1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
DEWEY & LEBOEUF LLP
Barbara A. Caulfield (bcaulfield@dl.com) SBN 108999
Peter E. Root (proot@dl.com) SBN 142348
1950 University Avenue, Suite 500
East Palo Alto, California 94303
Telephone: (650) 845-7000
Facsimile: (650) 845-7333
Attorneys for Plaintiff
Brocade Communications Systems, Inc.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
IN RE BROCADE COMMUNICATIONS
SYSTEMS, INC. DERIVATIVE
LITIGATION
This Document Relates to:
ALL ACTIONS
Case No. C 05-02233 CRB
NOTICE OF MOTION AND MOTION
FOR PARTIAL LIFTING OF STAY
AND FOR APPROVAL OF
SETTLEMENT AND ENTRY OF
COMPLETE BAR ORDER AS TO
DEFENDANT GREGORY L. REYES
Date: December 4, 2009
Time: 10:00 a.m.
Judge: Honorable Charles R. Breyer
Dept: 8, 19th Floor
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page1 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- i - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
TABLE OF CONTENTS
Page
I. INTRODUCTION .............................................................................................................. 3
II. BACKGROUND FACTS ................................................................................................... 4
III. THE COURT SHOULD APPROVE THE SETTLEMENT WITH REYES. .................... 6
IV. THE COURT SHOULD ENTER A CONTRIBUTION BAR. .......................................... 8
A. Delaware Law Appears To Govern The Contribution Bar. .................................... 9
B. The Requested Bar Order Is Necessary And Appropriate. ................................... 10
V. THE COURT SHOULD LIFT THE STAY FOR THE LIMITED PURPOSE OF
THIS MOTION................................................................................................................. 12
VI. CONCLUSION................................................................................................................. 13
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page2 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- ii - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
TABLE OF AUTHORITIES
CASES
Bluth v. Bellow,
1987 WL 9369 (Del. Ch. Apr. 9, 1987) .................................................................................... 7
Class Plaintiffs v. City of Seattle,
955 F.2d 1268 (9th Cir. 1991).................................................................................................. 11
Eichenholtz v. Brennan,
52 F.3d 478 (3d Cir. 1995)...................................................................................................... 11
Franklin v. Kaypro Corp.,
884 F.2d 1222 (9th Cir. 1989)............................................................................................ 11, 12
Gackstetter v. Frawley,
135 Cal. App. 4th 1257 (Cal. Ct. App. 2006) .......................................................................... 12
In re Enron Corp. Sec., Deriv. & “ERISA” Litig.,
2008 WL 2566867 (S.D. Tex. June 24, 2008) .......................................................................... 9
In re Heritage Bond Litig.,
546 F.3d 667 (9th Cir. 2008)......................................................................................... 9, 11, 12
Lockyer v. Mirant Corp.,
398 F.3d 1098 (9th Cir. 2005).................................................................................................. 12
Valeant Pharm. Int’l v. Jerney,
921 A.2d 732 (Del. Ch. 2007)................................................................................................... 7
Zapata v. Maldonado,
430 A.2d 779 (Del. 1980) ..................................................................................................... 6, 7
STATUTES
10 Del. Code § 6302(d)................................................................................................................... 9
10 Del. Code § 6304(b).......................................................................................................... passim
15 U.S.C. § 78u-4(f)(7)(B).............................................................................................................. 2
Cal. Code Civ. P. § 877(a) .............................................................................................................. 9
Cal. Code Civ. P. § 877.6.......................................................................................................... 9, 10
Cal. Code Civ. P. § 877.6(c) ......................................................................................................... 12
Federal Rule of Civil Procedure 23.1.............................................................................................. 6
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page3 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 1 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
NOTICE OF MOTION AND MOTION
TO ALL PARTIES AND THEIR COUNSEL OF RECORD:
PLEASE TAKE NOTICE THAT, on December 4, 2009, at 10:00 a.m., or as soon
thereafter as the matter may be heard in the courtroom of the Honorable Charles R. Breyer,
Department 8, 19th Floor, in the United States District Court for the Northern District of
California, 450 Golden Gate Avenue, San Francisco, California, plaintiff Brocade
Communications Systems, Inc. (“Brocade”), by and through the Special Litigation Committee of
its Board of Directors (the “SLC”), will and hereby does move this Court to partially lift the stay
of proceedings in this action and to approve the settlement between Brocade and Gregory L.
