In reliance on the federal forum provision (FFP) in the company’s corporate charter, a California Superior Court judge has granted the defendants’ motion to dismiss the state court ’33 Act liability action pending against Uber. The ruling represents the second occasion on which a California state court has dismissed a state court ’33 Act liability action in reliance on an FFP in the corporate defendant’s charter, providing further hope that the adoption of FFPs may help companies address the Cyan problem – that is, the possibility of having to face identical ’33 Act liability actions in both state and federal court. The California Superior Court’s November 16, 2020 order in the Uber case can be found here.
Background Regarding Federal Forum Provisions
In March 2018, the United States Supreme Court held in Cyan, Inc. v. Beaver County Employees Retirement Fund that state courts retain concurrent jurisdiction for liability actions under the Securities Act of 1933. In response to this development, and out of concern that they could be subject to parallel state court and federal court litigation, a number of companies adopted charter provisions specifying that ’33 Act liability actions against the company must be brought in federal court. In March 2020, the Delaware Supreme Court held in Sciabacucchi v. Salzburg that federal forum provisions are valid under Delaware law. Even after the Sciabacucchi decision, the question remained whether the courts of other states would find FFP to be valid and enforceable. In September 2020, a California court in the Restoration Robotics case held an FFP to be valid and enforceable and granted the motion of the defendants to dismiss the state court action.
Background Regarding the Uber Case
Uber is a Delaware corporation with its principal place of business in San Francisco, California. Uber completed an initial public offering in May 2019. Uber’s charter contains a provision stating that “The federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933.”
Following the offering, investor plaintiffs filed a class action on behalf of investors who purchased Uber shares in the companies IPO in California (San Francisco County) Superior Court alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933. The complaint names as defendants the company; certain of its directors and officers; and the company’s offering underwriters. An identical putative class asserted the same claims and allegations in federal court.
The defendants filed a motion to dismiss the action on the grounds of inconvenient forum, in reliance on the FFP in Uber’s charter.
The November 16, 2020 Ruling
On November 16, 2020, California (San Francisco County) Superior Court Judge Andrew Y.S. Cheng granted the defendants’ motion to dismiss. In granting the defendants’ motion, Judge Cheng held that Uber’s FFP is valid and enforceable under California law.
Judge Cheng first concluded that because the federal securities law claims the plaintiff asserts do not arise from Uber’s corporate governance, the securities action does not involve the company’s internal affairs, and therefore that the “internal affairs doctrine” is inapplicable, meaning that in order for the court to determine whether the FFP is valid, it should look to California law.
In concluding that the Uber’s FFP is “lawful and valid under California law,” Judge Cheng rejected the plaintiff’s several arguments questioning the provision’s validity. Judge Cheng held that the plaintiff’s assent to the FFP was not required in order for the provision to be valid; that the removal bar and concurrent jurisdiction provisions in the ’33 Act do not preclude the adoption of a provision specifying a federal forum; and that FFP does not contravene the ’33 Act’s anti-waiver provisions.
Judge Cheng also held that Uber’s FFP is enforceable under California law. In so ruling, Judge Cheng rejected the plaintiff’s arguments that the provision was outside the plaintiff’s reasonable expectations and that the provision in unconscionable and therefore unenforceable.
Judge Cheng did hold, due to the fact that the provision’s presence in Uber’s charter was buried deep within various corporate documents, that the provision presented “procedural unconscionability”; however, under California law, in order for a provision to be unenforceable due to unconscionability, the provision must be both procedurally and substantively unconscionable. Because the FFPs purpose is to protect company from duplicative litigation, and because prospective claimants have an adequate available alternative forum in federal court, the provision in not substantively unconscionable.
As noted above, this ruling is the second instance in which a California state court judge has granted a motion to dismiss a state court securities suit in reliance on an FFP in the corporate defendant’s charter. The prior ruling, in San Mateo County, was in the Restoration Robotics case. Anyone who reads Judge Cheng’s decision in the Uber case after having first read the Restoration Robotics decision will find Judge Cheng’s opinion to be a model of clarity and precision, at least by comparison to the Restoration Robotics opinion.
Interestingly, even though Judge Cheng’s consideration of these issues follows the prior Restoration Robotics decision, Judge Cheng’s opinion does not cite or even refer to the Restoration Robotics decision. Obviously, as the ruling of a state trial court judge in a different county from the one in which the Uber case was pending, the Restoration Robotics decision had no precedential authority. However, I would have thought that another court’s consideration of the same issues presented here would have entered somewhere in Judge Cheng’s consideration of these issues. The fact that Judge Cheng did not even refer to the Restoration Robotics decision may underscore the point that rulings by state court trial judges do not represent authority that will bind other courts, and that in fact may or may not even influence other courts.
In other words, while there are now two California state trial court decisions holding FFPs to be valid and enforceable under California law, there may still be a long road ahead as other courts in cases involving other companies work through the process of determining whether or not FFPs are going to be the conclusive solution to the Cyan problem.
One potential remaining set of issues out there that may yet need to be resolved is the question of the constitutionality of the FFP. In both the Restoration Robotics and the Uber decision, the courts declined to reach the respective plaintiffs’ arguments that the provisions violate Commerce Clause and the Supremacy Clause of the U.S. Constitution. In declining to address these arguments, Judge Chen said that the authorities on which the plaintiff relied in raising the constitutionality question all pertain to constitutional attacks on a statute, not the terms of an agreement. Judge Chen said that the question of constitutionality of the Delaware statutory provisions on which Uber relied in adopting the FFP “is not properly before this Court on a forum non conveniens motion.”
The fact that neither of the two decisions in which FFP were found to be valid addressed the constitutionality issue may suggest a line of attack that plaintiffs’ in future disputes over the enforceability of FFP may seek to pursue, if they can figure out a procedural way to tee the constitutionality issue up for the court’s consideration. I emphasize this point about the constitutionality question to underscore my point above, that there may still be further road ahead on these issues.
One interesting apparent difference between the Uber decision and the Restoration Robotics decision is that while the court in the Restoration Robotics decision granted the motion to dismiss of the corporate defendant and of the individual directors and officers, the court declined to extend the dismissal as to the offering underwriter defendants (on both procedural and substantive grounds). However, in the Uber case, Judge Chen granted the motion to dismiss as to all defendants, including the offering underwriters, which will be good news for underwriter defendants in other state court securities suits in which the underwriter defendants are seeking to rely on FFP in the corporate defendant’s charter as the basis for their dismissal.
One final note. It is worth emphasizing that these circumstances involved here represent the very situation for which FFP were proposed. Uber faces identical parallel federal court and state court lawsuits with no means of consolidating the actions – that is, the very situation people have in mind when the refer to “the Cyan problem.” If nothing else, Judge Chen’s opinion provides some substantial assurance that the adoption of an FFP may be an effective way for companies to try to address the Cyan problem.
Special thanks to a loyal reader for providing me with a copy of the Uber opinion.