaintiffs’ failure to state a claim.

Answer:  The Court: (i) found that it lacked personal jurisdiction over the individual defendants; (ii) found certain of the counts were solely derivative in nature, and therefore were dismissed based on res judicata and release; (iii) dismissed the plaintiffs‘ claim for breach of the implied covenant of good faith and fair dealing because the complaint failed to plead a specific, implied contractual obligation; (iv) dismissed plaintiffs‘ negligent misrepresentation claim because it is either barred by the exculpation provision of the limited partnership agreement or duplicative of the fraud and intentional misrepresentation claims; and (v) granted in part the motion to dismiss plaintiffs‘ claims for aiding and abetting and civil conspiracy.

New York Madoff-Related Litigation Against Tremont Settled

After Madoff’s arrest, numerous individual, class, and derivative actions were filed against Madoff’s companies and in particular, Tremont Group Holdings (“TGH”) and others to recover losses as a result of Madoff’s Ponzi scheme. Those actions were consolidated in the United States District Court for the Southern District of New York as In re Tremont Group Holdings, Inc., Securities Litigation.  That case settled, among other things, all Madoff-related derivative and direct claims. The settlement also gave the limited partners in the settling entities an opt-out right, which the plaintiffs in the Court of Chancery action exercised.  After opting out of the settlement, the plaintiffs filed suit in the Court of Chancery on December 7, 2011. 

Consent to Jurisdiction

The first issue the Court addressed was whether it had personal jurisdiction over the individual defendants because the LPA contained a forum selection clause whereby the parties expressly consented to Delaware as the exclusive jurisdiction and venue of the Court of Chancery.  In analyzing this issue, the Court noted that a party may expressly consent to jurisdiction by contract, and if the party properly consents to personal jurisdiction by contract, a minimum contacts’ analysis is not required.  However, in this action, the only parties to the LPA were the Fund’s general partner and its limited partners, including the plaintiff carriers but not the individual defendants.

The Court described in detail the statutory basis for specific and general jurisdiction and the provisions of the Delaware long-arm statute, 10 Del. C. § 3104(c).  The Court ultimately concluded that because the plaintiffs had not alleged contacts that would “meet the minimum contacts standard, such as residing, conducting business, or owning real property or other assets in Delaware,” and that they had failed to allege facts that the individual defendants “purposefully directed their activities at the forum and the litigation resulted from injuries that arose out of or related to those activities,” the Court had no jurisdiction over the individual defendants.

Exculpation Provision

Defendants next argued that the Exculpation Provision of the LPA barred the plaintiffs’ claims for breach of contract, breach of fiduciary duty, negligent misrepresentation and unjust enrichment.  The plaintiffs argued that they had satisfied their burden in the complaint by six allegations of gross negligence and willful and reckless conduct. The Court concluded that the complaint adequately pled facts in support of a claim against Tremont that conceivably could satisfy one or more of the grossly negligent, willful, or reckless requirements set forth in the Exculpation Provision.  Thus, the Court denied Tremont’s motion to dismiss those counts.

Derivative Claims

Tremont next argued that claims should be dismissed because: (i) the doctrines of res judicata and release by operation of the final judgment in the New York action barred the plaintiffs’ derivative claims; (ii) although the plaintiffs label the breach of fiduciary duty and unjust enrichment claims as direct claims, they are also derivative claims and should be barred; and (iii) the plaintiffs have failed to satisfy the demand requirements applicable to those claims.

 Tremont also argued that the claims for breach of fiduciary duty and unjust enrichment arise out of the diminution in the value of the funds resulting from Madoff’s theft of the funds’ assets and from the funds’ payment of allegedly unwarranted fees to Tremont. Because these injuries were suffered by the funds and only indirectly by the plaintiffs, Tremont argued that the claims were derivative, and not direct.  The plaintiffs argued that the settlement rendered their claims direct rather than derivative.  Specifically, they argue that the first prong of the Tooley test—i.e., who suffered the alleged harm—was satisfied because the plaintiffs received no benefit from the settlement because they opted out.  The plaintiffs also argued that they satisfied the second prong of the Tooley test—i.e., who would receive the benefit of any recovery or other remedy—because the claimed damages would benefit the plaintiffs alone.

