California Courts Rule Federal Forum Selection Provisions in Chartering Documents Enforceable

Wilson Sonsini Goodrich & Rosati

Wilson Sonsini Goodrich & Rosati

In March, the Delaware Supreme Court held in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020) that "Federal Forum Selection Provisions," corporate bylaw or charter provisions that require claims under the Securities Act of 1933 (the "Securities Act") to be brought in federal court, are facially valid under Delaware's General Corporation Law. Wilson Sonsini represented Stitch Fix, Inc. and Roku, Inc. and their respective directors in the Sciabacucchi case, and previously issued an alert describing the Sciabacucchi opinion. The Delaware Supreme Court, however, expressly left open the question of whether Federal Forum Provisions were enforceable, leaving that decision to the various state courts in which Securities Act claims were filed. Three recent decisions in California have considered the enforceability of Federal Forum Provisions adopted by Restoration Robotics, Inc., Uber, Inc., and Dropbox, Inc., as a matter of first impression, and each found the provisions enforceable under California law.

In an opinion issued on December 4, 2020, Judge Nancy Fineman of the San Mateo County Superior Court granted Dropbox's Motion to Dismiss, holding that the Federal Forum Provision in Dropbox, Inc.'s bylaws was enforceable and required litigation of plaintiffs' Securities Act claims in federal court. In re Dropbox, Inc. Securities Litigation, Case No. 19-CIV-05089 (San Mateo Cty., CA). In the order, the Court rejected plaintiffs' argument that the Supreme Court's decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018), which held that Securities Act cases brought in state court could not be removed to federal court, prohibited enforcement of Federal Forum Provisions under both federal and California law. Instead, the Court was guided by Rodriguez de Quijas v. Shearson/American Express, 490 U.S. 477 (1989), in which the Supreme Court held that the Securities Act's provision conferring concurrent state court jurisdiction without the possibility of removal is not critical to a complainants' substantive rights and may be waived. The Court also held that Plaintiffs failed to show that Dropbox's Federal Forum Provision was unfair, unreasonable, or unconscionable: Dropbox provided a legitimate business need for adopting the provision (to avoid defending multiple cases simultaneously in both state and federal court); the provision allows plaintiffs to file in any federal court; the federal forum permits shareholders to pursue the same claims and remedies as the state court; and federal courts are well suited to handle claims under the Securities Act. Wilson Sonsini Goodrich & Rosati represents Dropbox and its officers and directors in this lawsuit.

In addition to the two other recent decisions enforcing Federal Forum Provisions, Judge Fineman's decision in Dropbox represents an important milestone in the enforcement of Federal Forum Provisions. Nevertheless, the question of enforceability of Federal Forum Provisions is not yet settled in California; the three recent state court decisions are not binding precedent in California, and at least one of the three recent decisions has been appealed by plaintiffs.

Wilson Sonsini previously issued an alert discussing key questions and considerations in potentially adopting a Federal Forum Provision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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