In Salzberg, et al. v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020) (“Blue Apron”), the Delaware Supreme Court upheld the facial validity of federal-forum provisions (FFPs) in a Delaware corporation’s certificate of incorporation requiring actions arising under the Securities Act of 1933 to be filed exclusively in federal court. Here is Kevin LaCroix’s helpful summary of the decision and discussion of its background, including the valiant litigation funding effort by D&O insurers and brokers: “Delaware Supreme Court Holds Federal Forum Provisions Facially Valid.”
In many cases, Blue Apron will help Delaware corporations better coordinate multiple securities class actions challenging disclosures in a registration statement and prospectus for an initial public offering (IPO) or secondary offering, by reducing the chances that a company will face concurrent federal-court and state-court 1933 Act actions. For this reason, Blue Apron is important.
But it is important for companies and their D&O insurers and brokers to appreciate that Blue Apron will not eliminate concurrent state-court 1933 Act cases – it doesn’t affect state-court claims against non-Delaware corporations, and I predict that some plaintiffs’ firms will continue to file cases against Delaware corporations with FFPs in state court, leaving us with inefficient pre-Cyan-like jurisdictional battles. And only time will tell, but I wouldn’t be surprised if the Supreme Court were to end up addressing this issue, either through a cert petition by the Blue Apron plaintiffs or through one of the jurisdictional battles in subsequent cases. At a minimum, the post-Blue Apron environment almost certainly will not be serene and certain.
The only way for companies and their D&O insurers and brokers to improve 1933 Act outcomes is to help create a system that results in more effective and efficient litigation defense. After exploring Blue Apron‘s limitations, I chart a course forward to more effective and efficient defense strategies.
- Blue Apron’s Limitations
a. Scope of Application
Blue Apron will not apply to non-Delaware IPO cases, or to non-Delaware secondary- or debt- offering cases. More than 40% of public companies are incorporated outside of Delaware, so there will remain a nagging number of concurrent federal and state cases. We can all think of many of our cases over the years involving non-Delaware companies: most REITs are incorporated in Maryland, an increasing number of companies are incorporated in Nevada, and many companies remain incorporated in their home state – for example, General Electric is a New York corporation, Target is a Minnesota corporation, and Apple is a California corporation.
Although secondary-offering 1933 Act claims are less frequent than IPO claims, there are plenty. I’m currently defending concurrent secondary-offering securities class actions. It is indeed more difficult for plaintiffs’ lawyers to find plaintiffs who can prove they bought stock in or traceable to secondary offerings, since secondary-offering stock is scrambled in the market, but they do find them, largely because of the institutional investor relationships the Private Securities Litigation Reform Act of 1995 incentivized. And the larger plaintiffs’ firms have now spent 25 years developing relationships with the types of institutions who directly purchase in secondary offerings.
Blue Apron will have the biggest impact in IPO securities class actions. Although Blue Apron only applies to Delaware corporations, of course, more than 80% of IPO companies are incorporated in Delaware, and with Blue Apron, that number is bound to increase. But beware: the allure of Delaware can be a trap for the unwary litigant; it is a great forum for defendants facing meritless litigation, but it is a buzz-saw for questionable conduct or inexcusable inaction – think Southern Peru Copper and Blue Bell.
b. Practical Problems
I expect that some plaintiffs’ lawyers will continue to file state-court 1933 Act cases against Delaware corporations with FFPs. In those cases, a company with an FFP will make a motion to dismiss in state court on the basis of the FFP or remove the case to federal court. The plaintiffs will argue that, notwithstanding Blue Apron, a company can’t eliminate state-court 1933 Act jurisdiction, as confirmed by the 9-0 decision in Cyan, or that the FFP, while facially valid, is not valid as applied in the particular case for one reason or another.
While I expect defendants will win many of those battles, or even most, they will all be costly to fight. And whatever the win-loss record, for public companies and their D&O insurers and brokers, the outcome will be additional defense costs and a lack of certainty. We will not be able to plan on federal court being the exclusive jurisdiction for 1933 Act claims.
2. Charting a Path Forward
a. The first step: increasing specialization.
The only way that public companies and their D&O insurers and brokers will achieve better outcomes in 1933 Act cases is to improve the effectiveness and efficiency of securities class action defense. It is that simple. There are no shortcuts.
Effectiveness and efficiency are at an all-time low, primarily due to a splintering of the defense bar. Although there remains a small group of full-time securities defense lawyers, the so-called defense bar comprises an increasing number of general commercial litigators. Some of these lawyers are fabulous litigators for other types of cases, or to help the securities class action specialist shape litigation strategy, but they are rarely the right choice to lead the defense. (For more on the deterioration of the defense bar, see, for example, my multi-part series “The New Securities Litigation Landscape: How D&O Insurers and Brokers Can Help Defendants Navigate” and my most recent D&O Discourse post, “Putting ‘Litigation’ Back in ‘Securities Litigation.’”)
