New Defense Strategy Proving Successful in Derivative Actions Based on Backdating Stock Options
In recent months, plaintiffs’ attorneys from across the country have rushed to file derivative lawsuits premised on allegations of illegal backdating. In many cases, this mad scramble by the Plaintiffs’ Bar has resulted in companies being sued several times in multiple jurisdictions (in both state and federal court) over the same alleged wrongdoing. When this happens, companies are not only forced to fight the underlying allegations of wrongdoing, but they are also required to coordinate a complex and often costly multi-jurisdictional defense.
But increasingly (see this recent post in Securities Law 360), defense counsel are turning to a new litigation strategy – the use of the collateral estoppel defense – to successfully stem multi-jurisdictional attacks. The strategy is simple: defense counsel select one “test” case to litigate, and petition to have the rest of the derivative cases that are premised on the same allegations of wrongdoing stayed until the “test” case is resolved. If defense counsel can successfully dismiss the “test” case, they can then (under some circumstances) apply that dismissal to the other related cases by use of the collateral estoppel defense.
In order to successfully assert the collateral estoppel defense, the related cases must meet three requirements: the parties must be the same in all cases, the issues must be the same, and there must be a final decision on the merits in the “test” case. To date, defense counsel have had some success arguing that in related derivative actions, the parties are the same – because in derivative actions, the named plaintiff is always the company, even if the representative plaintiffs are different. Further, because the central issue in these cases is often demand futility, defense counsel have also been successful in arguing that the issues are the same. Once these first two requirements are met, defense counsel who successfully obtain an adjudication in the “test” case have a strong basis to apply that judgment to dismiss other related cases.
For one recent example where a court dismissed a derivative action on the basis of collateral estoppel, see Levin ex rel. Tyco International Ltd. v. Kozlowski, 2006 WL 3317048 (N.Y. Gen. Term Nov. 14, 2006) (dismissing derivative action against Tyco on the basis of collateral estoppel after related derivative action against Tyco was dismissed in New Hampshire).
