Chancery Closing the Door to Multidistrict Litigation
Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | October 9, 2013
There is much agitation over multiforum litigation. Both the typical defendants in such cases, corporations involved in a merger, and the courts decry what they see as duplicative suits over the same dispute in two or more jurisdictions. The past legal rules that might have resolved the issue of what case goes forward no longer seem to work. The Delaware Court of Chancery is now moving forward to develop new approaches to resolve the problems presented by multiforum litigation over the same basic dispute.
As is now well-known, in Boilermakers Local 154 Retirement Fund v. Chevron, C.A. No. 7220 (Del. Ch. June 25, 2013), the Court of Chancery upheld a corporate bylaw that mandated internal corporate disputes be litigated in Delaware. If courts outside of Delaware respect the Boilermakers decision, that will severely limit multijurisdiction litigation over those internal corporate disputes. But, what about other disputes where Delaware cannot rely on the primacy of its corporate law to justify requiring litigation involving that law be brought only in Delaware?
Moreover, the difficulties inherent in multiforum litigation are not confined to just internal corporate disputes. For example, multistate employers may face litigation in several states over the enforcement of noncompete provisions in their employment contracts. Many states severely limit enforcement of those types of restrictions on the right to be employed, while other states regularly enforce those restrictions. Complex business deals between multiple parties may end up in more than one state court, with possibly inconsistent judgments resulting. What, then, is the solution to the problem these situations present?
Forum-selection clauses are frequently chosen to address the threat of uncertain sites for litigation. As part of a contract between sophisticated parties, the courts do generally recognize their choice of forum by sustaining complaints in the chosen venue against attack on that court's jurisdiction over a party to the contract. That recognition alone may not be enough to address two recurring problems.
First, plaintiffs want the forum they see as best for them when they file suit. They will simply ignore forum-selection clauses in their contracts to gain any advantage they believe they will have in a different forum. Second, in complex transactions there may be multiple contracts involved, one or more of which either lack a forum-selection clause consistent with other contracts' choice of forum or are silent as to forum. That circumstance creates uncertainty that is not easily resolved.
Recently, the Delaware Court of Chancery faced both of those scenarios in BE&K Engineering v. RockTenn CP LLC, C.A. No. 8837-VCL (Del. Ch. Sept. 27, 2013) (transcript). The court granted a preliminary injunction that barred defendants from litigating a breach of contract suit they had filed in Georgia. BE&K had filed a breach of contract action on the same contract in the Delaware Superior Court. The defendants had ignored a forum-selection clause in a contract with the plaintiff that chose Delaware as the venue over disputes under that contract. This anti-suit injunction was authorized by the recent Delaware Supreme Court decision in National Industries Group (Holding) v. Carlyle Investment Management LLC, 67 A.3d 373 (Del. 2013).
The BE&K decision is a significant precedent. At least prior to the Supreme Court's Carlyle decision, Delaware courts were reluctant to issue anti-suit injunctions. Typically, the plaintiff seeking such an anti-suit injunction was told to instead ask for a stay of proceedings in the other forums where the same dispute was pending. Judicial comity for another state court's decision led to that result. While anti-suit injunctions did issue, they were not easy to obtain. For example, in the often-cited case of Household International v. Eljer Industries, (Del. Ch. June 19, 1995), then-Chancellor William T. Allen twice refused to enjoin a second-filed Texas action proceeding at the same time as a Delaware action on the same issues. The Court of Chancery issued an injunction on the third request only after the Texas court was given the opportunity to stay its hand and had refused.
Anti-suit injunctions also were difficult to obtain against defendants who were not parties to a contract with a forum-selection clause. After all, those defendants could claim they had a right to their own choice of forum. When such a nonparty to a contract was added to litigation in a forum not selected in the contract, its presence in the litigation led even some parties to the contract to claim its forum-selection clause was not binding anymore.
The BE&K decision dealt with both of those impediments to obtaining an anti-suit injunction. First, the court held that a contractual forum-selection clause gave the plaintiff a right to relief without any need to seek a stay in the competing forum. Second, the injunction in BE&K enjoined a nonparty to the contract with the forum-selection clause. That nonparty had sought relief in the Georgia litigation based on that contract's terms. Hence, the BE&K court felt it was only fair to also impose on the nonparty that contract's selection of a forum to resolve disputes over those contractual obligations.
Of course, the BE&K approach will not end multiforum litigation. Its somewhat unusual facts may make it distinguishable at least when a plaintiff seeks to apply it to parties not signatories to a contract with a forum-selection clause. BE&K does not even apply to plaintiffs in derivative and class litigation. But, BE&K is another example of the Delaware courts' efforts to properly control multiforum litigation to avoid its problems.
Edward M. McNally is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He practices primarily in the Delaware Superior Court and Court of Chancery, handling disputes involving contracts, business torts and managers and stakeholders of Delaware business organizations.
Delaware Business Court Insider l October 9, 2013