Author: Donna Ferrara
Since the United States Supreme Court decided Cyan Inc. v. Beaver County Employees Retirement Fund (Cyan), 1 defendants in cases alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933 (the ’33 Act) may face litigation brought in both federal and state courts. In Cyan, the United States Supreme Court held that state courts retain concurrent jurisdiction over lawsuits asserting liability claims under the ’33 Act, prohibiting removal of such cases to federal courts and permitting state court claims to continue, even if federal cases had already been filed.
While the number of state court actions alleging violations of the ’33 Act have risen, plaintiffs do not always find smooth sailing in all state courts. In Rezko et al v. XBiotech Inc. et al, a Texas trial court dismissed a federal securities case for failure to state a cause of action.2 For similar reasons, a New York state court dismissed In re Sundial Growers Inc. Securities Litigation.3
Still, Cyan’s ruling has created a two-prong disadvantage for defendants: a risk of duplicative litigation, with a potential for contradictory results, and the lack of the protection of federal procedural rules. These concerns have caused defendants to adopt various measures to assure federal jurisdiction over securities litigation. Among these measures is the insertion of a federal forum selection provision in their corporate documents. These provisions mandate that any securities litigation brought against the corporate entity must be brought in federal district court.
Delaware and the U.S. Supreme Court Ruling on Cyan
In March 2020, the Delaware Supreme Court found that federal forum provisions comport with both Delaware law and the U.S. Supreme Court’s ruling in Cyan. In Salzberg v. Sciabacucchi (Sciabacucchi),4 the Delaware court exhaustively analyzed the state’s corporate law in overruling a trial court’s contrary decision, concluding that federal forum provisions do not “offend” federal law and policy. Yet, the state Supreme Court’s ruling was not comprehensive. Rather, 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.5
More recently, a California state court took a different tack in enforcing a federal forum provision. While, again, the court engaged in a detailed review of state and federal law, the court in Wong v. Restoration Robotics6 first held that, although Restoration Robotics was a Delaware corporation, the legality of the federal forum provision under Delaware law was irrelevant to its own analysis. Further, the Delaware court’s finding that federal forum provisions did not “offend” federal law was nonbinding dicta. The California court found the Delaware court’s analysis to be a jumble of unrelated cases.
The only important analysis, the California court found, was whether the forum selection provision comported with California state law. Having found that, facially, the provision did meet state law standard, “[t]he burden of proof shifted to the Plaintiffs to demonstrate that the [provision] is unenforceable, unconscionable, unjust or unreasonable.”7
What does the Supreme Court ruling mean for our clients?
While both the Delaware and the California cases are welcome news for defendants facing the possibility of duplicative litigation in state court, neither case creates a single nationwide rule for assessing the validity of forum selection provisions. As a ruling of the highest court, in the important Delaware court system, Sciabacucchi will be more influential than Restoration Robotics, a trial-level decision. Both courts left open the possibility that such provisions could be found invalid in specific application.
In the current hard market for Directors & Officers liability insurance, it is unlikely that premium rates will drop significantly as a result of these two cases, although there may be some relief for companies planning an initial public offering.
As always, Gallagher professionals are ready to assist in these and other D&O liability matters.
