On May 15, 2023, the Appellate Division of the Superior Court of New Jersey unanimously affirmed the dismissal with prejudice of a putative securities class action asserting claims under the Securities Act of 1933 against a bioelectric medicine company, its officers and directors, and the underwriters of its initial public offering. Kuehl v. electroCore, Inc., No. A-1539-21, 2023 WL 3444383 (N.J. App. Div. May 15, 2023). Plaintiffs alleged that the IPO offering documents did not disclose sufficient information about the company's competitors or the challenges the company was facing in its business. The Court held that a federal forum selection provision in the Delaware-incorporated company's charter was enforceable and had not been waived, and therefore affirmed the action's dismissal with prejudice.
At the time the litigation was commenced, the Delaware Court of Chancery had held that federal forum selection provisions—which required shareholders to consent that any claim under the Securities Act must be brought in the federal courts—were unenforceable. Id. at *2. After the case was originally dismissed without the lower court providing any reasoning, the Appellate Division remanded so that the lower court could explain the basis for dismissal. Id. at *3. In the interim, the Delaware Supreme Court reversed the Chancery Court and held that federal forum selection provisions applicable to Securities Act claims were valid and enforceable. Id. Defendants then sought enforcement of the federal forum selection provision. Id. The lower court again dismissed the action and issued a written decision explaining that dismissal with prejudice was proper on the basis of the forum selection provision in the company's charter. Id.
On appeal, plaintiffs first contended that defendants had waived enforcement of the forum selection provision by failing to raise it in their original motion to dismiss. The Court rejected this argument, explaining that, at the time of the original motion to dismiss, such clauses were unenforceable under controlling Delaware precedent and "defendants were under no obligation to assert the federal forum selection provision when such a provision was unenforceable under Delaware law." Id. The Court also noted that defendants had not withheld the assertion of the federal forum selection provision as part of a legal strategy and had instead asserted the defense when it first became available. Id.
In addition, the Court held that enforcement of the federal forum selection provision was not unreasonable even though the statute of limitations has expired on plaintiffs' Securities Act claims. The Court emphasized that there was a parallel federal court action, in which plaintiffs were members of the putative class, and plaintiffs had not offered "any reason why [it] fails to provide an adequate forum for their claims." Id. at *5.
The Court further rejected plaintiffs' argument that enforcement of the federal forum selection provision was void under the Securities Act. The Court noted that the United States Supreme Court has held that the Securities Act does not preclude arbitration agreements, which are "merely a specialized kind of forum-selection clause." Id. at *6.
Finally, the Court rejected plaintiffs' argument that the federal forum selection provision was void as a matter of New Jersey public policy, noting that New Jersey courts "look to Delaware courts for guidance on matters of corporate law," and "[w]e are satisfied that the Delaware Supreme Court's decision ... is dispositive and federal forum selection provisions regarding Securities Act claims are valid and enforceable." Id. Indeed, the Court explained that, although Delaware law governed the enforceability of a federal forum clause in a Delaware corporation's charter, even under New Jersey law the federal forum clause would have been enforceable. Id. at 3 n.2.
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