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

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.