California Judge Rules That Federal Forum Provisions May Be Permitted

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In a first-of-its-kind ruling in California that came down on September 1, 2020, San Mateo County Superior Court Judge Marie Weiner declined jurisdiction over securities claims against Restoration Robotics by holding that the federal forum provision in the company’s amended and restated certificate of incorporation is not “unenforceable, unconscionable, unjust or unreasonable.” Although Judge Weiner’s rationale in Wong v. Restoration Robotics differs from that provided in the Delaware Supreme Court’s recent ruling in Salzberg v. Blue Apron Holdings, her decision is consistent with the result in the Delaware Supreme Court’s ruling that corporations may require stockholders to litigate claims under the Securities Act of 1933 (Securities Act) in federal court, holding that such forum provisions in corporate charter documents and bylaws are facially valid. In its March 2020 decision, the Delaware Supreme Court overturned the Delaware Court of Chancery’s ruling from December 2018 in Sciabacucchi v. Salzberg that we discussed here, in which the Court of Chancery had held that such federal forum provisions were unenforceable.

The enforceability of federal forum provisions has received increased attention since the U.S. Supreme Court ruled in March 2018 in Cyan v. Beaver County Employees’ Retirement Fund that plaintiffs were allowed to bring their Securities Act claims in either state or federal court.

Restoration Robotics Ruling

In her ruling in Wong v. Restoration Robotics, Judge Weiner noted that the Delaware Supreme Court’s ruling earlier this year is not binding on courts in other states, and disagreed with the Delaware Supreme Court’s basis of analysis of federal forum provision clauses, stating that “the most‑closely analogous law” to federal forum provisions “is that pertaining to [contractual] forum selection clauses,” and emphasized that her holding did not affect the substantive rights afforded to plaintiffs under the Securities Act.

This is the first California court decision to address the matter since the Delaware Supreme Court ruling. Judge Weiner noted in her decision that the subject federal forum provision had been approved by shareholders and was not being applied retroactively, leaving open the possibility of a different outcome on different facts.

Takeaways

This decision reinforces our recommendation that corporations that do not have such provisions (that are incorporated in states like Delaware which may permit such bylaw amendments, including the state of Washington) should adopt a federal forum provision promptly.

Publicly held corporations that already have such provisions should consider updating any risk factor discussion of the enforceability of the provision.

Corporations involved in pending litigation should confer with counsel regarding whether to seek enforcement of a preexisting federal forum provision, or whether to attempt retroactive adoption of one.

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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