Since 2018 when the U.S. Supreme Court's Cyan v. Beaver County decision established that Securities Act of 1933 (the "Securities Act") claims filed in state court are not removable to federal court under the Securities Litigation Uniform Standards Act of 1998, plaintiffs have filed a surge of class action securities litigation in state courts around the country, particularly in Northern California where many new issuers are headquartered. Plaintiffs find state courts attractive because, among other things, generally more lenient state procedures may allow more cases to survive initial challenges to the pleadings. Complicating matters, securities class actions are often filed by competing plaintiffs simultaneously in state and federal courts on behalf of the same or overlapping putative classes of investors. Aside from general principles of state-federal comity and deference and certain provisions of the Private Securities Litigation Reform Act of 1995, which have not been consistently applied in this context, there often is no reliable mechanism to coordinate or consolidate these actions.

In response to the challenges of overlapping and duplicative class action litigation, many issuers have adopted provisions in their corporate governance documents providing that Securities Act claims by investors must be filed in federal court (where they can be consolidated and coordinated). Earlier this year in Salzberg v. Sciabacucchi, the Delaware Supreme Court held that such clauses are presumptively enforceable under Delaware law, which governs a majority of public companies in the United States, reversing a Court of Chancery decision to the contrary. 227 A.3d 102 (Del. 2020). The court in Sciabacucchi found that federal forum provisions ("FFPs") are consistent with a central purpose of the Delaware General Corporations Law – to provide "immense freedom for businesses to adopt the most appropriate terms for the organization, finance, and governance of their enterprise." Id. at 116. The court noted the costly burden of state/federal overlapping Securities Act class action litigation (enabled by the Cyan decision), and held that FFPs in general do not violate federal law or policy.

With the foundational questions seemingly settled under Delaware law, Securities Act class action plaintiffs are now raising constitutional and other state law arguments against the enforceability of FFPs in courts outside Delaware. Three California trial courts to date have rejected these arguments and held that FFPs may properly be used to direct Securities Act litigation to the federal courts.

California Weighs In

'Wong v. Restoration Robotics'

First to act was the San Mateo County Superior Court in Wong v. Restoration Robotics, No. 18-CIV-02609 (Cal. Sup. Ct. Sept. 1, 2020). That court had earlier denied an FFP-based motion to dismiss, following the Delaware Court of Chancery decision in Sciabacucchi. On Sept. 1, 2020, Judge Marie Weiner granted a renewed motion to dismiss, ruling that the FFP in Restoration Robotics' certificate of incorporation was not "unenforceable, unconscionable, unjust or unreasonable." Order at 43. This is the first California decision to evaluate the enforceability of a Delaware charter federal forum provision.

Given the relative nascency of such provisions, the Restoration Robotics decision focused on finding the proper analytical framework. After first deciding that California law governed the inquiry, the court considered and rejected both the enforcement of arbitration provisions and settlement releases as the most relevant analogs. The court settled on contractual forum selection clauses, specifically those requiring shareholder derivative breach of fiduciary duty actions and other internal corporate claims to be brought in the company's state of incorporation. Under California law, such clauses are enforceable unless the plaintiff can demonstrate the clause is "unreasonable," and the courts routinely uphold and apply them to bar claims outside the designated jurisdiction. Id. at 36. Ultimately, the court was persuaded that plaintiffs had failed to show that enforcing the FFP at issue would be "unfair or unreasonable" because plaintiffs would retain the substantive rights and claims under the Securities Act whether their case proceeded in federal or state court. Id. at 43.

The Restoration Robotics decision enforced the FFP despite plaintiffs putting forth several federal law arguments, including a Commerce Clause-based challenge to FFPs which the court declined to consider. Id. at 37-38. Finally, the court dismissed the case only as to the company and its directors and officers, declining to do so in favor of other defendants (underwriters and alleged controlling shareholders) who had joined in the motion but did not separately brief the issue. The remaining defendants' renewed motion to dismiss is now pending, and plaintiffs have appealed the dismissal of their claims against the company.