Reyes (“Reyes”) and enter a contribution bar order pursuant to this settlement.
1. Settling Parties: The parties to this settlement are Brocade, by and through the
SLC, and Reyes.
2. Basis and Terms: The basis and terms of the settlement are set forth in the
Settlement Agreement, a true and correct copy of which is attached as Exhibit A to the
accompanying Declaration of Peter E. Root in Support of Motion for Approval of Settlement with
Defendant Gregory L. Reyes, and is incorporated herein by reference.
3. Amount: The monetary consideration for the settlement with Reyes is
$12,500,000.00. In addition, Reyes has agreed to release indemnification and advancement rights
as of May 2, 2009, as more fully described in the Settlement Agreement.
4. List of Parties: The following is a list of all remaining parties to this action:
a. Plaintiff: Brocade Communications Systems, Inc.
b. Defendant: Reyes.
5. Pleading Affected By Settlement: The pleading affected by the settlement is the
Second Amended Complaint filed by Brocade on August 1, 2008 (the “Complaint”).
6. Request for Entry of Complete Bar Order: Brocade, by and through the SLC,
moves the Court to enter the proposed contribution-bar order (the “Complete Bar Order”) that is
provided for in paragraph 11 of the Settlement Agreement.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page4 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 2 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
7. Judgment-Reduction Credit: The judgment-reduction credit or set-off amount
given to non-settling persons for any joint liability with Reyes will be the amount prescribed in
subparagraph 11(b) of the Reyes Settlement Agreement, which provides that the judgment-
reduction credit will be equal to the Reyes Releasees’ “pro rata share of the judgment against
such [non-settling] person or entity, pursuant to the terms of Delaware law; provided further that,
if a court should determine that the amount of the judgment-reduction credit should be prescribed
in whole or in part by federal law or by California law, the amount of the judgment-reduction
credit shall be equal to (i) the amount specified in 15 U.S.C. § 78u-4(f)(7)(B), to the extent
federal law applies, or (ii) $12,500,000.00, to the extent California law applies.”
8. Request for Dismissal: Upon entry of the Complete Bar Order, Brocade will
move the Court for an order dismissing with prejudice the remaining claims against Reyes in this
action and the related arbitration proceeding. The dismissal of those claims will end all
remaining proceedings in this action.
The present motion is based upon this Notice of Motion and Motion, the attached
Memorandum of Points and Authorities, the accompanying Declaration of Peter E. Root, the
accompanying Declaration of the Special Litigation Committee members, the [Proposed] Order
Partially Lifting Stay, and the [Proposed] Order Approving Settlement and Entry of Complete Bar
Order as to Defendant Gregory L. Reyes.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page5 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 3 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
MEMORANDUM OF POINTS AND AUTHORITIES
I. INTRODUCTION
Plaintiff Brocade Communications Systems, Inc. (“Brocade”), by and through the Special
Litigation Committee of its Board of Directors (the “SLC”), respectfully requests that the Court
lift the stay of proceedings in this action and enter an Order (i) approving the settlement that the
SLC has reached on behalf of Brocade with defendant Gregory L. Reyes and (ii) barring
contribution claims against Reyes in accordance with 10 Del. Code § 6304(b) and the Court’s
inherent authority to preclude such claims. The settlement agreement with Reyes (the
“Settlement Agreement”) – which is attached as Exhibit A to the accompanying Declaration of
Peter E. Root (the “Root Declaration” or “Root Decl.”) – provides for Reyes to pay
$12,500,000.00 to Brocade. The Settlement Agreement also provides that, subject to certain
limited exceptions more fully described in the Agreement, Brocade will not be responsible as of
May 2, 2009 for any further advancement or indemnification of fees, expenses, fines or penalties,
amounts of disgorgement, judgments, or settlements that Reyes has incurred or might incur in the
future arising out of or relating to Brocade’s past equity-compensation practices or the allegations
in the SLC Complaint.
Because the Court has realigned Brocade as the sole plaintiff in this action and has
dismissed the original shareholder plaintiffs, the Court’s approval of the settlement itself does not
appear to be required. However, the SLC seeks the Court’s approval of the settlement out of
respect for the Court’s long involvement in this litigation and the SLC’s desire to ensure that the
Court does not disapprove of its handling of this matter on behalf of Brocade.
