In Wong v. Restoration Robotics, Inc., Case No. 18CIV02609 (Cal. Sup. Ct. Sept. 1, 2020), the Superior Court of California for the County of San Mateo recently dismissed claims against an issuer and its directors and officers asserted under the Securities Act of 1933 (the Securities Act) in favor of a federal forum-selection provision (FFP) in the issuer-defendant's certificate of incorporation. The court's decision is significant because it is one of the first state courts to address the enforceability of FFPs in the wake of the Delaware Supreme Court's decision in Salzberg v. Sciabacucchi (hereafter 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).
Prior to the Court's decision in Cyan, state courts were split as to whether Securities Act cases could be brought in state court, and if so, whether such cases were removable to federal court, in light of amendments made to the Securities Act by the Public Securities Litigation Reform Act of 1995 (PSLRA) and the Securities Litigation Uniform Standards Act of 1998 (SLUSA). The vast majority of state courts held that such cases could not be brought in state court, or if they could, that they were removable to federal court. In Cyan, the Court adopted the minority view (held by certain California state courts), holding that (i) claims asserted under the Securities Act can be brought in either state or federal court; and (ii) if a Securities Act claim is brought in state court, it cannot be removed to federal court. Following the Court's decision, the number of Securities Act class actions filed by plaintiffs in state court increased dramatically. That surge has arguably led to a corresponding rise in directors and officers (D&O) insurance costs for companies planning initial public offerings or secondary offerings. In response, and in the interest of avoiding expensive and duplicative federal and state court Securities Act litigation and preserving the benefits of litigating before a federal judiciary experienced in such cases, many companies prior to public offerings chose to include FFPs in their certificates of incorporation or bylaws. A typical FFP provides that "the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the federal securities laws of the United States."
In Blue Apron, the Delaware Supreme Court considered whether FFPs are enforceable under the Delaware General Corporations Law (DGCL). The plaintiff in that case brought claims against the directors of three corporations (Blue Apron Holdings Inc., Stitch Fix Inc., and Roku Inc.), seeking a declaratory judgment that the FFPs in the charters of those companies were invalid. Below, the Court of Chancery found in favor of the plaintiff, holding that the FFPs were unenforceable because "constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware's corporate law."
On appeal, the Delaware Supreme Court reversed, holding that FFPs are facially valid under the DGCL and do not violate Delaware public policy. The court noted that the DGCL "allows immense freedom for businesses to adopt the most appropriate terms for the organization, finance, and governance of their enterprise." Under Section 102 of the DGCL, a corporate charter may contain "any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders[,] ... if such provisions are not contrary to the laws of this State." The court held that FFPs fall within the permissible scope of Section 102 because "[t]he drafting, reviewing, and filing of registration statements by a corporation and its directors" — from which Securities Act cases arise — "is an important aspect of a corporation's management of its business and affairs and of its relationship with its stockholders." In upholding the facial validity of FFPs, the court left for another day the question of whether such provisions could be subject to "as applied" challenges or otherwise invalidated "if adopted or used for an inequitable purpose."
The Restoration Robotics Decision
In the Restoration Robotics case, the defendants moved to dismiss in favor of the FFP in the issuer-defendant's certificate of incorporation prior to the Delaware Supreme Court's ruling in Blue Apron, and the California Superior Court denied that motion. Following the Blue Apron decision on appeal, the court permitted the defendants to renew their motion. The plaintiff opposed, arguing that notwithstanding the Blue Apron decision, the FFP was unenforceable as applied in that case.
In some ways, the Superior Court was not sympathetic to the Delaware Supreme Court's reasoning. In its decision, the court first disagreed with the Delaware Supreme Court's analysis of the U.S. Supreme Court's decisions in Rodriguez de Quijas v. Shearson/American Express Inc., 490 U.S. 477 (1989); M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972); and Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367 (1996), finding those cases inapplicable to the issues before the court. However, the court then went on to analyze the enforceability of the FFP under principles of California forum selection and forum non conveniens law.1 The court concluded that the plaintiff had failed to make the required showing that the FFP "is unenforceable, unconscionable, unjust or unreasonable," and dismissed the complaint against the issuer and its officers and directors.2
The Restoration Robotics decision is notable because, even prior to Cyan, California courts had been protective of state-court Securities Act litigation. The decision is a significant initial 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.3
1. The court declined to address the plaintiff's commerce clause and preemption arguments, ruling that those issues were not properly before the court.
2 The court denied without prejudice the motions of the Underwriters and Venture Capital defendants, who had joined in the issuer's motion, but provided no separate analysis as to the effect of the FFP on those defendants.
3 There is a second case in San Mateo County before a different judge posing similar issues, but that court has yet to issue a ruling. See In re Dropbox, Inc. Sec. Litig., Case No. 19-CIV-5089 (Cal. Sup. Ct.).
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