Forum-Selection Bylaws Find Support In California Federal Court
Forum-selection bylaws can be a powerful tool for corporations to manage the risk of duplicative stockholder lawsuits by requiring suits against the company or its directors be brought in a specified court, typically in the company’s state of incorporation. In the absence of such clauses, plaintiffs can “forum shop,” seeking a friendlier judge or other sort of advantage, and litigate the same claims in multiple courts. This can be a burden for companies financially and result in inconsistent outcomes. As a result, many corporations in recent years have begun to adopt exclusive forum bylaws. But this has led to a heated dispute and some legal challenges over whether these types of clauses are enforceable.
In 2013, the Delaware Court of Chancery, in Boilermakers Local 154 Ret. Fund v. Chevron Corp., issued an important ruling when it held that such bylaws generally are enforceable. Since then, courts in Delaware have consistently upheld these types of clauses and courts in other states have followed their lead, often dismissing suits that were filed in the wrong venue.
This trend continued recently with a decision in the Central District of California, in In Re CytRx Corporation Stockholder Derivative Litigation. The court upheld the forum-selection bylaws of CytRx Corp., which made the Delaware Court of Chancery the venue of choice for shareholder derivative suits. The decision is notable because the court departed from an earlier California federal decision, while becoming the first district court within the Ninth Circuit to enforce a forum-selection bylaw unilaterally adopted by a board of directors.
In its analysis of whether the clause was facially valid, the court cited the Boilermakers case, accepting its reasoning that such bylaws were consistent with Delaware law and the nature of the contractual relationship between shareholders and a corporation. Turning to enforceability, the court followed a framework laid out in a 2013 U.S. Supreme Court case, Atlantic Marine Const. Co. v. U.S. District Court W.D. Tex. In Atlantic Marine, the Supreme Court held that in situations where forum-selection clauses point to state forums, federal courts should weigh certain public-interest factors and enforce valid clauses in “all but the most exceptional cases.”
Though the Atlantic Marine case addressed a forum-selection clause in a contract, as opposed to a corporate bylaw, the California court held that it nonetheless applied in the CytRx case. Weighing the various public-interest factors – which include whether there is an interest in having the trial in a forum that is “at home” with the law – the court said this case didn’t present a situation where the forum-selection bylaw should not be enforced.
If the decision stands on appeal (the plaintiffs have filed a notice indicating they plan to challenge it), the analysis used in In Re CytRx could be used by other federal courts in situations where stockholders test the enforceability of forum-selection bylaws. This would most certainly strengthen the trend of courts enforcing these types of provisions, giving corporations some confidence that litigation involving derivative claims, breaches of fiduciary duties, and other intra-corporate matters will be resolved in a forum of its choice.