Pyott v. Louisiana Municipal Police Employees' Retirement System
74 A.3d 612 (2013)
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Rule of Law:
Under the doctrine of collateral estoppel and the Full Faith and Credit Clause, a state court must give preclusive effect to a final judgment from a federal court by applying the preclusion law of the state in which the federal court sits. In shareholder derivative suits, different groups of shareholders are considered in privity with each other, as the corporation is the real party in interest.
Facts:
- Allergan, Inc., a Delaware corporation, develops and markets the specialty pharmaceutical BOTOX.
- While it is legal for doctors to prescribe BOTOX for unapproved 'off-label' uses, it is unlawful for Allergan to market the product for such uses.
- In 2007, the U.S. Department of Justice began an investigation into Allergan's marketing practices for BOTOX.
- On September 1, 2010, Allergan announced it had pled guilty to the criminal misdemeanor of misbranding and agreed to pay a total of $600 million in fines.
- Following the announcement, different groups of Allergan stockholders initiated separate derivative lawsuits against the company and its directors based on the improper marketing.
Procedural Posture:
- The Louisiana Municipal Police Employees’ Retirement System (LAMPERS) filed a derivative action against Allergan in the Delaware Court of Chancery (a trial court).
- Other Allergan stockholders filed similar derivative actions in the United States District Court for the Central District of California (a federal trial court), which were later consolidated.
- Allergan moved to dismiss both actions for failure to adequately plead that making a pre-suit demand on the board would have been futile.
- The California federal court granted Allergan's motion and dismissed the California action with prejudice, entering a final judgment.
- Allergan then moved to dismiss the Delaware action, arguing the California judgment had a preclusive effect under the doctrine of collateral estoppel.
- The Delaware Court of Chancery, as the court of first instance, denied Allergan's motion to dismiss.
- Allergan and its directors (appellants) filed an interlocutory appeal of the Court of Chancery's denial to the Delaware Supreme Court (the highest state court).
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Issue:
Does the doctrine of collateral estoppel require a Delaware court to dismiss a shareholder derivative suit when a federal court in California has already issued a final judgment on the merits dismissing a nearly identical derivative suit brought by different shareholders on behalf of the same corporation?
Opinions:
Majority - Berger, Justice
Yes. The doctrine of collateral estoppel requires the dismissal of the Delaware action. The Court of Chancery erred by applying Delaware's internal affairs doctrine to the questions of privity and adequacy of representation. Instead, federalism, comity, and the Full Faith and Credit Clause require the Delaware court to apply the preclusion law of the state where the first judgment was rendered, which is California. Under California law, all five elements of collateral estoppel are met: the issue (demand futility) is identical, was actually litigated, was necessarily decided, resulted in a final judgment on the merits, and the parties are in privity. Different groups of shareholders in a derivative action are in privity because the true plaintiff is the corporation itself. The trial court's creation of a 'fast filer' presumption to find the California plaintiffs were inadequate representatives was an error, as it was not supported by the record.
Analysis:
This decision solidifies the principle that the Full Faith and Credit Clause and the doctrine of collateral estoppel take precedence over a state's interest in applying its own corporate law under the internal affairs doctrine. It prevents plaintiffs from forum shopping by re-litigating a failed derivative claim in a different jurisdiction after an initial suit is dismissed on the merits. The ruling effectively harmonizes the treatment of derivative suits across state lines, ensuring that a final judgment on a core issue like demand futility has a nationally preclusive effect, thereby promoting judicial efficiency and finality. The court also curbed the lower court's attempt to create a new per se rule that would deem stockholder plaintiffs who file suit quickly, without first seeking corporate records, to be inadequate representatives.
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