As previously discussed in our Sept. 10, 2020, client alert, in Wong v. Restoration Robotics, Inc., Case No. 18-CIV-02609 (Cal. Super. Ct. Sept. 1, 2020), the Superior Court of California for the County of San Mateo dismissed claims against an issuer and its directors and officers, asserted under the Securities Act of 1933 (Securities Act), in favor of a federal forum-selection provision (FFP) in the issuer-defendant’s certificate of incorporation. This was the first state court case to opine on the enforceability of FFPs in the wake of the Delaware Supreme Court’s decision in Salzberg v. Sciabacucci (Blue Apron), 227 A.3d 102 (Del. 2020), and the U.S. Supreme Court’s decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1069 (2018).
Since the Restoration Robotics decision, two more California state courts have upheld the enforceability of FFPs, in In re Uber Technologies Securities Litigation and In re Dropbox, Inc. Securities Litigation. These three decisions together have significant implications for issuers, as well as for the D&O insurance industry.
Many companies planning IPOs or secondary offerings began including FFPs in their certificates of incorporation or bylaws following the U.S. Supreme Court’s decision in Cyan, which upheld a plaintiff’s ability to bring Securities Act claims in either state or federal court. The FFPs, which require that all complaints asserting claims under the securities laws be brought in federal district court, were designed to avoid potentially expensive and duplicative federal and state court litigation and to preserve the benefits of litigating before a federal judiciary experienced in securities cases. Broad enforceability of these FFPs could stem the surge of Securities Act cases that had been brought in state courts post-Cyan. That surge has arguably led to a corresponding rise in D&O insurance costs for companies planning IPOs or secondary offerings.
The Restoration Robotics Decision
As previously discussed, in some ways, the Restoration Robotics court was not sympathetic to the Delaware Supreme Court’s reasoning in Blue Apron. Notably, the court expressly disagreed with the Delaware Supreme Court’s analysis of several U.S. Supreme Court decisions, including Rodriguez de Quijas v. Shearson/American Express Inc., 490 U.S. 477 (1989). In Rodriguez, the Supreme Court held that in the context of a mandatory arbitration provision, the Securities Act’s provision conferring concurrent state court jurisdiction without the possibility of removal is not critical to a complainant’s substantive rights and may be waived. The Restoration Robotics court found that Rodriguez was inapplicable to its analysis, but went on to conclude that the plaintiff had failed to make the required showing that the FFP “is unenforceable, unconscionable, unjust or unreasonable,” and the court dismissed the complaint against the issuer and its officers and directors. The court, however, denied without prejudice the motions of the underwriters and venture capital defendants, who had joined in the issuer’s motion, but provided no separate analysis as to the FFP’s effect on those defendants.
The Uber Decision
On Feb. 11, 2020, Uber shareholders filed Securities Act claims against the company and the underwriters of its IPO in California Superior Court for San Francisco County. On Nov. 16, 2020, the court dismissed the complaint in favor of the FFP in Uber’s charter. In re Uber Technologies Sec. Litig., Case No. CGC-19-579544 (Cal. Super. Ct. Nov. 16, 2020). The Uber decision went further than Restoration Robotics in that it dismissed claims against both the issuer and the underwriters.
In its decision, the court first rejected the contention that the FFP was unenforceable because plaintiffs had not consented to the provision, noting that “neither California nor Delaware law requires forum selection clauses to be freely negotiated to be enforceable.” The court then analyzed whether, under the Securities Act, “corporations can select the federal courts as the exclusive forum for Securities Act claims as a matter of corporate governance.” The court concluded that “[t]he state and federal courts’ concurrent jurisdiction does not preclude the parties from agreeing in advance to select either state or federal court to be the exclusive forum to resolve claims arising under the Securities Act.”
Unlike the court in Restoration Robotics, the Uber court found the Supreme Court’s decision in Rodriguez applicable, and held that “applying Rodriguez, . . . the FFP does not contravene the 1933 Act’s concurrent jurisdiction and anti-removal protections or the Supreme Court’s decision in Cyan.” Finally, the court found that the FFP was enforceable because the terms of the FFP were neither “outside Plaintiffs’ reasonable expectations” nor procedurally and substantively unconscionable. With respect to the underwriters, the court held that plaintiffs’ entire action fell within the scope of the FFP, noting that the provision applies broadly to “any complaint” asserting a claim under the Securities Act.
In re Dropbox, Inc. Securities Litigation
On Aug. 30, 2019, shareholders of Dropbox sued under the Securities Act in California Superior Court for San Mateo County. On Dec. 4, 2020, the court granted Dropbox’s motion to dismiss based on the FFP in Dropbox’s bylaws. In re Dropbox, Inc. Securities Litigation, Case No. 19-CIV-05089 (Cal. Super. Ct. Dec. 4, 2020). Prior to issuing its decision, the court considered supplemental briefing in light of the Restoration Robotics decision, which was decided by a different San Mateo County judge.
Like the court in Uber, the Dropbox court held that under the Supreme Court’s decision in Rodriguez, a shareholder may waive her right to litigate Securities Act claims in California state court. The court rejected the notion that a forum selection clause is unreasonable simply because it is not negotiable and emphasized that “when Plaintiffs acquired their shares, their purchases were subject to the Dropbox Bylaws and they assented to the FFP.” As in Restoration Robotics and Uber, the court found the FFP was not substantively unconscionable because it permitted the plaintiffs to “file in any federal court” and did “not take away the right to discovery, jury trial or appeal.” Moreover, it acknowledged that Dropbox’s desire to avoid the unnecessary costs and burden associated with defending against duplicative litigation provided a “legitimate business need to support the FFP.”
The Restoration Robotics, Uber and Dropbox decisions do not constitute binding precedent on other California state courts, and appeals are possible. Nevertheless, these decisions are victories for California-based issuers that, in this time of soaring D&O insurance costs, put in place FFPs in hopes of avoiding the expense of duplicative federal and state court Securities Act litigation and obtaining the efficiencies of federal court litigation.
 In its recently issued Proxy Voting Guidelines Updates for 2021, Institutional Shareholder Services (ISS) indicated it would generally recommend a vote “for federal forum selection provisions in the charter or bylaws that specify ‘the district courts of the United States’ as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders,” but against provisions that select a particular federal district court as the exclusive forum.
 Although the court found that the FFP may be procedurally unconscionable because plaintiffs did not have an opportunity to negotiate its terms and because the FFP was buried in Dropbox’s lengthy registration statement, under California law, a plaintiff must establish that a forum-selection provision is both procedurally and substantively unconscionable for it not to be enforceable.
 In both Uber and Dropbox, amicus briefs from industry groups were filed on behalf of both plaintiffs and defendants.
 With respect to the other defendants who joined in the Dropbox defendants’ motion, including the underwriters, the court did not “reach the substantive arguments of [those Defendants]. Instead, using its discretion after analyzing all the facts, the Court also dismisses the action on the grounds of economy and efficiency.”