In a recent decision, the Delaware Supreme Court reversed the Court of Chancery in Pyott, et al. v. Louisiana Mun. Police Emp. Ret. Sys., et al., holding that a derivative suit against Botox-maker Allergan, Inc. should be dismissed because Allergan had already secured a judgment in its favor in a nearly identical suit in California. The decision will make it more difficult for plaintiffs’ lawyers to pursue duplicative derivative litigation in multiple jurisdictions.
Shortly after Allergan entered into a $600 million settlement with the U.S. Department of Justice over alleged off-labeling marketing of Botox, separate groups of shareholders brought suit in Delaware and California. Before motions to dismiss in the Delaware derivative litigation were heard, a California Federal Court dismissed the California derivative suit, finding that plaintiffs could not support the inference that the Allergan directors conspired to violate the law, which prevented plaintiffs from showing that making a demand on the Board to investigate the matter would be futile. The Delaware Court of Chancery held that the California Judgment did not bar the Delaware action and denied Allergan’s motion to dismiss. The Court of Chancery’s decision that it was not required to give preclusive effect to the California judgment was based on two principles: first, under Delaware law, the shareholder plaintiffs in two jurisdictions were not in privity with each other, and second, the California shareholders were not adequate representatives of the corporation.
The Delaware Supreme Court held that Federal law on collateral estoppel applied, not Delaware law, and reversed the Court of Chancery. The Court opined, “[T]he undisputed interest that Delaware has in governing the internal affairs of its corporations must yield to the stronger national interests that all state and federal courts have in respecting each other judgments.” The dismissal of the California action for failure to adequately plead demand futility met the requirements of collateral estoppel under California law because the legal issues in the Delaware and California derivative actions were identical and actually litigated, and the California court entered a final judgment on the merits, with prejudice. Finally, the Delaware and California plaintiffs were in privity because different groups of shareholders who potentially represent the corporation are in privity for purposes of issue preclusion.
The Court also rejected the Court of Chancery’s finding that collateral estoppel did not bar the second, identical claim because the California plaintiffs were inadequate representatives, as they had raced to file suit before pursuing a books and records investigation. The Court dismissed this “‘fast filer’ irrebuttable presumption of inadequacy,” finding “no record support for the trial court’s premise that stockholders who file quickly . . . are a priori acting on behalf of their law firms instead of the corporation.”