The Court found that the claims were derivative in nature because Tremont’s misconduct damaged the plaintiffs “only to the extent of their proportionate interest in TOF III independent of the funds.”  However, the Court went on to note that those derivative claims were released by the settlement of the New York litigation therefore, the Court dismissed those claims as barred  by principles of res judicata and release by operation of the final judgment in New York.

Failure to State a Claim

Tremont also moved to dismiss the remaining claims—breach of contract, breach of covenant of good faith and fair dealing, fraud, intentional misrepresentation, negligent misrepresentation, and civil conspiracy/aiding and abetting.  For the contract claim, the Court found that the complaint alleged facts that could conceivably support a reasonable inference that Tremont breached its obligations under the LPA, so the Court denied the motion to dismiss the breach of contract claim. With respect to the breach of an implied covenant, the Court found that the complaint failed to plead a specific implied contractual obligation so the Court granted the motion to dismiss this count.  With respect to fraud or intentional misrepresentation, the Court found that the plaintiffs had adequately pled facts to support both of those claims therefore the motion to dismiss was denied.  However, with respect to the claim for negligent misrepresentation, the Court found that claim to be either barred by the Exculpation Provision or duplicative of the fraud and intentional misrepresentation claim, so it was dismissed.

Finally, the Court found that the plaintiffs had alleged facts sufficient to support their claim for aiding and abetting, thus denying the motion to dismiss, however, the Court dismissed the claim for civil conspiracy.  The complaint alleged that one of the defendants, Tremont Partners, Inc. (“TPI”) was a wholly-owned subsidiary of TGH which, the Court noted, could provide a basis for precluding the plaintiffs’ claim for civil conspiracy under In re Transamerica Airlines, Inc., 2006 WL 587846 (Del. Ch. Feb. 28, 2006) (holding that a corporation generally cannot be deemed to have conspired with its wholly owned subsidiary) but “only if TPI was acting for reasons outside the normal course of its business.”  However, the Court found that the complaint failed to contain any such allegations, so this claim was dismissed.

Duff v. Innovative Discovery LLC, C.A. No. 7599-VCP (Del. Ch. Dec. 7, 2012).

Issues Addressed: The Court of Chancery addressed the following issues in this opinion:  (1) Whether a forum selection clause providing for “sole” jurisdiction in California courts should be honored when a conflicting forum selection clause in a related agreement provided for jurisdiction in Delaware courts; (2) Whether 6 Del. C. § 18-111 provided a basis for equitable jurisdiction when the agreement that gave the Court of Chancery jurisdiction only provided for money damages; (3) Whether reformation as a remedy will be allowed when the complaint did not specifically request reformation but provided notice of the elements of that form of relief.

Brief Overview

This case arose in connection with the redemption agreements and related agreements through which two members of a Delaware LLC redeemed their interests.

One of the disputes was whether the agreement should be read to cap a total tax liability for the departing members, who each received a Schedule K-1 after the redemption closed, in an amount greater than they thought the agreement allowed.

This decision provides several useful statements of Delaware law that can be effectively highlighted with bullet points.

●          Section 18-111 of Title 6 of the Delaware Code provides for Chancery jurisdiction when agreements among members or managers and their LLC are sought to be enforced.

●          Chancery rejected the arguments that this statutory basis for jurisdiction was conditioned on equitable relief being sought, and also rejected the argument that the Court had the discretion to decline the jurisdiction if a complaint met the requirements of Section 18-111.

●          The Court also explained that the “cleanup doctrine” allows the Court to decide requests for relief that are not equitable as long as there is at least one basis for equitable jurisdiction at the time the complaint was filed.”  See footnotes 30 to 34.

●          The Court reiterated the now well-established Delaware standard for a motion to dismiss under Rule 12(b)(6) as allowing a claim to proceed when there is a mere “possibility of recovery.”  See footnotes 36 to 39.

●          Even though the complaint did not specifically request reformation as a count or a remedy, the Court allowed reformation to be sought as a remedy without amendment to the complaint because the Court explained that each of the elements for reformation were contained in the complaint, even if not so named, and that gave sufficient notice to the defendant.  See footnotes 51 through 65.

