By Stephen B. Brauerman

Frustrated with the proposed settlement of weak, disclosure-based derivative claims that raised "meaningful, litigable process" concerns, Vice Chancellor J. Travis Laster took the extraordinary step of appointing special counsel to advise the court on collusive forum shopping and the proper role the court should play in policing multi-jurisdictional derivative litigation in Scully v. Nighthawk Radiology Holdings Inc.

The brief of special counsel, filed last month, is important both for the conclusions it reaches and its illustration of the sincerity with which the Court of Chancery takes its supervisory role in approving derivative settlements and monitoring its docket. The Nighthawk case, and a recent letter opinion by Vice Chancellor Leo E. Strine Jr. dismissing a placeholder suit in In re Dynergy Inc. Shareholders Litigation, provide important lessons for corporate defendants managing multi-jurisdictional deal litigation.

In Nighthawk, Laster took the unusual step of appointing special counsel to consider the question of collusive forum shopping after receiving notice of the parties’ intent to submit their disclosure based settlement to the state courts of Arizona for approval in pending companion litigation. While the court recognized that numerous suits are frequently filed in multiple jurisdictions almost immediately after the announcement of a major deal and that eventually only one court can approve the derivative settlement the parties negotiate, Laster took issue with the parties’ decision to submit a disclosure based settlement for approval by another jurisdiction after he had considered plaintiffs’ disclosure based claims on a motion to expedite and found them wanting. Compounding the vice chancellor’s frustration was his observation that actionable substantive problems plagued the deal.

The court expressed concern that the parties chose Arizona specifically to avoid questions from a skeptical judge (himself) who already reached a conclusion about the merits of the case: "This is a case that involved issues of Delaware law on the internal affairs doctrine, yet here the parties were running to a different court not familiar with Delaware law to seek approval from a court that hadn’t done anything to look at the case yet. ... So I had serious concerns when I got that [settlement agreement] that what was going on here was collusive forum shopping."

Though Nighthawk had indicia of collusive forum shopping — for example multiple jurisdictions with competing plaintiffs lawyers and a favored jurisdiction that became disfavored after a preliminary ruling on the merits against the defendant — Laster acknowledged that collusive forum shopping may be necessary and even a permissible evil of multi-jurisdictional litigation and sought briefing from the parties as well as appointed special counsel to consider the issue.

In a comprehensive brief, special counsel first reviewed forum shopping in the context of multi-jurisdictional class action litigation, explained the "reverse auction phenomenon" where defendants induce competing sets of plaintiffs’ counsel to bid against the class in different jurisdictions to earn a larger fee award, and discussed the risks from delaying class certification until after approval of the settlement. Then special counsel addressed the court’s questions about the evils of collusive forum shopping and what role, if any, the court should play in preventing it. After observing that "forum shopping often carries with it a negative connotation," the special counsel emphasized that evaluating the virtues of each jurisdiction in which litigation is filed is not only ethically permissible but also expected of zealous advocates. Although plaintiffs initially have the upper hand in foru