On April 28, 2022, the First Appellate District Court of Appeals for the State of California affirmed the dismissal of putative securities class action against a hair transplant technology company (the “Company”) alleging violations of the Securities Act of 1933 (the “1933 Act”). Wong v. Restoration Robotics, Inc., A161489 (Cal. Ct. App. Apr. 28, 2022). Plaintiff initiated the action in California state court, alleging that the offering documents for the Company’s 2017 initial public offering (“IPO”) contained materially false and misleading statements in violation of the 1933 Act. The trial court dismissed the complaint on the basis of a federal forum provision (“FFP”) in the Company’s certificate of incorporation. The Court affirmed, holding that the FFP was enforceable and that the trial court would only have jurisdiction if the Company consented to a different forum, which it had not.
The Company manufactures a robotic system used in a type of hair transplant procedure. The Company filed its Form S-1 Registration Statement with the SEC on September 1, 2017, and it was declared effective on October 11, 2017. The Company amended the Registration Statement on September 18, 2017, adding an “Exclusive Forum” provision which provided that unless the Company consents in writing, federal district court shall be the exclusive forum for any cause of action arising under the 1933 Act, and that any shareholder shall be deemed to have notice.
Plaintiff shareholder filed a putative class action complaint against the Company in May 2018 in California state court, alleging that “the registration statement was inaccurate and misleading, contained untrue statements of material fact, and failed to disclose material facts, in violation of sections 11, 12(a)(2), and 15 of the 1933 Act.” Plaintiff pointed to a 50% drop in the sales price of the Company’s stock since its IPO and alleged that the registration statement “mischaracterized the company’s liquidity and capital needs, and failed to disclose that substantial engineering and programming work was required before the implantation technology would be commercially viable.” The trial court initially denied the Company’s motion to dismiss based on the FFP, relying on a Delaware Chancery Court decision holding that FFPs were facially invalid under Delaware law, but granted the Company’s renewed motion to dismiss after the Delaware Supreme Court overturned the Chancery Court’s decision and held that FFPs are not contrary to Delaware or federal law or policy. Plaintiff appealed, contending that (i) the FFP violated the concurrent state and federal jurisdiction provision of the 1933 Act, (ii) the Delaware statutory scheme permitting the FFP violated the Commerce Clause and Supremacy Clause of the United States Constitution, and (iii) the FFP was invalid and unenforceable because it was unfair and unreasonable.
As an initial matter, the Court rejected plaintiff’s argument that the FFP was barred by the 1933 Act, holding that the plain and unambiguous language of Section 77v(a)—which grants concurrent jurisdiction between federal and state courts—simply “prevent[s] a defendant from removing a civil case that has been filed in state court to the United States district court,” and that the FFP only “requires [plaintiff] to file his action in federal court in the first place, rather than in state court.” With respect to Section 77n—which prohibits waiver of compliance with provisions of the 1933 Act—the Court relied on the Supreme Court decision Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989), for the proposition that “section 77n does not apply to the concurrent jurisdiction provision of the 1933 Act, and does not bar forum selection arrangements.”
Turning to plaintiff’s constitutional argument that Delaware law permitting FFPs violates the Commerce Clause, the Court held that there was no state action—a necessary factor in triggering the Commerce Clause—because the Company “[did] not perform a traditional, exclusive public function; nor [was] it compelled by Delaware law to include an FFP in its certificate of incorporation; nor [was] Delaware acting jointly with” the Company. In any event, the Court held that plaintiff’s Commerce Clause argument failed on the merits because Delaware has an interest in “promoting stable relationships among parties in the corporations it charters,” which is advanced by providing “certainty and predictability, uniformity, and prompt judicial resolution to corporate disputes,” such as through FFPs. Concerning the Supremacy Clause, the Court held that while Delaware law “authorizes, but does not require,” Delaware corporations to adopt forum selection clauses requiring 1933 Act claims to be brought in federal court, it does not allow Delaware corporations to adopt forum selection clauses that exclude Delaware state court as a forum for “internal corporate claims.” The Court explained that plaintiff’s argument relied on the false premise that although Delaware law allows an FFP, it protects state court jurisdiction for claims similar to his 1933 Act claim. The Court noted that plaintiff failed to identify any state law claim that is similar in “size and type,” in part because “no state law securities class actions with claims similar to 1933 Act claims can be brought in any court, state or federal.”
Lastly, the Court rejected plaintiff’s argument that the FFP was unconscionable, noting that plaintiff did not cite to any cases in which a court has held that a provision in a corporation’s certificate of incorporation is procedurally unconscionable. Accordingly, the Court “decline[d] to hold that there is anything substantively unconscionable in the waiver of the waivable procedural right to a state forum, particularly where, as here, the provision does not restrict a plaintiff’s procedural right under the statute to file suit in a local federal court.”