●          Equally important is the ruling that a forum selection clause in one agreement that required all suits to be filed in California was not given effect because it conflicted with a forum selection clause allowing for the jurisdiction of Delaware courts in a related agreement that was incorporated by reference.

●          Delaware law was applied which holds that where one contract incorporates another contract by reference, and the forum selection language is not “crystalline,” the Court will not interpret that forum selection clause to be exclusive.  See footnote 67 through 77.

Carlyle Investment Management L.L.C. v. National Industries Group (Holding), C.A. No. 5527-CS (Del. Ch. Oct. 11, 2012).

Issue Presented: Whether a default judgment should be opened when the defendant Kuwaiti company agreed to a forum selection clause in Delaware and willfully ignored multiple opportunities to participate in the lawsuit.

Short Answer: No.

Brief Background: This case involves the Carlyle Group, which the Court described as one of the largest private equity firms in the world, and National Industries Group, which is described as a multi-national, multi-billion dollar conglomerate based in Kuwait. (Note Kuwaiti flag above.)  The parties entered into various agreements involving the investment by National in various closed-end investment funds of Carlyle which were unsuccessful.  The agreements between the parties included a forum selection clause requiring that any disputes to be litigated exclusively in the Delaware Court of Chancery.  Carlyle filed suit in the Court of Chancery to enjoin National from litigating a dispute regarding the agreements in Kuwait.  Despite multiple attempts to encourage National to participate, National continued to ignore the Delaware lawsuit and continued to litigate in Kuwait.  The Delaware Court of Chancery issued a default judgment which included an anti-suit injunction preventing National from litigating in Kuwait.  After many months of ignoring Delaware proceedings, and in connection with a motion by Carlyle to have National held in contempt for violation of the injunction, National filed a motion to vacate the default judgment under Court of Chancery Rule 60(b)(4) and Rule 60(b)(6).  The Court denied the motion to vacate the judgment.

Analysis

Although most businesses do not intentionally permit a default judgment to be entered against them, this case is still notable for its robust analysis of the enforceability of forum selection clauses and the policy underpinning the enforceability of those clauses.  This opinion is also helpful to explain why it is a gamble not worth taking, to allow a default judgment to be entered and thereafter to seek to have that judgment vacated under Rule 60.  The Court rejected arguments based on alleged lack of personal jurisdiction and based on an alleged lack of subject matter jurisdiction, as well as rejecting arguments about the non-enforceability of the forum selection clause.  Highlights from this relatively short 33-page opinion include the following:

●          A Rule 60(b) motion is “not an opportunity for a do-over or an appeal.”

●          At a Rule 60(b) hearing, a party does not have the privilege of contesting whether the injunction should have issued.  Rather, one must show that the judgment is void under Rule 60(b)(4) or that “extraordinary circumstances” warrant vacating it under Rule 60(b)(6).

●          Decisions from the Supreme Court of the United States and of Delaware’s Supreme Court were cited to support the general enforceability of forum selection clauses.  See, e.g., footnote 54.

●          A party may use a Rule 60(b)(4) motion only to attack the jurisdiction of the Court and not to attack the resolution of a case on the merits.

●          Delaware courts prevent a party from “making an end-run around an otherwise enforceable forum selection provision through an argument about the enforceability of other terms in the contract.”  See footnote 87.

●          The recent Delaware Supreme Court decision in Ingres Corp. v. CA, Inc. ruled that the Court of Chancery did not err in granting an anti-suit injunction in order to enforce a forum selection clause and prevent a party from litigating in another forum.  See footnote 99, and highlights of that case on these pages available here.  See also Malouf decision by the Court of Chancery, highlighted here.

●          Although Rule 60(b)(6) may be seen as a catch-all provision, and the Court may grant relief “for any other reason,” the standard is stringent and the moving party must show “extraordinary circumstances.”  A strategy by National in this case not to appear and to allow a default judgment may have been unwise, but it does not constitute extraordinary circumstances relieving it of the consequences of its own tactical choice.