D&O insurers and brokers need to increase their involvement in securities class action defense to ensure that only specialists defend these specialized cases. Doing so requires a shift in the way we think but otherwise is straightforward: the D&O insurance contract needs a tweak to increase insurers’ contractual right to be more involved in defense counsel selection and defense strategy.
With increased specialization, supply and demand will take over to improve quality and cost. With a more specialized bar, each lawyer will defend a greater number of cases – which will yield game-changing benefits.
b. The second step: increasing volume of cases for specialists
Increasing the volume of work for securities defense specialists will improve both effectiveness and efficiency.
Increasing volume will improve effectiveness. As specialists devote more time, attention, and resources to improving their knowledge, strategies, and relationships, and they do not want to let their repeat-play insurer and broker colleagues down with bad results.
In 1933 Act cases, specialization is absolutely critical to achieving better results. We can win or substantially reduce 1933 Act case severity, but we need the right lawyers defending the cases. For example:
- Omnicare is a powerful tool in Section 11 cases – it can even be used to argue that restated financial statements weren’t false – but far too few defense lawyers use it effectively, a shocking shortcoming I attribute to the decline of specialization. (I wrote a U.S. Supreme Court amicus brief in Omnicare, and just published an article on Omnicare‘s five-year anniversary for my amicus client, Washington Legal Foundation: “Omnicare, Five Years Later: Strategies for Securities Defense Lawyers’ More Effective Use of the Decision.“)
- The key case-management skill in 1933 Act cases is knowledge of and relationships with the plaintiffs’ bar, D&O insurers, and mediators, and those can only come from decades spent in this practice (though it takes people skills too). Only a lawyer who is well known to the plaintiffs’ bar can understand the intra-plaintiff dynamics and the often-subtle strategies the plaintiffs are trying to pull. The lead lawyer also needs to manage the settlement dynamics among groups of plaintiffs’ lawyers and the tower of D&O insurers, among the fairly small number of repeat securities class action mediators.
Increasing volume will improve efficiency. Greater volume will also improve efficiency, as D&O insurers and brokers, on behalf of their public company clients, can insist on greater efficiency by defense firms, who will defend each case with an abundance mentality and the knowledge that they’d better not let the insurers and brokers down with an inefficient defense.
Let’s go back to General Electric. Imagine if GE decided it would take over all D&O insurance, primary and excess, and could have a meaningful right to help its insureds choose defense counsel. With its money at stake, GE would help its insureds choose excellent lawyers who will be willing to give GE an effective and efficient defense. Not one of these lawyers would ever do less than a stellar job or bill a penny more than necessary. And all of these lawyers would give rate and other economic concessions (e.g. volume discounts) well beyond what any defense firm would ever give to a D&O insurer today. D&O insurers and brokers need to find a way to approximate GE in my hypothetical.
c. A journey of a thousand miles begins with a single step
How can insurers and brokers achieve this type of involvement under non-duty to defend policies? In the current hard market, and especially with IPO companies, D&O insurers have the ability to negotiate contractually tailored defense arrangements under a non-duty to defend policy, and brokers have ability to negotiate better terms for their clients through demystifying the claims process for underwriters – one that locks in a more effective and efficient defense at policy inception. And, most importantly, companies and their directors and officers would benefit from better terms while still obtaining an excellent defense that stretches their limits farther. Everyone would be better off.
So, why not negotiate, in the underwriting process, the insureds’ obligation to interview a set of 3-5 agreed-upon defense lawyers (specific lawyers, not firms) in the event of a claim? The underwriter and broker could even ask each defense lawyer candidate for a case management plan and budget for a typical type of claim that might arise for the particular insureds. The key is to set this up at policy inception.
With the right lawyer in the case, companies and their D&O insurers and broker can work with the lawyer to create a case management plan that addresses how to deal with concurrent federal and state cases, plans for litigation of the case past the motion to dismiss if it’s defensible, and includes litigation budgets and even caps – not every concurrent 1933 Act case involves unpredictable or intolerable defense costs (e.g. I just budgeted only 15% more for the presence of concurrent state cases).
A securities class action specialist who works collegially with D&O insurers and brokers can and will win 1933 Act cases and engage in thoughtful, reliable discussions about defense strategy and cost. That – and not any FFP or even a legislative fix to the 1933 Act – is the only way we can fundamentally improve outcomes in 1933 Act cases.