On August 12, 2015, in Espinoza ex rel. JPMorgan Chase & Co. v. Dimon, the US Court of Appeals for the Second Circuit adopted a de novo standard of review for dismissals of derivative actions, discarding its former more deferential abuse of discretion standard of review (No. 14-1754, (2d Cir. Aug. 12, 2015)).

The plaintiff, Ernesto Espinoza, a JPMorgan shareholder, sent a letter to the JPMorgan Board of Directors demanding that the Board investigate the alleged wrongdoers in the "London Whale" trading debacle, which cost JPMorgan Chase billions of dollars. After establishing a review committee, JPMorgan ultimately rejected Espinoza's demand. In turn Espinoza brought suit challenging JPMorgan's decision, arguing that JPMorgan's investigation into the wrongdoing was unreasonably narrow and overlooked alleged misstatements made by JPMorgan executives about the scale of its losses. The district court dismissed Espinoza's suit for failure to state a claim because the complaint did not show that the board had failed to exercise appropriate business judgment in rejecting the demand. The district court did not grant Espinoza's leave to amend his complaint and instead entered judgment for the defendants. Espinoza appealed.

The Second Circuit overruled the lower court. In doing so, the court adopted a de novo standard of review for dismissals of derivative actions, discarding its former deferential abuse of discretion standard of review in these types of cases. The court reasoned that appellate review of the dismissal of derivative actions involves the same tasks as any other action. Specifically, the court reads the alleged facts, assumes the truth of those facts, and decides whether a claim has been stated. No evidence is considered, no credibility determinations are made, and no reasons to defer to a district court are present.

Applying the newly adopted de novo standard of review, the Second Circuit found that Delaware law is unclear on how to handle Espinoza's argument that the scope of JPMorgan's investigation was too narrow. The cases cited by the district court stood for the proposition that boards have broad discretion in choosing how to respond to a shareholder demand. However, Espinoza posed a different question: he challenged the scope of the board's investigation by arguing that the board failed to investigate allegations concerning JPMorgan executive's misleading statements at all. This placed the case in a different posture from cases which involve investigations that actually looked into the substance of the shareholder's demand. The Second Circuit conducted independent research and found no case law squarely addressing this issue. Accordingly, it certified the following question to the Delaware Supreme Court:

Practitioners in the Second Circuit should note the new higher standard of review when appealing dismissals in derivative cases.