We typically focus on summarizing corporate and commercial decisions of Delaware’s Supreme Court and Court of Chancery, but today we find noteworthy a bevy of new lawsuits just filed in the Delaware Court of Chancery.

These new suits challenge bylaws in several companies that require shareholder suits to be filed exclusively in the Delaware Court of Chancery.  If suits are filed elsewhere, the company threatens to sue those shareholders to recoup fees for breach of the bylaw provision. The challenge is based on the alleged violation of due process rights because there was no mutual consent by the shareholders. The suits were filed by the highly-regarded corporate litigator Michael Hanrahan of the Prickett Jones firm in Wilmington. Among the companies sued by shareholders challenging the exclusive forum bylaw provision, in separate lawsuits, are the following Delaware corporations:

Navistar International Corp., AutoNation, Inc. Chevron Corp., SPX Corp., Superior Energy Services, Inc., Franklin Resources, Inc., Curtiss-Wright Corp., Danaher Corp., and Solutia Inc.

Friend of this blog and well-recognized corporate law expert, Professor Stephen Bainbridge, provides timely comments on these new lawsuits. Thomson Reuter’s Alison Frankel wrote an excellent article about these cases that provides a very helpful overview and also has a link to the actual complaints. Broc Romanek on his site called The Corporate Counsel.net, provides helpful observations on this development.

The concept of a forum selection clause in a corporate charter was given momentum by the dicta and citations to Delaware decisions and law review articles, in Vice Chancellor Laster’s footnote 8 in his opinion in the case of In Re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010), read opinion here.

Scholarship on the Topic

Corporate law scholars have written extensively about this topic and we have featured much of that scholarship on these pages. For example, Professor Joseph Grundfest of Stanford, one of the early promoters of the idea of adding a charter provision (as compared with a bylaw provision), with an exclusive forum selection clause for shareholder suits, presented a lecture in Delaware before the Bench and Bar on the issue, as discussed on these pages here . Prof. Steven Davidoff provided insights on the topic here. Ted Mirvis of Wachtell Lipton, who often litigates high-stakes matters in the Delaware Court of Chancery, has also been credited with this particular forum-selection concept, as indicated in his 2007 article available here.

Although Delaware Courts have not squarely decided the issue of a forum selection clause in a bylaw provision, that is not voted on by the shareholders, a California court struck down a provision in a case noted on these pages here. Professor Bainbridge comments on the topic here.  Prof. Brian J.M. Quinn wrote a law review article on the issue, available here.

Our post here  on this topic and related issues, includes commentary by the late, great scholar Prof. Larry Ribstein and others who have addressed the related problems with multi-jurisdictional litigation and the challenges that arise with an apparent increase in the number of non-Delaware courts deciding issues of Delaware corporate law. A ruling on these new cases by the Delaware Court of Chancery, which will likely be appealed to the Delaware Supreme Court, will be a welcome addition to provide a measure of certainty on this cutting edge topic.

Supplement: Corporate attorney Claudia Allen prepared a study of Delaware forum selection clauses in charters and bylaws that is available via a post by Professor Bainbridge here. Delaware litigator Edward Micheletti has written an article on the issues of multi-jurisdictional litigation that these bylaw amendments are attempting to address. Kevin La Croix on his blog called The D & O Diary compiles articles and statistics and related sources on the various issues related to an increase in M& A/Takeover litigation here  including multi-jurisdictional aspects of that litigation here.

The Wilmington News Journal has an article co-authored by Phil Milford that examines average awards of attorneys’ fees in cases challenging deals even when it is not apparent if the shareholders are receiving a quantifiable benefit from the lawsuit.

In ASDC Holdings, LLC, et al. v. The Richard J. Malouf 2008 All Smiles Grantor Retained Annuity Trust, et al., C.A. No. 6562-VCP (Del. Ch. Sept. 14, 2011), read opinion here, the Court of Chancery held that where a forum selection clause is enforceable in a Delaware court, the Court will enforce it even if Delaware, based on McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., would otherwise default to the first-filed forum.  Accordingly, the Court enforced the forum selection clause and enjoined the first-filed action.

This summary was prepared by Kevin F. Brady and Ryan P. Newell of Connolly Bove Lodge & Hutz LLP.

