SS M&A Litigation Outlook - Flipbook - Page 37
Wong v. Restoration Robotics, lnc.,
No. 18CIV02609 (Cal. Super. Ct. Sept. 1, 2020)
Why it is important
In Wong v. Restoration Robotics, Inc., the California
Superior Court in San Mateo County addressed an
issue of first impression: whether the exclusive federal
forum provision (FFP) in Restoration Robotics,
Inc.’s (Restoration) corporate charter is applicable
to claims under the Securities Act of 1933. The court
answered in the affirmative, finding that an FFP
can require plaintiffs to file ’33 Act claims in federal
court. In upholding the validity of the FFP as applied
to ’33 Act claims, the court found that Restoration’s
FFP is not illegal under California law, did not violate
due process because plaintiffs still can sue in federal
court in the state in which they would have filed, and
because all rights and remedies remain available
to plaintiffs in federal court. By upholding the FFP,
the court provided corporations with a means to
avoid having to defend parallel actions in state and
federal court, promoting consistent outcomes and
minimizing unnecessary costs.
Summary
Shareholders of Restoration, a Delaware
corporation, filed a lawsuit in California state court
against Restoration as well as certain directors,
officers, underwriters, and venture capital investors
alleging violations of the ’33 Act. Restoration
moved to dismiss, arguing that the shareholders’
choice of filing the suit in state court violated its
FFP. The California Superior Court originally
denied Restoration’s bid to dismiss the action
citing the Delaware Chancery decision in Salzberg
v. Sciabacucchi, in which the Delaware Chancery
Court held that FFPs were not “internal affairs”
and therefore, not enforceable under Delaware law.
Following the Delaware Supreme Court’s reversal
of the Chancery Court’s decision, the California
Superior Court granted Restoration’s motion for
reconsideration of its motion to dismiss.
Like many corporations, Restoration adopted an FFP
following the United States Supreme Court’s decision
in Cyan, which held that claims under the Securities
Act of 1933 could not be removed from state to
federal court. This was the first case in California
addressing the validity of an FFP in this context since
the Delaware Supreme Court ruled in Salzberg that
FFPs were allowable under Delaware law because
“Delaware Section 102 allowed corporate charters to
go beyond matters of ‘internal affairs.’”
The court was initially dismissive of the Delaware
Supreme Court’s holding in Salzberg and critical of
the Salzberg court’s lack of analysis as to whether
FFPs were contrary to federal law. Nevertheless,
the Wong court agreed with the Delaware Supreme
Court that FFPs are enforceable, but did so based
on an application of the standards California courts
use to determine the validity of forum selection
clauses and forum non conveniens arguments.
The court found that plaintiffs did not meet their
burden to show that the FFP was “unenforceable,
unconscionable, unjust, or unreasonable” because
the FFP (1) was subject to shareholder approval, and
(2) came into effect before the present lawsuit was
filed. The court further concluded that FFPs do not
violate due process because all rights and remedies
remain available, and plaintiffs are not meaningfully
inconvenienced as they can file their suit in the
federal court located in the state in which they would
have otherwise sued. Therefore, the court dismissed
the complaint against Restoration, as well as its
officers and directors.
The court did not dismiss plaintiffs’ claims against
Restoration’s underwriters and investors, finding that
neither group had standing to invoke rights under the
corporation’s charter. It also declined to rule on the
plaintiffs’ arguments that the FFP violated the U.S.
Constitution’s Commerce and Supremacy Clauses, as
that analysis would have been outside the scope of the
court’s focus on the defendants’ motion to dismiss for
forum non conveniens.
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