State Courts Continue to Enforce Federal Forum Provisions
- Corporations started inserting federal forum provisions in light of the decision of the United States Supreme Court in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (“Cyan”) (2018), which reaffirmed that state courts have concurrent jurisdiction for claims brought under the Securities Act.
- In Salzberg, et al. and Blue Apron Holdings, Inc., et al. v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the Delaware Supreme Court upheld a federal forum provision in a company’s charter finding that the provision was facially valid under the Delaware statute governing contents of certification of incorporation. The court emphasized that it was only addressing the “facial challenge” of the federal forum provision under Delaware corporate law and not its substantive application.
- State courts, including recent cases in California, are continuing to enforce federal forum provisions providing additional comfort to entities incorporated or organized in Delaware which have enacted such provisions. See In re Dropbox Inc. Securities Litigation, No. 19-civ-05089 (Cal. Super. Ct., San Mateo Cnty, Dec. 4, 2020),
- However, state courts remain a viable jurisdiction for federal Securities Act claims, as shown by the Supreme Court of New York’s recent post-Cyan Securities Act ruling in Lyu v. Ruhnn Holding Ltd., addressing the merits of the claim.
The number of Securities Act claims filed in state court has dramatically increased over the past few years following the U.S. Supreme Court’s March 2018 decision in Cyan, Inc. v. Beaver Cty. Employees Ret. Fund, 138 S. Ct. 1061 (2018), which confirmed not only that state and federal courts exercise concurrent jurisdiction over Securities Act claims, but also that claims filed in state court are not removable to federal court. Following that ruling, plaintiffs’ counsel filed a flurry of claims in state court. As acknowledged by the Delaware Supreme Court, the number of Securities Act claims filed in state court in 2019 is “historically unprecedented,” jumping from only a handful of state court filings before 2015 to 65 filings in 2019.
As a result, securities issuers and sellers subject to Sections 11 and/or 12 of the Securities Act have faced an increasing number of state court Securities Act lawsuits—including a number of instances in which identical Securities Act claims have been filed in both state and federal court simultaneously, with no mechanism to consolidate these duplicative actions—a costly and wasteful endeavor which could potentially result in inconsistent decisions. To avoid this risk, many Delaware corporations have adopted “federal-forum provisions” in their charters, requiring plaintiffs to file any action arising under the Securities Act exclusively in federal courts.
On March 18, 2020, the Delaware Supreme Court issued Salzberg, et al. and Blue Apron Holdings, Inc., et al. v. Sciabacucchi, 227 A.3d 102 (Del. 2020), which confirmed that Delaware corporations can adopt charter provisions requiring actions arising under the Securities Act to be filed exclusively in federal court.1 Blue Apron was a landmark decision critically important to companies preparing registration statements in connection with their initial public offerings, as well as to investment companies (e.g., mutual funds) or other corporations that routinely issue prospectuses. Given the plaintiffs’ bar’s increasing desire to pursue Securities Act claims in state courts, including entirely duplicative claims in both state and federal courts, Blue Apron gave companies organized in Delaware the ability to adopt federal-forum provisions requiring Securities Act claims to be litigated exclusively in federal court. The decision also confirmed, once again, that Delaware courts will show great respect and due deference to stockholder-approved charter provisions, giving corporations and their investors significant leeway to structure and govern their own relationships.
State Law Courts Consistently Enforce Federal Forum Provisions
After the Delaware Supreme Court’s decision, certain state courts have recently enforced federal forum provisions.2
In re Dropbox Inc. Securities Litigation, No. 19-civ-05089 (Cal. Super. Ct., San Mateo Cnty, Dec. 4, 2020). In a hotly watched case, on December 4, 2020, the Superior Court of California granted Defendants’ motion to dismiss based upon forum non conveniens.