Court action is required for entry of the requested bar order (the “Complete Bar Order”),
although the Delaware statute appears to be self-executing in precluding contribution claims
where – as here – the plaintiff agrees to give nonsettling parties the judgment-reduction credit
required by Delaware law. (The settling parties believe that Delaware law probably governs this
issue, because the claims being settled are all Delaware-law claims.) Nevertheless, to preempt
any question about whether Reyes is protected from contribution claims, Reyes has conditioned
the settlement on the Court’s entry of the requested bar order.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page6 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 4 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
II. BACKGROUND FACTS
Since 2004, Brocade and several of its former officers, directors, and employees have
been embroiled in a series of internal investigations and legal proceedings related to the
backdating and manipulation of stock options. Those matters have included two internal
investigations, criminal trials of two high-ranking Brocade officers (including Reyes), SEC
investigations and civil enforcement actions, federal- and state-court securities class actions, and
several federal- and state-court shareholder derivative actions.
In February 2008, Brocade’s Board of Directors appointed two outside directors as a
Special Litigation Committee and delegated to the SLC plenary authority to decide whether
Brocade’s and its shareholders’ best interests would be served by pursuing or otherwise resolving
any and all claims arising out of Brocade’s historical equity-options compensation practices and
related matters (the “Options Matters”), including, without limitation, the claims asserted in In re
Brocade Communications Systems, Inc. Derivative Litigation, No. 1:05cv041683 (the “Superior
Court Action”) and in two actions filed in this Court: the above-captioned action (the
“Consolidated Federal Derivative Action”) and Barbour v. Reyes, No. 08-cv-2029-CRB. The
Board also delegated to the SLC, to the fullest extent permitted by law, the exclusive power and
authority to take any and all actions the SLC deems necessary or appropriate to the exercise of the
delegation made to it. SLC Decl. ¶ 3.1
On August 1, 2008, the SLC filed a Second Amended Complaint (the “SLC Complaint”)
on behalf of Brocade in this action against ten former directors, officers, and employees of the
company, including Reyes. SLC Decl. ¶ 4. Reyes formerly was the Chief Executive Office and
Chairman of the Board of Brocade. SLC Decl. ¶ 5. Reyes already had been named as a
defendant in the Consolidated Federal Derivative Action, the Superior Court Action, and the
Barbour Action.
After filing the Complaint, the SLC moved to realign Brocade as the party-plaintiff and to
replace the original shareholder plaintiffs in all of the derivative actions. SLC Decl. ¶ 7.
1 Citations to the “SLC Decl.” refer to the joint Declaration of Brocade’s Special Litigation
Committee members Renato A. DiPentima and John W. Gerdelman accompanying this motion.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page7 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 5 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
On October 6, 2008, all of the defendants moved to dismiss the claims asserted against
them in the SLC Complaint. SLC Decl. ¶ 9. On December 12, 2008, the Court issued an Order,
supplemented by a January 6, 2009 Opinion, dismissing certain claims against Reyes in the
Consolidated Federal Derivative Action, but denying Reyes’ motion to dismiss other certain
claims. In re Brocade Commc’ns Sys., Inc. Deriv. Litig., 615 F. Supp. 2d 1018 (N.D. Cal. 2009);
In re Brocade Commc’ns Sys., Inc. Deriv. Litig., No. C 05-02233 CRB, 2008 WL 5213460 (N.D.
Cal. Dec. 12, 2008).
Mr. Reyes was among five defendants remaining in the Consolidated Federal Derivative
Action following the Court’s ruling on the motions to dismiss.2 SLC Decl. ¶ 12. Brocade
reached settlements with two of those defendants – Robert D. Bossi and Antonio Canova – in
January 2009, and the Court approved the settlements and entered contribution-bar orders as to
those defendants. SLC Decl. ¶ 13.
As of February 2009, Brocade and the remaining three defendants in the Consolidated
Federal Derivative Action – Reyes, Neal Dempsey, and Seth D. Neiman – entered into an
Agreement to Binding Arbitration. SLC Decl. ¶ 14. On February 27, 2009, the Court entered a
stipulated Order Referring Action to Binding Arbitration, and stayed the Consolidated Federal
Derivative Action pending completion of the arbitration proceeding. SLC Decl. ¶ 15.
