Wong v. Restoration Robotics, Inc.

• Citation: 78 Cal.App.5th 48,293 Cal.Rptr.3d 226
• Decision Date: 28 April 2022
• Docket Number: A161489
• Parties: Sunny C. WONG, Plaintiff and Appellant, v. RESTORATION ROBOTICS, INC., Defendant and Respondent.
• Court: California Court of Appeals

78 Cal.App.5th 48

293 Cal.Rptr.3d 226

Sunny C. WONG, Plaintiff and Appellant,

v.RESTORATION ROBOTICS, INC., Defendant and Respondent.

A161489

Court of Appeal, First District, Division 2, California.

Filed April 28, 2022

Robbins Geller Rudman & Dowd LLP, Andrew S. Love, San Francisco, James I. Jaconette, San Diego; Goldstein & Russell, P.C., Thomas C. Goldstein, Molly Runkle, Charles H. Davis ; Cotchett, Pitre & McCarthy LLP, Mark C. Molumphy, Burlingame, Tyson C. Redenbarger, San Francisco, Noorjahan Rahman, for Plaintiff and Appellant

Latham & Watkins, Matthew Rawlinson, Daniel R. Gherardi, Menlo Park, Gavin M. Masuda, Nicholas Rosellini, San Francisco, Melissa Arbus Sherry, for Defendant and Respondent

Munger, Tolles & Olson LLP, John W. Spiegel, Elaine J. Goldenberg, for Amicus Curiae Chamber of Commerce of the United States of America, in support of Respondent

Miller, J.

The value of shares of stock in Restoration Robotics, Inc., a Delaware corporation, dropped within months of the company's 2017 initial public stock offering. Sunny C. Wong, who had bought the company's stock, sued Restoration Robotics in San Mateo County Superior Court, alleging that the company's offering documents contained materially false and misleading statements in violation of the Securities Act of 1933 ( 15 U.S.C. § 77a et seq. (1933 Act).) Although the 1933 Act generally allows a plaintiff to choose whether to file suit in state or federal court, and bars the removal to federal court of a suit filed in state court, a "federal forum provision" (FFP) in Restoration Robotics’ certificate of incorporation states that 1933 Act claims must be brought in federal court unless Restoration Robotics consents to a different forum. So Restoration Robotics promptly moved to dismiss Wong's complaint, arguing that because of the FFP the case could be brought only in federal court unless Restoration Robotics consented to state court jurisdiction, which it had not. The trial court eventually declined jurisdiction on the basis of the FFP, and a judgment of dismissal without prejudice was entered in favor of Restoration Robotics.

Wong now appeals, raising three arguments. First, the FFP violates the 1933 Act, which states that both state and federal courts have jurisdiction over 1933 Act causes of action. ( 15 U.S.C. § 77v(a).) Second, the Delaware statutory scheme permitting the FFP violates the Commerce Clause and the Supremacy Clause of the United States Constitution. And third, the FFP is invalid and should not be enforced in any event because it is unfair and unreasonable. We find none of these arguments persuasive, and we will affirm.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Introduction of Federal Forum Provisions

We begin with some background on the development of FFP's like the one at issue here.

The 1933 Act protects investors by requiring companies offering securities for sale to the public to make a " ‘full and fair disclosure’ " of relevant information. ( Omnicare, Inc. v. Laborers Dist. Council Const. Industry Pension Fund (2015) 575 U.S. 175, 178, 135 S.Ct. 1318, 191 L.Ed.2d 253.) "The linchpin of the Act is its registration requirement." ( Ibid. ) As a general matter, a company can offer securities only after filing a registration statement, which "must contain specified information about both the company itself and the security for sale." ( Ibid. ) The 1933 Act created private rights of action "to aid enforcement of" the obligation to make full and fair disclosure. ( Cyan, Inc. v. Beaver County Employees Retirement Fund (2018) ––– U.S. –––– , 200 L.Ed.2d 332 ( Cyan ).) Congress authorized state and federal courts to exercise jurisdiction over 1933 Act suits, and barred the removal of those suits from state to federal court. ( Ibid. ) "So if a plaintiff chose to bring a 1933 Act suit in state court, the defendant could not change the forum." ( Ibid. )

In 1995, prompted by " ‘perceived abuses of the class-action vehicle in litigation involving nationally traded securities,’ " Congress amended the 1933 Act by enacting the Private Securities Litigation Reform Act (PSLRA). ( Cyan, supra , 138 S.Ct. at p. 1066.) The PSLRA included certain provisions that applied only to 1933 Act claims that were filed in federal court. "To take one example, the statute required a lead plaintiff in any class action brought under the Federal Rules of Civil Procedure to file a sworn certification stating, among other things, that he had not purchased the relevant security ‘at the direction of plaintiff's counsel.’ " ( Id. at p. 1067 [quoting 15 U.S.C. § 77z-1(a)(2)(A)(ii) ].) But the PSLRA had " ‘unintended consequences’ ": " ‘Rather than face the obstacles set in their path by the [PSLRA], plaintiffs and their representatives began bringing class actions under state law.’ " ( Ibid. )

