In re Facebook, Inc. Shareholder Derivative Privacy Litigation

          ORDER DENYING DEFENDANT'S MOTION FOR PERMANENT INJUNCTION Re: Dkt. No. 124

          Haywood S. Gilliam, Jr. United States District Judge.

         Pending before the Court is Defendant Facebook's motion for permanent injunction. Dkt. No. 124 (“Mot.”). Defendant seeks an order enjoining an action captioned O'Connor v. Zuckerberg, No. 19-CIV-03759, pending before the Honorable Nancy L. Fineman in San Mateo Superior Court (“O'Connor Action”). Judge Fineman stayed the O'Connor Action for forty-five days from the hearing on this motion or the issuance of a ruling, whichever occurs first. Dkt. No. 141-1, Ex. A. Because the Supreme Court has cautioned that the relitigation exception to the Anti-Injunction Act permits a federal court to enjoin a state court proceeding “only in rare cases, ” the Court DENIES Defendant's motion. See Smith v. Bayer Corp., 564 U.S. 299, 302 (2011).^[1]

         I. BACKGROUND

         On July 2, 2018, Plaintiffs filed a consolidated shareholder derivative action against nominal Defendant Facebook and individual Defendants, alleging the following eight causes of action: (1) violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9; (2) violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5; (3) misappropriation of information and breach of fiduciary duty for insider sales; (4) violation of California Corporations Code § 25402; (5) violation of California Corporations Code § 25403; (6) breach of fiduciary duty; (7) contribution and indemnification; and (8) aiding and abetting breaches of fiduciary duty. Dkt. No. 56 (“Compl.”) ¶¶ 464-517. The Court found that Facebook's forum selection clause was enforceable and dismissed all the derivative state claims on forum non conveniens grounds, without leave to amend but without prejudice to their reassertion in the Delaware Court of Chancery. Dkt. No. 113 (“Dismissal Order”) at 7-12. Only Plaintiffs' federal derivative claims remain in this action.

         John O'Connor, another Facebook shareholder, filed his derivative action on June 28, 2019, approximately three months after the Court's Dismissal Order. Dkt. No. 124-2, Ex. 1 (“O'Connor Compl.”). The parties do not dispute that the O'Connor Action arises from the same facts and circumstances as this case. See Mot. at 3; Dkt. No. 132 (“O'Connor Opp.”) at 1 (“There is a case pending in this Court based on similar factual allegations.”). In his complaint, Mr. O'Connor brings the following five causes of action: (1) declaratory relief; (2) violation of California Corporations Code § 25400; (3) violation of California Corporations Code § 25401; (4) violation of California Corporations Code § 25402; and (5) control personal liability under California Corporations Code § 25504. O'Connor Compl. ¶¶ 408-71.

         II. LEGAL STANDARD

         Under the Anti-Injunction Act, “[a] court of the United States may not grant an injunction to stay proceedings in a State Court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” 28 U.S.C. § 2283. The Act is a “necessary concomitant of the Framers' decision to authorize, and Congress' decision to implement, a dual system of federal and state courts.” Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 146 (1988). “And the Act's core message is one of respect for state courts.” Smith, 564 U.S. at 306.

         The Anti-Injunction Act is subject to only “three specifically defined exceptions.” Id. (citation and quotations omitted); see also 28 U.S.C. § 2283. The enumerated exceptions “are narrow and are ‘not [to] be enlarged by loose statutory construction.'” Smith, 564 U.S. at 306 (citation and quotations omitted and alterations in original). “Indeed, ‘[a]ny doubts as to the propriety of a federal injunction against state court proceedings should be resolved in favor of permitting the state courts to proceed.'” Id. (citation omitted and alterations in original). “[T]he fact that an injunction may issue under the Anti-Injunction Act does not mean that it must issue.” Chick Kam Choo, 486 U.S. at 151 (1988).

         III. DISCUSSION

         At issue here is whether the Act's third exception, known as the “relitigation exception, ” warrants the Court enjoining the O'Connor Action. Defendant argues that an injunction is appropriate because the O'Connor Action “seeks to relitigate an issue that this Court finally determined in its March 22, 2019 order[, namely] whether the Delaware exclusive forum provision in Facebook's charter is valid and enforceable with respect to California Corporations Code claims brought derivatively.” Mot. at 1. Mr. O'Connor (and Plaintiffs) argue that the relitigation exception does not apply because: (1) the forum selection issues are not identical; (2) the Dismissal Order is not a final order; and (3) Mr. O'Connor is not in privity with Plaintiffs. O'Connor Opp. at 5-11. In addition, Mr. O'Connor argues that even if the relitigation exception applies, the Court should decline in its discretion to issue an injunction. Id. at 11-12.

         A. Relitigation Exception

         Under the third enumerated exception, a federal court can enjoin a state court proceeding “to protect or effectuate its judgments.” 28 U.S.C. § 2283. The relitigation exception is “designed to implement ‘well-recognized concepts' of claim and issue preclusion.” Smith, 564 U.S. at 306. It “authorizes an injunction to prevent state litigation of a claim or issue that previously was presented to and decided by the federal court.” Id. (citation omitted). The Supreme Court has held that in applying the exception, it has “taken special care to keep it ‘strict and narrow.'” Id. at 306-07 (citation and quotations omitted). “Deciding whether and how prior litigation has preclusive effect is usually the bailiwick of the second court, ” so “issuing an injunction under the relitigation exception is resorting to heavy artillery.” Id. at 307 (citation omitted). For that reason, “every benefit of the doubt goes toward the state court … an injunction can issue only if preclusion is clear beyond peradventure.” Id. (citation omitted).

         In W. Sys., Inc. v. Ulloa, 958 F.2d 864 (9th Cir. 1992), the Ninth Circuit read Chick Kam Choo as “holding an injunction permissible where a prior federal decision ‘necessarily precludes' a certain result, even if that result was not itself actually litigated.” Id. at 870. In doing so, the Ninth Circuit disagreed with several circuit courts which had concluded that the relitigation exception was limited to issues “actually litigated” in a prior court proceeding. Id. The Ninth Circuit held that reading Chick Kam Choo as the other circuits did would be “contrary to the language of Choo, which would bar relitigation of ‘claims or issues [that] actually have been decided.” Id. (citing Chick Kam Choo, 486 U.S. at 148; alterations in original); see also id. (“To read Choo as the other Circuits have, however, would in essence be to read res judicata entirely out of section 2283.”). Therefore, under Ulloa, the relitigation exception would apply to bar “both claims actually litigated and those that arise from the same transaction and could have been litigated in a prior proceeding.” Id. at 868.

         However, Ulloa does not require the Court to issue an injunction “solely because the claims pursued in a state court are barred by res judicata.” See Herrera v. CarMax Auto Superstores California, LLC, No. EDCV14776MWFVBKX, 2014 WL 12567154, at *3 (C.D. Cal. Aug. 27, 2014). In Ulloa, the Ninth Circuit found that the “principles announced in Choo” were not “disserved by the district court's injunction” because of the “compelling circumstances of [that] case.” Ulloa, 958 F.2d at 871 (finding “compelling circumstances” when plaintiff brought a second complaint in a Guam territorial court within one hour after the federal case settled after seventeen years of litigation). ...