The SLC (on behalf of Brocade) later entered into settlements with Dempsey and Neiman.
SLC Decl. ¶ 16. The Court approved those settlement and entered contribution-bar orders in July
2009. Id.
The SLC entered into a settlement with Reyes on August 14, 2009. SLC Decl. ¶ 17.
Brocade now moves for a partial lifting of the stay and for an Order approving the settlement
between Brocade and Reyes, and entering a contribution bar order in accordance with 10 Del.
Code § 6304(b).
2 The Court dismissed all claims against five other defendants as untimely for purposes of
this action. SLC Decl. ¶ 11. In so ruling, the Court stated that “[t]he state [derivative] action has
not been dismissed, rather it has been stayed pending the outcome of this action. Thus, Plaintiff
would not lose all remedies against the state court Defendants if equitable tolling is not permitted
here.” In re Brocade Commc’ns Sys., Inc., Deriv. Litig., 615 F. Supp. 2d at 1042.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page8 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 6 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
ARGUMENT
This motion presents two separate, but related issues: whether the Court should approve
Brocade’s settlement with Reyes, and whether the Court should enter an order barring
contribution claims against him. As discussed below, Brocade believes it is free to settle this
direct action without judicial approval, but the SLC has decided to seek the Court’s approval.
Entry of the requested bar order does require judicial action to provide the express protection that
the settling defendant seeks. Brocade will address each of these issues in turn.
III. THE COURT SHOULD APPROVE THE SETTLEMENT WITH REYES.
The Federal Rules of Civil Procedure and the law of the State of Delaware (Brocade’s
state of incorporation) require courts to approve settlements of derivative actions. This case,
however, is no longer a derivative action, because the Court realigned Brocade as the sole
plaintiff and substituted it for the original shareholder plaintiffs, who have been dismissed from
the case. The case thus is now a direct action by Brocade, and neither federal nor Delaware law
requires court approval of a corporation’s settlement of a direct action against its former directors,
officers, or employees. Nevertheless, out of respect for the Court’s long involvement in this
matter and the Court’s repeatedly expressed interest in ensuring the prompt and appropriate
resolution of claims arising out of the options matters, the SLC seeks the Court’s approval of the
settlement, because the SLC wishes to ensure that the Court does not object to the way the SLC
has been handling this action on behalf of Brocade. See SLC Decl. ¶ 23.
Federal Rule of Civil Procedure 23.1 – which “applies when one or more shareholders . . .
bring a derivative action to enforce a right that the corporation . . . may properly assert but has
failed to enforce” – provides that “[a] derivative action may be settled, voluntarily dismissed, or
compromised only with the court’s approval” and upon notice to shareholders “in the manner that
the court orders.” Fed. R. Civ. P. 23.1(a), (c) (emphasis added). Delaware Court of Chancery
Rule 23.1 is to the same effect. Similarly, the Delaware Supreme Court held in Zapata v.
Maldonado, 430 A.2d 779, 788-89 (Del. 1980), that court approval is required where a special
litigation committee seeks to take over and dismiss a shareholder derivative action.
These rules do not apply to this case and to the settlement with Reyes, however, because
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page9 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 7 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
this case is no longer a derivative action. Brocade has been realigned as the sole plaintiff and has
been substituted for the shareholder plaintiffs pursuant to this Court’s Order and the shareholder
plaintiffs’ approval. The Zapata decision also does not control here, because the corporation in
Zapata had not been realigned as the sole plaintiff; thus, the case that the special litigation
committee sought to dismiss in Zapata was still a derivative action. In fact, the Delaware Court
of Chancery has held that Zapata does not apply to a motion to realign a corporation as a plaintiff
to prosecute what was formerly a derivative action where there was no threat of collusion
between the corporation and the defendants. Bluth v. Bellow, 1987 WL 9369 (Del. Ch. Apr. 9,
1987).
