On October 24, 2022, the Ninth Circuit granted en banc review in Lee v. Fisher 34 F.4th 777 (9th Cir. 2022), vacating the Circuit’s prior ruling that the forum selection clause in the bylaws of Gap Inc. (“Gap”) is enforceable. This is the latest chapter in the saga of forum selection enforceability that has gripped the Courts and litigants for years. With this ruling, the Ninth Circuit is set to consider whether forum selection clauses are enforceable, even if they result in a waiver of substantive rights under federal law. A ruling enforcing Gap’s clause will leave the Ninth and Seventh Circuits in direct conflict, while a ruling against Gap could bring the two circuits back into alignment.
Plaintiff Noelle Lee originally brought her derivative lawsuit in the federal district court in California, alleging that Gap failed to honor its commitment to diversity in violation of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a). Plaintiff’s Section 14(a) claim is subject to exclusive federal jurisdiction, but the district court dismissed the case for forum non conveniens, concluding that the case should have been filed in the Delaware Chancery Court in accordance with the forum selection clause in Gap’s bylaws. Plaintiff appealed, arguing that Gap’s forum-selection clause violates public policy and is unenforceable because it prevents her from bringing a derivative Section 14(a) claim in any court.
As noted, the forum selection dispute in Lee v. Fisher follows several years of litigation regarding jurisdiction under the Securities Act of 1933, which permits plaintiffs to choose whether they would bring their action in state or federal court and the enforcement of forum selection clauses in cases under that Act. In Cyan Inc. v. Beaver County Employees Retirement Fund, the Supreme Court preserved the bar on removing securities class actions brought in state court under the Securities Act of 1933 to federal court, thus limiting the ability of corporations to direct litigation to federal forums. In Salzberg v. Sciabacucchi, the Delaware Supreme Court upheld the validity of a Delaware corporation’s certificate of incorporation, requiring shareholders to sue in federal court, rather than state court. Salzberg clarified that corporations could control the forum where securities actions are brought under certain circumstances. The Delaware Supreme Court, however, noted that forum selection provisions wouldn’t be valid in all circumstances and that charter and bylaw provisions that may be facially valid would not be enforceable if used for inequitable purposes.
In Lee v. Fischer, the Ninth Circuit panel affirmed the lower court ruling and held that Plaintiff was bound by Gap’s bylaws. In reaching this conclusion, the panel explained that forum selection clauses are enforceable and binding on parties unless a party can demonstrate extraordinary circumstances, such as when (1) the forum selection clause is invalid because of fraud or overreaching, (2) enforcement of the clause would contravene a strong public policy of the forum in which suit is brought, or (3) the forum would be so difficult and inconvenient as to deprive the litigant of its day in court. See Bremen v. Zapata Off-Shore Co. 407 U.S. 1 (1972). Plaintiff did not contend that the forum selection clause is invalid due to fraud, nor that litigating her derivative claim in the Delaware forum would be gravely difficult; instead, the panel considered only the second factor derived from Bremen—whether enforcement of the clause would contravene strong public policy. The panel held that Plaintiff did not meet her burden to show that enforcing Gap’s forum selection clause contravenes federal public policy.
The Ninth Circuit panel’s affirmation put it in direct conflict with the Seventh Circuit’s decision in Seafarers Pension Plan v. Bradway. 23 F.4th 714 (7th Cir. 2022). In Seafarers, Boeing defended the enforceability of an identical forum selection clause in its bylaws. The Seventh Circuit overturned the lower court’s decision to enforce forum non conveniens, holding that Boeing could not rely on that forum selection clause to prevent shareholders from bringing federal derivative claims. The Seventh Circuit held that Section 115 of the Delaware General Corporation Law, 8 Del. Code § 115, “reject[ed] Boeing’s use of its forum bylaw to foreclose entirely plaintiff’s derivative action under Section 14(a).” Id. at 720. The court also held that Boeing’s bylaw violated the Exchange Act’s antiwaiver provision.
While the Ninth Circuit panel in Lee v. Fisher acknowledged Seafarers, it declined to consider Delaware General Corporation Law, 8 Del. Code § 115 because Plaintiff had never raised that argument. In addition, the court followed Ninth Circuit precedent, holding “the strong federal policy in favor of enforcing forum-selection clauses . . . supersede[s] antiwaiver provisions in state statutes as well as federal statutes, regardless whether the clause points to a state court, a foreign court, or another federal court.” Yei A. Sun v. Advanced China Healthcare Inc., 901 F.3d 1081, 1090 (9th Cir. 2018). The court held that the Exchange Act’s antiwaiver provision does not contain a clear declaration of federal policy.
The en banc review by the full Ninth Circuit court is primed to reconsider these questions and its ruling will determine whether a circuit split remains.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.