Background

Plaintiffs included a dental practice (“All Smiles”), a private equity firm and its management firm (“Valor”), a limited liability company formed by Valor to invest in All Smiles (“ASDC”), the CEO and director of the private equity firm, and some directors and officers of the dental group and private equity firm.  Defendants are Dr. Richard J. Malouf, the founder and controlling shareholder of the dental practice, as well as a trust Malouf established and controls (collectively, “Defendants” or “Malouf”).

In a 2010 contract with Malouf, ASDC agreed to invest $65 million in All Smiles, receiving in return 71% of its stock.  At the same time, some of the Plaintiffs entered into various side agreements (the “Agreements”) with the Defendants.  In the Agreements, they agreed to the exclusive jurisdiction in Delaware for “any claim or cause of action arising under or relating to t[he] Agreement[s] . . . .”  In February 2011, Malouf and three other parties filed suit in Texas against a number of the Plaintiffs.  The Plaintiffs who were sued in the Texas action moved to dismiss on the grounds that the forum selection clause in the Agreements conferred jurisdiction only in Delaware.

The Plaintiffs then brought suit in Delaware in June 2011.  Plaintiffs sought specific performance under the Agreements, a declaratory judgment that Defendants must litigate exclusively in Delaware, and a preliminary injunction to enjoin the Texas action.  Defendants moved to dismiss, challenging the Court’s subject matter jurisdiction on the basis that Plaintiffs had an adequate remedy at law as they could have raised the forum selection clause as an affirmative defense in Texas.  They also claim that Plaintiffs cannot satisfy the standard for a preliminary injunction.  Specifically, Defendants contend Plaintiffs have not shown (1) a reasonable probability of success and (2) that they would suffer imminent and irreparable harm if the Texas court determined whether the forum selection clause applied.

Broad vs. Narrow Forum Selection Clauses

In Malouf’s motion to dismiss, he relied upon El Paso Natural Gas Co. v. TransAmerican Natural Gas Corp. where the Delaware Supreme Court affirmed the holding that the Court of Chancery lacked subject matter jurisdiction to enjoin a proceeding in Texas even though the parties had agreed to exclusive jurisdiction in the Court of Chancery.

The Court pointed to two key distinctions between El Paso and this matter.  First, in El Paso the parties contracted to confer subject matter jurisdiction specifically on the Court of Chancery for both legal and equitable claims between the parties.  Because the underlying claims in Texas were legal in nature, the Court of Chancery could not exercise jurisdiction.  Contrary to El Paso, in this case the forum selection clause was broader than the one in the El Paso case and enforceable as to legal and equitable claims because the parties submitted “‘to the exclusive jurisdiction of any state court within New Castle County, Delaware or, if it can obtain jurisdiction, the United States District Court for the District of Delaware sitting in Wilmington, Delaware . . . with respect to any claim or cause of action arising under or relating to th[e] Agreement[s] . . . .’”

Second, the forum selection clause in El Paso was narrower than the one in this case.  The El Paso clause was limited to “ALL ACTIONS TO ENFORCE OR SEEK DAMAGES, SPECIFIC PERFORMANCE . . . FOR THE ALLEGED BREACH OF THIS AGREEMENT . . . .” Such “narrow forum selection clauses only cover claims dealing directly with rights embodied in the relevant contract.”   Because it was so narrow, even if there was subject matter jurisdiction, it was unlikely that the clause could have applied to the claims.  The clause in this case, rather, concerned “any claim or cause of action arising under or relating to th[e] Agreement[s].”  Such broad clauses “apply not only to claims dealing directly with the terms of the contract itself, but also to ‘any issues that touch on contract rights or contract performance.’”  The Court concluded that where such a clause is enforceable the parties’ contract should be honored even if the McWane first-filed analysis would suggest otherwise.

Texas Action Should Be Enjoined

The Court found that Plaintiffs satisfied the three elements for a preliminary injunction.  On the first element, the Court held that even though some of the Delaware plaintiffs in Texas were not signatories to the Agreements “‘officers and directors . . . have standing to invoke [a] Forum Selection Provision as parties closely related to one of the signatories such that the non-party’s enforcement of the clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound.’” It also held that there is a colorable argument that the breach of fiduciary, breach of contract, and unjust enrichment claims arise out of the Agreements, given their broad scope.