Dropbox (a Delaware incorporated company with its principal place of business in California) and the officer and director defendants (the “Dropbox Defendants”), brought a motion to dismiss for forum non conviens based primarily on the argument that the Delaware Supreme Court’s ruling in Salzberg v. Sciabacucchi 227 A.3d 102 (Del. 2020), which upheld a federal forum selection clause, should be followed by this Court in dismissing the case. The motion was also joined by the underwriter defendants.
Plaintiffs in Dropbox brought a putative class action on behalf of themselves and all persons who purchased certain Dropbox stock pursuant to a March 23, 2018 Registration Statement issued in connection with Dropbox’s initial public offering. The complaint alleged a claim for violation of Sections 11 and 15 of the Securities Act of 1933. Before the IPO, however, Dropbox’s Board of Directors amended the company’s bylaws to include a provision that designated federal district courts as the “exclusive forum” for Securities Act claims. This Federal Forum Provision provided that the “federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933.”
The Court found that a shareholder may waive the right to litigation of Securities Act claims in a California state court. It then explained that the United States Supreme Court in Cyan was “unequivocal” in reaffirming that federal and state courts have concurrent jurisdiction over Securities Act claims. Acknowledging that the Cyan court did not address the issue of whether the anti-waiver statute of 15 U.S.C. § 77n was waivable by private parties pre-litigation, the Court found that a party may waive the right to have an action decided in state court and instead may agree to have cases decided exclusively in federal court.
The Court then weighed whether “application of the clause is unfair or unreasonable,” finding that there is no California statute at issue and thus no waivable right under California law that the Court must consider. The Court explained that when Plaintiffs acquired their shares, their purchases were subject to the Dropbox Bylaws and they assented to the federal forum provision. And after weighing factors regarding unconscionability, the court concluded that the federal forum provision is not unconscionable.
Interestingly in this case, two former Delaware Chancery Court Vice Chancellors, four former Delaware Supreme Court justices, and a former Commissioner of the U.S. Securities and Exchange Commission also filed an amicus brief, arguing in favor of dismissal. In the amicus, the amici argued that the federal forum provision at issue in this case was covered by the internal affairs doctrine, and that “[t]here is no basis for displacing in this case the Delaware ruling that ‘FFPs, as a facial matter, do not violate principles of horizontal sovereignty.” Importantly, the amici argued that adopting Plaintiffs’ reading of the law would render corporations ungovernable, and “if followed, would prevent the ordinary operation of every publicly traded corporation in the United States, as millions of stockholders could complain that relevant governing provisions were ‘buried in an exhibit’ and that there was a failure of mutual asset. The result would be boardroom chaos throughout corporate America.’” Last, the amici argued that dismissal makes sense because the federal court is the only forum that adequately addresses the possibility of simultaneous state- and federal-court litigation of federal securities-law claims.
The California court granted the Dropbox Defendants’ motion to dismiss and did not reach the substantive arguments of the Defendants who joined the motion.
In re Uber Technologies, Inc. Sec. Litig., No. CGC-19-579544 (Cal. Super. Ct., San Francisco Cnty., Nov. 16, 2020). On November 16, 2020, Judge Andrew Cheng granted defendants’ motion to dismiss on the grounds of inconvenient forum pursuant to C.C.P. § 418.10(A)(2) and C.C.P. § 410.30. Plaintiff filed a putative class action against Uber and certain of its officers and directors (the “Uber Defendants”) as well as certain underwriters arising out of the purchase of common stock in connection with Uber’s 2019 IPO and asserted violations of Sections 11, 12(a)(2) and 15 of the Securities Act. An identical putative class has asserted the same claims and allegations in federal court. See Stirrratt v. Uber Techs., Inc. et al., No. 3:19-cv-06361-RS (N.D. Cal.).
