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The Gap beats shareholder lawsuit over commitment to diversity

The Gap logo is seen on the front of a store on Oxford Street in London

By Daniel Wiessner

(Reuters) - The Gap Inc on Thursday beat a shareholder lawsuit claiming the company's directors breached their duties by making misleading statements in securities filings about the retailer's commitment to racial diversity in its leadership ranks.

An en banc panel of the 9th U.S. Circuit Court of Appeals in a 6-5 ruling said The Gap can enforce a corporate bylaw requiring shareholder derivative litigation to be filed in Delaware Chancery Court, even when it blocks federal securities claims that can only be heard in federal court.

The ruling cements a split among federal appeals courts on how forum selection provisions apply to derivative suits alleging violations of the federal Securities and Exchange Act. Last year, the 7th Circuit said Boeing Co could not enforce a forum selection provision mandating that derivative claims be filed in Delaware Chancery Court.

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The court's six Republican-appointed judges rejected claims by Gap shareholder Noelle Lee that enforcing the forum selection clause would allow the company to avoid any litigation and effectively waive its obligations under federal securities law.

The Gap, which is based in San Francisco, did not immediately respond to a request for comment. Nor did Lee's lawyers at Bottini & Bottini, which has brought similar shareholder lawsuits against Google parent Alphabet Inc, Oracle Corp, Qualcomm Inc and other companies. Those companies have denied wrongdoing.

Lee in a 2020 lawsuit in San Francisco federal court said The Gap had failed to make progress in diversifying its senior leadership despite making statements to the contrary in securities filings. The Gap has maintained that the allegations in the lawsuit are "offensive, racially charged and demonstrably false."

U.S. District Judge Sallie Kim in 2021 said the forum selection clause was enforceable and dismissed the case, and a 9th Circuit panel affirmed last year. The court granted en banc review and vacated the panel ruling in October.

Lee's lawyers argued that the forum clause was unenforceable because it violated a provision in the Securities and Exchange Act barring corporate directors from waiving their legal obligations.

On Thursday, Circuit Judge Sandra Ikuta wrote for the majority that the law only bars the waiver of substantive legal obligations imposed on company directors, and "not the waiver of a particular procedure for enforcing such duties." Ikuta said that shareholders will not be barred from suing because they can still file lawsuits on their own behalf in federal court, rather than derivative lawsuits on behalf of a company.

But Circuit Judge Sidney Thomas, who penned the dissenting opinion, called The Gap's forum selection clause "a litigation bridge to nowhere" that deprives shareholders of any forum to pursue derivative claims.

"The majority’s contrary conclusion renders the Exchange Act's protections meaningless," Thomas wrote.

Thomas and the judges who joined him all are appointees of Democratic presidents.

The case is Lee v. Fisher, 9th U.S. Circuit Court of Appeals, No. 21-15923.

For the shareholders: Yury Kolesnikov of Bottini & Bottini

For Gap: Roman Martinez of Latham & Watkins

Read more:

The Gap’s forum selection clause gets 9th Circ.'s full review in shareholder suit

The Gap nixes Exchange Act derivative claims via forum selection - 9th Circ.

Boeing's forum selection bid to send 737 MAX derivative suit to Delaware nixed by 7th Circ.