Two Cases with Possible Implications for Corporate By-Laws

Two recent cases in Delaware has possible implications for corporate by-laws and the how corporations attempt to control both the type of proceedings parties must agree to and the forum in which parties must proceed.

The Delaware Supreme Court just added more ammunition to those favoring arbitration by applying for the first time the McWane doctrine (also known as the first-filed rule and articulated in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281 (Del. 1970)) to dismiss an action because an arbitration proceeding had been earlier-filed.  In LG Electronics, Inc. v. InterDigital Communications, Inc., No. 475, 2014 (Del. Supr., April 14, 2015).  The McWane doctrine states that “litigation should be confined to the forum in which it is first commenced, and a defendant should not be permitted to defeat the plaintiff’s choice of forum in a pending suit by commencing litigation involving the same cause of action in another jurisdiction of its own choosing.‟

In LG Electronics, Chancellor Laster held that the Court could exercise its discretion under McWane “freely in favor of the stay when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.”

The facts were somewhat unusual as there was no certainty as to whether the parties had actually agreed to arbitrate.  This ambiguity allowed the Court to find that the case presented “the rare instance when both the arbitral tribunal and the court have jurisdiction such that McWane could apply.”

LG argued that McWane could not apply because an arbitration proceed did not constitute a “prior action” under McWane –and in fact, no Delaware court had ever applied McWane to dismiss a lawsuit in favor of first-filed arbitration. The Court disagreed, finding that arbitral tribunal could provide “prompt and complete justice,” and noting that the interests of justice are better served if the tribunal deciding the overall matter in the first instance determines procedural disputes like the instant one. “Allowing parties to seek judicial review every time an arbitrator rules on—or, as in this case, declines to rule on—a procedural issue would frustrate the arbitral process.”

The decision in LG Electronics should be read together with the Chancery Court’s opinion in UtiliPath, LLC v. Hayes, Del. Ch., No. 9922-VCP, 4/15/15) finding that McWane does not apply if the parties agree in their contract that Delaware courts have jurisdiction over the dispute pursuant to a non-exclusive forum selection clause.  The clause at issue read

• THE PARTIES AGREE THAT JURISDICTION AND  VENUE IN ANY ACTION BROUGHT BY ANY PARTY PURSUANT TO THIS AGREEMENT SHALL PROPERLY (BUT NOT EXCLUSIVELY) LIE IN ANY STATE COURT OF THE STATE OF DELAWARE LOCATED IN NEW CASTLE COUNTY OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO SUCHACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, ANDHEREBY WAIVE ANY OBJECTION THAT SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION

In UtiliPath there was a prior-pending action in the Eastern District of Pennsylvania when an action was filed in Delaware.  In light of above forum-selection language, Vice Chancellor Donald F. Parsons Jr. found that he was precluded from dismissing the lawsuit on McWane grounds because the parties clearly and unambiguously agreed that jurisdiction and venue would properly lie in the chancery court pursuant to a non-exclusive forum selection clause in the redemption agreement.

Consider the impact of these decisions taken together and what they may mean for corporate by-laws. Forum selection by-laws are receiving strong support in both Delaware courts and its legislature.  Corporations will likely now seek to adopt by-laws that require at least non-exclusive Delaware forum selection.  If they do, under Utilipath, first-filing in another jurisdiction will not prevent a Delaware filing.  Further, the strong support of arbitration shown by both the Delaware legislature in its passing of the Rapid Arbitration Act and the Delaware courts in LG Electronics suggests that by-laws requiring arbitration stand a strong chance of success –particularly given Boilermakers Local 154 Retirement Fund v. Chevron Corp., discussed here and here.