This Article examines the intersection of fee-shifting bylaws and federal private securities fraud suits. Specifically, this Article hypothesizes about the effects fee-shifting bylaws would have, if enforceable, on private securities fraud litigation. It then turns to the validity of fee-shifting bylaws under federal law and concludes that they are invalid as applied to securities fraud claims. In light of this conclusion, this Article considers whether Congress should pass legislation to validate fee-shifting bylaws and determines that it should not.
Under the "American Rule," each party to a lawsuit pays its own attorney's fees. (1) Parties can, however, contract for a different arrangement. (2) In that regard, a number of corporations have recently amended their bylaws, (3) a document considered a contract between a corporation and its stockholders, (4) to contract around the American Rule. (5) These "fee-shifting bylaws" obligate a stockholder who fails to prevail in a suit against the corporation to pay the corporation's attorney's fees. (6)
Fee-shifting bylaws are a new phenomenon, bursting onto the scene in May 2014 following ATP Tour, Inc. v. Deutscher Tennis Bund. (7) In ATP, the Delaware Supreme Court held that a fee-shifting bylaw is facially valid under Delaware law. (8) Given that Delaware is the state of incorporation for the majority of US public companies, the opinion has received significant attention and promptly triggered proposed amendments to the Delaware General Corporation Law ("DGCL").
Fee-shifting bylaws raise issues under both state and federal law. This Article focuses on federal law; specifically, the intersection of fee-shifting bylaws and federal private securities fraud suits. Given that these suits are largely brought by stockholders, they fall squarely within the language of a typical fee-shifting bylaw. (9)
This Article proceeds as follows. Part I examines the ATP decision and post-decision developments. Part II provides an overview of the federal securities laws most commonly invoked in private securities fraud suits. Part III hypothesizes about the effects fee-shifting bylaws would have, if enforceable, on private securities fraud litigation. Part IV finds that fee-shifting bylaws are invalid as applied to securities fraud claims because such application would violate the anti-waiver provisions of federal securities law and the Supremacy Clause of the United States Constitution. In light of this finding, Part V considers whether Congress should pass legislation to validate fee-shifting bylaws and determines that it should not. Part VI concludes.
ATP AND ITS AFTERMATH
The ATP Litigation
ATP Tour, Inc. ("ATP") is the organizer of the ATP Tour, an international men's tennis circuit. (10) ATP was incorporated in Delaware in 1987 as a nonstock corporation. (11) As such, it has members instead of stockholders, but is governed by the DGCL, the same statute applicable to stock (regular) corporations. (12) In 2007, ATP's board of directors voted to restructure the ATP Tour. (13) As part of this restructuring, ATP downgraded the Hamburg, Germany, tennis tournament from first tier to second tier status. (14) The tournament is owned by the German and Qatari tennis federations, both of which are ATP members and neither of whom was happy about the downgrade. (15) Thus, they sued ATP and some of its directors in federal district court, alleging federal antitrust violations and breaches of their fiduciary duties to the corporation under Delaware law. (16) Following a jury trial, the district court granted the defendants' motion for judgment as a matter of law on the antitrust and fiduciary duty claims against the defendant directors. (17) The jury then returned a verdict for ATP on all remaining claims. (18)
Following its victory, ATP filed a motion with the district court pursuant to Federal Rule of Civil Procedure 54, seeking $17.87 million in attorney's fees and other costs it incurred in connection with the litigation. (19) ATP based its claim for these fees and costs on Article 23 of its bylaws. (20) This Article provides, in part, as follows:
(a) In the event that (i) any [current or prior member or Owner or anyone on their behalf ("Claiming Party")] initiates or asserts any [claim or counterclaim ("Claim")] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys' fees and other litigation expenses) (collectively, "Litigation Costs") that the parties may incur in connection with such Claim. (21) ATP argued that Article 23 entitles it to attorney's fees because the Article falls within the contractual exception to the American Rule that each party pays its own attorney's fees. (22) The district court denied the motion. (23) It recognized that "bylaws, as internal documents governing a corporation, are binding on a corporation's board and members in most settings." (24) But it also pointed out that "ATP cites no case in which a court held that a board-adopted corporate bylaw can form the basis for the recovery of attorney's fees from members who sue the corporation, much less in actions where the bylaws are not directly at issue in the dispute." (25) The court also noted that ATP adopted Article 23 after the plaintiffs became members and, given the timing of enactment, possibly to deter members from bringing suits to challenge the ATP tour restructuring at issue in the case. (26) The court also observed that "[allowing corporate antitrust defendants to adopt bylaws that would impose attorney's fees on members who unsuccessfully--but without bad faith--file an antitrust suit would likely have a chilling effect on the filing of meritorious actions." (27) It thus concluded that "[permitting corporations accused of anticompetitive conduct to enforce bylaws with such potent deterrent potential would be antithetical to the purposes of the Sherman Act." (28)
ATP appealed the district court's denial of its motion for attorney's fees to the Third Circuit Court of Appeals. (29) The Third Circuit read the district court's ruling as preemption based; specifically, that "federal law preempts the enforcement of fee-shifting agreements when antitrust claims are involved." (30) It then concluded that federal preemption was not ripe for decision because "there has been no determination of whether Article 23.3 is valid (therefore, enforceable) under state law." (31) Thus, it remanded the case back to the district court to make such a determination. (32)
Following remand, ATP asked the district court to certify four questions related to the validity of a fee-shifting bylaw under Delaware law to the Delaware Supreme Court. (33) The district court granted the request, and the Delaware Supreme Court "accepted the certified questions based on principles of comity." (34) The questions were as follows:
May the Board of a Delaware non-stock corporation lawfully adopt a bylaw (i) that applies in the event that a member brings a claim against another member, a member sues the corporation, or the corporation sues a member (ii) pursuant to which the claimant is obligated to pay for "all fees, costs, and expenses of every kind and description (including, but not limited to, all reasonable attorneys' fees and other litigation expenses)" of the party against which the claim is made in the event that the claimant "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought"?
May such a bylaw be lawfully enforced against a member that obtains no relief at all on its claims against the corporation, even if the bylaw might be unenforceable in a different situation where the member obtains some relief?
Is such a bylaw rendered unenforceable as a matter of law if one or more Board members subjectively intended the adoption of the bylaw to deter legal challenges by members to other potential corporate action then under consideration?
Is such a bylaw enforceable against a member if it was adopted after the member had joined the corporation, but where the member had agreed to be bound by the corporation's rules "that may be adopted and/or amended from time to time" by the corporation's Board, and where the member was a member at the time that it commenced the lawsuit against the corporation? (35)
The court addressed each certified question in a May 2014 unanimous en banc opinion. In analyzing the first question, the court stated that "[t]o be facially valid, a bylaw must be authorized by the ... (DGCL), consistent with the corporation's certificate of incorporation, and its enactment must not be otherwise prohibited." (36) The court found that the DGCL permits a fee-shifting bylaw that "allocates risk among parties in intra-corporate litigation" (37) because it falls within the DGCL requirement that a bylaw "relat[e] to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." (38) It then noted that a "corporate charter could permit fee-shifting provisions, either explicitly or implicitly by silence," (39) and that "no principle of common law prohibits directors from enacting fee-shifting bylaws." (40) Thus, it held that "[a]...