A few years later, Congress further amended the 1933 Act in the Securities Litigation Uniform Standards Act of 1998 (SLUSA) "to limit the conduct of securities class actions under State law, and for other purposes." ( Pub.L. No. 105-353 (Nov. 3, 1998) 112 Stat. 3227.) SLUSA prohibited certain securities class actions that are based on state law, and provided for the removal of such class actions to federal court, where they were subject to dismissal. ( Cyan, supra , 138 S.Ct. at pp. 1067-1068.) However, as the Supreme Court held in Cyan , "SLUSA did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations. Neither did SLUSA authorize removing such suits from state to federal court." ( Id. at p. 1078.)

In recent years, some corporations preferring to litigate 1933 Act claims in federal court adopted forum-selection provisions designating federal courts as the exclusive forums for those claims. ( Salzberg v. Sciabacucchi (Del. 2020) 227 A.3d 102, 111 ( Salzberg ).) In Salzberg , the Delaware Supreme Court analyzed federal forum provisions that appear in the certificates of incorporation of three Delaware corporations that, like Restoration Robotics, launched initial public offerings in 2017. ( Id. at p. 109.) Salzberg held that federal forum provisions were facially valid under the Delaware General Corporation Law, which governs the contents of certificates of incorporation, and that the provisions did not violate any Delaware or federal law or policy. ( Id. at pp. 113, 115, 132.)

B. Restoration Robotics’ Initial Public Offering and Federal Forum Provision

Restoration Robotics, incorporated in Delaware and headquartered in California, develops, and manufactures a robotic system used in a type of hair transplantation procedure.¹

On September 1, 2017, Restoration Robotics filed a Form S-1 Registration Statement with the Securities and Exchange Commission as a step toward its initial public offering. After several amendments, the registration statement was declared effective on October 11, 2017. The first of the amendments, filed on September 18, 2017, included among its exhibits a "Form of Amended and Restated Certificate of Incorporation, to be in effect at the time of consummation of this offering." Article VIII of the amended Certificate of Incorporation was entitled "Exclusive Forum" and contained the FFP at issue in this case: "Unless the Corporation consents in writing to the selection of an alternative forum, 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, as amended. Any person or entity purchasing or otherwise acquiring any interest in any security of the Corporation shall be deemed to have notice of and consented to this Article VIII."

The initial public offering (IPO) was completed on October 16, 2017, with investors buying 3,575,000 shares at $7 per share, generating just over $25 million.

C. Proceedings in the Trial Court

In May 2018, Wong filed a class action complaint against Restoration Robotics, alleging that he purchased the company's common stock "pursuant to the IPO and was damaged thereby." The complaint was brought on behalf of those who bought Restoration Robotics stock "pursuant or traceable" to the IPO, and alleged that the registration statement was inaccurate and misleading, contained untrue statements of material fact, and failed to disclose material facts, in violation of sections 11, 12(a)(2), and 15 of the 1933 Act. ( 15 U.S.C. §§ 77k, 77l (a)(2), 77o.) The complaint alleged that the registration statement mischaracterized the company's liquidity and capital needs, and failed to disclose that substantial engineering and programming work was required before the implantation technology would be commercially viable. At the time the complaint was filed, Restoration Robotics stock traded at less than 50 percent of the IPO sales price.²

In August 2018, Restoration Robotics moved to dismiss the complaint based on the FFP. The trial court initially denied the motion in an order that adopted the analysis of a Delaware Chancery Court decision holding that forum selection clauses requiring all 1933 Act claims to be brought in federal court (in other words, FFP's) are facially invalid under Delaware law. (See Sciabacucchi v. Salzberg (Del.Ch.Ct., Dec. 19, 2018) 2018 WL 6719718, at p. *3, revd. Salzberg, supra, 227 A.3d 102.)

Restoration Robotics renewed its motion to dismiss after the Delaware Supreme Court's ruling in Salzberg, supra , 227 A.3d 102, reversed the Chancery Court decision. In holding that FFP's are not contrary to Delaware or federal law or policy, the Delaware Supreme Court observed that the question remained whether FFP's would "be respected and enforced" by states other than Delaware. ( Id. at p. 133.) The court acknowledged "that our sister states might react negatively to what could be viewed as an out-of-our lane power grab," but concluded that "there are persuasive arguments that could be made [that an FFP] does not offend principles of...