California State Teachers Retirement System v. Alvarez, No. 295, 2016 (Del. Jan. 25, 2018)

This is an important decision clarifying the rules regarding the preclusive effect a dismissal of a derivative suit may have on a similar suit pending or brought later in Delaware.  This litigation saga involving a bribery scandal at Wal-Mart took some interesting turns, ping-ponging between the Delaware Court of Chancery and the Delaware Supreme Court. 

Relevant here, the Court of Chancery had dismissed a derivative suit in Delaware based on the preclusive effect of an earlier dismissal in a similar suit in an Arkansas federal court.  In doing so, the Court applied the accepted approach, which involves applying the other jurisdiction’s law examining the “adequacy of representation” provided by the plaintiffs in the dismissed action.  So long as the representation was adequate, i.e., not “grossly deficient,” dismissal was likely in the second suit.  But, on appeal, the Supreme Court remanded the matter back to the Court of Chancery to consider federal due process concerns in that rule’s application. 

On remand, considering the issue afresh, the Court of Chancery found no due process concerns but advocated a new test governing preclusion in derivative litigation.  According to this new test, just because one derivative litigation was dismissed for failure to overcome the requirement of a pre-suit demand on the board, it does not mean a similar derivative suit must be dismissed on the same grounds.  Instead, an earlier dismissal should only affect the second suit if the first suit was dismissed after (i) the plaintiff survived a demand futility motion or (ii) the board conceded that demand is excused.

Then, on back on appeal, in the instant decision, the Supreme Court rejected this new test and defaulted to the old approach, with thorough reasoning for doing so.  For plaintiffs, the race to the courthouse must continue to avoid the likelihood of having your case defeated in some other jurisdiction.