9th Circuit Upholds Issue Preclusion In Subsequent Derivative Suit
Derivative suits rarely arrive alone. When something goes awry, directors and officers can be expected to see multiple suits based on demand futility as well as wrongful demand refusal. Often, suits will be filed at different times and in different fora. It is important to remember, however, that the “real” plaintiff in these suits is the corporation itself.
When one suit is dismissed, does that have any effect on other pending or subsequently filed suits? This is a topic that I first discussed two years ago in Delaware Court of Chancery “Overrules” Federal Court. That post was critical of Vice Chancellor Laster’s refusal to give preclusive effect to a federal court’s dismissal of a parallel derivative action. Pyott v. Louisiana Municipal Police Employees’ Retirement System, 46 A.3d 313 (Del. Ch. 2012). The Delaware Supreme Court subsequently reversed V.C. Laster in Pyott v. Louisiana Municipal Police Employees’ Retirement System, 74 A.3d 612 (Del. 2013). See Delaware Supreme Court Upholds Federalism, Comity & Finality. Then, U.S. District Judge Kent J. Dawson rejected V.C. Laster’s privity analysis in Pyott as a matter of Nevada law. In re MGM Mirage Derivative Litig., 2014 U.S. Dist. LEXIS 88967 (D. Nev. 2014).
This brings me to yesterday’s holding by the Nevada Supreme Court in Arduini v. Hart, Case No. 12-15750 (9th Cir. Dec. 17, 2014). This case involved a derivative suit alleging demand futility that was filed after a previous demand futility suit had been dismissed. Writing for the panel, Judge Consuelo M. Callahan concluded:
Under Nevada law (the corporation was incorporated in that state), demand futility allegations need not be identical before issue preclusion applies. This result is consistent with In re Sonus Networks, Inc. Shareholder Litigation, 499 F.3d 47 (1st Cir. 2007), in which the First Circuit held that issue preclusion foreclosed the re-litigation of the question of demand futility despite the inclusion of additional factual allegations in the second suit.
Shareholders who bring derivative suits are in privity for the purposes of issue preclusion under Nevada law. This is consistent with the Delaware Supreme Court’s interpretation of California law in Pyott.
The original plaintiffs adequately represented the corporation. In doing so, the Ninth Circuit found that the original plaintiffs’ failure to amend their complaint and subsequent loss on appeal did not mean that they were inadequate.
Defendants in derivative suits should be cheered by this ruling. Ironically, however, they should hope that their initial adversaries prove worthy opponents.