On September 1, 2020, Judge Marie S. Weiner of the Superior
Court of California, County of San Mateo, addressing "an issue
of first impression in the United States," dismissed certain
defendants from a putative class action asserting claims under the
Securities Act of 1933 on the basis of a federal forum selection
provision in the Delaware company's certificate of
incorporation. Wong v. Restoration Robotics, Inc.,
No. 18-cv-2609, slip op. (Cal. Super. Ct. Sept. 1, 2020). The
decision is not citable precedent under California law, but it is
summarized here because it is the first decision addressing the
substantive enforceability of such provisions since they were held
facially valid by the Delaware Supreme Court.
The Court had originally denied the company's motion to
dismiss, in reliance on a prior holding by the Delaware Chancery
Court that federal forum selection provisions could only apply to
the "internal affairs" of a Delaware corporation under
Delaware law. Id. at 12. After the Delaware
Supreme Court reversed that decision and rejected a facial
challenge to a federal forum selection provision in Salzberg v.
Sciabacucchi, 227 A.3d 102 (Del. 2020)—as discussed in
our prior post—the Restoration Robotics
Court granted a motion for reconsideration and dismissed the
Securities Act claims against the company and its executives.
However, the Court denied, without prejudice, defendants' joint
motion as to the underwriters of the company's IPO and venture
capital companies that invested in the company, who the Court held
had not separately argued for dismissal or demonstrated that they
had the right to enforce the federal forum selection clause.
The Court explained, by way of background, that in response to the
United States Supreme Court's decision in Cyan Inc. v.
Beaver County Employees Retirement Fund, 138 S. Ct. 1061
(2018), holding that Securities Act claims brought in state court
are not removable to federal court, companies have adopted
provisions in their certificates of incorporation establishing that
the federal courts shall be the exclusive forum for Securities Act
claims. Slip. Op. at 3-9. The Court stated that, while
the Delaware Supreme Court has held that such provisions are
facially valid under Delaware law, the Delaware Supreme Court has
not, in the Court's eyes, addressed whether the federal forum
provision was legal and enforceable under California and/or federal
law. Id. at 11-13.
The Court reasoned that the provision at issue was analytically
similar to a forum selection clause under California contract law,
because the company's shareholders had the opportunity to, and
did, vote upon the certificate of incorporation. Id.
at 29. The Court observed that forum selection clauses
providing that shareholder derivative claims be adjudicated in a
particular forum are common in corporate charters and had been
upheld in multiple prior decisions by California courts.
Id. at 30-31. The Court analogized from those prior
California decisions that such clauses are generally enforceable as
long as the trial court has discretion whether to decline or
exercise jurisdiction, and that, under California law, the opposing
party has the burden to show that the application of a forum
selection clause would be "unfair or unreasonable."
Id. at 35-36. Here, the Court concluded, plaintiffs
failed to do so.
In addition, the Court rejected plaintiffs' argument that a
federal forum provision is unconstitutional under either the
Commerce Clause or the Supremacy Clause of the United States
Constitution. As to the Commerce Clause, the Court concluded
that it was not an appropriate subject for a California state court
adjudicating a motion for forum non conveniens.
Id. at 37-38. With respect to the Supremacy Clause,
the Court reasoned that, while it would not be appropriate for the
federal forum provision to attempt to create jurisdiction or select
jurisdiction where none would otherwise exist, the provision in
question did not attempt to limit federal jurisdiction or
venue. Id. at 39. Moreover, the Court noted
that the federal forum provision did not deprive plaintiffs of any
rights or remedies they had under federal law and was
"cautiously and narrowly drafted to only address the choice of
forum, but leave intact all of the substantive rights and remedies
(and the right to a jury trial) provided to investors under the
Securities Act of 1933." Id. at 41-42.
Finally, the Court disagreed with plaintiffs' assertion that
state court jurisdiction is a nonwaivable right under Section 14 of
the Securities Act, which holds that "[a]ny condition . . .
binding any person acquiring any security to waive compliance with
any provision of this subchapter . . . shall be void."
Id. at 39-40. Plaintiffs relied on the Supreme
Court's decision in Wilko v. Swan, 346 U.S.
427 (1953), which held that the nonwaiver provision applies to both
substantive and procedural terms of the Securities Act, but the
Court noted that the Supreme Court had subsequently held that the
Wilko case was "overruled" in Rodriguez v.
Shearson, 490 U.S. 477 (1989). Restoration
Robotics, slip op. at 40.
The Court declined to dismiss, at this time, the non-company
defendants on the basis that in the eyes of the Court, they had not
yet provided substantive justification for being either covered by
the forum selection provision or party to an agreement containing
such a provision. Id. at 2. But that denial
was explicitly made without prejudice, id, and the
provision on its face applies to the entire action regardless of
defendant.
This decision, though not precedential, appears to be the first
state court decision since Sciabacucchi was decided to
address the enforceability of a Securities Act federal forum
provision in a corporate charter.
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