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In a victory for policyholders, a California state court has dismissed initial public offering litigation against a medical device company, stating it has no jurisdiction to consider the case because of a provision in its certificate of incorporation that says litigation must be filed in federal court.
Tuesday’s California state court ruling in San Mateo in Sunny C. Wong vs. Restoration Robotics, et. al., which is the first of its kind in the country, could lead to lower directors and officers liability insurance rates for IPOs, says an expert.
The decision follows a Delaware Supreme Court ruling in March, Matthew B. Salzberg, et al. and Blue Apron Holdings Inc., Stitch Fix Inc., and Roku Inc. v. Matthew Sciabacucchi, which held that firms that included a “federal forum” provision in their corporate charters could require that litigation be filed in federal rather than in state courts, which are considered more plaintiff friendly.
State court litigation had increased following the U.S. Supreme Court’s 2018 ruling in Cyan Inc. et al. v. Beaver County Retirement Fund et. al., which held that in addition to federal courts, securities offering litigation can be heard in state courts.
The California ruling said the San Jose-based company’s federal forum provision “is not illegal under California law and does not violate any California Statute or public policy – unless it was shown to be unconstitutional or illegal under federal law.”
“Plaintiffs had a heavy burden; and Plaintiffs have no federal law actually holding that the forum selection clauses are unconstitutional or illegal under federal law,” the ruling said, in declining jurisdiction over the claims alleged against Restoration Robotics and its officers and directors.
Company attorney Mathew Rawlinson, a partner with Latham & Watkins LLP in Menlo Park, California, said in a statement, “This decision – the first of its kind following the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi – recognizes the ability of Delaware corporations to select the venue in which they can be sued for claims under the Securities Act of 1933, and finds that restricting such federal claims to federal court is neither unfair nor unreasonable under California law.
“We are pleased with the outcome, not only for our client but the many other companies that have been or could be subjected to costly duplicative federal and state court litigation.”
A plaintiff attorney could not be reached for comment.
Priya Cherian Huskins, San Francisco-based partner and senior vice president at broker Woodruff Sawyer & Co., said the ruling shows California “will be deferential to federal forum provisions” of Delaware-chartered companies.
She added, “In some sense, this is an expected outcome, given that California courts have been deferential to state choice of forum provisions in Delaware-charted companies. However, until a California court took this step we actually didn’t know” whether California would continue to follow this precedent.
Ms. Huskins said the ruling is likely to be influential in other states, because they followed California in allowing Delaware-charted companies’ choice of state provisions.
The ruling could help lower IPO-related D&O coverage, she said. “We have seen D&O insurance rates skyrocket” since the Cyan ruling, Ms. Huskins said.
Directors and officers liability insurance pricing increased 74.4% in the second quarter for Aon PLC clients, which was a slight increase over the percentage reported for the first quarter.