On September 1, 2020, the California Superior Court for San Mateo County granted Restoration Robotics, Inc. and certain individual defendants’ (collectively, “Restoration Robotics”) Motion for Reconsideration and Renewed Motion to Dismiss in Wong v. Restoration Robotics, Inc., et al. becoming the first court outside of Delaware to uphold a federal forum provision (“FFP”) in governing corporate documents. This is significant because it increases the number of applicable circumstances in which courts have allowed companies to use FFPs to avoid the risk of costly and duplicative parallel state and federal litigation or litigation in multiple states under the Securities Act of 1933 (the “Securities Act”) (15 U.S.C. § 77z-1). It may also influence other courts, not bound by the decision, to follow its logic.
In Cyan Inc. v. Beaver County Employees Retirement Fund, the Supreme Court held state courts have jurisdiction over claims brought under the Securities Act of 1933, prohibiting removal of these claims to federal court. The Cyan ruling allows plaintiffs to avoid at least some aspects of the Private Securities Litigation Reform Act’s (“PSLRA”) provisions designed to eliminate meritless securities litigation by filing Securities Act claims in state court while simultaneously filing nearly identical actions in federal court. Cyan has resulted in duplicative, unnecessary, and costly litigation. Immediately after the decision was issued, the number of Securities Act claims filed in state court increased. Moreover, nearly half of the state court cases filed in 2018-2019 coincided with concurrent filing of federal litigation. Additionally, different state courts have reached contradictory conclusions as to whether federal safeguards, such as some of those provided by the PSLRA and federal common law principles, apply in state court proceedings. In the wake of Cyan, Professor Joseph Grundfest of Stamford Law School has advocated including federal forum selection clauses in certificates of incorporation or bylaws as a means of trying to combat the adverse effects of multiple jurisdiction litigation in Securities Act cases. After the Cyan decision, and the publication of Professor Grundfest’s approach, it became more common for public corporations, particularly those incorporated in Delaware to include FFPs in their corporate documents.
The Delaware Supreme Court addressed the enforceability of such a FFP under Delaware law in Sciabacucchi v. Salzberg (Blue Apron)  reversing the Chancery Court’s ruling that FFPs contained in a Delaware corporation’s charter are unenforceable under relevant provisions of Delaware General Corporation Law (“DGCL”). In Sciabacucchi, the Delaware Supreme Court held the FFP was not contrary to Delaware corporate law. The court explained “Delaware courts attempt ‘to achieve judicial economy and avoid duplicative efforts among courts in resolving disputes.’ [FFPs] advance these goals.’” Sciabacucchi was a significant step in validating the enforceability of FFPs and reducing the adverse effects of Cyan, but because it was not binding on courts in other jurisdictions it was unclear whether it would be adopted by courts in other states, particularly in traditionally plaintiff-friendly jurisdictions like California.
Wong v. Restoration Robotics, Inc.
Restoration Robotics is a Delaware corporation with its principle place of business in California. On May 23, 2018, a shareholder of Restoration Robotics filed a complaint alleging claims under the Securities Act in California Superior Court for San Mateo County. Restoration Robotics moved to dismiss the complaint pursuant to a FFP in its charter, which the court initially denied, relying on the Delaware Chancery Court’s decision in Sciabacucchi. After the Delaware Supreme Court reversed the Chancery Court’s holding, Restoration Robotics filed a Motion for Reconsideration and Renewed Motion to Dismiss on March 30, 2020. On September 1, 2020, the court granted Restoration Robotics’ motion.
In Restoration Robotics, the California Superior Court characterized Sciabacucchi’s holding that a FFP was permissible under Delaware law as “basically irrelevant,” and its discussion about federal law and policy and “suggest[ions] that other states should consider finding them enforceable under the laws of their own state” as nonbinding “dicta.” However, notwithstanding this view of Sciabacucchi, the Restoration Robotics court upheld the FFP as valid, concluding that Restoration Robotics’ FFP, which was (i) narrowly drafted to leave intact all substantive rights and remedies under the Securities Act, (ii) included in corporate documents after the approval of a shareholder vote, and (iii) put into effect before the Section 11 lawsuit at issue was filed, was “akin to a contractual forum selection clause.” Moreover, the court found there was no procedural loss of due process rights because shareholders could present their federal law claims to a federal court, in a state or province of a state close to their residence and shareholders would have the opportunity for discovery and trial by jury.
Restoration Robotics is the first California state court decision to enforce an FFP following the Delaware Supreme Court’s decision in Sciabacucchi. It is significant in part because the Superior Court for San Mateo county has been considered a plaintiff-friendly jurisdiction. Restoration Robotics effectively upheld Sciabacucchi’s holding, despite a clear reluctance to do so. This suggests other California courts considering FFPs pertaining to Delaware corporations may also enforce them. Nonetheless, the decision is not a binding precedent even in California nor does it address FFPs for businesses incorporated outside of Delaware. Ultimately, congressional reform would be the preferred method of remedying the abuses possible following the Cyan decision, including providing a remedy to the unfairness and wasteful extra expense of allowing parallel state and federal proceedings for a claim brought under the Securities Act. In the meantime it is recommended that public companies, wherever incorporated, include an FFP in their corporate documents, where feasible with shareholder approval.
 No. 18CIV02609, 2020 Cal. Super. LEXIS 227 (Cal. Sup. Ct. Sept. 1, 2020). The court denied the motion to dismiss as to the underwriter and venture capital defendants, explaining that neither were signatories to the “Amended and Restated Certificate of Incorporation” that contained the FFP.
Compare In re Dentsply, Inc. v. XXX, Index No. 155393/2018, 2019 WL 3526142 (Sup. Ct. N.Y. Cnty. Aug. 2, 2019) and In re PPDAI Group Sec. Litig., No. 654482/2018, 2019 WL 2751278 (Sup. Ct. N.Y. Cnty. July 1, 2019) (holding PSLRA’s stay of discovery during a pending motion to dismiss did not apply in state court proceedings) with In re Everquote, Inc. Sec. Litig., Index No. 651177/2019, 2019 WL 3686065 (Sup. Ct. N.Y. Cnty. Aug. 7, 2019) (finding Cyan did not control whether the PSLRA discovery stay applied to state courts and concluding discovery is stayed during a pending motion to dismiss); see also Switzer v. Hambrecht & Co., No. CGC-18-564904, 2018 WL 4704776 (Cal. Super. Ct. Sept. 19, 2018) (holding the PSLRA’s discovery stay does not apply in state court); cf. City of Livonia Retiree Health and Disability Benefits Plan v. Pitney Bowes, No. X08-FST-CV-18-6038160-S, 2019 WL 2293924 (Conn. Super. Ct. May 15, 2019) (holding the PSLRA discovery stay applies).