The Vanishing Substance-Procedure Distinction in Contemporary Corporate Litigation: An Essay

By Jacobs, Jack B. | Suffolk University Law Review, Winter 2007 | Go to article overview

The Vanishing Substance-Procedure Distinction in Contemporary Corporate Litigation: An Essay


Jacobs, Jack B., Suffolk University Law Review


If any distinction in our law has survived the test of time, it is that between substance and procedure. That was true when I was a law student, and it is true today. The classic expression of that distinction is that substantive laws--whether statutory, administrative, or judge-made--are rules that are intended to guide the conduct of persons subject to the rule.

I. INTRODUCTION

Substantive rules typically state the rights and duties as among citizens, and disclose the circumstances where courts redress violations of those rights and duties. Procedural laws, on the other hand, are rules of procedure that have been adopted by courts and legislatures, and that instruct persons on how to bring a controversy before a court, and how to proceed in that court to obtain redress. A workable description of procedural rules is that they prescribe the mechanics of litigation. (3)

The substance-procedure distinction comes up in various areas of our law. Choice of law is a good example. Who can forget Erie Railroad Co. v. Tompkins (4) from our first year of law school? In Erie, the U.S. Supreme Court held that where federal court jurisdiction is grounded on diversity of citizenship, the federal court must apply the substantive law of the forum state as the rule of decision, and can apply federal common law only as to matters of procedure. (5)

The substance-procedure distinction arises in state courts as well. Suppose, for example, that a lawsuit is brought in a court of state A to enforce a cause of action arising under the law of state B. The choice of law rule is that the law of the forum state governs procedural matters while the law of the state where the cause of action arose governs substantive matters. (6)

Over the years, the substance-procedure distinction, although far from perfect, has, by and large, proved workable in most areas. Not surprisingly, where outcomes turn on choice of law matters, litigation inevitably has arisen over what issues are "procedural," and which are "substantive." (7) But, in at least one area--corporate law--the distinction has begun to fray around the edges. That development has become problematic for reasons I will later explain.

The story that I come to tell is that, in the corporate law area, procedure has come to beget substance, and substance has begotten procedure. That development has unnecessarily complicated the efficient and speedy litigation of corporate and business law disputes. My message is that procedural rules are an important part of our legal dispute resolution system, and that for the system to operate satisfactorily, the crafting of procedural rules should be accomplished by an institutional process. Where possible, this process should remain separate from the articulation of substantive rules as part of the common law adjudication process.

At first blush this statement undoubtedly sounds abstract. To bring the subject closer to earth, I will discuss selected Delaware corporate cases to illustrate the thought that I am trying to convey. After that, I will argue why what I describe as the "vanishing distinction" between substance and procedure merits our attention. Thereafter, I will conclude with some modest suggestions.

II. PROCEDURE BEGETTING, THEN BLENDING INTO, SUBSTANCE

I start with a quintessentially procedural rule--Rule 23.1 of the Delaware Court of Chancery (Rule 23.1). That Rule, which governs derivative stockholder actions, is the substantially similar counterpart to Rule 23.1 of the Federal Rules of Civil Procedure. (8) Chancery Rule 23.1 directs that "[t]he complaint ... shall allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority ... and the reasons for the plaintiff's failure to obtain the action or for not making the effort." (9) Both federal and state courts have construed this language to mean that before filing a derivative action, a stockholder must make a demand on the board of directors to redress the wrong complained of. …

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