CURRENT MONTH (January 2023)
Delaware Court of Chancery Confirms that Corporate Officers Owe the Same Fiduciary Duties, Including the Duty of Oversight, as Directors
On January 25, 2023, the Delaware Court of Chancery denied a motion to dismiss filed by Defendant David Fairhurst, the former Executive Vice President and Global Chief People Officer of McDonald’s Corporation, seeking to dismiss Plaintiffs’ claims that Fairhurst breached his fiduciary duties “by allowing a corporate culture to develop that condoned sexual harassment and misconduct.” Plaintiffs allege, among other things, that Fairhurst breached the fiduciary duty of oversight established by In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) in failing “to establish an information system that would generate the information necessary to manage the Company’s human resources function.” In his motion to dismiss, Fairhurst argued that the duty of oversight applies only to directors, and not to corporate officers, and therefore Plaintiffs failed to state a claim against him. In denying Fairhurst’s motion, the Court held that “corporate officers owe the same fiduciary duties as corporate directors, which logically includes a duty of oversight[.]” Though the Court explained that the application of such duties is “context-driven,” it went on to find that Plaintiffs stated a claim against Fairhurst, as Plaintiffs’ complaint contained a number of allegations concerning sexual harassment and other misconduct in the workplace, including Fairhurst’s own misconduct, such that the Court could reasonably infer that Fairhurst “knew about and played a role in creating the Company’s problems with sexual harassment and misconduct, which led to the external signs that took the form of employee complaints and a ten-city strike.” The Court also found that Plaintiffs stated a claim for breach of fiduciary duty of loyalty in connection with Fairhurst’s acts of sexual harassment, as those acts were not done to “further the best interests of the Company” and instead were done for “selfish reasons.”
A copy of the opinion is available here.
Supreme Court to Resolve Circuit Split as to Whether the Appeal of a Denial of a Motion to Compel Arbitration Mandates a Stay of the Underlying Litigation
By Leslie Ann Berkoff, Partner and Chair of Dispute Resolution Department, Moritt Hock & Hamroff LLP
The U.S. Supreme Court has granted certiorari in Coinbase Inc. v. Bielski, No. 22-105 to resolve a 6–3 federal circuit split as to whether the appeal of a denial of a motion to compel arbitration mandates that the district court stay the underlying litigation pending the appeal or permits the district court to decide on an individual case-by-case basis whether to place the proceedings on hold. At the present time, the U.S. Courts of Appeals for the Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits have ruled that district courts must stay all proceedings when a party has filed a “non-frivolous” appeal challenging a lower court’s decision denying a motion to compel arbitration. These courts have uniformly held that once the appeal is filed, the lower court no longer has jurisdiction over the matter. In contrast, the U.S. Courts of Appeals for the Second, Fifth, and Ninth Circuits have held that a district court has discretion in deciding whether to stay the proceedings or allow them to continue while the appeal is pending.
In the case currently slated to be heard by the Supreme Court, a class action was commenced against cryptocurrency platform Coinbase, Inc. under the Electronic Funds Transfer Act in California. In response to the action, Coinbase filed a motion to compel arbitration relying on the arbitration provision contained in its underlying user agreement. The district court denied the motion to compel, holding that the arbitration provision was substantively unconscionable under California law.
Coinbase then filed an interlocutory appeal with the U.S. Court of Appeals for the Ninth Circuit challenging the decision and simultaneously sought to stay the litigation pending a decision on the appeal. The circuit court denied the motion, relying upon law in the Ninth Circuit allowing courts to make a case-by-case determination on a request for a stay pending appeal. Coinbase filed a motion to stay the district court proceedings pending the appeal with the Ninth Circuit, which the Ninth Circuit also denied.
The U.S. Supreme Court granted certiorari to consider the question and resolve the split in the circuits as to whether appealing the denial of a motion to compel arbitration removes jurisdiction over the case from a district court and thereby prevents the court from proceeding with a litigation pending appeal.
Coinbase relied upon prior Supreme Court precedent, Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58 (1982), wherein the Court held that an appeal “divests the district court of its control over those aspects of the case involved in the appeal.” Where the question is one of arbitrability of a dispute, Coinbase argued that the district court had to be divested of jurisdiction to proceed with a case until such time as the court of appeals determines whether the case belongs in litigation or the arbitration can proceed. Coinbase further noted that allowing litigation to move forward while an appeal is pending was contrary to the provisions of the Federal Arbitration Act providing for a right to seek an immediate interlocutory appeal of refusals to compel arbitration.
The Court’s decision on this matter will impact strategic decisions on both filing motions to compel and appealing denials of those decisions. It is currently anticipated that a decision will be forthcoming in 2023.