CA1: claim preclusion in derivative actions

In Re: Sonus Networks, Inc, No. 06-1937.  This is a really big piece of derivative litigation.  The plaintiff’s claims were dismissed when the district court held that their claims were precluded by an earlier state-court lawsuit, in which the plaintiffs did not plead that they demanded that the company sue its employees (or allege futility under the law of the state of incorporation).  The state court had held that futility wasn’t apparent from the face of the complaint, which named several officers, because it wasn’t really alleging wrongdoing by them, but rather a failure of supervision and there wasn’t enough particularity to show that the other directors were so disinterested that they couldn’t consider the demand.   

When I first started reading this case, I thought it would be nothing but tales of corporate woe.  Instead, it is a pretty standard civil procedure case, dealing with how federal courts have to apply state law in dealing with claim preclusion.  The First concludes that yes, the state court’s resolution was preclusive.  However, the First goes into how Massachusetts differs as to whether a judgment is on the “merits” or not from the Restatement.  Indeed, the First explains how it is quite wide, and how various kinds of dismissals are entitled to preclusive effect, and besides caselaw from 1973 from the First is on point.  So, failing to plead demand that a company sue itself is a failure of a precondition and good enough for issue preclusion.

The First then goes though the more vanilla aspects of res judicata – like identity of issues and privity. It ads a caveat about how adequate representation is required in derivative actions, but concludes that there, in fact, was adequate representation.  The First rejects the argument that the differences between the federal and state claims do not show an inadequacy of representation.

Blawgletter comments here.