Uber Securities Litigation

Following Restoration Robotics, on Nov. 16, 2020, San Francisco Superior Court Judge Andrew Y.S. Cheng dismissed a Securities Act class action against Uber Technologies, Inc., finding Uber's FFP "lawful and valid under California law." In re Uber Technologies, Inc. Securities Litigation, Lead Case No. CGC-19-579544. Although the court did not cite the Restoration Robotics opinion, it followed a similar analysis, applying California rather than Delaware law and rejecting Plaintiffs' state law arguments focused on unconscionability and alleged lack of consent, as well as federal law arguments. Exemplifying the predicament FFPs are meant to address, Uber faces a parallel and overlapping suit in the Northern District of California.

As in Restoration Robotics, the court was persuaded by the fact that plaintiffs would have identical substantive rights and claims under the Securities Act whether their case proceeded in federal or state court. In deciding that Uber's FFP was not unconscionable, the court noted in particular that Uber's FFP explicitly preserved plaintiffs' rights to a jury trial. Based on Uber's FFP, the Court dismissed the entire Uber action, including claims against non-signatory underwriter defendants, reasoning that the FFP's broad terms applied to "any complaint." Order at 14.

Dropbox Securities Litigation

Another San Mateo judge became the latest to rule on the enforceability of FFPs on Dec. 4, 2020. In re Dropbox, Inc. Securities Litigation, No. 19-CIV-05089, is a Securities Act class action filed against Dropbox in California state court. Similar to Uber, Dropbox also faces parallel litigation in the Northern District of California. Dropbox moved to dismiss the state court action, advancing several arguments that build on Sciabacucchi and Restoration Robotics and seeking to avoid duplicative litigation and the possibility of inconsistent outcomes and rulings.

Highlighting the significance of this issue, several former Delaware Vice Chancellors and Supreme Court Justices and a former SEC commissioner filed an amicus brief arguing that FFPs should be enforced. Among other notable points, the amici argued that FFPs' enforceability should be evaluated under the law of the company's state of incorporation rather than the law of the forum state. Adopting this approach would enhance the attractiveness of FFPs because plaintiffs could not attack their enforceability under the laws of different forum states.

On December 4, Judge Nancy L. Fineman granted Dropbox's motion to dismiss, holding that its FFP is enforceable. As in Restoration Robotics and Uber, the court applied California law and found that the provision was fair and reasonable. The court's decision tracks the reasoning in Restoration Robotics and Uber and further solidifies FFPs as enforceable under California law.

Judge Fineman's order also analyzed whether Dropbox's FFP violated the Securities Act's "non-waiver" provision, which prohibits contractual waivers of the Act's substantive protections. The court held that an FFP did not waive any substantive protections because the choice between a state or federal forum amounted only to a procedural matter, as the substantive standards of liability are the same in either forum. Finally, Judge Fineman summarily rejected plaintiffs' constitutional arguments, finding no conflict between the FFP and federal law.

Implications

Under California practice, trial court decisions are not precedential, so litigation over FFPs may continue, though the tide is decidedly turning against plaintiffs seeking to challenge an FFP in these cases. Therefore, particularly in light of these recent decisions, FFPs remain an attractive tool that companies should consider in an effort to avoid the costs and uncertainty of duplicative class actions.

Lucy Wang has broad experience representing financial institutions and high-tech companies in complex and cross-border disputes. Lucy's practice focuses on securities and regulatory actions as well as a range of intellectual property and commercial litigation. She is a partner in Morgan Lewis's San Francisco office.

Joseph E. Floren defends clients facing class and derivative actions. He represents securities broker-dealers, investment managers, and other financial services companies and professionals throughout every aspect of litigation and related regulatory issues. In addition to his trial practice, Joseph represents securities industry clients and issuers of securities in investigations and enforcement proceedings before US federal and state securities regulators and self-regulatory organizations. He is a partner in Morgan Lewis's San Francisco office.