One of the chief litigation risks facing corporations is class actions by their shareholders. Recently, the United States Supreme Court published its opinion in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013), and the Delaware Chancery Court issued Boilermakers Local 154 Ret. Fund v. Chevron Corp., —A.3d —, 2013 WL 3191981 (Del. Ch. June 25, 2013). These cases make it possible for Delaware corporations to require their shareholders to resolve disputes with the companies through bilateral arbitrations instead of class actions.

From Concepcion to Italian Colors: Endorsement of Waivers

Vincent and Liza Concepcion filed a class action against AT&T Mobility in the Southern District of California in 2006, alleging that AT&T had engaged in deceptive advertising by claiming that its wireless plan included free cellphones, but then charged sales tax on the "free" phones. AT&T moved to dismiss because the contract it had with the Concepcions "provided for arbitration of all disputes between the parties, but required that claims be brought in the parties' individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." AT&T Mobility v. Concepcion, 131 S.Ct. 1740, 1744 (2011).

The district court declined to compel arbitration, ruling that under California's Discover Bank rule, class-action waivers are unconscionable where the party with superior bargaining power has allegedly carried out a scheme to cheat large numbers of consumers for individually small sums of money. The Ninth Circuit affirmed the district court's decision, and AT&T appealed to the U.S. Supreme Court.

The Supreme Court reversed the Ninth Circuit. It held that Section 2 of the Federal Arbitration Act (FAA) reflects a "liberal federal policy favoring arbitration." Concepcion, 131 S.Ct. at 1745. California's Discover Bank rule — allowing consumers to demand class arbitration when class action was waived — "interferes with arbitration" and is pre-empted by the FAA. "Arbitration is a matter of contract, and the FAA requires courts to honor parties' expectations." Courts will enforce class-action waivers in arbitration agreements.

After Concepcion, plaintiffs wishing to undo class waivers relied on the "effective vindication" exception. Citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), they argued that the Supreme Court was willing to invalidate arbitration agreements that operate "as a prospective waiver of a party's right to pursue statutory remedies." The most notable case is perhaps In re Am. Express Merchants' Litig., 667 F.3d 204 (2d Cir. 2012), where the Second Circuit held that the only economically feasible means for plaintiffs to enforce their antirust rights is via class action; a class-action waiver was unenforceable as it would "effectively deprive" plaintiffs of "the protection of the federal antitrust law."

The Supreme Court reversed the Second Circuit. Rejecting the argument that federal antitrust rights must be vindicated through class actions, the court noted that the "antitrust laws do not evinc[e] an intention to preclude a waiver of class-action procedure," and that the "Sherman and Clayton Acts make no mention of class actions" and "were enacted decades before" Rule 23. Italian Colors, 133 S.Ct. at 2309. Limiting antitrust claims to bilateral arbitrations "no more eliminates those parties' right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938." 133 S.Ct. at 2311. The court also stated that in its opinion, Concepcion "all but resolves this case." 133 S.Ct. at 2312.

Boilermakers and the Binding Effect of Corporate Bylaws

On June 25, Chancellor Strine issued Boilermakers, holding that corporate bylaws that establish Delaware as the exclusive forum for litigation between a corporation and its shareholders are facially valid. In Boilermakers, plaintiffs challenged Chevron's and FedEx's bylaws, requiring four types of litigation between the corporations and their shareholders to be exclusively venued in Delaware: (i)??derivative actions; (ii) breach of fiduciary duty actions; (iii) actions under the Delaware General Corporation Law; or (iv) internal affairs actions (together, the "Boilermakers litigations). 2013 WL 3191981, at *4-5.

Chancellor Strine held that these provisions are statutorily valid under 8 Del. C. § 109(b), because they generally address internal affairs claims, relating quintessentially to the corporation's business, the conduct of its affairs, and the rights of its stockholders.

The court also held that these provisions are contractually sound.

In an unbroken line of decisions dating back several generations, our Supreme Court has made clear that the bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders.… In other words, the Chevron and FedEx stockholders have assented to a contractual framework established by the DGCL and the certificates of incorporation that explicitly recognizes that stockholders will be bound by bylaws adopted unilaterally by their boards.

2013 WL 3191981, at *14. These bylaws will bind the shareholders and the corporation to the selected litigation forum. The court was not bothered by the fact that these provisions were adopted only by the board, noting that (1) the corporate articles and bylaws put shareholders on notice that the bylaws may be amended by the board; and (2) Section 109(a) gives the shareholders the unremovable power to adopt, amend, and repeal bylaws. The court deferred the "as applied" aspect of the bylaws provisions until parties had developed a record.

