Chemed Wins First Federal Court Decision Enforcing a Delaware Corporation’s Forum‑Selection Bylaw

On September 19, 2014, Judge Michael R. Barrett of the U.S. District Court for the Southern District of Ohio granted Cravath’s motion to transfer to the District of Delaware a shareholder derivative suit against certain officers, directors and former directors of Chemed Corporation. This is the first decision from a federal court to uphold and enforce a Delaware corporation’s forum-selection bylaw.

Cravath represents Chemed Corporation, as well as certain of its officers, directors and former directors, in two shareholder derivative actions — the instant suit that was recently transferred from federal court in Ohio, and a suit filed in the U.S. District Court for the District of Delaware — alleging breach of fiduciary duty and other claims based on the alleged improper billing of Medicare and Medicaid. In August 2013, prior to the filing of these lawsuits but after the alleged wrongdoing, Chemed enacted a forum-selection bylaw requiring that certain lawsuits, including derivative suits involving Chemed, proceed in either state or federal court in Delaware.

Plaintiff in the Ohio action moved the Judicial Panel on Multidistrict Litigation to centralize the two suits in Ohio, arguing that the forum-selection clause in Chemed’s bylaws is inapplicable in an MDL proceeding and invalid under federal law, based upon decisions in Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011), and In re Facebook, Inc., 922 F. Supp. 2d 445 (S.D.N.Y. 2013). Cravath successfully opposed the motion and subsequently moved to transfer the Ohio case to Delaware, based in part on Chemed’s forum-selection bylaw. In granting Chemed’s motion to transfer to Delaware, Judge Barrett held, inter alia, that (1) the forum-selection bylaw does not become unenforceable simply because it was adopted after the purported wrongdoing; (2) the bylaw was not adopted for an improper purpose; and (3) Delaware was not a seriously inconvenient forum for plaintiff. In upholding Chemed’s bylaw, the court rejected plaintiff’s argument that the court should follow Galaviz, a decision applying federal common law, rather than more recent decisions from Delaware state courts. Instead, the court adopted the reasoning outlined in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), which upheld the statutory and contractual validity and enforceability of unilaterally adopted forum-selection clauses in corporate bylaws. The court also cited the more recent decision in City of Providence v. First Citizens BancShares Inc., No. 9795 (Del. Ch.), in which Cravath successfully represented First Citizens in upholding a forum-selection bylaw that was enacted simultaneously with the announcement of a proposed merger and after some claims had arisen. For the related news item on the First Citizens case, click here.

In addition to these derivative actions, Cravath represented Chemed and three of its top executives in a related putative class action lawsuit in the U.S. District Court for the Southern District of Ohio, In re Chemed Corp. Securities Litigation, No.12-cv-00028, alleging Securities Exchange Act violations based on an alleged fraudulent scheme to enroll ineligible hospice patients and obtain payments from the federal government. The parties agreed to a settlement without any admission of liability, which was approved by the court on July 15, 2014.

The Cravath team included partners Michael A. Paskin and Timothy G. Cameron and associates Michael A. Cabin, Alexander J. Scolnik and Huaou Yan. The case is North v. McNamara, et al., No. 13-cv-833 (S.D. Ohio) and No. 14-cv-1209 (D. Del.)