On the second element, the Court held that “the procession of a claim in an unwarranted forum poses a threat of irreparable harm warranting a preliminary injunction.” Accordingly, if Plaintiffs are forced to litigate in Texas, they would be deprived of what they bargained for in the forum selection clause.  As to the final element, because the parties agreed to litigate in Delaware, the balance of equities weighed in favor of Plaintiffs and what they bargained for, as opposed to Malouf and his choice of Texas as a forum.

Please join me in a warm welcome to the blogosphere for a new blog that is designed to cater to Delaware lawyers and judges. The recently launched Delaware Trial Practice Forum Blog was advertised as follows in an email sent today to all members of the Delaware Bar:

The purpose of the site is to provide a place for Delaware judges and lawyers to communicate about topical issues, trends and news. We hope that members of the bar and judiciary will regularly participate in discussions on the site and help this project reach its full potential. It is the first website of its kind; dedicated to fostering enhanced and meaningful communication, mentoring and discussion between and among members of the Delaware Bar and the Delaware judiciary, and to advance … the principals and ideals of the Judge Bifferato Superior Court Trial Practice Forum.  

The new site is available here, and we wish them well. I will also be adding it to my blogroll.

In the recent decision of In Re Allion Healthcare Inc. S’holders Litig., C.A.No. 5022-CC (Del. Ch. Mar. 29, 2011), read opinion here, Chancellor Chandler decided the rarely discussed issue of the division of attorneys’ fees between plaintiffs’ counsel in what has become common and problematic in multi-forum deal litigation.

Kevin F. Brady of Connolly Bove Lodge & Hutz LLP prepared this summary. 

 

Background

 

The underlying transaction involves a going-private transaction regarding Allion Healthcare, Inc. After the merger was announced, there occurred what the Chancellor described as the “fairly typical race-to-the-courthouse.” Various plaintiffs filed suit: first one suit in New York, then three actions were filed in Delaware. In the last filed case, the plaintiff’s lawyers were unhappy with the leadership positions and opted to voluntarily withdraw its suit in Delaware and file in New York where it moved for co-lead plaintiff status, which was granted. The cases moved forward on parallel tracks and preliminary injunction hearings were scheduled in both Delaware and New York. Then the Delaware plaintiffs announced that they had reached a settlement involving corrective disclosures.  A supplemental proxy was issued, the stockholders approved the merger and it closed on January 13, 2010. 

 

Plaintiffs in Delaware and New York filed amended complaints asserting claims arising out of the merger. Motions to dismiss were filed. And a few months later the Delaware plaintiffs announced an agreement in principle to settle the Delaware action. The proposed settlement resulted in a $4 million increase in merger consideration. The Court set a date for the settlement hearing and the New York plaintiffs immediately filed an emergency motion to intervene and take discovery. The Court denied the emergency request but did allow some discovery.     

 

Settlement Hearing

 

The Court approved the settlement between defendants and the Delaware plaintiffs, over the objection of New York plaintiffs. The Court approved the certification of the settlement class and a fee award totaling $1 million, which constituted a $250,000 disclosure fee award and a $750,000 increased share price fee award. When the Delaware and New York plaintiffs’ attorneys could not resolve their disagreement over the fees, the Court was forced to address the division of those attorneys’ fees. The Delaware plaintiffs’ counsel argued that the New York plaintiffs’ portion should not exceed $100,000, amounting to 40% of the disclosure fee and that the New York plaintiffs were “not entitled to any portion whatsoever of the increased share price fee.” Counsel for the New York plaintiffs requested 50% of the disclosure fee and one-third of the increased share price fee, amounting to a total of $375,000.

