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Delaware Developing Solid Record of "Staying in Its Lane"

May 4, 2016
Peter B. Ladig
Delaware Business Court Insider

Chief Justice Leo E. Strine Jr. has been known to be fond of the concept of "staying in your lane," (i.e., sticking with what you know). In the judicial arena, staying in your lane usually means deciding cases that require application of, and are important to, the law of the jurisdiction while eschewing opportunities to decide cases requiring application of the law of other states. Although Delaware law has always recognized this principle, six recent decisions by Delaware courts have emphasized this point. This emphasis is important because if Delaware intends to protect its laws, in particular its corporate laws, by taking the position that its courts should be the ones to decide important issues of Delaware law, Delaware must also show the reciprocal respect to foreign jurisdiction.

The Delaware Court of Chancery began to build this record in Boilermakers Local 154 Retirement Fund v. Chevron, 73 A.3d 934 (Del. Ch. 2013), decided in June 2013. In Chevron, the Court of Chancery resolved motions for judgment on the pleadings in two cases challenging the validity of forum selection bylaws adopted by the boards of Chevron and FedEx. In its analysis of the merits, the Chancery Court concluded that determining where stockholders can file actions is appropriately addressed in a bylaw because, among other things, the bylaws "plainly relate to the conduct of the corporation by channeling internal affairs cases into the courts of the state of incorporation, providing for the opportunity to have internal affairs cases resolved authoritatively by our Supreme Court if any party wishes to take an appeal."

The Delaware Supreme Court laid the next piece of the foundation in Martinez v. E.I. DuPont de Nemours & Co., 86 A.3d 1102 (Del. 2014). In Martinez, the Supreme Court affirmed the dismissal on forum non conveniens grounds of an action brought by Argentinian textile workers asserting claims under Argentinian law. The Superior Court held that it would be an overwhelming hardship for DuPont to have to litigate claims based on Argentinian law in a Delaware court notwithstanding the fact that DuPont was headquartered in Wilmington. The Supreme Court affirmed, holding it was a proper exercise of discretion to dismiss the case. In affirming the decision, the Supreme Court acknowledged that its holding was in tension with prior forum non conveniens decisions of the Supreme Court. Explaining the change, the Supreme Court held that the prior decisions did not give adequate weight to the important factor implicated by the facts in Martinez—"the importance of the right of all parties (not only the plaintiffs) to have important, uncertain questions of law decided by the courts whose law is at stake, and to the reality that the plaintiffs who are not residents of Delaware, and whose claims are not governed by Delaware law have a less substantial interest in having their claims adjudicated in Delaware." Stated differently by the Supreme Court in Martinez, the Superior Court acted within its discretion to determine that Argentinian law claims by Argentinian citizens "were more appropriately determined by the courts of the only sovereign whose law is at stake—Argentina—just as this court has recognized that novel or important issues of Delaware law are best determined by Delaware courts."

Interestingly, the Martinez decision elicited a dissent, a relative rarity under Delaware Supreme Court jurisprudence. The dissent directly accused the majority of hiding its real agenda: "That Delaware corporate law should be decided in Delaware and that other jurisdictions should 'stay in their lane.' By making novel or important issues of foreign law a significant factor in favor of dismissing a Delaware action, the majority is demonstrating its willingness to stay in its own lane."

The opinions in Chevron and Martinez laid the building blocks for the symbiotic concepts of ensuring Delaware courts decide Delaware cases and showing foreign courts that Delaware courts will stay out of their business. In City of Providence v. First Citizens Bancshares, 99 A.3d 229 (Del. Ch. 2014), the Court of Chancery's commitment to these ideals was put to the test in an unusual follow-up to Chevron. In First Citizens, the plaintiffs challenged the adoption and application of a forum selection bylaw by a Delaware corporation that selected the courts of North Carolina as the only forum to bring fiduciary duty claims. After adopting the statutory validity analysis from Chevron and concluding that application of the bylaw was not unreasonable under the test in The Bremen v. Zapata Off-Shore, 407 U.S. 1 (1972), the court held that its conclusion also was supported by the interests of judicial comity. The court explained that "if Delaware corporations are to expect, after Chevron, that foreign courts will enforce valid bylaws that designate Delaware as the exclusive forum for intra-corporate disputes, then as a matter of comity, so too should the court enforce a Delaware corporation's bylaw that does not designate Delaware as the exclusive forum. In my opinion, to conclude otherwise would stray too far from the harmony that fundamental principles of judicial comity seek to maintain." In other words, if the parties have chosen to have their Delaware corporate disputes resolved somewhere other than Delaware, a Delaware court will not be so presumptuous to invalidate that selection based on some notion that only a Delaware court has the capacity to decide the issue.

