© Reuters. FILE PHOTO: The Gap logo is seen on the front of the company’s store on Oxford Street in London, Britain, July 1, 2021. REUTERS/John Sibley
Written by Daniel Wiesner
(Reuters) – The Gap Inc (NYSE) on Thursday beat a lawsuit against a shareholder alleging that company directors breached their duties by making misleading statements in stock filings about the retailer’s commitment to racial diversity in its leadership ranks.
The 9th U.S. Court of Appeals en banc commission said in a 6-5 ruling that The Gap could enforce a corporate bylaw requiring shareholder-derived litigation to be filed in Delaware Chancery Court, even as it barred federal securities claims that can only be heard in federal court. .
The ruling reinforces a divide among federal appeals courts over how to apply forum selection rulings to derivative claims alleging violations of federal securities and exchange law. Last year, the Seventh Circuit said Boeing (NYSE:Co) was unable to enforce a forum-choice clause that mandates that derivative claims be filed in the Delaware Chancery Court.
The court’s six Republican-appointed justices rejected claims from Gap shareholder Noel Lee that enforcing the forum-choice clause would allow the company to avoid any litigation and waive its obligations under federal securities law.
The Gap, based in San Francisco, did not immediately respond to a request for comment. Neither did Lee’s attorneys at Bottini & Bottini, which has filed similar shareholder lawsuits against Alphabet (NASDAQ:) Inc., Google’s parent company, Oracle Corporation (NYSE:), Qualcomm (NASDAQ:: Inc), and others. Those companies denied any wrongdoing.
Lee said in a lawsuit filed in 2020 in federal court in San Francisco that The Gap failed to make progress on diversifying its senior leadership despite making statements to the contrary in securities filings. Gap asserted that the allegations in the lawsuit were “abusive, racially charged, and clearly false.”
U.S. District Judge Sally Kim said in 2021 that the forum selection clause is enforceable and dismissed the case, the Ninth Circuit panel affirmed last year. The court granted InBank a review and overturned the committee’s ruling in October.
Lee’s attorneys argued that the Forum Clause is not enforceable because it violates a provision of the Securities and Exchange Act that prevents company directors from waiving their legal obligations.
On Thursday, Circuit Judge Sandra Ikota wrote for the majority that the law only forbids the waiver of substantive legal obligations imposed on company directors, not the waiver of a specific procedure for enforcing such duties. Shareholders won’t be barred from filing lawsuits, Ikota said, because they can still file lawsuits on their behalf in federal court, rather than derivative lawsuits on behalf of the company.
But Circuit Judge Sidney Thomas, who wrote the dissenting opinion, called The Gap’s forum choice clause a “litigation bridge to nowhere” that denied contributors any forum to pursue derivative claims.
“The opposite conclusion reached by the majority makes exchange law protection meaningless,” Thomas wrote.
Thomas and the justices who joined him are all appointees of Democratic presidents.
The case is Lee v. Fisher, United States Court of Appeals for the Ninth Circuit, No. 21-15923.
For contributors: Yuri Kolesnikov from Putini and Putini
For Gap: Roman Martinez of Latham and Watkins
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