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.