California's Trial Courts Are Enforcing Federal Forum Selection Clauses for Securities Act Claims

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.