April 17, 2013
Edward M. McNally
Delaware Business Court Insider

The corporate defense bar is excited over the Delaware Supreme Court's April 14 decision in Pyott v. Louisiana Municipal Police Employees' Retirement System, No. 380, 2012 (more often referred to as the "Allergan case"). The Supreme Court reversed a Court of Chancery decision that had refused to dismiss a Delaware derivative complaint notwithstanding that a California federal court had previously dismissed virtually the same complaint. The Court of Chancery ruled that it was not bound under principles of collateral estoppel to follow the federal court ruling. It further held that even if it would normally follow the prior court's decision, it would not in the Allergan case because the California plaintiff had not adequately represented the Allergan stockholders before the California federal court.

The Court of Chancery's Allergan decision had been widely criticized by counsel for corporate defendants. They pointed to the abuse presented when multiple complaints are filed in multiple jurisdictions over a single transaction. That forces defendants to wage a multistate defense. Thus, if the Allergan case decision in the Court of Chancery had been upheld, defendants feared that even if they won one battle, the war against them would continue on another front. The defendants' concern led to several amicus briefs filed in the Delaware Supreme Court urging reversal of the Court of Chancery's Allergan decision.

The Delaware Supreme Court gave the corporate defendants the relief they sought. First, the Supreme Court held that Delaware courts must respect the decision of a state or federal court dismissing a derivative suit by also dismissing a pending Delaware derivative suit filed by a different plaintiff stockholder over the same transaction. Second, the Delaware Supreme Court rejected the Court of Chancery's conclusion that the California plaintiff had failed to adequately represent the Allergan stockholders. Therefore, the Supreme Court decided that the Delaware Allergan case should be dismissed.

The immediate impact of the Delaware Supreme Court's decision in Allergan is that there probably will be a race to file motions to dismiss derivative suits in the jurisdiction the corporate defendants believe will most likely grant their motion. By winning in one state, they will hope to win the whole war by then claiming Allergan mandates dismissal of all similar derivative claims. Indeed, Allergan may actually foster just what the Court of Chancery critics feared, multiple litigation in different jurisdictions. For if the corporate defendant fails to win its motion to dismiss in one jurisdiction, it may well try again in a different jurisdiction. After all, a decision denying a motion to dismiss is not a final judgment. Therefore, the defendants may be free to argue that because only a final judgment is entitled to preclusive effect, their motion to dismiss in another case must be decided on its own merits. Such a tactic would be ironic indeed.

The longer-term effects of the Supreme Court's Allergan decision, however, may well depend on how it is interpreted. The Supreme Court carefully noted that it did "not address the merits of" whether Delaware should hold there is always privity among all derivative stockholders in every case. Hence, the court did not rule that collateral estoppel will always require a second court to dismiss a derivative suit that has been previously dismissed by a different court dealing with another stockholder's similar complaint. This leaves open a potential way for plaintiffs to escape collateral estoppel's effects.

Understanding this loophole requires focusing on the facts in Allergan. The California case that the federal court dismissed involved an amended complaint that had the benefit of being drafted based in part on internal Allergan documents. The California plaintiffs had access to those documents because the plaintiffs in Delaware had used a books-and-records case to force Allergan to produce the documents. The California plaintiffs then obtained those documents and amended their complaint. Eventually, as the Delaware Supreme Court noted, the Delaware and California complaint "are so similar that the California complaint could not be [held] 'grossly deficient.'"

But what will happen if a Delaware plaintiff does use a books-and-records case to support its complaint and other plaintiffs in other jurisdictions rush to file without those records? It is possible that the Delaware Supreme Court would conclude that dismissal of the complaint in other jurisdictions that lacked records to support its allegations should not be given preclusive effect in Delaware. After all, the Delaware Supreme Court favorably cited the Restatement (Second) of Judgments § 42(1) that recognizes an exception to collateral estoppel when a prior judgment was the result of a lack of "due diligence and reasonable prudence." Meanwhile, it is probable that any Delaware court will more quickly decide any motion to dismiss to avoid having its decision dictated to it by another state's courts. Of course, if the Delaware court upholds the Delaware complaint, no later decision elsewhere will be preclusive. If all that happens, Allergan will have little long-term consequences.

It is also possible that some plaintiffs firms will now try to avoid Allergan by not filing suits in jurisdictions less friendly to derivative claims. Previously, multiple filings were encouraged by giving some preferences to attorneys who filed first or who was able to move their cases faster. After Allergan, it will be risky to sue in unfriendly forums and the plaintiffs bar should be more open to sharing leadership in the litigation in more favorable jurisdictions to discourage such filings. Delaware has a balanced reputation for permitting good complaints to proceed, particularly if based on a prior records inspection. Hence, it may become the forum of choice. We will just have to wait and see what Allergan produces.