By: Maria Canlas
Source: Billy Penn at WHYY
Introduction
Despite being the second smallest state, Delaware is widely regarded as the capital of American corporate law. Decades of decisions from the Delaware Court of Chancery and the Supreme Court of Delaware have developed an extensive body of corporate governance jurisprudence.[1] These decisions are the foundation of modern corporate law.[2] But not every dispute involving a Delaware corporation is decided in Delaware. Corporate litigation frequently appears in federal court.[3] Because Delaware is within its jurisdiction, the United States Court of Appeals for the Third Circuit often serves as a key interpreter of these doctrines.[4]
The Erie Doctrine, Briefly
Civil procedure, everyone’s favorite 1L class, starts with a fundamental question: which law applies? Under the Erie Doctrine, federal courts apply substantive state law and federal procedural law when deciding state-law claims.[5] Corporate governance rules, such as fiduciary duties or demand futility analyses, are considered substantive law.[6] As a result, when a case involving a Delaware-incorporated business appears in federal court, Delaware corporate law typically applies.[7] However, there are some instances where federal procedural law may not align with Delaware practices or serve the purposes as the state law doctrine.[8] In such cases, even the Court of Appeals may look to Delaware for certain procedural questions.
In re Cognizant Technology Solutions Corp. Derivative Litigation
A common way Delaware law cases appear in federal court is through derivative litigation, which allows shareholders to sue the board of directors on behalf of the corporation.[9] However, Delaware imposes an important threshold rule; before filing suit, shareholders must either make a demand that the board pursue the claim or explain why demand would be futile.[10] Although this is a widely applied rule in corporate cases, there are still some issues federal courts grapple with.[11] Particularly, the standard of appellate review in a Rule 23.1 derivative suit.[12] The question arises: should these cases be reviewed de novo or under an abuse of discretion?
A recent Third Circuit case contemplating this question is In re Cognizant Technology Solutions Corp. Derivative Litigation.[13] Although this case arose in the District of New Jersey, the court applied Delaware corporate law because that is where Cognizant is incorporated.[14] Shareholders alleged that Cognizant’s directors breached their fiduciary duty of loyalty by failing to prevent violations of the Foreign Corrupt Practices Act of 1977.[15] The plaintiff-shareholders argued demand futility because the directors themselves faced a “substantial likelihood of liability on the claims asserted.”[16] The Third Circuit affirmed the dismissal of this case, finding that the plaintiff-shareholders failed to adequately plead that the directors are likely to face liability or are insufficiently independent.[17] The Third Circuit faithfully applied the substantive Delaware corporate law in determining whether the plaintiff-shareholders sufficiently pled that demand would be futile.[18]
However, Judge Fuentes also looked to precedent from the Supreme Court of Delaware considering the proper standard of appellate review.[19] The landmark issue was whether the abuse of discretion standard should be abandoned.[20] Comparing the analogous Delaware Chancery Court Rule 23.1[21] to the Federal Rule 23.1, Judge Fuentes found that demand futility is ultimately a question deeply rooted in substantive Delaware corporate law.[22] Citing it as one of his reasons, because Delaware courts review demand-futility decisions de novo, he found it persuasive the Third Circuit follow the same approach.[23] This case illustrates exactly how Delaware corporate law can shape Third Circuit decisions not only substantively, but procedurally as well.
Many organizations are incorporated in Delaware. As a result, courts across the country are often applying Delaware law when resolving contract disputes, fiduciary duty claims, and other issues alike. Even at the federal appellate level, judges frequently interpret and apply cases from two Delaware state courts: the Supreme Court of Delaware and Delaware Court of Chancery. Not many states can say the same. For example, sister circuits—including the Fifth Circuit—have relied on Delaware’s demand futility doctrine in shareholder litigation.[24]
Conclusion
Corporate disputes may travel far from Wilmington, Delaware, but the law rarely does. Federal courts, whether in the Third Circuit or elsewhere, rely on doctrines developed by the Delaware Court of Chancery and the Supreme Court of Delaware. Delaware writes the rules; everyone else just applies them.
About the Author
Maria is a third-year regular division student at Widener University Delaware Law School and is a Staff Editor for Volume 51 of the Delaware Journal of Corporate Law. Maria serves as a Judicial Extern for the United States Court of Appeals for the Third Circuit. Her other extracurricular activities include serving as the Vice President of Training & Recruitment for the Moot Court Honor Society and Vice President of the Asian Law Student Association. After graduating and taking the Pennsylvania bar, Maria will be joining Freeman Mathis & Gary as an associate in the firm’s employment law department in Philadelphia.
[1] Litigation in the Delaware Court of Chancery and the Delaware Supreme Court, Del. Corp. L., https://corplaw.delaware.gov/delaware-court-chancery-supreme-court/.
[2] Id.
[3][3] See Brian Cheffins, Delaware Corporate Litigation and the Fragmentation of the Plaintiffs’ Bar, 2012 Colum. Bus. L. Rev. 427, 437 (2012) (stating that the number of decisions made by Delaware judges over business transaction cases have fallen from 75% to 30%; attributing the fall in percentage to “opinions issued by federal courts rather [than] other state courts”).
[4] About the Court, U.S. Ct. App. For the Third Cir., https://www.ca3.uscourts.gov/about-court (last visited Mar. 16, 2026).
[5] Erie R. Co. v. Tompkins 304 U.S. 64, 78 (1938).
[6] See Guth v. Loft, 5 A.2d 503, 510 (Del. 1939); Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162, 1166 (Del. 1989) (stating that demand futility requirements under Rule 23.1 “are more than mere formalities of litigation” but are “substantive law”).
[7] See generally Erie R. Co., 304 U.S. at 78.
[8] See In re Cognizant Tech. Sols. Corp. Derivative Litig., 101 F.4th 250 (3d Cir. 2024).
[9] Fed. R. Civ. P. 23.1(a).
[10] Id. 23.1(b)(3)(B).
[11] See In re Cognizant, 101 F.4th at 250.
[12] Id. at 256.
[13] See generally id.
[14] Id. at 255 (“Cognizant . . . is an information technology services and consulting company incorporated in Delaware and headquartered in New Jersey.”).
[15] In re Cognizant, 101 F.4th at 255.
[16] Id. at 265.
[17] Id.
[18] Id.
[19] In re Cognizant, 101 F.4th at 256.
[20] Id.
[21] Del. Ch. Ct. R. 23.1
[22] In re Cognizant, 101 F.4th at 258 (“[T]he Delaware Supreme Court abandoned the abuse-of-discretion standard in favor of de novo review for demand futility dismissals under the analogous Delaware Chancery Court Rule 23.1.”).
[23] Id.
[24] See Ezell v. Dinges, 137 F.4th 291 (5th Cir. 2025).
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