In a recent 6-5 ruling, an en banc panel of the Ninth Circuit affirmed the dismissal of a derivative suit asserting Exchange Act violations against The Gap, Inc. and its directors. The district court had dismissed the suit — accusing the defendants of making false and misleading statements regarding their commitment to diversity — based on a clause in The Gap’s corporate bylaws mandating that any derivative suit should be filed in the Delaware Court of Chancery. In affirming, the Ninth Circuit upheld the clause as valid and enforceable.
In its decision, the majority rejected the argument that the forum-selection clause violated the antiwaiver provision of the Securities Exchange Act of 1934 (Exchange Act), § 29(a), 15 U.S.C. Section 78cc(a). The defendants did not functionally waive compliance with their substantive obligations under the Exchange Act by designating a Delaware state court as the exclusive forum for any derivative action. The majority pointed out that while the state court would have to dismiss the action asserting securities law violations for lack of jurisdiction, the plaintiff could still bring these claims directly in federal court. Thus, there existed some procedure for enforcing the company’s compliance with its statutory duties, even if not the particular procedure favored by the plaintiff.
Next, the majority determined that the plaintiff had not met her “heavy burden of showing the sort of exceptional circumstances that would justify disregarding a forum-selection clause” — specifically, that enforcing the clause would contravene a strong public policy. While the plaintiff cited to the Supreme Court’s decision in J.I. Case Co. v. Borak, 377 U.S. 426 (1964), holding that a private right of action was necessary to redress injuries caused by allegedly false and misleading proxy statements, the majority found that case did not establish a strong public policy in favor of allowing shareholders to bring derivative claims. The majority noted that although Borak has not been overruled, there had been a jurisprudential shift since it was decided; the Supreme Court “now views implied rights of action with disapproval, construing them narrowly, and casting doubt on the viability of a corporation’s standing to bring a § 14(a) action.”
Nor did the forum-selection clause contravene any public policy that might underlie § 27(a) of the Exchange Act, which grants federal courts exclusive jurisdiction over § 14(a) claims. For one, the Supreme Court indicated that “there was no specific purpose on the part of Congress in enacting § 27.” To the extent that Congress intended to achieve “greater uniformity of construction and more effective and expert application of that law,” enforcing the forum-selection clause did not threaten that purpose: a state court would simply dismiss the action for lack of jurisdiction, rather than adjudicate the claims.
Finally, the majority concluded the forum-selection clause was not invalid under Section 115 of the Delaware General Corporation Law (DGCL). Section 115 states, in relevant part, that a corporation’s “bylaws may require . . . that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State.” In Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the Delaware Supreme Court interpreted the phrase “internal corporate claims” to mean “claims requiring the application of Delaware corporate law, as opposed to federal law.” Thus, Section 115 did not prevent a forum-selection clause from mandating that federal claims — such as those asserted in the present case — be brought in Delaware state court.
Notably, the majority acknowledged that its decision created a circuit split with the Seventh Circuit in Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022) (as discussed here). But the majority felt that the Seventh Circuit’s analysis was flawed because it failed to apply Salzberg correctly and to consider the implications of the availability of a direct § 14(a) action.
In contrast, the dissent concluded that The Gap’s forum-selection clause — referred to as “a litigation bridge to nowhere” because it deprived shareholders of “any forum in which to pursue derivative claims” — violated the Exchange Act’s antiwaiver provision, which applied broadly and without exception. The dissent also noted that direct and derivative actions were not interchangeable because they had “different purposes and different remedies.” For example, a direct action provided for damages as compensation for loss in stock value, while a derivative action allowed an individual shareholder to “step into the corporation’s shoes and to seek in its right the restitution he could not demand on his own.”
In addition, the dissent determined that The Gap’s forum-selection clause was rendered unenforceable by the strong public policy expressed in the Exchange Act’s antiwaiver and exclusive-jurisdiction provisions. First, as the Seventh Circuit held in Seafarers, “[n]onwaiver is woven into the public policy of the federal securities laws because it is the express statutory law.” The Supreme Court’s reasoning in Borak, which the dissent emphasized remained good law, supported this principle. Second, the Exchange Act “indicates a legislative concern for greater federal control over the adjudication of particular federal claims” — which would be thwarted if a company could through its bylaws “ensure that no federal court could ever adjudicate the merits of a derivative Section 14(a) claim” brought against it.
As the en banc panel of the Ninth Circuit observed, The Gap’s inclusion of a forum-selection clause in its bylaws is consistent with a modern corporate trend. Seeking to avoid the high costs and other risks of multiforum litigation, a growing number of corporations have required that derivative claims be litigated in a single forum that they have selected. The en banc decision reinforces a clear conflict between the circuits as to the enforceability of such clauses when Exchange Act claims are asserted derivatively and may encourage Supreme Court review of the issue.
 The case is Lee v. Fisher, 9th U.S. Circuit Court of Appeals, No. 21-15923. The decision is available at: https://cdn.ca9.uscourts.gov/datastore/opinions/2023/06/01/21-15923.pdf.
 In May 2022, a three-judge panel of the Ninth Circuit affirmed the dismissal below. A few months later, however, the court granted the plaintiff’s petition for an en banc rehearing to resolve the circuit split on the issue. The ruling discussed here is the result of that en banc rehearing.
 Matsushita Elec. Indus. Co., Ltd. v. Epstein, 516 U.S. 367 (1996).
 The majority exercised its discretion to decide the Section 115 issue given its importance to the case, despite the plaintiff’s failure to identify the issue in her opening brief before the three-judge panel.
 Judge Easterbrook’s dissenting opinion in Seafarers described what the majority called a “novel proposal to send [the] dispute to state court in Delaware.” Judge Easterbrook determined that the forum-selection clause did not preclude a shareholder from ever bringing a Section 14(a) claim against the corporation, because that clause applied only to derivative actions, not direct actions. He went further by disagreeing that federal courts hold exclusive jurisdiction over derivative Section 14(a) claims at all stages of litigation. For example, it is state law that “determines both when a demand is required and when investors can step into a corporation’s shoes.” Finally, Judge Easterbrook interpreted Section 115 of the DGCL as prohibiting only those bylaws that “prevent litigation in state court” and cited Salzberg for support.
 The dissent also rejected the defendants’ argument that a judicially created policy in favor of forum-selection clauses supersedes the Exchange Act’s antiwaiver provision. The dissent explained that the cases cited by the defendants do not control here because none involved the complete, nonconsensual waiver of an exclusive federal statutory claim.