California Court Enforces Federal Forum Selection Provision For 1933 Act Claims

A California court ruled that a forum selection provision in a Delaware company’s registration statement requiring that certain securities litigation be brought solely in federal court was enforceable.  Wong v. Restoration Robotics, Inc., Case No. 18CIV02609 (Cal. Sup. Ct., San Mateo County, Sept. 1, 2020).  The California court’s ruling could signal the beginning of a broader trend, started in Delaware, that would be helpful to securities defendants, and, in turn, to insurance carriers.

In Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), the Supreme Court held that the Securities Act of 1933 (the 1933 Act) provided for concurrent jurisdiction in state and federal court and specifically barred removal where litigants filed in state court.  Following Cyan there was an uptick in 1933 Act claims filed in state courts.  Some corporations responded by adding federal forum provisions (FFP) to their governing documents providing that all 1933 Act claims must be brought in federal court.

Delaware courts were first to tackle this issue.  In Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. Mar. 18, 2020), the Delaware Supreme Court held that FFPs were enforceable.  In explaining its reasoning, the Delaware Supreme Court noted the increase in state court 1933 Act filings after Cyan as well as the associated “costs and inefficiencies” of companies having to litigate concurrently in state and federal fora.  Although the Delaware Supreme Court determined the FFP before it to be valid, it raised the question whether other state courts would reach the same conclusion.

In Wong, a California Superior Court decided that it would.  There, Restoration Robotics was a Delaware corporation with its principal place of business in California.  Restoration Robotics’ Amended and Restated Certification of Incorporation designated federal district courts as the exclusive forum for all lawsuits asserting a cause of action under the 1933 Act.  Plaintiffs brought a putative class action in California state court, and Restoration Robotics moved to dismiss.  The court denied the motion to dismiss and then granted a motion to reconsider based on the Delaware Supreme Court’s decision in Sciabacucchi.  On reconsideration, the California Superior court found the FFP to be enforceable and dismissed the case.

The Wong court first analyzed the Delaware Supreme Court’s Sciabacucchi decision in detail.  The Wong court agreed that FFPs were allowable under Delaware law.  However, it opined that the analysis of Delaware law was “basically irrelevant” to the question before it, which was governed by California law.  It then evaluated the Delaware Supreme Court’s conclusion that FFPs “do not offend federal law and policy.”  The court found the Delaware Supreme Court’s analysis wanting.  It reasoned that “the Delaware Supreme Court provided no actual analysis of whether or not the FFP was contrary to federal law.”  With respect to federal policy, the Wong court maintained that the Delaware Supreme Court “jumble[d]together different cases on different topics, subject to different tests”—namely,  cases interpreting several types of contractual provisions:  forum selection clauses, mandatory arbitration provisions, and releases. The court discussed each area and its potential relevance (or lack thereof) to the current case.

The Wong court then turned to the applicability of Sciabacucchi to the current case.  The Wong court noted that the Delaware Supreme Court’s decision was limited to a facial challenge, and its suggestion that other states should also enforce FFPs was dicta.  It then looked at choice-of-law.  Although the Delaware Supreme Court ultimately applied Delaware law, the court noted that it did not do so on the basis of the internal affairs doctrine whereby Delaware law governs the internal affairs of Delaware corporations.  Rather, the Delaware Supreme Court found that 1933 Act claims were “intra corporate affairs” which were “something more than an internal affair but something less than an external affair.”  The Wong court concluded that, since the internal affairs doctrine did not apply, California law should govern.  Having analyzed the Delaware Supreme Court’s decision, the Wong court turned to evaluating the issue before it under California law.

Finding no analogous cases under California law, the court analyzed the FFP under the established standards governing three types of contractual provisions that the Delaware Supreme Court assertedly “jumble[d] together” inSciabacucchi.  The court found the law governing forum selection clauses to be most relevant.  Using that framework, the Court observed that the FFP was subject to shareholder approval and was effective before the lawsuit was filed.  The burden thus shifted to the plaintiffs to demonstrate that the FFP was unenforceable, unconscionable, unjust or unreasonable.  Plaintiffs could not carry that burden.  The court reasoned that there was no disruption of plaintiffs’ substantive rights under the FFP—only the procedural aspect regarding where they could enforce those rights.  There was no loss of procedural due process because plaintiffs could present their 1933 Act claims in the federal court closest to their residence and would have the opportunity for discovery and a jury trial.  Additionally, the Wong Court noted that federal courts have greater authority to obtain personal jurisdiction over defendants and to subpoena witnesses for trial.  Accordingly, the trial court concluded the FFP at issue was a proper forum selection clause and the case was dismissed.

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Impact for D&O Insurers:  The Wong decision is a positive development for carriers facing increased 1933 Act claims in state courts that are frequently tendered under D&O policies.  When this forum-selection issue inevitably comes up in other state courts, companies can point to Wong, in addition to Sciabacucchi in support of a federal forum for 1933 Act claims.  It is too early to say if Wong is the start of a trend, but it is certainly a step in the right direction.  However, a word of caution is due.  The Wong decision is likely to be appealed and could be reversed.  Moreover, although the California Superior Court in Wong ultimately reached the same conclusion as the Delaware Supreme Court inSciabacucchi, it was critical of the Delaware Supreme Court’s reasoning on some issues.  Future challenges to FFPs in other states may attempt to use this language as ammunition.