An E-Commerce China Dangdang Inc. banner hangs from the facade of the New York Stock Exchange after its IPO in 2010. (Photo: Jin Lee/Bloomberg)

A district court failed to apply the multistage analysis before determining whether a case should be dismissed on forum non conveniens grounds, the U.S. Court of Appeals for the Second Circuit ruled Friday.

The order issued by the panel, composed of Circuit Judges Richard Wesley, Denny Chin, and Richard Sullivan, vacated and reversed the 2018 litigation victory for Chinese e-commerce company Dangdang and its counsel at O'Melveny & Myers. That January, U.S. District Judge Katherine Polk Failla of the Southern District of New York ruled in favor of the Chinese company facing a class action brought by investors. The Second Circuit panel said Failla abused her discretion by failing to conduct the proper analysis in tossing the investors' lawsuit.

According to the panel decision, the complaint focused on a going-private merger, which allowed controlling defendant shareholders to purchase American depository shares from minority plaintiff shareholders. The plaintiffs claimed they were paid an unfair, below-market price. The defendants argued that the suit shouldn't even be heard in the United States, as Dangdang is incorporated in the Cayman Islands.

While Failla agreed that both New York and the Cayman Islands had “legitimate interest” in having the case heard in their respective jurisdictions, the Caribbean nation had “a closer nexus to the parties and events that are at the heart of this case.”

“Simply put, the most critical parties are registered in, and the events giving rise to the suit took place in, the Cayman Islands, not the United States,” the judge wrote.

On Friday, the appellate court made clear it disagreed in its per curiam opinion.

The panel pointed to the assessment courts in the circuit should make when considering forum non conveniens around deference to plaintiffs, the adequacy of that forum, and the balance of public and private interests. However, the panel noted, when a forum is contractually selected, the analysis is substantially modified to shift in favor of the selected forum.

That, Dangdang conceded, was the case, as the shares at issue contained a mandatory forum selection clause identifying Manhattan as the litigation forum of choice. The presumption of enforceability should apply, then, unless the defendants could show the selection was unreasonable, unjust, fraudulent, or overreaching, according to the panel.

The problem for the appellate court was that “the district court did not address or even mention the forum selection clause and did not consider whether enforcement of the clause would be unreasonable or unjust.” Instead, the district court abused its discretion by adhering to the traditional forum non conveniens analysis, “without any consideration of the forum selection clause.”

The panel, in dismissing Dangdang's arguments on appeal, found the issue of whether the clause covers the key defendants and claims was better addressed on remand. The district court needed now to consider a range of issues attached to the presumption of enforceability, including whether certain parties were covered and whether it cleared the unreasonable or unjust hurdles previously articulated.

O'Melveny & Myers partner Abby Rudzin, who handled the suit at both the district and appellate levels, declined to comment.

The plaintiffs, likewise, have been represented by Sadis & Goldberg partner Sam Lieberman, who said the decision was important both for his clients and U.S. markets.

“The decision is important to ensuring that foreign issuers who exclusively list their stock on U.S. exchanges are held accountable in U.S. courts,” he said. It's important to the stability of U.S. markets that all issuers who exclusively list their stock here can be held to account for their actions in U.S. courts to enforce their duties to investors in U.S. markets.”

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