 

Problems Associated With Multi-Deal Litigation

 

The Chancellor discussed the many practical problems that resulted from plaintiffs’ counsel filing multiple actions in different jurisdictions regarding the same deal with no workable solutions.” The Court noted:

Defense counsel is forced to litigate the same case—often identical claims—in multiple courts. Judicial resources are wasted as judges in two or more jurisdictions review the same documents and at times are asked to decide the exact same motions. Worse still, if a case does not settle or consolidate in one forum, there is the possibility that two judges would apply the law differently or otherwise reach different outcomes, which would then leave the law in a confused state and pose full faith and credit problems for all involved. 

 

Efficiency and comity would be better served if these cases were litigated in one jurisdiction. Of course, if a stay or dismissal is not granted in one jurisdiction, defense counsel may attempt to “forum shop” for the jurisdiction in which the best outcome for its client is likely. As has been noted recently before this Court, the forum shopping issue, in and of itself, is not necessarily problematic at all, and indeed may be “unquestionably proper or [] part of the zealous advocacy expected of attorneys.” But it in turn does highlight the potential, at least, for collusive settlements or “reverse auctions”—even if what defense counsel is ultimately doing is simply attempting to litigate its case in one jurisdiction only, wherever that may be. Plaintiffs’ counsel may similarly engage in forum shopping for the jurisdiction where the judge is most likely to approve their settlement.

 

The problems do not end there. In the event that defense counsel settles in Delaware over another jurisdiction, leaving one set of plaintiffs’ counsel out in the cold, the unfavored forum’s plaintiffs’ lawyers then often flock to Delaware to oppose the settlement (and vice versa). And there are the post-settlement or post-litigation issues as well: class certification, approval of attorneys’ fees, and then dividing those attorneys’ fees between the various plaintiffs’ counsel.

 

Chancellor Chandler did offer some advice and suggested an approach that has “worked for me in every instance when it was tried”:

 

My personal preferred approach, for what it’s worth, is for defense counsel to file motions in both (or however many) jurisdictions where plaintiffs have filed suit, explicitly asking the judges in each jurisdiction to confer with one another and agree upon where the case should go forward….[The] defendants [should] “go into all the Courts in which the matters are pending and file a common motion that would be in front of all of the judges that are implicated, asking those judges to please confer and agree upon, in the interest of comity and judicial efficiency, if nothing else, what jurisdiction is going to proceed and go forward and which jurisdictions are going to stand down and allow one jurisdiction to handle the matter.” Of course…judges in different jurisdictions might not always find common ground on how to move the litigation forward. Nevertheless, this would be, I think, one (if not the most) efficient and pragmatic method to deal with this increasing problem.

 

In the end, the Court determined that because the disclosure benefits were negotiated by both Delaware and New York plaintiffs’ counsel, they were entitled to equally share in the disclosure fee award, 50% or $125,000 to each. With respect to the increased share price fee award, the Court determined that New York counsel were not parties to the settlement agreement between the Delaware plaintiffs and defendants even though they had the opportunity to sign on to the settlement. Based on the evidence presented at the settlement hearing, the Court found that the New York plaintiffs “in no way caused any of the benefit achieved by the Delaware plaintiffs in the settlement.” As a result, the Court awarded the full increased share price fee award of $750,000 to the Delaware plaintiffs.     

 

Supplement:   Further expert insights on this case were recently provided by Theodore “Ted” Mirvis, William Savitt and Ryan McLeod of the Wachtell Lipton firm on the Harvard Law School Corporate Governance Blog here.

Scully v. Nighthawk is a recent Delaware Court of Chancery case involving multi-state class action litigation, highlighted on these pages here, in which the issue was raised about forum shopping and settlements of suits in multi-state corporate cases that could be potentially collusive.

Professor Brian J.M. Quinn writes here about a short letter dated April 12, 2011 from the Court to counsel in the case, available here, in which the Court offers a mea culpa and accepts the report of the Special Counsel appointed by the Court, which concluded that there was no wrongdoing by any of the lawyers involved and the several issues raised by multi-state class actions, such as what some may describe as forum shopping, are relatively unchartered areas of the law in terms of the absence of bright-line standards in many instances.

The good professor also links to a paper he authored about the increasing trend of merger-related litigation being filed in states other than Delaware as well as the related topic of exclusive forum selection clauses. Some wags refer to the ancillary phenomenon of cases being filed outside of Delaware as "ABC" (anywhere but Chancery).