Opinion ID: 3214863
Heading Depth: 2
Heading Rank: 1

Heading: Selection of Governing Law

Text: Plaintiffs’ claims arise under federal statutory law (§ 14(a) of the Exchange Act) and the common law (of some jurisdiction, not specified in the complaint). It is not obvious, however, what law should govern the standards for determining whether Plaintiffs were required to demand that ZAGG’s directors bring suit before Plaintiffs filed suit themselves. The Federal Rules of Civil Procedure require all shareholder-derivative complaints filed in federal court to “state with particularity: (A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (B) the reasons for not obtaining the action or not making the effort.” Fed. R. Civ. P. 23.1(b)(3). But the federal procedural rules cannot establish substantive law. As the Supreme Court wrote in a shareholderderivative suit bringing claims under § 20(a) of the Investment Company Act of 1940, 15 U.S.C. § 80a-20(a) (ICA): [A]lthough Rule 23.1 clearly contemplates both the demand requirement and the possibility that demand may be excused, it does not create a demand requirement of any particular dimension. On its face, Rule 23.1 speaks only to the adequacy of the shareholder representative’s pleadings. Indeed, as a rule of procedure issued pursuant to the Rules Enabling Act, Rule 23.1 cannot be understood to “abridge, enlarge or modify any substantive right.” 28 U.S.C. § 2072(b). . . . [T]he function of the demand doctrine in delimiting the respective powers of the individual shareholder and of the directors to control corporate litigation clearly is a matter of “substance,” not “procedure.” 7 Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96–97 (1991) (citations omitted). “Thus,” said the Court, “in order to determine whether the demand requirement may be excused by futility in a derivative action founded on § 20(a) of the ICA, we must identify the source and content of the substantive law that defines the demand requirement in such a suit.” Id. at 97. The Court began its analysis by stating that the substantive-law issue is one of federal law: It is clear that the contours of the demand requirement in a derivative action founded on the ICA are governed by federal law. Because the ICA is a federal statute, any common law rule necessary to effectuate a private cause of action under that statute is necessarily federal in character. Id. That was not, however, the end of the story. The Court then determined that federal common law should adopt the futility law of the state of incorporation of the company on behalf of which the plaintiffs are bringing suit. It reached that conclusion because (1) as a matter “that bears on the allocation of governing powers within the corporation, federal courts should incorporate state law into federal common law unless the particular state law in question is inconsistent with the policies underlying the federal statute,” and (2) recognition of a futility exception would “not impede the regulatory objectives of the ICA.” Id. at 108. We are aware of no federal policy underlying Exchange Act § 14(a) that would distinguish a claim under § 14(a) from, as in Kamen, a claim under § 20 of the ICA with respect to futility doctrine. Therefore we look to the law of Nevada, ZAGG’s state of 8 incorporation, for the standards that govern the futility exception—at least for Plaintiffs’ § 14(a) claim. But what about Plaintiffs’ common-law claims? Because those claims arise under state law, we ordinarily look to the substantive law (including choice-of-law rules) of the forum state. See Boyd Rosene & Assocs., Inc. v. Kan. Mun. Gas Agency, 123 F.3d 1351, 1352–53 (10th Cir. 1997) (“[A] federal court sitting in diversity must apply the substantive law of the state in which it sits, including the forum state’s choice-of-law rules.”); Timmerman v. Modern Indus. Inc., 960 F.2d 692, 696 (7th Cir. 1992) (“federal courts exercising pendent or diversity jurisdiction must apply state law to matters of substantive law”). Perhaps it would be too problematic to apply two futility standards in the same case. As stated in a similar context by RCM Sec. Fund, Inc. v. Stanton, 928 F.2d 1318, 1327–28 (2d Cir. 1991), decided before Kamen: If a state demand requirement were to apply to state claims and a federal demand requirement were to apply to federal claims, a plaintiff bringing a derivative suit based on a single transaction might well be subject to a demand requirement as to one legal theory while excused from making a demand as to another legal theory. . . . Needless complexity, needless litigation, and perhaps the loss of substantive claims would also result from a rule that state law governs the demand requirement involving a state claim but federal law governs where a federal claim is in issue. But we need not decide the matter. The parties agree that Nevada law should apply to the futility issue (apparently because Utah courts would choose Nevada law as the governing law); and we see no reason to search for a reason to disagree. See TMJ Implants, Inc. v. Aetna, Inc., 498 F.3d 1175, 1180–81 (10th Cir. 2007) (“The parties agree that the 9 applicable substantive law is that of Colorado. . . . We therefore assume that this case is governed by Colorado substantive law.”).