No decision to our knowledge has squarely addressed the precise question presented here:
whether court approval is required when a corporation that has been realigned as the sole plaintiff
seeks to settle a direct action against a former corporate director, officer, or employee. However,
the concerns that animated Federal and Delaware Rules 23.1 and the Zapata decision do not
apply in this context, because, as in Bluth, there is no hint of collusion between the realigned
plaintiff corporation and the settling defendant, and no evidence that the corporation did not
prosecute and resolve the action in good faith. To the contrary, Brocade vigorously litigated its
claims against Reyes and is obtaining a reasonable settlement from him. Moreover, in Valeant
Pharmaceuticals International v. Jerney, 921 A.2d 732, 736 (Del. Ch. 2007), a corporation that
had been realigned as the plaintiff in a former derivative action settled a claim against its former
Chairman and CEO without seeking court approval, and the Chancery Court did not express any
concern about that procedure.
Accordingly, the SLC believes it is free to settle Brocade’s claims against Reyes in this
direct action without court approval. SLC Decl. ¶ 23. However, as noted above, the SLC is
keenly aware of the Court’s longstanding interest in this case and its desire to ensure that the
matter is handled appropriately. Id. Out of respect for the Court’s work, and to ensure that the
Court does not question whether the SLC is exceeding its authority, the SLC seeks the Court’s
approval of the settlement with Reyes, and the SLC respectfully asks the Court to grant its
approval. Id.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page10 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 8 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
In considering whether to settle with Reyes and in reaching the agreed settlement amount,
the SLC weighed a number of matters relevant to whether Brocade’s best interests would be
served by continuing to litigate or by promptly resolving the remaining claims against him.
Those factors included (i) the likelihood of Brocade’s success on the merits of the claims asserted
and the quantum of any likely recovery against Reyes, (ii) the assets Reyes has available to satisfy
any judgment entered against him in favor of Brocade, (iii) any obligation Brocade might have to
indemnify and/or advance attorneys’ fees and expenses to Reyes in connection with the Options
Matters, including Brocade’s litigation of the claims asserted in the Complaint against him,
(iv) Brocade’s own costs to pursue claims against Reyes, (v) the funds recovered and anticipated
to be recoverable from other defendants, (vi) the $9,500,000 contributed to Brocade by Wilson
Sonsini Goodrich & Rosati, P.C., (vii) the $15,000,000 that Reyes paid as a criminal fine without
seeking indemnification or reimbursement from Brocade, (viii) Reyes’ pledge to use his best
efforts to direct to Brocade the recovery of fines, penalties, or disgorgements that he has paid or
might pay in the future in connection with his disposition of any governmental proceeding, and
(ix) Reyes’ waiver of any claims for indemnification or for advancement of fees and expenses as
of May 2, 2009. SLC Decl. ¶ 21.
Based on these various considerations, the SLC determined that prompt settlement with
Reyes would be in Brocade’s best interests and would save Brocade substantial amounts of
attorneys’ fees and advancements of defense costs (including in connection with any further
appeals or retrial of the criminal case against Reyes). SLC Decl. ¶ 22. Accordingly, Brocade
believes that the settlement is reasonable in light of the circumstances presented here, and
Brocade respectfully asks the Court to approve it.
IV. THE COURT SHOULD ENTER A CONTRIBUTION BAR.
The settling parties also respectfully ask the Court to issue an Order barring contribution
claims (however denominated) against Reyes. Delaware law precludes such claims where – as
here – a settlement provides an appropriate judgment-reduction credit to nonsettling parties, and
the Court has inherent authority to enter the requested bar order. The Complete Bar Order that
Brocade asks the Court to enter in connection with the settlement with Reyes is substantively
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page11 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 9 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
identical to the Complete Bar Orders that the Court entered in connection with its approval of
Brocade’s settlements with Canova, Dempsey, and Neiman. See Docket Nos. 435, 452, 453.
A. Delaware Law Appears To Govern The Contribution Bar.
Although the authorities on this issue are not clear, case law appears to suggest that the
law underlying the claims being settled determines the extent to which the settlement must
provide judgment-reduction credit to nonsettling parties in exchange for barring contribution
claims – especially where the plaintiff’s claims against the nonsettling parties are based on the
same jurisdiction’s laws as are the plaintiff’s claims against the settling defendant. See, e.g., In re
Enron Corp. Sec., Deriv. & “ERISA” Litig., 2008 WL 2566867, at *9, *11 (S.D. Tex. June 24,
2008) (applying federal judgment-reduction law for credit as to federal claims, and Ohio
judgment-reduction law for credit as to Ohio-law claims); see also In re Heritage Bond Litig., 546
F.3d 667-81 (9th Cir. 2008) (applying federal judgment-reduction credit as to federal claims and
Cal. Code Civ. P. § 877.6 for state-law claims).
