In re Facebook, Inc. Shareholder Derivative Privacy Litigation

Background

Facebook moved for a permanent injunction—an order requiring a party to stop an ongoing legal proceeding—to halt a related shareholder derivative action in California Superior Court. The state court had temporarily stayed that action for 45 days from the federal hearing or ruling, whichever came first.

The federal case began as a consolidated shareholder derivative action against Facebook as the nominal defendant and individual defendants. The complaint asserted eight causes of action, including federal securities-law claims, California Corporations Code claims, and fiduciary-duty claims. In an earlier order, the court held that Facebook’s forum-selection clause was enforceable and dismissed all of the derivative state claims on forum non conveniens grounds. The dismissal was without leave to amend but without prejudice to reasserting those claims in the Delaware Court of Chancery. The federal securities claims remained.

A separate shareholder later filed the state-court action based on the same facts and circumstances. That complaint asserted claims for declaratory relief and violations of several California Corporations Code provisions.

Parties’ Positions

Facebook argued that the state-court action sought to relitigate whether the Delaware exclusive forum provision in Facebook’s charter was valid and enforceable for derivative claims under California law. The other parties argued that the forum-selection issues were not identical, that the earlier federal order was not final, and that the shareholder who filed the state case was not legally connected closely enough to the federal plaintiffs for the earlier ruling to control. The state-court plaintiff also argued that, even if the federal court could issue an injunction, it should exercise its discretion not to do so.

Legal Standard

The Anti-Injunction Act generally bars federal courts from stopping proceedings in state court, subject to three narrow exceptions. Facebook relied on the third exception, which permits an injunction to protect or enforce a federal court’s judgment. Courts call this the relitigation exception. It is intended to prevent state litigation of a claim or issue already decided by a federal court, but the Supreme Court has instructed that the exception must be applied strictly and that any doubt should favor allowing the state court to proceed.

Court’s Analysis

The court focused on whether the federal and California standards for enforcing the forum-selection clause were identical. Under federal law, courts generally enforce a forum-selection clause unless the selected forum provides no remedy, and the party opposing the clause bears the burden of showing that enforcement is unwarranted. California law also generally favors freely and voluntarily agreed forum-selection clauses, but California courts may refuse enforcement when it would substantially diminish rights protected by California public policy. For claims based on rights that California law makes nonwaivable, the party seeking enforcement bears the burden of showing that the selected forum would not diminish those rights.

The court found the California standard substantially similar to the federal standard, but not identical. It also noted that the earlier federal order had not decided whether the California Corporations Code claims in the state-court complaint involved nonwaivable rights under California law. The court said that question was best left to the California state court.

The court recognized possible gamesmanship in the timing of the state-court complaint and earlier efforts to avoid the forum-selection clause. But it concluded that federalism—the principle requiring respect for the separate authority of state courts—supported allowing the state court to decide whether the federal order precluded the forum-selection argument. Because this was at least a close case, the court held that the federal court should not issue an injunction.

Disposition

Judge Haywood S. Gilliam, Jr. denied Facebook’s motion for permanent injunction. The order did not decide whether the state-court action was ultimately barred; it left that preclusion question for the state court.