July 15, 2021
A federal judge has quashed a high-profile attempt to force Johnson & Johnson to present shareholders with a proposal requiring the use of arbitration, instead of the courts, to resolve their legal disputes with the company.
In his June 30, 2021 Memorandum Opinion and Order, Judge Michael A. Shipp of the U.S. District Court of New Jersey granted Defendants’ motion to dismiss a complaint filed by Harvard Law School Professor Hal S. Scott and the Doris Behr 2012 Irrevocable Trust (“Trust”). Plaintiffs in The Doris Behr 2012 Irrevocable Trust, et al. v. Johnson & Johnson sought declaratory and injunctive relief from Johnson & Johnson for allegedly violating Section 14(a) of the Securities Exchange Act by excluding the Trust’s proposal to change the company’s bylaws from the proxy materials issued for its April 2019 shareholder meeting.
Public pension funds and their advocates mobilized to oppose the lawsuit, which offered the strange spectacle of a shareholder recurring to the courts to prevent future investors from doing the same. The New Jersey Attorney General, the California Public Employees’ Retirement System and the Colorado Public Employees’ Retirement Association all intervened on Johnson & Johnson’s behalf in asking the judge to dismiss the claims. Cohen Milstein was among the law firms working on behalf of institutional investor clients concerned about the potential repercussions of the lawsuit, which was the latest in a long line of initiatives led by Scott to curb shareholder rights and “overregulation.”
Before the April 2019 shareholder meeting, Johnson & Johnson had sought and received a “no-action letter” from the Securities and Exchange Commission supporting its decision to shelve the forced arbitration proposal presented by Scott. The New Jersey Attorney General had also asked the SEC to allow Johnson & Johnson to exclude the proposal, opining that it would violate New Jersey state law. Judge Shipp stayed the case in late 2019 to allow the Delaware Supreme Court to issue its decision in Salzberg v. Sciabacucchi, reopening the case in June 2020 after it was decided. Scott’s second amended complaint cited Salzberg, saying the decision invalidated arguments by Defendants and the New Jersey Attorney General that the forced arbitration proposal, if adopted, would violate New Jersey law. The second amended complaint sought declaratory relief—asking the Court to issue a declaration that the forced arbitration proposal would be legal under federal and New Jersey law—and dropped Plaintiffs’ previous petition for injunctive relief.
In his 10-page decision dismissing Plaintiffs’ complaint in its entirety, Judge Shipp sided squarely with Defendant-intervenors who argued that the Trust’s claims should be rejected on multiple grounds. First, the Court agreed with Defendant-intervenors that Plaintiffs’ demand for declaratory relief was moot since Johnson & Johnson excluded the proposal from proxy materials for its 2019 annual meeting and declaratory relief “cannot be obtained for alleged past wrongs.” He also agreed that Plaintiffs’ request for declaratory relief was not ripe for consideration “because any controversy with respect to a proposal that the Trust might submit in connection with future shareholder meetings is hypothetical on future events, including this Court issuing a declaration that the proposal is legal under both federal and state law.” On the question of whether Plaintiffs deserve declaratory relief, Judge Shipp said the Trust would not “face hardship if the Court refuses to rule on the legality of the Trust’s proposal” and because “the requested declaratory relief would amount to an advisory opinion,” which federal courts are not entitled to grant.
The victory for investors comes amid signs that the SEC may consider formalizing its traditional opposition to public corporations that seek to include forced arbitration clauses in their governing or offering documents. Under the Trump administration, the Treasury Department had alarmed investor advocates when it urged the SEC to consider allowing companies to require shareholders to use arbitration, an idea that was later publicly supported by two Republican SEC Commissioners.
But in two appearances before Congress this year, new SEC Chair Gary Gensler has firmly supported the importance of preserving shareholders’ access to the courts. In his most recent testimony before the House Financial Services Committee in May, Gensler was asked if it would violate federal securities law to insert a forced arbitration provision into a public company’s governing documents. “The SEC has said consistently to issuers, as I understand it, that it would be best not to put this into these corporate charters,” Gensler responded. “And I think the American public needs to be able to have redress to their courts. That’s sort of a fundamental piece to be able to go straight to the courts. And that’s been true in terms of issuers for decades. And I think that’s worked well.”