In this case, the pending claims against Reyes are Delaware-law claims, because the Court
dismissed Brocade’s federal and California-law causes of action against him. Similarly,
Brocade’s claims against any nonsettling persons are also likely to be Delaware-law claims.
Thus, Delaware law would appear to be the appropriate law to govern issues relating to the
contribution bar and the accompanying judgment-reduction credit.
Nonsettling parties can hardly complain about Brocade’s willingness to apply Delaware
law to the settlement agreement with Reyes, because Delaware law appears to be more favorable
to nonsettling parties than is California law – the law of the forum, which the Court might
otherwise apply to state-law claims. Under California’s good-faith settlement statute, a good-
faith settlement reduces a judgment against jointly liable nonsettling defendants by the greater of
the good-faith settlement amount (here, $12,500,000) or “the amount stipulated by the release
. . . .” Cal. Code Civ. P. § 877(a). As discussed below, however, Delaware law gives jointly
liable nonsettling defendants a judgment-reduction credit equal to the settling defendant’s “pro
rata share” of the plaintiff’s damages. 10 Del. Code § 6304(b). The “pro rata share” under
Delaware law requires consideration of proportional fault, because 10 Del. Code § 6302(d) states
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page12 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 10 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
that, “[w]hen there is such a disproportion of fault among joint tort-feasors as to render
inequitable an equal distribution among them of the common liability by contribution, the relative
degrees of fault of the joint tort-feasors shall be considered in determining their pro rata shares”
(emphasis added).
In this case, where Brocade has claimed hundreds of millions of dollars in damages,
Reyes’ settlement amount ($12,500,000) is likely to be less than any remaining nonsettling
defendant’s pro rata share of Brocade’s damages, so the nonsettling defendant would benefit from
Brocade’s willingness to grant “pro rata” judgment reduction under Delaware law, rather than pro
tanto judgment reduction under California law.3
B. The Requested Bar Order Is Necessary And Appropriate.
The Delaware Code specifies the circumstances in which a settling party can be protected
from contribution claims by nonsettling parties:
A release by the injured person of one joint tort-feasor does not relieve the
one joint tort-feasor from liability to make contribution to another joint
tort-feasor unless the release is given before the right of the other tort-
feasor to secure a money judgment for contribution has accrued, and
provides for a reduction, to the extent of the pro rata share of the released
tort-feasor, of the injured person’s damages recoverable against all the
other tort-feasors.
10 Del. Code § 6304(b) (emphasis added).
Paragraph 11(b) of the Settlement Agreement here provides for the pro-rata judgment-
reduction credit contemplated by § 6304(b):
[I]f Brocade obtains any judgment against [a] person or entity based upon,
arising out of, or relating to a Released Claim or the Options Matters for
which such person or entity and any of the Reyes Releasees are found to
be jointly liable, that person or entity shall be entitled to a judgment credit
equal to the Reyes Releasees’ pro rata share of the judgment against such
person or entity, pursuant to the terms of Delaware law [emphasis added].
3 Moreover, if California law were to apply, the California statute expressly authorizes
judgment-reduction credits of any stipulated amount, so the parties’ reliance on Delaware’s
judgment-reduction credit would not be inconsistent with California law. Thus, the parties in
effect could use California’s good faith settlement statute (Cal. Code. Civ. P. § 877.6) to
incorporate Delaware’s probably broader judgment-reduction credit in this case.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page13 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 11 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
This contractual credit satisfies the terms of § 6304(b).4
Where, as here, the judgment-reduction credit comports with § 6304(b)’s requirement, the
Delaware statute appears to be self-executing: it states that contribution claims will be barred if
the proper credit is provided to the nonsettling parties. Nevertheless, the settlement here is
conditioned on entry of a Complete Bar Order to enforce the statute’s terms: Reyes has the right
to terminate the agreement if the Court does not enter the bar order. See Root Decl., Ex. A,
¶ 14(a). Reyes insisted on this condition because he wants to ensure he will be protected from
contribution claims (and any other claims seeking to recover a nonsettling party’s joint liability to
Brocade).
Public policy strongly favors settlement, particularly of complex and multi-party suits
such as this one. Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1276 (9th Cir. 1991).
