By Amber Tindall, Staff Writer
In 1934, during the long cleanup of the stock market crash of 1929, the United States Legislature enacted the Securities Exchange Act (The “SEA”) to regulate the aftermarket sale of securities.[1] The SEA created the Securities Exchange Commission (“SEC”) to regulate securities exchanges by promulgating and enforcing regulations.[2] These regulations are enforced in the court system in two ways: by the SEC itself, and by private citizens via causes of action created explicitly by the language of the SEA[3] or implicitly through SEC rules.[4] These causes of action, especially when they are created implicitly through SEC rules, have recently been weakened or eliminated by decisions in the federal courts.
One recent decision in the Ninth Circuit illustrates this evolution in the treatment of SEC rule enforcement in federal courts. In Lee v. Fisher, the court heard an appeal from a representative of Gap, Inc. following a lower court’s decision not to enforce a choice-of-forum clause in the bylaws of the corporation.[5] A choice-of-forum clause is generally a contractual provision which solves conflict-of-laws disputes between two parties by stating that all contractual disputes should be resolved in the courts of a specific jurisdiction, often in a particular state or federal court.[6] As with arbitration clauses, choice-of-law clauses, and clauses preventing parties from bringing class-action lawsuits, choice-of-forum clauses have become more prevalent over the years,[7] and some states have been especially willing to enforce them. More recently, the Circuit Courts have begun to grapple with the role of federal versus state law in choice-of-forum clause enforcement, [8] and an unresolved circuit split exists about this question.[9] Debates about enforcement of these clauses often focus on litigation by consumers or employees, who might find themselves inconvenienced or prejudiced by a predetermined forum or method of adjudication.[10] On the other hand, proponents of enforceable choice-of-forum clauses, including litigation-unfriendly states[11] and a vocal defense bar,[12] argue that the freedom to choose where and how to resolve disputes protects against judicial abuse and economic hardship.
However, the choice-of-forum clause in Lee v. Fisher was different than most. Instead of affecting two parties to a contract for goods or services, it involved shareholder derivative lawsuits. A shareholder derivative lawsuit is a unique form of corporate litigation in which the shareholders of a publicly traded corporation sue the directors or officers of a corporation over an alleged breach of duty.
In September 2020, shareholders of Gap, Inc. sued the directors of the corporation in the Northern District of California for failing to follow through on their 2019 and 2020 decisions to hire a more diverse board of directors.[13] The plaintiffs sued in this federal court under a cause of action implied by SEC Rule 14a-9,[14]which prohibits corporations from misleading their shareholders about the decisions on which those shareholders are voting.[15] The shareholders of Gap, Inc. alleged that, by failing to follow through on a diversity decision, the board of directors had illegally misled the shareholders.[16] The directors of Gap, Inc. moved to dismiss the lawsuit from federal court because their corporate bylaws mandated that any derivative lawsuits be brought in Delaware state court.[17] The district court granted the motion, and the shareholders appealed.[18] The Ninth Circuit reversed the motion to dismiss in a three-judge panel decision, and then agreed to hear the case again en banc.[19] In their en banc decision, the Ninth Circuit decided to enforce the forum selection clause and dismiss the lawsuit from federal court.[20]
However, lawsuits brought under SEC rules can only be brought in federal court.[21] A Delaware state court can usually hear any given shareholder’s derivative lawsuit, but not if the central cause of action is created by SEC rules, which the federal courts have sole authority to enforce. The plaintiffs in Lee v. Fisherwere therefore faced with a catch-22: they could not sue in state court because the cause of action underlying their case was created by an SEC rule, but they could not sue in federal court because the bylaws of the corporation they owned contained an enforceable choice-of-forum clause. By including this clause in its corporate bylaws, Gap, Inc. effectively prevented the use of a federal cause of action against it. This decision created a circuit split with the Seventh Circuit,[22] which decided not to enforce a similar choice-of-forum clause three months earlier in Seafarers Pension Plan on behalf of Boeing Company v. Bradway,[23] on the grounds that enforcing the clause would eliminate a cause of action. This split has not yet been resolved and remains a point of contention around forum selection clauses.
[1] Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78rr (2024).
[2] 15 U.S.C. § 78d(a).
[3] See 15 U.S.C. § 78r(a) (allowing a private plaintiff to recover damages “in any court of competent jurisdiction” for reliance on a false or misleading statement in a document that was filed pursuant to the SEA or to SEC regulations).
[4] See, e.g., Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D. Pa. 1946) (establishing a cause of action created by SEC in a regulation, CFR § 240.10b-5, which enforces a section of the SEA that does not explicitly create a private civil remedy, 15 U.S.C. § 78j(5)).
[5] Lee v. Fisher, 70 F.4th 1129 (9th Cir. 2023).
[6] Symeon C. Symeonides, What Law Governs Forum Selection Clauses, 78 La. L. Rev 1120, 1120 (2018).
[7] Solimine, Michael E., Forum-Selection Clauses and the Privatization of Procedure, 25 Cornell Int’l L.J. 51, 51 (1992). https://core.ac.uk/download/pdf/80563324.pdf
[8] Cara Reichard, Keeping Litigation at Home: The Role of States in Preventing Unjust Choice-of-Forum, 129 Yale L.J. 866, 890 (2020). https://www.yalelawjournal.org/pdf/ReichardNote_1sfbcrxb.pdf
[9] Sarah Tishler, Supreme Court Declines to Resolve Circuit Split on Forum Selection Clauses, Beck Reed Riden (2023). https://beckreedriden.com/the-supreme-court-declines-to-resolve-the-circuit-split-on-forum-selection-clauses/.
[10] Reichard, supra note 8, at 882.
[11] Royal Canin U.S.A., Inc. V. Wullschleger. Brief amicus curae of State of Tennessee, et. al. 12 Aug 2024. SCOTUSBlog, https://www.supremecourt.gov/DocketPDF/23/23-677/322236/20240812134429544_Br.%20of%20State%20of%20Tennessee%20et%20al..pdf.
[12] Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC. Brief amicus curae of New England Legal Foundation. 25 May 2023. SCOTUSBlog, https://www.supremecourt.gov/DocketPDF/22/22-500/267702/20230605141539019_6%201%2023%20No.%2022-500%20CORRECTED%20merits-stage%20amicus%20brief%20of%20New%20England%20Legal%20Foundation.pdf
[13] Lee, 70 F.4th at 1135.
[14] CFR § 240.14a-9.
[15] Lee, 70 F.4th at 1136.
[16] Id. at 1137.
[17] Id.
[18] Id.
[19] Id. at 1138.
[20] Id. at 1159.
[21] 15 U.S.C. § 78aa(a).
[22] Michael K. Davy, Circuit Split in Forum Selection Provisions Foreclosing Derivative Section 14(a) Exchange Act Claims: A Proposal for Congressional Reform to the Act, 51 W. St. L. Rev. 47 (2024).
[23] Seafarers Pension Plan on behalf of Boeing Company v. Bradway, 23 F.4th 714 (2022).