The defendants moved to dismiss as a result of the company’s federal forum provision. Initially, the court found that federal securities claims brought by a shareholder are not an “internal affair,” but instead arise from securities purchased by plaintiffs and concern the purchasers’ rights as holders of corporate stock. Thus, the court applied California law to determine whether Uber's federal foreign provision was valid. In making that determination, the court held that the “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.” The court further held that the FFP “[wa]s consistent with Plaintiffs’ reasonable expectations at the time they chose to purchase Uber stock. At that time, Plaintiffs knew or should have known that Uber was a Delaware corporation and that, consistent with Delaware law, its certificate of incorporation was binding on shareholders,” and thus “should have expected to litigate in federal court if FFPs were upheld by the Delaware Supreme Court.”
Finally, in addressing plaintiffs’ arguments relating to unconscionability, the court found that “[w]hile [the] FFP does limit the filing of Plaintiffs’ action to federal court, it does not eliminate the substantive protections provided by the Securities Act itself. The FFP does not take away the rights to discovery, jury trial or appeal. The FFP provides that Plaintiffs can file in any federal court; thus, it does not particularly create any additional expense or inconvenience. . . . Having weighed all the factors regarding unconscionability, the Court concludes that the FFP is not unconscionable.” Thus, the court granted Defendants’ motion to dismiss on the basis of an inconvenient forum and dismissed the complaint in its entirety.
Absent a Foreign Forum Provision, State Courts Remain Viable Jurisdictions to Litigate Securities Act Claims
Lyu v. Ruhnn Holdings Ltd, et al., Index No. 655420/19, 2020 WL 7062118 (NY Sup. Ct., Dec. 3, 2020). Despite these recent rulings, state courts are not stripped of jurisdiction. The New York appellate division addressed the merits of the federal Securities Act in its first post-Cyan Securities Act ruling. On December 3, 2020, a five-judge panel reversed a lower court’s holding and granted dismissal of claims against Ruhnn Holdings Ltd., a leading internet facilitator of social media influencers in China. Earlier, in September 2019, plaintiff commenced a putative class action asserting claims based on violations of Sections 11, and 12(a)(2) of the Securities Act of 1933 against all defendants and Section 15 against the individual defendants. The Company and the underwriters moved to dismiss, urging that an alleged omission about store closures was immaterial based on disclosures in the Offering Materials expressing a shift away from the full-service model to the platform model as the primary generator of revenue. The defendants argued that the store closures were part of that shift and the revenue decline resulted from other factors. In April, the Court below denied defendants’ motion to dismiss the complaint alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 in its entirety except to the extent it dismissed the Section 12(a)(2) claim against the company. The company appealed.
In a two page order, the appellate court sided with the company and dismissed the suit in its entirety for failing to state a cause of action. It explained that “[a]s the full service sector’s revenue was not closely related to either the number of stores or the number of online influencers serving the segment, the focus on metrics was ‘myopic’; disclosure would not have given a more accurate picture of the status of the business.” Looking at the “total mix of information”, the appellate court dismissed the federal Securities Act claims.
The recent court rulings are important in understanding that due deference and respect is given to stockholder-approved charter provisions around the country, not just in Delaware. However, absent an attempt to dismiss an action based on a foreign forum provision, a state court may retain concurrent jurisdiction over Securities Act claims.
1) Dechert OnPoint, Delaware Supreme Court Rules that Corporations Can Require Securities Act Claims to Be Filed Exclusively in Federal Court (March 20, 2020), available at https://www.dechert.com/knowledge/onpoint/2020/3/delaware-supreme-court-rules-that-corporations-can-require-secur.html
2) See Wong v. Restoration Robotics, Inc., No. 18-civ-02609, 2020 WL 605040 (Cal. Super. Ct., San Mateo Cnty., Sept. 1, 2020) (upholding validity of a Delaware corporation’s federal forum provision); see also Dechert OnPoint, California Superior Court Enforces Federal Forum Selection Provision Under California Law (Sept. 11, 2020), available at https://www.dechert.com/knowledge/onpoint/2020/9/california-superior-court-enforces-federal-forum-selection-provi.html