As previously discussed in our Sept. 10, 2020, client alert, in Wong v. Restoration Robotics, Inc., Case No. 18-CIV-02609 (Cal. Super. Ct. Sept. 1, 2020), the Superior Court of California for the County of San Mateo dismissed claims against an issuer and its directors and officers, asserted under the Securities Act of 1933 (Securities Act), in favor of a federal forum-selection provision (FFP) in the issuer-defendant's certificate of incorporation. This was the first state court case to opine on the enforceability of FFPs in the wake of the Delaware Supreme Court's decision in Salzberg v. Sciabacucchi (Blue Apron), 227 A.3d 102 (Del. 2020), and the U.S. Supreme Court's decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1069 (2018).
As we discussed in our Dec. 23, 2020, client alert, since the Restoration Robotics decision, two more California state courts have upheld the enforceability of FFPs, in In re Uber Technologies Securities Litigation and In re Dropbox, Inc. Securities Litigation.
Most recently, on April 28, 2022, the California Court of Appeal for the First Judicial District affirmed the Superior Court's decision in Restoration Robotics, becoming the first state appellate court outside of Delaware to consider the enforceability of FFPs. Wong v. Restoration Robotics, Case No. A161489 (Cal. App. Apr. 28, 2022). The appellate court's decision is another positive development for issuers that wish to protect against having to defend costly and potentially duplicative Securities Act claims brought in state court and, along with the earlier trial court rulings, has significant implications for the D&O insurance industry.
The Court's Decision
Restoration Robotics was decided by the Superior Court in the wake of the Delaware Supreme Court's decision in Blue Apron, in which that court held that FFPs are facially valid under the Delaware General Corporations Law and do not violate Delaware public policy. As we have noted previously, in some ways, the Restoration Robotics Superior Court was not sympathetic to the Delaware Supreme Court's reasoning. For instance, in its decision, the Superior Court disagreed with the Delaware Supreme Court's analysis of certain U.S. Supreme Court decisions, including Rodriguez de Quijas v. Shearson/American Express Inc., 490 U.S. 477 (1989).
In contrast, the Court of Appeal in a 35-page reasoned decision affirmed the decision below, but on grounds consistent with the Delaware Supreme Court in Blue Apron. For example, the court agreed with the Delaware Supreme Court that the Rodriguez decision foreclosed Appellant's argument that enforcing FFPs violated substantive provisions of the Securities Act. In Rodriguez, the Supreme Court held that in the context of a mandatory arbitration provision, the Securities Act's provision conferring concurrent state court jurisdiction without the possibility of removal is not critical to a complainant's substantive rights and may be waived. Both the Delaware Supreme Court in Blue Apron and the California Court of Appeal in Restoration Robotics held that enforcing FFPs similarly does not violate any substantive provision of the Securities Act.
The Court of Appeal also rejected Appellant's claims that enforcing FFPs would run afoul of the commerce clause and/or the supremacy clause of the U.S. Constitution.1 Appellant's commerce clause claim failed because Appellant could not demonstrate that enforcing FFPs constitutes a "state action," and even if he could, Delaware has a legitimate interest in allowing its corporations to include FFPs in their charters, and any resulting burden on interstate commerce did not outweigh the benefits. The court rejected Appellant's supremacy clause claim because Appellant failed to identify any Delaware state law claim that was similar in "size and type" to his Securities Act claim.
Finally, the Court of Appeal agreed with the Superior Court that enforcing FFPs is not unconscionable, unjust or unreasonable. The court rejected Appellant's argument that a reasonable investor should not be expected to "pore over a registration statement or otherwise investigate a company's certificate of incorporation," noting that Appellant failed to cite to any authority in support of that proposition. The court also found that the FFP was not procedurally or substantively unconscionable, as the FFP did not restrict Appellant from bringing his claim in a local federal court.
While California Superior Court decisions are not precedential, the published Court of Appeal decision is binding precedent on California lower courts. The reasoned decision of the Court of Appeal is another victory for California-based issuers that, in this time of soaring D&O insurance costs, through FFPs, hope to avoid the expense of duplicative federal and state court Securities Act litigation and obtain the efficiencies of federal court litigation.
1 The Superior Court had declined to rule on Appellant's constitutional claims, ruling that they were not properly brought before the court.
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