The next two cases in the foundation arise out of personal jurisdiction analyses. In Hazout v. Tsang, 2016 Del. LEXIS 103 (Del. Feb. 26, 2016), the plaintiff asserted claims arising out of an agreement to invest in and take control of Silver Dragon Resources against the president, CEO and director of Silver Dragon, Marc Hazout. After paying the first installment, the Silver Dragon directors failed to approve the agreement. Hazout then allegedly transferred the money to a company he controlled. Hazoutargued that he was not subject to jurisdiction under the director consent statute because the claims were not brought against him because of a duty to Silver Dragon.

The Delaware Supreme Court affirmed the Superior Court's denial of the motion to dismiss. In most simple terms, the Supreme Court held that personal jurisdiction under the director consent statute is not limited to claims against directors or officers for breach of a duty owed to a corporation or its stockholders. The Supreme Court's statutory analysis has been covered elsewhere extensively and is beyond the scope of this article. For purposes of this article, the Supreme Court's attempt to square the result in Hazout with its own prior dictum limiting personal jurisdiction to cases inextricably bound with Delaware law reveals a theme common to Chevron and Martinez: "In this case, as we discuss, the conduct underlying all the claims was in fact Delaware-focused and involved parties using Delaware law as their language of commerce in negotiating the change of control of a Delaware corporation," the Supreme Court said in Hazout. "We need not make a choice-of-law analysis at this juncture to conclude that this is a case in which Delaware has a legitimate interest in providing a forum for efficient redress of claims against a Delaware corporation and the fiduciary whose actions are at the heart of those claims." So, providing a forum for Delaware law claims involving Delaware corporations remains a constant.

The Supreme Court fulfilled the other half of the equation—staying out of cases not involving Delaware issues—in its recent opinion in Genuine Parts v. Cepec, No. 528, 2015 (Del. Supr. April 18, 2016). In Cepec, the plaintiff sued his employer for wrongful exposure to asbestos. Although the alleged exposure occurred in Florida, the plaintiff sued Genuine Parts Co. in Delaware, arguing that Genuine Parts, a Georgia corporation, was subject to general jurisdiction in Delaware because it was registered to do business in Delaware. The Supreme Court phrased the question before it like this: "This interlocutory appeal raises the singular issue of whether Delaware may exercise general jurisdiction over a foreign corporation for claims having nothing to do with Delaware, as a price for the corporation agreeing simply to be able to do business here." Relying in part on the U.S. Supreme Court's decision in Daimler AG v. Bauman, 134 S. Ct. 746 (2014), the Supreme Court held the answer was no. As part of its discussion, the Supreme Court noted that subjecting any foreign entity registered to do business in Delaware to general jurisdiction for any claim exacted a disproportionate toll on commerce that could itself violate the Constitution. More importantly, if Delaware "overreached," it would "encourage other states to do the same" and "as the home of a majority of the United States' largest corporations, Delaware has a strong interest in avoiding overreaching in this sensitive area."

It is plain from these cases that as a matter of public policy, Delaware courts are emphasizing their interest in resolving Delaware questions in exchange for staying out of foreign disputes. Whether that be through increased emphasis on the "overwhelming hardship" test of the forum non conveniens analysis or statutes narrowly to limit the ability of Delaware courts to adjudicate claims, these six cases show that Delaware is serious about fulfilling its end of the "goose-and-gander" approach by staying out of the lane of other states. Only time will tell if the other states fulfill theirs.

Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and vice chair of the corporate and commercial litigation group. He focuses his practice in the areas of corporate governance and commercial litigation, stockholder litigation, fiduciary duties, partnership and limited liability company disputes, and class action and derivative litigation.

Delaware Business Court Insider  l  May 4, 2016