However, courts recognize that defendants are unlikely to settle if the settlement will not end their
involvement in litigation and will leave them exposed to further liability. As the Ninth Circuit
has noted, “[a]nyone foolish enough to settle without barring contribution is courting disaster.”
Franklin v. Kaypro Corp., 884 F.2d 1222, 1229 (9th Cir. 1989) (internal quotation marks omitted).
See also, e.g., Eichenholtz v. Brennan, 52 F.3d 478, 486 (3d Cir. 1995) (“to encourage settlement
in [multi-party] cases, modern settlements increasingly incorporate settlement bar orders into
partial settlements”).
Accordingly, courts have used their inherent powers to bar contribution claims (and other
such claims based on the nonsettling parties’ liability to the plaintiff) where the nonsettling
parties are given the appropriate judgment-reduction credit in exchange for the loss of their
contribution claims. See, e.g., In re Heritage Bond Litig., 546 F.3d 667, 676 (9th Cir. 2008) (“We
have already acknowledged the authority of a district court under federal common law to issue
bar orders barring future claims for contribution and indemnity as part of its approval of a
proposed settlement”); Eichenholtz, 52 F.3d at 486 (“we agree with the federal courts that have
4 In an excess of caution, paragraph 11(b) of the Reyes Agreement also stipulates what the
judgment-reduction credit would be if a court were to determine that California or federal law
should apply.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page14 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 12 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
imposed the [contribution] bar as a matter of federal common law” in securities cases); Franklin,
884 F.2d at 1229 (declining “to prohibit orders that bar further contribution”). And California
law, to the extent applicable, also provides for contribution bars under § 877.6(c) of the Code of
Civil Procedure.
The scope of the proposed Complete Bar Order comports with legal requirements. As the
Ninth Circuit recently explained (in applying federal and California law), a bar order “may only
bar claims for contribution and indemnity and claims where the injury is the non-settling
defendant’s liability to the plaintiff.” In re Heritage Bond Litig., 546 F.3d at 680 (internal
quotation marks omitted); accord id. at 681; cf., e.g., Gackstetter v. Frawley, 135 Cal. App. 4th
1257, 1274 (Cal. Ct. App. 2006) (“A claim by a joint tortfeasor seeking neither indemnity nor
contribution survives a good faith settlement under [Cal. Code Civ. P.] section 877.6. But a party
may not avoid a section 877.6 motion by providing different labels for what are in reality
indemnity or contribution claims.”).
The Complete Bar Order here seeks to bar only claims that arise out of the options-related
matters where the alleged injury to the barred person or entity is that person’s or entity’s “alleged
liability to Brocade . . . .” Root Decl., Ex. A, ¶¶ 11(a), 11(b), 11(c). The Complete Bar Order
thus does not purport to bar “independent” claims where the damages at issue do not flow from
the barred person’s or entity’s liability to Brocade.
In the circumstances of this case, where Reyes seeks to limit his future liability and has
conditioned his settlement on obtaining a contribution-bar order, the parties respectfully ask the
Court to exercise its equitable powers by issuing the Complete Bar Order prescribed in the
Settlement Agreement.
V. THE COURT SHOULD LIFT THE STAY FOR THE LIMITED PURPOSE OF
THIS MOTION.
The lifting of a stay, just like the decision to impose a stay, is a matter addressed to the
“discretionary power” of the district court. Lockyer v. Mirant Corp., 398 F.3d 1098, 1109 (9th
Cir. 2005). The lifting of the stay for the limited purposes of approving the settlement and
entering the bar order is entirely appropriate in view of the SLC’s decision not to pursue claims
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page15 of 16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 13 - NOTICE AND MOTION FOR APPROVAL OF REYES SETTLEMENT (C 05-02233-CRB)
against Reyes.
VI. CONCLUSION
For the foregoing reasons, Brocade respectfully requests that the Court temporarily lift the
stay of proceedings, approve Brocade’s settlement with Reyes, and enter the Complete Bar Order
provided for in paragraph 11 of the Settlement Agreement.
Dated: October 9, 2009 Respectfully submitted,
DEWEY & LEBOEUF LLP
/s/ Peter E. Root
Peter E. Root
Attorneys for Plaintiff
Brocade Communications Systems, Inc.
Case3:05-cv-02233-CRB Document455 Filed10/09/09 Page16 of 16
