The logo of Gap is seen on the front of a shop in Oxford Street, London.
On Thursday, the Gap Inc filed a suit alleging the company's directors violated their duties by making false statements about the retailer's commitment to racial diversity in its leadership ranks.
In a 6 p.m. ruling, Circuit Court of Appeals said The Gap can enforce a corporate bylaw requiring shareholder derivative lawsuits to be filed in Delaware Chancery Court, even when it blocks federal securities claims that can only be heard in federal court.
The ruling cements a split among federal appeals courts on how forum selection rules apply to derivative suits alleging violations of the federal securities and exchange act. The 7th Circuit said Boeing Co could not enforce a forum selection provision necessitating that derivative claims be filed in Delaware Chancery Court.
The court's six Republicans appointed judges rejected claims by Gap shareholder Noelle Lee that enforcing the forum selection clause would allow the company to avoid any lawsuits and effectively waive its obligations under federal securities law.
In another suit, Lee's lawyers brought similar shareholder suits against Google parent Alphabet Inc, Oracle Corp., Qualcomm Inc. and other companies. Companies have denounced wrongdoing and said they have no plans to face retaliation.
Lee in a California federal court lawsuit in 2020 said that The Gap had failed to make progress in diversifying its senior leadership despite making statements to the contrary in securities filings. The Gap has asserted that the accusations made in the lawsuit are offensive, racially charged and demonstrably false. U.S. District Judge Sallie Kim, in 2021, said the forum selection clause was enforceable and dismissed the case, and a 9th Circuit panel affirmed last year. The supreme court granted en banc review and vacated the panel's ruling in October.
The forum Clause was unenforceable because it violated a language in the Securities and Exchange Act that bars directors from waiving their legal duties.
On Thursday, Circuit Judge Sandra Ikuta wrote for the majority that the law only bars the waiver of substantive legal obligations imposed on company directors, not the waiver of a specific procedure for enforcing such duties. Ikuta said that shareholders won't be barred from suing because they can still file lawsuits on their own behalf in federal court rather than derivative lawsuits on behalf of a company.
The Gap's forum selection Clause is a litigation bridge to nowhere, he said, that deprives shareholders of any forum to pursue derivative claims.
The judges who joined him all are appointees of Democratic presidents.
The case is Lee v. Fisher, 9th U.S. The circuit court of appeals, No. The Gap forum selection Clause gets 9th Circ. Boeing's forum selection bid to send the 737 MAX derivative suit to Delaware has been nixed by 7th Circ.