Putting It Together: An Alternative to Shareholder Class Actions

Together, Italian Colors and Boilermakers may provide a framework for a bilateral arbitration alternative to shareholder class actions because the corporate bylaws may be able to mandate that all such disputes be resolved by bilateral arbitration instead of litigation.

Under Boilermakers, corporate bylaws are valid contracts binding the corporation and its shareholders in matters relating to the Boilermakers litigations. If an arbitration provision and class-action waiver were included in the bylaws, Concepcion and Italian Colors should ensure their enforceability, and the FAA should pre-empt contrary state law. Indeed, "a court may not rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what … the state legislature cannot." Concepcion, 131 S.Ct. at 1747 (citation omitted).

A few issues should be considered when drafting arbitration clauses and class-action waivers. In the context of enforcing federal statutory rights, the Supreme Court did not eliminate the "effective vindication" exception in Italian Colors. 133 S.Ct. at 2310. While the Boilermakers litigations involve only state law claims, compliance with the effective vindication exception should be advisable.

Italian Colors gave some indication as to how the court is likely to approach this issue. First, it is clear that the cost of proving a plaintiff's case relative to its damages is not a bar to the effective vindication of the plaintiff's rights. The "fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy." 133 S.Ct. at 2311.

Second, the court noted two situations where the effective vindication exception may invalidate an arbitration agreement: (1) a provision in an arbitration agreement forbidding the assertion of certain statutory rights and, by reasonable extrapolation, associated remedies; and (2)??administrative fees attached to arbitration that are so high as to make access to the forum impracticable. 133 S.Ct. at 2310-11.

A company contemplating adopting arbitration bylaws provisions may want to clearly address the court's two concerns. For example, the bylaws provision may require the company to pay the arbitration filing fees if the fees are significant compared to the alleged damages. The company may also want to make clear that it consents to allow the arbitrator to award all legal and equitable remedies permitted by relevant laws against the company if liability is found. In Concepcion, for example, the court concluded that arbitration was better for consumers, compared to class actions, because the arbitration agreement provided that AT&T will pay claimants a minimum of $7,500 and twice their attorney fees if these claimants obtain an arbitration award greater than AT&T's last settlement offer. 131 S.Ct. at 1753. Being in a similar position when litigating the class waiver should help to advance the company's argument.

Securities Class Actions: A Class of

Its Own

Whether a corporation may mandate bilateral arbitration as an alternative to securities class actions remains an open question. At least two obstacles stand in the way.

Scope of Section 109(b)

The scope of Section 109(b) controls the subject matters that can be validly addressed by corporate bylaws. Boilermakers addressed two clear-cut categories of litigation: (1) the Boilermaker litigations are clearly within the scope of Section 109(b), because those claims are most central to the relationship between management and stockholders, 2013 WL 3191981, at *11; and (2) cases such as a shareholder's personal injury on company premises or contract disputes between a company and its shareholders clearly falls outside of Section 109(b), as such, a bylaw provision "would not deal with the rights and powers of the plaintiff-stockholder as a stockholder."

Securities cases fall somewhere in between. It is arguable that they do not implicate the internal affairs of a corporation and should be grouped with those of personal injury, since securities cases ultimately involve alleged tortious wrongdoings. On the other hand, unlike personal injury and contract disputes, where the plaintiff's shareholder status is legally irrelevant and factually accidental, in securities cases the plaintiff's status as a current or former shareholder is sine qua nonto the securities claims. Delaware courts may ultimately have to resolve whether securities cases can be validly addressed in corporate bylaws, i.e., whether they fall within the scope of Section 109(b).

A company wishing to adopt mandatory bilateral arbitration provisions in securities cases may have to be mindful of potential invalidation. It may be advisable to draft securities provisions in parallel with the Boilermakers provisions, and clarify that invalidation of one provision should not affect other provisions. This should ensure at least the Boilermakers forum-selection provisions will survive scrutiny.

Contrary congressional command under securities laws

In Italian Colors, the court noted that a plaintiff's antitrust statutory right predates Rule 23. 133 S.Ct. at 2311. The class-action waiver "no more eliminates those parties' right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938." By contrast, while the original securities laws were adopted in 1933 and 1934 — similarly predating Rule 23 — Congress substantially amended these laws over time. In particular, the PSLRA of 1995 specifically addressed, but did not eliminate, securities class actions. See, e.g., 15 U.S.C.A. § 78u-4 (rebuttable presumption that "most adequate plaintiff" to lead a class is one with largest financial stake). Compared to antitrust laws, a stronger showing of a "contrary congressional command" to override the FAA is perhaps possible under the securities laws. 133 S.Ct. at 2309.•

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